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| TQ > SEC Filings for TQ > Form 10-Q on 20-Oct-2008 | All Recent SEC Filings |
20-Oct-2008
Quarterly Report
SAFE HARBOR STATEMENT
In addition to historical information, the information included in this Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the ''Securities Act''), and Section 21E of the Securities Exchange Act of 1934, as amended (the ''Exchange Act''), such as those pertaining to the Company's capital resources, performance and results of operations. Forward-looking statements involve numerous risks and uncertainties and should not be relied upon as predictions of future events. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as ''believes,'' ''expects,'' ''may,'' ''will,'' ''should,'' ''seeks,'' ''approximately", ''intends,'' ''plans,'' ''pro forma,'' ''estimates,'' or ''anticipates'' or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and may be incapable of being realized. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: significant and immediate need for capital, lack of revenue, market acceptance of the Company's products, technological restrictions upon development, limited marketing experience, uncertainty of product development, including our EMMA technology, dependence upon new technology, need for qualified management personnel and competition. The success of the Company also depends upon economic trends generally, governmental regulation, legislation, and population changes. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only. The Company assumes no obligation to update forward-looking statements.
Introduction
Cash Technologies, Inc., is a Delaware corporation, incorporated in August 1995. Unless the context otherwise requires, references herein to "we," "our" or "Cash Tech" refers to Cash Technologies, Inc., and its wholly-owned and majority-owned subsidiaries National Cash Processors, Inc., a Delaware corporation; CoinBank Automated Systems, Inc., a Delaware corporation; CoinBank Automation Handels GmbH, organized operating in Salzburg, Austria, Cash Tech Card Systems, Inc., a Delaware corporation, CT Holdings, LLC.,a Delaware limited liability company of which we own 86.65%, CPI Holdings, LLC dba Champion Parts, an Arkansas limited liability company, Claim-Remedi Service, Inc. (formerly Heuristic Technologies, Inc.), a Delaware company and TAP Holdings, LLC (formerly dba Tomco Auto Products), a California limited liability company. Our address is 1434 West 11th Street, Los Angeles, California 90015. Our telephone number is (213) 745-2000.
Our independent certified public accountant included an explanatory paragraph in its report for the year ended May 31, 2007, which indicated a substantial doubt as to the ability of us to continue as a going concern. This concern is primarily due to substantial debt service requirements and working capital needs. See independent certified public accountant's letter.
The research and development of new software products and enhancements to existing software products were expensed as incurred (and recorded in the consolidated statement of operation) until technological feasibility has been established. Technological feasibility is established upon completion of a detailed program design or working model. Amortization of the capitalized software commenced on January 1, 2002. As of May 31, 2007, capitalized software costs had been fully amortized . Technological feasibility was achieved in September of 1999 and commencing October 1, 1999 all expenses related to EMMA software development had been capitalized. As of December 31, 2001, we had capitalized $2,771,536 in development and related costs. The EMMA product was available for release to the public in January 2002 thus all development costs since have been expensed including $25,000 for the fiscal year ended May 31, 2008 and $93,750 for the fiscal year ended May 31, 2007 .
Much of our SG&A costs are fixed in nature, therefore, as revenues increase, our SG&A does not increase proportionately.
We record as revenue licensing and software fees as well as coin counting machine sales in accordance with generally accepted accounting principles.
We are currently engaged principally in the auto products business.
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2008 COMPARED TO THE THREE MONTHS ENDED AUGUST 31,
2007.
Net revenues for the three-month period ended August 31, 2008 increased to
$290,089 compared to $43,587 for the same 2007 period. The increase in net
revenue is attributable primarily to the acquisition of the Champion assets and
the corresponding start of operations of CPI Holdings off set by a decrease in
data processing by our Claim-Remedi Services, Inc. subsidiary.
Cost of revenues for the three-month period ended August 31, 2008 was $402,970
compared to $25,574 for the same 2007 period. The increase in cost of revenues
is directly related to the increase in sales from the start of our CPI Holdings
subsidiary.
Gross loss for the three months ended August 31, 2008 was $(112,881) compared to a Gross profit of $18,013 for the same period a year ago.
