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, 2007
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
------------------------------- ---------------------------------------
(State or Other Jurisdiction {I.R.S Employer Identification No.}
of 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
-------------------- -----------
As of August 20, 2007 30,769,853 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 JUNE 30, 2007
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, 2007 (unaudited) 1
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2007 and 2006 (unaudited) 2
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2007 and 2006 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation 20
Item 3. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits 31
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2007
(UNAUDITED)
ASSETS
Current assets:
Restricted cash $ 3,108,284
Accounts receivable 18,254
Prepaid expenses and other current assets 286,448
-----------
Total current assets 3,412,986
Property and equipment, net 941,418
Other assets
Intangible assets, net 1,305,573
Deferred financing costs 859,726
Deposits 55,399
----------
Total other assets 2,220,698
----------
Total assets $ 6,575,102
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 488,560
Accrued interest 105,087
Accrued expenses 634,935
Current portion of capital lease 229,748
Lines of credit 2,437,399
Due to officer 234,813
Commissions payable 695,074
-----------
Total current liabilities 4,825,616
Long-term liabilities:
Capital lease, net of current portion 463,135
Note payable, related party 5,040,864
Notes payable, net of debt discount 2,533,304
-----------
Total long-term liabilities 8,037,303
-----------
Total Liabilities 12,862,919
Stockholders' Deficit:
Preferred stock; $.001 par value, 20,000,000 shares authorized
0 shares issued and outstanding -
Common stock; $.01 par value, 150,000,000 shares authorized
30,769,853 shares issued and outstanding 306,498
Additional paid-in capital 16,008,533
Accumulated deficit (22,602,848)
------------
Total stockholders' deficit (6,287,817)
------------
Total liabilities and stockholders' deficit $ 6,575,102
==============
See accompanying notes to unaudited consolidated financial statements.
1
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2007 2006 2007 2006
----------- ---------- ---------- -----------
Revenues $ 2,209,754 $ 3,060,386 $ 4,379,436 $ 6,899,453
Cost of revenues 1,729,438 2,483,274 3,432,656 5,540,019
------------ ----------- ----------- -----------
Gross profit 480,316 577,112 946,780 1,359,434
Selling, general and administrative expenses 432,879 500,975 960,263 1,108,632
Noncash Compensation 35,000 26,462 620,995 32,650
Depreciation and amortization 223,172 85,229 445,704 160,338
----------- ---------- ---------- ----------
Operating income (loss) (210,735) (35,554) (1,080,182) 57,814
Other income (expenses):
Interest income 4,766 4,040 9,152 8,233
Interest expense (360,661) (434,456) (728,780) (881,988)
Noncash interest expense - (66,357) - (139,845)
Other expenses - (128,376) (128,376)
---------- --------- ---------- ----------
Total interest expense, net (355,895) (625,149) (719,628) (1,141,976)
---------- --------- ---------- ----------
Other income 6,837 - 16,625 19,152
---------- ---------- ---------- ----------
Total other income 6,837 - 16,625 19,152
---------- ---------- ---------- ----------
Net loss $ (559,793) $ (660,703) $ (1,783,185) $ (1,065,010)
========== ========== =========== =========
Net loss per common share - basic $ (0.02) $ (0.03) $ (0.06) $ (0.04)
=========== ========== =========== =========
Net loss per common share - diluted $ (0.02) $ (0.03) $ (0.06) $ (0.04)
=========== ========== =========== =========
Weighted Average Common Shares Outstanding During the period
-Basic 30,769,853 25,321,805 30,704,190 25,283,079
============ ============ =========== ==========
-Diluted 30,769,853 25,321,805 30,704,190 25,283,079
============ ============ =========== ==========
See accompanying notes to unaudited consolidated financial statements.
2
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Six Months Ended
June 30,
-----------------------
2007 2006
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Cash flows from operating activities:
Net loss $(1,783,185) $(1,065,010)
Adjustments used to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 445,704 160,338
Amortization of debt discount - 131,585
Issuance of warrants for services - 3,241
Issuance of common stock for services 990 3,938
Issuance of stock options for services 620,005 23,221
Changes in operating assets and liabilities:
Increase (decrease) in:
Accounts payable (11,104) (268,928)
Accrued interest 36,923 41,394
Accrued expenses (16,421) 145,508
Commissions payable (36,554) (99,683)
(Increase) decrease in:
Prepaid expenses and other current assets (15,850) 24,115
Accounts receivable 11,930 210,154
Deposits - (2,579)
---------- ----------
Net cash used in operating activities (747,562) (692,706)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (30,572) (9,579)
Cash paid for acquisition and intangible assets (136,958) (117,500)
---------- ----------
Net cash used in investing activities (167,530) (127,079)
---------- ----------
Cash flows from financing activities:
Net change in lines of credit (607,777) (1,909,153)
Payments on capital lease obligations - (40,372)
Advances to officer (59,317) (120,306)
Proceeds from notes payable 81,329 75,000
Payments on notes payable (15,696) (81,897)
Exercise of stock options and warrants 5,454 1,150
----------- ----------
Net cash used in financing activities (596,007) (2,075,578)
----------- ----------
NET DECREASE IN CASH (1,511,099) (2,895,363)
CASH, beginning of period 4,619,383 6,264,848
------------ -----------
CASH, end of period $ 3,108,284 $ 3,369,485
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 728,780 $ 881,988
============ ============
Supplemental disclosure on non-cash investing and financing activities:
Acquisition of software $ - $ -
============ ===========
Acquisition of equipment under capital lease $ - $ 292,915
============ ===========
Exchange for reduction in note payable due to litigation$ - $ -
============ ===========
Exchange for reduction in loan payable due to litigation$ - $ -
============ ===========
Reduction of loan payable officer in exchange for relate$ 175,000 $ 743,750
============ ===========
Record beneficial conversion feature for convertible debt
Detachable warrants $ - $ 10,305
============ ===========
Settlement with vendor $ - $ -
============ ===========
Record beneficial conversion feature for convertible
debt and detachable warants $ - $ -
============ ===========
Issuance of warrants to lender $ - $ -
============ ===========
See accompanying notes to unaudited consolidated financial statements.
