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SEC 10KSB: Report
(Management's Discussion)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
Since January 1992, the Company, a development stage corporation, has been engaged largely in research and development activities focused on designing, developing, and marketing its credit card activated control systems. From inception through June, 30, 1997, the Company has had nominal operating revenues (exclusive of interest) of $671,430 and has generated funds primarily through the sale of its securities. Through June 30, 1997 the Company has received, net of expenses of such sales, the amount of $5,487,636 in connection with private placements, $1,681,908 from the exercise of Common Stock purchase warrants, and $2,345,104 in connection with its initial public offering. The Company has incurred operating losses since its inception through June 30, 1997 of $9,363,671 and such losses are expected to continue through June 30, 1998.
The Company's independent auditors have included an explanatory paragraph in their report on the Company's June 30, 1997 financial statements discussing issues which raise substantial doubt about the Company's ability to continue as a going concern. The Company believes that the funds available at June 30, 1997 combined with the revenues to be generated during fiscal year 1998, the potential capital to be raised from the exercise of Common Stock purchase warrants, and the ability to defer anticipated expenditures, if required, will provide for the Company to continue a a going concern. There can be no assurance, however, that any significant revenues will be generated during the 1998 fiscal year or that sufficient capital can be raised by the Company. In such event, the Company may cease to be a going concern and investors in the Common Stock may lose all of their investment.
Results of Operations
Fiscal year ended June 30, 1997:
For the fiscal year ended June 30, 1997, the Company had a net loss of $3,120,712. Overall this loss reflects the continuing development stage activities of the Company. The Company's preferred stock provides for an annual cumulative dividend of $1.50 per share payable to the shareholders of record on February 1 and August 1 each year as declared by the Company's Board of Directors. The $4,364,007 loss applicable to common shares or $.21 loss per common share was derived by adding the $3,120,712 net loss and the $1,243,295 of cumulative preferred dividends earned for the year ending June 30, 1997, and dividing by the weighted average shares outstanding, of 20,984,381.
Revenues for the period were $607,772, which increased $554,793 from last year, primarily reflecting the sales of the Business Express(TM) product line.
Operating expenses for the fiscal year ended June 30,1997 were $3,742,961, representing a $1,212,166 or 47.9% increase over the prior year. The primary contributors to this increase were Cost of Sales, General and Administrative expense and Compensation, as detailed below.
Cost of sales increased by $525,090 from nothing in the prior year, reflecting the first year of equipment sales. (The implied gross profit of $82,682 represents a margin of 13.6%). General and administrative expense of $2,040,163 increased sharply by $528,882 or 35.0% which reflects both a general increase in spending to support the expansion of operations as well as several non-operational factors. Specifically the major contributors to this increase were: Travel and lodging increased by a total of $66,393, which reflected significant marketing related travel as well as an increase in travel for the increased numbers of installations. Marketing promotions, mailings and trade show expenses increased $110,147. Advertising increased by $26,000, reflecting the need to increase product awareness in the marketplace. Professional and consultant fees increased by $86,770, reflecting increased legal, public relations and patent activity. Product development expense increased $119,852 primarily due to developmental costs for new customers. The balance of the increase includes temporary services, telephone, office expense, and postage.
Compensation expense was $1,080,458, an increase of $177,060 or 19.6% over the previous year. This increase was primarily due to headcount increases in the sales function and to a lesser extent, operations.The cost of employee benefits also rose by $34,468.
Depreciation expense of $97,250 increased by $25,234, which is attributable to the increased depreciable asset base.
Fiscal year ended June 30, 1996:
For the fiscal year ended June 30, 1996, the Company had a net loss of $2,451,697. Overall this loss reflects the continuing development stage activities of the Company. The Company's preferred stock provides for an annual cumulative dividend of $1.50 per share payable to the shareholders of record on February 1 and August 1 each year as declared by the Company's Board of Directors. The $3,405,997 loss applicable to common shares or $.23 loss per common share was derived by adding the $2,451,697 net loss and the $954,300 of cumulative preferred dividends for the year ending June 30, 1996 and dividing by the weighted average shares outstanding.
