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 June 30, 2004
[ ] 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 X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practical date: 20,463,058 shares of Common Stock,
----------------------------------
$0.001 par value, outstanding on August 11, 2004.
- --------------------------------------------------------
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
RAPIDTRON, INC.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Condensed Consolidated Financial Statements:. . . . . . . . . . . . . . . . . . 1
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2004. . . . . . 1
Unaudited Condensed Consolidated Statements of Operations for the Three-Month
and Six-Month Periods Ended June 30, 2004 and 2003 . . . . . . . . . . . 2
Unaudited Condensed Consolidated Statements of Cash Flows for the Six-Month
Periods Ended June 30, 2004 and 2003 . . . . . . . . . . . . . . . . . . 4
Notes to Unaudited Condensed Consolidated Financial Statements. . . . . . . . 5
Item 2. Management's Discussion and Analysis or Plan of Operations. . . . . . . . . . . 16
Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . 23
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
i
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2004
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UNAUDITED
ASSETS
CURRENT ASSETS
Cash $ 35,725
Accounts receivable, net of allowance for doubtful accounts of
$20,000 953,888
Inventory 298,511
Prepaid expenses and other current assets 546,217
------------
1,834,341
PROPERTY AND EQUIPMENT, NET 92,624
DEPOSITS AND OTHER ASSETS 12,380
------------
$ 1,939,345
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,107,851
Accrued liabilities 228,665
Secured borrowings 80,000
Due to related party 86,126
Loans due to related parties 519,193
Current portion of long-term debt 29,822
Obligations under capital lease 5,957
------------
2,057,614
------------
LONG-TERM DEBT, NET OF CURRENT PORTION 48,933
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; 100,000,000 shares
authorized; 20,454,727 shares issued and outstanding 20,455
Additional paid-in capital 5,934,357
Stock subscriptions receivable (305)
Accumulated deficit (6,121,709)
------------
(167,202)
------------
$ 1,939,345
============
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
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UNAUDITED
THREE-MONTHS THREE-MONTHS SIX-MONTHS SIX-MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
NET SALES $ 873,302 $ 164,766 $ 1,355,251 $ 262,265
COST OF GOODS SOLD 648,363 99,593 994,375 143,945
---------------- ---------------- ---------------- ----------------
GROSS PROFIT 224,939 65,173 360,876 118,320
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 834,644 1,011,143 2,085,861 1,436,774
---------------- ---------------- ---------------- ----------------
LOSS FROM OPERATIONS (609,705) (945,970) (1,724,985) (1,318,454)
OTHER INCOME (EXPENSE)
Interest expense (8,247) (36,638) (14,738) (58,992)
Foreign exchange gain (loss) (14,552) 9,448 4,856 (13,092)
---------------- ---------------- ---------------- ----------------
(22,799) (27,190) (9,882) (72,084)
---------------- ---------------- ---------------- ----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (632,504) (973,160) (1,734,867) (1,390,538)
PROVISION FOR INCOME TAXES 800 800 1,600 800
---------------- ---------------- ---------------- ----------------
(continued)
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
- --------------------------------------------------------------------------------
UNAUDITED
THREE-MONTHS THREE-MONTHS SIX-MONTHS SIX-MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
NET LOSS $ (633,304) $ (973,960) $ (1,736,467) $ (1,391,338)
================ ================ ================ ================
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.03) $ (0.07) $ (0.09) $ (0.11)
================ ================ ================ ================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 20,446,000 14,415,000 20,225,000 12,223,000
================ ================ ================ ================
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
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UNAUDITED
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,736,467) $(1,391,338)
Adjustments to reconcile net loss to net cash used in operating
activities:
Provision for bad debts - 7,000
Depreciation 20,896 3,501
Common stock issued for professional services 97,871 400,000
Warrants issued for professional services 243,534 -
Unrealized foreign exchange loss (gain) (5,584) 335
Changes in operating assets and liabilities:
Accounts receivable (636,501) (113,216)
Inventory 259,691 (87,838)
Prepaid expenses and other current assets (37,291) 11,611
Deposits and other assets - (3,722)
Accounts payable 326,164 (294,365)
Accrued liabilities 31,428 70,790
Due to related party (1,219) 30,292
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NET CASH USED IN OPERATING ACTIVITIES (1,437,478) (1,366,950)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,907) (1,797)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,907) (1,797)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans due to related parties 250,000 1,627,924
Principal payment of loans due to related parties (55,076) (262,662)
Principal payment of capital lease obligations (1,554) (823)
Proceeds from secured borrowings 80,000 -
Principal payment of long-term debt (17,516) -
Proceeds from the issuance of common stock 200,000 -
Proceeds from exercise of warrant 400,000 -
Receipt of stock subscriptions receivable 535,000 -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,390,854 1,364,439
------------ ------------
NET DECREASE IN CASH (48,531) (4,308)
CASH - beginning of period 84,256 10,835
------------ ------------
CASH - end of period $ 35,725 $ 6,527
============ ============
(continued)
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
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UNAUDITED
2004 2003
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 1,600 $ 800
============ ============
Interest $ 8,984 $ 10,558
============ ============
Non-cash investing and financing activities:
Common stock issued to settle payable $ 20,000 $ -
============ ============
Common stock issued for prepaid expenses $ 100,000 $ -
============ ============
Software acquired through debt $ 96,271 $ -
============ ============
Warrants issued for prepaid expenses $ 381,250 $ -
============ ============
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 $ - $ 1,648,024
============ ============
Retire treasury stock $ - $ 196,000
============ ============
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
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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
six-month periods ended June 30, 2004 and 2003. Due to the merger with
Rapidtron, Inc., a Delaware corporation in May 2003, 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 June 30, 2004, and the results of operations and cash flows for
the three-month and six-month periods ended June 30, 2004 and 2003, 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 10-KSB
filed with the Securities and Exchange Commission ("SEC") on March 30, 2004.
