UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
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. 333-1026-D
FASTFUNDS FINANCIAL CORPORATION
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 87-0425514
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11100 Wayzata Boulevard, Suite 111
Minnetonka, Minnesota 55305
-------------------------------------------------
(Address of principal executive offices) (Zip code)
(952) 541-0455
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(Registrant's telephone number including area code)
Formerly:
Seven Ventures, Inc.
4685 South Highland Drive, Suite 202
Salt Lake City, Utah 94117
-------------------------------------------------
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 12, 2004: 10,374,670
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Condensed consolidated balance sheets -
September 30, 2004 (unaudited) and December 31, 2003 2
Condensed consolidated statements of operations-
three and nine months ended September 30, 2004
and 2003 (unaudited) 3
Condensed consolidated statement of changes
in stockholders' equity - nine months ended
September 30, 2004 (unaudited) 4
Condensed consolidated statements of cash flows
- nine months ended September 30, 2004
and 2003 (unaudited) 5 - 6
Notes to condensed consolidated
financial statements 7 - 26
Item 2. Management's discussion and analysis of financial
condition and results of operations 27 - 37
Item 3. Quantitative and qualitative disclosures of market risk 38
Item 4. Disclosure controls and procedures 39
PART II OTHER INFORMATION
Item 1. Legal proceedings 39
Item 2. Changes in securities and use of proceeds 39
Item 3. Defaults upon senior securities 39
Item 4. Submission of matters to a vote of security holders 39
Item 5. Other information 39
Item 6. Exhibits and reports on Form 8-K 39 - 40
Signatures 41
1
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,385,196 $ 7,606,602
Accounts receivable, net 1,666,131 2,483,698
Prepaid amounts on casino contracts (Note 7) 377,052 182,498
Current portion of notes receivable (Note 3) 62,100 58,200
Deferred tax asset (Note 9) 85,000
Other current assets 221,515 117,054
------------ ------------
Total current assets 8,711,994 10,533,052
------------ ------------
Notes and interest receivable, including related parties,
net of current portion (Note 3) 3,418,768 1,576,117
Other receivables, affiliates (Note 8) 245,377 219,409
Property and equipment, net (Note 4) 1,199,103 1,171,856
Deferred tax asset (Note 9) 388,000
Intangible and other assets, net (Note 5) 3,195,918 3,328,908
Goodwill (Note 5) 5,636,000 5,636,000
------------ ------------
13,695,166 12,320,290
------------ ------------
$ 22,407,160 $ 22,853,342
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft (Note 6) $ 2,497,766
Accounts payable $ 218,413 207,078
Accrued expenses 690,803 446,565
Accrued liabilities on casino contracts (Note 7) 612,186 587,099
Notes payable (Note 6) 10,807,782 10,692,177
Current portion of long-term debt (Note 6) 1,376,488 201,727
------------ ------------
Total current liabilities 13,705,672 14,632,412
Long-term debt, net of current portion (Note 6) 3,047,919 37,243
------------ ------------
16,753,591 14,669,655
------------ ------------
Commitments and contingencies (Note 7)
Stockholders' equity (Note 10):
Preferred stock, $.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding
Common stock, $.001 par value; 250,000,000 shares
authorized; 10,324,670 (2004) and 7,700,000 (2003)
shares issued and outstanding 10,325 7,700
Additional paid-in capital 13,371,925 11,748,128
Stock subscription receivable (800,000)
Investment in Equitex, Inc. (804,763) (611,680)
Notes, advances and interest receivable, affiliates (4,069,255) (2,111,268)
Accumulated deficit (2,854,663) (49,193)
------------ ------------
Total stockholders' equity 5,653,569 8,183,687
------------ ------------
$ 22,407,160 $ 22,853,342
============ ============
See notes to condensed consolidated financial statements.
2
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Fee revenue $ 4,308,684 $ 4,825,043 $ 11,230,047 $ 13,944,480
------------ ------------ ------------ ------------
Location expenses:
Fees to casinos 1,514,970 1,715,741 3,890,170 4,763,827
Salaries and benefits 827,323 1,062,383 2,324,903 3,004,725
Returned checks 175,439 217,347 479,832 438,884
Other 688,090 451,289 1,528,664 1,357,841
------------ ------------ ------------ ------------
Total location expenses 3,205,822 3,446,760 8,223,569 9,565,277
------------ ------------ ------------ ------------
Location gross margin 1,102,862 1,378,283 3,006,478 4,379,203
------------ ------------ ------------ ------------
Corporate operating expenses 1,216,100 861,250 3,523,914 2,726,579
Amortization of intangible and other
assets (Note 5) 218,565 185,000 632,691 555,000
Provision for (recovery of) losses
on related party note receivable 82,000 226,000 (172,799)
------------ ------------ ------------ ------------
1,516,665 1,046,250 4,382,605 3,108,780
------------ ------------ ------------ ------------
(Loss) income from operations (413,803) 332,033 (1,376,127) 1,270,423
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (501,557) (297,461) (1,308,161) (973,079)
Interest income 100,116 6,081 357,818 91,120
------------ ------------ ------------ ------------
Total other expense (401,441) (291,380) (950,343) (881,959)
------------ ------------ ------------ ------------
(Loss) income before income taxes (815,244) 40,653 (2,276,470) 388,464
Deferred tax expense (Note 9) (6,000) (473,000) (68,000)
Current income tax expense (Note 9) (8,000) (6,000) (32,000)
------------ ------------ ------------ ------------
Net (loss) income $ (815,244) $ 26,653 $ (2,805,470) $ 288,464
============ ============ ============ ============
Basic and diluted net (loss)
income per share $ (0.08) $ * $ (0.33) $ 0.04
============ ============ ============ ============
Weighted average number of common
shares outstanding:
Basic and diluted 9,773,901 7,700,000 8,447,289 7,700,000
============ ============ ============ ============
* Amount is less than $0.01 per share
See notes to condensed consolidated financial statements.
3
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
Notes,
advances and
Investment and
Common stock Additional Stock in interest Total
------------------- paid-in subscription Equitex, receivable, Accumulated stockholders'
Shares Amount capital receivable Inc. affiliates deficit equity
---------- ------- ----------- ---------- --------- ----------- ----------- -----------
Balances, January 1, 2004 7,700,000 $ 7,700 $11,748,128 $ (800,000) $(611,680) $(2,111,268) $ (49,193) $8,183,687
Acquisition of Seven Ventures,
Inc. 584,670 585 (8,700) (8,115)
Sales of Equitex, Inc. common
stock (Note 10) 270,457 248,972 519,429
Purchases of Equitex, Inc.
common stock (Note 10) (113,625) (113,625)
Distribution of Equitex, Inc.
common stock in exchange for
receivable due from Equitex,
Inc. (Note 10) 29,180 21,570 50,750
Conversion of note payable to
common stock (Note 6) 2,000,000 2,000 198,000 200,000
Proceeds received in
connection with stock
subscription receivable
(Note 10) 200,000 200,000
Beneficial conversion feature
on convertible promissory
note (Note 6) 200,000 200,000
Cancellation of portion of
stock subscription
receivable and return of
stock (Note 10) (250,000) 600,000 (350,000) -
Issuance of common stock in
exchange for related party
note receivable (Note 10) 40,000 40 215,960 (216,000) -
Contribution of capital from
Equitex, Inc. for allocated
expenses and deferred loan
costs (Note 10) 716,900 716,900
Increase in notes, advances
and interest receivable due
from affiliates (Note 10) (1,741,987) (1,741,987)
Issuance of warrants to
employees for services
(Note 1) 252,000 252,000
Net loss (2,805,470) (2,805,470)
---------- ------- ----------- ---------- --------- ----------- ----------- -----------
Balances, September 30, 2004 10,324,670 $10,325 $13,371,925 $ - $(804,763) $(4,069,255) $(2,854,663) $ 5,653,569
========== ======= =========== ========== ========= =========== =========== ===========
See notes to condensed consolidated financial statements.
