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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-49723
Money Centers of America, Inc.
------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 23-2929364
-------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
700 South Henderson Road, Suite 325, King of Prussia, PA 19406
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(Address of Principal Executive Offices)
(610) 354-8888
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of August 15, 2005, 25,206,978 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, 2005
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, 2005(unaudited) 3
Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2005 and 2004 (unaudited) 5
Notes to Financial Statements 6-13
Item 2. Management's Discussion and Analysis or Plan or Operation 14
Item 3. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Events 26
Item 6. Exhibits 26-27
Signatures 28
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
BALANCE SHEET
JUNE 30, 2005
UNAUDITED
ASSETS
--------
Current assets:
Cash and cash equivalents $ 459,654
Restricted cash 4,898,463
Accounts receivable 635,499
Loans receivable 13,000
Prepaid expenses and other current assets 364,826
---------------
Total current assets 6,371,442
Property and equipment, net 680,485
Intangible assets, net 1,233,389
Goodwill 203,124
Deferred financing costs 75,365
---------------
$ 8,563,805
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,471,687
Accrued expenses 203,710
Current portion of capital lease 52,956
Loans payable 500,000
Notes payable 90,837
Lines of credit 8,467,853
Due to officer 471,043
Commissions payable 1,354,957
---------------
Total current liabilities 12,613,043
Long-term liabilities:
Capital lease, net of current portion 233,062
---------------
Total long-term liabilities 233,062
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 25,206,978 shares issued and outstanding 252,070
Additional paid-in capital 10,971,739
Accumulated deficit (15,506,109)
---------------
Total stockholders' deficit (4,282,300)
---------------
$ 8,563,805
===============
The accompanying notes are an integral part of these financial statements.
3
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Revenues $ 5,432,262 $ 4,614,557 $ 10,810,853 $ 6,770,219
Operating expenses 4,135,783 3,575,553 8,801,522 5,685,034
-------------- -------------- -------------- --------------
Gross profit 1,296,479 1,039,004 2,009,331 1,085,185
Selling, general and administrative expenses 624,289 667,182 1,319,546 1,287,710
Noncash Compensation 6,550 7,925 76,400 5,291,628
Depreciation and amortization 157,074 324,433 338,725 577,109
-------------- -------------- -------------- --------------
Operating income (loss) 508,566 39,464 274,660 (6,071,262)
Other income (expenses):
Interest expense, net (461,580) (663,476) (966,927) (629,008)
Other income 1,650 170 1,650 170
Other expenses (4,462) - (4,462) (548,763)
-------------- -------------- -------------- --------------
(464,392) (663,306) (969,739) (1,177,601)
-------------- -------------- -------------- --------------
Net Income (loss) $ 44,174 $ (623,842) $ (695,079) $ (7,248,863)
============== ============== ============== ==============
Net income (loss) per common share basic $ 0.00 $ (0.12) $ (0.03) $ (1.79)
============== ============== ============== ==============
Net income (loss) per common share diluted $ 0.00 $ (0.12) $ (0.03) $ (1.79)
============== ============== ============== ==============
Weighted Average Common Shares Outstanding
-Basic 25,180,012 5,156,746 25,157,808 4,053,804
============== ============== ============== ==============
-Diluted 28,355,887 5,156,746 25,157,808 4,053,804
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
4
MONEY CENTERS OF AMERICA, INC
STATEMENTS OF CASH FLOWS
UNAUDITED
Periods Ended
June 30,
------------------------------
2005 2004
-------------- --------------
Cash flows from operating activities:
Net loss $ (695,079) $ (7,248,863)
Adjustments used to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 338,725 577,109
Inventory write-down - 130,833
Loss on impairment of intangibles - 417,880
Issuance of options to employees and consultants 57,750 5,328,850
Common stock issued for services - 30,000
Increase (decrease) in:
Accounts payable 407,276 1,301,918
Accrued expenses 28,743 66,875
Commissions payable 262,625 261,393
(Increase) decrease in:
Prepaid expenses and other current assets 34,609 45,473
Accounts receivable 172,667 (1,146,453)
Inventory - 1,515
-------------- --------------
Net cash provided by (used in) operating activities 607,316 (233,470)
Cash flows from investing activities:
Cash received in acquisition - 27,398
Purchases of property and equipment (325,871) (20,635)
Cash paid for acquisition of intangible asstes (379,891) (2,001,567)
-------------- --------------
Net cash used in investing activities (705,762) (1,994,804)
Cash flows from financing activities:
Decrease (increase) in restricted cash (710,687) (176,423)
Net change in line of credit 304,237 2,681,165
Capital lease obligation 183,026 -
Payments on capital lease obligations (38,690) (9,382)
Increase in loans payable - 2,000,000
Advances to officer (20,112) (3,940)
Payments on notes payable (103,821) (1,858,500)
Decrease (increase) in loans receivable 30,000 (63,000)
Increase in dividends payable - 25,000
Sale of common stock, net 479,450 -
Exercise of stock options 1,800 25,000
Dividends - (270,010)
-------------- --------------
Net cash provided by financing activities 125,203 2,349,910
NET INCREASE (DECREASE) IN CASH 26,757 121,636
CASH, beginning of period 432,897 273,397
-------------- --------------
CASH, end of period $ 459,654 $ 395,033
============== ==============
Supplemental disclosures:
Cash paid during the period for interest $ 966,927 $ 663,476
============== ==============
The accompanying notes are an integral part of these financial statements.
