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 March 31, 2005
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 333-1026-D
FASTFUNDS FINANCIAL CORPORATION
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(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
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(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
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at May 10, 2005: 10,513,672
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
PART I FINANCIAL INFORMATION Page
------
Item 1. Financial statements:
Condensed consolidated balance sheets -
March 31, 2005 (unaudited) and December 31, 2004 2
Condensed consolidated statements of operations-
three months ended March 31, 2005 and 2004 (unaudited) 3
Condensed consolidated statement of changes
in stockholders' equity - three months ended
March 31, 2005 (unaudited) 4
Condensed consolidated statements of cash flows -
three months ended March 31, 2005
and 2004 (unaudited) 5
Notes to condensed consolidated
financial statements 6 - 17
Item 2. Management's discussion and analysis of financial
condition and results of operations 18 - 24
Item 3. Quantitative and qualitative disclosures of market risk 25
Item 4. Disclosure controls and procedures 26
PART II OTHER INFORMATION
Item 1. Legal proceedings 26
Item 2. Changes in securities and use of proceeds 26
Item 3. Defaults upon senior securities 26
Item 4. Submission of matters to a vote of security holders 26
Item 5. Other information 26
Item 6. Exhibits and reports on Form 8-K 27
Signatures 28
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,332,737 $ 8,438,341
Accounts receivable, net 582,859 1,010,518
Prepaid and other assets 369,327 499,254
Current portion of notes, advances and interest receivable including
related parties of $7,900 (2005 and 2004) (Note 3) 357,291 61,900
------------ ------------
Total current assets 9,642,214 10,010,013
------------ ------------
Notes and interest receivable, including related parties of $253,016
(2005) and $247,890 (2004), net of current portion (Note 3) 2,440,126 2,640,391
Property and equipment, net 1,275,520 1,322,737
Intangible and other assets, net (Note 4) 2,862,803 3,105,618
Goodwill (Note 4) 5,636,000 5,636,000
------------ ------------
12,214,449 12,704,746
------------ ------------
$ 21,856,663 $ 22,714,759
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 191,020 $ 323,949
Accrued expenses 1,636,421 1,483,468
Convertible and other promissory notes and current portion of
long-term debt, including related party of $105,105
2005 and 2004) (Note 5) 13,441,412 12,903,154
------------ ------------
Total current liabilities 15,268,853 14,710,571
Long-term debt, net of current portion (Note 5) 2,710,388 3,044,016
------------ ------------
17,979,241 17,754,587
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' equity (Note 7):
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; 10,413,627 (2005) and 10,428,627 (2004) shares
issued and outstanding 10,414 10,429
Additional paid-in capital 14,923,960 15,054,695
Stock subscription receivable (135,000) (216,000)
Investment in Equitex, Inc. (14,905) (308,488)
Notes, advances and interest receivable, related parties (4,839,527) (4,743,277)
Accumulated deficit (6,067,520) (4,837,187)
------------ ------------
Total stockholders' equity 3,877,422 4,960,172
------------ ------------
$ 21,856,663 $ 22,714,759
============ ============
See notes to condensed consolidated financial statements.
2
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
2005 2004
------------ ------------
Fee revenue $ 4,414,143 $ 3,463,103
------------ ------------
Location expenses:
Fees to casinos 1,495,591 1,166,148
Salaries and benefits 795,417 774,033
Processing fees 403,961 67,810
Returned checks 214,058 98,003
Selling, general and administrative 333,712 324,906
------------ ------------
Total location expenses 3,242,739 2,430,900
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Location gross margin 1,171,404 1,032,203
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Corporate operating expenses:
Salaries and benefits 589,510 509,631
Selling, general and administrative 598,854 407,740
Amortization of intangible and other assets (Note 4) 246,815 195,771
------------ ------------
Total corporate operating expenses 1,435,179 1,113,142
------------ ------------
Loss from operations (263,775) (80,939)
------------ ------------
Other income (expense):
Interest expense, including related party interest of
$77,509 (2005) and $30,978 (2004) (1,056,438) (327,486)
Interest income, including related party interest of
$97,795 (2005) and $58,471 (2004) 97,880 118,393
------------ ------------
Total other expense (958,558) (209,093)
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Loss before income taxes (1,222,333) (290,032)
Income tax expense (8,000) (6,000)
------------ ------------
Net loss $ (1,230,333) $ (296,032)
============ ============
Basic and diluted net loss per share $ (0.12) $ (0.04)
============ ============
Weighted average number of common
shares outstanding:
Basic and diluted 10,421,794 7,700,000
============ ============
See notes to condensed consolidated financial statements.
3
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
Notes,
advances and
and interest
Common stock Additional Stock Investment receivable, Total
---------------------- paid-in subscription in Equitex, related Accumulated stockholders'
Shares Amount capital receivable Inc. parties deficit equity
---------- --------- ----------- ---------- ---------- ----------- ----------- -----------
Balances, January 1, 2005 10,428,627 $ 10,429 $15,054,695 $ (216,000) $ (308,488) $(4,743,277) $(4,837,187) $ 4,960,172
Return and retirement
of 15,000 shares of
common stock in exchange
for reduction of stock
subscription receivable
(Note 7) (15,000) (15) (80,985) 81,000 --
Sale of Equitex, Inc.
