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, 2001
-------------------
( ) 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.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2679963
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(State or other jurisdiction of incorporation (I.R.S. employer Identification No.)
or organization)
200 Plant Avenue, Wayne, Pennsylvania 19087
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(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 15, 2002, there were 35,399,300 shares of Common Stock, no par
value, outstanding.
USA TECHNOLOGIES, INC.
INDEX
PAGE NO.
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Balance Sheets - December 31, 2001 and June 30, 2001 1
Statement of Operations - Three and six months ended
December 31, 2001 and 2000 2
Statement of Shareholders' Deficit - December 31, 2001 3
Statement of Cash Flows - Six months ended
December 31, 2001 and 2000 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II - Other Information
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
USA Technologies, Inc.
Balance Sheets
December 31, June 30,
2001 2001
------------- -----------
(Unaudited) (Note 2)
Assets
Current assets:
Cash and cash equivalents $ 1,132,494 $ 817,570
Accounts receivable 139,562 64,752
Inventory 747,765 560,410
Prepaid expenses and other current assets 721,354 428,825
Subscriptions receivable 781,500 29,000
----------- -----------
Total current assets 3,522,675 1,900,557
Property and equipment, net of accumulated
depreciation of $835,915 at December 31, 2001
and $672,913 at June 30, 2001 630,092 761,324
Software development costs 4,666,130 3,087,415
Other assets 388,865 430,765
----------- -----------
Total assets $ 9,207,762 $ 6,180,061
=========== ===========
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable $ 2,716,090 $ 2,607,570
Accrued expenses 1,027,674 1,355,595
Funds deposited for Senior Notes 895,601 -
Equipment line of credit 42,132 45,785
Current obligations under convertible Senior Notes 240,000 211,704
Current obligations under capital leases 58,661 70,446
----------- -----------
Total current liabilities 4,980,158 4,291,100
Convertible Senior Notes, less current portion 4,497,228 4,236,281
Convertible Debenture, less current portion 54,792 -
Obligations under capital leases, less current portion 17,798 53,577
----------- -----------
Total liabilities 9,549,976 8,580,958
Shareholders' deficit:
Preferred Stock, no par value:
Series A Convertible Preferred:
Authorized shares - 1,800,000; issued and outstanding
shares - 550,959 at December 31, 2001 and 555,284 at
June 30, 2001 (liquidation preference of $10,582,879 at
December 31, 2001) 3,902,632 3,933,253
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 32,910,612 at
December 31, 2001 and 21,450,755
at June 30, 2001 39,774,958 32,977,922
Deferred compensation (51,500) (103,000)
Accumulated deficit (43,968,304) (39,209,072)
----------- -----------
Total shareholders' deficit (342,214) (2,400,897)
----------- -----------
Total liabilities and shareholders' deficit $ 9,207,762 $ 6,180,061
=========== ===========
See accompanying notes.
1
USA Technologies, Inc.
Statements of Operations
(Unaudited)
Three months ended Six months ended
December 31, December 31,
2001 2000 2001 2000
--------------------------------- -----------------------------------
Revenues:
Equipment sales 163,210 $ 94,242 $ 365,106 $ 337,040
License and transaction fees 161,672 164,000 325,523 327,961
----------- ----------- ----------- -----------
Total revenues 324,882 258,242 690,629 665,001
Operating expenses:
Cost of sales 196,998 135,671 410,031 386,177
General and administrative 1,468,237 1,196,590 2,599,442 2,032,076
Compensation 827,720 485,446 1,729,813 1,077,475
Depreciation 81,181 34,349 163,002 67,172
----------- ----------- ----------- -----------
Total operating expenses (2,574,136) (1,852,056) (4,902,288) (3,562,900)
----------- ----------- ----------- -----------
(2,249,254) (1,593,814) (4,211,659) (2,897,899)
Other income (expense):
Interest income 3,511 18,250 6,267 46,934
Interest expense:
Coupon or stated rate (170,501) (127,920) (336,998) (256,466)
Non-cash amortization
of debt discount (246,432) (234,209) (525,088) (468,920)
Less: amount capitalized 200,000 46,421 347,166 69,669
----------- ----------- ----------- -----------
Total interest expense (216,933) (315,708) (514,920) (655,717)
----------- ----------- ----------- -----------
Total other income (expense) (213,422) (297,458) (508,653) (608,783)
----------- ----------- ----------- -----------
Loss before cumulative effect of
accounting change and extraordinary item (2,462,676) (1,891,272) (4,720,312) (3,506,682)
Cumulative effect of accounting change - (821,000) - (821,000)
----------- ----------- ----------- -----------
Loss before extraordinary item (2,462,676) (2,712,272) (4,720,312) (4,327,682)
Extraordinary loss on exchange of debt - (863,000) - (863,000)
----------- ----------- ----------- -----------
Net loss (2,462,676) (3,575,272) (4,720,312) (5,190,682)
Cumulative preferred dividends - - (413,219) (421,833)
----------- ----------- ----------- -----------
Loss applicable to common shares $(2,462,676) $(3,575,272) $(5,133,531) $(5,612,515)
----------- ----------- ----------- -----------
Loss per common share (basic and diluted) $ (.08) $ (0.23) $ (.19) $ (0.37)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding (basic and diluted) 30,178,507 15,663,722 27,313,543 14,996,487
=========== =========== =========== ===========
See accompanying notes.