4
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
2004 2003
----------- -----------
Net cash (used in) provided by operating activities $ (468,178) $ 524,582
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (316,855) (258,386)
Repayments on notes receivable 18,773 690,398
Advances on notes receivable (3,129,673) (1,132,701)
----------- -----------
Net cash used in investing activities (3,427,755) (700,689)
----------- -----------
Cash flows from financing activities:
Decrease in bank overdraft (2,497,766)
Borrowings on notes and loans payable 7,247,210 1,020,000
Repayments on notes and loans payable (2,281,605) (2,948,000)
Borrowings on long-term debt 400,000
Repayments on long-term debt (464,116) (40,454)
Proceeds received in connection with stock
subscription receivable 200,000
Purchase of Equitex, Inc. common stock (113,625) (312,050)
Proceeds from sale of Equitex, Inc. common stock 519,429 147,794
Payment of deferred loan costs (335,000)
----------- -----------
Net cash provided by (used in) financing activities 2,674,527 (2,132,710)
----------- -----------
Decrease in cash and cash equivalents (1,221,406) (2,308,817)
Cash and cash equivalents, beginning of period 7,606,602 8,902,910
----------- -----------
Cash and cash equivalents, end of period $ 6,385,196 $ 6,594,093
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 790,378 $ 1,031,997
=========== ===========
Cash (received) paid for income taxes $ (33,193) $ 116,841
=========== ===========
Supplemental disclosure of non-cash investing
and financing activities:
Contribution of capital from Equitex, Inc. for
allocated expenses and deferred loan costs $ 716,900
===========
Cancellation of portion of stock subscription receivable $ 250,000
===========
Return of Equitex stock in exchange for stock subscription receivable $ 350,000
===========
Conversion of note payable to common stock $ 200,000
===========
Issuance of common stock in exchange for related party note
receivable $ 216,000
===========
Distribution of Equitex, Inc. common stock to third parties in exchange
for a receivable due from Equitex, Inc. $ 50,750
===========
See notes to condensed consolidated financial statements.
5
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
1. BUSINESS, ORGANIZATION, UNAUDITED FINANCIAL STATEMENTS, RECENT EVENTS AND
MANAGEMENT'S PLANS:
BUSINESS:
FastFunds Financial Corporation ("FFFC") is a holding company operating
through its wholly-owned subsidiary Chex Services, Inc. ("Chex", or the
"Company"). As discussed below, FFFC was previously organized as Seven
Ventures, Inc. ("SVI"). Effective June 7, 2004, Chex merged with SVI, a
Nevada corporation formed in 1985, whereby Equitex, Inc., a
publicly-traded SEC registrant incorporated in Delaware ("Equitex"),
exchanged its 100% ownership of Chex for 93% of SVI's outstanding common
stock following the transaction. On June 29, 2004, SVI changed its name
to FFFC.
Chex, a Minnesota corporation, provides financial services, primarily check
cashing, automated teller machine (ATM) access, and credit card advances
to customers primarily at Native American owned casinos and gaming
establishments. As of September 30, 2004, the Company operates at 30
casino and gaming locations and 16 other retail establishments. As of
September 30, 2004, the Company operated in gaming establishments located
in Arizona, Michigan, Minnesota, Nebraska, New Mexico, North Dakota and
Wisconsin. In 2002, the Company formed Collection Solutions, Inc.
("Collection Solutions"), a wholly owned Minnesota corporation, formed
for the purpose of providing collection services for the Company,
customers of the Company, and other entities both within and outside the
gaming industry. Collection Solutions is licensed as a collection agency
in one state.
On July 15, 2004, FFFC formed FastFunds International, Inc. ("FFI"), a
wholly-owned Corporation based in London. FFI was formed to build a
presence in Europe for the Company's stored value card program.
ORGANIZATION:
ACQUISITION OF CHEX BY SVI AND BASIS OF PRESENTATION:
Effective June 7, 2004, Equitex and the Company executed an Agreement and
Plan of Merger (the "Merger Agreement") with SVI to merge 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. 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. Of the warrants
received by Equitex, 640,000 were subsequently transferred to officers,
directors and a consultant of Equitex and Chex for services performed.
The warrants were determined to have a fair value of $1.00 at the date of
the grant. Of these warrants, 280,000 were issued to Chex officers,
resulting in $252,000 of compensation expense during the nine months
ended September 30, 2004. As a result, Chex became a wholly-owned
subsidiary of SVI, a publicly-traded shell company. In addition, under
the terms of the Merger Agreement, a bridge loan was consummated with an
international merchant bank, MBC Global ("MBC"), 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).
6
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
1. BUSINESS, ORGANIZATION, UNAUDITED FINANCIAL STATEMENTS, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
ORGANIZATION (CONTINUED):
ACQUISITION OF CHEX BY SVI AND BASIS OF PRESENTATION (CONTINUED):
Under the terms of the Merger Agreement and in consideration of the
$400,000 convertible promissory note, the Company granted SVI and MBC
limited anti-dilution rights. The limited anti-dilution rights cover any
common shares issued by FFFC (the "anti-dilution shares") in relation to
the repayment of any portion of the $5,000,000 of convertible promissory
notes (Note 6). Under the anti-dilution rights, SVI and MBC are to
receive the corresponding amount of FFFC common shares in order for their
ownership percentages to remain the same before and after any
anti-dilution shares are issued.
The acquisition of Chex by SVI has been recorded as a reverse acquisition
based on factors demonstrating that Chex represents the accounting
acquirer. The shareholder of Chex (Equitex) received 93% of the
post-acquisition outstanding common stock of SVI. In addition,
post-acquisition management personnel and the board members of the
Company now consist of individuals previously holding positions with Chex
and/or Equitex. The purchase price applied to the reverse acquisition was
based on the net book value of the underlying assets of SVI prior to the
transaction. The historical stockholder's equity of Chex prior to the
exchange has been retroactively restated (a recapitalization) for the
equivalent number of shares received in the exchange after giving effect
to any differences in the par value of the SVI and Chex common stock,
with an offset to additional paid-in capital. The restated consolidated
accumulated deficit of the accounting acquirer (Chex) has been carried
forward after the exchange.
The interim condensed consolidated financial statements include the
accounts of FFFC from the date of acquisition (June 7, 2004), Chex,
Collection Solutions, and beginning on July 15, 2004, FFI. All
significant intercompany transactions and balances have been eliminated
in consolidation.
UNAUDITED FINANCIAL STATEMENTS:
The condensed consolidated balance sheet as of September 30, 2004, the
condensed consolidated statements of operations for the three and nine
months ended September 30, 2004 and 2003, the statement of stockholders'
equity for the nine months ended September 30, 2004, and the condensed
consolidated statements of cash flows for the nine months ended September
30, 2004 and 2003 have been prepared by the Company without audit. In the
opinion of management, all adjustments necessary to present the financial
position, results of operations and cash flows for all stated periods
have been made. Except as described above, these adjustments consist only
of normal and recurring adjustments. These condensed consolidated
financial statements should be read in conjunction with a reading of the
Company's consolidated financial statements and notes thereto included in
the Company's 8-K/A filed with the Securities and Exchange Commission
("SEC") on September 14, 2004. The results of operations for the nine
months ended September 30, 2004 are not necessarily indicative of the
operating results for the full year.
7
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
1. BUSINESS, ORGANIZATION, UNAUDITED FINANCIAL STATEMENTS, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
RECENT EVENTS AND MANAGEMENT'S PLANS:
RECENT EVENTS:
In November 2003, Equitex and 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, Equitex and the Company
notified iGames that they were terminating the SPA due to various
material unrelated adverse events that have impacted the business of
iGames. In addition, Equitex and the Company declared a default under a
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 $1,500,000 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 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 also receive warrants to purchase 1,500,000 shares
of FFFC common stock at an exercise price of $2.00.
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, Equitex and Chex 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.
8
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
1. BUSINESS, ORGANIZATION, UNAUDITED FINANCIAL STATEMENTS, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
MANAGEMENT'S PLANS (CONTINUED):
In August 2004, FFFC entered into a Stock Purchase Agreement (the "SPA")
with Seaside Investments PLC ("Seaside"), a corporation organized under
the laws of England and Wales. Seaside is an open-end diversified
investment fund holding securities from numerous small-cap companies.
