UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE PERIOD ENDED: MARCH 31, 2005
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-31713
RAPIDTRON, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0455472
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3151 AIRWAY AVENUE, SUITE Q
COSTA MESA, CA 92626-4627
(Address of principal executive offices)
(949) 798-0652
(Issuer telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days: YES [X] NO [_]
The number of shares of our common stock outstanding on May 18, 2005, was
20,898,967.
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
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . 5
ITEM 2. MANAGEMENT'S PLAN OF OPERATION. . . . . . . . . . . . . . . . . . 12
ITEM 3. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . . 18
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 6. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
===============================================================================
UNAUDITED
ASSETS
CURRENT ASSETS
Cash $ 14,698
Accounts receivable, net of allowance for doubtful accounts
of $135,044 158,295
Inventory 284,049
Prepaid expenses and other current assets 110,084
------------
567,126
PROPERTY AND EQUIPMENT, NET 62,704
DEPOSITS AND OTHER ASSETS 12,380
------------
$ 642,210
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,421,726
Accrued liabilities 333,902
Due to related party 100,911
Loans due to related parties, net of discount 324,258
Notes payable 470,880
Obligations under capital lease 3,386
------------
2,655,063
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; 20,691,070 shares issued and
outstanding 20,691
Additional paid-in capital 6,079,721
Stock subscriptions receivable (305)
Accumulated deficit (8,112,960)
------------
(2,012,853)
------------
$ 642,210
============
===============================================================================
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 PERIODS ENDED MARCH 31, 2005 AND 2004
=========================================================================
UNAUDITED
2005 2004
------------ ------------
NET SALES $ 150,818 $ 481,949
COST OF GOODS SOLD 54,370 346,012
------------ ------------
GROSS PROFIT 96,448 135,937
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 281,575 1,251,217
------------ ------------
LOSS FROM OPERATIONS (185,127) (1,115,280)
OTHER INCOME (EXPENSE)
Interest expense (210,517) (6,491)
Foreign exchange gain (loss) (31,771) 19,408
------------ ------------
(242,288) 12,917
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (427,415) (1,102,363)
PROVISION FOR INCOME TAXES - 800
------------ ------------
NET LOSS $ (427,415) $(1,103,163)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.02) $ (0.06)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 20,587,000 19,992,000
============ ============
<FN>
=========================================================================
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 CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
==========================================================================================
UNAUDITED
2005 2004
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(427,415) $(1,103,163)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 9,370 2,422
Common stock issued for professional services - 62,999
Amortization of debt discounts to interest expense 130,765 -
Unrealized foreign exchange loss (gain) 49,796 (43,700)
Changes in operating assets and liabilities:
Accounts receivable 40,860 (173,008)
Inventory 50,693 46,571
Prepaid expenses and other current assets (22,150) (13,654)
Accounts payable 8,886 190,793
Accrued liabilities (697) 32,210
Due to related party 9,624 14,930
---------- ------------
NET CASH USED IN OPERATING ACTIVITIES (150,268) (983,600)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans due to related parties 125,000 -
Principal payment of loans due to related parties (1,078) (32,985)
Principal payment of capital lease obligations (859) (809)
Principal payment of long-term debt (21,797) -
Proceeds from the issuance of common stock 62,950 -
Proceeds from exercise of warrant - 400,000
Receipt of stock subscriptions receivable - 535,000
---------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 164,216 901,206
---------- ------------
NET INCREASE (DECREASE) IN CASH 13,948 (82,394)
CASH - beginning of period 750 84,256
---------- ------------
CASH - end of period $ 14,698 $ 1,862
========== ============
<FN>
==========================================================================================
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 THREE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
=====================================================================================
UNAUDITED
2005 2004
-------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ - $ 800
======== =======
Interest $ 27,750 $ 4,175
======== =======
Non-cash investing and financing activities:
Accounts receivable sold in connection with secured financing $235,657 $ -
======== =======
Warrants issued in connection with convertible debentures with
beneficial conversion features $ 70,600 $ -
======== =======
Common stock issued to settle payable $ - $20,000
======== =======
Software acquired through debt $ - $96,271
======== =======
<FN>
=====================================================================================
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
================================================================================
UNAUDITED
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 periods ended
March 31, 2005 and 2004. 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 March 31, 2005, and the results of operations and cash flows for the
three-month periods ended March 31, 2005 and 2004, 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 April 15, 2005.