2
USA Technologies, Inc.
Statement of Shareholders' Deficit
(Unaudited)
Series A
Convertible
Preferred Common Deferred Accumulated
Stock Stock Compensation Deficit Total
------------- ----------- -------------- -------------- --------------
Balance, June 30, 2001 $ 3,933,253 $32,977,922 $ (103,000) $ (39,209,072) $ (2,400,897)
Conversion of 4,325 shares of Preferred
Stock to 4,325 shares of Common Stock (30,621) 30,621 - - -
Conversion of $38,920 of cumulative
preferred dividends into 3,892 shares of
Common Stock at $10.00 per share - 38,920 - (38,920) -
Issuance of 1,330,500 shares of Common Stock
in exchange for professional services - 500,640 - - 500,640
Issuance of 500,000 Common Stock Warrants
in exchange for professional services - 115,000 - - 115,000
Issuance of 200,000 Common Stock Options in
exchange for professional services - 66,000 - - 66,000
Issuance of 498,000 shares of Common Stock
from the conversion of $622,500 of the
2000 12% Senior Notes at $1.25 per share - 622,500 - - 622,500
Exercise of 30,000 Common Stock warrants at
$1.00 per share - 30,000 - - 30,000
Compensation expense related to deferred
stock awards - - 51,500 - 51,500
Exercise of 500,000 Common Stock warrants
at $.29 per share, net of offering costs - 142,900 - - 142,900
Issuance of 38,850 shares of Common Stock
from the conversion of $10,000 of 9-3/4%
debentures and the related exercise of
Common Stock warrants at $.2574 per share
to purchase 388,500 shares of Common Stock - 83,717 - - 83,717
Issuance of 4,726,040 shares of Common Stock in
connection with the 2001-B Private Placement,
net of offering costs of $108,630 - 2,765,991 - - 2,765,991
Issuance of 3,704,576 shares of Common Stock in
connection with the 2001-C Private Placement,
net of offering costs of $203,567 and net of
subscriptions receivable of $270,000 - 1,608,852 - - 2,114,065
Issuance of 235,174 shares of Common Stock
in lieu of cash payment for interest on
the 2000 12% Convertible Senior Note
Offering - 117,867 - - 117,867
Debt discount relating to beneficial
conversion feature on the 2001 12% Senior
Notes due 2004 - 429,948 - - 429,948
Debt discount relating to beneficial
conversion feature on the $225,000, 9-3/4%
Convertible Debenture - 225,000 - - 225,000
Other - 19,080 - - 19,080
Net loss - - - (4,720,312) (4,706,973)
------------ ------------ ------------ ------------ -----------
Balance, December 31, 2001 $ 3,902,632 $ 39,774,958 $ (51,500) $(43,968,304) $ (342,214)
============ ============ ============ ============ ===========
See accompanying notes.
