UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Quarter ended September 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File No. 000-49723
Money Centers of America, Inc.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 23-2929364
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(State or Other Jurisdiction
of Incorporation or (I.R.S. Employer Identification No.)
Organization)
700 South Henderson Road, Suite 325, King of Prussia, PA 19406
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(Address of Principal Executive Offices)
(610) 354-8888
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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
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As of November 21, 2006, 30,212,353 shares of the registrant's common stock, par
value $0.01 per share, were issued and outstanding.
MONEY CENTERS OF AMERICA, INC.
QUARTERLY PERIOD ENDED September 30, 2006
INDEX TO FORM 10-QSB
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at
September 30, 2006 (unaudited) 1
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 2006 and 2005 (unaudited) 2
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2006
and 2005 (unaudited) 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis or Plan or Operation 20
Item 3. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Events 31
Item 6. Exhibits 32
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006
UNAUDITED
ASSETS
Current assets:
Restricted cash $ 4,322,423
Accounts receivable 106,440
Prepaid expenses and other current assets 280,441
-----------------
Total current assets 4,709,304
Property and equipment, net 985,188
Other assets
Intangible assets, net 1,161,371
Goodwill 203,124
Deferred financing costs 33,138
Deposits 183,476
-----------------
Total other assets 1,581,109
-----------------
Total assets $ 7,275,601
=================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 716,750
Accrued interest 157,350
Accrued expenses 331,740
Current portion of capital lease 58,290
Convertible notes payable, net of debt discount, related party 500,000
Notes payable, net of debt discount 93,515
Note payable, financial institution 2,162,320
Lines of credit 7,034,410
Due to officer 161,482
Commissions payable 1,012,270
-----------------
Total current liabilities 12,228,127
Long-term liabilities:
Capital lease, net of current portion 495,899
-----------------
Total long-term liabilities 495,899
Total Liabilities 12,724,026
Stockholders' Deficit:
Preferred stock; $.001 par value, 20,000,000 shares authorized
0 shares issued and outstanding -
Common stock; $.01 par value, 150,000,000 shares authorized
30,162,353 shares issued and outstanding 301,623
Additional paid-in capital 12,234,826
Accumulated deficit (17,984,874)
-----------------
Total stockholders' deficit (5,448,425)
-----------------
Total liabilities and stockholders' deficit $ 7,275,601
=================
See accompanying notes to unaudited consolidated financial statements.
1
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ----------------------------------
2006 2005 2006 2005
---------------- -------------- ---------------- ----------------
Revenues $ 2,598,863 $ 4,547,709 $ 9,498,316 $ 15,348,705
Cost of revenues 2,069,719 3,485,399 7,609,738 12,334,290
---------------- -------------- ---------------- ----------------
Gross profit 529,144 1,062,310 1,888,578 3,014,415
Selling, general and administrative expenses 433,080 428,097 1,541,713 1,700,273
Noncash Compensation 5,044 15,666 37,694 92,066
Depreciation and amortization 81,416 163,539 241,753 502,264
---------------- -------------- ---------------- ----------------
Operating income 9,604 455,008 67,418 719,812
Other income (expenses):
Interest income 4,104 4,011 12,338 13,868
Interest expense (453,499) (445,973) (1,335,487) (1,412,900)
Noncash interest expense (6,572) (5,197) (146,417) (5,197)
---------------- -------------- ---------------- ----------------
Total interest expense, net (455,967) (447,159) (1,469,566) (1,404,229)
---------------- -------------- ---------------- ----------------
Other income 3,500 - 22,652 1,650
Other expenses - - (128,376) (4,462)
---------------- -------------- ---------------- ----------------
Total other income (expense) 3,500 - (105,724) (2,812)
---------------- -------------- ---------------- ----------------
Net income (loss) $ (442,863) $ 7,849 $ (1,507,872) $ (687,229)
================ ============== ================ ================
Net income (loss) per common share - basic $ 0.02 $ 0.00 $ 0.06 $ (0.03)
================ ============== ================ ================
Net income (loss) per common share - diluted $ 0.02 $ 0.00 $ 0.06 $ (0.03)
================ ============== ================ ================
Weighted Average Common Shares Outstanding During the period
-Basic 27,385,409 25,206,978 25,991,556 25,172,534
================ ============== ================ ================
-Diluted 27,385,409 28,470,605 25,991,556 25,172,534
================ ============== ================ ================
See accompanying notes to unaudited consolidated financial statements.
2
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Nine Months Ended
Sept 30,
---------------------------
2006 2005
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Cash flows from operating activities:
Net loss $ (1,507,872) $ (687,231)
Adjustments used to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 241,753 502,264
Amortization of debt discount 138,156 -
Issuance of warrants for services 15,782 -
Issuance of common stock for services 5,742 -
Issuance of stock options for services 23,221 64,791
Changes in operating assets and liabilities:
Increase (decrease) in:
Accounts payable (302,443) 42,727
Accrued interest 40,389 -
Accrued expenses 146,139 (22,546)
Commissions payable (107,206) 116,229
(Increase) decrease in:
Prepaid expenses and other current assets (39,177) (86,555)
Accounts receivable 236,302 (15,999)
Deposits (2,579) -
------------ ------------
Net cash used in operating activities (1,111,793) (86,320)
Cash flows from investing activities:
Purchases of property and equipment (90,116) (411,350)
Cash paid for acquisition and intangible assets (253,190) (467,891)
------------ ------------
Net cash used in investing activities (343,306) (879,241)
Cash flows from financing activities:
Net change in lines of credit (461,216) 56,974
Capital lease obligation - 246,560
Payments on capital lease obligations (152,960) (40,153)
Repayments of loans payable - (500,000)
Advances to officer (208,848) (115,529)
Proceeds from notes payable 75,000 753,173
Payments on notes payable (779,092) (110,004)
Decrease in loans receivable - 43,000
Sale of common stock, net of $161,620 and $22,500
of offering costs respectively 1,038,390 479,450
Exercise of stock options and warrants 1,400 1,800
------------ ------------
Net cash provided by (used in) financing activities (487,326) 815,271
NET DECREASE IN CASH (1,942,425) (150,290)
CASH, beginning of period 6,264,848 4,620,673
------------ ------------
CASH, end of period $ 4,322,423 $ 4,470,383
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,335,487 $ 1,418,097
============ ============
Cash paid during the period for taxes $ - $ -
============ ============
Supplemental disclosure on non-cash investing and
financing activities:
Acquisition of equipment under capital lease $ 424,594 $ 264,235
============ ============
Reduction of loan payable officer in exchange for
related accrual $ 43,750 $ 175,000
============ ============
Record beneficial conversion feature for convertible debt
and freestanding warrants $ 10,305 $ -
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Money Centers of America Inc. (the "Company" or "MCA"), a Delaware corporation,
was incorporated in October 1997. The Company is a single source provider of
cash access services, OnSwitch TM Transaction Management System, and the Omni
Network TM. The Company has combined advanced technology with personalized
customer services to deliver ATM, Credit Card Advance, POS Debit, Check Cashing
Services, CreditPlus (outsourced marker services), cash access host program,
customer data sharing and merchant card processing.
(A) Basis of Presentation
The unaudited consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The unaudited consolidated financial statements include the accounts of
the Company and its subsidiaries. The Company and its subsidiaries have fiscal
years ending on December 31.
(B) Principles of Consolidation
The Company consolidates its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(C) Use of Estimates
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the periods presented. Actual
results may differ from these estimates.
Significant estimates during 2006 and 2005 include depreciable lives on
equipment, the valuation of stock options granted for services, the value of
warrants issued in connection with debt related financing, valuation of
intangible assets not having finite lives and the valuation allowance for
deferred tax assets since the Company had continuing operating losses.
(D) Reclassification
Certain prior periods balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or stockholders' deficit.
(E) Cash and Cash Equivalents and Compensating Balances
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with an original maturity date of three months or less to be
cash equivalents.
The Company minimizes its credit risk associated with cash by periodically
evaluating the credit quality of its primary financial institution. The balance
at times may exceed federally insured limits. At September 30, 2006, the balance
did not exceed the federally insured limits. In addition, the Company maintains
a significant amount of cash at each of the casinos. Management believes that
the Company has controls in place to safeguard these on-hand amounts, and that
no significant credit risk exists with respect to cash.
Additionally, the Company had $20,000 maintained under a compensating balance
agreement. The $20,000 is retained due to potential dishonorment of bad checks
that are unforeseen. There is an informal agreement between our bank and our
lender that requires this compensating balance agreement.
4
(F) Restricted Cash
Restricted cash is the balance of cash that is in the Company's bank accounts
and network that is used as collateral for our asset based lender (See Note 6).
The Company does not have access to this cash unless there is an amount over and
above the required amount of collateral. In order to pay operating expenses, the
Company requests that the asset based lender transfer funds into the Company's
unrestricted cash accounts. The restricted cash balance at September 30, 2006
was $4,322,423.
(G) Accounts Receivable
Accounts receivable arise primarily from ATM, credit card advances and check
cashing services provided at casino locations. Concentration of credit risk
related to ATM and credit card advances are limited to the processors who remit
the cash advanced back to the Company along with the Company's allocable share
of fees earned. The Company believes these processors are financially stable and
no significant credit risk exists with respect to accounts receivable arising
from credit card advances. Accordingly, no allowance was considered necessary at
September 30, 2006 and 2005.
(H) Equipment
Equipment is stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Equipment consists
primarily of cash access devices and computer equipment. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which ranges from three to seven years.
(I) Long Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell the asset. There were no impairment charges taken during the
periods ended September 30, 2006 and 2005.