The results of operations for the three-month period ended March 31, 2005 are
not necessarily indicative of the results to be expected for the full year.
BUSINESS
Rapidtron, Inc. (formerly The Furnishing Club, the "Parent") was incorporated in
the State of Nevada in March 2000. The Parent's wholly owed subsidiary, also
named Rapidtron, Inc. (collectively, the "Company"), 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 and ski industries
and universities 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.
The Company'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.
5
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
================================================================================
UNAUDITED
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, 2004 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 March 31,
2005, the Company has a working capital deficit of approximately $2,088,000,
recurring losses from operations, an accumulated deficit of approximately
$8,113,000, and has generated an operating cash flow deficit of approximately
$150,000 for the three-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, 2005.
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 doubts 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, 2005, 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
("SFAS") No. 123, "Accounting for Stock Based Compensation," as amended, to
stock-based employee compensation.
6
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
================================================================================
UNAUDITED
EMPLOYEE STOCK BASED COMPENSATION (continued)
FOR THE THREE-MONTHS ENDED
MARCH 31,
2005 2004
---------------- ----------------
Net loss:
As reported $ (427,415) $ (1,103,163)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (48,375) (48,375)
---------------- ----------------
Pro forma $ (475,790) $ (1,151,538)
================ ================
Basic and diluted net loss per share:
As reported $ (0.02) $ (0.06)
================ ================
Pro forma $ (0.02) $ (0.06)
================ ================
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements discussed in the Notes to the December 31, 2004
financial statements filed previously with the Securities and Exchange
Commission in Form 10-KSB on April 15, 2005 that were required to be adopted
during the year ended December 31, 2005 did not have a significant impact on the
Company's financial statements.
2. EQUITY TRANSACTIONS
During the three-month period ended March 31, 2005, the Company sold 228,009
shares of restricted common stock to one accredited investor for cash totaling
$62,950.
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 options or warrants were exercised during the three-month
period ended March 31, 2005.
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 March 31, 2005.
3. LOANS DUE TO RELATED PARTIES
During the three-month period ended March 31, 2005, a shareholder loaned
$117,500 to the Company under three separate notes payable, all of which require
monthly interest payments at 8% per annum and principal and unpaid interest are
payable in full on July 6, 2005. The first loan (the "Bridge Loan") was made on
January 6, 2005, for $12,500.
The second loan was a $30,000 convertible promissory note with detachable stock
purchase warrants entered into on February 8, 2005 ("Convertible Loan I"). Such
note is convertible at any time at the lesser of $0.33 per common share or 80%
of the lowest closing bid price of the common stock in any of the five trading
days immediately
7
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
================================================================================
UNAUDITED
preceding the conversion date, or it will be automatically converted at the
close of any equity financing transaction(s) that yields the Company gross
proceeds of at least $200,000. The automatic conversion will be made at the
price per share of the equity financing. Additionally, warrants to purchase
60,000 shares of the Company's restricted common stock at $0.33 per sharer were
granted in connection with this note. The Company has recorded a debt discount
of $9,900 to allocate the proceeds to the detachable stock purchase warrants
based on their relative fair value. In accordance with Emerging Issues Task
Force ("EITF") Issue No. 98-05, "Accounting for Convertible Securities with
Beneficial Conversion Features or contingently Adjustable Conversion Ratios,"
the Company calculated a beneficial conversion feature ("BCF") of $10,200 at the
commitment date, which has been recorded as an additional debt discount. Such
debt discounts are being amortized, as an adjustment to yield, over the life of
the note.
The third loan was a $75,000 convertible promissory note with detachable stock
purchase warrants entered into on March 2, 2005 ("Convertible Loan II"). Such
note is convertible at any time at the lesser of $0.33 per common share or 80%
of the lowest closing bid price of the common stock in any of the five trading
days immediately preceding the conversion date, or it will be automatically
converted at the close of any equity financing transaction(s) that yields the
Company gross proceeds of at least $200,000. The automatic conversion will be
made at the price per share of the equity financing. Additionally, warrants to
purchase 150,000 shares of the Company's restricted common stock at $0.33 per
share were granted in connection with this note. The Company has recorded a debt
discount of $24,900 to allocate the proceeds to the detachable stock purchase
warrants based on their relative fair value. In accordance with EITF Issue No.
98-05, the Company calculated a BCF of $25,600 at the commitment date, which has
been recorded as an additional debt discount. Such debt discounts are being
amortized, as an adjustment to yield, over the life of the note.
