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 March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 000-49723
Money Centers of America, Inc.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 23-2929364
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
700 South Henderson Road, Suite 325, King of Prussia, PA 19406
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(Address of Principal Executive Offices)
(610) 354-8888
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of May 19, 2006, 25,331,136 shares of the registrant's common stock,
par value $0.01 per share, were issued and outstanding.
MONEY CENTERS OF AMERICA, INC.
QUARTERLY PERIOD ENDED MARCH 31, 2006
INDEX TO FORM 10-QSB
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 2006
(unaudited) F-1
Consolidated Statements of Operations for the
Three Months Ended March 31, 2006 and 2005 F-2
(unaudited)
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2006 and 2005 F-3
(unaudited)
Notes to Consolidated Financial
Statements (Unaudited) F-4- F-18
Item 2. Management's Discussion and Analysis or Plan or
Operation 4
Item 3. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Events 15
Item 6. Exhibits 15
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 2006
(UNAUDITED)
ASSETS
Current assets:
Restricted cash $ 4,435,278
Accounts receivable 197,854
Prepaid expenses and other current assets 226,827
---------------
Total current assets 4,859,959
Property and equipment, net 685,913
Other assets
Intangible assets, net 993,307
Goodwill 203,124
Deferred financing costs 48,984
Deposits 180,897
---------------
Total other assets 1,426,312
---------------
Total assets $ 6,972,184
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 826,125
Accrued interest 148,986
Accrued expenses 215,419
Current portion of capital lease 116,075
Convertible notes payable, net of debt discount 638,662
Notes payable, net of debt discount 256,982
Lines of credit 8,467,696
Due to officer 312,195
Commissions payable 1,207,641
---------------
Total current liabilities 12,189,781
Long-term liabilities:
Capital lease, net of current portion 210,732
---------------
Total long-term liabilities 210,732
Total Liabilities 12,400,513
Stockholders' Deficit:
Preferred stock; $.001 par value, 20,000,000
shares authorized none issued and outstanding -
Common stock; $.01 par value, 150,000,000
shares authorized 25,291,136 shares issued and
outstanding 252,911
Additional paid-in capital 11,200,069
Accumulated deficit (16,881,309)
---------------
Total stockholders' deficit (5,428,329)
---------------
Total liabilities and stockholders' deficit $ 6,972,184
===============
See accompanying notes to unaudited consolidated financial statements.
F-1
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
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Revenues $ 3,839,067 $ 5,373,726
Cost of revenues 3,056,745 4,669,778
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Gross profit 782,322 703,948
Selling, general and administrative expenses 607,657 691,217
Noncash Compensation 6,188 69,850
Depreciation and amortization 75,109 181,651
------------- -------------
Operating income (loss) 93,368 (238,770)
Other income (expenses):
Interest income 4,193 4,865
Interest expense (447,532) (505,348)
Noncash interest expense (73,488) -
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Total Interest expense, net (516,827) (500,483)
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Other income 19,152 -
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Total other income 19,152 -
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Net loss $ (404,307) $ (739,253)
============= =============
Net loss per common share - basic $ (0.02) $ (0.03)
============= =============
Net loss per common share - diluted $ (0.02) $ (0.03)
============= =============
Weighted Average Common Shares Outstanding During the period
-Basic 25,179,895 25,126,978
============= =============
-Diluted 25,179,895 25,126,978
============= =============
See accompanying notes to unaudited consolidated financial statements.
F-2
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
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Cash flows from operating activities:
Net loss $ (404,307) $ (739,253)
Adjustments used to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 74,632 181,651
Amortization of debt discount 65,228 1,561
Issuance of common stock for services 3,938 -
Issuance of stock options for services - 57,750
Changes in operating assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other current assets 14,437 15,189
Accounts receivable 144,888 (114,693)
------------ ------------
Increase (decrease) in:
Accounts payable (193,068) 282,907
Accrued interest 32,025 -
Accrued expenses 29,818 (1,343)
Commissions payable 88,165 310,969
Payroll liabilities - 821
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Net cash used in operating activities (144,244) (4,441)
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Cash flows from investing activities:
Purchases of property and equipment (9,706) (148,569)
Cash paid for acquisition and intangible assets (60,000) (105,000)
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Net cash used in investing activities (69,706) (253,569)
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Cash flows from financing activities:
Increase in restricted cash - (772,107)
Net change in lines of credit (1,532,533) 575,163
Capital lease obligation - 116,515
Payments on capital lease obligations (35,328) (38,690)
Advances to officer (58,135) (8,565)
Proceeds from notes payable 50,000 -
Payments on notes payable (40,374) (7,939)
Decrease in loans receivable - 15,000
Sale of common stock, net of $22,500 of offering costs - 479,500
Exercise of stock options and warrants 750 1,500
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Net cash provided by (used in) financing activities (1,615,620) 360,377
------------ ------------
NET INCREASE (DECREASE) IN CASH (1,829,570) 102,367
CASH, beginning of period 6,264,848 432,897
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CASH, end of period $4,435,278 $ 535,264
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 447,532 $ 505,348
============ ============
Cash paid during the period for taxes $ - $ -
============ ============
Supplemental disclosure on non-cash investing and financing
activities:
Acquisition of equipment under capital lease $ 79,580 $ -
============ ============
Reduction of loan payable officer in exchange for related
accrual $ 43,750 $ -
============ ============
Record beneficial conversion feature for convertible debt
and freestanding warrants $ 6,682 $ -
============ ============
See accompanying notes to unaudited consolidated financial statements.
F-3
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Money Centers of America Inc. (the "Company" or "MCA"), a Delaware corporation,
was incorporated in October 1997. The Company is a single source provider of
cash access services, OnSwitch TM Transaction Management System, and the Omni
Network TM. The Company has combined advanced technology with personalized
customer services to deliver ATM, Credit Card Advance, POS Debit, Check Cashing
Services, CreditPlus (outsourced marker services), cash access host program,
customer data sharing and merchant card processing.
(A) Basis of Presentation
The unaudited consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The unaudited consolidated financial statements include the accounts of
the Company and its subsidiary. All material intercompany balances and
transactions have been eliminated. The Company and its subsidiary have fiscal
years ending on December 31.
(B) Principles of Consolidation
The Company consolidates its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(C) Use of Estimates
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the periods presented. Actual
results may differ from these estimates.
Significant estimates during 2006 and 2005 include depreciable lives on
equipment, the valuation of stock options granted for services, the value of
warrants issued in connection with debt related financing, valuation of
intangible assets not having finite lives and the valuation allowance for
deferred tax assets since the Company had continuing operating losses.
(D) 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 March 31, 2006, the balance did
not exceed the federally insured limits. In addition, the Company maintains a
significant amount of cash at each of the casinos. Management believes that the
Company has controls in place to safeguard these on-hand amounts, and that no
significant credit risk exists with respect to cash.
Additionally, the Company had $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-4
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(E) 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 5).
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 March 31, 2006 was
$4,435,278.
(F) 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
March 31, 2006 and 2005.
(G) Equipment
Equipment is stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Equipment consists
primarily of cash access devices and computer equipment. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which ranges from three to seven years.
(H) 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 March 31, 2006 and 2005.
F-5
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(I) Goodwill, Intangibles and Related Impairment
Based on the discounted estimated cash flows of the Company over the remaining
amortization period, the Company's carrying values of the assets would be
reduced to their estimated fair values. Goodwill is assumed to have an
indefinite life pursuant to statement of Financial Accounting Standards No. SFAS
142, "Goodwill and Other Intangible Assets" and accordingly is not amortized but
subject to periodic impairment tests. Acquired contract rights are considered to
have a finite life, pursuant to SFAS 142, to be amortized over the period the
asset is expected to contribute to future cash flows. The Company expects the
period to be 1 to 4 years. The contract rights will also be subject to periodic
impairment tests. In accordance with SFAS No. 142, the Company is required to
evaluate the carrying value of its intangible assets (goodwill) subsequent to
their acquisition.