5
(J) Goodwill, Intangibles and Related Impairment
Based on the discounted estimated cash flows of the Company over the remaining
amortization period, the Company's carrying values of the assets would be
reduced to their estimated fair values. Goodwill is assumed to have an
indefinite life pursuant to statement of Financial Accounting Standards No. SFAS
142, "Goodwill and Other Intangible Assets" and accordingly is not amortized but
subject to periodic impairment tests. Acquired contract rights are considered to
have a finite life, pursuant to SFAS 142, to be amortized over the period the
asset is expected to contribute to future cash flows. The Company expects the
period to be 1 to 4 years. The contract rights will also be subject to periodic
impairment tests. In accordance with SFAS No. 142, the Company is required to
evaluate the carrying value of its intangible assets (goodwill) subsequent to
their acquisition.
(K) Internal Use Software and Website Development Costs
The Company has adopted the provisions of AICPA Statement of Position ("SOP")
98-1, "Accounting for the Costs of Software Developed or Obtained for Internal
Use", and Emerging Issues Task Force ("EITF" ) Consensus #00-2. "Accounting for
Website Development Costs." The type of costs incurred by the Company in
developing its internal use software and Website include, but are not limited to
payroll-related costs (e.g. fringe benefits) for employees who devote time to
the internal use computer software or Website project, consulting fees, the
price of computer software purchased from third parties and travel expenses
incurred by employees or consultants in their duties directly associated with
developing the software. These costs are either expensed or capitalized
depending on the type of cost and the stage of development of the software and
Website.
The Company makes ongoing evaluations of the recoverability of its capitalized
internal use software and Web site by comparing the amount capitalized for each
module or component of software to their estimated net realizable values. If
such evaluations indicate that the unamortized costs exceed the net realizable
values, the Company writes off the amount by which the unamortized costs exceed
the net realizable values. At September 30, 2006 and 2005, no such write-offs
were required.
At September 30, 2006, the net book value of capitalized software was
$1,125,409. Amortization expense for the periods ended September 30, 2006 and
2005 was $5,411 and $5,411, respectively.
(L) Deferred Financing Costs
Deferred financing costs are capitalized and amortized over the term of the
related debt. At September 30, 2006, the gross amount of deferred financing
costs was $ 176,283 and related accumulated amortization was $ 143,145. At
September 30, 2006 the Company reflects in the accompanying consolidated balance
sheet net deferred financing costs of $33,138. Amortization of deferred
financing costs was $32,210 and $33,121 at September 30, 2006 and 2005,
respectively.
6
(M) Derivative Liabilities
In order to determine whether the Company has derivative liabilities, the
Company reviewed SFAS No. 133, SFAS No. 150, EITF No. 00-19 and EITF No. 05-02,
"The Meaning of Convertible Debt Instrument in Issue No. 00-19".
Pursuant to the terms of the Company's outstanding convertible debt and the
associated detachable freestanding warrants, management determined that no
instruments should be classified as a derivative liability. Additionally, there
are no other issued and outstanding instruments which require the application of
the aforementioned accounting guidance.
(N) Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 104 for revenue recognition. In general, the
Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably assured.
The following policies reflect specific criteria for the various revenues
streams of the Company:
(1) ATM's and Credit Cards
Fees earned from ATM and credit card advances are recorded on the date of
transaction.
(2) Check Cashing
Revenue is recorded from fees on check cashing services on the date the check is
cashed. If a customer's check is returned by the bank on which it is drawn, the
full amount of the check is charged as bad debt loss. The check is subsequently
resubmitted to the bank for payment. If the bank honors it, the amount of the
check is recognized as a negative bad debt expense. Based on the quick
turnaround of the check being returned by the bank on which it is drawn and the
resubmission to the bank for payment, the Company feels this method approximates
the allowance method, which is a Generally Accepted Accounting Principle. Based
upon past history no allowance was considered necessary at September 30, 2006
and 2005, respectively.
(O) Cost of Revenues
The cost of revenues primarily includes commissions paid, non management wages,
employee benefits, bad debts, rents paid to contract lessors, transaction
processing costs, cash replenishment fees, non-capitalizable operating lease
fees for ATM's and repairs and maintenance of ATM's.
7
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
(P) Advertising
In accordance with Accounting Standards Executive Committee Statement of
Position 93-7, ("SOP 93-7") costs incurred for producing and communicating
advertising of the Company, are charged to operations as incurred. Advertising
expense for the periods ended September 30, 2006 and 2005 were $41,400 and
$27,401, respectively.
(Q) Income Taxes
The Company accounts for income taxes under the Financial Accounting Standards
No. 109 "Accounting for Income Taxes" ("Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period, which includes the enactment date.
(R) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, accounts payable and accrued expenses,
commissions payable, notes payable, convertible notes payable, net of debt
discount, line of credit and due to related party approximate fair value due to
the relatively short period to maturity for these instruments.
(S) Earnings per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share", basic earnings per share is computed by dividing the net
income (loss) less preferred dividends for the period by the weighted average
number of shares outstanding. Diluted earnings per share is computed by dividing
net income (loss) less preferred dividends by the weighted average number of
shares outstanding including the effect of share equivalents. Common share
equivalents consist of shares issuable upon the exercise of certain common stock
purchase warrants, stock options, and convertible preferred stock. The Company
has excluded these common share equivalents from its computation of earnings per
share due to their antidilutive effect as the Company has reflected a net loss
at September 30, 2006 and 2005, respectively. Accordingly, the basic and diluted
EPS are the same.
At September 30, 2006 and 2005 there were 6,218,611 and 5,969,438 shares of
issuable common stock underlying the options, warrants and convertible debt
securities, respectively.
8
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
The following table summarizes all common stock equivalents outstanding at
September 30, 2006 and 2005, respectively.
2006 2005
---- ----
Common stock options 3,492,500 3,475,000
Common stock warrants 1,615,000 2,494,438
Convertible notes payable 1,111,111 -
------------ -----------
Total Common Stock Equivalents 6,218,611 5,969,438
============= ============
(T) Stock Based Compensation
We previously accounted for stock-based compensation issued to our employees
using the intrinsic value method. Accordingly, compensation cost for stock
options issued was measured as the excess, if any, of the fair value of our
common stock at the date of grant over the exercise price of the options. The
pro forma net loss per share amounts are presented as if the fair value method
had been used during the nine months ended September 30, 2005 in accordance with
the Company's adoption of SFAS 123(R) effective January 1, 2006.
For purposes of the following disclosures during the transition period of
adoption of SFAS 123(R), the weighted-average fair value of options has been
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted-average assumptions used for grants for the nine
months ended September 30, 2006: expected dividend yield of 0%; expected
volatility of 150%; risk-free interest rate of 4%; and an expected term of 7 to
10 years for options and warrants granted. Had the compensation cost for the
quarter ended September 30, 2005 been determined based on the fair value at the
grant, our net income (loss) and basic and diluted earnings (loss) per share
would have been reduced to the pro forma amount for that period indicated below.
For the quarter ending September 30, 2006, the net income and earnings per share
reflect the actual deduction for option expense as compensation. Compensation
recorded for stock options is a non-cash expense item.
Nine Months Ended
September 30
2006 2005
---- ----
Net income (loss) - as reported $(1,507,872) $(687,229)
Add: stock-based employee compensation - (136,355)
determined under the fair value method
Less: stock-based employee compensation
determined under the intrinsic value method (APB
#25) - -
============== ===========
Net income (loss) (1,507,872) (823,584)
============== ===========
Basic and Diluted earnings (loss)per share-as
reported $ (0.05) $(0.03)
Basic and Diluted earnings (loss) per share-pro
forma $ (0.05) $(0.03)
9
2. UNAUDITED INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The accompanying unaudited consolidated
financial statements for the interim periods reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the unaudited consolidated financial
position, operating results and cash flows for the periods presented. These
unaudited consolidated financial statements should be read in conjunction with
the financial statements and related footnotes for the year ended December 31,
2005 and notes thereto contained in the annual report on Form 10-KSB as filed
with the Securities and Exchange Commission. The results of operations for the
nine months ended September 30, 2006 are not necessarily indicative of the
results for the full year ending December 31, 2006.
3. CONVERTIBLE NOTES PAYABLE, NET OF DEBT DISCOUNT AND NOTES PAYABLE
(A) Convertible Notes Payable, net of debt discount
At September 30, 2006, the Company had the following outstanding convertible
notes payable:
Convertible notes payable - related party $ 500,000
--------------
Total convertible notes payable 500,000
Less: debt discount -
==============
Convertible notes payable, net of debt discount $500,000
==============
At September 30, 2006, the Company had the following outstanding accrued
interest payable for all convertible and non-convertible debt instruments:
Convertible notes payable - related party - accrued
interest $ 53,401
Interest accrued on Notes Payable and Lines of Credit 101,783
Interest accrued on non convertible related note (see
Note 5(B) ) 2,166
--------
Total accrued interest payable $ 157,350
=========
In September 2004, the Company granted 25,000 warrants to a related party lender
pursuant to a promissory note requiring the issuance of such warrants provided
the original principal and interest was not paid in full by March 1, 2006. The
payment represents additional interest as consideration for extending the note.
Based upon the following factors used to determine the fair value of these
warrants, the Company attributed a fair value to these warrants of $9,300 and
recorded them as non cash interest.
10
(B) Notes Payable, net of debt discount
In March 2006 the Company borrowed an aggregate $50,000 evidenced by two
separate $25,000 promissory notes. The Company recorded a debt discount of
$6,682 related to the beneficial conversion feature attributed to the 25,000
warrants issued in connection with these notes. At September 30, 2006, the
Company recorded amortization of debt discount for these notes totaling $5,197
as a component of interest expense. The remaining $1,485 of debt discount is
being amortized over the life of the promissory note.
