EXHIBIT 99.1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter 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 No. 333-1026-D
FASTFUNDS FINANCIAL CORPORATION
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 87-0425514
-------------------------------- ------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11100 Wayzata Boulevard, Suite 111
Minnetonka, Minnesota 55305
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(Address of principal executive offices) (Zip code)
(952) 541-0455
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(Registrant's telephone number including area code)
Formerly:
Seven Ventures, Inc.
4685 South Highland Drive, Suite 202
Salt Lake City, Utah 94117
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Indicate by check mark whether the Registrant (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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at August 20, 2004: 9,284,670
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
PART I FINANCIAL INFORMATION Page
----
Item 1. Unaudited financial statements:
Condensed consolidated balance sheets -
June 30, 2004 and December 31, 2003 2
Condensed consolidated statements of operations-
three and six months ended June 30, 2004 and 2003 3
Condensed consolidated statement of changes
in stockholders' equity - six months ended
June 30, 2004 4
Condensed consolidated statements of cash
flows - six months ended June 30, 2004
and 2003 5
Notes to condensed consolidated
financial statements 6 - 23
Item 2. Management's discussion and analysis of financial
condition and results of operations 24 - 33
Item 3. Quantitative and qualitative disclosures of
market risk 34
Item 4. Disclosure controls and procedures 35
PART II OTHER INFORMATION
Item 1. Legal proceedings 35
Item 2. Changes in securities and use of proceeds 35
Item 3. Defaults upon senior securities 36
Item 4. Submission of matters to a vote of security holders 36
Item 5. Other information 36
Item 6. Exhibits and reports on Form 8-K 36
Signatures 37
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,755,289 $ 7,606,602
Accounts receivable, net 1,211,515 2,483,698
Prepaid amounts on casino contracts (Note 7) 290,435 173,998
Current portion of notes receivable (Note 3) 66,973 58,200
Deferred tax asset (Note 9) 85,000
Other current assets 207,086 125,554
------------ ------------
Total current assets 8,531,298 10,533,052
------------ ------------
Notes and interest receivable, including related parties, net of
current portion (Note 3) 3,504,644 1,576,117
Other receivables, affiliates (Note 8) 239,160 219,409
Property and equipment, net (Note 4) 1,203,449 1,171,856
Deferred tax asset (Note 9) 388,000
Intangible and other assets, net (Note 5) 3,414,482 3,328,908
Goodwill (Note 5) 5,636,000 5,636,000
------------ ------------
13,997,735 12,320,290
------------ ------------
$ 22,529,033 $ 22,853,342
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft (Note 6) $ 2,497,766
Accounts payable $ 106,390 207,078
Accrued expenses 724,246 446,565
Accrued liabilities on casino contracts (Note 7) 528,636 587,099
Notes payable (Note 6) 10,217,677 10,692,177
Current portion of long-term debt (Note 6) 1,139,900 201,727
------------ ------------
Total current liabilities 12,716,849 14,632,412
Long-term debt, net of current portion (Note 6) 3,544,602 37,243
------------ ------------
16,261,451 14,669,655
------------ ------------
Commitments and contingencies (Notes 7 and 8)
Stockholders' equity (Note 10):
Preferred stock, $.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding
Common stock, $.001 par value; 250,000,000 shares
authorized; 9,284,670 (2004) and 7,700,000 (2003) shares
issued and outstanding 9,285 7,700
Additional paid-in capital 12,885,870 11,748,128
Stock subscription receivable (350,000) (800,000)
Investment in Equitex, Inc. (479,868) (611,680)
Notes, advances and interest receivable, affiliates (3,758,286) (2,111,268)
Accumulated deficit (2,039,419) (49,193)
------------ ------------
Total stockholders' equity 6,267,582 8,183,687
------------ ------------
$ 22,529,033 $ 22,853,342
============ ============
See notes to condensed consolidated financial statements.
2
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
Three months ended June 30, Six months ended June 30,
2004 2003 2004 2003
---------------- ----------------- ---------------- -----------------
Fee revenue $ 3,458,260 $ 4,545,488 $ 6,921,363 $ 9,119,437
---------------- ----------------- ---------------- -----------------
Location expenses:
Fees to casinos 1,209,052 1,539,844 2,375,200 3,048,086
Salaries and benefits 723,547 983,445 1,497,580 1,942,342
Returned checks 206,390 125,654 304,393 221,537
Other 421,413 489,847 840,574 906,552
---------------- ----------------- ---------------- -----------------
Total location expenses 2,560,402 3,138,790 5,017,747 6,118,517
---------------- ----------------- ---------------- -----------------
Location gross margin 897,858 1,406,698 1,903,616 3,000,920
---------------- ----------------- ---------------- -----------------
Corporate operating expenses 1,416,888 937,882 2,307,814 1,865,329
Amortization of intangible assets (Note 5) 218,355 185,000 414,126 370,000
Provision for (recovery of) losses on
related party note receivable 144,000 (172,799) 144,000 (172,799)
---------------- ----------------- ---------------- -----------------
1,779,243 950,083 2,865,940 2,062,530
---------------- ----------------- ---------------- -----------------
(Loss) income from operations (881,385) 456,615 (962,324) 938,390
---------------- ----------------- ---------------- -----------------
Other income (expense):
Interest expense (479,118) (327,583) (806,604) (675,618)
Interest income 139,309 51,700 257,702 85,039
---------------- ----------------- ---------------- -----------------
Total other expense (339,809) (275,883) (548,902) (590,579)
---------------- ----------------- ---------------- -----------------
(Loss) income before income taxes (1,221,194) 180,732 (1,511,226) 347,811
Deferred tax expense (Note 9) (473,000) (62,000) (473,000) (62,000)
Current income tax expense (Note 9) (12,000) (6,000) (24,000)
---------------- ----------------- ---------------- -----------------
Net (loss) income $ (1,694,194) $ 106,732 $ (1,990,226) $ 261,811
================ ================= ================ =================
Basic and diluted net (loss) income per share $ (0.22) $ 0.01 $ (0.26) $ 0.03
================ ================= ================ =================
Weighted average number of common
shares outstanding:
Basic and diluted 7,858,763 7,700,000 7,779,381 7,700,000
================ ================= ================ =================
See notes to condensed consolidated financial statements.
3
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
Notes,
advances
and
Common stock Additional Stock Investment interest Total
----------------- paid-in subscription in Equitex, receivable, Accumulated stockholders'
Shares Amount capital receivable Inc. affiliates deficit equity
--------- ------ ----------- ---------- ---------- ----------- ----------- -----------
Balances, January 1, 2004 7,700,000 $7,700 $11,748,128 $ (800,000) $ (611,680) $(2,111,268) (49,193) $ 8,183,687
Acquisition of Seven
Ventures, Inc. 584,670 585 (8,700) (8,115)
Sale of Equitex, Inc.
common stock (Note 10) 268,162 223,867 492,029
Purchases of Equitex, Inc.
common stock (Note 10) (113,625) (113,625)
Distribution of Equitex, Inc.
common stock in exchange
for receivable from
Equitex, Inc. 29,180 21,570 50,750
Conversion of note payable to
common stock 1,000,000 1,000 99,000 100,000
Proceeds received in
connection with stock
subscription receivable 200,000 200,000
Beneficial conversion feature
on convertible promissory
note 100,000 100,000
Cancellation of portion of
stock subscription receivable (250,000) 250,000
Contribution of capital from
Equitex, Inc. for allocated
expenses and deferred loan
costs (Note 10) 648,100 648,100
Increase in notes, advances
and interest receivable due
from affiliates (Note 10) (1,647,018) (1,647,018)
Issuance of warrants to
employees for services 252,000 252,000
Net loss (1,990,226) (1,990,226)
--------- ------ ----------- ---------- ---------- ----------- ----------- -----------
Balances, June 30, 2004 9,284,670 $9,285 $12,885,870 $ (350,000) $ (479,868) $(3,758,286) $(2,039,419) $ 6,267,582
========= ====== =========== ========== ========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
2004 2003
----------- -----------
Net cash provided by (used in) operating activities $ 290,759 $ (760,952)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (194,513) (177,258)
Repayment on notes receivable 4,900 302,401
Advances on notes receivable (3,129,673) (824,750)
----------- -----------
Net cash used in investing activities (3,319,286) (699,607)
----------- -----------
Cash flows from financing activities:
Decrease in bank overdraft (2,497,766)
Borrowings on notes and loans payable 6,152,000 620,000
Repayments on notes and loans payable (1,776,500) (1,310,000)
Borrowings on long-term debt 400,000
Repayments on long-term debt (343,924) (27,521)
Payment received on stock subscription receivable 200,000
Purchase of Equitex, Inc. common stock (113,625) (287,000)
Proceeds from sale of Equitex, Inc. common stock 492,029 147,794
Payment of deferred loan costs (335,000)
----------- -----------
Net cash provided by (used in) financing activities 2,177,214 (856,727)
----------- -----------
Decrease in cash and cash equivalents (851,313) (2,317,286)
Cash and cash equivalents, beginning of period 7,606,602 8,902,910
----------- -----------
Cash and cash equivalents, end of period $ 6,755,289 $ 6,585,624
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 581,121 $ 710,164
=========== ===========
Cash paid for income taxes $ 26,989 $ 102,387
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Contribution of capital from Equitex, Inc. for allocated expenses
and deferred loan costs $ 648,100
===========
Cancellation of portion of stock subscription receivable $ 250,000
===========
Conversion of note payable to common stock $ 100,000
===========
Distribution of Equitex, Inc. common stock to third parties in
exchange for a receivable from Equitex, Inc. $ 50,750
===========
See notes to condensed consolidated financial statements.
