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UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from______________ to ________________
Commission File Number: 000-32849
ACCUPOLL HOLDING CORP.
(Exact name of small business issuer as specified in its charter)
Nevada 11-2751630
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15101 Red Hill Ave # 220, Tustin, Ca 92780
(Address of principal executive offices)
(949) 200-4000
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES NO X
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
148,449,049 shares of common stock
as of May 24, 2004
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
March 31, 2004 June 30, 2003
(Unaudited) (As Restated)
------------ ------------
CURRENT ASSETS
Cash $ 1,855,680 $ --
Accounts receivable, net 184,645 --
Inventories 56,035 --
Deferred acquisition costs -- 144,206
Prepaid expenses 58,807 2,500
------------ ------------
TOTAL CURRENT ASSETS 2,155,167 146,706
Property and equipment, net 34,783 --
Capitalized software development costs 2,470,379 1,403,899
Other assets 3,494 --
------------ ------------
TOTAL ASSETS $ 4,663,823 $ 1,550,605
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,582,665 $ 931,503
Related party payables -- 872,940
Deferred revenue 143,848 --
Convertible debt, net of discount 1,786,843 --
Notes payable to related parties 90,000 175,000
Liabilities subject to compromise 973,701 --
------------ ------------
TOTAL LIABILITIES 4,577,057 1,979,443
------------ ------------
Put liability related to warrant issuances 163,760 113,750
Equity instruments subject to rescission 7,326,732 4,377,033
Equity interest of stockholders in consolidated affiliate 864,389 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Convertible Series A preferred stock, $0.01 par value,
80,000 shares authorized, zero shares issued or outstanding -- --
Common stock, par value of $0.001, 600,000,000 shares
authorized; 148,449,049 and 112,945,963 shares issued
and outstanding, respectively 148,449 112,946
Additional paid in capital 8,326,588 2,222,580
Accumulated deficit (16,743,152) (7,255,147)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (8,268,115) (4,919,621)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,663,823 $ 1,550,605
============ ============
- --------------------------------------------------------------------------------
Page F-1 See notes to these condensed consolidated financial statements
- --------------------------------------------------------------------------------
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Month Periods Ended March 31, 2004 and 2003
- --------------------------------------------------------------------------------
March 31, 2004 March 31, 2003
(Unaudited) (Unaudited)
-------------- -------------
NET SALES $ 620,140 $ --
COST OF SALES 604,572 --
------------- -------------
GROSS PROFIT 15,568 --
OPERATING EXPENSES
General and administrative 536,122 196,788
Professional fees 637,982 786,457
Salaries and related 253,651 131,942
Impairment of goodwill 2,542,752 --
------------- -------------
3,970,507 1,115,187
------------- -------------
OPERATING LOSS (3,954,939) (1,115,187)
INTEREST EXPENSE, NET 327,354 --
------------- -------------
NET LOSS $ (4,282,293) $ (1,115,187)
============= =============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.03) $ (0.01)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 135,466,634 107,540,128
============= =============
- --------------------------------------------------------------------------------
Page F-2 See notes to these condensed consolidated financial statements
- --------------------------------------------------------------------------------
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Nine Month Periods Ended March 31, 2004 and 2003
- --------------------------------------------------------------------------------
March 31, 2004 March 31, 2003
(Unaudited) (Unaudited)
-------------- -------------
NET SALES $ 981,372 $ --
COST OF SALES 1,002,185 --
------------- -------------
GROSS PROFIT (20,813) --
OPERATING EXPENSES
General and administrative 1,230,157 985,670
Professional fees 1,590,385 2,145,346
Salaries and related 448,629 386,423
Impairment of goodwill 2,542,752 --
------------- -------------
5,811,923 3,517,439
------------- -------------
OPERATING LOSS (5,832,736) (3,517,439)
OTHER EXPENSE
Interest, net 2,455,269 20,000
Loss on disposal of MTNA stock 1,200,000 --
------------- -------------
3,655,269 20,000
------------- -------------
NET LOSS $ (9,488,005) $ (3,537,439)
============= =============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.08) $ (0.04)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 126,105,261 105,536,205
============= =============
- --------------------------------------------------------------------------------
Page F-3 Notes to these condensed consolidated financial statements
- --------------------------------------------------------------------------------
ACCUPOLL HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ended March 31, 2004 and 2003
- --------------------------------------------------------------------------------
2004 2003
Cash flows from operating activities: (UNAUDITED) (UNAUDITED)
------------ ------------
Net loss $(9,488,005) $(3,537,439)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,439 --
Amortization of estimated fair value of warrants granted
and beneficial conversion feature in connection with the
issuance of convertible notes payable 1,786,843 20,000
Amortization of beneficial conversion feature in connection
with the issuance of subordinated convertible notes 500,000 --