3
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended December 31,
2001 2000
-----------------------------
Operating activities
Net loss $(4,720,312) $ (3,576,352)
Adjustments to reconcile net loss to net cash used in operating activities:
Compensation charges incurred in connection with
Stock awards and the issuance of Common Stock 1,914,241 71,775
Issuance of Common Stock in lieu of cash payments for interest on
Senior Note 117,867
Interest/amortization relating to Senior Note Offering 525,088 468,920
Depreciation 163,002 93,589
Provision for allowance for uncollectible accounts 11,855 9,875
Changes in operating assets and liabilities:
Accounts receivable (86,665) 368,712
Inventory (187,355) (357,166)
Prepaid expenses, deposits, and other assets 264,774 152,243
Accounts payable 108,520 444,252
Accrued expenses (327,921) 192,896
---------- ----------
Net cash used in operating activities (2,216,906) (2,131,256)
Investing activities
Purchase of property and equipment (31,770) (221,856)
Increase in software development costs (1,578,715) (724,021)
---------- ----------
Net cash used in investing activities (1,610,485) (945,877)
Financing activities
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants 2,715,916 2,067,651
Net proceeds from issuance of Senior Notes and Convertible Debenture 558,015 12,840
Increase in funds deposited for Senior Notes 895,601 --
Net repayment of equipment line of credit (3,653) (74,235)
Payment of deferred financing costs (49,227)
Collection of subscriptions receivable 24,000 12,199
Repayment of principal on capital lease obligations (47,564) (7,489)
---------- ----------
Net cash provided by financing activities 4,142,315 1,961,739
---------- ----------
Net (decrease) increase in cash and cash equivalents 314,924 (1,115,394)
Cash and cash equivalents at beginning of year 817,570 1,859,360
---------- ----------
Cash and cash equivalents at end of period $1,132,494 $ 743,966
========== ==========
Supplemental disclosures of cash flow information:
Conversion of Convertible Preferred Stock to Common Stock $ 30,621 $ 84,960
========== ==========
Conversion of Convertible Preferred Dividends to Common Stock $ 38,920 $ 98,980
========== ==========
Conversion of Senior Notes to Common Stock $ 622,500 $ 7,482
========== ==========
Cash paid for interest $ 336,998 $ 256,466
========== ==========
Prepaid stock compensation granted $ 557,303 $ -
========== ==========
Subscriptions receivable outstanding $ 781,500 $ 510,000
========== ==========
Issuance of Common Stock in connection with 2000 Senior Note Offering $ -- $ 7,042
========== ==========
Capital lease obligations $ -- $ 42,630
========== ==========
See accompanying notes.
4
USA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Business
USA Technologies, Inc. provides unattended, cashless payment / control
systems and associated network and financial services for the copy, fax, debit
card, smart card, vending, laundry and personal computer 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. Customers are
located primarily in the continental United States. The Company also has
installations in Alaska, Hawaii, Puerto Rico and Europe. Sample customers
include major hotel chains, consumer package goods companies, information
technology companies, and vending operators. Distribution and strategic partners
include International Business Machines, Marconi plc., DoubleClick, Xerox and
Sprint. Manufacturing partners include Rad.Sys and Masterwork Electronics. The
Company generates its revenues from the direct sale of its control systems and
the resale of configured business equipment utilizing its control systems, as
well as by network fees and a percentage of the monies generated from all credit
card transactions conducted through its control systems.
The Company has developed and commenced shipping of its next generation
of cashless control/payment systems, network and financial services
(e-Port(TM)). Current e-Port(TM) shipments include capabilities for credit card
processing, tracking of vending inventory, wireless communication and reporting
of this inventory data to a monitoring station. New networking and financial
services capabilities currently being delivered via USALive(TM) to customers
include electronic transfer of funds and transaction reports to customers. e-
Port(TM) terminal and USALive network capabilities currently in beta and
targeted for shipment to certain customers during the fourth quarter of fiscal
2002 include interactive advertising, web based transaction reporting and
terminal management, and acceptance of other forms of cashless payment systems.
At December 31, 2001, the Company had a total of 1,683 terminals
installed at various hotels, libraries, and vending machines located throughout
the United States and Canada. This represented an increase of 344 terminals
based on an installed base of 1,339 terminals as of December 31, 2000.
2. Accounting Policies
Interim Financial Information
The accompanying unaudited condensed 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 (consisting of normal recurring accruals)
considered necessary have been included. Operating results for the three and six
month period ended December 31, 2001 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2002. The balance
sheet at June 30, 2001 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.
5
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, 2001.
Use of Estimates
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.
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 is stated at the lower of cost (first-in, first-out method)
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.
Revenue Recognition
Revenue from the sale of equipment is recognized upon installation and
customer acceptance of the related equipment. License fee revenue (including
transaction processing revenue) is recognized upon the usage of the Company's
credit card activated control systems.
Software Development Costs
The Company capitalizes software development costs that are incurred
subsequent to the establishment of the software's technological feasibility and
up to the product's availability for general release to the Company's customers.
Through December 31, 2001, the Company has capitalized approximately $4.7
million of such costs relating to the development of the e-Port(TM) network.
Amortization of such capitalized costs will be 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, including the period being reported on. Amortization of such costs will
commence when the software becomes available for general release and use by the
Company's customers which is expected to occur in the third quarter of fiscal
2002. The Company anticipates capitalization of an additional $400,000 during
the third quarter of fiscal 2002 prior to release of the basic networked,
internet capable e-Port(TM) to the marketplace, and an additional amount
thereafter for enhancements to the basic network. All costs incurred in the
research and development of new software and costs incurred prior to the
establishment of technological feasibility have been expensed as incurred.
6
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 all periods
presented because the assumed exercise of these securities would be
antidilutive.