5
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Money Centers of America Inc. (the "Company"), a Delaware corporation, was
incorporated in October 1997.
On January 2, 2004, pursuant to an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") by and among the Company, Christopher M.
Wolfington, iGames Entertainment, Inc., a Nevada corporation ("iGames"), Michele
Friedman, Jeremy Stein and Money Centers Acquisition, Inc., a wholly-owned
subsidiary of iGames, Money Centers Acquisition, Inc. was merged with and into
the Company and the Company, as the surviving corporation, became a wholly-owned
subsidiary of iGames (the "Merger"). For accounting purposes, the transaction
was treated as a recapitalization and accounted for as a reverse acquisition.
Therefore, the financial statements reported herein and accompanying notes
thereto reflect the assets, liabilities and operations of the Company as if it
had been the reporting entity since inception. In connection with the Merger,
all of the issued and outstanding shares of capital stock of the Company were
tendered to iGames and iGames issued to the Company stockholders an aggregate of
1,351,640 shares of iGames Series A Convertible Preferred Stock, $.001 par value
per share, and warrants to purchase an aggregate of 2,500,000 shares of iGames
common stock, par value $.004 per share, at an exercise price of $.01 per share.
Each share of Series A Convertible Preferred Stock was entitled to ten votes in
all matters submitted to a vote of iGames shareholders and was convertible at
the option of the holders into ten shares of common stock at any time after the
date on which iGames amended its articles of incorporation to increase the
number of authorized shares of its common stock to at least 125,000,000. In
October 2004 iGames was merged into the Company, and each share of Series A
Convertible Preferred Stock was exchanged for 11.5 shares of the Company's
common stock.
The Company is a single source provider of cash access services to the gaming
industry. 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, and merchant card processing.
Pursuant to the terms of a Stock Purchase Agreement between iGames, Helene Regen
and Samuel Freshman dated January 6, 2004 (the "Stock Purchase Agreement"),
iGames acquired all of the issued and outstanding shares of capital stock of
Available Money, Inc., a provider of ATM cash access services based in Los
Angeles, California. The purchase price of this transaction was $3,850,000,
$2,000,000 of which was paid in cash at closing, $1,850,000 of which was paid in
cash on April 12, 2004. The allocation of the final purchase price of $2,100,000
was assigned to contract rights. . 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. MCA expects the period to
be 1 to 4 years. The contract rights will also be subject to periodic impairment
tests. The remaining 1,750,000 was assigned to Goodwill. As a result of the
settlement with Equitex and Chex we reduced Goodwill by $1,500,000 to
approximately $250,000.
2. UNAUDITED INTERIM INFORMATION
The accompanying unaudited 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 financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction with
the financial statements and related footnotes for the year ended December 31,
2004 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
three months ended June 30, 2005 are not necessarily indicative of the results
for the full year ending December 31, 2005.
6
3. LOANS AND NOTES PAYABLE
Notes payable at June 30, 2005 consisted of the following:
2005
-----------
The Company borrowed $2,000,000 from Chex Services, Inc. on $ 500,000
January 6, 2004 to pay the first $2,000,000 to the former owners
of Available Money. Pursuant to the Settlement Agreement and
Mutual Release dated July 21, 2005, Equitex and Chex agreed to
cancel our outstanding $2,000,000 principal liability, as well as
any liability for accrued but unpaid interest under that
promissory note. We agreed to pay Chex $500,000 within 60 days of
July 21, 2005. To secure our obligations under the Settlement
Agreement, we entered into a Security Agreement with Chex and
Equitex pursuant to which we granted Chex and Equitex a junior
security interest in substantially all of our assets.
On September 10, 2004, the Company borrowed $210,000 from a 90,837
family member of our chief executive officer to pay an advance on
commissions to the Angel of the Winds casino. This note is shown
net of a discount of $8,846 for the value of various warrants
issued in conjunction with the loan along with the corresponding
amortization of the note discount of $4,683. The discount of
$8,846 is amortized over 17 months beginning October 1, 2004. The
note bears interest at 10% per annum and is payable monthly. The
principal amount of this note is repayable in monthly payments
payable on the 1st day of each month commencing with the second
month following the month in which the Company commences
operations at Angel of the Winds Casino and continuing on the 1st
day of each month thereafter. Per the contract between the
Company and Angel of the Winds Casino, this note's interest is
deductible from the commission that the Company pays the Casino
on a monthly basis.
-----------
$ 590,837
===========
4. CAPITAL LEASES
On February 1, 2005 the company entered into a new capital lease for 6 ATM
machines at the Sandia Casino. The capitalized cost of the ATM machines is
$105,938. The terms of this lease require approximately $30,000 down payment 90
days from installation and the remaining balance of approximately $75,000 will
be financed over 59 months, at 8.211% for $1,500 per month This note is
collateralized by the equipment.
On June 15, 2005 the company entered into a new capital lease for 4 ATM machines
at the Tropicana Casino in Las Vegas. The approximate capitalized cost of the
ATM machines is $70,625. The terms of this lease require approximately $20,000
down payment 90 days from installation and the remaining balance of
approximately $50,000 will be financed over 59 months, at 8.211% for
approximately $1,000 per month This note is collateralized by the equipment.
7
5. LINES OF CREDIT
Lines of credit at June 30, 2005 consisted of the following:
Line of credit, maximum availability of $7,000,000, maturity date $ 4,898,462
June 30, 2006. Subject to various restrictive covenants, interest
is payable monthly at 17.0% per annum, borrowings are
collateralized by restricted cash and guaranteed by the majority
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. The line of credit is also collateralized
by all the assets of the Company.