5
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
1. BUSINESS, ORGANIZATION, UNAUDITED FINANCIAL STATEMENTS, RECENT EVENTS AND
MANAGEMENT'S PLANS:
BUSINESS:
FastFunds Financial Corporation ("FFFC") is a holding company operating
through its wholly-owned subsidiary Chex Services, Inc. ("Chex", or the
"Company"). As discussed below, FFFC was previously organized as Seven
Ventures, Inc. ("SVI"). Effective June 7, 2004, Chex merged with SVI, a
Nevada corporation formed in 1985, whereby Equitex, Inc., a
publicly-traded SEC registrant incorporated in Delaware ("Equitex"),
exchanged its 100% ownership of Chex for 93% of SVI's outstanding
common stock following the transaction. On June 29, 2004, SVI changed its
name to FFFC.
Chex, a Minnesota corporation, provides financial services, primarily check
cashing, automated teller machine (ATM) access, and credit card advances
to customers primarily at Native American owned casinos and gaming
establishments. As of June 30, 2004, the Company operates at forty-four
establishments. As of June 30, 2004, the Company operated in gaming
establishments located in Arizona, Michigan, Minnesota, Nebraska, New
Mexico, North Dakota and Wisconsin. In 2002, the Company formed
Collection Solutions, Inc. ("Collection Solutions"), a wholly owned
Minnesota corporation, formed for the purpose of providing collection
services for the Company, customers of the Company, and other entities
both within and outside the gaming industry. Collection Solutions is
licensed as a collection agency in seven states.
ORGANIZATION:
ACQUISITION OF CHEX BY SVI AND BASIS OF PRESENTATION:
Effective June 7, 2004, Equitex and the Company executed an Agreement and
Plan of Merger (the "Merger Agreement") with SVI to merge Chex into a
wholly-owned subsidiary of SVI (the "Merger Subsidiary"), whereby the
separate corporate existence of the Merger Subsidiary ceased. Under the
terms of the Merger Agreement, Equitex exchanged 100% of its equity
ownership in Chex for 7,700,000 shares of SVI, representing 93% of SVI's
outstanding common stock. In addition, Equitex received warrants to
purchase 800,000 shares of SVI common stock at an exercise price of $0.10
per share, expiring five years from the date of closing. As a result,
Chex became a wholly-owned subsidiary of SVI, a publicly-traded shell
company. In addition, under the terms of the Merger Agreement, a bridge
loan was consummated with an international merchant bank, whereby SVI
received $400,000 through the issuance of a convertible promissory note.
The promissory note is convertible into 4,000,000 shares of SVI common
stock upon the occurrence of certain future events (Note 6).
Of the warrants received by Equitex, 640,000 were subsequently transferred
to officers, directors and a consultant of Equitex and Chex for services
performed. The warrants were determined to have a fair value of $1.00 at
the date of the grant. Of these warrants, 280,000 were issued to Chex
officers, resulting in $252,000 of compensation expense during the three
months and six months ended June 30, 2004.
6
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
1. BUSINESS, ORGANIZATION, UNAUDITED FINANCIAL STATEMENTS, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
ORGANIZATION (CONTINUED):
ACQUISITION OF THE CHEX BY SVI AND BASIS OF PRESENTATION (CONTINUED):
The acquisition of Chex by SVI has been recorded as a reverse acquisition
based on factors demonstrating that Chex represents the accounting
acquirer. The shareholder of Chex (Equitex) received 93% of the
post-acquisition outstanding common stock of SVI. In addition,
post-acquisition management personnel and the board members of the
Company now consist of individuals previously holding positions with Chex
and/or Equitex. The purchase price applied to the reverse acquisition was
based on the net book value of the underlying assets of SVI prior to the
transaction. The historical stockholder's equity of Chex prior to the
exchange has been retroactively restated (a recapitalization) for the
equivalent number of shares received in the exchange after giving effect
to any differences in the par value of the SVI and Chex common stock,
with an offset to additional paid-in capital. The restated consolidated
accumulated deficit of the accounting acquirer (Chex) has been carried
forward after the exchange.
The interim condensed consolidated financial statements include the
accounts of FFFC, Chex and Collection Solutions. All significant
intercompany transactions and balances have been eliminated in
consolidation.
UNAUDITED FINANCIAL STATEMENTS:
The condensed consolidated balance sheets as of June 30, 2004 and December
31, 2003, the condensed consolidated statements of operations for the
three and six months ended June 30, 2004 and 2003, the statement of
stockholders' equity for the six months ended June 30, 2004, and the
condensed consolidated statements of cash flows for the six months ended
June 30, 2004 and 2003 have been prepared by the Company without audit.
In the opinion of management, all adjustments necessary to present the
financial position, results of operations and cash flows for all stated
periods have been made. Except as described above, these adjustments
consist only of normal and recurring adjustments. The results of
operations for the six months ended June 30, 2004 are not necessarily
indicative of the operating results for the full year.
7
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
1. BUSINESS, ORGANIZATION, UNAUDITED FINANCIAL STATEMENTS, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
RECENT EVENTS AND MANAGEMENT'S PLANS:
RECENT EVENTS:
In November 2003, Equitex and the Company executed a Stock Purchase
Agreement (the "SPA") with iGames Entertainment, Inc. ("iGames"), a
publicly-traded Nevada Corporation. Pursuant to the SPA, Chex was to have
been sold to iGames by Equitex in exchange for 62.5% of iGames' common
stock and other consideration. In March 2004, Equitex and the Company
notified iGames that they were terminating the SPA due to various
material unrelated adverse events that have impacted the business of
iGames. In addition, Equitex and the Company declared a default under a
term loan made by Chex to iGames in January 2004 (Note 7).
In January 2004, Chex received a termination notice from Native American
Cash Systems Florida, Inc. ("NACSF"), terminating Chex's December 2001
contract to provide cash access services at five Seminole Tribe casino
properties located throughout Florida. The loss of this contract, which
provided approximately $4,000,000 of Chex's revenue for the year ended
December 31, 2003, resulted in Chex immediately implementing cost savings
measures.
MANAGEMENT'S PLANS:
The Company has developed plans and strategies to address its capital and
liquidity needs for the next twelve-month period based on the events
discussed above. Management believes that cash flows from operations will
continue to provide the Company's primary source of operating capital. In
March 2004, Equitex and Chex closed on a $5,000,000 convertible
promissory note, which provided the Company with additional working
capital (Note 6). Management believes that the Company may be able to
issue additional debt instruments in order to raise additional capital if
necessary. The Company also evaluates, on an ongoing basis, potential
business acquisition/restructuring opportunities that become available
from time to time, which management considers in relation to its
corporate plans and strategies.
STOCK BASED COMPENSATION:
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, defines a fair-value
based method of accounting for stock-based employee compensation plans
and transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees, and encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and guidance provided in SFAS Interpretation
("FIN") No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
8
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
1. BUSINESS, ORGANIZATION, UNAUDITED FINANCIAL STATEMENTS, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
STOCK BASED COMPENSATION (CONTINUED):
Had compensation cost for stock-based awards issued to employees been
determined based on the fair values at the grant dates for awards under
the plans consistent with the fair-value based method of accounting
prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's results would have been changed to the pro forma amounts
indicated below:
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Net (loss) income $ (1,694,194) $ 106,732 $ (1,990,226) $ 261,811
ADD: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 252,000 -- 252,000 --
DEDUCT: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (255,000) (214,000) (255,000) (214,000)
------------- ------------- ------------- -------------
Pro forma net loss $ (1,697,194) $ (107,268) $ (1,993,226) $ 47,811
============= ============= ============= =============
Net (loss) income per share:
Basic and diluted - as reported $ (0.22) $ 0.01 $ (0.26) $ 0.03
============= ============= ============= =============
Basic and diluted - pro forma $ (0.22) $ (0.01) $ (0.26) $ 0.01
============= ============= ============= =============
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS AND PRESENTATION OF CASH FLOWS:
For the purpose of the statements of cash flows, the Company considers all
highly-liquid investments with a maturity of three-months or less at the
time of purchase to be cash equivalents.
The Company maintains cash in bank accounts, which, at times, may exceed
federally insured limits. At June 30, 2004 and December 31, 2003, the
Company had deposits in excess of federally insured amounts aggregating
$6,885,149 and $5,122,724, respectively, at various financial
institutions. The Company believes it has its cash deposits at high
quality financial institutions. In addition, the Company maintains a
significant amount of cash at each of the casinos. Management believes
the Company has controls in place to safeguard these on-hand amounts, and
that no significant credit risk exists with respect to cash.
