UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 000-31713
RAPIDTRON, INC.
---------------
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0455472
- ----------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3151 AIRWAY AVENUE, BUILDING Q
COSTA MESA, CALIFORNIA 92626
- -------------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
(949) 798-0652
--------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the last 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ___ No ___
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practical date: 17,929,314 shares of Common Stock,
----------------------------------
$0.001 par value, outstanding on November 5, 2003.
- --------------------------------------------------------
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
TABLE OF CONTENTS
Part I -- FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Balance Sheet . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements Of Operations. . . . . . . . . . 2
Condensed Consolidated Statements Of Cash Flows. . . . . . . . . . 3
Notes To Unaudited Condensed Financial Statements. . . . . . . . . 4
Item 2. Management's Discussion and Analysis. . . . . . . . . . . . 10
Item 3. Controls And Procedures. . . . . . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . 17
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes In Securities. . . . . . . . . . . . . . . . . . . . 17
Item 3. Defaults By The Company Upon Its Senior Securities . . . . . 18
Item 4. Submission Of Matter To A Vote Of Security Holders . . . . . 18
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits And Reports On Form 8-K . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
i
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
- ---------------------------------------------------------------------------------
RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------------
UNAUDITED
ASSETS
CURRENT ASSETS
Cash $ 11,607
Accounts receivable, net of allowance for doubtful
accounts of $22,000 298,464
Receivable from stockholder 11,305
Inventory 345,120
Prepaid expenses and other current assets 65,489
------------
731,985
PROPERTY AND EQUIPMENT, NET 11,982
DEPOSITS AND OTHER ASSETS 12,380
------------
$ 756,347
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 696,587
Accrued liabilities 331,412
Due to related party 213,699
Loans due to related parties 599,474
Obligations under capital lease 4,655
------------
1,845,827
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, par value $0.001 per share; 5,000,000
shares authorized; no shares issued or outstanding -
Common stock, par value $0.001 per share; 20,000,000
shares authorized; 17,855,830 shares issued and
outstanding 17,856
Additional paid-in capital 2,205,777
Accumulated deficit (3,313,113)
------------
(1,089,480)
------------
$ 756,347
============
- --------------------------------------------------------------------------------
Page F-1 The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
- -----------------------------------------------------------------------------------------------------------
RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
- -----------------------------------------------------------------------------------------------------------
UNAUDITED
THREE-MONTHS
ENDED THREE-MONTHS
SEPTEMBER 30, ENDED SEPTEMBER NINE-MONTHS ENDED NINE-MONTHS ENDED
2003 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
-------------- ----------------- -------------------- --------------------
NET SALES $ 325,648 $ 72,908 $ 587,913 $ 1,528,103
COST OF GOODS SOLD 246,887 21,372 390,832 787,240
-------------- ----------------- -------------------- --------------------
GROSS PROFIT 78,761 51,536 197,081 740,863
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 480,379 296,549 1,917,154 944,164
-------------- ----------------- -------------------- --------------------
LOSS FROM
OPERATIONS (401,618) (245,013) (1,720,073) (203,301)
OTHER INCOME
(EXPENSE)
Interest expense (13,517) (2,984) (72,509) (11,607)
Foreign exchange loss (25,698) (13,408) (38,790) (17,159)
-------------- ----------------- -------------------- --------------------
(39,215) (16,392) (111,299) (28,766)
-------------- ----------------- -------------------- --------------------
INCOME (LOSS) BEFORE
PROVISION FOR
INCOME TAXES (440,833) (261,405) (1,831,372) (232,067)
PROVISION FOR INCOME
TAXES - 862 800 1,662
-------------- ----------------- -------------------- --------------------
NET LOSS $ (440,833) $ (262,267) $ (1,832,172) $ (233,729)
============== ================= ==================== ====================
BASIC AND DILUTED NET
LOSS PER COMMON
SHARE $ (0.03) $ (0.03) $ (0.13) $ (0.02)
============== ================= ==================== ====================
BASIC AND DILUTED
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 17,771,000 10,120,000 14,085,000 10,120,000
============== ================= ==================== ====================
- --------------------------------------------------------------------------------
Page F-2 The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
- ---------------------------------------------------------------------------------------------
RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
UNAUDITED
- ---------------------------------------------------------------------------------------------
2003 2002
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,832,172) $(233,729)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Provision for bad debts 17,000 -
Depreciation 5,260 3,293
Common stock issued for professional services 400,000 -
Changes in operating assets and liabilities:
Accounts receivable (236,305) (40,203)
Inventory (92,684) (29,753)
Prepaid expenses and other current assets 8,422 (17,460)
Deposits and other assets 1,521 (1,521)
Accounts payable (140,870) 432,298
Accrued liabilities 219,209 117,736
Due to related party 45,524 (225,011)
------------ ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,605,095) 5,650
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,797) (13,613)
------------ ----------
NET CASH USED IN INVESTING ACTIVITIES (1,797) (13,613)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans due to related parties 1,777,924 10,000
Principal payment of loans due to related parties (291,349) (8,222)
Principal payment of capital lease obligations (1,279) -
Proceeds from the issuance of common stock 122,368 -
------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,607,664 1,778
------------ ----------
NET INCREASE (DECREASE) IN CASH 772 (6,185)
CASH - beginning of period 10,835 6,525
------------ ----------
CASH - end of period $ 11,607 $ 340
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 37,523 $ -
============ ==========
Non-cash investing and financing activities:
Common stock issued to pay accrued salaries $ 64,000 $ -
============ ==========
Equipment acquired via capital lease $ 2,375 $ -
============ ==========
Stock issued to retire related party debt at $1.00 per share $ 1,708,024 $ -
============ ==========
Common stock issued to settle accounts payable $ 28,951 $ -
============ ==========
Retire treasury stock $ 196,000 $ -
============ ==========
- --------------------------------------------------------------------------------
Page F-3 The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS
BASIS OF PRESENTATION
The management of Rapidtron, Inc. (the "Company"), without audit, prepared the
condensed consolidated financial statements for the three-month and nine-month
periods ended September 30, 2003 and 2002. Due to the Merger with Rapidtron,
Inc., a Delaware corporation (see Note 2), the reported amounts are those of the
surviving corporation. The results of operations of Rapidtron, Inc. and
Subsidiary (formerly known as The Furnishing Club) previously filed in prior
years are not included herein. In the opinion of management, all adjustments
necessary to present fairly, in accordance with accounting principles generally
accepted in the United States of America, the Company's consolidated financial
position as of September 30, 2003, and the results of operations and cash flows
for the three-month and nine-month periods ended September 30, 2003 and 2002,
have been made. Such adjustments consist only of normal recurring adjustments.
