U.S. 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 December 31, 2002
---------------------------------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 33-70992
USA Technologies, Inc.
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2679963
------------ -----------
(State or other jurisdiction of incorporation (I.R.S. employer Identification
or organization) No.)
200 Plant Avenue, Wayne, Pennsylvania 19087
------------------------------------- -----
(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 February 12, 2003, there were 101,007,697 shares of Common Stock, no par
value, outstanding.
USA TECHNOLOGIES, INC.
INDEX
PAGE NO.
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - December 31, 2002
and June 30, 2002 2
Consolidated Statement of Operations - Three and six months ended
December 31, 2002 and 2001 3
Consolidated Statement of Shareholders' Equity - December 31, 2002 4
Consolidated Statement of Cash Flows - Six months ended
December 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Controls and Procedures 18
Part II - Other Information
Item 2. Changes in Securities 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 22
1
USA Technologies, Inc.
Consolidated Balance Sheets
Unaudited
December 31, June 30,
2002 2002
---------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 517,809 $ 557,970
Accounts receivable, less allowance for uncollectible accounts
of $55,555 at December 31, 2002 and $37,000 at June 30, 2002 422,604 340,293
Inventory 742,615 877,814
Prepaid expenses and other current assets 1,749,515 124,865
Subscriptions receivable 276,000 35,000
---------------------------------------
Total current assets 3,708,543 1,935,942
Property and equipment, net 1,676,248 1,932,427
Software development costs, at cost, less accumulated amortization
of $3,578,531 at December 31, 2002 and $2,995,979 at June 30,
2002 1,747,655 2,330,207
Goodwill 6,800,827 6,800,827
Intangibles, less accumulated amortization of $182,500 at December
31, 2002 and $36,500 at June 30, 2002 2,737,500 2,883,500
Other assets 19,257 29,117
---------------------------------------
Total assets $ 16,690,030 $ 15,912,020
=======================================
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable $ 4,088,023 $ 3,081,495
Accrued expenses 2,156,471 2,131,289
Deposits 120,000 480,000
Current obligations under long term debt 789,373 850,644
Convertible Senior Notes, current portion 4,533,803 -
---------------------------------------
Total current liabilities 11,687,670 6,543,428
Convertible Senior Notes, less current portion 3,536,672 6,289,825
Long term debt, net of current portion 477,008 762,085
Convertible debenture 72,530 65,543
---------------------------------------
Total liabilities 15,773,880 13,660,881
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares--1,800,000
Series A Convertible Preferred--Authorized shares - 900,000 Issued and
outstanding shares- 529,132 at December 31, 2002
and 529,282 at June 30, 2002 (liquidation preference of
$10,862,283 at December 31, 2002) 3,748,096 3,749,158
Common Stock, no par value:
Authorized shares--200,000,000 at December 31, 2002 and
150,000,000 at June 30, 2002
Issued and outstanding shares--99,096,167 at December 31, 2002
and 66,214,188 at June 30, 2002 61,166,858 55,443,750
Subscriptions receivable - (149,750)
Accumulated deficit (63,998,804) (56,792,019)
---------------------------------------
Total shareholders' equity 916,150 2,251,139
---------------------------------------
Total liabilities and shareholders' equity $ 16,690,030 $ 15,912,020
=======================================
See accompanying notes.
2
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
December 31, December 31,
2002 2001 2002 2001
-------------------------------- ----------------------------------
Revenues:
Equipment sales $ 384,459 $ 163,210 $ 572,947 $ 365,106
Product sales 75,576 - 278,880 -
Service and transaction fees 314,612 161,672 657,265 325,523
-------------- -------------- ------------- ----------------
Total revenues 774,647 324,882 1,509,092 690,629
Operating expenses:
Cost of sales (including amortization
of software development costs) 671,940 196,998 1,339,400 410,031
General and administrative 1,368,373 1,468,237 3,010,751 2,599,442
Compensation 838,713 827,720 1,684,432 1,729,813
Depreciation 247,579 81,181 494,663 163,002
-------------- -------------- -------------- ----------------
Total operating expenses (3,126,605) (2,574,136) (6,529,246 (4,902,288)
-------------- -------------- -------------- ----------------
(2,351,958) (2,249,254) (5,020,154) (4,211,659)
Other income (expense):
Interest income 4,263 3,511 7,237 6,267
Interest expense:
Coupon or stated rate (498,853) (170,501) (846,605) (336,998)
Non-cash amortization of
debt discount (784,449) (246,432) (1,345,693) (525,088)
Less: amounts capitalized - 200,000 - 347,166
-------------- -------------- -------------- -----------------
Total interest expense (1,283,302) (216,933) (2,192,298) (514,920)
--------------- -------------- -------------- -----------------
Total other income (expense) (1,279,039) (213,422) (2,185,061) (508,653)
--------------- -------------- -------------- -----------------
Net loss (3,630,997) (2,462,676) (7,205,215) (4,720,312)
Cumulative preferred dividends - - (396,962) (413,219)
--------------- -------------- -------------- -----------------
Loss applicable to common shares $ (3,630,997) $ (2,462,676) $ (7,602,177) $ (5,133,531)
--------------- -------------- -------------- -----------------
Loss per common share (basic and diluted)
$ (0.04) $ (0.08) $ (-0.10) $ (0.19)
============== =============== ============== =================
Weighted average number of common shares
outstanding (basic and diluted) 87,713,910 30,178,507 79,493,416 27,313,543
============== =============== ============== =================
See accompanying notes.
3
USA Technologies, Inc.
Statement of Shareholders' Equity
(Unaudited)
Series A
Convertible
Preferred Common Subscriptions Accumulated
Stock Stock Receivable Deficit Total
-------------------------------------------------------------------------------
Balance, June 30, 2002 $ 3,749,158 $ 55,443,750 $ (149,750) $ (56,792,019) $ 2,251,139
Conversion of 150 shares of Convertible
Preferred Stock to 150 shares of
Common Stock (1,062) 1,062 -
Conversion of $1,570 cumulative
preferred dividends into shares of
157 Common Stock at $10.00 per share 1,570 (1,570) -
Exercise of 6,281,579 Common Stock
warrants at $0.10 per share 628,158 628,158
Issuance of 1,110,465 shares of Common
Stock from the conversion of $222,058
of the 2002-A 12% Senior Notes 222,058 222,058
Issuance of 495,421 shares of Common
Stock from conversion of $51,000 of
9-3/4% debentures, and the
related exercise of Common Stock
Warrants to purchase 4,954,210
shares of Common Stock, and the
issuance of 175,294 adjustment shares. 561,000 561,000
Issuance of 2,050,003 shares of Common
Stock in exchange for payroll and
professional services 395,008 149,750 544,758
Issuance of 2,000,000 shares of Common
Stock at $0.12 per share 240,000 240,000
Issuance of 1,500,000 shares of Common
Stock at $0.10 per share, net of
offering costs 123,000 123,000
Issuance of 715,000 shares of Common
Stock in connection with the 2003-A
Private Placement Offering at $0.10 71,500 71,500
per share
Issuance of 3,571,429 shares of Common
Stock at $0.07 per share, net of
offering costs 244,925 244,925
Issuance of 1,122,958 shares of Common
Stock and related Warrants in lieu
of cash payment for interest on the 12%
Convertible Senior Notes 318,011 318,011
4
USA Technologies, Inc.
