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 March 31, 2005
( ) 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 May 16, 2005: 6,206,901
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 -
March 31, 2005 (unaudited) and December 31, 2004 4 - 5
Condensed consolidated statements of operations -
three months ended March 31, 2005 and 2004 (unaudited) 6
Condensed consolidated statement of changes in
stockholders' equity - three months ended March 31, 2005
(unaudited) 7
Condensed consolidated statements of cash flows -
three months ended March 31, 2005 and 2004 (unaudited) 8 - 9
Notes to condensed consolidated financial statements 10 - 20
Item 2. Management's discussion and analysis of financial
condition and results of operations 21 - 29
Item 3. Quantitative and qualitative disclosures of market risk 29
Item 4. Disclosure controls and procedures 30
PART II OTHER INFORMATION
Item 1. Legal proceedings 30
Item 2. Changes in securities and use of proceeds 30
Item 3. Defaults upon senior securities 30
Item 4. Submission of matters to a vote of security holders 30
Item 5. Other information 30
Item 6. Exhibits and reports on Form 8-K 31
Signature 32
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 March 31, 2005, the related condensed
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 2005 and 2004, and the related condensed consolidated statement
of changes in stockholders' equity for the three months ended March 31, 2005.
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, 2004, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
April 4, 2005 (which includes an explanatory paragraph relating to the adoption
of Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANTIBLE ASSETS,
effective January 1, 2002), 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, 2004,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ GHP HORWATH, P.C.
Denver, Colorado
May 17, 2005
3
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2005 2004
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 8,373,421 $ 8,389,686
Receivables, net 887,524 1,338,109
Current portion of notes and interest receivable, including
related parties of $7,900 (2005) and $212,900 ( 2004) 357,292 472,291
Prepaid expenses and other 400,717 517,182
----------- -----------
Total current assets 10,018,954 10,717,268
----------- -----------
Notes and interest receivable, net, including related parties
of $1,089,461 (2005) and $962,128 (2004) 3,509,160 3,399,240
Property, equipment and leaseholds, net 1,281,896 1,330,095
Intangible and other assets, net 2,892,288 3,135,103
Goodwill 5,636,000 5,636,000
----------- -----------
13,319,344 13,500,438
----------- -----------
$23,338,298 $24,217,706
=========== ===========
(Continued)
4
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
Current liabilities:
Accounts payable $ 824,453 $ 982,774
Accrued expenses and other liabilities, including related
party accruals of $559,000 (2005) and $526,000 (2004) 2,782,305 2,541,406
Convertible and other promissory notes and current
portion of long-term debt, including related party notes of
$93,219 (2005) and $93,719 (2004) 13,719,629 13,181,873
Due to credit card holders 186,890 187,432
Liabilities of discontinued operations 103,316 592,911
------------ ------------
Total current liabilities 17,616,593 17,486,396
Long-term debt, net of current portion 2,710,388 3,044,016
------------ ------------
Total liabilities 20,326,981 20,530,412
------------ ------------
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 $621,000 408,000 408,000
Series G, 6%; stated value $1,000 per share; 370 shares issued
and outstanding; liquidation preference of $618,000 370,000 370,000
Series I, 6%; stated value $1,000 per share; 1,600 shares issued
and outstanding; liquidation preference of $2,528,000 1,600,000 1,600,000
Common stock, $0.01 par value; 50,000,000 shares authorized
6,216,638 (2005) and 5,893,634 (2004) shares issued;
6,206,901 (2005) and 5,801,589 (2004) shares outstanding 62,166 58,936
Notes, interest and stock subscription receivable (682,002) (763,002)
Additional paid-in capital 22,125,335 21,322,132
Accumulated deficit (20,743,240) (18,886,247)
Less treasury stock at cost; 9,737 shares (2005) and 92,045
shares (2004) (128,942) (422,525)
------------ ------------
Total stockholders' equity 3,011,317 3,687,294
------------ ------------
$ 23,338,298 $ 24,217,706
============ ============
(See notes to condensed consolidated financial statements)
5
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS MARCH 31, 2005 AND 2004 (UNAUDITED)
2005 2004
----------- -----------
Fee revenue $ 4,414,143 $ 3,463,103
Credit card income, net of provision for losses 72,804 78,711
----------- -----------
Total revenue 4,486,947 3,541,814
----------- -----------
Location expenses 3,242,739 2,430,900
Location support expenses 1,435,179 1,081,142
Corporate selling, general and administrative 616,350 400,877
----------- -----------
5,294,268 3,912,919
----------- -----------
Loss from operations (807,321) (371,105)
----------- -----------
Other income (expense):
Interest income, including related party interest
of $24,921 (2005) and $26,456 (2004) 25,006 84,927
Interest expense, including related party interest
of $2,351 (2005) and $3,753 (2004) (1,064,077) (335,532)
----------- -----------
(1,039,071) (250,605)
----------- -----------
Loss from continuing operations before income taxes (1,846,393) (621,710)
Income tax expense 8,000 6,000
----------- -----------
Loss from continuing operations (1,854,393) (627,710)
Loss from discontinued operations (2,600) (3,304)
----------- -----------
Net loss (1,856,993) (631,014)
Warrant accretion (3,290)
Deemed preferred stock dividends (55,370) (54,800)
----------- -----------
Net loss applicable to common stockholders $(1,912,363) $ (689,104)
=========== ===========
Basic and diluted net loss per common share:
Loss from continuing operations $ (0.32) $ (0.12)
Loss from discontinued operations * *
----------- -----------
Basic and diluted net loss per share $ (0.32) $ (0.12)
=========== ===========
Weighted average number of common shares outstanding,
basic and diluted 5,989,970 5,600,806
=========== ===========
*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
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
Notes,
interest
Convertible and stock
preferred stock Common Additional Total
----------------- subscription Common stock treasury paid-in Accumulated stockholders'
Shares Amount receivable Shares Amount stock capital deficit equity
----- ---------- --------- --------- ------- --------- ----------- ------------ -----------
Balances, January 1, 2005 2,378 $2,378,000 $(763,002) 5,893,634 $58,936 $(422,525) $21,322,132 $(18,886,247) $ 3,687,294
Exercises of options and
warrants for common
stock 184,691 1,847 369,774 371,621
Conversion of third party
note and interest
payable for common stock 25,426 254 81,366 81,620
Return of common stock
previously issued for
conversion of accounts
payable (2,500) (25) (6,425) (6,450)
