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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-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, 1999
----------------------------
( ) 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.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2679963
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(State or other jurisdiction of incorporation (I.R.S. employer
or organization) Identification No.)
200 Plant Avenue, Wayne, Pennsylvania 19087
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(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 8, 1999, there were 6,756,834 shares of Common Stock, no par
value, and 624,577 shares of Series A Convertible Preferred Stock, no par value,
outstanding.
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USA TECHNOLOGIES, INC.
INDEX
PAGE NO.
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1999 (Unaudited)
and June 30, 1999 1
Consolidated Statements of Operations - Three months ended
September 30, 1999 and 1998 (Unaudited) 2
Consolidated Statement of Shareholders' Deficit 3
September 30, 1999 (Unaudited)
Consolidated Statements of Cash Flows - Three months ended 4
September 30, 1999 and 1998 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II - Other Information 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 12
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USA Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 411,282 $ 1,665,016
Accounts receivable less allowance
for uncollectible accounts of $75,505 at September
30, 1999 (unaudited) and $69,555 at June 30, 1999 441,456 361,463
Inventory 1,120,687 1,255,836
Subscriptions receivable 96,060 178,873
Prepaid expenses and deposits 578,725 42,746
----------- -----------
Total current assets 2,648,210 3,503,934
Property and equipment, at cost, net of accumulated
depreciation of $400,026 at September 30, 1999
(unaudited) and $382,857 at June 30, 1999 184,715 143,670
Other assets 10,250 10,250
----------- -----------
Total assets $ 2,843,175 $ 3,657,854
=========== ===========
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable $ 907,176 $ 917,141
Equipment line of credit 780,787 804,485
Accrued expenses 711,776 498,548
Current obligations under capital leases 4,613 4,393
----------- -----------
Total current liabilities 2,404,352 2,224,567
Senior Notes 2,310,842 2,054,232
Obligations under capital leases, less current portion 20,366 22,584
----------- -----------
Total liabilities 4,735,560 4,301,383
Shareholders' deficit:
Preferred Stock, no par value, authorized shares - 1,200,000:
Series A Convertible Preferred: 4,427,388 4,537,128
Authorized shares - 1,200,000; issued and outstanding shares -
625,077 at September 30, 1999 (unaudited) and 640,577 at June 30,
1999 (liquidation preference of $ 9,955,024 at September 30, 1999 -
unaudited)
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 6,629,934 at
September 30, 1999 (unaudited) and 6,191,097
at June 30, 1999 15,104,873 14,277,763
Subscriptions receivable (69,308) (83,983)
Accumulated deficit (21,355,338) (19,374,437)
----------- -----------
Total shareholders' deficit (1,892,385) (643,529)
----------- -----------
Total liabilities and shareholders' deficit $ 2,843,175 $ 3,657,854
=========== ===========
</TABLE>
See accompanying notes.
1
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USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Three months ended
September 30,
1999 1998
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Revenues:
Equipment sales $ 358,327 $ 712,294
License and transaction fees 154,865 80,165
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Total revenues 513,192 792,459
Operating Expenses:
Cost of equipment sales 316,385 623,178
General and administrative 1,185,611 453,420
Compensation 447,293 339,480
Depreciation and amortization 17,169 23,082
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Total operating expenses 1,966,458 1,439,160
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(1,453,266) (646,701)
Other income (expense):
Interest income 17,252 2,509
Interest expense (418,375) (1,411)
Joint Venture activities (33,142) (24,878)
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Total other income (expense) (434,265) (23,780)
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Net loss (1,887,531) (670,481)
Cumulative preferred dividends (469,183) (503,420)
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Loss applicable to common shares $(2,356,714) $(1,173,901)
Loss per common share (basic and
diluted) $ (0.37) $ (0.29)
Weighted average number of common
shares outstanding (basic and
diluted) 6,410,516 4,022,912
See accompanying notes.
2
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USA Technologies, Inc.
Consolidated Statement of Shareholders' Deficit
(Unaudited)
<TABLE>
<CAPTION>
Series A
Convertible
Preferred Common Subscriptions Accumulated
Stock Stock Receivable Deficit Total
-------------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1999 $ 4,537,128 $14,277,763 $ (83,983) $ (19,374,437) $ (643,529)
Issuance of 55,000 shares of Common Stock to
employees as prepaid compensation - 110,000 - 110,000
Conversion of 15,500 shares of Convertible
Preferred Stock to 15,500 shares of Common
Stock (109,740) 109,740 - -
Conversion of $93,370 of cumulative preferred
dividends into 9,337 shares of Common
Stock at $10.00 per share - 93,370 (93,370) -
Issuance of 223,000 shares of Common Stock in
exchange for prepaid professional and
consulting services - 446,000 - 446,000
Exercise of 136,000 Common Stock warrants at
$.50 per share - 68,000 - 68,000
Collection of subscriptions receivable 14,675 14,675
Net loss - - (1,887,531) (1,887,531)
============== ============ =========== ============= ===========
Balance, September 30, 1999 $ 4,427,388 $ 15,104,873 $ (69,308) $ (21,355,338) $(1,892,385)
=============== ============ =========== ============= ===========
</TABLE>
See accompanying notes.