Statement of Shareholders' Equity
(Unaudited)
Series A
Convertible
Preferred Common Subscriptions Accumulated
Stock Stock Receivable Deficit Total
-------------------------------------------------------------------------------
Debt discount relating to beneficial
conversion feature on the 2002-A 12%
Senior Notes 1,084,120 1,084,120
Issuance of 8,568,016 shares in
connection with the 2002-A 12%
Convertible Senior Notes 1,750,062 1,750,062
Issuance of 337,300 shares of Common
Stock in connection with severance
arrangements 78,075 78,075
Other 4,559 4,559
Net loss (7,205,215) (7,205,215)
-------------------------------------------------------------------------------
Balance, December 31, 2002 $ 3,748,096 $ 61,166,858 $ - $ (63,998,804) $ 916,150
===============================================================================
See accompanying notes.
5
USA Technologies, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Six months ended December 31,
2002 2001
--------------------------------------
Operating activities
Net loss $ (7,205,215) $ (4,720,312)
Adjustments to reconcile net loss to net cash used in operating activities:
Service and Compensation charges incurred in connection with
the issuance of Senior Notes and Common Stock 399,187 1,914,241
Issuance of Common Stock in lieu of cash payments for
interest on Senior Note 318,011 117,867
Interest/amortization relating to Senior Notes and Convertible
Debentures 1,288,332 525,088
Depreciation 348,663 163,002
Amortization 728,552 -
Changes in operating assets and liabilities:
Accounts receivable (82,311) (74,810)
Inventory 135,199 (187,355)
Prepaid expenses, deposits, and other assets (48,190) 264,774
Accounts payable 1,006,528 108,520
Accrued expenses 25,182 (327,921)
--------------------------------------
Net cash used in operating activities (3,086,062) (2,216,906)
Investing activities
Purchase of property and equipment (92,484) (31,770)
Increase in software development costs - (1,578,715)
--------------------------------------
Net cash used in investing activities (92,484) (1,610,485)
Financing activities
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants 1,657,583 2,715,916
Net proceeds from issuance of Senior Notes and Convertible Debenture 1,792,150 558,015
Increase in funds deposited for Senior Notes - 895,601
Net repayment of equipment line of credit and other (308,143) (3,653)
Collection of subscriptions receivable 35,000 24,000
Repayment of principal on capital lease obligations (38,205) (47,564)
--------------------------------------
Net cash provided by financing activities 3,138,385 4,142,315
--------------------------------------
Net (decrease) increase in cash and cash equivalents (40,161) 314,924
Cash and cash equivalents at beginning of year 557,970 817,570
--------------------------------------
Cash and cash equivalents at end of period $ 517,809 $ 1,132,494
======================================
Supplemental disclosures of cash flow information:
Conversion of Convertible Preferred Stock to Common Stock $ 1,062 $ 30,621
======================================
Conversion of Convertible Preferred Dividends to Common Stock $ 1,570 $ 38,920
======================================
Conversion of Senior Notes to Common Stock $ 222,058 $ 622,500
======================================
Cash paid for interest $ 371,972 $ 336,998
======================================
$
Subscriptions Receivable $ 276,000 781,500
======================================
Beneficial Conversion feature related to Senior Notes and Convertible
Debentures $ 1,084,120 $ 654,948
======================================
Prepaid stock expense through Issuance of Common Stock $ 236,800 $ 557,303
======================================
Prepaid Senior Note Issuances $ 1,329,800 $ -
======================================
Transfer of deposits to debt and equity $ 360,000 $ -
======================================
Issuance of Common Shares in connection with Senior Note Offering $ 1,750,062 $ -
======================================
Conversion of Convertible Debenture $ 51,000 $ -
======================================
See accompanying notes.
6
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 financial services to
automated business centers, vending machines, debit card revalue stations, and
commercial laundries. The Company's devices process credit and debit cards for
these markets. The Company's customers are principally located in the United
States and are comprised of hotel chains; vending operators for cold drinks,
snacks and cameras; and consumer package goods companies.
The Company offers the Business Express(R) and Business Express(R)
Space Saver principally to the hospitality industry. These products combine the
Company's business applications for computers, copiers and facsimile machines
into a business center unit. In the vending industry, the Company has developed
its next generation of cashless control/payment systems (e-Port(TM)), which
includes capabilities for interactive multimedia and e-commerce, acceptance of
other forms of electronic payments and remote monitoring of host machine data.
The e-PortTM is being marketed and sold primarily to operators, distributors and
original equipment manufacturers (OEM) in the vending industry. All products use
the Network which has been developed by USA and upgraded by IBM, and which is
currently hosted at a remote location operated by IBM.
The Company's wholly owned subsidiary, Stitch Networks Corporation
(Stitch) designs and employs embedded connectivity solutions that enable network
servers to monitor and control vending machines and appliances over the
internet. On December 31, 2000, Stitch executed a Vending Placement, Supply and
Distribution Agreement (the Agreement) with Eastman Kodak Company, Maytag
Corporation and Dixie Narco, Inc., which formed a strategic alliance to market
and execute a national vending program for the sale of one-time use camera and
film products. The initial phase of the Agreement ends December 31, 2003, with
provision for extensions. The Agreement also provides for exclusivity among the
parties for the term of the Agreement relating to the sale of camera and film
products from vending machines within the continental United States.
At December 31, 2002, the Company had a total of 1,728 terminals
shipped and installed at various hotels, vending machines, amusement/theme
parks, retail locations and business/ industry locations located throughout the
United States and Canada.
2. Accounting Policies
-------------------
Interim Financial Information
The accompanying unaudited condensed 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.
7
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended December 31, 2002
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2003. The balance sheet at June 30, 2002 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, 2002.
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 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, components,
and packaging materials, 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.
Goodwill
Goodwill represents the excess of cost over fair value of the net
assets acquired from Stitch in May 2002.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
arising from business combinations completed after June 30, 2001. SFAS No. 142
prohibits the amortization of goodwill and intangible assets with indefinite
8
useful lives and requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. The Company adopted SFAS No. 142 on July 1, 2002.
however the non-amortization provisions of SFAS No. 142 for combinations
initiated after June 30, 2001 were applicable for the Company effective July 1,
2001.
The Company has completed the required transitional impairment test of goodwill
as of July 1, 2002, as prescribed in SFAS No. 142, during the quarter ended
December 31, 2002 using a discounted cash flow analysis. The Company has
concluded that there were no goodwill impairment indicators to be recorded as a
result of this transitional test.
Intangible Assets
Intangible assets include patents ($1,870,000) and trademarks
($1,050,000) acquired in the Stitch acquisition. Amortization of intangible
assets is computed on the straight-line basis over 10 years. Amortization
expense was $73,000 and $146,000 during the three and six-month periods ended
December 31, 2002, respectively. At December 31, 2002, the expected amortization
of the intangible assets is as follows: $146,000 in fiscal 2003, $292,000 per
year in fiscal 2004-2011 and $255,500 in fiscal 2012.