Line of credit, interest is payable monthly at 9% per annum, the 310,000
line is unsecured and due on demand.
Lines of credit, non-interest bearing, the lines are unsecured 536,122
and due on demand
On December 1, 2003, the Company entered into a $250,000 line of 288,233
credit, due on demand with an asset based lender. The Company has
received a one year extension, with renewal subject to the
lender's discretion. This extension expires June 30, 2006.
Beginning June 30, 2005 the company began reducing this liability
by making monthly payments in the amount of $68,428. This debt
bears interest at the prime rate of interest plus 10%, floating
with daily resets, for the actual number of days that the loan
remains outstanding, provided that the minimum rate on this loan
is 14.5% per annum. The Company prepaid the lender a facility fee
of $25,000 on June 30, 2005 for the next twelve months. In order
to secure the performance of the Company's obligation under this
loan, the Company granted the lender a continuing lien on and
security interest in and to 250,000 newly issued shares of the
Company's common stock. In addition, upon an event of default
under the loan, the Company is obligated to register the resale
of these pledged shares of common stock. Upon payment in full of
all amounts due under the loan, the lender is obligated to
deliver all stock certificates evidencing the ownership of these
shares to the Company for cancellation.
On April 12, 2004, the Company borrowed $2,050,000 from an 2,435,036
asset-based lender to make the second Available Money payment.
The Company has received a one year extension, with renewal
subject to the lender's discretion. This extension expires June
30, 2006. The note bears interest at 17% per annum and once the
$250,000 line of credit is paid off this note will begin to
amortize over 5 years at $68,428 per month. The note is
guaranteed by the majority shareholder of the Company and also
collateralized by all the assets of the Company. Unpaid interest
has been added to the balance, increasing the balance of the note
to $2,435,036.
-----------
$ 8,467,853
===========
6. STOCKHOLDERS' DEFICIT
In January 2005, the Company issued 75,000 shares of common stock to its board
of directors for services rendered. The company valued the shares at the fair
value on the date of the issuance and recorded non-cash compensation of $57,750.
In January 2005, the Company raised $479,450, net of offering costs of $22,500,
from the sale of 989,314 shares of common stock at $0.51 per share.
8
Pursuant to the terms of a common stock offering with registration rights, the
company has accrued penalties in the amount of 102,500 shares. The Company has
valued these shares at $63,973.
7. STOCK OPTIONS
In June 2005, the Company issued 200,000 options to purchase common stock to one
of its employees at an exercise price of $.42 per share, pursuant to the terms
of this executive's employment contract. These options vest over 2 years.
In June 2005, an employee exercised 30,000 options at $.01 per share. The
company received proceeds of $300 from the transaction.
Employee stock option activity for the period ended June 30, 2005 is summarized
as follows:
Number of Weighted Average
Shares Exercise Price
----------- ------------------
Outstanding at December 31, 2004 3,161,250 $ .15
Granted 200,000 .42
Exercised (30,000) (.01)
Cancelled - -
----------- ------------------
Outstanding at June 30, 2005 3,331,250 $.017
----------- ------------------
The following table summarizes the Company's employee stock options outstanding
at June 30, 2005:
Options and
Warrants Outstanding
-------------------------------------------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
------------------- -------------- ------------------ ------------------
.01 2,875,000 8.52-8.57 .01
.40-.42 206,250 .17-8.96 .42
.70 62,500 8.84 .70
2.00-2.28 187,500 7.92-8.35 2.11
--------------
3,331,250
==============
All outstanding employee stock options are exercisable at June 30, 2005 except
for 150,000 options at $.42, 50,000 of which vest in June 2006 and 100,000 of
which vest in June 2007.
The exercise prices of all options granted by the Company equal the market price
at the dates of the grant. No compensation expense has been recognized. Had
compensation cost for the stock option plan been determined based on the fair
value of the options at the grant dates consistent with the method of "SFAS 123,
"Accounting for Stock Based Compensation", the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below for the
six months ended June 30, 2005.
8. WARRANTS
In January 2005, the Company issued warrants to purchase 150,000 shares of our
common stock at an exercise price of $.77 per share, the fair market value at
9
the date of the issuance, to our board of directors pursuant to the terms of the
directors 2004 and 2005 agreements. These warrants were issued under our stock
option plan in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof.
In February 2005, the former chief executive officer and affiliate exercised
150,000 options at $.01 per share. The company received proceeds of $1,500 from
the transaction.
Warrant activity for the period ended June 30, 2005 is summarized as follows:
Number of Weighted Average
Shares Exercise Price
--------------- ------------------
Outstanding at December 31, 2004 2,079,438 $ 3.13
Granted 150,000 .77
Exercised (150,000) (.01)
Cancelled - -
--------------- ------------------
Outstanding at June 30, 2005 2,079,438 $ 2.97
1.33
--------------- ------------------
The following table summarizes the Company's warrants outstanding at June 30,
2005:
Warrants Outstanding
-------------------------------------------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
------------------- -------------- ------------------ ------------------
.01 215,000 8.57 .01
.33-.35 125,000 4.20-9.31 .35
.77 150,000 9.56 .77
1.00 75,000 3.00 1.00
2.40 112,500 3.33-7.76 2.40
4.00-6.00 1,401,938 .50-3.00 4.37
--------------
2,079,438
==============
All outstanding warrants are exercisable at June 30, 2005.
