<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, 2000
-----------------------
( ) 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 5, 2000, there were 13,381,006 shares of Common Stock, no par value,
and 571,027 shares of Series A Convertible Preferred Stock, no par value,
outstanding.
<PAGE>
USA TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2000 (Unaudited)
and June 30, 1999 1
Consolidated Statements of Operations - Three and nine months ended
March 31, 2000 and 1999 (Unaudited) 2
Consolidated Statement of Shareholders' Equity (Deficit)
March 31, 2000 (Unaudited) 3
Consolidated Statements of Cash Flows - Nine months ended
March 31, 2000 and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - Other Information 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
</TABLE>
<PAGE>
USA Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,385,430 $ 1,665,016
Accounts receivable less allowance
For uncollectible accounts of $79,915 at March
31, 2000 (unaudited) and $69,555 at June 30, 1999 192,635 361,463
Inventory 1,117,375 1,255,836
Subscriptions receivable 340,222 178,873
Prepaid expenses and deposits 615,112 42,746
------------ -----------
Total current assets 5,650,774 3,503,934
Property and equipment, at cost, net of accumulated
Depreciation of $446,094 at March 31, 2000
(unaudited) and $382,857 at June 30, 1999 361,861 143,670
Other assets 14,740 10,250
------------ -----------
Total assets $ 6,027,375 $ 3,657,854
============ ===========
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 758,018 $ 917,141
Note payable-equipment 83,689 804,485
Accrued expenses 729,523 498,548
Current obligations under capital leases 9,144 4,393
------------ -----------
Total current liabilities 1,580,374 2,224,567
Senior Notes 2,466,640 2,054,232
Obligations under capital leases, less current portion 37,450 22,584
------------ -----------
Total liabilities 4,084,464 4,301,383
Shareholders' equity (deficit):
Preferred Stock, no par value:
Series A Convertible Preferred:
Authorized shares - 1,200,000; issued and outstanding
shares - 595,027 at March 31, 2000 (unaudited) and
640,577 at June 30, 1999 (liquidation preference of
$9,941,719 at March 31, 2000 - unaudited) 4,214,634 4,537,128
Common Stock, no par value:
Authorized shares - 62,000,000
Issued and outstanding shares - 13,083,732 at
March 31, 2000 (unaudited) and 6,191,097
At June 30, 1999 23,398,919 14,277,763
Subscriptions receivable (31,446) (83,983)
Accumulated deficit (25,639,196) (19,374,437)
------------ -----------
Total shareholders' equity (deficit) 1,942,911 (643,529)
------------ -----------
Total liabilities and shareholders' equity (deficit) $ 6,027,375 $ 3,657,854
============ ===========
</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,
2000 1999 2000 1999
-------------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales $ 159,011 $ 864,343 $ 931,797 $ 3,021,727
License and transaction fees 155,245 133,093 475,963 318,555
-------------------------------------- ----------------------------------
Total revenues 314,256 997,436 1,407,760 3,340,282
Operating Expenses:
Cost of equipment sales 159,310 684,836 864,402 2,576,394
General and administrative 1,392,857 616,069 3,555,753 1,614,407
Compensation 513,382 336,674 1,664,299 1,025,154
Depreciation and amortization 20,150 31,710 46,736 82,012
-------------------------------------- ----------------------------------
Total operating expenses 2,085,699 1,669,289 6,131,190 5,297,967
-------------------------------------- ----------------------------------
(1,771,443) (671,853) (4,723,430) (1,957,685)
Other income (expense):
Interest income 27,303 1,534 49,471 5,229
Interest expense (402,894) (20,353) (1,245,332) (28,260)
Joint Venture activities (28,005) (67,971) (78,398) (158,064)
-------------------------------------- ----------------------------------
Total other income (expense) (403,596) (86,790) (1,274,259) (181,095)
Net loss (2,175,039) (758,643) (5,997,689) (2,138,780)
Cumulative preferred dividends (460,895) (499,033) (930,078) (1,002,453)
-------------------------------------- ----------------------------------
Loss applicable to common shares $(2,635,934) $(1,257,676) $(6,927,767) $(3,141,233)
====================================== ==================================
Loss per common share (basic and
diluted) $ (0.22) $ (0.30) $ (0.76) $ (0.77)
====================================== ==================================
Weighted average number of common
shares outstanding (basic and
diluted) 12,115,239 4,132,107 9,138,032 4,059,540
====================================== ==================================
</TABLE>
See accompanying notes.
2
<PAGE>
USA Technologies, Inc.