Revenue Recognition
Revenue from the sale of equipment is recognized upon freight on board
shipment terms or upon installation of the equipment if installation services
are purchased for the related equipment. Transaction processing revenues are
recognized upon the usage of the Company's credit card activated systems and
network. Services fees for access to the Company's credit card terminals and
vending equipment are recognized on a monthly basis. Revenues from the sale of
products from the Company's vending machines are recognized upon purchase and
acceptance by the vending customer.
Software Development Costs
The Company capitalizes software development costs 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 were expensed as incurred. During May
2000, the Company reached technological feasibility for the development of the
e-Port(TM) product and related network and, accordingly, the Company commenced
capitalization of software development costs related to this product.
Amortization of software development costs commenced when the product became
available for general release to customers, in April 2002. 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, writes down the balance to net realizable value if
the unamortized costs exceed the net realizable value of the asset.
During the fourth quarter of fiscal 2002, the e-Port(TM) product and
related network became available for general release to the Company's customers.
Management performed an evaluation of the commercial success and preliminary
market acceptance of the e-Port(TM) product and network and as a result of this
evaluation, the Company wrote down $2,663,000 of software development costs
9
related to the e-Port(TM) and the related network. The unamortized balance after
the impairment charge is being amortized over an estimated useful life of two
years. Amortization expense during three and six months ended December 31, 2002
was $291,276 and $582,552, respectively. Such amount is reflected in cost of
sales in the statements of operations.
Loss Per Common Share
Basic earnings per share are calculated by dividing income (loss)
applicable to common shares by the weighted average common shares outstanding
for the period. Diluted earnings per share are 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 all periods
presented because the assumed exercise of these securities would be
antidilutive.
Recently Issued Accounting Pronouncements
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations for a disposal of a segment of a
business". SFAS 144 was effective for fiscal years beginning after December 15,
2001 and, accordingly, the Company adopted SFAS 144 as of July 1, 2002. The
adoption of the Statement did not have an impact on the Company's financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires all gains and losses from extinguishment of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provide in Accounting
Principles Board No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002. The Company does not expect the
adoption of SFAS No. 145 to have a material impact, if any, on its financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of SFAS No.
123. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. SFAS No. 48
is effective for financial statements for fiscal years ending after December 15,
2002. The Company is in the process of determining if SFAS No. 148 will have any
10
impact on the Company's financial position or results of operations.
3. Financing Activities
--------------------
During June 2002, the Company commenced a private placement offering
(the "2002-A" offering) of up to $2,500,000 of 12% Convertible Senior Notes
(increased in October 2002 to $4,300,000). The offering consisted of up to 430
units at $10,000 and each note is convertible into Common Stock at $.20 per
share and is due in December 2005. Interest is payable quarterly. Each note
holder also received 20,000 shares of Restricted Common Stock for each unit
purchased. This offering closed on October 31, 2002, for a total of 4.284 units
issued (258.5 units were issued in cash and 169.9 units for services). A total
of 8,568,016 shares of Common Stock were issued to these note holders. The Board
of Directors authorized the issuance of $400,000 of these Senior Notes to
certain officers, directors and consultants of the Company in exchange for
services to be performed.
During September 2002, the Company issued to an investor 2,000,000
shares of its restricted Common Stock at $.12 per share generating gross
proceeds of $240,000. This investor also received a warrant to purchase up to
2,000,000 shares of restricted Common Stock of the Company at $.10 per share at
any time on or before November 30, 2002 (subsequently extended to January 31,
2003) and if all such warrants are exercised, the investor was granted another
warrant to purchase up to 2,000,000 shares of Common Stock at $.10 per share
expiring March 31, 2003.
During October 2002, the Company issued to an investor 1,500,000
shares of its restricted Common Stock at $.10 per share generating net proceeds
of $123,000. The investor group also received a warrant to purchase up to
750,000 shares of restricted Common Stock of the Company at an exercise price of
$0.15 per share. Within 7 business days of the effectiveness of a registration
statement to register the 1,500,000 shares, the investor group has agreed to
purchase an additional 1,500,000 shares of restricted Common Stock at $.10 per
share and receive another warrant to purchase up to 750,000 shares of restricted
Common Stock at $.15 per share.
During October 2002, the Company issued to an investor 3,571,429
shares of its restricted Common Stock at $.07 per share generating net proceeds
of $244,925. This investor group also received a warrant to purchase up to
7,142,858 shares of restricted Common Stock of the Company at $.07 per share at
any time on or before October 26, 2007, and a warrant to purchase up to
7,142,858 shares of Common Stock at $.07 per share and up to 5,000,000 shares at
$.10 per share over a one year period. None of these warrants have been
exercised through December 31, 2002.
During October 2002 the Company's Board of Directors also approved that
for the quarterly interest payment made by the Company on the 12% Convertible
Senior Notes (for September 30, 2002 and December 30, 2002), at the option of
the note holder, the interest payment due can be used to purchase shares of the
Company's Common Stock at a rate of $.20 per share. For each share purchased,
the note holder shall receive a warrant to purchase one share of the Company's
Common Stock at $.20 per share exercisable at any time prior to June 30,
2004. During the three and six months ended December 31, 2002, 529,324 and
593,634 shares respectively, were issued for payment of the quarterly interest
payment and 529,324 and 593,634 warrants to purchase Common Stock were issued to
the note holders, respectively. The fair value of the warrants issued of
approximately $93,000 was determined using a Black Scholes Valuation Model.
11
During October 2002, the Company's Board of Directors authorized the
issuance of 1,480,000 shares of its Common Stock to certain of its employees and
consultants at the fair value of the underlying shares on the grant date. Such
shares were issued for services to be performed in subsequent periods. At
December 31, 2002, $236,800 is reflected in prepaid expenses for the services
that have not been performed as of December 31, 2002.
During October 2002, the Company granted to all of the holders of the
12% Convertible Senior Notes, 10,306,026 warrants to purchase Common Stock at
$.10 per share. The total number of the warrants issued was equal to 75% of the
dollar amount of the Senior notes held by the note holders. The warrants are
exercisable through November 30, 2002 (subsequently extended through January 31,
2003). Upon the exercise of this warrant by the Senior note holder, the Company
granted an identical number of warrants to that note holder with an exercise
price of $0.10 per share exercisable through March 31, 2003. Through December
31, 2002, the note holders exercised a total of 5,080,261 Common Stock warrants
of the 10,306,026 warrants initially granted, generating gross proceeds to the
Company of $508,026. An additional 5,080,261 warrants were granted upon the
exercise of the initial warrant to the note holders at December 31, 2002. Of
these additional March 2003 warrants, 291,376 were exercised as of December 31,
2002 generating gross proceeds to the Company of $29,138.
On October 28, 2002 at a special meeting of shareholders, the Company's
shareholders approved an increase in the number of authorized shares of the
Company's Common Stock from 150,000,000 shares to 200,000,000 shares and
approved an increase in the size of the Board of Directors from ten to eleven
members.
