UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
------------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF
1934
For the transition period from ____________________ to _____________________
Commission file number 000-50054
USA Technologies, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2679963
------------ ----------
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) Identification No.)
100 Deerfield Lane, Suite 140, Malvern, Pennsylvania 19355
- ---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(610) 989-0340 (Registrant's telephone number, including area code)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of October 31, 2004, there were 370,371,440 shares of Common Stock, no par
value, outstanding.
USA TECHNOLOGIES, INC.
INDEX
PAGE NO.
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2004
and June 30, 2004 2
Consolidated Statements of Operations - Three months ended
September 30, 2004 and 2003 3
Consolidated Statement of Shareholders' Equity - Three months
ended September 30, 2004 4
Consolidated Statements of Cash Flows - Three months ended
September 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Part II - Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 6. Exhibits 16
Signatures 17
Certifications
1
USA Technologies, Inc.
Consolidated Balance Sheets
SEPTEMBER 30, JUNE 30,
2004 2004
(UNAUDITED)
------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 626,639 $ 3,019,214
Accounts receivable, less allowance for uncollectible accounts
of $288,000 at September 30, 2004 and $240,000 at June 30, 2004 1,245,297 1,075,858
Inventory 1,896,606 1,707,684
Prepaid expenses and other current assets 261,800 234,448
Subscriptions receivable -- 300,000
Investment 57,617 68,636
Assets held for sale 42,300 46,200
------------------------------
Total current assets 4,130,259 6,452,040
Property and equipment, less accumulated depreciation of $2,979,707
at September 30, 2004 and $2,892,679 at
June 30, 2004 609,829 602,953
Intangibles, less accumulated amortization of $1,846,318 at
September 30, 2004 and $1,537,168 at June 30, 2004 10,522,682 10,831,832
Goodwill 7,663,208 7,985,208
Other assets 10,244 8,544
------------------------------
Total assets $ 22,936,222 $ 25,880,577
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,934,987 $ 2,929,491
Accrued expenses 1,414,801 1,569,368
Current obligations under long-term debt 136,039 240,764
Convertible Senior Notes 426,520 401,887
------------------------------
Total current liabilities 4,912,347 5,141,510
Convertible Senior Notes, less current portion 6,930,093 6,617,987
Long-term debt, less current portion 6,865 12,418
------------------------------
Total liabilities 11,849,305 11,771,915
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares--1,800,000
Series A Convertible Preferred--Authorized shares - 900,000 Issued and
outstanding shares--522,742 at September 30, 2004
and June 30, 2004 (liquidation preference of $12,296,657 at
September 30, 2004) 3,702,856 3,702,856
Common Stock, no par value:
Authorized shares--475,000,000
Issued and outstanding shares--359,785,148 at September 30,
2004 and 351,654,131 at June 30, 2004 111,265,654 110,635,743
Accumulated other comprehensive income 21,230 32,249
Accumulated deficit (103,902,823) (100,262,186)
------------------------------
Total shareholders' equity 11,086,917 14,108,662
------------------------------
Total liabilities and shareholders' equity $ 22,936,222 $ 25,880,577
==============================
See accompanying notes
2
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
-------------------------------
Revenues:
Equipment sales $ 765,346 $ 1,286,478
License and transaction fees 267,232 319,649
Product sales and other -- 74,481
-------------------------------
Total revenues 1,032,578 1,680,608
Cost of sales (including amortization of software
development costs of $0 and $332,887 for the three months
ended September 30, 2004 and 2003, respectively) 902,044 1,082,163
-------------------------------
Gross profit 130,534 598,445
Operating expenses:
General and administrative 1,442,178 1,501,769
Compensation 1,300,022 5,703,198
Depreciation and amortization 396,178 394,959
Loss on debt modification -- 277,297
-------------------------------
Total operating expenses 3,138,378 7,877,223
-------------------------------
Operating loss (3,007,844) (7,278,778)
Other income (expense):
Interest income 10,537 7,729
Gain on investment -- 31,361
Interest expense:
Coupon or stated rate (296,591) (265,491)
Non-cash interest and amortization of debt discount (346,739) (1,797,905)
-------------------------------
Total interest expense (643,330) (2,063,396)
-------------------------------
Total other income (expense) (632,793) (2,024,306)
-------------------------------
Net loss (3,640,637) (9,303,084)
Cumulative preferred dividends (392,057) (393,369)
-------------------------------
Loss applicable to common shares $ (4,032,694) $ (9,696,453)
===============================
Loss per common share (basic and diluted) $ (0.01) $ (0.04)
===============================
Weighted average number of common shares outstanding (basic and
diluted) 355,719,640 249,989,212
===============================
See accompanying notes.