Consolidated Statement of Shareholders' Equity
(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 210,023 shares of Common Stock to
employees as compensation - 504,425 - 504,425
Conversion of 45,550 shares of Convertible
Preferred Stock to 45,550 shares of Common
Stock (322,494) 322,494 - -
Conversion of $267,070 of cumulative
preferred dividends into 26,707 shares of
Common Stock at $10.00 per share - 267,070 - (267,070) -
Issuance of 418,000 shares of Common Stock in
exchange for professional and consulting
services - 836,000 - - 836,000
Exercise of 910,600 Common Stock warrants at
$.50 per share - 455,300 - - 455,300
Exercise of 217,750 Common Stock warrants at
$2.00 per share - 435,500 - - 435,500
Exercise of 34,000 Common Stock
Warrants at $2.50 per share - 85,000 - - 85,000
Exercise of 10,000 Common Stock
Options at $1.50 per share - 15,000 - - 15,000
Exercise of 6,500 Common Stock
Options at $2.50 per share - 16,250 - - 16,250
Issuance of 150,000 Common Stock warrants in
exchange for professional services - 99,000 - - 99,000
Issuance of 210,000 shares of Common Stock
from the conversion of $525,000 of the 12%
Senior Notes - 339,931 - - 339,931
Issuance of 3,560,000 shares of Common Stock
at $1.00 per share in connection with the
1999-B Private Placement, net of offering
costs of $96,058 - 3,463,942 - - 3,463,942
Issuance of 1,263,500 shares of Common Stock at
$2.00 per share in connection with the 2000-A
Private Placement, net of offering
costs of $220,902 - 2,306,098 - - 2,306,098
Reduction of 20,000 shares of Common Stock
issued in connection with the cancellation
of $50,000 Senior Notes (5,618) (5,618)
Reduction of 10,000 warrants in connection
with the cancellation of $50,000 Senior
Notes (19,559) (19,559)
Collection of subscriptions receivable 52,537 52,537
Net loss - - (5,997,689) (5,997,689)
----------------------------------------------------------------------------------
Balance, March 31, 2000 $ 4,214,634 $23,398,919 $ (31,446) $(25,639,196) $1,942,911
==================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
USA Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended March 31,
2000 1999
----------------------------------
<S> <C> <C>
Operating activities
Net loss $ (5,997,689) $ (2,138,780)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation charges incurred in
Connection with the issuance of Common Stock 848,969 37,100
Interest expense relating to Senior Note Offering 752,339 -
Depreciation 68,741 82,012
Provision for allowance for uncollectible accounts 10,360 -
Changes in operating assets and liabilities:
Accounts receivable 158,468 (526,321)
Inventory 38,215 (367,708)
Prepaid expenses, deposits, and other assets 13,923 (11,946)
Accounts payable (159,123) 1,701,139
Accrued expenses 230,975 (20,709)
----------------------------------
Net cash used in operating activities (4,054,822) (1,245,213)
Investing activities
Purchase of property and equipment (139,704) (8,984)
----------------------------------
Net cash used in investing activities (139,704) (8,984)
Financing activities
Repayment of note payable - equipment (720,796) -
Net proceeds from issuance of Senior Notes 171,411 883,192
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants and options 6,422,691 193,775
Net proceeds from issuance of Convertible
Preferred Stock - 234,485
Net decrease in Subscriptions Receivable 48,999 -
Repayment of principal on capital lease obligations (7,365) (19,567)
----------------------------------
Net cash provided by financing activities 5,914,940 1,291,885
----------------------------------
Net increase in cash and cash equivalents 1,720,414 37,688
Cash and cash equivalents at beginning of year 1,665,016 324,824
----------------------------------
Cash and cash equivalents at end of period $ 3,385,430 $ 362,512
==================================
Supplemental disclosures of cash flow information:
Cash paid for interest on 12% Senior Notes $ 270,939 $ -
==================================
Prepaid stock compensation $ 590,779 $ -
==================================
Transfer of depreciation to cost of goods $ 22,005 $ -
==================================
Non-cash addition to property and equipment $ 20,000 $ -
==================================
Transfer of inventory to property and equipment $ 100,246 $ -
==================================
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.
The Company has further developed its control systems 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 that
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 March 31, 2000, the Company had a total installed base
of 1,321 control systems, distributed as follows: 1,122 Business Express(R) or
MBE Business Express(TM) control systems, 75 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, 42 Public PC(TM)
control systems, and 8 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 March 31, 2000 is
352.
