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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 0-12374
EQUITEX, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0905189
- ------------------------------- ------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7315 East Peakview Avenue
Englewood, Colorado 80111
-------------------------------------------------
(Address of principal executive offices) (Zip code)
(303) 796-8940
-------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at November 19, 2003: 30,822,455
EQUITEX, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Independent accountants' report 3
Condensed consolidated balance sheets - September 30, 2003 (unaudited)
and December 31, 2002 4 - 5
Condensed consolidated statements of operations-
three and nine months ended September 30, 2003 and 2002 (unaudited) 6
Condensed consolidated statement of changes in stockholders'
equity - nine months ended September 30, 2003 (unaudited) 7 - 8
Condensed consolidated statements of cash
flows - nine months ended September 30, 2003 and 2002 (unaudited) 9 - 10
Notes to condensed consolidated financial statements 11 - 22
Item 2. Management's discussion and analysis of financial
condition and results of operations 23 - 28
Item 3. Quantitative and qualitative disclosures of market risk 28
Item 4. Disclosure controls and procedures 28
PART II OTHER INFORMATION
Item 1. Legal proceedings 29
Item 2. Changes in securities and use of proceeds 29
Item 3. Defaults upon senior securities 29
Item 4. Submission of matters to a vote of security holders 29
Item 5. Other information 29
Item 6. Exhibits and reports on Form 8-K 29
Signature 30
2
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Equitex, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Equitex, Inc. and subsidiaries as of September 30, 2003, and the related
condensed consolidated statements of operations and cash flows for the
three-month and nine-month periods ended September 30, 2003 and 2002, and the
related condensed consolidated statement of stockholders' equity for the nine
months ended September 30, 2003. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Equitex, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated April 3,
2003, (which includes an explanatory paragraph relating to the adoption of
Statement of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS and
Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS) we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
November 18, 2003
3
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2003 2002
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 6,262,499 $ 8,931,713
Receivables, net 3,379,289 3,507,425
Current portion of notes receivable, including related
parties of $182,700 (2003) and $245,322 (2002) 789,016 245,322
Interest receivable, related parties 62,157 95,547
Prepaid expenses and other 450,761 354,433
----------- -----------
Total current assets 10,943,722 13,134,440
----------- -----------
Notes receivable, net, including related parties of
$1,100,428 (2003) and $1,206,436 (2002) 2,046,821 1,980,030
Property, equipment and leaseholds, net 1,173,352 1,202,885
Deferred tax asset 1,380,000 1,380,000
Intangible and other assets, net 3,543,393 4,098,393
Goodwill 5,636,000 5,636,000
----------- -----------
13,779,566 14,297,308
----------- -----------
$24,723,288 $27,431,748
=========== ===========
(Continued)
4
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2003 2002
------------ ------------
(Unaudited)
Current liabilities:
Accounts payable $ 1,103,153 $ 1,278,267
Accrued expenses and other liabilities, including related
party accruals of $250,135 (2003) and $375,109 (2002) 1,855,933 1,379,878
Accrued liabilities on casino contracts 648,026 622,361
Current portion of long-term debt 51,727 251,727
Line of credit, notes and loans payable 11,961,428 13,493,776
Notes payable, related parties 155,421 254,194
Due to credit card holders 326,970 403,405
------------ ------------
Total current liabilities 16,102,658 17,683,608
------------ ------------
Long-term debt, net of current portion 75,175 240,629
------------ ------------
Total liabilities 16,177,833 17,924,237
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; 2,000,000 shares authorized:
Series D, 6%; stated value $1,000 per share; 408 shares (2003) and
575 shares (2002) issued and outstanding; liquidation preference
of $584,000 408,000 575,000
Series G, 6%; stated value $1,000 per share; 370 shares
issued and outstanding; liquidation preference of $562,000 370,000 370,000
Series I, 6%; stated value $1,000 per share; 1,600 shares (2003) and
1,690 shares (2002) issued and outstanding; liquidation preference
of $2,339,000 1,600,000 1,690,000
Series J, 6%; stated value $1,000 per share; 1,380 shares (2002)
issued and outstanding 1,380,000
Less preferred treasury stock; Series J, at cost; 650 shares (2002) (650,000)
Common stock, $0.02 par value; 50,000,000 shares authorized;
31,752,346 (2003) and 26,527,282 (2002) shares issued;
29,390,278 (2003) and 26,111,425 (2002) shares outstanding 635,047 530,546
Additional paid-in capital 15,002,137 12,719,855
Accumulated deficit (8,372,588) (6,851,039)
Less treasury stock at cost; 2,362,068 shares (2003) and
415,857 shares (2002) (1,097,141) (256,851)
------------ ------------
Total stockholders' equity 8,545,455 9,507,511
------------ ------------
$ 24,723,288 $ 27,431,748
============ ============
See notes to condensed consolidated financial statements.
5
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Three months ended September 30, Nine months ended September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Fee revenue $ 4,825,045 $ 5,039,922 $ 13,944,482 $ 15,012,805
Credit card income, net of provision for losses 85,702 297,184 336,798 2,857,587
Application fees, net of direct marketing costs 1,259 354,048
Other 539,286 14,196 1,190,445
------------ ------------ ------------ ------------
Total revenues 4,910,747 5,877,651 14,295,476 19,414,885
------------ ------------ ------------ ------------
Fees paid to casinos 1,715,741 1,636,759 4,763,827 4,783,961
Salaries, wages and employee benefits 1,729,708 2,079,926 5,047,700 6,514,382
Third party servicing fees 57,669 108,487 202,459 1,570,358
Other operating expenses 1,844,556 1,918,234 4,789,980 6,383,896
Impairment of FDIC receivable 2,151,207 2,151,207
------------ ------------ ------------ ------------
5,347,674 7,894,613 14,803,966 21,403,804
------------ ------------ ------------ ------------
Loss from operations (436,927) (2,016,962) (508,490) (1,988,919)
------------ ------------ ------------ ------------
Other income (expense):
Interest income, including related party interest
of $33,786 and $57,735 for the three and nine months
ended September 30, 2003 and $48,756 and $91,931 for
the three and nine months ended September 30, 2002 33,786 53,140 66,128 96,315
Interest expense, including related party interest of
$144,349 and $421,148 for the three and nine months
ended September 30, 2003, and $181,368 and $516,847
for the three and nine months ended September 30,
2002 (350,573) (392,506) (1,047,187) (1,218,410)
------------ ------------ ------------ ------------
(316,787) (339,366) (981,059) (1,122,095)
------------ ------------ ------------ ------------
Loss before income taxes (753,714) (2,356,328) (1,489,549) (3,111,014)
Income tax expense 8,000 14,000 32,000 50,000
------------ ------------ ------------ ------------
Net loss (761,714) (2,370,328) (1,521,549) (3,161,014)
Repricing of warrants issued to preferred stockholders (235,000) (235,000)
Additional warrants issued to preferred stockholders (53,000)
Warrant accretion (3,300) (9,990)
Redemption of convertible preferred stock in excess
of beneficial conversion features 38,430 86,000
Deemed preferred stock dividends (57,000) (82,000) (176,500) (253,000)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (1,057,014) $ (2,452,328) $ (1,894,619) $ (3,381,014)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.04) $ (0.10) $ (0.07) $ (0.15)
============ ============ ============ ============
Weighted average number of common shares outstanding 29,170,051 23,568,522 28,777,656 22,303,992
============ ============ ============ ============
See notes to condensed consolidated financial statements.