Certain note disclosures normally included in our annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to instructions
for Form 10-QSB. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto which are included in Rapidtron, Inc.'s Form 8-K/A filed with
the Securities and Exchange Commission on June 5, 2003.
The results of operations for the three-month and nine-month periods ended
September 30, 2003 are not necessarily indicative of the results to be expected
for the full year.
BUSINESS
Rapidtron, Inc. (formerly The Furnishing Club, the "Company") was incorporated
in the State of Nevada in March 2000. The Company's wholly owed subsidiary,
also named Rapidtron, Inc., was incorporated in the State of Delaware in January
2000. The Company is headquartered in Costa Mesa, California and provides Radio
Frequency ("RF") Smart access control and ticketing/membership systems (the
"System") to the fitness, ski, entertainment and transportation industries in
North America. The System facilitates rapid operator-free entry and exit
through automated turnstiles or portals and optional hands-free entry. The
Company incorporates "Smart Card" debit/credit technology for retail purchases
and promotional/loyalty programs. The System is versatile and utilizes either
read-write RF Smart cards or bar code paper tickets. This dual capability allows
a venue to issue and re-issue numerous types and durations of access privilege
cards. Its open architecture allows for an easy interface with existing back
office software.
During the period ended September 30, 2003, the Company completed a reverse
merger (see Note 2). Effective May 8, 2003, the merged entity trades on the
Over the Counter Bulletin Board under the symbol "RPDT.OB".
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of the Company and its wholly owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
- --------------------------------------------------------------------------------
Page F-4
4
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The Company's independent public accountants have included a "going concern"
explanatory paragraph in their audit report on the December 31, 2002 financial
statements, which have been prepared assuming the Company will continue as a
going concern. As such, the accompanying condensed consolidated financial
statements have been prepared assuming the Company will continue as a going
concern, which contemplates, among other things, the realization of assets and
satisfaction of liabilities in the normal course of business. As of September
30, 2003, the Company has a working capital deficit of approximately $1,114,000,
recurring losses from operations, an accumulated deficit of approximately
$3,313,000, and has generated an operating cash flow deficit of approximately
$1,605,000 for the nine-month period then ended. The Company intends to fund
operations through increased sales and debt and equity financing arrangements,
which may be insufficient to fund its capital expenditures, working capital and
other cash requirements for the year ending December 31, 2003.
Thereafter, the Company will be required to seek additional funds to finance its
long-term operations. The successful outcome of future activities cannot be
determined at this time, and there is no assurance that if achieved, the Company
will have sufficient funds to execute its intended business plan or generate
positive operating results.
In response to these problems, management has planned the following actions:
- Management intends to raise additional funds through future private
placement offerings.
- Management expects its increased marketing efforts to result in future
sales increases. There can be no assurances, however, that
management's expectations of future sales will be realized.
These factors, among others, raise concerns about the Company's ability to
continue as a going concern. The accompanying condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market and is
primarily comprised of finished goods. Market is determined by comparison with
recent sales or net realizable value. Such net realizable value is based on
management's forecasts for sales of the Company's products or services in the
ensuing years. Should the demand for the Company's products prove to be
significantly less than anticipated, the ultimate realizable value of the
Company's inventory could be substantially less than amounts shown in the
accompanying balance sheet.
STOCK BASED COMPENSATION
At September 30, 2003, the Company had no stock-based compensation plans.
Options to acquire 150,000 shares of the Company's restricted common stock at
December 31, 2002 were cancelled in connection with the Merger (see Note 2). No
stock options were outstanding at September 30, 2003.
Additionally, in January 2003, the Company intended to grant to employees, in
connection with certain employment agreements, options to acquire up to
1,175,000 shares of the Company's restricted common stock. However, such grants
were contingent upon the Company establishing a qualified stock option plan. As
of November 12, 2003, no qualified stock option plan has been established, and,
therefore, no additional options have been granted.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the Notes to the December 31, 2002
and 2001 financial statements filed previously with the Securities and Exchange
Commission in Form 8-K/A on June 5, 2003 that were required to be adopted during
the year ended December 31, 2003 did not have a significant impact on the
Company's financial statements.
- --------------------------------------------------------------------------------
Page F-5
5
2. REVERSE MERGER
On May 8, 2003, The Furnishing Club and subsidiary ("TFC"), a publicly traded
"shell" company (the previous public registrant), completed a reverse merger
under an Agreement and Plan of Merger (the "Plan" or "Merger") with Rapidtron,
Inc., a Delaware corporation (the "Private Company"), in a tax-free share
exchange under section 368(a)(1)(B) of the Internal Revenue Code of 1986, as
amended. Immediately prior to the Merger, TFC had 20,000,000 shares authorized
and 19,993,752 shares of common stock issued and outstanding. Pursuant to the
Merger, all of the 10,052,000 issued and outstanding shares of common stock of
the Private Company (including 128,000 shares for the settlement of accrued
salaries, as discussed in Note 4) were exchanged for 9,600,000 shares of TFC, on
a 0.955 to 1 basis. Concurrent with the closing of the Merger, 13,943,750
shares of common stock of TFC were canceled, and the Private Company issued
5,598,002 shares of common stock. As a result, immediately after the Merger
15,650,002 shares of common stock were issued and outstanding.
Immediately after the Merger, the officers and directors of TFC resigned and the
management of the Private Company took control of such positions, therefore
reflecting a change of control. As a result, the transaction was recorded as a
"reverse merger" whereby the Private Company was considered the accounting
acquirer as it retained control of TFC after the merger, however, legally the
Private Company became a wholly owned subsidiary of TFC after the Merger. In
connection with the Merger, TFC changed its name to Rapidtron, Inc. Since TFC's
continuing operations and balance sheet are insignificant, a pro forma
consolidated balance sheet at December 31, 2002 and consolidated statement of
operations for the year then ended are not presented here.
In connection with the terms of the Merger, all outstanding stock options
(150,000 in total) were cancelled.
3. LOANS DUE TO RELATED PARTY
During the three-month period ended September 30, 2003, the Company borrowed
approximately $150,000 from a related party. Such note bears interest at 6%, is
convertible, in whole or in part, to the Company's restricted common stock at
$1.00 per share, and all principal and interest is due on demand at any time
after October 16, 2003. Management does not believe that the conversion option
of these notes was considered a beneficial conversion feature at the time such
option was granted. Immediately after the funds from such note were received by
the Company, the note holder elected to convert $60,000 of principal into 60,000
shares of the Company's restricted common stock (see Note 4).