RECEIVABLES:
ACCOUNTS RECEIVABLE:
Accounts receivable arise primarily from credit card and ATM advances
provided at casino locations. Concentrations of credit risk related to
credit card and ATM advances are limited to the credit card and ATM
processors who remit the cash advanced back to the Company along with the
Company's allocable share of fees earned. The Company believes these
processors are financially stable and no significant credit risk exists
with respect to accounts receivable arising from ATM and credit card
advances. The allowance for doubtful accounts was $65,000 at June 30,
2004. No allowance was considered necessary on these receivables at
December 31, 2003.
9
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NOTES RECEIVABLE:
The Company has made advances to various third parties, as well as
officers, affiliates and employees of the Company under various loan
agreements (Note 3). The advances made to officers were made prior to the
acquisition of Chex by Equitex in December 2001. Typically, the loans are
unsecured, with approximately $1,971,000 due from affiliates being
collateralized by Equitex common stock, including registered and
unregistered shares. The Company's allowance for doubtful notes
receivable is adjusted based on the value of the underlying collateral.
Due to the level of risk associated with this common stock, it is
reasonably possible that changes in the value of the common stock will
occur in the near term and that such changes could materially affect the
value of the collateral underlying the notes. After all attempts to
collect a note receivable have failed, the note receivable is written-off
against the allowance. The allowance for doubtful notes receivable was
$1,197,300 and $1,053,300 as of June 30, 2004 and December 31, 2003,
respectively.
REVENUE RECOGNITION:
Revenue is recognized from financial services at the time the service is
provided.
RETURNED CHECKS:
The Company charges operations for potential losses on returned checks in
the period in which the amounts are deemed uncollectible, generally when
such checks are returned. Recoveries on returned checks are credited to
operations in the period when the recovery is received.
In September 2003, checks totaling $606,316 from one customer were cashed
by the Company and were returned as insufficient funds. In March 2004,
the Company received a non-interest bearing promissory note from this
customer. Based on an imputed interest rate of 12%, a discount of
$256,316 was applied to this note, which was charged to operating expense
during the fourth quarter of 2003. The Company believes the remaining
balance of $345,500 is collectible, based on collateral pledged in
connection with the note (Note 6).
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate
methodologies; however, considerable judgment is required in interpreting
information necessary to develop these estimates. Accordingly, the
Company's estimates of fair values are not necessarily indicative of the
amounts that the Company could realize in a current market exchange.
The fair values of cash and cash equivalents, current non-related party
receivables, and accounts payable approximate their carrying amounts
because of the short maturities of these instruments.
10
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
The fair values of notes receivable from non-related parties approximate
their carrying values because of the short maturities of these
instruments. The fair values of notes receivable from related parties are
not practicable to estimate, based upon the related party nature of the
underlying transactions.
The fair values of notes and loans payable to non-related parties
approximate their carrying values because of the short maturities of
these instruments. The fair values of long-term debt payable to banks,
approximates carrying values, net of discounts applied, based on market
rates currently available to the Company. The fair value of the notes
payable to related parties are not practicable to estimate, based upon
the related party nature of the underlying transaction.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost, and depreciation is provided by
use of accelerated and straight-line methods over the estimated useful
lives of the assets. The cost of leasehold improvements is depreciated
over the estimated useful lives of the assets or the length of the
respective leases, whichever period is shorter. The estimated useful
lives of property, equipment and leaseholds are as follows:
Office equipment and furniture 3 to 7 years
Computer hardware and software 3 to 5 years
Leasehold improvements 7 years
Expenditures for additions and improvements are capitalized, while repairs
and maintenance are expensed as incurred.
INVESTMENT IN EQUITEX COMMON STOCK:
At June 30, 2004 and December 31, 2003, the Company has an investment in
common stock of Equitex. The Company's investment in Equitex common stock
is accounted for under the cost method and is adjusted only for
other-than-temporary declines in fair value.
At June 30, 2004 and December 31, 2003, the Company has presented its
investment in Equitex common stock as a reduction of stockholders' equity
in a manner similar to that of treasury stock (Note 10). This
presentation is based upon the Company's consideration of the provisions
of Emerging Issues Task Force ("EITF") Issue No. 98-2, Accounting by a
Subsidiary or Joint Venture for an Investment in the Stock of its Parent
Company or Joint Venture Partner. This EITF discusses that in the
separate financial statements of a subsidiary, an investment in the
common stock of a parent whose only significant asset is its investment
in the subsidiary is essentially the same as stock of the subsidiary and
should be classified as a reduction to stockholders' equity.
11
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
GOODWILL, INTANGIBLE ASSETS AND AMORTIZATION:
In connection with Equitex's acquisition of Chex, and in accordance with
SEC Staff Accounting Bulletin No. 54 "APPLICATION OF 'PUSH DOWN' BASIS OF
ACCOUNTING IN FINANCIAL STATEMENTS OF SUBISDIARIES ACQUIRED BY PURCHASE",
Goodwill and intanbible assets have been "pushed-down" to Chex. Goodwill
represents the excess of the purchase price paid by Equitex over the
estimated fair values of the Company's net tangible and identifiable
intangible assets acquired. As discussed below, goodwill and intangible
assets with indefinite lives are not amortized pursuant to recently
issued accounting standards. Identifiable intangible assets with finite
lives are being amortized on a straight-line basis over three to seven
years (Note 5).
SFAS No. 142 requires companies to allocate goodwill to identifiable
reporting units, which are then tested for impairment using a two-step
process. The first step requires comparing the fair value of each
reporting unit with its carrying amount, including goodwill. If the fair
value exceeds the carrying amount, goodwill of the reporting unit is
considered not impaired, and the second step of the impairment test is
not necessary. If the fair value of the reporting unit does not exceed
the carrying amount, the second step of the goodwill impairment test must
be performed to measure the amount of impairment loss, if any. This step
requires the allocation of the fair value of the reporting unit to the
reporting unit's assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit was the
price paid to acquire the reporting unit. The excess of the fair value of
the reporting unit over its re-evaluated net assets would be the new
basis for the reporting unit's goodwill, and any necessary goodwill write
down to this new value would be recognized as an impairment expense.
A goodwill impairment test is performed annually in the fourth quarter or
upon significant changes in the Company's business environment.
INCOME TAXES:
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes represent the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
NET INCOME (LOSS) PER SHARE:
SFAS No. 128, EARNINGS PER SHARE, requires dual presentation of basic and
diluted earnings or loss per share ("EPS") with a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes
dilution. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
Income and loss per share of common stock is computed based on the weighted
average number of common shares outstanding during the period. The
historical income per share of Chex prior to the merger has been
presented to reflect the new capital structure. Stock options, warrants,
and common stock underlying convertible promissory notes are not
considered in the calculations for the periods ended June 30, 2004, as
the impact of the potential common shares, which total 3,800,000, would
be to decrease loss per share. Therefore, diluted loss per share is
equivalent to basic loss per share. Chex did not have any options,
warrants or other potentially dilutive securities outstanding for the
periods ended June 30, 2003; therefore, diluted income per share is
equivalent to basic income per share.
12
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
COMPREHENSIVE INCOME (LOSS):
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes requirements for
disclosure of comprehensive income. During the three-month and six-month
periods ended June 30, 2004 and 2003, the Company did not have any
components of comprehensive income (loss) to report.
USE OF ESTIMATES:
Preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the balance sheets and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS:
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS
No.150 establishes new standards on how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities
and equity. The provisions of SFAS No. 150 are generally effective for
all financial instruments entered into or modified after May 31, 2003,
except for those provisions relating to mandatory redeemable
non-controlling interests, which have been deferred. The adoption of SFAS
No. 150 did not have a material impact on the financial position or
results operation of the Company. If the deferred provisions of SFAS No.
150 are finalized in their current form, management does not expect
adoption to have a material effect on the financial position or results
of operation of the Company.
In January 2003, the FASB issued SFAS Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES ("FIN 46"), which changes the criteria by
which one company includes another entity in its consolidated financial
statements. FIN 46 requires a variable interest entity ("VIE") to be
consolidated by a company if that company is subject to a majority of the
entity's residual returns or both. In December 2003, the FASB approved a
partial deferral of FIN 46 along with various other amendments. The
effective date for this interpretation has been extended until the first
fiscal period ending after December 15, 2004. However, prior to the
required application of this interpretation, a public entity that is not
a small business issuer shall apply this interpretation to those entities
that are considered to be special purpose entities no later than as of
the end of the first reporting period after December 15, 2003. As the
Company does not currently have an interest in a VIE or special purpose
entity, the adoption of FIN 46 did not have an effect on the financial
condition or results of operations of the Company.
13
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED):
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION TRANSITION AND DISCLOSURE. This statement amends SFAS No.
123, Accounting for Stock-Based Compensation, and establishes two
alternative methods of transition from the intrinsic value method to the
fair value method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 requires prominent disclosure about the effects on
reported net income or loss and requires disclosure for these effects in
interim financial information. The provisions for the alternative
transition methods are effective for fiscal years ending after December
15, 2002, and the amended disclosure requirements are effective for
interim periods beginning after December 15, 2002. The Company adopted
the disclosure only provisions of SFAS No. 148 and plans to continue
accounting for stock-based compensation under APB 25.