3
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Money Centers of America Inc. (the "Company" or "MCA"), a Delaware corporation,
was incorporated in October 1997. The Company is a single source provider of
cash access services, OnSwitch TM Transaction Management System, and the Omni
Network TM. The Company has combined advanced technology with personalized
customer services to deliver ATM, Credit Card Advance, POS Debit, Check Cashing
Services, CreditPlus (outsourced marker services), cash access host program,
customer data sharing and merchant card processing.
(A ) Basis of Presentation
The unaudited consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The unaudited consolidated financial statements include the accounts of
the Company and its subsidiaries. The Company and its subsidiaries have fiscal
years ending on December 31.
(B) Principles of Consolidation
The Company consolidates its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(C) Use of Estimates
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the periods presented. Actual
results may differ from these estimates.
Significant estimates during 2007 and 2006 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, 2007, the balance
exceeded the federally insured limit by $3,347,940. 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.
4
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
Additionally, the Company had $30,000 maintained under a compensating balance
agreement. The $30,000 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.
(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 3).
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, 2007 was
$3,108,284.
(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, 2007 and 2006.
(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 five 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, 2007 and 2006.
5
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(J ) 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.
(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, 2007 and 2006, no such write-offs were
required.
At June 30, 2007, the net book value of capitalized software was $1,305,573.
Amortization expense for the periods ended June 30, 2007 and 2006 was $3,363 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, 2007, the gross amount of deferred financing costs was
$1,299,183 and related accumulated amortization was $439,456. At June 30, 2007
the Company reflects in the accompanying consolidated balance sheet net deferred
financing costs of $859,726. Amortization of deferred financing costs was
$289,821 and $24,836 at June 30, 2007 and 2006, respectively.
6
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(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 revenue 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, 2007 and
2006, 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
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(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, 2007 and 2006 were $20,249 and $38,103,
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, 2007 and 2006, respectively. Accordingly, the basic and diluted EPS
are the same.
At June 30, 2007 and 2006 there were 13,090,780 and 6,588,056 shares of issuable
common stock underlying the options, warrants and convertible debt securities,
respectively.
8
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
The following table summarizes all common stock equivalents outstanding at June
30, 2007 and 2006, respectively.
2007 2006
---- ----
Common stock options 9,013,280 3,492,500
Common stock warrants 4,077,500 1,540,000
Convertible notes payable - 1,555,556
----------- -----------
Total Common Stock Equivalents 13,090,780 6,588,056
=========== ===========
(T ) Stock Based Compensation
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123(R), "Share-Based Payment," under the modified prospective method. SFAS No.
123(R) eliminates accounting for share-based compensation transactions using the
intrinsic value method prescribed under APB Opinion No. 25 "Accounting for Stock
Issued to Employees," and requires instead that such transactions be accounted
for using a fair-value-based method. Under the modified prospective method, the
Company is required to recognize compensation cost for share-based payment to
employees based on their grant date fair value from the beginning of the fiscal
period in which the recognition provisions are first applied. For periods prior
to adoption, the financial statements are unchanged, and the pro forma
disclosures previously required by SFAS No. 123, as amended by SFAS No. 148,
will continue to be required under SFAS No. 123(R) to the extent those amounts
differ from those in the Statement of Operations.
During the first six months of 2007, the Company granted 1,265,000 options to
employees that were accounted for pursuant to SFAS No. 123(R) and 123,
respectively.
During the first six months of 2007, the Company granted 900,000 warrants to
non-employees that were accounted for pursuant to SFAS No. 123(R) and 123,
respectively.
Six Months Ended
June 30,
--------------------
2007 2006
---- ----
Net loss - as reported $(1,783,185) $(1,065,010)
Add: stock-based employee compensation
determined under the fair value method - -
Less: stock-based employee compensation
determined under the intrinsic value method (APB
#25) - -
------------ ------------
Net loss (1,783,185) (1,065,010)
============ ============
Basic and Diluted loss per share-as reported $ (0.06) $ (0.04)
Basic and Diluted loss per share-pro forma $ (0.06) $ (0.04)
9
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
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,
2006 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, 2007 are not necessarily indicative of the results for
the full year ending December 31, 2007.
3. NOTES PAYABLE
Notes payable at June 30, 2007 consisted of the following:
--------------------------------------------------------------------------------
In December 2006 the Company borrowed an aggregate
$4,750,000 from a related party, Baena Advisors, LLC
("Baena"), evidenced by a promissory note. Baena is
owned by Sean Wolfington, the brother of our
Chief Executive Officer and Chairman. Interest 5,040,864
on the note is payable monthly and bears interest
at 30-day LIBOR plus 13% per annum. In April 2007,
the Lender paid off a bridge loan in the amount of
$290,864 which included principal and all accrued
interest, and added it to the principal amount of
this note. Monthly payments consist of interest only
with the full amount of the note due on February 28, 2009.
--------------------------------------------------------------------------------
In December 2006 the Company borrowed an aggregate
$2,525,000 from Mercantile Capital, LLP, as evidenced
by a promissory note. Interest on the note is payable 2,525,000
monthly and bears interest at a rate of 12.75% per
annum. Monthly payments consist of interest only with
the full amount of the note due at the end of the
two year term.
--------------------------------------------------------------------------------
In June 2007 the Company borrowed $9,000 from a
family member of our chief executive officer.
The note bears interest at 8% per annum and is payable 8,304
monthly, beginning June 1, 2007.
--------------------------------------------------------------------------------
Notes Payable $ 7,574,168
--------------------------------------------------------------------------------
During the second quarter of 2007, the Company reflected aggregate principal
repayments of $15,696 for all non-convertible promissory notes.