In May 2006 The Company borrowed, from a related party, an aggregate $25,000
evidenced by a promissory note. The Company recorded a debt discount of $3,623
related to the beneficial conversion feature attributed to the 12,500 warrants
issued in connection with this note. At September 30, 2006, the Company recorded
amortization of debt discount for these notes totaling $3,623 as a component of
interest expense
The following Weighted Average Assumptions reflect all 2006
Option/Warrant Grants
Exercise price on grant date $0.01- $0.36
------------------------------------ ------------------------------
Expected dividend yield 0%
------------------------------------ ------------------------------
Expected Volatility 150-200%
------------------------------------ ------------------------------
Risk free interest rate 4%
------------------------------------ ------------------------------
Expected life of option 4- 10 years
------------------------------------ ------------------------------
During 2006, the Company reflected aggregate principal repayments of $211,809
for all non-convertible promissory notes.
At September 30, 2006, the Company had the following outstanding notes payable:
Notes payable $50,000
Notes payable - related party 45,000
----------
Total notes payable 95,000
Less: debt discount (1,485)
==========
Note payable, net of debt discount $93,515
==========
4. CAPITAL LEASES
In February 2006, the Company entered into a new capital lease for 4 ATM
machines at a Casino in California. The capitalized cost of the ATM machines is
$63,685. The terms of this lease require an approximately $19,000 down payment
90 days from installation with the remaining balance of approximately $44,685
financed over 59 months, at 15.15% for $949 per month. This note is
collateralized by the equipment.
In February 2006, the Company entered into a new capital lease for 1 additional
ATM machine at a Casino in New Mexico. The capitalized cost of the ATM machine
is $15,894. The terms of this lease require an approximately $5,000 down payment
90 days from installation with the remaining balance of approximately $10,894
financed over 59 months, at 14.53% for $237 per month. This note is
collateralized by the equipment.
In April 2006, the Company entered into a new capital lease for 4 additional ATM
machines at a Casino in Wisconsin. The capitalized cost of the ATM machines is
$63,574. The terms of this lease require an approximately $19,000 down payment
90 days from installation with the remaining $44,574 financed over 59 months, at
8.61% for $928 per month. This note is collateralized by the equipment.
11
In April 2006, the Company entered into a new capital lease for 2 ATM machines
at a Casino in California. The capitalized cost of the ATM machines is $39,644.
The terms of this lease require an approximately $12,000 down payment 90 days
from installation with the remaining $27,644 financed over 59 months, at 8.61%
for $579 per month. This note is collateralized by the equipment.
In April 2006, the Company entered into a new capital lease for 4 additional ATM
machines at a Casino in Colorado. The capitalized cost of the ATM machines is
$77,129. The terms of this lease require an approximately $23,000 down payment
90 days from installation with the remaining $54,129 financed over 59 months, at
8.61% for $1,126 per month. This note is collateralized by the equipment.
In April 2006, the Company entered into a new capital lease for 2 ATM machines
at retail locations in New York. The capitalized cost of the ATM machines is
$32,986. The terms of this lease require an approximately $10,000 down payment
90 days from installation with the remaining $22,986 financed over 59 months, at
8.61% for $482 per month. This note is collateralized by the equipment.
In September 2006, the Company entered into a new capital lease for 5 ATM
machines at retail locations in California. The capitalized cost of the ATM
machine is $131,679. The terms of this lease require an approximately $39,500
down payment 90 days from installation with the remaining $92,179 financed over
59 months, at 8.25% for $1,906 per month. This note is collateralized by the
equipment.
Capital lease obligations at September 30, 2006 consisted of the following:
Obligation under capital lease, imputed interest rate at $ 20,482
12.78%; due May 2007; collateralized by equipment
Obligation under capital lease, imputed interest rate at 27,958
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 27,958
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 59,208
7.95%; due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 8.3%; 10,704
due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 20,943
11.63%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 53,602
9.74%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 10,739
14.53%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 42,537
15.15%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 44,502
8.61%; due April 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 27,751
8.61%; dueApril 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 53,990
8.61%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 22,136
8.61%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 131,679
8.25%; due August 2011; collateralized by equipment
Less: current maturities (58,290)
-------------
Long term obligation, net of current portion $ 495,889
=============
12
5. DUE TO OFFICER
During 2006, the Company issued a note to its CEO totaling $43,750. The note was
issued in payment of the CEO's 2005 guaranteed bonus. This loan and other notes
to our CEO bear interest at 10%, are unsecured and due on demand. The
outstanding principal and related accrued interest balance at September 30, 2006
was $161,482. Of the total, $1,385 represented accrued interest payable.
6. LINES OF CREDIT AND NOTE PAYABLE, FINANCIAL INSTITUTION
Lines of credit at September 30, 2006 consisted of the following:
Line of credit, maximum availability of $7,000,000, maturity
date May 31, 2006. Although this loan has not been formally
renewed, we are in discussions with Mercantile and other
lenders regarding the terms of new credit facilities and
Mercantile has continued to finance our vault cash on the
current terms subject to various restrictive covenants,
interest is payable monthly at Prime plus 10.75% per annum, $ 4,665,628
borrowings are collateralized by restricted cash, all the
assets of the Company, 250,000 shares of common stock, and
guaranteed by the principal shareholder of the Company. The
Company is required to pay a monthly facility fee equal to
1/12% of the highest balance of the line during the month.
At September 30, 2006, the Company had recorded related
accrued interest payable of $69,213 in connection with this
line of credit.
Line of credit, interest is payable monthly at 9% per annum, the 875,550
line is unsecured and due on demand. This line has been
established with one of our casino customers.
Line of credit, non-interest bearing, unsecured and due on demand.
This line has been established with one of our casino customers. 1,037,760
Line of credit, unsecured and due on demand. The Company pays a
fixed stated amount of interest totaling $1,000 per month. The
payments are recorded and charged to interest expense. This line
has been established with one of our casino customers. At 455,472
September 30, 2006, the Company had recorded related accrued
interest payable of $1,000 in connection with this line ofcredit.
On April 12, 2004, the Company borrowed $2,050,000 from an
asset-based lender to make the second payment for the Available
Money acquisition. From April 12, 2004 until June 30, 2005 all 2,162,320
interest was accrued and added to the principal balance. The
Company has received a one year extension, with renewal subject
to the lender's discretion. This extension expired May 31, 2006.
Although this loan has not been formally renewed, we are in
discussions with Mercantile regarding the terms of a renewal and
Mercantile has continued to finance our vault cash on the current
terms. The note bears interest at 17% per annum. This note is
amortized over 5 years at $68,428 per month. At September 30,
2006, the Company had recorded related accrued interest payable
of $31,570 in connection with this line of credit. The note is
guaranteed by the majority shareholder of the Company and also
collateralized by all the assets of the Company.
------------
$ 9,196,730
============
13
7. STOCKHOLDERS' DEFICIT
Nine Months Ended September 30, 2006
(A) Common Stock Issuances
(1) Cash
In August 2006, the Company issued 4,800,000 shares of common stock to
investors at $.25 per share. The Company received proceeds of $1,038,390
from the transaction net of offering costs.
(2) Services
In February 2006, the Company issued 9,158 shares of common stock to
employees for services rendered. The Company valued the shares at the fair
value on the date of issuance which was $.43 per share based on the quoted
closing trading price and recorded non-cash compensation expense of $3,938.
In September 2006, the Company issued 6,217 shares of common stock to
employees for services rendered. The Company valued the shares at the fair
value on the date of issuance which was $.29 per share based on the quoted
closing trading price and recorded non-cash compensation expense of $1,803.
14
(3) Exercise of Options/Warrants
In February 2006, an employee and a consultant exercised an aggregate
75,000 options and warrants at $.01 per share. The Company received
proceeds of $750 from the transaction and issued 75,000 shares.
In July 2006, a lender exercised an aggregate 25,000 warrants at $.01 per
share The Company received proceeds of $250 from the transaction and
issued 25,000 shares.
(B) Accrued Penalty Shares
At September 30, 2006, pursuant to the terms of a prior common stock offering
with registration rights, the Company has accrued penalties in the amount of
142,500 shares. The Company has valued these shares at $81,048 based on the
quoted closing trading price every two weeks when the penalty accrues. The fair
value of the penalty has been recorded as a component of accrued expenses. In
February 2006, the Company's Form SB-2 was declared effective. Pursuant to the
terms of the original agreement once a registration statement had been declared
effective, accrual of penalty shares is no longer required. As of February 2006,
the penalty shares have ceased accruing.
(C) Stock Options
The Company follows SFAS No. 123(R) for all share based payment awards. The fair
value of each option or warrant granted is estimated on the date of grant using
the Black-Scholes option pricing model. The following is a summary of all stock
option and warrant activity with employees and non-employees during 2006:
(1) Option Grants - Employees
In May, 2006, 12,500 options at an exercise price of $0.33 per share issued
to an employee vested according to their stock option agreement. The
Company valued these shares at $4,266 and accordingly booked a noncash
compensation expense in the same amount.
In June 2006, 50,000 options at an exercise price of $0.42 per share issued
to the Company's Chief Financial Officer vested according to the executives
employment agreement. The Company valued these shares at $18,955 and
accordingly booked a noncash compensation expense in the same amount.
(2) Options/ Warrants Exercised - Employees
In February 2006, a consultant exercised 5,000 warrants at $.01 per share.
The Company received proceeds of $50 from the transaction and issued 5,000
shares of common stock.
In February 2006, an employee exercised 70,000 options at $.01 per share.
The Company received proceeds of $700 from the transaction and issued
70,000 shares of common stock.