Estimated fair value of options and warrants granted for services 168,000 1,455,000
Estimated fair value of common stock issued for services 249,870 399,891
Loss on disposal of MTNA stock 1,200,000 --
Impairment of goodwill 2,542,752
Changes in operating assets and liabilities:
Accounts recievable 25,067 --
Inventories 39,301 --
Prepaid expenses and other assets (48,765) (2,500)
Accounts payable and accrued expenses 275,482 325,951
Related party payables 516,510 --
Liabilities subject to compromise 64,605 589,561
----------- -----------
Net cash used in operating activities (2,161,901) (749,536)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (11,589) --
Increase in capitalized software development costs (1,066,480) (421,415)
Proceeds from collection of note recievable -- 300,000
Cash of acquired company 2,368 --
----------- -----------
Net cash used in investing activities (1,075,701) (121,415)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of notes payable to related parties 91,493 --
Principal payments on notes payable to related parties (125,000) --
Proceeds from issuance of convertible subordinated debt 500,000 --
Proceeds from issuance of convertible notes payable 640,000 --
Proceeds from the issuance of notes payable 7,496 50,000
Principal payments on notes payable (10,000) --
Proceeds from the issuance of common stock, net of commissions 838,697 244,850
Net increase in line of credit 75,000 --
Proceeds from issuance of common stock upon exercise of warrants,
net of commissions 3,075,596 345,048
----------- -----------
Net cash provided by financing activities 5,093,282 639,898
----------- -----------
Net increase (decrease) in cash 1,855,680 (231,053)
Cash at beginning of period -- 287,159
----------- -----------
Cash at end of period $ 1,855,680 $ 56,106
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
See accompanying notes to the condensed consolidated financial statements for
information relating to non-cash investing and financing activities.
- --------------------------------------------------------------------------------
Page F-4 See notes to these condensed consolidated financial statements
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 1: BASIS OF REPORTING
The accompanying condensed consolidated financial statements have been prepared
in accordance with the Securities and Exchange Commission's ("SEC") regulations
for interim financial information. Accordingly, they do not include all of the
disclosures required by accounting principles generally accepted in the United
States of America ("GAAP") for complete financial statements. The unaudited
condensed consolidated financial statements should, therefore, be read in
conjunction with the consolidated financial statements and notes thereto in the
Form 10-KSB annual report of the Company, as amended, for the year ended June
30, 2003. In the opinion of management, all adjustments (which, except as
described in Note 2 and in the last paragraph of "Impairment of Long-Lived
Assets" below, consist only of normal and recurring adjustments) considered
necessary for a fair presentation have been included. The results of operations
for the three and nine month periods ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the entire fiscal year.
Going Concern Considerations
- ----------------------------
The condensed consolidated financial statements are presented on the basis that
the Company is a going concern which contemplates the realization of assets and
the satisfaction of liabilities in the ordinary course of business over a
reasonable length of time. The Company has incurred significant operating losses
and has used cash in its operations since inception. Most of this cash was
expended in the development of software and systems infrastructure and in
organization development and staffing. Other funds were invested in the
development and protection of intellectual property, and financial investment
advisory fees and commissions related to fund raising. At March 31, 2004, the
Company had a working capital deficit approximating $2,422,000. In addition, the
Company experienced a loss from operations for the nine months ended March 31,
2004, approximating $9,488,000 and has an accumulated deficit approximating
$16,743,000 at such date.
Principles of Consolidation
- ---------------------------
The condensed consolidated financial statements include the accounts of AccuPoll
Holding Corp. (a Nevada Corporation) and its wholly owned subsidiaries,
AccuPoll, Inc. and Z Prompt, Inc. ("Z Prompt"). In accordance with Financial
Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46, the accounts
of Web Tools International, Inc. ("WTI") have been consolidated for the three
months ended March 31, 2004 (see "Consolidation of WTI" below). All significant
inter-company balances and transactions have been eliminated in consolidation.
Except where the context requires otherwise, the entities named in the preceding
paragraph are hereinafter collectively referred to as the "Company."
As discussed in Note 3, Z Prompt filed bankruptcy in March 2004. The
accompanying financial statements do not include any adjustments that may be
required in connection with restructuring Z Prompt, as it proposes to reorganize
under Chapter 11 of the Bankruptcy Code. The Company has not deconsolidated the
accounts of Z Prompt in its March 31, 2004 consolidated financial statements.
Page F-5
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 1: BASIS OF REPORTING (continued)
Organization
- ------------
AccuPoll Holding Corp. does business through its wholly owned subsidiaries,
AccuPoll, Inc. and Z Prompt, Inc.