Revenues for the period remained at a nominal level reflecting the disappointing performance of the Credit Card Copy Express(TM) product line. Expenses for the fiscal year ended June 30,1996 were $2,536,544, representing a $868,546 or 52% increase over the prior year. The primary contributors to this increase were General and Administrative expense and Compensation.
At June 30, 1996, cash was $1,773,356 compared to $376,191 on June 30, 1995. Such increase reflects the net proceeds received by the Company in connection with a private placement offering that closed in June 1996 which raised net proceeds of $1,249,264. In addition, during fiscal year 1996, 3,686,000 1995 Warrants were exercised for aggregate proceeds to the Company of $1,105,800. At June 30, 1996, inventory was $426,391 compared to zero on June 30, 1995. Such inventory was purchased by the Company in connection with the marketing of its Credit Card Computer Express (TM) product (now known as the Public PC(TM). The increase of accounts payable and accrued expenses reflects the increased operating expenses incurred by the Company.
General and administrative expense of $1,449,889 increased sharply by $751,289 or 10.7% which reflects both a general increase in spending to support the expansion of operations as well as several non-operational factors. Specifically the major contributors to this increase were (a) $187,122 increase in travel and lodging which was concentrated in the operations area and reflects the installation of the Company's control devices; (b) $103,355 increase in professional fees due to financial consultant and legal fees, including increased patent activity; (c) $93,888 increase in product development expense primarily due to the programming and configuration of the Company's newly completed C3X(TM); (d) $313,548 increase in consulting expenses of which $247,205 is a non-cash transaction attributable to the issuance of Common Stock in exchange for services rendered; and the
balance of the increase which includes public relations and technical services. Telephone, office expense, and postage increased moderately.
Compensation expense was $903,398, an increase of $215,013 or 31% over the previous year. This increase was concentrated in the marketing function and corporate staffing, and also including $27,343 of expense to initiate an employee medical benefits plan.
Depreciation expense of $72,016 increased by $56,548, which is attributable to the increased depreciable asset base. Advertising remained consistent with the previous year.
A provision for losses on equipment was charged to operations in the amount of $44,100 which represents the final charge for the discontinuance of the Golfers Oasis(TM) product line.
Interest expense returned to normal levels with the elimination of the public offering interest cost reflected in the prior year.
Plan of Operations
As of June 30, 1997, the Company had a total of 285 credit card activated control systems installed in the field as follows: Business Express(TM) 130, Copy Express(TM) 44, Debit Express(TM) 34, Public PC(TM) 54, Fax/Printer Express(TM) 23. Through June 30, 1997 the total license fee income received by the Company from these systems was $117,158.
During the past year the Company has continued its new direction in product development. It has focused on products capable of generating new incremental revenue for equipment operators (ie, Business Express) as opposed to in the past simply providing a better method of payment (ie. Copy Express). The new direction is also reflected in the move toward the sale of the Company's proprietary equipment to operators rather than the revenue sharing arrangements employed to date. The Company still retains all rights to software and proprietary technology which it licenses to location operators for their exclusive use. However this shift in market approach reduces the Company's dependency on equipment revenue by providing a built in gross profit on the sale of the equipment, and simultaneously reduces the Company's capital asset requirements.
Plans for the coming fiscal year include progressing from the developmental stage to an operating mode. The Company also intends to continue to focus on the sales and/or leasing of its Business Express(TM) business centers.
Liquidity and Capital Resources
During the fiscal year ended June 30, 1997, the Company completed a number of equity transactions. Net proceeds of $394,688 were realized from the two Private Placement Offerings of Preferred Stock and $1,141,126 was realized from Common Stock transactions, principally the exercise of Common Stock purchase warrants. As of June 30, 1997 total working capital was $671,914, including cash on hand of $630,266.