3
USA Technologies, Inc.
Consolidated Statement of Shareholders' Equity
(Unaudited)
SERIES A ACCUMULATED
CONVERTIBLE OTHER
PREFERRED COMMON COMPREHENSIVE ACCUMULATED
STOCK STOCK INCOME DEFICIT TOTAL
-----------------------------------------------------------------------------------
Balance, June 30, 2004 $ 3,702,856 $ 110,635,743 $ 32,249 $(100,262,186) $ 14,108,662
Exercise of 677,344 Common Stock
Warrants at $0.15 per share, net -- 98,507 -- -- 98,507
Issuance of 50,000 shares of Common
Stock from the conversion of 12%
Senior Notes -- 10,000 -- -- 10,000
Issuance of 50,000 shares of Common
Stock in exchange for professional
services -- 8,500 -- -- 8,500
Issuance of 8,053,673 shares of Common
Stock to an accredited investor at
varying prices per share, less
issuance costs of $78,550 -- 834,904 -- -- 834,904
Cancellation of 700,000 shares of Common
Stock in connection with the Bayview
acquisition -- (322,000) -- -- (322,000)
Comprehensive loss:
Net loss -- -- -- (3,640,637) (3,640,637)
Unrealized loss on investment -- -- (11,019) -- (11,019)
-------------
Total comprehensive loss (3,651,656)
---------------------------------------------------------------------------------
Balance, September 30, 2004 $ 3,702,856 $ 111,265,654 $ 21,230 $(103,902,823) $ 11,086,917
=================================================================================
See accompanying notes.
4
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
--------------------------
OPERATING ACTIVITIES
Net loss $(3,640,637) $(9,303,084)
Adjustments to reconcile net loss to net cash used in operating activities:
Charges incurred in connection with the issuance of Common Stock,
Common Stock Purchase Warrants and Senior Notes 8,500 4,692,000
Interest expense on Senior Notes paid through the issuance of Common
Stock -- 363,831
Interest amortization related to Senior Notes and Convertible 346,739 1,434,074
Debentures
309,150 614,105
Amortization
Depreciation 87,028 143,356
Loss on debt modification -- 277,297
Gain on sale of investment -- (31,361)
Changes in operating assets and liabilities:
Accounts receivable (169,439) (1,051,221)
Inventory (188,922) (453,563)
Prepaid expenses and other assets (48,852) 4,039
Accounts payable 5,496 231,650
Accrued expenses (154,567) 351,162
--------------------------
Net cash used in operating activities (3,445,504) (2,727,715)
INVESTING ACTIVITIES
Purchase of property and equipment (93,904) (105,826)
Cash paid in connection with Bayview acquisition -- (727,969)
Cash received from the sale of assets held for sale 23,700 --
--------------------------
Net cash used in investing activities (70,204) (833,795)
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock and
exercise of Common Stock Warrants 933,411 4,933,355
Collection of subscriptions receivable 300,000 1,002,163
Repayment of long-term debt (110,278) (140,043)
--------------------------
Net cash provided by financing activities 1,123,133 5,795,475
--------------------------
Net increase (decrease) in cash and cash equivalents (2,392,575) 2,233,965
Cash and cash equivalents at beginning of period 3,019,214 2,384,455
--------------------------
Cash and cash equivalents at end of period $ 626,639 $ 4,618,420
==========================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 299,848 $ 249,423
==========================
Subscriptions receivable $ -- $ 406,687
==========================
Conversion of Senior Notes to Common Stock $ 10,000 $ 1,500,167
==========================
Beneficial conversion feature related to Senior Notes $ -- $ 1,796,607
==========================
Prepaid stock expenses through issuance of Common Stock $ -- $ 105,000
==========================
Issuance (cancellation) of Common Stock in connection with the Bayview
acquisition $ (322,000) $ 9,278,200
==========================
Other receivable for sale of Jubilee investment $ -- $ 395,249
==========================
See accompanying notes.