The exercise prices of all options granted by the Company equal the market price
at the dates of the grant. No compensation expense has been recognized. Had
compensation cost for the stock option plan been determined based on the fair
value of the options at the grant dates consistent with the method of "SFAS 123,
"Accounting for Stock Based Compensation", the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below for the
six months ended June 30, 2005.
SIX MONTHS ENDED
JUNE 30, 2005
----------------
Net loss as reported $ (695,079)
Add: total stock based compensation (136,355)
compensation expense determined
under fair value based method, net
of related tax effect ----------------
Pro forma net loss $ (831,434)
================
Basic loss per share
As reported $ (0.03)
================
Pro forma $ (0.03)
================
10
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as options vest over several years and
the Company may continue to grant options to employees.
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants:
2005
--------
Divided yield 0%
Expected volatility range 201%
Risk-free interest rate 3%
Expected holding periods 10 Years
9. COMMITMENTS
a. LEASE COMMITMENTS
The Company leases office space in Minnesota on a month to month basis for $738
per month.
In conjunction 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 $41,000 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.
The Company's total rent expense under operating leases was approximately
$21,583 and $28,128 for the six months ended June 30, 2005 and 2004,
respectively.
Estimated rent expense under operating leases over the next five years is as
follows:
Year Amount
------ --------
2005 $ 40,476
2006 $ 40,476
2007 $ 40,476
2008 $ 40,476
2009 $ 40,476
b. 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:
i. A dollar amount, as defined by the contract, per transaction volume
processed by the Company.
ii. A percentage of the Company's profits at the respective location.
As of June 30, 2005 the Company has recorded $1,354,957 of accrued commissions
on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not waived
their sovereign immunity.
c. EMPLOYMENT AGREEMENT
In January 2004, the Company entered into a five-year employment agreement with
Christopher M. Wolfington, our Chairman, President and Chief Executive Officer.
In addition to an annual salary of $350,000 per year (subject to annual
11
increases at the discretion of the Board of Directors) (the "Base Salary"), Mr.
Wolfington's 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, Mr. Wolfington is entitled to fringe benefits including participation
in retirement plans, life insurance, hospitalization, major medical, paid
vacation, a leased automobile and expense reimbursement.
Money Centers of America, Inc. (the "Company") and Jason P. Walsh entered into
an employment agreement dated June 14, 2005 (the "Employment Agreement") for Mr.
Walsh to be employed as the Company's Vice President - Finance and Chief
Financial Officer.
The employment term commences 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. Mr. Walsh's annual salary during the term of his employment under the
Employment Agreement shall be no less than $120,000. In addition, Mr. Walsh 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 Mr. Walsh. 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
10. CONCENTRATION OF CREDIT RISK
The Company maintains cash in bank accounts that exceed federally insured
limits. At June 30, 2005, the Company had deposits in excess of federally
insured amounts aggregating approximately $9,200,000 at various financial
institutions. The Company believes it has its cash deposits at high quality
financial institutions. 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.
For the six months ended June 30, 2005, approximately 37% of total revenues were
derived from operations at 2 full service casinos and 11% was derived from 1 ATM
contract. No other customers represented more than ten percent of our total
revenues for the six months ended June 30, 2005.
11. DUE TO OFFICER
Amounts due to officer are evidenced by notes in the aggregate amount of
$471,043 that bear an interest rate of 10% per annum, payable monthly, and are
due on demand. This consists of $100,000 loaned to the Company by the officer in
fiscal year 2004. This amount also includes monies due the officer in the amount
of $6,771 from 2002, sales commissions due the officer in the amount of $21,029
from 2001, sales commissions due the officer in the amount of $5,000 from fiscal
year 2003, the officer's sign on bonus per his employment agreement in the
amount of $200,000, the officer's 2004 bonus of $175,000 and dividends declared
while an S corporation in the amount of $23,710. Payments in the amount of
$60,467 paid to the officer have been netted to this note. The officer has been
paid $24,082 in interest on this note during the six months ended June 30, 2005.
12. INTEREST EXPENSE
Included in interest expense are monies owed to a vendor for interest charges.
The interest is based on the amount of cash in our Available Money ATM machines
and network and is calculated on a daily basis. The balance of this cash funded
by the bank in our ATM machines at June 30, 2005 was approximately $12 million.
The interest rate on the 12 million is 5.375% per annum.
13. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has an accumulated deficit
of $15,506,109 as of June 30, 2005 and had a net loss of $695,079 for the six
12
months ended June 30, 2005. 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.
14. 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. The suit also raises claims for fraudulent
misrepresentation and intentional interference with contractual relations. 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. This matter is still in the pleadings stage and iGames has moved to dismiss
the plaintiff's claims for fraudulent misrepresentation and intentional
interference with contractual relations, as well as to strike all claims for
punitive damages. We are vigorously defending this action and believe that Lake
Street's claims 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.
15. SUBSEQUENT EVENTS
Effective July 21, 2005, we entered into a Settlement Agreement and Mutual
Release (the "Settlement Agreement") with Chex Services, Inc., the wholly owned
operating subsidiary of FastFunds Financial Corporation ("Chex") and Equitex,
Inc. ("Equitex"), pursuant to which the parties agreed to resolve all pending
litigation between them and release all claims related to such litigation. The
subject litigation is described in our Annual Report on Form 10-K for the year
ended December 31, 2004. No party to the Settlement Agreement admitted any
wrongdoing or liability related to the litigation. The litigation was dismissed
with prejudice on July 22, 2005.