During the fiscal year ended June 30, 1997, net cash of $2,651,341 was used by operating activities, primarily compensation and general and administrative expenses. Consulting expense reflected $277,198 of a non-cash transaction attributable to the issuance of common stock in exchange for services rendered. Net cash of $17,855 was used by investing activities principally for the purchase of furniture. The net cash provided by financing activities of $1,526,107 was principally due to the net proceeds generated from the issuance of securities described in the prior paragraph.
The Company's independent auditors have included an explanatory paragraph in their report on the Company's June 30, 1997 financial statements discussing issues which raise substantial doubt about the Company's ability to
continue as a going concern. The Company believes that the funds available at June 30, 1997 combined with the revenues and earnings to be generated during fiscal year 1998, the potential capital to be raised from the exercise of the Common Stock purchase warrants, and the ability to defer anticipated expenditures, if required, will provide for the Company to continue as a going concern through at least June 30, 1998. There can be no assurance, however, that any significant revenues and earnings will be generated during the 1998 fiscal year or that sufficient capital can be raised by the Company. In such event, the Company may cease to be a going concern or may have to reduce its operations or operating procedures. In such event, investors in the Common Stock may lose all of their investment.
The Company anticipates that for the year ended June 30, 1998 there will be a negative cash flow from operations in excess of $1 million. The Company anticipates that the shortfall in cash flow will be supported by additional equity infusion from the exercise of the Common Stock purchase warrants, and, if needed, the ability to defer planned expenditures.
Commitment
During October 1996, the Company entered into a lease for approximately 7,000 square feet in Wayne, Pennsylvania for a monthly rental of $5,000 plus utilities and operating expenses. The lease expires on October 15, 1999. A former property located at 1265 Drummers Lane, Wayne, PA, was vacated in October, 1996. The lease payment of approximately $5,000 per month ceased as of August 31, 1997.
During August 1997, the Company entered into a commitment to acquire 500 control system equipment for $242,325. These amounts are expected to be paid from the existing cash resources plus funds generated by Common Stock warrant exercises.
Item 7. Financial Statements
Page
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Report of Independent Auditors F-1
Balance Sheets F-2
Statements of Operations F-3
Statement of Shareholders' Equity F-4
Statements of Cash Flows F-9
Notes to Financial Statements F-11
Report of Independent Auditors
To the Board of Directors and Shareholders USA Technologies, Inc.
We have audited the accompanying balance sheets of USA Technologies, Inc. (A Development Stage Corporation) as of June 30, 1997 and 1996, and the related statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended June 30, 1997 and the period January 16, 1992 (inception) through June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of USA Technologies, Inc. at June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 1997 and for the period January 16, 1992 (inception) through June 30, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming USA Technologies, Inc. will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's recurring losses from operations from its inception and its accumulated deficit through June 30, 1997, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania August 14, 1997
F-1
USA Technologies, Inc.
(A Development Stage Corporation)
Balance Sheets
June 30
1997 1996
------------ ---------------
Assets
Current assets:
Cash and cash equivalents $ 630,266 $ 1,773,356
Accounts receivable less allowance for
uncollectible accounts of $19,345 127,318 --
Inventory 378,318 426,391
Stock subscriptions receivable 60,000 106,350
Prepaid expenses and deposits 15,670 3,614
------------ ------------
Total current assets 1,211,572 2,309,711
Property and equipment, net 178,457 235,214
Other assets 20,250 42,446
------------ ------------
Total assets $ 1,410,279 $ 2,587,371
============ ============
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 474,646 $ 301,849
Accrued expenses 46,742 41,559
Current obligations under capital leases 18,270 9,048
------------ ------------
Total current liabilities 539,658 352,456
Obligations under capital leases, less current portion 24,480 21,209
Accrued rent -- 13,516
------------ ------------
Total liabilities 564,138 387,181
Shareholders' equity: Preferred Stock, no par value: Authorized shares - 1,200,000 Series A Convertible issued and outstanding shares - 861,205 and 796,025 at June 30, 1997 and 1996, respectively (liquidation preference of $ 11,449,136
at June 30, 1997) 7,024,811 6,776,132
Common Stock, no par value:
Authorized shares - 55,000,000
Issued and outstanding shares - 29,969,934 and
23,023,976 at June 30, 1997 and 1996, respectively 4,355,334 2,720,201
Deficit accumulated during the development stage (10,534,004) (7,296,143)
------------ ------------
Total shareholders' equity 846,141 2,200,190
------------ ------------
Total liabilities and shareholders' equity $ 1,410,279 $ 2,587,371
============ ============
See accompanying notes.