2. Accounting Policies
Interim Financial Information
The financial statements and disclosures included herein for the three
and nine months ended March 31, 2000 and 1999 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.
5
<PAGE>
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.
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 Offerings and Senior Note Activity
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 consisted 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. All 356 units have been sold, resulting in net proceeds of
$3,463,942 to the Company.
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. The Company has registered under the
Securities Act of 1933 the Common Stock underlying the Senior Notes for resale
by the holder. During the quarter ended, anf thruough March 31, 2000, $525,000
of the Senior Notes were converted into 210,000 shares of unrestricted Common
Stock. Also during the quarter, 5 units ($50,000) of the Senior Note were
cancelled, resulting in the reduction of 10,000 1999-A Warrants and
20,000 shares of Common Stock.
On January 12, 2000, the Board of Directors authorized the Company to
sell up to 1,000,000 shares of restricted Common Stock at $2.00 per share to
accredited investors (the "2000-A" offering). This offering has since been
amended to allow an additional 300,000 shares to be sold, through April 15,
2000. At March 31, 2000, 1,263,500 shares have been sold, generating net
proceeds to the Company of $2,306,098. Subsequent to March 31, 2000, all
remaining shares have been sold.
During January, 2000, the Board authorized the Company to issue 45,000
fully vested shares of Common Stock to consultants for services rendered and to
be rendered, at the then current market value of $2.25.
6
<PAGE>
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 March 31, 2000 the JV recorded gross accounts payable to
MBE of $140,793. 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
On January 12, 2000, the Board of Directors authorized the Company to
a) reduce 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;
b) extend 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; c) extend 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; and d) extend 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.
On May 11, 2000, the Board of Directors authorized the Company to a)
extend the expiration date of the 1999-B Common Stock Purchase Warrants from
June 1, 2000 to June 30, 2000, except that if at least half of a holder's
Warrants have been exercised by June 30, 2000, then the expiration date for the
remaining Warrants shall be extended until November 1, 2000; b) extend the
period to June 30, 2000 during which the exercise price of the 11,740 purchase
rights is reduced from $10.00 to $2.00 per share; and c) extend the period to
June 30, 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.
As of March 31, 2000, there were 11,740 Common Stock Purchase Rights
outstanding; 991,267 options outstanding to purchase Common Stock at exercise
prices ranging from $.50 to $5.00 per share, of which 811,267 were vested;
3,452,250 shares of Common Stock issuable upon exercise of the 1999-B warrants
issued between October and December, 1999; 13,000 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; 67,300 shares of Common Stock issuable upon
exercise of the 1995 warrants issued in 1995; 1,637,200 shares of common stock
issuable upon conversion of $4,093,000 of the remaining 12% Senior Notes;
and 116,000 shares of Common Stock issuable upon exercise of warrants issued to
a consultant in August 1999. In addition, the 595,027 shares of Series A
Preferred Stock are convertible into 595,027 shares of Common Stock and the
$3,991,449 of accrued and unpaid dividends thereon are convertible into
399,145 shares of Common Stock.
6. Subsequent Events
On April 14, 2000, the Company's Board of Directors authorized issuance
of up to 25,000 shares of registered Common Stock, to be available for use by
the Chairman and Chief Executive Officer for issuance to future or current
employees, directors or consultants as compensation or as signing bonus. Also on
that date, the Board of Directors authorized the Company to issue 150,000 shares
of fully vested, registered Common Stock at the then fair market value of $2.25
for legal services in connection with the MBE litigation. The Board also
permanently reduced the exercise price of 116,000 of outstanding warrants held
by a consultant from $2.50 to $1.00; and agreed to register 43,400 formerly
restricted shares of Common Stock held by a consultant.
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 March 31, 2000 resulted in a net operating
loss of $2,175,039 compared to a net loss of $758,643 for the fiscal quarter
ended March 31, 1999, 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 $314,256 compared to $997,436 from the previous year's
fiscal quarter. This $683,180 or 69% 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 $159,011, a decrease of $705,332 or
82% over the same period last year. License fees, however, increased to $155,245
from $133,093 for the same period during the prior year, an increase of 17%.
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 sales for the period included labor and equipment of $159,310
which represented a decrease of $525,526 or 77% versus the same period during
the prior year, and is directly attributable to the decrease in equipment sales
described above.