Under the Settlement Agreement, Equitex and Chex agreed to cancel our
outstanding $2,000,000 principal liability under a $2,000,000 promissory note
from us to Chex, dated January 6, 2004, as well as any liability for accrued but
unpaid interest under that promissory note. We agreed to pay Chex $500,000
within 60 days of July 21, 2005. To secure our obligations under the Settlement
Agreement, we entered into a Security Agreement with Chex and Equitex pursuant
to which we granted Chex and Equitex a junior security interest in substantially
all of our assets. In addition, Money Centers agreed to deliver to Fastfunds
Financial, Inc., Chex's corporate parent, a contingent warrant to purchase up to
500,000 shares of our common stock at a purchase price of $0.50 per share. The
warrant is not exercisable until we achieve $1,000,000 in net income during a
fiscal year.
13
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 15, 2005. 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 our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this report. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties, and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to the risks discussed in this report.
History
We are a single source provider of cash access services 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. Our business plan is
to identify fragmented segments of the market to capitalize on merger and
acquisition targets of synergistic companies that support our business model.
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. We currently provide
services in 20 locations across the United States.
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
14
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.
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 continues to grow and be the major source of our
revenue and profits in 2005. We have also launched several new services in the
last 18 months, such as CreditPlus, Our Cash Services Host Program, and our
Transaction Management System that have begun to create new revenue and have
helped to differentiate our product offering in the marketplace.
The acquisition of Available Money that was completed in January 2004
continues to provide challenges for management in terms of the longer than
expected conversion of the processing of the Available Money cash services
business over to the systems we utilize and the renegotiation or termination of
nonprofitable contracts. We have completed our new ATM processing agreement
which has lowered our operating costs, provided needed capacity for our vault
cash needs, and will help facilitate the completion of the Available Money
conversion. The settlement of the Available Money lawsuit in the first quarter
has also enabled us to begin renegotiating several of the unprofitable Available
Money Contracts, the benefits of which will start to be recognized as of
September 1, 2005. Those contracts where a beneficial renegotiation is not
possible may be terminated. These contracts that have or will be terminated will
decrease revenue but will have a positive effect on cash flow and net income. We
also recorded a significant purchase price adjustment relating to Available
Money as part of the favorable settlement relating to these terminated and
unprofitable contracts.
We remain on schedule for the deployment of our Transaction Management
System, which is scheduled for September. Though we feel confident that The
Transaction Management System will differentiate us from our competitors and
create new sources of revenue for the company, there is no guarantee that the
market will accept this new deployment strategy. Regardless of the markets
acceptance of this new deployment strategy, The Transaction Management System
(TMS) enables Money Centers of America to gain complete control over all our
cash access transactions, including booth operations and ATMs. The TMS will
"drive" the ATMs and teller applications and process all transactions through
our central system allowing for quicker customer interactions which translate to
greater revenue at less cost from our current book of business. The TMS permits
Money Centers of America to negotiate network processing contracts based on
sound business decisions versus technology requirements so that the cost per
transaction may be reduced, once again translating to greater revenue potential
from our current book of business. Once all of the properties have been
converted to the TMS, general operating procedures, field support, and internal
accounting processes will also be streamlined.
Our current cost of capital remains high as we have been distracted in our
efforts to recapitalize our balance sheet due to ongoing litigation and our
focused efforts to deploy The Transaction Management System on schedule. Now
that both of these distractions have been removed management considers
recapitalization of our balance sheet a major priority for the remainder of
2005. The success of this recapitalization will reduce the interest rates we pay
on our lines of credit, which will lower our expenses and contribute to our
profitability. Mercantile Capital has been a strong finance partner to the
company, however, the ability to continue our growth is largely dependent on our
ability to identify and secure capital at reasonable rates.
We seek to avoid litigation and to minimize our exposure to potential
claims arising in the normal course of our business and as a result of our
acquisitions. Despite these efforts, we have been named as a defendant in
several legal proceedings, described in Part II, Item 1, Legal Proceedings,
15
beginning on page 25 of this report. We are confident that it is in our best
interests to defend these claims and to pursue counterclaims where we believe
that we are likely to obtain a favorable result. We are very pleased to announce
that our two major lawsuits were settled on very favorable terms to the company.
During the six month period ended June 30, 2005, we have incurred approximately
$455,391 in legal fees related to these legal proceedings. However, due to our
settlement of the two major lawsuits, we do not anticipate incurring a
substantial amount of additional legal fees related to these legal proceedings
throughout 2005.
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.
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 a transaction
management system. Instead of outsourcing the cash services operations, we have
16
begun to offer 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, the user agreements are for a longer period of time and we do 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.
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 Credit Plus 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 internal sales. Other barriers within the casino operation
itself may also have a negative impact on our ability to generate revenue from
our CreditPlus product.
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
17
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.
Organic growth through sales by internal salespeople is usually the most
efficient and profitable growth strategy in the cash services business. Much of
our historical growth has occurred in this manner. We realize that recognizing
industry trends is no assurance of success. We have also complimented our
internal sales strategy by creating relationships with independent sales
organizations that have established relationships with gaming operators
nationwide. Although our sales commissions will be higher at gaming
establishments entered through this sales channel, we will not be burdened with
the up-front salary, travel and entertainment costs associated with the
traditional internal sales approach. We continue to view strategic acquisitions
as part of our business plan to obtain the critical mass we believe is necessary
to compete effectively in our industry.
This parallel strategy of sales, acquisitions and product development is
capital intensive and presents substantial risk. There is no guarantee that we
will be able to manage all three strategies effectively.