In November 2002, the FASB issued SFAS Interpretation No. 45 ("FIN 45"),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES AND INDEBTEDNESS OF OTHERS. FIN 45
elaborates on the disclosures to be made by the guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while the provisions of the disclosure requirements
are effective for financial statements of interim or annual reports
ending after December 15, 2002. The adoption of FIN 45 did not have an
effect on the financial condition or results of operations of the
Company, as the Company has not issued any such guarantees.
3. NOTES AND INTEREST RECEIVABLE:
Notes receivable at June 30, 2004 and December 31, 2003, consist of the
following:
June 30, December 31,
2004 2003
----------- -----------
Note receivable from iGames; interest at 10%,
maturity January 2005 [A] $ 2,000,000
Notes receivable from the estate of a
deceased officer; interest at 6%; principal
and unpaid interest due in November 2004;
collateralized by unregistered shares of
Equitex common stock; a valuation allowance
of $1,197,300 and $1,053,300 has been
recorded against this receivable at June
30, 2004 and December 31, 2003,
respectively [B] 1,484,691 $ 1,484,691
Notes receivable from a former officer of
Chex; interest at rates ranging from 5.75%
to 6%; due on demand; collateralized by
unregistered shares of Equitex common stock
[B] 485,936 485,936
Note receivable from a customer of Chex;
non-interest bearing; principal balance of
$606,316, net of $256,316 discount at June
30, 2004 and December 31, 2003, based on
imputed interest rate of 12%; discount
charged to operating expense in 2003;
monthly payments of $4,500 beginning May
2004 through December 2010, at which time
the balance is due in full; collateralized
by mortgages on three parcels of real
property in Florida; currently in default
as only one payment has been made 345,500 350,000
14
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
3. NOTES AND INTEREST RECEIVABLE (CONTINUED):
June 30, December 31,
2004 2003
----------- -----------
Notes receivable from Equitex 2000; interest
at 10%; unsecured, due on demand [B] 205,000 205,000
Notes receivable from various Company
employees and a former shareholder;
non-interest bearing, unsecured and due on
demand [B] 57,973 53,700
----------- -----------
4,579,100 2,579,327
Interest receivable, includes related party
interest of $61,066 at June 30, 2004 and
December 31, 2003 [B] 189,817 108,290
Less current maturities (66,973) (58,200)
----------- -----------
Notes receivable, net of current portion,
before valuation allowance 4,701,944 2,629,417
Less valuation allowance (1,197,300) (1,053,300)
----------- -----------
Notes receivable, long-term $ 3,504,644 $ 1,576,117
=========== ===========
[A] In January 2004, Chex advanced iGames $2,000,000 under a Term Loan Note
(the "Note"). Interest accrues at 10% per annum, and the maturity date
was scheduled to occur in January 2005, as defined in the Note. The Note
was to be secured by a pledge of capital stock of the borrower pursuant
to a stock pledge agreement. The stock pledge agreement was not executed,
which resulted in an event of default under the terms of the Note.
Therefore, Chex has demanded the entire unpaid principal and accrued
interest be paid in full. Chex has commenced litigation relating to the
collection of the Note (Note 7). The Company has presented the Note as a
long-term asset at June 30, 2004 due to uncertainty as to the anticipated
litigation settlement date.
[B] Demand notes and interest receivable, net aggregating to $1,226,117 and
$1,284,317, respectively, at June 30, 2004 and December 31, 2003, have
been classified as long-term assets, as it is management's intention
not to demand payment within the next year.
4. PROPERTY AND EQUIPMENT:
Property and equipment at June 30, 2004 and December 31, 2003 are as
follows:
June 30, December 31,
2004 2003
----------- -----------
Furniture and equipment $ 1,728,904 $ 1,632,236
Computer hardware and software 236,508 138,662
Leasehold improvements 52,765 52,765
----------- -----------
2,018,177 1,823,663
Less accumulated depreciation
and amortization (814,728) (651,807)
----------- -----------
$ 1,203,449 $ 1,171,856
=========== ===========
15
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
5. GOODWILL, INTANGIBLE AND OTHER ASSETS:
At June 30, 2004 and December 31, 2003, goodwill was $5,636,000, none of
which is deductible for tax purposes based on the tax structuring of the
Chex acquisition. Intangible and other assets are as follows:
June 30, 2004 December 31, 2003
------------------------------------------ --------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
amount amortization amount amount amortization amount
------------- ------------- -------------- ------------- ------------- --------------
Casino contracts $ 4,300,000 $ 1,649,440 $ 2,650,560 $ 4,300,000 $ 1,349,440 $ 2,950,560
Non-compete
agreements 350,000 195,300 154,700 350,000 163,300 186,700
Customer lists 250,000 216,600 33,400 250,000 178,600 71,400
Trade names 100,000 100,000 100,000 100,000
------------- ------------- -------------- ------------- ------------- --------------
Total intangible
assets 5,000,000 2,061,340 2,938,660 5,000,000 1,691,340 3,308,660
Other assets 519,948 44,126 475,822 20,248 20,248
------------- ------------- -------------- ------------- ------------- --------------
$ 5,519,948 $ 2,105,466 $ 3,414,482 $ 5,020,248 $ 1,691,340 $ 3,328,908
============= ============= ============== ============= ============= ==============
Casino contracts represent the Company's renewable agreements with Native
American owned gaming establishments to operate in those establishments
for initial terms of one to five years. Casino contracts have
historically been renewed by gaming establishments and are amortized
using the straight-line method over seven years. The non-compete
agreements with members of management are amortized using the
straight-line method over five years. Customer lists relate to core
customers that rely on the use of the Company's facilities and are
amortized using the straight-line method over five years. Trade names
consist of the Chex Services and Fast Funds names, which are believed to
be readily identified and known in the marketplace by customers. Trade
names are considered to have an indefinite life and are therefore not
amortized. Other assets represent long-term deposits and deferred loan
costs.
Other assets increased during the six months ended June 30, 2004 for loan
costs associated with the closing of the $5,000,000 convertible
promissory note, including $335,000 in fees paid for legal services and
finder's fees and $164,700 of costs associated with the issuance of
warrants issued by Equitex to an advisory firm in connection with the
transaction (Note 6).
Aggregate amortization expense was $218,355 and $185,000 for the three
months ended June 30, 2004 and 2003, and $414,126 and $370,000 for the
six months ended June 30, 2004 and 2003, respectively.
16
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
6. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt at June 30, 2004 and December 31, 2003,
consist of the following:
June 30, December 31,
2004 2003
----------- -----------
NOTES PAYABLE:
Notes payable to individuals; interest rates
ranging from 9% to 12%; interest and
principal payable monthly and/or quarterly;
the notes are unsecured and mature on
various dates through December 2004; the
notes are subject to repayment with ninety
days notice at the option of the holder $10,217,677 $10,692,177
=========== ===========
LONG-TERM DEBT:
Note payable to Equitex, net of discount [A] $ 4,321,395
Convertible promissory note, interest at 5%
per annum [B] 300,000
Note payable to a bank; interest at prime
plus .25%, repaid in June 2004 $ 150,000
Obligations under capital leases; imputed
interest rates ranging from 6.5% to 7%; due
at various dates through October 2005;
collateralized by equipment 63,107 88,970
----------- -----------
4,684,502 238,970
Less current portion (1,139,900) (201,727)
----------- -----------
Long-term debt, net of current portion $ 3,544,602 $ 37,243
=========== ===========
[A] In March 2004, Equitex closed on $5,000,000 of convertible promissory
notes (the "Notes") with two financial institutions (the "Lenders").
The proceeds from the Notes were loaned to Chex. The Notes carry a
stated interest rate of 7% per annum and have a 45-month term. Interest
only payments are due April 2004 through June 2004. Beginning in July
2004, principal and interest payments will amortize over the remaining
42-month period. The Notes are senior to all other debt of the Company
and are collateralized by all assets of Chex as defined in the security
agreement. In connection with the closing, Equitex entered into a
$5,000,000 secured promissory note (the "Chex Note") agreement with
Chex. Interest and payment terms of the Chex Note are identical to
those set forth in the Notes.
The Notes are convertible into common stock of Equitex. Equitex has the
right to make any monthly payment of principal and interest in shares
of its common stock. The common stock is to be issued based on 85% of
the average bid price of Equitex for 20 trading days prior to the
payment due date. Any beneficial conversion features will be recorded
in earnings of the Company (allocated by Equitex) at the time of
conversion, as the number of shares the lenders will receive is not
known until the triggering event occurs.
17
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
LONG-TERM DEBT (CONTINUED):
The Lenders also received warrants to acquire up to 800,000 shares of
Equitex's common stock These warrants were valued at $392,400 based
upon the Black-Scholes option-pricing model, and therefore $392,400 of
the total proceeds were allocated to the warrants, resulting in an
imputed interest rate of 7.5%. Equitex allocated the value of these
warrants to Chex; therefore the Company reduced the carrying value of
the Notes for this amount and is amortizing the discount to interest
expense over the 45-month term of the Note.
Accordingly, $7,964 and $31,856 has been recorded by Chex as interest
expense for the three and six months ended June 30, 2004, respectively.