Return and retirement
of subsidiary common
stock in exchange for
reduction of stock
subscription receivable 81,000 (81,000) -
Conversion of accounts
payable for common stock 115,387 1,154 489,238 490,392
Sale of 82,308 shares of
treasury stock for cash 293,583 (49,750) 243,833
Net loss (1,856,993) (1,856,993)
----- ---------- --------- --------- ------- --------- ----------- ------------ -----------
Balances, March 31, 2005 2,378 $2,378,000 $(682,002) 6,216,638 $62,166 $(128,942) $22,125,335 $(20,743,240) $ 3,011,317
===== ========== ========= ========= ======= ========= =========== ============ ===========
(See notes to condensed consolidated financial statements)
7
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
2005 2004
----------- -----------
Cash flow used in operating activities from continuing operations:
Net loss $(1,856,993) $ (631,014)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities
from continuing operations:
Loss from discontinued operations 2,600 3,304
Provision for valuation allowances 30,465 690
Depreciation and amortization 384,936 276,738
Amortization of discount on convertible promissory notes payable 31,614 7,964
Beneficial conversion feature on convertible promissory notes payable 596,380
Changes in assets and liabilities:
Decrease in accounts receivable 427,658 647,005
Decrease in other receivables 14,866 8,402
Decrease (increase) in interest receivable and other assets 91,545 (376,872)
(Decrease) increase in due to credit card holders (542) 3,681
Increase (decrease) in accounts payable and accrued expenses 76,246 (497,776)
----------- -----------
Total adjustments 1,655,768 73,136
----------- -----------
Net cash used in operating activities from continuing operations (201,225) (557,878)
----------- -----------
Cash flows from investing activites:
Net decrease in credit card receivables 7,596 6,978
Purchases of furniture, fixtures and equipment (89,922) (92,044)
Issuances of notes receivable (1,080) (2,038,917)
Repayments of notes receivable 1,080 2,044
----------- -----------
Net cash used in investing activities from continuing operations (82,326) (2,121,939)
----------- -----------
Cash flows from financing activities:
Decrease in bank overdraft (2,497,766)
Redemption of preferred stock for cash (151,000)
Proceeds from the exercise of options and warrants 371,621 168,208
Purchase of Equitex, Inc. shares for treasury by subsidiary (24,750)
Increase in deferred loan costs (4,000) (320,000)
Issuances of notes payable, related parties and other 603,000 5,885,000
Repayments of notes payable, related parties and other (945,364) (1,017,857)
Sale of treasury stock for cash 243,833 410,012
----------- -----------
Net cash provided by financing activities from continuing operations 269,090 2,451,847
----------- -----------
Net cash used in discontinued operations (1,804) (33,198)
----------- -----------
(Continued)
8
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
2005 2004
----------- -----------
Decrease in cash and cash equivalents $ (16,265) $ (261,168)
Cash and cash equivalents, beginning 8,389,686 8,059,780
----------- -----------
Cash and cash equivalents, ending $ 8,373,421 $ 7,798,612
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 433,781 $ 244,351
=========== ===========
Cash paid for income taxes $ 13,325 $ 26,484
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Warrants issued in connection with convertible promissory notes $ 523,100
===========
Conversion of accounts payable for common stock previously issued for
contingent consideration $ 10,908
===========
Conversion of note and interest payable and accounts payable to
common stock $ 572,012
===========
Return and retirement of subsidiary common stock in exchange for stock
subscription receivable $ 81,000
===========
Return of common stock previously issued for conversion of accounts payable $ 6,450
===========
(See notes to condensed consolidated financial statements)
9
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, ORGANIZATION AND BASIS OF PRESENTATION,
RECENT EVENTS AND MANAGEMENT'S PLANS:
INTERIM FINANCIAL STATEMENTS:
The condensed consolidated interim financial statements of Equitex, Inc.
and subsidiaries (the "Company") as of and for the three-month periods
ended March 31, 2005 and 2004, 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 March 31, 2005, and for the periods ended March 31, 2005 and 2004,
have been made. Except as described below, those adjustments consist only
of normal and recurring adjustments.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These condensed consolidated financial statements
should be read in conjunction with a reading of the consolidated
financial statements and notes thereto included in the Company's Form
10-K annual report filed with the Securities and Exchange Commission
("SEC") on April 15, 2005. The results of operations for the three months
ended March 31, 2005, are not necessarily indicative of the results to be
expected for the full year.
ORGANIZATION AND BASIS OF PRESENTATION:
ACQUISITION OF CHEX BY FFFC (FORMERLY SVI):
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"), whereby 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 74% at December 31, 2004 and March 31, 2005 through the issuance of
2,128,957 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").
BASIS OF PRESENTATION:
On January 25, 2005, the Company affected a one-for-six reverse stock
split. As a result of the reverse split, the number of shares outstanding
and per share information for all prior periods have been retroactively
restated to reflect the new capital structure.
10
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, ORGANIZATION AND BASIS OF PRESENTATION,
RECENT EVENTS AND MANAGEMENT'S PLANS (CONTINUED):
BASIS OF PRESENTATION (CONTINUED):
The interim condensed consolidated financial statements presented herein
include the financial statements of Equitex, Inc. and its wholly-owned
subsidiaries, Key Financial Systems, Inc. ("Key") and Nova Financial
Systems, Inc. ("Nova"), and Equitex's majority-owned subsidiaries, FFFC
and Denaris Corporation ("Denaris") as of March 31, 2005 and December 31,
2004. During the year ended December 31, 2004, the net loss incurred by
FFFC exceeded the minority interest in the common equity (deficiency) of
the subsidiary. The excess of the losses for the three months ended March
31, 2005 and 2004 applicable to minority interests have been charged to
the Company and therefore no minority interest is reflected in the
Company's condensed consolidated balance sheets. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
RECENT EVENTS:
In May 2005, the Company entered into an agreement to acquire 100% of
Digitel Network Corporation ("Digitel"), and National Business
Communications, Inc. ("NBC"). Digitel's wholly-owned subsidiaries are
Platinum Benefit Group, Inc., Personal Voice, Inc. and Private Voice,
Inc. Digitel, NBC and their subsidiaries (collectively the "Companies")
are 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.