We believe that it is necessary to increase our working capital position so
that we can capitalize on the profitable trends in the industry 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.
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. This accounting policy may at times overstate the impact of bad
checks on our financial results, and adoption of a different accounting policy
could have a material impact on our reported results.
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.
18
Stock Based Compensation.
-------------------------
We account for stock based compensation utilizing Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), which encourages, but does not require, companies to record compensation
cost for stock-based employee compensation plans at fair value. We have chosen
to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the estimated fair market value of our stock at the date of the grant
over the amount an employee must pay to acquire the stock. We have adopted the
"disclosure only" alternative described in SFAS 123 and SFAS 148 (See New
Accounting Pronouncements), which require pro forma disclosures of net income
and earnings per share as if the fair value method of accounting had been
applied.
Results of Operations
Three Months Ended June 30, 2005 vs. Three Months Ended June 30, 2004
Three Months Ended Three Months Ended
June 30, 2005 ($) June 30, 2004 ($) Change ($)
-------------------- -------------------- ------------
Net Income (Loss) 44,174 (623,842) 668,016
Revenues 5,432,262 4,614,557 817,705
Operating Expenses 4,135,783 3,575,553 560,230
Gross Profit 1,296,479 1,039,004 257,475
Selling, General and
Administrative Expenses 624,289 667,182 (42,893)
Noncash Compensation 6,550 7,925 (1,375)
Depreciation and amortization 157,074 324,433 (167,359)
Other Income (Expenses) (464,392) (663,306) (198,914)
Our net income increased by $668,016 during the three months ended June 30,
2005 due to an increase in gross profit of approximately $258,000, a decrease in
depreciation and amortization of approximately $170,000 due to reduced
amortization of casino contracts, reflecting the termination of certain
contracts in 2004. Additionally management has been able to reduce the company's
interest cost related to the Available Money portfolio by approximately
$175,000.
Our revenues increased by approximately 18% during the three months ended
June 30, 2005 as compared to the three months ended June 30, 2004. Approximately
$194,000 of this increase represented increased volume under contracts in place
at the beginning of 2004 and $1,350,000 represented revenues from new contracts.
This was offset by the loss of approximately $730,000 in revenues due to
cancellations and non-renewals from our Available Money portfolio. Our operating
expenses increased during the three months ended June 30, 2005 due to a $60,000
increase in bad debt expense primarily resulting from having additional full
service casinos with check cashing, a $20,000 decrease in cash compensation
expenses due to a reduction in operations personnel due to the loss of one our
contracts, and a $196,000 increase in transaction processing expenses as the
result of increased transaction volume. Commissions paid to casinos increased by
$132,000 from the same quarter last year.
Our selling, general and administrative expenses decreased during the three
months ended June 30, 2005 primarily due to our CEO agreeing to forego
compensation due to him under his employment agreement of approximately $87,500.
Additionally, we had one less executive for most of the quarter as compared to
2004, which reduced management compensation by another $36,000. Legal expenses
related to litigation proceedings were higher by $170,000 as compared to the
same quarter last year. Since we have settled our two major lawsuits we expect
to see legal expenses decrease significantly beginning in the middle of the
third quarter of 2005.
19
Our other expenses decreased during the three months ended June 30, 2005
mostly due to a decrease in interest expense of approximately $190,000 resulting
from lower borrowing levels reflecting the cancellation and non-renewal of
Available Money contracts.
Six Months Ended June 30, 2005 vs. Six Months Ended June 30, 2004
Six Months Ended Six Months Ended
June 30, 2005 ($) June 30, 2004 ($) Change ($)
------------------- ------------------- ------------
Net Income (Loss) (695,079) (7,248,863) 6,553,784
Revenues 10,810,853 6,770,219 4,040,634
Operating Expenses 8,801,522 5,685,034 3,116,488
Gross Profit 2,009,331 1,085,185 924,146
Selling, General and
Administrative Expenses 1,319,546 1,287,710 31,836
Noncash Compensation 76,400 5,291,628 (5,215,228)
Depreciation and amortization 338,725 577,109 (238,384)
Other Income (Expenses) (969,739) (1,177,601) (207,862)
Our net loss decreased by $6,553,784 during the six months ended June 30,
2005 due to a decrease in noncash compensation of approximately $5,200,000 due
to one-time charges for noncash compensation during 2004 that were not repeated
in 2005, an increase in gross profit of approximately $925,000, due to our
success in lowering various operating expenses, a decrease in depreciation and
amortization of approximately $240,000 due to reduced amortization of casino
contracts reflecting the termination of certain contracts in 2004. Other
expenses decreased due to the fact that management has been able to reduce the
Company's interest cost related to the Available Money portfolio and there were
no impairments of intangible assets or written off obsolete inventory in 2005.
Our revenues increased by approximately 60% during the six months ended
June 30, 2005 as compared to the six months ended June 30, 2004. Approximately
$408,000 of this increase represented increased volume under contracts in place
at the beginning of 2004 and $2,400,000 represented revenues from new contracts.
This was offset by the loss of approximately $730,000 in revenues due to
cancellations and non-renewals from our Available Money portfolio and
approximately $2,000,000 of the increase in revenue was due to the recognition
in our financial statements of gross revenues rather than net revenues from the
Available Money portfolio in 2005 following a change of ATM processors. Our
operating expenses increased during the six months ended June 30, 2005 due to a
$262,000 increase in bad debt expense primarily resulting from having additional
full service casinos with check cashing, commissions paid to casinos increased
by approximately $2,100,000 although as a percentage of revenue, the commissions
stayed relatively level as compared to the same period in 2004. In addition,
approximately $750,000 of various other expenses increased due to the
recognition in our financial statements of all operating expenses from the
Available Money portfolio in 2005 following a change in ATM processors.