In addition, warrants to acquire up to 300,000 shares of Equitex's
common stock were issued to an advisory firm in connection with the
transaction. These warrants were valued at $164,700 based upon the
Black-Scholes option-pricing model. In addition, the Company paid cash
of $320,000 for legal services and finders' fees in connection with the
transaction. Equitex allocated the value of these warrants to Chex. The
cash paid and the value of these warrants were recorded as deferred
loan costs and the Company is amortizing these costs over the 45-month
term of the Notes. Accordingly, $10,771 and $43,084 is included in
general and administrative expenses for the three and six months ended
June 30, 2004, respectively.
[B] In connection with the June 7, 2004 Merger Agreement, the Company
received $400,000 in exchange for a convertible promissory note. The
note is convertible into 4,000,000 shares ($0.10 per share) of FFFC
common stock upon the occurrence of certain future events, and bears
interest at 5% per annum. Unless converted, any outstanding balance of
principal and interest is due on April 14, 2007. On June 29, 2004 an
advisory agreement between Chex and the lender was executed (Note 7).
As a result, 25% ($100,000) of the notes were converted into 1,000,000
shares of FFFC common stock. An additional 25% ($100,000) shall be
converted upon an independent director being added to the FFFC Board
and delivery to FFFC of a list of potential acquisition candidates. The
remaining 50% ($200,000) shall convert to 2,000,000 shares of FFFC
common stock upon FFFC's execution of a definitive merger acquisition
or agreement of an entity having not less than $10,000,000 in revenue.
The conversion of the note is deemed to be beneficial as the note
converts to common stock of FFFC at $0.10 per share (the estimated fair
value of FFFC's common stock was determined to be $1.00 per share on
the date of closing). The intrinsic value of the beneficial conversion
feature is limited to the amount of the proceeds allocated to the
convertible note; therefore the value of the convertible feature was
determined to be $400,000. In connection with the conversion of the 25%
portion of the note to common stock on June 29, 2004, the Company
recorded an additional $100,000 of interest expense related to the
beneficial conversion feature. As the remaining 75% of the conversion
feature is contingent upon the occurrence of future events, it will be
recorded in earnings when converted.
18
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES:
The Company leases its corporate facilities under a non-cancellable
operating lease through March 2006. Pursuant to the lease, the Company is
required to pay its pro-rata share of taxes and operating expenses.
In addition, the Company leases office equipment pursuant to a
non-cancelable lease obligation expiring in July 2005.
SALARY CONTINUATION PLAN:
The Company has a salary continuation plan for two of its employees.
Pursuant to the plan, these two individuals are guaranteed two years of
salary, which totals approximately $233,800 and $236,200 at June 30, 2004
and December 2003, respectively, in the event that the Company is sold or
their employment is terminated.
CASINO CONTRACTS:
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental fee
to operate at the respective gaming locations. Occasionally, these
agreements require the Company to prepay a negotiated amount of such
anticipated fees. Typically, the gaming establishment earns the fees over
the life of the contract based on one of the following scenarios:
o A minimum amount as defined in the contract.
o A dollar amount, as defined by the contract, per transaction volume
processed by the Company.
o A percentage of the Company's profits at the respective location.
o The greater of the monthly amount, dollar amount per transaction volume
or percent of the Company's profits payable at the end of the contract
term.
As of June 30, 2004 and December 31, 2003, the Company has recorded
$290,435 and $173,998, respectively, of prepaid amounts on casino
contracts and has recorded $528,636 and $587,099, respectively, of
accrued liabilities on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
19
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
LITIGATION:
In April 2004, the Company and Equitex executed a settlement agreement with
Cash Systems pursuant to which the Company paid Cash Systems $125,000 for
expenses related to the terminated APM. As part of the settlement
agreement, Cash Systems paid Chex approximately $476,000 for commissions
owed to Chex by Cash Systems. In April 2004, both the Company and Cash
Systems agreed to mutually release each other from further liability
related to the APM and the Seminole Tribe termination; however, the
Company has retained the right to legal action against NASCF, NACS and
its President, for the wrongful termination of the Seminole Tribe casino
contracts.
In March 2004, Chex commenced a lawsuit in Hennepin County, Minnesota
demanding repayment of $2,000,000, plus a $1,000,000 termination fee,
accrued interest and other fees, due from iGames under a term note made
in January 2004. In addition, in March 2004, the Company commenced a
lawsuit in Delaware state court (New Castle county) relative to the
termination of the SPA. In March 2004, iGames commenced a lawsuit in
United States District Court for the District of Delaware relative to
both the termination of the SPA and iGames' obligations under the term
note, which is the subject of Chex's lawsuit in Hennepin County,
Minnesota. The Company is confident that its claims in litigation will be
upheld and management believes that the claims made by iGames lack merit.
The Company intends to vigorously prosecute its claims and defend against
iGames' claims.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
impact either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
EMPLOYEE BENEFIT PLAN:
In January 2003, the Company adopted a 401(k) retirement plan (the "Plan"),
which covers defined eligible employees of Chex. Eligible employees are
able to contribute a portion of their compensation to the Plan, subject
to an annual Internal Revenue Service deferral limit. Employee
contributions are 100% vested when made. Company contributions are
discretionary. During 2004 and 2003, Chex made a matching contribution of
100% on the first 3% of employee deferrals and 50% on employee deferrals
between 3% and 5%. Contribution expense was approximately $22,300 for the
three months ended June 30, 2004 and 2003 and approximately $44,600 and
$34,900 for the six months ended June 30, 2004 and 2003, respectively.
CONSULTING AGREEMENT:
In May 2004, Chex entered into a consulting agreement with a financial
advisor to provide assistance in the placement of debt or equity
financing with prospective investors and facilitating future merger,
acquisition and strategic partnerships on behalf of the Company. The term
of the agreement is two years and requires the Company to pay a total of
$240,000 to the financial advisor in monthly installments of $10,000 each
month.
20
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
8. OTHER RECEIVABLES, AFFILIATES:
During 2003, Chex made $219,409 of net advances to Denaris Corporation
("Denaris"), a majority-owned subsidiary of Equitex. During the six
months ended June 30, 2004, Chex made net additional advances of $19,751,
resulting in a receivable balance of $239,160 as of June 30, 2004. These
amounts have been classified as other receivables, related party on the
consolidated balance sheets.
9. INCOME TAXES:
The operations of the Company are included in consolidated federal income
tax returns filed by Equitex. However, for financial reporting purposes,
the Company's provision for income taxes has been computed on the basis
that the Company files a separate income tax return. The Company did not
make any federal tax payments. Rather, calculated federal tax liabilities
owed by the Company for the year ended December 31, 2003 were recorded as
a capital contribution from Equitex.
During the quarter ended June 30, 2004 management assessed the realization
of its deferred tax assets. Based on this assessment it was determined to
be more likely than not that the Company's deferred tax assets will not
be realizable and determined that a valuation allowance was required.
Accordingly, the Company's valuation allowance was increased by $473,000,
which resulted in an increase to the provision for income taxes of the
same amount.
10. STOCKHOLDER'S EQUITY:
COMMON STOCK:
In June 2004, FFFC issued 1,000,000 shares of common stock in exchange for
the conversion of $100,000 in notes payable.
21
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
10. STOCKHOLDER'S EQUITY (CONTINUED):
INVESTMENT IN EQUITEX COMMON STOCK:
At June 30, 2004 and December 31, 2003, the Company has an investment in
common stock of Equitex. This investment is presented as a reduction of
stockholders' equity in a manner similar to that of treasury stock. The
following table summarizes the activity of this investment.
Year ended December 31, Six months ended June 30,
2003 2004
------------------------ ------------------------
Shares Cost Shares Cost
---------- ---------- ---------- ----------
Common stock:
Beginning balances 382,507 $ 216,714 1,328,718 $ 611,680
Shares purchased 525,000 312,050 103,500 113,625
Shares received upon Equitex
conversion of preferred
stock and unpaid dividends 1,647,211 658,884
Shares sold (1,226,000) (575,968) (483,500) (223,867)
Shares distributed to third parties
on behalf of Equitex, in exchange
for an Equitex receivable (45,000) (21,570)
---------- ---------- ---------- ----------
Ending balances 1,328,718 611,680 903,718 479,868
---------- ---------- ---------- ----------
Preferred stock:
Beginning balance 650 650,000 -- --
Shares purchased
Shares converted to common stock (650) (650,000) -- --
---------- ---------- ---------- ----------
Ending balances -- -- -- --
Total 1,328,718 $ 611,680 903,718 $ 479,868
========== ========== ========== ==========
Purchases of Equitex common stock are stated at cost. Sales of Equitex
common stock are removed from the investment account at the weighted
average cost of the total shares outstanding, and the difference between
the sales price and cost of the shares sold is classified as additional
paid-in capital.
NOTES, ADVANCES AND INTEREST RECEIVABLE, AFFILIATES:
Chex has notes receivable due from Equitex and Denaris under various loan
agreements. In addition, Chex has made advances to Equitex and Denaris to
fund their operations. In accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 9, ALLOCATION OF EXPENSES AND
RELATED DISCLOSURE IN FINANCIAL STATEMENTS OF SUBSIDIARIES, DIVISIONS OR
LESSOR BUSINESS COMPONENTS OF ANOTHER ENTITY, certain expenses paid by
Chex on behalf of Equitex have been debited (charged) to the receivables.