(J) 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 March 31, 2006 and 2005, no such write-offs were
required.
At March 31, 2006, the net book value of capitalized software was $943,326.
Amortization expense for the periods ended March 31, 2006 and 2005 was $2,077
and $1,947, respectively.
(K) Deferred Financing Costs
Deferred financing costs are capitalized and amortized over the term of the
related debt. At March 31, 2006, the gross amount of deferred financing costs
was $ 176,283 and related accumulated amortization was $ 127,299. At March 31,
2006 the company reflects in the accompanying consolidated balance sheet net
deferred financing costs of $48,984. Amortization of deferred financing costs
was $16,364 and $10,919 at March 31, 2006 and 2005, respectively.
F-6
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(L) 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.
(M) Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 104 for revenue recognition. In general, the
Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably assured.
The following policies reflect specific criteria for the various revenues
streams of the Company:
(1) ATM's and Credit Cards
Fees earned from ATM and credit card advances are recorded on the date of
transaction.
(2) Check Cashing
Revenue is recorded from fees on check cashing services on the date the check is
cashed. If a customer's check is returned by the bank on which it is drawn, the
full amount of the check is charged as bad debt loss. The check is subsequently
resubmitted to the bank for payment. If the bank honors it, the amount of the
check is recognized as a negative bad debt expense. Based on the quick
turnaround of the check being returned by the bank on which it is drawn and the
resubmission to the bank for payment, the Company feels this method approximates
the allowance method, which is a Generally Accepted Accounting Principle. Based
upon past history no allowance was considered necessary at March 31, 2006 and
2005, respectively.
(N) 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.
F-7
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICYS continued
(O) 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 March 31, 2006 and 2005 were $25,224 and $14,229,
respectively.
(P) 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.
(Q) 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.
(R) 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 March 31, 2006 and 2005, respectively. Accordingly, the basic and diluted
EPS are the same.
F-8
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
At March 31, 2006 and 2005 there were 6,595,556 and 5,240,688 shares of issuable
common stock underlying the options, warrants and convertible debt securities,
respectively.
The following table summarizes all common stock equivalents outstanding at March
31, 2006 and 2005, respectively.
2006 2005
---- ----
Common stock options 3,532,500 3,161,250
Common stock warrants 1,507,500 2,079,438
Convertible notes payable 1,555,556 -
----------- -----------
Total Common Stock Equivalents 6,595,556 5,240,688
=========== ===========
(S) Stock Based Compensation
We previously accounted for stock-based compensation issued to our employees
using the intrinsic value method. Accordingly, compensation cost for stock
options issued was measured as the excess, if any, of the fair value of our
common stock at the date of grant over the exercise price of the options. The
pro forma net loss per share amounts are presented as if the fair value method
had been used during the three months ended March 31, 2005 in accordance with
the Company's adoption of SFAS 123(R) effective January 1, 2006.
For purposes of the following disclosures during the transition period of
adoption of SFAS 123(R), the weighted-average fair value of options has been
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted-average assumptions used for grants for the three
months ended March 31, 2006: expected dividend yield of 0%; expected volatility
of 150%; risk-free interest rate of 4%; and an expected term of 7 to 10 years
for options and warrants granted. Had the compensation cost for the quarter
ended March 31, 2005 been determined based on the fair value at the grant, our
net income (loss) and basic and diluted earnings (loss) per share would have
been reduced to the pro forma amount for that period indicated below. For the
quarter ending March 31, 2006, the net income and earnings per share reflect the
actual deduction for option expense as compensation. Compensation recorded for
stock options is a non-cash expense item.
Three Months Ended
March 31
2006 2005
----- ----
Net income (loss) - as reported $(404,307) $(739,253)
Less: stock-based employee compensation (115,380)
determined under the
Net income (loss) (404,307) (854,633)
=========== ==========
Basic and Diluted earnings (loss)per share-as
reported $(0.02) $(0.03)
Basic and Diluted earnings (loss) per share-pro
forma $(0.02) $(0.03)
F-9
2. UNAUDITED INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The accompanying unaudited consolidated
financial statements for the interim periods reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the unaudited consolidated financial
position, operating results and cash flows for the periods presented. These
unaudited consolidated financial statements should be read in conjunction with
the financial statements and related footnotes for the year ended December 31,
2005 and notes thereto contained in the annual report on Form 10-KSB as filed
with the Securities and Exchange Commission. The results of operations for the
three months ended March 31, 2006 are not necessarily indicative of the results
for the full year ending December 31, 2006.
3. CONVERTIBLE NOTES PAYABLE, NET OF DEBT DISCOUNT AND NOTES PAYABLE
(A) Convertible Notes Payable, net of debt discount
At March 31, 2006, the Company had the following outstanding convertible notes
payable:
Convertible notes payable $175,000
Convertible notes payable - related party 525,000
--------------
Total convertible notes payable 700,000
Less: debt discount (61,338)
==============
Convertible notes payable, net of debt discount $638,662
==============
At March 31, 2006, the Company had the following outstanding accrued interest
payable for all convertible and non-convertible debt instruments:
Convertible notes payable - accrued interest $5,781
Convertible notes payable - related party - accrued
interest 26,979
Interest accrued on Notes Payable and Lines of Credit 103,721
Interest accrued on non convertible related note
12,505
---------
Total accrued interest payable $148,986
=========
In March 2006, the Company granted 25,000 warrants to a related party lender
pursuant to a promissory note requiring the issuance of such warrants provided
the original principal and interest was not paid in full by March 1, 2006. The
payment represents additional interest as consideration for extending the note.
Based upon the following factors used to determine the fair value of these
warrants, the Company attributed a fair value to these warrants of $9,300 and
recorded them as non cash interest.
F-10
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(B) Notes Payable, net of debt discount
In March 2006 the Company borrowed an aggregate $50,000 evidenced by two
separate $25,000 promissory notes. The Company recorded a debt discount of
$6,682 related to the beneficial conversion feature attributed to the 25,000
warrants issued in connection with these notes. At March 31, 2006, the Company
recorded amortization of debt discount for these notes totaling $742 as a
component of interest expense. The remaining $5,940 of debt discount is being
amortized over the life of the promissory note.
The following Weighted Average Assumptions reflect all 2006 Option/Warrant
Grants
Exercise price on grant date $0.01- $0.33
------------------------------------ ----------------------
Expected dividend yield 0%
------------------------------------ ----------------------
Expected Volatility 150%
------------------------------------ ----------------------
Risk free interest rate 4%
------------------------------------ ----------------------
Expected life of option 7- 10 years
------------------------------------ ----------------------
During 2006, the Company reflected aggregate principal repayments of $40,374 for
all non-convertible promissory notes.
At March 31, 2006, the Company had the following outstanding notes payable:
Notes payable $211,435
Notes payable - related party 55,000
-----------
Total notes payable 266,435
Less: debt discount (9,453)
===========
Note payable, net of debt discount $256,982
===========
4. CAPITAL LEASES
In February 2006, the Company entered into a new capital lease for 4 ATM
machines at the Golden Acorn Casino in Campo, California. The capitalized cost
of the ATM machines is $63,685. The terms of this lease require an approximately
$19,000 down payment 90 days from installation with the remaining balance of
approximately $44,685 financed over 59 months, at 15.15% for $949 per month.
This note is collateralized by the equipment.