AccuPoll, Inc. is engaged in the design and development of an intuitive
touch-screen interface (the "Voting System") that provides a polling place
electronic voting solution that is confidential, reliable, accurate, immediate,
secure and auditable. While maintaining and preserving the current voter
experience, the Company adds the ability to accurately capture in electronic
form a voter's true intent, while simultaneously preserving the legally binding
vote - the official paper ballot. The Voting System has the ability to
simultaneously produce two different electronic audit trails (recorded on both
the polling place administrative work station and the local voting station), in
addition to generating a printed-paper ballot. The Company completed a stock
exchange with AccuPoll, Inc. in May 2002 and its common stock is quoted on the
OTC Bulletin Board under the symbol "ACUP."
Z Prompt provides a number of standard service programs, as well as customized
programs, to fit the special needs of its customers. Z Prompt, Inc. offers
services such as on-site hardware service, installation and training, inventory
management and preventive maintenance.
WTI was incorporated in 1996 and is owned and operated by two
stockholders/officers of AccuPoll Holding Corp. WTI is in the business of
software engineering in various computer languages with an emphasis on
Linux/Apache, Sun Solaris and Microsoft NT/Win2K platforms.
Page F-6
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 1: BASIS OF REPORTING (continued)
Stock-based Employee Compensation
- ---------------------------------
As of March 31, 2004, the Company has not adopted a stock-based employee
compensation plan. The Company accounts for stock-based compensation to
employees under the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. The Company did not incur any
stock-based employee compensation cost for the three months ended March 31, 2004
and 2003 under APB Opinion No. 25. The following table illustrates the pro-forma
effect on net loss and loss per common share if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss available to common $ (4,451,293) $ (1,161,187) $ (9,930,005) $ (3,642,439)
stockholders, as reported *
------------ ------------ ------------ ------------
Pro forma compensation expense (355,000) (150,000) (1,065,000) (450,000)
------------ ------------ ------------ ------------
Pro forma net loss available to
common stockholders $ (4,806,293) $ (1,311,187) $(10,995,005) $ (4,092,439)
============ ============ ============ ============
Loss per common share, as reported
Basic and diluted $ (0.03) $ (0.01) $ (0.08) $ (0.04)
============ ============ ============ ============
Loss per common share, pro forma
Basic and diluted $ (0.04) $ (0.01) $ (0.09) $ (0.04)
============ ============ ============ ============
* These amounts include interest related to certain equity instruments subject
to rescission (see Note 2).
Beneficial Conversion Feature
- -----------------------------
The convertible feature of convertible debt and subordinated convertible note
payable provides for a rate of conversion that is below market value. Such
feature is normally characterized as a "beneficial conversion feature" ("BCF").
Pursuant to Emerging Issues Task Force Issue No. 98-5 ("EITF 98-5"), "Accounting
For Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratio" and Emerging Issues Task Force Issue No.
00-27,"Application of EITF Issue No. 98-5 To Certain Convertible Instruments,"
the relative fair values of the BCFs have been recorded as a discount from the
face amount of the respective debt instrument. The BCFs related to the attached
warrants will be amortized over the life of the notes and the BCF related to the
notes will be expensed in accordance with the terms of conversion.
Page F-7
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
Inventories
- -----------
Inventories are stated at the lower of cost or estimated market and consist
entirely of finished goods. Cost is determined on a weighted average basis that
approximates the first-in, first-out basis. Market is estimated by comparison
with recent purchases or net realizable value. Such net realizable value is
based on management's forecast for sales of the Company's products or services
in the ensuing years. The industry in which the Company operates is
characterized by technological advancement and change. Should demand for the
Company's products prove to be significantly less than anticipated, the ultimate
realizable value of the Company's inventories could be substantially less than
the amount shown in the accompanying condensed consolidated balance sheets.
Page F-8
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 1: BASIS OF REPORTING (continued)
Revenue Recognition
- -------------------
The Company records sales when goods are shipped to the customer or upon the
completion of the service. Amounts received prior to the completion of the
earning process, such as maintenance contracts paid in advance, are included in
deferred revenues in the accompanying condensed consolidated balance sheet.
The SEC issued Staff Accounting Bulletin 104 ("SAB 104"), "REVENUE RECOGNITION,"
which outlines the basic criteria that must be met to recognize revenue and
provides guidance for presentation of revenue and for disclosures related to
revenue recognition policies in financial statements filed with the SEC.
Management of the Company believes that its revenue recognition accounting
policy conforms to SAB 104.