General and administrative expenses and deferred loan costs allocated by
Equitex to Chex totaling $648,100 for the six months ended June 30, 2004
have been credited to additional paid-in capital as a contribution of
capital by Equitex. These transactions include the allocation of certain
operating expenses from Equitex to Chex, as well as certain capitalized
costs relating to the $5,000,000 promissory note that have been allocated
to Chex.
22
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
10. STOCKHOLDER'S EQUITY (CONTINUED):
NOTES, ADVANCES AND INTEREST RECEIVABLE, AFFILIATES (CONTINUED):
The following table summarizes the activity for the year ended December 31,
2003 and for the six months ended June 30, 2004:
December 31, June 30,
2003 2004
---------- ----------
Beginning balances $1,075,760 $1,944,785
Cash advances 1,111,655 1,125,000
Cash repayments (595,000)
Chex cash disbursements allocated to Equitex 352,370 332,833
Distribution of Equitex common stock held by
Chex to third parties in exchange for
receivable from Equitex 50,750
---------- ----------
1,944,785 3,453,368
Interest receivable 166,483 304,918
---------- ----------
Ending balances $2,111,268 $3,758,286
========== ==========
The above balances at June 30, 2004 and December 31, 2003 are presented as
a reduction of stockholders' equity on the consolidated balance sheet of
the Company. The balance at December 31, 2003 is comprised of $837,250
due from Denaris and $1,107,535 due from Equitex. The balance at June 30,
2004 is comprised of $837,250 due from Denaris and $2,616,118 due from
Equitex. The Denaris receivables are in the form of notes, $325,000 of
which bear interest at 10% per annum and $512,250 which bear interest at
12% per annum. The notes are collateralized by a pledge by Equitex of
1,000,000 shares of Equitex common stock. The Equitex receivables are in
the form of notes and advances, which bear interest at 10% per annum. The
notes and advances are collateralized by a pledge of 700,000 shares of
FFFC common stock owned by Equitex.
STOCK SUBSCRIPTION RECEIVABLE:
In December 2003, Chex sold 1,000,000 shares of Equitex common stock in
exchange for $200,000 cash and an $800,000 promissory note. The note is
presented as a reduction of stockholders' equity at June 30, 2004 and
December 31, 2003. The note has an interest rate of 7% per annum and was
originally payable in three installments of principal and interest
through June 30, 2004. The promissory note is secured by a pledge
agreement, which grants Chex a security interest in 700,000 of the
purchased shares. A payment of $200,000 was received during the three
months ended June 30, 2004. The note is currently in default.
The Company has been informed that it is the intent of the note holder to
return 500,000 shares of Equitex common stock in full payment of the
remaining $600,000 receivable. Since the current market price of 500,000
shares of common stock is approximately $350,000, the Company has reduced
the receivable by $250,000 and charged equity (additional paid-in
capital).
23
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO,
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL
CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS, FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE",
"MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON THE VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL
REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY OTHER FACTORS DISCUSSED IN
THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
Effective June 7, 2004, Equitex and the Company executed an Agreement and Plan
of Merger (the "Merger Agreement") with SVI to merge Chex into a wholly-owned
subsidiary of SVI (the "Merger Subsidiary"), where upon the separate corporate
existence of the Merger Subsidiary ceased. Under the terms of the Merger
Agreement, Equitex exchanged 100% of its equity ownership in Chex for 7,700,000
shares of SVI, representing 93% of SVI's outstanding common stock following the
transaction. In addition, Equitex received warrants to purchase 800,000 shares
of SVI common stock at an exercise price of $0.10 per share, expiring five years
from the date of closing. As a result, Chex became a wholly-owned subsidiary of
SVI, a publicly traded shell company. In addition, under the terms of the Merger
Agreement, a bridge loan was consummated with an international merchant bank,
whereby SVI received $400,000 through the issuance of a convertible promissory
note. The promissory note is convertible into 4,000,000 shares of SVI common
stock upon the occurrence of certain future events.
The acquisition of Chex by SVI has been recorded as a reverse acquisition based
on factors demonstrating that Chex constituted the accounting acquirer. The
shareholder of Chex received 93% of the post-acquisition outstanding common
stock of SVI. In addition, post-acquisition management personnel and the board
members of the Company now consist of individuals previously holding positions
with Chex or Equitex. The purchase price applied to the reverse acquisition was
based on the net book value of the underlying assets of SVI prior to the
transaction. The historical stockholder's equity of Chex prior to the exchange
has been retroactively restated (a recapitalization) for the equivalent number
of shares received in the exchange after giving effect to any differences in the
par value of the SVI and Chex common stock, with an offset to additional paid-in
capital. The restated consolidated accumulated deficit of the accounting
acquirer (Chex) has been carried forward after the exchange.
24
OVERVIEW
The financial results presented for the three and six months ended June 30, 2004
and 2003 are those of Chex Services, Inc. ("Chex") and its wholly-owned
subsidiary Collection Solutions, Inc. ("Collection Solutions"), and from June 7,
2004, on a consolidated basis with those of FastFunds Financial Corporation
("FFFC").
LIQUIDITY AND CAPITAL RESOURCES
For the year ending December 31, 2004, we presently anticipate our liquidity and
capital resource needs will be satisfied from cash flows generated from our
operating activities.
Our operating subsidiary, Chex, anticipates positive cash flows in 2004.
Additionally, Chex has begun to introduce new products during the year. These
products are complementary to its existing products and services. Future
products may include: cashless gaming smart cards, debit cards and customized
funds transfer systems for multi-jurisdictional gaming operators.
Cash flow activity for the six months ended June 30, 2004 and 2003 includes the
activity of Chex and Collection Solutions, and FFFC since its acquisition on
June 7, 2004. For the six months ended June 30, 2004, net cash provided by
operating activities was $290,759 compared to net cash used in operating
activities of $760,952 for the six months ended June 30, 2003. The most
significant portion of this change was the changes in accounts receivable, which
decreased and provided cash and adjusted the net loss by $1,272,183 for the six
months ended June 30, 2004 compared to an increase in accounts receivable for
the six months ended June 30, 2003, which used cash of $1,271,385. Additionally,
non-cash adjustments to the current year's results were $1,327,953 including
depreciation and amortization of $577,046, stock-based compensation of $252,000
and an increase in the deferred tax asset valuation allowance of $473,000,
compared to total non-cash adjustments of $580,140, mostly comprised of $538,939
for depreciation and amortization for the six months ended June 30, 2003.
Cash used in investing activities for the six months ended June 30, 2004 was
$3,319,286 compared to $699,607 for the six months ended June 30, 2003. Cash
used in investing activities for the six months ended June 30, 2004, was
primarily attributable to net advances of $3,124,773 on notes receivable and
purchases of property and equipment of $194,513. These advances (loans) were
mainly attributed to iGames ($2,000,000) and Equitex ($1,125,000). Cash used in
investing activities for the six months ended June 30, 2003 was primarily due to
net advances of $522,349 on notes receivable and purchases of property and
equipment of $177,258.
Cash provided by financing activities for the six months ended June 30, 2004 was
$2,177,214 compared to cash used in financing activities of $856,727 for the six
months ended June 30, 2003. The significant activity for the six months ended
June 30, 2004 included the Company receiving proceeds of $6,552,000 upon the
issuance of notes payable and long-term debt, receiving $492,029 upon the sale
of 483,500 shares of Equitex common stock and proceeds received of $200,000 on
the stock subscription receivable. These proceeds were offset by the repayment
of notes payable and long-term debt of $2,120,424, repayment of a bank overdraft
of $2,497,766, payment of fees of $335,000 related to the issuance of notes
payable, and the purchase of 103,500 shares of Equitex common stock for
$113,625.
25
The significant financing activity for the six months ended June 30, 2003
included the Company receiving proceeds from the sale of 226,000 shares of
Equitex common stock for $147,794. The Company also received proceeds of
$620,000 upon the issuance of notes payable and repaid $1,337,521 of notes
payable and long-term debt. During the six months ended June 30, 2003, the
Company also purchased 460,000 shares of Equitex common stock for $287,000.
For the six months ended June 30, 2004, cash decreased by $851,313 compared to a
decrease in cash of $2,317,286 for the six months ended June 30, 2003. Ending
cash at June 30, 2004 was $6,755,289 compared to $6,585,624 at June 30, 2003.
Significantly all cash is required to be utilized for Chex's casino operations.
In March 2004, Equitex closed on $5,000,000 of convertible promissory Notes (the
"Notes") with two financial institutions (the "Lenders"). The Notes carry an
interest rate of 7% per annum and have a 45-month term. Interest only payments
were due monthly beginning in April 2004 through June 2004. Beginning in July
2004, principal and interest payments amortize over the remaining 42-month
period. The Notes are senior to all other debt of the Company and are
collateralized by all assets of Chex as defined in the security agreement.
Other sources available to us that we may utilize include the sale of equity
securities through private placements of common and/or preferred stock as well
as the exercise of outstanding warrants, all of which may cause dilution to our
stockholders.
REVENUES
Consolidated revenues for the three months ended June 30, 2004 and 2003 were
$3,458,260 and $4,545,488, respectively, compared to consolidated revenues of
$6,921,363 and $9,119,437 for the six months ended June 30, 2004 and 2003. The
decrease in both periods was due primarily to the loss of revenues resulting
from the closure of five Seminole Tribe casino locations located throughout
Florida in January 2004, which provided approximately $4 million in revenues per
year.