In February 2006, the Company entered into a new capital lease for 1 additional
ATM machine at Sandia Resort & Casino in Albuquerque, New Mexico. The
capitalized cost of the ATM machine is $15,894. The terms of this lease require
an approximately $5,000 down payment 90 days from installation with the
remaining balance of approximately $10,894 financed over 59 months, at 14.53%
for $237 per month. This note is collateralized by the equipment.
F-11
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
Capital lease obligations at March 31, 2006 consisted of the following:
Obligation under capital lease, imputed interest rate at $ 29,032
12.78%; due May 2007; collateralized by equipment
Obligation under capital lease, imputed interest rate at 30,795
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 30,795
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 64,765
7.95%; due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 8.3%; 11,411
due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 22,460
11.63%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 57,970
9.74%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 15,894
14.53%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 63,685
15.15%; due March 2011; collateralized by equipment
Less: current maturities (116,075)
Long term obligation, net of current portion $ 210,732
5. DUE TO OFFICER
During 2006, the Company issued a note to its CEO totaling $43,750.
The note was issued in payment of the CEO's 2005 guaranteed bonus.
This loan and other notes to our CEO bear interest at 10%, are
unsecured and due on demand. The outstanding principal and related
accrued interest balance at March 31, 2006 was $312,195. Of the total,
$2,650 represented accrued interest payable.
6. LINES OF CREDIT
Lines of credit at March 31, 2006 consisted of the following:
Line of credit, maximum availability of $7,000,000, maturity date
May 31, 2006. Subject to various restrictive covenants, interest
is payable monthly at Prime plus 10.75% per annum, borrowings
are collateralized by restricted cash, all the assets of the
Company, 250,000 shares of common stock, and guaranteed by $4,599,094
the principal shareholder of the Company. The Company is
required to pay a monthly facility fee equal to 1/12% of the
highest balance of the line during the month. At March 31,
2006, the Company had recorded related accrued interest payable
of $66,651 in connection with this line of credit.
F-12
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
Line of credit, interest is payable monthly at 9% per annum, the 328,250
line is unsecured and due on demand. This line has been
established with one of our casino customers.
Line of credits, non-interest bearing, unsecured and due on 943,329
demand.
These lines have been established with two of our casino customers.
Line of credit, unsecured and due on demand. The Company pays
a fixed stated amount of interest totaling $1,000 per month.
The payments are recorded and charged to interest expense. This 228,324
line has been established with one of our casino customers. At
March 31, 2006, the Company had recorded related accrued
interest payable of $1,000 in connection with this line of
credit.
On April 12, 2004, the Company borrowed $2,050,000 from an asset-
based lender to make the second Available Money payment. From April
12, 2004 until June 30, 2005 all interest was accrued and added to
the principal balance. The Company has received a one year
extension, with renewal subject to the lender's discretion.This 2,368,699
extension expires May 31, 2006. The note bears interest at 17%
per annum. This note is amortized over 5 years at $68,428 per month.
At March 31, 2006, the Company had recorded related accrued interest
payable of $35,645 in connection with this line of credit. The note is
guaranteed by the majority shareholder of the Company and also
collateralized by all the assets of the Company.
------------
$8,467,696
============
7. STOCKHOLDERS' DEFICIT
Three Months Ended March 31, 2006
(A) Common Stock Issuances
(1) Cash
None
(2) Services
In February 2006, the Company issued 9,158 shares of common stock to
employees for services rendered. The Company valued the shares at the
fair value on the date of issuance which was $.43 per share based on the
quoted closing trading price and recorded non-cash compensation expense
of $3,938.
(3) Exercise of Options/Warrants
In February 2006, an employee and a consultant exercised an aggregate
75,000 options and warrants at $.01 per share. The Company received
proceeds of $750 from the transaction and issued 75,000 shares.
F-13
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(B) Accrued Penalty Shares
At March 31, 2006, pursuant to the terms of a prior common stock offering with
registration rights, the Company has accrued penalties in the amount of 142,500
shares. The Company has valued these shares at $81,048 based on the quoted
closing trading price every two weeks when the penalty accrues. The fair value
of the penalty has been recorded as a component of accrued expenses. In February
2006, the Company's Form SB-2 was declared effective. Pursuant to the terms of
the original agreement once a registration statement had been declared
effective, accrual of penalty shares is no longer required. As of February 2006,
the penalty shares have ceased accruing.
(C) Stock Options
The Company follows SFAS No. 123 for all share based payment awards. The fair
value of each option or warrant granted is estimated on the date of grant using
the Black-Scholes option pricing model. The following is a summary of all stock
option and warrant activity with employees and non-employees during 2006:
(1) Option Grants - Employees
None
(2) Options/ Warrants Exercised - Employees
In February 2006, a consultant exercised 5,000 warrants at $.01 per
share. The Company received proceeds of $50 from the transaction and
issued 5,000 shares of common stock.
In February 2006, an employee exercised 70,000 options at $.01 per share.
The Company received proceeds of $700 from the transaction and issued
70,000 shares of common stock.
(3) Option Forfeitures - Employees
None
(4) Weighted Average Assumptions for 2006 Option Grants - Employees
None
Employee stock option activity for the three months ended March 31, 2006 and
2005 are summarized as follows:
Weighted Average
Number of Shares Exercise Price
------------------- ------------------
Outstanding at December 31, 2004 3,161,250 $ .15
Granted 477,500 .49
Exercised (30,000) .01
Cancelled/Expired (6,250) .40
------------------- ------------------
Outstanding at December 31, 2005 3,602,250 $ .19
Granted - -
Exercised (70,000) .01
Cancelled/Expired - -
-------------------- ------------------
Outstanding at March 31, 2006 3,532,500 $ .20
F-14
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
The following table summarizes the Company's employee stock options outstanding
at March 31, 2006:
Options Outstanding
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
.01 2,805,000 7.76-7.82 .01
.33 127,500 1.75-2.72 .27
.42 200,000 8.21 .42
.70-.77 212,500 8.09-8.81 .75
2.00-2.28 187,500 7.17-7.59 2.11
--------------- ----------------
3,532,500 .20
=============== ================
At March 31, 2006 3,532,500 stock options are exercisable with a weighted
average exercise price of $.20.
(D) Warrants
Warrant activity for the period ended March 31, 2006 is summarized as follows:
Number of Weighted Average
Shares Exercise Price
--------------- ----------------
Outstanding at December 31, 2004 2,079,438 $ 3.13
Granted 172,500 .16
Exercised (150,000) .01
Cancelled (644,438) 4.00
--------------- ----------------
Outstanding at December 31, 2005 1,457,500 $ 2.72
--------------- ----------------
Granted 55,000 .17
Exercised (5,000) .01
Cancelled - -
--------------- ----------------
Outstanding at March 31, 2006 1,507,500 $ 2.64
=============== ================
F-15
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
Warrants Outstanding
-----------------------------------------------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
------------------ ------------ ----------------- ----------------------
.01 352,500 6.48-7.82 .01
.33-.35 150,000 3.45-8.56 .34
.40-.44 30,000 9.51 .42
.47-.51 30,000 9.43-9.51 .49
1.00 75,000 2.25 1.00
2.40 112,500 2.58-7.01 2.40
4.00-6.00 757,500 1.00-2.25 4.68
------------
1,507,500
============
All outstanding warrants are exercisable at March 31, 2006.
8. COMMITMENTS AND CONTINGENCIES
(1) Operating Leases
In connection with converting all of the Available Money ATM's, the
Company now pays rent to various mall properties where it has ATM
machines. These monthly rents average $36,000 per month.
