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, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 000-49723
Money Centers of America, Inc.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 23-2929364
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
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
----------------- ---------------
As of May 21, 2007, 30,769,853 shares of the registrant's common stock, par
value $0.01 per share, were issued and outstanding.
MONEY CENTERS OF AMERICA, INC.
QUARTERLY PERIOD ENDED MARCH 31, 2007
INDEX TO FORM 10-QSB
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at
March 31, 2007 (unaudited) 1
Consolidated Statements of Operations
for the Three Months Ended March 31, 2007 and 2006 2
(unaudited)
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2007 and 2006 3
(unaudited)
Notes to Consolidated Financial
Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis or
Plan or Operation 20
Item 3. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered sales of Equity
Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of
Security Holders 30
Item 5. Other information 30
Item 6. Exhibits 30
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
(UNAUDITED)
ASSETS
Current assets:
Restricted cash $ 3,495,467
Accounts receivable 18,471
Prepaid expenses and other current assets 292,088
--------------
Total current assets 3,806,026
Property and equipment, net 999,530
Other assets
Intangible assets, net 1,218,929
Deferred financing costs 1,005,095
Deposits 55,398
--------------
Total other assets 2,279,422
--------------
Total assets $ 7,084,978
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 470,122
Accrued interest 151,905
Accrued expenses 486,256
Current portion of capital lease 219,684
Convertible notes payable, related party 250,000
Lines of credit 2,401,688
Due to officer 281,032
Commissions payable 828,950
--------------
Total current liabilities 5,089,637
Long-term liabilities:
Capital lease, net of current portion 473,199
Note payable, related party 4,750,000
Notes payable, net of debt discount 2,540,000
--------------
Total long-term liabilities 7,763,199
Total Liabilities 12,852,836
Stockholders' Deficit:
Preferred stock; $.001 par value, 20,000,000
shares authorized
0 shares issued and outstanding -
Common stock; $.01 par value, 150,000,000
shares authorized
30,769,853 shares issued and outstanding 306,373
Additional paid-in capital 15,969,329
Accumulated deficit (22,043,560)
--------------
Total stockholders' deficit (5,767,858)
--------------
Total liabilities and stockholders' deficit $ 7,084,978
==============
See accompanying notes to unaudited consolidated financial statements.
1
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2007 2006
----------------- ---------------
Revenues $ 2,169,683 $ 3,839,067
Cost of revenues 1,703,219 3,056,745
----------------- ---------------
Gross profit 466,464 782,322
Selling, general and administrative expenses 527,384 607,657
Noncash Compensation 585,995 6,188
Depreciation and amortization 222,532 75,109
----------------- ---------------
Operating income (loss) (869,447) 93,368
Other income (expenses):
Interest income 4,386 4,193
Interest expense (368,119) (447,532)
Noncash interest expense - (73,488)
----------------- ---------------
Total interest expense, net (363,733) (516,827)
----------------- ---------------
Other income 9,788 19,152
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Total other income 9,788 19,152
----------------- ---------------
Net loss $ (1,223,392) $ (404,307)
================= ===============
Net loss per common share - basic $ (0.04) $ (0.02)
================= ===============
Net loss per common share - diluted $ (0.04) $ (0.02)
================= ===============
Weighted Average Common Shares Outstanding During the period
-Basic 30,769,853 25,179,895
================= ===============
-Diluted 30,769,853 25,179,895
================= ===============
See accompanying notes to unaudited consolidated financial statements.
2
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2007 2006
------------ -----------
Cash flows from operating activities:
Net loss $ (1,223,392) $ (404,307)
Adjustments used to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 222,532 74,632
Amortization of debt discount - 65,228
Issuance of common stock for services 990 3,938
Issuance of stock options for services 585,005 -
Changes in operating assets and liabilities:
Increase (decrease) in:
Accounts payable (29,541) (193,068)
Accrued interest 42,877 32,025
Accrued expenses (40,947) 29,818
Commissions payable (26,831) 88,165
(Increase) decrease in:
Prepaid expenses and other current assets (21,490) 14,437
Accounts receivable 11,713 144,888
------------ -----------
Net cash (used in) operating activities (479,084) (144,244)
Cash flows from investing activities:
Purchases of property and equipment (12,445) (9,706)
Cash paid for acquisition and intangible assets (48,750) (60,000)
------------ -----------
Net cash used in investing activities (61,195) (69,706)
Cash flows from financing activities:
Net change in lines of credit (643,489) (1,532,533)
Payments on capital lease obligations - (35,328)
Advances to officer (13,098) (58,135)
Proceeds from notes payable 72,329 50,000
Payments on notes payable - (40,374)
Exercise of stock options and warrants 621 750
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Net cash used in financing activities (583,637) (1,615,620)
NET (DECREASE) IN CASH (1,123,916) (1,829,570)
CASH, beginning of period 4,619,383 6,264,848
------------ -----------
CASH, end of period $ 3,495,467 $4,435,278
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 368,119 $ 447,532
============ ===========
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 $ 175,000 $ 743,750
============ ===========
Record beneficial conversion feature for convertible debt
Detachable warrants $ - $ 6,682
============ ===========
See accompanying notes to unaudited consolidated financial statements.
3
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Money Centers of America Inc. (the "Company" or "MCA"), a Delaware corporation,
was incorporated in October 1997. The Company is a single source provider of
cash access services, OnSwitch TM Transaction Management System, and the Omni
Network TM. The Company has combined advanced technology with personalized
customer services to deliver ATM, Credit Card Advance, POS Debit, Check Cashing
Services, CreditPlus (outsourced marker services), cash access host program,
customer data sharing and merchant card processing.
(A) Basis of Presentation
The unaudited consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The unaudited consolidated financial statements include the accounts of
the Company and its subsidiaries. The Company and its subsidiaries have fiscal
years ending on December 31.
(B) Principles of Consolidation
The Company consolidates its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(C) Use of Estimates
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the periods presented. Actual
results may differ from these estimates.
Significant estimates during 2007 and 2006 include depreciable lives on
equipment, the valuation of stock options granted for services, the value of
warrants issued in connection with debt related financing, valuation of
intangible assets not having finite lives and the valuation allowance for
deferred tax assets since the Company had continuing operating losses.
(D) Reclassification
Certain prior periods balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or stockholders' deficit.
(E) Cash and Cash Equivalents and Compensating Balances
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with an original maturity date of three months or less to be
cash equivalents.
The Company minimizes its credit risk associated with cash by periodically
evaluating the credit quality of its primary financial institution. The balance
at times may exceed federally insured limits. At March 31, 2007, the balance
exceeded the federally insured limit by $3,436,586. 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.
4
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(F) Restricted Cash
Restricted cash is the balance of cash that is in the Company's bank accounts
and network that is used as collateral for our asset based lender (See Note 3).
The Company does not have access to this cash unless there is an amount over and
above the required amount of collateral. In order to pay operating expenses, the
Company requests that the asset based lender transfer funds into the Company's
unrestricted cash accounts. The restricted cash balance at March 31, 2007 was
$3,495,467.
(G) Accounts Receivable
Accounts receivable arise primarily from ATM, credit card advances and check
cashing services provided at casino locations. Concentration of credit risk
related to ATM and credit card advances are limited to the processors who remit
the cash advanced back to the Company along with the Company's allocable share
of fees earned. The Company believes these processors are financially stable and
no significant credit risk exists with respect to accounts receivable arising
from credit card advances. Accordingly, no allowance was considered necessary at
March 31, 2007 and 2006.
(H) Equipment
Equipment is stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Equipment consists
primarily of cash access devices and computer equipment. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, which ranges from five to seven years.
(I) Long Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell the asset. There were no impairment charges taken during the
periods ended March 31, 2007 and 2006.
5
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(J) Intangibles and Related Impairment
Based on the discounted estimated cash flows of the Company over the remaining
amortization period, the Company's carrying values of the assets would be
reduced to their estimated fair values. Goodwill is assumed to have an
indefinite life pursuant to statement of Financial Accounting Standards No. SFAS
142, "Goodwill and Other Intangible Assets" and accordingly is not amortized but
subject to periodic impairment tests. Acquired contract rights are considered to
have a finite life, pursuant to SFAS 142, to be amortized over the period the
asset is expected to contribute to future cash flows. The Company expects the
period to be 1 to 4 years. The contract rights will also be subject to periodic
impairment tests.
