U.S. 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, 2002
----------------------------
( ) 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 Identification No.)
or organization)
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 15, 2002, there were 90,520,493 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, 2002
and June 30, 2002 2
Consolidated Statement of Operations - Three months ended
September 30, 2002 and 2001 3
Consolidated Statement of Shareholders' Equity - September 30, 2002 4
Consolidated Statement of Cash Flows - Three months ended
September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3. Controls and Procedures 19
PART II - Other Information
ITEM 2. Changes in Securities 19
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
CERTIFICATIONS 22
2
USA Technologies, Inc.
Consolidated Balance Sheets
SEPTEMBER 30, JUNE 30,
2002 2002
-----------------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 430,067 $ 557,970
Accounts receivable, less allowance for uncollectible
accounts of $46,500 at September 30, 2002 and $37,000
at June 30, 2002 292,769 340,293
Inventory 855,844 877,814
Prepaid expenses and other current assets 406,453 124,865
Subscriptions receivable - 35,000
--------------- -------------
Total current assets 1,985,133 1,935,942
Property and equipment, net 1,803,812 1,932,427
Software development costs, at cost, less accumulated
amortization of $3,287,255 at September 30, 2002 and
$2,995,979 at June 30, 2002 2,038,931 2,330,207
Goodwill 6,800,827 6,800,827
Intangibles, less accumulated amortization of $109,500 at
September 30, 2002 and $36,500 at June 30, 2002 2,810,500 2,883,500
Other assets 23,561 29,117
--------------- -------------
Total assets $ 15,462,764 $ 15,912,020
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 4,134,306 $ 3,081,495
Accrued expenses 2,008,478 2,131,289
Deposits 120,000 480,000
Current obligations under long term debt 817,285 850,644
--------------- -------------
Total current liabilities 7,080,069 6,543,428
Convertible Senior Notes, less current portion 6,855,276 6,289,825
Long term debt, net of current portion 619,610 762,085
Convertible debenture 71,167 65,543
--------------- -------------
Total liabilities 14,626,122 13,660,881
Shareholders' equity:
Preferred Stock, no par value:
Authorized shares-1,800,000
Series A Convertible Preferred-Authorized shares-900,000
Issued and outstanding shares-529,282 at September 30,
2002 and June 30, 2002 (liquidation preference of
10,865,353 at September 30, 2002) 3,749,158 3,749,158
Common Stock, no par value:
Authorized shares-150,000,000
Issued and outstanding shares-76,171,652 at
September 30, 2002 and 66,214,188 at June 30, 2002 57,603,471 55,443,750
Subscriptions receivable (149,750) (149,750)
Accumulated deficit (60,366,237) (56,792,019)
--------------- -------------
Total shareholders' equity 836,642 2,251,139
--------------- -------------
Total liabilities and shareholders' equity $ 15,462,764 $ 15,912,020
=============== =============
See accompanying notes.
2
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2001
Revenues:
Equipment sales $ 404,111 $ 201,896
License and transaction fees 330,334 163,851
------------ ------------
Total revenues 734,445 365,747
Operating expenses:
Cost of sales 376,184 213,034
General and administrative 1,642,378 1,131,207
Compensation 845,719 902,092
Depreciation and amortization 538,360 81,821
------------ ------------
Total operating expenses 3,402,641 2,328,154
------------ ------------
(2,668,196) (1,962,407)
Other income (expense):
Interest income 2,974 2,756
Interest expense:
Coupon or stated rate (347,752) (166,497)
Non-cash amortization of debt discount (561,244) (278,656)
Less: amounts capitalized - 147,166
------------ ------------
Total interest expense (908,996) (297,987)
------------ ------------
Total other income (expense) (906,022) (295,231)
------------ ------------
Net loss (3,574,218) (2,257,638)
Cumulative preferred dividends (396,962) (413,219)
------------ ------------
Loss applicable to common shares $(3,971,180) $(2,670,857)
============ ============
Loss per common share (basic and diluted) $ (0.06) $ (0.11)
============ ============
Weighted average number of common shares outstanding (basic and diluted) 71,192,921 24,448,579
============ ============
See accompanying notes.
3
USA Technologies, Inc.
Statement of Shareholders' Equity
(Unaudited)
SERIES A
CONVERTIBLE
PREFERRED COMMON SUBSCRIPTIONS ACCUMULATED
STOCK STOCK RECEIVABLE DEFICIT TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 $ 3,749,158 $ 55,443,750 $ (149,750) $ (56,792,019) $ 2,251,139
Exercise of 49,318 Common Stock
warrants at $.10 per share 4,931 4,931
Issuance of 600,000 shares of Common
Stock from the conversion of $120,000 of
the 2002-A 12% Senior Notes 120,000 120,000
Issuance of 201,226 shares of Common
Stock from conversion of $21,000 of
9-3/4% debentures, and the related
exercise of Common Stock Warrants to
purchase 2,012,260 shares of Common
Stock 231,000 231,000
Issuance of 320,000 shares of Common
Stock in exchange for professional
Services 79,307 79,307
Issuance of 2,000,000 shares of Common
Stock at $0.12 per share. 240,000 240,000
Issuance of 529,324 shares of Common
Stock and related Warrants in lieu of
Cash payment for interest on the 12%
Convertible Senior Notes 139,113 139,113
Debt discount relating to beneficial
conversion feature on the 2002-A 12% Senior
Notes 410,247 410,247
Issuance of 3,908,036 shares in connection
with the 2002-A 12% Convertible Senior
Notes 854,288 854,288
Issuance of 337,300 shares of Common
Stock in connection with severance
arrangements 78,075 78,075
Other 2,760 2,760
Net loss (3,574,218) (3,574,218)
--------------------------------------------------------------------------------------
Balance, September 30, 2002 $ 3,749,158 $ 57,603,471 $(149,750) $ (60,366,237) $ 836,642
======================================================================================
See accompanying notes.