common stock (Note 7) (49,750) 293,583 243,833
Increase in notes,
advances and interest
receivable due from
related parties (Note 7) (96,250) (96,250)
Net loss (1,230,333) (1,230,333)
---------- --------- ----------- ---------- ---------- ----------- ----------- -----------
Balances, March 31, 2005 10,413,627 $ 10,414 $14,923,960 $ (135,000) $ (14,905) $(4,839,527) $(6,067,520) $ 3,877,422
========== ========= =+========= ========== ========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
2004 2005
----------- -----------
Net loss $(1,230,333) $ (296,032)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 383,954 276,374
Non-cash interest expense 31,614 7,964
Recovery of valuation allowance (Note 3) (90,000)
Beneficial conversion feature on convertible promissory
notes payable 596,380
Allocated expenses from Equitex, Inc. 352,000
Decrease (increase) in assets:
Accounts receivable 427,659 (5,561)
Interest and other receivables (97,797) (126,906)
Prepaid and other assets 129,927 (295,817)
(Decrease) increase in liabilities:
Accounts payable (132,929) (143,235)
Accrued expenses 152,953 58,983
----------- -----------
Net cash provided by (used in) operating activities 171,428 (172,230)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (89,922) (92,045)
Repayments on notes receivable 1,080 400
Advances on notes receivable (1,080) (2,001,816)
----------- -----------
Net cash used in investing activities (89,922) (2,093,461)
----------- -----------
Cash flows from financing activites:
Decrease in bank overdraft (2,497,766)
Borrowings on notes and loans payable 460,000 5,830,000
Repayments on notes and loans payable (529,000) (950,000)
Repayments on long-term debt (354,363) (12,932)
Purchase of Equitex, Inc. common stock (24,750)
Proceeds from sale of Equitex, Inc. common stock 243,833 410,012
Payment of deferred loan costs (4,000) (320,000)
Notes and advances to related parties (3,580) (635,544)
----------- -----------
Net cash (used in) provided by financing activities (187,110) 1,799,020
----------- -----------
Decrease in cash and cash equivalents (105,604) (466,671)
Cash and cash equivalents, beginning of period 8,438,341 8,770,842
----------- -----------
Cash and cash equivalents, end of period $ 8,332,737 $ 8,304,171
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 408,688 $ 273,381
=========== ===========
Cash paid for income taxes $ 13,325 $ 3,392
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Contribution of capital from Equitex, Inc. for allocated expenses and deferred loan costs $ 523,100
===========
Return and retirement of common stock in exchange for stock subscription receivable $ 81,000
===========
See notes to condensed consolidated financial statements.
5
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION AND MANAGEMENT'S PLANS:
BUSINESS:
FastFunds Financial Corporation ("FFFC") is a holding company operating
primarily 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's wholly-owned subsidiary, 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 FastFunds Financial Corporation. As of March 31, 2005, Equitex's
ownership in FFFC has been reduced to 74%.
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 March 31, 2005, the Company operates at 49
establishments. As of March 31, 2005, the Company operated in
establishments located in Connecticut, Illinois, Michigan, Minnesota,
Nebraska, New Mexico, North Dakota, South Dakota and Wisconsin.
ORGANIZATION AND BASIS OF PRESENTATION:
ACQUISITION OF CHEX BY FFFC (FORMERLY 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.
As a result of the merger, Chex became a wholly-owned subsidiary of SVI, a
publicly-traded shell company. In addition, under the terms of the Merger
Agreement, FFFC received $400,000 through the issuance of convertible
promissory notes bearing interest at 5% per annum and convertible into
four million shares of Company common stock upon the occurrence of
certain future events. Through March 31, 2005, $200,000 of the notes have
been converted into two million shares of the Company's common stock.
6
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION AND MANAGEMENT'S PLANS
(CONTINUED):
ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED):
ACQUISITION OF CHEX BY FFFC (FORMERLY SVI) AND BASIS OF PRESENTATION
(CONTINUED):
At the date of the Merger, SVI was a public shell with no significant
operations. The acquisition of Chex by SVI was recorded as a reverse
acquisition based on factors demonstrating that Chex represents the
accounting acquirer. Equitex received 93% of the post-acquisition
outstanding common stock of SVI. In addition, at closing, management
personnel and the board members of the Company consisted of individuals
previously holding positions with Chex and/or Equitex. The transaction is
equivalent to the issuance of stock by Chex for the net monetary assets
of SVI. The historical stockholder's equity of Chex prior to the exchange
was 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 as of and for the
three months ended March 31, 2005 and 2004 presented herein include the
financial statements of Chex for all periods prior to June 7, 2004 and
the financial statements of the consolidated companies from the date of
the acquisition forward. All significant intercompany accounts and
transactions have been eliminated in consolidation.
UNAUDITED FINANCIAL STATEMENTS:
The condensed consolidated balance sheet as of March 31, 2005, the
condensed consolidated statements of operations for the three months
ended March 31, 2005 and 2004, the statement of stockholders' equity for
the three months ended March 31, 2005, and the condensed consolidated
statements of cash flows for the three months ended March 31, 2005 and
2004 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. Certain information and note disclosures
normally included in the Company's annual financial statements prepared
in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with a
reading of the Company's consolidated financial statements and notes
thereto included in the Company's Form 10-K annual report filed with the
Securities and Exchange Commission ("SEC") on April 15, 2005. The results
of operations for the three months ended March 31, 2005 are not
necessarily indicative of the operating results for the full year.
7
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION AND MANAGEMENT'S PLANS
(CONTINUED):
MANAGEMENT'S PLANS:
The Company incurred a net loss of $1,230,333 for the three months ended
March 31, 2005 and $4,787,994 for the year ended December 31, 2004.