6
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
Convertible preferred stock Common stock
--------------------------- Preferred -------------------------
treasury
Shares Amount stock Shares Amount
----------- ----------- ----------- ----------- -----------
Balances, January 1, 2003 4,015 $ 4,015,000 $(650,000) 26,527,282 $ 530,546
Exercises of warrants for common stock 1,001,566 20,031
Warrants issued for services
Purchase of shares of common stock by subsidiary
from a related party
Redemption of Series I preferred stock for cash (90) (90,000)
Conversion of Series D preferred stock to
common stock (167) (167,000) 467,253 9,345
Conversion of Series J preferred stock to
common stock (1,380) (1,380,000) 650,000 3,496,354 69,927
Conversion of accounts and notes payable to
common stock 259,891 5,198
Sale of treasury stock for cash
Repricing of warrants
Net loss
----------- ----------- ----------- ----------- -----------
Balances, September 30, 2003 2,378 $ 2,378,000 $ - 31,752,346 $ 635,047
=========== =========== =========== =========== ===========
(Continued)
7
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
Common Additional Total
treasury paid-in Accumulated stockholders'
stock capital deficit equity
----------- ----------- ----------- -----------
Balances, January 1, 2003 $ (256,851) $12,719,855 $ (6,851,039) $ 9,507,511
Exercises of warrants for common stock (105,050) 346,706
261,687
Warrants issued for services 254,000 254,000
Purchase of shares of common stock by subsidiary
from a related party (207,000) (207,000)
Redemption of Series I preferred stock for cash (10,942) (100,942)
Conversion of Series D preferred stock to
common stock 157,655
Conversion of Series J preferred stock to
common stock (650,000) 1,310,073
Conversion of accounts and notes
payable to common stock 175,756 180,954
Sale of treasury stock for cash 121,760 26,034 147,794
Repricing of warrants 23,000 23,000
Net loss (1,521,549) (1,521,549)
----------- ----------- ----------- -----------
Balances, September 30, 2003 $(1,097,141) $15,002,137 $(8,372,588) $ 8,545,455
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
8
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
Cash flows provided by operating activities:
Net loss $(1,521,549) $(3,161,014)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by operating activities:
(Recovery of) increase in provision for losses (14,599) 117,821
Depreciation and amortization 836,068 961,893
Beneficial conversion features on convertible promissory notes 40,000
Amortization of discount on convertible promissory notes 58,300
Stock-based compensation expense 277,000 487,500
Impairment of FDIC receivable 2,151,207
Gain on sale of equipment
(1,268)
Changes in assets and liabilities:
Increase (decrease) in accounts receivable 159,923 (773,483)
(Increase) decrease in other assets (96,328) 233,169
(Decrease) increase in due to credit card holders (76,435) 679,990
Increase in accounts payable and accrued liabilities 507,560 736,986
----------- -----------
Total adjustments 1,593,189 4,692,115
----------- -----------
Net cash provided by operating activities 71,640 1,531,101
----------- -----------
Cash flows from investing activities:
Proceeds from sale of equipment 5,233 2,000
Net decrease (increase) in credit card receivables 3,403 (486,227)
Purchases of furniture, fixtures and equipment (269,408) (383,612)
Issuance of related party notes receivable (286,771) (628,499)
Issuance of notes receivable, other (606,316) (500,000)
Repayment of related party notes receivable 295,401 124,258
----------- -----------
Net cash used in investing activities (858,458) (1,872,130)
----------- -----------
Cash flows from financing activities:
Sale of treasury stock 147,794
Redemption of Series I preferred stock for cash (100,942) (382,867)
Proceeds from the exercise of warrants 261,687 406,513
Proceeds from common stock private placement (net of offering costs) 706,196
Purchase of Equitex shares for treasury by subsidiary (207,000) (80,000)
Increase in deferred costs (29,200)
Issuance of notes payable, related parties and other 1,187,640 1,980,806
Repayment of notes payable, related parties and other (2,171,575) (2,286,597)
Net payments on line of credit (1,000,000) (2,000)
----------- -----------
Net cash (used in) provided by financing activities (1,882,396) 312,851
----------- -----------
(Continued)
9
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
Decrease in cash and cash equivalents (2,669,214) (28,178)
Cash and cash equivalents, beginning 8,931,713 7,830,426
----------- -----------
Cash and cash equivalents, ending $ 6,262,499 $ 7,802,248
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,077,122 $ 1,063,983
=========== ===========
Cash paid for taxes $ 126,154 $ 5,500
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Conversion of preferred stock to common stock $ 1,547,000 $ 790,000
=========== ===========
Warrants attached to convertible promissory notes $ 15,000
===========
Amortization of additional warrants issued to preferred
stockholders $ 53,000
===========
Termination of agreement to issue common stock and warrants for
Services $ 750,000
===========
Related party note receivable exchanged for related party note payable $ 200,000
===========
Conversion of promissory notes, accrued interest and accounts payable
to common stock $ 107,911
===========
Conversion of accounts and note payable to common stock
by subsidiary $ 180,954
===========
Equipment exchanged for a reduction in a note payable $ 12,640 $ 62,814
=========== ===========
Reclassification of receivables due from Net First and liabilities
due to Net First card holders to a net receivable due from the FDIC:
Credit card receivables, net $ 1,687,931
Other receivables 6,261,571
Accounts payable (562,736)
Due to credit card holders (5,235,559)
-----------
Receivable from FDIC, as receiver for Net First $ 2,151,207
===========
See notes to condensed consolidated financial statements.
10
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION AND RECENT EVENTS:
INTERIM FINANCIAL STATEMENTS:
The condensed consolidated interim financial statements of Equitex, Inc. and
subsidiaries (the "Company") for the three-month and nine-month periods
ended September 30, 2003 and 2002, have been prepared by the Company
without audit by the Company's independent auditors. In the opinion of the
Company's management, all adjustments necessary to present fairly the
financial position, results of operations, and cash flows of the Company as
of September 30, 2003, and for the periods ended September 30, 2003 and
2002, have been made. Except as described below, those adjustments consist
only of normal and recurring adjustments.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These condensed consolidated financial statements
should be read in conjunction with a reading of the consolidated financial
statements and notes thereto included in the Company's Form 10-K annual
report filed with the Securities and Exchange Commission (`SEC") on April
15, 2003. The results of operations for the three months and nine months
ended September 30, 2003, are not necessarily indicative of the results to
be expected for the full year.
BASIS OF PRESENTATION:
The accompanying financial statements present the consolidated financial
position of Equitex, Inc. and its wholly-owned subsidiaries, Key Financial
Systems, Inc. ("Key"), Nova Financial Systems, Inc. ("Nova"), Chex
Services, Inc. ("Chex"), and its wholly-owned subsidiary Collection
Solutions, Inc. ("Collection") and Equitex's majority-owned subsidiary,
Denaris Corporation ("Denaris") as of September 30, 2003 and December 31,
2002. The results of operations and cash flows of the Company for the three
and nine months ended September 30, 2003 present the consolidated results
of Equitex, Key, Nova, Chex, Collection, and Denaris. The financial
statements presented for the three and nine month periods ended September
30, 2002 consist of the consolidated results of Equitex, Key, Nova and
Chex. During the three and nine months ended September 30, 2003, the net
loss incurred by the Company's majority-owned subsidiary Denaris, exceeded
the minority interest in the common equity (deficiency) of the subsidiary.