Goodwill
- --------
Goodwill represents the excess of the purchase price over the estimated fair
value of identifiable net assets acquired. The Company has applied the
provisions of SFAS 142, "Goodwill and Other Intangible Assets," in accounting
for goodwill. SFAS 142 requires that goodwill and other intangible assets that
have indefinite lives not be amortized but instead be tested at least annually
for impairment, when events or changes in circumstances indicate that the asset
might be impaired. For indefinite lived intangible assets, impairment is tested
by comparing the carrying value of the asset to the estimated fair value of the
reporting unit to which they are assigned. the Company recorded an impairment
charge approximating $2,543,000 to write-off all of the goodwill associated with
the acquisition of Z Prompt described in Note 3.
Impairment of Long Lived-assets
- -------------------------------
The Company periodically evaluates the carrying value of its long-lived assets
under the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets, and supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Effects of the Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). SFAS No. 144 also amends Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements," to eliminate the exception
to consolidation of a subsidiary when control is likely to be temporary.
Page F-9
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 1: BASIS OF REPORTING (continued)
Impairment of Long Lived-assets (continued)
- -------------------------------------------
SFAS No. 144 requires impairment losses to be recorded on long-lived assets used
in operations, including amortizable intangible assets when indicators of
impairment are present. Indicators of impairment include an economic downturn or
a change in the assessment of future operations. In the event a condition is
identified that may indicate an impairment issue, an assessment is performed
using a variety of methodologies, including analysis of undiscounted future cash
flows, estimates of sales proceeds and independent appraisals. If such assets
are impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the asset exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or
estimated fair market value, less cost to sell.
During the quarter ended March 31, 2004, Z Prompt filed for bankruptcy (see Note
3). In connection with the bankruptcy filing, the Company recorded an impairment
charge approximating $2,543,000 to write-off all of the goodwill associated with
the acquisition of Z Prompt described in Note 9.
Loss Per Common Share
- ---------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per common share computations for the three and nine
month periods ended March 31, 2004 and 2003:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss, as reported $ (4,282,293) $ (1,115,187) $ (9,488,005) $ (3,537,439)
Interest related to equity
instruments subject to rescission (169,000) (46,000) (442,000) (105,000)
------------- ------------- ------------- -------------
Dilutive net loss available to $ (4,451,293) $ (1,161,187) $ (9,930,005) $ (3,642,439)
============= ============= ============= =============
Shares used to compute loss per
common share: 135,466,634 107,540,128 126,105,261 105,536,205
============= ============= ============= =============
Basic and diluted loss per common
share: $ (0.03) $ (0.01) $ (0.08) $ (0.04)
============= ============= ============= =============
Reclassifications
- -----------------
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current year presentation.
Page F-10
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 1: BASIS OF REPORTING (continued)
Equity Instruments Subject to Rescission
- ----------------------------------------
The Company accounts for common stock and other equity instruments that may be
subject to rescission claims at estimated fair value (based on applicable
measurement criteria) in accordance with (1) the SEC's promulgated accounting
rules and interpretive releases, and (2) the applicable provisions of SFAS No.
150 and its related interpretations (see Note 2). Under the SEC's interpretation
of GAAP, reporting such claims outside of stockholders' equity/deficit is
required regardless of how remote the redemption event may be.
Consolidation of Variable Interest Entities
- -------------------------------------------
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
to provide guidance on the identification of entities for which control is
achieved through means other than voting rights (variable interest entities, or
"VIEs"), and how to determine when and which business enterprise should
consolidate the VIE. This new model for consolidation applies to an entity for
which either: (a) the equity investors do not have a controlling financial
interest; or (b) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN No. 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. As amended in December 2003, the effective
dates of FIN No. 46 ("FIN 46-R") for the Company are as follows: (a) For
interests in special-purpose entities: the first period ended after December 15,
2003; and (b) For all other types of VIEs: the first period ended after March
15, 2004.
As disclosed in the notes to the Company's June 30, 2003 consolidated financial
statements previously filed with the SEC in amended Form 10-KSB, the Company is
associated with WTI through common ownership; in addition, the Company is
virtually WTI's only customer for software development services. Based on these
and other factors, the Company has determined that (1) WTI is a VIE and (2) the
Company is its primary beneficiary. Therefore, effective January 1, 2004, the
accounts of WTI have been consolidated in the accompanying condensed
consolidated balance sheet at March 31, 2004 and the condensed consolidated
statement of operations for the quarter then ended. The December 31, 2003
pre-consolidation interest of WTI's stockholders has been reported in the
"mezzanine" section of the Company's March 31, 2004 condensed consolidated
balance sheet. Because of the related party attribution rules of FIN 46-R, for
financial reporting purposes there is no minority interest in WTI's
post-December 31, 2003 results of operations. As permitted by FIN 46-R, the
Company's 2003 condensed consolidated financial statements have not been
restated.