Reclassification
During April 2001, the Company granted 6,000,000 fully vested
options to a distributor in connection with the signing of a five-year
distribution agreement. The estimated fair value of the options was $420,000 and
is being recorded as a reduction of revenues or as selling, general, and
administrative expenses, to the extent revenues have not been earned, over the
term of the distribution agreement. Prior to December 31, 2001, the unamortized
balance had previously been classified as a contra-equity account. Pursuant to
EITF 00-18, the Company has presented the unamortized balance as an other asset
on the consolidated balance sheet at December 31, 2001 and has reclassified the
June 30, 2001 balance sheet to be consistent with the current period
presentation.
3. Financing Activities
During the quarter ended December 31,2001, the Company initiated a
$2,500,000 private placement offering (the "2001-D" offering), consisting of 12%
Convertible Senior Notes ("Notes") due December 31, 2004. Each $10,000 Unit is
convertible into Common Stock at $.40 per share, and interest is payable
quarterly. Certain stockholders of the Company, who received warrants to
purchase common stock of the Company as a part of earlier private placements,
received an extension of the termination date and a reduction of the exercise
price of a portion of their warrants if they invested in the 2001-D Offering.
The warrants were scheduled to expire by December 31, 2001 or March 2002
(according to their original terms) at $.50 and now become exercisable at $.10
through December 31, 2002. The fair value of this warrant on the date of
extension of $429,948 has been recorded as equity, and this debt discount is
being amortized to interest expense through the maturity date of the Notes. The
Convertible Note offering is to close no later than March 30, 2002. As of
December 31, 2001, gross proceeds of approximately $1,230,000 had been
deposited, and additional signed subscription documents for approximately
$559,000 had been received, for which the Company received cash in January 2002.
Subsequent to December 31, 2001 the Company increased the offering by an
additional $4,000,000. As of January 30, 2002, a total of approximately
$3,311,000 of subscriptions and cash have been received.
During January 2002, the Company modified the terms of the 2001-D
Offering so that pending the March 21, 2002 Annual Shareholder's Meeting only
half of the first $3,500,000 of subcriptions may be accepted. If the Company's
shareholders do not approve an increase in the authorized shares of Common Stock
at the Annual Meeting, the Company will return one-half of such initial
subscription. Since half of the 2001-D Notes for which the consideration was
received prior to December 31 may be returned to the note holder upon the
noteholder's election, the Company has reported one-half of the cash and
subscriptions receivable received (approximately $896,000) prior to December 31,
2001 as a current liability in the December 31, 2001 balance sheet.
7
During the quarter ended December 31, 2001, the Company issued
2,969,074 shares of Common Stock in connection with the 2001-C private placement
offering. Of the total of shares issued, 1,240,392 were issued for services,
743,682 for cash and 985,000 for subscriptions receivable. For each share, the
Company issued a Common Stock purchase warrant to purchase one share of
restricted Common Stock for $0.50 per share at any time through March 31, 2002.
Combined with first quarter results, net equity increased in the amount of
$1,608,852 from the sale of 3,704,576 shares. Of the gross amount, $983,077 are
for services, $606,842 are cash proceeds which have been deposited by the
Company, and $222,500 has been classified as a subscription receivable, which
has been received in cash subsequent to December 31, 2001.
During the quarter ended September 30, 2002, the Company issued to a
private investment company a $225,000 9 3/4% Convertible Debenture with a
maturity date two years following issuance. The debenture may be converted into
Common Stock at any time prior to maturity at a price per share equal to the
lower of $1.00 or 80% of the lowest market price during the twenty trading days
immediately prior to the conversion. In December 2001, the twenty trading days
was amended to be two hundred seventy calendar days prior to any conversion. In
addition, the investor is entitled to receive additional Common Stock purchase
warrants equal to ten times the number of Common shares converted from the
debenture. The investor is entitled to convert up to 6% of the original value of
the debentures each month starting also during August of 2001, on a cumulative
basis. Due to the significance of the beneficial conversion feature associated
with this instrument, the entire amount of the proceeds of $225,000 has been
allocated to equity. This discount to the face value of the debt is being
amortized to interest expense over the term of the debt. During the quarter
ended December 31, 2001, the investment company converted $10,000 of these
debentures, resulting in issuance of 38,850 shares of Common Stock, and
exercised warrants resulting in the issuance of 388,500 shares of Common Stock
and generating net proceeds of $83,717.
4. Stock Options, Warrants and Purchase Rights
During the quarter ended December 31, 2001, and subject to the approval
of the proposal to increase the authorized shares at the Annual Shareholder's
Meeting, the Company agreed to issue an aggregate of 650,000 warrants to two
consultants and one employee at $0.40 per share, which approximated the market
value at the time of the grant. The warrants will vest immediately and are
exercisable for a period of two years after issuance. The warrants will be
issued in exchange for consulting services rendered and to be rendered in the
future.