Se lling, General and Administrative expenses for the three months ended August 31, 2008, decreased to $325,045 compared to $746,673 for the same three months ended August 31, 2007. These expenses consist primarily of wages (and wage related costs), outside contractor expenses, travel/promotional expenses, professional services and facilities/office related expenses.
Research and development expenses for the three months ended August 31, 2008 were $0 and for 2007 , were $18,750.
Depreciation and amortization expenses for the three months ended August 31, 2008, and August 31, 2007, were $155,676 and $754, respectively. The increase is due to the amortization of deemed interest expense.
Interest expense for the three months ended August 31, 2008 and August 31, 2007, was $86,204 and $73,421.
Minority Interest for the three months ended August 31, 2008 and August 31, 2007, is $6,549 and $6,549, respectively.
As a result of the foregoing, net income (losses) for the three months ended August 31, 2008 and August 31, 2007, are $(673,257) and $(2,815,036), respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements have been and will continue to be significant, and our cash requirements have exceeded cash flow from operations. At August 31, 2008, we had a working capital of $4,599,658 compared to working capital of $5,241,369 at May 31, 2008. At August 31, 2008, we had a cash balance of approximately $161,381. We are in immediate need of working capital to continue our business and operations. To date, we have been funding our operations primarily through the issuance of equity in private placement transactions with existing stockholders or affiliates of stockholders. There can be no assurance that we will be able to continue to raise required working capital in this or any other manner.
Since inception, we have satisfied our working capital requirements through limited revenues generated from operations, the issuance of equity and debt securities, borrowing under a line of credit and loans from our security holders. Our independent certified public accountant included an explanatory paragraph in its report for the year ended May 31, 2008, which indicated a substantial doubt as to our ability to continue as a going concern. This concern is primarily due to substantial debt service requirements and working capital needs.
Net cash used in operating activities was $(568,175) for the three-months ended August 31, 2008 compared to $(1,054,198) for the three-months ended August 31, 2007.
Net cash provided by (used in) financing activities for the three-months ended August 31, 2008, was $319,251 as compared to $(39,688) for the three-months ended August 31, 2007. The increase was attributable to the net result of various fund raising activities.
In 1997, we entered into a credit agreement with G.E. Capital Corporation, or G.E. Capital, pursuant to which we borrowed $ 5,500,000 for the purchase of CoinBank component equipment, working capital and general corporate purposes. Due to our inability to repay G.E. Capital on the original terms, on September 29, 2000 we entered into the first of several loan modifications with G.E. The most recent modification requires a payment of certain fees and interest following which GE has agreed to extend the loan on interest-only terms at a rate of 9.5% for 12 additional months at which time the entire unpaid balance shall be due and payable. We have no current plan or capability to repay G.E. its principal. A default of this obligation could result in the delisting and/or bankruptcy of the Company. As of August 31, 2008, we owed G.E. Capital $3,938,924, which includes the principal, financing fees and unpaid interest.
In May 2003 we completed a private placement offering with one of our stockholders consisting of convertible notes and warrants under Section 4(2) of the Securities Act of 1933. The offering consisted of an unsecured convertible promissory note in the principal amount of $50,000, bearing interest at the rate of 5% per annum and redeemable warrants to purchase 100,000 shares of common stock. The note is convertible into our common stock at the conversion rate of $0.50 per share. The Warrants are exercisable at a price of $1.00 per share. We also reduced the exercise price of 8,000 Series C warrants owned by the stockholder from $2.50 to $0.25 per share. The note was due and payable on May 2, 2008 and remains upaid. A deemed dividend expense of $25,331 was recognized in conjunction with the warrants offered in this placement.
In May 2003 we completed a private placement offering with one of our stockholders consisting of convertible notes and warrants under Section 4(2) of the Securities Act of 1933. The offering consisted of an unsecured convertible promissory note in the principal amount of $20,750, bearing interest at the rate of 5% per annum and redeemable warrants to purchase 30,000 shares of common stock. The note is convertible into our common stock at the conversion rate of $0.50 per share. The Warrants are exercisable at a price of $0.65 per share. We also reduced the exercise price of 45,000 Series B warrants owned by the stockholder from $4.50 to $0.65 per share which were converted immediately for gross proceeds to us of $29,250. The note was due and payable on May 8, 2008 and remains upaid. A deemed dividend expense of $25,901 was recognized in conjunction with the warrants offered in this placement.