10
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
At June 30, 2007, the Company had the following outstanding accrued interest
payable for all debt instruments:
Interest accrued on Notes Payable and Lines of Credit 103,147
Interest accrued on non convertible related note 1,940
-----------------
Total accrued interest payable, Convertible notes $105,087
=================
4. CAPITAL LEASES
Capital lease obligations at June 30, 2007 consisted of the following:
Obligation under capital lease, imputed interest rate at $ 20,482
12.78%; due May 2007; collateralized by equipment
Obligation under capital lease, imputed interest rate at 27,958
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 27,958
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 59,208
7.95%; due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 8.3%; 10,704
due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 20,943
11.63%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 53,602
9.74%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 10,738
14.53%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 42,537
15.15%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 44,502
8.61%; due April 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 27,751
8.61%; due April 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 53,990
8.61%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 22,136
8.61%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 131,679
8.25%; due August 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 100,063
5.060%; due September 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 19,301
8.33%; due October 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 19,331
8.23%; due September 2011; collateralized by equipment
Less: current maturities (229,748)
------------
Long term obligation, net of current portion $ 463,135
============
11
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
5. DUE TO OFFICER
During the first quarter of 2007, the Company issued a note to its CEO totaling
$175,000. The note was issued in payment of the CEO's 2006 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, 2007 was $236,753. Of the total, $1,940 represented accrued interest
payable.
6. LINES OF CREDIT
Lines of credit at June 30, 2007 consisted of the following:
Line of credit, interest is payable monthly
at 9% per annum, the line is unsecured and
due on demand. This line has been $ 922,827
established with one of our casino customers.
Line of credit, non-interest bearing,
the line is unsecured and due on demand.
This line has been established with one of 1,124,372
our casino customers.
Line of credit, the line is unsecured and
due on demand. The Company pays a fixed stated
amount of interest totaling $1,000 per month.
The payments are recorded and charged to
interest expense. This line has been established 390,200
with one of our casino customers. At June
30, 2007, the Company had recorded related
accrued interest payable of $1,000 in connection
with this line of credit.
-------------------------
Lines of Credit $2,437,399
=========================
7. STOCKHOLDERS' DEFICIT
Six Months Ended June 30, 2007
(A ) Common Stock Issuances
(1 ) Cash
None
(2 ) Services
In February 2007, the Company issued 1,833 shares of common stock to
employees for services rendered. The Company valued the shares at the
fair price on the date of issuance which was $0.54 per share based on the
quoted closing trading price and recorded non-cash compensation expense
of $990.
(3 ) Exercise of Options/Warrants
In February 2007, 2 directors exercised 200,000 options at $0.01 per
share. The Company received proceeds of $2,000 from the transaction and
issued 200,000 shares of common stock.
In February 2007, our CFO/COO exercised 12,500 warrants at $0.01 per
share. The Company received proceeds of $125 from the transaction and
issued 12,500 shares of common stock.
12
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
In March 2007, a former employee exercised 12,500 options at $0.33 per
share. The Company received proceeds of $4,125 from the transaction and
issued 12,500 shares of common stock.
(B ) Accrued Penalty Shares
At June 30, 2007, 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 with respect to a delay in registering shares sold in a
prior common stock offering. The Company has valued these shares at
$81,048 based on the quoted closing trading price every two weeks when
the penalty accrued. The fair value of the penalty has been recorded as a
component of accrued expenses.
(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 2007:
(1 ) Option Grants - Employees
In February 2007, 500,000 options at an exercise price of $0.38 per share
were issued to the Company's CFO/COO pursuant to his employment
agreement. 250,000 options vest July 1, 2007 and 250,000 options vest
December 31, 2007.
In February 2007, 100,000 options at an exercise price of $0.38 per share
were issued to an employee and vested immediately. The Company valued
these shares using the Black-Scholes valuation model at $52,200 and
accordingly booked a non-cash compensation expense in the same amount.
In March 2007, 400,000 options at an exercise price of $0.01 per share
were issued to our non-employee directors according to their compensation
arrangements. The Company valued these shares using the Black-Scholes
valuation model at $246,800 and accordingly booked a non-cash
compensation expense in the same amount.
In March 2007, 265,000 options at an exercise price of $0.38 per share
were issued to 5 employees according to management and the board of
directors for additional compensation. The Company valued these shares
using the Black-Scholes valuation model at $158,205 and accordingly
booked a non-cash compensation expense in the same amount.
In June 2007, 100,000 options at an exercise price of $0.42 per share
vested according to an executive's employment agreement. The Company
valued these shares using the Black-Scholes valuation model at $35,000
and accordingly booked a non-cash compensation expense in the same
amount.
13
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(2 ) Options/ Warrants Exercised - Employees
In February 2007, 2 directors exercised 200,000 options at $0.01 per
share. The Company received proceeds of $2,000 from the transaction and
issued 200,000 shares of common stock.
In February 2007, our CFO/COO exercised 12,500 warrants at $0.01 per
share. The Company received proceeds of $125 from the transaction and
issued 12,500 shares of common stock.
In March 2007, an employee exercised 12.500 options at $0.33 per share.
The Company received proceeds of $4,125 from the transaction and issued
12,500 shares of common stock.