The results of operations for the three-month and six-month periods ended
June 30, 2004 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.
6
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
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1. BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
BUSINESS (continued)
During the year ended December 31, 2003, the Company completed a reverse
merger. Effective May 8, 2003, the merged entity's common stock is quoted 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.
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, 2003
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 June 30,
2004, the Company has a working capital deficit of approximately $223,000,
recurring losses from operations, an accumulated deficit of approximately
$6,122,000, and has generated an operating cash flow deficit of approximately
$1,437,000 for the six-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, 2004.
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.
7
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
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1. BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
GOING CONCERN AND LIQUIDITY CONSIDERATIONS (continued)
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.
EMPLOYEE STOCK BASED COMPENSATION
As of March 31, 2004, the Company has one employee stock-based compensation
plan. The Company accounts for such grants under the recognition and measurement
principles of Accounting Principle Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net loss, as all options granted in prior
periods had an exercise price equal to the estimated market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation," as amended, to stock-based
employee compensation.
8
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
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1. BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
EMPLOYEE STOCK BASED COMPENSATION (continued)
FOR THE THREE-MONTHS ENDED JUNE 30,
2004 2003
-------------------- -------------------
Net loss:
As reported $ (633,304) $ (973,960)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (48,375) -
-------------------- -------------------
Pro forma $ (681,679) $ (973,960)
==================== ===================
Basic and diluted net loss per share:
As reported $ (0.03) $ (0.07)
==================== ===================
Pro forma $ (0.03) $ (0.07)
==================== ===================
FOR THE SIX-MONTHS ENDED JUNE 30,
2004 2003
-------------------- -------------------
Net loss:
As reported $ (1,736,467) $ (1,391,338)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (96,750) -
-------------------- -------------------
Pro forma $ (1,833,217) $ (1,391,338)
==================== ===================
Basic and diluted net loss per share:
As reported $ (0.09) $ (0.11)
==================== ===================
Pro forma $ (0.09) $ (0.11)
==================== ===================
9
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS (continued)
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the Notes to the December 31,
2003 and 2002 financial statements filed previously with the Securities and
Exchange Commission in Form 10-KSB on March 30, 2004 that were required to be
adopted during the year ended December 31, 2004 did not have a significant
impact on the Company's financial statements.
2. EQUITY TRANSACTIONS
Effective April 1, 2004, the Company sold in a private placement to
Generation Capital Associates ("Generation Capital"), an accredited investor,
160,000 "Units" consisting of one share of restricted common stock and one
warrant to purchase restricted common stock at a price of $1.46 for up to five
years, for a total purchase price of $200,000. If prior to April 1, 2006 the
Company files a new registration statement with the SEC, excluding any
amendments to or refilings of registration statements currently on file with the
SEC, then the Company is to include Generation Capital's resale of its shares in
such registration statement on the same terms and conditions as provided to the
other selling securities holders.
In connection with the Pioneering Innovations Agreement (see Note 6), the
Company issued 210 shares of restricted common stock in June 2004 for services
approximating $400.
During the three-month period ended March 31, 2004, a warrant holder
converted warrants to acquire 320,000 shares of the Company's common stock for
cash totaling $400,000. No warrants were exercised during the three-month period
ended June 30, 2004.
In connection with a financial public relations agreement entered into in
January 2004 (see Note 5), the Company is required to issue 50,000 shares of its
restricted common stock during the term of the agreement in six equal monthly
installments of 8,333 shares, beginning on February 1, 2004. As of June 30,
2004, the Company has issued 41,666 shares of common stock under this agreement
and has recorded approximately $58,000 of public relations expenses during the
six-month period then ended related to such issuances.
10
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
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2. EQUITY TRANSACTIONS (continued)
In November 2003, the Company entered into a consulting agreement with Big
Sky Management Ltd ("Big Sky"). Such agreement required the Company to issue
120,000 shares of its restricted common stock plus warrants to acquire 120,000
shares of common stock (collectively, the "Units") in exchange for $160,000 of
services to be performed during a 12-month period beginning on November 12,
2003. The Units were approved by the Board of Directors and issued in February
2004. The warrants are exercisable upon issuance at a price of $1.25 per share
at any time up to February 12, 2005 and, thereafter, at a price of $1.50 per
share at any time up to February 12, 2006, at which time such warrants shall
expire. Under this agreement, the Company is required to file a registration
statement on Form S-8 to register the common shares and the common shares
acquirable upon exercise of the warrants under the Securities Act of 1933, as
amended. At June 30, 2004, approximately $67,000 of expense under this agreement
is included in prepaid expenses and other current assets in the accompanying
condensed consolidated balance sheet.
