<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 December 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.
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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
- --------------------------------------- -----
(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 February 1, 2000, there were 11,311,575 shares of Common Stock, no par
value, and 621,627 shares of Series A Convertible 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 - December 31, 1999 (Unaudited)
and June 30, 1999 1
Consolidated Statements of Operations - Three and six months ended
December 31, 1999 and 1998 (Unaudited) 2
Consolidated Statement of Shareholders' Equity (Deficit) 3
December 31, 1999 (Unaudited)
Consolidated Statements of Cash Flows - Six months ended
December 31, 1999 and 1998 (Unaudited) 4
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 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
USA Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
--------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,744,429 $ 1,665,016
Accounts receivable less allowance
for uncollectible accounts of $78,152 at December
31, 1999 (unaudited) and $69,555 at June 30, 1999 285,532 361,463
Inventory 1,040,867 1,255,836
Subscriptions receivable 490,650 178,873
Prepaid expenses and deposits 569,277 42,746
----------- -----------
Total current assets 5,130,755 3,503,934
Property and equipment, at cost, net of accumulated
depreciation of $422,465 at December 31, 1999
(unaudited) and $382,857 at June 30, 1999 201,412 143,670
Other assets 12,450 10,250
----------- -----------
Total assets $ 5,344,617 $ 3,657,854
=========== ===========
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 1,541,898 $ 917,141
Note payable-equipment 135,085 804,485
Accrued expenses 495,975 498,548
Current obligations under capital leases 4,804 4,393
----------- -----------
Total current liabilities 2,177,762 2,224,567
Senior Notes 2,572,992 2,054,232
Obligations under capital leases, less current portion 14,534 22,584
----------- -----------
Total liabilities 4,765,288 4,301,383
Shareholders' equity (deficit):
Preferred Stock, no par value:
Series A Convertible Preferred:
Authorized shares - 1,200,000; issued and outstanding shares -
623,377 at December 31, 1999 (unaudited) and 640,577 at June 30,
1999 (liquidation preference of $ 9,926,554 at December 31, 1999 -
unaudited) 4,415,352 4,537,128
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 11,146,744 at
December 31, 1999 (unaudited) and 6,191,097
at June 30, 1999 19,567,965 14,277,763
Subscriptions receivable (102,061) (83,983)
Accumulated deficit (23,301,927) (19,374,437)
----------- -----------
Total shareholders' equity (deficit) 579,329 (643,529)
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 5,344,617 $ 3,657,854
=========== ===========
</TABLE>
See accompanying notes.
1
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
---------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales $ 414,459 $ 1,445,090 $ 772,786 $ 2,157,384
License and transaction fees 165,853 105,297 320,718 185,462
----------- ----------- ----------- -------------
Total revenues 580,312 1,550,387 1,093,504 2,342,846
Operating Expenses:
Cost of equipment sales 388,706 1,268,380 705,092 1,891,558
General and administrative 977,606 544,918 2,162,896 998,338
Compensation 703,302 349,000 1,150,916 688,480
Depreciation and amortization 9,418 27,220 26,586 50,302
----------- ----------- ----------- -------------
Total operating expenses 2,079,032 2,189,518 4,045,490 3,628,678
----------- ----------- ----------- -------------
(1,498,720) (639,131) (2,951,986) (1,285,832)
Other income (expense):
Interest income 4,915 1,186 22,167 3,695
Interest expense (424,063) (6,496) (842,438) (7,907)
Joint Venture activities (17,251) (65,215) (50,393) (90,093)
----------- ----------- ----------- -------------
Total other income (expense) (436,399) (70,525) (870,664) (94,305)
----------- ----------- ----------- -------------
Net loss (1,935,119) (709,656) (3,822,650) (1,380,137)
Cumulative preferred dividends (499,033) (469,183) (1,002,453)
----------- ----------- ----------- -------------
Loss applicable to common shares $(1,935,119) $(1,208,689) $(4,291,833) $(2,382,590)
=========== =========== =========== ============
Loss per common share (basic and
diluted) $ (0.22) $ (0.30) $ (0.56) $ (0.59)
=========== =========== ========== ===========
Weighted average number of common
shares outstanding (basic and
diluted) 8,888,340 4,026,865 7,649,428 4,023,256
============ =========== ========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
USA Technologies, Inc.