5
USA Technologies, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
Interim Financial Information
The accompanying unaudited consolidated financial statements of USA
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and therefore should be read in conjunction
with the Company's Annual Report on Form 10-KSB for the year ended June 30,
2004. In the opinion of management, all adjustments considered necessary,
consisting of normal recurring adjustments, have been included. Operating
results for the three-month period ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2005. The balance sheet at June 30, 2004 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended June
30, 2004.
Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Stitch Networks Corporation ("Stitch").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or market
and consists of finished goods and packaging materials.
6
USA Technologies, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
1. Accounting Policies (Continued)
Loss Per Common Share
Basic earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period.
Diluted earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period
plus the dilutive effect (unless such effect is anti-dilutive) of equity
instruments. No exercise of stock options, purchase rights, stock purchase
warrants, or the conversion of senior notes, debentures, preferred stock, or
cumulative preferred dividends was assumed during the periods presented because
the assumed exercise of these securities would be anti-dilutive.
Accounting For Stock Options
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), as amended by Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure", provides
companies with a choice to follow the provisions of FAS 123 in determination of
stock-based compensation expense or to continue with the provisions of APB No.
25, "Accounting for Stock Issued to Employees and Related Interpretations in
Accounting for Stock-Compensation Plans" ("APB 25") and the related FASB
Interpretation No. 44. The Company has elected to follow the provisions of APB
25. Under APB 25, if the exercise price of the Company's stock options granted
to employees and directors equals or exceeds the market price of the underlying
Common Stock on the date of grant, no compensation expense is recognized. All
stock options granted by the Company have been at prices equal to the market
price of the Company's Common Stock on the date of grant. Under FAS 123, the
fair value of stock options is estimated at the date of grant using an option
pricing model such as Black-Scholes and the value determined is amortized to
expense over the option vesting period.
There were no stock options granted during the quarter ended September 30, 2004.
The pro-forma disclosures required by FAS 148 have not been included as the
pro-forma compensation expense related to the vesting of options during the
quarter ended September 30, 2004 was not considered to be material and there was
no pro-forma compensation expense during the quarter ended September 30, 2003.
7
USA Technologies, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
2. Acquisition of Bayview Technology Group, LLC ("Bayview")
On July 11, 2003, the Company acquired substantially all of the assets of
Bayview. The initial acquisition cost was $10,030,894, which principally was
comprised of the issuance of 20,000,000 shares of restricted Common Stock valued
at $9,200,000 and a cash payment of $631,247. The value of the 20,000,000 shares
of Common Stock was determined based on the average market price of the
Company's Common Stock over the two-day period before and after the definitive
agreement date of July 11, 2003. The purchase price also included acquisition
related costs of $199,647.
Of the 20,000,000 shares issued to Bayview, 700,000 shares were placed into an
escrow account to be issued to one owner of Bayview if certain Bayview stock
options were exercised. This agreement called for these shares to be returned to
the Company if the Bayview stock options were not exercised. During the
three-month period ending September 30, 2004, the Company determined that the
Bayview stock options would not be exercised and the shares previously issued
into escrow would be cancelled. Therefore, the Company decreased the purchase
price by $322,000 due to the return and cancellation of the 700,000 shares held
in escrow. The decrease in the purchase price resulted in a reduction of
goodwill and shareholders' equity of $322,000 in the three months ended
September 30, 2004.
