SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-QSB
(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, 1998
-------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 33-70992
USA Technologies, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2679963
- --------------------------------------------- ----------------
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) Identification No.)
200 Plant Avenue, Wayne, Pennsylvania 19087
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, area code first. (610)-989-0340
--------------
Check whether the Registrant has (1) 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 _____
As of November 4, 1998, there were 40,250,852 shares of Common Stock, no par
value, and 682,641 shares of Series A Convertible Preferred Stock, no par value,
outstanding.
USA TECHNOLOGIES, INC.
INDEX
PAGE NO.
--------
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1998 and June 30, 1998 1
Consolidated Statements of Operations - Three months ended 2
September 30, 1998 and 1997
Consolidated Statement of Shareholders' Equity - 3
September 30, 1998
Consolidated Statements of Cash Flows - Three months ended 4
September 30, 1998 and 1997
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II - Other Information 10
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 11
Item 6. Reports on Form 8-K 11
USA Technologies, Inc.
Consolidated Balance Sheets
(Unaudited)
September 30, June 30,
1998 1998
-------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 142,529 $ 324,824
Accounts receivable less allowance 659,950 222,743
for uncollectible accounts of $19,155 at September
30, 1998 (unaudited) and $23,764 at June 30, 1998
Inventory 729,562 436,971
Stock subscriptions receivable -- 19,875
Prepaid expenses and deposits 22,246 20,515
------------ ------------
Total current assets 1,554,287 1,024,928
Property and equipment, at cost, net of accumulated 151,293 151,906
depreciation of $300,347 at September 30, 1998
(unaudited) and $291,084 at June 30, 1998
Other assets 10,250 10,250
------------ ------------
Total assets $ 1,715,830 $ 1,187,084
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,556,942 $ 576,787
Accrued expenses 420,234 430,643
Current obligations under capital leases 19,242 22,810
------------ ------------
Total current liabilities 1,996,418 1,030,240
Obligations under capital leases, less current portion 134 1,669
------------ ------------
Total liabilities 1,996,552 1,031,909
Shareholders' equity (deficit):
Preferred Stock, no par value:
Series A Convertible Preferred: 4,737,588 4,538,114
Authorized shares - 1,200,000; issued and outstanding shares -
669,066 at September 30, 1998 (unaudited) and 618,236 at June
30, 1998 (liquidation preference of $ 9,619,644 at September
30, 1998 - unaudited)
Series B Equity Participating Preferred: -- --
Authorized shares - 200,000; none issued and outstanding at
September 30, 1998
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 40,229,122 at 11,275,409 11,223,213
September 30, 1998 (unaudited) and 40,163,837
at June 30, 1998
Accumulated deficit (16,293,719) (15,606,152)
------------ ------------
Total shareholders' equity (deficit) (280,722) 155,175
------------ ------------
Total liabilities and shareholders' equity $ 1,715,830 $ 1,187,084
============ ============
See accompanying notes.
1
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended
September 30,
1998 1997
------------ -------------
Revenues:
Equipment Sales $ 712,294 $ 310,311
License and transaction fees 80,165 49,102
------------ ------------
Total revenues 792,459 359,413
Expenses:
Cost of equipment sales 623,178 292,640
General and administrative 453,420 396,795
Compensation 339,480 307,217
Depreciation and amortization 23,082 25,497
------------ ------------
Total expenses 1,439,160 1,022,149
------------ ------------
Operating loss (646,701) (662,736)
Other income (expense):
Interest income 2,509 4,531
Interest expense (1,411) (2,319)
Joint Venture activities (24,878) --
------------ ------------
Total other income (expense) (23,780) 2,212
------------ ------------
Net loss (670,481) (660,524)
Cumulative preferred dividends and other
Adjustments (503,420) (903,274)
============ ============
Loss applicable to common shares $ (1,173,901) $ (1,563,798)
============ ============
Loss per common share (basic and diluted) $ (0.03) $ (0.06)
============ ============
Weighted average number of common shares outstanding (basic
and diluted) 40,229,122 27,287,669
============ ============
See accompanying notes.