During August 2001, the Company issued to an investment company a 9.75%
$225,000 Convertible Debenture maturing August 2003. On June 18, 2002, the
Debenture was increased by $100,000, the maturity date extended to August 2004,
and the conversion rate was lowered (Amended Debenture) Interest is payable by
the Company monthly in arrears. The Amended Debenture is convertible at the
lower of $1.00 per share or 72% of the lowest closing bid price of the Common
Stock during the 20 days preceding exercise. The investment company is limited
to no more than 5% of the investment that is convertible during any month, on a
cumulative basis. If on the date of conversion the closing bid price of the
shares is $.40 or below, the Company shall have the right to prepay the portion
being converted at 150% of the principal amount being converted. In such event,
the investment company shall have the right to withdraw its conversion notice.
At the time of conversion of the Debenture, the Company will issue to the
investment company warrants to purchase an amount of Common Stock equal to ten
times the number of shares actually issued upon conversion of the Debenture at
the same conversion price as the Debenture. The warrants are exercisable at any
time for two years following issuance and at the related conversion price of the
Debenture. During the three and six months ended December 31, 2002, the
investment company converted $21,000 and $30,000, respectively of the Debenture
resulting in the issuance of 201,226 and 294,195 shares of Common Stock,
respectively and exercised related warrants for 2,012,260 and 2,941,950 shares,
respectively resulting in gross proceeds of $561,000 . The investment company
has paid the Company $120,000 towards a future exercise of Common Stock warrants
which has been reflected in deposits at December 31, 2002. The Company has
granted to the investment company an additional 175,294 shares of Common Stock
to correct an earlier conversion calculation. The additional shares are
reflected in the consolidated statement of shareholder's equity.
12
During December 2002, the Company's Board of Directors
authorized a Private Placement Offering to sell up to 15,000,000 shares of the
Company's Common Stock at $.10 per share for a total offering of $1,500,000. The
Company's Board of Directors also authorized the 2003-A Private Placement
Offering to sell up to 5,000,000 shares of restricted Common Stock of the
Company at $0.10 per share for a ninety-day period. Through December 31, 2002,
715,000 shares of Common Stock were sold from the 2003-A offering generating
gross proceeds of $71,500. Subsequent to December 31, 2002 and through February
12, 2003, the Company issued an aggregate of 1,945,000 additional shares in this
offering generating additional gross proceeds of $194,500.
4. Long-Term Debt
--------------
At December 31, 2002, Stitch has a $1.5 million bank facility available
(the Facility) to fund the purchase of vending machines placed at locations
where Kodak film products are sold. Borrowings are 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. Stitch has granted the
bank a security interest in the film products vending machines. Repayment of
principal is also insured by a Surety Bond issued by a third-party insurer in
exchange for an initial fee paid by Stitch. At December 31, 2002, $1,043,047 is
outstanding under this Facility.
Stitch also has outstanding working capital loans, of which
approxiamately $195,000 is outstanding, at December 31, 2002 and bears interest
at 6.75%. Subsequent to June 30, 2002, Stitch has made payments to the bank on
these loans. On July 26, 2002, August 29, 2002, September 27, 2002, October 31,
2002, February 3 2003 and February 19 2003 , the bank agreed to extend the due
date of these notes until September 1, 2002, October 1, 2002, November 1, 2002,
December 1, 2002, March 1 2003 and March 17, 2003, respectively, under several
forbearance agreements. In connection with these extensions, Stitch paid $3,000
of fees to the bank.
5. Stock Options and Stock Warrants
--------------------------------
As of December 31, 2002, there were 5,235,485 options outstanding to
purchase Common Stock at exercise prices ranging from $0.165 to $5.00 per share,
of which 5,115,487 were vested; and there were 18,319,812 fully vested warrants
to purchase Common Stock at exercise prices ranging from $0.10 to $4.00 per
share.
6. Subsequent Events
-----------------
On February 14, 2003 at the Annual Shareholders Meeting, the Company's
shareholders approved an increase in the number of authorized shares of the
Company's Common Stock from 200,000,000 shares to 300,000,000 shares.
Subsequent to December 31, 2002 and through February 12, 2003, 475,909
of the Common Stock warrants expiring on January 31, 2003 and March 31, 2003,
were exercised at $.10 per share by the 12% Senior Note Holders generating gross
proceeds of $47,591. (Note 3).
13
Subsequent to December 31, 2002 and through February 12, 2003, the
Company issued an aggregate of 3,826,000 shares in the 2003-A Private Placement
Offering at $.10 per share generating gross proceeds of $382,600. The 2003-A
offering and sale of the shares was exempt from registration under Section 4(2)
of the Act.
In February, 2003, Jubilee Investment Trust, PLC ("Jubilee"), a United
Kingdom investment trust whose shares trade on the London Stock Exchange, agreed
to make an equity investment in USA Technologies at U.S.$0.20 per share. Jubilee
is a newly established investment trust set up to invest in securities traded on
a range of public markets, primarily in the United Kingdom. USA Technologies
will issue to Jubilee 15,000,000 shares of Common Stock of USA Technologies at a
price per share of U.S.$0.20 with an aggregate value of U.S.$3,000,000. In full
payment for the shares of USA Technologies, Jubilee will issue to USA
Technologies a U.S.$3,000,000 equivalent of their shares (1,870,091 shares of
Jubilee at a price per share valued at One British Pound which was the initial
public offering price per share for the Jubilee shares). The exchange rate used
by the parties for the transaction was One British Pound equals U.S.$1.6042.
The shares to be issued to Jubilee by USA Technologies will not be
registered under the Securities Act of 1933, as amended. The Jubilee shares to
be issued to USA Technologies are admitted to listing on the London Stock
Exchange under the symbol JIT. USA Technologies has agreed not to sell the
Jubilee shares for a period of 90 days from January 24, 2003, and to sell a
maximum of 10% of the Jubilee shares during each month thereafter. Jubilee has
agreed not to sell USA Technologies' shares for a period of two (2) years from
the date of issuance unless USA Technologies agrees otherwise. USA Technologies
has agreed to use its best efforts to file an appropriate Registration Statement
with the Securities and Exchange Commission no later than June 30, 2003
registering all of the shares to be issued to Jubilee for resale under the Act
and to use its best efforts to keep such registration statement effective for a
period of three years.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Critical Accounting Policies
General
The preparation of the 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.
Revenue Recognition
Revenue from the sale of equipment is recognized upon freight on board
shipment terms or upon installation of the equipment if installation services
are purchased for the related equipment. Transaction processing revenues are
recognized upon the usage of the Company's credit card activated systems and
network. Services fees for the access to the Company's credit card terminals and
vending equipment are recognized on a monthly basis. Revenues from the sale of
14
products from the Company's vending machines are recognized upon purchase
and acceptance by the vending customer.
Software Development Costs
The Company capitalizes software development costs 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. During May
2000, the Company reached technological feasibility for the development of the
e-Port(TM) control system and related network and, accordingly, the Company
commenced capitalization of software development costs related to this product.
Amortization of software development costs commences when the product becomes
available for general release to customers. Amortization of software development
costs will be 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. Amortization
of such costs commences when the product becomes available for general release
to it customers. 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.
During the fourth quarter of fiscal 2002, the e-Port(TM) product and
related network became available for general release to the Company's customers.