During the three months ended March 31, 2005, the Company borrowed $7,500 from
Equus (see Note 9). Such note is due on demand and bears interest at the Prime
rate plus 1% per annum.
4. NOTES PAYABLE
On October 8, 2004, the Company borrowed $350,000 under a convertible secured
promissory note. Such note was due on December 15, 2004; however, as of March
31, 2005, only $322,500 has been repaid. As such, the note is in default and
interest accrues at 14% per annum on the remaining balance.
On December 1, 2004, the Company borrowed $400,000 under a secured convertible
promissory note with detachable stock purchase warrants, as disclosed in the
notes to the December 31, 2004 consolidated financial statements previously
filed with the SEC. Such note was due on March 31, 2005; however no payments
have been made. Effective April 1, 2005, the note was in default, and now may be
converted into the Company's common stock. As such, in accordance with EITF
Issue No. 98-05, the Company will be required to record the $146,800 contingent
BCF on April 1, 2005. The Company was also obligated to prepare and file with
the SEC no later than December 31, 2004, a registration statement covering all
shares issuable under the detachable stock purchase warrants, for continuous
offering pursuant to Rule 415 under the Securities Act of 1933. The Company is
obligated to pay an additional $8,000 to the holder of the note for every 30
days after December 31, 2004, until the registration statement is declared
effective by the Commission. No registration statement has been filed as of
March 31, 2005. During the three months ended March 31, 2005, the Company
amortized a previous debt discount totaling $110,100 to interest expense in the
accompanying condensed consolidated statements of operations.
5. SECURED BORROWINGS
Effective June 29, 2004, the Company entered into an Accounts Receivable
Purchase Agreement (the "Agreement") with Silicon Valley Bank ("SVB"). Under the
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. The Company
is required to pay $20,000 yearly as a Facility
8
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
================================================================================
UNAUDITED
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 SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." During the three-month period ended
March 31, 2005, the Company sold receivables totaling $235,657 to SVB. The
Company has no outstanding advances under this agreement at March 31, 2005.
6. 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 periods ended March 31, 2005 and 2004. As a result, options
and warrants outstanding at March 31, 2005 and 2004 to acquire 4,752,862 and
2,182,000 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.
Additionally, convertible debt to acquire 1,880,315, and 12,000 shares of the
Company's common stock at March 31, 2005 and 2004, respectively, 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.
7. COMMITMENTS AND CONTINGENCIES
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 granted warrants to acquire 250,000 shares of restricted common stock
plus monthly consulting fees 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. No registration statements have been
filed with the SEC regarding such warrants as of March 31, 2005.
ESCROW AND CONTRIBUTION AGREEMENT
In connection with the November 12, 2003 Unit Purchase Agreement, certain
executives of the Company made certain representations and warranties to the
investors related to the Company's forecasted performance and agreed that such
representations were a material inducement to the investment in the Units, as
defined. In connection with such forecasts, the executives, as principal
shareholders, each entered into an Escrow and Contribution Agreement under which
they agree to place their common shares into escrow and to contribute their pro
rata share of such escrowed shares to the Company in the event of a breach of
such representations and warranties or the issuance of stock or stock options in
excess of certain limits. The executives placed 9,124,392 shares into escrow.
Under the terms of the Escrow and Contribution Agreement, these shareholders
agreed to contribute to the Company one share of common stock for (i) each $1.00
that the Company's gross revenue for the 15 month period ending December 31,
2004 falls below the gross revenue forecast of $10,880,000 for such period, (ii)
each share of common stock issued and each option (or other securities
exercisable to acquire a share of common stock) granted by the Company after
November 12, 2003, under all compensatory or other arrangements in excess of
400,000 shares in the aggregate, and
9
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
================================================================================
UNAUDITED
(iii) each share of common stock issued and each option (or other securities
exercisable to acquire a share of common stock) granted by the Company which
fails to satisfy certain criteria, including a minimum share price of $1.25 per
share and certain vesting requirements in connection with option grants. The
Company had sales approximating 2,395,000 during the 15 month period ended
December 31, 2004. As such, management estimates that approximately 8,485,000
common shares will be returned to the Company from escrow. The remaining 639,000
common shares will be returned to the shareholders. The investors shall make a
claim within 120 days, as amended March 31, 2005, following the date that the
December 31, 2004 annual report is filed with the SEC (April 15, 2005). Such
transaction has not been recorded at March 31, 2005, but will be recorded once
the investors' claim is accepted and settled.
