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, 2004
( ) 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, 2004: 33,929,830
EQUITEX, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Report of Independent Registered Public Accounting Firm 3
Condensed consolidated balance sheets - September 30, 2004
(unaudited) and December 31, 2003 4 - 5
Condensed consolidated statements of operations - three and
nine months ended September 30, 2004 and 2003 (unaudited) 6
Condensed consolidated statement of changes in stockholders'
equity - nine months ended September 30, 2004 (unaudited) 7
Condensed consolidated statements of cash flows - nine months
ended September 30, 2004 and 2003 (unaudited) 8 - 9
Notes to condensed consolidated financial statements 10 - 26
Item 2. Management's discussion and analysis of financial condition
and results of operations 27 - 35
Item 3. Quantitative and qualitative disclosures of market risk 36
Item 4. Disclosure controls and procedures 37
PART II OTHER INFORMATION
Item 1. Legal proceedings 37
Item 2. Changes in securities and use of proceeds 37
Item 3. Defaults upon senior securities 37
Item 4. Submission of matters to a vote of security holders 37
Item 5. Other information 37
Item 6. Exhibits and reports on Form 8-K 37
Signature 38
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Equitex, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Equitex, Inc. and subsidiaries as of September 30, 2004, the related condensed
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 2004 and 2003, the related condensed consolidated statement
of changes in stockholders' equity for the nine-month period ended September 30,
2004, and the related condensed consolidated statements of cash flows for the
nine-month periods ended September 30, 2004 and 2003. These interim financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board (United
States), 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 the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Equitex, Inc. and subsidiaries as of December 31, 2003, 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 13,
2004 (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, 2003, 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 17, 2004
3
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2004 2003
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 6,387,881 $ 8,059,780
Receivables, net 2,616,890 3,509,120
Current portion of notes and interest receivable, including
related parties of $0 (2004) and $239,206 (2003) 62,100 707,155
Prepaid expenses and other 604,295 314,372
Assets of discontinued operations 113 1,055
----------- -----------
Total current assets 9,671,279 12,591,482
----------- -----------
Notes and interest receivable, net, including related parties
of $1,738,160 (2004) and $1,462,375 (2003) 4,661,656 2,107,062
Property, equipment and leaseholds, net 1,212,572 1,184,813
Deferred tax asset 1,380,000
Intangible and other assets, net 3,225,403 3,358,393
Goodwill 5,636,000 5,636,000
----------- -----------
14,735,631 13,666,268
----------- -----------
$24,406,910 $26,257,750
=========== ===========
(Continued)
4
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
Current liabilities:
Bank overdraft $ 2,497,766
Accounts payable $ 716,815 651,106
Accrued expenses and other liabilities, including related
party accruals of $574,371 (2004) and $1,293,360 (2003) 2,318,885 2,722,986
Accrued liabilities on casino contracts 612,186 587,099
Current portion of long-term debt 1,376,488 201,727
Notes and loans payable, including related party notes of
$29,344 (2004) and $155,421 (2003) 11,022,126 11,432,598
Due to credit card holders 221,534 275,499
Liabilities of discontinued operations 591,149 621,768
------------ ------------
Total current liabilities 16,859,183 18,990,549
Long-term debt, net of current portion 3,047,919 37,243
------------ ------------
Total liabilities 19,907,102 19,027,792
------------ ------------
Minority interest 194,371 --
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; 2,000,000 shares authorized:
Series D, 6%; stated value $1,000 per share; 408 shares issued
and outstanding; liquidation preference of $609,000 408,000 408,000
Series G, 6%; stated value $1,000 per share; 370 shares issued
and outstanding; liquidation preference of $600,000 370,000 370,000
Series I, 6%; stated value $1,000 per share; 1,600 shares issued
and outstanding; liquidation preference of $2,447,000 1,600,000 1,600,000
Common stock, $0.02 par value; 50,000,000 shares authorized
35,234,420 (2004) and 34,530,040 (2003) shares issued;
33,847,352 (2004) and 33,167,972 shares outstanding 704,689 690,601
Stock subscription receivable (216,000) (800,000)
Additional paid-in capital 18,959,824 17,115,338
Accumulated deficit (16,602,276) (11,428,264)
Less treasury stock at cost; 1,387,068 shares (2004) and 1,362,068
shares (2003) (918,800) (725,717)
------------ ------------
Total stockholders' equity 4,305,437 7,229,958
------------ ------------
$ 24,406,910 $ 26,257,750
============ ============
See notes to condensed consolidated financial statements.
5
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
Three months ended September 30, Nine months ended September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Fee revenue $ 4,308,684 $ 4,825,043 $ 11,230,047 $ 13,944,480
Credit card income, net of provision for losses 63,243 85,272 208,421 331,062
------------ ------------ ------------ ------------
Total revenue 4,371,927 4,910,315 11,438,468 14,275,542
------------ ------------ ------------ ------------
Fees paid to casinos 1,514,970 1,715,741 3,890,170 4,763,827
Salaries, wages and employee benefits 1,394,018 1,729,708 4,091,349 5,047,279
Third party servicing fees 36,621 56,523 118,730 195,927
Other operating and corporate expenses 2,112,349 1,818,719 6,148,243 4,714,547
------------ ------------ ------------ ------------
5,057,958 5,320,691 14,248,492 14,721,580
------------ ------------ ------------ ------------
Loss from operations (686,031) (410,376) (2,810,024) (446,038)
------------ ------------ ------------ ------------
Other income (expense):
Interest income, including related party
interest for the three months of $46,296
(2004) and $12,564 (2003) and $111,369
(2004) and $36,513 (2003) for the nine
months 46,318 33,786 219,862 66,128
Interest expense, including related party
interest for the three months of $745
(2004) and $10,623 (2003) and $1,510
(2004) and $17,829 (2003) for the nine
months (592,989) (350,573) (1,415,002) (1,046,125)
------------ ------------ ------------ ------------
(546,671) (316,787) (1,195,140) (979,997)
------------ ------------ ------------ ------------
Loss from continuing operations before
income taxes and minority interest (1,232,702) (727,163) (4,005,164) (1,426,035)
Deferred income tax expense (1,380,000)
Current income tax expense (8,000) (6,000) (32,000)
------------ ------------ ------------ ------------
Loss before minority interest (1,232,702) (735,163) (5,391,164) (1,458,035)
Minority interest 171,609 225,349
------------ ------------ ------------ ------------
Loss from continuing operations (1,061,093) (735,163) (5,165,815) (1,458,035)
Loss from discontinued operations (2,468) (26,551) (8,197) (63,514)
------------ ------------ ------------ ------------
Net loss (1,063,561) (761,714) (5,174,012) (1,521,549)
Repricing of warrants issued to preferred
stockholders (235,000) (235,000)
Warrant accretion (3,300) (4,640) (9,990)
Redemption of convertible preferred stock
in excess of beneficial conversion features 38,430
Deemed preferred stock dividends (56,600) (57,000) (168,400) (176,500)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (1,120,161) $ (1,057,014) $ (5,347,052) $ (1,904,609)
============ ============ ============ ============
Basic and diluted net loss per common share:
Loss from continuing operations $ (0.03) $ (0.04) $ (0.16) $ (0.07)
Loss from discontinued operations * * * *
------------ ------------ ------------ ------------
Basic and diluted loss per share $ (0.03) $ (0.04) $ (0.16) $ (0.07)
============ ============ ============ ============
Weighted average number of common
shares outstanding:
Basic and diluted 33,940,681 29,170,051 33,846,375 28,777,656
============ ============ ============ ============
*Amount is less than $(0.01) per share
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, 2004 (UNAUDITED)
Convertible
preferred stock Stock Additional Total
------------------ subscription Common stock Treasury paid-in Accumulated stockholders'
Shares Amount receivable Shares Amount stock capital deficit equity
------ ---------- --------- ---------- -------- --------- ----------- ------------ -----------
Balances,
January 1, 2004 2,378 $2,378,000 $(800,000) 34,530,040 $690,601 $(725,717) $17,115,338 $(11,428,264) $ 7,229,958
Exercises of options
and warrants for
common stock 704,380 14,088 364,052 378,140
Warrants issued for
services performed in
connection with
convertible
promissory notes 164,700 164,700
Options issed to
consultants
for services 6,970 6,970
Warrants attached to
convertible
promissory
notes 461,200 461,200
Purchase by subsidiary
of 103,500 shares of
common stock (113,625) (113,625)
Conversion of accounts
payable for common
stock previously
issued as contingent
consideration 25,647 25,647
Proceeds received on
stock subscription
receivable 200,000 200,000
Sale of 533,500 shares
of treasury stock
for cash 248,972 270,457 519,429
Distribution of 45,000
shares of treasury
stock for services 21,570 29,180 50,750
Conversion of note
payable for
subsidiary common
stock 200,000 200,000
Beneficial conversion
feature on
convertible
promissory note 200,000 200,000
Cancellation of
portion of stock
subscription
receivable and return
of stock 600,000 (350,000) (250,000)
Issuance of subsidiary
warrants for services 576,000 576,000
Issuance of subsidiary
common stock in
exchange for related
party note receivable (216,000) 216,000
Acquisition of SVI in
exchange for
subsidiary
common stock (419,720) (419,720)
Net loss (5,174,012) (5,174,012)
------ ---------- --------- ---------- -------- --------- ----------- ------------ -----------
Balances,
September 30, 2004 2,378 $2,378,000 $(216,000) 35,234,420 $704,689 $(918,800) $18,959,824 $(16,602,276) $ 4,305,437
====== ========== ========= ========== ======== ========= =========== ============ ===========
See notes to condensed consolidated financial statements.