The following table summarizes the final purchase price allocation to reflect
the fair values of the assets acquired and liabilities assumed at the date of
acquisition.
Current assets $ 7,628
Property and equipment 244,704
Intangible assets 9,449,000
Goodwill 7,562
----------
Total assets acquired $9,708,894
==========
The acquisition was accounted for using the purchase method and, accordingly,
the results of operations of Bayview have been included in the accompanying
consolidated statements of operations since the date of acquisition. Results of
operations of the Company for three months ended September 30, 2003 would not
have been significantly different than reported had the acquisition taken place
July 1, 2003 as the acquisition occurred on July 11, 2003.
8
USA Technologies, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
3. Senior Notes
As of September 30, 2004, the outstanding balance of Senior Notes was
$7,356,613. This is comprised of notes with a face amount of $9,685,840 less
unamortized debt discount and other issuance costs of $2,329,227.
Debt discount and other issuance costs associated with the Senior Notes are
amortized to interest expense over the remaining life of the Senior Notes. Upon
conversion of Senior Notes into Common Stock, unamortized costs relating to the
notes converted are charged to interest expense. Total charges to interest for
debt discount and other issuance costs were $346,739 and $1,434,074 for the
three months ended September 30, 2004 and 2003, respectively.
During the three months ended September 30, 2004 and 2003, Senior Notes totaling
$10,000 and $1,500,167, respectively, converted into 50,000 and 7,500,834
shares, respectively, of the Company's Common Stock.
4. Common Stock
On August 6, 2004, the Company entered into a Common Stock purchase agreement
(the "Common Stock Agreement") with an accredited investor to purchase shares of
the Company's Common Stock, provided that the aggregate purchase price does not
exceed $7,500,000. Under the Common Stock Agreement, the Company has the right
at any time to require the investor to purchase Common Stock from the Company at
the lower of: (i) $0.30 per share; or (ii) 90% of the closing bid price per
share on the date prior to the date of the delivery by the Company to the
investor of notice of his obligation to purchase. The Company can require the
investor to purchase shares under the Common Stock Agreement only if the shares
have been registered by the Company for resale under the Act. Such shares were
registered effective August 13, 2004. Additionally, the shares are only
available for purchase for a period of one year from the date the shares are
registered under the Act. During any calendar month, the investor cannot be
required by the Company to purchase Common Stock for an aggregate purchase price
in excess of $700,000. The Company has registered 35,000,000 shares for resale
by the investor and the Company has the right in the future, if necessary, to
register additional shares in order to ensure that a sufficient number of shares
are available for purchase by the investor. The Company paid the investor a due
diligence fee of $45,000 in connection with this transaction. During the quarter
ended September 30, 2004, the Company issued 8,053,673 shares of Common Stock
under the Common Stock Agreement for total gross proceeds of $913,454. In
addition to the due diligence fee, the Company incurred $33,550 of other stock
issuance costs during the three months ended September 30, 2004.
9
USA Technologies, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
5. Subsequent Events
From October 1, 2004 to November 12, 2004, the Company issued an additional
12,786,797 shares of Common Stock under the Common Stock Agreement (Note 3) for
total gross proceeds of $1,209,166.
Senior Notes outstanding, which are scheduled to mature on December 31, 2004,
have an aggregate face amount of $451,152 and are convertible into shares of
Common Stock at $0.40 per share. In October 2004, the holders of these Senior
Notes were granted the option, through December 31, 2004, to extend the maturity
of the Senior Notes to December 31, 2006 in exchange for reducing the conversion
rate to $0.15 per share.