During the three-month period ended March 31, 2004, the Company collected
cash totaling $535,000 related to stock subscriptions receivable. No stock
subscription collections were made during the three-months ended June 30, 2004.
3. WARRANTS
Warrants to acquire 120,000 shares of the Company's common stock were
granted in February 2004 as part of the Big Sky Management agreement (see Note
2). The Company has estimated the grant date fair value of such options to be
$0.45 per share.
In connection with the Adair Consulting Agreement (see Note 5), the Company
granted warrants to acquire 250,000 shares of the Company's restricted common
stock at an exercise price of $1.25 per share between January 1, 2004 and
December 31, 2004, and thereafter at $1.50 per share until five years following
the expiration or termination of the Adair Consulting Agreement. Such warrants
are exercisable on the date of grant. Total compensation of $145,000 has been
estimated using the Black-Scholes option pricing model and is to be amortized
over the one-year life of the Adair Consulting Agreement. At June 30, 2004,
approximately $73,000 of expense under this agreement is included in prepaid
expenses and other current assets in the accompanying condensed consolidated
balance sheet.
Warrants to acquire 160,000 shares of the Company's common stock were
granted in April 2004 in connection with the Generation Capital Associates
purchase of Units (see Note 2). The Company has estimated the grant date fair
value of such options to be $0.65 per share.
11
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
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3. WARRANTS (continued)
On April 1, 2004, the Company entered into a two-year management
consulting agreement with Amothy Corporation ("Amothy") pursuant to which the
Company will issue warrants for up to 1,000,000 shares of its restricted common
stock, exercisable at the rate of $1.46 per share for five years from the date
the warrants are vested. The warrants will vest as follows: 600,000 on or about
April 1, 2004, 200,000 on or about July 1, 2004, and 200,000 on or about October
1, 2004. The warrants have piggyback registration rights. If the warrants are
not registered at any time 12 months after the respective vesting dates of such
warrants, then the warrants will have a cashless exercise provision at Amothy's
option until such time as the shares underlying the warrants are registered.
Based on the fair value of the warrants on the grant date, the Company estimates
that it will record consulting fees approximating $650,000 over the life of this
agreement. Expense approximating $81,000 was charged to expense during the
three-month period ended June 30, 2004. At June 30, 2004, approximately $309,000
of expense under this agreement is included in prepaid expenses and other
current assets in the accompanying condensed consolidated balance sheet.
As part of the Silicon Valley Bank ("SVB") Accounts Receivable Purchase
Agreement (see Note 9), the Company granted SVB warrants to acquire 150,862
shares of common stock at $0.58 per share for five years from the date of grant.
Such warrants are immediately exercisable. The Company recorded expense
approximating $50,000 based on the estimated fair value of the warrants.
The above fair values were estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions: 4.8-year expected life;
52% estimated volatility; 3.13% risk free interest rate; and no dividends.
4. 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 six-month periods ended June 30, 2004 and
2003. As a result, options and warrants outstanding at June 30, 2004 and 2003 to
acquire 3,742,862 and 150,000 shares of the Company's common stock, respectively
have been excluded from the calculation of diluted net loss per share, because
their inclusion would be antidilutive.
12
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
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4. LOSS PER SHARE (continued)
Additionally, convertible debt to acquire 12,000 shares of the Company's common
stock at March 31, 2004 (see Note 5) have been excluded from the calculation of
diluted net loss per share, because those shares would also be antidilutive. 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.
5. COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
To obtain the release of inventory on order 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. Axess AG released this security
agreement prior to June 30, 2004.
To obtain the release of additional inventory on order from Axess AG, the
Company filed a UCC-1 Financing Statement on April 27, 2004, securing the
related payable to Axess AG of approximately $250,000. Such payable is secured
by the Company's accounts receivable. The Company has met all conditions and
obligations required by the security agreement, and Axess AG released this
security agreement prior to June 30, 2004.
LIOLIOS AGREEMENT
On January 1, 2004, the Company entered into a public financial relations
agreement with Liolios Group, Inc. ("Liolios"), pursuant to which the Company
will pay Liolios $5,000 per month for six months, plus 50,000 shares of
restricted common stock, in six equal monthly installments (see Note 2). The
Company may terminate the agreement upon 30 days advance written notice,
whereupon the obligation to issue the remaining portion of the 50,000 shares
will terminate.