7
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
2004 2003
----------- -----------
Cash flows (used in) provided by operating activities
from continuing operations:
Net loss $(5,174,012) $(1,521,549)
----------- -----------
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities
from continuing operations:
Deferred income taxes 1,380,000
Loss from discontinued operations 8,197 63,514
Provision for (recovery of) losses 228,025 (14,599)
Depreciation and amortization 923,591 814,223
Amortization of discount on convertible promissory notes 60,753
Stock-based compensation expense 633,720 277,000
Beneficial conversion feature on convertible promissory note 200,000
Minority interest (225,349)
Changes in assets and liabilities:
Decrease in accounts receivable 817,055 529,084
Decrease (increase) in other receivables 65,690 (417,546)
Increase in interest receivable and other assets (414,237) (66,541)
Decrease in due to credit card holders (53,965) (63,857)
(Decrease) increase in accounts payable and accrued liabilities (274,352) 544,075
----------- -----------
Total adjustments 3,349,128 1,665,353
----------- -----------
Net cash (used in) provided by operating activities from continuing
operations (1,824,884) 143,804
----------- -----------
Cash flows from investing activites:
Net decrease (increase) in credit card receivables 7,460 (3,575)
Purchase of furniture, fixtures and equipment (318,660) (269,408)
Issuances of notes receivable, related parties and other (2,041,773) (893,087)
Repayments of notes receivable, related parties and other 30,548 295,401
----------- -----------
Net cash used in investing activities from continuing operations (2,322,425) (870,669)
----------- -----------
Cash flows from financing activities:
Decrease in bank overdraft (2,497,766)
Redemption of preferred stock for cash (100,942)
Proceeds from the exercise of options and warrants 229,178 366,737
Purchase of Equitex shares for treasury by subsidiary (113,625) (312,050)
Increase in deferred loan costs (335,000)
Issuances of notes payable, related parties and other 7,722,210 1,175,000
Repayments of notes payable, related parties and other (3,211,142) (2,163,033)
Repayment of stock subscription receivable 200,000
Net payments on line of credit (1,000,000)
Sale of treasury stock for cash 519,429 147,794
----------- -----------
Net cash provided by (used in) financing activities from continuing
operations 2,513,284 (1,886,494)
----------- -----------
Net cash used in discontinued operations (37,874) (50,440)
----------- -----------
(Continued)
8
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
2004 2003
----------- -----------
Decrease in cash and cash equivalents (1,671,899) (2,663,799)
Cash and cash equivalents, beginning 8,059,780 8,926,124
----------- -----------
Cash and cash equivalents, ending $ 6,387,881 $ 6,262,325
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 790,378 $ 1,077,122
=========== ===========
Cash (received) paid for income taxes $ (33,193) $ 126,154
=========== ===========
Supplemental disclosure of non-cash investing and financing activities
Warrants issued in connection with convertible promissory notes $ 625,900
===========
Conversion of accounts payable for common stock previously issued as
contingent consideration $ 25,647
===========
Conversion of notes payable and accrued interest in exchange for exercise of
warrants $ 148,962
===========
Return of treasury stock to subsidiary in exchange for stock subscription
receivable $ 350,000
===========
Cancellation of portion of subsidiary stock subscription receivable $ 250,000
===========
Issuance of subsidiary common stock in exchange for stock subscription
receivable $ 216,000
===========
Conversion of note payable in exchange for issuance of subsidiary common
stock $ 200,000
===========
Conversion of preferred stock to common stock $ 1,547,000
===========
Conversion of accounts payable to common stock $ 180,954
===========
Equipment exchanged for a reduction in a note payable included in discontinued
operations $ 12,640
===========
See notes to condensed consolidated financial statements.
9
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, ORGANIZATION AND 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 and nine month periods
ended September 30, 2004 and 2003, 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, 2004, and for the periods ended September 30, 2004
and 2003, 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 14, 2004. The results of operations for the nine months
ended September 30, 2004, are not necessarily indicative of the results
to be expected for the full year.
ORGANIZATION:
ACQUISITION OF CHEX BY SVI AND BASIS OF PRESENTATION:
Effective June 7, 2004, the Company executed an Agreement and Plan of
Merger (the "Merger Agreement") with Seven Ventures, Inc. ("SVI") to
merge its wholly-owned subsidiary Chex Services, Inc. ("Chex") into a
wholly-owned subsidiary of SVI (the "Merger Subsidiary"), where upon the
separate corporate existence of the Merger Subsidiary ceased. Under the
terms of the Merger Agreement, Equitex exchanged 100% of its equity
ownership in Chex for 7,700,000 shares of SVI, representing 93% of SVI's
outstanding common stock following the transaction (subsequently reduced
to 75% at September 30, 2004 through the issuance of 2,040,000 shares of
subsidiary common stock). In addition, Equitex received warrants to
purchase 800,000 shares of SVI common stock at an exercise price of $0.10
per share, expiring five years from the date of closing. As a result,
Chex became a wholly-owned subsidiary of SVI, a publicly-traded shell
company. On June 29, 2004, SVI changed its name to FastFunds Financial
Corporation ("FFFC"). In addition, under the terms of the Merger
Agreement, a bridge loan was consummated with an international merchant
bank, whereby SVI received $400,000 through the issuance of a convertible
promissory note. The promissory note is convertible into 4,000,000 shares
of SVI common stock upon the occurrence of certain future events (Note
6).
Of the warrants received by Equitex, 640,000 were subsequently transferred
to officers, directors and a consultant of Equitex and Chex. The warrants
were determined to have a fair value of $1.00 at the date of the grant,
resulting in $576,000 of compensation expense included in the nine months
ended September 30, 2004.
10
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, ORGANIZATION AND BASIS OF PRESENTATION AND
RECENT EVENTS (CONTINUED):
ORGANIZATION (CONTINUED):
The accompanying financial statements present the consolidated financial
position of Equitex and its subsidiaries, FFFC, and its wholly-owned
subsidiaries FastFunds International, Inc. ("FFI") and Chex, and Chex's
wholly-owned subsidiary Collection Solutions, Inc. ("Collection"), Key
Financial Systems, Inc. ("Key"), Nova Financial Systems, Inc. ("Nova"),
and Denaris Corporation ("Denaris"). Minority interest at September 30,
2004 represents the 25% minority ownership of FFFC. Minority interest
reflected in the Company's statements of operations for the three and
nine months ended September 30, 2004 represents net loss of FFFC
allocated to the minority common stockholders for the periods from July
1, 2004 through September 30, 2004 and June 7, 2004 through September 30,
2004, respectively. The excess of the losses for the three and nine
months ended September 30, 2004 and 2003 applicable to the minority
interest of Denaris have been charged to the Company, and no minority
interest is reflected in the Company's September 30, 2004 or December 31,
2003, consolidated financial statements for Denaris. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
RECENT EVENTS:
CHEX RECENT EVENTS:
In November 2003, the Company executed a Stock Purchase Agreement (the
"SPA") with iGames Entertainment, Inc. ("iGames"), a publicly-traded
Nevada Corporation. Pursuant to the SPA, Chex was to have been sold to
iGames by Equitex in exchange for 62.5% of iGames' common stock and other
consideration. In March 2004, the Company notified iGames that it was
terminating the SPA due to various material unrelated adverse events that
have impacted the business of iGames. In addition, the Company declared a
default under a $2,000,000 term loan made by Chex to iGames in January
2004 (Note 7).
In January 2004, Chex received a termination notice from Native American
Cash Systems Florida, Inc. ("NACSF"), terminating Chex's December 2001
contract to provide cash access services at five Seminole Tribe casino
properties located throughout Florida. The loss of this contract, which
provided approximately $4,000,000 of Chex's revenue for the year ended
December 31, 2003, resulted in Chex immediately implementing cost savings
measures.
FFFC is negotiating on a proposed series of up to $2 million unsecured
convertible promissory notes (the "Proposed Notes") with third parties
(the "Holders"). If issued, each of the Proposed Notes will carry a
stated interest rate of 9.5% per annum and each Proposed Note will have a
nine month term. All principal and interest under the Proposed Notes
would be due August 2005.
The Holders would be able to convert, at their option, the Proposed Notes
and any unpaid interest into shares of FFFC common stock at $1.00 per
share for a three-year period commencing on the due date. In addition,
the Holders would also receive warrants to purchase up to 2,000,000
shares of FFFC common stock at an exercise price of $2.00.
11
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, ORGANIZATION AND BASIS OF PRESENTATION AND
RECENT EVENTS (CONTINUED):
RECENT EVENTS (CONTINUED):
DENARIS RECENT EVENTS:
In August 2004, the Company along with its majority owned subsidiary,
Denaris, executed a non-binding letter of intent to acquire Digitel
Network Corporation, Platinum Benefit Group, Inc., National Business
Communications, Inc., Personal Voice, Inc. and Private Voice, Inc.
(collectively the "Companies") all based in Clearwater, Florida. The
Companies design, develop and market stored value card programs as well
as personal voice mail products through their call center operations. In
conjunction with their stored value card products, the Companies offer
the Platinum Benefit Group premium service that includes vehicle roadside
assistance, a prescription discount program, a dental care discount
program, a registered nurse hotline and a family legal plan. The
Companies also offer personal voice mail services through Personal Voice,
Inc. and Private Voice, Inc. Completion of these acquisitions is subject
to further due diligence by both parties, negotiation and execution of a
definitive agreement, necessary state or federal regulatory approvals,
board of director approval and any necessary stockholder approvals.
