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 June 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 (I.R.S. Employer
Incorporation or Organization) Identification)
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 August 18, 2006, 25,331,136 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 MARCH 31, 2006
INDEX TO FORM 10-QSB
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 2006 (unaudited) 1
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2006 and 2005 (unaudited) 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005 (unaudited) 3
Notes to Consolidated Financial Statements (Unaudited) 4-19
Item 2. Management's Discussion and Analysis or Plan or Operation 20-30
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 31-32
Signatures 33
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2006
UNAUDITED
ASSETS
Current assets:
Restricted cash $ 3,369,485
Accounts receivable 132,588
Prepaid expenses and other current assets 217,149
------------------
Total current assets 3,719,222
Property and equipment, net 834,672
Other assets
Intangible assets, net 1,038,023
Goodwill 203,124
Deferred financing costs 40,512
Deposits 183,476
------------------
Total other assets 1,465,135
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Total assets $ 6,019,029
==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 750,265
Accrued interest 158,355
Accrued expenses 331,109
Current portion of capital lease 179,500
Convertible notes payable, net of debt discount 700,000
Notes payable, net of debt discount 241,855
Lines of credit 8,091,076
Due to officer 250,024
Commissions payable 1,019,793
------------------
Total current liabilities 11,721,977
Long-term liabilities:
Capital lease, net of current portion 355,598
------------------
Total long-term liabilities 355,598
Total Liabilities 12,077,575
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
25,331,136 shares issued and outstanding 253,311
Additional paid-in capital 11,230,155
Accumulated deficit (17,542,012)
------------------
Total stockholders' deficit (6,058,546)
------------------
Total liabilities and stockholders' deficit $ 6,019,029
==================
See accompanying notes to unaudited consolidated financial statements.
1
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDEDSIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ----------------------------------
2006 2005 2006 2005
---------------- -------------- ---------------- ----------------
Revenues $ 3,060,386 $ 5,427,270 $ 6,899,453 $ 10,810,853
Cost of revenues 2,483,274 4,131,744 5,540,019 8,801,522
---------------- -------------- ---------------- ----------------
Gross profit 577,112 1,295,526 1,359,434 2,009,331
Selling, general and administrative expenses 500,975 628,329 1,108,632 1,319,546
Noncash Compensation 26,462 6,550 32,650 76,400
Depreciation and amortization 85,229 157,074 160,338 338,725
---------------- -------------- ---------------- ----------------
Operating income (loss) (35,554) 503,573 57,814 274,660
Other income (expenses):
Interest income 4,040 4,992 8,233 1,650
Interest expense (434,456) (461,579) (881,988) (966,927)
Noncash interest expense (66,357) - (139,845) -
Other expenses (128,376) (4,462) (128,376) (4,462)
---------------- -------------- ---------------- ----------------
Total interest expense, net (625,149) (461,049) (1,141,976) (969,739)
---------------- -------------- ---------------- ----------------
Other income - 1,650 19,152 -
---------------- -------------- ---------------- ----------------
Total other income - 1,650 19,152 -
---------------- -------------- ---------------- ----------------
Net income (loss) $ (660,703) $ 44,174 $ (1,065,010) $ (695,079)
================ ============== ================ ================
Net income (loss) per common share - basic $ (0.03) $ 0.00 $ (0.04) $ (0.03)
================ ============== ================ ================
Net income (loss) per common share - diluted $ (0.03) $ 0.00 $ (0.04) $ (0.03)
================ ============== ================ ================
Weighted Average Common Shares Outstanding During the period
-Basic 25,321,805 25,180,012 25,283,079 25,157,808
================ ============== ================ ================
-Diluted 25,321,805 28,355,887 25,283,079 25,157,808
================ ============== ================ ================
See accompanying notes to unaudited consolidated financial statements.