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 customers existing back office software.
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 three-month period ended March 31, 2005, the Company completed 7
software integrations and will issue Pioneering Innovations 70 shares of
restricted common stock.
8. 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 March 31, 2005.
9. 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 three-month periods ended March 31, 2005 and 2004,
the Company incurred expenses from Equus approximating $39,000 and $115,000,
respectively, and made repayments to Equus approximating $30,000 and $100,000,
respectively.
Other related party transactions are discussed elsewhere in the notes to the
condensed consolidated financial statements.
10. SUBSEQUENT EVENTS
On April 12, 2005, the Company borrowed $50,000 from a shareholder under a
convertible promissory note with detachable stock purchase warrants. Interest
accruing at 8% per annum and principal are due on July 6, 2005. Such note is
convertible at any time at the lesser of $0.175 per common share or 80% of the
lowest closing bid price of the common stock in any of the five trading days
immediately preceding the conversion date, or it will be automatically converted
at the close of any equity financing transaction(s) that yields the Company
gross proceeds of at least $200,000. The automatic conversion will be made at
the price per share of the equity financing. Additionally, warrants to purchase
100,000 shares of the Company's restricted common stock for a period of 5 years
at $0.175 per share
10
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RAPIDTRON, INC.
(FORMERLY THE FURNISHING CLUB)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
================================================================================
UNAUDITED
were granted in connection with this note. Such detachable stock purchase
warrants are immediately exercisable and have a life of five years. Concurrent
with this borrowing, the Company entered into a Security Agreement where
substantially all assets of the Company now secure this debt and the Bridge
Loan, Convertible Loan I and Convertible Loan II.
Effective April 25, 2005, the Company sold in a private placement to Harald
Plautz, an accredited investor, 100,000 restricted common shares at a price of
$0.175 per share for a total of $17,500.
On April 29, 2005, pursuant to the terms of a commission agreement by both
parties, Rapidtron issued to the agent 7,900 shares of restricted common stock
at a price of $0.0175 per share. The commission is for the above mentioned
private placement and efforts currently underway to raise additional capital
On April 20 2005, the Company granted to a consultant options to acquire 100,000
shares of the Company's restricted common stock at $1.00 per share. Such options
were immediately exercisable and were exercised on April 29, 2005. Consulting
expense approximating $8,000 will be recorded based on the estimated fair value
of the warrants.
On May 20, 2005, the Company issued a convertible promissory note in the amount
of $50,000 with detachable stock purchase warrants. The note is convertible at
any time at the lesser of $0.175 per common share or 80% of the lowest closing
bid price of our common stock in any of the five trading days immediately
preceding the conversion date, or it will be automatically converted at the
close of any equity financing transaction(s) that yields our company gross
proceeds of at least $200,000. The automatic conversion will be made at the
price per share of the equity financing. Additionally, warrants to purchase
100,000 shares of the Company's restricted common stock at $0.175 per share were
granted in connection with this note. Such detachable stock purchase warrants
are immediately exercisable and have a life of five years.
11
ITEM 2. MANAGEMENT'S PLAN OF OPERATION.
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
Form SB-2 filed with the Commission on February 5, 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, Inc., a Delaware corporation. We
distribute access control and ticketing/membership systems to the fitness,
winter resort, and amusement 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 5,100 access and 2,150 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
12
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 universities, which constitute the
majority of our business activities.
RESULTS OF OPERATIONS OF THE COMPANY:
Three months ended March 31, 2005 compared to three months ended March 31, 2004.
REVENUE
Our revenue for the three months ending March 31, 2005, was $150,818, a decrease
of $331,131 (69%) compared to the $481,949 from the same period last year.
For the three-month period ended March 31, 2005, the $331,131 decrease in our
sales revenue was due primarily to the decreased sales to national fitness
chains. The first quarter revenues in 2004 were largely related to sales to one
national fitness chain. The majority of the sales to this customer in 2004 were
related to a purchase order of 100 systems which was completed in the later part
of 2004, resulting in a significantly lower amount of sales to this customer in
the first quarter of 2005. We are currently working on software integration and
an implementation plan with another leading national fitness chain that has
forecasted a roll out to their clubs in the third quarter of 2005.
A new and improved indoor fitness system was introduced to the fitness industry
at a national trade show in February 2005. The response from existing and
potential customers was positive, noting the more streamline configuration and
lower cost of the unit. The planned launch of this equipment is in July 2005.