STEVE MEINEKE TERMINATION
Effective March 1, 2004, the Company entered into a termination of
employment agreement with Steve Meineke, former Chief Financial Officer of the
Company. The Company agreed to pay Meineke Consulting, LLC, its 2002 accrued
fees in the amount of $6,987 prior to paying any unpaid wages earned by any
employees in the year 2003, and when it pays all other wages remaining unpaid
for the year 2002, pro rata and in proportion to all other unpaid wages earned
in 2002 and remaining unpaid as of March 1, 2004.
13
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
- --------------------------------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES (continued)
STEVE MEINEKE TERMINATION (continued)
The Company also agreed to pay to Steve Meineke his 2003 accrued salary in
the amount of $38,959 after all wages remaining unpaid for the year 2002 are
paid, and when it pays all other wages remaining unpaid for the year ended
December 31, 2003, pro rata and in proportion to all other unpaid wages earned
in 2003 and remaining unpaid as of March 1, 2004. In addition, the Company
delivered a replacement promissory note payable on demand to Steve Meineke in
the principal amount of $15,000, which is convertible into common stock at $1.25
per share.
ADAIR CONSULTING AGREEMENT
Effective January 1, 2004, the Company entered into a consulting agreement
with Mark Adair Financial Accounting Services ("Adair"), pursuant to which the
Company will pay Adair $12,500 per month for 12 months, plus warrants to acquire
250,000 shares of restricted common stock (see Note 3) in exchange for
financial, accounting and strategic business planning consulting services. Such
agreement, as amended, requires the Company to register the underlying 250,000
shares by filing a registration statement on Form S-8 by October 29, 2004.
6. PIONEERING INNOVATIONS AGREEMENT
The Company entered into a software development agreement with Pioneering
Innovations Inc. ("Pioneering Innovations") on January 13, 2004. Pioneering
Innovations has developed a piece of software titled COM DLL, which allows the
Company's products to interface with customer's existing back office software.
In accordance with this agreement, the Company purchased COM DLL for
$100,000, to be paid in 24 equal monthly installments of $4,166.67. As no
interest rate was specified in the agreement, the Company has applied a rate of
4% and recorded the related debt and asset at $96,271. Additionally, the
agreement provides for support and maintenance services, related to new
installations of the Company's products, by Pioneering Innovations over its
three-year term. As consideration for such services, the Company will pay
Pioneering Innovations 10 shares of the Company's restricted common stock per
product installed that becomes fully integrated and operational with COM DLL, up
to 40,000 shares. Such shares are due within 30 days of the end of each quarter.
For the six-months ended June 30, 2004, the Company completed 21 software
integrations and has issued Pioneering Innovations 210 shares of restricted
common stock (see Note 2).
14
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
JUNE 30, 2004
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6. PIONEERING INNOVATIONS AGREEMENT
In the Company's March 31, 2004 Form 10-QSB that was previously filed with
the SEC on May 17, 2004, management disclosed that 33 installations had been
completed prior to March 31, 2004. However, it was found that the true number of
installations was 21 through June 30, 2004.
7. MARKETING SERVICES AGREEMENT
During the three-month period ended March 31, 2004, the Company entered
into a marketing services agreement. The Company incurred $400,000 in fees
related to such agreement, which is included in selling, general and
administrative expenses in the accompanying condensed consolidated statements of
operations. Services under this agreement were completed prior to March 31,
2004. There were no similar expenditures during the three-month period ended
June 30, 2004 or the three-month and six-month periods ended June 30, 2003.
8. RELATED PARTY TRANSACTIONS
Equus Marketing and Design, Inc. ("Equus") is a party related to the
Company through commonality of ownership. The Company shares a facility and
certain administrative personnel with Equus (Equus is the lessee of the property
and employer of certain personnel). Additionally, Equus provides marketing
services to the Company. During the six-month periods ended June 30, 2004 and
2003, the Company incurred expenses from Equus approximating $192,000 and
$228,000, respectively, and made repayments to Equus approximating $193,000 and
$198,000, respectively.
Other related party transactions are discussed elsewhere in the notes to
the condensed consolidated financial statements.
9. SECURED BORROWINGS
Effective June 29, 2004, the Company entered into an Accounts Receivable
Purchase Agreement with Silicon Valley Bank ("SVB"). Under such agreement, the
Company can request SVB to purchase, with full recourse, certain trade accounts
receivable. If SVB accepts such offer, they will advance 70% to 80% of the face
amount of the "purchased" receivable to the Company. RPDT is required to pay
$20,000 yearly as a Facility Fee, plus a monthly Finance Charge of 1.5% on the
average daily Account Balance outstanding, as defined. Advances may not exceed
$1,750,000 (with the underlying "purchased" receivables not exceeding
$2,500,000). Advances are secured by substantially all assets of the Company.
The Agreement has a one-year term, and then continues on a year-to-year
basis thereafter. The Company is recording advances under the agreement as
secured borrowings. The Company is obligated to repurchase transferred
receivables under the agreement and, therefore, the transaction does not qualify
as a sale under the terms of Statement of Financial Accounting Standard No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." At June 30, 2004, the Company received an advance of $80,000
against the "purchase" of trade receivables totaling $116,246.