3
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USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
1999 1998
------------- ------------
<S> <C> <C>
Operating activities
Net loss $ (1,887,531) $(670,481)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation charges incurred in
connection with the issuance of Common Stock 6,000 100
Interest relating to Senior Note Offering 256,610
Depreciation 17,169 23,082
Provision for allowance for uncollectible accounts 5,950
Changes in operating assets and liabilities:
Accounts receivable (85,943) (437,207)
Inventory 106,669 (306,410)
Prepaid expenses, deposits, and other assets 14,021 (1,731)
Accounts payable (9,965) 980,155
Accrued expenses 213,228 (10,410)
------------ ---------
Net cash used in operating activities (1,363,792) (422,902)
Investing activities
Purchase of property and equipment (29,734) (8,650)
----------- ---------
Net cash used in investing activities (29,734) (8,650)
Financing activities
Net repayment of equipment line of credit (23,698) -
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants and options 68,000 19,875
Collection of subscriptions receivable 97,488 -
Net proceeds from issuance of Convertible
Preferred Stock 234,485
Repayment of principal on capital lease obligations (1,998) (5,103)
------------ ---------
Net cash provided by financing activities 139,792 249,257
------------ ---------
Net decrease in cash and cash equivalents (1,253,734) (182,295)
Cash and cash equivalents at beginning of year 1,665,016 324,824
------------ ---------
Cash and cash equivalents at end of period $ 411,282 $ 142,529
============ =========
Supplemental disclosures of cash flow information:
Transfer of inventory to property and equipment 28,840 -
Prepaid stock compensation 550,000
</TABLE>
See accompanying notes.
4
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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 automated business centers,
primarily to the hospitality industry. The Company's patented unattended credit
card activated devices make available the use of various business equipment
including personal computers, copiers, fax machines and laptop connectivity to
the internet. The Company generates its revenues from the direct sale of its
control systems and the resale of configured business equipment, 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, 1999, the Company had a total installed
base of 1,294 control systems, distributed as follows: 1,156 Business Express(R)
or MBE Business Express(TM) control systems, 24 Business Express(R) Limited
Service (LSS), 36 Copy Express(TM) control systems, 27 Debit Express(TM) control
systems, 10 Fax/Printer Express(TM) control systems, and 41 Public PC(TM)
control systems located primarily at various hotels and libraries throughout the
United States and Canada. The total Business Express(R) or MBE Business
Express(TM) locations as of September 30, 1999 is 327, compared to 173 locations
as of September 30, 1998.
2. Accounting Policies
Interim Financial Information
The financial statements and disclosures included herein for the three
months ended September 30, 1999 and 1998 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
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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
On July 30, 1999, the Board of Directors granted fully vested warrants
to purchase 250,000 shares of the Company's Common Stock to two consultants.
These warrants were issued in exchange for financial and public relations
consulting services. The warrants may be exercised for two years from date of
issuance. Of the total, 50,000 warrants are exercisable at $2.00 per share,
50,000 at $3.00 per share, and 150,000 at $2.50 per share. In October 1999, the
exercise price of the 50,000 options exercisable at $3.00 was reduced to $2.00
through January 31, 2000. The Company's Board of Directors also granted a new
director 10,000 options to purchase Common Stock of the Company at $2.00 per
share for a period of five years, with half of the options vesting immediately
and the other half vesting after six months.
As of September 30, 1999, there were 11,740 Common Stock Purchase
Rights outstanding at a price of $10.00 per share, exercisable through June 30,
2000; 947,100 options outstanding to purchase Common Stock at exercise prices
ranging from $.50 to $5.00 per share, of which 738,767 were vested; 797,600
shares of Common Stock issuable upon exercise of the 1999-A warrants issued
between November 1998 and June 1999; 5,000 shares of Common Stock issuable upon
exercise of the 1998-B warrants issued in July 1998; 4,000 shares of Common
Stock issuable upon exercise of the 1998-A warrants issued in January and
February 1998; 110,000 shares of Common Stock issuable upon exercise of warrants
issued to affiliates and/or consultants of GEM Advisors, Inc. in June 1997;
1,500 shares of Common Stock issuable upon exercise of the 1997 warrants issued
in July 1997; 4,000 shares of Common Stock issuable upon exercise of the 1996-B
warrants issued in January and February 1997; 86,800 shares of Common Stock
issuable upon exercise of the 1996 warrants issued in 1996; and 67,300 shares of
Common Stock issuable upon exercise of the 1995 warrants issued in 1995.