In November 2004, TAP Holdings, LLC established a line of credit with BFI Business Finance. The maximum amount available under the line of credit is $2,000,000, limited to 60% of eligible accounts receivable plus 60% of eligible inventory up to $1,000,000, less any availability reserves, as defined in the loan agreement. Interest is payable monthly at 4.0% per annum above the prime interest rate (10% at May 31, 2005). The line of credit is collateralized by a security interest in TAP's accounts receivable, inventories, property and equipment and certain other assets as well as a limited personal guaranty from TAP's chairman (who is not an employee of Cash Technologies). TAP must also adhere to covenant limitations, conditions and restrictions as set forth in the loan and security agreement. As of August 31, 2008, there was $205,703 outstanding including interest.
The outstanding balance is expected to be paid from the sale of certain assets of TAP and refunded insurance deposits.
RISK FACTORS
The following factors, in addition to those discussed elsewhere, should be considered carefully in evaluating our business and us. An investment in our shares involves a high degree of risk and is suitable only for those investors who can bear the risk of loss of their entire investment.
Risks Related to Our Financial Condition
We have limited revenues and a history of incurring losses, which has resulted in our independent accountants issuing opinions containing doubts about our ability to continue as a going concern.
We have generated limited revenues since our inception, and, while we expect to generate significant revenues within the next fiscal year, there is no assurance that we will be successful. For the fiscal years ended May 31, 2008 and 2007, we had net sales of $336,615 and $313,946, respectively. Virtually all of our revenues for the fiscal year ended May 31, 2005 until the quarter ending November 30, 2006 were derived from our TAP subsidiary; however TAP operations substantially ceased on October 31, 2006 with the sale of most of its assets. Our efforts are now focused on the healthcare products which are marketed by our Claim-Remedi Services, Inc. subsidiary, however revenues will be substantially lower and losses will continue until and unless our products are more widely sold.
Prior to the fiscal year ended May 31, 2008 we have incurred losses since our inception. For the last two fiscal years ended May 31, 2007 and 2008, net income (losses) of ($3,065,247) and $(800,052) respectively. Net income for the fiscal year ended May 31, 2006, was derived principally from our purchase of the Tomco assets. In its reports accompanying our audited financial statements for the fiscal years ended May 31, 2007 and 2008, our independent auditors included an explanatory paragraph wherein they expressed substantial doubt about our ability to continue as a going concern. For the three-month period ended August 31, 2008 we have incurred additional (losses) of $(673,257).
We are unable to pay our current liabilities, and must rely on the continued forbearance of specific creditors to avoid bankruptcy.
As of August 31, 2008 we had outstanding current liabilities of $8,758,004, consisting of obligations and accruals for loans, dividends and notes payable, trade payables, taxes, unpaid salaries and other items of which approximately $1,820,000 is not being paid as agreed. Our creditors have, to date, agreed not to accelerate on these obligations and not to foreclose on our assets. However, should the creditors demand immediate repayment, we would have to raise the needed funds to satisfy the obligations, possibly on unsatisfactory terms or failing that, we would have to consider ceasing operations and/or filing for bankruptcy protection.
We have an immediate need for capital and if we are unable to obtain the financing we need, our business may fail.
As of August 31, 2008, Cash Tech had working capital of $4,599,658 and available cash of $161,381. Our capital requirements have been and will continue to be significant, and our cash requirements have exceeded cash flow from operations since inception. We are in immediate need of capital to continue to operate. We have been dependent on the proceeds of private placements of our debt and equity securities to satisfy our working capital requirements. We will be dependent upon the proceeds of future private placement offerings or other public offerings to fund our short-term working capital requirements, to fund certain marketing activities and to continue implementing our business strategy. There can be no assurance we will be able to raise necessary capital. To the extent that we incur indebtedness or issue debt securities, we will be subject to all of the risks associated with incurring indebtedness, including the risks that interest rates may fluctuate and cash flow may be insufficient to pay principal and interest on any such indebtedness. Any inability to obtain additional financing when needed could require us to significantly curtail, or possibly cease altogether, our operations. There can be no assurance that our lenders will not declare an event of default and demand immediate payment or seek to attach our assets. As of August 31, 2008, we also owe $$3,938,924 to General Electric Capital Corporation. In 2000, we entered into the first of several loan renewals with G.E., the most recent of which requires certain fees and interest to be paid on May 1, 2008 and shall expire on April 1, 2009 at which time all sums owing to GE are due and payable. A default of this obligation or failure to negotiate a renewal could result in the delisting and/or bankruptcy of the Company.