As of December 31, 2001, there were 2,276,667 options outstanding to
purchase Common Stock at exercise prices ranging from $0.50 to $5.00 per share,
of which 2,046,668 were vested, and 12,999,905 warrants to purchase Common Stock
at exercise prices ranging from $.10 to $4.00 per share, of which all were
vested.
5. Senior Note Offerings -- 1999/2000
During the quarter ended December 31, 2000, the Company exchanged a new debt
instrument (2000 Senior Note) for an existing debt instrument (1999 Sernior
Note). The exchange of the 1999 Senior Notes to the 2000 Senior Notes was
determined to be a substantial modification of the terms of the original debt
instrument and, accordingly, the Company wrote-off the unamortized debt discount
and other issuance costs associated with the exchange of the 1999 Senior Notes
in the amount of $863,000. Such amount has been reported as a non-cash
extraordinary item in the fiscal year 2001 statement of operations.
8
6. Cumulative Effect of Accounting Change
During fiscal year 1999, the Company issued $4,618,000 (as adjusted) of $10,000
principal amount of Senior Notes. The Notes also included detachable equity
instruments. During October 1999, the Company added a conversion feature to the
Senior Notes whereby the Senior Notes were immediately convertible into Common
Stock at $2.50 per share at the option of the holder. At the time of the
addition of the conversion feature, the Company determined that, based on the
fair value of the Company's Common Stock and specified conversion prices, and,
in accordance with the then applicable accounting pronouncements, these Senior
Notes did not contain an embedded conversion feature.
In November 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus on Issue 00-27,
Application of EITF Issue 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to
Certain Convertible Instruments," whereby it was concluded that an issuer should
calculate the intrinsic value of a conversion option using the effective
conversion price, based on the proceeds received allocated to the convertible
instrument instead of the specified conversion prices in the instrument. Issue
00-27 requires companies to apply the prescribed methodology for computing the
beneficial conversion feature of convertible securities through a cumulative
catch-up accounting change (in the quarter that includes November 2000) for any
such security issued after May 20, 1999, the effective date of EITF 98-5.
Accordingly, the Company recorded a one-time, non-cash charge of $821,000 during
the quarter ended December 31, 2000 to record the cumulative effect of an
accounting change as required by the EITF.
7. Employment Agreement
In November 2001, the Company and Mr. Jensen agreed to reduce the
percentage of shares of Common Stock to be issued to him under his Employment
Agreement in the event of a USA Transaction from eight percent to seven percent
of the issued and outstanding shares.
8. Subsequent Event
In November 2001, the Company agreed to issue a bonus in January 2002
to its Executive Officers. The bonus consists of 1,080,000 shares of Common
Stock. In addition, subject to approval of the proposal to increase the
authorized shares at the March 21, 2002 Annual Shareholder's Meeting, the
Company agreed to issue 1,080,000 additional options exercisable at $.40 per
share to the executive officers. The additional options are vested 75% upon
issuance and 25% on March 30, 2002.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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, 2001 resulted in a net loss of
$2,462,676 compared to a net loss of $3,575,272 (including the effects of a
non-cash extraordinary loss on exchange of debt of $863,000 and a non-cash
cumulative effect of change in accounting principle of $821,000) for the fiscal
quarter ended December 31, 2000. Losses are projected to continue until
sufficient revenue is generated from equipment sales and licensing fees from the
Company's proprietary technology.
Revenues were $324,882 compared to $258,242 from the previous year's
fiscal quarter. This $66,640 or 26% increase was due to an increase in equipment
sales of the same amount, as sales from license fees remained consistent with
the December quarter of the prior year. Revenue is still well below the level
required for the Company to be profitable.
Cost of sales for the period included labor and equipment of $196,998,
an increase of $61,327 or 45% compared to the same period during the prior
year. This increase is directly attributable to the increase in equipment sales
described above.
General and administrative expenses of $1,468,237 increased by $271,647
or 23% from the same quarter last year. The increase was due principally to
increases in spending for consulting and promotion services of $631,693 (of
which $607,632 was non-cash), and increases in professional fees of $66,537,
partially offset by decreases in spending for legal services of $208,011,
primarily related to the MBE litigation which has been settled, and for outside
services of $194,607.
10
Compensation expense of $827,720 increased by $342,274 or 71%. Non-cash
compensation in the quarter was $253,845.
The interest expense decrease of $98,775 is primarily due to the
capitalization of software development interest costs associated with the
Company's spending to develop its e-Port(TM) network, partially offset by
smaller increases in cash interest payments and the amortization of the debt
discount. Depreciation expense increased from $34,349 to $81,181, largely due to
an increase in the depreciable asset base.
Of the total of $2,590,560 of operating and other expenses for the
quarter, $1,083,333 were non-cash expenses, primarily consulting, public
relations, employee compensation, depreciation, amortization and interest.