Finalization of this transaction is subject to completion of the
schedules, exhibits and related contracts to the agreement, board of
director approval, negotiation of certain promissory notes, completion
and acceptance of audited financial statements for the business to be
acquired, and any applicable stockholder approvals. The purchase price
per the terms of the agreement is $9 million; $5 million cash due at
closing and two $2,000,000 notes payable.
MANAGEMENT'S PLANS:
The Company has incurred significant net losses, including a net loss of
$1,856,993 and $7,457,983 for the three months ended March 31, 2005 and
the year ended December 31, 2004, respectively. Although the 2005
quarterly and 2004 annual net losses included certain non-cash expenses
of approximately $1,043,000 and $4,500,000, respectively, FFFC incurred
significant costs related to its international marketing strategy and
expansion plans, including costs associated with the development of
proprietary software. Therefore, the Company anticipates that its
liquidity and capital resources needs for the next 12 months may not be
satisfied solely from cash flows generated from operating activities.
11
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, ORGANIZATION AND BASIS OF PRESENTATION,
RECENT EVENTS AND MANAGEMENT'S PLANS (CONTINUED):
MANAGEMENT'S PLANS (CONTINUED):
The Company has developed plans and strategies to address its capital and
liquidity needs for the next twelve-month period. Management believes
that cash flows from operations will provide the Company's primary source
of operating capital, as Chex continues to generate cash flow from its
casino locations. However, the Company may be required to issue
additional debt or equity instruments in order to raise additional
capital, to continue to support the operating costs of Equitex, FFFC's
international marketing efforts, as well as for the ongoing development
of new software. Accordingly, Equitex has entered into discussions with
an investment banker to provide advisory services regarding a
contemplated equity offering of the 7,700,000 shares of FFFC common stock
that it owns. The proceeds from the sale of these shares, if any, may be
utilized to satisfy the cash component of the acquisitions discussed
above. Additionally, during the quarter ended March 31, 2005, FFFC has
significantly reduced the expenditures associated with its international
marketing efforts.
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.
Management believes that these plans will provide sufficient resources to
fund its operations, debt payments, and working capital needs at least
through March 31, 2006.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, defines a fair-value based method of
accounting for stock-based employee compensation plans and transactions
in which an entity issues its equity instruments to acquire goods or
services from non-employees, and encourages but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and guidance provided in SFAS Interpretation
("FIN") No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION. Accordingly, compensation cost for employee stock options
is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an
employee must pay to acquire the stock. There were no options granted
during the three months ended March 31, 2005 and 2004.
12
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
2. DISCONTINUED OPERATIONS:
The carrying amounts of assets and liabilities of Key (presented as
discontinued operations) at March 31, 2005 and December 31, 2004 are as
follows:
March 31, December 31,
2005 2004
--------- ---------
Cash (included in prepaid expenses and other) $ 185 $ 139
--------- ---------
Accounts payable $ 490,854
Accrued expenses $ 25,000 25,000
Notes and interest payable, related party 78,316 77,057
---------- ---------
Total liabilities (all current) $ 103,316 $ 592,911
========== =========
Key had no revenues for the three months ended March 31, 2005 and 2004.
Losses incurred by Key for the three months ended March 31, 2005 and 2004
were $2,600 and $3,304, respectively. During the quarter ended March 31,
2005, the Company issued 115,387 shares of its common stock valued at
$490,392 (the market value of the common stock at the date of the
transaction) to a third party in exchange for the third party's
assumption of Key's accounts payable.
3. RECEIVABLES:
Receivables at March 31, 2005 and December 31, 2004 consist of the
following:
March 31, December 31,
2005 2004
---------- -----------
Credit card and ATM processors, net of
allowance of $65,000 (2005 and 2004) $ 480,754 $ 777,723
Amount held in trust 167,318 182,184
Credit card receivables, net of allowance
of $465 (2005) and $705 (2004) 131,602 139,663
Other receivables 107,850 238,539
---------- -----------
$ 887,524 $ 1,338,109
========== ===========
Amounts due from credit card and ATM processors arise primarily from fees
from credit card and ATM advances by Chex to casino patrons. The amount
held in a trust under an agreement is to secure payment of reservation
fees due customers under Nova's credit card portfolio. 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.
13
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
4. NOTES AND INTEREST RECEIVABLE:
Notes and interest receivable as of March 31, 2005 and December 31, 2004
consist of the following:
March 31, December 31,
2005 2004
------------ -----------
Note receivable, iGames Entertainment, Inc. $ 2,000,000 $ 2,000,000
Notes receivable from the estate of a
deceased Chex officer 1,484,691 1,484,691
Note receivable, Chex customer 336,500 336,500
Note receivable, Paymaster Jamaica, Ltd. 500,000 500,000
Notes receivable, Equitex 2000, Inc. 1,208,574 1,208,574
Notes receivable from various Chex
employees and a former Chex shareholder 52,900 52,900
------------ -----------
5,582,665 5,582,665
Interest receivable, includes related
party interest of $160,787 (2005)
and $118,554 (2004) 239,587 214,666
Less current maturities (357,292) (472,291)
------------ -----------
Notes and interest receivable,
net of current portion 5,464,960 5,325,040
Less allowance for uncollectible notes
receivable (1,955,800) (1,925,800)
------------ -----------
$ 3,509,160 $ 3,399,240
============ ===========
As of March 31, 2005 and December 31, 2004, allowances for uncollectible
notes receivable are comprised of $1,189,300 (2005) and $1,279,300 (2004)
on the receivable from the estate of a deceased Chex officer's estate, a
$280,000 (2005) and $160,000 (2004) allowance on the notes receivable
from Equitex 2000, Inc., a $250,000 (2005 and 2004) allowance on the note
receivable due from Paymaster Jamaica, Ltd., and a $236,500 (2005 and
2004) allowance on the note receivable, Chex customer.
In April 2005, the Company received $295,721 from the sale of all shares
pledged as collateral in exchange for the amount due from the estate of a
deceased Chex officer.
In January 2004, Chex advanced iGames Entertainment, Inc. $2,000,000 under
a Term Loan Note (the "Note"). Interest accrues at 10% per annum, and the
initial maturity 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 demanded the entire unpaid principal and
accrued interest due in full, and Chex commenced litigation relating to
the collection of the Note (Note 7). The Company has presented the note
as a non-current asset at March 31, 2005 and December 31, 2004 due to
uncertainty as to the anticipated litigation settlement date. In
addition, the Company has ceased accrual of interest on the note due to
uncertainty as to collection.