NOTE 2: EQUITY INSTRUMENTS SUBJECT TO RESCISSION
The Company may be subject to claims for rescission with respect to the sale or
other issuances of common stock, options and warrants. For that reason, the
Company intends to amend its June 30, 2003 Form 10-KSB, its September 30, 2003
Form 10-Q, and its December 31, 2003 Form 10-Q to (a) restate the balance sheets
as of those dates and (b) disclose the contingent liability for the possible
rescission of the transactions described below. The June 30, 2003 condensed
consolidated balance sheet included in this filing reflects such adjustment.
Page F-11
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 2: EQUITY INSTRUMENTS SUBJECT TO RESCISSION (Continued)
Approximately 36 million shares of the Company's common stock, options and
warrants that were issued or granted in the United States without registration
or qualification under federal or state securities laws during the two year
period ended March 31, 2004 may be subject to rescission. In the aggregate, the
average purchase price paid or the estimated fair value of the services rendered
by the equity instrument owners in these transactions was $0.20 per share. The
fair value of these securities was estimated based on a combination of (a) the
selling price of the common stock on the dates sold, (b) the price per the
agreement for stock issued in satisfaction of convertible debt, and (c) the fair
value of the stock options and warrants on their grant dates. The estimated fair
value of these options and warrants was estimated using the Black-Scholes
option-pricing model. Based on these measurement criteria, the Company's March
31, 2004 potential liability directly associated with the aforementioned
securities transactions is estimated to approximate $7.3 million (including
interest) plus legal fees and any fines or penalties that might be assessed by
regulatory agencies.
Management is unable to determine at this time whether any claim for rescission
may be filed against the Company; however, there can be no assurance that claims
will not be asserted. In addition, regulatory agencies could launch a formal
investigation and/or institute an enforcement proceeding against the Company.
The ultimate outcome of the matters discussed above is not presently
determinable. Accordingly, management is unable to estimate the liability, if
any, that the Company may incur as a result of such contingencies. Regardless of
how remote a redemption event may be, GAAP as interpreted by the SEC requires
that equity securities subject to rescission be reported outside of the
stockholders' equity section of the balance sheet until the applicable statute
of limitations has expired. Thus, the Company has reported approximately $7.3
million as "mezzanine equity" in the accompanying March 31, 2004 condensed
consolidated balance sheet.
At May 31, 2004, approximately 17 million shares of common stock, options and
warrants are subject to rescission, with a potential liability approximating
$5.9 million. The number of equity instruments subject to rescission as of June
2, 2004 does not include warrants and options to purchase 3.6 million shares of
common stock granted within two years of June 2, 2004 to the Company's CEO and
President, or a warrant to purchase 12.4 million shares of common stock for
which the holder has contractually agreed that it will not assert any right of
rescission that it may have.
NOTE 3: BANKRUPTCY FILING BY WHOLLY-OWNED SUBSIDIARY
On March 23, 2004 (the "Petition Date"), Z Prompt (or the "Debtor") filed a
voluntary petition for relief (the "Chapter 11 Case") under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"). Since the Petition Date, Z Prompt has continued to conduct business
activities as a debtor-in-possession under the Bankruptcy Code.
Page F-12
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 3: BANKRUPTCY FILING BY WHOLLY-OWNED SUBSIDIARY (Continued)
The accompanying consolidated financial statements have been prepared in
accordance with GAAP applicable to a going concern, which (except as otherwise
disclosed) assumes that assets will be realized and liabilities will be
discharged in the ordinary course of business. As a result of the Chapter 11
Case, the realization of Z Prompt's assets and the liquidation of its
liabilities are subject to uncertainty. In the Chapter 11 Case, a substantial
portion of the Debtor's liabilities as of the Petition Date is subject to
compromise or other treatment under a plan of reorganization. Generally, actions
to enforce or otherwise effect repayment of all pre-Chapter 11 liabilities as
well as any pending litigation against the Debtor (see Note 7) are stayed while
Z Prompt operates as a debtor-in-possession during bankruptcy proceedings.
Schedules have been filed by the Debtor with the Bankruptcy Court setting forth
the liabilities (approximately $ 1 million) and assets of Z Prompt as of the
Petition Date based on its unaudited accounting records. Differences between
amounts reflected in such schedules and claims filed by creditors will be
investigated, and will either be amicably resolved or adjudicated by the
Bankruptcy Court. The ultimate amount and settlement terms of such liabilities
are not presently determinable.