8
<PAGE>
General and administrative expenses of $1,392,857 increased by $776,788
or 126% from the same quarter last year. The principal reason was a large
increase in legal costs of $355,095 or 117%. Of this increase, $280,272 was for
legal fees related to the MBE litigation described in Part II, Item 1 (Legal
Proceedings), which has been funded through the issuance of Company stock and
therefore does not consume cash. Other components of general and administrative
costs included an increase in outside services of $147,273 or 351%; consulting
fees increase of $72,050, advertising cost increase of $42,105, professional
fees increase of $40,139, repairs and maintenance expense increase of $34,942,
travel expense increases of $26,641, and increases in telephone expenses of
$19,976 or 72%.
Compensation expense of $513,382 increased by 52% due to increased
personnel activities in all areas of the Company. The interest expense of
$402,894 increased by $382,541, which was due to two factors. The increase in
non-cash amortization of the debt issuance cost and the equity component was
$258,401; while the remaining increase was primarily due to interest payments on
the remaining 12% Senior Debt. Depreciation expense decreased from $31,710 to
$20,150, primarily due to the transfer of $8,984 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 $351,899, and are reflected primarily as
an increase in prepaid assets.
As of March 31, 2000, the Company had an installed base of a
total of 1,321 control systems, distributed as follows: 1,122 Business
Express(R) or MBE Business Express(TM) control systems, 75 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, 42 Public PC(TM) control systems, and 8 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 March 31, 2000 is 352, compared to 290 locations as of March 31, 1999. The
total license fee revenues received by the Company from these systems increased
17% from the same quarter last fiscal year but is still well below the level
required to achieve profitability.
The nine month period ended March 31, 2000 resulted in a net operating
loss of $5,997,689 compared to a net loss of $2,138,780 for the comparable
period ended March 31, 1999. Revenues were $1,407,760 compared to $3,340,282, a
$1,932,522 or 58% reduction. Of the total revenues, equipment sales totaled
$931,797, a decrease of $2,089,930 or 69%. Cost of sales of $864,402 represented
a decrease of $1,711,992, and is directly attributable to the decrease in
equipment sales. General and administrative expenses of $3,555,753 increased by
$1,941,346 or 120%. The principal reason was a large increase in legal fees of
$1,112,438 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 $370,399, increased
charges for consulting and professional fees of $195,535, and increases in costs
related to the rental and maintenance of the company's corporate office of
$88,087 or 153%; offset by reductions in travel and entertainment and trade show
costs of $45,504. Compensation expense of $1,664,299 increased by $639,145 or
62% due to increased personnel activities in all areas of the Company. Debt
related expenses including interest charges increased $1,217,072 over the
comparable nine month period last year, due to interest charges on the Senior
Notes outstanding for this current period and amortization of debt issuance
costs and the equity component of the Senior Notes.
9
<PAGE>
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 March 31, 2000, 43 LSS locations have been
installed, in Holiday Inns, Best Westerns, Red Lions, and other hotels.
In March 2000, the Company signed an agreement with an affiliate of
MeriStar Hospitality Corporation, which is the largest independent hotel
management company in the United States, operating approximately 225 hotels and
resorts under such names as Hilton, Holiday Inn and Wyndham. The agreement
provides that the Company will be the exclusive provider of business center
solutions to the approximately half of the hotels and resorts which are owned by
MeriStar, and will be recommended as the preferred provider of business center
solutions to the other half which are managed but not owned by MeriStar. The
agreement expires in February 2002. As of March 31, 2000, two business center
solutions have been installed at MeriStar locations.
In April, 2000, the Company signed an agreement with Wayport, Inc. of
Austin Texas, a leading high speed Internet solutions provider. The agreement
allows the Company to broaden its business center offering to provide its hotel
customers with in-room Internet access; provides faster response times for its
current Business Express(R) product; and gives the Company a strategic partner
to co-market the Business Express(R).
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 next
several months, the Company anticipates that it would beta-test these terminals
in selected locations, and believes that it would begin selling e-Port(TM) in
the next fiscal year.
On May 2, 2000, the Company was issued a United States patent for a
system to control and network vending machines. The Company believes that the
patent may place it in a solid position to help the $35 billion vending industry
in its on-going efforts to network its vending machines together for better
control and increases in operating efficiency. The Company also received a
notice of allowance for a related patent for a system for batch processing of
credit card transactions, and believes that this patent may facilitate a unique
ability to affordably process the micro transactions which are typical of
vending machine operations. The Company is working with a Fortune 100 consumer
products company, in which that 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 spring and last several months, with all costs covered.
The Company is in discussions with that consumer products company regarding a
comprehensive business relationship if the pilot program is a success. The
patent in conjunction with e-Port(TM) would allow a networked, credit card
operated system which could manage inventory on a real time basis, and give
consumers an internet experience.