(3 ) Option Forfeitures - Employees
None
(4 ) Weighted Average Assumptions for 2007 Option Grants - Employees
None
Employee stock option activity for the six months ended June 30, 2007 are
summarized as follows:
Number of Shares Weighted Average Exercise Price
------------------ -------------------------------
Outstanding at December 31, 2006 7,960,780 $.10
Granted 1,265,000 .11
Exercised (212,500) .01
Cancelled/Expired - -
------------------ -------------------------------
Outstanding at June 30, 2007 9,013,280 $.10
================== ===============================
The following table summarizes the Company's employee stock options outstanding
at June 30, 2007:
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
----------------- ---------- ---------------- ----------------
.01 7,245,780 6.52-9.50 .01
.26 - .33 302,500 0.50-9.39 .28
.38 - .42 1,065,000 6.96-9.67 .21
.70 - .77 212,500 6.84-7.56 .75
2.00 - 2.28 187,500 5.92-6.35 2.11
------------ ----------------
9,013,280 .10
============ ==============
At June 30, 2007, 9,013,280 stock options are exercisable with a weighted
average exercise price of $.10 except 500,000 at $0.38.
14
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(D) Warrants
(1) Warrant Grants - Consultants
In January 2007, the Company issued 300,000 warrants to purchase
the Company's stock at an exercise price of $0.35, $0.37 and $0.70
respectively per share to a consultant for services rendered.
According to the issuance 300,000 warrants at $0.35 vested January
31, 2007, 300,000 warrants at $0.37 vest January 31, 2008 and the
remaining 300,000 warrants at $0.70 will vest January 31, 2009.
The Company valued the 300,000 vested shares at $127,800 and
accordingly booked a non-cash compensation expense in the same
amount.
Warrant activity for the period ended June 30, 2007 is summarized as follows:
Number of Weighted Average
Shares Exercise Price
------------- -----------------
Outstanding at December 31, 2006 3,565,000 $1.13
Granted 900,000 .12
Exercised (12,500) .01
Cancelled (375,000) 4.00
------------- -----------------
Outstanding at June 30, 2007 4,077,500 $0.64
============= =================
Warrants Outstanding
-----------------------------------------------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
------------------ --------------- ----------------- --------------------
.01 2,277,500 5.29-9.50 .01
.30-.37 870,000 2.20-0.60 .23
.40 15,000 8.26 .40
.44 15,000 8.26 .44
.47-.51 30,000 8.18-8.26 .49
.70 300,000 9.60 .00
1.00 75,000 1.00 1.00
2.40 112,500 1.33-5.76 2.40
4.00-6.00 382,500 0.25-1.00 5.35
---------
4,077,500
=========
All outstanding warrants are exercisable at June 30, 2007 except for 300,000 at
$0.37 vesting in January 2008, 300,000 at $0.70 vesting in January 2009, and
1,000,000 at $0.01 vesting in December 2007.
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 $22,500 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.
15
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
The Company's total rent expense under operating leases was $170,924 and
$238,823 for the six months ended June 30, 2007 and 2006, 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:
(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, 2007 the Company has recorded $390,457 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 its 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, 2007, 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 $2,017 in sales commissions for the first
six months of 2007.
(B ) CFO/COO
In March 2007, the Company entered into an amended and restated
employment agreement, dated March 1, 2007 which amended and restated
the employment agreement, dated June 14, 2005, by and between the
Company and its Chief Financial Officer. Mr. Walsh shall serve as the
Company's Chief Financial Officer and Chief Operating Officer.
16
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
The term of the Employment Agreement was retroactive to December 31,
2006 and continues until the earlier of CFO's death or termination by
either the Company or the CFO. The CFO/COO annual salary shall be no
less than $170,000. Upon termination of the Employment Agreement within
six (6) months following a change in control of the Company either by
the Company without cause or by the CFO/COO, the CFO/COO will receive
severance pay equal to one year's salary.
In addition, the CFO was granted options to purchase 500,000 shares of
the Company's common stock with an exercise price of $.38 per share.
The Options have a term of ten years and are exercisable as follows:
(i) options to purchase 250,000 shares of the Company's common stock
are exercisable on July 1, 2007; and (ii) options to purchase 250,000
shares of the Company's common stock are exercisable on December 31,
2007, in each case as long as the CFO is employed by the Company. The
Options are immediately exercisable following a change in control of
the Company. If CFO's employment by the Company is terminated by the
Company without good cause or CFO elects early termination with good
reason, all unvested Options automatically vest.
(4 ) Litigation
On or about July 6, 2007, The Campo Band of Kumeyaay Indians d/b/a The Golden
Acorn Casino (the "Casino"), filed with the Superior Court of the State of
California for the County of San Diego, a Petition to Compel Arbitration (the
"Petition"). Through the Petition, the Casino seeks to compel Money Centers of
America, Inc. ("MCA") to participate in arbitration before JAMS in San Diego. If
successful, the Casino will file its Demand for Arbitration seeking in excess of
$922,826 in damages which it claims resulted from MCA's breach of the Financial
Service Agreement that was executed by the parties. MCA is contesting the
Petition and believes the arbitration should be heard in Philadelphia. If MCA is
compelled to participate in arbitration, it will file a counterclaim against the
Casino and a Demand for Arbitration against Ralph Goff, the tribe Vice Chairman,
individually, for its significant damages that resulted from the Casino's
wrongful termination of the Financial Service Agreement.
On March 2, 2007, the trial of Ameristar Casino v. Money Centers of America and
Available Money was held in Gilpin County District Court. Ameristar Casino
alleged that they permitted Defendants to operate their ATM's on its property
and that Defendants never paid the plaintiff the agreed-upon fee structure for
those ATM's. Ameristar Casino alleged that Defendants breached their agreement
with Plaintiff by refusing to make payments for the ATM's on casino premises in
January and February, 2005. In addition, Ameristar Casinos also alleged that
Defendants' ATM's on casino premises in January and February, 2005 generated
revenue which conferred a benefit on Defendants that would be inequitable for
Defendants to retain without payment of its value to Plaintiff. The one-day
trial concluded on March 2, 2007. The Court ruled in favor of Money Centers on
the Plaintiff's breach of contract claim. The Court ruled against money Centers
on the Plaintiff's unjust enrichment claim and a judgment was entered in the
amount of $56,879 plus statutory interest in favor of the Ameristar Casinos.
