<PAGE>
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 March 31, 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.
----------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2679963
------------ -----------
(State or other jurisdiction of (I.R.S. employer Identification No.)
incorporation 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 May 6, 1999, there were 42,444,776 shares of Common Stock, no par
value, 652,727 shares of Series A Convertible Preferred Stock, no par value,
outstanding, and 129,387 shares of Series B Equity Participating Preferred
Stock, no par value, outstanding.
<PAGE>
USA TECHNOLOGIES, INC.
INDEX
PAGE NO.
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1999 and June 30, 1998 1
Consolidated Statements of Operations - Three and nine months
ended March 31, 1999 and 1998 2
Consolidated Statement of Shareholders' Equity -
March 31, 1999 3
Consolidated Statements of Cash Flows - Nine months ended
March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 12
<PAGE>
USA Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- ----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 362,512 $ 324,824
Accounts receivable less allowance
for uncollectible accounts of $23,783 at March
31, 1999 (unaudited) and $23,764 at June 30, 1998 749,064 222,743
Inventory 790,860 436,971
Stock subscriptions receivable - 19,875
Prepaid expenses and deposits 32,461 20,515
---------- ----------
Total current assets 1,934,897 1,024,928
Property and equipment, at cost, net of accumulated
depreciation of $367,530 at March 31, 1999
(unaudited) and $291,084 at June 30, 1998 127,505 151,906
Other assets 10,250 10,250
---------- ----------
Total assets $2,072,652 $1,187,084
========== ==========
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $2,277,926 $ 576,787
Accrued expenses 409,934 430,643
Current obligations under capital leases 12,030 22,810
---------- ----------
Total current liabilities 2,699,890 1,030,240
Senior Notes 888,758 -
Obligations under capital leases, less current portion 22,124 1,669
---------- ----------
Total liabilities 3,610,772 1,031,909
Shareholders' equity (deficit):
Preferred Stock, no par value, authorized shares - 1,200,000:
Series A Convertible Preferred: 4,673,592 4,538,114
Authorized shares - 787,591; issued and outstanding shares -
660,027 at March 31, 1999 (unaudited) and 618,236 at
June 30, 1998 (liquidation preference of $ 9,982,823 at
March 31, 1999 - unaudited)
Series B Equity Participating Preferred: - -
Authorized shares - 250,000; issued and outstanding shares
- 95,950 at March 31, 1999 (unaudited)
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 42,333,976 at
March 31, 1999 (unaudited) and 40,163,837
at June 30, 1998 11,595,769 11,223,213
Accumulated deficit (17,807,481) (15,606,152)
---------- ----------
Total shareholders' equity (deficit) (1,538,120) 155,175
---------- ----------
Total liabilities and shareholders' equity $2,072,652 $ 1,187,084
========== ==========
</TABLE>
See accompanying notes.
1
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales $ 864,343 $ 477,239 $ 3,021,727 $ 1,096,961
License and transaction fees 133,093 70,969 318,555 173,709
Other - - - 9,342
---------- ---------- ----------- -----------
Total revenues 997,436 548,208 3,340,282 1,280,012
Operating Expenses:
Cost of equipment sales 684,836 380,473 2,576,394 929,610
General and administrative 616,069 468,044 1,614,407 1,359,962
Compensation 336,674 320,723 1,025,154 968,798
Depreciation and amortization 31,710 25,497 82,012 76,491
---------- ---------- ----------- -----------
Total operating expenses 1,669,289 1,194,737 5,297,967 3,334,861
---------- ---------- ----------- -----------
(671,853) (646,529) (1,957,685) (2,054,849)
Other income (expense):
Interest income 1,534 5,696 5,229 15,169
Interest expense (20,353) (2,484) (28,260) (7,133)
Joint Venture activities (67,971) - (158,064) -
---------- ---------- ----------- -----------
Total other income (expense) (86,790) 3,212 (181,095) 8,036
---------- ---------- ----------- -----------
Net loss (758,643) (643,317) (2,138,780) (2,046,813)
Cumulative preferred dividends (499,033) (464,277) (1,002,453) (1,109,431)
Other adjustments - (58,715) - (645,135)
---------- ---------- ----------- -----------
Loss applicable to common shares $(1,257,676) $(1,166,309) $(3,141,233) $(3,801,379)
=========== =========== =========== ===========
Loss per common share (basic and diluted) $(0.03) $ (0.03) $ (0.08) $ (0.11)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding (basic and diluted) 41,321,074 36,094,736 40,595,401 34,160,761
=========== =========== =========== ===========
</TABLE>
2
See accompanying notes.