Management performed an evaluation of the commercial success and preliminary
market acceptance of the e-Port(TM) product and network and as a result of this
evaluation, the Company wrote down $2,663,000 of software development costs
related to the e-Port(TM) and the related network. The unamortized balanced
after the impairment charge is being amortized over an estimated useful life of
two years. Amortization expense during three and six months ended December 31,
2002 was $291,276 and $582,552, respectively. Such amount is reflected in cost
of sales in the statement of operations.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over fair value of the net
assets acquired from Stitch in May 2002.
Intangible assets include patents ($1,870,000) and trademarks
($1,050,000) acquired in the Stitch acquisition. Amortization of intangible
assets is computed on the straight-line basis over 10 years. Amortization
expense was $73,000 and $146,000 during the three and six-month periods ended
December 31, 2002, respectively. At December 31, 2002, the expected amortization
of the intangible assets is as follows: $146,000 in 2003, $292,000 per year in
2004-2011 and $255,500 in 2012.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
arising from business combinations completed after June 30, 2001. SFAS No. 142
prohibits the amortization of goodwill and intangible assets with indefinite
useful lives and requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
15
their estimated useful lives. The Company adopted SFAS No. 142 on July 1, 2002.
however the non-amortization provisions of SFAS No. 142 for combinations
initiated after June 30, 2001 were applicable for the Company effective July 1,
2001.
The Company has completed the required transitional impairment test of goodwill
as of July 1, 2002, as prescribed in SFAS No. 142, during the quarter ended
December 31, 2002 using a discounted cash flow analysis. The Company has
concluded that there were no goodwill impairment indicators to be recorded as a
result of this transitional test.
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 including the e-Port(TM), or if
actually commercialized, to obtain commercial acceptance thereof, (v) the
ability of the Company to compete with its competitors to obtain market share,
(vi) the ability of the Company to obtain sufficient funds through operations or
otherwise to repay its debt obligations, (vii) the ability to collect its
subscriptions receivable, or (viii) the ability to locate and acquire suitable
acquisition opportunities, and if acquired, the ability of any such businesses
to generate operating profits. Although the Company believes that the forward
looking statements contained herein are reasonable, it can give no assurance
that the Company's expectations will be met.
Results of Operations
The fiscal quarter ended December 31, 2002 resulted in a net loss of
$3,630,997 compared to a net loss of $2,462,676 for the fiscal quarter ended
December 31, 2001. Losses are projected to continue until sufficient revenue is
generated from equipment and product sales, service and transaction fees from
the Company's proprietary technology.
Revenues were $774,647 compared to $324,882 from the previous year's
fiscal quarter. This $449,765 or 138% increase was primarily due to an increase
in equipment sales of e-Ports of approximately $110,000, during the quarter. An
increase in the installed base also resulted in an increase in revenues by
increasing service and transaction fees by $152,940. In addition, the inclusion
of Stitch revenues for the Kodak vending program increased revenues by $75,576
for product sales during the quarter. Total revenue for Stitch inclusive of the
Kodak vending revenues was $291,014 for the quarter. Such revenues did not exist
in the second quarter of the prior year, as the Stitch acquisition occurred in
the fourth quarter of fiscal 2002. Revenue is still well below the level
required for the Company to be profitable.
16
Cost of sales for the period included labor, equipment and amortization
of software costs of $671,940, an increase of $474,942 or 251% compared to the
same period during the prior year. This increase is primarily due to the
inclusion of amortization of software development costs in the amount of
$291,276 for the quarter ended December 31, 2002. A similar amount did not exist
for the quarter ended December 31, 2001 as amortization of such costs commenced
in the fourth quarter of fiscal year 2002. This remaining increase was directly
attributable to the increase in equipment and product revenues.
General and administrative expenses of $1,368,373 decreased by $99,864
or 7% from the same quarter last year. The decrease was due principally due to
decreases in promotion expense of $412,154 offset by increases in product
development expense of $130,018, legal fees of $53,451, software license fees of
$44,254, licenses of $36,992 and insurance expense of $33,129.
Compensation expense of $838,713 increased by $10,993 or 1%. This
increase was due to small fluctuations in the employee base.
The interest expense increase of $1,066,369 was primarily due to the
increases in non-cash amortization of the debt discount and beneficial
conversion features relating to the senior notes and convertible debentures, as
well as an increase in cash interest expense due to the addition of the 2001-D
and 2002-A Senior Notes in the current fiscal year. Depreciation and
amortization expense increased by $166,398, largely due to an increase of
$73,000 of amortization relating to intangible assets. The remaining increase is
due to the higher depreciable asset levels due to assets acquired in the Stitch
Acquisition.
Of the total of $3,126,605 of operating and other expenses for the
quarter, $1,602,449 were non-cash expenses, including consulting, promotions,
employee compensation, public relations, amortization, non-cash interest and the
issuance of common stock in lieu of interest.
The six-month period ended December 31, 2002 resulted in a net
operating loss of $7,205,215 compared to a net loss of $4,720,312 for the
comparable period ended December 31, 2001. Revenues were $1,509,092 compared to
$690,629, a $818,463 or 119% increase. Of the total revenues, equipment sales
totaled $572,947, an increase of $207,841 or 57%. Cost of sales of $1,339,400
represented an increase of $929,369, and is directly attributable to the
increase in equipment sales as well as the inclusion of amortization of software
development costs in the amount of $582,550 for the six-month period ended
December 31, 2002.
General and administrative expenses of $3,010,751 increased by $411,309
or 16%. The principal reason was a large increase in product development expense
of $748,621, telephone expense of $195,408 and legal fees of $132,489. The
increase was offset by decreases in promotion expense of $403,746, public
relations expense of $207,272 and consultant fees expense of $96,400.
Compensation expense of $1,684,432 decreased by $45,381 or 3%. Non-cash
compensation was $2,963,794 including consulting expense, promotion expense,
public relations expense, employee compensation, amortization expense, non-cash
interest and the issuance of common stock in lieu of interest. The interest
expense increase of $1,677,378 is primarily due to increases in non-cash
amortization of the debt discount and beneficial conversion features relating to
the senior notes and convertible debentures, as well as an increase in cash
interest expense due to the addition of the 2001-D and 2002-A Senior Notes.
17
Plan of Operations
The Company has focused on presenting the multiple capabilities of the
e-Port(TM) by developing several product lines of e-Port(TM) and by the
acquisition of Stitch Networks. The "audit plus cashless" version contains all
the functionality for multiple forms of cashless payment processing including
credit card processing, control and data management, plus the added ability to
audit vending product usage and vending machine status. Through December 31,
2002, over 825 units have been sold to distributors, soft drink bottlers and
operators. Additional in-house work continues, to enable the e-Port(TM) to be
compatible with the largest feasible portion of the installed base of 8 million
vending machines in the United States, many of which have slightly different
connectivity requirements. With the acquisition of Stitch Networks, the Company
acquired a wireless "audit plus cashless" product line.
An enhanced version of e-Port(TM) offers capability for Internet and
wireless connectivity, in addition to the capabilities of the "audit plus
cashless" version. For this product, the Company is working with RadiSys, a
contract manufacturer providing value added design, development, fulfillment and
product warranty services. Through December 31, 2002, 58 units have been
sold.