14
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
5. GOODWILL, INTANGIBLE AND OTHER ASSETS:
As of March 31, 2005 and December 31, 2004, goodwill was $5,636,000, none
of which is deductible for tax purposes. Intangible and other assets
consist of the following at March 31, 2005 and December 31, 2004:
March 31, 2005 December 31, 2004
------------------------------------ ------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
amount amortization amount amount amortization amount
---------- ---------- ---------- ---------- ---------- ----------
Casino contracts $4,300,000 $2,099,440 $2,200,560 $4,300,000 $1,949,440 $2,350,560
Non-compete
agreements 350,000 243,300 106,700 350,000 227,300 122,700
Customer lists 250,000 250,000 250,000 250,000
Trade names 100,000 100,000 100,000 100,000
---------- ---------- ---------- ---------- ---------- ----------
Total intangible assets 5,000,000 2,592,740 2,407,260 5,000,000 2,426,740 2,573,260
Deferred loan costs 641,625 206,330 435,295 637,625 125,515 512,110
Other assets 49,733 49,733 49,733 49,733
---------- ---------- ---------- ---------- ---------- ----------
$5,691,358 $2,799,070 $2,892,288 $5,687,358 $2,552,255 $3,135,103
========== ========== ========== ========== ========== ==========
6. CONVERTIBLE AND OTHER PROMISSORY NOTES AND LONG-TERM DEBT:
Convertible and other promissory notes and long-term debt at March 31, 2005
and December 31, 2004, consist of the following:
March 31, December 31,
2005 2004
------------- -------------
Notes payable to individual investors $ 11,333,602 $ 11,402,602
Note payable to affiliates through
common ownership 33,200 21,700
Convertible promissory notes, net
of discounts of $1,329,658 (2005)
and $1,957,612 (2004) 4,858,416 4,559,781
Note payable to officers 60,019 72,019
Obligations under capital leases 144,780 169,787
------------- -------------
16,430,017 16,225,889
Less current maturities (13,719,629) (13,181,873)
------------- -------------
$ 2,710,388 $ 3,044,016
============= =============
15
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
In April 2004, Equitex and Chex executed a settlement agreement with Cash
Systems, Inc. ("Cash Systems") pursuant to which the Company paid Cash
Systems $125,000 for expenses related to an Agreement and Plan of Merger
("APM"), which was terminated in December 2003. As part of the settlement
agreement, Cash Systems paid Chex approximately $476,000 for commissions
owed to Chex by Cash Systems. In April 2004, both Equitex and Chex and
Cash Systems agreed to mutually release each other from further liability
related to the APM and the Seminole Tribe termination in January 2004;
however, Equitex and Chex retained the right to legal action against
Native American Cash Systems Florida, Inc. (NACSF), Native American Cash
Systems, Inc. (NACS) and its President, for the wrongful termination of
the Seminole Tribe casino contracts. In February 2005, Equitex and Chex
reached a tentative settlement agreement to litigation pending in
Hennepin County, Minnesota with NACSF, NACS and its President under which
all the parties have agreed to dismiss their claims against each other in
exchange for mutual releases. It is anticipated that this agreement will
end litigation.
In March 2004, Chex commenced a lawsuit in Hennepin County, Minnesota
demanding repayment of $2,000,000, plus a $1,000,000 termination fee,
accrued interest and other fees, due from iGames under a term note
executed 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 Stock Purchase Agreement ("SPA"). iGames
commenced a lawsuit in the Unites States District Court for the District
of Delaware alleging Equitex breached both the January 2004 term note and
the SPA. iGames has asserted it is entitled to approximately $3.3 million
in damages. The Company is confident that its claims in 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 Federal Deposit Insurance
Corporation ("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 (March 1, 2002). 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. 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 asserted was for refunds to be made to
customers who did not receive credit cards as a result of the closing of
Net First. In 2002, the Company reserved 100% of the net remaining
balance due of $2,151,207 from the FDIC, as receiver for Net First, in
addition to amounts previously reserved.
In December 2004, the Company settled with the FDIC, resulting in Key
receiving an additional FDIC receiver's certificate for an allowed claim
of $400,000. All other claims and counterclaims have been released under
the settlement. The receiver's certificate is to be paid upon
distribution as the FDIC liquidates the assets of the receivership.
Therefore, no assurance can be given as to whether or not collection will
eventually occur.
16
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (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 was $32,710 for the three months ended March 31, 2005.
No expense was required to be recorded for the three months ended March
31, 2004. As of March 31, 2005 and December 31, 2004, approximately
$559,000 and $526,000 is included in accrued liabilities, respectively.
CONSULTING AGREEMENTS:
In July 2004, FFFC entered into a twelve-month agreement with a third party
consultant who was to provide sales, program and business development,
and consulting services for FFFC's International operations. Under the
terms of the agreement, FFFC is required to pay the consultant
approximately $15,800 per month as an advance against future commissions
earned by the consultant. The consultant was entitled to a 10% commission
on all sales generated. In addition, the consultant was to earn a minimum
of 3% of the acquisition value if the Company closed on an acquisition
introduced by the consultant. The agreement could be terminated by either
party subject to not less than three months written notice. As of March
31, 2005, no revenues were generated. Effective April 1, 2005, the
parties agreed to terminate the agreement.
In May 2004, Chex entered into a consulting agreement with a financial
advisor to provide assistance in the placement of debt or equity
financing with prospective investors and facilitating future merger,
acquisition and strategic partnerships on behalf of the Company. The term
of the agreement is two years and requires the Company 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 fees if the advisor is
successful in completing a debt or equity financing for or on behalf of
the Company. Pursuant to the agreement and in connection with the
December 2004 closing on $1,774,064 of convertible promissory notes
issued by FFFC, the Company incurred fees of $105,925. The Company
incurred fees of $4,000 for the three months ended March 31, 2005.
17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
8. STOCKHOLDERS' EQUITY:
SERIES D CONVERTIBLE PREFERRED STOCK:
The Series D Preferred Stock is convertible, together with any cumulative
unpaid dividends, at any time into shares of the Company's common stock
at a conversion price equal to 65% of the average closing bid price of
the Company's common stock as specified in the agreement.