2
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
(Unaudited)
Series A
Convertible
Preferred Common Accumulated
Stock Stock Deficit Total
------------ ------------ ------------ ------------
Balance, June 30, 1998 $ 4,538,114 $ 11,223,213 $(15,606,152) $ 155,175
Issuance of 500 shares of Common Stock to an
employee as compensation -- 100 -- 100
Conversion of 4,770 shares of Convertible
Preferred Stock to 47,700 shares of Common
Stock (35,011) 35,011 -- --
Conversion of $17,085 of cumulative preferred
dividends into 17,085 shares of Common
Stock -- 17,085 (17,085) --
Issuance of 55,600 shares (27.8 units) of
Convertible Preferred Stock at $5.00 per
share in connection with the 1998-B
Private Placement, net of offering costs
234,485 -- -- 234,485
Net loss -- -- (670,481) (670,481)
------------ ------------ ------------ ------------
Balance, September 30, 1998 $ 4,737,588 $ 11,275,409 $(16,293,719) $ (280,722)
============ ============ ============ ============
See accompanying notes.
3
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended September 30,
1998 1997
--------- ---------
Operating activities
Net loss $(670,481) $(660,524)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation charges incurred in
connection with the issuance of Common Stock
and repricing of Common Stock options 100 14,355
Depreciation and amortization 23,082 25,497
Changes in operating assets and liabilities:
Accounts receivable (437,207) (86,102)
Inventory (306,410) (14,937)
Prepaid expenses, deposits, and other assets (1,731) (10,290)
Accounts payable 980,155 (61,761)
Accrued expenses (10,410) 88,055
--------- ---------
Net cash used in operating activities (422,902) (705,707)
Investing activities
Purchase of property and equipment (8,650) --
--------- ---------
Net cash used in investing activities (8,650) --
Financing activities
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants 19,875 381,979
Net proceeds from issuance of Convertible
Preferred Stock 234,485 --
Repayment of principal on capital lease obligations (5,103) (4,195)
--------- ---------
Net cash provided by financing activities 249,257 377,784
--------- ---------
Net decrease in cash and cash equivalents (182,295) (327,923)
Cash and cash equivalents at beginning of year 324,824 630,266
--------- ---------
Cash and cash equivalents at end of year $ 142,529 $ 302,343
========= =========
See accompanying notes.
4
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
--------
USA Technologies, Inc., a Pennsylvania corporation (the
"Company") is a leading provider and licensor of unattended, credit card
activated control systems for the copying, debit card and personal computer
industries. The Company's devices make available credit card payment technology
in connection with the sale of a variety of products and services. The Company
generates its revenues from the direct sale of its control systems and the
resale of configured office products, as well as by license fees and a portion
of the monies generated from all credit card transactions conducted through its
control systems.
As of September 30, 1998, the Company had an installed base of
a total of 764 control systems, distributed as follows: 613 Business Express(TM)
or MBE Business Express(TM) control systems, 45 Copy Express(TM) control
systems, 33 Debit Express(TM) control systems, 9 Fax/Printer Express(TM) control
systems, and 64 Public PC(TM) control systems located primarily at various
hotels and libraries throughout the United States and Canada.
2. Accounting Policies
-------------------
Interim Financial Information
The financial statements and disclosures included herein for the three
months ended September 30, 1998 and 1997 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance with
generally accepted accounting principles and reflect all adjustments consisting
of adjustments of a normal and recurring nature which, in the opinion of
management, are necessary for a fair presentation of the Company's consolidated
financial position and the results of its operations and cash flows.
Consolidation
The consolidated financial statements include the accounts of the MBE
Joint Venture (Note 4). All significant intercompany accounts and transactions
have been eliminated in consolidation.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method)
or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over three to seven years for financial statement
purposes and accelerated methods for income tax reporting purposes.
5
Revenue Recognition
Revenue from the sale of equipment is recognized upon
installation and customer acceptance of the related equipment. License fee
revenue (including transaction processing revenue) is recognized upon the usage
of the Company's credit card activated control systems.
Loss per Common Share
Loss per share is calculated by dividing the loss by the weighted
average common shares outstanding for the period. No exercise of stock options,
purchase rights, stock purchase warrants, or the conversion of preferred stock
and cumulative preferred dividends was assumed because the assumed exercise of
these securities would be antidilutive.
3. Stock Options, Warrants and Purchase Rights
-------------------------------------------
During July 1998, the Company's Board of Directors approved a reduction
of the exercise price of the 1995 Common Stock purchase warrants and the 1996
Common Stock purchase warrants from $.50 to $.25 through September 30, 1998.
Thereafter, the exercise price will return to $.50.
As of September 30, 1998, there was a total of 152,800 Common Stock
Purchase Rights outstanding at a price of $1.00 per share. As of September 30,
1998, there was a total of 4,201,000 options outstanding to purchase Common
Stock at exercise prices ranging from $.05 to $.50 per share, of which 3,938,500
were vested. As of September 30, 1998, many of the options and purchase rights
granted were issued at or above fair market value on the date of grant, and
those that were issued below fair market value have resulted in an appropriate
charge against earnings during the period the options were issued.