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Series B
Series A Equity
Convertible Participating
Preferred Preferred Common Accumulated
Stock Stock Stock Deficit Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 $ 4,538,114 $ - $11,223,213 $ (15,606,152) $ 155,175
Issuance of 500 shares of Common Stock to an
employee as compensation - - 100 - 100
Conversion of 13,809 shares of Convertible
Preferred Stock to 138,090 shares of
Common Stock (99,007) - 99,007 - -
Conversion of $62,549 of cumulative preferred
dividends into 62,549 shares of Common
Stock at $1.00 per share - - 62,549 (62,549) -
Issuance of 55,600 shares (27.8 units) of
Convertible Preferred Stock at $5.00 per
share for 1998-B Private Placement, net of
offering costs of $43,155 234,485 - - - 234,485
Issuance of 230,000 shares of Common Stock in
exchange for consulting services - - 37,000 - 37,000
Exercise of 1,289,000 Common Stock warrants
at $.10 per share - - 128,900 - 128,900
Exercise of 450,000 Common Stock options at
$.10 per share - - 45,000 - 45,000
Issuance of 95,950 shares (95.95 units) of
Series B Equity Participating Preferred
Stock - - - - -
Net loss - - - (2,138,780) (2,138,780)
=================================================================================
Balance, March 31, 1999 $ 4,673,592 $ - $ 11,595,769 $ (17,807,481) $ (1,538,120)
=================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended March 31,
1999 1998
---------------------------------------
<S> <C> <C>
Operating activities
Net loss $ (2,138,780) $ (2,046,813)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation charges incurred in
connection with the issuance of Common Stock 37,100 70,661
Depreciation and amortization 82,012 76,491
Changes in operating assets and liabilities:
Accounts receivable (526,321) (277,670)
Inventory (367,708) (218,012)
Prepaid expenses, deposits, and other assets (11,946) ( 8,449)
Accounts payable 1,701,139 271,273
Accrued expenses (20,709) 167,627
---------------------------------------
Net cash used in operating activities (1,245,213) (1,964,892)
Investing activities
Purchase of property and equipment (8,984) (723)
---------------------------------------
Net cash used in investing activities (8,984) (723)
Financing activities
Net proceeds from issuance of Senior Notes 883,192 -
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants and options 193,775 1,055,439
Net proceeds from issuance of Convertible
Preferred Stock 234,485 715,125
Repayment of principal on capital lease obligations (19,567) (13,316)
---------------------------------------
Net cash provided by financing activities 1,291,885 1,757,248
---------------------------------------
Net increase (decrease) in cash and cash equivalents 37,688 (208,367)
Cash and cash equivalents at beginning of year 324,824 630,266
=======================================
Cash and cash equivalents at end of period $ 362,512 $ 421,899
=======================================
Supplemental Disclosure of Cashflow Information:
Capital lease obligations $ 29,242 -
</TABLE>
See accompanying notes.
4
<PAGE>
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 March 31, 1999, the Company had a total installed base
of 1,224 control systems, distributed as follows: 1,068 Business Express(TM) or
MBE Business Express(TM) control systems, 45 Copy Express(TM) control systems,
33 Debit Express(TM) control systems, 9 Fax/Printer Express(TM) control systems,
and 69 Public PC(TM) control systems located primarily at various hotels and
libraries throughout the United States and Canada. The total Business
Express(TM) or MBE Business Express(TM) locations as of March 31, 1999 is 290
compared to 100 locations as of March 31, 1998.
2. Accounting Policies
-------------------
Interim Financial Information
The financial statements and disclosures included herein for the three
and nine months ended March 31, 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
<PAGE>
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
-------------------------------------------
As of March 31, 1999, there was a total of 152,800 Common Stock
Purchase Rights outstanding at a price of $1.00 per share. As of March 31, 1999,
there was a total of 3,751,000 options outstanding to purchase Common Stock at
exercise prices ranging from $.05 to $.50 per share, of which 3,688,500 were
vested.