(K) Internal Use Software and Website Development Costs
The Company has adopted the provisions of AICPA Statement of Position ("SOP")
98-1, "Accounting for the Costs of Software Developed or Obtained for Internal
Use", and Emerging Issues Task Force ("EITF" ) Consensus #00-2. "Accounting for
Website Development Costs." The type of costs incurred by the Company in
developing its internal use software and Website include, but are not limited to
payroll-related costs (e.g. fringe benefits) for employees who devote time to
the internal use computer software or Website project, consulting fees, the
price of computer software purchased from third parties and travel expenses
incurred by employees or consultants in their duties directly associated with
developing the software. These costs are either expensed or capitalized
depending on the type of cost and the stage of development of the software and
Website.
The Company makes ongoing evaluations of the recoverability of its capitalized
internal use software and Web site by comparing the amount capitalized for each
module or component of software to their estimated net realizable values. If
such evaluations indicate that the unamortized costs exceed the net realizable
values, the Company writes off the amount by which the unamortized costs exceed
the net realizable values. At March 31, 2007 and 2006, no such write-offs were
required.
At March 31, 2007, the net book value of capitalized software was $1,218,929.
Amortization expense for the periods ended March 31, 2007 and 2006 was $1,798
and $2,077, respectively.
(L) Deferred Financing Costs
Deferred financing costs are capitalized and amortized over the term of the
related debt. At March 31, 2007, the gross amount of deferred financing costs
was $1,299,183 and related accumulated amortization was $294,088. At March 31,
2007 the Company reflects in the accompanying consolidated balance sheet net
deferred financing costs of $1,005,095. Amortization of deferred financing costs
was $144,452 and $16,364 at March 31, 2007 and 2006, respectively.
6
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(M) Derivative Liabilities
In order to determine whether the Company has derivative liabilities, the
Company reviewed SFAS No. 133, SFAS No. 150, EITF No. 00-19 and EITF No. 05-02,
"The Meaning of Convertible Debt Instrument in Issue No. 00-19".
Pursuant to the terms of the Company's outstanding convertible debt and the
associated detachable freestanding warrants, management determined that no
instruments should be classified as a derivative liability. Additionally, there
are no other issued and outstanding instruments which require the application of
the aforementioned accounting guidance.
(N) Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 104 for revenue recognition. In general, the
Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably assured.
The following policies reflect specific criteria for the various 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, 2007 and
2006, respectively.
(O) Cost of Revenues
The cost of revenues primarily includes commissions paid, non management wages,
employee benefits, bad debts, rents paid to contract lessors, transaction
processing costs, cash replenishment fees, non-capitalizable operating lease
fees for ATM's and repairs and maintenance of ATM's.
7
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(P) Advertising
In accordance with Accounting Standards Executive Committee Statement of
Position 93-7, ("SOP 93-7") costs incurred for producing and communicating
advertising of the Company, are charged to operations as incurred. Advertising
expense for the periods ended March 31, 2007 and 2006 were $12,903 and $25,224,
respectively.
(Q) Income Taxes
The Company accounts for income taxes under the Financial Accounting Standards
No. 109 "Accounting for Income Taxes" ("Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period, which includes the enactment date.
(R) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, accounts payable and accrued expenses,
commissions payable, notes payable, convertible notes payable, net of debt
discount, line of credit and due to related party approximate fair value due to
the relatively short period to maturity for these instruments.
(S) Earnings per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share", basic earnings per share is computed by dividing the net
income (loss) less preferred dividends for the period by the weighted average
number of shares outstanding. Diluted earnings per share is computed by dividing
net income (loss) less preferred dividends by the weighted average number of
shares outstanding including the effect of share equivalents. Common share
equivalents consist of shares issuable upon the exercise of certain common stock
purchase warrants, stock options, and convertible preferred stock. The Company
has excluded these common share equivalents from its computation of earnings per
share due to their antidilutive effect as the Company has reflected a net loss
at March 31, 2007 and 2006, respectively. Accordingly, the basic and diluted EPS
are the same.
At March 31, 2007 and 2006 there were 10,476,336 and 6,595,556 shares of
issuable common stock underlying the options, warrants and convertible debt
securities, respectively.
8
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
The following table summarizes all common stock equivalents outstanding at March
31, 2007 and 2006, respectively.
2007 2006
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Common stock options 8,013,280 3,532,500
Common stock warrants 1,907,500 1,507,500
Convertible notes payable 555,556 1,555,556
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Total Common Stock Equivalents 10,476,336 6,595,556
=========== ============
(T) Stock Based Compensation
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123(R), "Share-Based Payment," under the modified prospective method. SFAS No.
123(R) eliminates accounting for share-based compensation transactions using the
intrinsic value method prescribed under APB Opinion No. 25 "Accounting for Stock
Issued to Employees," and requires instead that such transactions be accounted
for using a fair-value-based method. Under the modified prospective method, the
Company is required to recognize compensation cost for share-based payment to
employees based on their grant date fair value from the beginning of the fiscal
period in which the recognition provisions are first applied. For periods prior
to adoption, the financial statements are unchanged, and the pro forma
disclosures previously required by SFAS No. 123, as amended by SFAS No. 148,
will continue to be required under SFAS No. 123(R) to the extent those amounts
differ from those in the Statement of Operations.
During the first three months of 2007, the Company granted 1,265,000 options to
employees that were accounted for pursuant to SFAS No. 123(R) and 123,
respectively.
During the first three months of 2007, the Company granted 900,000 warrants to
non-employees that were accounted for pursuant to SFAS No. 123(R) and 123,
respectively.
Three Months Ended
March 31
2007 2006
------------- ------------
Net loss - as reported $ (1,223,392) $ (404,307)
Add: stock-based employee compensation
determined under the fair value method -- --
Less: stock-based employee compensation
determined under the intrinsic value method
(APB #25) -- --
============= ============
Net loss (1,223,392) (404,307)
============= ============
Basic and Diluted loss per share-as reported $ (0.04) $ (0.02)
Basic and Diluted loss per share-pro forma $ (0.04) $ (0.02)
9
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
2. UNAUDITED INTERIM INFORMATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The accompanying unaudited consolidated
financial statements for the interim periods reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the unaudited consolidated financial
position, operating results and cash flows for the periods presented. These
unaudited consolidated financial statements should be read in conjunction with
the financial statements and related footnotes for the year ended December 31,
2006 and notes thereto contained in the annual report on Form 10-KSB as filed
with the Securities and Exchange Commission. The results of operations for the
three months ended March 31, 2007 are not necessarily indicative of the results
for the full year ending December 31, 2007.
3. CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE
(A) Convertible Notes Payable
During 2005, the Company borrowed $250,000 from a relative of the Company's
President and CEO and issued a convertible promissory note. In connection with
the issuance of this convertible promissory note, the Company issued warrants to
purchase an aggregate of 125,000 shares of its common stock at an exercise price
of $0.01.
The note bears interest at 10% with default interest at 25%. The note is
unsecured and was due in September 2006. The debt is convertible at the option
of the holder into shares of our common stock at a conversion price equal to 85%
of the average of the mean of the closing bid and ask prices for the 10 trading
days immediately preceding the conversion by the holder, but not less than a
floor amount of $0.45 ("floor"). As a result of the established floor price on
these convertible debt instruments, the Company has determined that it has
enough authorized and unissued shares to settle all potential conversions
related to this debt instrument as well any other outstanding equity instruments
that are convertible. This convertible debt instrument is not considered a
derivative liability. Rather, pursuant to the literature in APB No. 14, EITF No.
98-5 and EITF No. 00-27, this instrument is considered convertible debt that
requires an allocation of proceeds between the convertible debt and related
warrants.
At March 31, 2007, the Company was in default with respect to the repayment of
this promissory note. We have reached an agreement in principle to refinance the
remaining $250,000, together with accrued interest, by a $300,000 increase in
the Baena Advisors, LLC facility.