Although the net loss included certain non-cash expenses of approximately
$922,000 and $3,230,000, respectively for each period, the Company
incurred significant costs related to its international marketing
strategy and expansion plans, including costs associated with the
development of its proprietary software. Therefore, the Company
anticipates that its liquidity and capital resources needs for the next
12 months may not be satisfied solely from cash flows generated from
operating activities.
The Company has developed plans and strategies to address its capital and
liquidity needs for the next twelve-month period. Management believes
that cash flows from operations will provide the Company's primary source
of operating capital, as Chex continues to generate location cash flow.
However, the Company may be required to issue additional debt or equity
instruments in order to raise additional capital, to continue the support
of its international marketing efforts, as well as for the ongoing
development of new software. Accordingly, the Company has entered into
discussions with an investment banker to provide advisory services
regarding a contemplated equity offering. Additionally, during the
quarter ended March 31, 2005, management has significantly reduced the
expenditures associated with its international marketing efforts, as no
revenues have been generated.
In January 2005, the Company entered into a twelve-month, non-exclusive
agreement with a financial advisor to provide investment banking services
to the Company. Under the terms of the agreement, the Company is to pay a
fee of 10% of the total amount of capital received by the Company from
the sale of its equity securities to investors introduced to the Company
by the financial advisor ("Investors"). In addition, the Company is to
issue warrants to purchase its common stock in an amount equal to 10% of
the number of shares of common stock purchased by Investors. The warrants
would be immediately exercisable at the higher of the price per share at
which the Investors can acquire the common stock or the closing price of
the Company's common stock on the date any transaction closes.
The Company also evaluates, on an ongoing basis, potential business
acquisition/restructuring opportunities that become available from time
to time, which management considers in relation to its corporate plans
and strategies.
Management believes that these plans will provide sufficient resources to
fund its operations, debt payments, and working capital needs at least
through March 31, 2006.
8
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash in the process of collection
("CIPC"). CIPC includes ATM advances, as well as credit card advances
made to customers. ATM advances made to customers included in CIPC
totaled approximately $665,000 and $809,000 as of March 31, 2005 and
December 31, 2004, respectively. Credit card advances made to customers
included in CIPC totaled approximately $577,000 and $745,000 as of March
31, 2005 and December 31, 2004, respectively. Concentrations of credit
risk related to credit card and ATM advances are limited to the credit
card and ATM processors who remit the cash back to the Company. The
Company believes these processors are financially stable and no
significant credit risk exists with respect to CIPC arising from ATM and
credit card advances.
RECEIVABLES:
Accounts receivable arise primarily from fees from credit card and ATM
advances provided at casino locations. Concentrations of credit risk
related to the fees from credit card and ATM advances are limited to the
credit card and ATM processors who remit to the Company its 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 the fees for ATM and credit card advances. The allowance for
doubtful accounts receivable was $65,000 as of March 31, 2005 and
December 31, 2004.
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 (Notes 3 and 7). The advances made to officers were made prior
to the acquisition of Chex by Equitex in December 2001. Certain of these
loans are 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
among other factors. Due to the level of risk associated with this common
stock, it is reasonably possible that changes 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 $1,425,800 and $1,515,800 as of March 31, 2005 and
December 31, 2004, respectively.
REVENUE RECOGNITION:
Revenue is recognized from financial services at the time the service is
provided. Revenues are derived from check cashing fees, credit and debit
card advance fees and automated teller machine ("ATM") surcharge and
transaction fees.
In general, check cashing fees are comprised of a fee based upon a
percentage of the face amount of total checks cashed, and is recognized
at the point a transaction is generated by the casino cage.
9
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION (CONTINUED):
Credit and debit card advance fees are comprised of the fee charged to
patrons for credit and debit card cash advances and are recognized at the
point a transaction is generated by the casino cage for the patron's
transaction or cash is dispensed from an ATM.
ATM surcharge and transaction fees are comprised of upfront patron
transaction fees or surcharges assessed at the time the transaction is
initiated and a percentage of interchange fees paid by the patron's
issuing bank. These issuing banks share the interchange revenue with the
Company. Upfront patron transaction fees are recognized when a
transaction is initiated, and interchange revenue is recognized on a
monthly basis based on the total transactions occurring during the month.
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.
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.
There were no options granted for the three months ended March 31, 2005 and
2004.
IMPAIRMENT OF LONG-LIVED ASSETS:
Management assesses the carrying value of long-lived assets for impairment
when circumstances indicate such amounts may not be recoverable from
future operations. Generally, assets to be held and used are considered
impaired if the sum of the expected undiscounted future cash flows is
less than the carrying amount of the asset. At March 31, 2005 and
December 31, 2004, management believes no impairment has occurred.
10
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
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 (loss) 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 calculation for the period ended March 31, 2005, as the
impact of the potential common shares, which total 6,243,128, would be to
decrease loss per share. There were no outstanding stock options,
warrants, or common stock underlying convertible promissory notes for the
three months ended March 31, 2004. Therefore, diluted loss per share for
the three months ended March 31, 2005 and 2004 is equivalent to basic
loss per share.