Under the terms of the SPA, FFFC, upon closing, is to sell and issue
800,000 shares of its common stock to Seaside in exchange for 1,321,440
shares of Seaside. The shares of FFFC and Seaside 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 Seaside is dependent upon the Seaside shares being accepted for
trading on the London Stock Exchange, PLC. Upon such acceptance, FFFC is
allowed to sell 10% of its Seaside 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 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 stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Had compensation cost for stock-based awards issued to employees been
determined based on the fair value at the grant dates for awards under
the plans consistent with the fair-value based method of accounting
prescribed by 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) income $(815,244) $ 26,653 $(2,805,470) $ 288,464
ADD: Stock-based employee
compensation expense
included in reported net
income 252,000
9
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
1. BUSINESS, ORGANIZATION, UNAUDITED FINANCIAL STATEMENTS, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
STOCK BASED COMPENSATION (CONTINUED):
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- ----------- ---------
DEDUCT: Total stock-based
compensation expense
determined under fair value
based method for all
awards, net of related tax effects (10,000) (214,000) (265,000) (214,000)
--------- --------- ----------- ---------
Pro forma net (loss) income $(825,244) $(187,347) $(2,818,470) $ 74,464
========= ========= =========== ==========
Net (loss) income per share:
Basic and diluted - as reported $ (0.08) $ * $ (0.33) $ 0.04
========= ========= =========== ==========
Basic and diluted - pro forma $ (0.08) $ (0.02) $ (0.33) $ 0.01
========= ========= =========== ==========
* Amount is less than $0.01 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS AND PRESENTATION OF CASH FLOWS:
For the purpose of the statements of cash flows, the Company considers all
highly-liquid investments with a maturity of three-months or less at the
time of purchase to be cash equivalents.
The Company maintains cash in bank accounts, which, at times, may exceed
federally insured limits. At September 30, 2004 and December 31, 2003,
the Company had deposits in excess of federally insured amounts
aggregating $6,385,196 and $5,122,724, respectively, at various financial
institutions. The Company believes it has its cash deposits at high
quality financial institutions. In addition, the Company maintains a
significant amount of cash at each of the casinos. Management believes
the Company has controls in place to safeguard these on-hand amounts, and
that no significant credit risk exists with respect to cash.
RECEIVABLES:
ACCOUNTS RECEIVABLE:
Accounts receivable arise primarily from credit card and ATM advances
provided at casino locations. Concentrations of credit risk related to
credit card and ATM advances are limited to the credit card and ATM
processors who remit the cash advanced back to the Company along with the
Company's allocable share of fees earned. The Company believes these
processors are financially stable and no significant credit risk exists
with respect to accounts receivable arising from ATM and credit card
advances. The allowance for doubtful accounts was $65,000 at September
30, 2004. No allowance was considered necessary on these receivables at
December 31, 2003.
10
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NOTES RECEIVABLE:
The Company has made advances to various third parties, as well as
officers, affiliates and employees of the Company under various loan
agreements (Note 3). The advances made to officers were made prior to the
acquisition of Chex by Equitex in December 2001. Typically, the loans are
unsecured, with approximately $1,971,000 due from affiliates that is
collateralized by Equitex common stock, including registered and
unregistered shares. The Company's allowance for doubtful notes
receivable is adjusted based on the value of the underlying collateral.
Due to the level of risk associated with this common stock, it is
reasonably possible that change in the value of the common stock will
occur in the near term and that such changes could materially affect the
value of the collateral underlying the notes. After all attempts to
collect a note receivable have failed, the note receivable is written-off
against the allowance. The allowance for doubtful notes receivable was
$1,279,300 and $1,053,300 at September 30, 2004 and December 31, 2003,
respectively.
REVENUE RECOGNITION:
Revenue is recognized from financial services at the time the service is
provided.
RETURNED CHECKS:
The Company charges operations for potential losses on returned checks in
the period in which the amounts are deemed uncollectible, generally when
such checks are returned. Recoveries on returned checks are credited to
operations in the period when the recovery is received.
In September 2003, checks totaling $606,316 from one customer were cashed
by the Company and were returned as insufficient funds. In March 2004,
the Company received a non-interest bearing promissory note from this
customer. Based on an imputed interest rate of 12%, a discount of
$256,316 was applied to this note, which was charged to operating expense
during the fourth quarter of 2003. The Company believes the remaining
balance of $336,500 is collectible, based on collateral pledged in
connection with the note (Note 6).
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate
methodologies; however, considerable judgment is required in interpreting
information necessary to develop these estimates. Accordingly, the
Company's estimates of fair values are not necessarily indicative of the
amounts that the Company could realize in a current market exchange.
The fair values of cash and cash equivalents, current non-related party
receivables, and accounts payable approximate their carrying amounts
because of the short maturities of these instruments.
The fair values of notes receivable from non-related parties approximate
their carrying values because of the short maturities of these
instruments. The fair values of notes receivable from related parties are
not practicable to estimate, based upon the related party nature of the
underlying transactions.
11
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
The fair values of notes and loans payable to non-related parties
approximate their carrying values because of the short maturities of
these instruments. The fair values of long-term debt payable to banks,
approximates carrying values, net of discounts applied, based on market
rates currently available to the Company. The fair value of the notes
payable to related parties are not practicable to estimate, based upon
the related party nature of the underlying transaction.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost, and depreciation is provided by
use of accelerated and straight-line methods over the estimated useful
lives of the assets. The cost of leasehold improvements is depreciated
over the estimated useful lives of the assets or the length of the
respective leases whichever period is shorter. The estimated useful lives
of property, equipment and leaseholds are as follows:
Office equipment and furniture 3 to 7 years
Computer hardware and software 3 to 5 years
Leasehold improvements 7 years
Expenditures for additions and improvements are capitalized, while repairs
and maintenance are expensed as incurred.
INVESTMENT IN EQUITEX COMMON STOCK:
At September 30, 2004 and December 31, 2003, the Company has an investment
in common stock of Equitex. The Company's investment in Equitex common
stock is accounted for under the cost method and is adjusted only for
other-than-temporary declines in fair value.
At September 30, 2004 and December 31, 2003, the Company has presented its
investment in Equitex common stock as a reduction of stockholders' equity
in a manner similar to that of treasury stock (Note 10). This
presentation is based upon the Company's consideration of the provisions
of Emerging Issues Task Force ("EITF") Issue No. 98-2, ACCOUNTING BY A
SUBSIDIARY OR JOINT VENTURE FOR AN INVESTMENT IN THE STOCK OF ITS PARENT
COMPANY OR JOINT VENTURE PARTNER. This EITF discusses that in the
separate financial statements of a subsidiary; an investment in the
common stock of a parent whose only significant asset is its investment
in the subsidiary is essentially the same as stock of the subsidiary and
should be classified as a reduction to stockholders' equity.
12
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
GOODWILL, INTANGIBLE ASSETS AND AMORTIZATION:
In connection with Equitex's acquisition of Chex, and in accordance with
SEC Staff Accounting Bulletin No. 54 "APPLICATION OF 'PUSH DOWN' BASIS OF
ACCOUNTING IN FINANCIAL STATEMENTS OF SUBSIDIARIES ACQUIRED BY PURCHASE",
goodwill and intangible assets have been "pushed-down" to Chex. Goodwill
represents the excess of the purchase price paid by Equitex over the
estimated fair values of the Company's net tangible and identifiable
intangible assets acquired. As discussed below, goodwill and intangible
assets with indefinite lives are not amortized pursuant to recently
issued accounting standards. Identifiable intangible assets with finite
lives are being amortized on a straight-line basis over three to seven
years (Note 5).
SFAS No. 142 "GOODWILL AND OTHER INTANGIBLE ASSETS" requires companies to
allocate goodwill to identifiable reporting units, which are then tested
for impairment using a two-step process. The first step requires
comparing the fair value of each reporting unit with its carrying amount,
including goodwill. If the fair value exceeds the carrying amount,
goodwill of the reporting unit is considered not impaired, and the second
step of the impairment test is not necessary. If the fair value of the
reporting unit does not exceed the carrying amount, the second step of
the goodwill impairment test must be performed to measure the amount of
impairment loss, if any. This step requires the allocation of the fair
value of the reporting unit to the reporting unit's assets and
liabilities (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the price paid to acquire the reporting
unit. The excess of the fair value of the reporting unit over its
re-evaluated net assets would be the new basis for the reporting unit's
goodwill, and any necessary goodwill write down to this new value would
be recognized as an impairment expense.
A goodwill impairment test is performed annually in the fourth quarter or
upon significant changes in the Company's business environment.