Our assets serve as collateral for various loan obligations and therefore may not be available for distribution to stockholders in the event of liquidation.
We have previously granted security interests in all of our assets to several lenders, including the holder of notes in the principal and interest amount of $178,520 issued in a placement which was completed in January 2000, General Electric Capital Corporation pursuant to a Master Security Agreement originally entered into in May 1997 and liens in favor of BFI Finance on all assets of TAP Holdings pursuant to a Loan and Security Agreement entered into in November, 2004.
As of August 31, 2008, we were indebted to G.E. in the amount of approximately $3,938,524 including interest. As a result of the aforementioned security interests, creditors would be entitled to collect upon the assets prior to any distribution being available to holders of our Common Stock or Preferred Stock.
The BFI loan is a revolving accounts receivable credit facility secured by all of the business assets of TAP Holdings, LLC as well as a limited personal guaranty from TAP's former chairman (who is not an employee of Cash Technologies). As of August 31, 2008 we owed BFI approximately $205,703 including interest. The outstanding balance owed to BFI is expected to be paid from the sale of certain assets of TAP and refunded insurance deposits.
Any additional financing that we may obtain may substantially dilute the interests of our stockholders
To the extent that we obtain additional financing through the issuance of additional equity securities in the future, such issuance may involve substantial dilution to our then-existing stockholders.
Risks Related to CPI Holdings, LLC
CPI is expected to be substantially dependent on its major customers; initially Autozone, Pep Boys, and CARQUEST, Mercury Marine and ATG. These customers have accounted thus far for approximately 77% of CPI's revenue. The loss of any of these customers would have a material adverse affect on CPI's revenue.
The market for fuel system products is shrinking.
Until and unless CPI begins sales of turbocharger and/or other products under consideration, all or virtually all of CPI's revenue will be from the sale of rebuilt carburetors and air conditioning compressors. Sales of carburetors have fluctuated and may continue to fluctuate or decline as the number of vehicles using carburetors continues to decline. CPI expects to compensate for this decline by increasing its market share and from routine price increases but there is no assurance that it can succeed in this effort.
CPI may not fully recover the carrying value of its inventory.
As of August 31, 2008, CPI had a carrying value of $11,967,341 for its inventory. In May 2008, at the time CPI's assets were purchased, an obsolescence reserve of $1,113,200 was established to cover potential inventory impairment. In future periods, additional reserves may be taken based on CPI's inventory, which could result in a substantial expense and negatively impact CPI's financial results.
The turbocharger market is competitive and sales are uncertain
Following the acquisition of the Turbomotive assets (see above), CPI intends to manufacture and distribute turbochargers though its retail and other channels. While CPI's retailers have indicated their interest in carrying the company's turbo products, there can be no assurance that the retail channel will be timely activated or produce sufficient revenues to meet CPI's objectives. In addition, other larger manufacturers of turbos, such as Honeywell and Borg-Warner, are better capitalized and better known than CPI and could negatively impact CPI's sales if they targeted the same markets.
Turbocharger manufacturing may be delayed
Following the acquisition of the Turbomotive assets, CPI will begin to establish manufacturing operations to produce turbochargers at its factory in Hope, Arkansas. While CPI's management has manufactured turbos in the past and believes that it possesses the necessary expertise to do so in the future, various manufacturing start-up problems, including engineering, supply chain, quality control or other issues, or insufficient capital to purchase needed tooling or equipment, can delay or impede the start or continuation of turbo production and materially impact turbocharger sales.
Risks Related to TAP Holdings, LLC
TAP's revenues have ceased
On October 31, 2007, the Company's TAP Holdings, LLC (dba Tomco Auto Products) subsidiary sold most of its assets to competitor Champion Parts, Inc. TAP received $1.3 million in cash and a secured promissory note for $9.5 million subject to certain offsets to be paid over a maximum of 11 years, however, Champion defaulted on the note when it filed for Chapter 11 bankruptcy protection on October 10, 2007. Champion's bankruptcy and default of the $9.5 million secured note owed by Champion to TAP Holdings required us to write-off the adjusted $7.9 million remaining note balance.