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 dates of the balance sheets and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
3. NOTES AND INTEREST RECEIVABLE:
Notes receivable at March 31, 2005 and December 31, 2004, consist of the
following:
March 31, December 31,
2005 2004
----------- -----------
Note receivable from iGames Entertainment,
Inc. [A] $ 2,000,000 $ 2,000,000
Notes receivable from the estate of a
deceased officer; a valuation allowance of
$1,189,300 and $1,279,300 has been recorded
against this receivable at March 31, 2005
and December 31, 2004, respectively;
received $295,721 in April 2005 from the
sale of all shares pledged as collateral 1,484,691 1,484,691
Note receivable from a customer of Chex;
non-interest bearing; a valuation allowance
of $236,500 has been recorded against this
receivable at March 31, 2005 and December
31, 2004 336,500 336,500
11
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
3. NOTES AND INTEREST RECEIVABLE (CONTINUED):
March 31, December 31,
2005 2004
----------- -----------
Notes receivable from Equitex 2000, Inc. 205,000 205,000
Notes receivable from various employees and a
former shareholder of the Company 52,900 52,900
----------- -----------
4,079,091 4,079,091
Interest receivable, includes related party
interest of $48,016 at March 31, 2005 and
$42,890 at December 31, 2004 144,126 139,000
Less current maturities (357,291) (61,900)
----------- -----------
Notes receivable, net of current portion,
before valuation allowance 3,865,926 4,156,191
Less valuation allowance (1,425,800) (1,515,800)
----------- -----------
Notes receivable, long-term $ 2,440,126 $ 2,640,391
=========== ===========
[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 6).
The Company has presented the Note as a long-term asset at March 31,
2005 and December 31, 2004 due to uncertainty as to the anticipated
litigation settlement date. In addition, the Company is no longer
accruing interest due to uncertainty of collection.
12
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
4. GOODWILL, INTANGIBLE AND OTHER ASSETS:
At March 31, 2005 and December 31, 2004, goodwill was $5,636,000, none of
which is deductible for income tax purposes based on the tax structuring
of the acquisition of Chex by Equitex in December 2001. Intangible and
other assets are as follows:
March 31, 2005 December 31, 2004
------------------------------------- -------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
amount amortization amount amount amortization amount
----------- ----------- ----------- ----------- ----------- -----------
Casino contracts $ 4,300,000 $ 2,099,440 $ 2,200,560 $ 4,300,000 $ 1,949,440 $ 2,350,560
Non-compete
agreements 350,000 243,300 106,700 350,000 227,300 122,700
Customer lists 250,000 250,000 250,000 250,000
Trade names 100,000 100,000 100,000 100,000
----------- ----------- ----------- ----------- ----------- -----------
Total intangible assets 5,000,000 2,592,740 2,407,260 5,000,000 2,426,740 2,573,260
Loan costs 641,625 206,330 435,295 637,625 125,515 512,110
Other assets 20,248 20,248 20,248 20,248
----------- ----------- ----------- ----------- ----------- -----------
$ 5,661,873 $ 2,799,070 $ 2,862,803 $ 5,657,873 $ 2,552,255 $ 3,105,618
=========== =========== =========== =========== =========== ===========
5. CONVERTIBLE AND OTHER PROMISSORY NOTES AND LONG-TERM DEBT:
Convertible and other promissory notes and long-term debt at
March 31, 2005 and December 31, 2004, consist of the following:
March 31, December 31,
2005 2004
----------- -----------
Convertible promissory notes; face value
of $1,974,064, net of discounts of
$992,349 (2005) and $1,588,729 (2004) $ 981,715 $ 385,335
Notes payable to individual investors 11,333,602 11,402,602
Note payable to Equitex, net of discount
of $337,219 (2005) and $368,883 (2004) 3,691,703 3,989,446
Obligations under capital leases 144,780 169,787
----------- -----------
16,151,800 15,947,170
Less current portion (13,441,412) (12,903,154)
----------- -----------
Long-term debt, net of current portion $ 2,710,388 $ 3,044,016
=========== ===========
13
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES:
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 fee 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.
Pursuant to the contracts, the Native American owned casinos have not
waived their sovereign immunity.
LITIGATION:
In April 2004, the Company and Equitex resolved litigation pending in
Hennepin County, Minnesota with Cash Systems, Inc. ("Cash Systems") by
executing a settlement agreement pursuant to which the Company paid Cash
Systems $125,000 for expenses related to an Agreement and Plan of Merger
("APM"), which was terminated in December 2003. As part of the settlement
agreement, Cash Systems paid Chex approximately $476,000 for commissions
owed to Chex by Cash Systems. In April 2004, both the Company and Cash
Systems agreed to mutually release each other from further liability
related to the APM and the Seminole Tribe termination in January 2004;
however, the Company retained the right to legal action against Native
American Cash Systems Florida, Inc. (NACSF), Native American Cash
Systems, Inc. (NACS) and its President, for the wrongful termination of
the Seminole Tribe casino contracts. In February 2005, Equitex and Chex
reached a tentative settlement agreement to litigation pending in
Hennepin County, Minnesota with NACSF, NACS and its President under which
all the parties agreed to dismiss their claims against each other and
exchange mutual releases. It is anticipated that this agreement will end
litigation.
In March 2004, the Company commenced a lawsuit in Hennepin County,
Minnesota demanding repayment of $2,000,000, plus a $1,000,000
termination fee, accrued interest and other fees, due from iGames under a
term note executed in January 2004. In addition, in March 2004, the
Company commenced a lawsuit in Delaware state court (New Castle County)
relative to the termination of the Stock Purchase Agreement ("SPA").
iGames commenced a lawsuit in the United States District Court for the
District of Delaware alleging the Company and Equitex breached both the
January 2004 term note and the SPA. iGames has asserted that it is
entitled to approximately $3.3 million in damages. All of the matters
have since been consolidated so that all of the disputes are being heard
before the United States District Court for the District of Delaware. The
Company is confident that its claims in litigation will be upheld, and
management believes that the claims made by iGames lack merit. The
Company intends to vigorously prosecute its claims and defend against
iGames' claims.