The excess of 2003 losses applicable to the minority interest have been
charged to the Company, and no minority interest is reflected in the
Company's September 30, 2003 consolidated financial statements. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
RECENT EVENTS:
PROPOSED SALE OF CHEX:
In July 2003, the Company announced that it executed a definitive agreement
for the sale of its wholly-owned subsidiary, Chex Services, Inc. to Cash
Systems, Inc. ("Cash Systems"), a publicly-traded Delaware Corporation.
Terms of the agreement are for Cash Systems to issue 9,000,000 shares of
common stock to Equitex for all of the outstanding common stock of Chex. As
part of the agreement Equitex will distribute to its stockholders the
number of shares required for Equitex to hold less than ten percent of Cash
Systems' outstanding common stock following the transaction or 1,500,000
shares, whichever is less. Closing of the transaction is subject to certain
requirements including necessary stockholder and regulatory approval,
completion of final documents, due diligence and other customary
pre-closing conditions.
11
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION AND RECENT EVENTS
(CONTINUED):
PROPOSED SALE OF CHEX (CONTINUED):
In November 2003, the Company announced that it executed a definitive
agreement for the sale of Chex to iGames Entertainment, Inc. ("iGames"), a
publicly traded Nevada Corporation. Terms of the agreement are for iGames
to issue at least 62.5% of its common stock to Equitex, with the shares
having a value of at least $63 million for all of the outstanding common
stock of Chex. In addition, the agreement includes a $780,000 two-year
agreement between iGames and Equitex's majority-owned subsidiary, Denaris,
for various services to be provided by Denaris. As part of the agreement
Equitex is to distribute to its stockholders the number of shares required
for Equitex to hold less than ten percent of iGames' outstanding common
stock following the transaction. Closing of the transaction is subject to
certain requirements including necessary stockholder and regulatory
approval, completion of final documents, due diligence and other customary
pre-closing conditions.
The Equitex Board of Directors intends to place both transactions before its
stockholders and recommend that its stockholders approve the iGames
transaction.
NASDAQ STOCK MARKET LISTING:
In July 2002, the Company received notice from the Nasdaq Stock Market
("Nasdaq") that the minimum bid price of the Company's common stock had
fallen below the $1.00 per share price required for continued inclusion. In
June 2003 the Company received notification that the Company regained
compliance with Nasdaq pertaining to the $1.00 minimum bid price
requirement for continuing listing.
AGREEMENT WITH PAYMASTER JAMAICA:
In August 2002, the Company entered into a binding agreement with Paymaster
(Jamaica) Limited ("Paymaster Jamaica") to form a jointly-owned and
operated company to replicate Paymaster Jamaica's financial services
business model throughout the Caribbean, North America and ultimately,
worldwide. This newly-formed company was to be named Paymaster Worldwide,
Inc. ("PWI"). Under the terms of the agreement, the Company advanced
$500,000 to Paymaster Jamaica that could be converted into stock of PWI if
the Company was formed by August 15, 2003. Because the Company was not
formed by this date, the $500,000 advance became a promissory note under
the terms of the agreement. The note bears interest at 6%, is due in
semi-annual payments of principal and interest, and is collateralized by
shares of Paymaster Jamaica stock sufficient to represent on a fully
diluted basis, 20% of the share ownership of the Company, which have been
pledged by the President of Paymaster Jamaica.
Paymaster Jamaica, headquartered in Kingston, Jamaica, commenced operations
in 1997, and offers revenue collection and customer care to businesses,
institutions and consumers on the island of Jamaica. It offers its
customers an alternative to retaining their own commercial offices. In
addition, through its bill payment services, Paymaster Jamaica is
developing cash remittance services, affording its customers the
convenience to send and receive various types of remittances nationally or
internationally via cash or debit cards.
12
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION AND RECENT EVENTS
(CONTINUED):
RECENT EVENTS (CONTINUED):
NET FIRST NATIONAL BANK CLOSURE AND KEY AND NOVA OPERATIONS:
Through March 1, 2002, Key's credit card products were marketed for Net First
National Bank ("Net First") under an agreement that provided the Company
with a 100% participation interest in the receivables and related rights
associated with credit cards issued, and required the payment of monthly
servicing fees to Net First. The Company provided collection and customer
services related to the credit cards issued. On March 1, 2002, federal
banking regulators closed Net First, which was the sole issuing bank for
Key's PAY AS YOU GO credit card program.
On March 4, 2002, the Federal Deposit Insurance Corporation ("FDIC") notified
the Company that it had been appointed receiver of all funds due from Net
First to Key. As receiver, the FDIC elected to disaffirm, to the full
extent, all contracts Key was a party to with Net First. On March 10, 2002,
the Company was made aware that the FDIC was notifying Net First credit
card holders that their accounts were to be closed, and accordingly, Key
would not be able to transfer the existing PAY AS YOU GO credit card
portfolio to a successor financial institution. In November 2002, the
Company filed a lawsuit seeking to recover the full amount of a claim with
the FDIC for all funds due from Net First to Key through the date federal
banking regulators closed Net First (Note 4).
The Company immediately implemented steps to eliminate Key's operating costs
associated with marketing and servicing the Net First program. These steps
included employee lay-offs of all but essential management and employee
personnel necessary to re-establish its marketing and servicing
capabilities upon the establishment of a new relationship with another
financial institution. The Company had discussions with financial
institutions to initiate a new credit card program; however, the Company
has not been successful in establishing such a relationship, and no longer
intends to actively pursue such a relationship. At September 30, 2003, Key
and Nova operations consist solely of processing residual payments on
remaining active accounts.
13
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION AND RECENT EVENTS
(CONTINUED):
STOCK OPTIONS:
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations in accounting
for its stock option plans. Accordingly, no compensation expense has been
recognized for options granted at fair market value. Had compensation cost
for the Company's stock option plans been determined based on the fair
values at the grant dates for awards under the plans consistent with the
fair-value based method of accounting prescribed by Statement of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation", the
Company's results would have been changed to the pro forma amounts
indicated below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net loss $ (761,714) $ (2,370,328) $ (1,521,549) $ (3,161,014)
ADD: Stock-based employee compensation
expense included in reported net income,
(loss) net of related tax effects -- -- -- --
DEDUCT: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects -- -- (484,000) --
------------- ------------- ------------- --------------
Pro forma net loss $ (761,714) $ (2,370,328) $ (2,005,549) $ (3,161,014)
============= ============= ============= ==============
Net loss per share:
Basic and diluted - as reported $ (0.04) $ (0.10) $ (0.07) $ (0.15)
============= ============= ============= ==============
Basic and diluted - pro forma $ (0.04) $ (0.10) $ (0.08) $ (0.15)
============= ============= ============= ==============
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, Accounting for CertaiN Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes
new standards on how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. Under
previous guidance, issuers could account for many of those instruments as
equity. SFAS No.150 requires that those instruments be classified as
liabilities in statements of financial position. This statement does not
affect the classification or measurement of convertible bonds, puttable
stock, or other outstanding shares that are conditionally redeemable.
SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003 for public
companies. The Company currently has no financial instruments that embody
an unconditional obligation of the Company. Therefore, the adoption of
SFAS No. 150 did not impact the Company's results of operations or
financial condition.