In September 2004, the Company, along with its majority owned subsidiary
Denaris, executed a definitive joint venture agreement with Financial
Freedom International ("Financial Freedom") of Orem, Utah to distribute
Denaris' stored value card and payroll card products to Financial
Freedom's customers. Under the terms of the agreement, Denaris will
provide Financial Freedom stored value cards and payroll cards for
Financial Freedom to market along with their current products. Net
income, if any, from the card sales is to be split equally between
Financial Freedom and Denaris under the joint venture. Financial Freedom
is a provider of educational materials, software and services to
consumers with troubled debt.
In October 2004 the Company announced that Denaris has signed a marketing
agreement with AmeriTech Advertising, Inc. ("AmeriTech") of Clearwater,
Florida, to market Denaris' stored value card products via the Internet.
AmeriTech is an Internet marketing company that maintains various
databases and has relationships with other Internet marketing companies
to which it markets products via the Internet. Under the terms of the
agreement, AmeriTech is to make Denaris' stored value products available
to its customers through a hotlinked URL connection to a designated
Denaris product website.
12
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, ORGANIZATION AND BASIS OF PRESENTATION AND
RECENT EVENTS (CONTINUED):
RECENT EVENTS (CONTINUED):
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 (Note 4). The note is due in full on August
15, 2008. The note bears interest at 6%, is due in bi-annual payments of
interest only, and is collateralized by shares of Paymaster Jamaica stock
sufficient to represent on a fully diluted basis, a 20% ownership
interest in Paymaster Jamaica. The shares have been pledged by the
President of Paymaster Jamaica. As of September 30, 2004, PWI had not yet
been formed. The Company has recorded a valuation allowance of $250,000
against this receivable at September 30, 2004 and December 31, 2003, due
to uncertainty as to ultimate collectability.
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.
NASDAQ COMPLIANCE:
In July 2004, the Company received a notice from the NASDAQ Stock Market
("NASDAQ") notifying the Company that for the last 30 consecutive trading
days the price of the Company's common stock closed below $1.00 per
share, the minimum per share requirement for continued inclusion under a
Marketplace Rule (the "Rule"). Under the Rule, the Company is provided
180 calendar days, or until January 24, 2005, to regain compliance. If at
anytime before January 24, 2005, the bid price of the Company's common
stock closes at $1.00 per share or more for a minimum of 10 consecutive
trading days, the Company is to receive written notification that the
Company is compliant.
If the Company does not meet the required criteria by January 24, 2005, a
determination is to be made whether the Company meets initial listing
criteria. If the Company does, it will be granted an additional 180
calendar days to demonstrate compliance of the $1.00 minimum closing bid
price for 10 consecutive trading days. Thereafter, if the Company has not
regained compliance with the second 180 day period, but satisfies the
initial inclusion criteria, it may be afforded an additional compliance
period, up to its next shareholder meeting, provided the Company commits
to (1) seek shareholder approval for a reverse stock split at or before
its next shareholder meeting and (2) to promptly thereafter effect the
reverse stock split. The shareholder meeting to seek such approval must
occur no later than two years from July 28, 2004. If the Company does not
regain compliance with the Rule and is not eligible for an additional
compliance period, NASDAQ will provide written notification that the
Company's securities will be delisted. At that time, the Company may
appeal NASDAQ's determination to delist its securities to a Listing
Qualification Panel.
13
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, ORGANIZATION AND BASIS OF PRESENTATION AND
RECENT EVENTS (CONTINUED):
NASDAQ COMPLIANCE (CONTINUED):
On November 3, 2004, the Company filed a Preliminary Proxy Statement with
the SEC requesting approval for a 1 for 6 reverse stock split, among
other items. The Company plans on seeking such shareholder approval at
its annual meeting of stockholders to be held in December 2004 (the "2004
Annual Meeting"). In conjunction with the reverse stock split, the board
of directors authorized a dividend to be declared and paid to
stockholders of record at a date to be determined, but only after the
proposed reverse stock split is ratified and confirmed at the 2004 annual
meeting. If enacted, the dividend would be payable through the issuance
of warrants to purchase shares of common stock on a post-reverse-split
basis. The current resolution approved by the board calls for
stockholders to receive one A warrant and one B warrant for every two
shares of Equitex stock owned on the record date. The A warrant would be
exercisable at $0.51 per pre-split share (or $3.06 per post-split share)
for a period of five years from issuance, callable by the Company at a
nominal price should the stock price close above $1.17 per pre-split
share (or $7.02 per post-split share) for 15 consecutive trading days.
The B warrant would be exercisable at $1.02 per pre-split share (or $6.12
per post-split share) for the five-year period, callable at a nominal
price should the stock trade at $1.50 per pre-split share (or $9.00 per
post-split share) for 15 consecutive trading days. The warrants would not
be exercisable until a registration statement registering the underlying
common stock has been filed and declared effective.
MANAGEMENT'S PLANS:
The Company has developed plans and strategies to address its capital and
liquidity needs for the next twelve-month period based on the events
discussed above. In March 2004, the Company closed on a $5,000,000
convertible promissory note, which provided the Company with additional
working capital (Note 6). Management believes that the Company may be
able to issue additional debt instruments in order to raise additional
capital if necessary. The Company also evaluates, on an ongoing basis,
potential business acquisition/restructuring opportunities that become
available from time to time, which management considers in relation to
its corporate plans and strategies.
In August 2004, FFFC entered into a Stock Purchase Agreement ("SPA") with a
corporation organized under the laws of England and Wales. The
organization is an open-end diversified investment fund holding
securities from numerous small-cap companies (the "Investment Fund").
Under the terms of the SPA, FFFC, upon closing, is to sell and issue
800,000 shares of its common stock to the Investment Fund in exchange for
1,321,440 shares of the Investment Fund. The shares of FFFC and the
Investment Fund are currently being held in escrow. The execution of the
transaction, including the delivery of FFFC's 800,000 shares of common
stock and receipt by FFFC of 1,321,440 shares of the Investment Fund is
dependent upon the Investment Fund shares being accepted for trading on
the London Stock Exchange, PLC. Upon such acceptance, FFFC is allowed to
sell 10% of its Investment Fund shares on a monthly basis and must
utilize at least 75% of such proceeds to reduce its obligations on the
$5,000,000 convertible promissory note described above.
STOCK OPTIONS:
The Company applies Accounting Principles Board Opinion No. 25 (APB 25)
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans.
14
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, ORGANIZATION AND BASIS OF PRESENTATION AND
RECENT EVENTS (CONTINUED):
STOCK OPTIONS (CONTINUED):
Had compensation cost for stock-based awards issued to employees 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 Standards ("SFAS") No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's results would
have been changed to the pro forma amounts indicated below:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
-------------- ------------- ------------- --------------
Net loss $ (1,063,561) $ (761,714) $ (5,174,012) $ (1,521,549)
ADD: Stock-based employee compensation expense
included in reported net income - - 553,000 -
DEDUCT: Total stock-based employee compensation
expense determined under fair value based method
for all awards (27,000) - (587,000) (484,000)
-------------- ------------- ------------- --------------
Pro forma net loss $ (1,090,561) $ (761,714) $ (5,208,012) $ (2,005,549)
============== ============= ============= ==============
Net loss per share:
Basic and diluted - as reported $ (0.03) $ (0.04) $ (0.16) $ (0.07)
============== ============= ============= ==============
Basic and diluted - pro forma $ (0.03) $ (0.04) $ (0.16) $ (0.08)
============== ============= ============= ==============
In July 2004, the Company granted 1,590,000 options to various employees
for services. The options were granted with exercise prices equal to the
quoted market price at the date of the grant and expire in July 2009. In
addition, in July 2004 the Company granted 410,000 options for legal and
consulting services provided to the Company. These options were granted
with exercise prices equal to the quoted market price at the date of the
grant and expire in July 2009. The options granted to consultants were
valued at approximately $7,000 based upon the Black-Scholes option
pricing model.
2. DISCONTINUED 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.
15
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2. DISCONTINUED OPERATIONS (CONTINUED):
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 7).
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
was not able to establish such a relationship. During the fourth quarter
of 2003, "run-off" operations, which consisted of processing residual
payments on remaining active accounts in its portfolio, ceased.
The carrying amounts of assets and liabilities of Key at September 30, 2004
and December 31, 2003 are as follows:
September 30, December 31,
2004 2003
----------- -----------
Cash $ 113 $ 1,055
=========== ===========
Accounts payable $ 490,392 $ 524,829
Accrued expenses 25,000 25,000
Notes payable, related party 75,757 71,939
----------- -----------
Total liabilities (all current) $ 591,149 $ 621,768
=========== ===========
Key had no revenues for the nine months ended September 30, 2004 and
$19,932 of revenues for the nine months ended September 30, 2003, which
are included in discontinued operations. Losses incurred by Key for the
nine months ended September 30, 2004 and 2003 were $8,197 and $63,514,
respectively.
3. RECEIVABLES:
Receivables at September 30, 2004 and December 31, 2003 consist of the
following:
September 30, December 31,
2004 2003
----------- ------------
Credit card and ATM processors, net of
allowance of $65,000 (2004) and $0 (2003) $ 1,597,415 $ 2,278,232
Due from Paymaster Jamaica 608,000 608,000
Amount held in trust 192,952 258,642
Credit card receivables, net of allowance for
losses of $795 (2004) and $1,545 (2003) 144,062 153,547
16
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
3. RECEIVABLES (CONTINUED):
September 30, December 31,
2004 2003
------------- ------------
Other receivables 74,461 210,699
------------- ------------
$ 2,616,890 $ 3,509,120
============= ============
Amounts due from credit card and ATM processors arise primarily from credit
card and ATM advances by Chex to casino patrons. Amounts due from
Paymaster Jamaica are due for services performed by Denaris, which have
been recorded as deferred revenue at September 30, 2004 and December 31,
2003 (presented in accrued expenses and other liabilities). The amount
held in trust under an agreement is to secure payment of reservation
fees due to customers. The amount is held by a third party financial
institution. 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.