4
USA Technologies, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Three months ended September 30,
================================
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net loss $(3,574,218) $(2,257,638)
Adjustments to reconcile net loss to net cash used in operating activities:
Services and compensation paid through issuance of Common
Stock Warrants and shares of Common Stock 160,142 -
Issuance of Common Stock and Warrants in lieu of cash payments for
interest on Senior Note 139,113 59,217
Interest/amortization relating to Senior Notes and Convertible
Debentures 513,605 278,656
Amortization 364,276 -
Depreciation 174,084 81,821
Changes in operating assets and liabilities:
Accounts receivable 47,524 (65,587)
Inventory 21,970 (185,514)
Prepaid expenses, deposits, and other assets (77,588) 7,311
Accounts payable 1,052,811 257,714
Accrued expenses (122,811) (528,964)
------------ ------------
Net cash used in operating activities (1,301,092) (1,463,426)
INVESTING ACTIVITIES
Purchase of property and equipment (45,468) (4,035)
Increase in software development costs - (778,715)
------------ ------------
Net cash used in investing activities (45,468) (782,750)
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants 294,931 2,263,851
Net proceeds from issuance of Senior Notes and Convertible Debentures 1,064,560 100,000
Net repayment of equipment line of credit and other (154,743) (3,653)
Collection of subscriptions receivable 35,000 24,000
Repayment of principal on capital lease obligations (21,091) (16,324)
------------ ------------
Net cash provided by financing activities 1,218,657 2,367,874
------------ ------------
Net (decrease) increase in cash and cash equivalents (127,903) 121,698
Cash and cash equivalents at beginning of period 557,970 817,570
--------------------------
Cash and cash equivalents at end of period $ 430,067 $ 939,268
============ ============
Supplemental disclosures of cash flow information:
Conversion of Convertible Preferred Stock to Common Stock $ - $ 30,621
============ ============
Conversion of Convertible Preferred Dividends to Common Stock $ - $ 38,920
============ ============
Conversion of Senior Notes to Common Stock $ 120,000 $ 472,500
============ ============
Cash paid for interest $ 347,752 $ 166,497
============ ============
Subscriptions receivable $ - $ 125,000
============ ============
Beneficial conversion feature related to Senior Notes $ 410,247 $ -
============ ============
Prepaid stock expense through Issuance of Common Stock $ 204,000 $ -
============ ============
Transfer of deposits to debt and equity $ 360,000 $ -
============ ============
Issuance of common shares in connection with Senor Note offering $ 854,288 $ -
============ ============
See accompanying notes.
5
USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BUSINESS
--------
USA Technologies, Inc., a Pennsylvania corporation (the Company), was
incorporated on January 16, 1992. The Company provides unattended cashless
payment/control systems and associated network and financial services for the
copy, fax, debit card, smart card personal computer, laundry, and vending
industries. The Company's devices make available credit and debit card and other
payment methods in connection with the sale of a variety of products and
services. The Company's customers are principally located in the United States
and are comprised of hotels, chains, consumer package goods companies,
information technology and vending operators. The Company generates its revenues
from the direct sale of its control systems and configured business equipment
utilizing its control systems, from retaining a percentage of the gross
licensing fees generated by the control systems, and from a monthly
administrative service fee.
The Company offers the Business Express and Business Express Limited
Service (LSS) principally to the hospitality industry. The Business Express and
Business Express Limited Service (LSS) combines the Company's business
applications for computers, copiers and facsimile machines into a business
center unit. The Company has developed its next generation of cashless
control/payment systems (e-Port), which includes capabilities for interactive
multimedia and e-commerce, acceptance of other forms of electronic payments and
remote monitoring of host machine data and is being marketed and sold to
operators, distributors and original equipment manufacturers (OEM) primarily in
the vending industry.
The Company's wholly owned subsidiary, Stitch Networks Corporation (Stitch)
designs and employs embedded connectivity solutions that enable network servers
to monitor and control vending machines and appliances over the internet. On
December 31, 2000, Stitch executed a Vending Placement, Supply and Distribution
Agreement (the Agreement) with Eastman Kodak Company, Maytag Corporation and
Dixie Narco, Inc., which formed a strategic alliance to market and execute a
national vending program for the sale of one-time use camera and film products.
The Agreement provides for an initial term of three years ending December 31,
2003, with additional provisions for early termination and extensions as
defined. Furthermore, the Agreement also provides for exclusivity among the
parties for the term of the Agreement relating to the sale of camera and film
products from vending machines within the Continental United States.
At September 30, 2002, the Company had a total of 1,681 terminals shipped
6
and installed at various hotels, libraries, vending machines, airports, theme
parks, retail locations and business/ industry locations located throughout the
United States and Canada.
2. ACCOUNTING POLICIES
--------------------
INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary have been
included. Operating results for the three-month period ended September 30, 2002
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2003. The balance sheet at June 30, 2002 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, 2002.
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.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Stitch. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of a money
market fund and certificates of deposit.
INVENTORY
Inventory, which principally consists of finished goods, components, and
packaging materials, is stated at the lower of cost (first-in, first-out basis)
or market. The Company maintains a valuation reserve, which reflects the
Company's estimate of the impact on inventory of potential obsolescence, excess
quantities, and declines in market values.