Management used the following weighted average assumptions on the date of issue
when determining the fair value of the freestanding warrants issued in
connection with the convertible debt:
Expected dividend yield 0%
Expected volatility 119% - 127%
Risk free interest rate 5%
Expected life of option 10 years
At March 31, 2007, the Company had the following outstanding convertible notes
payable:
Convertible notes payable - related party $250,000
-----------
Total convertible notes payable $250,000
===========
10
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
At March 31, 2007, the Company had the following outstanding accrued interest
payable for all convertible and non-convertible debt instruments:
Convertible notes payable - related party - accrued
interest $ 40,864
Interest accrued on Notes Payable and Lines of Credit
108,529
Interest accrued on non convertible related note (see
Note 3(B)) 2,512
------------
Total accrued interest payable, Convertible notes $151,905
============
(B ) Notes Payable
Notes payable at March 31, 2007 consisted of the following:
In December 2006 the Company borrowed an aggregate $4,750,000 from a related
party, Baena Advisors, LLC ("Baena"), evidenced by a promissory note. Baena is
owned by Sean Wolfington, the brother of our Chief Executive Officer and 4,750,000
Chairman. Interest on the note is payable monthly and bears interest at 30-day
LIBOR plus 13% per annum. Monthly payments consist of interest only with the full
amount of the note due at the end of the two year term.
------------------------------------------------------------------------------------ ---------------------------------
In December 2006 the Company borrowed an aggregate $2,525,000 evidenced by a
promissory note. Interest on the note is payable monthly and bears interest at a
rate of 12.75% per annum. Monthly payments consist of interest only with the
full
amount of the note due at the end of the two year term. 2,525,000
------------------------------------------------------------------------------------ ---------------------------------
On September 10, 2004, the Company borrowed $210,000 from a family member of our
chief executive officer to pay an advance on commissions to a casino. The note
bears interest at 10% per annum and is payable monthly, beginning October 1,
2004. The principal amount of this note is repayable in monthly payments payable
on the 1st day of each month commencing with the second month following the
month
in which the Company commences operations at the casino. As additional 15,000
consideration for extending the principal amount of this loan to the Company, the
Company issued warrants to purchase 50,000 of the Company's common stock at an
exercise price of $0.33 per share. In March 2006 the Company recorded additional
interest expense of $9,300 on this note related to the warrants. During the first
quarter of 2007, the Company repaid this related party $15,000 in connection with
this promissory note.
------------------------------------------------------------------------------------ ---------------------------------
Notes Payable $ 7,290,000
------------------------------------------------------------------------------------ ---------------------------------
During the first quarter of 2007, the Company reflected aggregate principal
repayments of $15,000 for all non-convertible promissory notes.
11
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
4. CAPITAL LEASES
Capital lease obligations at March 31, 2007 consisted of the following:
--------------
Obligation under capital lease, imputed interest rate at 20,482
12.78%; due May 2007; collateralized by equipment
Obligation under capital lease, imputed interest rate at 27,958
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 27,958
8.21%; due December 2009; collateralized by equipment
Obligation under capital lease, imputed interest rate at 59,208
7.95%; due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 8.3%; 10,704
due March 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 20,943
11.63%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 53,602
9.74%; due July 2010; collateralized by equipment
Obligation under capital lease, imputed interest rate at 10,738
14.53%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 42,537
15.15%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 44,502
8.61%; due April 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 27,751
8.61%; due April 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 53,990
8.61%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 22,136
8.61%; due March 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 131,679
8.25%; due August 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 100,063
5.060%; due September 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 19,301
8.33%; due October 2011; collateralized by equipment
Obligation under capital lease, imputed interest rate at 19,331
8.23%; due September 2011; collateralized by equipment
Less: current maturities (219,684)
--------------
Long term obligation, net of current portion 473,199
==============
5. DUE TO OFFICER
During the first quarter of 2007, the Company issued a note to its CEO totaling
$175,000. The note was issued in lieu of cash payment of the CEO's 2006
guaranteed bonus, which was accrued over the course of the fiscal year. 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, 2007 was $283,417. Of the total, $2,385 represented accrued interest
payable.
12
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
6. LINES OF CREDIT
Lines of credit at March 31, 2007 consisted of the following:
Line of credit, interest is payable monthly at 9% per annum, the line is
unsecured and due on demand. This line has been established with one of our $922,827
casino customers.
Line of credit, non-interest bearing, the line is unsecured and due on
demand. This line has been established with one of our casino customers. 1,052,431
Line of credit, the line is unsecured and due on demand. The Company pays a
fixed stated amount of interest totaling $1,000 per month. The payments are
recorded and charged to interest expense. This line has been established
with one of our casino customers. At March 31, 2007, the Company had 426,430
recorded related accrued interest payable of $1,000 in connection with this
line of credit.
-------------
Lines of Credit $2,401,688
=============
7. STOCKHOLDERS' DEFICIT
Three Months Ended March 31, 2007
(A) Common Stock Issuances
(1) Cash
None
(2) Services
In February 2007, the Company issued 1,833 shares of common stock to
employees for services rendered in lieu of cash bonueses otherwise due. The
Company valued the shares at the fair price on the date of issuance which
was $0.54 per share based on the quoted closing trading price and recorded
non-cash compensation expense of $990.
(3) Exercise of Options/Warrants
In February 2007, 2 directors exercised 200,000 options at $0.01 per share.
The Company received proceeds of $2,000 from the transaction and issued
200,000 shares of common stock.
In February 2007, our CFO/COO exercised 12,500 warrants at $0.01 per share.
The Company received proceeds of $125 from the transaction and issued
12,500 shares of common stock.
In March 2007, a former employee exercised 12,500 options at $0.33 per
share. The Company received proceeds of $4,125 from the transaction and
issued 12,500 shares of common stock.
(B) Accrued Penalty Shares
At March 31, 2007, pursuant to the terms of a prior common stock offering
with registration rights, the Company has accrued penalties in the amount
of 142,500 shares. 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. The penalty shares have ceased accruing in February 2006.
13
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(C) Stock Options
The Company follows SFAS No. 123(R) for all share based payment awards. The fair
value of each option or warrant granted is estimated on the date of grant using
the Black-Scholes option pricing model. The following is a summary of all stock
option and warrant activity with employees and non-employees during 2007:
(1) Option Grants - Employees
In February 2007, 500,000 options at an exercise price of $0.38 per share
were issued to the Company's CFO/COO according to his employment agreement.
250,000 options vest July 1, 2007 and 250,000 options vest December 31,
2007.
In February 2007, 100,000 options at an exercise price of $0.38 per share
were issued to an employee and vested immediately. The Company valued these
shares using the Black-Scholes valuation model at $52,000 and accordingly
booked a non-cash compensation expense in the same amount.
In March 2007, 400,000 options at an exercise price of $0.01 per share were
issued to our non-employee directors. The Company valued these shares using
the Black-Scholes valuation model at $246,800 and accordingly booked a
non-cash compensation expense in the same amount.
In March 2007, 265,000 options at an exercise price of $0.38 per share were
issued to 5 employees. The Company valued these shares using the
Black-Scholes valuation model at $158,205 and accordingly booked a non-cash
compensation expense in the same amount.
(2) Options/ Warrants Exercised - Employees
In February 2007, 2 directors exercised 200,000 options at $0.01 per share.
The Company received proceeds of $2,000 from the transaction and issued
200,000 shares of common stock.
In February 2007, our CFO/COO exercised 12,500 warrants at $0.01 per share.
The Company received proceeds of $125 from the transaction and issued
12,500 shares of common stock.