There are also 1,390,000 shares of Common Stock issuable upon exercise
of the 1998-B warrants issued in July 1998; 40,000 shares of Common Stock
issuable upon exercise of the 1998-A warrants issued in January and February
1998; 1,100,000 shares of Common Stock issuable upon exercise of warrants issued
to affiliates and/or consultants of GEM Advisors, Inc. in June 1997; 15,000
shares of Common Stock issuable upon exercise of the 1997 warrants issued in
1997; 40,000 shares of Common Stock issuable upon exercise of the 1996-B
warrants issued in January and February 1997; 868,000 shares of Common Stock
issuable upon exercise of the 1996 warrants issued in 1996; and 673,000 shares
of Common Stock issuable upon exercise of the 1995 warrants issued in 1995.
4. MBE Joint Venture
-----------------
On March 31, 1998, the MBE Joint Venture signed agreements with
International Business Machines Corporation ("IBM") whereby IBM agreed to be the
executional partner for certain aspects of the MBE Joint Venture's business,
including project management services, asset procurement and inventory
financing, configuration and testing of equipment, site preparation,
installation, maintenance services, and asset management. IBM would also assist
the MBE Joint Venture with marketing and technology exchange. As of September
30, 1998, IBM installed 34 MBE Business Express(TM) units for the Joint Venture.
6
During the quarter ended September 30, 1998, IBM began purchasing and
financing inventory, installing assembled product, and billing customers on
behalf of the MBE Joint Venture. A significant portion of the installations (and
revenues) was the partial fulfillment of the 100 unit order from Prime
Hospitality for the MBE Business Express(TM) units installed in Amerisuites
hotels across the United States.
At September 30, 1998 the Joint Venture recorded gross accounts payable
to MBE of approximately $255,000, due to inventory and other items. This amount
has been partially offset by approximately $74,000 which is due to the Company
from MBE.
5. Private Placements
------------------
During July 1998, the Company's Board of Directors authorized a
$700,000 private placement offering of 70 units at a unit price of $10,000. Each
unit includes 2,000 shares of Series A Convertible Preferred Stock ("Series A
Preferred Stock") and 50,000 1998-B Common Stock purchase warrants at an
exercise price of $.15 through January 1, 1999 and $.40 thereafter for five
years after the termination of the offering. The Company terminated the offering
on August 17, 1998, having sold 27.8 units which generated gross proceeds of
$278,000.
During September 1998, the Company's Board of Directors authorized a
$2,000,000 private placement offering of 200 units at a unit price of $10,000.
Each unit of the offering consists of a 12% Senior Note in the principal amount
of $10,000, 15,000 1998-C Common Stock purchase warrants and 1,000 shares of
Series B Equity Participating Preferred Stock. Each 1998-C Common Stock purchase
warrant entitles the holder to purchase 1 share of Common Stock for $.10 at any
time through December 31, 2001. Each share of Series B Preferred Stock is
automatically convertible into 40 shares of Common Stock at the time of a "USA
Transaction," as defined. In connection with this Offering, the Board of
Directors also authorized the creation of 200,000 shares of a new Series B
Equity Participating Preferred Stock. The offering commenced on September 28,
1998. Subsequent to September 30, 1998, 15 units have been sold resulting in
$150,000 of gross proceeds to the Company, and no warrants have been exercised.
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The fiscal quarter ended September 30, 1998 resulted in a net operating
loss of $670,481 compared to a net loss of $660,524 for the comparable fiscal
quarter ended September 30, 1997. Losses are projected to continue until
sufficient revenue is generated from equipment sales and licensing fees from the
Company's proprietary technology.
Revenues were $792,459 compared to $359,413 from the previous year's
fiscal quarter. This $433,046 or 120% improvement reflects the success of the
Company's sales efforts and the increasing marketplace acceptance of the
Company's products. Of the total revenues, equipment sales totaled $712,294, an
increase of $401,983 or 130% over the same period last year. License fees
7
increased to $80,165 from $49,102 for the same period during the prior year, an
increase of 63%. Despite these gains, revenue is still well below the level
required for the Company to be profitable.
Cost of equipment sales for the period included labor and equipment of
$623,178 which represented an increase of $330,538 over the same period during
the prior year, and is directly attributable to the increase in equipment sales
described above.
General and administrative expenses of $453,420 increased by $56,625 or
14% from the same quarter last year. The principal reasons were increases in
manufacturing overhead to prepare for increased activity of $43,544, and charges
for warranty cost coverage of $22,476, which offset reductions in consultant and
professional fees of $45,234.