This matter was subsequently resloved and settled with the payment of $50,000 by
Money Centers to Ameristar.
On or about November 8, 2006, Plaintiffs GFM LLC, The Grove Cinemas, LLC and the
Commons at Calabasas, LLC (collectively, "Plaintiffs") filed a Complaint against
Available Money, Inc. and Money Centers of America (collectively, "MCA"),
alleging that MCA breached lease agreements executed on February 15, 2002 and
January 7, 2004. On or about March 1, 2007, another Defendant, Samuel Freshman,
cross-complained against MCA. Under the agreements, MCA rented from Plaintiffs a
portion of certain locations for purposes of an ATM machine. Due to Money
Centers' acquisition of Available Money, Inc, the original party to the lease,
Plaintiffs alleged that the transfer was "unpermitted" and therefore a breach of
the lease. Further, Plaintiffs alleged MCA's failed to pay rental obligations.
MCA denied the allegations. All parties in this litigation have settled, and all
the claims against Money Centers are in the process of being dismissed. (See
Note 12 - Subsequent Events)
17
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
9. CUSTOMER CONCENTRATIONS
For the six months ended June 30, 2007, approximately 63% of total revenues were
derived from operations at two full service casinos. Two other customers
represented approximately 21% of our total revenues for the six months ended
June 30, 2007.
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, 2007
was approximately $946,500. The interest rate on the $946,500 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,
2007. Interest expense from this cash was $68,346 for the six months ended June
30, 2007.
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 $1,412,630, a stockholders' deficit of $6,287,817 and
an accumulated deficit of $22,602,848 at June 30, 2007. The Company also
reflected a net loss of $1,783,185 and net cash used in operations of $747,562,
for the six months ended June 30, 2007. 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
On July 13, 2007, the Company entered into an Agreement of Compromise and
Settlement with GFM, LLC, The Grove Cinemas, LLC and the Commons at Calabasas,
LLC (collectively, "Plaintiffs"). In order to bring about the full and final
resolution of the Dispute, the Parties agreed that the Company shall pay to
plaintiffs the sum of $120,000. Payments to be made are $5,000 on July 16, 2007,
$10,000 on August 13, 2007, and the balance of $105,000 to be paid monthly in
the amount of $2,917, commencing on September 1, 2007 and continuing until
August 1, 2010.
On or about July 18, 2007, the Company entered into a Renewal of Financial
Services Agreement with its largest casino customer. The contract renewal is
valid through February 1, 2010.
18
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 17, 2007. The following discussion should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
included elsewhere in this report.
19
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 to the gaming
industry. We combine advanced technology with personalized customer services to
deliver ATM, credit card advance, POS debit card advance, Check Cashing Services
and CreditPlus marker services on an outsourcing basis to casinos, license our
OnSwitchTM transaction management system to casinos 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.
Current Overview
Our core business of providing single source full service cash access
services in the gaming industry continues to be the major source of our revenue
and profits in 2007. We have also launched several new services in the last 21
months, such as OnSwitchTM and Omni Network 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.
20
We deployed our OnSwitchTM Transaction Management System (OnSwitchTM)
in January 2006. Though we feel confident that OnSwitchTM will differentiate us
from our competitors and create new sources of revenue for us, there is no
guarantee that the market will accept this new deployment strategy. Regardless
of the markets acceptance of this new deployment strategy, OnSwitchTM enables us
to gain complete control over our cash access booth operations and ATMs.
OnSwitchTM 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. OnSwitchTM permits us 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 OnSwitchTM, general operating procedures, field support,
and internal accounting processes will also be streamlined.
Our management focused on improving our capital structure during 2006.
In August 2006 we raised $1.2 million in equity in a successful private
placement. In addition, at the end of 2006 we refinanced most of our outstanding
debt on a favorable basis, converting most of it from short term to long term,
reducing our interest rates and obtaining "interest only" payment terms. In
combination, these efforts have allowed us to pay off our highest cost capital
and increase our cash flow by over $700,000 per year.
Our management focused on improving our capital structure during 2006.
In August 2006 we raised $1.2 million in equity in a successful private
placement. In addition, at the end of 2006 we refinanced most of our outstanding
debt on a favorable basis, converting most of it from short term to long term,
reducing our interest rates and obtaining "interest only" payment terms. In
combination, these efforts have allowed us to pay off our highest cost capital
and increase our cash flow by over $700,000 per year.
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 licensing OnSwitchTM , our transaction management system. In
addition to outsourcing the cash services operations, we now 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 Native American 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
Native American 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, Native American 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 Native American Gaming market there are
virtually no credit services currently available. Approximately 26 of 29 states
that have approved Native American Gaming do not allow Native American 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 Native American casinos to issue
credit to players, providing Native American 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 Native American 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.
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.
This parallel strategy of sales 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, Inc. ("Available Money"), which we
acquired in April of 2004. 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.
23
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 our various revenue streams:
ATM's and Credit Cards. Fees earned from ATM and credit card advances
are recorded on the date of transaction.
Check Cashing: Revenue is recorded from the fees on check cashing
services on the date the check is cashed. If a customer's check is returned by
the bank on which it is drawn, the full amount of the check is charged as bad
debt loss. The check is subsequently resubmitted to the bank for payment. If the
bank honors it, the amount of the check is recognized as negative bad debt
expense.
Check Cashing Bad Debt. The principal source of bad debts that we
experience are due to checks presented by casino patrons that are ultimately
returned by the drawer's bank for insufficient funds. We account for these check
cashing bad debts on a cash basis. Fees charged for check cashing are recorded
as income on the date the check is cashed. If a check is returned by the bank on
which it is drawn, we charge the full amount of the check as a bad debt loss. If
the bank subsequently honors the check, we recognize the amount of the check as
a negative bad debt. Based on the quick turnaround of the check being returned
by the bank on which it is drawn and our resubmission to the bank for payment,
we feel this method approximates the allowance method, which is a Generally
Accepted Accounting Principle.