7
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The straight-line method of
depreciation is used over the estimated useful lives of the related assets.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over fair value of the net assets
acquired from Stitch in May 2002. Intangible assets include patents and
trademarks acquired in the Stitch acquisition. Amortization of these
intangibles is computed on the straight-line basis over 10 years.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized upon shipment, or upon
installation of the equipment if installation services are purchased of the
related equipment. License and transaction fee revenue (including transaction
processing revenue) is recognized upon the usage of the Company's credit card
activated control systems. Revenue from the sale of products from the Company's
vending machines is recognized upon the acceptance by the customer of the
products. Monthly fees for the use of vending machines equipped with embedded
Internet connectivity technology is recognized upon usage of the equipment.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility were expensed as incurred. During May
2000, the Company reached technological feasibility for the development of the
e-Port product and related network and, accordingly, the Company commenced
capitalization of software development costs related to this product.
Amortization of software development costs commenced when the product became
available for general release to customers, in April 2002. Amortization of
software development costs is calculated as the greater of the amount computed
using (i) the ratio that current gross revenues for a product bear to the total
of current and anticipated future gross revenues of that product or (ii) the
straight-line method over the remaining estimated economic life of the product.
The Company reviews the unamortized software development costs at each balance
sheet date and, if necessary, writes down the balance to net realizable value if
the unamortized costs exceed the net realizable value of the asset.
During the fourth quarter of fiscal 2002, the e-Port product and related
network became available for general release to the Company's customers.
Management performed an evaluation of the commercial success and preliminary
market acceptance of the e-Port product and network pursuant to SFAS 121 during
the fourth quarter of fiscal 2002. As a result the Company wrote down $2,663,000
of software development costs related to the e-Port and the related network.
The unamortized balanced after the impairment charge is being amortized over an
estimated useful life of two years. Amortization expense during the quarter
ended September 30, 2002 was $291,276.
8
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. As Statement 142 is effective for fiscal years
beginning after December 15, 2001, the Company adopted the Statement on July 1,
2002. Although the Company did not adopt Statement 142 until fiscal year 2003,
the non-amortization provisions of Statement 142 for combinations initiated
after June 30, 2001 were applicable for the Company effective July 1, 2001.
Under Statement 142 the Company will test goodwill for impairment during
fiscal year 2003 using the two-step process prescribed in Statement 142. The
first step is a screen for potential impairment, while the second step measures
the amount of the impairment, if any. The Company expects to perform the first
of the required impairment tests of goodwill and indefinite lived intangible
assets as of July 1, 2002 in the second quarter of fiscal year 2003. If the
first test indicates a potential impairment, the second phase will be completed
to calculate any actual impairment. Any impairment charge resulting from these
transitional impairment tests will be reflected as the cumulative effect of a
change in accounting principle in the second quarter of fiscal year 2003. The
Company has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
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 for all periods presented
because the assumed exercise of these securities would be antidilutive.
3. FINANCING ACTIVITIES
---------------------
In June 2002, the Company commenced a private placement offering (the
"2002-A" offering) of up to $4,000,000 of Convertible Senior Notes (increased in
October 2002 to $4,300,000). The offering consists of up to 430 units at
$10,000. Each note is convertible into Common Shares at $.20 per share and is
due in December 2005. Each noteholder was initially to receive 20,000 Common
Stock warrants for each unit purchased. Subsequent to June 30, 2002, the
offering was amended to replace the warrants with 20,000 shares of Common Stock
for each unit. Through September 30, 2002 $1,954,018 of Senior Notes were
subscribed for ($1,760,785 in cash and $193,233 for services) and a total of
3,908,036 shares were issued to these
9
noteholders. The offering is exempt from the registration requirements of the
Act pursuant to Section 4(2) and Rule 506 thereunder and is being offered and
sold only to accredited investors. The Company has agreed to prepare and file at
its expense a registration statement covering the resale of the shares of Common
Stock. The offering terminated October 31, 2002 with total subscriptions of
$4,284,000. The Company's Chief Executive Officer and the Company's President
have each subscribed for $100,000 into this offering, as compensation for
services rendered and to be rendered.
During August 2001, the Company issued to an investment company a $225,000
Convertible Debenture bearing 9-3/4 percent interest with a maturity date of
August 2, 2003. On June 18, 2002, the debenture was increased by $100,000, the
maturity date extended to August 2004, and the conversion rate was lowered.
Interest is payable by the Company monthly in arrears. The Debenture is
convertible at the lower of $1.00 per share or 80% (amended to 72%) of the
lowest closing bid price of the Common Stock during the 20 days preceding
exercise. The investment company is limited to no more than 5% of the investment
that is convertible during any month, on a cumulative basis. If on the date of
conversion the closing bid price of the shares is $.40 or below, the Company
shall have the right to prepay the portion being converted at 150% of the
principal amount being converted. In such event, the investment company shall
have the right to withdraw its conversion notice. At the time of conversion of
the Debenture, the Company has agreed to issue to the investment company
warrants to purchase an amount of Common Stock equal to ten times the number of
shares actually issued upon conversion of the Debenture. The warrants are
exercisable at any time for two years following issuance and at the related
conversion price of the Debenture. The Company has filed at its expense a
registration statement covering the resale of the shares of Common Stock
underlying the Debenture as well as the related warrants issuable upon
conversion of the Debenture. At September 30, 2002, $222,000 of
Convertible Debentures were outstanding. During the quarter ended September 30,
2002, the investment company converted $21,000 of the debenture resulting in the
issuance of 201,226 shares of common stock, and exercised related warrants for
2,012,260 shares. Funds for the conversion of the debentures and the exercise of
warrants were $50,000 in cash received this quarter and $160,000 of funds
previously paid, which had been reflected as a deposit as of June 30, 2002.