The six month period ended December 31, 2001 resulted in a net loss of
$4,702,312 compared to a net loss of $5,190,682 (including the effects of a non-
cash extraordinary loss on exchange of debt of $863,000 and a non-cash
cumulative effect of change in accounting principle of $821,000) for the
comparable period ended December 31, 2000. Revenues were $690,629 compared to
$665,001, a $25,628 or 4% increase. Of the total revenues, equipment sales
totaled $365,106, an increase of $28,066 or 8%. Cost of sales of $410,031
represented an increase of $23,854, and is directly attributable to the increase
in equipment sales. General and administrative expenses of $2,599,442 increased
by $567,366 or 28%. The principal reason was a large increase in promotion
expense, public relations, and consultant fees of $1,170,538. The increase was
offset by decreases in legal fees of $390,102 mostly related to the pending MBE
litigation and a reduction in outside services of $249,252. Compensation expense
of $1,729,813 increased by $652,338 or 61%. Non-cash compensation was $545,895.
The interest expense decrease of $140,797 is primarily due to the capitalization
of software development interest costs associated with the Company's spending to
develop its e-Port(TM) network.
Plan of Operations
During the quarter the Company sold e-Port terminals and network
services and continued its work towards the release of the e-Port(TM) products
and services. The Company also continued development of its distribution
channels, strategic partnerships, and current and future customers. Current
e-Port(TM) shipments include capabilities for credit card processing, tracking
of vending inventory, wireless communication and reporting of this inventory
data to a monitoring station. New networking and financial services capabilities
currently being delivered via USALive(TM) to customers include electronic
transfer of funds and transaction reports to customers. e-Port(TM) terminal and
USALive network capabilities currently in development and testing and targeted
for shipment to certain customers in the near future include internet
capability, interactive advertising, web based transaction reporting and
terminal management, and acceptance of other forms of cashless payment systems.
The Company is marketing its products through its full-time sales staff
consisting of five salespeople, approximately 25 authorized resellers, and
office equipment and vending OEMs, either directly to customer locations or to
management companies servicing these locations. Strategic partnerships and
demonstration programs with key distributors continue to be pursued and
developed. Among these partnerships is the Marketing Agreement signed with IBM
in June, 2001, which has already generated IBM participation in developing
market strategies and in identifying specific customer opportunities with
numerous Fortune 100 consumer package goods, retail, pharmaceutical and large
vending companies. Applications for e-Port(TM) are believed to exist in a wide
variety of point of sale locations including retail, coin operated laundromats,
car wash centers, postage machine dispensers and even possibly gas pumps.
11
During October 2001, the Company unveiled enhancements to its
e-Port(TM) and the USALive(TM) network to the vending industry at Fall NAMA, the
vending industry's semi-annual trade show event. Enhancements included mobile
commerce technology permitting access to vending machines through customer cell
phones; proprietary wireless technology allowing for low cost, highly reliable
connectivity via existing customer telephone connections; and capability 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 seven different vending machine manufacturers, and the Company received sales
orders for our e-Port(TM) at the show. From the inception of shipments of
e-Port(TM) to date, the Company has delivered e-Ports to or taken orders from 70
separate customers, many of them on behalf of very large corporations with
well-known brand names, including two Fortune 50 companies.
An investment banker has been retained by the Company to help it plan
and execute the growth of the Company. We are currently working to acquire
complementary technology, products, services and customers. The goal is to
increase potential market applications and increase near term revenues of the
Company.
Liquidity and Capital Resources
For the quarter ended December 31, 2001, there was a net increase in
cash of $314,924. This was attributable to $2,216,906 of cash used in operating
activities, $1,610,485 of cash used for investing activities, principally
software development cost for the new e-Port(TM) network, offset by cash
provided by financing activities of $4,142,315 primarily from the issuance of
Common Stock, and the 2001-D note offering. The cash used in operating
activities consisted of the operating loss of $4,720,312, partially offset by
$1,914,241 in non cash charges from the issuance of stock and warrants, and
$525,088 of non cash amortization of debt discount. As of December 31, 2001,
total cash on hand was $1,132,494, and the working capital deficit was
$1,507,270.