During the six-month period ended June 30, 2003, the Company borrowed
approximately $1,618,000 from related parties. Such notes bore interest at
rates ranging from 6% to 10%, were secured by substantially all assets of the
Company, were convertible to the Company's restricted common stock at
approximately $1.00 per share, and all principal and interest was due within one
year. Management does not believe that the conversion option of these notes was
considered a beneficial conversion feature at the time such option was granted.
The Company also borrowed approximately $10,000 from employee-shareholders of
the Company during the six-month period ended June 30, 2003. Such loans are due
on demand and bear no interest.
Immediately after the Merger (see Note 2), loans approximating $1,648,000 were
converted to the Company's common stock at approximately $1.00 per share (see
Note 4). During the nine-month period ended September 30, 2003, principal
payments approximating $290,000 were made on certain other loans due to related
parties.
See Note 9 for debt repayments subsequent to September 30, 2003.
- --------------------------------------------------------------------------------
Page F-6
6
4. EQUITY TRANSACTIONS
In January 2003, the Company issued 128,000 shares of the Company's common stock
to an employee to settle accrued salaries payable of $64,000.
Immediately after the Merger (see Note 2), the Company converted loans
approximating $1,648,000 into 1,599,000 shares of the Company's common stock
(see Note 3).
In connection with the Merger (see Note 2), the Company issued 400,000 shares of
common stock as finder's fees to certain individuals. Such shares were valued
at $1 per share based on recent stock sales and conversions of debt to equity.
The Company recorded acquisition costs totaling $400,000, which is included in
selling, general and administrative expenses in the accompanying condensed
consolidated statements of operations.
In connection with the Merger, the Company retired all 196,000 treasury shares.
In July 2003, a convertible note payable holder converted $60,000 of principal
into 60,000 shares of the Company's restricted common stock (see Note 3).
During the three-months ended September 30, 2003, the Company sold 122,500
shares of its restricted common stock at approximately $1.00 per share for cash
approximating $134,000. The Company did not receive $11,305 of the total until
after September 30, 2003; therefore this amount has been recorded as receivable
from stockholder on the accompanying condensed consolidated balance sheet.
On August 29, 2003, the Company filed with the Securities and Exchange
Commission Form S-8 to register 37,815 shares of the Company's common stock
pursuant to a legal services agreement with the Company's legal counsel. Under
such agreement, legal counsel may convert past due amounts due from the Company
into registered common stock at $1.19 per share (estimated to be the fair market
value of such shares on the date of the agreement). The Company issued 24,328
of these shares at $1.19 per share during the quarter ended September 30, 2003.
The balance was issued subsequent to period-end.
Subsequent to September 30, 2003, the Company sold 60,000 shares of its
restricted common stock for cash totaling $60,000.
See Note 9 for additional subsequent stock issuances.
5. LOSS PER SHARE
The Company computes net loss per common share using SFAS No. 128 "Earnings Per
Share." Basic loss per common share is computed based on the weighted average
number of shares outstanding for the period. Diluted loss per share is computed
by dividing net loss by the weighted average shares outstanding assuming all
dilutive potential common shares were issued. The Company reported a net loss
for the three-month and nine-month periods ended September 30, 2003. As a
result, convertible debt to acquire 90,000 shares of the Company's common stock
(see Note 3) have been excluded from the calculation of diluted net loss per
share, because those shares would be antidilutive. At September 30, 2002,
outstanding options to acquire 150,000 shares of common stock were not
considered by management to be potentially dilutive common shares due to the
exercise price being higher than the estimated stock price used in the EPS
calculation. As such, basic and diluted loss per share are the same for all
periods presented. Additionally, for purposes of calculating diluted loss per
share, there were no adjustments to net loss.
6. CONTINGENCIES
At December 31, 2002, the Company was under a distribution agreement with Axess
AG, to purchase a minimum of $3,000,000 through May 2003. On December 11, 2002,
Axess AG agreed that if the Company made certain payments and followed certain
conditions, the purchase commitment would be released. As of September 30,
2003, management believes that all payments have been made and conditions have
been met, as required by Axess AG.
- --------------------------------------------------------------------------------
Page F-7
7
To obtain the release of inventory on orders from Axess AG, the Company filed a
UCC-1 Financing Statement on September 23, 2003, securing the related payable to
Axess AG of approximately $100,000. Such payable is secured by certain accounts
receivable totaling $100,000. Management believes that as of November 12, 2003,
the Company has met all conditions and obligations required by the security
agreement.
7. EMPLOYMENT AGREEMENTS
In January 2003, the Company entered into employment agreements with certain
employees. The agreements expire on December 31, 2004 and can only be
terminated prior to such date by either party for "cause", as defined. The
agreements have provisions that include base salary amounts, various benefits,
the granting of stock options (see Note 1), and covenants not to compete. Upon
a resignation of an agreement with cause by the employee or without cause by the
Company, the Company is to immediately pay all accrued compensation, and is to
continue paying the base salary for 12 months following termination. Total
base salaries to be paid to these employees are as follows for the years ending
December 31:
2003 $ 360,000
2004 360,000
-------------
$ 720,000
=============
8. RECLASSIFICATION IN 2002
In the quarter ended September 30, 2002, the Company made a reclassification of
year-to-date consulting expenses from cost of goods sold accounts to selling,
general and administrative accounts, to correct an error. The reclassification,
approximating $92,000, was all booked in the current quarter and therefore was
not reflected in previous interim financial statements. Had this
reclassification been posted in each respective quarter, certain balances
reported in the Company's June 30, 2003 Form 10-QSB, filed with the Securities
and Exchange Commission on August 19, 2003, would have been changed as follows:
1. THREE- 2. SIX-MONTHS
MONTHS ENDED ENDED JUNE 30,
JUNE 30, 2003 2003
-------------- ---------------
Cost of Goods Sold
As reported $ 794,196 $ 827,268
As adjusted $ 763,496 $ 765,868
Gross Profit
As reported $ 676,208 $ 627,927
As adjusted $ 706,908 $ 689,327
Selling, General and Administrative Expenses
As reported $ 325,589 $ 586,216
As adjusted $ 356,289 $ 647,616
Income From Operations
As reported $ 350,619 $ 41,711
As adjusted $ 350,619 $ 41,711
This reclassification had no effect on income from operations and net income for
the periods presented above.
- --------------------------------------------------------------------------------
Page F-8
8
9. SUBSEQUENT EVENTS
On November 12, 2003, the Company closed the unregistered sale of common stock
and warrants, as more fully described below. The Company sold 1,280,000 "Units"
at a purchase price of $1,600,000 in three separate tranches, as follows:
- Tranche 1 on or about November 11, 2003, for 576,000 Units for
proceeds of $720,000;
- Tranche 2 on or about December 11, 2003, for 416,000 Units for
proceeds of $520,000; and
- Tranche 3 on December 31, 2003 for 288,000 Units for proceeds of
$360,000.