Subsequent to September 30, 2002 and through November 15, 2002, the investment
company converted an additional $17,500 of Debentures into 170,188 shares of
Common Stock and exercised Warrants to purchase 1,701,880 shares of Common
Stock.
In September 2002, the Company sold to an investor 2,000,000 shares at
$0.12 per share, receiving $240,000 in net proceeds. (Note 6)
4. LONG-TERM DEBT
At September 30, 2002 the Company has a $1.5 million bank facility
available (the Facility) to fund the purchase of vending machines placed at
locations where Kodak film products are sold. Borrowings are made from time to
time under the Facility, with repayment schedules set at the time of each
borrowing, including equal monthly payments over 36 months and an interest rate
based upon 495 basis points over the three year U.S. Treasury Notes. The Company
has granted the bank a security interest in the film products vending machines.
Repayment of principal is also insured by a Surety Bond issued by a third-party
10
insurer in exchange for an initial fee paid by the Company. At September 30,
2002, $1,168,465 is outstanding under this Facility.
The Company also has outstanding working capital loans, of which
$221,000 is outstanding at September 30,2002 and bears interest at 6.75%.
Subsequent to June 30, 2002, the Company has made payments to the
bank on these loans. On July 26, 2002, August 29, 2002, September 27, 2002 and
October 31, 2002 the bank agreed to extend the due date of these notes until
September 1, 2002, October 1, 2002, November 1, 2002, and December 1, 2002,
respectively under several forebearance agreements. In connection with these
extensions, the Company paid $3,000 of fees to the bank.
5. STOCK OPTIONS, WARRANTS, AND STOCK
--------------------------------------
As of September 30, 2002, there were 5,290,485 options outstanding to
purchase Common Stock at exercise prices ranging from $0.50 to $5.00 per share,
of which 5,170,487 were vested; and there were 7,299,826 fully vested warrants
to purchase Common Stock at exercise prices ranging from $0.10 to $4.00 per
share.
In October 2002, the Company issued to a Director of the Company 50,000
shares in lieu of the 100,000 options granted to the Director in April 2002.
Such shares were issued at the fair value of the Common Stock on the grant date.
The 100,000 options were cancelled in October.
6. SUBSEQUENT EVENTS
------------------
On October 28, 2002 at a special meeting of shareholders, the Company's
shareholders approved an increase in the number of authorized shares of the
Company's Common Stock from 150,000,000 to 200,000,000 and approved an increase
in the size of the Board of Directors from ten to eleven members.
During October 2002, the Company granted to the same investor who purchased
2,000,000 shares in September 2002, a total of 2,000,000 warrants to purchase
the Company's Common Stock at $0.10 per share through November 30, 2002. If all
2,000,000 warrants are exercised, the investor has been granted another warrant
to purchase 2,000,000 shares of Common Stock at $0.10 per share through March
31, 2003.
In October 2002, the Company sold to an investor 1,500,000 shares of
Restricted Common Stock for gross proceeds of $150,000 and granted common stock
warrants to purchase up to 750,000 shares at $.10 per share at any time for a
five year period. Within seven days following the effectiveness of the
registration statement covering these shares, the Company has agreed to sell
to the investor an additional 1,500,000 shares at $.10 per share and grant
common stock warrants to purchase up to 750,000 shares at $.10 per share at
any time for a five year period.
In October 2002, the Company sold to an investor 3,571,429 shares at $.07
per share and issued the following common stock warrants: (1) warrants to
purchase up to 7,142,858 shares at $0.07 at any time for a five year period;
and (2) warrants to purchase up to 7,142,858 shares at $0.07 per share and
11
5,000,000 shares at $0.10 per share, exercisable over a one year period.
In October 2002, the Company granted to the holders of all the 12% Senior
Notes common stock warrants to purchase that number of shares equal to 75% of
the dollar amount of the notes held by such holder. The total number of warrants
is 10,360,025. They are exercisable at any time prior to November 30, 2002. If
the holder exercises all of such holder's warrants, the holder shall receive
another identical warrant exercisable at any time prior to March 31, 2003. The
offer and sale of the shares was exempt from registration under Section 4(2) of
the Act.
In October 2002, the Company approved the issuance to the Chief Executive
Officer and President of the Company $100,000 each of the senior note offering
for future services to be rendered to the Company. Pursuant thereto, each of
them received a $100,000 senior note and 200,000 shares of common stock. In
October 2002, the Company approved the issuance of $100,000 of the senior note
offering to an employee for services rendered.
In October 2002, the Company agreed to issue 400,000 shares to one of its
law firms. Such shares are intended to resolve certain outstanding obligations
to this firm. We have agreed to register these shares for resale under the Act
at our cost and expense.
In November 2002, the Company issued an aggregate of 1,480,000 shares to
employees and consultants for services to be rendered. The shares were valued at
$.125 per share which was the fair value of such shares on the grant date. The
offer and sale of the shares was exempt from registration under Section 4(2) of
the Act.
In November 2002, the Company issued an aggregate of 690,000 shares to 4
accredited investors at $.10 per share for an aggregate of $69,000. The offer
and sale of the shares was exempt from registration under Section 4(2) of the
Act.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
GENERAL
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.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized upon shipment, or if
installation services are purchased, upon installation of the equipment of the
related equipment. License and transaction fee revenue (including transaction
processing revenue) is recognized upon the usage of the Company's credit card
activated control systems. Revenue from the sale of products from the Company's
vending machines is recognized upon the acceptance by the customer of the
products. Monthly fees for the use of vending machines equipped with embedded
12
Internet connectivity technology is recognized upon usage of the equipment.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility are expensed as incurred. During May
2000, the Company reached technological feasibility for the development of the
e-Port control system and related network and, accordingly, the Company
commenced capitalization of software development costs related to this product.