(3) Option Forfeitures - Employees
None
(4) Weighted Average Assumptions for 2007 Option Grants - Employees
None
Employee stock option activity for the three months ended March 31, 2007 are
summarized as follows:
Number of Shares Weighted Average
Exercise Price
------------------ --------------------
Outstanding at December 31, 2006 7,960,780 $.10
Granted 1,265,000 .01
Exercised (200,000) .01
Cancelled/Expired - -
------------------ --------------------
Outstanding at March 31, 2007 9,025,780 $.10
================== ====================
14
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
The following table summarizes the Company's employee stock options outstanding
at March 31, 2007:
Options Outstanding
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
.01 7,245,780 6.76-9.75 .01
.26 - .33 315,000 0.75-9.64 .28
.38 - .42 1,065,000 7.21-9.92 .21
.70 - .77 212,500 7.09-7.81 .75
2.00-2.28 187,500 6.17-6.59 2.11
-------------- ----------
9,025,780 .10
============== ==========
At March 31, 2007, 9,025,780 stock options are exercisable with a weighted
average exercise price of $.10 except 500,000 at $0.01.
(D) Warrants
(1) Warrant Grants - Consultants
In January 2007, the Company issued 300,000 warrants to purchase the
Company's stock at an exercise price of $0.35, $0.37 and $0.70
respectively per share to a consultant for services rendered.
According to the issuance 300,000 warrants at $0.35 vested January 31,
2007, 300,000 warrants at $0.37 vest January 31, 2008 and the
remaining 300,000 warrants at $0.70 will vest January 31, 2009. The
Company valued the 300,000 vested shares at $127,800 and accordingly
booked a non-cash compensation expense in the same amount.
Warrant activity for the period ended March 31, 2007 is summarized as follows:
Number of Weighted Average
Shares Exercise Price
----------- ----------------
Outstanding at December 31, 2006 3,565,000 $1.13
----------- ----------------
Granted 900,000 .12
Exercised (12,500) .01
Cancelled (375,000) 4.00
----------- ----------------
Outstanding at March 31, 2007 4,077,500 $0.64
=========== ================
15
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
Warrants Outstanding
-----------------------------------------------------------
Range of Exercise Weighted Average Weighted Average
Price Number Remaining Life Exercise Price
-------------------- --------------- ----------------- ------------------
.01 2,277,500 5.72-9.75 .01
.30-.36 870,000 2.45-8.05 .23
.40 15,000 8.51 .40
.44 15,000 8.51 .44
.47-.51 30,000 8.43-8.51 .49
.70 300,000 9.85 .00
1.00 75,000 1.25 1.00
2.40 112,500 1.58-6.01 2.40
4.00-6.00 382,500 .50-1.25 5.35
---------------
4,077,500
===============
All outstanding warrants are exercisable at March 31, 2007 except 300,000 at
$0.37 vesting in January 2008 and 300,000 at $0.70 vesting in January 2009.
8. COMMITMENTS AND CONTINGENCIES
(1) Operating Leases
In connection with converting all of the Available Money ATM's, the Company
now pays rent to various mall properties where it has ATM machines. These
monthly rents average $22,500 per month.
The Company is party to a 39-month lease agreement pursuant to which it
rents office space in Pennsylvania at a monthly rent of $2,635. This Lease
expires February 2008.
The Company's total rent expense under operating leases was $85,125 and
$125,594 for the three months ended March 31, 2007 and 2006, respectively.
(2) Casino Contracts
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental fee to
operate at the respective gaming locations.
Typically, the fees are earned by the gaming establishment over the life of
the contract based on one of the following scenarios:
(A) A dollar amount, as defined by the contract, per transaction volume
processed by the Company.
(B) A percentage of the Company's profits at the respective location.
As of March 31, 2007 the Company has recorded $540,474 of accrued commissions on
casino contracts.
Pursuant to the contracts, the Native American owned casinos have not waived
their sovereign immunity.
16
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(3) Employment Agreements
(A) CEO
(1) Employment Agreement
In January 2004, the Company entered into a five-year employment
agreement with its Chairman, President and Chief Executive Officer. In
addition to an annual salary of $350,000 per year (subject to annual
increases at the discretion of the Board of Directors ) (the "Base
Salary"), the employment agreement provides for a $200,000 signing
bonus, a guaranteed bonus equal to 50% of his Base Salary in any
calendar year (the "Guaranteed Bonus" ) and a discretionary incentive
bonus of up to 50% of his Base Salary in any calendar year pursuant to
a bonus program to be adopted by the Board of Directors (the
"Incentive Bonus"). Pursuant to his employment agreement, the officer
is entitled to fringe benefits including participation in retirement
plans, life insurance, hospitalization, major medical, paid vacation,
a leased automobile and expense reimbursement. Effective March 2006,
the Company amended the executive's agreement to reduce his guaranteed
bonus for 2005 from 50% of his salary to 12.5% of his salary. At
December 31, 2006, the Company had accrued $175,000 for the 2006
bonus.
(2) Commissions Payable
The Company pays sales commissions to sales persons closing various
contracts. The CEO was paid $2,017 in sales commissions for the first
three months of 2007.
(B) CFO/COO
In March 2007, the Company entered into an amended and restated
employment agreement, dated March 1, 2007 which amended and restated
the employment agreement, dated June 14, 2005, by and between the
Company and its Chief Financial Officer. Mr. Walsh serves as the
Company's Chief Financial Officer and Chief Operating Officer.
The term of the Employment Agreement was retroactive to December 31,
2006 and continues until the earlier of CFO's death or termination by
either the Company or the CFO. The CFO/COO annual salary is than
$170,000. Upon termination of the Employment Agreement within six (6)
months following a change in control of the Company either by the
Company without cause or by the CFO/COO, the CFO/COO will receive
severance pay equal to one year's salary.
In addition, the CFO was granted options to purchase 500,000 shares of
the Company's common stock with an exercise price of $.38 per share.
The Options have a term of ten years and are exercisable as follows:
(i) options to purchase 250,000 shares of the Company's common stock
are exercisable on July 1, 2007; and (ii) options to purchase 250,000
shares of the Company's common stock are exercisable on December 31,
2007, in each case as long as the CFO is employed by the Company. The
Options are immediately exercisable following a change in control of
the Company. If CFO's employment by the Company is terminated by the
Company without good cause or CFO elects early termination with good
reason, all unvested Options automatically vest.
(4) Litigation
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street") filed a
Complaint against iGames Entertainment, Inc. and Money Centers of America, Inc.
("MCA") (collectively referred to hereinafter as "iGames") in the United States
District Court for the Eastern District of Pennsylvania, alleging that iGames
breached an Asset Purchase Agreement ("APA") that the parties executed on or
about February 14, 2003. By virtue of the APA, Lake Street sold to iGames all of
Lake Street's right, title and interest in a casino game called "Table Slots."
Lake Street alleges that it is entitled to additional compensation for the game.
The parties in this matter reached a settlement in principal which is in the
drafting stage. The court, having been notified of the settlement, dismissed the
action on March 12, 2007. Pursuant to the terms of the settlement agreement,
Money Centers of America, Inc. ("MCA") will pay Lake Street Gaming, LLC ("Lake
Street") a total of $160,000. Under the agreement reached, MCA will make an
initial payment of $30,000 followed by monthly payments of $4,333 for thirty
(30) months. The settlement also requires that certain stock be held in escrow
and has a contingency for early payment.
17
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
On or about October 26, 2006, Money Centers of America, Inc. ("MCA") served a
demand for arbitration on The Campo Band of Kumeyaay Indians d/b/a The Golden
Acorn Casino (the "Casino") and on Ralph Goff, the tribe Vice Chairman,
individually, and requested that the Casino and Mr. Goff consent to the
jurisdiction of the JAMS arbitrator in Philadelphia. MCA filed the demand to
recover damages it suffered as a result of having its Financial Services
Agreement wrongfully terminated by the Casino and from being evicted from the
Casino without sufficient notice. The Casino has refused to consent to the
jurisdiction of JAMS (i.e., the chosen arbitration service) in Philadelphia.
On or about March 1, 2007, the Casino served MCA with a demand for arbitration
which it purportedly filed with JAMS in San Diego, California. The Casino
allegedly seeks in excess of $922,826 in damages which it claims resulted from
MCA's breach of the same Financial Service Agreement that MCA alleges was
wrongfully terminated. MCA has not consented to the jurisdiction of JAMS in San
Diego, California.