Through June 30, 2004, the Company issued warrants to purchase approximately
3,700,000 shares of Common Stock to holders of the Senior Notes who chose to
receive quarterly interest on their Notes in shares of Common Stock, in lieu of
cash payment of interest ("Original Interest Warrants"). These warrants were
exercisable at $0.20 per share through August 30, 2004. In June 2004, the
Company issued additional warrants to the Senior Note holders who chose to
receive interest in shares of Common Stock ("Additional Interest Warrants"). One
additional warrant was issued for each warrant previously issued with an
exercise price of $0.20 per share through December 31, 2004.
The Company reduced the exercise price of the Original Interest Warrants to
$0.15 per share and extended their expiration through October 29, 2004. In
addition, for each Original Interest Warrant exercised through October 4, 2004,
the expiration date of one Additional Interest Warrant was extended to June 30,
2005 from December 31, 2004 and the exercise price was permanently reduced to
$0.15 per share. The Company also reduced the exercise price of the Additional
Interest Warrants to $0.15 per share through November 30, 2004. Through October
29, 2004, Original Interest Warrants and Additional Interest Warrants were
exercised at $0.15 per share to purchase approximately 750,000 shares of Common
Stock. Such exercises generated gross proceeds of approximately $113,000.
As of October 25, 2004, the Company reduced the exercise price of the Common
Stock warrants issued in conjunction with the 2004-A Private Placement Offering
of Common Stock to $0.10 per share, from $0.20 per share, through November 30,
2004. During October 2004, the Company received $150,000 upon the exercise of
1,500,000 of these Common Stock warrants at an exercise price of $0.10 per
share.
On October 29, 2004, the Board of Directors approved the 2004-B Stock
Compensation Plan to allow up to 500,000 shares of Common Stock to be available
for issuance to future or current employees, directors or consultants of the
Company.
10
USA Technologies, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
4. Subsequent Events (Continued)
On November 3, 2004, the Company authorized the issuance of up to $2,500,000 of
Senior Notes convertible into shares of Common Stock at $0.10 per share and
maturing on June 30, 2007. Interest is payable quarterly at a rate of 10% per
annum. Participation in the Senior Note offering will be offered to the holders
of the Additional Interest Warrants, holders of the warrants issued in
conjunction with the 2004-A Private Placement Offering, and to an accredited
investor and current warrant holder. As of November 3, 2004, these warrants were
for the purchase of approximately 18,800,000 shares of Common Stock. If any of
the warrant holders participate in the Senior Note offering, all of their
above-mentioned warrants will be cancelled. If a warrant holder does not
participate in the Senior Note offering, their warrants will remain in full
force and effect in accordance with their terms.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
For this purpose, forward looking statements are any statements contained herein
that are not statements of historical fact and include, but are not limited to,
those preceded by or that include the words, "believes," "expects,"
"anticipates," or similar expressions. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The
forward looking information is based on various factors and was derived using
numerous assumptions. Important factors that could cause the Company's actual
results to differ materially from those projected, include, for example (i) the
ability of the Company to generate sufficient sales to generate operating
profits, or to sell products at a profit, (ii) the ability of the Company to
raise funds in the future through sales of securities, including but not limited
to the exercise of outstanding options and warrants, (iii) whether the Company
is able to enter into binding agreements with third parties to assist in product
or network development, (iv) the ability of the Company to commercialize its
developmental products including the e-Port(TM), or if actually commercialized,
to obtain commercial acceptance thereof, (v) the ability of the Company to
compete with its competitors to obtain market share, (vi) the ability of the
Company to obtain sufficient funds through operations or otherwise to repay its
debt obligations, including but not limited to Senior Notes, or to fund
development and marketing of its products (vii) the ability of the Company to
obtain approval of its pending patent applications, or (viii) the ability of the
Company to satisfy its trade obligations included in accounts payable and
accrued liabilities. Although the Company believes that the forward looking
statements contained herein are reasonable, it can give no assurance that the
Company's expectations will be met.