The holder of each share of Series D convertible preferred stock is
entitled to a 6% cumulative annual dividend, payable quarterly. Dividends
are payable in cash or, at the Company's option, in shares of the
Company's common stock. The Series D Preferred Stock contains liquidation
preference equal to the sum of the stated value of each share plus an
amount equal to 130% of the stated value plus the aggregate of all
cumulative unpaid dividends on each share of Series D Preferred Stock
until the most recent dividend payment date or date of liquidation,
dissolution or winding up of the Company.
SERIES G CONVERTIBLE PREFERRED STOCK
The Series G Preferred Stock is convertible, together with any cumulative
unpaid dividends, at any time into shares of the Company's common stock
at a conversion price per share equal to the lesser of $6.50 or 65% of
the average closing bid price of the Company's common stock as specified
in the agreement.
The holder of each share of the Series G Preferred Stock is entitled to
cumulative dividends at 6% per annum plus a 4% dividend default rate,
payable quarterly. Dividends are payable in cash or, at the Company's
option, in shares of the Company's common stock. The Series G Preferred
Stock contains a liquidation preference equal to the sum of the stated
value of each share plus an amount equal to 130% of the stated par value
plus the aggregate of all cumulative unpaid dividends on each share of
Series G Preferred Stock until the most recent dividend payment date or
date of liquidation, dissolution or winding up of the Company. All
outstanding shares of Series G Preferred Stock were to automatically
convert into common stock on August 31, 2003. However, the Company has
been negotiating with the holder to extend the terms; therefore the
holder has not elected to convert the preferred shares to common stock.
The Series G Preferred Stock is redeemable at the Company's option at any
time prior to its conversion, at a redemption price equal to $1,350 per
share plus any cumulative unpaid dividends.
SERIES I CONVERTIBLE PREFERRED STOCK:
The Series I Preferred Stock is convertible, together with any cumulative
unpaid dividends, at any time into shares of the Company's common stock
at a conversion price per share equal to the lesser of $5.98 or 65% of
the average closing price of the Company's common stock as specified in
the agreement.
18
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
SERIES I CONVERTIBLE PREFERRED STOCK (CONTINUED):
The holder of each share of Series I Preferred Stock is entitled to
cumulative dividends at 6% per annum plus a 4% dividend default rate,
payable quarterly. Dividends are payable in cash, or at the Company's
option, in shares of the Company's common stock. The Series I Preferred
Stock contains a liquidation preference equal to the sum of the stated
value of each share plus an amount equal to 125% of the stated value plus
the aggregate of all cumulative unpaid dividends on each share of Series
I Preferred Stock until the most recent dividend payment date or date of
liquidation, dissolution or winding up of the Company. All outstanding
shares of the Series I Preferred Stock 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.
NOTES, INTEREST AND STOCK SUBSCRIPTION RECEIVABLE:
In August 2004, FFFC issued 40,000 shares of its common stock to a
convertible note holder in exchange for a stock subscription receivable
valued at $216,000. In February 2005, 15,000 of the shares, valued at
$81,000, were returned to and retired by FFFC, reducing the stock
subscription receivable to $135,000.
At March 31, 2005, notes and interest receivable from an officer of Chex of
$547,002 are presented as a reduction in stockholders' equity based on
management's evaluation of repayment intentions. The notes are due on
demand and the Company is no longer accruing interest on these notes due
to uncertainty as to collection. The notes are collateralized by
unregistered shares of the Company's common stock.
ISSUANCES OF COMMON STOCK:
During the three months ended March 31, 2005, the Company issued 184,691
shares of common stock upon the conversion of warrants for $371,621, at
an average conversion price of $2.01 per share.
During the three months ended March 31, 2005, the Company issued 115,387
shares of common stock to a third party in exchange for their assumption
of Key's accounts payable of $490,392 at a conversion price of $4.25 per
share, the market price of the common stock at the date of conversion. In
addition, the Company converted notes and interest payable of $81,620 due
to a third party into 25,426 shares of common stock at a conversion price
of $3.21 per share, the market price of the common stock at the date of
conversion.
19
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
TREASURY STOCK TRANSACTIONS:
During the three months ended March 31, 2005, Chex sold 82,308 shares of
Equitex common stock for $243,833 or $2.96 per share (the market price of
the common stock at the date of sale). The stock was acquired at an
average cost of approximately $3.57 per share and the cost of the shares
sold ($293,583) has been removed from treasury stock. The difference
between the sales price and cost of the shares sold ($49,750) has been
classified as a reduction of additional paid-in capital.
20
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
On 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 its 100% ownership of
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 connection with the merger, FFFC
received $400,000 through the issuance of convertible promissory notes. The
promissory notes bear interest at 5% per annum and are convertible into
4,000,000 shares of FFFC common stock upon the occurrence of certain future
events. Unless earlier converted, any outstanding balance of principal and
interest is due April 14, 2007. During the year ended December 31, 2004, FFFC
issued 2,000,000 shares of its common stock in exchange for $200,000 of the
notes, as certain events had been met. As of March 31, 2005, Equitex's ownership
percentage in FFFC is approximately 74%.
21
OVERVIEW
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes thereto for the years ended December 31, 2004, 2003 and
2002. The financial results presented for the three months ended March 31, 2005
and 2004 are those of FastFunds Financial Corporation ("FFFC"), Key Financial
Systems, Inc. ("Key"), Nova Financial Systems, Inc. ("Nova") and Denaris
Corporation ("Denaris"), on a consolidated basis with those of Equitex, Inc. Key
ceased "run-off" operations in the fourth quarter of 2003 and Key's results for
both periods are presented in a one-line presentation and are included in "loss
from discontinued operations".
LIQUIDITY AND CAPITAL RESOURCES
For the next twelve months we anticipate our liquidity and capital resource
needs may not be satisfied solely from cash flows generated from our operating
activities. Chex has also begun to develop and introduce new products during the
past 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 formed a wholly-owned London based
subsidiary, FastFunds International, Inc. ("FFI"). FFI began operations in July
2004 and opened a London and Chicago office. In connection with the start-up of
FFI and the Company's attempt to expand its business model into new markets and
products, FFFC entered into various management advisory and consultant
agreements. However, during the quarter ended March 31, 2005, FFFC terminated
certain consulting agreements, closed its Chicago office and also gave the
required 90-day notice on April 1, 2005 to the landlord that it was terminating
the London lease, as no revenues have been generated sufficient to offset the
operating costs being incurred.