On March 2, 2007, the trial of Ameristar Casino v. Money Centers of America and
Available Money was held in Gilpin County District Court. Ameristar Casino
alleged that they permitted Defendants to operate their ATM's on its property
and that Defendants never paid the plaintiff the agreed-upon fee structure for
those ATM's. Ameristar Casino alleged that Defendants breached their agreement
with Plaintiff by refusing to make payments for the ATM's on casino premises in
January and February, 2005. In addition, Ameristar Casinos also alleged that
Defendants' ATM's on casino premises in January and February, 2005 generated
revenue which conferred a benefit on Defendants that would be inequitable for
Defendants to retain without payment of its value to Plaintiff. The one-day
trial concluded on March 2, 2007. The Court ruled in favor of Money Centers on
the Plaintiff's breach of contract claim. The Court ruled against money Centers
on the Plaintiff's unjust enrichment claim and a judgment was entered in the
amount of $56,879 plus statutory interest in favor of the Ameristar Casinos.
With interest through March 20, 2007 the value of the debt owed by Money Centers
of America as a result of the judgment is $67,019. The advisability of appeal is
being considered. The exposure to further loss on appeal is interest on the
judgment at 9% compounded annually while the appeal is pending, assuming the
verdict is not reversed.
On or about November 8, 2006, Plaintiffs GFM LLC, The Grove Cinemas, LLC and the
Commons at Calabasas, LLC (collectively, "Plaintiffs") filed a Complaint against
Available Money, Inc. and Money Centers of America (collectively, "MCA"),
alleging that MCA breached lease agreements executed on February 15, 2002 and
January 7, 2004. Under the agreements, MCA rented from Plaintiffs a portion of
certain locations for purposes of an ATM machine. Due to Money Centers'
acquisition of Available Money, Inc, the original party to the lease, Plaintiffs
allege that the transfer was "unpermitted" and therefore a breach of the lease.
This case has just entered the discovery stage and a trial date has not been
set.
9. CUSTOMER CONCENTRATIONS
For the three months ended March 31, 2007, approximately 64% of total revenues
were derived from operations at two full service casinos. One other customer
represented approximately 11% of our total revenues for the three months ended
March 31, 2007.
10. CASH RENTAL PROGRAM AND RELATED INTEREST EXPENSE
Included in interest expense are monies owed to an unrelated vendor for interest
charges. The interest is based on the amount of cash in the Company's Available
Money ATM machines and network and is calculated on a daily basis. The balance
of this cash funded by the bank in the Company's ATM machines at March 31, 2007
was approximately $835,000. The interest rate on the $835,000 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,
2007. Interest expense from this cash was $33,512 for the three months ended
December 31, 2007.
18
MONEY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
11. GOING CONCERN
The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has a
working capital deficit of $1,283,611 a stockholders' deficit of $5,767,858 and
an accumulated deficit of $22,043,560 at March 31, 2007. The Company also
reflected a net loss of $1,223,392 and net cash used in operations of $479,084,
for the three months ended March 31, 2007. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management is in the process of implementing its business plan. Additionally,
management is actively seeking additional sources of capital, but no assurance
can be made that capital will be available on reasonable terms. Management
believes the actions it is taking allow the Company to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
12. SUBSEQUENT EVENTS
None
19
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," anticipate," believe,"
estimate," continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those included in our Annual Report on Form
10-KSB filed on April 17, 2007. 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 to the gaming
industry. We combine advanced technology with personalized customer services to
deliver ATM, credit card advance, POS debit card advance, Check Cashing Services
and CreditPlus marker services on an outsourcing basis to casinos, license our
OnSwitchTM transaction management system to casinos and merchant card
processing.
We were formed as a Delaware corporation in 1997. Prior to March 2001, we
were a development company focusing on the completion of a Point of Sale ("POS")
transaction management system for the gaming industry. In March 2001, we
commenced operations with the launch of the POS system at the Paragon Casino in
Marksville, LA.
Current Overview
Our core business of providing single source full service cash access
services in the gaming industry continues to be the major source of our revenue
and profits in 2007. We have also launched several new services in the last 18
months, such as OnSwitchTM and Omni Network that have helped to differentiate
our product offering in the marketplace. Our core business generates revenues
from transaction fees associated with each unique service we provide, including
ATMs, credit card advances, POS Debit, check cashing, markers and various other
financial instruments. We receive our fees from either the casino operator or
the consumer who is requesting access to their funds. The pricing of each
transaction type is determined by evaluating risk and costs associated with the
transaction in question. Accordingly, our transaction fees have a profit
component built into them. Furthermore, reimbursement for electronic
transactions are guaranteed by the credit or debit networks and associations
that process the transactions as long as procedures are followed, thereby
reducing the period of time that trade accounts receivable are outstanding to
several days.
We deployed our OnSwitchTM Transaction Management System (OnSwitchTM) in
January 2006. Though we feel confident that OnSwitchTM will differentiate us
from our competitors and create new sources of revenue for us, there is no
guarantee that the market will accept this new deployment strategy. Regardless
of the market's acceptance of this new deployment strategy, OnSwitchTM enables
us to gain complete control over our cash access booth operations and ATMs.
OnSwitchTM will "drive" the ATMs and teller applications and process all
transactions through our central system allowing for quicker customer
interactions which translate to greater revenue at less cost from our current
book of business. OnSwitchTM permits us to negotiate network processing
contracts based on sound business decisions versus technology requirements so
that the cost per transaction may be reduced, once again translating to greater
revenue potential from our current book of business. Once all of the properties
have been converted to OnSwitchTM, general operating procedures, field support,
and internal accounting processes will also be streamlined.
20
One of the obstacles with OnSwitchTM was that we had to achieve Payment
Card Industry ("PCI") compliance. PCI Compliance is a set of security standards
that were created by the major credit card companies (American Express, Discover
Financial Services, JCB, MasterCard Worldwide, and Visa International) to
protect their customers from increasing identity theft and security breaches.
After over a year of comprehensive updates of our systems, audits by Visa and
other actions, we have now satisfied all requirements to be PCI compliant and
are waiting for final approval. To our knowledge, we will be the only PCI
compliant cash access vendor in the gaming industry.
Our management focused on improving our capital structure during 2006. In
August 2006 we raised $1.2 million in equity in a successful private placement.
In addition, at the end of 2006 we refinanced most of our outstanding debt on a
favorable basis, converting most of it from short term to long term, reducing
our interest rates and obtaining "interest only" payment terms. In combination,
these efforts have allowed us to pay off our highest cost capital and increase
our cash flow by over $700,000 per year.
Companies providing cash access services to the gaming industry face some
unique challenges and opportunities in the next ten years. Many companies in the
industry have merged, been acquired or have recapitalized in order to capitalize
on the trends identified in the gaming industry.
Historically, providers of cash access services to the gaming industry had
cash flow margins that were generally higher than those experienced in the funds
transfer and processing industries. Growing competition and the maturing of the
market has resulted in a decline in these margins as companies have begun
marketing their services based on price rather than innovation or value added
services. This trend is highlighted by the number of companies that promote
revenue growth and an increased account base but experience little increase in
net income. This trend is magnified by the fact that the largest participant in
the industry has close to 65% market share and has begun to forgo margin in
order to retain business. Companies that can adapt to the changing market and
can create innovative products and services stand at the forefront of a new wave
in revenue and profit growth.
Substantially all gaming facilities provide ATM services, credit card cash
advances, debit, and/or check cashing services to their customers. Services are
typically outsourced and provided on an exclusive basis for an average of two to
five years. Each year, approximately 400 accounts totaling $300 million in
revenue are put out to bid. Currently there are five major companies, including
us, that have proprietary systems to compete for this business. Although this
market has matured from a pricing perspective, the demand for the services from
the end user is still strong.
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.