F-2
USA Technologies, Inc.
(A Development Stage Corporation)
Statements of Operations
January 16, 1992 (date
of inception) through
Year ended June 30 June 30,
1997 1996 1997
--------------------------------------------------------------------
Revenues:
Equipment sales $ 490,614 $ -- $ 490,614
License fees 117,158 52,979 180,816
------------ ------------ ------------
Total revenues 607,772 52,979 671,430
Operating expenses:
General and administrative 2,040,163 1,511,281 5,258,688
Compensation 1,080,458 903,398 3,546,234
Cost of sales 525,090 -- 525,090
Depreciation and amortization 97,250 72,016 195,644
Provision for losses on equipment -- 44,100 400,715
Costs incurred in connection with
abandoned private placement -- -- 50,000
------------ ------------ ------------
Total operating expenses 3,742,961 2,530,795 9,976,371
------------ ------------ ------------
(3,135,189) (2,477,816) (9,304,941)
Other income (expense):
Interest income 26,676 31,868 80,080
Interest expense (12,199) (5,749) (138,810)
------------ ------------ ------------
Total other income (expense) 14,477 26,119 (58,730)
------------ ------------ ------------
Net loss (3,120,712) (2,451,697) $ (9,363,671)
============
Cumulative preferred dividends (1,243,295) (954,300)
------------ ------------
Loss applicable to common shares $ (4,364,007) $ (3,405,997)
============ ============
Loss per common share $ (.21) $ (.23)
============ ============
Weighted average number of common shares
outstanding 20,984,381 14,908,904
============ ============
See accompanying notes
F-3
USA Technologies, Inc.
(A Development Stage Corporation)
Statements of Shareholders' Equity
Deficit
Series A Accumulated
Convertible During the
Preferred Common Development
Stock Stock Stage Total
----------------------------------------------------------------------
Balance, January 16, 1992, inception $ -- $ -- $ -- $ --
April 1992-10,500,000 shares of Common Stock at $.001
per share -- 10,500 -- 10,500
May 1992-10,000 shares of Convertible Preferred Stock
at $9.98 per share 99,800 -- -- 99,800
June 1992-100,000 shares of Common Stock at $.001
per share -- 100 -- 100
Net loss -- -- (1,848) (1,848)
----------- ----------- ----------- -----------
Balance, June 30, 1992 99,800 10,600 (1,848) 108,552
September 1992-15,000 shares of Convertible Preferred
Stock at $9.97 per share 149,550 -- -- 149,550
September 1992-450,000 shares of Common Stock at
at $.001 per share -- 450 -- 450
April 1993-400,000 shares of Common Stock at $.001
per share -- 400 -- 400
June 1993-695,000 shares of Common Stock at $.001
per share -- 695 -- 695
June 1993-142.2 units (142,200 shares, net of offering
costs, of Convertible Preferred Stock at $9.97 per
share and 4,266,000 shares of Common Stock at $.001
per share) 1,266,439 3,815 -- 1,270,254
Net loss -- -- (899,547) (899,547)
----------- ----------- ----------- -----------
Balance, June 30, 1993 1,515,789 15,960 (901,395) 630,354
September 1993-110,000 shares of Common Stock at
$.001 per share -- 110 -- 110
February 1994-79,522 units (79,522 shares, net of
offering costs, of Convertible Preferred Stock
at $9.99 per share and 556,654 shares of Common
Stock at $.001 per share) 624,824 438 -- 625,262 |