In May 2005, the Company entered into a preliminary agreement to acquire 100% of
Digitel Network Corporation ("Digitel"), and National Business Communications,
Inc. ("NBC"). Digitel's wholly-owned subsidiaries are Platinum Benefit Group,
Inc., Personal Voice, Inc. and Private Voice, Inc. Digitel, NBC and their
subsidiaries (collectively the "Companies") are 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. Finalization of this transaction is subject to completion of the schedules
and exhibits to the preliminary agreement, board of director approval and any
necessary stockholder approvals. The purchase price per the terms of the
preliminary agreement is $9 million; $5 million cash due at closing and two
$2,000,000 notes payable.
The Company has incurred significant net losses, including a net loss of
$1,856,993 and $7,457,983 for the three months ended March 31, 2005 and the year
ended December 31, 2004, respectively. Although the 2005 quarterly and 2004
annual net losses included certain non-cash expenses of approximately $1,043,000
and $4,500,000, respectively, FFFC incurred significant costs related to its
international marketing strategy and expansion plans, including costs associated
with the development of proprietary software. Therefore, the Company anticipates
that its liquidity and capital resources needs for the next 12 months may not be
satisfied solely from cash flows generated from operating activities.
22
The Company has developed plans and strategies to address its capital and
liquidity needs for the next twelve-month period. Management believes that cash
flows from operations will provide the Company's primary source of operating
capital, as Chex continues to generate cash flow from its casino locations.
However, the Company may be required to issue additional debt or equity
instruments in order to raise additional capital, to continue to support the
operating costs of Equitex, FFFC's international marketing efforts, as well as
for the ongoing development of new software. Accordingly, Equitex has entered
into discussions with an investment banker to provide advisory services
regarding a contemplated equity offering of the 7,700,000 shares of FFFC common
stock that it owns. The proceeds from the sale of these shares, if any, may be
utilized to satisfy the cash component of the acquisitions discussed above.
Additionally, during the quarter ended March 31, 2005, FFFC has significantly
reduced the expenditures associated with its international marketing efforts.
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.
Management believes that these plans will provide sufficient resources to fund
its operations, debt payments, and working capital needs at least through March
31, 2006.
In March 2004, Equitex closed on an aggregate of $5,000,000 of convertible
promissory notes (the "Whitebox Notes") from Pandora Select Partners, L.P. and
Whitebox Hedged High Yield Partners, L.P. The Whitebox Notes carry interest at a
rate of 7% per annum and have a 45-month term. The Whitebox Notes are senior to
all other debt of both Equitex and Chex. Concurrently with the loan, Equitex
loaned the borrowed proceeds to Chex under terms identical to the Whitebox
Notes. The Whitebox Notes are collateralized by all of the assets of Chex,
Equitex's stock ownership in the Company and Chex's note issued in favor of
Equitex.
In December 2004, FFFC closed on the sale of $1,774,064 of unsecured convertible
promissory notes (the "Convertible Notes") with various investors, in a private
placement made under Section 4(2) of, and Regulation D under, the Securities Act
of 1933. The Convertible Notes accrue interest at a rate of 9.5% per annum, have
a 9-month term, and are convertible at the holder's option (including any unpaid
interest) into shares of FFFC common stock at a rate of $1.00 per share for a
three-year period commencing on the due date. The Convertible Notes may be
prepaid at any time, in whole or in part and from time to time, without premium
or penalty, so long as at least 50% of the outstanding amount due on the
Whitebox Notes discussed above have then been paid. At this time it is uncertain
whether FFFC will prepay the Convertible Notes. In connection with the sale and
issuance of the Convertible Notes, the note holders also received warrants to
purchase an aggregate of 1,774,064 shares of FFFC common stock at an exercise
price of $2.00 per share.
For the three months ended March 31, 2005, net cash used in operating activities
from continuing operations was $201,225 compared to $557,878 for the three
months ended March 31, 2004. The net loss for the three months ended March 31,
2005 increased compared to the three months ended March 31, 2004. The increase
in net loss was primarily attributable to increases in the net loss of FFFC and
Equitex corporate expenses of approximately $934,000 and $215,000, respectively.
Adjustments to the current periods results were $1,655,768; including non-cash
adjustments of $1,043,395, predominantly comprised of $596,380 of interest
expense related to the beneficial conversion feature on convertible promissory
notes incurred in the three months ended March 31, 2005 which were not incurred
in the three months ended March 31, 2004, and depreciation and amortization of
$384,936 compared to $276,738 in the previous period.
23
Cash used in investing activities from continuing operations for the three
months ended March 31, 2005 was $82,326 compared to $2,121,939 for the three
months ended March 31, 2004. Cash used in 2005 investing activities was
primarily attributable to purchases of furniture, fixtures and equipment of
$89,922. Cash used in 2004 investing activities was primarily attributable to
purchases of furniture, fixtures and equipment of $92,044 and net advances of
$2,038,917 on notes receivable, of which $2 million was issued to iGames
Entertainment, Inc.
Cash provided by financing activities from continuing operations for the three
months ended March 31, 2005 was $269,090 compared to the three months ended
March 31, 2004 of $2,451,847. The significant activity for the three months
ended March 31, 2005 included the Company receiving proceeds of $603,000 from
the issuances of notes payable and receiving $371,621 and $243,833 from the
exercise of warrants and upon the sale of 82,308 shares of treasury stock by
Chex, respectively. In addition, the Company repaid $945,364 of notes payable.
The significant activity for the three months ended March 31, 2004, included the
Company receiving proceeds of $5,885,000 upon the issuance of notes payable,
receiving $410,012 upon the sale of 68,333 shares of treasury stock by Chex and
proceeds received of $168,208 upon the exercise of options and warrants. These
proceeds were offset by the repayment of notes payable and a bank overdraft of
$1,017,857 and $2,497,766, respectively, payment of fees of $320,000 related to
the issuance of notes payable, purchase of Equitex shares for treasury by Chex
for $24,750 and redemption of Series D preferred stock for $151,000 in cash.
Net cash used in discontinued operations was $1,804 for the three months ended
March 31, 2005 compared to $33,198 for the three months ended March 31, 2004.
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 three months ended March 31, 2005, net cash decreased by $16,265
compared a decrease of $261,168 for the three months ended March 31, 2004.