On May 5, 2008 the Company's CPI Holdings, LLC (dba Champion Parts) subsidiary acquired most of the assets of Champion Parts, Inc. from its lender, PNC Bank, following a court-ordered foreclosure, for $2.97 million. To fund the acquisition and working capital, Cash Tech raised approximately $3.4 million in debt and convertible debt.
The acquired assets consist of finished goods, raw materials, component parts, all manufacturing and office equipment, furniture, computers, intangible assets such as the company name, IP, software, records, etc.
Risks Related to Our Healthcare Products
Competition in healthcare software is intense.
Claim-Remedi's healthcare products compete with products offered by companies that are larger, better known and better capitalized than Claim-Remedi. Claim-Remedi has taken steps and developed features designed to differentiate its products, however these steps may prove inadequate in which event Claim-Remedi might have to withdraw one or more of its products which would have a material adverse effect on Cash Technologies.
Claim-Remedi is liable for the loss or misuse of personal information.
Claim-Remedi and its affiliates have custody of, or come into contact with, various types of personal information about consumers, their medical records and financial transactions. The company has taken steps to safeguard such information and requires that its suppliers safeguard such information, however, in the event such safeguards fail to prevent the loss or misuse of personal information, the company might be liable for any damages caused thereby.
Claim-Remedi is substantially dependent on third parties for data processing and customer support.
Most data processing and customer support for Claim-Remedi's products are performed by third parties under various exclusive and non-exclusive contracts. This reduces infrastructure development costs and increases speed to market, however the failure of a third party to perform its duties or renew a service agreement could be materially detrimental to the company's operations.
Essential services related to CashTechCard have ceased.
In December, 2007 the Company's CashTechCard Systems, Inc. subsidiary received notice that its card issuer, First Premier Bank, would be exiting the prepaid debit card industry and its card transaction processing would cease by April 10, 2008. CashTechCard began efforts to secure a replacement issuer on acceptable terms. However, as a result of the significant costs and requirements of replacement issuers and the limited resources available from the Company as it plans to acquire the Champion assets, on April 18, 2008 the board of CashTechCard decided not to continue card issuance and processing activities.
Data processing margins generally decline as products become more mature.
Data processing products usually become "commoditized" as they mature, with a corresponding reduction in profit margins. This is caused by a number of factors, including: Increased competition forcing lower prices; increased volumes creating economies of scale which permit lower prices by competitors, software development costs which are eventually fully amortized also permits lower prices, et al. There is no assurance that Claim-Remedi can generate enough growth in its sales to outpace these market forces.
Risks Related to Our CoinBank Machines
Impairment Charge
We are currently holding for sale approximately 190 CoinBank machines which were manufactured when the Company was actively engaged in the sale of such equipment. The machines have a carrying value of approximately $509,890 at August 31, 2008 and $609,890 at August 31, 2007. We have taken an impairment charge of $100,000 in the quarter ended August 31, 2008 for the carrying value of our CoinBank machines. The impairment was taken due to low inventory turnover for the coin machines. In October, 2008 we sold 10 CoinBank machines for $69,500. In future periods, while we intend to liquidate the remaining machines, additional impairment may be taken. If we conclude that such impairment exists, this could give rise to a substantial expense, which would increase our reported losses. We have identified parties interested in acquiring the remaining units, although there is no assurance that such sales will be consummated and we may not fully recover the carrying value of our CoinBank machines held for sale.
We may not successfully compete with our competitors.
The automotive and healthcare industries are fully developed markets served by large companies who are better able to finance, develop and market products than is the Company. We have attempted to differentiate our products from those of our competitors but competitive products aimed at our target markets could obviate the need for our products or severely limit our market penetration.
We are dependent on third-party manufacturers and on independent contractors, whose nonperformance could harm our business.
We are substantially dependent on the ability of the independent contractors we hire to provide software engineering and support for our products. Any contractor that we utilize or may utilize may not have sufficient capacity to satisfy our needs during any period of sustained demand. The loss of services of independent contractors could disrupt our business. Furthermore, certain of our products access networks which are owned and operated by third parties. The . . .
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