Each "Unit" consists of 1 share of the Company's common stock, and one warrant
for the purchase of one share of common stock for a purchase price of $1.25,
through the first anniversary of the date of issuance, and $1.50 up to the
second anniversary of the date of issuance, upon which the warrant will expire.
Closing of each tranche is conditioned upon several factors, including no
material adverse change in the Company's financial condition, operations,
results of operations or business since the date of the financial statements
included in this report.
The Company is required to register the resale of the common stock issued as
part of the Units, and if available, keep a shelf-registration statement
effective for such resale for a period of 2 years following the issuance of the
Units. The Company is required to pay all costs and expenses associated with
the registration. $50,000 of the proceeds of the sale of the Units has been set
aside to cover the cost of the registration. The Company anticipates that such
costs may total $60,000, or more, depending upon the number of comments we
receive from the SEC and the number of supplements or amendments we may be
required to file. Additional costs must be paid from operating revenue or
through additional investments.
The Company is required to use the proceeds of the sale to repay certain
outstanding payables and future expenses related to registrations of securities,
with $385,000 set aside for paying general operating expenses.
In addition, the Company cannot use any of the proceeds to pay debt to
related-parties. As a condition to the foregoing proceeds, related parties and
employees were required to accept a total of 350,000 shares of common stock in
exchange for $350,000 of outstanding debt. As a result, an additional 350,000
new shares of restricted common stock will be issued on or about November 12,
2003, as satisfaction of $350,000 of debt.
On or about November 12, 2003, the Company closed the first tranche and issued
576,000 Units (including 576,000 shares of common stock) for a total of
$720,000. Only $125,000 of the proceeds may be used for the Company's operating
expenses.
The Company has agreed to sell up to 320,000 additional Units for $400,000 (for
a total investment of $2,000,000) pursuant to the same terms and conditions, on
or before January 31, 2004. There is no guaranty that the additional investment
will be made, but if made available, the Company is obligated and intends to
accept.
- --------------------------------------------------------------------------------
Page F-9
9
Item 2. Management's Discussion and Analysis
CAUTIONARY STATEMENTS:
This Quarterly Report on Form 10-QSB contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. We intends that such forward-looking
statements be subject to the safe harbors created by such statutes. The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. Accordingly, to the extent
that this Quarterly Report contains forward-looking statements regarding the
financial condition, operating results, business prospects or any other aspect
of our Company, please be advised that our actual financial condition, operating
results and business performance may differ materially from that projected or
estimated by us in forward-looking statements. The differences may be caused by
a variety of factors, including but not limited to adverse economic conditions
and intense competition, including intensification of price competition and the
expansion of competition in providing end-to-end product and system solutions as
more fully described in management discussion in this report. This report on
Form 10-QSB contains, in addition to historical information, forward-looking
statements that involve substantial risks and uncertainties. Our actual results
could differ materially from the results anticipated by us and discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences are discussed in the section entitled "factors that may affect our
business, operating results, and financial condition" in our 8-K filed on May
23, 2003, hereby incorporated by reference.
GENERAL OVERVIEW:
Our company specializes in providing solutions for Automated Access. We
researched the marketplace for the past six (6) years to identify automated
access needs in the specific industries discussed below, which led to
development of Rapidtron's versatile access system. As a result, we provide
access control and ticketing/membership systems to the fitness, winter resort,
amusement, transit industries and universities in North America. Our system
facilitates rapid operator-free customer or member entry and exit through
automated turnstiles or portals and optional hands-free entry. This means our
unique system provides customers and members automated access control to enter
and exit facilities such as fitness clubs, university recreational centers, or
access to a ski lift.
Our system and readers have open architecture, which allows for an easy
interface with the existing back-office computer software of the targeted venues
and marketplaces in which we sell and serve. Our readers communicate data to and
from the computer software existing in the customer's back office for managing
information related to membership validation required for access, and other
information desired by the client. We have accomplished interface solutions
with many major software providers to the venues in which we sell and service
(for example, in Fitness - Aphelion, CSI, Check Free and Computer Outfitters;
and in Resorts - all three major providers, Comptrol, RTP and Siriusware). We
are continuing to invest and accomplish interface solutions with software
providers through investment in software programming with software provider
companies to allow our system to be compatible with a large customer base.
Our system is versatile and reads either bar code or RF Smart cards and other
media (tags, ID bracelets, etc.). This dual capability allows a venue to issue
and re-issue numerous types and durations of access privilege cards. Bar code
tickets and cards are commonly found in grocery stores where they are read at
check-out counters. Bar code tickets and cards are also common at fitness clubs
where they are checked by operator assisted manual scanning done at front desk
entry, and athletic and amusement venues where tickets are manually checked, or
manually scanned by staff members at entry to the arena or amusement park. RF
Smart cards, a technology that has been in existence since 1988, primarily in
Europe, incorporate an antenna and a 2K memory chip and microprocessor laminated
between two plastic sheets. Our RF Smart cards provide passive contactless
identification technology. These cards require no electrical contacts, or
visual contact. Our RF smart cards operate in harsh environmental conditions
such as skiing at winter resorts in extreme temperatures with hands- free
operation at the turnstile, as the long range antennas can read the cards in the
pockets of the skier without being removed and placed near the reader. Our RF
Smart cards have read/write memory, which means the card, when read by one of
our RF ID readers, can read the data on the card, debit (points or cash) and
write new data in addition to the value stored on the card.
10
Our RF Smart card is passive, which means it is powered by the reader field
unlike an active card (transponder) with a battery. Our card and reader has a
reading range of 10 to 120 centimeters. This allows the card to be utilized for
hands-free operation. The range of 10 to 120 centimeters is totally dependent
on the size of the antenna. Our indoor system of satellite readers provide
proximity reading of Smart cards at a range of up to 10 centimeters, and our
resort systems with long range antennas can read cards at a range of up to 120
centimeters for hands free operation. The Rapidtron Smart Card utilizes a 13.56
MHZ transponder for fast communication speed. We currently utilize the ISO 15693
standard chip.
Our automated system allows a fitness club to use its existing bar code
membership cards to start and upgrade to Smart cards at any time. We can
incorporate Smart card debit/credit technology for retail purchases for a
wallet-less workout or visit. Our system offers a variety of read/write Smart
media: cards, key fobs, ID bracelets, for multifunctional capabilities including
access, debit/credit and affinity/loyalty programs, parking and other uses. Our
unique printers can issue both bar code tickets and Smart cards. Our Smart
cards come with four color printing on the front with the client's design.