In April 2006, an employee exercised 15,000 options at $.01 per share, The
Company received proceeds of $150 from the transaction and issued 15,000
shares of common stock.
In April 2006, an employee exercised 25,000 options at $.01 per share, The
Company received proceeds of $250 from the transaction and issued 25,000
shares of common stock.
(3) Option Forfeitures - Employees
None
15
(4) Weighted Average Assumptions for 2006 Option Grants - Employees
None
Employee stock option activity for the nine months ended September 30, 2006 and
2005 are summarized as follows:
Number of Shares Weighted Average Exercise Price
------------------------ ---------------------------------
Outstanding at December 31, 2005 3,602,500 $.19
Granted - -
Exercised (110,000) .01
Cancelled/Expired - -
------------------------ --------------------------------
Outstanding at September 30, 2006 3,492,500 $.20
======================== ================================
The following table summarizes the Company's employee stock options outstanding
at September 30, 2006:
Options Outstanding
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
.01 2, 765,000 7.26-7.32 .01
.33 127,500 1.25-2.21 .30
.42 200,000 7.71 .42
.70-.77 212,500 7.59-8.31 .75
2.00-2.28 187,500 6.67-7.09 2.11
---------------------- -----------------
3,492,500 .20
====================== ================
At September 30, 2006, 3,492,500 stock options are exercisable with a weighted
average exercise price of $.20.
(D) Warrants
(1) Warrant Grants - Consultants
In May, 2006, the Company issued 20,000 warrants to purchase the
Company's stock at an exercise price of $0.33 per share to a
consultant for services rendered. According to the issuance
10,000 warrants vested June 29, 2006 and the remaining 10,000
warrants will vest August 28, 2006. The Company valued the 10,000
vested shares at $3,241 and accordingly booked a noncash
compensation expense in the same amount.
Also in May 2006, the company issued 12,500 warrants to purchase
the Company's stock at $0.01 to a lender as described in Note 3
(B).
In August 2006, in connection with the private placement of 4.8 million shares,
the company issued 100,000 warrants at a strike price of $.36 to the placement
agent. The Company valued the shares via the black scholes at the fair value on
the date of issuance which was $.33 per share and recorded offering cost of
$33,010.
16
Warrant activity for the period ended September 30, 2006 is summarized as
follows:
Number of Weighted Average
Shares Exercise Price
--------------- ----------------
Outstanding at December 31, 2005 1,457,500 $2.72
Granted 182,500 .28
Exercised (25,000) .01
Cancelled - -
--------------- ----------------
Outstanding at September 30, 2006 1,615,000 $2.49
=============== ================
Warrants Outstanding
-----------------------------------------------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
-------------------- --------------- ----------------- ---------------
.01 340,000 5.98-7.32 .01
.30-.36 270,000 2.95-8.05 .35
.40 15,000 9.01 .40
.44 15,000 9.01 .44
.47-.51 30,000 8.93-9.01 .49
1.00 75,000 1.75 1.00
2.40 112,500 2.08-6.50 2.40
4.00-6.00 757,500 .50-1.75 4.68
--------------
1,615,000
==============
All outstanding warrants are exercisable at September 30, 2006.
8. COMMITMENTS AND CONTINGENCIES
(1) Operating Leases
In connection with converting all of the Available Money ATM's, the Company
now pays rent to various mall properties where it has ATM machines. These
monthly rents average $36,000 per month.
The Company is party to a 39-month lease agreement pursuant to which it
rents office space in Pennsylvania at a monthly rent of $2,635. This Lease
expires February 2008.
The Company's total rent expense under operating leases was $354,413 and
$410,314 for the nine months ended September 30, 2006 and 2005,
respectively.
17
(2) Casino Contracts
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental fee to
operate at the respective gaming locations.
Typically, the fees are earned by the gaming establishment over the life of
the contract based on one of the following scenarios:
(A) A dollar amount, as defined by the contract, per transaction volume
processed by the Company.
(B) A percentage of the Company's profits at the respective location.
As of September 30, 2006 the Company has recorded $762,788 of accrued
commissions on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
(3) Employment Agreements
(A) CEO
(1) Employment Agreement
In January 2004, the Company entered into a five-year employment
agreement with it's Chairman, President and Chief Executive Officer.
In addition to an annual salary of $350,000 per year (subject to
annual increases at the discretion of the Board of Directors ) (the
"Base Salary"), the employment agreement provides for a $200,000
signing bonus, a guaranteed bonus equal to 50% of his Base Salary in
any calendar year (the "Guaranteed Bonus" ) and a discretionary
incentive bonus of up to 50% of his Base Salary in any calendar year
pursuant to a bonus program to be adopted by the Board of Directors
(the "Incentive Bonus"). Pursuant to his employment agreement, the
officer is entitled to fringe benefits including participation in
retirement plans, life insurance, hospitalization, major medical, paid
vacation, a leased automobile and expense reimbursement. Effective
March, 2006, the Company amended the executive's agreement to reduce
his guaranteed bonus for 2005 from 50% of his salary to 12.5% of his
salary. At September 30, 2006, the Company had accrued $131,250 for
bonus.
(2) Commissions Payable
The Company pays sales commissions to sales persons closing various
contracts. The CEO was paid $27,299 in sales commissions for the first
nine months of 2006.
(B) CFO
The Company entered into an agreement with its Vice President of
Finance and Chief Financial Officer (CFO) dated June 14, 2005 (the
"Employment Agreement" ) The employment term commenced on June 14,
2005 and continues until the close of business on December 31, 2006,
with automatic annual renewals thereafter unless either party gives
notice of non-renewal at least thirty days prior to automatic renewal.
The officer's annual salary during the term of employment under the
Employment Agreement shall be no less than $120,000. In addition, the
officer was granted options to purchase 200,000 shares of the
Company's common stock with an exercise price of $.42 per share under
the Company's Amended and Restated 2003 Stock Incentive Plan, pursuant
to an Award Agreement for Non-Qualified Stock Option dated June 14,
2005 entered into between the Company and the officer. The options
have a term of ten years and are exercisable as follows: (a) 50,000
shall be exercisable immediately on the date of grant; (b) 50,000
shall be exercisable on June 1, 2006; and (c) 100,000 shall be
exercisable on June 1, 2007. On October 20, 2005, the CFO's employment
agreement was amended to increase his annual salary to $145,000 and
decrease his maximum annual bonus compensation to $25,000.
18
(4) Litigation
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street") filed a
Complaint against iGames Entertainment, Inc. and Money Centers of America, Inc.
("MCA") (collectively referred to hereinafter as "iGames") in the United States
District Court for the Eastern District of Pennsylvania, alleging that iGames
breached an Asset Purchase Agreement ("APA") that the parties executed on or
about February 14, 2003. By virtue of the APA, Lake Street sold to iGames all of
Lake Street's right, title and interest in a casino game called "Table Slots."
Lake Street alleges that it is entitled to additional compensation for the game.
We disagree and are vigorously defending this action.
9. CUSTOMER CONCENTRATIONS
For the nine months ended September 30, 2006, approximately 51% of total
revenues were derived from operations at two full service casinos. One other
customer represented approximately 11% of our total revenues for the nine months
ended September 30, 2006.
In May 2006, the Company ceased operations with the Sycuan Casino, a casino
customer that did not renew its contract which ended May 6, 2006. The Sycuan
Casino accounted for approximately $5.3 million in revenue and approximately
$460,000 in gross profit for the year ended December 31, 2005.
In the second quarter of 2006 the Sycuan Casino generated $597,242 in revenue
and $128,921 in net loss for operations. The net loss included $128,376 related
to the closing down of our operations at the Sycuan Casino.
10. CASH RENTAL PROGRAM AND RELATED INTEREST EXPENSE
Included in interest expense are monies owed to an unrelated vendor for interest
charges. The interest is based on the amount of cash in the Company's Available
Money ATM machines and network and is calculated on a daily basis. The balance
of this cash funded by the bank in the Company's ATM machines at September 30,
2006 was approximately $1 million. The interest rate on the $1 million is prime
plus zero. Effectively the Company rents this cash. The Company does not reflect
this cash as an asset or the loan as a liability on its balance sheet at
September 30, 2006. Interest expense from this cash was $249,336 for the nine
months ended September 30, 2006.
11. GOING CONCERN
The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has a
working capital deficit of $7,460,533, a stockholders' deficit of $5,448,425 and
an accumulated deficit of $17,984,874 at September 30, 2006. The Company also
reflected a net loss of $1,507,872 and net cash used in operations of
$1,111,794, for the nine months ended September 30, 2006. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management is in the process of implementing its business plan. Additionally,
management is actively seeking additional sources of capital, but no assurance
can be made that capital will be available on reasonable terms. Management
believes the actions it is taking allow the Company to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
12. SUBSEQUENT EVENTS
In October 2006, a lender exercised an aggregate 50,000 warrants at $.01 per
share The Company received proceeds of $500 from the transaction and issued
50,000 shares.
19
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," believe,"
estimate," continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those included in our Annual Report on Form
10-KSB filed on April 14, 2006. The following discussion should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
included elsewhere in this report.
Item 2 - Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of the results of operations,
financial condition and liquidity should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere in this
report. These statements have been prepared in accordance with accounting
principles generally accepted in the United States. These principles require us
to make certain estimates, judgments and assumptions that affect the reported
amount of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and related liabilities. On a going forward basis, we evaluate
our estimates based on historical experience and various other assumptions that
are believed to be reasonable under the circumstances, the result of which form
the basis for making judgments about carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
History
We are a single source provider of cash access services, the ONSwitch(TM)
transaction management system and the Omni Network to the gaming industry. We
combine advanced technology with personalized customer services to deliver ATM,
Credit Card Advance, POS Debit, Check Cashing Services, CreditPlus outsourced
marker services, and merchant card processing.