Subsequent to September 30, 1999, the Company authorized a private placement
offering, and as of November 11, 1999, 60,000 1999-B Warrants have been
purchased.
6
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4. MBE Joint Venture
In May, 1999, the MBE Business Express Joint Venture was terminated.
Pre-termination customer obligations for new installations, and obligations for
continued servicing of existing installations are being met by the Company. See
discussion in Legal Proceedings in Part II of this document. During the quarter
ended September 30, 1999, IBM completed installation of the last of the 100 unit
MBE Business Express(TM) order from Prime Hospitality in Amerisuites hotels
across the United States. At September 30, 1999 the Joint Venture recorded gross
accounts payable to MBE of approximately $95,537, due to inventory and other
items.
6. Subsequent Events
During October 1999, the Company's Board of Directors authorized a
private placement offering (the "Offering") to accredited investors of 150 units
at a unit price of $10,000. Each unit of the Offering consists of 10,000 shares
of restricted Common Stock at $1.00 per share, and 10,000 1999-B Common Stock
purchase warrants. Each 1999-B Common Stock purchase warrant entitles the holder
to purchase one share of restricted Common Stock for $2.00 at any time through
March 31, 2000. As of November 11, 1999, 6 units have been sold, at $10,000 per
unit, resulting in gross proceeds of $60,000 to the Company. The Company has
agreed to use its best efforts to register for resale under the Securities Act
of 1933 (the "Act") such Common Stock as well as the Common Stock underlying the
warrants.
During October 1999, the Company's Board of Directors also authorized
voluntary conversion of all or any part of the 12% Senior Notes into shares of
restricted Common Stock at the rate of $2.50 per share, at any time until the
maturity date of December 31, 2001. If all of the $4,668,000 principal amount of
the Notes are converted, the Company would issue 1,867,200 shares of Common
Stock. The Company has agreed to use its best efforts to register for resale
under the Act the shares of Common Stock into which the Senior Notes are
convertible. The Board of Directors also provided that if at any time the
Company prepaid the Senior Notes, the holders of such notes would maintain the
right to convert the notes into Common Stock prior to such prepayment. The Board
of Directors also temporarily reduced the prices of the following through
January 31, 2000: 11,740 Common Stock purchase rights from $10.00 per right to
$2.00 per right; and 218,600 Common Stock warrants from prices ranging from
$3.00 to $5.00 per warrant to $2.00 per warrant.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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
7
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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, (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, or if actually commercialized, to
obtain commercial acceptance thereof, (v) the ability of the Company to compete
with its competitors to obtain market share, or (vi) the ability of the Company
to obtain sufficient funds through operations or otherwise to repay its debt
obligations. 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, 1999 resulted in a net operating
loss of $1,887,531 compared to a net loss of $670,481 for the fiscal quarter
ended September 30, 1998. Losses are projected to continue until sufficient
revenue is generated from equipment sales and licensing fees from the Company's
proprietary technology.
Revenues were $513,192 compared to $792,459 from the previous year's
fiscal quarter. This $279,267 or 35% shortfall reflects the beginning of the
large Prime Hospitality rollout last year at this time as well as reduced
marketing efforts in the latter half of fiscal year 1999 due to the dispute with
MBE. Of the total revenues, equipment sales totaled $358,327, a decrease of
$353,967 or 50% over the same period last year. License fees, however, increased
to $154,865 from $80,165 for the same period during the prior year, an increase
of 93%. This is due to the continuing increase in the installed base of control
systems. 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
$316,385 which represented a decrease of $306,793 or 49% versus the same period
during the prior year, and is directly attributable to the decrease in equipment
sales described above.
General and administrative expenses of $1,185,611 increased by $732,191
or 161% from the same quarter last year. The principal reason was a large
increase in legal costs of $460,912 or 656%. Of this amount, $374,715 was for
activities related to the MBE litigation described in Part II, Item 1 (Legal
Proceedings), all of which has been funded through the issuance of Company stock
and therefore does not consume cash. Other components of general and
administrative costs included increases in outside services of $114,840;
professional and consulting fee increases of $54,815, and increases in
advertising and print media expenses of $30,370 or 104%; offset by reductions in
travel and entertainment of $22,318 or 32%.