Financial accounting and reporting during a Chapter 11 case are prescribed by
Statement of Position No. 90-7, FINANCIAL REPORTING BY ENTITIES IN
REORGANIZATION UNDER THE BANKRUPTCY CODE ("SOP 90-7"). For financial reporting
purposes, Z Prompt's pre-petition liabilities and obligations, which may be
subject to settlement or otherwise dependent on the outcome of the Chapter 11
case, have been segregated and classified as "liabilities subject to compromise"
in the accompanying March 31, 2004 condensed consolidated balance sheet (see
Note 10). In addition, the Company will report all significant Z Prompt
transactions (other than interest expense) directly related to the Chapter 11
Case as "reorganization items" in its future statements of operations. Certain
additional disclosures including (a) claims not subject to reasonable estimation
of the amount to be allowed and (b) any significant difference between reported
interest expense and stated contractual interest will be provided in future
financial statements (as required by SOP 90-7) when such amounts are
determinable and/or when the related transactions occur.
As discussed above, Z Prompt is currently a debtor-in-possession pursuant to the
Bankruptcy Code. Management continues to conduct business activities under the
supervision of the Bankruptcy Court and, among other things, the Debtor is
granted a 120-day exclusive right to propose a plan of reorganization which must
be approved by the creditors and confirmed by the Bankruptcy Court. In
accordance with the Bankruptcy Code, an automatic stay provides that creditors
of Z Prompt and other parties in interest are prevented from seeking repayment
of pre-petition debts. Additionally, unless otherwise approved by the Bankruptcy
Court, the Debtor must refrain from paying any pre-petition indebtedness.
Z Prompt's bankruptcy filing resulted in non-payment of the April 2004
installment owed to a secured creditor under a line of credit agreement (see
Note 5). Because of this event, such indebtedness is in default and is now due
and payable. The repayment, if any, of such indebtedness will be a subject of
the reorganization plan.
Page F-13
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 3: BANKRUPTCY FILING BY WHOLLY-OWNED SUBSIDIARY (Continued)
On April 20, 2004, the Bankruptcy Court approved a debtor-in-possession
financing arrangement whereby Z Prompt is permitted to obtain credit from
AeroFund Financial, Inc. of no more than $500,000 through the sale and/or
factoring of its post-petition accounts receivable; this credit facility is
collateralized by a security interest in such accounts receivable.
Although legal fees and other administrative expenses to complete Z Prompt's
bankruptcy proceedings may be significant, they are not susceptible to
reasonable estimation at this time; accordingly, the accompanying March 31, 2004
condensed consolidated financial statements do not include any provision for
such costs not yet incurred by the Debtor.
Z Prompt could decide to reject some or all of its lease obligations in the
Chapter 11 Case. This action may result in lease rejection claims pursuant to
the Bankruptcy Code; any such claims would then be adjudicated by the Bankruptcy
Court. No expenses for any possible lease rejection claims have been reflected
in the Company's March 31, 2004 condensed consolidated financial statements.
An important element in successfully reorganizing the Debtor will be the ability
to restructure certain liabilities in order to reduce indebtedness and provide
funding for operations. As part of the process of attempting to reorganize, Z
Prompt is pursuing various financing alternatives that may be available,
although there can be no assurance that the Debtor will be able to successfully
implement any such alternatives. Though Z Prompt intends to make efforts to
increase its revenues to improve operations, it is possible that losses will
continue for the foreseeable future and the Debtor will require additional
funding and financial support from a third party and/or its parent company.
There can be no assurance that any such additional financing will be available
on acceptable terms, that such funds (if available) would enable Z Prompt to
continue operating, or that the Debtor will be successful in increasing its
revenues. In addition, there is no assurance that the creditors and the
Bankruptcy Court will approve a reorganization plan that will allow Z Prompt to
survive.
NOTE 4: CAPITALIZED SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86 "Accounting for the Costs of Computer Software to
be Sold Leased or Otherwise Marketed," the Company capitalizes certain costs
related to the development of new software products or the enhancement of
existing software products for sale or license. These costs are capitalized from
the point in time that technological feasibility has been established, as
evidenced by a working model or detailed working program design to the point in
time that the product is available for general release to customers. Capitalized
development costs will be amortized on a straight-line basis over the estimated
economic lives of the products, beginning with the general product release to
customers. Research and development costs incurred prior to establishing
technological feasibility and costs incurred subsequent to general product
release to customers are charged to expense as incurred. The Company
periodically evaluates whether events or circumstances have occurred that
indicate that the remaining useful lives of the capitalized software development
costs should be revised or that the remaining balance of such assets may not be
recoverable.
Page F-14
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 4: CAPITALIZED SOFTWARE DEVELOPMENT COSTS (Continued)
At March 31, 2004, management believes that no revisions to the remaining useful
lives or write-down of capitalized software development costs are required. The
Company received federal qualification in late March 2004. The Company will
begin amortizing the capitalized software development costs over a period of
twelve months beginning April 2004.