Ending cash at March 31, 2005, was $8,373,421 compared to $7,798,612 at March
31, 2004. Significantly all of the Chex's cash is required to be utilized for
its casino operations, and consequently Equitex needs to rely on other sources
for its liquidity needs.
RESULTS OF OPERATIONS
REVENUES
Consolidated revenues from continuing operations for the three months ended
March 31, 2005, were $4,486,947 compared to consolidated revenues of $3,541,814
for the three months ended March 31, 2004. The increase in the period was
primarily due to revenues from three casino locations of approximately $540,000
for the three months ended March 31, 2005 that were opened in the third and
fourth quarters of 2004, and accordingly, the Company had no revenues from these
properties for the three months ended March 31, 2004. Additional increases in
revenues of approximately $555,000 were the result of the new proprietary cash
advance platforms used to process cash advance transactions. This software was
installed beginning in July 2004.
24
FEE REVENUE
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 March 31, 2005 and
2004 were comprised of the following:
2005 2004
-------------------------------------- --------------------------------------
Number of Dollars Earned Number of Dollars Earned
Transactions Handled Revenues Transactions Handled Revenues
------------ ----------- ----------- ------------ ----------- -----------
Personal checks 175,234 $32,962,972 $ 1,613,700 159,183 $29,474,085 $ 1,538,879
"Other" checks 59,974 22,570,150 261,729 60,767 23,103,174 237,992
Credit cards 55,068 19,363,629 1,169,981 55,800 18,895,559 680,368
Debit cards 12,047 3,675,629 85,837 9,969 3,113,314 40,274
ATM transactions 620,639 53,861,424 1,161,379 428,158 33,547,520 782,709
NSF collection fees - - 96,146 - - 118,847
Other - - 25,371 - - 64,034
--------- ------------ ---------- --------- ------------ -----------
922,962 $132,433,804 $4,414,143 713,877 $108,133,652 $ 3,463,103
========= ============ ========== ========= ============ ===========
Chex cashes personal checks at its cash access locations for fees of based upon
a percentage of the face amount of the check cashed per each casino contract.
Chex also cashes "other" checks, comprised of tax and insurance refunds, casino
employee payroll checks and casino jackpot winnings.
Chex credit/debit card cash advance services allow patrons to use their VISA,
MasterCard, Discover and American Express cards to obtain cash. In July 2004,
Chex began using its own proprietary credit and debit cash advance platform to
process cash advance transactions. Accordingly, for the three months ended March
31, 2004, on similar total cash advances transacted for the three months ended
March 31, 2004, Chex recorded additional revenues of approximately $490,000.
During the three months ended March 31, 2005, third party vendors, at their
expense, supplied, installed and maintained 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 paid a portion of such
service fee to Chex.
ATM surcharge and transaction fees are comprised of upfront patron transaction
fees or surcharges assessed at the time the transaction is initiated and a
percentage of interchange fees paid by the patron's issuing bank. These issuing
banks share the interchange revenue with the Company. Upfront patron transaction
fees are recognized when a transaction is initiated, and interchange revenue is
recognized on a monthly basis based on the total transactions occurring during
the month.
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.
CREDIT CARD INCOME
Credit card income decreased to $72,804 for the three months ended March 31,
2005 compared to $78,711 for the three months ended March 31, 2004. The decrease
was due to the attrition of customers.
25
OPERATING EXPENSES
Total operating expenses for the three months ended March 31, 2005, was
$5,294,268 compared to $3,912,919 for the three months ended March 31, 2004.
LOCATION EXPENSES
Chex location expenses were $3,242,739 and $2,430,900 for the three months ended
March 31, 2005 and 2004, respectively. The location expenses are comprised as
follows:
Three months ended
March 31,
2005 2004
----------- -----------
Fees to casinos $ 1,495,591 $ 1,166,148
Salaries and related costs 795,417 774,033
Returned checks, net of collections 214,058 98,003
Processing fees 403,961 67,810
Selling, general and administrative 293,522 291,394
Depreciation and amortization 40,190 33,512
----------- -----------
$ 3,242,739 $ 2,430,900
=========== ===========
Fees to casinos are comprised of compensation paid to the casino pursuant to the
terms of each financial services agreement that the Company has entered into
with the 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 or a fixed percentage of the net income from
operations at that location. Chex passes on an agreed upon percentage of the
surcharge commissions to the locations where ATM's are utilized. At 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. For the locations where Chex's proprietary product is used, Chex
pays a fee to the casino based on the fees it receives from processing the
transaction. For these transactions, Chex also has a cost of processing the
transaction. Chex began installing their proprietary product in July 2004 and
accordingly, there was a significant increase in processing costs for the three
months ended March 31, 2005 compared to March 31, 2004.
Returned checks, net of collections expense, increased for the three months
ended March 31, 2005 compared to March 31, 2004. The primary reason for the
increase was the result of approximately $28,000 of expenses for 3 new full
booth locations and approximately $91,000 of expenses from 2 new stand alone
locations.
Chex generally records a returned check expense for potential losses in the
period such checks are returned.
Selling, general and administrative expenses for locations include bank charges,
depreciation, communications, insurance licensing, collections, and travel and
entertainment. For the three months ended March 31, 2005, these expenses were
comparable to the three months ended March 31, 2004.
26
LOCATION SUPPORT EXPENSES
Location support expenses for the three months ended March 31, 2005, were
$1,435,179 compared to $1,081,142 for the three months ended March 31, 2004. The
expenses were comprised of the following:
2005 2004
-------------- -------------
Salaries and related costs $ 589,510 $ 509,631
Accounting, legal and consulting 268,123 102,730
Travel and entertainment 105,440 61,057
Advertising 9,783 44,631
Depreciation and amortization 297,202 242,862
Recovery of valuation allowance (90,000)
Other 255,121 120,231
-------------- -------------
$ 1,435,179 $ 1,081,142
============== =============
Corporate operating expenses include Chex's Minneapolis administrative office,
which supports the 49 operating locations and also include for the three months
ended March 31, 2005 those expenses associated with FFI's London and Chicago
offices.
Salaries and related costs increased for the three months ended March 31, 2005
compared to the three months ended March 31, 2004 primarily as a result of the
hiring of the Company's Chief Executive Officer, as well as the corporate
staffing of FFI's London office. The salaries and related costs included in 2005
for the above items were approximately $121,000.