10. SUBSEQUENT EVENTS
In July 2004, the Company entered into a Memorandum of Understanding
("MOU") regarding a potential transaction with Smart Card Integrators, Inc., a
privately held California corporation ("SCI"). The MOU gives both parties the
right to conduct due diligence until October 18, 2004, to determine if it is in
their respective best interest to bring in SCI as a subsidiary of the Company.
For more information, please see the Company's Form 8-K, as filed with the SEC
on August 3, 2004.
15
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 intend 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. This report should be read in conjunction with the
risk factors set forth on pages 3 through 13 of our registration statement on
From SB-2 filed with the Commission on May 2, 2004, which risk factors are
hereby incorporated by this reference.
GENERAL OVERVIEW:
We specialize in providing solutions for automated access through our
wholly-owned operating company, Rapidtron Delaware. We distribute access control
and ticketing/membership systems to the fitness, winter resort, amusement,
transit industries and universities in North America. We have an exclusive
distribution agreement for the North American market with Axess AG, a European
manufacturer and distributor of such systems. We have jointly researched and
developed such systems with Axess AG, and we sell, install and service all North
American installations for Axess AG.
Our RF access control and ticketing/membership technology has been in operation
for approximately six years with over 2,750 access and 1,700 point of sale
systems in Europe and North America. The European installations were sold,
installed and serviced by Axess AG, our supplier.
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.
We are competing with traditional bar code providers. Our system is versatile
and reads either bar code or RF Smart cards or 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.
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
16
interface solutions with many major software providers to the venues in which we
sell and service (for example, in Fitness - Aphelion, CSI, Check Free, Twin
Oaks, ASF and Computer Outfitters; and in Resorts - the three major providers,
Comptrol, RTP and Siriusware). We have completed a new software interface,
COMdll that provides the software provider a faster and easier interface than
before and 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 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. We are targeting the sale of our systems to existing bar code
users in the fitness, resort and amusement, and university industries who have
the opportunity to fully utilize the hands-free RF technology together with the
Smart card debit/credit technology.
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.
The following analysis of our operations refers primarily to those in the
fitness, winter resort, amusement, and university industries, which constitute
the majority of our business activities. We are also exploring the possible
integration of biometric technology with our RF Smart card technologies that
would combine fingerprint identification systems with our access control
systems. On or about July 19, 2004, we entered into a Memorandum of
Understanding with Smart Card Integrators, Inc., a privately held California
corporation ("SCI"), regarding a potential our potential acquisition of SCI as
another subsidiary that we would operate, in addition to Rapidtron, Inc., a
Delaware corporation. The MOU gives both parties the right to conduct due
diligence until October 18, 2004, to determine if it is in their respective best
interest to bring in SCI as a subsidiary of Rapidtron. If we are satisfied with
our due diligence and are able to meet the other conditions of closing this
transaction more fully described below, our current financial statements may not
be indicative of future results, and the business plan discussed below may be
modified accordingly. While we would expect any such acquisition to result in an
increase in our operating revenue, such an acquisition will result in an
increase in one-time expenses which are difficult at this time to predict and
will likely cause future net losses to continue for a longer period of time than
we currently estimate. If we are able to successfully acquire and combine such
technologies, we will begin to market our combined products to new industries
such as the government and security industries, while continuing to market the
RF and Smart card access control systems in our traditional markets discussed
below. A more detailed discussion of the business of SCI is set forth on pages 2
and 3 of our report on Form 8-K, filed with the Commission on August 3, 2004,
which is hereby incorporated by reference.
RESULTS OF OPERATIONS OF THE COMPANY:
Three Months ended June 30, 2004 compared to three months ended June 30, 2003
and the six months ended June 30, 2004 compared to the six months ended June 30,
2003.
REVENUE
Our revenue for the three months ending June 30, 2004 was $873,302, an increase
of $708,536 (430%) compared to the $164,766 from the same period last year.
17
For the three month period ended June 30, 2004, the $708,536 increase in our
sales revenue was due primarily to the increased sales in fitness. Sales in
fitness continue to expand into several major national fitness chains and will
continue through 2004. We are currently in the process of fulfilling orders for
125 access control systems for two national fitness chains, totaling
approximately $1.7 million over the first three quarters of 2004. We recognized
approximately $700,000 in gross revenue from these sales in the second quarter
of 2004 and expect to recognize approximately $600,000 in gross revenue from
these sales in the third quarter of 2004.
For the six month period ending June 30, 2004, we had revenues of $1,355,251, an
increase of $1,092,986 (416%) from $262,265 for the same period in fiscal year
2003.