Goodwill and Long-Lived Intangible Assets. The carrying value of
goodwill as well as other long-lived intangible assets such as contracts with
casinos is reviewed if the facts and circumstances suggest that they may be
impaired. With respect to contract rights in particular, which have defined
terms, this will result in an annual adjustment based on the remaining term of
the contract. If this review indicates that the assets will not be recoverable,
as determined based on our discounted estimated cash flows over the remaining
amortization period, then the carrying values of the assets are reduced to their
estimated fair values. Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill And Other Intangible Assets"
which eliminates amortization of goodwill and certain other intangible assets
and requires annual testing for impairment. The calculation of fair value
includes a number of estimates and assumptions, including projections of future
income and cash flows, determining remaining contract periods 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 terminations 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. Effective January 1, 2006, the Company adopted the
provisions of SFAS No. 123(R), "Share-Based Payment," under the modified
prospective method. SFAS No. 123(R) eliminates accounting for share-based
compensation transactions using the intrinsic value method prescribed under APB
Opinion No. 25 "Accounting for Stock Issued to Employees," and requires instead
that such transactions be accounted for using a fair-value-based method. Under
the modified prospective method, the Company is required to recognize
compensation cost for share-based payment to employees based on their grant date
fair value from the beginning of the fiscal period in which the recognition
provisions are first applied. For periods prior to adoption, the financial
statements are unchanged, and the pro forma disclosures previously required by
SFAS No. 123, as amended by SFAS No. 148, will continue to be required under
SFAS No. 123(R) to the extent those amounts differ from those in the Statement
of Operations.
24
Results of Operations
Three Months Ended June 30, 2007 (Unaudited)
vs. Three Months Ended June 30, 2006 (Unaudited)
Three Months Three Months
Ended June 30, Ended June 30,
2007 2006 Change
------------ ---------- ----------
Net Income (Loss) $ (559,793) $ (660,703) $ 100,910
Revenues 2,209,754 3,060,386 (850,632)
Cost of revenues 1,729,438 2,483,274 (753,836)
Commissions & Rents Paid 934,621 1,401,814 (467,193)
Wages & Benefits 399,244 558,734 (159,490)
Processing Fee & Service Charges 268,072 319,215 (51,143)
Bad Debts 49,062 48,732 330
ATM Lease Fees & Maintenance 7,031 49,302 (42,271)
Cash Replenishment Services 23,270 33,802 (10,532)
Other 48,138 71,675 (23,537)
Gross Profit 480,316 577,112 (96,796)
Selling, General and Administrative Expenses 432,879 500,975 (68,096)
Contributions 6,630 4,000 2,630
Management Compensation 173,750 173,750 -
Marketing 7,346 12,879 (5,533)
Professional Fees 105,279 69,638 35,641
Trade Show & Sponsorships 2,362 46,651 (44,289)
Travel 34,246 58,778 (24,532)
Other 103,266 135,279 (32,013)
Noncash Compensation 35,000 26,462 8,538
Depreciation and amortization 223,172 85,229 137,943
Interest expense, net (355,895) (496,773) (140,878)
Other income (expenses) 6,837 (128,376) (135,213)
Our net loss decreased by approximately $100,000 during the three
months ended June 30, 2007 primarily due to a decrease in other expenses as we
did not have the one time expenses related to the deinstallation of the Sycuan
contract in May of 2006 combined with a decreases in interest expense and SG &
A, offset by increased amortization expense resulting from amortization of
deferred financing costs in connection with the refinance of our vault cash .
Our revenues as a whole decreased by approximately 27.8% during the
three months ended June 30, 2007 as compared to the three months ended June 30,
2006. The Money Centers portfolio (consisting primarily of full-service casino
contracts) decreased 25% or $610,000. We lost approximately $600,000 in revenues
from the loss of the Sycuan contract which de-installed on May 9, 2006 and
approximately $212,000 from the loss of the Campo contract in the 4th quarter
2006. We had the addition of $46,000 in revenues from new contracts, while the
remaining Money Centers casinos had increased same store sales of 9% from same
quarter last year. The Available Money portfolio (consisting of ATM contracts)
decreased 44% or $239,634 due to termination of contracts.
Our selling, general and administrative expenses decreased by
approximately $68,000 during the three months ended June 30, 2007 primarily due
to decreased trade show, travel and other expenses offset by an increase in
legal expenses. Our depreciation and amortization expenses increased during the
three months ended June 30, 2007 primarily due to the amortization of our
financing cost related to the refinancing in December of 2006.
Our interest expense decreased by approximately $141,000 during the
three months ended June 30, 2007. Lower borrowing levels resulting from the
termination of unprofitable contracts and the favorable refinancing in December
2006.
Other income (expenses) in the second quarter of 2007 were approximatly
$135,000 less than in 2006 as we had no expenses in 2007 equivalent to the 2006
one time expenses related to the closing down of our operations at the Syuan
Casino of approximatly $130,000.
25
Six Months Ended June 30, 2007 (Unaudited) vs.