In November 2001, the Company commenced a private placement offering of
$2,500,000 principal amount of 12% Convertible Senior Notes due 2004. The
principal amount of each Senior Note is convertible at any time into shares of
Common Stock at the rate of $.40 per share. As part of this offering, current
warrant holders were incented to participate through a price reduction of some
warrants and an extension of time for exercise, as related in Note 3. Because
the offering was oversubscribed, in January 2002, the offering was increased to
up to $6,500,000 principal amount of Senior Notes. In order to not exceed the
number of currently authorized shares of Common Stock, the Company further
amended the offering so that pending the consideration of the proposal to
increase the authorized number of shares at the March 21, 2002 Annual
Shareholder's Meeting, the Company will accept only fifty percent (50%) of the
first $3,500,000 subscriptions actually received. If this proposal is approved
at the Annual Meeting, the Company will accept any and all additional
subscriptions received for the Senior Notes up to the authorized offering amount
of $6,500,000. If the proposal is not approved, the Company will not be
permitted to accept any further subscriptions for the Senior Notes. As of
January 30, 2002, the Company has received subscription agreements and cash for
$3,311,000 of the Senior Notes, and in accordance with the above, has accepted
$1,655,500 of these subscriptions and is holding the balance pending the Annual
Shareholder's Meeting. The Company has also received subscription agreements and
checks (which have not been cashed) for $1,061,000.
During the quarter ended December 31, 2001, the Company deposited
$371,841 as part of the 2001-C private placement offering. Combined with first
quarter results, proceeds generated were $1,812,419, less offering costs of
$203,567. Of the gross amount, $983,077 are for services, $606,842 are cash
proceeds which have been deposited by the Company, and $222,500 has been
classified as a subscription receivable, which has been received in cash
subsequent to December 31, 2001.
12
The Company's ability to meet its future obligations is dependent upon
the success of its products in the marketplace and its ability to raise capital,
which may not be readily available, until the Company's products can generate
sufficient operating revenues. These factors raise doubt about the Company's
ability to continue as a going concern. The Company believes that, assuming
approval at the Annual Shareholder's Meeting of the proposal to increase the
number of authorized Common shares, proceeds from the completion of the 2001 - D
offering of Convertible Notes which might yield an additional $4.5 million,
conversion of convertible debentures held by a private investment company with
subsequent exercise of warrants which might yield up to $2.0 million, the
potential exercise of outstanding warrants and options, plus 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, or
that its subscriptions receivable could be collected, or that increased revenues
would result from its business activities. Under such circumstances, the Company
may cease to be a going concern or may have to reduce its operations.
13
Part II - Other Information
Item 2. Changes in Securities
During the previous quarter, the Company sold a $225,000 9 3/4%
Convertible Debenture with a maturity date two years following issuance, to La
Jolla Cove Investors, Inc. The debenture may be converted into Common Stock at
any time prior to maturity at a price per share equal to the lower of $1.00 or
80% of the lowest market price during the twenty trading days (changed to 270
calendar days) immediately prior to the conversion. In addition, the investor is
entitled to receive additional Common Stock purchase warrants equal to ten times
the number of common shares converted from the debenture. During this quarter,
the private investment company converted $10,000 of principal and exercised
related warrants for 388,500 shares receiving a total of 427,350 shares of
Common Stock. The Debenture was converted at the rate of $.2574 per share and
the exercise price of the warrants was $.2574 per share and was paid in cash to
the Company. The shares were issued pursuant to the exemption from registration
set forth in Section 4(2) of the Act. The Company has registered these shares
for resale by the holder under the Act at its cost and expense.
During November, 2001, and subject to approval of the proposal to
increase the authorized shares at the Annual Meeting, the Company agreed to
grant to two consultants and an employee, fully vested warrants to purchase up
to 650,000 shares of Common Stock at $0.40, in return for services rendered or
to be rendered to the Company. The Company will issue the warrants pursuant to
the exemption from registration set forth in Section 4(2) of the Act. The
Company has agreed at its cost and expense to use its best efforts to register
the Common Stock underlying the warrants for resale by the holder under the Act.
Through the quarter ended December 31, 2001, the Company has sold
$1,812,419 in a private placement offering (the "2001-C" offering), consisting
of 3,704,576 shares of restricted Common Stock and the same number of Warrants
to purchase Common Stock, exercisable at $.50 per share, to accredited
investors. The Company received $606,842 of cash, $222,500 of subscriptions
receivable and issued the remainder for $983,077 of services rendered or to be
rendered to the Company. The $1,812,419 does not include $270,000 of
subscriptions from the executive officers which were satisfied through a bonus
in January 2002. The securities were issued pursuant to the exemption from
registration set forth in Section 4(2) of the Act and Rule 506 promulgated
thereunder. The Company has registered the Common Stock as well as the Common
Stock underlying the warrants for resale by the holder under the Act.
During the quarter, the Company initiated a private placement offering
(the "2001-D" offering), consisting of up to $2,500,000 (later revised to
$6,500,000) principal of 12% Convertible Senior Notes due December 31, 2004.