Concurrent with the above developments to the e-Port product line, IBM
is working with the Company to enhance the existing network to support
transaction processing, advertising and e-commerce on a worldwide basis with
enhanced security features. Expenditures have been made to recode our existing
system in an Internet capable or TCPIP protocol and to use a more appropriate
operating system. In September 2002, the Company signed a Hosting Agreement with
IBM, and completed a transfer of its network to a remote IBM location, which is
secure and equipped with 24/7 backup protection. The Company believes that the
security and professionalism of the hosting arrangement will be a significant
factor in assuring customers of the reliability of the financial and data
management services which the Company is providing. IBM and the Company are
combining products and capabilities to target sales to the intelligent vending,
retail point of sale, and networked home applications markets. Customer
prospects have been identified, and trade shows have been attended.
In the vending industry, the e-Port(TM) is being purchased by soft
drink bottlers and independent vending operators throughout the USA and Canada.
On the soft drink bottler side, heavy effort is being put into securing initial
distribution agreements with the top ten Coke and Pepsi bottlers. At a corporate
level, the Dr Pepper / 7-Up Company announced in October 2002 at the Dr Pepper
National Bottling meeting that it has selected USA Technologies to make
available its cashless payment services in its vending machines throughout the
United States. Dr Pepper will offer our e-Port(TM) not only to its own bottlers,
but also to Coca-Cola and Pepsi bottlers that distribute Dr Pepper products. The
Dr Pepper Company has completed its first implementation of e-Port(TM) with The
Pepsi Cola Bottler of Central Virginia, with some vending machines using a
Sprint-enabled wireless solution.
Three of the premier national independent vending operators, Compass,
ARAMARK and Sodexho, have already installed e-Port(TM) in various locations,
with plans for additional purchases based on the success of the initial e-Ports.
One major vending operator, International Vending Management (IVM), has signed a
contract with the Company. Through December 31, 2002, 98 units have been sold to
IVM and 19 are installed.
18
In March 2002, the Company signed an agreement with MEI (Mars
Electronics), a world leader in the manufacturing and supplier of electronic
coin mechanisms and dollar bill acceptors to the vending industry. MEI has
agreed to sell and distribute an MEI branded cashless payment system developed
by the Company, as part of its portfolio of vending solutions, which would
include a comprehensive suite of cashless payment services and vending software
management tools. The Company introduced the combined offering at the fall NAMA
in October (the primary annual vending trade show) with commercial availability
planned for March 2003. By contract, MEI has committed to buy a minimum of
10,000 units of the USA product over the course of the 24 month agreement, or
pay the Company $4.00 per unit for any shortfall from 10,000 units. In addition,
all MEI payment systems in the field would have the option to connect to the
Company's network and produce recurring revenues.
The Stitch Kodak program has 296 units installed as of December 31,
2002, including high profile locations like Yankee Stadium, Times Square, the
Empire State Building and Six Flags Amusement Parks. Kodak machines provide
recurring revenues to the Company from monthly service fees as well as from
sales of product.
The Company continues to work with the top vending machine
manufacturers, including Automatic Products, AMS, U-Select-It, Crane
Merchandising Systems, FastCorp and Dixie-Narco, in order to incorporate our
e-Port(TM) technology into vending machines at the factory (OEM); and with
authorized resellers, including Betson Enterprises, HA Franz, Brady Distributing
and Weymouth Distributing.
In October 2002, the Company signed a Strategic Alliance Agreement
with ZiLOG Corporation, a semiconductor company that is the largest supplier of
microprocessors to the retail point of sale industry. The agreement allows the
Company's proprietary network software (USAlive) to be embedded on a chip
produced by ZiLOG. The Company would license its software to the purchaser and
would receive a fee from the licensing of each such chip. A second revenue
stream could be generated when those who buy the retail point of sales terminals
begin to use them, because they could elect to use the USA network which is
embedded on the chip. The Company believes that these fees could become the
primary driver of profitability for the Company in the intermediate and longer
term. The company believes that the cost of e-Port(TM) to our customers could
decline with this activity.
In the hospitality industry, Business Express(R) continues to be one of
the premier solutions for automated business centers. The Company has
relationships with two of the most recognized global hotel chains, Marriott and
Hilton Hotels. The addition of e-Port(TM) technology for vending machines
located in hotels now offers a "one-stop shopping" experience to hotels which
also have or are considering purchasing a USA business center. The Company has
developed an e-Port(TM) application using hotel room keys in vending machines,
with the purchase being added to the hotel bill of the hotel guest. Forty
vending machines are now operating successfully with such technology at the
1,400 room Gaylord Palms Resort & Convention Center in Orlando, Florida.
In laundry, American Sales Inc. (ASI) signed a five-year agreement to
purchase units of Stitch's e-Suds(TM) laundry solution for their university
locations in the Midwest, with initial installations to begin in the summer of
2003. The agreement provides that if ASI purchases at least 9,000 units over the
contract period, then ASI shall have exclusive rights to the units in Ohio,
Kentucky, Indiana, Michigan and Marshall University. The Company has
additionally begun working with two of the premier laundry operators, Web
19
Services and the MacGray Company. These two companies have already implemented
the e-Port(TM) solution, with discussions underway to implement the e-Suds(TM)
solution.
The Company is marketing its products through its full-time sales staff
consisting of five salespeople, approximately 35 authorized resellers, and
office equipment and vending OEMs, either directly to customer locations or to
management companies servicing these locations.
During October 2002, the Company demonstrated capabilities of its
e-Port(TM) and the network to the vending industry at Fall NAMA, the vending
industry's semi-annual trade show event. Capabilities include mobile commerce
technology permitting access to vending machines through customer cell phones;
proprietary wireless technology allowing for low cost, connectivity via existing
customer telephone connections; and ability for customers to manage their own
e-Port locations and access vending machine data and transaction data on the
web. The e-Port(TM) was demonstrated in the booths of several different vending
machine manufacturers. From the inception of shipments of e-Port(TM) to date,
the Company has delivered e-Ports to or taken orders from over 70 separate
customers, many of them on behalf of very large corporations with well-known
brand names, including several Fortune 500 companies.
In March 2002 the Company signed a letter of intent with Virtual
Concepts Corporation to help promote a specially designed vending machine known
as CineMachine(TM). The CineMachine(TM) would sell DVDs, CDs, and video games
and would be equipped with a screen and speakers to preview movie trailers,
commercials and music selections of the items for sale in the CineMachine(TM),
and promotional posters for advertising placement. The CineMachine(TM) would use
the Company's e-Port(TM) for cashless transactions, and allow for multiple
purchases, sales and inventory tracking, and printing a receipt. Sales
opportunities are currently being explored in movie theatres, universities,
fitness centers and retail locations.
In November 2002, the e-Port(TM) was introduced to Japan at VENDEX
Japan 2002, a major vending exposition in Tokyo. Altech Co. Ltd., a major
distributor of information technology products to the Japanese market, showcased
the e-Port(TM). The Company and its partners plan to collaborate to support the
implementation of e-Port(TM) systems in Japan.
Technology Partners (Holdings) LLC, an investment banker, has been
retained by the Company to help it plan and execute the growth of the Company.
Work is underway to acquire financing, complementary technology, products,
services and customers.