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 2004 were $1,032,578 compared
to $1,680,608 for the corresponding three-month period in the previous fiscal
year. This $648,030 or 39% decrease was primarily due to a decrease in equipment
sales and the termination of the Kodak Vending Placement Agreement. The $521,132
decrease in equipment sales was primarily due to a decrease in sales of
approximately $517,000 of energy conservation equipment and a decrease of
approximately $72,000 in e-Port vending equipment sales, offset by an increase
of approximately $79,000 in business center equipment sales. Of the $517,000
decrease is energy conservation equipment, $432,000 relates to one large
customer order of energy Miser(TM) products during the three month period ended
September 30, 2003. There was no corresponding equipment sale of this magnitude
in the first quarter of the current fiscal year. License and transaction fees
decreased by $52,417 primarily due to a decrease of approximately $131,000 in
fees due to the termination of the Kodak agreement and a decrease of
approximately $24,000 in fees from our business centers, offset by an increase
in our vending fees of approximately $96,000. Product sales decreased $74,481
due to the termination of the Kodak vending placement agreement.
During the first quarter 2004, the next generation internal vending miser,
VM2IQ, was not available for sale to our customers. This smaller and more
affordable internal vending miser product became available for sale to our
customers during the second quarter. The Company is in negotiations with a
Fortune 50 company that has conducted independent testing of this internal
vending miser product. The Company anticipates receiving a contract with this
potential customer to provide internal vending misers for installation
throughout the United States--including installations at outlets of a major
retailer which has thousands of locations in the United States and abroad. The
Company anticipates that installations by the major company would commence
during the third quarter of the current fiscal year. The Company can make no
assurances about being successful in executing this contract or how many
internal vending misers would ultimately be purchased by the potential customer
under the contract. If the Company is successful in selling vending misers under
the contract, the impact upon revenues could be material.
12
Cost of sales for the period consisted of equipment costs of approximately
$442,000 and network and transaction related costs of $460,000. The decrease in
cost of sales of $180,119 or 17% over the prior year period was due to the fact
that software development costs were fully amortized as of June 30, 2004,
resulting in a decrease of approximately $333,000. Additionally, equipment costs
decreased by approximately $155,000 due to the reduction in energy and vending
equipment sales. These two decreases were offset by an increase of approximately
$308,000 of network and transaction related costs. This increase was primarily a
result of approximately $94,000 related to a net increase in the number of
vending and business center transactions processed, approximately $20,000
related to an increase in wireless service costs due to an increase in the
number of networked e-Port vending devices, and approximately $224,000 related
to processing customer credit card transactions. This increase was slightly
offset by a reduction of approximately $56,000 of Kodak vending placement
agreement related costs.
Gross profit for the three months ended September 30, 2004 was $103,534,
compared to gross profit of $598,445 for the corresponding three-month period in
the previous fiscal year. This 78% decrease is due to the combined effect of the
decrease in energy and vending equipment sales, the termination of the Kodak
vending placement agreement and the increase in transaction processing costs.
Compensation expense of $1,300,022 decreased by $4,403,176 or 77% primarily due
to the issuance of 10,500,000 shares of Common Stock to the Company's Chief
Executive Officer in connection with the amendment of his employment agreement
during the corresponding period in the prior fiscal year. This was a one-time,
non-cash payment valued at $4,620,000. This decrease was offset by an increase
in salaries expense of approximately $219,000 due to an increase in the number
of full-time employees.
During the first quarter of the prior fiscal year, the Company incurred a charge
of $277,297 related to the modification of debt terms for certain 2003 and 2004
12% Convertible Senior Notes. This charge represents the unamortized debt
discount that remained on the Senior Notes that were scheduled to mature in
December 2003 and 2004, and whose terms were substantially modified when the
note holders agreed to extend the maturity date of their notes in exchange for a
reduction in the conversion rate on the note. There was no such comparable
charge in the quarter ended September 30, 2004.