14
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED):
LITIGATION (CONTINUED):
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
impact either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
CONSULTING AGREEMENTS:
In July 2004, the Company entered into a twelve-month agreement with a
third party consultant who is to provide sales, program and business
development, and consulting services for FFFC's International operations.
Under the terms of the agreement, the Company is required to pay the
consultant approximately $15,800 per month as an advance against future
commissions earned by the consultant. The consultant will be entitled to
a 10% commission on all sales generated. In addition, the consultant is
to earn a minimum of 3% of the acquisition value if the Company closes on
an acquisition introduced by the consultant. The agreement can be
terminated by either party subject to not less than three months written
notice. As of March 31, 2005, no revenues have been generated. Effective
April 1, 2005, the parties agreed to terminate the agreement.
In May 2004, the Company entered into a consulting agreement with a
financial advisor to provide financing assistance and to facilitate
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. The advisor is to receive additional
compensation upon successfully completing a financing for the Company.
Pursuant to the agreement and in connection with the December 2004
closing on $1,774,064 of convertible promissory notes issued by FFFC, the
advisory firm earned fees of $105,925.
7. STOCKHOLDERS' EQUITY:
INVESTMENT IN EQUITEX COMMON STOCK:
At March 31, 2005 and December 31, 2004, 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:
15
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
7. STOCKHOLDERS' EQUITY (CONTINUED):
INVESTMENT IN EQUITEX COMMON STOCK (CONTINUED):
Three months ended Year ended
March 31, 2005 December 31, 2004
------------------- --------------------
Shares Cost Shares Cost
------- --------- -------- ---------
Beginning balances 86,486 $ 308,488 221,453 $ 611,680
Shares purchased 17,250 113,625
Shares sold (82,308) (293,583) (228,050) (745,247)
Shares returned to Chex in exchange
for stock subscription receivable 83,333 350,000
Shares distributed to third parties
on behalf of Equitex, in exchange
for an Equitex receivable (7,500) (21,570)
------- --------- -------- ---------
Ending balances 4,178 $ 14,905 86,486 $ 308,488
======= ========= ======== =========
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 RELATED PARTIES:
Chex has notes receivable due from Equitex and its majority-owned
subsidiary Denaris Corporation ("Denaris") under various loan agreements.
In addition, Chex has made advances to Equitex and Denaris to fund their
operations. Certain expenses paid by Chex on behalf of Equitex have been
debited (charged) to the receivables. In addition, certain operating
expenses allocated from Equitex to Chex, as well as certain capitalized
costs relating to the $5,000,000 promissory note have been allocated to
Chex and therefore have been credited (reduced) the receivables.
The following table summarizes the activity for the year ended December 31,
2004 and for the three months ended March 31, 2005:
December 31, March 31,
2004 2005
----------- -----------
Beginning principal balances $ 1,944,785 $ 4,189,816
Cash advances 1,125,000 3,580
Chex cash disbursements allocated to Equitex 332,833
Reclassification of other receivables
due from Denaris 250,512
Reclassification of notes receivable
from an officer of Chex 485,936
16
FASTFUNDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
7. STOCKHOLDER'S EQUITY (CONTINUED):
NOTES, ADVANCES AND INTEREST RECEIVABLE FROM RELATED PARTIES (CONTINUED):
December 31, March 31,
2004 2005
----------- -----------
Distribution of Equitex common stock
held by Chex to third parties in exchange
for receivable from Equitex 50,750
----------- -----------
4,189,816 4,193,396
Interest receivable, including
reclassification of interest from an
officer of Chex of $61,066 (2004) 553,461 646,131
----------- -----------
Ending balances $ 4,743,277 $ 4,839,527
=========== ===========
The above balances at March 31, 2005 and December 31, 2004 are presented as
a reduction of stockholders' equity on the accompanying consolidated
balance sheets. The principal balance at December 31, 2004 is comprised
of $1,087,762 due from Denaris, $2,616,118 due from Equitex and $485,936
due from an officer of Chex. The principal balance at March 31, 2005 is
comprised of $1,091,342 due from Denaris, $2,616,118 due from Equitex and
$485,936 due from an officer of Chex. The Denaris receivables at March
31, 2005 and December 31, 2004 are in the form of promissory notes and
advances, $325,000 of which bear 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 166,667 shares of Equitex common stock. The Equitex
receivables are in the form of promissory 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 notes
receivable from an officer of Chex are due on demand and the Company is
no longer accruing interest on these notes due to uncertainty as to
collection. The notes are collateralized by unregistered shares of
Equitex common stock.
STOCK SUBSCRIPTION RECEIVABLE:
In August 2004, the Company issued 40,000 shares of FFFC common stock to a
convertible note holder in exchange for a stock subscription receivable
of $216,000. In February 2005, 15,000 of the shares were returned to and
retired by the Company, reducing the stock subscription receivable to
$135,000.
ISSUANCES OF COMMON STOCK:
In April 2005, the Company issued 100,045 shares of common stock upon the
cashless exercise of warrants to purchase 102,000 shares of common stock.