Amortization of software development costs commence when the product becomes
available for general release to customers. Amortization of software development
costs will be calculated as the greater of the amount computed using (i) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. Amortization
of such costs commences when the product becomes available for general release
to it customers. The Company reviews the unamortized software development costs
at each balance sheet date and, if necessary, will write down the balance to net
realizable value if the unamortized costs exceed the net realizable value of the
asset.
During the fourth quarter of fiscal 2002, the e-Port product and related
network became available for general release to the Company's customers.
Management performed an evaluation of the commercial success and preliminary
market acceptance of the e-Port product and network pursuant to SFAS 121 during
the fourth quarter. As a result the Company wrote down to fair value $2,663,000
of software development costs related to the e-Port and the related network.
The unamortized balanced is being amortized over an estimated useful life of two
years. Amortization expense during the quarter ended September 30, 2002 was
$291,276.
FORWARD LOOKING STATEMENTS
This Form 10-QSB 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 , or if actually
commercialized, to obtain commercial acceptance thereof, (v) the ability of the
13
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, (vii) the ability to collect its subscriptions
receivable, or (viii) the ability to locate and acquire suitable acquisition
opportunities, and if acquired, the ability of any such businesses to generate
operating profits. 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
The fiscal quarter ended September 30, 2002 resulted in a net loss of
$3,574,218 compared to a net loss of $2,257,638 for the fiscal quarter ended
September 30, 2001. Losses are projected to continue until sufficient revenue is
generated from equipment sales and licensing fees from the Company's proprietary
technology.
Revenues were $734,445 compared to $365,747 from the previous year's fiscal
quarter. This $368,698 or 101% increase was due to the inclusion of Stitch
Networks revenues for the Kodak vending program during the first quarter of
fiscal 2003. Such revenues did not exist in the first quarter of the prior year,
as the Stitch acquisition occurred in the fourth quarter of fiscal 2002. The
increase of $202,215 in equipment sales was primarily due to the addition Stitch
Networks revenues. License and transaction fees increased $166,483 as a result
of the increased install base. Revenue is still well below the level required
for the Company to be profitable.
Cost of sales for the period included labor and equipment of $376,184, an
increase of $163,150 or 77% compared to the same period during the prior year.
This increase was directly attributable to the increase in revenues.
General and administrative expenses of $1,642,378 increased by $511,171 or
45% from the same quarter last year. The increase was due principally due to
increases in product development expense of $618,603, telephone expense of
$195,267 and legal expense of $79,038. These increases were partially offset by
a decrease in public relations of $217,804 and consulting fees of $124,629.
Compensation expense of $845,719 decreased by $56,373 or 6%. This decrease
was primarily due to a decrease in non-cash compensation.
The interest expense increase of $611,009 was primarily due to the
increases in non-cash amortization of the debt discount and beneficial
conversion features relating to the senior notes and convertible debentures, as
well as an increase in cash interest expense due to the addition of the 2001-D
and 2002-A Senior Notes. Depreciation and amortization expense increased by
$456,539, largely due to an increase of $291,276 in amortization of software
development costs and $73,000 of amortization relating to intangibles. The
remaining increase is due to the higher depreciable asset levels due to assets
acquired from Stitch.
Of the total of $4,311,637 of operating and other expenses for the quarter,
$1,361,345 were non-cash expenses, including consulting, promotions, employee
compensation, depreciation, amortization, non-cash interest and the issuance of
common stock in lieu of interest.
14
PLAN OF OPERATIONS
The Company has focused on presenting the multiple capabilities of the
e-Port by developing several product lines of e-Port and by the acquisition of
Stitch Networks. The "audit plus cashless" version contains all the
functionality for multiple forms of cashless payment processing including credit
card processing, control and data management, plus the added ability to audit
vending product usage and vending machine status. Through September 30, 2002,
over 625 units have been sold to distributors, soft drink bottlers and
operators. Additional in-house work continues, to enable the e-Port to be
compatible with the largest feasible portion of the installed base of 8 million
vending machines in the United States, many of which have slightly different
connectivity requirements. With the acquisition of Stitch Networks, the Company
acquired a wireless "audit plus cashless" product line and is pursuing and
securing customers for that product.
An enhanced version of e-Port offers capability for internet and
wireless connectivity, in addition to the capabilities of the "audit plus
cashless" version. For this product, the Company is working with RadiSys, a
contract manufacturer providing value added design, development, fulfillment and
product warranty services.
Concurrent with the above developments to the e-Port product line, IBM
is working with the Company to enhance the existing network, which is designed
to support transaction processing, advertising and e-commerce on a worldwide
basis with enhanced security features. Expenditures have been made to recode our
existing system in an Internet capable or TCPIP protocol and to use a more
appropriate operating system. In September 2002, the Company signed an Agreement
with IBM to host its network at a remote location which is secure and equipped
with 24 / 7 backup protection. The Company believes that the security and
professionalism of the hosting arrangement will be a significant factor in
assuring customers of the reliability of the financial and data management
services which the Company is providing. In addition, the Company and IBM signed
an Agreement which establishes the basis for a strategic alliance. We are
combining products and capabilities to target sales to the intelligent vending,
retail point of sale, and networked home applications markets. Customers have
been identified, and trade shows have been attended.