Interest expense decreased by $1,420,006 or 69% due to a decrease in non-cash
charges of $1,451,167 that related to accelerated interest charges for the
unamortized debt discount and other issuance costs on the 12% Senior Notes that
were converted into Common Stock during the first quarter of the prior fiscal
year. Conversions of Senior Notes totaled $1,500,167 during the quarter ended
September 30, 2003 whereas only $10,000 of Senior Notes were converted during
the first quarter of the current fiscal year.
The quarter ended September 30, 2004 resulted in a net loss of $3,640,637
(approximately $0.8 million of non-cash charges) compared to a net loss of
$9,303,084 (approximately $7.5 million of non-cash charges) for the quarter
ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 2004, net cash of $3,445,504 was used
by operating activities, primarily due to the net loss of $3,640,637 offset by
non-cash charges aggregating to $751,417 for transactions involving issuing
Common Stock for services, depreciation and amortization of assets, and
amortization of debt discount. In addition, the Company's net operating assets
increased by $556,284 primarily due to increases in inventories and accounts
receivable. The Company's working capital decreased during the three months
ended September 30, 2004 due primarily to cash utilized to fund operations.
Proceeds from financing activities for the three months ended September 30, 2004
provided funds to support cash used in operating and investing activities. Net
proceeds of $1,123,133 were realized from the sale of Common Stock, the exercise
of Common Stock Warrants and the collection of Common Stock subscriptions
receivable, offset by cash used to repay long-term debt.
13
The Company has incurred losses since inception. Cumulative losses through
September 30, 2004 amounted to approximately $101,200,000. The Company has
raised capital through equity and debt offerings to fund operations.
During the year ended June 30, 2004, cash used in operating activities was
approximately $1,050,000 per month. These cash flows were impacted by working
capital increases that were disproportionate to the increase in revenues. The
Company is in the process of improving its management of working capital,
specifically as it relates to controllable costs, accounts receivable,
inventory, accounts payable and accrued expenses. Excluding the working capital
requirements related to the Bayview acquisition (approximately $1,200,000) and
existing operations (approximately $800,000), cash used in operating activities
would have been approximately $850,000 per month in fiscal year 2004. Using that
as a basis for estimating cash requirements for the year ending June 30, 2005
(which assumes a static level of revenues year over year), cash requirements for
fiscal year 2005, including requirements for capital expenditures and repayment
of long-term debt, would be approximately $10,500,000. Through the funding
sources outlined below and by improving working capital, the Company believes it
has a plan to obtain funding for operating activities through June 30, 2005. As
of September 30, 2004, the Company had approximately $627,000 of cash and cash
equivalents on hand. From the funding sources mentioned below, the Company has
raised $1,361,259 from October 1, 2004 through November 12, 2004.
On August 6, 2004, the Company entered into a Common Stock Purchase Agreement
with an accredited investor to purchase shares of the Company's Common Stock,
provided that the aggregate purchase price does not exceed $7,500,000. Under
this agreement, the Company has the right at any time to require the investor to
purchase Common Stock from the Company at the lower of: (i) $0.30 per share; or
(ii) 90% of the closing bid price per share on the date prior to the date of the
delivery by the Company to the investor of notice of his obligation to purchase.
The Company can require the investor to purchase shares under this agreement
only if the shares have been registered by the Company for resale under the Act.
35,000,000 shares were registered, effective August 13, 2004. Additionally, the
shares are only available for purchase for a period of one year from the date
the shares are registered under the Act. During any calendar month, the investor
cannot be required by the Company to purchase Common Stock for an aggregate
purchase price in excess of $700,000. From July 1, 2004 through November 12,
2004, the Company issued 20,840,470 shares under this agreement for total gross
proceeds of $2,122,620.
Through October 29, 2004, Original Interest Warrants and Additional Interest
Warrants were exercised at $0.15 per share to purchase approximately 750,000
shares of Common Stock. Such exercises generated gross proceeds of approximately
$113,000.