Consolidated Statement of Shareholders' Equity (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 121,263 shares of Common Stock to
employees as prepaid compensation - 242,526 - 242,526
Conversion of 17,200 shares of Convertible
Preferred Stock to 17,200 shares of Common
Stock (121,776) 121,776 - -
Conversion of $104,840 of cumulative
preferred dividends into 10,484 shares of
Common Stock at $10.00 per share - 104,840 (104,840) -
Issuance of 373,000 shares of Common Stock in
exchange for prepaid professional and
consulting services - 746,000 - 746,000
Exercise of 763,700 Common Stock warrants at
$.50 per share - 381,850 (51,000) - 330,850
Exercise of 110,000 Common Stock warrants at
$2.00 per share - 220,000 - 220,000
Issuance of 3,560,000 shares (356 units) of
Common Stock at $1.00 per share in connection
with the 1999-B Private Placement, net
of offering costs of $86,790 - 3,473,210 - 3,473,210
Collection of subscriptions receivable 32,922 32,922
Net loss - - (3,822,650) (3,822,650)
----------------------------------------------------------------------------------
Balance, December 31, 1999 $4,415,352 $19,567,965 $ (102,061) $(23,301,927) $ 579,329
==================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended December 31,
1999 1998
---------------------------------------
<S> <C> <C>
Operating activities
Net loss $ (3,822,650) $ (1,380,137)
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 7,100
Interest expense relating to Senior Note Offering 518,760 -
Depreciation 39,607 50,302
Provision for allowance for uncollectible accounts 8,597 -
Changes in operating assets and liabilities:
Accounts receivable 67,334 (177,999)
Inventory 161,708 (471,555)
Prepaid expenses, deposits, and other assets 453,795 (906)
Accounts payable 624,757 1,283,634
Accrued expenses (2,573) 47,176
---------------------------------------
Net cash used in operating activities (1,944,665) (642,385)
Investing activities
Purchase of property and equipment (44,088) (8,650)
---------------------------------------
Net cash used in investing activities (44,088) (8,650)
Financing activities
Repayment of note payable - equipment (669,400) -
Net proceeds from issuance of Senior Notes 141,795 368,206
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants and options 3,603,410 19,875
Net proceeds from issuance of Convertible
Preferred Stock - 234,485
Repayment of principal on capital lease obligations (7,639) (12,287)
---------------------------------------
Net cash provided by financing activities 3,068,166 610,279
---------------------------------------
Net increase (decrease) in cash and cash equivalents 1,079,413 (40,756)
Cash and cash equivalents at beginning of year 1,665,016 324,824
---------------------------------------
Cash and cash equivalents at end of period $ 2,744,429 $ 284,068
=======================================
Supplemental disclosures of cash flow information:
Prepaid stock compensation $ 982,526 $ -
=======================================
Capital lease obligations $ - $ 29,242
=======================================
Transfer of inventory to property and equipment $ 53,261 $ -
=======================================
</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.
The Company has further developed its control system to include
interactive advertising and e-commerce capabilities. It is anticipated that
terminals will be piloted by various customers and manufactured in production
quantities by the fourth quarter of calendar 2000. The Company anticipates
interactive advertising and e-commerce revenues from e-Port will grow to become
a significant portion of overall Company revenues in the future.
As of December 31, 1999, the Company had a total installed base of
1,307 control systems, distributed as follows: 1,132 Business Express(R) or MBE
Business Express(TM) control systems, 57 Business Express(R) Limited Service
(LSS) control systems, 36 Copy Express(TM) control systems, 27 Debit Express(TM)
control systems, 11 Fax/Printer Express(TM) control systems, 41 Public PC(TM)
control systems, and 3 TransAct(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) or LSS locations as of December 31, 1999
is 343.
2. Accounting Policies
Interim Financial Information
The financial statements and disclosures included herein for the three
and six months ended December 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. Private Placement Offering and Senior Note Conversion
On October 21, 1999, the Company's Board of Directors authorized a
private placement offering (the "1999-B" offering) to accredited investors of
150 units (later increased to 356 units by the Board of Directors) 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 December 31, 1999, 356 units have been sold, at $10,000
per unit, resulting in gross proceeds of $3,560,000 to the Company. At December
31, 1999, $420,650 of subscriptions to purchase 42.065 units was not received in
cash. All of the $420,650 was received through the current date and, accordingly
is presented as a subscription receivable in current assets.
On October 21, 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 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 Company has
registered under the Securities Act of 1933 the Common Stock underlying the
Senior Notes for resale by the holder.
4. MBE Joint Venture
In May, 1999, the MBE Business Express Joint Venture (JV) was
terminated. Obligations for continued servicing of JV installations are being
met by the Company. At December 31, 1999 the JV recorded gross accounts payable
to MBE of $112,788. The Company is currently involved in legal proceedings with
MBE. See discussion in Legal Proceedings in Part II.