21
The trend towards consolidation of the major gaming companies has continued
and will make it difficult to continue to offer our services in the traditional
manner. The economics are too compelling for the gaming operators not to
consider internalizing these operations in order to generate additional revenue
and profits to service the debt associated with the consolidation. Our
preparation has continued to position us to capitalize on this trend. We have
prepared for this change and have already begun to offer our systems and
services through licensing OnSwitchTM , our transaction management system. In
addition to outsourcing the cash services operations, we now offer turn-key
processing capabilities for internal use by the casino. This means casinos will
license our technology so they can operate and maintain their own cash access
services, including the addition of their merchant card processing. Our size
makes us uniquely capable of adapting to this change. Though the license
agreements do not have the same revenue potential as a traditional cash services
contract, the net income derived from these agreements is higher, the user
agreements are for a longer period of time and we do not have the same capital
expenditures or vault cash requirements that we experience in performing
traditional cash access services. Furthermore, our larger competitors have spent
years trying to conceal the economic benefits of this type of offering because
their large infrastructure is designed to only support an outsourced solution.
2. Ticket In-Ticket Out technology growth exceeding expectations.
The first major casino company to remove coins from the casino floor was
Caesars Palace in Atlantic City, NJ. Since then, slot machine manufacturers have
developed a technology that prints and accepts bar-coded tickets at the slot
machine instead of accepting or dispensing coins. It was originally anticipated
that it would take 10-15 years for the industry to fully adopt this technology.
It appears it may only take half this amount of time. This presents a problem to
casino operators. They now have tens of thousands of bar-coded tickets a day
that need to be redeemed for cash. This has paved the way for self-service
ticket redemption technology so customers do not have to go to the casino cage
in order to redeem their tickets. The initial ticket redemption machines placed
in service have proven to be too big and too expensive. Most casino operators
have to wait until budget season to appropriate the necessary funds in order to
even consider the acquisition of the required equipment. We believe this
functionality will ultimately reside on the ATM machine thus eliminating the
requirement to purchase new equipment and eliminating the need to remove a slot
machine to make room for a stand-alone ticket redemption device. We are
developing technology that will allow ticket-redemption functionality on our
cash access devices. There is still the problem of security with the bar-coded
ticket, which is as good as cash. Many casino operators will refuse to allow
vendors to handle the tickets for security and fraud concerns. This is an
additional economic benefit of our plan to have the casino operator internalize
their cash access services because only the casino's personnel will handle the
tickets in the situations where they are licensing our services.
3. Execution of long-term and stable compacts for Native American casinos in
numerous state jurisdictions has made traditional capital more readily available
paving the way for a new wave of expansion and the resulting need for new
sources of revenue and customer amenities.
Recent shortfalls in state budgets have brought the tribal and state
governments together to execute long-term compacts that meet the financial needs
of both parties. In recent years, California, Arizona, New Mexico and Wisconsin
are just a few examples of this development. The added financial stability for
Native American casinos has made traditional capital more readily available to
tribes, leading many tribes to undertake expansion of casino facilities and
operations.
In order to support this expansion, Native American casino operators will
seek new sources of revenues and new amenities to attract and retain more
quality customers. One of the most critical customer amenities in casino
operations is the availability of credit. Traditional gaming markets, such as
Las Vegas and Atlantic City, rely on credit issuance for up to 40% of their
revenues. These markets issue credit internally and rely on specialized credit
reporting in their risk management decisions. Significant capital investment in
technology is required for these transactions to be executed efficiently.
However, within the $15 billion dollar Native American Gaming market there are
virtually no credit services currently available. Approximately 26 of 29 states
that have approved Native American Gaming do not allow Native American tribes or
their respective casinos to issue credit. The lack of credit play is also due to
the lack of a third party credit issuer that is capable of facilitating the
transactions. Our CreditPlus platform allows Native American casinos to issue
credit to players, providing Native American casinos with a guest amenity that
is already widely accepted in traditional jurisdictions. Our ability to convert
this market opportunity into revenue is largely dependent on the success of our
sales efforts in educating casinos in the Native American Gaming market
regarding the advantages of CreditPlus and its compliance with the regulatory
requirements.
22
Our Cash Services Host Program is uniquely aimed at capitalizing on the
need for new profitable guest amenities. Where most guest amenities require
additional expenses, this service helps the casino operator generate more
revenues. This service allows customers to facilitate cash access transactions
from the slot machine or gaming table. Our hosts are available to bring the
transaction to the guest, which is viewed as a valuable customer amenity, while
driving more money to the gaming floor for the casino operator.
Organic growth through sales by internal salespeople is usually the most
efficient and profitable growth strategy in the cash services business. Much of
our historical growth has occurred in this manner. We realize that recognizing
industry trends is no assurance of success. We have also complimented our
internal sales strategy by creating relationships with independent sales
organizations that have established relationships with gaming operators
nationwide. Although our sales commissions will be higher at gaming
establishments entered through this sales channel, we will not be burdened with
the up-front salary, travel and entertainment costs associated with the
traditional internal sales approach. We continue to view strategic acquisitions
as part of our business plan to obtain the critical mass we believe is necessary
to compete effectively in our industry.
This parallel strategy of sales, acquisitions and product development is
capital intensive and presents substantial risk. There is no guarantee that we
will be able to manage all three strategies effectively.
We believe that it is necessary to increase our working capital position so
that we can capitalize on the profitable trends in the industry while
maintaining and servicing our current customer base and integrating acquired
operations such as Available Money, Inc. ("Available Money"), which we acquired
in April of 2004. Without sufficient working capital, we would be forced to
utilize working capital to support revenue growth at the expense of executing on
our integration and conversion plans. This would result in substantially higher
operating costs without the assurance of additional revenues to support such
costs.
Critical Accounting Policies
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
Revenue Recognition. In general, we record revenue when persuasive evidence
of an arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectability is reasonably assured. The following policies reflect specific
criteria for our various revenue streams:
ATM's and Credit Cards. Fees earned from ATM and credit card advances are
recorded on the date of transaction.
Check Cashing: Revenue is recorded from the fees on check cashing services
on the date the check is cashed. If a customer's check is returned by the bank
on which it is drawn, the full amount of the check is charged as bad debt loss.
The check is subsequently resubmitted to the bank for payment. If the bank
honors it, the amount of the check is recognized as negative bad debt expense.
23
Check Cashing Bad Debt. The principal source of bad debts that we
experience are due to checks presented by casino patrons that are ultimately
returned by the drawer's bank for insufficient funds. We account for these check
cashing bad debts on a cash basis. Fees charged for check cashing are recorded
as income on the date the check is cashed. If a check is returned by the bank on
which it is drawn, we charge the full amount of the check as a bad debt loss. If
the bank subsequently honors the check, we recognize the amount of the check as
a negative bad debt. Based on the quick turnaround of the check being returned
by the bank on which it is drawn and our resubmission to the bank for payment,
we feel this method approximates the allowance method, which is a Generally
Accepted Accounting Principle.
Goodwill and Long-Lived Intangible Assets. The carrying value of goodwill
as well as other long-lived intangible assets such as contracts with casinos is
reviewed if the facts and circumstances suggest that they may be impaired. With
respect to contract rights in particular, which have defined terms, this will
result in an annual adjustment based on the remaining term of the contract. If
this review indicates that the assets will not be recoverable, as determined
based on our discounted estimated cash flows over the remaining amortization
period, then the carrying values of the assets are reduced to their estimated
fair values. Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards No. 142, "Goodwill And Other Intangible Assets" which
eliminates amortization of goodwill and certain other intangible assets and
requires annual testing for impairment. The calculation of fair value includes a
number of estimates and assumptions, including projections of future income and
cash flows, determining remaining contract periods and the choice of an
appropriate discount rate. In our experience, forecasts of cash flows based on
historical results are relatively dependable. We use the remaining contract term
for estimating contract periods, which may vary from actual experience due to
early terminations that cannot be forecast. We use our current cost of funds,
which is a variable rate, as the discount rate. Use of a higher discount rate
would have the effect of reducing the calculated fair value, while use of a
lower rate would increase the calculated fair value. In connection with the
acquisition of Available Money (our only acquired reporting unit), goodwill was
allocated based on the excess of the final purchase price over the value of the
acquired contract rights, determined as described above.