14
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2. RECEIVABLES:
Receivables at September 30, 2003 and December 31, 2002 consist of the
following:
September 30, December 31,
2003 2002
----------- -----------
Credit card and ATM processors $ 2,373,248 $ 2,652,504
Credit card receivables, net of allowance for
losses of $1,665 (2003) and $3,465 (2002) 154,394 155,997
Other receivables 851,647 698,924
----------- -----------
$ 3,379,289 $ 3,507,425
=========== ===========
Amounts due from credit card and ATM processors arise primarily from credit
card and ATM advances by Chex to casino patrons. Credit card receivables
include refundable and earned fees, which represent the balance reported to
customers. Credit card receivables are reduced by allowances for refundable
fees and losses. Other receivables at September 30, 2003 include
approximately $552,233 due from Paymaster Jamaica, which represents amounts
due for services performed by Denaris, which has been recorded as deferred
revenue at September 30, 2003. Also included in other receivables at
September 30, 2003 and December 31, 2002, is $299,414 and $433,293,
respectively, due from third party financial institutions to Key. These
amounts are held in trust under agreements to secure payment of reservation
fees due customers.
3. NOTES RECEIVABLE:
Included in related party notes receivable at December 31, 2002, are notes
due from shareholders of $918,936, notes due from an affiliated company of
Equitex of $522,721, and notes due from Chex employees of $10,101. Included
in related party notes receivable at September 30, 2003, are notes are due
from shareholders of $630,936, notes due from an affiliated company of
Equitex of $649,492, and notes due from Chex employees of $2,700. During
the quarter ending September 30, 2003, the Company recorded an allowance of
$160,000 against the related party receivable due from an affiliated
company of Equitex.
Included in other receivables at September 30, 2003 and December 31, 2002, is
a note due from Paymaster Jamaica of $500,000. As of December 31, 2002 and
September 30, 2003, the Company also had a note due from a deceased Chex
officer's estate of $273,594 and $446,393, respectively, net of allowances.
The loan is collateralized by unregistered shares of the Company's common
stock and accordingly, the Company reviews the valuation allowance
regarding the note in relation to the shares pledged. As of December 31,
2002 and September 30, 2003, the valuation allowance was $1,211,100 and
$1,038,300, respectively.
Also included in notes receivable at September 30, 2003, is a note due from a
customer of $606,316, representing the repayment of checks that were
originally cashed at two casino locations and subsequently were returned
for insufficient funds. The note provides for direct payment to the Company
from funds anticipated to be available to the makers of the note during the
fourth quarter of 2003.
4. GOODWILL, INTANGIBLE AND OTHER ASSETS:
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, prescribes a two-phase
process for impairment testing of goodwill, which is performed once
annually, absent indicators of impairment. The first phase screens for
impairment, while the second phase (if necessary) measures the impairment.
The Company has elected to perform its annual analysis during the fourth
calendar quarter of each year. No indicators of impairment were identified
during the nine months ended September 30, 2003.
15
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
4. GOODWILL, INTANGIBLE AND OTHER ASSETS (CONTINUED):
Intangible and other assets consist of the following at September 30, 2003
and December 31, 2002:
September 30, 2003 December 31, 2002
-------------------------------------------- --------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
amount amortization amount amount amortization amount
------------- ------------- -------------- ------------- ------------- --------------
Casino contracts $ 4,300,000 $ 1,199,440 $ 3,100,560 $ 4,300,000 $ 749,440 $ 3,550,560
Non-compete agreements 350,000 147,300 202,700 350,000 99,300 250,700
Customer lists 250,000 159,600 90,400 250,000 102,600 147,400
Trade names 100,000 100,000 100,000 100,000
------------- ------------- -------------- ------------- ------------- --------------
Total intangible assets 5,000,000 1,506,340 3,493,660 5,000,000 951,340 4,048,660
Other assets 49,733 49,733 49,733 49,733
------------- ------------- -------------- ------------- ------------- --------------
$ 5,049,733 $ 1,506,340 $ 3,543,393 $ 5,049,733 $ 951,340 $ 4,098,393
============= ============= ============== ============= ============= ==============
The net carrying amount of intangible assets at September 30, 2003 is
scheduled to be fully amortized by the end of 2009. Amortization expense
for the net carrying amount of intangible assets at September 30, 2003, is
estimated to be $185,000 for the remainder of 2003, and $735,000, $664,000,
$659,000, and $600,000 in 2004, 2005, 2006 and 2007, respectively.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
In May 2002, Key filed a claim with the FDIC for all funds due from Net First
to Key under the Credit Card Program Agreement through the date federal
banking regulators closed Net First. The total amount of the claim was
$4,311,027. In October 2002, the FDIC notified Key that it had determined
to disallow all but $111,734 of the total claim. The notification states
that as the FDIC liquidates the assets of the receivership, Key may
periodically receive payments on the allowed portion of this claim through
dividends. The Company does not agree with this disallowance. In November
2002, the Company filed a lawsuit in the United States District Court for
the Southern District of Florida seeking to recover the full amount of its
claim. The FDIC answered the complaint, asserting a counterclaim for
$1,000,000, which the FDIC asserts is for refunds to be made to customers
who did not receive credit cards as a result of FDIC actions.
While the Company believes that it will ultimately be successful in
collecting on its claim, there is no assurance that collection will
eventually occur. Accordingly, the Company has allowed for 100% of the net
remaining balance due of $2,151,207 from the FDIC, as receiver for Net
First, in addition to amounts previously allowed for.
16
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED):
LITIGATION (CONTINUED):
In August 2000, William G. Hays, Jr., liquidating agent for RDM Sports Group,
Inc. and related debtors, filed an adversary proceeding against Equitex,
Smith Gambrell and Russell, LLP, David J. Harris, P.C. and David J. Harris,
in the United States Bankruptcy Court for the Northern District of Georgia,
Newnan Division, Adversary Proceeding No. 00-1065. The liquidating agent
alleges that the Company breached its October 29, 1987, consulting
agreement with RDM, breached fiduciary duties allegedly owed to RDM, and
that Equitex is liable for civil conspiracy and acting in concert with
directors of RDM. The liquidating agent is seeking unspecified compensatory
and punitive damages, along with attorney's fees, costs and interest. In
connection with the Company's distribution of its assets and liabilities to
Equitex 2000 on August 6, 2001, Equitex 2000 has agreed to indemnify the
Company and assume defense in this matter, as well as certain other legal
actions existing at August 6, 2001. The costs to defend this matter may be
material, and an unfavorable outcome may have a material adverse effect on
the Company should Equitex 2000 not be in a position to fulfill its
indemnification to the Company for any losses that may be incurred.
In November 2003, Equitex reached a tentative settlement agreement with the
liquidating agent pursuant to which Equitex is to pay the sum of $400,000
no later than May 21, 2004, in exchange for the dismissal of the adversary
proceeding and the execution of a mutual release of claims by both parties.
Should Equitex 2000 be unable to fulfill its obligations under the
indemnification and settlement as agreed, Equitex would be required to
perform under the proposed agreement.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company.