We were formed as a Delaware corporation in 1997. Prior to March 2001, we
were a development company focusing on the completion of a Point of Sale ("POS")
transaction management system for the gaming industry. In March 2001, we
commenced operations with the launch of the POS system at the Paragon Casino in
Marksville, LA.
On January 2, 2004, iGames Entertainment, Inc. acquired us pursuant to our
merger with and into a wholly-owned subsidiary of iGames formed for that
purpose. In addition, on January 6, 2004, iGames acquired Available Money, Inc.,
an operator of free-standing ATM machines in casinos. The business operations of
Available Money were combined with our business operations. As a result of the
acquisition of Available Money and our continued growth, we currently provide
services in 34 locations across the United States and the Caribbean.
Our acquisition by iGames was treated as a recapitalization and accounted
for as a reverse acquisition. Although iGames was the legal acquirer in the
merger, we were the accounting acquirer since our shareholders acquired a
majority ownership interest in iGames. Consequently, our historical financial
information is reflected in the financial statements prior to January 2004. All
significant intercompany transactions and balances have been eliminated. We do
not present pro forma information, as the merger was a recapitalization and not
a business combination.
On October 15, 2004, pursuant to an Agreement and Plan of Merger dated as
of August 10, 2004 (the "Merger Agreement") by and between iGames and us, iGames
was merged with and into us. Pursuant to the Merger Agreement, the holder of
each share of iGames' common stock received one share of our common stock, and
each holder of shares of iGames' Series A Convertible Preferred Stock received
11.5 shares of our common stock. Options and warrants to purchase iGames' common
stock, other than warrants issued as part of the merger consideration in iGames'
January 2004 acquisition of us (the "Merger Warrants"), are deemed options and
warrants to purchase the same number of shares of our common stock with no
change in exercise price. The Merger Warrants were cancelled in exchange for
1.15 shares of our common stock for each share of common stock purchasable
thereunder.
20
As a result of this merger, we have retained our December 31 fiscal year
end.
Our business model is to be an innovator and industry leader in cash access
and financial management services for the gaming industry. Within the funds
transfer and processing industries there exists niche markets that are capable
of generating substantial operating margins without the requirement to process
billions of dollars in transactions that is the norm for the industry. We
believe there is significant value to having a proprietary position in each
phase of the transaction process in the niche markets where management has a
proven track record. The gaming industry is an example of such a market and is
currently where we derive the majority of our revenues. We have identified other
markets with similar opportunities, however we have not executed any plans to
exploit these markets at this time.
Current Overview
Our core business of providing single source full service cash access
services in the gaming industry is the source of our revenue and profits in
2006. We have also launched several new services in the last 2 years, such as
our ONSwitch(TM) Transaction Management System, CreditPlus, Cash Services Host
Program, and the Omni Network(TM) that have helped to differentiate our product
offering in the marketplace.
Our core business generates revenues from transaction fees associated with
each unique service we provide, including ATMs, credit card advances, POS Debit,
check cashing, markers and various other financial instruments. We receive our
fees from either the casino operator or the consumer who is requesting access to
their funds. The pricing of each transaction type is determined by evaluating
risk and costs associated with the transaction in question. Accordingly, our
transaction fees have a profit component built into them. Furthermore,
reimbursement for electronic transactions are guaranteed by the credit or debit
networks and associations that process the transactions as long as procedures
are followed, thereby reducing the period of time that trade accounts receivable
are outstanding to several days.
Companies providing cash access services to the gaming industry face some
unique challenges and opportunities in the next ten years. Many companies in the
industry have merged, been acquired or have recapitalized in order to capitalize
on the trends identified in the gaming industry.
Historically, providers of cash access services to the gaming industry had
cash flow margins that were generally higher than those experienced in the funds
transfer and processing industries. Growing competition and the maturing of the
market has resulted in a decline in these margins as companies have begun
marketing their services based on price rather than innovation or value added
services. This trend is highlighted by the number of companies that promote
revenue growth and an increased account base but experience little increase in
net income. This trend is magnified by the fact that the largest participant in
the industry has close to 65% market share and has begun to forgo margin in
order to retain business. Companies that can adapt to the changing market and
can create innovative products and services stand at the forefront of a new wave
in revenue and profit growth.
Substantially all gaming facilities provide ATM services, credit card cash
advances, debit, and/or check cashing services to their customers. Services are
typically outsourced and provided on an exclusive basis for an average of two to
five years. Each year, approximately 400 accounts totaling $300 million in
revenue are put out to bid. Currently there are five major companies, including
us, that have proprietary systems to compete for this business. Although this
market has matured from a pricing perspective, the demand for the services from
the end user is still strong.
21
Like most maturing markets, the companies that succeed are those that are
capable of reinventing themselves and the markets they serve. We believe that
smaller gaming properties will always look to have cash access services provided
in the traditional manner. However, there are several major trends occurring in
the gaming industry that will have a major impact on our industry and will
determine which companies emerge as industry leaders:
1. Consolidation of major casino companies that will put pressure on other
major casino companies to follow suit and will put pressure on smaller
casino companies to focus on service and value added amenities in order
to compete.
The trend towards consolidation of the major gaming companies has continued
and will make it difficult to continue to offer our services in the traditional
manner. The economics are too compelling for the gaming operators not to
consider internalizing these operations in order to generate additional revenue
and profits to service the debt associated with the consolidation. Our
preparation has continued to position us to capitalize on this trend. We have
prepared for this change and have already begun to offer our systems and
services through the issuance of Technology and Use Agreements for our
ONSwitch(TM) Transaction Management System. Instead of outsourcing the cash
services operations, ONSwitch(TM) offers turn-key processing capabilities for
internal use by the casino. This means casinos will license our technology so
they can operate and maintain their own cash access services, including the
addition of their merchant card processing. Our size makes us uniquely capable
of adapting to this change. Though the license agreements do not have the same
revenue potential as a traditional cash services contract, the net income
derived from these agreements is higher and the user agreements are for a longer
period of time. For instance, the standard outsourced contract is from one to
three years in length, while we offer ONSwitch(TM) only under five to ten year
licenses. It is in the casino's interest to license ONSwitch(TM) for the longer
period of time as well. Also, we will not have the same capital expenditures or
vault cash requirements that we experience in performing traditional cash access
services. Furthermore, our larger competitors have spent years trying to conceal
the economic benefits of this type of offering because their large
infrastructure is designed to only support an outsourced solution.
2. Ticket In-Ticket Out technology growth exceeding expectations.
The first major casino company to remove coins from the casino floor was
Caesars Palace in Atlantic City, NJ. Since then, slot machine manufacturers have
developed a technology that prints and accepts bar-coded tickets at the slot
machine instead of accepting or dispensing coins. It was originally anticipated
that it would take 10-15 years for the industry to fully adopt this technology.
It appears it may only take half this amount of time. This presents a problem to
casino operators. They now have tens of thousands of bar-coded tickets a day
that need to be redeemed for cash. This has paved the way for self-service
ticket redemption technology so customers do not have to go to the casino cage
in order to redeem their tickets. The initial ticket redemption machines placed
in service have proven to be too big and too expensive. Most casino operators
have to wait until budget season to appropriate the necessary funds in order to
even consider the acquisition of the required equipment. We believe this
functionality will ultimately reside on the ATM machine thus eliminating the
requirement to purchase new equipment and eliminating the need to remove a slot
machine to make room for a stand-alone ticket redemption device. We are
developing technology that will allow ticket-redemption functionality on our
cash access devices. There is still the problem of security with the bar-coded
ticket, which is as good as cash. Many casino operators will refuse to allow
vendors to handle the tickets for security and fraud concerns. This is an
additional economic benefit of our plan to have the casino operator internalize
their cash access services because only the casino's personnel will handle the
tickets in the situations where they are licensing our services.
3. Execution of long-term and stable compacts for Indian Casinos in
numerous state jurisdictions has made traditional capital more readily
available paving the way for a new wave of expansion and the resulting
need for new sources of revenue and customer amenities.
Recent shortfalls in state budgets have brought the tribal and state
governments together to execute long-term compacts that meet the financial needs
of both parties. In recent years, California, Arizona, New Mexico and Wisconsin
are just a few examples of this development. The added financial stability for
Indian casinos has made traditional capital more readily available to tribes,
leading many tribes to undertake expansion of casino facilities and operations.
22
In order to support this expansion, Indian casino operators will seek new
sources of revenues and new amenities to attract and retain more quality
customers. One of the most critical customer amenities in casino operations is
the availability of credit. Traditional gaming markets, such as Las Vegas and
Atlantic City, rely on credit issuance for up to 40% of their revenues. These
markets issue credit internally and rely on specialized credit reporting in
their risk management decisions. Significant capital investment in technology is
required for these transactions to be executed efficiently. However, within the
$15 billion dollar Indian Gaming market there are virtually no credit services
currently available. Approximately 26 of 29 states that have approved Indian
Gaming do not allow the Tribes or their respective casinos to issue credit. The
lack of credit play is also due to the lack of a third party credit issuer that
is capable of facilitating the transactions. Our CreditPlus platform allows
Indian casinos to issue credit to players, providing Indian casinos with a guest
amenity that is already widely accepted in traditional jurisdictions. Our
ability to convert this market opportunity into revenue is largely dependent on
the success of our sales efforts in educating casinos in the Indian Gaming
market regarding the advantages of CreditPlus and its compliance with the
regulatory requirements.