10
<PAGE>
In total, the Company has 7 issued patents, 7 patents for which a
notice of allowance has been given, and 27 patents pending. These patents
generally cover credit card processing and the system and network in which it
functions, which includes office equipment, vending machines and retail points
of sale. The most recent patents pending cover the use of the e-Port(TM)
including interactive advertising and e-commerce, in a variety of end user
applications.
The Company continues to work with its business partner IBM in
designing 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 three national accounts salespeople and two regional sales
managers, either directly to customer locations or to management companies or
distributors servicing these locations. Strategic partnerships and pilot
programs with key customers continue to be pursued and developed.
In May, 2000, the Company demonstrated its vision for use of the
e-Port(TM) at the @d:tech.San Francisco Internet conference. The Company
announced its intention to position itself as a key player in the interactive
media space, with e-Port(TM) targeted at three Internet markets: interactive
advertising, electronic commerce and pervasive computing. As a non-PC device,
e-Port(TM) allows Internet access in many locations currently unreachable by the
PC, such as retail point of sale and vending.
Liquidity and Capital Resources
For the nine month period ended March 31, 2000, there was a net
increase in cash of $1,720,414. This was attributable primarily to net proceeds
of $6,422,691 from the issuance of Common Stock and the exercise of warrants.
Cash was used by the operating loss of $5,997,689, partially offset by favorable
changes of $282,458 in operating assets and liabilities including the effect of
using stock in lieu of cash payments, and $752,339 of non cash amortization of
the equity component of the Senior Note. As of March 31, 2000, total cash on
hand was $3,385,430, and working capital was $4,070,400, of which $1,117,375 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. All 356 units have
been sold at $10,000 per unit, resulting in net proceeds raised of $3,463,942.
On January 12, 2000, the Board of Directors authorized the Company to
sell up to 1,000,000 shares (later increased to 1,300,000) of restricted Common
Stock at $2.00 per share to several institutional investors (the "2000-A"
offering). At March 31, 2000, 1,263,500 shares have been sold, generating net
proceeds raised of $2,306,098. Subsequent to March 31, 2000, all remaining
shares have been sold.
If all warrants outstanding as of March 31, 2000 were to be exercised
at the currently authorized prices, the Company would realize gross proceeds of
more than $7 million.
The Company believes that 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 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.
11
<PAGE>
Year 2000 Compliance
The Company experienced no significant disruptions in mission
critical information technology and non-information technology systems in the
first quarter of the year 2000, and believes those systems successfully
responded to the Year 2000 date change. The Company spent approximately $25,000
during 1999 in remediating these systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties.
12
<PAGE>
Part II - Other information
Items 3, 4, 5 and 6 are not applicable.
Item 1. Legal Proceedings
The background of the litigation with Mail Boxes Etc. is described
in the Company's Form 10-KSB for the fiscal year ended June 30, 1999, and
updated for the subsequent two quarters on Forms 10-QSB . The Court has
scheduled a mandatory settlement conference on June 16, 2000.
The Company has entered into a settlement agreement with Alphanet
Hospitality and is waiting for confirmation of completion of terms by Alphanet,
after which a notice of dismissal of the Company's complaint will be filed.
Item 2. Changes in Securities
During the quarter ended March 31, 2000, 146,900 1999-A Common Stock
purchase warrants were exercised at $.50 per warrant, generating gross proceeds
of $73,450; 107,750 1999-B Common Stock purchase warrants were exercised at
$2.00 per warrant, generating gross proceeds of $215,500; 10,000 options were
exercised at $1.50 per option, generating gross proceeds of $15,000; 6,500
options were exercised at $2.50 per option, generating gross proceeds of
$16,250; and 34,000 Common Stock purchase warrants were exercised at $2.50 per
warrant, generating gross proceeds of $85,000. 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 March 31, 2000, the Company issued 28,350
shares of Common Stock upon the conversion of 28,350 shares of Series A
Preferred Stock and issued 16,223 shares of Common Stock upon the conversion of
$162,230 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.
During the quarter ended March 31, 2000, the Company sold 1,263,500
shares of the 2000-A private offering for $2.00 per share, for aggregate gross
proceeds of $2,527,000. The shares of Common Stock 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.
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: May 15, 2000 /s/ George R. Jensen, Jr.
---------------------------------------------------
George R. Jensen, Jr., Chairman, Chief
Executive Officer
Date: May 15, 2000 /s/ Leland P. Maxwell
---------------------------------------------------
Leland P. Maxwell, Senior Vice President, Chief
Financial Officer
14
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