BONUS TO OFFICER:
In June 2003, the Company's Board of Directors approved a bonus arrangement
with the Company's president. The bonus arrangement, effective June 2,
2003, provides for an annual bonus to be calculated quarterly based on 5%
of the increase in the market value of the Company's common stock, accrued
quarterly, beginning with the closing price as reported by Nasdaq on
December 31 of each year, and ending with the closing price on December 31
of the following year. Payments under the bonus arrangement are to be made
at the discretion of the Company's management from time to time, as cash
flow permits. Total compensation expense recorded under this arrangement
for the three and six months ended September 30, 2003 was approximately
$209,000, of which approximately $15,000 has been paid and approximately
$194,000 is included in accrued liabilities at September 30, 2003.
17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
6. STOCKHOLDERS' EQUITY:
SERIES D CONVERTIBLE PREFERRED STOCK:
The Series D Preferred Stock is convertible, together with any cumulative
unpaid dividends, at any time into shares of the Company's common stock at
a conversion price equal to 65% of the average closing bid price of the
Company's common stock as specified in the agreement.
The holder of each share of Series D convertible preferred stock is entitled
to a 6% cumulative annual dividend, payable quarterly. Dividends are
payable in cash or, at the Company's option, in shares of the Company's
common stock. The Series D Preferred Stock contains liquidation preference
equal to the sum of the stated value of each share plus an amount equal to
130% of the stated value plus the aggregate of all cumulative unpaid
dividends on each share of Series D Preferred Stock until the most recent
dividend payment date or date of liquidation, dissolution or winding up of
the Company.
During the nine months ended September 30, 2003, 167 shares of Series D
Preferred Stock, plus unpaid dividends of $49,135 were converted into
467,253 shares of common stock at conversion prices of $0.25 to $0.66 per
share.
SERIES G CONVERTIBLE PREFERRED STOCK:
The Series G Preferred Stock is convertible, together with any cumulative
unpaid dividends, at any time into shares of the Company's common stock at
a conversion price per share equal to the lesser of $6.50 or 65% of the
average closing bid price of the Company's common stock as specified in the
agreement.
The holder of each share of the Series G Preferred Stock is entitled to
cumulative dividends at 6% per annum plus a 4% dividend default rate,
payable quarterly. Dividends are payable in cash or, at the Company's
option, in shares of the Company's common stock. The Series G Preferred
Stock contains a liquidation preference equal to the sum of the stated
value of each share plus an amount equal to 130% of the stated par value
plus the aggregate of all cumulative unpaid dividends on each share of
Series G Preferred Stock until the most recent dividend payment date or
date of liquidation, dissolution or winding up of the Company. All
outstanding shares of Series G Preferred Stock were to automatically
convert into common stock on August 31, 2003. However, the Company has been
negotiating with the holder to extend the terms, therefore the holder has
not elected to convert the preferred shares to common stock. The Series G
Preferred Stock is redeemable at the Company's option at any time prior to
its conversion, at a redemption price equal to $1,350 per share plus any
cumulative unpaid dividends.
SERIES I CONVERTIBLE PREFERRED STOCK:
The Series I Preferred Stock is convertible, together with any cumulative
unpaid dividends, at any time into shares of the Company's common stock at
a conversion price per share equal to the lesser of $5.98 or 65% of the
average closing price of the Company's common stock as specified in the
agreement.
18
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED):
SERIES I CONVERTIBLE PREFERRED STOCK (CONTINUED):
The holder of each share of Series I Preferred Stock is entitled to
cumulative dividends at 6% per annum plus a 4% dividend default rate,
payable quarterly. Dividends are payable in cash, or at the Company's
option, in shares of the Company's common stock. The Series I Preferred
Stock contains a liquidation preference equal to the sum of the stated
value of each share plus an amount equal to 125% of the stated value plus
the aggregate of all cumulative unpaid dividends on each share of Series I
Preferred Stock until the most recent dividend payment date or date of
liquidation, dissolution or winding up of the Company. All outstanding
shares of the Series I Preferred Stock automatically convert into common
stock on July 20, 2004. The Series I Preferred Stock is redeemable at the
Company's option at any time through July 20, 2004, at a redemption price
equal to $1,250 per share plus any cumulative unpaid dividends.
In February 2003, the Company redeemed 90 shares of Series I Preferred Stock
for $100,000. The redemption price was less than the amount originally
allocated to the beneficial conversion feature, and as a result, loss
applicable to common stockholders was reduced by $38,430 for the three
months ended March 31, 2003.
In September 2003, the Company redeemed accrued unpaid dividends on the
Series I Preferred Stock for $942.
SERIES J CONVERTIBLE PREFERRED STOCK:
The Series J Preferred Stock was convertible, together with any cumulative
unpaid dividends, at any time into shares of the Company's common stock at
a conversion price per share equal to 65% of the average closing bid price
of the Company's common stock as specified in the agreement (but in no
event less than $0.40 per share).
Dividends on the Series J Preferred Stock were at 6% per annum plus a 4%
dividend default rate, payable quarterly. Dividends were payable in cash
or, at the Company's option, in shares of the Company's common stock.
In January 2003, all of the outstanding shares of Series J Preferred Stock
and unpaid dividends of $18,542 were converted into 3,496,354 shares of
common stock at $0.40 per share.
ISSUANCES OF COMMON STOCK:
During the nine months ended September 30, 2003, the Company issued 1,001,566
shares of common stock upon the conversion of warrants for $366,737, at an
average conversion price of $0.37 per share. Of these shares, 225,000 were
issued to a subsidiary of the Company at exercise prices of $0.38 to $0.50
per share. The shares issued to the subsidiary are presented as common
treasury stock. Accordingly common treasury stock was increased by
$105,050.
During the nine months ended September 30, 2003, the Company also converted
accounts payable of $180,954 into 259,891 shares of common stock at
conversion prices of $0.64 to $0.72 per share, the market price of the
common stock at the date of issuance.
19
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK OPTIONS AND WARRANTS:
In January 2003, the Company issued a one-year warrant to a consultant for
services to purchase 100,000 shares of the Company's common stock at $0.41
per share (the market price of the common stock at the date of the grant).
These warrants were valued at $12,000 based upon the Black-Scholes option
pricing model.
In January 2003, the Company also issued two-year warrants to consultants and
unrelated parties to purchase 400,000 shares of common stock at $0.54 per
share (the market price of the common stock at the date of the grant).
These warrants were valued at $64,000 based upon the Black-Scholes option
pricing model.
In April 2003, the Company issued two-year warrants to a consultant for
services to purchase 70,000 shares of common stock at $0.52 per share (the
market price of the common stock at the date of the grant). These warrants
were valued at $12,500 based upon the Black-Scholes option pricing model.
In May 2003, the Company issued two-year warrants to a consultant for
services to purchase 450,000 shares of common stock. The exercise price on
200,000 warrants is $0.68 per share (the market price of the common stock
at the date of the grant). The next 200,000 warrants have an exercise price
of $0.88 per share and the remaining 50,000 warrants have an exercise price
of $0.90 per share. These warrants were valued at approximately $78,000
based upon the Black-Scholes option pricing model.
In May 2003 the Company also issued four month warrants to consultants for
services to purchase 500,000 shares of common stock at $0.69 per share (the
market price of the common stock at the date of the grant). These warrants
were valued at $68,500 based upon the Black-Scholes option pricing model. A
related party received 200,000 of these warrants.