5. Stock Options, Warrants, Purchase Rights and Shares Outstanding
As of December 31, 1999, there were 11,740 Common Stock Purchase Rights
outstanding at a price of $10.00 per share, exercisable through June 30, 2000;
1,001,267 options outstanding to purchase Common Stock at exercise prices
ranging from $.50 to $5.00 per share, of which 821,267 were vested; 3,560,000
6
<PAGE>
shares of Common Stock issuable upon exercise of the 1999-B warrants issued
between October and December, 1999; 157,900 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; 100,000 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. On a fully diluted basis, including conversion of
all senior notes, the Company would have 19,168,106 common shares outstanding at
December 31, 1999.
In November 1999, the Company issued to a legal firm 150,000 fully
vested shares of Common Stock at $2.00 per share, which was the fair value at
the time. The Company will register the Common Stock for resale under the Act.
On October 21, 1999, the Company's Board of Directors authorized the
reduction in the exercise price of 50,000 options issued to a consultant from
$3.00 to $2.00 (the then fair market value) through January 31, 2000; reduced
the exercise price of 11,740 purchase rights from $10.00 to $2.00 through
January 31, 2000; and reduced the exercise prices of 168,600 outstanding Common
Stock Purchase Warrants to $2.00 from a range of $3.00 to $5.00, through January
31, 2000. On November 23, 1999 the Company granted to certain officers 90,000
fully vested Common Stock options at $2.00, which was the fair market value of
the underlying stock on the grant date. The Board of Directors also authorized
the Company to issue 150,000 shares of fully vested Common Stock to consultants
for services rendered and to be rendered, at a price of $2.00 per share. These
shares have been registered under the Securities Act of 1933, as amended.
6. Subsequent Events
As authorized by the Board of Directors in January, 2000, the Company
a) registered for resale under the Securities Act of 1933, 13,013,597 shares of
Common Stock which underlie the current Private Placement Offering, the
conversion of the Senior Notes, and all Warrants, options, purchase rights and
Stock issued by the Company; b) authorized issuance of up to 1,000,000 shares of
restricted Common Stock at $2.00 per share, to several institutional investors;
c) reduced the exercise price of the 1999-A Common Stock Purchase Warrants to
$.50 through January 31, 2000, after which time it shall be increased to $1.00;
d) extended the expiration date of the 1999-B Common Stock Purchase Warrants
from March 31, 2000 to June 1, 2000, except that if at least half of a holder's
Warrants have been exercised by June 1, 2000, then the expiration date for the
remaining Warrants shall be extended until November 1, 2000; e) extended the
period to June 1, 2000 during which the exercise price of the 11,740 purchase
rights is reduced from $10.00 to $2.00 per share; f) extended the period to June
1, 2000 during which the exercise price of 168,600 Warrants is reduced to $2.00
per share from original prices ranging from $3.00 to $5.00; g) issued a total of
45,000 fully vested shares of Common Stock at $2.25 to several consultants for
services to be rendered. Such shares were registered under the Securities Act of
1933, as amended.
7
<PAGE>
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
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, (vi) the ability of the Company to
obtain sufficient funds through operations or otherwise to repay its debt
obligations, or (vii) the ability to prevail in its pending legal proceeding
with MBE. 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 December 31, 1999 resulted in a net operating
loss of $1,935,119 compared to a net loss of $709,656 for the fiscal quarter
ended December 31, 1998, for the reasons described below. Losses are projected
to continue until sufficient revenue is generated from equipment sales and
licensing fees from the Company's proprietary technology.
Revenues were $580,312 compared to $1,550,387 from the previous year's
fiscal quarter. This $970,075 or 63% shortfall reflects the large Prime
Hospitality rollout of the MBE Business Express(TM) last year at this time. Of
the total revenues, equipment sales totaled $414,459, a decrease of $1,030,631
or 71% over the same period last year. License fees, however, increased to
$165,853 from $105,297 for the same period during the prior year, an increase of
57%. 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
$388,706 which represented a decrease of $879,674 or 69% 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 $977,606 increased by $432,688
or 79% from the same quarter last year. The principal reason was a large
increase in legal costs of $296,432 or 151%. Of this increase, $275,772 was for
legal fees related to the MBE litigation described in Part II, Item 1 (Legal
Proceedings), most 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 $110,787 or 270%;
product development cost increases of $19,315, and increases in telephone
expenses of $18,593 or 78%; offset by reductions in promotions and trade shows
of $34,676 or 62%.