Our selling, general and administrative expenses increased slightly during
the six months ended June 30, 2005 primarily due to increased legal expenses
related to pending litigation. Otherwise the remaining selling, general and
administrative expenses have remained relatively the same as compared to the
quarter ended June 30, 2004. Since we settled our two major lawsuits we expect a
significant decrease in legal expenses beginning in the middle of the third
quarter of 2005. Our depreciation and amortization expenses decreased during the
six months ended June 30, 2005 primarily due to the elimination of amortization
that otherwise would have been realized on contracts that terminated in 2004.
Our other expenses decreased during the six months ended June 30, 2005
mostly due to a decrease in interest expense of approximately $190,000 resulting
from lower borrowing levels reflecting the cancellation and non-renewal of
Available Money contracts.
Off-Balance Sheet Arrangements
20
There were no off-balance sheet arrangements during the fiscal quarter
ended June 30, 2005 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
Changes in Financial Position, Liquidity and Capital Resources
Six Months Six Months
Ended June 30, Ended June 30,
2005 ($) 2004 ($) Change ($)
---------------- ---------------- ------------
Net Cash Provided by (Used in) Operating Activities 607,316 (233,470) 840,786
Net Cash Used in Investing Activities (705,762) (1,994,804) 1,289,042
Net Cash Provided by Financing Activities 125,203 2,349,910 (2,224,707)
Net cash provided by operations increased by $840,786, primarily due to a
significant decrease in our net loss and as a result of the fact that we
experienced a temporary delay in collections of accounts receivable from the
Available Money portfolio following its acquisition in January 2004.
Net cash used in investing activities decreased during the six months ended
June 30, 2005 due to the fact that we did not make any acquisitions in the first
half of 2005 and acquired Available Money in the first quarter of 2004. We have,
however, used cash in 2005 to purchase some of the Available Money ATM's and to
complete our Transaction Management System which we intend to roll out in
September of 2005.
Net cash provided by financing activities decreased during the six months
ended June 30, 2005 primarily because we had no need for acquisition financing.
Our available cash equivalent balance at June 30, 2005 was approximately
$460,000 and was approximately $2,150,000 at July 31, 2005. Since our formation
we have raised an aggregate of approximately $3,000,000 in capital through the
sale of our equity securities. In addition, we issued two 10% convertible
promissory notes in the aggregate principal amount of $250,000 to one investor.
In October 2002, this investor converted a $150,000 note into 300,000 shares of
our common stock, and the remaining balance of this note has been repaid.
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 has a maturity date of June 30, 2006 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 Prime minus 5/8%.
We incurred $3,850,000 of debt associated with the acquisition of Available
Money. $2,000,000 of this indebtedness was a loan provided by Chex Services,
Inc. As a result of the settlement of the lawsuit with Chex Services (see "Legal
Proceedings"). Equitex and Chex agreed to cancel our outstanding $2,000,000
principal liability as well as any liability for accrued but unpaid interest
under that promissory note. We agreed to pay Chex $500,000 within 60 days of
July 21, 2005. This obligation is secured by a junior security interest in
substantially all of our assets.
21
The remaining $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 amortizating
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
still intend to refinance this obligation in 2005 and are making every effort to
do so. We paid a facility fee of $41,000 in connection with this loan.
On December 1, 2003, we obtained a $250,000 line of credit from Mercantile
Capital, L.P., due on demand. This debt bears interest at the prime rate of
interest plus 10%, floating, provided that the minimum rate on this loan is
14.5% per annum. As of June 30, 2005, this loan was also converted to a 5 year
amortizing loan with annual renewals at the lender's discretion. The Company
paid a $25,000 facility fee on June 30, 2005 when the loan began to be
amortized. This loan is secured by 250,000 shares of the Company's common stock.
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, 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 principal
balance outstanding as of August 15, 2005 is $95,000. In addition, we issued the
lender warrants to purchase 50,000 shares of our common stock at an exercise
price of $.33 per share. In the event that the principal amount of this loan
plus all accrued interest thereon is paid in full on or before March 1, 2006,
then we shall have the right to cancel warrants to purchase 25,000 shares.
Though 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
had originally 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 approximately 35. We have converted
approximately 17 of these ATM's to date. The remaining capital lease agreement
will require us to incur an upfront charge of approximately $90,000 and monthly
rental expense of approximately $4,600 over the remaining 59 months of the lease
term.
Our goal is to change the way our customers view cash access services by
transforming the way casinos find, serve and retain their customers. We will
strive to assist our customers by continuing to grow and improve everything we
do. We require significant capital to meet these objectives. Our capital
requirements are as follows:
o Equipment: Each new account requires hardware at the location level and
some additions to network infrastructure at our central server farm.
o Vault Cash: All contracts in which we provide full service money centers
and ATM accounts for which we are responsible for cash replenishment
require vault cash. Vault cash is the money necessary to fund the float
22
that exists when we pay money to patrons but have yet to be reimbursed from
the Debit, Credit Card Cash Advance, or ATM networks for executing the
transactions.
o Acquisition Financing: We presently have no cash for use in completing
additional acquisitions. To the extent that we cannot complete acquisitions
through the use of our equity securities, we will need to obtain additional
indebtedness or seller financing in order to complete such acquisitions.
o Working Capital: We will require substantial working capital to pay the
costs associated with our expanding employee base and to service our
growing base of customers.
o Technology Development: We will continue to incur development costs related
to the design and development of our new products and related technology.