We have chosen to focus our sales efforts on fitness clubs, winter resorts 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
13
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 2004 which resulted in two sales orders
totalling 125 access control systems, in which 115 were shipped throughout 2004.
We continue meetings 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 UC Berkley and sales presentations
to more than 250 universities, we anticipate increased sales to Universities in
2005. We continue to work with several California State Universities on
proposals and design layouts for potential implementations into their fitness
and recreation centers. The winter resort business is currently budgeting
capital expenditures and implementation of those expenditures for the 2005/2006
season now. We anticipate capturing a significant amount of business in winter
resorts in 2005. We currently have indication from several major ski resorts
that we will be implementing our system at their resorts in third quarter of
2005. We have expanded our presence with more installations at Park City, Utah,
Copper Mountain and Tamarack ski resorts.
We expect to increase our revenues in the targeted venues of fitness clubs,
winter resorts, and universities in 2005. We continue to 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. In the past several months, we
have had meetings and attended national trade shows with leading companies in
the fitness and winter resort industries, who we are currently working with us
for potential tests and implementations in 2005. 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 of 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 March 31, 2005, our gross profit totalled $96,448,
compared to $135,937 for the same period last year. The $39,489 decrease in
gross profit was primarily a result of decreased sales to fitness clubs.
We expect to modestly improve our gross profit through increased sales in the
targeted venues of fitness clubs, winter resorts, and universities in 2005, and
increase our gross profit in the targeted venues in the same period based on the
same assumptions identified in our revenues. During the three-month period ended
March 31, 2005, the strengthening dollar positively impacted gross profit
margins due to our purchasing from a European supplier. During the same period
in 2004, foreign exchange variances negatively impacted gross margin. The
positive impact in the current year versus the negative impact in the prior year
has caused gross margin as a percentage of sales to significantly increase this
quarter. However, we expect unfavorable currency variances of the US Dollar to
the Euro in the remainder of 2005, which may negatively impact gross profit
margins due to our plan to continue purchasing equipment, readers, and cards
from our European supplier. The launch of the new indoor system in July of 2005
will add to improved margins in the latter half of 2005.
We introduced and implemented increased pricing in the fourth quarter of 2004.
The new published pricing did not significantly improve the margins in the
fourth quarter due to the fact that the majority of sales in the fourth quarter
were related to sales orders from large National fitness chains that were
negotiated with the customer prior to the implementation of the price increase.
In addition, we have negotiated volume discounts from our equipment suppliers,
which should lead to reduced costs of goods in 2005.
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.
14
OPERATING EXPENSES
During the three months ended March 31, 2005, our selling, general &
administrative operating expenses totalled $281,575, a decrease of $969,642
(77%) from the $1,251,217 incurred during the same period last year.
The decrease in expenses can be mainly attributed to decreased costs in
Professional/Consulting fees of approximately $743,000 related to expenses
associated with marketing and the raising of capital in the first quarter of
2004. Other reduction in expenses occurred in salaries of approximately
$110,000, travel of approximately $33,000, advertising of approximately $36,000,
and product development of approximately $32,000. The reduction in product
development expenses can be attributed to the fact that the needed work on
software integration was completed in 2004. Other reductions in expenses were
planned cutbacks to reduce expenses.
We expect operating expenses in the ordinary course of business to remain at the
decreased levels experienced in the first quarter of 2005 throughout the
remainder of the year. As sales are expected to be realized to a greater level
in 2005, operating expenses in the ordinary course of business may increase
modestly to meet the sales demand, 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 are expected to increase as a percentage of selling, general and
administrative expenses as sales increase in 2005. 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 may increase to secure and
meet the demand of our customers in the targeted venues.
LOSS FROM OPERATIONS
During the three months ended March 31, 2005, we had a loss from operations of
$185,127, compared to a loss from operations in the prior year of $1,115,280.
The $930,153 decrease in loss from operations was primarily a result of
decreased operating expenses as described above.
We expect overall loss from operations to decrease over the next quarter as a
result of increased sales in fitness and resorts. We expect the overall loss
from operations to decrease over 2005 as a result of 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 March 31, 2005, our interest expense was $210,517.
Our interest expense was $6,491 in the same quarter last year.