8
<PAGE>
Compensation expense of $703,302 increased by 101% due to increased
personnel activities in all areas of the Company. The interest expense of
$424,063 increased by $417,567, which was due to two factors. The increase in
non-cash amortization of the debt issuance cost and the equity component was
$262,151; while the remaining increase was primarily due to interest payments on
the 12% Senior Debt. Depreciation expense decreased from $27,200 to $9,418,
primarily due to the transfer of $13,021 of depreciation expense to cost of
goods as offset to licensing revenues generated from installations owned by the
Company.
During the quarter, shares of common stock have been issued in lieu of
cash payments with a fair value of $432,526, and are reflected primarily as an
increase in prepaid assets.
As of December 31, 1999, the Company had an installed base of a total
of 1,307 control systems, distributed as follows: 1,132 Business Express(R) or
MBE Business Express(TM) control systems, 57 Business Express(R) Limited Service
Series (LSS) control systems, 36 Copy Express(TM) control systems, 27 Debit
Express(TM) control systems, 11 Fax/Printer Express(TM) control systems, 41
Public PC(TM) control systems, and 3 TransAct(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 December 31,
1999 is 343, compared to 248 locations as of December 31, 1998. The total
license fee revenues received by the Company from these systems increased 57%
from the same quarter last fiscal year but is still well below the level
required to achieve profitability.
The six month period ended December 31, 1999 resulted in a net
operating loss of $3,822,650 compared to a net loss of $1,380,137 for the
comparable period ended December 31, 1998. Revenues were $1,093,504 compared to
$2,342,846, a $1,249,342 or 53% reduction. Of the total revenues, equipment
sales totaled $772,786, a decrease of $1,384,598 or 64%. Cost of sales of
$705,092 represented a decrease of $1,186,466, and is directly attributable to
the decrease in equipment sales. General and administrative expenses of
$2,162,896 increased by $1,164,558 or 117%. The principal reason was a large
increase in legal fees of $757,344 related to the MBE litigation described in
Part II, Item 1, (Legal Proceedings). Other components of general and
administrative costs included increases in outside marketing and operational
services of $223,127, and increased charges for consulting and professional fees
of $63,346 or 43%; offset by reductions in field service repair costs of $37,056
and reductions in travel and entertainment and trade show costs of $54,474.
Compensation expense of $1,150,916 increased by $462,436 or 67% due to increased
personnel activities in all areas of the Company. Debt related expenses
including interest charges increased $834,531 over the comparable six month
period last year, due to the Senior Notes outstanding for this current period.
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 December 31, 1999, 34 LSS locations have
been installed, in Holiday Inns, Best Westerns and other hotels.
9
<PAGE>
The Company's next generation of terminal, e-Port(TM), would contain
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
introduced to the public a preliminary version of e-Port(TM) in mid December. A
limited number of e-Port(TM) units have been manufactured, and during the
remainder of the fiscal year, the Company anticipates that it would beta-test
these terminals in selected hospitality and other locations, and believes that
it would begin selling e-Port(TM) in the next fiscal year.
The Company is working 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 begin in the early spring and 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, a variety of form factors, and a lower total cost of
goods. IBM is also working with the Company to help design an enhanced
internet-capable version of the network which will underlie all transaction
processing for e-Port(TM), including advertising and e-commerce.
The Company is marketing its products through its full-time sales staff
consisting of two national accounts salespeople and three regional sales
managers, either directly to customer locations or to management companies
servicing these locations. Strategic partnerships and pilot programs with key
customers continue to be pursued and developed.
Liquidity and Capital Resources
For the six month period ended December 31, 1999, there was a net
increase in cash of $1,079,413. This was attributable primarily to net proceeds
of $3,603,410 from the issuance of Common Stock and the exercise of warrants,
and the collection of $141,795 of subscriptions receivable. Cash was used by the
operating loss of $3,822,650, partially offset by favorable changes of
$1,305,021 in operating assets and liabilities including the effect of using
stock in lieu of cash payments, and $518,760 of non cash amortization of the
equity component of the Senior Note. As of December 31, 1999, total cash on hand
was $2,744,429, and working capital was $2,952,993, of which $1,040,867 was
invested in inventory.
During October 1999, the Company's Board of Directors authorized a
private placement offering (the "1999-B" Offering) to accredited investors of
150 units (later increased to 356 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 December 31,
1999, all 356 units have been sold at $10,000 per unit, resulting in the
commitment of gross proceeds of $3,560,000 to the Company.
10
<PAGE>
The Company believes that proceeds from the above Offering, together
with funds available from the potential exercise of outstanding warrants and
options, plus the newly authorized ability to issue up to 1,000,000 shares of
Common Stock at $2.00 (see Note 6, Subsequent Events, above) plus increased
revenues from its business would be sufficient to fund operations and
development costs until at least through the end of the calendar year. 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 resulted in a
transition into the new millenium with no known problems to date.