Stock Based Compensation. Effective January 1, 2006, the Company adopted
the provisions of SFAS No. 123(R), "Share-Based Payment," under the modified
prospective method. SFAS No. 123(R) eliminates accounting for share-based
compensation transactions using the intrinsic value method prescribed under APB
Opinion No. 25 "Accounting for Stock Issued to Employees," and requires instead
that such transactions be accounted for using a fair-value-based method. Under
the modified prospective method, the Company is required to recognize
compensation cost for share-based payment to employees based on their grant date
fair value from the beginning of the fiscal period in which the recognition
provisions are first applied. For periods prior to adoption, the financial
statements are unchanged, and the pro forma disclosures previously required by
SFAS No. 123, as amended by SFAS No. 148, will continue to be required under
SFAS No. 123(R) to the extent those amounts differ from those in the Statement
of Operations.
Results of Operations
Three Months Ended March 31, 2007 (Unaudited) vs. Three Months Ended March 31, 2006 (Unaudited)
Three Months Ended Three Months Ended
March 31, 2007 ($) March 31, 2006 ($) Change ($)
-------------------- -------------------- ------------------
Net Loss (1,223,392) (404,307) (819,085)
Revenues 2,169,683 3,839,067 (1,669,384)
Cost of revenues 1,703,219 3,056,745 (1,353,526)
Commissions & Rents Paid 928,057 1,910,124 (982,067)
Wages & Benefits 429,031 618,169 (189,138)
Processing Fee & Service Charges 256,461 369,653 (113,192)
Bad Debts 11,056 13,207 (2,151)
ATM Lease Fees & Maintenance 8,775 55,913 (47,138)
Cash Replenishment Services 23,637 9,386 14,251
Other 46,201 80,293 (34,092)
Gross Profit 466,464 782,322 (315,858)
Selling, General and Administrative Expenses 527,384 607,657 (80,273)
Contributions 3,000 9,500 6,500
Management Compensation 172,059 173,750 (1,691)
Marketing 12,903 25,224 (12,321)
Professional Fees 78,423 93,800 (15,377)
Seminars - 10,597 (10,597)
Trade Show & Sponsorships 51,307 67,422 (16,115)
Travel 57,892 71,585 (13,693)
Other 151,800 155,779 (3,979)
Noncash Compensation 585,995 6,188 579,807
Depreciation and amortization 222,532 75,109 147,423
Interest expense, net (363,733) (516,827) (153,094)
Other income 9,788 19,152 (9,364)
24
Our net loss increased by approximately $800,000 for the three months ended
March 31, 2007 primarily due to a decrease in revenue from the loss of the
Sycuan and Campo contracts in 2006. In addition, an increase in amortization
expense resulted from a substantial increase in deferred financing costs in
connection with the refinance of our vault cash. Also, noncash compensation
increased substantially as a result of the issuance of options to purchase our
common stock.
Our revenues as a whole decreased by approximately 43% during the three
months ended March 31, 2007 as compared to the three months ended March 31,
2006. The Money Centers portfolio (consisting primarily of full-service casino
contracts) decreased 27.5% or approximately $3.6 million. We lost approximately
$1.3 million in revenues from the loss of the Sycuan contract which terminated
on May 9, 2006 and approximately $200,000 from the loss of the Campo contract in
October 2006. While The Available Money portfolio (consisting of ATM contracts)
decreased 65.6% or $4 million. This reflected a decision to terminate
unprofitable contracts from the Available Money portfolio.
Our cost of services decreased as a result of our lower revenues.
Our selling, general and administrative expenses decreased by approximately
$80,000 during the three months ended March 31, 2007 primarily due to decreased
legal expenses, decreased marketing, decreased travel and a decrease in the
amount paid for trade shows. Other selling, general and administrative expenses
were relatively unchanged from the three months ended March 31, 2006.
Our interest expense decreased $153,094 during the three months ended March
31, 2007 mostly due to a decrease in the interest rate we are paying on our
long-term debt as a result of the refinance that took place in December 2006. In
addition, we did not incur any non-cash interest expense as we did in 2006
relating to the bridge notes that were raised in 2005.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the fiscal quarter
ended March 31, 2007 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
25
Changes in Financial Position, Liquidity and Capital Resources
Three Months Three Months
Ended March 31, Ended March 31,
2007 ($) 2006($)
(Unaudited) (Unaudited) Change ($)
Net Cash Used in Operating Activities (479,084) (144,244) (334,840)
Net Cash Used in Investing Activities (61,195) (69,706) 8,511
Net Cash Used in Financing Activities (583,637) (1,615,620) 1,031,983
Net cash used in operations increased by approximately $335,000, primarily
due to a increase in our net loss.
Net cash used in financing activities decreased during the three months
ended March 31, 2007 primarily due to reductions in the utilization of
short-term lines of credit.
A significant portion of our existing indebtedness prior to December 28,
2006 was associated with our vault cash line of credit of $7,000,000 with
Mercantile Capital, L.P., which we used to provide vault cash for our casino
operations at most locations. Vault cash is the money necessary to fund the
float, or money in transit, that exists when customers utilize our services but
we have yet to be reimbursed from the Debit, Credit Card Cash Advance, or ATM
networks for executing the transactions. Although these funds are generally
reimbursed within 24-48 hours, a significant amount of cash is required to fund
our operations due to the magnitude of our transaction volume. Our vault cash
loan accrued interest at the base commercial lending rate of Wilmington Trust
Company of Pennsylvania plus 10.75% per annum on the outstanding principal
balance, with a minimum rate of 15% per annum, and had a maturity date of May
31, 2006. Vault cash for our ATM operations at locations where we do not provide
full cash access services (primarily Available Money customers) is provided by
our ATM processing provider under the terms of the ATM processing agreement, at
a cost equal to the ATM processor's cost of funds, which currently is the Prime
Rate.
On December 28, 2006, the Mercantile line of credit was converted to a
$2,525,000 term loan maturing December 31, 2008 and bearing interest at 12.75%,
payable monthly. The principal balance due to Mercantile above $2,525,000 was
repaid with a portion of the proceeds from a $4,750,000 term loan from Baena
Advisors, LLC. This loan bears interest at 30-day LIBOR plus 13%, payable
monthly, and is due February 28, 2009. Baena Advisors, LLC is owned by the
brother of our Chief Executive Officer. One of our directors, John Ziegler Jr.,
is a manager of Baena Advisors, LLC.
In September and October 2005 we borrowed $800,000 from individuals,
including the uncle and brother of our Chief Executive Officer, pursuant to
convertible notes that bore interest at 10% per annum and matured in September
and October of 2006. $550,000 of this amount has been repaid. We have reached an
agreement in principle to refinance the remaining $250,000, together with
accrued interest, by a $300,000 increase in the Baena Advisors facility.
In addition, two of our casino customers provide vault cash lines of credit
for our activities at their casinos. These facilities are unsecured and bear
interest rates ranging from zero to 9%. Our debt is used primarily to provide
vault cash for our casino operations. Vault cash for our ATM operations at
locations where we do not provide full cash access services (primarily Available
Money customers) is provided by our ATM processing provider under the terms of
the ATM processing agreement, at a cost equal to the ATM processor's cost of
funds, which currently is Prime minus 5/8%.
On September 10, 2004, we borrowed $210,000 from the father of our chief
executive officer to pay an advance on commissions to a new casino customer.
This loan bears interest at 10% per annum, payable monthly. We currently are
making $5,000 principal payments per month. The current principal balance
outstanding is $15,000. In addition, we issued the lender warrants to purchase
50,000 shares of our common stock at an exercise price of $.33 per share.
26
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 the lender
will have the right to sell our assets to satisfy any outstanding indebtedness
under our line of credit loan or our term loan that we are unable to repay.
We also have a substantial amount of accounts payable and accrued expenses.
To the extent that we are unable to satisfy these obligations as they come due,
we risk the loss of services from our vendors and possible lawsuits seeking
collection of amounts due.