We have chosen to focus our sales efforts on fitness clubs, winter resorts and
entertainment, and universities and colleges, niche markets where our system has
penetrated key venues. We have made notable installations of our products with
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 U.S. 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. In this
regard, we increased our focus in selling to the leading fitness chains in 2003
which resulted in two sales orders totaling 125 access control systems to be
shipped through the first three quarters of 2004. We have additional meetings
scheduled with other leading fitness chains that have shown interest in
implementing our access control systems in their clubs. Following our
installation at UCLA John Wooden Center, and sales presentations to more than
250 universities, we anticipate increased sales in 2004 with 8 new universities
currently analyzing our systems for potential implementations in 2004. While the
winter resort business is now preparing for its 2004/2005 season, we have
expanded our presence with more installations at Park City, Utah, and the hiring
of Chris Perkins as our V.P. of Resort Sales. We expect increased sales in each
of the three targeted venues of fitness clubs, universities, and winter resorts
over the third and fourth quarter of 2004. Even if we enter the biometric
government and securities markets through the acquisition of SCI as a new
subsidiary, we will continue to focus on these three targeted venues through our
Rapidtron Delaware operations.
We expect to increase our revenues in the targeted venues of fitness clubs,
winter resorts, and universities in the third quarter of 2004, and to
significantly increase our revenues in the targeted venues in the upcoming 12
months. We continue to base these revenue growth expectations on the assumption
that the successful sales, installations, and operations 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 90 locations with a national fitness club with 35 more scheduled over the
next several months, and we expect to continue to expand in the club's other
locations over the next 12 months. In the first six months of 2004, we received
approximately eighty-five percent (85%) of our gross revenue from fitness clubs,
with 78% of gross revenues derived from one fitness customer. We expect to
continue our growth in sales to fitness clubs in 2004, and we have meetings
scheduled during the third and fourth quarter of 2004 with all other leading
companies in the fitness industry, who we are currently working with for
potential implementations in 2004. As a result of these meetings, we hope to
increase and diversify our gross revenue received through sales in the fitness
industry.
Actual results may differ from our expectations as a result unexpected
modifications to our systems that may be requested to meet the specific needs of
potential customers that cause delay in the recognition of sales, or other
delays in expected sales to the customers in the targeted venues.
GROSS PROFIT
For the three months ending June 30, 2004, our gross profit totaled $224,939,
compared to $65,173 for the same period last year. The $159,766 increase in
gross profit was primarily a result of increased sales to fitness clubs.
During the six months ending June 30, 2004, we had gross profit of $360,876,
compared to gross profit of $118,320 for the same period last year. This
represents an increase of $242,556 from the same period last year. The 205%
increase in gross profit was primarily a result of increased sales to fitness
clubs.
18
We expect to modestly improve our gross profit through increased sales in the
targeted venues of fitness clubs, winter resorts, and universities over the
third and fourth quarter of 2004, 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 2004 due to
our purchasing from a European supplier. We expect the unfavorable currency
variance of the US Dollar to the Euro to continue in 2004 with possibly slight
improvements, and to continue to negatively impact gross profit margins due to
our plan to continue purchasing equipment, readers, and cards from our European
supplier.
At the end of the second quarter of 2004, we published 10% to 15% price
increases for our access control systems to our customers, which will result in
improved margins in the third and fourth quarter of 2004. In addition, we are in
the process of negotiating volume discounts from our equipment suppliers, which
should lead to reduced costs of goods in the later part of the second quarter.
Actual results may differ from our expectations as a result of delay in sales
revenues, and in the ability to use gross profit from those revenues to meet
orders from customers in the targeted venues. If we experience a delay in
receiving gross revenue, we may need to finance, through short-term debt or
equity financing, the acquisition and distribution of our products to meet the
increase in demand, resulting in smaller margins and a decrease in gross profit.
OPERATING EXPENSES
During the three months ending June 30, 2004, our selling, general and
administrative operating expenses totaled $834,644, a decrease of $176,499 (18%)
from the $1,011,143 incurred during the same period last year. The reduction in
expenses can be attributed to costs incurred in the prior year quarter related
to our reverse merger, plus decreased costs and travel expenses over the three
month period.
For the six months ended June 30, 2004, selling, general and administration
expenses totaled $2,085,861, an increase of $649,087, or 45% from $1,436,774
incurred during the same period last year. Included in the $649,087 increase of
operating expenses for the current quarter is approximately $550,000 related to
a one-time increase in marketing costs associated with the creation, production
and distribution of marketing material to potential investors, and investor
relations/consulting of $50,000, pursuant to the Unit Purchase Agreement
discussed in the section titled "Transactions with Selling Stockholders" in our
registration statement on Form SB-2 filed with the Commission on February 5,
2004, hereby incorporated by reference. In addition, we incurred one-time
expenses of approximately $60,000 in legal and accounting fees for the filing of
our SB-2 and $15,000 for our website construction. Excluding the increased costs
associated with the Unit Purchase Agreement and the professional fees related to
the filing of the SB-2, our selling, general & administrative expenses were
comparable with the same period last year.