11
<PAGE>
Part II - Other information
Items 3, 4 and 5 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. On January 7,
2000 the Company filed a First Amended Answer and Counterclaims. As set forth in
the Form 10-KSB, the Company has denied the allegations set forth in MBE's
original complaint of September 1998. In addition to the counterclaims
previously set forth, the Company has stated additional claims against MBE,
including that MBE misrepresented to USA that MBE's franchisees would be capable
of selling the Joint Venture's products. The new counterclaims seek relief from
MBE for intentional and negligent misrepresentation and seek recovery of an
unspecified amount of money damages in excess of 10 million dollars as well as
punitive damages. The Company has eliminated its demand for injunctive relief
regarding the Joint Venture Agreement and ICW Project as described in the Form
10-KSB because the Joint Venture has now been terminated.
On January 7, 2000, MBE filed a First Amended Complaint. In addition to
the allegations set forth in MBE's original complaint, MBE has stated numerous
additional claims against the Company, including that the Company failed to
develop for MBE a working ICW Project as promised, the Company owes MBE $392,760
under the Joint Venture Agreement, and the Company's technology was not viable
and "public proof" as promised. The new claims seek relief from the Company for
intentional misrepresentation, breach of the Joint Venture Agreement, breach of
express and implied warranty, breach of fiduciary duty, and trade libel, and
seek recovery of an unspecified amount of money damages in excess of 10 million
dollars as well as punitive damages.
The Company believes that the claims of MBE are without merit and that
it will prevail in this matter. Accordingly there has been no provision recorded
for this action in the financial statements.
On January 27, 2000 MBE filed a motion in the United States District
Court for the Southern District of California to dismiss three claims of the
Company's amended counterclaims against MBE. Subsequent to this filing, MBE has
agreed to withdraw a portion of its motion to dismiss that relates to one of
USA's claims. The date for a hearing on the remaining motion is set for February
28, 2000, although both parties have agreed to continue the hearing to March 13,
2000. The Company will oppose the motion to dismiss.
Both parties have requested a jury trial. To 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 June 9, 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
12
<PAGE>
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 have been registered under the Securities Act of 1933, as amended
("Act"). Of the 377,800 total shares, 278,000 shares were issued during the
quarter ended September 30, 1999, and an additional 66,263 shares were issued
during the quarter ended December 31, 1999.
During the quarter ended December 31, 1999, 627,700 1999-A Common Stock
purchase warrants were exercised at $.50 per warrant, generating gross proceeds
of $313,850. Such shares of Common Stock were issued pursuant to the exemption
from registration set forth in Section 4(2) of the Act. All of such shares have
been registered for resale by the holder thereof under the Act.
During the quarter ended December 31, 1999, the Company issued 1,700
shares of Common Stock upon the conversion of 1,700 shares of Series A Preferred
Stock and issued 1,147 shares of Common Stock upon the conversion of $11,470 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 November 1999, the Company issued to several executive officers
fully vested options to acquire up to 90,000 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 registered
all of the shares of Common Stock underlying the options for resale by the
holder under the Act.
During October, November and December 1999, the Company sold 356 units
at $10,000 each for aggregate gross proceeds of $3,560,000. Each unit consisted
of 10,000 shares of Common Stock and 10,000 1999-B Common Stock purchase
warrants. Each warrant is exercisable at $2.00 per share of Common Stock. The
shares of Common Stock and warrants were offered and sold by the Company
pursuant to the exemption from registration set forth in Section 4(2) of the Act
and the Rules promulgated thereunder. The Company has registered for resale by
the holder under the Act all of such shares of Common Stock as well as the
shares of Common Stock underlying the warrants.
In December 1999, the holder of 10,000 of the GEM Warrants which had
been issued in June 1997 exercised such warrants for $2.00 per share resulting
in $20,000 of gross proceeds. The shares were issued by the Company pursuant to
Regulation S promulgated under the Act.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
On November 3, 1999 the Company filed a Form 8-K reporting an event under
Item 5.
On December 3, 1999 the Company filed a Form 8-K reporting an event under
Item 5.
13
<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: February 14, 2000 /s/ George R. Jensen, Jr.
------------------------------------
George R. Jensen, Jr.,
Chairman, Chief Executive Officer
Date: February 14, 2000 /s/ Leland P. Maxwell
------------------------------------
Leland P. Maxwell,
Senior Vice President,
Chief Financial Officer
14
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