NOTE 5: LINE OF CREDIT
The Company has a revolving line of credit agreement (the "Line") with a
financial institution that matures in August 2004, as amended. The Line bears
interest at 5% per annum. A shareholder of the Company who is also a former
majority shareholder of Z Prompt guarantees the Line. The terms of the Line
provide for borrowings of up to $280,000. At March 31, 2004, the Company's
outstanding borrowings totaled $250,000, which are included in liabilities
subject to compromise in the accompanying March 31, 2004 condensed consolidated
balance sheet.
NOTE 6: CONVERTIBLE DEBT
In January 2004, the Company borrowed $250,000 under a convertible note payable
(the "Convertible Note"), which bears interest at 7% per annum. All borrowings,
including interest, are due in July 2004. The Convertible Note may be converted
into restricted common stock of the Company at $0.12 per share, at any time at
the option of the noteholder, as defined.
A beneficial conversion feature approximating $250,000 was recorded during the
period ended March 31, 2004 and was expensed upon issuance of the Convertible
Note based on the immediate conversion feature. The outstanding balance of the
Convertible Note at March 31, 2004 was $250,000.
NOTE 7: OTHER COMMITMENTS AND CONTINGENCIES
In November 2002, the Company entered into a Location Incentives Agreement (the
"Agreement") with the Amarillo Economic Development Corporation ("AEDC") to
establish the Company's customer service center and voting machine repair
operations in Amarillo, Texas. According to the terms of the Agreement, AEDC
will pay the Company $250,000 upon the Company's execution of a lease for
facilities in Amarillo. The funds advanced under the Agreement are to be used
solely for the operations in Amarillo. If the Company does not meet certain
minimum employment requirements, as defined, it will be required to repay all
amounts advanced. In connection with the Agreement, the Company granted warrants
to purchase 250,000 shares of the Company's restricted common stock at an
exercise price of $1.04 per share, valued at approximately $205,000 (based on
the Black-Scholes pricing model), which was expensed upon issuance. In January
2003, the Company received the $250,000 and has included such amount in accounts
payable and accrued expenses in the accompanying condensed consolidated balance
sheets, as the Company has yet to fulfill its obligations related to the
Agreement.
Page F-15
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 7: OTHER COMMITMENTS AND CONTINGENCIES (Continued)
During the year ended June 30, 2003, the Company granted warrants to purchase
250,000 shares of the Company's restricted common stock at an exercise price of
$0.91 per share valued at $206,000 (based on the Black-Scholes pricing model) to
a consultant for services rendered, which was expensed in the consolidated
statement of operations for the year ended June 30, 2003. In connection with the
issuance, the warrant holder may cause the Company to re-purchase any warrants
not previously exercised by the warrant holder on or after June 2006 for $0.46
per share. Accordingly, a liability of $113,750 has been recorded in the
accompanying June 30, 2003 consolidated balance sheet, representing the
Company's re-purchase liability.
In July 2003, the Company granted warrants to purchase 300,000 shares of the
Company's restricted common stock at an exercise price of $0.90 per share valued
at $168,000 (based on the Black-Scholes pricing model) to a consultant for
services rendered, which has been expensed in the accompanying consolidated
statement of operations for the nine month period ended March 31, 2004. In
connection with the issuance, the warrant holder may cause the Company to
re-purchase any warrants not previously exercised by the warrant holder on or
after July 15, 2006 for approximately $0.17 per share. Accordingly, a liability
of $50,010 has been recorded in the accompanying March 31, 2004 condensed
consolidated balance sheet, representing the Company's re-purchase liability.
In November 2003, the Company executed a non-binding letter of intent to
purchase a company that provides consulting, software, support and services to
the election industry throughout the United States of America. As of May 15,
2004, the Company continues to negotiate with the potential acquiree.
In October, 2003, the Company, and its wholly-owned subsidiary, Z Prompt, Inc.,
were served with a lawsuit by Paul Musco, the former President of Z Prompt,
which was filed in Superior Court of California, County of Orange. Mr. Musco is
alleging that the Company and/or Z Prompt have breached various agreements,
including a breach of a promissory note and his employment agreement. He is
seeking damages in the approximate aggregate amount of $800,000. The Company
intends to vigorously defend these claims. In December 2003, the Company filed a
cross-complaint against Mr. Musco.
In October, 2003, the Company, Z Prompt and certain individuals were served with
a lawsuit filed by Nathalie Luu, a former employee of Z Prompt, in Superior
Court of California, County of Orange. Ms. Luu, who was an accounting clerk at Z
Prompt, is seeking damages approximating $112,000 based on claims of intentional
infliction of emotional distress and unlawful retaliation. The Company believes
the claims are without merit and intends to defend them vigorously.
Page F-16
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 8: STOCKHOLDERS' EQUITY
Preferred Stock
- ---------------
In December 2003, the Company entered into an agreement to issue 8,471 shares of
Convertible Series A preferred stock ("Series A") and $1,200,000 of convertible
notes payable in exchange for 3,325,000 shares of free trading common stock of
Material Technologies, Inc., a publicly traded company whose common stock is
quoted on the Over-The-Counter Bulletin Board under the symbol "MTNA."