In the vending industry, the e-Port is being purchased by soft drink
bottlers and independent vending operators throughout the USA and Canada. On the
soft drink bottler side, heavy effort is being put into securing initial
distribution agreements with the top ten Coke and Pepsi bottlers. At a corporate
level, the Dr Pepper / 7-Up Company announced in October 2002 at the Dr Pepper
National Bottling meeting that it has selected USA Technologies to make
available its cashless payment services in its vending machines throughout the
United States. Dr Pepper will offer our e-Port not only to its own bottlers,
but also to Coca-Cola and Pepsi bottlers that distribute Dr Pepper products.
The Dr Pepper Company has completed its first implementation of e-Port with The
Pepsi Cola Bottler of Central Virginia, with numerous vending machines using
e-Port and a Sprint-enabled wireless solution.
Three of the premier national independent vending operators, Compass,
ARAMARK and Sodexho, have already installed e-Port in various locations, with
plans for additional purchases based on the success of the initial e-Ports. One
major vending operator, International Vending Management, has signed a contract
with the Company.
In March 2002, the Company signed an agreement with MEI (Mars Electronics),
a world leader in the manufacturing and supplier of electronic coin mechanisms
15
and dollar bill acceptors to the vending industry. MEI has agreed to sell and
distribute an MEI branded cashless payment system to be developed by the
Company, as part of its portfolio of vending solutions, which would include a
comprehensive suite of cashless payment services and vending software management
tools. The Company has performed its developmental work, and the combined
offering was introduced at the fall NAMA in October (the primary annual vending
trade show) with commercial availability planned for early 2003. By contract,
MEI has committed to buy a minimum of 10,000 units of the USA product over the
course of 24 month agreement, or pay the Company $4.00 per unit for any
shortfall from 10,000 units. In addition, all MEI payment systems in the field
would have the option to connect to the Company's network and produce recurring
revenues.
The Stitch Kodak program continues to install machines, with 335 units
installed as of September 30, 2002, including high profile locations like Yankee
Stadium, Time Square and Six Flags Amusement Parks. New Kodak machines are being
installed weekly. They provide recurring revenues to the Company from service
fees as well as sales of disposable cameras and film.
The Company continues to work with the top vending machine manufacturers,
including Automatic Products, AMS, U-Select-It, Crane Merchandising Systems,
FastCorp and Dixie-Narco, in order to incorporate our e-Port technology into
vending machines at the factory (OEM); and with authorized resellers, including
Betson Enterprises, HA Franz, Brady Distributing and Weymouth Distributing.
In October 2002, the Company signed a Strategic Alliance Agreement with
ZiLOG Corporation, a semiconductor company which is the largest supplier of
microprocessors to the retail point of sale industry. The agreement allows the
Company's proprietary network software (USAlive) to be embedded on a chip
produced by ZiLOG. The Company would license its software to the purchaser and
would receive a fee from the licensing of each such chip. A second revenue
stream could be generated when those who buy the retail point of sales terminals
begin to use them, because they could elect to use the USA network which is
embedded on the chip. The Company believes that these fees could become the
primary driver of profitability for the Company in the intermediate and longer
term. The company believes that the cost of e-Port to our customers could
decline with this activity.
In the hospitality industry, Business Express continues to be one of the
premier solutions for automated business centers. The Company has relationships
with two of the most recognized global hotel chains, Marriott and Hilton Hotels.
The addition of e-Port technology for vending machines located in hotels now
offers a "one-stop shopping" experience to hotels which also have or are
considering purchasing a USA business center. The Company has developed an
e-Port application using hotel room keys in vending machines, with the purchase
being added to their hotel bill. Forty vending machines are now operating
successfully with such technology at the 1,400 room Gaylord Palms Resort &
Convention Center in Orlando, Florida.
In laundry, American Sales Inc. (ASI) signed a five year agreement to
purchase units of Stitch's e-Suds laundry solution for their university
locations in the Midwest, with initial installations to begin in December
2002.The agreement provides that if ASI purchases at least 9,000 units over the
contract period, then ASI shall have exclusive rights to the units in Ohio,
Kentucky, Indiana, Michigan and Marshall University. The Company has
additionally begun working with two of the premier laundry operators, Web
Services and the MacGray Company. These two companies have already implemented
the e-Port solution, with discussions underway to implement the e-Suds
solution.
16
The Company continues to work with IBM, including a recent installation of
its wireless (802.11) e-Port in a prominent hotel vending machine.
As of September 30, 2002, the Company had a total of 1,681 credit card
terminals installed in the field as follows: Hospitality related (consisting of
Business Express , MBE Business Express , Business Express Limited Service
(LSS), and other) 1,171; e-Port Vending related 175; and Cash Free 200 (Kodak)
335.
The Company is marketing its products through its full-time sales staff
consisting of five salespeople, approximately 13 authorized resellers, and
office equipment and vending OEMs, either directly to customer locations or to
management companies servicing these locations.
During October 2002, the Company demonstrated capabilities of its e-Port
and the network to the vending industry at Fall NAMA, the vending industry's
semi-annual trade show event. Capabilities include mobile commerce technology
permitting access to vending machines through customer cell phones; proprietary
wireless technology allowing for low cost, highly reliable connectivity via
existing customer telephone connections; and ability for customers to manage
their own e-Port locations and access vending machine data and transaction data
on the web. The e-Port was demonstrated in the booths of several different
vending machine manufacturers. From the inception of shipments of e-Port to
date, the Company has delivered e-Ports to or taken orders from over 70 separate
customers, many of them on behalf of very large corporations with well-known
brand names, including several Fortune 500 companies.
The Company is negotiating to become a 50% owner in CineMachine, Inc., a
newly formed Delaware corporation. CineMachine, Inc. would be an entertainment
marketing company selling DVDs, CDs, and video games through a specially
designed vending machine known as CineMachine . The CineMachine would be
equipped with a screen and speakers to preview movie trailers, commercials and
music selections of the items for sale in the CineMachine , and promotional
posters for advertising placement. The CineMachine would use the Company's
e-Port for cashless transactions, and allow for multiple purchases, sales and
inventory tracking, and printing a receipt. Sales opportunities are currently
being explored in movie theatres, universities, fitness centers and retail
locations.