In May and June 2003 the Company granted five-year options to purchase
1,400,000 shares of common stock to directors, officers and employees of
the Company (which includes 760,000 options to Chex employees) and 100,000
options to a consultant for services. The options were granted under the
2003 Stock Option Plan (the "2003 Plan"). Common stock reserved for options
under the 2003 Plan total 3,500,000. The options have exercise prices
between $0.68 and $1.03 per share (the market price of the common stock at
the respective grant dates). The options granted to the consultant were
valued at $19,000 based upon the Black-Scholes option pricing model.
In May and June 2003, the Company reduced the exercise price of certain
existing warrants to purchase up to 221,625 shares of the Company's common
stock, including 80,000 warrants issued to Chex. As a result of the
reduction in exercise price, the Company recognized an additional $23,000
of stock based compensation expense relating to these repriced warrants.
In September 2003, the Company reduced the exercise price of certain existing
warrants to purchase up to 946,400 shares of the Company's common stock to
induce the holders to exercise these warrants. The warrants were initially
issued in connection with the sale of preferred stock. As a result of the
reduction in the exercise price, loss applicable to common stockholders was
increased by $235,000 for the three months ended September 30, 2003.
20
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED):
TREASURY STOCK TRANSACTIONS:
In January 2003, Chex converted 650 shares of the Company's Series J
Preferred Stock plus unpaid dividends of $8,884 into 1,647,211 shares of
common stock. The cost of the preferred stock was $650,000, which has been
reclassified from preferred treasury stock to common treasury stock.
In April 2003, Chex exercised a warrant to purchase 160,000 shares of Equitex
common stock at $0.50 per share. The cost of the shares issued ($80,000)
has been added to treasury stock.
In June 2003, Chex purchased 300,000 shares of Equitex common stock from its
affiliate, Equitex 2000, Inc. for $0.69 per share (the market price of the
common stock at the date of the purchase). The cost of the shares
($207,000) has been added to treasury stock.
In August 2003, Chex exercised warrants to purchase 65,000 shares of Equitex
common stock at $0.385 per share. The cost of these shares issued ($25,050)
has been added to treasury stock.
During the nine months ended September 30, 2003, Chex sold 226,000 shares of
Equitex common stock between $0.57 and $0.70 per share (the market prices
of the common stock at the date of each sale). The stock was acquired at an
average cost of approximately $0.54 per share and the cost of the shares
sold ($121,760) has been removed from treasury stock. The difference
between the sales price and cost of the shares sold ($26,034) has been
classified as additional paid in capital.
21
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
7. OPERATING SEGMENTS:
As of and for the three-month period ended September 30, 2003, segment
results were as follows:
Cash
Credit card disbursement Corporate
services services activities Total
-------------- ------------ ----------- ------------
(Key and Nova) (Chex)
Revenues $ 85,702 $ 4,825,045 $ 4,910,747
Net income (loss) (32,695) 72,814 $ (801,833) (761,714)
Total assets 475,773 22,856,661 1,390,854 24,723,288
As of and for the three-month period ended September 30, 2002, segment
results were as follows:
Cash
Credit card disbursement Corporate
services services activities Total
-------------- ------------ ----------- ------------
(Key and Nova) (Chex)
Revenues $ 837,728 $ 5,039,923 $ 5,877,651
Net income (loss) (2,259,446) 140,171 $ (251,053) (2,370,328)
Total assets 1,650,422 25,951,041 933,210 28,534,673
As of and for the nine-month period ended September 30, 2003, segment results
were as follows:
Cash
Credit card disbursement Corporate
services services activities Total
-------------- ------------ ----------- ------------
(Key and Nova) (Chex)
Revenues $ 350,994 $ 13,944,482 $ 14,295,476
Net income (loss) 20,244 539,656 $(2,081,449) (1,521,549)
As of and for the nine-month period ended September 30, 2002, segment results
were as follows:
Cash
Credit card disbursement Corporate
services services activities Total
-------------- ------------ ----------- ------------
(Key and Nova) (Chex)
Revenues $ 4,402,080 $ 15,012,805 $ 19,414,885
Net income (loss) (2,315,369) 430,269 $ (1,275,914) (3,161,014)
22
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO,
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL
CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AMOUNTS RECEIVABLE
FROM NET FIRST NATIONAL BANK, AND FUTURE OPERATIONAL PLANS, FOR THIS PURPOSE,
ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY
BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE",
"INTENT", "COULD", "ESTIMATE", "MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER
VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND
ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON THE VARIETY OF IMPORTANT
FACTORS, INCLUDING UNCERTAINTY RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR
ACQUISITIONS, GOVERNMENTAL REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY
OTHER FACTORS DISCUSSED IN THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION.
OVERVIEW
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated/combined
financial statements and notes thereto for the years ended December 31, 2002,
2001 and 2000. The financial results presented for the nine months ended
September 30, 2003 are those of Chex Services, Inc. ("Chex"), Key Financial
Systems, Inc. ("Key"), Nova Financial Systems, Inc. ("Nova") and Denaris
Corporation ("Denaris"), formed in August 2002, on a consolidated basis with
those of Equitex, Inc. The financial results presented for the nine months ended
September 30, 2002 are those of Chex, Key and Nova on a consolidated basis with
Equitex.
LIQUIDITY AND CAPITAL RESOURCES
For the year ending December 31, 2003, we presently anticipate our liquidity and
capital resource needs will be satisfied from cash flows generated from our
operating activities. Although the closure of Net First National Bank ("Net
First") and subsequent closure of Key operations have eliminated positive cash
flows at Key, we implemented actions in 2002 to reduce personnel, marketing and
other operating costs.
Our other operating subsidiary, Chex, anticipates positive cash flows in 2003.
Additionally, Chex has begun to introduce new products during the year. These
products are complementary to its existing products and services. Future
products may include: cashless gaming smart cards, debit cards and customized
funds transfer systems for multi-jurisdictional gaming operators.
23
Cash flow activity for the nine months ended September 30, 2003, includes the
activity of Chex, Key and Nova, Equitex, and Denaris. Cash flow activity for the
three months ended September 30, 2002 includes the activity of Chex, Key and
Nova and Equitex. For the nine months ended September 30, 2003, net cash
provided by operating activities was $71,640 compared to $1,531,101 for the nine
months ended September 30, 2002. The most significant portion of this change was
the changes in current assets and liabilities which provided cash and adjusted
the net loss by $494,720 for the nine months ended September 30, 2003 compared
to the changes in the same assets and liabilities for the nine months ended
September 30, 2002 of $876,662. Additionally, non-cash adjustments to the
current year's results were $1,098,469 including depreciation and amortization
of $836,068 and stock based compensation of $277,000 compared to total non-cash
adjustments of $3,815,453, mostly comprised of $2,151,207 for the impairment of
the FDIC receivable, and $961,893 and $487,500, respectively, for depreciation
and amortization and stock based compensation for the nine months ended
September 30, 2002. For the nine months ended September 30, 2003 there was a
decrease in the provision for losses of $14,599 compared to an increase in the
provision for the nine months ended September 30, 2002 of $117,821. During the
nine months ended September 30, 2003, the company reduced a provision that had
previously been recorded based upon the improvement in the collateral provided
as security for a note receivable.