The Company is party to a 39-month lease agreement pursuant to which it
rents office space in Pennsylvania at a monthly rent of $2,635. This Lease
expires February 2008.
The Company's total rent expense under operating leases was $125,594 and
$136,547 for the three months ended March 31, 2006 and 2005, respectively.
(2) Casino Contracts
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental fee to
operate at the respective gaming locations.
Typically, the fees are earned by the gaming establishment over the life of
the contract based on one of the following scenarios:
(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 March 31, 2006 the Company has recorded $986,845 of accrued
commissions on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
F-16
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(3) Employment Agreements
(A) CEO
(1) Employment Agreement
In January 2004, the Company entered into a five-year employment
agreement with it's Chairman, President and Chief Executive
Officer. In addition to an annual salary of $350,000 per year
(subject to annual increases at the discretion of the Board of
Directors) (the "Base Salary"), the employment agreement provides
for a $200,000 signing bonus, a guaranteed bonus equal to 50% of
his Base Salary in any calendar year (the "Guaranteed Bonus") and a
discretionary incentive bonus of up to 50% of his Base Salary in
any calendar year pursuant to a bonus program to be adopted by the
Board of Directors (the "Incentive Bonus"). Pursuant to his
employment agreement, the officer is entitled to fringe benefits
including participation in retirement plans, life insurance,
hospitalization, major medical, paid vacation, a leased automobile
and expense reimbursement. Effective March, 2006, the Company
amended the executive's agreement to reduce his guaranteed bonus
for 2005 from 50% of his salary to 12.5% of his salary. At March
31, 2006, the Company had accrued $43,750 for salary.
(2) Commissions Payable
The Company pays sales commission to sales persons closing various
contracts. The CEO was paid $5,449 in sales commission for the
first quarter of 2006.
(B) CFO
The Company entered into an agreement with its Vice President of
Finance and Chief Financial Officer (CFO) dated June 14, 2005 (the
"Employment Agreement") The employment term commences on June 14,
2005 and continues until the close of business on December 31,
2006, with automatic annual renewals thereafter unless either party
gives notice of non-renewal at least thirty days prior to automatic
renewal. The officer's annual salary during the term of employment
under the Employment Agreement shall be no less than $120,000. In
addition, the officer was granted options to purchase 200,000
shares of the Company's common stock with an exercise price of $.42
per share under the Company's Amended and Restated 2003 Stock
Incentive Plan, pursuant to an Award Agreement for Non-Qualified
Stock Option dated June 14, 2005 entered into between the Company
and the officer. The options have a term of ten years and are
exercisable as follows: (a) 50,000 shall be exercisable immediately
on the date of grant; (b) 50,000 shall be exercisable on June 1,
2006; and (c) 100,000 shall be exercisable on June 1, 2007. On
October 20, 2005, the CFO's employment agreement was amended to
increase his annual salary to $145,000 and decrease his maximum
annual bonus compensation to $25,000. At March 31, 2006, the
Company had accrued $6,250 for salary.
(4) Litigation
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street") filed a
Complaint against iGames Entertainment, Inc. and Money Centers of America, Inc.
("MCA") (collectively referred to hereinafter as "iGames") in the United States
District Court for the Eastern District of Pennsylvania, alleging that iGames
breached an Asset Purchase Agreement ("APA") that the parties executed on or
about February 14, 2003. The suit also raises claims for fraudulent
misrepresentation and intentional interference with contractual relations. By
virtue of the APA, Lake Street sold to iGames all of Lake Street's right, title
and interest in a casino game called "Table Slots." Lake Street alleges that it
is entitled to additional compensation for the game that exceeds what was agreed
to. This matter is still in the pleadings stage and iGames has moved to dismiss
the plaintiff's claims for fraudulent misrepresentation and intentional
interference with contractual relations, as well as to strike all claims for
punitive damages. We are vigorously defending this action and believe that Lake
Street's claims for additional compensation and damages lack merit.
F-17
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
9. CUSTOMER CONCENTRATIONS
For the three months ended March 31, 2006, approximately 59% of total revenues
were derived from operations at two full service casinos. No other customers
represented more than ten percent of our total revenues for the three months
ended March 31, 2006. (See Subsequent Events)
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 March 31, 2006
was approximately $8 million. The interest rate on the $8 million is prime plus
zero. Effectively the Company rents this cash. The Company does not reflect this
cash as an asset or the loan as a liability on its balance sheet at March 31,
2006. Interest expense from this cash was $74,367 for the three months ended
March 31, 2006.
11. GOING CONCERN
The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has a
working capital deficit of $7,329,822, a stockholders' deficit of $5,428,329 and
an accumulated deficit of $16,881,309 at March 31, 2006. The Company also
reflected a net loss of $404,307 and net cash used in operations of $144,244,
for the three months ended March 31, 2006. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management is in the process of implementing its business plan. Additionally,
management is actively seeking additional sources of capital, but no assurance
can be made that capital will be available on reasonable terms. Management
believes the actions it is taking allow the Company to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
12. SUBSEQUENT EVENTS
In April 2006, 2 employees exercised 40,000 options at $.01 per share. The
Company received proceeds of $400 from the transaction and issued 40,000 shares.
In April 2006, the Company was given notice that a casino customer will not
renew its contract which ends May 6, 2006. The Customer accounted for
approximately $5.3 million in revenue and approximately $460,000 in gross profit
for the year ended December 31, 2005.
In May 2006, the Company issued a promissory note in the amount of $25,000. The
note bears interest at 10% per annum and all principal and interest is due at
maturity February 2007 or earlier at the option of the holder or upon a Change
in Control. In the event that the note is not repaid in full within ninety (90)
days following the maturity date, additional interest is due and payable in an
amount equal to ten percent (10%) of the unpaid amount. Thereafter, additional
interest accrues each sixty (60) days in an amount equal to twenty-five percent
(25%) of the unpaid amount.
F-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 14, 2006. The following discussion should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
included elsewhere in this report.
Item 2 - Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis of the results of operations,
financial condition and liquidity should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere in this
report. These statements have been prepared in accordance with accounting
principles generally accepted in the United States. These principles require us
to make certain estimates, judgments and assumptions that affect the reported
amount of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and related liabilities. On a going forward basis, we evaluate
our estimates based on historical experience and various other assumptions that
are believed to be reasonable under the circumstances, the result of which form
the basis for making judgments about carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
History
We are a single source provider of cash access services, the
ONSwitch(TM) transaction management system and the Omni Network to the gaming
industry. We combine advanced technology with personalized customer services to
deliver ATM, Credit Card Advance, POS Debit, Check Cashing Services, CreditPlus
outsourced marker services, and merchant card processing.
We were formed as a Delaware corporation in 1997. Prior to March 2001,
we were a development company focusing on the completion of a Point of Sale
("POS") transaction management system for the gaming industry. In March 2001, we
commenced operations with the launch of the POS system at the Paragon Casino in
Marksville, LA.
On January 2, 2004, iGames Entertainment, Inc. acquired us pursuant to
our merger with and into a wholly-owned subsidiary of iGames formed for that
purpose. In addition, on January 6, 2004, iGames acquired Available Money, Inc.,
an operator of free-standing ATM machines in casinos. The business operations of
Available Money were combined with our business operations. As a result of the
acquisition of Available Money and our continued growth, we currently provide
services in 27 locations across the United States.
Our acquisition by iGames was treated as a recapitalization and
accounted for as a reverse acquisition. Although iGames was the legal acquirer
in the merger, we were the accounting acquirer since our shareholders acquired a
majority ownership interest in iGames. Consequently, our historical financial
information is reflected in the financial statements prior to January 2004. All
significant intercompany transactions and balances have been eliminated. We do
not present pro forma information, as the merger was a recapitalization and not
a business combination.