INCOME TAXES:
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes represent the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
NET INCOME (LOSS) PER SHARE:
SFAS No. 128, EARNINGS PER SHARE, requires dual presentation of basic and
diluted earnings or loss per share ("EPS") with a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes
dilution. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
13
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NET INCOME (LOSS) PER SHARE (CONTINUED):
Income and loss per share of common stock is computed based on the weighted
average number of common shares outstanding during the period. The
historical income per share of Chex prior to the merger has been
presented to reflect the new capital structure. Stock options, warrants,
and common stock underlying convertible promissory notes are not
considered in the calculations for the periods ended September 30, 2004,
as the impact of the potential common shares, which total 2,800,000,
would be to decrease loss per share. Therefore, diluted loss per share is
equivalent to basic loss per share. Chex did not have any options,
warrants or other potentially dilutive securities outstanding for the
periods ended September 30, 2003; therefore, diluted income per share is
equivalent to basic income per share.
COMPREHENSIVE INCOME (LOSS):
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes requirements for
disclosure of comprehensive income. During the three-month and nine-month
periods ended September 30, 2004 and 2003, the Company did not have any
components of comprehensive income (loss) to report.
USE OF ESTIMATES:
Preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the balance sheets and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS:
In May 2003, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS No.150 establishes
new standards on how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are generally effective for all financial
instruments entered into or modified after May 31, 2003, except for those
provisions relating to mandatory redeemable non-controlling interests,
which have been deferred. The adoption of SFAS No. 150 did not have a
material impact on the financial position or results operation of the
Company. If the deferred provisions of SFAS No. 150 are finalized in
their current form, management does not expect adoption to have a
material effect on the financial position or results of operation of the
Company.
14
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED):
In January 2003, the FASB issued SFAS Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES ("FIN 46"), which changes the criteria by
which one company includes another entity in its consolidated financial
statements. FIN 46 requires a variable interest entity ("VIE") to be
consolidated by a company if that company is subject to a majority of the
entity's residual returns or both. In December 2003, the FASB approved a
partial deferral of FIN 46 along with various other amendments. The
effective date for this interpretation has been extended until the first
fiscal period ending after December 15, 2004. However, prior to the
required application of this interpretation, a public entity that is not
a small business issuer shall apply this interpretation to those entities
that are considered to be special purpose entities no later than as of
the end of the first reporting period after December 15, 2003. As the
Company does not currently have an interest in a VIE or special purpose
entity, the adoption of FIN 46 did not have an effect on the financial
condition or results of operations of the Company.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION TRANSITION AND DISCLOSURE. This statement amends SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and establishes two
alternative methods of transition from the intrinsic value method to the
fair value method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 requires prominent disclosure about the effects on
reported net income or loss and requires disclosure for these effects in
interim financial information. The provisions for the alternative
transition methods are effective for fiscal years ending after December
15, 2002, and the amended disclosure requirements are effective for
interim periods beginning after December 15, 2002. The Company adopted
the disclosure only provisions of SFAS No. 148 and plans to continue
accounting for stock-based compensation under APB 25.
In November 2002, the FASB issued SFAS Interpretation No. 45 ("FIN 45"),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES AND INDEBTEDNESS OF OTHERS. FIN 45
elaborates on the disclosures to be made by the guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while the provisions of the disclosure requirements
are effective for financial statements of interim or annual reports
ending after December 15, 2002. The adoption of FIN 45 did not have an
effect on the financial condition or results of operations of the
Company, as the Company has not issued any such guarantees.
3. Notes and interest receivable:
Notes receivable at September 30, 2004 and December 31, 2003, consist of
the following:
September 30, December 31,
2004 2003
----------- -----------
Note receivable from iGames; interest at 10%,
maturity January 2005 [A]
$ 2,000,000
15
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
3. NOTES AND INTEREST RECEIVABLE (CONTINUED):
September 30, December 31,
2004 2003
----------- -----------
Notes receivable from the estate of a
deceased officer; interest at 6%; principal
and unpaid interest due in November 2004;
collateralized by unregistered shares of
Equitex common stock; a valuation allowance
of $1,279,300 and $1,053,300 has been
recorded against this receivable at
September 30, 2004 and December 31, 2003,
respectively [B] 1,484,691 $ 1,484,691
Notes receivable from a former officer of
Chex; interest at rates ranging from 5.75%
to 6%; due on demand; collateralized by
unregistered shares of Equitex common stock
[B] 485,936 485,936
Note receivable from a customer of Chex;
non-interest bearing; principal balance of
$606,316, net of $256,316 discount at June
30, 2004 and December 31, 2003, based on
imputed interest rate of 12%; discount
charged to operating expense in 2003;
monthly payments of $4,500 beginning May
2004 through December 2010, at which time
the balance is due in full; collateralized
by mortgages on three parcels of real
property in Florida; as of September 30,
2004 two months ($9,000) delinquent 336,500 350,000
Notes receivable from Equitex 2000; interest
at 10%; unsecured, due on demand [B] 205,000 205,000
Notes receivable from various Company
employees and a former shareholder;
non-interest bearing, unsecured and due on
demand [B] 53,100 53,700
----------- -----------
4,565,227 2,579,327
Interest receivable, includes related party
interest of $61,066 at September 30, 2004
and December 31, 2003 [B] 194,941 108,290
Less current maturities (62,100) (58,200)
----------- -----------
Notes receivable, net of current portion,
before valuation allowance 4,698,068 2,629,417
Less valuation allowance (1,279,300) (1,053,300)
----------- -----------
Notes receivable, long-term $ 3,418,768 $ 1,576,117
=========== ===========
16
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
3. NOTES AND INTEREST RECEIVABLE (CONTINUED):
[A] 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 to be paid in full. Chex has commenced litigation
relating to the collection of the Note (Note 7). The Company has
presented the Note as a long-term asset at September 30, 2004 due to
uncertainty as to the anticipated litigation settlement date.
[B] Demand notes and interest receivable, net aggregating to $1,194,368 and
$1,284,317, at September 30, 2004 and December 31, 2003,
respectively, have been classified as long-term assets, as it is
management's intention not to demand payment within the next year.
4. PROPERTY AND EQUIPMENT:
Property and equipment at September 30, 2004 and December 31, 2003 are as
follows:
September 30, December 31,
2004 2003
----------- -----------
Furniture and equipment $ 2,528,038 $ 2,402,404
Computer hardware and software 329,883 138,661
Leasehold improvements 52,765 52,765
----------- -----------
2,910,686 2,593,830
Less accumulated depreciation
and amortization (1,711,583) (1,421,974)
----------- -----------
$ 1,199,103 $ 1,171,856
=========== ===========
5. GOODWILL, INTANGIBLE AND OTHER ASSETS:
At September 30, 2004 and December 31, 2003, goodwill was $5,636,000, none
of which is deductible for tax purposes based on the tax structuring of
the Chex acquisition. Intangible and other assets are as follows:
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
Other assets 519,948 77,690 442,258 20,248 20,248
---------- ---------- ---------- ----------- ---------- ----------
$5,519,948 $2,324,030 $3,195,918 $ 5,020,248 $1,691,340 $3,328,908
========== ========== ========== =========== ========== ==========
17
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
5. GOODWILL, INTANGIBLE AND OTHER ASSETS (CONTINUED):
Casino contracts represent the Company's renewable agreements with Native
American owned gaming establishments to operate in those establishments
for initial terms of one to five years. Casino contracts have
historically been renewed by gaming establishments and are amortized
using the straight-line method over seven years. The non-compete
agreements with members of management are amortized using the
straight-line method over five years. Customer lists relate to core
customers that rely on the use of the Company's facilities and are
amortized using the straight-line method over five years. Trade names
consist of the Chex Services and Fast Funds names, which are believed to
be readily identified and known in the marketplace by customers. Trade
names are considered to have an indefinite life and are therefore not
amortized. Other assets represent long-term deposits and deferred loan
costs.
Other assets increased during the nine months ended September 30, 2004, for
loan costs associated with the closing of the $5,000,000 convertible
promissory note, including $335,000 in fees paid for legal services and
finder's fees and $164,700 of costs associated with the issuance of
warrants issued by Equitex to an advisory firm in connection with the
transaction (Note 6).
Aggregate amortization expense was $218,565 and $185,000 for the three
months ended September 30, 2004 and 2003, and $632,691 and $555,000 for
the nine months ended September 30, 2004 and 2003, respectively.