Utilizing our Thermo printer, the reverse side can be printed on site with
photos and copy that can be removed and reprinted when re-programming the Smart
cards on the printer. As a result, our Thermo read/write Smart cards are 100%
recyclable.
Our proven technology has been in operation for five years with over 2,000
access and 1,000 point of sale systems in Europe and North America. The
European installations were sold, installed and serviced by AXESS AG, our
supplier. We have an exclusive Distribution Agreement for the North American
market with AXESS AG. We sell, install and service all North American
installations for Axess AG.
The following analysis of our operations refer primarily to those in the
fitness, winter resort, amusement and transit industries, and universities which
constitute the majority of our business activities.
RESULTS OF OPERATIONS OF THE COMPANY:
Three Months ended September 30, 2003 compared to three months ended June 30,
2002 and the nine months ended September 30, 2003 compared to the nine months
ended September 30, 2002.
REVENUE
Our revenue for the three months ending September 30, 2003 was $325,648, an
increase of $252,740 (346%) compared to the $72,908 from the same period last
year.
During the nine months ending September 30, 2003, we had revenues of $587,913, a
decrease of $940,190 (61%) from the $1,528,103 for the same period in fiscal
year 2002.
For the nine month period ended September 30, 2003, the $940,190 decrease in our
sales revenue was due entirely to the lack of sales in 2003 from transit,
specifically the Las Vegas Monorail Project, more fully described below. The Las
Vegas Monorail Company has chosen to go to magnetic stripe technologies to
integrate with the existing system in place with the RTP bus transit system, and
will consider an upgrade to Smart card systems in the future.
Bombardier is the supplier of the monorail and fare box collection system to the
Las Vegas Monorail Company ("LVMC"). Bombardier conducted 1 1/2 years of due
diligence on our equipment and system and awarded us the contract for a Smart
Card only Fare Collection System in December 2001. The Las Vegas Monorail
Company decided to integrate with the Rapid Transit Company, the bus line in Las
Vegas, which then required the fare system to utilize a magnetic stripe rather
than a Smart Card in order to integrate their existing system. We fulfilled all
the requirements of the first phase of the contract resulting in earning the
revenue of approximately $1,350,000, but with the change to magnetic stripe,
Bombardier was forced to cancel the contract with Rapidtron. We still have an
opportunity to provide our RF Smart card in the future as an upgrade to the
LVMC.
11
We have chosen to focus our sales efforts on fitness clubs, winter resorts,
universities and colleges, and entertainment, niche markets where our system has
penetrated key venues with notable installations such as Bally Total Fitness,
the world's largest fitness club chain, Park City Resort, Utah and Copper
Mountain, Colorado well-known four-season resorts, and University of California,
Berkeley, a leading US university. We targeted these specific customers due to
their leadership position in each of their industries and the potential for
sizeable revenues related to their individual contracts and future contracts.
We have structured our sales, marketing and service around these 3 markets -
fitness clubs, universities, and winter resorts, while continuing to explore
opportunities in amusement such as auto racing and sports arenas. In this
regard, we increased our focus in selling to the leading fitness chains in the
third quarter of 2003, with follow-up meetings scheduled for the fourth quarter
of 2003 leading into 2004. Following our installation at UCLA John Wooden
Center, we will increase our presence and contact to universities in
presentations to a combined group of more than 250 universities attending NIRSA
events. While the winter resort business is now preparing for it's 2003/2004
season, we have expanded our presence with more installations at Park City,
Utah, and plan to intensify our selling effort pre -Holiday 2003 with focused
selling efforts beginning in November/December 2003, trade-show attendance in
the East and West United States followed by face to face selling in the first
and second quarters of 2004 for the 2004/2005 season. We expect increased sales
in each of the three targeted venues of fitness clubs, universities, and winter
resorts over the next quarter, and throughout 2004.
We expect to modestly increase our revenues in the targeted venues of fitness
clubs, winter resorts, and universities over the next quarter, and to
significantly increase our revenues in the targeted venues in the coming 12
months. We base these revenue growth expectations on the assumption that the
successful sales, installations, and operation of our Rapidtron systems to date
with industry leading customers in targeted venues will result in other
customers within each venue emulating the leader in making their purchase
decisions. For example, our Rapidtron system has now been operational in 27
Bally Total Fitness locations, and we expect to continue to expand in other
Bally's locations over the next 12 months. Bally's is the largest fitness club
chain in North America with 420 clubs. During the period covered by this
report, we received approximately fifty-five percent (55%) of our gross revenue
from Bally's. We expect to continue sales to Bally's during the fourth quarter
of 2003, and we have meetings scheduled during the fourth quarter of 2003 with
five leading companies in the fitness industry. As a result of these meetings,
we hope to increase and diversify our gross revenue received through sales in
the fitness industry. Our Rapidtron system has been operational at Copper
Mountain since November 2001, and Park City, Utah since November 2002, with an
expansion scheduled for the 2003/2004 season. During the period covered by this
report, we received less than ten percent (10%) of our gross revenue from sales
to winter resorts. We expect continued sales to Park City in the fourth quarter
of 2003, and we have commitments for additional orders from Copper Mountain in
the first quarter of 2004. We are in dicsussions with several other major
winter resorts that we hope will result in increased sales in the winter resort
industry. Our Rapidtron system has been operational at University of
California, Berkeley since May 2002 and UCLA since October 2003. During the
period covered by this report, we received less than ten percent (10%) of our
gross revenue from sales to these universities.
Actual results may differ from our expectations as a result of delay in sales to
the customers in the targeted venues.
GROSS PROFIT
For the three months ending September 30, 2003, our gross profit totaled
$78,761, compared to $51,536 for the same period last year. The $27,225
increase in gross profit was primarily a result of increased sales.
For the nine months ending September 30, 2003, our gross profit for the period
was $197,081, compared to gross profit of $740,863 for the same period last
year. This represents a decrease of $543,782 from the same period last year.
The decrease in gross profit is also primarily the result of the drop in sales
from the cancellation of the Las Vegas Monorail Project.
We expect to modestly improve our gross profit through increased sales in the
targeted venues of fitness clubs, winter resorts, and universities over the next
quarter, and to significantly increase our gross profit in the targeted venues
in the coming 12 months based on the same assumptions identified in our
revenues. The unfavorable currency variance of the US Dollar to the Euro
continues to negatively impact gross profit margins in 2003 due to our
purchasing from a European supplier. We expect the unfavorable currency
variance of the US Dollar to the Euro to continue in 2003, and to continue to
negatively impact gross profit margins due to our plan to continue purchasing
equipment, readers, and cards from our European supplier. Actual results may
differ from our expectations as a result of delay in sales revenues, and gross
profit from those revenues to the customers in the targeted venues.