Each Senior Note is convertible into Common Stock at $.40 per share, and
interest is payable quarterly. The offering is to close no later than March 30,
2002. As of December 31, 2001, gross proceeds of approximately $1,230,000 had
been deposited. The Notes were issued pursuant to the exemption from
registration set forth in Section 4(2) of the Act. The Company has agreed at its
cost and expense to use its best efforts to register the Common Stock underlying
the Notes for resale by the holder under the Act. As of January 30, 2002, a
total of approximately $3,311,000 cash subscriptions have been received and
pending the Annual Meeting, the Company has accepted $1,655,500 of these
subscriptions.
During the quarter, 117,300 shares of Common Stock were issued to
certain 12% Senior Note Holders, in lieu of cash payment, for interest earned on
the Notes during the quarter. Such Note holders elected to receive Common Stock
at the rate of one share per $0.50 of interest earned. Such shares of Common
Stock were issued pursuant to the exemption from registration set forth in
Section 3(a)(9) of the Act.
14
During October 2001, the Company agreed to issue 200,000 shares to
Ratner & Prestia, P.C., an accredited investor. The offering did not involve any
general advertising or solicitation, and was therefore exempt from registration
under Section 4(2) of the Act. The proceeds from the sales of the shares will be
applied by Ratner & Prestia towards the unpaid professional fees due to them by
the Company. The Company has registered these shares for resale under the Act.
During the quarter, La Jolla Cove Investors, Inc. exercised warrants to
purchase 500,000 shares under warrants granted to it by the Company in July
2001. The warrants were exercised for a cash payment of approximately $.29 per
share. The shares were issued pursuant to the exemption from registration set
forth in Section 4(2) of the Act. The Company has registered these shares for
resale under the Act.
During November 2001, the Company reduced the exercise price of
warrants to purchase up to 100,000 shares from $2.00 per share to $.40 per share
and agreed to register these shares for resale under the Act. The warrants had
been issued to a consultant and expire in June 2002.
In November 2001, and subject to the approval at the Annual
Shareholder's Meeting of the proposal to increase the number of authorized
shares, the Company agreed to issue the following options to purchase an
aggregate of 1,080,000 shares to its executive officers: George R. Jensen, Jr. -
320,000 options; Stephen P. Herbert - 300,000 options; Haven Brock Kolls 200,000
options; Leland Maxwell - 130,000 options; and Michael Lawlor - 130,000 options.
Each option is exercisable at $.40 per share at any time following vesting and
on or before June 30, 2003. The options vest three-quarters immediately upon
issuance and the balance on March 30, 2002. The securities will be issued
pursuant to the exemption from registration set forth in Section 4(2) of the
Act. The Company has agreed at its cost and expense to register for resale under
the Act all of the shares underlying these options.
The following executive officers had signed subscription agreements but
had not paid the amounts due thereunder to the Company in connection with the
private placement offering of Common Stock and 2001-C Warrants that closed in
October 2001: George R. Jensen, Jr. - $160,000; Stephen P. Herbert - $150,000;
Haven Brock Kolls - $100,000; Leland P. Maxwell - $75,000; and Michael Lawlor -
$75,000. For each $10,000 subscribed for in the offering, the subscriber is
entitled to receive 10,000 shares and warrants to purchase up to 10,000 shares
at $.50 per share. As detailed in the next paragraph, in January 2002, the
shares of Common Stock subscribed for as well as all of the shares of Common
Stock underlying the 2001-C Warrants subscribed for were issued to the executive
officers by the Company as a bonus.
In November 2001, the Company approved a bonus payable in January 2002
to the executive officers, as follows: George R. Jensen, Jr. - 320,000 shares;
Stephen P. Herbert - 300,000 shares; Haven Brock Kolls - 200,000 shares; Leland
P. Maxwell - 130,000 shares; and Michael Lawlor - 130,000 shares. These shares
represented all of the Common Stock issuable pursuant to the subscription
agreements entered into by these executive officers referred to above as well as
all of the Common Stock underlying all of the 2001-C Warrants subscribed for by
them. In connection with the issuance of the shares, the executive officers were
not required to pay any amounts due under the subscription agreements or any of
the amounts due for the exercise price of the 2001-C Warrants. The shares were
issued pursuant to the exemption from registration set forth in Section 4(2) of
the Act. The Company has agreed at its cost and expense to register all of these
shares for resale under the Act.
In November 2001, the Company and Mr. Jensen agreed to reduce the
percentage of shares to be issued to him under his Employment Agreement in the
event of a USA Transaction from eight percent to seven percent of the issued and
outstanding shares.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None.
--------
(b) Reports on Form 8-K.
None.
15
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, 2002 /s/ George R. Jensen, Jr.
-----------------------------------------
George R. Jensen, Jr., Chairman,
Chief Executive Officer
Date: February 19, 2002 /s/ Leland P. Maxwell
-----------------------------------------
Leland P. Maxwell, Senior Vice President,
Chief Financial Officer
16