Chex recognizes revenue at the time certain financial services are performed.
Revenues are derived from check cashing fees, credit and debit card advance
fees, automated teller machine ("ATM") surcharge and transaction fees, and NSF
collection fees. Chex revenues for the three months ended June 30, 2004 and 2003
were comprised of the following:
2004 2003
------------------------------------ ------------------------------------
Number of Dollars Earned Number of Dollars Earned
Transactions Handled Revenues Transactions Handled Revenues
---------- ------------ ---------- ---------- ------------ ----------
Personal checks 163,923 $ 30,295,833 $1,556,525 213,907 $40,306,680 $ 2,068,114
"Other" checks 64,674 20,357,481 191,244 89,438 35,081,167 241,704
Credit cards 52,280 17,851,730 737,985 92,524 31,377,646 1,199,131
Debit cards 7,817 2,402,603 34,425 15,707 5,046,710 104,103
ATM transactions 434,128 36,590,380 824,358 916,147 87,354,568 803,529
NSF collection fees - - 100,675 - - 117,231
Other - - 13,048 - - 11,676
---------- ------------ ---------- ---------- ------------ ----------
722,822 $107,498,027 $3,458,260 1,327,723 $199,166,771 $4,545,488
========== ============ ========== ========== ============ ==========
26
Chex revenues for the six months ended June 30, 2004 and 2003 were comprised of
the following:
2004 2003
------------------------------------ ------------------------------------
Number of Dollars Earned Number of Dollars Earned
Transactions Handled Revenues Transactions Handled Revenues
---------- ------------ ---------- ---------- ------------ ----------
Personal checks 323,106 $57,769,918 $ 3,095,404 428,642 $ 78,787,983 $4,066,317
"Other" checks 125,441 43,460,655 429,236 181,729 73,407,060 540,522
Credit cards 108,080 36,747,289 1,418,353 182,293 61,891,673 2,393,593
Debit cards 17,786 5,515,917 74,699 30,845 10,893,173 210,880
ATM transactions 862,286 70,137,900 1,607,067 1,812,601 174,697,548 1,625,808
NSF collection fees - - 219,542 - - 246,620
Other - - 77,062 - - 35,697
---------- ------------ ---------- ---------- ------------ ----------
1,436,699 $213,631,679 $6,921,363 2,636,110 $399,677,437 $9,119,437
========== ============ ========== ========== ============ ==========
Chex cashes personal checks at its cash access locations for fees of between 3
and 10 percent based on its casino contracts. Chex also cashes "other" checks,
comprised of tax and insurance refunds, casino employee payroll checks and
casino jackpot winnings at a reduced rate.
Chex credit/debit card cash advance services allow patrons to use their VISA,
MasterCard, Discover and American Express cards to obtain cash. Third party
vendors, at their expense, supply, install and maintain the equipment to operate
the cash advance system. Under vendor agreements, the vendor charges each
customer a services fee based upon the cash advance amount and pays a portion of
such service fee to Chex.
Chex receives a surcharge fee for each cash withdrawal from the ATM machines in
locations where Chex provides such services. The surcharge, which is a charge in
addition to the cash advance, is made against the bank account of the customer
and is deposited in the vendor's account. The vendor reimburses Chex for the
cash amount and pays the surcharge commission due.
Chex utilizes its own in-house collections department to pursue collection of
returned checks, and generally charges an insufficient funds fee when it
ultimately collects the check.
In the ordinary course of business, Chex receives new financial services
agreements or renews existing ones as their original terms expire. Chex may also
not renew contracts from certain expiring agreements. In January of 2004, Chex
was advised that 5 existing casino locations were terminating the agreements for
Chex to provide its services. These locations accounted for $1,003,670 and
$2,010,832 in revenues for the three and six months ended June 30, 2003. For the
year ended December 31, 2003, these locations accounted for approximately
$4,090,000 in revenues. Accordingly, Chex anticipates a decline in 2004 revenues
due to the loss of these contracts and the absence of significant new contracts
to replace the revenues lost. Chex has implemented cost savings expense
reductions to minimize the effect of the loss of these contracts.
27
OPERATING EXPENSES
LOCATION EXPENSES
Chex location expenses were $2,560,402 and $3,138,790 for the three months
ended June 30, 2004 and 2003, respectively. For the six months ended June 30,
2004 and 2003, location expenses were $5,017,747 and $6,118,517, respectively.
The location expenses are comprised as follows:
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Fees to casinos $ 1,209,052 $ 1,539,844 $ 2,375,200 $ 3,048,086
Salaries and related costs 723,547 983,445 1,497,580 1,942,342
Returned checks, net of collections 206,390 125,654 304,393 221,537
Other 388,343 451,162 773,991 831,327
Depreciation and amortization 33,070 38,685 66,583 75,225
----------- ----------- ----------- -----------
$ 2,560,402 $ 3,138,790 $ 5,017,747 $ 6,118,517
=========== =========== =========== ===========
Chex pays a fee to casinos as compensation pursuant to the terms of each
financial services agreement that the Company has entered into with each
respective establishment. At locations where Chex provides check-cashing
services, Chex pays the location operator a commission based upon the monthly
amount of checks cashed, as defined in the agreement. Chex passes on an agreed-
upon percentage of the surcharge commissions to the locations where ATM's are
utilized. At all of the locations at which Chex provides credit/debit card
advance services, it pays the operator a commission for each completed
transaction. The decrease in fees to casinos of $339,792 and $722,886 for the
three and six months ended June 30, 2004 compared to the three and six months
ended June 30, 2003, was primarily due to the loss of the five Seminole tribal
locations in January 2004.
Chex Services employs personnel at the locations where it provides check cashing
services as well as corporate staff to support its operations. Due to the
terminated locations, Chex has reduced location staff needs going forward.
The terminated locations accounted for location expenses for the three and six
months ended June 30, 2003 of $753,746 and $1,510,642, respectively.
28
CORPORATE OPERATING EXPENSES
Corporate operating expenses include the corporate activities of Chex and
Collection Solutions and costs allocated from locations for its support of the
operating locations. Beginning June 7, 2004, the expenses also include those of
FFFC.
Corporate expenses for the three months ended June 30, 2004, were $1,416,888
compared to $937,882 for the three months ended June 30, 2003. Corporate
expenses for the six months ended June 30, 2004, were $2,307,814 compared to
$1,865,329 for the six months ended June 30, 2003. The expenses were comprised
as follows:
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Salaries and benefits $ 466,522 $ 479,541 $ 976,153 $ 1,002,518
Stock-based compensation 252,000 252,000
Accounting, legal and consulting 163,821 84,542 266,551 159,374
Travel and entertainment 61,231 53,513 122,288 134,531
Advertising 48,042 107,114 92,673 111,008
Allocated expenses from Equitex 59,000 39,000 91,000 117,000
Depreciation and amortization 49,342 47,639 96,433 93,714
Other 316,930 126,533 410,716 247,184
----------- ----------- ----------- -----------
$ 1,416,888 $ 937,882 $ 2,307,814 $ 1,865,329
=========== =========== =========== ===========
The primary reason for the increase in corporate operating expenses of $227,006
and $190,485 for the three and six months ended June 30, 2004 and 2003 was due
to increased costs for accounting, legal and consulting services and stock-based
compensation expense incurred in connection with the June 7, 2004, sale of Chex
to Seven Ventures, Inc. by Equitex, in addition to a reserve recorded of $65,000
on an account receivable in the three and six months ended June 30, 2004.
OTHER INCOME (EXPENSE)
Other expense for the three months ended June 30, 2004, was $339,809 compared to
$275,883 for the three months ended June 30, 2003. Interest expense for the
three months ended June 30, 2004 was $479,118 compared to $327,583 for the three
months ended June 30, 2003. The primary reasons for the increase was due to
interest expense of $87,260 related to the $5,000,000 note payable issued in
March 2004 and $100,000 expensed as interest related to the beneficial
conversion feature on the convertible promissory notes. Interest income
increased to $139,309 for the three months June 30, 2004, from $51,700 for the
three months ended June 30, 2003. The primary reasons for the increase were due
to the increase in notes receivable due from Equitex, as well as $50,000 of
interest income recorded in the current quarter related to the $2,000,000 note
receivable from iGames.
Other expenses for the six months ended June 30, 2004, was $548,902 compared to
$590,579 for the six months ended June 30, 2003. Interest expense for the six
months ended June 30, 2004, was $806,604 compared to $675,618 for the six months
ended June 30, 2003. The primary reasons for the increase are interest of
$110,274 related to the $5,000,000 note entered into in March 2004 and the
$100,000 expensed as interest related to the beneficial conversion feature on
the convertible promissory notes. Interest income increased to $257,702 for the
six months ended June 30, 2004, compared to $85,039 for the six months ended
June 30, 2003. The primary reasons for the increase were $96,111 related to the
$2,000,000 note receivable from iGames, as well as increased interest due to the
increase in notes receivable due from Equitex.