8
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Compensation expense of $447,293 increased by 32% due to increased
personnel requirements in all areas of the Company. The interest expense
increase of $418,375 was due to two factors. The non-cash amortization of the
debt cost and the equity component was $256,610; while the remaining amount
was primarily due to interest payments on the 12% Senior Debt. Depreciation
expense decreased from $23,082 to $17,169, due to completed depreciation on
older assets.
During the quarter, shares of common stock have been issued in lieu of
cash payments with a fair value of $556,000, and are reflected primarily as an
increase in prepaid assets.
As of September 30, 1999, the Company had an installed base of a total
of 1,294 control systems, distributed as follows: 1,156 Business Express(R) or
MBE Business Express(TM) control systems, 24 Business Express(R) Limited Service
control systems, 36 Copy Express(TM) control systems, 27 Debit Express(TM)
control systems, 10 Fax/Printer Express(TM) control systems, and 41 Public
PC(TM) control systems located at various hotels and libraries throughout the
United States and Canada. The total Business Express(R) or MBE Business
Express(TM) locations as of September 30, 1999 is 327, compared to 173 locations
as of September 30, 1998. The total license fee revenues received by the Company
from these systems increased 93% from last fiscal year but is still well below
the level required to achieve profitability.
Plan of Operations
The Company has developed a product line extension to its flagship
Business Express(R) product, called the Business Express(R) Limited Service
Series (LSS). The LSS has copier and fax capabilities plus laptop printing,
dataport capabilities and credit card activated phone. The LSS is targeted to
the heart of the hospitality industry, which includes mid-market, limited
service and economy properties. As of September 30, 1999, 14 LSS locations have
been installed, in Holiday Inns, Best Westerns and others.
The Company's next generation of terminal, e-Port(TM), is nearing
completion of development, and would contain all the functionality of the
current TransAct(TM) terminal for card processing, control and data management,
and in addition would offer capability for public access electronic commerce and
advertising using the internet. The Company intends to introduce to the public a
preliminary version of e-Port(TM) in early to mid-December. During the second
fiscal quarter, the Company anticipates that it would beta-test these terminals
in selected hospitality locations, and believes that it would begin selling
e-Port(TM) in the following quarter.
In October 1999, the Company filed a Form 8-K with the SEC describing
a preliminary agreement with a Fortune 100 consumer products company, pursuant
to which the consumer products company would establish a pilot program using
e-Port(TM) in a limited number of its beverage vending machines. The pilot is
expected to last several months, with all costs covered. The Company is in
discussions with the consumer products company regarding a comprehensive
business relationship if the pilot program is a success. In June 1999, the
Company received a notice of allowance for a vending application of its
technology, with patent issuance expected soon.
The Company continues to work with its business partner IBM on a number
of different projects. A proposal is being developed with IBM whereby IBM will
provide value added design, development, fulfillment and product warranty
services for e-port(TM). The goal is to benefit from IBM research, purchasing,
manufacturing and global services to provide the Company with shortened time to
market, product excellence, and a lower total cost of goods. IBM has also signed
a non-binding letter of intent to help the Company design an enhanced version of
the network which will underlie all transaction processing for e-port(TM),
including advertising and e-commerce.
9
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The Company is marketing its products through its full-time sales staff
consisting of two national accounts salespeople and three telesales individuals,
either directly to customer locations or to management companies servicing these
locations. Strategic partnerships continue to be pursued and developed.
Liquidity and Capital Resources
For the three month period ended September 30, 1999, there was a net
decrease in cash of $1,253,734. This was attributable to using $1,363,792 for
operating activities, partially offset by net proceeds of $139,792 raised
through the exercise of warrants and collection of subscriptions receivable. As
of September 30, 1999, total cash on hand was $411,282, and working capital was
$243,858, of which $1,120,687 was invested in inventory.
During the quarter ended September 30, 1999, 136,000 Common Stock
warrants were exercised at $.50 per share, resulting in proceeds to the Company
of $68,000.
During October 1999, the Company's Board of Directors authorized a
private placement offering (the "Offering") to accredited investors of 150 units
at a unit price of $10,000. Each unit of the Offering consists of 10,000 shares
of restricted Common Stock at $1.00 per share, and 10,000 1999-B Common Stock
purchase warrants. Each 1999-B Common Stock purchase warrant entitles the holder
to purchase one share of restricted Common Stock for $2.00 at any time through
March 31, 2000. As of November 11, 1999, 6 units have been sold at $10,000 per
unit, resulting in gross proceeds of $60,000 to the Company.