12
OPERATING EXPENSES
During the three months ending September 30, 2003, our selling, general &
administrative operating expenses totaled $480,379, an increase of $183,830
(62%) from the $296,549 incurred during the same period last year. Included in
the $183,830 increase of operating expenses for the current quarter is
approximately $58,000 related to increased costs associated with professional
fees (legal, accounting, and investor relations) related to public reporting.
Excluding the increased costs associated with the professional fees, our
selling, general & administrative expenses were up approximately $126,000 (42%)
from the same period last year. The remaining increase can be primarily
attributed to increased salaries related to additional hires of a Financial
Manager, a General Manager, and Systems Technician.
For the nine months ending September 30, 2003, our selling, general &
administrative expenses totaled $1,917,154, an increase of $972,990, or 103%,
from the $944,164 incurred during the same period last year. As noted above,
the significant portion of the increase was due to the $654,856 related to the
reverse merger and the increase in professional fees related to public
reporting. The reverse merger fees of $583,000 were one-time charges that
represent over one half of the increase in operating expenses on a year-to-year
basis. The remaining increase can be primarily attributed to increased
salaries.
We expect operating expenses in the ordinary course of business (not taking into
consideration the one time expenses related to the reverse merger) to increase
modestly over the next quarter as a result of operating, marketing and selling
expenses to the fitness club, winter resort, university, and amusement markets.
We expect operating expenses in the ordinary course of business to increase
modestly over the next 12 months as a result of operating, marketing, selling,
service and sales commission expenses related to increased revenues. The
commissions paid to independent sales representatives are less than 1% of
selling, general and administrative expenses during this period; however, will
increase as a percentage of sales in the coming quarter, and 12 months. Actual
results may differ from our expectations as a result of delay in sales revenues,
and gross profit from those revenues, while operating expenses continue to
secure those sales to the customers in the targeted venues.
LOSS FROM OPERATIONS
During the three months ended September 30, 2003, we had a loss from operations
of $401,618, compared to a loss from operations in the prior year of $245,013.
Excluding approximately $72,000 for professional fees due to the operations
related to public reporting requirements, the loss from operations in the
current quarter was approximately $330,000. Higher personnel costs to focus on
core business channels in fitness, winter resort, university, amusement and
financial reporting combined with increased costs related unfavorable foreign
currency exchange rates with our European supplier were the factors driving the
loss from operations in the current quarter when compared to the loss in the
same period in 2002.
The loss from operations for the first nine months of fiscal 2003 was $1,720,073
compared to a loss from operations of $203,301 in the same period in the prior
year. Excluding the approximately $583,000 in fees due to the reverse merger, we
would have had a loss from operations of $1,137,073, resulting in a variance of
$933,772 from the prior year period.
The loss from operations for the nine months ended September 30, 2003, was
primarily the result of the following (a) reduction in transit sales, (b) a
delay in roll-out of fitness club sales caused by our customers' software
suppliers delaying the completion and implementation of the software interface
that allows our system to work effectively with the customers back office
software, and (c) our increase in selling, general & administrative costs.
Software interfaces with all major software providers in the fitness and resort
industry have now been completed.
We expect overall loss from operations to increase over the next quarter as a
result of continued expenses in excess of the gross margin from a modest
increase in sales revenues during the same quarter. We expect the overall loss
from operations to decrease over the next 12 months as a result of significant
increases in revenues and gross margin related to those sales. Actual results
may differ from our expectations as a result of delay in sales revenues, and
gross profit from those revenues, while operating expenses continue to secure
those sales to the customers in the targeted venues.
13
INTEREST EXPENSE
For the three months ending September 30, 2003, our interest expense was
$13,517. Our interest expense was $2,984 in the same quarter last year. Our
interest expense for the nine-month period was $72,509. In the same period last
year, our interest expense was $11,607.
The increase in interest expense was primarily the result of higher debt to
related parties. At September 30, 2003, we owed $599,474 on notes due to
related parties, compared to $255,948 at September 30, 2002. Additionally, we
borrowed approximately $1,780,000 during the nine months ended September 30,
2003, and made re-payments through cash and stock issuances of approximately
$2,000,000 during such period.
We expect interest expense to decrease over the next quarter as a result of debt
repayments and conversion of debt to equity. Actual results may differ from our
expectations as a result of taking on additional debt necessary to finance
operations, due to not meeting sales expectations.
ASSETS AND LIABILITIES
At September 30, 2003, we had total assets of $756,347 compared to total assets
of $443,312 at December 31, 2002. Cash was $11,607 as of September 30, 2003, up
slightly from the $10,835 cash balance as of December 31, 2002. Cash used in
operations was $1,605,095; cash used in investing activities was $1,797; and
cash provided by financing activities was $1,607,664, with net increase in cash
during the current period being $772. Major cash out-flows included net debt
payments of $291,349, and net payments to product and equipment vendors of
approximately $502,000.
Our net accounts receivable were $298,464 at September 30, 2003, an increase of
$219,305 (277%) from the $79,159 at December 31, 2002. The increase in accounts
receivable is primarily due to new customers in fitness club industry that we
began doing business with in July 2002.
Our net inventories increased $92,684 (36%) over the past nine months, to
$345,120, from the $252,436 at December 31, 2002. A majority of the increase in
inventory is due to purchases to support shipments scheduled to fitness
customers.
Our net fixed assets totaled $11,982 at September 30, 2003, compared to $13,070
at December 31, 2002. Our purchases of fixed assets totaled $4,172 during the
current period, while our depreciation totaled $5,260 resulting in a net
decrease in fixed assets of $1,088.
Our total liabilities at September 30, 2003 were $1,845,827, a decrease of
$189,441 (9%) from the $2,035,268 at December 31, 2002. Our accounts payable
and accrued liabilities totaled $1,027,999 at September 30, 2003, a decrease of
$14,612 (1%) from the $1,042,611 at December 31, 2002. There was a decrease in
accounts payable of $169,821 and an increase in accrued liabilities of $155,209.
Our payables decreased as a result of paying vendors for products purchased to
support sales and inventory for fitness clubs from the proceeds of debt
financing, and the accrued liabilities increased as a result of not paying
salaries to senior executives during the period.
Our accrued payroll totaled $225,916 at September 30, 2003, compared to $135,686
at December 31, 2002. The increase was due primarily to senior executives only
receiving partial payment of their current and prior wages, with the remaining
amount being accrued. Our accrued interest payable, which is included in
accounts payable and accrued liabilities, was $35,483 at September 30, 2003, an
increase of $25,577 from the $9,906 at December 31, 2002.