Compensation expense of $339,480 increased by 11% due to permanent and
higher personnel requirements in all areas of the Company. Depreciation and
amortization expense decreased nominally from $25,497 to $23,082.
Accounts receivable and accounts payable have increased
substantially from June 30, 1998 due to the September 1998 Prime Hospitality
rollout which approximately doubled the number of installations of any previous
month. Additionally, inventory and accounts payable also increased due to
preparation for an even larger volume anticipated in the second quarter of
fiscal year 1999.
Plan of Operations
As of September 30, 1998, the Company had an installed base of a total
of 764 control systems, distributed as follows: 613 Business Express(TM) or MBE
Business Express(TM) control systems, 45 Copy Express(TM) control systems, 33
Debit Express(TM) control systems, 9 Fax/Printer Express(TM) control systems,
and 64 Public PC(TM) control systems located at various hotels and libraries
throughout the United States and Canada. The total license fee revenues received
by the Company from these systems has been increasing but is still well below
the level required to achieve profitability.
During the past three months the Company continued to emphasize the
resale of equipment utilizing the Company's control systems rather than the
revenue sharing arrangements previously employed. The Company still retains all
rights to software and proprietary technology which it licenses to location
operators for their exclusive use. This shift in approach reduces the Company's
dependency on licensing revenues and simultaneously reduces the Company's
capital asset requirements.
The Company is marketing its products through its full-time sales staff
consisting of three persons, either directly to customer locations or through
management companies servicing these locations.
8
On June 19, 1998, Prime Hospitality Corp. ("Prime") declared that the
trial of 6 MBE Business Express(TM) installations was successful and that it
would install the additional 94 MBE Business Express(TM) units at Prime's owned
and managed hotels. The agreement provides for a purchase price of approximately
$1.9 million for all 100 units. During the quarter ending September 30, 1998, 23
units have been installed, generating revenues of approximately $430,000.
Liquidity and Capital Resources
For the three month period ended September 30, 1998, there was a net
decrease in cash of $182,295. This was attributable to using $422,902 for
operating activities, partially offset by net proceeds of $19,875 raised through
the exercise of Common Stock purchase warrants, and net proceeds of $234,485
raised through the issuance of Series A Preferred Stock. As of September 30,
1998, total cash on hand was $142,529, and the working capital deficit was
$442,131 of which $729,562 was invested in inventory.
During July 1998, the Company's Board of Directors authorized a
$700,000 private placement offering of 70 units at a unit price of $10,000. Each
unit includes 2,000 shares of Series A Preferred Stock and 50,000 1998-B Common
Stock purchase warrants at an exercise price of $.15 through January 1, 1999 and
$.40 thereafter for five years after the termination of the offering. The
Company terminated the offering on August 17, 1998. As of August 17, 1998, 27.8
units were sold generating gross proceeds of $278,000.
During September 1998, the Company's Board of Directors authorized a
$2,000,000 private placement offering (the "Offering") of 200 units at a unit
price of $10,000. Each unit of the Offering consists of a 12% Senior Note in the
principal amount of $10,000, 15,000 1998-C Common Stock purchase warrants and
1,000 shares of Series B Equity Participating Preferred Stock. Each 1998-C
Common Stock purchase warrant entitles the holder to purchase 1 share of common
stock for $.10 at any time through December 31, 2001. Each share of Series B
Preferred Stock is automatically convertible into 40 shares of Common Stock at
the time of a "USA Transaction," as defined. In connection with this Offering,
the Board of Directors also authorized the creation of 200,000 shares of a new
Series B Equity Participating Preferred Stock. The offering commenced on
September 28, 1998. As of October 31, 1998, 15 units have been sold, resulting
in $150,000 of gross proceeds to the Company.
The Company believes that proceeds from the above private placements,
together with funds available from the potential exercise of outstanding
warrants and options, plus inventory financing from IBM and increased revenues
from its business would be sufficient to fund operations until at least through
the quarter ended March 31, 1999. There can be no assurance that any such
additional sales of securities could be made by the Company or that increased
revenues would result from its business activities. In such event, the Company
may cease to be a going concern or may have to reduce its operations.
Year 2000 Compliance
The Company has recently commenced a study of its business in order to
determine whether its computer systems are in compliance with Year 2000 issues.
In this regard, many existing computer programs use only two digits to identify
a year in the date field. These programs were designed and developed without
9
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000.
In connection with its study, the Company is concentrating on five
areas of its business: (i) its control system terminals; (ii) its office
computers; (iii) its credit card processing systems and related systems; (iv)
its back-up, off-site recovery system and (v) its non-Information Technology
("IT") systems. The study should be completed on or before December 31, 1998.