17
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
On June 7, 2004, a wholly-owned subsidiary of Seven Ventures, Inc. merged with
and into Chex. In the merger, Equitex exchanged its 100% ownership of Chex for
7,700,000 shares of Company common stock, representing approximately 93% of the
Company outstanding common stock. In addition, Equitex received warrants to
purchase 800,000 shares of Company common stock at an exercise price of $0.10
per share, expiring five years from the date of closing. In connection with the
Merger, the Company received $400,000 through the issuance of convertible
promissory notes, bearing interest at five percent per annum and convertible
into 4,000,000 shares of FFFC common stock upon the occurrence of certain future
events. Unless earlier converted, any outstanding balance of principal and
interest is due on April 14, 2007. As of March 31, 2005, 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 of the issuance of the 2 million
shares and other equity transactions, Equitex's ownership percentage in FFFC is
approximately 74% at March 31, 2005.
18
The acquisition of Chex by SVI was 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, at closing, management personnel and the board
members of the Company consisted of individuals previously holding positions
with Chex and/or Equitex. The transaction is equivalent to the issuance of stock
by Chex for the net monetary assets of SVI. 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 months ended March 31, 2005 and
2004 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, but 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 anticipate our liquidity and capital resource
needs may not be satisfied solely from cash flows generated from our operating
activities. Chex has also begun to develop and introduce new products during the
past year. These products are complementary to its existing products and
services. Future products may include: cashless gaming smart cards, debit cards
and customized funds transfer systems for multi-jurisdictional gaming operators.
Also, Chex plans on expanding its business into non-gaming cash access products.
Costs associated with the development of such products have been and will
continue to be incurred. Additionally, FFFC formed a wholly-owned London based
subsidiary, FFI. FFI began operations in July and opened a London and Chicago
office. In connection with the start-up of FFI and the Company's attempt to
expand its business model into new markets and products, FFFC and the Company
entered into various management advisory and consultant agreements. However,
during the quarter ended March 31, 2005, the Company terminated certain
consulting agreements, closed its Chicago office and also gave the required
90-day notice on April 1, 2005 to the landlord that it was terminating the
London lease, as no revenues have been generated sufficient to offset the
operating costs being incurred.
In March 2004, Equitex issued an aggregate of $5,000,000 of convertible
promissory notes (the "Whitebox Notes") to Pandora Select Partners, L.P. and
Whitebox Hedged High Yield Partners, L.P. The Whitebox Notes carry interest at a
rate of 7% per annum and have a 45-month term. The Whitebox Notes are senior to
all other debt of both Equitex and Chex. Concurrently with the loan, Equitex
loaned the borrowed proceeds to Chex under terms identical to the Whitebox
Notes. The Whitebox Notes are collateralized by all of the assets of Chex,
Equitex's stock ownership in the Company and Chex's note delivered in favor of
Equitex.
19
In December 2004, the Company closed on the sale of $1,774,064 of unsecured
convertible promissory notes (the "Convertible Notes") to various investors,
in a private placement made under Section 4(2) of, and Regulation D under, the
Securities Act of 1933. The Convertible Notes accrue interest at a rate of 9.5%
per annum, have a 9-month term, and are convertible at the holder's option
(including any unpaid interest) into shares of Company common stock at a rate of
$1.00 per share for a three-year period commencing on the due date. The
Convertible Notes may be prepaid at any time, in whole or in part and from time
to time, without premium or penalty, so long as at least 50% of the outstanding
amount due on the Whitebox Notes discussed above have then been paid. At this
time it is uncertain whether the Company will prepay the Convertible Notes. In
connection with the sale and issuance of the Convertible Notes, investors also
received warrants to purchase an aggregate of 1,774,064 shares of Company common
stock at an exercise price of $2.00.
For the three months ended March 31, 2005, net cash provided by operating
activities was $171,428 compared to net cash used in operating activities of
$172,230 for the three months ended March 31, 2004. The net loss was $1,230,333
for the three months ended March 31, 2005 compared to $296,032 for the three
months ended March 31, 2004. The increase in the net loss was primarily
attributable to increases in interest expense and corporate operating expenses
of approximately $728,000 and $322,000, respectively. These additional costs
were partially offset by an increase in location margin of approximately
$139,000.
Cash used in investing activities for the three months ended March 31, 2005 was
$89,922 compared to $2,093,461 for the three months ended March 31, 2004. Cash
used in investing activities for the three months ended March 31, 2005, was
attributable to purchases of property and equipment. Cash used in investing
activities for the three months ended March 31, 2004 were primarily a result of
an advance on a note receivable of $2 million to iGames and purchases of
property and equipment of approximately $92,000.
Cash used in financing activities for the three months ended March 31, 2005 was
$187,110 compared to cash provided by financing activities of $1,799,020 for the
three months ended March 31, 2004. The significant activity for the three months
ended March 31, 2005 included the Company receiving proceeds of $460,000 upon
the issuance of notes payable and receiving $243,833 upon the sale of 82,308
shares of Equitex common stock. In addition, the Company repaid notes payable
and long-term debt of $883,363.
The significant financing activity for the three months ended March 31, 2004
included the Company receiving proceeds from the sale of 68,333 shares of
Equitex common stock for $410,012. The Company also received proceeds of
$5,830,000 upon the issuance of notes payable and repaid $962,932 of notes
payable and long-term debt as well as a bank overdraft of $2,497,766. During the
three months ended March 31, 2004, the Company also purchased 4,167 shares of
Equitex common stock for $24,750.