4. NOTES AND INTEREST RECEIVABLE:
Notes and interest receivable as of September 30, 2004 and December 31,
2003 consist of the following:
September 30, December 31,
2004 2003
----------- -----------
Note receivable, iGames $ 2,000,000
Notes receivable from the estate of
a deceased Chex officer 1,484,691 $1,484,691
Note receivable, customer 336,500 350,000
Note receivable, officer of Chex 485,936 485,936
Note receivable, Paymaster Jamaica 500,000 500,000
Notes receivable, Equitex 2000 1,291,881 1,266,556
Notes receivable from various Chex employees 53,100 53,700
----------- ----------
6,152,108 4,140,883
Interest receivable 260,947 136,633
Less current maturities (62,100) (707,155)
----------- -----------
Notes receivable, net of current portion 6,350,955 3,570,361
Less allowance for uncollectible notes
receivable (1,689,299) (1,463,299)
----------- -----------
$ 4,661,656 $ 2,107,062
=========== ===========
As of September 30, 2004 and December 31, 2003, the allowance for
uncollectible notes receivable is comprised of an allowance of $1,279,299
as of September 30, 2004 and $1,053,299 as of December 31, 2003 on the
receivable from the estate of a deceased Chex officer, a $250,000
allowance on the Paymaster Jamaica note as of September 30, 2004 and
December 31, 2003 and a $160,000 allowance on the notes receivable from
Equitex 2000 as of September 30, 2004 and December 31, 2003.
17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
4. NOTES AND INTEREST RECEIVABLE (CONTINUED):
In January 2004, Chex advanced iGames $2,000,000 under a Term Loan Note
(the "Note"). Interest accrues at 10% per annum, and the maturity date
was scheduled to occur in January 2005, as defined in the Note. The Note
was to be secured by a pledge of capital stock of the borrower pursuant
to a stock pledge agreement. The stock pledge agreement was not executed
which resulted in an event of default under the terms of the Note.
Therefore, Chex has demanded the entire unpaid principal and accrued
interest due in full. Chex has commenced litigation relating to the
collection of the Note (Note 7). The Company has presented the Note as a
non-current asset at September 30, 2004 due to uncertainty as to the
anticipated litigation settlement date.
5. 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, 2004.
Intangible and other assets consist of the following at September 30, 2004
and December 31, 2003:
September 30, 2004 December 31, 2003
----------------------------------- ----------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
amount amortization amount amount amortization amount
---------- ---------- ---------- ---------- ---------- ----------
Casino contracts $4,300,000 $1,799,440 $2,500,560 $4,300,000 $1,349,440 $2,950,560
Non-compete
agreements 350,000 211,300 138,700 350,000 163,300 186,700
Customer lists 250,000 235,600 14,400 250,000 178,600 71,400
Trade names 100,000 100,000 100,000 100,000
---------- ---------- ---------- ---------- ---------- ----------
Total intangible assets 5,000,000 2,246,340 2,753,660 5,000,000 1,691,340 3,308,660
Deferred loan costs 499,700 77,690 422,010
Other assets 49,733 49,733 49,733 49,733
---------- ---------- ---------- ---------- ---------- ----------
$5,549,433 $2,324,030 $3,225,403 $5,049,733 $1,691,340 $3,358,393
========== ========== ========== ========== ========== ==========
18
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
6. NOTES AND LOANS PAYABLE, AND LONG-TERM DEBT:
NOTES AND LOANS PAYABLE:
Notes and loans payable at September 30, 2004 and December 31, 2003,
consist of the following:
September 30, December 31,
2004 2003
----------- -----------
Notes payable to individual investors $10,807,782 $10,692,177
Note payable to officer of Chex 14,344 150,000
Note payable to affiliate through
common ownership 5,421
Convertible promissory notes 185,000 185,000
Note payable under litigation settlement 400,000
Note payable, officer 15,000
----------- -----------
$11,022,126 $11,432,598
=========== ===========
LONG-TERM DEBT:
September 30, December 31,
2004 2003
----------- -----------
Convertible promissory notes due to
financial institutions, net of discount
[A] $ 4,174,232
Convertible promissory note, due to
advisory firm [B] 200,000
Note payable to a bank, repaid in
March 2004 $ 150,000
Obligations under capital leases 50,175 88,970
----------- -----------
4,424,407 238,970
Less current maturities 1,376,488) (201,727)
----------- -----------
$ 3,047,919 $ 37,243
=========== ===========
[A] In March 2004, the Company closed on $5,000,000 of convertible
promissory notes (the "Notes") with two financial institutions (the
"Lenders"). The Notes carry a stated interest rate of 7% per annum
and have a 45-month term. Interest only payments were due April 2004
through June 2004. Beginning in July 2004, principal and interest
payments amortize over the remaining 42-month period. The Notes are
senior to all other debt of the Company and are collateralized by all
assets of Chex as defined in the security agreement.
19
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
6. NOTES AND LOANS PAYABLE, AND LONG-TERM DEBT (CONTINUED):
LONG-TERM DEBT (CONTINUED):
The Notes are convertible into common stock at $1.35 per share up to
an amount equal to 4.99% of the Company's outstanding common stock.
In June 2004, the Company reduced this conversion price to $1.1475
per share. The Company has the right to make any monthly payment of
principal and interest in shares of its common stock. The common
stock is to be issued based on 85% of the average bid price for 20
trading days prior to the payment due date. The maximum number of
shares that can be delivered as payment is to be equal to 10% of the
average monthly trading volume for the month prior to the payment due
date. The Company may also issue common shares each month in an
amount not to exceed 10% of the prior month's total share volume as
payment, to be applied to the outstanding principal balance up to a
value of $100,000. Any beneficial conversion features resulting from
future payments made by the Company in common stock will be recorded
in earnings at the time of conversion, as the number of shares the
holder will receive is not known until the triggering event occurs.
The Notes contain certain anti-dilution provisions requiring the
Company to pay the Lenders as collateral, the pro-rata number of
shares the Lenders would receive in any spin-off or dividend from the
Company as if the remaining principal balance under the Note was
fully converted at $1.35 per share. The dividend shares are to be
segregated and may be liquidated at the discretion of Lenders. At the
end of each quarter, 85% of the proceeds are to be applied to the
principal balance as long as the Company is current in monthly
principal and interest payments.
The Lenders also received warrants to acquire up to 800,000 shares of
the Company's common stock at an exercise price of $1.50 per share.
The warrants are exercisable for a period of five years, and include
a cashless exercise provision. These warrants were valued at $358,400
based upon the Black-Scholes option-pricing model, and therefore
$358,400 was allocated to the warrants, resulting in an imputed
interest rate of 7.5%. In June 2004, the Company reduced the exercise
price of these warrants to $1.275 per share. In August 2004, the
Company reduced the exercise price of these warrants to $0.71 per
share. As a result of the additional allocation resulting from these
reductions in exercise price, the Company allocated an additional
$102,800 to these warrants. The Company reduced the carrying value of
the Notes by this amount and is amortizing the discount to interest
expense over the 45-month term of the Note. Accordingly, $28,897 and
$60,753 has been recorded as interest expense for the three and nine
months ended September 30, 2004. In addition, warrants to acquire up
to 300,000 shares of common stock exercisable at $1.00 per share for
a period of two years were issued to an advisory firm in connection
with the transaction. These warrants were valued at $164,700 based
upon the Black-Scholes option-pricing model. The Company also paid
cash of $320,000 for legal services and finders' fees in connection
with the transaction. The Company recorded the value of these
warrants and the cash paid as deferred loan costs and is amortizing
these costs over the 45-month term of the Notes. Accordingly, $32,314
and $75,398 is included in general and administrative expense for the
three and nine months ended September 30, 2004, respectively.
The Company was required to file with the Securities and Exchange
Commission a registration statement registering common shares
underlying conversion of the Notes, warrants and shares used to make
monthly payments. The registration statement was declared effective
July 13, 2004.