Our Cash Services Host Program is uniquely aimed at capitalizing on the
need for new profitable guest amenities. Where most guest amenities require
additional expenses, this service helps the casino operator generate more
revenues. This service allows customers to facilitate cash access transactions
from the slot machine or gaming table. Our hosts are available to bring the
transaction to the guest, which is viewed as a valuable customer amenity, while
driving more money to the gaming floor for the casino operator.
The acquisition of Available Money continues to provide challenges for
management in terms of the longer than expected conversion of this portfolio to
our processing platform and the renegotiation or termination of nonprofitable
contracts. We have been successful in renegotiating several of the Available
Money contracts to increase the fees that we can charge under those contracts,
the benefits of which we began to recognize in September 2005. In addition, due
to interest rate increases, we again increased our fees on some Available Money
locations in July 2006. Certain other contracts that were not profitable and
that we were unable to renegotiate have been terminated. Although this has
resulted in decreased revenues, it has had a positive effect on cash flow and
gross profit.
We launched our ONSwitch(TM) Transaction Management System in January 2006
and we began to offer ONSwitch(TM) to our customers as a "turn-key" solution
that they can use to process and facilitate their own transactions without using
a vendor. ONSwitch(TM) allows a gaming operator to leverage existing
infrastructure to internalize the delivery and operation of cash access
services, retail merchant card processing, automated ticket redemption, and
player's club redemptions.
With ONSwitch(TM), we will generate revenues from licensing fees and
ongoing support fees rather than providing cash access services ourselves.
Although our recurring revenues from a particular casino will be substantially
reduced, we will no longer incur the costs associated with on-site personnel and
equipment and interest expense on the substantial working capital required for
vault cash to support our current services. This will enable us to support a
much larger customer base.
We believe that the economics of our business are too compelling for gaming
operators not to consider internalizing cash access operations in order to
generate additional revenue and profits, especially when these operations are
virtually identical to a gaming operator's core competencies. Substantially all
gaming facilities provide ATM services, credit card cash advances, debit, and/or
check cashing services to their customers.
In January 2006 we also made a conscious effort to increase our sales team,
both inside sales and independent sales and step up our marketing in conjunction
with the marketing of ONSwitch(TM) and the Omni Network(TM). The positive
effects of this effort are beginning to bear fruit. We had originally signed 10
new contracts between April and August 2006. Unfortunately due to unanticipated
delays in obtaining needed local authorizations in the Caribbean we were unable
to meet the installation deadlines for 4 casinos. To date we have installed 2 of
the remaining 6 new casinos and we have increased our sales pipeline by 400%.
Our increased investment in sales and marketing in the first nine months was
approximately $80,000. 77% of this increase was related to trade show expenses
to launch our new products. Although we think this was a wise investment, with
the loss of our contract at the Sycuan Casino (discussed below), management has
been forced to spend less in trade shows and marketing. Management believes we
can be just as effective with such an decrease in the tradeshow budget as we
have illustrated with the recently signed contracts. We feel that the most
important piece of our increased sales activity is our added sales personnel.
23
In April 2006 we were notified that our contract with the Sycuan casino
would not be renewed at its May 2006 expiration. We did not lose this contract
based on service or diversity of products, but rather due to very aggressive
pricing by a competitor. We feel that our competitor irresponsibly bid for the
business and will either lose money or provide poor customer service and less
money to the casino floor.
This contract represented approximately 27.3% of our gross revenues and
12.7% of our gross profit for the year ended December 31, 2005. Although we had
hoped to retain this customer, we recognized that our contract might not be
renewed and made appropriate cost reduction plans. We have been able to offset
most if not all of the lost cash flow by curtailing expenses, deferring certain
software development, reduction in nonsales personnel, repositioning employees,
deferring certain planned investor relations activities, and reducing trade show
expenses. In addition, management is working to get the 6 newly signed contracts
installed and generating revenue as soon as possible. The cost reductions and
new contract revenue will help improve our cash flow dramatically.
None of the personnel reductions have been in sales. We feel our sales team
has proven themselves with 6 new contracts signed since April 2006 and 2
contract extensions. In addition, our sales pipeline is as full as it has ever
been. As a result of these efforts and the extremely positive reception of
ONSwitch(TM) and the Omni Network, we are confident that we will execute one or
more letters of intent for ONSwitch(TM) shortly. ONSwitchTM is still being
tested by a large casino that is not a current customer. Although this test is
taking longer than we anticipated, the delay is the result of the casino's
decision to make software and hardware upgrades. Our current cost of capital
remains high as we were initially delayed in our efforts to recapitalize our
balance sheet due to our focused efforts to deploy ONSwitch(TM) on schedule and
our new sales and marketing of ONSwitch(TM). Management has completed most of
the cost reductions after the loss of Sycuan. Management is now simultaneously
focused on installing our newly signed contracts and the recapitalization of our
balance sheet; a major priority for the remainder of 2006. The success of this
recapitalization will reduce the interest we pay on our lines of credit, which
will lower our expenses and contribute to our profitability. We are also
attempting to move to a more long-term lender, so our debt will not all be short
term in nature. The ability to continue our growth will be largely dependent on
our ability to identify and secure capital at reasonable rates, although our new
customers have all agreed to finance their vault cash needed at their casinos.
We have instituted additional cost reductions. We anticipate cutting an
additional $180,000 in payroll beginning January 1, 2007. Due to severance
payments, only half that savings will be seen in the 1st quarter. In addition,
our CEO has voluntarily agreed to defer $70,000 per year of his salary for an
indefinite period of time, effective January 1, 2007.
We believe that it is necessary to increase our working capital position so
that we can capitalize on the profitable trends in the industry, expansion into
the Caribbean and South America while maintaining and servicing our current
customer base and integrating acquired operations such as Available Money.
Without sufficient working capital, we would be forced to utilize working
capital to support revenue growth at the expense of executing on our integration
and conversion plans. This would result in substantially higher operating costs
without the assurance of additional revenues to support such costs.
Critical Accounting Policies
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
24
Revenue Recognition. In general, we record revenue when persuasive evidence
of an arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectability is reasonably assured. The following policies reflect specific
criteria for the various revenue streams of the Company:
ATM's and Credit Cards: Fees earned from ATM and credit card advances
are recorded on the date of transaction.
Check Cashing: Revenue is recorded from the fees on check cashing
services on the date the check is cashed. If a customer's check is
returned by the bank on which it is drawn, the full amount of the
check is charged as bad debt loss. The check is subsequently
resubmitted to the bank for payment. If the bank honors it, the amount
of the check is recognized as negative bad debt expense.
Check Cashing Bad Debt. The principal source of bad debts that we
experience are due to checks presented by casino patrons that are ultimately
returned by the drawer's bank for insufficient funds. We account for these check
cashing bad debts on a cash basis. Fees charged for check cashing are recorded
as income on the date the check is cashed. If a check is returned by the bank on
which it is drawn, we charge the full amount of the check as a bad debt loss. If
the bank subsequently honors the check, we recognize the amount of the check as
a negative bad debt. Based on the quick turnaround of the check being returned
by the bank on which it is drawn and our resubmission to the bank for payment,
we feel this method approximates the allowance method, which is a Generally
Accepted Accounting Principle.
Goodwill and Long-Lived Intangible Assets. The carrying value of goodwill
as well as other long-lived intangible assets such as contracts with casinos is
reviewed if the facts and circumstances suggest that they may be impaired. With
respect to contract rights in particular, which have defined terms, this will
result in an annual adjustment based on the remaining term of the contract. If
this review indicates that the assets will not be recoverable, as determined
based on our discounted estimated cash flows over the remaining amortization
period, then the carrying values of the assets are reduced to their estimated
fair values. Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards No. 142, "Goodwill And Other Intangible Assets" which
eliminates amortization of goodwill and certain other intangible assets and
requires annual testing for impairment. The calculation of fair value includes a
number of estimates and assumptions, including projections of future income and
cash flows, the identification of appropriate market multiples and the choice of
an appropriate discount rate. In our experience, forecasts of cash flows based
on historical results are relatively dependable. We use the remaining contract
term for estimating contract periods, which may vary from actual experience due
to early termination that cannot be forecast. We use our current cost of funds,
which is a variable rate, as the discount rate. Use of a higher discount rate
would have the effect of reducing the calculated fair value, while use of a
lower rate would increase the calculated fair value. In connection with the
acquisition of Available Money (our only acquired reporting unit), goodwill was
allocated based on the excess of the final purchase price over the value of the
acquired contract rights, determined as described above.
Stock Based Compensation. We previously accounted for stock-based
compensation issued to our employees using the intrinsic value method.
Accordingly, compensation cost for stock options issued was measured as the
excess, if any, of the fair value of our common stock at the date of grant over
the exercise price of the options.
25
Results of Operations
Three Months Ended September 30, 2006 (Unaudited) vs. Three Months Ended September 30, 2005 (Unaudited)
Three Months Three Months
Ended September Ended September
30, 2006 30, 2005 Change
----------------- ----------------- -----------------
Net Income (Loss) (442,863) 7,849 (450,712)
Revenues 2,598,863 4,547,709 (1,948,846)
Cost of revenues 2,069,719 3,485,399 (1,415,680)
Commissions & Rents Paid 1,110,700 2,222,117 (1,111,417)
Wages & Benefits 479,266 613,477 (134,211)
Processing Fee & Service Charges 288,806 440,297 (151,491)
Bad Debts 33,859 24,479 9,380
ATM Lease Fees & Maintenance 56,005 68,557 (12,552)
Cash Replenishment Services 40,157 26,743 13,414
Other 60,926 89,729 (28,803)
Gross Profit 529,144 1,062,310 (533,166)
Selling, General and Administrative Expenses 433,080 428,097 4,983
Contributions 3,050 1,100 1,950
Management Compensation 173,750 126,899 46,851
Marketing 3,297 6,496 (3,199)
Professional Fees 64,614 73,743 (9,129)
Seminars - 11,827 (11,827)
Trade Show & Sponsorships - 24,901 (24,901)
Travel 48,226 55,578 (7,352)
Other 140,143 127,553 12,590
Noncash Compensation 5,044 15,666 (10,622)
Depreciation and amortization 81,416 163,539 (82,123)
Interest expense, net (455,967) (447,159) 8,808
Other income 3,500 - 3,500
Our net loss increased by approximately $450,000 during the three months
ended September 30, 2006 compared to 2005 primarily due to a decrease in revenue
from the loss of the Sycuan contract in May of this year and the Valley View
contract in 2005. This loss in revenue resulted in a decrease in gross profit of
approximately $530,000.