On October 15, 2004, pursuant to an Agreement and Plan of Merger dated
as of August 10, 2004 (the "Merger Agreement") by and between iGames and us,
iGames was merged with and into us. Pursuant to the Merger Agreement, the holder
of each share of iGames' common stock received one share of our common stock,
and each holder of shares of iGames' Series A Convertible Preferred Stock
received 11.5 shares of our common stock. Options and warrants to purchase
iGames' common stock, other than warrants issued as part of the merger
consideration in iGames' January 2004 acquisition of us (the "Merger Warrants"),
are deemed options and warrants to purchase the same number of shares of our
common stock with no change in exercise price. The Merger Warrants were
cancelled in exchange for 1.15 shares of our common stock for each share of
common stock purchasable thereunder.
4
As a result of this merger, we have retained our December 31 fiscal
year end.
Our business model is to be an innovator and industry leader in cash
access and financial management services for the gaming industry. Within the
funds transfer and processing industries there exists niche markets that are
capable of generating substantial operating margins without the requirement to
process billions of dollars in transactions that is the norm for the industry.
We believe there is significant value to having a proprietary position in each
phase of the transaction process in the niche markets where management has a
proven track record. The gaming industry is an example of such a market and is
currently where we derive the majority of our revenues. We have identified other
markets with similar opportunities, however we have not executed any plans to
exploit these markets at this time.
Current Overview
Our core business of providing single source full service cash access
services in the gaming industry is the source of our revenue and profits in
2006. We have also launched several new services in the last 2 years, such as
our ONSwitch(TM) Transaction Management System, CreditPlus, Cash Services Host
Program, and the Omni Network(TM) that have helped to differentiate our product
offering in the marketplace.
Our core business generates revenues from transaction fees associated
with each unique service we provide, including ATMs, credit card advances, POS
Debit, check cashing, markers and various other financial instruments. We
receive our fees from either the casino operator or the consumer who is
requesting access to their funds. The pricing of each transaction type is
determined by evaluating risk and costs associated with the transaction in
question. Accordingly, our transaction fees have a profit component built into
them. Furthermore, reimbursement for electronic transactions are guaranteed by
the credit or debit networks and associations that process the transactions as
long as procedures are followed, thereby reducing the period of time that trade
accounts receivable are outstanding to several days.
Companies providing cash access services to the gaming industry face
some unique challenges and opportunities in the next ten years. Many companies
in the industry have merged, been acquired or have recapitalized in order to
capitalize on the trends identified in the gaming industry.
Historically, providers of cash access services to the gaming industry
had cash flow margins that were generally higher than those experienced in the
funds transfer and processing industries. Growing competition and the maturing
of the market has resulted in a decline in these margins as companies have begun
marketing their services based on price rather than innovation or value added
services. This trend is highlighted by the number of companies that promote
revenue growth and an increased account base but experience little increase in
net income. This trend is magnified by the fact that the largest participant in
the industry has close to 65% market share and has begun to forgo margin in
order to retain business. Companies that can adapt to the changing market and
can create innovative products and services stand at the forefront of a new wave
in revenue and profit growth.
Substantially all gaming facilities provide ATM services, credit card
cash advances, debit, and/or check cashing services to their customers. Services
are typically outsourced and provided on an exclusive basis for an average of
two to five years. Each year, approximately 400 accounts totaling $300 million
in revenue are put out to bid. Currently there are five major companies,
including us, that have proprietary systems to compete for this business.
Although this market has matured from a pricing perspective, the demand for the
services from the end user is still strong.
5
Like most maturing markets, the companies that succeed are those that
are capable of reinventing themselves and the markets they serve. We believe
that smaller gaming properties will always look to have cash access services
provided in the traditional manner. However, there are several major trends
occurring in the gaming industry that will have a major impact on our industry
and will determine which companies emerge as industry leaders:
1. Consolidation of major casino companies that will put pressure on other
major casino companies to follow suit and will put pressure on smaller
casino companies to focus on service and value added amenities in order
to compete.
The trend towards consolidation of the major gaming companies has
continued and will make it difficult to continue to offer our services in the
traditional manner. The economics are too compelling for the gaming operators
not to consider internalizing these operations in order to generate additional
revenue and profits to service the debt associated with the consolidation. Our
preparation has continued to position us to capitalize on this trend. We have
prepared for this change and have already begun to offer our systems and
services through the issuance of Technology and Use Agreements for our
ONSwitch(TM) Transaction Management System. Instead of outsourcing the cash
services operations, ONSwitch(TM) offers turn-key processing capabilities for
internal use by the casino. This means casinos will license our technology so
they can operate and maintain their own cash access services, including the
addition of their merchant card processing. Our size makes us uniquely capable
of adapting to this change. Though the license agreements do not have the same
revenue potential as a traditional cash services contract, the net income
derived from these agreements is higher and the user agreements are for a longer
period of time. For instance, the standard outsourced contract is from one to
three years in length, while we offer ONSwitch(TM) only under five to ten year
licenses. It is in the casino's interest to license ONSwitch(TM) for the longer
period of time as well. Also, we will not have the same capital expenditures or
vault cash requirements that we experience in performing traditional cash access
services. Furthermore, our larger competitors have spent years trying to conceal
the economic benefits of this type of offering because their large
infrastructure is designed to only support an outsourced solution.
2. Ticket In-Ticket Out technology growth exceeding expectations.
The first major casino company to remove coins from the casino floor
was Caesars Palace in Atlantic City, NJ. Since then, slot machine manufacturers
have developed a technology that prints and accepts bar-coded tickets at the
slot machine instead of accepting or dispensing coins. It was originally
anticipated that it would take 10-15 years for the industry to fully adopt this
technology. It appears it may only take half this amount of time. This presents
a problem to casino operators. They now have tens of thousands of bar-coded
tickets a day that need to be redeemed for cash. This has paved the way for
self-service ticket redemption technology so customers do not have to go to the
casino cage in order to redeem their tickets. The initial ticket redemption
machines placed in service have proven to be too big and too expensive. Most
casino operators have to wait until budget season to appropriate the necessary
funds in order to even consider the acquisition of the required equipment. We
believe this functionality will ultimately reside on the ATM machine thus
eliminating the requirement to purchase new equipment and eliminating the need
to remove a slot machine to make room for a stand-alone ticket redemption
device. We are developing technology that will allow ticket-redemption
functionality on our cash access devices. There is still the problem of security
with the bar-coded ticket, which is as good as cash. Many casino operators will
refuse to allow vendors to handle the tickets for security and fraud concerns.
This is an additional economic benefit of our plan to have the casino operator
internalize their cash access services because only the casino's personnel will
handle the tickets in the situations where they are licensing our services.
3. Execution of long-term and stable compacts for Indian Casinos in
numerous state jurisdictions has made traditional capital more readily
available paving the way for a new wave of expansion and the resulting
need for new sources of revenue and customer amenities.
Recent shortfalls in state budgets have brought the tribal and state
governments together to execute long-term compacts that meet the financial needs
of both parties. In recent years, California, Arizona, New Mexico and Wisconsin
are just a few examples of this development. The added financial stability for
Indian casinos has made traditional capital more readily available to tribes,
leading many tribes to undertake expansion of casino facilities and operations.