Liquidity and Capital Resources
For the six months ended December 31, 2002, there was a net decrease in
cash of $40, 161. This was attributable to $3,086,062 of cash used in operating
activities, $92,484 of cash used for investing activities, offset by cash
provided by financing activities of $3,138,385 primarily from the 2002-A Senior
Note offering and the issuance of Common Stock. The cash used in operating
activities consisted of the operating loss of $7,205,215, partially offset by
$1,288,332 of non-cash amortization of debt discount and $1,006,528 increase in
accounts payable. As of December 31, 2002, total cash on hand was $517,809 and
the working capital deficit was $7,979,127.
In June 2002, the Company commenced a private placement offering (the
"2002-A" offering) of up to $2,500,000 of Convertible Senior Notes (increased in
October 2002 to $4,300,000). The offering now consists of up to 430 units at
$10,000, convertible into Common Shares at $.20 per share. Each note holder
receives 20,000 shares of Common Stock for each unit purchased. The Notes mature
20
in December 2005. Through December 31, 2002 $4,284,008 of Senior Notes were
subscribed for ($2,585,024 in cash and $1,698,984 for services) and a total of
8,568,016 shares were issued to these Senior note holders. The offering is
exempt from the registration requirements of the Act pursuant to Section 4(2)
and Rule 506 thereunder and is being offered and sold only to accredited
investors. The Company has agreed to prepare and file at its expense a
registration statement covering the resale of the shares of Common Stock. The
offering terminated October 31, 2002 with total subscriptions of $4,284,008. The
Board of Directors authorized the issuance of $400,000 of these Senior Notes to
certain officers, directors and consultants of the Company in exchange for
services to be performed.
During October 2002, the Company granted to all of the holders of the
12% Convertible Senior Notes, 10,306,026 warrants to purchase Common Stock at
$.10 per share. The total number of the warrants issued was equal to 75% of the
dollar amount of the Senior notes held by the note holders. The warrants are
exercisable through November 30, 2002 (subsequently extended through January 31,
2003). Upon the exercise of this warrant by the Senior note holder, the Company
granted an identical number of warrants to that note holder with an exercise
price of $0.10 per share exercisable through March 31, 2003. Through December
31, 2002, the note holders exercised a total of 5,080,261 Common Stock warrants
of the 10,306,026 warrants initially granted, generating gross proceeds to the
Company of $508,026. An additional 5,080,261 warrants were granted upon the
exercise of the initial warrant to the note holders at December 31, 2002. Of
these additional March 2003 warrants, 291,376 were exercised as of December 31,
2002 generating gross proceeds to the Company of $29,138.
On December 19, 2002, the Company was authorized to
sell during the subsequent sixty days up to 15 million shares of restricted
Common Stock at $.10 per share (or other securities convertible into shares of
Common Stock at $.10 per share) to no more than three accredited investors. The
conversion period is limited to not more than 90 days. To date, no gross
proceeds have been deposited. The Company was also authorized to sell
up to 5 million shares of restricted Common Stock at $.10
per share (or other securities convertible into shares of Common Stock at $.10
per share) to accredited investors called the 2003-A offering. The conversion
period is limited to not more than 180 days. As of December 31, 2002, $71,500 of
gross proceeds has been deposited.
During the remainder of fiscal 2003, the Company anticipates expensing
additional expenditures of approximately $500,000 for enhancements to its
network.
At December 31, 2002 Stitch has a $1.5 million bank facility available
(the Facility) to fund the purchase of vending machines placed at locations
where Kodak film products are sold. Borrowings are 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. Stitch has granted the
bank a security interest in the film products vending machines. Repayment of
principal is also insured by a Surety Bond issued by a third-party insurer in
exchange for an initial fee paid by Stitch. At December 31, 2002, $1,043,047 is
outstanding under this Facility.
Stitch also has outstanding working capital loans, of which
approxiamately $195,000 is outstanding, at December 31, 2002 and bears interest
at 6.75%. Subsequent to June 30, 2002, Stitch has made payments to the bank on
these loans. On July 26, 2002, August 29, 2002, September 27, 2002, October 31,
2002, February 3 2003 and February 19 2003 , the bank agreed to extend the due
date of these notes until September 1, 2002, October 1, 2002, November 1, 2002,
December 1, 2002, March 1 2003 and March 17, 2003, respectively, under several
forbearance agreements. In connection with these extensions, Stitch paid $3,000
of fees to the bank.
As described in Note 6, during February 2003, the Company entered into
an Agreement with an Investment Trust (the Trust) whereby the Company will
exchange 15,000,000 shares of its restricted Common Stock at a fixed price of
$.20 per share for securities of the Trust valued at a fixed price of one
21
British Pound per share, which would be listed on the London Stock Exchange. The
Company has agreed not to sell the Trust shares for a period of 90 days from
January 24, 2003, but is allowed to sell a maximum of 10% of the Trust's shares
during each month thereafter. Given the uncertain liquidity of this new Trust,
the cash that the Company might obtain from such sales is difficult to predict.
As shown on the Consolidated Statement of Cash Flows for the six months
ended December 31, 2002, and discussed in Note 3 for the quarter ended on the
same date, the Company has financed its operations basically through issuance of
stock, exercise of warrants, and issuance of convertible debentures. Over this
time period there has been a small decrease in cash, approximately $40,000.
Plans are in place to continue financing Company operations through similar
means at least through the remainder of the fiscal year ending June 30, 2003.
The increases in the authorized shares of Common Stock enable those plans. These
additional shares would be not only for investors who provide cash to the
Company, but also for service providers who otherwise would require cash from
the Company. The financings are also anticipated in part to permit the Company
to reduce payables. We continue to explore ways to reduce costs further,
while preserving resources needed to grow the business.
The Company's ability to meet its obligations is currently dependent
upon its ability to raise capital, (which may not be readily available), until
the Company's products are purchased in sufficient quantities in the marketplace
to generate sufficient operating revenues. These factors raise doubt about the
Company's ability to continue as a going concern. The Company believes that
proceeds from the sale of additional debt or equity securities, the potential
exercise of outstanding warrants and options, future equity or debt offerings,
and revenues from its business, would be sufficient to fund operations and
investing activities until at least through the end of the fiscal year. However,
there can be no assurance that any such additional sales of securities could be
made by the Company, the Company's products will be purchased in sufficient
quantities in the marketplace to generate the required revenues. Under such
circumstances, the Company may cease to be a going concern or may have to reduce
its operations.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The principal executive officer and principal financial officer have
evaluated the disclosure controls and procedures as of the date within 90 days
prior to the filing date of this report. Based on this evaluation, they conclude
that the disclosure controls and procedures effectively ensure that the
information required to be disclosed in our filings and submissions under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
evaluation of the internal controls, including any corrective action with regard
to significant deficiencies or material weaknesses.
22
Part II - Other Information
Item 2. Changes in Securities
In June 2002, the Company commenced a private placement offering (the
"2002-A" offering) of up to $4,000,000 of Convertible Senior Notes (increased in
October 2002 to $4,300,000). The offering consists of up to 430 units at
$10,000, convertible into Common Shares at $.20 per share. Each note holder
initially was to receive 20,000 Common Stock warrants for each unit purchased.