In November 2002, the e-Port was introduced to Japan at VENDEX Japan 2002,
a major vending exposition in Tokyo. Altech Co. Ltd., a major distributor of
information technology products to the Japanese market, showcased the e-Port .
The Company and its partners plan to collaborate to support the implementation
of e-Port systems in Japan. Vending machines are more prevalent in Japan than
the United States on a per capita basis, which makes the market attractive. In
addition, since cell phone use is widespread in Japan, the ability of the e-Port
to support this form of wireless purchase is critical.
Technology Partners (Holdings) LLC, an investment banker, has been retained
by the Company to help it plan and execute the growth of the Company. We are
working to acquire complementary technology, products, services and customers.
17
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 2002, there was a net decrease in
cash of $127,903. This was attributable to $1,301,092 of cash used in operating
activities, $45,468 of cash used for investing activities, offset by cash
provided by financing activities of $1,218,657 primarily from the 2002-A Senior
Note offering and the issuance of Common Stock. The cash used in operating
activities consisted of the operating loss of $3,574,218, partially offset by
$1,052,811 increase in accounts payable, and $513,605 of non cash amortization
of debt discount. As of September 30, 2002, total cash on hand was $430,067 and
the working capital deficit was $5,094,936.
In June 2002, the Company commenced a private placement offering (the
"2002-A" offering) of up to $4,000,000 of Convertible Senior Notes (increased in
October 2002 to $4,300,000). The offering consists of up to 430 units at
$10,000, convertible into Common Shares at $.20 per share. Each noteholder
initially was to receive 20,000 Common Stock warrants for each unit purchased.
Subsequent to June 30, 2002, the offering was amended to replace the warrants
with 20,000 shares of Common Stock for each unit. The Notes mature in December
2005. Through September 30, 2002 $1,954,018 of Senior Notes were subscribed for
($1,760,785 in cash and $193,233 for services) and a total of 3,908,036 shares
were issued to these Senior noteholders. The offering is exempt from the
registration requirements of the Act pursuant to Section 4(2) and Rule 506
thereunder and is being offered and sold only to accredited investors. The
Company has agreed to prepare and file at its expense a registration statement
covering the resale of the shares of Common Stock. The offering terminated
October 31, 2002 with total subscriptions of $4,284,000. The Company's Chief
Executive Officer and the Company's President have each subscribed for $100,000
into this offering, as compensation for services rendered and to be rendered.
During the remainder of fiscal 2003, the Company anticipates expensing
additional expenditures of approximately $0.5 - $1.0 million for enhancements
to its network.
At September 30, 2002 the Company has a $1.5 million bank facility
available (the Facility) to fund the purchase of vending machines placed at
locations where Kodak film products are sold. Borrowings are made from time to
time under the Facility, with repayment schedules set at the time of each
borrowing, including equal monthly payments over 36 months and an interest rate
based upon 495 basis points over the three year U.S. Treasury Notes. The Company
has granted the bank a security interest in the film products vending machines.
Repayment of principal is also insured by a Surety Bond issued by a third-party
insurer in exchange for an initial fee paid by the Company. At September 30,
2002, $1,168,465 is outstanding under this Facility.
At September 30, 2002, $221,000 of working capital loans originally due on
July 8, 2002, and bearing interest at 6.75%, are outstanding. On July 26, 2002,
August 29, 2002, September 27, 2002 and October 31, 2002, the bank agreed to
extend the due date of these notes until September 1, 2002, October 1, 2002,
November 1, 2002 and December 1, 2002, respectively. In connection with these
extensions, the Company paid $3,000 of fees to the bank.
The Company's ability to meet its obligations is currently dependent upon
its ability to raise capital, which may not be readily available, until the
Company's products are purchased in sufficient quantities in the marketplace to
generate sufficient operating revenues. These factors raise doubt about the
Company's ability to continue as a going concern. The Company believes that
proceeds from the sale of additional debt or equity securities, the potential
exercise of outstanding warrants and options, future equity or debt offerings,
and revenues from its business, would be sufficient to fund operations and
investing activities until at least through the end of the fiscal year.
However, there can be no assurance that any such additional sales of securities
could be made by the Company, the Company's products will be purchased in
sufficient quantities in the marketplace to generate the required revenues.
Under such circumstances, the Company may cease to be a going concern or may
have to reduce its operations.
18
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The principal executive officer and principal financial officer have
evaluated the disclosure controls and procedures as of the date within 90 days
prior to the filing date of this report. 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 significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
evaluation of the internal controls, including any corrective action with regard
to significant deficiencies or material weaknesses.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In June 2002, the Company commenced a private placement offering (the
"2002-A" offering) of up to $4,000,000 of Convertible Senior Notes (increased
in October 2002 to $4,300,000). The offering consists of up to 430 units at
$10,000, convertible into Common Shares at $.20 per share. Each noteholder
initially was to receive 20,000 Common Stock warrants for each unit purchased.
Subsequent to June 30, 2002, the offering was amended to replace the warrants
with 20,000 shares of Common Stock for each unit. Through September 30, 2002
$1,954,018 of Senior Notes were subscribed for ($1,760,785 in cash and $193,233
for services) and a total of 3,908,036 shares were issued to these Senior
noteholders. The offering is exempt from the registration requirements of the
Act pursuant to Section 4(2) and Rule 506 thereunder and is being offered and
sold only to accredited investors. The Company has agreed to prepare and file at
its expense a registration statement covering the resale of the shares of Common
Stock. The offering terminated October 31, 2002 with total subscriptions of
$4,284,000.