6. NOTES PAYABLE AND LONG-TERM DEBT:
Notes payable and long-term debt at September 30, 2004 and December 31,
2003, consist of the following:
September 30, December 31,
2004 2003
----------- -----------
Notes payable:
Notes payable to individuals; interest rates
ranging from 9% to 12%; interest and
principal payable monthly and/or quarterly;
the notes are unsecured and mature on
various dates through December 2004; the
notes are subject to repayment with ninety
days notice at the option of the holder $10,807,782 $10,692,177
=========== ===========
Long-term debt:
Note payable to Equitex, net of discount [A] $ 4,174,232
Convertible promissory note, interest at 5%
per annum [B] 200,000
Note payable to a bank; interest at prime
plus .25%, repaid in June 2004 $ 150,000
18
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
September 30, December 31,
2004 2003
----------- -----------
Obligations under capital leases; imputed
interest rates ranging from 6.5% to 7%; due
at various dates through October 2005;
collateralized by equipment 50,175 88,970
----------- -----------
4,424,407 238,970
Less current portion (1,376,488) (201,727)
----------- -----------
Long-term debt, net of current portion $ 3,047,919 $ 37,243
=========== ===========
[A] In March 2004, Equitex closed on $5,000,000 of convertible promissory
notes (the "Notes") with two financial institutions (the "Lenders").
The proceeds from the Notes were loaned to Chex. 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. In connection with the closing, Equitex entered into a
$5,000,000 secured promissory note (the "Chex Note") agreement with
Chex. Interest and payment terms of the Chex Note are identical to
those set forth in the Notes.
The Notes are convertible into common stock of Equitex. Equitex 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. Any beneficial conversion features will be recorded in earnings
of the Company (allocated by Equitex) at the time of conversion, as the
number of shares the lenders will receive is not known until the
triggering event occurs.
The Lenders also received warrants to acquire up to 800,000 shares of
Equitex's common stock at an exercise price of $1.50. In June 2004,
Equitex reduced the exercise price of these warrants to $1.275. In
August 2004 Equitex reduced the exercise price of these warrants to
$0.71. These warrants, inclusive of the additional allocation resulting
from the reduced exercise prices, were valued at $461,200 based upon
the Black-Scholes option-pricing model, and therefore $461,200 of the
total proceeds were allocated to the warrants, resulting in an imputed
interest rate of 7.5%. Equitex allocated the value of these warrants to
Chex; therefore the Company reduced the carrying value of the Notes for
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 by Chex as interest expense for the three and nine months
ended September 30, 2004, respectively.
19
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):
In addition, warrants to acquire up to 300,000 shares of Equitex's
common stock 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. Equitex allocated the value of these warrants to Chex. The
cash paid and the value of these warrants was recorded as deferred loan
costs and the Company is amortizing these costs over the 45-month term
of the Notes. Accordingly, $32,313 and $75,397 is included in general
and administrative expenses for the three and nine months ended
September 30, 2004, respectively.
[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 notes were converted into 1,000,000
shares of FFFC common stock. An additional 25% ($100,000) was converted
on August 17, 2004 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 estimated fair value of FFFC's common 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
the conversion of the 25% portion of the note to common stock on June
29, 2004, the Company recorded an additional $100,000 of interest
expense related to the beneficial conversion feature.
In connection with the conversion of the 25% portion of the note to
common stock on August 17, 2004, the Company recorded an additional
$100,000 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:
OPERATING LEASES:
The Company leases its corporate facilities under a non-cancellable
operating lease through March 2006. Pursuant to the lease, the Company is
required to pay its pro-rata share of taxes and operating expenses.
In addition, the Company leases office equipment pursuant to a
non-cancelable lease obligation expiring in July 2005.
20
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
SALARY CONTINUATION PLAN:
The Company has a salary continuation plan for one of its employees.
Pursuant to the plan, this individual is guaranteed two years of salary,
which based on the agreement, would be approximately $68,460 at September
30, 2004 and December 2003, in the event that the Company is sold and
employment is terminated under certain circumstances.
CASINO CONTRACTS:
The Company operates at a number of Native American owned gaming
establishments under contracts requiring the Company to pay a rental fee
to operate at the respective gaming locations. Occasionally, these
agreements require the Company to prepay a negotiated amount of such
anticipated fees. Typically, the gaming establishment earns the fees over
the life of the contract based on one of the following scenarios:
o A minimum amount as defined in the contract.
o A dollar amount, as defined by the contract, per transaction volume
processed by the Company.
o A percentage of the Company's profits at the respective location.
o The greater of the monthly amount, dollar amount per transaction volume
or percent of the Company's profits payable at the end of the contract
term.
As of September 30, 2004 and December 31, 2003, the Company has recorded
$377,052 and $173,998, respectively, of prepaid amounts on casino
contracts and has recorded $612,186 and $587,099, respectively, of
accrued liabilities on casino contracts.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
LITIGATION:
In April 2004, the Company and Equitex executed a settlement agreement with
Cash Systems pursuant to which the Company paid Cash Systems $125,000 for
expenses related to the terminated APM. 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 the Company and Cash
Systems agreed to mutually release each other from further liability
related to the APM and the Seminole Tribe termination; however, the
Company has retained the right to legal action against NASCF, NACS and
its President, for the wrongful termination of the Seminole Tribe casino
contracts.
21
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
LITIGATION (CONTINUED):
In March 2004, Chex commenced a lawsuit in Hennepin County, Minnesota
demanding repayment of the $2,000,000, plus 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 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.
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.
EMPLOYEE BENEFIT PLAN:
In January 2003, the Company adopted a 401(k) retirement plan (the "Plan"),
which covers defined eligible employees of Chex. Eligible employees are
able to contribute a portion of their compensation to the Plan, subject
to an annual Internal Revenue Service deferral limit. Employee
contributions are 100% vested when made. Company contributions are
discretionary. During 2004 and 2003, Chex made a matching contribution of
100% on the first 3% of employee deferrals and 50% on employee deferrals
between 3% and 5%. Contribution expense was approximately $24,300 and
$31,900 for the three months ended September 30, 2004 and 2003 and
approximately $64,900 and $66,800 for the nine months ended September 30,
2004 and 2003, respectively.
CONSULTING AGREEMENTS:
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 a fee if it is successful
in concluding a debt or equity financing for or on behalf of the Company.
In August 2004, Chex entered into a month-to-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
pre-approved travel expenses.
22
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
CONSULTING AGREEMENTS (CONTINUED):
In October 2004, the Company entered into a management services agreement
on a month-to-month basis with a third party consultant. 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 card 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.
8. OTHER RECEIVABLES, AFFILIATES:
During 2003, Chex made $219,409 of net advances to Denaris Corporation
("Denaris"), a majority-owned subsidiary of Equitex. During the nine
months ended September 30, 2004, Chex made net additional advances of
$25,968, resulting in a receivable balance of $245,377 as of September
30, 2004. These amounts have been classified as other receivables,
related party on the consolidated balance sheets.
9. INCOME TAXES:
The operations of the Company were included in consolidated federal income
tax returns filed by Equitex for the year ended December 31, 2003.
However, for financial reporting purposes, the Company's provision for
income taxes has been computed on the basis that the Company files a
separate income tax return. The Company did not make any federal tax
payments. Rather, calculated federal tax liabilities owed by the Company
for the year ended December 31, 2003 were recorded as a capital
contribution from Equitex.
During the quarter ended June 30, 2004 management assessed the realization
of its deferred tax assets. Based on this assessment it was determined to
be more likely than not that the Company's deferred tax assets will not
be realizable and determined that a valuation allowance was required.
Accordingly, the Company's valuation allowance was increased by $473,000,
which resulted in an increase to the provision for income taxes of the
same amount.
10. STOCKHOLDER'S EQUITY:
COMMON STOCK:
In June 2004, FFFC issued 1,000,000 shares of common stock in exchange for
a 25% conversion of the $400,000 convertible notes issued in connection
with the June 7, 2004 merger agreement.
In August 2004, FFFC issued 1,000,000 shares of common stock in exchange
for a 25% conversion of the $400,000 convertible notes issued in
connection with the June 7, 2004 merger agreement. FFFC also issued
40,000 shares of common stock on the basis of an acceleration of an
anti-dilution clause in the Merger Agreement.