Subsequent to June 30, 2002, the offering was amended to replace the warrants
with 20,000 shares of Common Stock for each unit. The offering terminated
October 31, 2002. During the quarter ended December 31, 2002, $2,449,990 of
Senior Notes were subscribed for ($824,240 in cash and $1,625,750 for services)
and a total of 4,899,980 shares were issued to these Senior noteholders. The
offering is exempt from the registration requirements of the Act pursuant to
Section 4(2) and Rule 506 thereunder and is being offered and sold only to
accredited investors. The Company has agreed to prepare and file at its expense
a registration statement covering the resale of the shares of Common Stock.
During August 2001, the Company issued to La Jolla Cove Investors, Inc.
a $225,000 Convertible Debenture bearing 9-3/4 percent interest with a maturity
date of August 2, 2003. On June 18, 2002, the Debenture was increased by
$100,000, the maturity date extended to August 2004, and the conversion rate was
lowered. Interest is payable by the Company monthly in arrears. The Debenture is
convertible at the lower of $1.00 per share or 80% (amended to 72%) of the
lowest closing bid price of the Common Stock during the 20 days preceding
exercise. The investment company is limited to no more than 5% of the investment
that is convertible during any month, on a cumulative basis. If on the date of
conversion the closing bid price of the shares is $.40 or below, the Company
shall have the right to prepay the portion being converted at 150% of the
principal amount being converted. In such event, the investment company shall
have the right to withdraw its conversion notice. At the time of conversion of
the Debenture, the Company has agreed to issue to the investment company
warrants to purchase an amount of Common Stock equal to ten times the number of
shares actually issued upon conversion of the Debenture. The warrants are
exercisable at any time for two years following issuance and at the related
conversion price of the Debenture. The Company has granted to La Jolla certain
registration rights covering the resale of the shares of Common Stock underlying
the Debenture as well as the related warrants issuable upon conversion of the
Debenture. At December 31, 2002, there were $192,530 Convertible Debentures
outstanding with a due date of August 2, 2004. During the quarter ended December
31, 2002, the investment company converted $30,000 of the debenture resulting in
the issuance of 294,194 shares of common stock, and exercised related warrants
for 2,941,950 shares. Funds for the conversion of the debentures and the
exercise of warrants were $300,000 in cash received this quarter and $30,000 of
funds previously paid, which had been reflected as a deposit as of June 30,
2002. The price per share paid by La Jolla during the quarter was $0.103.
During the quarter, 593,634 shares of Common Stock were issued to
certain holders of 12% Senior Notes due December 31, 2003, December 31, 2004,
and December 31, 2005 in lieu of cash payment, for interest earned on the Notes
during the quarter ended September 30, 2002. Such Note holders elected to
receive Common Stock at the rate of one share per $0.20 of interest earned. Such
Note holders also are entitled to receive 593,364 warrants to purchase Common
Stock as part of their election to receive stock in lieu of interest. Such
shares of Common Stock were issued pursuant to the exemption from registration
23
set forth in Section 3(a)(9) of the Act. The Company, at its cost and expense,
has agreed to register these shares under the Act for resale by the holder.
In September 2002, the Company sold to an investor 2,000,000
shares at $0.12 per share, receiving $240,000 in proceeds. In addition, in
October 2002, the Company granted to the investor warrants to purchase up to
2,000,000 shares at $.10 per share through November 30, 2002 (later extended
until January 31, 2003, and if all of these warrants are exercised, the investor
has been granted another identical warrant for 2,000,000 shares exercisable at
any time through March 31, 2003. None of these warrants have been exercised.
Such shares of Common Stock and warrants were issued pursuant to the exemption
from registration set fort in Section 4(2) of the Act and Regulation D. The
Company, at its cost and expense, has agreed to register these shares under the
Act for resale by the holder.
In October 2002, the Company issued to Edwin R. Boynton, a
Director, 50,000 shares in lieu of the 100,000 options granted to him in April
2002. The shares were issued at a price per share of $.___. The offering was
exempt from the registration requirements of the Act 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.
In October 2002, the Company sold to an investor 3,571,429
shares at $.07 per share and issued the following warrants: (1) warrants to
purchase up to 7,142,858 shares at $.07 at any time for a five year period; and
(2) warrants to purchase up to 7,142,858 shares, at $.07 per share and up to
5,000,000 shares at $.10 per share, exercisable over a one year period. The
offering is exempt from the registration requirements of the Act pursuant to
Section 4(2) and Rule 506 thereunder. We have agreed to register these shares
for resale under the Act at our cost and expense.
In October 2002, the Company sold to an investor 1,500,000 shares
at $.10 per share and granted warrants to purchase up to 750,000 shares at $.15
per share at any time for five years. Within seven days following the
effectiveness of the registration statement covering these shares, the Company
has agreed to sell to the investor an additional 1,500,000 shares at $.10 per
share and grant warrants to purchase up to 750,000 shares at the then closing
price per share at any time for five years. The offering is exempt from the
registration requirements of the Act pursuant to Section 4(2) and Rule 506
thereunder and is being offered and sold only to accredited investors. We have
agreed to register these shares for resale under the Act at our cost and
expense.
In October 2002, the Company granted to the holders of the 12%
senior notes warrants to purchase that number of shares equal to 75% of the
dollar amount of the notes held by such holder. The total number of warrants was
10,360,025 and are exercisable at any time prior to November 30, 2002 (later
extended to January 31, 2003). If the holder exercises all of such holder's
warrants, the holder shall receive another identical warrant exercisable at any
time prior to March 31, 2003. Through December 31, 2002, warrants were exercised
for an aggregate of 5,371,637 shares resulting in $537,164 of proceeds. The
offering is exempt from the registration requirements of the Act pursuant to
Section 4(2) and Rule 506 thereunder and is being offered and sold only to
accredited investors. We have agreed to register these shares for resale under
the Act at our cost and expense.
In November 2002, the Company agreed to issue an aggregate of
1,480,000 shares to employees and consultants for services to be rendered. The
shares were valued at $.16 per share. The offering is exempt from the
24
registration requirements of the Act 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.
In December 2002, the Company issued an aggregate of 715,000
shares to 5 investors at $.10 per share for an aggregate of $71,500. The
offering is exempt from the registration requirements of the Act pursuant to
Section 4(2) and Rule 506 thereunder and is being offered and sold only to
accredited investors. The Company has agreed to prepare and file at its expense
a registration statement covering the resale of the shares of Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certifications Pursuant to 18 U.S.C Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certifications Pursuant to 18 U.S.C Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None
25
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: February 19, 2003 / s /
------------------------------------------------
George R. Jensen, Jr., Chairman, Chief
Executive Officer
Date: February 19, 2003 / s /
-----------------------------------------------
Leland P. Maxwell, Senior Vice-President,
Chief Financial Officer
26
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, George R. Jensen, Jr., Chief Executive Officer of the registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-QSB of USA Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 19, 2003 /s/ George R. Jensen, Jr.
----------------- -------------------------
George R. Jensen, Jr., Chief Executive Officer
27
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Leland P. Maxwell, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of USA Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 19, 2003 /s/Leland P. Maxwell
----------------- ----------------------
Leland P. Maxwell, Chief Financial Officer
28