For the three months ended March 31, 2005, cash decreased by $105,604 compared
to a decrease in cash of $466,671 for the three months ended March 31, 2004.
Ending cash at March 31, 2005 was $8,332,737 compared to $8,304,171 at March 31,
2004. 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, as well as the exercise of outstanding warrants, all of which may
cause dilution to our stockholders.
20
REVENUES
Consolidated revenues for the three months ended March 31, 2005 and 2004 were
$4,414,143 and $3,463,103, respectively. The increase in the period was
primarily due to revenues from three casino locations of approximately $540,000
for the three months ended March 31, 2005 that were opened in the third and
fourth quarters of 2004, and accordingly, the Company had no revenues from these
properties for the three months ended March 31, 2004. Additional increases in
revenues from credit cards and ATM transactions of approximately $364,000 and
$191,000, respectively, for locations open the entire comparable periods were
the result of the new proprietary cash advance platforms to process cash advance
transactions. This software was installed beginning in July 2004.
Chex recognizes revenue at the time certain financial services are performed.
Revenues are derived from check cashing fees, credit and debit card advance
fees, automated teller machine ("ATM") surcharge and transaction fees, and NSF
collection fees. Chex revenues for the three months ended March 31, 2005 and
2004 were comprised of the following:
2005 2004
-------------------------------------- --------------------------------------
Number of Dollars Earned Number of Dollars Earned
Transactions Handled Revenues Transactions Handled Revenues
------------ ----------- ----------- ------------ ----------- -----------
Personal checks 175,234 $32,962,972 $ 1,613,700 159,183 $29,474,085 $ 1,538,879
"Other" checks 59,974 22,570,150 261,729 60,767 23,103,174 237,992
Credit cards 55,068 19,363,629 1,169,981 55,800 18,895,559 680,368
Debit cards 12,047 3,675,629 85,837 9,969 3,113,314 40,274
ATM transactions 620,639 53,861,424 1,161,379 428,158 33,547,520 782,709
NSF collection fees - - 96,146 - - 118,847
Other - - 25,371 - - 64,034
--------- ------------ ---------- --------- ------------ -----------
922,962 $132,433,804 $4,414,143 713,877 $108,133,652 $ 3,463,103
========= ============ ========== ========= ============ ===========
Chex cashes personal checks at its cash access locations for fees of based upon
a percentage of the face amount of the check cashed per each casino contract.
Chex also cashes "other" checks, comprised of tax and insurance refunds, casino
employee payroll checks and casino jackpot winnings.
Chex credit/debit card cash advance services allow patrons to use their VISA,
MasterCard, Discover and American Express cards to obtain cash. In July 2004,
Chex began to use its own proprietary credit and debit cash advance platform to
process cash advance transactions. Accordingly, for the three months ended March
31, 2004 on similar total cash advances transacted for the three months ended
March 31, 2004, Chex recorded additional revenues of approximately $490,000.
During the three months ended March 31, 2005, third party vendors, at their
expense, supplied, installed and maintained the equipment to operate the cash
advance system. Under vendor agreements, the vendor charges each customer a
services fee based upon the cash advance amount and paid a portion of such
service fee to Chex.
ATM surcharge and transaction fees are comprised of upfront patron transaction
fees or surcharges assessed at the time the transaction is initiated and a
percentage of interchange fees paid by the patron's issuing bank. These issuing
banks share the interchange revenue with the Company. Upfront patron transaction
fees are recognized when a transaction is initiated, and interchange revenue is
recognized on a monthly basis based on the total transactions occurring during
the month.
21
Chex utilizes its own in-house collections department to pursue collection of
returned checks, and generally charges an insufficient funds fee when it
ultimately collects the check.
OPERATING EXPENSES
LOCATION EXPENSES
Chex location expenses were $3,242,739 and $2,430,900 for the three months
ending March 31, 2005 and 2004, respectively. The location expenses are
comprised as follows:
Three months ended
March 31,
2005 2004
----------- -----------
Fees to casinos $ 1,495,591 $ 1,166,148
Salaries and related costs 795,417 774,033
Returned checks, net of collections 214,058 98,003
Processing fees 403,961 67,810
Selling, general and administrative 293,522 291,394
Depreciation and amortization 40,190 33,512
----------- -----------
$ 3,242,739 $ 2,430,900
=========== ===========
Fees to casinos are comprised of compensation paid to the casino pursuant to the
terms of each financial services agreement that the Company has entered into
with the respective establishment. At locations where Chex provides
check-cashing services, Chex pays the location operator a commission based upon
the monthly amount of checks cashed or a fixed percentage of the net income from
operations at that location. Chex passes on an agreed upon percentage of the
surcharge commissions to the locations where ATM's are utilized. At the
locations at which Chex uses third party vendors to provide credit/debit card
advance services, it pays the operator a commission for each completed
transaction. For the locations where Chex's proprietary product is used, Chex
pays a fee to the casino based on the fees it receives from processing the
transaction. For these transactions, Chex also has a cost of processing the
transaction. Chex began installing their proprietary product in July 2004 and
accordingly, there was a significant increase in processing costs for the three
months ended March 31, 2005 compared to March 31, 2004.
Returned checks, net of collections expense increased for the three months ended
March 31, 2005 compared to March 31, 2004. The primary reason for the increase
was the result of approximately $28,000 of expenses for 3 new full booth
locations and approximately $91,000 of expenses from 2 new stand alone
locations.
Chex generally records a returned check expense for potential losses in the
period such checks are returned.