The increase in interest expense was primarily the result of interest related to
$130,000 amortization of debt discount on a bridge note entered into in the
fourth quarter of 2004 and increased debt this quarter over the same period in
the previous year. The remaining increase in interest expense is related to
interest on the use of our accounts receivable credit facility. At March 31,
2005, we owed $324,258, net of discounts totaling $49,935, on notes due to
related parties, compared to $250,271 at December 31, 2004 and $291,284 at March
31, 2004. Also, at March 31, 2005, we owed $470,880 on other notes payable,
compared to $382,577 and $96,271 at December 31, 2004 and March 31, 2004,
respectively.
At March 31, 2005, we had paid off our accounts receivable credit facility and
had a zero balance. We expect interest expense to increase in 2005 with the
increased utilization of the credit facility to support the working capital
needs for the forecasted increased sales. 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.
15
ASSETS AND LIABILITIES
At March 31, 2005, we had total assets of $642,210 compared to total assets of
$942,692 at December 31, 2004. Cash was $14,698 as of March 31, 2005, up from
the $750 cash balance as of December 31, 2004. Cash used in operations was
$150,268; cash used in investing activities was $0; and cash provided by
financing activities was $164,216; with net increase in cash during the three
month period being $13,948.
Our net accounts receivable were $158,295 at March 31, 2005, a decrease of
$276,517 (64%) from the $434,812 at December 31, 2004. The decrease in accounts
receivable is primarily due to the reduction in sales to the fitness club
industry.
Our net inventories decreased $50,693 (15%) over the past three months, to
$284,049, from the $334,742 at December 31, 2004. A decrease in inventory is due
to decreased sales and the timing of receipts of incoming inventory purchases.
Inventory will increase over the next 12 months to support the increased sales
forecast in both fitness and the winter resorts equipment.
Our net fixed assets totalled $62,704 at March 31, 2005, compared to $72,074 at
December 31, 2004. The decrease in fixed assets is related to accumulated
depreciation over the three months with no fixed asset purchases.
Our total liabilities at March 31, 2005, were $2,655,063, a decrease of $6,621
from the $2,661,684 at December 31, 2004. Our accounts payable and accrued
liabilities totaled $1,755,628 at March 31, 2005, an increase of $57,981 (3%)
from the $1,697,647 at December 31, 2004. Our payables increased as a result of
negative operating cash flow during the three month period with extended payment
terms to vendors.
Our accrued payroll, which is included in accrued liabilities, totaled $237,772
at March 31, 2005, compared to $226,657 at December 31, 2004. 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 also included in accrued liabilities, was $21,328 at
March 31, 2005, an increase of $4,173 from the $17,155 at December 31, 2004.
Our accounts receivable credit facility decreased from $235,657 at the end of
2004 to $0 at March 31, 2005. This facility was put in place at the end of the
second quarter 2004 to help finance the increased working capital needs as sales
increase.
Our notes payable to related parties, net of discounts, were $324,258, lease
obligations were $3,386 and other debt was $470,880, totaling $798,524 at March
31, 2005, an increase of $161,431 (25%) from the $637,093 at December 31, 2004.
The increase is related to short term bridge loans.
STOCKHOLDER'S DEFICIT
Our stockholder's deficit was $2,012,853 at March 31, 2005, an increase of
$293,861 from the $1,718,992 at December 31, 2004. The changes in stockholder's
equity were as follows:
Balance as of December 31, 2004 ($1,718,992)
Net Loss ($427,415)
Increase in Additional Paid in Capital $ 133,326
Increase in Common Stock $ 228
--------------
Balance as of March 31, 2005 ($2,012,853)
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, we had $642,210 in total assets, including $14,698 in cash,
$158,295 in accounts receivable, $284,049 in inventories, and $110,084 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
16
fitness club industry; however an allowance for bad debt has been provided for
those accounts that we deem to be uncollectible.
Our inventories are finished goods consisting primarily of readers, turnstiles,
and equipment. Our inventories are very marketable and will continue as current
product models during 2005. 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 to support
expected increases in fitness club, university, and winter resort sales.
At March 31, 2005, our total liabilities were $2,655,063, including accounts
payable and accrued liabilities of $1,755,628, and amounts due to related
parties (including due to related party and loans due to related parties) of
$425,169. Loans to related parties include approximately $238,000 to John Creel,
director of the Company, and/or Equss, his wholly owned company.