During August 2001, the Company issued to La Jolla Cove Investors, Inc. a
$225,000 Convertible Debenture bearing 9-3/4 percent interest with a maturity
date of August 2, 2003. On June 18, 2002, the Debenture was increased by
$100,000, the maturity date extended to August 2004, and the conversion rate was
lowered. Interest is payable by the Company monthly in arrears. The Debenture is
convertible at the lower of $1.00 per share or 80% (amended to 72%) of the
lowest closing bid price of the Common Stock during the 20 days preceding
exercise. The investment company is limited to no more than 5% of the investment
that is convertible during any month, on a cumulative basis. If on the date of
conversion the closing bid price of the shares is $.40 or below, the Company
shall have the right to prepay the portion being converted at 150% of the
principal amount being converted. In such event, the investment company shall
have the right to withdraw its conversion notice. At the time of conversion of
the Debenture, the Company has agreed to issue to the investment company
19
warrants to purchase an amount of Common Stock equal to ten times the number of
shares actually issued upon conversion of the Debenture. The warrants are
exercisable at any time for two years following issuance and at the related
conversion price of the Debenture. The Company has filed at its expense a
registration statement covering the resale of the shares of Common Stock
underlying the Debenture as well as the related warrants issuable upon
conversion of the Debenture. At September 30, 2002, there were $222,000
Convertible Debentures outstanding with a due date of August 2, 2004. During the
quarter ended September 30, 2002, the investment company converted $21,000 of
the debenture resulting in the issuance of 201,226 shares of common stock, and
exercised related warrants for 2,012,260 shares. Funds for the conversion of the
debentures and the exercise of warrants were $50,000 in cash received this
quarter and $160,000 of funds previously paid, which had been reflected as a
deposit as of June 30, 2002. Subsequent to September 30, 2002 and through
November 15, 2002, the investment company converted an additional $17,500 of
Debentures into 170,188 shares of Common Stock and exercised Warrants to
purchase 1,701,880 shares of Common Stock.
During the quarter, 529,324 shares of Common Stock were issued to certain
holders of 12% Senior Notes due December 31, 2003, December 31, 2004, and
December 31, 2005 in lieu of cash payment, for interest earned on the Notes
during the quarter ended September 30, 2002. Such Note holders elected to
receive Common Stock at the rate of one share per $0.20 of interest earned. Such
Note holders also are entitled to receive 529,324 warrants to purchase Common
Stock as part of their election to receive stock in lieu of interest. Such
shares of Common Stock were issued pursuant to the exemption from registration
set forth in Section 3(a)(9) of the Act. The Company, at its cost and expense,
has registered these shares under the Act for resale by the holder.
During the quarter, 337,300 shares of Common Stock were issued to former
employees of Stitch and the Company as severance. The offer and sale of the
shares was exempt from registration under Section 4(2) of the Act. The Company
agreed at its cost and expense to register these shares for resale by the holder
under the Act.
In September 2002, the Company sold to an investor 2,000,000 shares at
$0.12 per share, receiving $240,000 in proceeds. Such shares of Common Stock
were issued pursuant to the exemption from registration set fort in Section 4(2)
of the Act and Regulation D. The Company, at its cost and expense, has agreed to
register these shares under the Act for resale by the holder.
During the quarter, holders of common stock purchase warrants were issued an
aggregate of 49,318 shares of Common Stock purchased at the exercise price of
$.10 per share for an aggregate of $4,931. The offer and sale of the shares was
exempt from registration under Section 4(2) of the Act. The Company agreed at
its cost and expense to register these shares for resale by the holder under the
Act.
During the quarter, the Company issued to two consultants (Diligent Finance Ltd.
and Technology Partners (Holdings) LLC), an aggregate of 320,000 shares of
Common Stock at $.20 per share at any time prior to December 31, 2004 for
services. Of these shares, 40,000 were issued at $.21 per share, 80,000 were
issued at $.19 per share and 200,000 at $.199 per share. The shares were issued
at the fair value on the date of grant. The offer and sale of the shares was
exempt from registration under Section 4(2) of the Act. The Company agreed at
its cost and expense to register these shares for resale by the holder under the
Act.
During the quarter, the Company issued an aggregate of 600,000 shares at $.20
per share in connection with the conversion of $120,000 of the 12% Convertible
Senior Notes due December 31, 2005. The offer and sale of these shares were
issued pursuant to the exception from registration set forth in Section 4(2) of
the Act. The Company has agreed to register these shares for resale under the
Act at its cost and expense.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certifications Pursuant to 18 U.S.C Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certifications Pursuant to 18 U.S.C Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On July 29, 2002, the Company filed a Form 8-K to report information
under Items 2 and 7 thereof relating to the acquisition of Stitch
Networks Corporation.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
USA TECHNOLOGIES, INC.
Date: November 19, 2002 / s / George R.Jensen, Jr.
----------------------------
Chairman,Chief Executive Officer
Date: November 19, 2002 / s / Leland P. Maxwell
----------------------------
Senior Vice President,
Chief Financial Officer
21
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, George R. Jensen, Jr., Chief Executive Officer of the registrant, certify
that:
1. I have reviewed this quarterly report on Form 10-QSB of USA Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ George R. Jensen, Jr.
----------------- -------------------------
George R. Jensen, Jr.,Chief Executive Officer
22
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Leland P. Maxwell, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of USA Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
3. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/Leland P. Maxwell
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Leland P. Maxwell, Chief Financial Officer
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