Accounting, legal and consulting expenses increased for the three months ended
March 31, 2005 compared to the three months ended March 31, 2004 primarily as a
result of an increase in consulting fees of approximately $175,000 for the three
months ended March 31, 2005. FFI hired marketing and sales consultants to assist
the Company in entering the store-valued card international market in the gaming
and retail industries. As a result of no revenues being generated to offset
these operating costs, during the three months ended March 31, 2005, the Company
terminated certain sales and marketing consulting and advisory agreements that
previously required the Company to pay approximately $36,000 per month. In
addition, FFI has entered into various consulting agreements with a financial
advisor and individuals who provide various consulting services to the Company.
These continuing agreements require the Company to pay approximately $17,000 per
month.
Travel and entertainment increased for the three months ended March 31, 2005
compared to March 31, 2004 primarily as a result of the increased costs of
travel associated with employees of FFFC and FFI and consultants.
Prior to July 1, 2004 Equitex was incurring certain general and administrative
expenses on behalf of Chex that were allocated by Equitex to Chex. Beginning
July 1, 2004, Chex and FFFC began incurring these expenses on their own behalf,
and accordingly, there is no longer an allocation from Equitex.
Depreciation and amortization increased in 2005 compared to 2004 primarily as a
result of increased depreciation on additional fixed assets, as well as the
amortization of deferred loan costs.
27
Other costs included in corporate operating expenses increased for the three
months ended March 31, 2005 compared to March 31, 2004. The primary reason for
the increase was the additional rent and occupancy costs of approximately
$39,000 for the London and Chicago offices, as well as directors and officers
insurance of approximately $26,000, and other office expenses such as,
telecommunication and supplies.
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE
Corporate expenses include those of Equitex, Denaris and Nova. Total corporate
activity expenses for the three months ended March 31, 2005 and 2004 were
comprised as follows:
2005 2004
-------------- -------------
Employee costs $ 144,965 $ 111,626
Accounting and legal 227,954 56,694
Impairment of notes receivable 120,000
Other 123,431 232,557
-------------- -------------
$ 616,350 $ 400,877
============== =============
Employee costs for the three months ended March 31, 2005 increased by $33,339
from the three months ended March 31, 2004. The 2005 period includes $32,710 of
officer's bonus. Accounting and legal expenses increased by $171,260 for the
three months ended March 31, 2005 compared to March 31, 2004. The increase was
primarily attributable to legal expenses associated with the lawsuit against
iGames, as well as defending claims made against the Company by iGames.
During the three months ended March 31, 2005, the Company increased the
valuation allowance related to notes receivable from Equitex 2000, Inc. by
$120,000.
Other expenses for the three months ended March 31, 2005 and 2004 include the
general operating costs of Equitex, Denaris and Nova. For the three months ended
March 31, 2005, Nova general operating expenses decreased compared to the three
months ended March 31, 2004. The majority of the decrease from the three months
ended March 31, 2004, was related to reduced general operating costs of Nova of
$41,000 and reduced third party service fees of approximately $17,000.
OTHER INCOME (EXPENSE):
Consolidated other expenses for the three months ended March 31, 2005 were
$1,039,071 compared to $250,605 for the three months ended March 31, 2004.
Interest expense increased by $728,545 for the three months ended March 31, 2005
compared to March 31, 2004. The increase was primarily attributable to non-cash
interest expense of approximately $628,000 recorded due to the amortization of
the beneficial conversion features on convertible promissory notes and warrants
and approximately $74,000 of interest expense related to the $5 million note
payable issued in March 2004. Interest income decreased by $59,921 for the three
months ended March 31, 2005 compared to March 31, 2004. The most significant
portion of the decrease was $46,111 of interest income recorded on the iGames
$2.0 million note in the three months ended March 31, 2004. The Company is no
longer accruing interest on this note.
28
DISCONTINUED OPERATIONS
Discontinued operations represents the operations of Key, which ceased during
the fourth quarter of 2003. The loss from discontinued operations was $2,600 and
$3,304 for the three months ended March 31, 2005 and 2004, respectively.
CONTRACTUAL OBLIGATIONS
No material changes during the quarter ended March 31, 2005.
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
$17,481,369 and $17,904,731 of debt outstanding as of March 31, 2005 and
December 31, 2004, respectively, of which $11,333,602 and $11,402,602 has been
borrowed at fixed rates ranging from 9% to 15% at March 31, 2005 and December
31, 2004, 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, $4,028,922 and $4,358,279 of the total debt at March 31, 2005 and
at December 31, 2004 has been borrowed at a fixed rate of 7% and $1,774,064 and
$200,000 of the total debt at March 31, 2005 and December 31, 2004 has fixed
rates of 9.5% and 5%, respectively. Chex also has $144,780 and $169,787 of
obligations under capital leases with fixed rates ranging from 6.5% to 7% at
March 31, 2005 and December 31, 2004, 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,
2005.
29
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 evaluation. There
were no significant material weaknesses identified in the course of such review
and evaluation and, therefore, no corrective measures were taken by the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
On February 2, 2005, the Company converted notes and interest payable
of $81,620 due to a third party into 25,426 shares of common stock at a
conversion price of $3.21 per share, the market price of the common stock at the
date of conversion.
On March 31, 2005, the Company issued 115,387 shares of common stock to
a third party in exchange for their assumption of Key's accounts payable of
$490,392 at a conversion price of $4.25 per share, the market price of the
common stock at the date of conversion.
The Company offered and sold the common stock indicated above in
reliance on an exemption from registration for offers and sales of securities
that do not involve a public offering (i.e., Section 4(2) of the Securities Act
of 1933, as amended). This shares of common stock issued as described above were
not registered under the Securities Act of 1933, as amended, and may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
30
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 March 31, 2005
On February 1, 2005, the Company filed a Current Report on Form
8-K reporting a Notice of Delisting or Failure to Satisfy a Continued
Listing Rule or Standards; Transfer of Listing Under Item 3.01
On February 11, 2005, the Company filed a Current Report on Form
8-K reporting Unregistered Sales of Equity Securities under Item 3.02.
On March 18, 2005, the Company filed a Current Report on Form 8-K
reporting the rescission of stock transaction under Item 8.01 Other
Items.
31
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: May 19, 2005 By: /s/ Henry Fong
-------------------------------------
Henry Fong
President, Treasurer and
Chief Financial Officer
32