In January, 1999, the Board of Directors approved the following: a) a
reduction of the exercise of the warrants of the 1998-C debt offering from $.10
to $.05, effective until December 31, 1999 at which time the price shall revert
to $.10; b) an increase in the number of warrants in each unit of the current
debt offering from 15,000 per unit to 20,000 per unit. If all 200 units are
sold, the increase would total 1,000,000 warrants; c) an extension of the
reduced exercise price of $.10 for the 1,390,000 1998-B warrants through March
31, 1999 versus through February 1, 1999; and d) a reduction in the exercise
price of the 152,800 purchase rights issued in July 1993 from $1.00 per share to
$.10 per share through March 31, 1999, at which time the price will revert to
$1.00.
There are also 1,919,000 shares of Common Stock issuable upon exercise
of the 1998-C warrants issued in November and December 1998; 101,000 shares of
Common Stock issuable upon exercise of the 1998-B warrants issued in July 1998;
40,000 shares of Common Stock issuable upon exercise of the 1998-A warrants
issued in January and February 1998; 1,100,000 shares of Common Stock issuable
upon exercise of warrants issued to affiliates and/or consultants of GEM
Advisors, Inc. in June 1997; 15,000 shares of Common Stock issuable upon
exercise of the 1997 warrants issued in 1997; 40,000 shares of Common Stock
issuable upon exercise of the 1996-B warrants issued in January and February
1997; 868,000 shares of Common Stock issuable upon exercise of the 1996 warrants
issued in 1996; and 673,000 shares of Common Stock issuable upon exercise of the
1995 warrants issued in 1995.
During the quarter ended March 31, 1999, 1,289,000 Common Stock
warrants were exercised at $.10 per share, resulting in proceeds to the Company
of $128,900 and 450,000 Common Stock options were exercised at $.10 per share,
resulting in proceeds of $45,000.
6
<PAGE>
4. MBE Joint Venture
-----------------
On March 31, 1998, the MBE Joint Venture signed agreements with
International Business Machines Corporation ("IBM") whereby IBM agreed to be the
executional partner for certain aspects of the MBE Joint Venture's business. For
the quarter ended March 31, 1999, IBM installed 42 MBE Business Express(TM)
units for the Joint Venture. As part of this, IBM is nearing completion of the
100 unit MBE Business Express(TM) order from Prime Hospitality in Amerisuites
hotels across the United States, with 94 units installed as of March 31, 1999.
Also at March 31, 1999 the Joint Venture recorded gross accounts payable to MBE
of approximately $153,000, due to inventory and other items.
On May 14, 1999 the Company notified MBE that the Company was
terminating the Joint Venture Agreement. As required under this agreement on
Februay 4, 1999 and February 19, 1999, the Company delivered to MBE notice that
MBE was in default of the Joint Venture Agreement and demanded that MBE cure the
breaches within sixty days. Through the date of the termination of the Joint
Venture, MBE failed to cure any of the breaches and had not otherwise taken any
steps to remedy the breaches. See Note 6 and discussion in Legal Proceedings in
Part II of this document.
5. Private Placement Offering
--------------------------
During September 1998, the Company's Board of Directors authorized a
$2,000,000 private placement offering of 200 units at a unit price of $10,000.
Each unit of the offering consists of a 12% Senior Note in the principal amount
of $10,000, 15,000 1998-C Common Stock purchase warrants and 1,000 shares of
Series B Equity Participating Preferred Stock. Each 1998-C Common Stock purchase
warrant entitles the holder to purchase 1 share of Common Stock for $.10 at any
time through December 31, 2001. Each share of Series B Preferred Stock is
automatically convertible into 40 shares of Common Stock at the time of a "USA
Transaction," as defined. In connection with this Offering, the Board of
Directors also authorized the creation of 200,000 shares of a new Series B
Equity Participating Preferred Stock. The offering commenced on September 28,
1998. As of March 31, 1999, 95.95 units have been sold at $10,000 per unit,
resulting in net proceeds of $883,192 to the Company after deducting costs, and
no warrants have been exercised.
In connection with the Senior Note offering described above, on January
21, 1999 the Board of Directors approved a commitment by the President to
purchase 10 units for $100,000. The President will pay for the units by
foregoing payroll from April 1, 1999 through June 30, 2000. The President also
directly purchased 10 units, resulting in proceeds to the Company of $100,000.
The Board of Directors on January 21, 1999 also expanded the rights of holders
of the Series B Equity Participating Preferred Stock to allow them to convert
such shares to the same number of shares of Common Stock in the event of a
reverse stock split; and increased the allowable number of members of the Board
of Directors from seven to nine.
On March 4, 1999, the Board of Directors extended the offering to April
30, 1999 and increased the number of shares of Series B Equity Participating
Preferred Stock from 200,000 to 250,000.