20
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
6. NOTES AND LOANS PAYABLE, AND LONG-TERM DEBT (CONTINUED):
LONG-TERM DEBT (CONTINUED):
[B] In connection with the June 7, 2004 Merger Agreement, the Company
received $400,000 in exchange for a convertible promissory note. The
note is convertible into 4,000,000 shares ($0.10 per share) of FFFC
common stock upon the occurrence of certain future events, and bears
interest at 5% per annum. Unless converted, any outstanding balance
of principal and interest is due on April 14, 2007. On June 29, 2004,
an advisory agreement between Chex and the lender was executed (Note
7), as a result, 25% ($100,000) of the note was converted into
1,000,000 shares of FFFC common stock. On August 17, 2004, an
additional 25% ($100,000) was converted into 1,000,000 shares of FFFC
common stock upon an independent director being added to the FFFC
Board and delivery to FFFC of a list of potential acquisition
candidates. The remaining 50% ($200,000) shall convert to 2,000,000
shares of FFFC common stock upon FFFC's execution of a definitive
merger acquisition or agreement of an entity having not less than
$10,000,000 in revenue. The conversion of the note is deemed to be
beneficial as the note converts to common stock of FFFC at $0.10 per
share (the fair value of FFFC's stock was determined to be $1.00 per
share on the date of closing). The intrinsic value of the beneficial
conversion feature is limited to the amount of the proceeds allocated
to the convertible note; therefore the value of the convertible
feature was determined to be $400,000. In connection with each of the
conversions of the 25% portion of the note to common stock on June
29, 2004 and August 17, 2004, the Company recorded an additional
$200,000 of interest expense related to the beneficial conversion
feature. As the remaining 50% of the conversion feature is contingent
upon the occurrence of future events, it will be recorded in earnings
when converted.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
In March 2004, Chex commenced a lawsuit in Hennepin County, Minnesota
demanding repayment of $2,000,000, plus accrued interest and other fees,
due from iGames under a term note made in January 2004. In addition, in
March 2004, the Company commenced a lawsuit in Delaware state court (New
Castle county) relative to the termination of the SPA. In March 2004,
iGames commenced a lawsuit in United States District Court for the
District of Delaware relative to both the termination of the SPA and
iGames' obligations under the term note, which is the subject of Chex's
lawsuit originating in Minnesota. These three actions have now been
consolidated in the United States District Court for the District of
Delaware and are proceeding in the normal course of litigation. The
Company is confident that its claims in this litigation will be upheld
and management believes that the claims made by iGames lack merit. The
Company intends to vigorously prosecute its claims and defend against
iGames' claims.
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.
The Company is currently in settlement negotiations as part of mediation
with the FDIC regarding this lawsuit.
21
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
LITIGATION (CONTINUED):
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 year ended December 31, 2003 was approximately
$1,490,000. Based on the bonus calculation, no expense was recorded for
the nine months ended September 30, 2004. The Company paid approximately
$209,000 in 2003 and approximately $755,100 for the nine months ended
September 30, 2004. As of September 30, 2004, approximately $526,000 is
included in accrued liabilities.
CONSULTING AGREEMENTS:
In May 2004, Chex entered into a consulting agreement with a financial
advisor to provide services relating to assistance provided in the
placement of debt or equity financing with prospective investors and
facilitating future merger, acquisition and strategic partnerships on
behalf of FFFC. The term of the agreement is two years and requires FFFC
to pay a total of $240,000 to the financial advisor in monthly
installments of $10,000 each month. Additionally, the advisor is to
receive a fee if it is successful in concluding a debt or equity
financing for or on behalf of FFFC.
In August 2004, Chex entered into a six month consulting agreement with a
business advisor to provide management services to assist FFFC to
establish operations in Canada, as well as to identify acquisition
prospects in Canada, the United States and abroad. The consultant also
works to develop strategic relationships worldwide. Under the terms of
the agreement, FFFC is required to pay $10,000 per month, plus reimburse
preapproved travel expenses.
In October 2004, FFFC entered into a management services consultant
agreement on a month-to-month basis. The consultant is to provide general
administrative and management services to FFFC, as well as develop and
implement consumer financial services products. These products include
the FFFC kiosk and stored-value card programs. Under the terms of the
agreement, FFFC is to pay the consultant $10,000 per month. Additionally,
FFFC is to pay a monthly revenue participation fee at the rate of 10% of
gross revenues received from sales of its kiosk and stored value programs
after deducting all third party costs. The fee is incurred as a result of
the consultant's introduction and development of distribution channels of
FFFC's stored-value card.
22
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
8. STOCKHOLDERS' EQUITY:
AUTHORIZED CAPITAL:
The Company's authorized capital consists of, among other classes of
securities, 50,000,000 common shares. As of September 30, 2004, there are
35,234,420 common shares issued and 33,847,352 shares outstanding. In
addition, the Company has warrants and options outstanding, a balance of
$4,574,679 on a $5 million convertible promissory note outstanding, and
certain classes of securities outstanding which are convertible into
common shares, all of which would, if converted, cause the Company to
exceed its authorized common shares. This is prohibited by the laws of
the State of Delaware and therefore, until the Company is able to convene
a Special Meeting of the Shareholders pursuant to the proxy solicitation
requirements of Section 24 of the Securities Exchange Act of 1934, and
the laws of the State of Delaware, it cannot permit all outstanding
conversions, which means that the Company is or will be in default of
certain terms and conditions of such instruments. On November 3, 2004,
the Company filed a Preliminary Proxy Statement with the SEC seeking
approval for the shareholders of Equitex to approve a one-for-six share
reverse stock split, among other items (Note 1). The securities affected
consist of the following at September 30, 2004:
(1) 408 shares of Series D preferred shares convertible into 1,046,154
common shares,
(2) 370 shares of Series G preferred shares convertible into 948,718
common shares,
(3) 1,600 shares of Series I preferred shares convertible into 4,102,564
common shares,
(4) $4,574,679 of convertible debt convertible into 3,986,648 shares,
(5) Warrants convertible into 8,277,199 common shares of which 5,099,108
expire in 2004 (4,232,037 of which expired on November 10, 2004
including 298,687 that were exercisable at $0.02 per share) and have
an average exercise price of $3.50 per share, and
(6) Options convertible into 3,736,700 common shares.
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 a
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.
In January 2004, the Company redeemed 93 shares of Series D Preferred
Stock for $151,000, which included $25,450 of cumulative unpaid
dividends. During the second quarter of 2004, the redemption of these
shares was voided and the cash was returned to the Company.
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.
23
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
SERIES G CONVERTIBLE PREFERRED STOCK (CONTINUED):
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.
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 were to automatically convert into
common stock on July 20, 2004. 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 I Preferred
Stock is redeemable at the Company's option at any time prior to its
conversion, at a redemption price equal to $1,250 per share plus any
cumulative unpaid dividends.
STOCK SUBSCRIPTION RECEIVABLE:
In December 2003, Chex sold 1,000,000 shares of Equitex common stock owned
by Chex and which represent treasury stock of the Company, in exchange
for $200,000 cash and an $800,000 promissory note. The note is presented
as a reduction of stockholders' equity at December 31, 2003. The note had
an interest rate of 7% per annum and was originally payable in three
installments of principal and interest through June 30, 2004. The note
was secured by a pledge agreement, which granted Chex a security interest
in up to 700,000 of the purchased shares. A payment of $200,000 was
received during the nine months ended September 30, 2004.
In June 2004, the Company reached an agreement with the note holder for the
note holder to return 500,000 shares of Equitex common stock in full
payment of the remaining $600,000 receivable. Since the market price of
the 500,000 shares of common stock was approximately $350,000 on the date
of the agreement, the Company reduced the receivable by $250,000 and
charged equity (additional paid-in capital). The 500,000 shares were
returned to Chex during the third quarter of 2004 and are presented as
treasury stock of the Company.
24
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
ISSUANCES OF COMMON STOCK:
During the nine months ended September 30, 2004, the Company issued 412,200
shares of common stock upon the exercise of stock options for $131,334
cash and in exchange for retirement of interest and note payable
principal of $148,962 at an average exercise price of $0.68 per share.
During the nine months ended September 30, 2004, the Company also issued
292,180 shares of common stock upon the conversion of warrants for
$97,884, at an average conversion price of approximately $0.33 per share.
During the nine months ended September 30 2004, the Company converted
$25,647 of accounts payable for common stock previously issued as
contingent consideration. The common stock was issued in December 2003 as
contingent consideration for accounts payable. Under the agreement, as
the shares of stock are sold by the holder, the accounts payable due to
holder by the Company are reduced.
In November 2004, the Company issued 82,478 shares of common stock upon the
exercise of 82,478 warrants for $1,650, at an exercise price of $0.02 per
share.
STOCK OPTIONS:
In July 2004, the Company granted five-year options to purchase 1,590,000
shares of common stock to directors, officers, and employees of the
Company, which includes 585,000 options to Chex employees, and 410,000
options to consultants for services. The options were granted under the
2003 Stock Option Plan (the "2003 Plan"). The options have an exercise
price of $0.85 per share (the market price of the common stock on the
date of grant). The options granted to the consultants were valued at
approximately $7,000 based upon the Black-Scholes option pricing model.
Common stock reserved for additional options that may be granted under
the 2003 Plan total 1,500,000.
TREASURY STOCK TRANSACTIONS:
During the nine months ended September 30, 2004, Chex sold 533,500 shares
of Equitex common stock for approximately $519,429 or $0.97 per share
(the market price of the common stock at the date of sale). The stock was
acquired at an average cost of approximately $0.47 per share and the cost
of the shares sold ($248,972) has been removed from treasury stock. The
difference between the sales price and cost of the shares sold ($270,457)
has been classified as additional paid in capital.
During the nine months ended September 30, 2004, Chex purchased 103,500
shares of Equitex common stock for $113,625 or $1.10 per share (the
market price of the Company's common stock on the purchase date). The
cost of the shares has been added to treasury stock.
During the nine months ended September 30, 2004, Chex distributed 45,000
shares of Equitex common stock to third parties for services rendered to
Equitex. Accordingly, Equitex has recorded an expense of $50,750 or
approximately $1.13 per share (the market price of the common stock on
the distribution date).
25
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
9. INCOME TAXES:
During the quarter ended June 30, 2004, management assessed the realization
of its deferred tax assets. Based on this assessment, management
concluded that it was more likely than not that existing deferred tax
assets would not be realizable in the foreseeable future and determined
that the valuation allowance should be increased to fully allow for its
recorded deferred tax assets. Accordingly, the Company's valuation
allowance was increased by $1,380,000, which resulted in an increase to
the provision for income taxes of the same amount during the nine months
ended September 30, 2004.