2
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
UNAUDITED
Six Months Ended
June 30,
---------------------------
2006 2005
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Cash flows from operating activities:
Net loss $ (1,065,010) $ (695,079)
Adjustments used to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 160,338 338,725
Amortization of debt discount 131,585 -
Issuance of warrants for services 3,241 -
Issuance of common stock for services 3,938 -
Issuance of stock options for services 23,221 57,750
Changes in operating assets and liabilities:
Increase (decrease) in:
Accounts payable (268,928) 407,276
Accrued interest 41,394 -
Accrued expenses 145,508 28,743
Commissions payable (99,683) 262,625
(Increase) decrease in:
Prepaid expenses and other current assets 24,115 34,609
Accounts receivable 210,154 172,667
Deposits (2,579) -
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Net cash used in operating activities (692,706) 607,316
Cash flows from investing activities:
Purchases of property and equipment (9,579) (325,871)
Cash paid for acquisition and intangible assets (117,500) (379,891)
------------ ------------
Net cash used in investing activities (127,079) (705,762)
Cash flows from financing activities:
Net change in lines of credit (1,909,153) 304,237
Capital lease obligation - 183,026
Payments on capital lease obligations (40,372) (38,690)
Advances to officer (120,306) (20,112)
Proceeds from notes payable 75,000 -
Payments on notes payable (81,897) (103,821)
Decrease in loans receivable - 30,000
Sale of common stock, net of $22,500 of offering costs - 479,450
Exercise of stock options and warrants 1,150 1,800
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Net cash provided by (used in) financing activities (2,075,578) 835,890
NET INCREASE (DECREASE) IN CASH (2,895,363) 737,444
CASH, beginning of period 6,264,848 4,620,673
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CASH, end of period $ 3,369,485 $ 5,358,117
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 881,988 $ 966,927
============ ============
Cash paid during the period for taxes $ - $ -
============ ============
Supplemental disclosure on non-cash investing and financing activities:
Acquisition of equipment under capital lease $ 292,915 $ -
============ ============
Reduction of loan payable officer in exchange for related accrual $ 43,750 $ -
============ ============
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
JUNE 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. All material intercompany balances and
transactions have been eliminated. 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 June 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 June 30, 2006 was
$3,369,485.
(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
June 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 June 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 June 30, 2006 and 2005, no such write-offs were
required.
At June 30, 2006, the net book value of capitalized software was $998,987.
Amortization expense for the periods ended June 30, 2006 and 2005 was $3,916 and
$3,916, respectively.
(L) Deferred Financing Costs
Deferred financing costs are capitalized and amortized over the term of the
related debt. At June 30, 2006, the gross amount of deferred financing costs was
$ 176,283 and related accumulated amortization was $ 135,771. At June 30, 2006
the company reflects in the accompanying consolidated balance sheet net deferred
financing costs of $40,512. Amortization of deferred financing costs was $24,836
and $21,959 at June 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 June 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 June 30, 2006 and 2005 were $38,103 and $17,405,
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 June 30, 2006 and 2005, respectively. Accordingly, the basic and diluted EPS
are the same.
At June 30, 2006 and 2005 there were 6,588,056 and 5,410,688 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 June
30, 2006 and 2005, respectively.
2006 2005
---- ----
Common stock options 3,492,500 3,331,250
Common stock warrants 1,540,000 2,079,438
Convertible notes payable 1,555,556 -
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Total Common Stock Equivalents 6,588,056 5,410,688
=========== ===========
(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 six months ended June 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 six
months ended June 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 June 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 June 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.
Six Months Ended
June 30
2006 2005
---- ----
Net income (loss) - as reported $(1,065,010) $(695,079)
Less: stock-based employee compensation - (136,355)
determined under the fair value method
Add: stock-based employee compensation
determined under the intrinsic value method (APB
#25) - -
============ ==========
Net income (loss) (1,065,010) (831,434)
Basic and Diluted earnings (loss) per share-as
reported $ (0.04) $ (0.03)
Basic and Diluted earnings (loss) per share-pro
forma $ (0.04) $ (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
six months ended June 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 June 30, 2006, the Company had the following outstanding convertible notes
payable:
Convertible notes payable $175,000
Convertible notes payable - related party 525,000
--------------
Total convertible notes payable 700,000
Less: debt discount -
==============
Convertible notes payable, net of debt discount $700,000
==============
At June 30, 2006, the Company had the following outstanding accrued interest
payable for all convertible and non-convertible debt instruments:
Convertible notes payable - accrued interest $8,551
Convertible notes payable - related party - accrued
interest 41,605
Interest accrued on Notes Payable and Lines of Credit 95,009
Interest accrued on non convertible related note (see
Note 5(B)) 13,190
--------
Total accrued interest payable $158,355
=========
In March 2006, 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 March 31, 2006, the Company
recorded amortization of debt discount for these notes totaling $742 as a
component of interest expense. The remaining $5,940 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 June 30, 2006, the Company recorded
amortization of debt discount for these notes totaling $684 as a component of
interest expense. The remaining $2,939 of debt discount is being amortized over
the life of the promissory note.
The following Weighted Average Assumptions reflect all 2006 Option/Warrant
Grants
Exercise price on grant date $0.01- $0.33
------------------------------------ -----------------
Expected dividend yield 0%
------------------------------------ -----------------
Expected Volatility 150% - 200%
------------------------------------ -----------------
Risk free interest rate 4%
------------------------------------ -----------------
Expected life of option 7- 10 years
------------------------------------ -----------------
During 2006, the Company reflected aggregate principal repayments of $81,897 for
all non-convertible promissory notes.