7
<PAGE>
6. Subsequent Events
-----------------
At the direction of the Board of Directors, the Company terminated the
Joint Venture Agreement with MBE on May 14, 1999(see Part II, Legal
Proceedings).
On May 10, 1999, the Board of Directors authorized an increase in the
aggregate Senior Note offering from $2,000,000 to $3,500,000; increased the
aggregate of 1998-C Warrants from 4,000,000 to 7,000,000 and the aggregate of
Series B Equity Participating Preferred Stock from 250,000 shares to 350,000
shares; and extended the offering deadline from April 30, 1999 to May 31, 1999,
with right of extension for another thirty days, or until June 30, 1999. As of
May 14, 1999 subscriptions for a total of approximately $1,650,000 have been
received for this Offering.
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The fiscal quarter ended March 31, 1999 resulted in a net operating
loss of $758,643 compared to a net loss of $643,317 for the comparable fiscal
quarter ended March 31, 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 $997,436 compared to $548,208 from the previous year's
fiscal quarter. This $449,228 or 82% improvement reflects the success of the
Company's sales efforts and the increasing marketplace acceptance of the
Company's products. Of the total revenues, equipment sales totaled $864,343, an
increase of $387,104 or 81% over the same period last year. License fees
increased to $133,093 from $70,969 for the same period during the prior year, an
increase of 87%. Despite these gains, revenue is still well below the level
required for the Company to be profitable.
Cost of equipment sales for the period included labor and equipment of
$684,836 which represented an increase of $304,363 over the same period during
the prior year, and is directly attributable to the increase in equipment sales
described above.
General and administrative expenses of $616,069 increased by $148,025
or 32% from the same quarter last year. The principal reason was a large
increase in legal costs of $226,077 to pay for activities related to MBE
described in Part II, Item 1 (Legal Proceedings). Without this legal cost,
overall general and administrative costs would have decreased by $78,052. Other
components of general and administrative costs included increases in
professional fees of $45,805, and increases in trade show expenses of $14,480;
offset by reductions in advertising costs of $42,154, product development cost
reductions of $23,994, and reductions in travel and entertainment of $57,660.
Compensation expense of $336,674 increased by 5% due to increased
personnel requirements in all areas of the Company. Depreciation and
amortization expense increased from $25,497 to $31,710.
8
<PAGE>
Accounts payable has increased substantially from June 30, 1998 due
to the increased activity resulting from increased operations and increased
expenses. Inventory and accounts payable both increased due to preparation for
activity anticipated in the fourth quarter of fiscal year 1999.
As of March 31, 1999, the Company had an installed base of a total of
1,224 control systems, distributed as follows: 1,068 Business Express(TM) or MBE
Business Express(TM) control systems, 45 Copy Express(TM) control systems, 33
Debit Express(TM) control systems, 9 Fax/Printer Express(TM) control systems,
and 69 Public PC(TM) control systems located at various hotels and libraries
throughout the United States and Canada. The Total Business Express(TM) or MBE
Business Express(TM) locations as of March 31, 1999 is 290 compared to 100
locations as of March 31, 1998. The total license fee revenues received by the
Company from these systems has been increasing but is still well below the level
required to achieve profitability.
The nine month period ended March 31, 1999 resulted in a net operating
loss of $2,138,780 compared to a net loss of $2,046,813 for the comparable
period ended March 31, 1998. Revenues were $3,340,282 compared to $1,280,012, a
$2,060,270 or 161% improvement. Of the total revenues, equipment sales totaled
$3,021,727, an increase of $1,924,766 or 175%. Cost of sales of $2,576,394
represented an increase of $1,646,784, and is directly attributable to the
increase in equipment sales. General and administrative expenses of $1,614,407
increased by $254,445 or 19%. The principal reason was a large increase in legal
costs of $358,586 to pay for activities related to MBE described in Part II,
Item 1, (Legal Proceedings). Without this legal cost, overall general and
administrative cost would have decreased by $104,141. Other components of
general and administrative costs included increases in outside marketing and
operational services of $72,001, and increased charges for warranty cost
coverage of $26,648; offset by reductions in consultant and professional fees of
$113,341 and reductions in travel and entertainment of $102,884. Compensation
expense of $1,025,154 increased by 6% due to permanent and increased personnel
requirements in all areas of the Company.
Plan of Operations
On May 14, 1999, the Company signed an agreement with International
Business Machines (IBM). This agreement expanded the original Agreement whereby
IBM will install USA products in 1,000 locations, to 5,000 locations. In
addition, the new agreement includes a wider array of USA products which are
eligible for such installations.