6
In order to support this expansion, Indian casino operators will seek
new sources of revenues and new amenities to attract and retain more quality
customers. One of the most critical customer amenities in casino operations is
the availability of credit. Traditional gaming markets, such as Las Vegas and
Atlantic City, rely on credit issuance for up to 40% of their revenues. These
markets issue credit internally and rely on specialized credit reporting in
their risk management decisions. Significant capital investment in technology is
required for these transactions to be executed efficiently. However, within the
$15 billion dollar Indian Gaming market there are virtually no credit services
currently available. Approximately 26 of 29 states that have approved Indian
Gaming do not allow the Tribes or their respective casinos to issue credit. The
lack of credit play is also due to the lack of a third party credit issuer that
is capable of facilitating the transactions. Our CreditPlus platform allows
Indian casinos to issue credit to players, providing Indian casinos with a guest
amenity that is already widely accepted in traditional jurisdictions. Our
ability to convert this market opportunity into revenue is largely dependent on
the success of our sales efforts in educating casinos in the Indian Gaming
market regarding the advantages of CreditPlus and its compliance with the
regulatory requirements.
Our Cash Services Host Program is uniquely aimed at capitalizing on the
need for new profitable guest amenities. Where most guest amenities require
additional expenses, this service helps the casino operator generate more
revenues. This service allows customers to facilitate cash access transactions
from the slot machine or gaming table. Our hosts are available to bring the
transaction to the guest, which is viewed as a valuable customer amenity, while
driving more money to the gaming floor for the casino operator.
The acquisition of Available Money continues to provide challenges for
management in terms of the longer than expected conversion of this portfolio to
our processing platform and the renegotiation or termination of nonprofitable
contracts. We have been successful in renegotiating several of the Available
Money contracts to increase the fees that we can charge under those contracts,
the benefits of which we began to recognize in September 2005. Certain other
contracts that were not profitable and that we were unable to renegotiate have
been or will be terminated. We expect that the last of the contracts we have
intentionally terminated because they were unprofitable will be in the second
quarter of 2006. This will continue to decrease revenue but will have a positive
affect on cash flow and net income as our last 3 quarters have illustrated.
We launched our ONSwitch(TM) Transaction Management System in January
2006 and we began to offer ONSwitch(TM) to our customers as a "turn-key"
solution that they can use to process and facilitate their own transactions
without using a vendor. ONSwitch(TM) allows a gaming operator to leverage
existing infrastructure to internalize the delivery and operation of cash access
services, retail merchant card processing, automated ticket redemption, and
player's club redemptions.
With ONSwitch(TM), we will generate revenues from licensing fees and
ongoing support fees rather than providing cash access services ourselves.
Although our recurring revenues from a particular casino will be substantially
reduced, we will no longer incur the costs associated with on-site personnel and
equipment and interest expense on the substantial working capital required for
vault cash to support our current services. This will enable us to support a
much larger customer base.
We believe that the economics of our business are too compelling for
gaming operators not to consider internalizing cash access operations in order
to generate additional revenue and profits, especially when these operations are
virtually identical to a gaming operator's core competencies. Substantially all
gaming facilities provide ATM services, credit card cash advances, debit, and/or
check cashing services to their customers.
In January 2006 we also made a conscious effort to increase our sales
team, both inside sales and independent sales and step up our marketing in
conjunction with the marketing of ONSwitch(TM) and the Omni Network(TM). The
positive effects of this effort are beginning to bear fruit. We signed 4 new
contracts in April of 2006 and we have increased our sales pipeline by 400%. Our
increased investment in sales and marketing in the first quarter was
approximately $100,000. 60% of this increase was related to a trade show
expenses to launch our new products. Although, we think this was wise
investment, with the loss of our contract at the Sycuan Casino (discussed
below), management believes we can be just as effective without such an increase
in the tradeshow budget. We feel that the most important piece of our increased
sales activity is our sales people.
7
In April 2006 we were notified that our contract with the Sycuan casino
would not be renewed at its May 2006 expiration. We did not lose this contract
based on service or diversity of products, but rather due to very aggressive
pricing by a competitor. We feel that our competitor irresponsibly bid for the
business and will either lose money or provide poor customer service and less
money to the casino floor.
This contract represented approximately 27.3% of our gross revenues and
12.7% of our gross profit for the year ended December 31, 2005. Although we had
hoped to retain this customer, we recognized that our contract might not be
renewed and made appropriate cost reduction plans. We anticipate that we will be
able to offset most if not all of the lost cash flow by curtailing of expenses,
deferring certain software development, reduction in nonsales personnel,
repositioning of employees, deferring certain planned investor relations
activities, and a reduction in trade show expenses.
None of the personnel reductions will be in sales. We feel that the
hiring of two new sales people in January 2006 and the increased pipeline of
potential business is critical to our future. As a result of these efforts and
the extremely positive reception of ONSwitch(TM) and the Omni Network, we are
confident that we will execute one or more letters of intent for ONSwitch(TM) in
the second quarter of 2006. In addition, we believe that we will be able to
offset the loss of the Sycuan contract in the near future with new traditional
contracts. We have begun to illustrate this with the signing of 4 new contracts
in April of 2006.
Our current cost of capital remains high as we have delayed our efforts
to recapitalize our balance sheet due to our focused efforts to deploy
ONSwitch(TM) on schedule and our new sales and marketing of ONSwitch(TM). Now
that these have been accomplished, we consider recapitalization of our balance
sheet a major priority for the remainder of 2006. The success of this
recapitalization will reduce the interest rates we pay on our lines of credit,
which will lower our expenses and contribute to our profitability. The ability
to continue our growth will be largely dependent on our ability to identify and
secure capital at reasonable rates.
We believe that it is necessary to increase our working capital
position so that we can capitalize on the profitable trends in the industry
while maintaining and servicing our current customer base and integrating
acquired operations such as Available Money. Without sufficient working capital,
we would be forced to utilize working capital to support revenue growth at the
expense of executing on our integration and conversion plans. This would result
in substantially higher operating costs without the assurance of additional
revenues to support such costs
Critical Accounting Policies
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
Revenue Recognition. In general, we record revenue when persuasive
evidence of an arrangement exists, services have been rendered or product
delivery has occurred, the sales price to the customer is fixed or determinable,
and collectability is reasonably assured. The following policies reflect
specific criteria for the various revenue streams of the Company:
ATM's and Credit Cards: Fees earned from ATM and credit card advances
are recorded on the date of transaction.
8
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 I, the amount of the check is
recognized as negative bad debt expense.
Check Cashing Bad Debt. The principal source of bad debts that we
experience are due to checks presented by casino patrons that are ultimately
returned by the drawer's bank for insufficient funds. We account for these check
cashing bad debts on a cash basis. Fees charged for check cashing are recorded
as income on the date the check is cashed. If a check is returned by the bank on
which it is drawn, we charge the full amount of the check as a bad debt loss. If
the bank subsequently honors the check, we recognize the amount of the check as
a negative bad debt. Based on the quick turnaround of the check being returned
by the bank on which it is drawn and our resubmission to the bank for payment,
we feel this method approximates the allowance method, which is a Generally
Accepted Accounting Principle.
Goodwill and Long-Lived Intangible Assets. The carrying value of
goodwill as well as other long-lived intangible assets such as contracts with
casinos is reviewed if the facts and circumstances suggest that they may be
impaired. With respect to contract rights in particular, which have defined
terms, this will result in an annual adjustment based on the remaining term of
the contract. If this review indicates that the assets will not be recoverable,
as determined based on our discounted estimated cash flows over the remaining
amortization period, then the carrying values of the assets are reduced to their
estimated fair values. Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill And Other Intangible Assets"
which eliminates amortization of goodwill and certain other intangible assets
and requires annual testing for impairment. The calculation of fair value
includes a number of estimates and assumptions, including projections of future
income and cash flows, the identification of appropriate market multiples and
the choice of an appropriate discount rate. In our experience, forecasts of cash
flows based on historical results are relatively dependable. We use the
remaining contract term for estimating contract periods, which may vary from
actual experience due to early termination that cannot be forecast. We use our
current cost of funds, which is a variable rate, as the discount rate. Use of a
higher discount rate would have the effect of reducing the calculated fair
value, while use of a lower rate would increase the calculated fair value. In
connection with the acquisition of Available Money (our only acquired reporting
unit), goodwill was allocated based on the excess of the final purchase price
over the value of the acquired contract rights, determined as described above.