23
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
10. STOCKHOLDER'S EQUITY (CONTINUED):
COMMON STOCK (CONTINUED):
In November 2004, FFFC issued 50,000 shares of common stock upon the
exercise of 50,000 warrants at $0.10 per share.
Investment in Equitex common stock:
At September 30, 2004 and December 31, 2003, the Company has an investment
in common stock of Equitex. This investment is presented as a reduction
of stockholders' equity in a manner similar to that of treasury stock.
The following table summarizes the activity of this investment.
Nine months ended
Year ended December 31, September 30,
2003 2004
Shares Cost Shares Cost
----------- ----------- ----------- -----------
Common stock:
Beginning balances 382,507 $ 216,714 1,328,718 $ 611,680
Shares purchased 525,000 312,050 103,500 113,625
Shares received upon Equitex conversion
of preferred stock and unpaid dividends 1,647,211 658,884
Shares sold (1,226,000) (575,968) (533,500) (248,972)
Shares returned to Chex in exchange for stock
subscription receivable 500,000 350,000
Shares distributed to third parties on behalf
of Equitex, in exchange for an Equitex
receivable (45,000) (21,570)
----------- ----------- ----------- -----------
Ending balances 1,328,718 611,680 1,353,718 804,763
----------- ----------- ----------- -----------
Preferred stock:
Beginning balance 650 650,000 - -
Shares converted to common stock (650) (650,000) - -
----------- ----------- ----------- -----------
Ending balances - - - -
Total 1,328,718 $ 611,680 1,353,718 $ 804,763
=========== =========== =========== ===========
Purchases of Equitex common stock are stated at cost. Sales of Equitex
common stock are removed from the investment account at the weighted
average cost of the total shares outstanding, and the difference between
the sales price and cost of the shares sold is classified as additional
paid in capital.
NOTES, ADVANCES AND INTEREST RECEIVABLE FROM AFFILIATES:
Chex has notes receivable due from Equitex and Denaris under various loan
agreements. In addition, Chex has made advances to Equitex and Denaris to
fund their operations. In accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 9, Allocation of Expenses and
Related Disclosure in Financial Statement of Subsidiaries, Divisions or
Lessor Business Components of Another Entity, certain expenses paid by
Chex on behalf of Equitex have been debited (charged) to the receivables.
General and administrative expenses and deferred loan costs allocated by
Equitex to Chex totaling $716,900 for the nine months ended September 30,
2004 have been credited to additional paid-in capital as a contribution
of capital by Equitex. These transactions
24
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
10. STOCKHOLDER'S EQUITY (CONTINUED):
NOTES, ADVANCES AND INTEREST RECEIVABLE FROM AFFILIATES (CONTINUED):
include the allocation of certain operating expenses from Equitex to Chex,
as well as certain capitalized costs relating to the $5,000,000
promissory note that have been allocated to Chex.
At December 31, 2003, the Company offset income taxes payable of $535,000
against notes and advances due from Equitex. During 2003, payment of the
$535,000 by Chex to Equitex was forgiven by Equitex. Therefore, notes and
advances due from Equitex were increased by $535,000 with an offsetting
credit to additional paid-in capital in 2003 to account for this
transaction as a contribution of capital by Equitex.
The following table summarizes the activity for the year ended December 31,
2003 and for the nine months ended September 30, 2004:
December 31, September 30,
2003 2004
----------- -----------
Beginning balances $ 540,760 $ 1,944,785
Cash advances 1,111,655 1,125,000
Cash repayments (595,000)
Chex cash disbursements allocated to Equitex 352,370 332,833
Capital contribution for 2002 income taxes 535,000
Common stock issued to MBC in exchange for a
note receivable 216,000
Distribution of Equitex common stock held by
Chex to third parties in exchange for
receivable from Equitex 50,750
----------- -----------
1,944,785 3,669,368
Interest receivable 166,483 399,887
----------- -----------
Ending balances $ 2,111,268 $ 4,069,255
=========== ===========
The above balances at September 30, 2004 and December 31, 2003 are
presented as a reduction of stockholders' equity on the consolidated
balance sheet of the Company. The balance at December 31, 2003 is
comprised of $837,250 due from Denaris and $1,107,535 due from Equitex.
The balance at September 30, 2004 is comprised of $837,250 due from
Denaris, $2,616,118 due from Equitex and $216,000 due from MBC, an
affiliated lender to the Company. The Denaris receivables are in the form
of notes, $325,000 of which bears interest at 10% per annum and $512,250,
which bear interest at 12% per annum. The notes are collateralized by a
pledge by Equitex of 1,000,000 shares of Equitex common stock. The
Equitex receivables are in the form of notes and advances, which bear
interest at 10% per annum. The notes and advances are collateralized by a
pledge of 700,000 shares of FFFC common stock owned by Equitex. The MBC
receivable was issued in exchange for an advance of 40,000 shares of FFFC
common stock. The shares were issued as an advance under the
anti-dilution rights of the Merger Agreement.
25
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
10. STOCKHOLDER'S EQUITY (CONTINUED):
STOCK SUBSCRIPTION RECEIVABLE:
In December 2003, Chex sold 1,000,000 shares of Equitex common stock 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 has an interest rate of 7% per annum and was originally payable
in three installments of principal and interest through June 30, 2004.
The promissory 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 to
return 500,000 shares of Equitex common stock in full payment of the
remaining $600,000 receivable. Since the market price of the stock on the
date of the agreement of the 500,000 shares of common stock was
approximately $350,000, the Company, in June 2004, 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.
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, 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, Equitex and the Company executed an Agreement and Plan
of Merger (the "Merger Agreement") with SVI to merge 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, 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
The acquisition of Chex by SVI has been recorded as a reverse acquisition based
on factors demonstrating that Chex constituted the accounting acquirer. The
shareholder of Chex (Equitex) received 93% of the post-acquisition outstanding
common stock of SVI. In addition, post-acquisition management personnel and the
board members of the Company now consist of individuals previously holding
positions with Chex or Equitex. The purchase price applied to the reverse
acquisition was based on the net book value of the underlying assets of SVI
prior to the transaction. The historical stockholder's equity of Chex prior to
the exchange has been retroactively restated (a recapitalization) for the
equivalent number of shares received in the exchange after giving effect to any
differences in the par value of the SVI and Chex common stock, with an offset to
additional paid-in capital. The restated consolidated accumulated deficit of the
accounting acquirer (Chex) has been carried forward after the exchange.
OVERVIEW
The financial results presented for the three and nine months ended September
30, 2004 and 2003 are those of Chex Services, Inc. ("Chex") and its wholly-owned
subsidiary Collection Solutions, Inc. ("Collection Solutions"), and from June 7,
2004, on a consolidated basis with those of FFFC.
On July 15, 2004, FFFC formed a wholly-owned corporation based in London,
FastFunds International, Inc. ("FFI"). FFI has started operations, however it
has generated no revenues. The financial results of FFI are included on a
consolidated basis with those of the Company from its date of inception.
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 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.
FFFC is in negotiations on a proposed series of $1,500,000 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 to 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 1,500,000 shares of FFFC common stock at an exercise price
of $2.00.
28
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 (the "SPA") with
Seaside Investments PLC ("Seaside"), a corporation organized under the laws of
England and Wales. Seaside is an open-end diversified investment fund holding
securities from numerous small-cap companies. Under the terms of the SPA, FFFC,
upon closing, is to sell and issue 800,000 shares of its common stock to Seaside
in exchange for 1,321,440 shares of Seaside. The shares of FFFC and Seaside 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 Seaside is dependent upon the Seaside shares being accepted
for trading on the London Stock Exchange, PLC. Upon such acceptance, FFFC is
allowed to sell 10% of its Seaside 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 Solutions, FFFC since its acquisition
on June 7, 2004, and FFI since its inception on July 15, 2004. For the nine
months ended September 30, 2004, net cash used in operating activities was
$468,178 compared to net cash provided by operating activities of $524,582 for
the nine months ended September 30, 2003. The most significant portion of this
change was the net loss of $2,755,470 for the nine months ended September 30,
2004 compared to net income for the nine months ended September 30, 2003 of
$288,464. Location gross margin decreased by approximately $1,373,000, during
the nine months ended September 30, 2004, significantly due to the loss of the 5
Seminole Tribe casino locations. Additionally, during the nine months ended
September 30, 2004, corporate expenses increased by approximately $1,200,000
which includes FFI beginning its operations, non-cash, stock compensation
expenses of $252,000 was recorded for stock options issued to employees and an
increase of $226,000 in the provision for related party receivables. Lastly, the
Company increased its valuation allowance on deferred tax assets by $473,000
during the nine months ended September 30, 2004.