The Company is planning to introduce in June 1999 its next generation
of terminal, which has received the approval for the trademark "e-port." This
new terminal contains all the functionality of the current TransAct(TM) terminal
for card processing, control and data management, and in addition offers
capability for public access electronic commerce, and advertising using the
internet.
Three patents have been filed for e-port(TM), raising the total to
fifteen patents filed covering various Company products. Two patents have been
issued. Two other patents have received notices of allowance, one for a vending
application and one for the dataport. This vending patent, in conjunction with
e-port(TM), may allow the Company to explore the vending market. Other markets
may also be available with e-port(TM), such as retail point of sale.
The Company has developed a product line extension to its flagship
Business Express(TM) product, called the Business Express(TM) 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 heat of the hospitality industry, which includes mid-market, limited service
and economy properties. On May 14, 1999 as part of the Company's marketing
effort for LSS, an Agreement was reached with Choice Hotels (franchisor of
approximately 3,000 Comfort, Clarion and Sleep brand hotels) which reflects
Choice's commitment to promote the LSS internally to its hotels.
9
<PAGE>
An additional market which the Company is beginning to explore with
current TransAct(TM) technology is apartments. Approximately 27,000 operators of
apartment buildings in the United States have been identified as potential users
of USA products. The first installation in an apartment complex has already
occurred at a site in Maryland.
The Company is marketing its products through its full-time sales staff
consisting of three national accounts salespeople, four telesales individuals
and one director of marketing, either directly to customer locations or to
management companies servicing these locations.
Liquidity and Capital Resources
For the nine month period ended March 31, 1999, there was a net
increase in cash of $37,688. This was attributable to using $1,245,213 for
operating activities, partially offset by net proceeds of $883,192 raised
through the issuance of 12% Senior Notes, $193,775 raised through the exercise
of Common Stock purchase warrants and options, and net proceeds of $234,485
raised through the issuance of Series A Preferred Stock. As of March 31, 1999,
total cash on hand was $362,512, and the working capital deficit was $764,993 of
which $790,860 was invested in inventory.
During September 1998, the Company's Board of Directors authorized
a $2,000,000 private placement offering (the "Offering") of 200 units at a unit
price of $10,000. Each unit of the Offering consists of a 12% Senior Note in the
principal amount of $10,000, 15,000 1998-C Common Stock purchase warrants and
1,000 shares of Series B Equity Participating Preferred Stock. Each 1998-C
Common Stock purchase warrant entitles the holder to purchase 1 share of common
stock for $.10 at any time through December 31, 2001. Each share of Series B
Preferred Stock is automatically convertible into 40 shares of Common Stock at
the time of a "USA Transaction," as defined. In connection with this Offering,
the Board of Directors also authorized the creation of 200,000 shares of a new
Series B Equity Participating Preferred Stock. The offering commenced on
September 28, 1998. As of March 31, 1998, 95.95 units have been sold, at $10,000
per unit, resulting in net proceeds of $883,192 to the Company, after deducting
costs.
In connection with the Senior Note described above, in January, 1999
the Board of Directors approved a commitment by the President to purchase 10
units for $100,000. The President will pay for the units by foregoing payroll
from April 1, 1999 through June 30, 2000. The President has also directly
purchased 10 additional units for $100,000.
During the quarter ended March 31, 1999, 1,289,000 Common Stock
warrants were exercised at $.10 per share, resulting in proceeds to the Company
of $128,900 and 450,000 Common Stock options were exercised at $.10 per share,
resulting in proceeds of $45,000.
The Company believes that existing and future proceeds from the
expanded Senior Note 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
quarter ended December 31, 1999. There can be no assurance that any such
additional sales of securities could be made by the Company or that increased
revenues would result from its business activities. In such event, the Company
may cease to be a going concern or may have to reduce its operations. Since the
cash received from sales of Senior Notes does not add to shareholder equity, a
shareholder deficit has arisen while long term liabilities reflects the cash
infusion. The Company's plan call for improved operating results and exercise of
warrants or options to turn the current deficit into positive shareholder
equity.
10
<PAGE>
Year 2000 Compliance
The company is near completion of a study of its business in order to
determine whether its computer systems are in compliance with Year 2000 issues.
In this regard, many existing computer programs use only two digits to identify
a year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000.