Stock Based Compensation. We previously accounted for stock-based
compensation issued to our employees using the intrinsic value method.
Accordingly, compensation cost for stock options issued was measured as the
excess, if any, of the fair value of our common stock at the date of grant over
the exercise price of the options.
Results of Operations
Three Months Ended March 31, 2006 (Unaudited) vs. Three Months Ended
March 31, 2005 (Unaudited)
Three Months Ended Three Months Ended
March 31, 2006 ($) March 31, 2005 ($) Change ($)
------------------- ------------------- ------------
Net Loss (404,307) (739,253) 334,946
Revenues 3,839,067 5,373,726 (1,534,659)
Cost of services 3,056,745 4,669,778 (1,613,033)
Commissions & Rents Paid 1,910,124 2,940,407 (1,030,283)
Wages & Benefits 618,169 508,490 109,679
Processing Fee & Service Charges 369,653 456,441 (86,788)
Bad Debts 13,207 350,216 (337,009)
ATM Lease Fees & Maintenance 55,913 193,742 (137,829)
Cash Replenishment Services 9,386 145,015 (135,629)
Other 80,293 75,467 4,826
Gross Profit 782,322 708,813 73,509
Selling, General and Administrative Expenses 607,657 691,217 (83,550)
Contributions 9,500 - 9,500
Management Compensation 173,750 130,769 42,981
Marketing 25,224 14,229 10,995
Professional Fees 93,800 367,376 (273,576)
Seminars 10,597 - 10,597
Trade Show & Sponsorships 67,422 7,838 59,584
Travel 71,585 78,981 (7,396)
Other 155,779 92,024 63,755
Noncash Compensation 6,188 69,850 (63,662)
Depreciation and amortization 75,109 181,651 (106,542)
Interest expense, net (516,827) (500,483) 16,344
Other income (expenses) 19,152 - 19,152
9
Our net loss decreased by approximately $335,000 during the three
months ended March 31, 2006 due to an increase in gross profit of approximately
$74,000 a decrease in S, G & A of approximately $176,000, a decrease in noncash
compensation of approximately $64,000 due to one-time charges for noncash
compensation during 2005 that were not repeated in 2006, and a decrease in
depreciation and amortization of approximately $107,000 due to reduced
amortization of casino contracts reflecting the termination of certain contracts
in 2005
Our revenues as a whole decreased by approximately 29% during the three
months ended March 31, 2006 as compared to the three months ended March 31,
2005. The Money Centers portfolio (consisting primarily of full-service casino
contracts) increased 3.1%, while the Available Money portfolio (consisting of
ATM contracts) decreased 74%. This reflected a conscious effort to terminate
unprofitable contracts from the Available Money portfolio as demonstrated by the
fact that gross profit increased. Our cost of services decreased as a percentage
of revenues from 86% to 80%, primarily due to a significant reduction in bad
debt expense due to better adherence to our check cashing and collection
policies.
Our selling, general and administrative expenses decreased slightly
during the three months ended March 31, 2006 primarily due to decreased legal
expenses reflecting the settlement of litigation in 2005, offset by increases in
our trade show and marketing of new products, and sponsorship of various tribal
activities. Our depreciation and amortization expenses decreased during the
three months ended March 31, 2006 primarily due to the elimination of
amortization that otherwise would have been realized on contracts that
terminated in 2005.
Our interest expense increased slightly by $7,044 during the three
months ended March 31, 2006. Lower borrowing levels resulting from the
termination of unprofitable contracts were offset by approximately $74,000 of
non-cash interest expense related to certain bridge loans we took out in the
latter part of 2005 and the effect of higher interest rates. Our interest rate
is variable and has increased approximately 200 basis points in the last year.
Other income in the first quarter of 2006 represented amounts received
that related to the 2005 settlement of the Available Money lawsuit.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal quarter
ended March 31, 2006 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
10
Changes in Financial Position, Liquidity and Capital Resources
Three Months Three Months
Ended March 31, Ended March 31,
2006 ($) 2005 ($)
(Unaudited) (Unaudited) Change ($)
------------------ ---------------- --------------
Net Cash Used in Operating Activities (144,244) (4,441) (139,803)
Net Cash Used in Investing Activities (69,706) (253,569) 183,863
Net Cash Provided by (Used in) Financing Activities (1,615,620) 360,377 (1,975,997)
Net cash used in operations increased by approximately $140,000,
primarily due to a decrease in our net loss combined with better collections of
accounts receivable offset by a substantial reduction in accounts payable.
Net cash used in investing activities decreased by approximately $184,000
due to the fact we did not have any new property installations in the first
quarter of 2006 and we decreased our expenditures in software development.
Net cash provided by financing activities decreased by approximately
$1,976,000 during the quarter March 31, 2006 primarily because we had no need
for cash to finance software development or installations of new properties . In
addition, due to the timing of the end of the quarter we had reduced borrowings
for our vault cash.
A significant portion of our existing indebtedness is associated with
our vault cash line of credit of $7,000,000 with Mercantile Capital, L.P., which
we use to provide vault cash for our casino operations. Vault cash is not
working capital but rather the money necessary to fund the float, or money in
transit, that exists when customers utilize our services but we have yet to be
reimbursed from the Debit, Credit Card Cash Advance, or ATM networks for
executing the transactions. Although these funds are generally reimbursed within
24-48 hours, a significant amount of cash is required to fund our operations due
to the magnitude of our transaction volume. Our vault cash loan accrues interest
at the base commercial lending rate of Wilmington Trust Company of Pennsylvania
plus 10.75% per annum on the outstanding principal balance, with a minimum rate
of 15% per annum, and has a maturity date of May 31, 2006. Our obligation to
repay this loan is secured by a first priority lien on all of our assets. The
outstanding balance on our vault cash line of credit fluctuates significantly
from day to day based on activity and collections, especially over weekends.
Vault cash for our ATM operations at locations where we do not provide full cash
access services (primarily Available Money customers) is provided by our ATM
processing provider under the terms of the ATM processing agreement, at a cost
equal to the ATM processor's cost of funds, which currently is the Prime Rate.
We incurred $3,850,000 of debt associated with the acquisition of
Available Money. $2,000,000 of this indebtedness is a loan provided by Chex
Services, Inc. As a result of the settlement of our lawsuit with Equitex, Inc.
and Chex Services, Inc. related to our terminated acquisition of Chex Services,
Equitex and Chex Services agreed to cancel our outstanding $2,000,000 principal
liability as well as any liability for accrued but unpaid interest under that
promissory note and we agreed to pay Chex $500,000 within 60 days of July 21,
2005. We paid this amount in September 2005. In part in order to fund the
payment to Chex Services, Inc., in September and October 2005 we borrowed
$800,000 from individuals, including the uncle and brother of our Chief
Executive Officer, pursuant to convertible notes that bear interest at 10% per
annum and mature in September and October of 2006. Each Note is convertible into
shares of our common stock at an exercise price equal to 85% of the trading
price at the time of exercise, with a floor of $.45 per share.