Selling, general and administrative expenses for locations include bank charges,
depreciation, communications, insurance licensing, collections, and travel and
entertainment. For the three months ended March 31, 2005, these expenses were
comparable to the three months ended March 31, 2004.
22
CORPORATE OPERATING EXPENSES
Corporate expenses for the three months ended March 31, 2005, were $1,435,179
compared to $1,113,142 for the three months ended March 31, 2004. The expenses
were comprised of the following:
2005 2004
----------- -----------
Salaries and related costs $ 589,510 $ 509,631
Accounting, legal and consulting 268,123 102,730
Travel and entertainment 105,440 61,057
Advertising 9,783 44,631
Allocated expenses from Equitex 32,000
Depreciation and amortization 297,202 242,862
Recovery of losses (90,000)
Other 255,121 120,231
----------- -----------
$ 1,435,179 $ 1,113,142
=========== ===========
Corporate operating expenses include Chex's Minneapolis administrative office,
which supports the 49 operating locations and also include for the three months
ended March 31, 2005 those expenses associated with FFI's London and Chicago
offices.
Salaries and related costs increased for the three months ended March 31, 2005
compared to the three months ended March 31, 2004 period primarily as a result
of the hiring of the Company's Chief Executive Officer, as well as the corporate
staffing of FFI's London office. The salaries and related costs included in 2005
for the above items were approximately $121,000.
Accounting, legal and consulting expenses increased for the three months ended
March 31, 2005 compared to the three months ended March 31, 2004 primarily as a
result of an increase in consulting fees of approximately $175,000 for the three
months ended March 31, 2005. FFI hired marketing and sales consultants to assist
the Company in entering the store-valued card international market in the gaming
and retail industries. As a result of no revenues being generated to offset
these operating costs, during the three months ended March 31, 2005, the Company
terminated certain sales and marketing consulting and advisory agreements that
previously required the Company to pay approximately $36,000 per month. In
addition, FFI has entered into various consulting agreements with a financial
advisor and individuals who provide various consulting services to the Company.
These continuing agreements require the Company to pay approximately $17,000 per
month.
Travel and entertainment increased for the three months ended March 31, 2005
compared to March 31, 2004 primarily as a result of the increased costs of
travel associated with employees of FastFunds and FFI and consultants.
Prior to July 1, 2004 Equitex was incurring certain general and administrative
expenses on behalf of Chex that were allocated by Equitex to Chex. Beginning
July 1, 2004, Chex and FastFunds began incurring these expenses on their own
behalf, and accordingly, there is no longer an allocation from Equitex.
Depreciation and amortization increased in 2005 compared to 2004 primarily as a
result of increased depreciation as a result of additional fixed assets, as well
as the amortization of deferred loan costs.
23
Other costs included in corporate operating expenses increased for the three
months ended March 31, 2005 compared to March 31, 2004. The primary reason for
the increase was the additional rent and occupancy costs of approximately
$39,000 for the London and Chicago offices, as well as directors and officers
insurance of approximately $26,000, and other office expenses such as,
telecommunication and supplies.
OTHER INCOME (EXPENSE)
Other expense, net for the three months ended March 31, 2005 was $958,558
compared to $209,093 for the three months ended March 31, 2004. Interest expense
for the three months ended March 31, 2005 was $1,056,438 compared to $327,486
for the three months ended March 31, 2004. The primary reasons for the increase
is related to non-cash interest expense of approximately $628,000 recorded due
to the beneficial conversion features on convertible promissory notes and
approximately $74,000 of interest expense related to the $5,000,000 note payable
issued in March 2004. Interest income decreased to $97,880 for the three months
ended March 31, 2005, from $118,393 for the three months ended March 31, 2004.
The decrease was due primarily to the interest income of $46,911 recorded on the
$2.0 million iGames Note in the three months ended March 31, 2004, the Company
is no longer accruing interest on this note.
CONTRACTUAL OBLIGATIONS
No material changes during the quarter ended March 31, 2005.
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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
$17,481,369 and $17,904,731, before note discounts, of debt outstanding as of
March 31, 2005 and December 31, 2004, respectively, of which $11,333,602 and
$11,402,602 has been borrowed at fixed rates ranging from 9% to 15% at March 31,
2005 and December 31, 2004, respectively. This fixed rate debt is subject to
renewal annually and is payable upon demand with 90 days written notice by the
debt holder. Additionally, $4,028,922 and $4,358,279 of the total debt at March
31, 2005 and at December 31, 2004 has been borrowed at a fixed rate of 7%, and
$1,774,064 and $200,000 of the total debt at March 31, 2005 and December 31,
2004 have fixed rates of 9.5% and 5%, respectively. Chex also has $144,780 and
$169,787 of obligations under capital leases with fixed rates ranging from 6.5%
to 7% at March 31, 2005 and December 31, 2004, respectively, owed to a bank.
As most of the Company's average outstanding indebtedness is renewed annually
and carries a fixed rate of interest, a change in interest rates is not expected
to have a material impact on the consolidated financial position, results of
operations or cash flows of the Company during the year ending December 31,
2005.
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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 6 of the Condensed Consolidated Financial Statements
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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Item 6. 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
Exhibit 32.2 - CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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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: May 16, 2005 By: /s/ Graham Newall
---------------------------------
Graham Newall
Chief Executive Officer
Date: May 16, 2005 By: /s/ Ijaz Anwar
---------------------------------
Ijaz Anwar
Chief Financial Officer
28