Cash used in investing activities for the nine months ended September 30, 2004
was $3,427,755 compared to $700,689 for the nine months ended September 30,
2003. Cash used in investing activities for the nine months ended September 30,
2004, was primarily attributable to net advances of $3,129,673 on notes
receivable and purchases of property and equipment of $316,855. These advances
(loans) were mainly attributed to iGames ($2,000,000) and Equitex ($1,125,000).
Cash used in investing activities for the nine months ended September 30, 2003
was primarily due to net advances of $1,132,701, mostly to Equitex and Denaris
to fund their operations, on notes receivable and purchases of property and
equipment of $258,386.
Cash provided by financing activities for the nine months ended September 30,
2004 was $2,674,527 compared to cash used in financing activities of $2,132,710
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
$7,647,210 upon the issuance of notes payable and long-term debt, receiving
$519,429 upon the sale of 533,500 shares of Equitex common stock and proceeds
received of $200,000 on a stock subscription receivable. The Company repaid
notes payable and long-term debt of $2,745,721, a bank overdraft of $2,497,766,
paid fees of $335,000 related to the issuance of notes payable, and purchased
103,500 shares of Equitex common stock for $113,625 to offset these proceeds.
29
The significant financing activity for the nine months ended September 30, 2003
included the Company receiving proceeds from the sale of 226,000 shares of
Equitex common stock for $147,794. The Company also received proceeds of
$1,020,000 upon the issuance of notes payable and repaid $2,988,454 of notes
payable and long-term debt. During the nine months ended September 30, 2003, the
Company also purchased 525,000 shares of Equitex common stock for $312,050.
For the nine months ended September 30, 2004, cash decreased by $1,221,406
compared to a decrease in cash of $2,308,817 for the nine months ended September
30, 2003. Ending cash at September 30, 2004 was $6,385,196 compared to
$6,594,093 at September 30, 2003. Significantly all cash is required to be
utilized for Chex's casino operations.
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 outstanding warrants, all of which may cause dilution to our
stockholders.
REVENUES
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 entered into three new contracts,
which resulted in revenues of approximately $442,000.
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:
30
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
========= ============ =========== ========== ============ ===========
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. At some
locations, 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 Chex
began to use its own propriety credit and debit card cash advance platform to
process 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.
31
OPERATING EXPENSES
LOCATION EXPENSES
Chex location expenses were $3,205,822 and $3,446,760 for the three months
ending September 30, 2004 and 2003, respectively. For the nine months ending
September 30, 2004 and 2003, location expenses were $8,223,569 and $9,565,277,
respectively. The location expenses are 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 827,323 1,062,383 2,324,903 3,004,725
Returned checks, net of
collections 175,439 217,347 479,832 438,884
Other 653,040 413,264 1,427,031 1,244,591
Depreciation and amortization 35,050 38,025 101,633 113,250
---------- ---------- ---------- ----------
$3,205,822 $3,446,760 $8,223,569 $9,565,277
========== ========== ========== ==========
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. For the locations where Chex's propriety product
is utilized, Chex pays a fee to the casino based on the commissions it receives
from processing those transactions. The decrease in fees to casinos for the
three and nine months ended September 30, 2004 compared to the three and nine
months ended September 30, 2003, was primarily due to the loss of the five
Seminole tribal locations in January 2004. Other expenses increased in the three
and nine months ended September 30, 2004 compared to September 30, 2003 are a
result of increased processing fees due to Chex now receiving a commission and
paying a fee from its proprietary product.
Chex Services employs personnel at the locations where it provides check cashing
services as well as corporate staff to support its operations.
The terminated locations accounted for location expenses for the three and nine
months ended September 30, 2003 of $814,664 and $2,325,306, respectively.
32
CORPORATE OPERATING EXPENSES
Corporate operating expenses include the corporate activities of Chex,
Collection Solutions and costs allocated from locations for its support of the
operating locations. Beginning June 7, 2004 and July 15, 2004, the expenses also
include those of FFFC and FFI respectively.
Corporate expenses for the three months ended September 30, 2004, were
$1,216,100 compared to $861,250 for the three months ended September 30, 2003.
Corporate expenses for the nine months ended September 30, 2004, were $3,523,914
compared to $2,726,579 for the nine months ended September 30, 2003. The
expenses were comprised as follows:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
---------- -------- ---------- ----------
Salaries and benefits $ 611,722 $456,417 $1,588,875 $1,458,935
Stock-based compensation 252,000
Accounting, legal and consulting 111,944 66,984 378,495 226,358
Travel and entertainment 106,951 74,789 229,139 209,320
Advertising 17,746 76,571 110,419 281,293
Allocated expenses from Equitex 43,000 91,000 160,000
Depreciation and amortization 91,731 51,267 188,164 144,981
Other 276,006 92,222 685,822 245,692
---------- -------- ---------- ----------
$1,216,100 $861,250 $3,523,914 $2,726,579
========== ======== ========== ==========
Included in the expenses for the three months ended September 30, 2004 are those
expenses associated with the opening of the FFI London and Chicago offices. In
addition, the Company entered into two consulting agreements during the quarter
ended September 30, 2004. Corporate operating expenses include the Minneapolis
head office, which supports the 46 operating locations. As currently structured,
total corporate operating expenses are expected to continue at the rate of the
current quarter. The primary reason for the increase in corporate operating
expenses for the nine months ended September 30, 2004 compared to 2003 was due
to the initial costs of FFI described above as well as increased costs for
accounting, legal and consulting services, stock-based compensation and other
expenses related to the June 7, 2004, sale of Chex to Seven Ventures, Inc. by
Equitex. Additionally, a reserve was recorded for $65,000 on an account
receivable in the nine months ended September 30, 2004.
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.
OTHER INCOME (EXPENSE)
Other expense, net for the three months ended September 30, 2004, was $351,441
compared to $291,380 for the three months ended September 30, 2003. Interest
expense for the three months ended September 30, 2004 was $501,557 compared to
$297,461 for the three months ended September 30, 2003. The primary reasons for
the increase was due to interest expense of $180,700 related to the $5,000,000
note payable issued in March 2004 and $100,000 expensed as interest related to
the beneficial conversion feature on the convertible promissory notes. Interest
income increased to $100,116 for the three months September 30, 2004, from
$6,081 for the three months ended September 30, 2003. The primary reasons for
the increase was due to the increase in notes receivable due from Equitex.
33
OTHER INCOME (EXPENSE) (CONTINUED)
Other expense, net for the nine months ended September 30, 2004, was $900,343
compared to $881,959 for the nine months ended September 30, 2003. Interest
expense for the nine months ended September 30, 2004, was $1,308,161 compared to
$973,079 for the nine months ended September 30, 2003. The primary reasons for
the increase was due to interest expense of $191,000 related to the $5,000,000
note entered into in March 2004 and the $200,000 expensed as interest related to
the beneficial conversion feature on the convertible promissory notes. Interest
income increased to $357,818 for the nine months ended September 30, 2004,
compared to $91,120 for the nine months ended September 30, 2003. The primary
reasons for the increase was due to $96,111 of interest income recorded on the
$2,000,000 note receivable from iGames, as well as increased interest due to the
increase in notes receivable due from Equitex.
INCOME TAX EXPENSE
During the quarter ended June 30, 2004 management assessed the realization of
its recorded 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, and determined a valuation allowance was required for
recorded deferred tax assets. Accordingly, the Company's valuation allowance was
increased by $473,000 during the second quarter of 2004, which resulted in an
increase to the provision for income taxes of the same amount.