At June 30, 2006, the Company had the following outstanding notes payable:
Notes payable $184,912
Notes payable - related party 65,000
----------
Total notes payable 249,912
Less: debt discount (8,057)
==========
Note payable, net of debt discount $241,855
==========
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.
11
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.
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, New York. The capitalized cost of
the ATM machine 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.
Capital lease obligations at June 30, 2006 consisted of the following:
Obligation under capital lease, imputed interest rate at $ 27,358
12.78%; due May 2007; collateralized by equipment
Obligation under capital lease, imputed interest rate at 30,237
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 30,237
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 63,669
7.95%; due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 8.3%; 11,411
due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 22,163
11.63%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 57,111
9.74%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 15,894
14.53%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 63,685
15.15%; due March 2011; collateralized by equipment
12
Obligation under capital lease, imputed interest rate at 63,574
8.61%; due April 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 39,644
8.61%; dueApril 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 77,129
8.61%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 32,986
8.61%; due March 2011; collateralized by equipment
Less: current maturities (179,500)
-----------
Long term obligation, net of current portion $ 355,597
===========
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 June 30, 2006 was
$250,024. Of the total, $2,650 represented accrued interest payable.
6. LINES OF CREDIT
Lines of credit at June 30, 2006 consisted of the following:
Line of credit, maximum availability of $7,000,000, maturity date
May 31, 2006. Subject to various restrictive covenants, interest
is payable monthly at Prime plus 10.75% per annum, borrowings are
collateralized by restricted cash, all the assets of the Company,
250,000 shares of common stock, and guaranteed by the principal $ 4,812,813
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 June 30, 2006, the Company had
recorded related accrued interest payable of $60,945 in
connection with this line of credit.
Line of credit, interest is payable monthly at 9% per annum, the 328,000
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. 495,313
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 187,200
established with one of our casino customers. At June 30, 2006, the
Company had recorded related accrued interest payable of $1,000 in
connection with this line of credit.
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 2,267,750
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 June 30, 2006,
the Company had recorded related accrued interest payable of
$33,064 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.
-----------
$ 8,091,076
===========
7. STOCKHOLDERS' DEFICIT
Six Months Ended June 30, 2006
(A) Common Stock Issuances
(1) Cash
None
(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.
(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.
(B) Accrued Penalty Shares
At June 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.
14
(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
(4) Weighted Average Assumptions for 2006 Option Grants - Employees
None
Employee stock option activity for the six months ended June 30, 2006 and 2005
are summarized as follows:
Number of Shares Weighted Average
Exercise Price
---------------- ------------------------
Outstanding at December 31, 2004 3,161,250 $.15
Granted 477,500 .49
Exercised (30,000) .01
Cancelled/Expired (6,250) .40
--------------- ---------------
Outstanding at December 31, 2005 3,602,500 $.19
Granted - -
Exercised (110,000) .01
Cancelled/Expired - -
--------------- ---------------
Outstanding at June 30, 2006 3,492,500 $.20
=============== ===============
15
The following table summarizes the Company's employee stock options outstanding
at June 30, 2006:
Options Outstanding
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
.01 2, 765,000 7.52-7.57 .01
.33 127,500 1.50-2.47 .30
.42 200,000 7.96 .42
.70-.77 212,500 7.84-8.56 .75
2.00-2.28 187,500 6.92-7.35 2.11
--------------- ------------
3,492,500 .20
=============== ============
At June 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).
Warrant activity for the period ended June 30, 2006 is summarized as follows:
Number of Weighted Average
Shares Exercise Price
--------------- ----------------
Outstanding at December 31, 2004 2,079,438 $ 3.13
Granted 172,500 .16
Exercised (150,000) .01
Cancelled (644,438) 4.00
--------------- ----------------
Outstanding at December 31, 2005 1,457,500 $2.72
--------------- ----------------
Granted 87,500 .14
Exercised (5,000) .01
Cancelled - -
---------------- ----------------
Outstanding at June 30, 2006 1,540,000 $2.58
================ =================
16
Warrants Outstanding
-----------------------------------------------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
-------------------- --------------- ----------------- ------------------
.01 365,000 6.24-7.57 .01
.33-.35 170,000 3.20-8.31 .32
.40 15,000 9.26 .40
.44 15,000 9.26 .44
.47-.51 30,000 9.18-9.26 .49
1.00 75,000 2.00 1.00
2.40 112,500 2.33-6.76 2.40
4.00-6.00 757,500 .75-2.00 4.68
------------
1,540,000
============
All outstanding warrants are exercisable at June 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 $238,823 and
$270,337 for the six months ended June 30, 2006 and 2005, respectively.