26
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.
GENERAL
Effective June 7, 2004, the Company executed an Agreement and Plan of Merger
(the "Merger Agreement") with SVI to merge its wholly-owned subsidiary Chex
Services, Inc. ("Chex") into a wholly-owned subsidiary of SVI (the "Merger
Subsidiary"), where upon the separate corporate existence of the Merger
Subsidiary ceased. Under the terms of the Merger Agreement, Equitex exchanged
100% of its equity ownership in Chex for 7,700,000 shares of SVI, representing
93% of SVI's outstanding common stock following the transaction. On June 29,
2004, SVI changed its name to FastFunds Financial Corporation ("FFFC"). In
addition, Equitex received warrants to purchase 800,000 shares of FFFC common
stock at an exercise price of $0.10 per share, expiring five years from the date
of closing. As a result, Chex became a wholly-owned subsidiary of FFFC. In
addition, under the terms of the Merger Agreement, a bridge loan was consummated
with an international merchant bank, Maroon Bells Capital ("MBC") whereby FFFC
received $400,000 through the issuance of a convertible promissory note. The
promissory note is convertible into 4,000,000 shares of FFFC common stock upon
the occurrence of certain future events. As of September 30, 2004, FFFC has
issued 2,000,000 shares of its common stock in exchange for $200,000 of the
note, as certain events have been met. As a result, Equitex's ownership
percentage in FFFC is approximately 75% at September 30, 2004.
27
In August 2004, the Company along with its majority owned subsidiary, Denaris,
executed a non-binding letter of intent to acquire Digitel Network Corporation,
Platinum Benefit Group, Inc., National Business Communications, Inc., Personal
Voice, Inc. and Private Voice, Inc. (collectively the "Companies") all based in
Clearwater, Florida. The Companies design, develop and market stored value card
programs as well as personal voice mail products through their call center
operations. In conjunction with their stored value card products, the Companies
offer the Platinum Benefit Group premium service that includes vehicle roadside
assistance, a prescription discount program, a dental care discount program, a
registered nurse hotline and a family legal plan. The Companies also offer
personal voice mail services through Personal Voice, Inc. and Private Voice,
Inc. Completion of this transaction is subject to further due diligence by both
parties, negotiation and execution of a definitive agreement, necessary state or
federal regulatory approvals, board of director approval and any necessary
stockholder approvals.
In September 2004, the Company, along with its majority owned subsidiary
Denaris, executed a definitive joint venture agreement with Financial Freedom
International ("Financial Freedom") of Orem, Utah to distribute Denaris' stored
value card and payroll card products to Financial Freedom's customers. Under the
terms of the agreement, Denaris will provide Financial Freedom stored value
cards and payroll cards for Financial Freedom to market along with their current
products. Net income from the card sales is to be split equally between
Financial Freedom and Denaris under the joint venture. Financial Freedom is a
provider of educational materials, software and services to consumers with
troubled debt. Their products and services help people in financial crisis avoid
bankruptcy, improve credit rating and reduce their debt to manageable levels.
Financial Freedom offers financial fitness analysis, comprehensive training
courses, a smart savings program, a personalized spending plan, customized debt
elimination, coaching sessions and ongoing support. Course materials teach a
variety of money management principals and offer sophisticated ways to budget
and save money, including the use of stored value cards. Products are packaged
in a variety of formats including print, videotape, CD-ROM and the Internet. The
joint venture has not yet begun operations.
In October 2004 the Company announced that Denaris has signed a marketing
agreement with AmeriTech Advertising, Inc. ("AmeriTech") of Clearwater, Florida,
to market Denaris' stored value card products via the Internet. AmeriTech is an
Internet marketing company that maintains various databases and has
relationships with other Internet marketing companies to which it markets
products via the Internet. Under the terms of the agreement, AmeriTech will make
Denaris' stored value products available to its customers through a hotlinked
URL connection to a designated Denaris product website.
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, 2003,
2002 and 2001. The financial results presented for the nine months ended
September 30, 2004 and 2003 are those of Chex Services, Inc. ("Chex") and its
wholly-owned subsidiary Collection Solutions, Inc. ("Collection") through June
6, 2004, Key Financial Systems, Inc. ("Key"), Nova Financial Systems, Inc.
("Nova") and Denaris Corporation ("Denaris"), on a consolidated basis with those
of Equitex, Inc. The financial results subsequent to June 6, 2004 include the
results of SVI (which subsequently changed its name to FastFunds Financial
Corporation) and its wholly-owned subsidiary Chex, and beginning July 15, 2004,
FFFC's newly formed wholly-owned subsidiary FastFunds International, Inc.
("FFI").
LIQUIDITY AND CAPITAL RESOURCES
For the next twelve months we presently anticipate our liquidity and capital
resource needs may not be satisfied solely from cash flows generated from our
operating activities. Chex has begun to develop and 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.
Also, Chex plans on expanding its business into non-gaming cash access products.
Development and costs associated with such products have been and will continue
to be incurred. Additionally, FFFC has formed a newly wholly-owned London based
subsidiary, FFI. FFI began operations in July as it opened a London and Chicago
office. There will be recurring costs associated with FFI, prior to the
realization, if at all, of any positive cash flow. In connection with the
start-up of FFI and the Company's objective to expand its business model into
new markets and products, FFFC and the Company have entered into various
management advisory and consultant agreements.
28
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
FFFC is negotiating on a proposed series of up to $2,000,000 unsecured
convertible promissory notes (the "Proposed Notes") with third parties (the
"Holders"). If issued, each of the Proposed Notes will carry a stated interest
rate of 9.5% per annum and each Proposed Note will have a nine month term. All
principal and interest under the Proposed Notes would be due August 2005.
The Proposed Notes and any unpaid interest, at the Holders option, would be
convertible into shares of FFFC common stock at $1.00 per share for a three-year
period commencing on the due date. In addition, the Holders would also receive
warrants to purchase up to 2,000,000 shares of FFFC common stock at an exercise
price of $2.00.
In March 2004, Equitex closed on $5,000,000 of convertible promissory Notes (the
"Notes") with two financial institutions (the "Lenders"). The Notes carry an
interest rate of 7% per annum and have a 45-month term. Interest only payments
were due monthly beginning in April 2004 through June 2004. Beginning in July
2004, principal and interest payments amortize over the remaining 42-month
period. The Notes are senior to all other debt of the Company and are
collateralized by all assets of Chex as defined in the security agreement. In
connection with the closing, Equitex entered into a $5,000,000 secured
promissory note with Chex (the "Chex Note"). Interest and payment terms of the
Chex Note are identical to those set forth in the Notes.
In August 2004, FFFC entered into a Stock Purchase Agreement ("SPA") with a
corporation organized under the laws of England and Wales. The corporation is an
open-end diversified investment fund holding securities from numerous small-cap
companies (the "Investment Fund"). Under the terms of the SPA, FFFC, upon
closing, is to sell and issue 800,000 shares of its common stock to the
Investment Fund in exchange for 1,321,440 shares of the Investment Fund. The
shares of FFFC and the Investment Fund are currently being held in escrow. The
execution of the transaction, including the delivery of FFFC's 800,000 shares of
common stock and receipt by FFFC of 1,321,440 shares of the Investment Fund is
dependent upon the the Investment Fund shares being accepted for trading on
the London Stock Exchange, PLC. Upon such acceptance, FFFC is allowed to sell
10% of its Investment Fund shares on a monthly basis and must utilize at least
75% of such proceeds to reduce its obligations on the $5,000,000 convertible
promissory note described above.
Cash flow activity for the nine months ended September 30, 2004 and 2003
includes the activity of Chex, Collection, Key and Nova, Equitex, Denaris, FFFC
since June 7, 2004 and FFI since July 15, 2004. For the nine months ended
September 30, 2004, net cash used in operating activities from continuing
operations was $1,824,884 compared to cash provided by operating activities of
$143,804 for the nine months ended September 30, 2003. The most significant
portion of this change was the increase in the net loss in the nine months ended
September 30, 2004 of $5,174,012 compared to a net loss of $1,521,549 for the
nine months ended September 30, 2003. The gross margin for Chex decreased by
approximately $1,373,000 during the nine months ended September 30, 2004,
significantly due to the loss of the five Seminole Tribe location contracts.
Additionally, other operating expenses increased approximately $597,000 due to
FFFC's and FFI's start-up operations included in the nine months ended September
30, 2004. Non-cash adjustments to the current year's results were $3,208,937,
mostly comprised of depreciation and amortization of $923,591 an increase in the
deferred tax asset valuation allowance of $1,380,000, stock-based compensation
of $633,720 and provision for loan losses of $228,025 compared to total non-cash
adjustments of $1,140,138, mostly comprised of $814,223 and $277,000,
respectively, for depreciation and amortization and stock-based compensation for
the nine months ended September 30, 2003. The increase loss was offset by
changes in current assets and liabilities which provided cash and adjusted the
net loss by $140,191 for the nine months ended September 30, 2004 compared to
the changes in the same assets and liabilities which provided cash for the nine
months ended September 30, 2003 of $525,215.
Cash used in investing activities from continuing operations for the nine months
ended September 30, 2004 was $2,322,425 compared to $870,669 for the nine months
ended September 30, 2003. Cash used in 2004 investing activities was primarily
attributable to net advances of $2,041,773 on notes receivable (of which
$2,000,000 was advanced to iGames), and purchases of furniture, fixtures and
equipment of $318,660. Cash used in 2003 investing activities was primarily due
to net advances of $893,087 on notes receivable, and purchases of furniture,
fixtures and equipment of $269,408, offset by repayments of notes receivable of
$295,401.