Cash used in investing activities for the nine months ended September 30, 2003
was $858,458 compared to $1,872,130 for the nine months ended September 30,
2002. Cash used in 2003 investing activities was primarily attributable to net
advances of $597,686 to related parties and others on notes receivable. Cash
used in 2002 investing activities was primarily due to an increase of $486,227
in credit card receivables, and net advances of $1,387,853 to related parties
and others on notes receivable.
Cash provided by financing activities for the nine months ended September 30,
2002 was $312,851 compared to cash used in financing activities of $1,882,396
for the nine months ended September 30, 2003. The significant activity for the
nine months ended September 30, 2003, included the Company making repayments on
notes payable (related parties and other) and on its line of credit of
$2,171,585 and $1,000,000, respectively, offset by the Company receiving
$261,687 from the exercise of warrants; also Chex sold 226,000 shares of the
Company's common stock for $147,794. The Company also received proceeds of
$1,187,640 upon the issuance of short-term notes payable to related parties.
During the nine months ended September 30, 2003, the Company redeemed 90 shares
of its Series I Preferred Stock for $100,942 in cash. The significant activity
for the nine months ended September 30, 2002, included the company receiving
$1,112,709 from the exercise of warrants and the issuance of common stock,
proceeds received of $1,980,806 upon the issuance of short term related party
and third party notes payable, and payments of $2,286,597 on short term notes
payable to related parties and third parties. In addition, the Company redeemed
300 shares of its Series I Preferred stock for $382,867 in cash.
For the nine months ended September 30, 2003, net cash decreased $2,669,214
compared to a decrease of $28,178 for the nine months ended September 30, 2002,
and ending cash at September 30, 2003, was $6,262,499 compared to $7,802,248 at
September 30, 2002. Significantly all of the Chex's cash is required to be
utilized for its casino operations, and they are prohibited from using it for
other corporate purposes. Consequently Equitex needs to rely on other sources
for its liquidity needs.
Other sources available to us that we may utilize include the sale of equity
securities through private placements of common and/or preferred stock as well
as the exercise of stock options and/or warrants, all of which may cause
dilution to our stockholders. In October 2003, the Company recieved cash of
approximately $828,000 upon the exercise the exercise of approximately 1,432,000
warrants. We may also be able to borrow funds from related and/or third
parties.
24
RESULTS OF OPERATIONS
REVENUES
Consolidated revenues for the nine months ended September 30, 2003, were,
$14,295,476 compared to consolidated revenues of $19,414,885 for the nine months
ended September 30, 2002. Consolidated revenues for the three months ended
September 30, 2003, were $4,910,947, compared to consolidated revenues of
$5,877,651 for the three months ended September 30, 2002. The decrease in each
of the periods was due primarily to the reduction of revenues from Key and Nova
resulting from the closure of Net First and our subsequent termination of our
credit card programs.
REVENUE BY SEGMENT
Three months ended Nine months ended
September 30, September 30,
Segment 2003 2002 2003 2002
- ------- ---------- ---------- ---------- -----------
Cash disbursement services $4,825,045 $5,039,922 $13,944,482 $15,012,805
Credit card services 85,702 837,729 350,994 4,402,080
---------- ---------- ----------- -----------
$4,910,747 $5,877,651 $14,295,476 $19,414,885
========== ========== =========== ===========
CASH DISBURSEMENT SERVICES SEGMENT
Chex processed over $611 million and $638 million in cash transactions for the
nine months ended September 30, 2003 and 2002, respectively. Revenues are
derived principally from check cashing fees, credit and debit card advance fees,
automated teller machine ("ATM") surcharges and transaction fees.
Chex cashes personal checks at its cash access locations for fees of between 5
and 6 percent based on its casino contracts. Chex also cashes "other" checks,
comprised of tax and insurance refunds, casino employee payroll checks and
casino jackpot winnings at a reduced rate. For the nine months ended September
30, 2003, Chex cashed over $122 million of personal checks and also over $109
million of "other checks". Fees earned on personal and "other" checks were
approximately $6,271,000 and $807,000, respectively, for the nine months ended
September 30, 2003. For the nine months ended September 30, 2002, Chex cashed
over $128 million personal checks and also over $116 million of "other checks".
Fees earned on personal and "other checks" were approximately $6,733,000 and
$940,000, respectively.
For the nine months ended September 30, 2003, Chex processed approximately
327,000 credit/debit card transactions with approximately $112 million in
advances and earned fees of $3,983,000 on these transactions. For the nine
months ended September 30, 2002, Chex processed approximately 377,000
credit/debit card transactions with approximately $138 million in advances and
earned fees of $4,281,000 on these transactions. For the nine months ended
September 30, 2003, Chex processed over 2,700,000 ATM transactions and earned
commissions or fees of $2,459,000 on approximately $266 million of transactions.
For the nine months ended September 30, 2002, Chex processed approximately
2,500,000 million ATM transactions and earned commissions or fees of $2,589,000
on approximately $255 million of transactions. Chex collected fees of $377,000
on returned checks and had other income of $47,000 for the nine months ended
September 30, 2003, compared to $336,000 on returned checks and other income of
$134,000 for the nine months ended September 30, 2002.
For the three months ended September 30, 2003, Chex cashed over $43 million of
personal checks and over $36 million of "other checks", earning fees of
approximately $2,205,000 and $266,000, respectively. For the three months ended
September 30, 2002, Chex cashed over $45 million of personal checks and over $38
million of "other checks", earning fees of approximately $2,330,000 and
$257,000, respectively.
For the three months ended September 30, 2003, Chex processed over 940,000 ATM
transactions, earning fees of $833,000 on over $92 million in transactions,
compared to 880,000 transactions, earning fees of $919,000 on over $87 million
in transactions for the three months ended September 30, 2002.
25
For the three months ended September 30, 2003, Chex processed approximately
113,000 credit/debit card transactions, with approximately $39 million in
advances, and earned fees of approximately $1,378,000 on these transactions. For
the three months ended September 30, 2002, Chex processed approximately 118,000
transactions, with approximately $42 million in advances, and earned fees of
approximately $1,369,000 on these transactions.
For the three months ended September 30, 2003 and September 30, 2002, Chex
collected fees of $131,000 and $112,000, respectively on returned checks and had
other income of approximately $12,000 and $53,000, respectively.
CREDIT CARD SERVICES SEGMENT
CREDIT CARD INCOME
On March 1, 2002, the Office of the Comptroller of the Currency closed Net First
National Bank ("Net First") and appointed the FDIC as receiver. Key immediately
ceased all marketing and processing of new credit card accounts at the close of
business on March 1, 2002. In addition, the FDIC repudiated Key's contract with
Net First effective March 4, 2002, and has closed all the credit card accounts
subject to Key's contract with Net First. The FDIC's action results in the
termination of all future credit card servicing revenues to Key from the Net
First portfolio after March 4, 2002.
Through February 28, 2002, the Net First portfolio provided $2,121,220 of credit
card servicing fees. For the nine months ended September 30, 2002, credit card
servicing fees, application fees and other was $4,402,080 compared to $350,994
for the nine months ended September 30, 2003. For the three months ended
September 30, 2003, credit card servicing fees were $85,702 compared to $350,944
for the three months ended September 30, 2002. The revenue in the current period
is the residual payments on remaining active accounts.