(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:
17
(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 June 30, 2006 the Company has recorded $782,210 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 June 30,
2006, the Company had accrued $87,500 for bonus.
(2) Commissions Payable
The Company pays sales commissions to sales persons closing various
contracts. The CEO was paid $18,960 in sales commissions for the
first six 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. At June 30, 2006, the Company
had accrued $12,500 for bonus.
(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
that exceeds what was agreed to. We are vigorously defending this action and
believe that Lake Street's claims for additional compensation and damages lack
merit.
18
9. CUSTOMER CONCENTRATIONS
For the six months ended June 30, 2006, approximately 55% of total revenues were
derived from operations at two full service casinos. No other customers
represented more than ten percent of our total revenues for the six months ended
June 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 June 30, 2006
was approximately $6 million. The interest rate on the $6 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 June 30,
2006. Interest expense from this cash was $145,105 for the six months ended June
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 $8,002,755, a stockholders' deficit of $6,058,546 and
an accumulated deficit of $17,542,012 at June 30, 2006. The Company also
reflected a net loss of $1,065,010 and net cash used in operations of $692,706,
for the six months ended June 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
None
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 have signed 10
new contracts since April of 2006 and we have increased our sales pipeline by
400%. Our increased investment in sales and marketing in the first six months
was approximately $100,000. 84% 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 10 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 10 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 currently being
tested by a large casino that is not a current customer. 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 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 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.
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.
24
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.
Results of Operations
Three Months Ended June 30, 2006 (Unaudited) vs. Three Months Ended June 30,
2005 (Unaudited)
Three Months Three Months
Ended June 30, Ended June 30,
2006 2005 Change
--------------------- ------------------- -----------
Net Income (Loss) $ (660,703) $ 44,174 $ (704,877)
Revenues 3,060,386 5,427,270 (2,366,884)
Cost of revenues 2,483,274 4,131,744 (1,648,470)
Commissions & Rents Paid 1,401,814 2,654,935 (1,253,121)
Wages & Benefits 558,734 525,823 32,911
Processing Fee & Service Charges 319,215 472,701 (153,486)
Bad Debts 48,732 141,172 (92,440)
ATM Lease Fees & Maintenance 49,302 146,392 (97,090)
Cash Replenishment Services 33,802 121,497 (87,695)
Other 71,675 69,224 2,451
Gross Profit 577,112 1,295,526 (718,414)
Selling, General and Administrative Expenses 500,975 628,329 (127,354)
Contributions 4,000 3,700 300
Management Compensation 173,750 40,000 133,750
Marketing 12,879 3,176 9,703
Professional Fees 69,638 332,380 (262,742)
Seminars - - -
Trade Show & Sponsorships 46,651 21,602 25,049
Travel 58,778 64,188 (5,410)
Other 135,279 163,281 (28,002)
Noncash Compensation 26,462 6,550 19,912
Depreciation and amortization 85,229 157,074 (71,845)
Interest expense, net (496,773) (456,587) (40,186)
Other income (expenses) (128,376) (2,812) (125,564)
25
Our net loss increased by approximately $700,000 during the three
months ended June 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
$700,000
Our revenues as a whole decreased by approximately 43.7% during the
three months ended June 30, 2006 as compared to the three months ended June 30,
2005. The Money Centers portfolio (consisting primarily of full-service casino
contracts) decreased 30% or $1.1 million. We lost approximately $725,000 in
revenues from the loss of the Sycuan contract which de-installed on May 9, 2006
and approximately $450,000 from the loss of the Valley View contract in 2005,
while the remaining Money Centers casinos had increased same store sales of 5%
from same quarter last year. The Available Money portfolio (consisting of ATM
contracts) decreased 70% or $1.276 million. Our selling, general and
administrative expenses decreased by approximately $127,000 during the three
months ended June 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 second 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 June 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 $40,186 during the three months ended
June 30, 2006. Lower borrowing levels resulting from the termination of
unprofitable contracts were offset by approximately $66,000 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 200 basis points in the last year.
Other income (expenses) in the second quarter of 2006 consisted of
expenses related to the closing down of our operations at the Syuan Casino of
approximatly $130,000.