29
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Cash provided by financing activities from continuing operations for the nine
months ended September 30, 2004 was $2,513,284 compared to cash used in
financing activities from continuing operations of $1,866,494 for the nine
months ended September 30, 2003. The significant activity for the nine months
ended September 30, 2004, included the Company receiving proceeds of $7,722,710
upon the issuance of notes payable, receiving $519,429 upon the sale of 533,500
shares of treasury stock by Chex, proceeds received of $229,178 upon the
exercise of options and warrants, and $200,000 received on a stock subscription
receivable. These proceeds were offset by the repayment of notes payable of
$3,211,142, payment of fees of $335,000 related to the issuance of notes
payable, purchase of Equitex shares for treasury by Chex for $113,625 and
repayment of bank overdraft of $2,497,766.
The significant financing activity for the nine months ended September 30, 2003,
included the Company receiving $366,737 from the exercise of warrants and the
sale of 226,000 shares of treasury stock by Chex for $147,794. The Company
received proceeds of $1,175,000 upon the issuance of notes payable and repaid
$2,163,033 of notes payable (related parties and other) and also paid $1,000,000
on its line of credit. During the nine months ended September 30, 2003, the
Company also redeemed 90 shares of its Series I Preferred Stock for $100,942 in
cash.
Net cash used in discontinued operations was $37,874 for the nine months ended
September 30, 2004 as compared to $50,440 for the nine months ended September
30, 2003. The decrease in cash used in discontinued operations is the result of
Key ceasing its run-off operations during the fourth quarter of 2003.
For the nine months ended September 30, 2004, net cash decreased by $1,671,899
compared to a decrease of $2,663,799 for the nine months ended September 30,
2003. Ending cash at September 30, 2004, was $6,387,881 compared to $6,262,325
at September 30, 2003. Significantly all of Chex's cash is required to be
utilized for its casino operations, consequently Equitex needs to rely on other
sources for 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.
RESULTS OF OPERATIONS
REVENUES
Consolidated revenues for the three months ended September 30, 2004 from
continuing operations was $4,371,927 compared to $4,910,315 for the three months
ended September 30, 2003. Consolidated revenues for the nine months ended
September 30, 2004, were, $11,438,468 compared to consolidated revenues of
$14,275,542 for the nine months ended September 30, 2003. The decrease in each
period was due primarily to the loss of revenues resulting from the closure of
five Seminole Tribe casino locations located throughout Florida in January 2004.
Revenues by segment were as follows:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Cash disbursement services $ 4,308,684 $ 4,825,043 $11,230,047 $13,944,480
Credit card services 63,243 85,272 208,421 331,062
----------- ----------- ----------- -----------
$ 4,371,927 $ 4,910,315 $11,438,468 $14,275,542
=========== =========== =========== ===========
30
CASH DISBURSEMENT SERVICES
Consolidated revenues for the three months ended September 30, 2004 and 2003
were $4,308,684 and $4,825,043, respectively, compared to consolidated revenues
of $11,230,047 and $13,944,480 for the nine months ended September 30, 2004 and
2003. The decrease in both periods was due primarily to the loss of revenues
resulting from the closure of five Seminole Tribe casino locations located
throughout Florida in January 2004, which provided approximately $4 million in
revenues per year.
In the ordinary course of business, Chex enters into new financial services
agreements or renews existing ones as their original terms expire. Chex may also
not renew contracts from certain expiring agreements. In January of 2004, Chex
was advised that 5 existing casino locations were terminating the agreements for
Chex to provide its services. These locations accounted for $1,139,157 and
$3,149,989 in revenues for the three and nine months ended September 30, 2003.
For the year ended December 31, 2003, these locations accounted for
approximately $4,090,000 in revenues. Accordingly, Chex anticipates a decline in
2004 revenues due to the loss of these contracts and the absence, until the
third quarter of 2004, of any significant new contracts to replace the revenues
lost. During the third quarter 2004, Chex received three new contracts, which
resulted in revenues of approximately $395,000. On an annualized basis, the
contracts are expected to generate approximately $2,250,000 in revenue per year.
Chex recognizes revenue at the time certain financial services are performed.
Revenues are derived from check cashing fees, credit and debit card advance
fees, automated teller machine ("ATM") surcharge and transaction fees, and NSF
collection fees. Chex revenues for the three months ended September 30, 2004 and
2003 were comprised of the following:
2004 2003
-------------------------------------- -------------------------------------
Number of Dollars Earned Number of Dollars Earned
Transactions Handled Revenues Transactions Handled Revenues
------------ ------------ ---------- ------------ ------------ ----------
Personal checks 186,684 $ 34,335,735 $1,740,105 196,844 $ 43,848,448 $2,205,005
"Other" checks 70,087 21,964,999 202,719 98,508 36,294,899 266,522
Credit cards 58,344 21,003,897 1,069,665 97,294 33,340,126 1,259,763
Debit cards 8,812 2,643,372 43,055 16,496 6,285,349 119,221
ATM transactions 596,107 56,284,719 1,135,113 940,245 91,720,180 833,841
NSF collection fees - - 103,641 - - 130,749
Other - - 14,386 - - 9,942
------- ------------ ---------- --------- ------------ ----------
920,034 $136,232,722 $4,308,684 1,349,387 $211,489,002 $4,825,043
======= ============ ========== ========= ============ ==========
Chex revenues for the nine months ended September 30, 2004 and 2003 were
comprised of the following:
2004 2003
--------------------------------------- ---------------------------------------
Number of Dollars Earned Number of Dollars Earned
Transactions Handled Revenues Transactions Handled Revenues
------------ ------------ ----------- ------------ ------------ -----------
Personal checks 446,162 $ 94,105,653 $ 4,835,509 619,306 $122,636,431 $ 6,271,322
"Other" checks 174,363 65,425,654 631,955 280,237 109,701,959 807,044
Credit cards 166,424 57,751,186 2,488,018 279,587 95,231,799 3,653,356
Debit cards 26,598 8,159,289 117,754 47,341 17,178,522 330,101
ATM transactions 1,458,393 126,422,619 2,742,180 2,752,846 266,417,728 2,459,647
NSF collection fees - - 323,183 - - 377,369
Other - - 91,448 - - 45,641
--------- ------------ ----------- ---------- ------------ -----------
2,271,940 $351,864,401 $11,230,047 3,979,317 $611,166,439 $13,944,480
========= ============ =========== ========== ============ ===========
31
CASH DISBURSEMENT SERVICES (CONTINUED):
Chex cashes personal checks at its cash access locations for fees of between 3
and 10 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.
Chex credit/debit card cash advance services allow patrons to use their VISA,
MasterCard, Discover and American Express cards to obtain cash. Third party
vendors, at their expense, supply, install and maintain the equipment to operate
the cash advance system. Under vendor agreements, the vendor charges each
customer a services fee based upon the cash advance amount and pays a portion of
such service fee to Chex. During the third quarter of 2004 Chex began to use its
own proprietary credit and debit card cash advance platform to process its
credit and debit card cash advance transactions.
Chex receives a surcharge fee for each cash withdrawal from the ATM machines in
locations where Chex provides such services. The surcharge, which is a charge in
addition to the cash advance, is made against the bank account of the customer
and is deposited in the vendor's account. The vendor reimburses Chex for the
cash amount and pays the surcharge commission due.
Chex utilizes its own in-house collections department to pursue collection of
returned checks, and generally charges an insufficient funds fee when it
ultimately collects the check.
OPERATING EXPENSES
Total operating expenses from continuing operations for the three and nine
months ended September 30, 2004, was $5,057,958 and $14,248,492, compared to
$5,320,691 and $14,721,580,for the three and nine months ended September 30,
2003, respectively. Operating expenses are comprised of the following:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Cash disbursement services $ 4,722,487 $ 4,493,010 $12,606,174 $12,674,057
Credit card services 46,575 91,417 179,352 247,298
Corporate activities 288,896 736,264 1,462,966 1,800,225
----------- ----------- ----------- -----------
$ 5,057,958 $ 5,320,691 $14,248,492 $14,721,580
=========== =========== =========== ===========
CASH DISBURSEMENT SERVICES
Chex operating expenses of $4,722,487 and $4,493,010 for the three months ending
September 30, 2004 and 2003, and $12,606,174 and $12,674,057 for the nine months
ended September 30, 2004 and 2003 were comprised as follows:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
---------- ---------- ----------- ----------
Fees to casinos $1,514,970 $1,715,741 $ 3,890,170 $ 4,763,827
Salaries and related costs 1,439,045 1,518,800 3,913,778 4,463,660
Returned checks, net of
collections 175,439 217,347 479,832 438,884
Other 1,247,687 766,830 3,399,906 2,194,455
Depreciation and amortization 345,346 274,292 922,488 813,231
---------- ---------- ----------- -----------
$4,722,487 $4,493,010 $12,606,174 $12,674,057
========== ========== =========== ===========
32
CASH DISBURSEMENT SERVICES (CONTINUED):
Chex pays a fee to casinos as compensation pursuant to the terms of each
financial services agreement that the company has entered into with each
respective establishment. At locations where Chex provides check cashing
services, Chex pays the location operator a commission based upon the monthly
amount of checks cashed, as defined in the agreement. Chex passes on an agreed
upon percentage of the surcharge commissions to the locations where ATM's are
utilized. At all of the locations at which Chex uses third party vendors to
provide credit/debit card advance services, it pays the operator a commission
for each completed transaction. The terminated locations accounted for $552,878
and $1,475,767 of fees to casinos for the three and nine months ended September
30, 2003.