Six Months Ended June 30, 2006 (Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
2007 ($) 2006 ($) Change ($)
---------- ---------- -----------
Net Loss (1,783,185) (1,065,010) (718,175)
Revenues 4,379,436 6,899,453 (2,520,017)
Cost of services 3,432,656 5,540,019 (2,107,363)
Commissions & Rents Paid 1,862,677 3,311,938 (1,449,261)
Wages & Benefits 828,276 1,176,903 (348,627)
Processing Fee & Service Charges 524,533 688,868 (164,335)
Bad Debts 60,118 61,939 (1,821)
ATM Lease Fees & Maintenance 15,806 105,215 (89,409)
Cash Replenishment Services 46,906 43,188 3,718
Other 94,340 151,968 (57,628)
Gross Profit 946,780 1,359,434 (412,654)
Selling, General and Administrative Expenses 960,263 1,108,632 (148,369)
Contributions 9,630 13,500 (3,870)
Management Compensation 345,809 347,500 (1,691)
Marketing 20,249 38,103 (17,854)
Professional Fees 183,702 163,538 20,164
Seminars - 10,597 (10,597)
Trade Show & Sponsorships 53,669 114,072 (60,403)
Travel 92,139 130,364 (38,225)
Other 255,065 290,958 (35,893)
Noncash Compensation 620,995 32,650 (588,345)
Depreciation and amortization 445,704 160,338 (285,366)
Interest expense, net (719,628) 1,013,600) (293,972)
Other income (expenses) 16,625 (109,224) (125,849)
Our net loss increased by approximately $720,000 for the six months
ended June 30, 2007 primarily due to a decrease in revenue from the loss of the
Sycuan and Campo contracts in 2006. In addition, an increase in amortization
expense resulted from a substantial increase in deferred financing costs in
connection with the refinance of our vault cash. Also, noncash compensation
increased substantially as a result of the issuance of options to purchase our
common stock.
Our revenues as a whole decreased by approximately 36.5% during the six
months ended June 30, 2007 as compared to the six months ended June 30, 2006.
The Money Centers portfolio (consisting primarily of full-service casino
contracts) decreased 35% or $2,010,033. Approximately $2,000,000 of this
reflected the loss of the Sycuan contract which de-installed on May 9, 2006 and
approximately $415,000 reflected the loss of the Campo contract in the 4th
quarter of 2006. We had the addition of $89,000 in revenues from new contracts,
while the remaining Money Centers casinos had increased same store sales of 9%
from same quarter last year. The Available Money portfolio (consisting of ATM
contracts) decreased 46% or $509,066.
Our selling, general and administrative expenses decreased by
approximately $148,000 during the six months ended June 30, 2007 due to
decreases in every category except legal. Our depreciation and amortization
expenses increased during the six months ended June 30, 2007 primarily due to
the amortization of our financing cost related to the recapitalization in
December of 2006.
26
Our interest expense decreased $293,972 during the six months ended
June 30, 2007 mostly due to a decrease in the interest rate we are paying on our
long-term debt as a result of the refinance that took place in December 2006. In
addition, we did not incur any non-cash interest expense in 2007 as we did in
2006 relating to the bridge loans in 2005.
Other income (expenses) in 2007 were approximatly $125,000 less because
we did not have the one time expenses related to the closing down of our
operations at the Syuan Casino of approximatly $130,000 as we did in 2006.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal quarter
ended June 30, 2007 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
Changes in Financial Position, Liquidity and Capital Resources
Six Months Six Months
Ended June 30, Ended June 30,
2007 ($) 2006($)
(Unaudited) (Unaudited) Change($)
--------------- -------------- ---------
Net Cash Used in Operating Activities (747,562) (692,706) 54,856
Net Cash Used in Investing Activities (167,530) (127,079) 40,451
Net Cash Used in Financing Activities (596,007) (2,075,578) (1,479,571)
Net cash used in operations increased by approximately $55,000,
primarily due to a increase in our net loss.
Net cash used in investing activities increased during the six months
ended June 30, 2007 primarily due to increased investment in our postilion
platform for OnSwitchTM.
Net cash used in financing activities decreased during the six months
ended June 30, 2007 primarily due to reductions in the utilization of short-term
lines of credit.
A significant portion of our existing indebtedness prior to December
28, 2006 was associated with our vault cash line of credit of $7,000,000 with
Mercantile Capital, L.P., which we used to provide vault cash for our casino
operations at most locations. Vault cash is 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 accrued 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. 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.
On December 28, 2006, the Mercantile line of credit was converted to a
$2,525,000 term loan maturing December 31, 2008 and bearing interest at 12.75%,
payable monthly. The principal balance due to Mercantile above $2,525,000 was
repaid with a portion of the proceeds from a $4,750,000 term loan from Baena
Advisors, LLC. This loan bears interest at 30-day LIBOR plus 13%, payable
monthly, and is due February 28, 2009.
27
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 bore interest at 10% per annum and matured in September
and October of 2006. All of this amount has been repaid, in part through a
$300,000 increase in the Baena Advisors facility.
In addition, two of our casino customers provide vault cash lines of
credit for our activities at their casinos. These facilities are unsecured and
bear interest rates ranging from zero to 9%. Our debt is used primarily to
provide vault cash for our casino operations. 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%.
On June 1, 2007, we borrowed $9,000 from a family member of our chief
executive officer. The note bears interest at 8% per annum and is payable
monthly, beginning June 1, 2007.
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.
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 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 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.
28
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 $22,602,848 as of June 30, 2007 and
our net losses and cash used in operations of $1,738,185 and $747,562,
respectively, for the period ended June 30, 2007, 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 2007 or at any time in the future.
Item 3 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2007, we carried out an evaluation of the effectiveness
of the design and operation of our "disclosure controls and procedures" (as
defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) under the supervision
and with the participation of our management, including Christopher M.
Wolfington, our Chief Executive Officer and Jason P. Walsh, our Chief Financial
Officer. Based upon that evaluation, Mr. Wolfington and Mr. Walsh concluded that
our disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management to allow timely decisions
regarding required disclosure.
Changes in Internal Controls
There were no significant changes in our internal controls or, to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the date we carried out this evaluation
29
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On or about July 6, 2007, The Campo Band of Kumeyaay Indians d/b/a The Golden
Acorn Casino (the "Casino"), filed with the Superior Court of the State of
California for the County of San Diego, a Petition to Compel Arbitration (the
"Petition"). Through the Petition, the Casino seeks to compel Money Centers of
America, Inc. ("MCA") to participate in arbitration before JAMS in San Diego. If
successful, the Casino will file its Demand for Arbitration seeking in excess of
$922,826 in damages which it claims resulted from MCA's breach of the Financial
Service Agreement that was executed by the parties. MCA is contesting the
Petition and believes the arbitration should be heard in Philadelphia. If MCA is
compelled to participate in arbitration, it will file a counterclaim against the
Casino and a Demand for Arbitration against Ralph Goff, the tribe Vice Chairman,
individually, for its significant damages that resulted from the Casino's
wrongful termination of the Financial Service Agreement.