Six Months Ended June 30, 2006 (Unaudited) vs. Six Months Ended June 30, 2005
(Unaudited)
Six Months Ended Six Months Ended
June 30, 2006 ($) June 30, 2005 ($) Change ($)
-------------------- ------------------ ---------------
Net Loss (1,065,010) (695,079) (369,930)
Revenues 6,899,453 10,810,853 (3,911,400)
Cost of services 5,540,018 8,801,522 (3,261,504)
Commissions & Rents Paid 3,311,938 5,595,340 (2,283,402)
Wages & Benefits 1,176,903 1,033,608 143,295
Processing Fee & Service Charges 688,868 929,143 (240,275)
Bad Debts 61,939 491,387 (429,448)
ATM Lease Fees & Maintenance 105,215 340,134 (234,919)
Cash Replenishment Services 43,188 266,512 (223,324)
Other 151,967 145,398 6,569
Gross Profit 1,359,435 2,009,331 (649,896)
Selling, General and Administrative Expenses 1,108,632 1,319,546 (210,914)
Contributions 13,500 3,700 9,800
Management Compensation 347,500 170,769 176,731
Marketing 38,103 17,405 20,698
Professional Fees 163,538 607,036 (443,498)
Seminars 10,597 - 10,597
Trade Show & Sponsorships 114,072 29,440 84,632
Travel 130,364 143,169 (12,805)
Other 290,958 348,027 (57,069)
Noncash Compensation 32,650 76,400 (43,750)
Depreciation and amortization 160,338 338,725 (178,387)
Interest expense, net (1,013,600) (966,927) 46,673
Other income (expenses) (109,224) (2,812) (106,412)
26
Our net loss increased by approximately $370,000 during the six months
ended June 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
$650,000. However we still have a better gross profit percentage for the six
months ended June 30, 2006 as compared to same period last year primarily due to
a significant reduction in bad debt expense due to better adherence to our check
cashing and collection polices and the conscious canceling of unprofitable
contracts. We offset this loss in gross profit with a reduction in Legal and
professional fees of approximately $440,000.
Our revenues as a whole decreased by approximately 36% during the six
months ended June 30, 2006 as compared to the six months ended June 30, 2005.
The Money Centers portfolio (consisting primarily of full-service casino
contracts) decreased 15% or approximately $1 million, We lost approximately
$660,000 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 15%, from same period last year. While the Available Money portfolio
(consisting of ATM contracts) decreased 72% or $2.9 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 cost of
services decreased as a percentage of revenues from 81.4% to 80%, primarily due
to a significant reduction in bad debt expense due to better adherence to our
check cashing and collection policies.
Our selling, general and administrative expenses decreased by
approximately $210,000 during the six months ended June 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 second 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 six months ended June 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 $47,000 during the six
months ended June 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 200 basis points in the last year.
Other income (expenses) decreased by approximatly $106,000 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.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal quarter
ended March 31, 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
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
(Unaudited) (Unaudited) Change
------------------ ----------------- -----------------
Net Cash Provided by (Used in) Operating Activities $ (692,706) $ 607,316 $ (1,300,002)
Net Cash Used in Investing Activities (127,079) (705,762) (578,683)
Net Cash Provided by (Used in) Financing Activities (2,075,578) 835,890 (2,911,468)
Net cash used in operations decreased by approximately $1,300,000,
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 the first
six months of 2006.
Net cash used by financing activities increased during the six months
ended June 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 did not raise any capital in
2006.
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 discussions with Mercantile regarding
the terms of a renewal 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
are confident we will repay these bridge loans before their maturity.
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 are also in the process of replacing all of the former Available
Money ATMs with new ATMs that will be processed on more favorable economic
terms. We have entered into a capital lease agreement to acquire 71 ATMs and
related equipment necessary to complete this conversion. We have reduced the
number of ATM's we will acquire to 33. We have converted approximately 25 of
these ATM's to our processing platform to date. The remaining capital lease
agreement will require us to incur an upfront charge of approximately $50,000
and monthly rental expense of approximately $1,500 over the remaining 59 months
of the lease term.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.
29
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.
Due to our accumulated deficit of $17,542,012 as of June 30, 2006 and
our net losses and cash used in operations of $1,065,010 and $692,706,
respectively, for the six months ended June 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 June 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 June 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 our 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
that exceeds what was agreed to. We are vigorously defending this action and
believe that Lake Street's claims for additional compensation and damages lack
merit.
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.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submissions of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
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.
31
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 21, 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 21, 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.
32.1 Certification dated August 21, 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: August 21, 2006 By: /s/ Christopher M. Wolfington
------------------------------------
Christopher M. Wolfington
Chief Executive Officer
Date: August 21, 2006 By: /s/ Jason P. Walsh
-------------------------------------
Jason P. Walsh
Chief Financial Officer
33