Chex Services employs personnel at the locations where it provides check cashing
services as well as corporate staff to support its operations. For the nine
months ended September 30, 2004 and 2003, location salaries and related costs
were $2,324,903 and $3,004,725, respectively. For the three months ended
September 30, 2004 and 2003 location salaries and related costs were $827,327
and $1,062,383. The decrease was as a result of the termination of the 5
locations in January 2004, partially offset by the 3 new casino locations opened
during the three months ended September 30, 2004. For the nine months ended
September 30, 2004, corporate salaries and related costs were $1,588,875
compared to $1,458,935 for the nine months ended September 30, 2003. For the
three months ended September 30, 2004, corporate salaries and related costs were
$611,722 compared to $456,417 for the three months ended September 30, 2003. The
increase in corporate salaries was a result of salaries associated with FFI, as
it opened offices in London and Chicago.
Other expenses increased in the three and nine months ended September 30, 2004
compared to September 30, 2003, mainly as a result of increased processing fees
and expenses related to FFFC and FFI. For the locations where Chex's propriety
product is utilized, Chex pays a processing fee to the casino based on the
commissions it receives from processing those transactions. Processing fees for
the three months ended September 30, 2004 and 2003 were $288,797 and $486,681
compared to $55,328 and $162,360 for the three and nine months ended September
30, 2003, respectively.
Additionally, included in other operating expenses are expenses of FFFC, the
parent of Chex, effective June 7, 2004, the date of the merger of Chex into
FFFC, and effective July 15, 2004, the expenses of FFI. For the three and nine
months ended September 30, 2004, the FFFC and FFI expenses were $198,464 and
$596,793, respectively. The expenses for the three months were mostly comprised
of $81,005 in professional fees and $20,000 consulting agreements, as well as
$53,416 for travel and $44,043 related to office rent and expenses. The expenses
for the nine months are comprised mostly of an indemnification fee of $100,000
related to the merger, $136,055 in professional fees and consulting agreements,
as well as $53,416 for travel and $44,043 for office rent and expenses.
CORPORATE ACTIVITY
Corporate activity expenses include those of Equitex and Denaris. Total
corporate activity expenses for the three and nine months ended September 30,
2004 and 2003 were comprised as follows:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Employee costs $ 112,288 $ 207,154 $ 335,886 $ 579,865
Other 169,638 529,110 745,360 943,360
Stock-based compensation 6,970 381,720 277,000
----------- ----------- ----------- -----------
$ 288,896 $ 736,264 $ 1,462,966 $ 1,800,225
=========== =========== =========== ===========
Employee costs for the three and nine months ended September 30, 2004 decreased
by $94,866 and $243,979, respectively, mostly as a result of a bonus to an
officer included in the employee costs for the three and nine months ended
September 30, 2003 of $90,582 and $208,552, respectively.
33
CORPORATE ACTIVITY (CONTINUED):
For the three months ended September 30, 2004, other corporate expenses were
comprised of $102,341 for professional fees and $67,297 for general operating
expenses. For the three months ended September 30, 2003, other corporate
expenses of $529,110 were comprised of $151,500 for professional services,
$183,951 related to fees incurred with preparing Chex for an initial public
offering, a $160,000 reserve on a related party note receivable (Equitex 2000)
and $33,659 for general operating expenses.
For the nine months ended September 30, 2004, other corporate expenses were
$745,360, which was comprised of $320,331 of professional fees and $425,029
general operating expenses. For the nine months ended September 30, 2003, other
corporate costs were $943,360 and which were comprised of $341,841 for
professional fees, $257,568 for general operating expenses, $183,951 related to
fees incurred with preparing Chex for an initial public offering and $160,000
reserve on a related party note receivable (Equitex 2000).
Stock based compensation for the nine months ended September 30, 2004 and 2003
was $381,720 and $277,000, respectively. The expense represents non-cash
expenses related to issuances of common stock, options and/or warrants to
employees and third party consultants for services.
CREDIT CARD SERVICES
Nova's operating expenses for the three months ended September 30, 2004 and 2003
were $46,575 and $91,417, respectively. The 2004 expenses were comprised of
third party servicing fees of $36,621 and other operating expenses of $9,954
compared to 2003 expenses of $56,523 for third party servicing fees and $34,894
for other operating expenses.
Nova's operating expenses were $179,352 and $247,298 for the nine months ended
September 30, 2004 and 2003, respectively. The 2004 expenses were comprised of
third party servicing fees of $118,730 and other operating expenses of $60,622,
compared to the 2003 expenses of $195,927 for third party servicing fees and
$51,371 for other operating expenses. The decrease in the third party servicing
fees for the 2004 periods compared to the 2003 periods is a direct result of the
reduced credit card revenue in the respective periods.
OTHER INCOME (EXPENSE):
Consolidated other expenses for the three months ended September 30, 2004 were
$546,671 compared to $316,787 for the three months ended September 30, 2003.
Interest income increased by $12,532 in the comparative periods. Interest
expense increased in the 2004 period by $242,416. The majority of the increase
was the result of the interest recorded on the $5.0 million convertible
promissory note of $190,957, as well as the beneficial conversion feature of
$100,000 charged to interest relating to the $400,000 convertible promissory
note issued in the merger. These increases were offset by lower interest expense
related to lower balances on other notes and loans payable and long-term debt.
Consolidated other expenses for the nine months ended September 30, 2004 were
$1,195,140 compared to $979,997 for the nine months ended September 30, 2003.
Interest income increased by $153,734 for the nine months ended September 30,
2004 compared to September 30, 2003. The most significant portion of the
increase was $96,111 of interest income recorded on the Igames $2.0 million
note. Additionally, the notes receivable from Equitex 2000 were substantially
higher as of September 30, 2004 compared to September 30, 2003. Accordingly,
interest income related to Equitex 2000 was $80,602 for the nine months ended
September 30, 2004 compared to $51,873 for the nine months ended September 30,
2003.
Interest expense for the nine months ended September 30, 2004 increased by
$368,877 compared to the nine months ended September 30, 2003. The increase was
due to interest of $190,957 on the $5.0 million convertible promissory note, as
well as the beneficial conversion feature of $200,000 charged to interest
related to the $400,000 convertible promissory note issued in the merger. These
increases were offset by lower interest expense related to lower balances on
other notes and loans payable and long-term debt.
34
DISCONTINUED OPERATIONS
Discontinued operations represents the operations of Key, which ceased during
the fourth quarter of 2003. The loss from discontinued operations was $2,468 and
$8,197 for the three and nine months ended September 30, 2004 compared to
$26,554 and $63,514 for the three and nine months ended September 30, 2003.
INCOME TAXES, DEFERRED TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements, and a deferred income tax liability or asset is recognized
for temporary differences between our financial statements and tax returns.
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 reverse. The effect on deferred assets and
liabilities of a change in tax rate is recognized in the statement of operations
in the period that includes the enactment date.
A valuation allowance has been provided to reduce the deferred tax assets, based
on management's estimate of the assets' realizibility. Management believes it is
more likely than not that the deferred tax assets will not be realized in the
foreseeable future. Therefore, the Company increased the valuation allowance by
$1,380,000 during the nine months ended September 30, 2004 to fully allow for
its deferred tax assets.
CONTRACTUAL OBLIGATIONS
No material changes during the quarter ended September 30, 2004.
35
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
$15,632,636 and $10,931,147 of debt outstanding as of September 30, 2004 and
December 31, 2003, respectively, of which $10,807,782 and $10,692,177 has been
borrowed at fixed rates ranging from 9% to 12% at September 30, 2004 and
December 31, 2003, respectively. This fixed rate debt is subject to renewal
annually and is payable upon demand with 90 days written notice by the debt
holder. Additionally, $4,574,679 of the total debt at September 30, 2004 has a
fixed rate of 7% and $200,000 of the total debt at September 30, 2004 has a
fixed rate of 5%. Chex also has $50,175 and $88,970 of variable rate debt at
September 30, 2004 and December 31, 2003, respectively, owed to a bank.
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,
2004.
36
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 within 90 days prior to the filing of 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 the CEO/CFO's
evaluation. There were no significant material weaknesses identified in the
course of such review and evaluation and, therefore, the Company took no
corrective measures.
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
(a) Exhibits
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
(b) Reports on Form 8-K during the quarter ended September 30, 2004
None
37
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 22, 2004 By: /s/ Henry Fong
-----------------------------------
Henry Fong
President, Treasurer and
Chief Financial Officer
38
EXHIBIT 31
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Henry Fong, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Equitex, Inc. (the
"Registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this report is being
prepared;
(b) [Paragraph omitted in accordance with SEC transition instructions
contained in SEC Release 34-47986];
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report my conclusion about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. I have disclosed, based on my most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 22, 2004 /s/ Henry Fong
------------------ -------------------------------
Henry Fong
President, Treasurer and
Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Equitex, Inc. (the "Company") on Form
10-Q for the period ended September 30, 2004, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"). I, Henry Fong, President,
Treasurer and Chief Executive Officer, certify, pursuant to 18 U.S.C.
Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002,that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company, as of, and for the periods presented in the Report.
/s/ Henry Fong
-----------------------------------
Henry Fong
President, Treasurer and
Chief Executive Officer
November 22, 2004
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN
PROVIDED TO EQUITEX, INC. AND SUBSIDIARIES AND WILL BE RETAINED BY EQUITEX, INC.
AND SUBSIDIARIES AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS
STAFF UPON REQUEST.