Our negative cash flow from operations resulted primarily from our loss. Our
cash flow needs were met over the last quarter through sales revenues, increased
debt and the proceeds from the unregistered sale of securities. We expect our
operations to continue operating at a negative cash flow through at least the
third quarter of 2005 as we continue to invest in new business opportunities and
grow sales mainly in fitness and winter resorts. As a result, we will continue
to rely upon short-term lines of credit with our suppliers and additional equity
or debt financing. 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 expect gross revenues averaging between $100,000 to $500,000 per month over
the next quarter with net margins of approximately $35,000 to $175,000 per
month. Operating expenses will be approximately $75,000 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.
As of the date of this report, we owe approximately $800,000 to our supplier,
Axess AG. We may need to pay a portion of the outstanding balance of our account
with Axess AG prior to receiving any additional delivery of our inventory. We
may not receive revenue from our existing accounts receivable in a timely
fashion to enable us to pay off this balance, and therefore we are seeking
additional debt and/ or equity financing in order to pay our outstanding balance
to Axess AG. If we are unable to raise the necessary financing, then we will
negotiate new terms of delivery with Axess AG to secure the inventory in time to
meet existing orders, and/ or we will negotiate new delivery terms with our
existing customers, which could significantly reduce our expected revenue.
Over the next 6 months, we project a loss from operations of approximately
$250,000 per quarter, and an increase in receivables and inventory of
approximately $1,500,000. We expect to need approximately $1,750,000 from
third-party loans and equity investment in order to meet the additional working
capital needs. A portion of this financing is required within in the second
quarter to meet our current operational and working capital requirements.
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 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 March 31, 2005, we had a
zero balance on the line. This facility will not be sufficient to
17
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
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: Under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended. Based on this
evaluation, our principal executive officer and our principal financial officer
concluded that, as of the end of the period covered by this quarterly report,
our disclosure controls and procedures were effective to ensure that the
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 is accumulated and communicated to
management, including our chief executive officer and chief financial officer,
to allow timely decisions regarding required disclosure, and that such
information is recorded, processed, summarized and reported within the time
periods prescribed by the SEC.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING: There were no changes
in our internal control over financial reporting as of the end of the period
covered by this report that that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 8, 2005, we issued a convertible promissory note in the amount of
$30,000 with detachable stock purchase warrants. The note is convertible at any
time at the lesser of $0.33 per common share or 80% of the lowest closing bid
price of our common stock in any of the five trading days immediately preceding
the conversion date, or it will be automatically converted at the close of any
equity financing transaction(s) that yields our company gross proceeds of at
least $200,000. The principal balance and interest is due on July 6, 2005. The
automatic conversion will be made at the price per share of the equity
financing. The detachable stock purchase warrants are to purchase a total of
60,000 shares of our common stock at $0.33 per share for a period of five years.
The issuance and sale of the securities 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 note and the warrant certificates issued to the purchaser contained a
restrictive legend in accordance with Rule 144. The offer was closed upon
execution of the agreement on or about February 8, 2005.
On or about February 11, 2005, we issued 228,009 shares of common stock to a
foreign investor for total proceeds of $62,950. 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 Regulation S. The sale did not involve a
public offering or general solicitation. We paid commissions on this sale in the
amount of $6,295. The stock certificates issued to the purchaser contained a
restrictive legend in accordance with Regulation S and Rule 144. The offer was
closed on acceptance of the subscription, on or about February 11, 2005.
On March 2, 2005, we issued a convertible promissory note in the amount of
$75,000 with detachable stock purchase warrants. The note is convertible at any
time at the lesser of $0.33 per common share or 80% of the lowest closing bid
price of our common stock in any of the five trading days immediately preceding
the conversion date, or it will be automatically converted at the close of any
equity financing transaction(s) that yields our company gross proceeds of at
least $200,000. The principal balance and interest is due on July 6, 2005, The
automatic conversion will be made at the price per share of the equity
financing. detachable stock purchase warrants are to purchase a total of 150,000
shares of the our common stock at $0.33 per share for a period of five years.
The issuance and sale of the securities 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 note and the warrant certificates issued to the purchaser contained a
restrictive legend in accordance with Rule 144. The offer was closed upon
execution of the agreement on or about March 2, 2005.