We presently do not have an internal staff of engineers or software
development experts and have outsourced this function to IntuiCode, LLC, a
company operated by Jeremy Stein, a member of our board of directors.
We are actively seeking various sources of growth capital and strategic
partnerships that will assist us in achieving our business objectives. We are
also exploring various potential financing options and other sources of working
capital. There is no assurance that we will succeed in finding additional
sources of capital on favorable terms or at all. To the extent that we cannot
find additional sources of capital, we may be delayed in fully implementing our
business plan.
We do not pay and do not intend to pay dividends on our common stock. We
believe it to be in the best interest of our stockholders to invest all
available cash in the expansion of our business. We presently have a liability
for dividends payable of $23,710 related to prior declared dividends that have
not yet been paid.
Due to our accumulated deficit of $14,811,030 as of December 31, 2004 and
our net losses and cash used in operations of $11,841,753 and $907,217,
respectively, for the year ended December 31, 2004, 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 for the remainder of 2005 or at any time in the
future.
Item 3 - 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, 2005 (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, 2005.
Disclosure controls and procedures (as defined in the Exchange Act Rules
13a-14(c) and 15d-14(c)) 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. 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.
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
23
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.
24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On April 21, 2005, we entered into a Settlement Agreement (the "Available
Money Settlement Agreement") with the former shareholders of Available Money and
related parties, pursuant to which the parties agreed to resolve all pending
litigation between then and release all claims related to such litigation.
Effective July 21, 2005, we entered into a Settlement Agreement and Mutual
Release (the "Equitex Settlement Agreement") with Chex Services, Inc., the
wholly owned operating subsidiary of FastFunds Financial Corporation ("Chex")
and Equitex, Inc. ("Equitex"), pursuant to which the parties agreed to resolve
all pending litigation between them and release all claims related to such
litigation. The litigation related to these settlements is described in our
Annual Report on Form 10-K for the year ended December 31, 2004.
Under the Available Money Settlement Agreement, the parties agreed that the
final purchase price for Available Money was equal to the cash amount of
$3,850,000 already paid, that no further amounts were due to the former
shareholders and that our previous cancellation of shares of our common stock
issued to them was proper. The former Available Money shareholders agreed to pay
us an aggregate of approximately $178,000 in expenses, legal fees and
court-ordered sanctions and agreed to assign to us certain ATM servicing
contracts. We agreed to release the former Available Money shareholders and
their affiliates from most of the non-competition and right of first refusal
provisions of the original purchase agreement, subject to certain conditions and
limitations. .
Under the Equitex Settlement Agreement, Equitex and Chex agreed to cancel
our outstanding $2,000,000 principal liability under a $2,000,000 promissory
note from us to Chex, dated January 6, 2004, as well as any liability for
accrued but unpaid interest under that promissory note. We agreed to pay Chex
$500,000 within 60 days of July 21, 2005. To secure our obligations under the
Equitex Settlement Agreement, we entered into a Security Agreement with Chex and
Equitex pursuant to which we granted Chex and Equitex a junior security interest
in substantially all of our assets. In addition, we agreed to deliver to
Fastfunds Financial, Inc., Chex's corporate parent, a contingent warrant to
purchase up to 500,000 shares of our common stock at a purchase price of $0.50
per share. The warrant is not exercisable until we achieve $1,000,000 in net
income during a fiscal year.
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. The suit also raises claims for fraudulent
misrepresentation and intentional interference with contractual relations. 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. This matter is still in the pleadings stage and iGames has moved to dismiss
the plaintiff's claims for fraudulent misrepresentation and intentional
interference with contractual relations, as well as to strike all claims for
punitive damages. We are vigorously defending this action and believe that Lake
Street's claims 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 - Changes in Securities and Use of Proceeds
Pursuant to the terms of a common stock offering with registration rights,
the company has accrued penalties in the amount of 102,500 shares. The company
has valued these shares at $63,973.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submissions of Matters to a Vote of Security Holders
None.
25
Item 5 - Other Information
None.
Item 6 - Exhibits
(a) Exhibits required by Item 601 of Regulation S-B
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 (incorporated by reference to
Exhibit 4.1 of Form 10-KSB filed on April 15, 2005).
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 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).
10.4 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).
10.5 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).
10.6 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).
10.7 Term Loan Note in the principal amount of $4,000,000 dated January 6,
2004 issued to Chex Services, Inc. (incorporated by reference to
Exhibit 10.7 of Form 10-KSB filed on July 13, 2004)
10.8 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)
14 Code of Ethics (incorporated by reference to Exhibit 14 of Form 10-KSB
filed on July 13, 2004)
31.1 Certification dated August 15, 2005 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
31.2 Certification dated August 15, 2005 pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a) of the Principal Financial Officer as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Jason P.
Walsh, Chief Financial Officer
26
32.1 Certification dated August 15, 2005 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
32.2 Certification dated August 15, 2005 pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
made by Jason P. Walsh, Chief Financial Officer
27
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, thereto duly
authorized.
MONEY CENTERS OF AMERICA, INC.
Date: August 15, 2005 By: /s/ Christopher M. Wolfington
-----------------------------------
Christopher M. Wolfington
Chief Executive Officer
By: /s/ Jason P. Walsh
-----------------------------------
Jason P. Walsh
Chief Financial Officer