Based on the study to date the Company estimates that it could incur costs of up
to $25,000 in order to be Year 2000 compliant. In reference to item (ii) above,
the Company has already found all but two office computers to be compliant.
These two computers will be replaced with Year 2000 compliant computers in
fiscal year 1999.
The Company is in the process of obtaining written assurances of
compliance from all material third parties whose products may affect the
Company's operations.
The worst case scenario for the Company would be if the control systems
in the field were all found to contain a Year 2000 problem which caused
defective transmissions into the Company's main processing software. Preliminary
analysis indicated the probability of this scenario actually happening is very
low (because the technology of the control units does not involve use or
transmission of two digit year data). If however it did happen, the Company
would utilize the services of IBM Global Services to replace all defective
units. The Company anticipates the cost of such services to be approximately
$150,000.
Part II - Other information
Items 3, 4, and 5 are not applicable.
Item 1. Legal Proceedings
As set forth in the Company's Form 10-KSB for the fiscal year ended
June 30, 1998, the Company commenced arbitration proceedings against MBE in
September 1998. In October 1998, MBE filed an answer to the complaint denying
the allegations of the complaint. As of the date hereof, no date has been set
for the arbitration hearings.
As set forth in the Company's Form 10-KSB for the fiscal year ended
June 30, 1998, MBE commenced a legal action against the Company in the courts of
the state of California in September 1998. In October 1998, the Company had the
case removed to the United States District Court for the Southern District of
California. The Company also filed a motion to have the case stayed and/or
dismissed pending the arbitration proceedings described above. The Company's
motion is currently pending before the Court.
In addition to the legal proceedings referred to above, on August 25,
1998, the Company notified MBE that MBE was in breach of the Joint Venture
Agreement, and on October 2, 1998, MBE notified the Company that the Company was
in breach of the Joint Venture Agreement. The Joint Venture Agreement provides
that it may be terminated by the non-breaching party if any breach is not cured
within sixty days. The Company has not terminated the Joint Venture Agreement as
of the date hereof as permitted thereunder.
10
Item 2. Changes in Securities
During the quarter ended September 30, 1998, the Company completed a
private placement offering pursuant to Rule 506 of Regulation D promulgated
under the Securities and Exchange Act of 1933, as amended, ("the "Act") for
$278,000 of the Company's securities. The offering consisted of 27.8 units at
$10,000 each, with each unit consisting of 2,000 shares of Series A Preferred
Stock and 50,000 1998-B Warrants. The Series A Preferred Stock is convertible at
any time into shares of Common Stock, no par value, at a rate of 10 shares of
Common Stock for each share of Preferred Stock. The 1998-B Warrants enable the
holder to purchase one share of Common Stock for $.15 on or before January 1,
1999 and for $.40 through August 17, 2003.
During the quarter ended September 30, 1998, the Company issued 500
shares of Common Stock to an employee as compensation for services. Such shares
contained a restrictive legend under the Act, and were issued pursuant to the
exemption from registration set forth in Section 4(2) of the Act. Also during
this quarter, the Company issued 47,700 shares of Common Stock upon the
conversion of 4,770 shares of Preferred Stock and issued 17,085 shares of Common
Stock upon the conversion of $17,085 of cumulative dividends accrued and unpaid
on the aforesaid shares of Preferred Stock. Such shares of Common Stock were
issued pursuant to the exemption from registration set forth in Section 3(a)(9)
of the Act.
Item 6. Reports on Form 8-K
On September 16, 1998, the Company filed with the Securities and
Exchange Commission a Form 8-K which reported items under Item 5. Other Events.
11
Signatures
In accordance with 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 13, 1998 /s/ George R. Jensen, Jr.
-----------------------------------------
George R. Jensen, Jr., President,
Chief Executive Officer
Date: November 13, 1998 /s/ Leland P. Maxwell
-----------------------------------------
Leland P. Maxwell, Senior Vice President,
Chief Financial Officer
12
5
0000896429
USA TECHNOLOGIES, INC.
1,000
U.S.DOLLARS
3-MOS
JUN-30-1999
JUL-01-1998
SEP-30-1998
1.000
142,529
0
679,105
(19,155)
729,562
1,554,287
451,640
300,347
1,715,830
1,996,418
0
0
4,737,588
11,275,409
0
1,715,831
712,294
792,459
623,178
1,439,160
(22,369)
0
1,411
(670,481)
0
(670,481)
0
0
0
(670,481)
(0.03)
(0.03)