CONTRACTUAL OBLIGATIONS
No material changes during the quarter ended September 30, 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the balance sheets and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
We believe that the following are some of the more critical policies that
currently affect our financial condition and results of operations:
o allowances for refundable fees and losses;
o returned checks;
o stock-based compensation;
o goodwill and other intangible assets;
o litigation; and
o income taxes, deferred taxes
34
ALLOWANCES FOR REFUNDABLE FEES AND LOSSES
The allowance for losses is established through a provision for losses charged
to expense. Receivables are charged against the allowance for losses when
management believes that collectibility of principal is unlikely. The allowance
is an amount that management believes will be adequate to absorb estimated
losses on existing accounts, based on evaluation of the collectibility of the
accounts and prior loss experience. This evaluation also takes into
consideration such factors as current economic conditions that may affect the
borrower's ability to pay. While management uses the best information available
to make its evaluation, this estimate is susceptible to significant change in
the near term.
RETURNED CHECKS
We charge operations for a potential loss on returned checks in the period such
checks are returned, since ultimate collection of these items is uncertain.
Recoveries on returned checks are credited in the period when the recovery is
received.
In September 2003, Chex cashed checks totaling $606,316 from one customer that
were returned for insufficient funds. In March 2004, Chex received a
non-interest bearing promissory note. Based on an imputed interest rate of 12%,
a discount of $256,316 was charged to operating expense in 2003. We believe the
remaining balance of $336,500 is collectible based upon collateral pledged in
connection with the note.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock Based Compensation, defines fair value-based method of accounting for
stock-based employee compensation plans and transactions in which an entity
issued 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. We have chosen to account
for employee stock-based compensation plans using the intrinsic-value method
prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25),
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, employee compensation cost for stock is measured as the excess, if
any, of the estimated fair value of our stock at the date of the grant over the
amount an employee must pay to acquire the stock.
35
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
We have significant intangible assets on our balance sheet that include goodwill
and other intangibles related to the acquisition of Chex by Equitex. The
valuation and classification of these assets and the assignment of useful
amortization lives involve significant judgments and the use of estimates. The
testing of these intangibles under established account guidelines for impairment
also requires significant use of judgment and assumptions. Our assets are tested
and reviewed for impairment on an ongoing basis under the established accounting
guidelines. Changes in business conditions could potentially require future
adjustments to asset valuations.
In connection with the adoption of SFAS 142 on January 1, 2002, goodwill is not
amortized, but instead is tested annually for impairment. If the carrying value
of goodwill exceeds its fair value based on this test, an impairment loss must
be recognized. A present value technique is often the best available technique
with which to estimate the fair value of a group of assets. The use of a present
value technique requires the use of estimates of future cash flows. These cash
flow estimates incorporate assumptions that marketplace participants would use
in their estimates of fair value as well as our own assumptions. These cash flow
estimates are based on reasonable and supportable assumptions and consider all
available evidence. However, there is inherent uncertainty in estimates of
future cash flow. As such, different assumptions were used in our calculations
and the likelihood of possible outcomes was considered.
We evaluate long-lived assets whenever events or changes in circumstances
indicate that carrying the amount of an asset may not be recoverable. In
performing the review of recoverability, we estimate future cash flows expected
to result from the use of the asset and its eventual disposition. The estimates
of future cash flows, based on reasonable and supportable assumptions and
projections, require management's subjective judgments. The time periods for
estimating future cash flows is often lengthy, which increases the sensitivity
to assumptions made. Depending on the assumptions and estimates used, the
estimated future cash flows projected in the evaluation of long-lived assets can
vary within a wide range of outcomes. We consider the likelihood of possible
outcomes in determining the best estimate for future cash flows.
36
LITIGATION
We are currently involved in certain legal proceedings, as described in Note 7
to the condensed consolidated financial statements included in this report. We
apply the provisions of SFAS No. 5, Accounting for Contingencies to determine
the effects of litigation on the financial statements and related disclosures.
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. Realization of the
deferred tax asset is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Management believes it is more likely than
not that the deferred tax asset will not be realized. Therefore, the Company has
applied a 100% reserve to it deferred tax assets at September 30, 2004.
37
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. Other than its investment in Equitex
common stock, 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 subsidiary 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 obligations under capital
leases with fixed rates ranging from 6.5% to 7% 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.
38
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") and 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 and CFO have
concluded that the Company's current disclosure controls and procedures, as
designed and implemented, were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect the Company's internal controls subsequent to the date of their
evaluation. There were no significant material weaknesses identified in the
course of such review and evaluation and, therefore, the Company took no
corrective measures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 7 of the Condensed Consolidated Financial Statements
Item 2. Changes in Securities
During the quarter ended September 30, 2004, the Company issued a total
of 1,040,000 shares of its $0.001 par value common stock, which were
not registered under the Securities Act of 1933, in various
transactions as described below. For each of the following
transactions, the Company relied upon the exemptions from registration
provided by Sections 4(6) or 4(2) of the Securities Act and Rule 506
promulgated there under based upon (i) representations from each
investor that it is an accredited or sophisticated investor with
experience in investing in securities such that it could evaluate the
merits and risks related to the Company's securities; (ii) that no
general solicitation of the securities was made by the Company; (iii)
each investor represented to the Company that it was acquiring the
securities for its own account and not with a view towards further
distribution; (iv) the securities issued were "restricted securities"
as that term is defined under Rule 144 promulgated under the Securities
Act; (v) the Company placed appropriate restrictive legends on the
certificates representing the securities regarding the restricted
nature of these securities; and (vi) prior to completion of the
transaction, each investor was informed in writing of the restricted
nature of the securities, provided with all information regarding the
Company as required under Rule 502 of Regulation D and were given the
opportunity to ask questions of and receive additional information from
the Company regarding its financial condition and operations. The
shares were issued as follows:
In August 2004, the Company issued 1,000,000 shares of common stock to
MBC Global in exchange for the conversion of $100,000 ($0.10 per share)
in notes payable as disclosed in Note 10 to the financial statements.
In August 2004, the Company issued 40,000 shares of common stock to MBC
Global as an advance for shares issuable under the anti-dilution clause
in the Merger Agreement as discussed in Note 1 to the financial
statements. These shares were valued at $216,000 or $5.40 per share
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
39
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 - CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 - CFO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 - CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
40 Exhibit 32.2 - CFO 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
On July 9, 2004, the Company filed a Current Report on Form 8-K
disclosing the change in its corporate name from "Seven Ventures, Inc."
to "FastFunds Financial Corporation".
On July 14, 2004, the Company filed a Current Report on Form 8-K
disclosing a change in its certifying accountant.
On August 24, 2004, the Company filed a Current Report on Form 8-K
disclosing that it had entered into a material definitive agreement
with Seaside Investments PLC relating to the issuance, subject to
certain conditions, of 800,000 shares of the Company's common stock.
On September 14, 2004, the Company filed an amendment to a Current
Report on Form 8-K, originally filed on June 22, 2004, which contained
certain financial information in connection with the merger by and
among the Company, Equitex, Inc. and Chex Services, Inc.
40
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.
FastFunds Financial Corporation
(Registrant)
Date: November 15, 2004 By: /s/ Graham Newall
-------------------------------------
Graham Newall
Chief Executive Officer
Date: November 15, 2004 By: /s/ Ijaz Anwar
-------------------------------------
Ijaz Anwar
Chief Financial Officer
41
EXHIBIT 31.1
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, Graham Newall, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of FastFunds Financial
Corporation (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 15, 2004
/s/ Graham Newall
-------------------------------
Graham Newall
Chief Executive Officer
EXHIBIT 31.2
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, Ijaz Anwar, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of FastFunds Financial
Corporation (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 15, 2004
/s/ Ijaz Anwar
-------------------------------
Ijaz Anwar
Chief Financial Officer
EXHIBIT 32.1
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 FastFunds Financial Corporation (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,
Graham Newall, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section
1350, 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/ Graham Newall
-------------------------------------
Graham Newall
Chief Executive Officer
November 15, 2004
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN
PROVIDED TO FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES AND WILL BE
RETAINED BY EQUITEX, INC. AND SUBSIDIARIES AND FURNISHED TO THE SECURITIES AND
EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.
EXHIBIT 32.2
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 FastFunds Financial Corporation (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,
Ijaz Anwar, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section
1350, 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/ Ijaz Anwar
-------------------------------------
Ijaz Anwar
Chief Financial Officer
November 15, 2004
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN
PROVIDED TO FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES AND WILL BE
RETAINED BY EQUITEX, INC. AND SUBSIDIARIES AND FURNISHED TO THE SECURITIES AND
EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.