We expect operating expenses in the ordinary course of business (not taking into
consideration the one time expenses related to the Unit Purchase Agreement and
the filing of the SB-2) to increase modestly over the next two quarters of 2004
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, these commissions will increase as a
percentage of sales in the coming quarter, and 12 months. In addition, we will
incur additional one-time expenses related to the filing of an amended
registration statement on Form SB-2 related to the Unit Purchase Agreement and
the cost associated with keeping the registration statement current and
effective. We estimate these expenses to be $50,000 to $75,000 over the third
quarter of 2004. Additionally, we will record approximately $154,000 during each
of the third and fourth quarters of 2004 in connection with warrants granted in
2004 for consulting agreements. Actual results may differ from our expectations
as a result of any delay in sales revenues, and gross profit from those
revenues, while operating expenses continue to increase to secure and meet the
demand of our customers in the targeted venues.
19
LOSS FROM OPERATIONS
During the three months ended June 30, 2004, we had a loss from operations of
$609,705, compared to a loss from operations in the prior year of $945,970. The
$336,265 decrease in loss from operations was primarily a result of increased
sales to fitness clubs.
During the six months ending June 30, 2004, we had a loss from operations of
$1,724,985, compared to a loss from operations of $1,318,454 for the same period
last year. This represents an increase in the loss from operations of $406,531
from the same period last year. The 31% increase in the loss from operations
was primarily a result of $675,000 in expenses related to the Unit Purchase
Agreement and the professional fees related to the filing of the SB-2. In
addition, 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 for the six
month period.
We expect overall loss from operations to decrease over the next quarter as a
result of increased sales in fitness and resorts and the absence of some of the
one-time expenses previously mentioned. 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.
INTEREST EXPENSE
For the three months ending June 30, 2004, our interest expense was $8,247. Our
interest expense was $36,638 in the same quarter last year.
During the six months ending June 30, 2004, our interest expense was $14,738,
compared to an interest expense of $58,992 for the same period last year. The
decrease in interest expense was primarily the result of the payoff of debt to
related parties over the past 12 months. At June 30, 2004, we owed $519,193 on
notes due to related parties, compared to $538,161 at June 30, 2003.
Additionally, during the three-month period ended June 30, 2003, we repaid debt
approximating $1,648,000 through the issuance of our restricted common stock.
We expect interest expense to increase over the third and fourth quarter of 2004
due to the interest related to the credit facility we implemented at the end of
the second quarter to help finance the increased working capital needs as sales
increase. 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 June 30, 2004, we had total assets of $1,939,345 compared to total assets of
$1,055,243 at December 31, 2003. Cash was $35,725 as of June 30, 2004, down from
the $84,256 cash balance as of December 31, 2003. Cash used in operations was
$1,437,478; cash used in investing activities was $1,907; and cash provided by
financing activities was $1,390,854; with net decrease in cash during the six
month period being $48,531.
Our net accounts receivable were $953,888 at June 30, 2004, an increase of
$636,501 (200%) from the $317,387 at December 31, 2003. The increase in accounts
receivable is primarily due to sales in the fitness club industry.
Our net inventories decreased $259,691 (47%) over the past six months, to
$298,511, from the $558,202 at December 31, 2003. A decrease in inventory is due
to increased sales and the timing of receipts of incoming inventory purchases.
Inventory will increase over the next 12 months to support the increased sales
forecast.
Our net fixed assets totaled $92,624 at June 30, 2004, compared to $15,342 at
December 31, 2003. The increase in fixed assets is related to the purchase of
COM DLL software from Pioneer Innovations for the integration/interface of our
equipment with the back office accounting systems of our fitness customers. The
software was purchased for $96,271.
20
Our total liabilities at June 30, 2004, were $2,057,614, an increase of $633,978
(45%) from the $1,423,636 at December 31, 2003. Our accounts payable and accrued
liabilities totaled $1,336,516 at June 30, 2004, an increase of $332,005 (33%)
from the $1,004,511 at December 31, 2003. There was an increase in accounts
payable of $300,580 and an increase in accrued liabilities of $31,425. Our
payables increased as a result of negotiating extended terms with our suppliers
to support payment terms offered to our customers, and the accrued liabilities
increased as a result of accruals for year-end audit fees and payroll taxes,
less decreases in customer deposits and the other reserves.
Our accrued payroll totaled $116,914 at June 30, 2004, compared to $96,164 at
December 31, 2003. 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 accrued
liabilities, was $8,371 at June 30, 2004, an increase of $1,697 from the $6,674
at December 31, 2003.
Our notes payable to related parties were $519,193, lease obligations of $5,957
and current and long-term debt of $78,755 (related to the purchase of the COM
DLL software) totaling $603,905 at June 30, 2004, an increase of $272,125 (82%)
from the $331,780 at December 31, 2003. The increase is related to a short term
bridge loan of $250,000 which was subsequently paid off in July 2004, plus
financing the purchase of the COM DLL software.
STOCKHOLDER'S DEFICIT
Our stockholder's deficit was $167,202 at June 30, 2004, a decrease of $201,191
from the $368,393 at December 31, 2003. The changes in stockholder's equity were
as follows:
Balance as of December 31, 2003 ($368,393)
Net Loss ($1,736,467)
Increase in Additional Paid in Capital $1,402,016
Increase in Common Stock $642
Receipt of Stock Subscription Receivable $535,000
---------
Balance as of June 30, 2004 ($167,202)
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, we had $1,939,345 in total assets, including $35,725 in
cash, $953,888 in accounts receivable, $298,511 in inventories, and $546,217 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 are finished goods consisting primarily of readers, turnstiles,
and equipment and are very marketable, and will continue as current product
models during 2004. 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 3rd and 4th quarter supporting
the increased sales.