29
INCOME TAX EXPENSES
During the quarter ended June 30, 2004 management assessed the realization of
its recorded deferred tax assets. Based on this assessment, management
concluded, that it was more likely than not that existing deferred tax assets
would not be realizable, and determined a valuation allowance was required for
recorded deferred tax assets. Accordingly, the Company's valuation allowance was
increased by $473,000, which resulted in an increase to the provision for income
taxes of the same amount.
CONTRACTUAL OBLIGATIONS
In March 2004, Equitex closed on $5,000,000 of convertible promissory Notes (the
"Notes") with two financial institutions (the "Lenders"). The Notes carry an
interest rate of 7% per annum and have a 45-month term. Interest only payments
were due monthly beginning in April 2004 through June 2004. Beginning in July
2004, principal and interest payments amortize over the remaining 42-month
period. The Notes are senior to all other debt of the Company and are
collateralized by all assets of Chex as defined in the security agreement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the balance sheets and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
We believe that the following are some of the more critical policies that
currently affect our financial condition and results of operations:
o allowances for refundable fees and losses;
o returned checks;
o stock-based compensation;
o litigation
o income taxes, deferred taxes; and
o goodwill and other intangible assets
30
ALLOWANCES FOR REFUNDABLE FEES AND LOSSES
The allowance for losses is established through a provision for losses charged
to expense. Receivables are charged against the allowance for losses when
management believes that collectibility of principal is unlikely. The allowance
is an amount that management believes will be adequate to absorb estimated
losses on existing accounts, based on evaluation of the collectibility of the
accounts and prior loss experience. This evaluation also takes into
consideration such factors as current economic conditions that may affect the
borrower's ability to pay. While management uses the best information available
to make its evaluation, this estimate is susceptible to significant change in
the near term.
RETURNED CHECKS
We charge operations for a potential loss on returned checks in the period such
checks are returned, since ultimate collection of these items is uncertain.
Recoveries on returned checks are credited in the period when the recovery is
received.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standard ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, as amended by SFAS No., 148, defines a fair
value-based method of accounting for stock-based employee compensation plans and
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees, and encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. We have chosen to account for employee stock-based compensation plans
using the intrinsic-value method prescribed in Accounting Principles Board
Opinion No. 25 (APB No. 25), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations. Accordingly, employee compensation cost for stock is
measured as the excess, if any, of the estimated fair value of our stock at the
date of the grant over the amount an employee must pay to acquire the stock.
31
GOODWILL AND OTHER INTANGIBLE ASSETS
We have significant intangible assets on our balance sheet that include goodwill
and other intangibles related to the acquisition of Chex by Equitex. The
valuation and classification of these assets and the assignment of useful
amortization lives involve significant judgments and the use of estimates. The
testing of these intangibles under established accounting guidelines for
impairment also requires significant use of judgment and assumptions. Our assets
are tested and reviewed for impairment on an ongoing basis under the established
accounting guidelines. Changes in business conditions could potentially require
future adjustments to asset valuations.
Since the adoption of SFAS 142 on January 1, 2002, we no longer amortize
goodwill but instead test annually for impairment. If the carrying value of
goodwill exceeds its fair value, an impairment loss must be recognized. A
present value technique is often the best available technique with which to
estimate the fair value of a group of assets. The use of a present value
technique requires the use of estimates of future cash flows. These cash flow
estimates incorporate assumptions that marketplace participants would use in
their estimates of fair value as well as our own assumptions. These cash flow
estimates are based on reasonable and supportable assumptions and consider all
available evidence. However, there is inherent uncertainty in estimates of
future cash flow.
We evaluate long-lived assets whenever events or changes in circumstances
indicate that carrying the amount of an asset may not be recoverable. In
performing the review of recoverability, we estimate future cash flows expected
to result from the use of the asset and its eventual disposition. The estimates
of future cash flows, based on reasonable and supportable assumptions and
projections, require management's subjective judgments. The time periods for
estimating future cash flows is often lengthy, which increases the sensitivity
to assumptions made. Depending on the assumptions and estimates used, the
estimated future cash flows projected in the evaluation of long-lived assets can
vary within a wide range of outcomes. We consider the likelihood of possible
outcomes in determining the best estimate for future cash flows.
LITIGATION
We are currently involved in certain legal proceedings, as described in Note 7
to the condensed consolidated financial statements included in this report. We
apply the provisions of SFAS No. 5, Accounting for Contingencies to determine
the effects of litigation on the financial statements and related disclosures.
32
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements, and a deferred income tax liability or asset is recognized
for temporary differences between our financial statements and tax returns.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. The effect on deferred assets and
liabilities of a change in tax rate is recognized in the statement of operations
in the period that includes the enactment date.
A valuation allowance has been provided to reduce the deferred tax assets, based
on management's estimate of the assets realizibility. Realization of the
deferred tax asset is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. At June 30, 2004, Management believes it
is more likely than not that the deferred tax asset will not be realized.
Therefore, the Company has fully allowed for its deferred tax assets at June 30,
2004.
33
ITEM THREE
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates and a decline in the stock market. The
Company does not enter into derivatives or other financial instruments for
trading or speculative purposes. The Company has limited exposure to market risk
related to changes in interest rates. Other than its investment in Equitex
common stock, the Company does not currently invest in equity instruments of
public or private companies for business or strategic purposes.
The principal risks of loss arising from adverse changes in market rates and
prices to which the Company and its subsidiary are exposed relate to interest
rates on debt. The Company has both fixed and variable rate debt. Chex has
$14,936,179 and $10,931,147 of debt outstanding as of June 30, 2004 and December
31, 2003, respectively, of which $10,217,677 and $10,692,177 has been borrowed
at fixed rates ranging from 9% to 12% at June 30, 2004 and December 31, 2003,
respectively. This fixed rate debt is subject to renewal annually and is payable
upon demand with 90 days written notice by the debt holder. Additionally,
$4,355,395 of the total debt at June 30, 2004 has a fixed rate of 7% and
$300,000 of the total debt at June 30, 2003 has a fixed rate of 5%. Chex also
has $63,107 and $238,970 of variable rate debt at June 30, 2004 and December 31,
2003, respectively, owed to a bank. The lender presently charges interest at
0.5% to 0.75% over the prime rate.
As most of the Company's average outstanding indebtedness is renewed annually
and carries a fixed rate of interest, a change in interest rates is not expected
to have a material impact on the consolidated financial position, results of
operations or cash flows of the Company during the year ending December 31,
2004.
34
ITEM FOUR
DISCLOSURE CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures within 90 days prior to the filing of this
quarterly report. Based on that review and evaluation, the CEO and CFO have
concluded that the Company's current disclosure controls and procedures, as
designed and implemented, were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect the Company's internal controls subsequent to the date of their
evaluation. There were no significant material weaknesses identified in the
course of such review and evaluation and, therefore, the Company took no
corrective measures.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Refer to Note 7 of the Condensed Consolidated Financial Statements
Item 2.Changes in Securities
In the quarter ended June 30, 2004, we issued 8,700,000 unregistered shares of
our $.001 par value common stock in the transactions described below. For each
of the following transactions, we relied upon the exemptions from registration
provided by Section 4(6) or 4(2) of the Securities Act and Rule 506 promulgated
thereunder based upon (i) representations from each investor that it is an
accredited or sophisticated investor with experience in investing in securities
such that it could evaluate merits and risks related to our securities; (ii)
that no general solicitation of the securities was made by us; (iii) each
investor represented to us that it was acquiring the securities for its own
account and not with a view towards further distribution; (iv) the securities
issued were "restricted securities" as that term is defined under Rule 144
promulgated under the Securities Act; and (v) we placed appropriate restrictive
legends on the certificates representing the securities regarding the restricted
nature of these securities; and (vi) prior to the completion of the transaction,
each investor was informed in writing of the restricted nature of the
securities, provided with all information regarding the Company as required
under Rule 502 of Regulation D and were given the opportunity to ask questions
of and receive additional information from us regarding our financial condition
and operations. The shares were issued as follows:
On June 7, 2004, 7,700,000 shares of common stock were issued to Equitex, Inc.
pursuant to an Agreement and Plan of Merger and Reorganization dated as of April
5, 2004, by and among Seven Ventures, Inc., Seven Ventures Newco, Inc., and Chex
Services, Inc.
On July 29, 2004, 1,000,000 shares of common stock were issued to a group of
affiliates of MBC Global, Inc. upon the conversion of $100,000 ($0.10 per share)
of a $400,000 convertible promissory note.
35
Item 3.Defaults upon Senior Securities
None.
Item 4.Submission of Matters to a Vote of Security Holders
None.
Item 5.Other Information
None.
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 - CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 - CFO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 - CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 - CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K during the quarter ended June 30, 2004
On April 15, 2004, the Company filed an 8-K disclosing the definitive
agreement entered into between Seven Ventures, Inc., Equitex, Inc.,
and Chex Services, Inc.
On June 22, 2004, the Company filed an 8-K disclosing change in
control of the registrant and the acquisition of Chex Services, Inc.
36
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.
FastFunds Financial Corporation
(Registrant)
Date: August 23, 2004 By: /s/ Graham Newall
-------------------------------------
Graham Newall
Chief Executive Officer
Date: August 23, 2004 By: /s/ Ijaz Anwar
-------------------------------------
Ijaz Anwar
Chief Financial Officer
37