On or about March 31, 2005, we issued 70 shares of common stock to an officer of
Pioneering Innovations, Inc. for services performed pursuant to the software
development agreement, dated January 13, 2004. 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 purchaser
contained a restrictive legend in
18
accordance with Rule 144. The offer was closed upon execution of the agreement
on January 13, 2004, upon execution of the agreement with Pioneering
innovations, Inc.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On December 1, 2004, we borrowed $400,000 under a secured convertible promissory
note with detachable stock purchase warrants, as disclosed in the notes to the
December 31, 2004 consolidated financial statements previously filed with the
SEC, incorporated by reference. Such note was due on March 31, 2005; however no
payments have been made. Effective April 1, 2005, the note was in default, and
now may be converted into our common stock. We were also obligated to prepare
and file with the SEC no later than December 31, 2004, a registration statement
covering all shares issuable under the detachable stock purchase warrants, for
continuous offering pursuant to Rule 415 under the Securities Act of 1933. We
are obligated to pay an additional $8,000 to the holder of the note for every 30
days after December 31, 2004, until the registration statement is declared
effective by the Commission. No registration statement has been filed as of
March 31, 2005. During the three months ended March 31, 2005, we amortized a
previous debt discount totaling $110,100 to interest expense in the accompanying
condensed consolidated statements of operations.
ITEM 5. OTHER INFORMATION
On January 6, 2005, we borrowed $12,500 from a shareholder under a note
requiring monthly interest payments at 8% per annum, and principal and unpaid
interest are payable in full on July 6, 2005.
On February 8, 2005, we borrowed $30,000 pursuant to a convertible promissory
note with detachable stock purchase warrants. The terms of the note and warrant
are included in Part II, Item 2 of this report on page 18, incorporated by
reference.
On March 2, 2005, we borrowed $75,000 pursuant to a convertible promissory note
with detachable stock purchase warrants. The terms of the note and warrant are
included in Part II, Item 2 of this report on page 18, incorporated by
reference.
Over the three months ended March 31, 2005, we borrowed $7,500 from a related
party. Such note is due on demand and bears interest at prime rate plus 1% per
annum.
On April 12, 2005, we borrowed $50,000 from a shareholder under a convertible
promissory note with detachable stock purchase warrants. Interest accruing at 8%
per annum and principal are due on July 6, 2005. Such note is convertible at any
time at the lesser of $0.175 per common share or 80% of the lowest closing bid
price of the common stock in any of the five trading days immediately preceding
the conversion date, or it will be automatically converted at the close of any
equity financing transaction(s) that yields our company gross proceeds of at
least $200,000. The automatic conversion will be made at the price per share of
the equity financing. Additionally, warrants to purchase 100,000 shares of our
restricted common stock for a period of five years at $0.175 per share were
granted in connection with this note. The issuance and sale of the securities
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 note and the warrant certificates issued to
the purchaser contained a restrictive legend in accordance with Rule 144. Unless
converted as described above, this note will automatically mature and be due and
payable on July 6, 2005. The offer was closed upon execution of the agreement on
or about April 12, 2005.
On April 12, 2005, concurrent with the borrowing described above, we entered
into a Security Agreement with Ceres Financial Limited where substantially all
assets of our company now secure the $50,000 debt incurred on April 12, 2005,
and the loans made on January 6, 2005, February 8, 2005, and March 2, 2005,
described above.
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On May 20, 2005, we issued a convertible promissory note in the amount of
$50,000 with detachable stock purchase warrants. The note is convertible at any
time at the lesser of $0.175 per common share or 80% of the lowest closing bid
price of our common stock in any of the five trading days immediately preceding
the conversion date, or it will be automatically converted at the close of any
equity financing transaction(s) that yields our company gross proceeds of at
least $200,000. The automatic conversion will be made at the price per share of
the equity financing. The detachable stock purchase warrants are to purchase a
total of 100,000 shares of our common stock at $0.175 per share for a period of
5 years. The issuance and sale of the securities 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 note and the warrant certificates issued to the purchaser contained a
restrictive legend in accordance with Rule 144. Unless converted as described
above, this note will automatically mature and be due and payable on July 6,
2005. The offer was closed upon execution of the agreement on or about May 20,
2005.
ITEM 6. EXHIBITS
EXHIBITS DOCUMENT DESCRIPTION
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-15(a) and Rule 15d-15(a),
promulgated under the Securities Act of 1934, as amended
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-15(a) and Rule 15d-15(a),
promulgated under the Securities Act of 1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, As adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, As adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on this 23rd day of May, 2005.
RAPIDTRON, INC.
(Registrant)
BY: /s/ John Creel
John Creel,
President and Chief (Principal) Executive Officer
BY: /s/ Peter Dermutz
Peter Dermutz
Chief (Principal) Financial Officer
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