Our notes payable and other debt totaled $604,129 at September 30, 2003, a
decrease of $220,353 (27%) from the $824,482 at December 31, 2002. Our total
Notes payable were reduced by the conversion of several Notes to equity at the
close of the merger in May 2003.
14
STOCKHOLDER'S DEFICIT
Our stockholder's deficit was $1,089,480 at September 30, 2003, a decrease of
$502,476 from the $1,591,956 at December 31, 2002. The changes in stockholder's
equity were as follows:
Balance as of December 31, 2002 ($1,591,956)
Net Loss ($1,832,172)
Additional Paid in Capital $2,130,912
Common Stock 7,736
Cancellation of Treasury Stock 196,000
------------
Balance as of September 30, 2003 ($1,089,480)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, we had $756,347 in total assets, including $11,607 in
cash, $298,464 in accounts receivable, $345,120 in inventories, and $65,489 in
prepaid expenses and other current assets. We consider the accounts receivable
to have a high probability of collection, as a majority of the receivables are
to large customers in the fitness club industry. Our inventories consist
primarily of readers, turnstiles, and equipment and are very marketable, and
will continue as current product models during 2003. Our fixed assets consist
primarily of computers, office furniture and equipment, software, and test
equipment. Due to the age and proprietary nature of most of the fixed assets,
these assets probably have limited value to third parties. We will acquire
additional inventory for fitness club, university, and winter resort sales in
the 4th quarter for installation in the 4th quarter of 2003 and the 1st quarter
of 2004.
At September 30, 2003, our total liabilities were $1,845,827, including accounts
payable and accrued liabilities of $1,027,999, and amounts due to related
parties (including due to related party and loans due to related parties) of
$813,173. Loans to related parties include $107,500 to John Creel and Steve
Meineke, directors of the Company.
We had negative working capital of $1,113,842 at September 30, 2003. Our
negative cash flow from operations resulted primarily from our loss, our
increased receivables and inventory along with the pay down of payables to key
vendors in order to support growth in the fitness category. Our cash flow needs
were met over the last quarter through sales revenues and the proceeds of
convertible loans and private placements. We expect our operations to continue
operating at a negative cash flow through at least the fourth quarter of fiscal
year 2003 as we continue to invest in new business opportunities. Thus, our
success, including our ability to fund future operations, depends largely on our
ability to secure additional funding. There can be no assurance we will be able
to consummate debt or equity financings in a timely manner, on a basis favorable
to the Company, or at all.
We need cash flow of approximately $125,000 per month to pay for our rent,
salary, marketing, services, software interface, inventory, and receivables,
excluding the anticipated increase due to sales commissions paid for increased
sales volume secured by independent sales agents, new business development. We
expect to receive adequate cash flow through revenues averaging at least
approximately $100,000 to $200,000 per month over the next quarter, plus
additional third-party loans and equity investment, including the equity
investment from a private placement that we expect to close in November 2004,
described in more detail below.
Over the next 12 months, we expect to need cash flow of approximately
$2,000,000 for operating expenses, new business development, potential merger
opportunities, marketing, services, software development for interface with
business systems in targeted industries, inventory, and receivables. We expect
to achieve these cash flow needs through operating revenues totaling at least
approximately $1,700,000 over such 12-month period, plus additional third-party
loans and equity investment.
The allocation of cash flow in operating the business will be dictated by where
those resources can optimize results through the production of sustained revenue
growth. If we do not raise the necessary capital or earn sufficient revenue to
cover the foregoing expenses, we will reduce variable overhead, such as
marketing expenses, travel and entertainment, software development, and
reduction of personnel as feasible.
15
On November 12, 2003, we closed the unregistered sale of common stock and
warrants, as more fully described below. We sold 1,280,000 "Units" at a
purchase price of $1,600,000 in three separate tranches, as follows:
- Tranche 1 on or about November 11, 2003, for 576,000 Units for
proceeds of $720,000;
- Tranche 2 on or about December 11, 2003, for 416,000 Units for
proceeds of $520,000; and
- Tranche 3 on December 31, 2003 for 288,000 Units for proceeds of
$360,000.
Each "Unit" consists of 1 share of our common stock, and one warrant for the
purchase of one share of common stock for a purchase price of $1.25, through the
first anniversary of the date of issuance, and $1.50 up to the second
anniversary of the date of issuance, upon which the warrant will expire.
Closing of each tranche is conditioned upon several factors, including no
material adverse change in our financial condition, operations, results of
operations or our business since the date of the financial statements included
in this report. A copy of the Unit Purchase Agreement is included as Exhibit
99.2 to this report.
We are required to register the resale of the common stock issued as part of the
Units, and if available, keep a shelf-registration statement effective for such
resale for a period of 2 years following the issuance of the Units. We are
required to pay all costs and expenses associated with the registration.
$50,000 of the proceeds of the sale of the Units has been set aside to cover the
cost of the registration. We anticipate that such costs may total $60,000, or
more, depending upon the number of comments we receive from the SEC and the
number of supplements or amendments we may be required to file. Additional
costs must be paid from operating revenue or through additional investments.
We must use the proceeds of the sale in accordance with the following use of
proceeds:
Tranche 1 for proceeds of $720,000:
(i) $400,000 payable to Axess AG for equipment and products;
(ii) $150,000 payable to Silverback Data Management in connection with
certain publication services;
(iii) $20,000 payable to Mark Adair for accrued compensation;
(iv) $125,000 to the Company for operating expenses; and
(v) $25,000 payable to the investor's legal counsel for preparation
of documents related to the sale of the Units and the preparation
of the registration statement.
Tranche 2 for proceeds of $520,000:
(i) $200,000 payable to Axess AG for equipment and products;
(ii) $150,000 payable to Silverback Data Management in connection with
certain publication services;
(iii) $20,000 payable to Mark Adair for accrued compensation;
(iv) $25,000 payable to the investor's legal counsel for preparation
of documents related to the sale of the Units and the preparation
of the registration statement; and
(v) $125,000 to the Company for operating expenses.
Tranche 3 for proceeds of $360,000:
(i) $150,000 payable to Silverback Data Management in connection with
certain publication services;
(ii) $25,000 payable to the Company's legal counsel;
(iii) $50,000 to the Company to be used for marketing materials and
activities; and
(iv) $135,000 to the Company for operating expenses.
In addition, we cannot use any of the proceeds to pay debt to related-parties.
As a condition to the foregoing proceeds, related parties and employees were
required to accept a total of 350,000 shares of common stock in exchange for
$350,000 of outstanding debt. As a result, an additional 350,000 new shares of
restricted common stock will be issued on or about November 12, 2003, as
satisfaction of $350,000 of debt.