On March 2, 2007, the trial of Ameristar Casino v. Money Centers of America and
Available Money was held in Gilpin County District Court. Ameristar Casino
alleged that they permitted Defendants to operate their ATM's on its property
and that Defendants never paid the plaintiff the agreed-upon fee structure for
those ATM's. Ameristar Casino alleged that Defendants breached their agreement
with Plaintiff by refusing to make payments for the ATM's on casino premises in
January and February, 2005. In addition, Ameristar Casinos also alleged that
Defendants' ATM's on casino premises in January and February, 2005 generated
revenue which conferred a benefit on Defendants that would be inequitable for
Defendants to retain without payment of its value to Plaintiff. The one-day
trial concluded on March 2, 2007. The Court ruled in favor of Money Centers on
the Plaintiff's breach of contract claim. The Court ruled against money Centers
on the Plaintiff's unjust enrichment claim and a judgment was entered in the
amount of $56,879 plus statutory interest in favor of the Ameristar Casinos.
This matter was subsequently resolved and settled with the payment of $50,000 by
Money Centers to Ameristar.
On or about November 8, 2006, Plaintiffs GFM LLC, The Grove Cinemas, LLC and the
Commons at Calabasas, LLC (collectively, "Plaintiffs") filed a Complaint against
Available Money, Inc. and Money Centers of America (collectively, "MCA"),
alleging that MCA breached lease agreements executed on February 15, 2002 and
January 7, 2004. On or about March 1, 2007, another Defendant, Samuel Freshman,
cross-complained against MCA. Under the agreements, MCA rented from Plaintiffs a
portion of certain locations for purposes of an ATM machine. Due to Money
Centers' acquisition of Available Money, Inc, the original party to the lease,
Plaintiffs alleged that the transfer was "unpermitted" and therefore a breach of
the lease. Further, Plaintiffs alleged MCA's failed to pay rental obligations.
MCA denied the allegations. All parties in this litigation have settled, and all
the claims against Money Centers are in the process of being dismissed. We have
agreed to pay the plaintiffs a total of $120,000, of which $15,000 has been paid
and the remainder is payable in monthly installments of $2,917 through August
2010.
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, we have accrued penalties in the amount of 142,500 shares, of which
7,500 shares were accrued in the first quarter of 2006. The Company has valued
these shares at $81,048.
In February, 2007, we issued an aggregate of 1,833 shares of our common
stock to 2 employees in lieu of a portion of cash bonuses otherwise due to them
at an effective price of $0.54 per share in a transaction under Rule 701 under
the Securities Act.
30
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.
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 22, 2006).
10.4 Amended and Restated Employment Agreement dated as of March 1, 2007,
but effective December 31, 2006 by and between Money Centers of
America, Inc. and Jason P. Walsh (incorporated by reference to Exhibit
10.4 to the Post Effective Amendment No. 1 to the Registration
Statement on Form SB-2 filed on June 21, 2007) (File No. 333-138150).
10.5 Credit and Security Agreement dated December 28, 2006 between Money
Centers of America, Inc. and Baena Advisors, LLC (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed
January 8, 2007).
10.6 $4,750,000 Promissory Note dated December 28, 2006 from Money Centers
of America, Inc.to Baena Advisors, LLC (incorporated by reference to
Exhibit 10.2 to the Current Report on Form 8-K filed January 8, 2007).
10.7 Amendment to Credit and Security Agreement dated December 28,
2006 between Money Centers of America, Inc. and Mercantile
Capital, L.P.(incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K filed January 8, 2007).
10.8 $2,525,000 Amended and Restated Promissory Note dated December 28,
2006 from Money Centers of America, Inc. to Mercantile Capital, L.P.
(incorporated by reference to Exhibit 10.4 to the Current Report on
Form 8-K filed January 8, 2007).
14 Code of Ethics (incorporated by reference to Exhibit 14 of Form 10-KSB
filed on July 13, 2004).
21 Subsidiaries of Money Centers of America, Inc.
31.1 Certification dated August 20, 2007 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 20, 2007 pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a) of the Principal Accounting Officer as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Jason P.
Walsh, Chief Financial Officer.
32 Certification dated August 20, 2007 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.
31
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 20, 2007 By: /s/ Christopher M. Wolfington
-----------------------------
Christopher M. Wolfington
Chief Executive Officer
Date: August 20, 2007 By: /s/ Jason P. Walsh
-----------------------------
Jason P. Walsh
Chief Financial Officer
32
Exhibit 31.1
I, Christopher M. Wolfington, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Money
Centers of America, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: August 20, 2007 By: /s/ Christopher M. Wolfington
-----------------------------
Christopher M. Wolfington
Chief Executive Officer
33
Exhibit 31.2
I, Jason P. Walsh, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Money
Centers of America, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: August 20, 2007 By: /s/ Jason P. Walsh
--------------------------
Jason P. Walsh
Chief Financial Officer
34
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-QSB of Money Centers
of America, Inc. (the "Company") for the fiscal quarter ended March 31, 2006, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Christopher M. Wolfington, Chief Executive Officer and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
Date: August 20, 2007 By: /s/ Christopher M. Wolfington
--------------------------------
Christopher M. Wolfington
Chief Executive Officer
Date: August 20, 2007 By: /s/ Jason P. Walsh
--------------------------------
Jason P. Walsh
Chief Financial Officer
This certification accompanies the Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 of
the Sarbanes Oxley Act of 2002 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.
35