The Company believes that existing and future proceeds from the above
Offering, together with funds available from the potential exercise of
outstanding warrants and options, plus increased revenues from its business
would be sufficient to fund operations until at least through the end of the
fiscal year ending June 30, 2000. However, 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. Under such
circumstances, the Company may cease to be a going concern or may have to reduce
its operations.
Year 2000 Compliance
The Company's Year 2000 remediation efforts have proceeded with
Executive level management sponsorship, funding and support. Efforts have been
made to ensure orderly transition leading up to and across the date change
event. The Company is committed to making the Millennium event come and pass
without disruption to its customers, suppliers and business partners. By
November 30, 1999 final trial testing and contingency planning will be
completed, in the event that issues arise that are outside of the Company's
control, specifically utilities, municipal infrastructures, communications
facilities and key interfaces. The Company has incurred costs estimated to be
approximately $10,000 for internal and external studies and analysis related to
Year 2000 compliance.
10
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In connection with its studies, the Company concentrated on five areas
of its business: (i) its control system terminals; (ii) its office computers;
(iii) its credit card processing capability and related systems; (iv) its
back-up and off-site recovery process; and (v) its non-Information Technology
("IT") systems. The study should be completed on or before November 30, 1999.
The Company estimates that its actual remediation costs have been approximately
$20,000, including replacement accounting software, other software and database
upgrades, and internal or external services.
In reference to item (i) above, selected terminals have been
re-examined by the Development Engineer. No hardware or firmware was found to
contain any date sensitive element that would cause a Year 2000 problem. In
addition, several terminals were tested by using year 2000 dates, and no problem
was found. In reference to item (ii) above, the Company has already found all
office computers to be compliant. In reference to item (iii), the programs
written by the Company to process credit card data received from the terminals
in the field have been reviewed, and no Year 2000 problems have emerged. In
reference to item (iv), the off-site recovery systems utilize IBM facilities
nearby which are Year 2000 compliant. Item (v), non IT systems, are deemed by
the Company to pose no Year 2000 risk.
The Company is in the process of obtaining written assurances of
compliance from all third parties whose products may materially affect the
Company's operations. These parties include, but are not limited to, the
Company's credit card processor, control systems and select equipment
manufacturers.
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. The Company
believes that 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 the scenario did happen, the Company's
licensing and processing revenues might be materially impacted if the time
required for replacing all defective units using compliant terminals was many
months. The Company anticipates the cost of such replacement units to be
approximately $200,000.
11
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Part II - Other information
Items 3, 4, 5, and 6 are not applicable.
Item 1. Legal Proceedings
The current litigation with Mail Boxes Etc. is described in the
Company's Form 10-KSB for the fiscal year ended June 30, 1999. Subsequent to
this date the parties have been conducting discovery but no trial date has been
set. By court order, discovery is currently required to be completed by February
18, 2000.
Item 2. Changes in Securities
During August 1999, the Company's Board of Directors authorized
issuance of a total of 377,800 shares of Common Stock to various employees and
consultants at $2.00 per share for services rendered or to be rendered in fiscal
year 2000, in lieu of cash compensation. Of such shares, 3,000 constitute
restricted securities as such term is defined under the Act, and the remaining
shares are to be registered under the Act. Of the 377,800 total shares, 278,000
shares were issued during the quarter ended September 30, 1999.
During the quarter ended September 30, 1999, 136,000 1999-A Common
Stock purchase warrants were exercised at $.50 per warrant, generating gross
proceeds of $68,000. Such shares of Common Stock were issued pursuant to the
exemption from registration set forth in Section 4(2) of the Act.
During the quarter ended September 30, 1999, the Company issued 15,500
shares of Common Stock upon the conversion of 15,500 shares of Series A
Preferred Stock and issued 9,337 shares of Common Stock upon the conversion of
$93,370 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.
In August 1999, the Company issued to an executive officer fully vested
options to acquire up to 20,000 shares of Common Stock at $2.00 per share. The
options are exercisable at any time within five years following issuance. The
Company issued the options pursuant to the exemption from registration set forth
in Section 4(2) of the Act. The Company has agreed to register for resale under
the Act the Common Stock underlying the options.
In July 1999, the Company extended the expiration dates until June 30,
2001 of options to acquire Common Stock held by certain directors, officers or
employees. All of such options would have expired in the first two calendar
quarters of the year 2000 or the first calendar quarter of year 2001.
12
<PAGE>
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 15, 1999 ________________________________________
George R. Jensen, Jr., Chairman,
Chief Executive Officer
Date: November 15, 1999 ________________________________________
Leland P. Maxwell, Senior Vice President,
Chief Financial Officer
13
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<NAME> USA TECHNOLOGIES, INC.
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