In connection with its study, the Company is concentrating on
five areas of its business: (i) its control system terminals; (ii) its office
computers; (iii) its credit card processing systems and related systems; (iv)
its back-up, off-site recovery system and (v) its non-Information Technology
("IT") systems. The study should be completed on or before September 30, 1999.
Based on the study to date the Company estimates that it could incur costs of up
to $25,000 in order to be Year 2000 compliant. In reference to item (ii) above,
the Company has already found all but two office computers to be compliant.
These two computers will be replaced with Year 2000 compliant computers in
fiscal year 1999.
The Company is in the process of obtaining written assurances
of compliance from all material third parties whose products may affect the
Company's operations.
The worst case scenario for the Company would be if the
control systems in the field were all found to contain a Year 2000 problem which
caused defective transmissions into the Company's main processing software.
Preliminary analysis indicated the probability of this scenario actually
happening is very low (because the technology of the control units does not
involve use or transmission of two digit year data). If however it did happen,
the Company would utilize the services of IBM Global Services to replace all
defective units. The Company anticipates the cost of such services to be
approximately $150,000.
Part II - Other information
Items 3, 4, 5, and 6 are not applicable.
Item 1. Legal Proceedings
On May 14, 1999, the Company notified Mail Boxes Etc. USA, Inc.
("MBE") that the Company was terminating the Joint Venture Agreement dated
September 24, 1997 ("Joint Venture Agreement"). The Joint Venture Agreement
provided that it could be terminated at any time by either partner if the other
partner breached any material term or condition of the agreement; provided that
the terminating partner allowed the other partner at least a sixty day period to
cure any alleged breach.
As required under the Joint Venture Agreement, on February 4, 1999 and
February 19, 1999, the Company delivered to MBE notice that MBE was in default
of the Joint Venture Agreement in connection with five separate items, and
demanded that MBE cure the breaches within sixty days. Through the date of the
termination of the Joint Venture, MBE failed to cure any of the breaches and had
not otherwise taken any steps to remedy the breaches.
11
<PAGE>
The Company's May 14, 1999 letter to MBE states five reasons for the
termination: MBE's refusal to authorize the installation of data port terminals
as required under the sales agreement between the joint venture and a customer;
MBE's refusal to allow the joint venture to market and sell data port terminals;
MBE's ongoing failure to commit adequate and appropriate resources to joint
venture sales and marketing to effectuate a reasonable number of sales of joint
venture business center equipment; MBE's failure to acknowledge the Company's
ownership of the trademark "Business Express" and its actions inconsistent with
the Company's ownership of the mark; and MBE's refusal to timely meet with the
Company to discuss and conclude a joint venture sales and marketing budget for
the fiscal year commencing April 1, 1999.
As previously disclosed, there is a pending legal action between the
Company and MBE in the United States District Court for the Southern District of
California. To date, limited discovery has been conducted by the parties and no
trial date has been set.
Item 2. Changes in Securities
During the quarter ended March 31, 1999, the Company issued 180,000
shares of Common Stock to a consultant as compensation for services. Such shares
contained a restrictive legend under the Act, and were issued pursuant to the
exemption from registration set forth in Section 4(2) of the Act. Also during
this quarter, the Company issued 71,340 shares of Common Stock upon the
conversion of 7,134 shares of Series A Preferred Stock and issued 35,465 shares
of Common Stock upon the conversion of $35,465 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.
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: May 17, 1999 /s/ George R. Jensen, Jr.
----------------------------------------------------
George R. Jensen, Jr., President,
Chief Executive Officer
Date: May 17, 1999 /s/ Leland P. Maxwell
----------------------------------------------------
Leland P. Maxwell, Senior Vice President,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000896429
<NAME> USA TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 362,512
<SECURITIES> 0
<RECEIVABLES> 772,847
<ALLOWANCES> (23,783)
<INVENTORY> 790,860
<CURRENT-ASSETS> 1,934,897
<PP&E> 495,035
<DEPRECIATION> 367,530
<TOTAL-ASSETS> 2,072,652
<CURRENT-LIABILITIES> 2,699,890
<BONDS> 0
0
4,673,592
<COMMON> 11,595,769
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,072,652
<SALES> 864,343
<TOTAL-REVENUES> 997,436
<CGS> 684,836
<TOTAL-COSTS> 1,669,289
<OTHER-EXPENSES> 66,437
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,353
<INCOME-PRETAX> (758,643)
<INCOME-TAX> 0
<INCOME-CONTINUING> (758,643)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (758,643)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