Prior to March 1, 2002, credit card servicing fees were the major component of
credit card income, which was Key and Nova's principal source of earnings before
the closure of Net First. Credit card fees were assessed on credit card accounts
owned by each company's client banks. These include monthly membership fees,
late charges, over limit fees, and return check fees. The fees were paid to Key
and Nova under a 100% loan participation agreement with the client bank. Credit
card servicing fees for the nine months ended September 30, 2002, were
$2,857,587. The Company has not issued any new cards since March 1, 2002, due to
the closure of Net First.
APPLICATION FEES, NET OF DIRECT MARKETING COSTS
Key and Nova no longer receive application fees due to the closure of Net First
and the termination of all marketing programs related to the Net First credit
card. Application fees were $354,048 for the nine months ended September 30,
2002, and $1,259 for the three months ended September 30, 2002..
OTHER INCOME, NET
Other income for Key and Nova for the nine months ended September 30, 2003, was
$14,189 compared to $1,190,445 for the nine months ended September 30, 2002.
There was no other income for Key and Nova for the three months ended September
30, 2003 and $539,286 for the nine months ended September 30, 2002. This income
is mostly comprised of other marketing and lead income, which was significantly
higher in 2002 when Key and Nova were producing marketing and lead revenues
after the March 1, 2002, closure of Net First.
26
OPERATING EXPENSES
Total operating expenses for the three and nine months ended September 30, 2003,
was $5,347,674 and $14,803,966 compared to $7,894,613 and $21,403,804 the three
and nine months ended September 30, 2002, respectively. The 2002 periods include
expenses for the Company, Chex, Key and Nova. The 2003 periods include expenses
of the Company, Chex, Key Nova, and Denaris.
Three months ended Nine months ended
September 30, September 30,
Segment 2003 2002 2003 2002
- ------- ---------- ---------- ----------- -----------
Cash disbursement services $4,452,851 $4,564,381 $12,516,898 $13,526,055
Credit card services 118,397 3,097,174 329,181 6,717,448
Corporate activities 776,426 233,058 1,957,387 1,160,301
---------- ---------- ----------- -----------
$5,347,674 $7,894,613 $14,803,966 $21,403,804
========== ========== =========== ===========
CASH DISBURSEMENT SERVICES SEGMENT
Chex operating expenses of $4,452,851 and $4,564,381 for the three months ending
September 30, 2003 and 2002, and $12,516,898 and $13,526,055 for the nine months
ended September 30, 2003 and 2002 were comprised as follows:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---------- ---------- ----------- ----------
Fees to casinos $1,715,741 $1,636,759 $ 4,763,827 $4,783,961
Salaries and related costs 1,522,554 1,522,464 4,467,414 4,487,785
Returned checks, net of collections 176,735 253,044 300,166 491,589
General operating expenses 763,529 856,714 2,172,269 1,611,795
Depreciation and amortization 274,292 295,400 813,231 856,211
---------- ---------- ----------- -----------
$4,452,851 $4,564,381 $12,516,898 $13,526,055
========== ========== =========== ===========
CREDIT CARD SERVICES SEGMENT
The closing of Net First and the shut down of their portfolio has had a
significant impact in reducing operating expenses from $6,717,448 for the nine
months ending September 30, 2002, compared to $329,681 for the nine months
ending September 30, 2003. Included in the operating expenses for the three and
nine months ended September 30, 2002, is the impairment of the FDIC receivable
for $2,151,207. The majority of the remaining operating expenses were directly
related to Key's credit card marketing efforts and portfolio servicing
responsibilities under the contract with Net First. Effective March 11, 2002,
Key has eliminated all direct costs associated with the Net First program.
Included in operating expenses for the nine months ended September 30, 2003,
were third party servicing fees of $202,459 associated with the remaining active
accounts. Additionally, for the nine months ended September 30, 2003, there were
general operating expenses of $126,801. Third party servicing fees for the nine
months ended September 30, 2002 were $1,570,358 and personnel costs were
$1,740,800. Other expenses including occupancy costs were $1,255,083 for the
nine months ended September 30, 2002.
27
CORPORATE ACTIVITY
Included in the three and nine months ended September 30, 2003, are operating
expenses for Equitex and Denaris of $776,426 and $1,957,387. For the three
months ended September 30, 2003, these operating expenses are comprised of
selling, general and administrative expenses of $569,272 and personnel costs of
$207,154. Included in the general and administrative expenses is a reserve of
$160,000 on a related party note, as well as $183,951 of expenses related to
previously incurred professional fees associated with preparing Chex for an
initial public offering. The remaining major components of the general and
administrative expenses are legal, accounting, and professional services of
$109,500 and general office expenses of $115,821. For the nine months ended
September 30, 2003, total costs comprise of general and administrative expenses
of $1,377,522 and $579,865 in personnel costs. Included in the general and
administrative expenses are $160,000 reserve on a note receivable from an
affiliate, and the $183,951 expenses described above, as well as $277,000 of
stock-based compensation expense. Other general and administrative expenses for
the nine months ended September 30, 2003, include professional fees of $385,641
and general office expenses of $370,930. Stock-based compensation expense
represents non-cash expenses related to issuances of warrants and options to
third party consultants for services.
Operating expenses for the three and nine months ended September 30, 2002, were
$233,058 and $1,169,301, respectively. For the nine months, these expenses are
comprised of professional fees of $367,145, salaries and related costs of
$235,796, charges related to a late registration filing regarding the Series I
convertible preferred shares of $263,600, stock-based compensation of $49,500
and $194,260 of other general operating costs.
For the three months ended September 30, 2002, costs were comprised of
professional fees of $117,635, salaries and related costs of $102,311, other
general operating costs of $39,612, offset by a reduction in stock-based
compensation of $26,500.
ITEM THREE
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates and a decline in the stock market. The
Company does not enter into derivatives or other financial instruments for
trading or speculative purposes. The Company has limited exposure to market risk
related to changes in interest rates. The Company does not currently invest in
equity instruments of public or private companies for business or strategic
purposes.
The principal risks of loss arising from adverse changes in market rates and
prices to which the Company and its subsidiaries are exposed relate to interest
rates on debt. The Company has both fixed and variable rate debt. Chex has
$11,732,678 and $13,644,132 of debt outstanding as of September 30, 2003 and
December 31, 2002, respectively, of which $11,437,776 and $12,208,766 has been
borrowed at fixed rates ranging from 8% to 12% at September 30, 2003 and
December 31, 2002, respectively. This fixed rate debt is subject to renewal
annually and is payable upon demand with 90 days written notice by the debt
holder. Chex also has $301,902 and $1,455,356 of variable rate debt at September
30, 2003 and December 31, 2002, respectively, owed to a bank. The lender
presently charges interest at 0.5% to 0.75% over the prime rate.
As most of the Company's average outstanding indebtedness is renewed annually
and carries a fixed rate of interest, a change in interest rates is not expected
to have a material impact on the consolidated financial position, results of
operations or cash flows of the Company during the year ending December 31,
2003.
ITEM FOUR
DISCLOSURE CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO")/Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
quarterly report. Based on that review and evaluation, the CEO/CFO has concluded
that the Company's current disclosure controls and procedures, as designed and
implemented, were effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's internal controls subsequent to the date of their evaluation.
There were no significant material weaknesses identified in the course of such
review and evaluation and, therefore, no corrective measures were taken by the
Company.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 31 - Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equitex, Inc.
(Registrant)
Date: November 19, 2003 By: /s/ Henry Fong
----------------------------------
Henry Fong
President, Treasurer and
Chief Financial Officer
30