Our revenues as a whole decreased by approximately 43% during the three
months ended September 30, 2006 as compared to the three months ended June 30,
2005. The Money Centers portfolio (consisting primarily of full-service casino
contracts) decreased 37% or $1.2 million. We lost approximately $1,360,000 in
revenues from the loss of the Sycuan contract which de-installed on May 9, 2006.
While the remaining Money Centers casinos had increased same store sales of 9%
from same quarter last year. The Available Money portfolio (consisting of ATM
contracts) decreased 58% or approximately $760,000. Our selling, general and
administrative expenses increased approximately $5,000 during the three months
ended September 30, 2006 primarily due to decreased legal and accounting
expenses reflecting the settlement of litigation in 2005 and less use of outside
accountants, offset by increases in management compensation due to having our
CFO for the entire third quarter in 2006 and payment to our CEO of the full
guaranteed bonus under his employment agreement. Our depreciation and
amortization expenses decreased during the three months ended September 30, 2006
primarily due to the elimination of amortization that otherwise would have been
realized on contracts that terminated in 2005.
Our interest expense increased by $8,808 during the three months ended
September 30, 2006. Lower borrowing levels resulting from the termination of
unprofitable contracts were offset by the effect of higher interest rates. Our
interest rate is variable and has increased approximately 150 basis points in
the last year.
Other income in the third quarter of 2006 increased $3,500.
26
Nine Months Ended September 30, 2006 (Unaudited) vs. Nine Months Ended September 30, 2005 (Unaudited)
Nine Months Nine Months
Ended September Ended September
30,2006 ($) 30, 2005 ($) Change ($)
----------------- ----------------- -----------------
Net Loss (1,507,872) (687,229) (820,643)
Revenues 9,498,316 15,348,705 (5,850,389)
Cost of services 7,609,738 12,334,290 (4,724,552)
Commissions & Rents Paid 4,422,638 7,817,459 (3,394,821)
Wages & Benefits 1,656,169 1,647,085 9,084
Processing Fee & Service Charges 977,674 1,369,440 (391,766)
Bad Debts 95,798 515,866 (420,068)
ATM Lease Fees & Maintenance 161,221 408,691 (247,470)
Cash Replenishment Services 83,346 293,255 (209,909)
Other 212,892 282,494 (69,602)
Gross Profit 1,888,578 3,014,415 (1,125,837)
Selling, General and Administrative Expenses 1,541,713 1,700,273 (158,560)
Contributions 16,550 4,800 11,750
Management Compensation 521,250 297,668 223,582
Marketing 41,400 23,901 17,499
Professional Fees 228,152 680,779 (452,627)
Seminars 10,597 11,827 (1,230)
Trade Show & Sponsorships 114,072 54,341 59,731
Travel 178,590 198,747 (20,157)
Other 431,102 428,210 2,892
Noncash Compensation 37,694 92,066 (54,372)
Depreciation and amortization 241,753 502,264 (260,511)
Interest expense, net (1,469,566) (1,404,229) 65,337
Other income (expenses) (105,724) (2,812) 102,912
Our net loss increased by approximately $820,000 during the nine months
ended September 30, 2006 primarily due to a decrease in revenue from the loss of
the Sycuan contract in May of this year and the Valley View contract in 2005.
This loss in revenue resulted in a decrease in gross profit of approximately
$1,125,000. Our gross profit is stabilizing at 20%. We offset this loss in gross
profit with a reduction in Legal and professional fees of approximately
$450,000.
Our revenues as a whole decreased by approximately 38% during the nine
months ended September 30, 2006 as compared to the nine months ended September
30, 2005. The Money Centers portfolio (consisting primarily of full-service
casino contracts) decreased 22% or approximately $2.2 million, We lost
approximately $2 million in revenues from the loss of the Sycuan contract which
de-installed in May 9, 2006 and approximately $845,000 from the loss of the
Valley View contract in 2005, while the remaining Money Centers casinos had
increased same store sales of 13%, from same period last year. While the
Available Money portfolio (consisting of ATM contracts) decreased 69% or $3.6
million. This reflected a conscious effort to terminate unprofitable contracts
from the Available Money portfolio as demonstrated by the fact that gross profit
increased. Our selling, general and administrative expenses decreased by
approximately $160,000 during the nine months ended September 30, 2006 primarily
due to decreased legal and accounting expenses reflecting the settlement of
litigation in 2005 and less use of outside accountants, offset by increases in
management compensation, due to having a CFO for the entire third quarter in
2006 and and payment to our CEO of the full guaranteed bonus under his
employment agreement and by increases in our trade show and marketing of new
products, and sponsorship of various tribal activities. Our depreciation and
amortization expenses decreased during the nine months ended September 30, 2006
primarily due to the elimination of amortization that otherwise would have been
realized on contracts that terminated in 2005.
27
Our interest expense increased by approximately $65,000 during the nine
months ended September 30, 2006. Lower borrowing levels resulting from the
termination of unprofitable contracts were offset by approximately $140,000 of
non-cash interest expense related to certain bridge loans we took out in the
latter part of 2005 and the effect of higher interest rates. Our interest rate
is variable and has increased approximately 150 basis points in the last year.
Other income (expenses) decreased by approximatly $100,000 primarily
because of approximatly $130,000 in expenses related to the closing down of our
operations at the Syuan Casino offset by approximatly $19,000 received that
related to the 2005 settlement of the Available Money lawsuit and other
miscellaneous income.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal quarter
ended September 30, 2006 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
Changes in Financial Position, Liquidity and Capital Resources
Nine Months Nine Months
Ended Ended
September 30, September 30,
2006 2005
(Unaudited) (Unaudited) Change
------------------ --------------- ---------------
Net Cash Used in Operating Activities $(1,111,793) $ (86,320) $ 1,025,473
Net Cash Used in Investing Activities (343,306) (879,241) (535,935)
Net Cash Provided by (Used in) Financing Activities (487,326) 815,271 (1,302,597)
Net cash used in operations decreased by approximately $1 million,
primarily due to a increase in our net loss combined with payment of our
accounts and commissions payable. Net cash used in investing activities
decreased due to the fact we have financed our new ATM purchases in 2006.
Net cash used by financing activities increased during the nine months
ended September 30, 2006 primarily due to reductions in the outstanding balance
of our vault cash facility because we require less vault cash after the
expiration of the Sycuan contract, combined with the fact we paid of some of the
bridge notes and other debts off, offset by us raising $1.2 million in equity. A
significant portion of our existing indebtedness is associated with our vault
cash line of credit of $7,000,000 with Mercantile Capital, L.P., which we use to
provide vault cash for our casino operations. Vault cash is not working capital
but rather the money necessary to fund the float, or money in transit, that
exists when customers utilize our services but we have yet to be reimbursed from
the Debit, Credit Card Cash Advance, or ATM networks for executing the
transactions. Although these funds are generally reimbursed within 24-48 hours,
a significant amount of cash is required to fund our operations due to the
magnitude of our transaction volume. Our vault cash loan accrues interest at the
base commercial lending rate of Wilmington Trust Company of Pennsylvania plus
10.75% per annum on the outstanding principal balance, with a minimum rate of
15% per annum, and had a maturity date of May 31, 2006. Although this loan has
not been formally renewed, we are in final negotiations with Mercantile and
other lenders on documentation for new credit facilities, and Mercantile has
continued to finance our vault cash on the current terms. Our obligation to
repay this loan is secured by a first priority lien on all of our assets. The
outstanding balance on our vault cash line of credit fluctuates significantly
from day to day based on activity and collections, especially over weekends.
Vault cash for our ATM operations at locations where we do not provide full cash
access services (primarily Available Money customers) is provided by our ATM
processing provider under the terms of the ATM processing agreement, at a cost
equal to the ATM processor's cost of funds, which currently is the Prime Rate.
28
We incurred $3,850,000 of debt associated with the acquisition of Available
Money. $2,000,000 of this indebtedness is a loan provided by Chex Services, Inc.
As a result of the settlement of our lawsuit with Equitex, Inc. and Chex
Services, Inc. related to our terminated acquisition of Chex Services, Equitex
and Chex Services agreed to cancel our outstanding $2,000,000 principal
liability as well as any liability for accrued but unpaid interest under that
promissory note and we agreed to pay Chex $500,000 within 60 days of July 21,
2005. We paid this amount in September 2005. In part in order to fund the
payment to Chex Services, Inc., in September and October 2005 we borrowed
$800,000 from individuals, including the uncle and brother of our Chief
Executive Officer, pursuant to convertible notes that bear interest at 10% per
annum and mature in September and October of 2006. Many of the Notes are
convertible into shares of our common stock at an exercise price equal to 85% of
the trading price at the time of exercise, with a floor of $.45 per share. We
have paid $250,000 of these bridge notes off in the 3rd quarter. We have $50,000
that is not due until March of 2007 remaining. However we are in default with
loans to our CEO's uncle and brother in the aggregate amount of $500,000. We are
in negotiations on the terms of extension or possible conversion and have
received preliminary indications that these notes will be converted.