Our goal is to change the way our customers view cash access services by
transforming the way casinos find, serve and retain their customers. We will
strive to assist our customers by continuing to grow and improve everything we
do. We require significant capital to meet these objectives. Our capital
requirements are as follows:
o Equipment: Each new account requires hardware at the location level and
some additions to network infrastructure at our central server farm.
o Vault Cash: All contracts in which we provide full service money
centers and ATM accounts for which we are responsible for cash
replenishment require vault cash. Vault cash is the money necessary to
fund the float that exists when we pay money to patrons but have yet to
be reimbursed from the Debit, Credit Card Cash Advance, or ATM networks
for executing the transactions.
o Acquisition Financing: We presently have no cash for use in completing
additional acquisitions. To the extent that we cannot complete
acquisitions through the use of our equity securities, we will need to
obtain additional indebtedness or seller financing in order to complete
such acquisitions.
o Working Capital: We will require substantial working capital to pay the
costs associated with our expanding employee base and to service our
growing base of customers.
o Technology Development: We will continue to incur development costs
related to the design and development of our new products and related
technology. We presently do not have an internal staff of engineers or
software development experts and have outsourced this function to
IntuiCode, LLC, a company operated by Jeremy Stein, a member of our
Board of Directors.
We are actively seeking various sources of growth capital and strategic
partnerships that will assist us in achieving our business objectives. We are
also exploring various potential financing options and other sources of working
capital. There is no assurance that we will succeed in finding additional
sources of capital on favorable terms or at all. To the extent that we cannot
find additional sources of capital, we may be delayed in fully implementing our
business plan.
We do not pay and do not intend to pay dividends on our common stock. We
believe it to be in the best interest of our stockholders to invest all
available cash in the expansion of our business.
Due to our accumulated deficit of $22,043,560 as of March 31, 2007 and our net
loss and cash used in operations of $1,223,392 and $479,084, respectively, for
the period ended March 31, 2007. At the end of the year 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 for 2007 or at any time in the future.
Item 3 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2007, we carried out an evaluation of the effectiveness of
the design and operation of our "disclosure controls and procedures" (as defined
in the Exchange Act Rules 13a-15(e) and 15d-15(e)) under the supervision and
with the participation of our management, including Christopher M. Wolfington,
our Chief Executive Officer and Jason P. Walsh, our Chief Financial Officer.
Based upon that evaluation, Mr. Wolfington and Mr. Walsh concluded that our
disclosure controls and procedures are effective.
27
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management to allow timely decisions regarding
required disclosure.
Changes in Internal Controls
There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the date we carried out this evaluation
28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On or about October 14, 2004, Lake Street Gaming, LLC ("Lake Street") filed a
Complaint against iGames Entertainment, Inc. and Money Centers of America, Inc.
("MCA") (collectively referred to hereinafter as "iGames") in the United States
District Court for the Eastern District of Pennsylvania, alleging that iGames
breached an Asset Purchase Agreement ("APA") that the parties executed on or
about February 14, 2003. By virtue of the APA, Lake Street sold to iGames all of
Lake Street's right, title and interest in a casino game called "Table Slots."
Lake Street alleges that it is entitled to additional compensation for the game.
The parties in this matter reached a settlement in principal which is in the
drafting stage. The court, having been notified of the settlement, dismissed the
action on March 12, 2007. Pursuant to the terms of the settlement agreement,
Money Centers of America, Inc. ("MCA") will pay Lake Street Gaming, LLC ("Lake
Street") a total of $160,000.00. Under the agreement reached, MCA made an
initial payment of $30,000.00 followed by monthly payments of $4,333.33 for
thirty (30) months. The settlement also requires that certain stock be held in
escrow and has a contingency for early payment.
On or about October 26, 2006, Money Centers of America, Inc. ("MCA") served a
demand for arbitration on The Campo Band of Kumeyaay Indians d/b/a The Golden
Acorn Casino (the "Casino") and on Ralph Goff, the tribe Vice Chairman,
individually, and requested that the Casino and Mr. Goff consent to the
jurisdiction of the JAMS arbitrator in Philadelphia. MCA filed the demand to
recover damages it suffered as a result of having its Financial Services
Agreement wrongfully terminated by the Casino and from being evicted from the
Casino without sufficient notice. The Casino has refused to consent to the
jurisdiction of JAMS (i.e., the chosen arbitration service) in Philadelphia.
On or about March 1, 2007, the Casino served MCA with a demand for arbitration
which it purportedly filed with JAMS in San Diego, California. The Casino
allegedly seeks in excess of $922,826.73 in damages which it claims resulted
from MCA's breach of the same Financial Service Agreement that MCA alleges was
wrongfully terminated. MCA has not consented to the jurisdiction of JAMS in San
Diego, California.
On March 2, 2007, the trial of Ameristar Casino v. Money Centers of America and
Available Money was held in Gilpin County District Court. Ameristar Casino
alleged that they permitted Defendants to operate their ATM's on its property
and that Defendants never paid the plaintiff the agreed-upon fee structure for
those ATM's. Ameristar Casino alleged that Defendants breached their agreement
with Plaintiff by refusing to make payments for the ATM's on casino premises in
January and February, 2005. In addition, Ameristar Casinos also alleged that
Defendants' ATM's on casino premises in January and February, 2005 generated
revenue which conferred a benefit on Defendants that would be inequitable for
Defendants to retain without payment of its value to Plaintiff. The one-day
trial concluded on March 2, 2007. The Court ruled in favor of Money Centers on
the Plaintiff's breach of contract claim. The Court ruled against money Centers
on the Plaintiff's unjust enrichment claim and a judgment was entered in the
amount of $56,879 plus statutory interest in favor of the Ameristar Casinos.
With interest through March 20, 2007 the value of the debt owed by Money Centers
of America as a result of the judgment is $67,019. The advisability of appeal is
being considered. The exposure to further loss on appeal is interest on the
judgment at 9% compounded annually while the appeal is pending, assuming the
verdict is not reversed.
On or about November 8, 2006, Plaintiffs GFM LLC, The Grove Cinemas, LLC and the
Commons at Calabasas, LLC (collectively, "Plaintiffs") filed a Complaint against
Available Money, Inc. and Money Centers of America (collectively, "MCA"),
alleging that MCA breached lease agreements executed on February 15, 2002 and
January 7, 2004. Under the agreements, MCA rented from Plaintiffs a portion of
certain locations for purposes of an ATM machine. Due to Money Centers'
acquisition of Available Money, Inc, the original party to the lease, Plaintiffs
allege that the transfer was "unpermitted" and therefore a breach of the lease.
This case has just entered the discovery stage and a trial date has not been
set.
29
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, 2007, we issued an aggregate of 1,833 shares of our common
stock to 2 employees in lieu of a portion of cash bonuses otherwise due to them
at an effective price of $0.54 per share in a transaction under Rule 701 under
the Securities Act.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submissions of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits
3.1 Money Centers of America, Inc. Amended and Restated Certificate
of Incorporation (incorporated by reference to Exhibit 3.1 of the
Current Report on Form 8-K filed on October 19, 2004).
3.2 Money Centers of America, Inc. Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.2 of the Current Report
on Form 8-K filed on October 19, 2004).
4.1 Form of Specimen Stock Certificate.
10.1 Amended and Restated 2003 Stock Incentive Plan (incorporated by
reference to Exhibit 10.2 of Form 10-KSB filed on July 13, 2004).
10.2 Employment Agreement dated as of January 2, 2004 by and between
iGames Entertainment, Inc. and Christopher M. Wolfington
(incorporated by reference to Exhibit 10.1 of Form 10-KSB filed
on July 13, 2004).
10.3 Amendment to Employment Agreement dated as of March 20, 2006 by
and between Money Centers of America, Inc. and Christopher M.
Wolfington.
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.)
30
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 21, 2007 pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a) of the Principal Executive Officer as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, by Christopher M. Wolfington, Chief Executive Officer and
Chief Financial Officer.
31.2 Certification dated May 21, 2007 pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a) of the Principal Accounting Officer as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
by Jason P. Walsh, Chief Financial Officer.
32 Certification dated May 21, 2007 pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, made by Christopher M. Wolfington, Chief Executive
Officer and Jason P. Walsh, Chief Financial Officer.
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MONEY CENTERS OF AMERICA, INC.
Date: May 21, 2007 By: /s/ Christopher M. Wolfington
---------------------------------
Christopher M. Wolfington
Chief Executive Officer
Date: May 21, 2007 By: /s/ Jason P. Walsh
---------------------------------
Jason P. Walsh
Chief Financial Officer
32