The final $1,850,000 of this indebtedness is part of a $2,050,000
bridge loan provided by Mercantile Capital, L.P. This bridge loan was accruing
interest until June 30, 2005 when it was converted into a 5 year amortizing loan
subject to annual renewal at the lender's discretion. Our obligation to repay
this loan is secured by a first priority lien on all of our assets. We intend to
refinance this obligation in 2006 and are making every effort to do so. We paid
a facility fee of $41,000 in connection with this loan.
11
On September 10, 2004, we borrowed $210,000 from the father of our chief
executive officer to pay an advance on commissions to a new casino customer.
This loan bears interest at 10% per annum, which is payable monthly. The
principal amount of this loan is repayable in monthly payments payable on the
1st day of each month commencing with the second month following the month in
which we commence operations at Angel of the Winds Casino, and continuing on the
1st day of each month thereafter, provided that, upon any merger of our company,
sale of substantially all of our assets or change in majority ownership of our
voting capital stock, the lender has the right to accelerate this loan and
demand repayment of all outstanding principal and all unpaid accrued interest
thereon. We currently are making $5,000 principal payments per month. The
current balance outstanding at March 31, 2006 is $55,000. In addition, we issued
the lender warrants to purchase 50,000 shares of our common stock at an exercise
price of $.33 per share. Though we anticipate our operating profits will be
sufficient to meet our current obligations under our credit facilities, if we
become unable to satisfy these obligations, then our business may be adversely
affected as Mercantile Capital will have the right to sell our assets to satisfy
any outstanding indebtedness under our line of credit loan or our term loan that
we are unable to repay.
We also have a substantial amount of accounts payable and accrued
expenses. To the extent that we are unable to satisfy these obligations as they
come due, we risk the loss of services from our vendors and possible lawsuits
seeking collection of amounts due. In addition, we have an existing obligation
to redeem 37,500 shares of our common stock from an existing stockholder at an
aggregate price of $41,250. This obligation arose in connection with iGames'
purchase of certain gaming software products for 75,000 shares of our common
stock. In order to complete this transaction under these terms, our former
management granted this stockholder the option to have 37,500 shares of his
stock redeemed. This stockholder has elected to exercise this redemption option.
We are also in the process of replacing all of the former Available
Money ATMs with new ATMs that will be processed on more favorable economic
terms. We have entered into a capital lease agreement to acquire 71 ATMs and
related equipment necessary to complete this conversion. We have reduced the
number of ATM's we will acquire to 33. We have converted approximately 19 of
these ATM's to our processing platform to date. The remaining capital lease
agreement will require us to incur an upfront charge of approximately $80,000
and monthly rental expense of approximately $3,500 over the remaining 59 months
of the lease term.
We are actively seeking various sources of growth capital and strategic
partnerships that will assist us in achieving our business objectives. We are
also exploring various potential financing options and other sources of working
capital. There is no assurance that we will succeed in finding additional
sources of capital on favorable terms or at all. To the extent that we cannot
find additional sources of capital, we may be delayed in fully implementing our
business plan.
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 $16,881,309 as of March 31, 2006 and
our net losses and cash used in operations of $404,307 and $144,244,
respectively, for the three months ended March 31, 2006, our independent
auditors have raised substantial doubt about our ability to continue as a going
concern While we believe that our present plan of operations will be profitable
and will generate positive cash flow, there is no assurance that we will
generate net income or positive cash flow in 2006 or at any time in the future.
Item 3 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2006 (the "Evaluation Date"), and, based
on their evaluation, our chief executive officer and chief financial officer
have concluded that these controls and procedures were effective as of the
Evaluation Date. There were no significant changes in our internal controls or
in other factors that could significantly affect these controls during the
quarter ended March 31, 2006.
12
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act are recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management to allow timely decisions
regarding required disclosure.
Changes in Internal Controls
There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the date we carried our this evaluation.
The Certifying Officers have also indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
Our management, including each of the Certifying Officers, does not
expect that our disclosure controls or our internal controls will prevent all
error and fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the control. The design of any systems of controls also
is based in part upon certain assumptions about the likelihood of future events,
and their can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of these inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street")
filed a Complaint against iGames Entertainment, Inc. and Money Centers of
America, Inc. ("MCA") (collectively referred to hereinafter as "iGames") in the
United States District Court for the Eastern District of Pennsylvania, alleging
that iGames breached an Asset Purchase Agreement ("APA") that the parties
executed on or about February 14, 2003. The suit also raises claims for
fraudulent misrepresentation and intentional interference with contractual
relations. By virtue of the APA, Lake Street sold to iGames all of Lake Street's
right, title and interest in a casino game called "Table Slots." Lake Street
alleges that it is entitled to additional compensation for the game that exceeds
what was agreed to. This matter is still in the pleadings stage and iGames has
moved to dismiss the plaintiff's claims for fraudulent misrepresentation and
intentional interference with contractual relations, as well as to strike all
claims for punitive damages. We are vigorously defending this action and believe
that Lake Street's claims for additional compensation and damages lack merit.
In addition, we are, from time to time during the normal course of our
business operations, subject to various litigation claims and legal disputes. We
do not believe that the ultimate disposition of any of these matters will have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
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, 2006, we issued an aggregate of 9,158 shares of our common
stock to 8 employees in lieu of a portion of cash bonuses otherwise due to them
at an effective price of $.43 per share in a transaction under Rule 701 under
the Securities Act.
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).
14
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.
10.4 Employment Agreement dated as of June 14, 2005 by and between
Money Centers of America, Inc. and Jason P. Walsh
(incorporated by reference to Exhibit 10.1 to the current
Report on Form 8-K filed on June 17, 2005).
10.5 Amendment to Employment Agreement dated as of October 20,
2005 by and between Money Centers of America, Inc. and Jason
P. Walsh.
10.6 Loan and Security Agreement by and between iGames
Entertainment, Inc. and Mercantile Capital, L.P. dated
November 26, 2003 (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-QSB for the fiscal quarter
ended December 31, 2003 filed on February 17, 2004).
10.7 Demand Note payable to the order of Mercantile Capital, L.P in
the principal amount of $250,000 dated November 26, 2003
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-QSB for the fiscal quarter ended December 31,
2003 filed on February 17, 2004.)
10.8 Amended and Restated Agreement and Plan of Merger By and Among
Money Centers of America, Inc., Christopher M. Wolfington,
iGames Entertainment, Inc., Michele Friedman, Jeremy Stein and
Money Centers Acquisition, Inc., dated as of December 23, 2003
(incorporated by reference to Exhibit 2.1 of Current Report on
Form 8-K filed on January 20, 2004).
10.9 Stock Purchase Agreement For the Acquisition of Available
Money, Inc. By iGames Entertainment, Inc., from Helene Regen
and Samuel Freshman dated January 6, 2004 (incorporated by
reference to Exhibit 1.1 of Current Report on Form 8-K filed on
January 21, 2004).
10.10 Software Development Agreement effective September 1, 2004 by
and between Money Centers of America, Inc. and Intuicode LLC.
(Incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form SB-2 filed on February 14, 2004 (File No.
333-122819).
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 May 22, 2006 pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a) of the Principal Executive
Officer as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, by Christopher M. Wolfington,
Chief Executive Officer and Chief Financial Officer.
31.2 Certification dated May 22, 2006 pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a) of the Principal Accounting
Officer as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Jason P. Walsh, Chief Financial
Officer.
32 Certification dated May 22, 2006 pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, made by Christopher M. Wolfington, Chief
Executive Officer and Jason P. Walsh, Chief Financial Officer.
15
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: May 22, 2006 By: /s/ Christopher M. Wolfington
-------------------------------------
Christopher M. Wolfington
Chief Executive Officer
Date: May 22, 2006 By: /s/ Jason P. Walsh
-------------------------------------
Jason P. Walsh
Chief Financial Officer
16