The final $1,850,000 of this indebtedness is part of a $2,050,000 bridge
loan provided by Mercantile Capital, L.P. This bridge loan was accruing interest
until June 30, 2005 when it was converted into a 5 year amortizing loan subject
to annual renewal at the lender's discretion. Our obligation to repay this loan
is secured by a first priority lien on all of our assets. We intend to refinance
this obligation in 2006 and are making every effort to do so. We paid a facility
fee of $41,000 in connection with this loan.
On September 10, 2004, we borrowed $210,000 from the father of our chief
executive officer to pay an advance on commissions to a new casino customer.
This loan bears interest at 10% per annum, which is payable monthly. The
principal amount of this loan is repayable in monthly payments payable on the
1st day of each month commencing with the second month following the month in
which we commence operations at Angel of the Winds Casino, and continuing on the
1st day of each month thereafter, provided that, upon any merger of our company,
sale of substantially all of our assets or change in majority ownership of our
voting capital stock, the lender has the right to accelerate this loan and
demand repayment of all outstanding principal and all unpaid accrued interest
thereon. We currently are making $5,000 principal payments per month. The
current balance outstanding is $45,000. In addition, we issued the lender
warrants to purchase 50,000 shares of our common stock at an exercise price of
$.33 per share.
Although we anticipate our operating profits will be sufficient to meet our
current obligations under our credit facilities, if we become unable to satisfy
these obligations, then our business may be adversely affected as Mercantile
Capital will have the right to sell our assets to satisfy any outstanding
indebtedness under our line of credit loan or our term loan that we are unable
to repay.
We also have a substantial amount of accounts payable and accrued expenses.
To the extent that we are unable to satisfy these obligations as they come due,
we risk the loss of services from our vendors and possible lawsuits seeking
collection of amounts due. In addition, we have an existing obligation to redeem
37,500 shares of our common stock from an existing stockholder at an aggregate
price of $41,250. This obligation arose in connection with iGames' purchase of
certain gaming software products for 75,000 shares of our common stock. In order
to complete this transaction under these terms, our former management granted
this stockholder the option to have 37,500 shares of his stock redeemed. This
stockholder has elected to exercise this redemption option.
We have replaced all of the former Available Money ATMs with new ATMs and
have converted all of these ATM's to our processing platform on more favorable
economic terms. We initially entered into a capital lease agreement to acquire
71 ATMs and related equipment necessary to complete this conversion but reduced
the number of ATM's we will acquire to 33. We are actively seeking various
sources of growth capital and strategic partnerships that will assist us in
achieving our business objectives. We are also exploring various potential
financing options and other sources of working capital. There is no assurance
that we will succeed in finding additional sources of capital on favorable terms
or at all. To the extent that we cannot find additional sources of capital, we
may be delayed in fully implementing our business plan.
We do not pay and do not intend to pay dividends on our common stock. We
believe it to be in the best interest of our stockholders to invest all
available cash in the expansion of our business.
29
Due to our accumulated deficit of $17,984,874 as of September 30, 2006 and
our net losses and cash used in operations of $1,507,872 and $1,111,793,
respectively, for the nine months ended September 30, 2006, our independent
auditors have raised substantial doubt about our ability to continue as a going
concern While we believe that our present plan of operations will be profitable
and will generate positive cash flow, there is no assurance that we will
generate net income or positive cash flow in 2006 or at any time in the future.
Item 3 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of September 30, 2006 (the "Evaluation Date"), and,
based on their evaluation, our chief executive officer and chief financial
officer have concluded that these controls and procedures were effective as of
the Evaluation Date. There were no significant changes in our internal controls
or in other factors that could significantly affect these controls during the
quarter ended September 30, 2006.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management to allow timely decisions regarding
required disclosure.
Changes in Internal Controls
There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the date we carried out this evaluation.
The Certifying Officers have also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including each of the Certifying Officers, does not expect
that our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
30
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street") filed a
Complaint against iGames Entertainment, Inc. and Money Centers of America, Inc.
("MCA") (collectively referred to hereinafter as "iGames") in the United States
District Court for the Eastern District of Pennsylvania, alleging that iGames
breached an Asset Purchase Agreement ("APA") that the parties executed on or
about February 14, 2003. By virtue of the APA, Lake Street sold to iGames all of
Lake Street's right, title and interest in a casino game called "Table Slots."
Lake Street alleges that it is entitled to additional compensation for the game.
We disagree and are vigorously defending this action.
In addition, we are, from time to time during the normal course of our
business operations, subject to various litigation claims and legal disputes. We
do not believe that the ultimate disposition of any of these matters will have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
In February, 2006, we issued an aggregate of 9,158 shares of our common
stock to 8 employees in lieu of a portion of cash bonuses otherwise due to them
at an effective price of $.43 per share in a transaction under Rule 701 under
the Securities Act.
In May, 2006, the Company issued 20,000 warrants to purchase the Company's
stock at an exercise price of $0.33 per share to a consultant for services
rendered in a transaction under Section 4(2) of the Securities Act. According to
the issuance 10,000 warrants vested June 29, 2006 and the remaining 10,000
warrants will vest August 28, 2006.
Also in May 2006, the company issued 12,500 warrants to purchase the
Company's stock at $0.01 to a lender in a transaction under Section 4(2) of the
Securities Act.
In July 2006, a lender exercised an aggregate 25,000 warrants at $.01
per share The Company received proceeds of $250 from the transaction and issued
25,000 shares.
In August 2006, we sold 4.8 million shares at a price of $0.25 per share in
a private placement under Rule 506 and Section 4(2) of the Securities Act. As
part of the placement agent's compensation, we issued 100,000 warrants at a
strike price of $.36. The Company valued the shares via the black scholes at the
fair value on the date of issuance which was $.33 per share and recorded
offering cost of $33,010.
In September 2006, the Company issued 6,217 shares of common stock to
employees for services rendered. The Company valued the shares at the fair value
on the date of issuance which was $.29 per share based on the quoted closing
trading price and recorded non-cash compensation expense of $1,803.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submissions of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
31
Item 6 - Exhibits
3.1 Money Centers of America, Inc. Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Current Report on Form 8-K filed on October 19, 2004).
3.2 Money Centers of America, Inc. Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 of the Current Report on Form 8-K filed on October 19, 2004).
4.1 Form of Specimen Stock Certificate.
10.1 Amended and Restated 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 of Form
10-KSB filed on July 13, 2004).
10.2 Employment Agreement dated as of January 2, 2004 by and between iGames Entertainment, Inc. and
Christopher M. Wolfington (incorporated by reference to Exhibit
10.1 of Form 10-KSB filed on July 13, 2004).
10.3 Amendment to Employment Agreement dated as of March 20, 2006 by and between Money Centers of
America, Inc. and Christopher M. Wolfington (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 2006 filed on May 19, 2006).
=
10.4 Employment Agreement dated as of June 14, 2005 by and between Money Centers of America, Inc. and
Jason P. Walsh (incorporated by reference to Exhibit 10.1 to the current Report on Form 8-K filed
on June 17, 2005).
10.5 Amendment to Employment Agreement dated as of October 20, 2005 by and between Money Centers of
America, Inc. and Jason P. Walsh (incorporated by reference to Exhibit 10.5 to the Quarterly Report
on Form 10-QSB for the fiscal quarter ended March 31, 2006 filed on May 19, 2006).
10.6 Loan and Security Agreement by and between iGames Entertainment, Inc. and Mercantile Capital, L.P.
dated November 26, 2003 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-QSB for the fiscal quarter ended December 31, 2003 filed on February 17, 2004).
10.7 Demand Note payable to the order of Mercantile Capital, L.P in the principal amount of $250,000 dated
November 26, 2003 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-QSB for
the fiscal quarter ended December 31, 2003 filed on February 17, 2004.)
10.8 Amended and Restated Agreement and Plan of Merger By and Among Money Centers of America, Inc., Christopher
M. Wolfington, iGames Entertainment, Inc., Michele Friedman, Jeremy Stein and Money Centers Acquisition, Inc.,
dated as of December 23, 2003 (incorporated by reference to Exhibit 2.1 of Current Report on Form 8-K filed
on January 20, 2004).
10.9 Stock Purchase Agreement For the Acquisition of Available Money, Inc. By iGames Entertainment,
Inc., from Helene Regen and Samuel Freshman dated January 6, 2004 (incorporated by reference to
Exhibit 1.1 of Current Report on Form 8-K filed on January 21, 2004).
10.10 Software Development Agreement effective September 1, 2004 by and between Money Centers of America,
Inc. and Intuicode LLC. (Incorporated by reference to Exhibit 10.8 to the Registration Statement on
Form SB-2 filed on February 14, 2004 (File No. 333-122819).
31.1 Certification dated August __, 2006 pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) of the
Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by
Christopher M. Wolfington, Chief Executive Officer and Chief Financial Officer.
31.2 Certification dated August __, 2006 pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) of the
Principal Accounting Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
by Jason P. Walsh, Chief Financial Officer.
32 Certification dated August __, 2006 pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, made by Christopher M. Wolfington, Chief Executive
Officer and Jason P. Walsh, Chief Financial Officer.
32
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MONEY CENTERS OF AMERICA, INC.
Date: November 20, 2006 By: /s/ Christopher M. Wolfington
----------------------------------
Christopher M. Wolfington
Chief Executive Officer
Date: November 20, 2006 By: /s/ Jason P. Walsh
---------------------------
Jason P. Walsh
Chief Financial Officer