At June 30, 2004, our total liabilities were $2,106,547, including accounts
payable and accrued liabilities of $1,336,516, and amounts due to related
parties (including due to related party and loans due to related parties) of
$611,276. Loans to related parties include $104,759 to John Creel and Steve
Meineke, directors of the Company.
We had negative working capital (current assets minus current liabilities) of
$223,273 at June 30, 2004. Our negative cash flow from operations resulted
primarily from our loss and our increased receivables. Our cash flow needs were
met over the last quarter through sales revenues and the proceeds of private
placements. We expect our operations to continue operating at a negative cash
flow through at least the third quarter of 2004 as we continue to invest in new
business opportunities. As a result, we will continue to rely upon short-term
lines of credit with our suppliers and potentially additional equity or debt
financing. Thus, our success, including our ability to fund future operations,
depends largely on our ability to
21
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 expect gross revenues averaging between $250,000 to $1,000,000 per month over
the next quarter with net margins of approximately $87,500 to $350,000 per
month. Operating expenses will be approximately $175,000 per month consisting of
rent, salary, marketing, services, software interface, and other, excluding the
anticipated increase due to sales commissions paid for increased sales volume
secured by independent sales agents, and new business development. The income
from operations will not be sufficient to meet the increased working capital
needs created by the increased sales over the next quarter. We expect to meet
these increased cash flow needs through additional third-party loans, equity
investment, and/or a revolving credit facility. 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.
Over the next 6 months, we project a loss from operations of approximately
$500,000 (excluding expenses related to future registration statement costs and
the expense that will be recorded in 2004 related to warrants issued for
consulting services), and an increase in receivables of approximately
$1,500,000. We expect to need approximately $2,000,000 from third-party loans
and equity investment in order to meet the additional working capital needs. If
we are able to meet the financing contingency and close the transaction with
SCI, we expect to meet these needs by the first part of 2005.
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.
As of June 27, 2004, we entered into an accounts receivable financing credit
facility with Silicon Valley Bank ("SVB") to help support the cash flow
requirements in financing our projected sales growth. The maximum borrowing on
the line is $1,750,000 on qualified and eligible gross domestic accounts
receivable subject to prior approval of account debtors by SVB, and as of June
30, 2004, we had borrowed $80,000 on the credit line. This facility will not be
sufficient to meet all the cash flow requirements over the next 12 months. We
will require additional debt or equity financings to meet the additional
requirements.
ITEM 3. CONTROLS AND PROCEDURES
-------------------------
John Creel, our president and chief accounting officer, and Peter Dermutz, our
executive Vice President and our acting 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.
PART II -- OTHER INFORMATION
-----------------
ITEM 2. CHANGES IN SECURITIES
---------------------
On or about May 12, 2004, we issued 16,666 shares of our common stock to an
individual accredited investor in connection with financial services provided to
our company. We are obligated to issue a total of 50,000 shares of common
stock in accordance with a financial services agreement included as Exhibit 10.1
to our Form 10-QSB filed with the Commission on May 17, 2004, which is hereby
incorporated by reference. The issuance and sale of the shares was exempt from
the registration and prospectus delivery requirements of the Securities Act of
1933 by virtue of Section 4(2). The sale did not involve a public offering or
general solicitation. No commissions were paid on the issuance and sale of the
shares. The stock certificates issued to the purchasers contained a restrictive
legend in accordance with Rule 144. The offer was closed upon execution of the
agreement on or about January 1, 2004. The final disbursement of 16,666 shares
of common stock was issued on July 26, 2004, after the period covered by this
report.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
10.1 Accounts Receivable Purchase Agreement
10.2 Intellectual Property Security Agreement with Rapidtron, Inc.,
a Nevada corporation
10.3 Intellectual Property Security Agreement with Rapidtron, Inc.,
a Delaware corporation
10.4 Warrant to Purchase Stock
10.5 Registration Rights Agreement
10.6 Amendment to Consulting Agreement
31.1 Certification of John Creel Pursuant to Rule 15d-14(a)
31.2 Certification of Peter Dermutz Pursuant to Rule 15d-14(a)
32.1 Certification of John Creel Pursuant to Rule 15d-14(b)
32.2 Certification of Peter Dermutz Pursuant to Rule 15d-14(b)
(b) Reports on Form 8-K
Form 8-K filed August 3, 2004, regarding Items 7 (exhibits only) and 9 related
to the Memorandum of Understanding entered into with Smart Card Integrators,
Inc.
PART I 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: August 16 ,2004
By:
----------------------------------------
John Creel, President &
Chief Executive Officer
By:
----------------------------------------
Peter Dermutz, Executive Vice
President, acting Secretary, Treasurer &
Principal Financial Officer
23