The Company has also reduced the exercise price of the Common Stock warrants
issued in conjunction with the 2004-A Private Placement Offering of Common Stock
to $0.10 per share, from $0.20 per share, through November 30, 2004. During
October 2004, the Company received $150,000 upon the exercise of 1,500,000 of
these Common Stock warrants at an exercise price of $0.10 per share.
On November 3, 2004, the Company authorized the issuance of up to $2,500,000 of
Senior Notes convertible into shares of Common Stock at $0.10 per share and
maturing on June 30, 2007. Interest is payable quarterly at a rate of 10% per
annum. Participation in the Senior Note offering will be offered to the holders
of the Additional Interest Warrants, holders of the warrants issued in
conjunction with the 2004-A Private Placement Offering, and to an accredited
investor and current warrant holder. As of November 3, 2004, these warrants were
for the purchase of approximately 18,800,000 shares of Common Stock. If any of
the warrant holders participate in the Senior Note offering, all of their
above-mentioned warrants will be cancelled. If a warrant holder does not
participate in the Senior Note offering, their warrants will remain in full
force and effect in accordance with their terms.
14
Other sources of capital include (i) future exercises of warrants for which
there are "in the money" warrants with exercise prices below $0.13 per share
that would yield approximately $550,000 to $800,000 and (ii) the capital
markets, which the Company believes are available to raise funding as needed
given its current product offerings and the markets the Company addresses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risks for interest rate changes is not
significant. Interest rates on its Senior Notes and long-term debt are generally
fixed and its investments in cash equivalents and other securities are not
significant. Market risks related to fluctuations of foreign currencies are not
significant and the Company has no derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The principal executive officer and principal financial officer have evaluated
the Company's disclosure controls and procedures as of September 30, 2004. Based
on this evaluation, they conclude that the disclosure controls and procedures
effectively ensure that the information required to be disclosed in our filings
and submissions under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in internal controls.
There have been no changes during the quarter ended September 30, 2004 in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended September 2004, the Company issued to Steve Illes
8,053,673 shares of Common Stock for an aggregate purchase price of $913,454
pursuant to a Stock Purchase Agreement between Mr. Illes and the Company. The
offer and sale of the shares were exempt from registration under Rule 506
promulgated under Section 4(2) of the Act. Mr. Illes is an accredited investor,
made appropriate investment representations, was afforded access to all public
filings and all other information that USA could reasonably obtain. We have
agreed to register the shares for resale under the Act.
During the quarter ended September 30, 2004, the Company received proceeds of
$98,503 from the exercise of Common Stock warrants at $.15 per share, resulting
in the issuance of 677,344 shares of Common Stock. We have agreed to register
the shares for resale under the Act. The securities were offered and sold under
the exemption from registration set forth in Rule 506 promulgated under Section
4(2) of the Act. All of the warrant holders were accredited investors and there
was no general solicitation or advertising.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults on any senior securities. However, on August 1, 2004, an
additional $392,057 of dividends accrued on our cumulative Series A Convertible
Preferred Stock. The total accrued and unpaid dividends on our Series A
Convertible Preferred Stock as of September 30, 2004 was $ 7,069,237. The
dividend accrual dates for our Preferred Stock are February 1 and August 1. The
annual cumulative dividend on our Preferred Stock is $1.50 per share.
15
ITEM 6. EXHIBITS
31.1 Certification by the Chief Executive Officer pursuant to 18 USC Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification by the Chief Financial Officer pursuant to 18 USC Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certifications by the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USA TECHNOLOGIES, INC.
Date: November 15, 2004 /s/ George R. Jensen, Jr.
-----------------------------------------
George R. Jensen, Jr.,
Chairman, Chief Executive Officer
Date: November 15, 2004 /s/ Mary W. Young
-----------------------------------------
Mary W. Young, Chief Financial Officer
17