On or about November 12, 2003, we closed the first tranche and issued 576,000
Units (including 576,000 shares of Common Stock) for a total of $720,000. Only
$125,000 of the proceeds may be used for our operating expenses. If we receive
the second and third tranches as planned, then we do not believe we will need
any additional equity investments or loans in order to meet our cash flow needs
through December 31, 2004.
16
If we do not receive the second or third tranches, then we will need to obtain
proceeds of approximately $400,000, through other loans or equity investments,
in order to meet our immediate cash flow needs.
We have agreed to sell up to 320,000 additional Units for $400,000 (for a total
investment of $2,000,000) pursuant to the same terms and conditions, on or
before January 31, 2004. There is no guaranty that the additional investment
will be made, but if made available, the company is obligated and intends to
accept.
GOING CONCERN
Our independent certified public accountants have stated in their reports
included in our Form 8-K/A filed on June 5, 2003 that our Company has negative
working capital, lack of operations history, and an accumulated deficit. These
conditions, among others, raise substantial doubt about our ability to continue
as a going concern. We do not believe our financial statements have improved in
a manner sufficient to alter this going concern opinion.
Item 3. Controls And Procedures
John Creel, our president and chief accounting officer, and Steve Meineke, our
Treasurer, Principal Accounting Officer and Secretary, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this report, and they concluded that our disclosure controls and procedures
are effective.
During the period covered by this report, we engaged the services of Mark
Taggatz, a professional investment relations firm, to advise us on complying
with Regulation FD and the public disclosure process. Our executives were
trained in a seminar at their corporate offices in New York City on correct
policies, procedures, and management controls for managing a publicly traded
company.
As of the date of this filing, we have adopted a new policy to require each
principal officer to complete a questionnaire, prior to filing a report
(including this report), regarding the information required to be disclosed
herein.
3. PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes In Securities
The following charts outline our unregistered sale of common stock and other
securities during the three months ended September 30, 2003. Following the
charts is an explanation of each such sale.
COMMON STOCK ISSUED THROUGH PRIVATE PLACEMENTS DURING PERIOD COVERED BY REPORT
NAME OF DATE OF DOLLAR NUMBER OF SHARES COMMISSIONS
SHARE HOLDER NOTE ISSUED AMOUNT OF COMMON STOCK PAID
ISSUED
- ------------------- ----------- ----------- ----------------- ------------
Accredited Investor 7/11/2003 $ 20,000.00 20,000 $ 2,000
Accredited Investor 8/8/2003 $113,672.50 102,500 $ 11,367
Accredited Investor 8/22/2003 $ 60,000.00(1) 60,000(1) $ -
Total $193,672.50 182,500 $ 13,367
<FN>
1) See conversion of Convertible Debenture Table below.
17
CONVERSION OF CONVERTIBLE DEBENTURES
- ---------------------------------------
NAME OF DATE OF ORIGINAL AMOUNT SHARES
NOTE HOLDER NOTE PRINCIPAL CONVERTED ISSUED
ISSUED AMOUNT
- -------------- -------- ---------- ---------- -------
Corvus Holdings 2/27/2003 $150,000.00 $ 60,000(2) 60,000(2)
- --------------- --------- ----------- ----------- -------
<FN>
2) Such shares were subsequently sold by Corvus Holdings to Jared Fivaz, and are
included in the table above.
Common Stock. During the three months ended September 30, 2003, we sold a total
- ------------
of 182,500 shares of common stock to three accredited investors for total
proceeds of $193,672.50. We paid total commissions of $13,367. In connection
with such sales, we relied on the exemption from registration pursuant to
Regulation S promulgated under the Securities Act of 1933. The foregoing sales
were made as part of the same offering begun during the 1st quarter of 2003.
Through the nine-month period ended September 30, 2003, we have issued common
stock in offshore transactions to a total of nine (9) purchasers residing
outside the United States. We did not solicit or publish any advertisement,
article, notice or other communication within the United States regarding our
intent to make this offering. The stock certificates issued to the purchasers
contained a restrictive legend in accordance with Rule 905 and Rule 144. We may
receive additional funding from offshore investors under similar terms, and
therefore we do not consider this offering to be closed at this time
Convertible Notes. During the period covered by this report, the holder of a
- ------------------
convertible note in the original principal amount of $150,000, dated February
27, 2003, converted $60,000 of the balance of such note into 60,000 shares of
common stock. Such shares and dollar amount are included in the 182,500 common
shares for $193,672.50 mentioned above. The remaining outstanding balance is
$90,000.
Item 3. Defaults By The Company Upon Its Senior Securities
None
Item 4. Submission Of Matter To A Vote Of Security Holders
None.
Item 5. Other Information
On May 13, 2003, the Registrant mailed a Dissenter's Notice to its stockholders,
which allows stockholders of record prior to January 17, 2003, to demand payment
for their shares as a result of the consummation of the Merger. Stockholders had
until June 13, 2003, to demand payment for their shares. We received no demands
for payment of shares from any dissenting stockholders.
On June 4, 2003, we issued a press release announcing a new relationship with
Bally Total Fitness. A copy of the press release is filed as an exhibit to this
report. We completed our installation of 11 of the 25 access systems, and we
have a contract to install all the remaining 14 of 25 access systems for gross
revenue of approximately $213,500.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
10.1 Letter Agreement, amending Employment Agreement with Peter Dermutz, dated
August 12, 2003.
10.2 Letter Agreement, amending Employment Agreement with Steve Meineke, dated
August 12, 2003.
18
10.3 Letter Agreement, amending Employment Agreement with John Creel, dated
August 12, 2003.
10.4 Purchase Order from Bally's Fitness
10.5 Letter Agreement with Axess AG regarding security interest in receivables,
dated September 29, 2003
10.6 Security Agreement, dated September 29, 2003.
31.1 Certification of John Creel Pursuant to Rule 15d-14(a)
31.2 Certification of Steve Meineke Pursuant to Rule 15d-14(a)
32.1 Certification of John Creel Pursuant to Rule 15d-14(b)
32.2 Certification of Steve Meineke Pursuant to Rule 15d-14(b)
99.1 Press Release re: Bally's dated June 4, 2003
99.2 Unit Purchase Agreement, dated November 12, 2003.
(b) Reports on Form 8-K
Form 8-K/A filed June 5, 2003, containing audited financial statements for
Rapidtron, Inc., a Delaware corporation.
Form 8-K filed July 15, 2003, regarding change in auditor.
19
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.
RAPIDTRON, INC.,
a Nevada corporation
Date: November 14, 2003
By: /s/ John Creel
---------------------------------------------
John Creel, President &
Chief Executive Officer
By: /s/ Steve Meineke
---------------------------------------------
Steve Meineke, Secretary, Treasurer &
Principal Financial Officer
20