The Company has not filed a certificate of designation with respect to any
series of preferred stock. On May 7, 2004, the Company entered into an agreement
whereby we exchanged the 3,325,000 shares of common stock of Material
Technologies, Inc. for the 8,471 shares of Series A. Accordingly, as of May 7,
2004, no preferred stock was issued or outstanding. However, the Company remains
liable on the $1.2 million convertible note payable.
The accounting adjustment described above has been reflected in the accompanying
March 31, 2004 condensed consolidated balance sheet of the Company. In addition,
because of the legal status of the Series A shares as of December 2003, the
Company's amended December 31, 2003 Form 10-Q retroactively reflects such
accounting adjustment at that date. This adjustment of the Company's financial
statements increases the previously reported net loss for the quarter and the
six months then ended by approximately $1.2 million ($0.01 per common share),
but does not affect cash used in operating activities during such periods.
Common Stock
- ------------
During the three-month period ended March 31, 2004, the Company issued 105,000
shares of restricted common stock for cash approximating $64,000.
During the three-month period ended March 31, 2004, the Company issued
13,884,534 shares of restricted common stock in connection with the exercise of
warrants for $2,291,000, net of commissions approximating $400,000.
During the three-month period ended March 31, 2004, the Company issued 1,724,167
shares of restricted common stock in connection with the conversion of a note
payable of $500,000, plus accrued interest of $17,250.
Page F-17
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 8: STOCKHOLDERS' EQUITY (continued)
Warrants
- --------
During the three-month period ended March 31, 2004, the Company granted warrants
to purchase 375,000 shares of the Company's restricted common stock with
exercise prices ranging from $0.18 to $1.54 per share, valued at approximately
$953,000 (based on the Black-Scholes pricing model) to various consultants for
services to be rendered through February 2005. The Company is amortizing such
expense over the term of the related services. As of March 31, 2004, the Company
has amortized approximately $162,000 to consulting expense.
During the three month period ended March 31, 2004, the Company granted warrants
to purchase 11,346,180 shares of the Company's common stock with exercise prices
ranging from $0.12 to $1.00. The warrants vested upon grant and are exercisable
through March 2009. These warrants were issued in connection with equity
fundraising activities, and accordingly, there was no related expense recorded
in the accompanying condensed consolidated financial statements.
NOTE 9: ACQUISITION
On April 9, 2003, the Company entered into an agreement with Z Prompt, a
California corporation. The Company purchased all of the outstanding capital
stock of Z Prompt from its stockholders in exchange for approximately 8,500,000
shares of restricted common stock of the Company. The primary reason for the
acquisition was to acquire a nation-wide network of qualified computer hardware
technicians, who could assist with the maintenance of the AccuPoll Ballot Buddy
product, and specifically it's integrated printer. Because of a contingency in
the purchase agreement, this transaction was not recorded until November 2003.
The results of operations of Z Prompt are included in the accompanying condensed
consolidated financial statements from November 1, 2003. The following proforma
summary presents condensed consolidated results of operations as if Z Prompt had
been acquired as of the beginning of the nine month periods ended March 31, 2004
and 2003 and the three month period ended March 31, 2003:
Three Months Nine Months
Ended March 31, Ended March 31,
--------------- -------------------------
2003 2004 2003
---------- ---------- -----------
Net sales $ 455,000 $1,785,000 $ 1,170,000
========== ========== ===========
Net loss $1,171,000 $8,385,000 $ 4,000,000
========== ========== ===========
Loss per common
share $ (0.01) $ (0.07) $ (0.04)
========== ========== ===========
Page F-18
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 10: LIABILITIES SUBJECT TO COMPROMISE
The March 31, 2004 balances of Z Prompt's liabilities that became subject to
compromise on March 23, 2004 approximate:
Accounts payable and accrued expenses $ 679,000
Line of credit payable to a financial institution (Note 5) 250,000
Notes payables to related parties 45,000
---------
Total $ 974,000
=========
Page F-19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, management's discussion and analysis or
plan of operations includes certain forward-looking statements, including, but
not limited to, those related to our growth and strategies, future operating
results and financial position as well as economic and market events and trends.
All forward-looking statements made by us, including such statements herein,
include material risks and uncertainties and are subject to change based on
factors beyond our control. Some of the factors that could affect our financial
performance or cause actual results to differ from our estimates in, or
underlying, such forward looking statements are set forth under the heading
"Risk Factors".
The following discussion of our financial condition and results of operations
should be read in connection with our condensed consolidated financial
statements and notes thereto appearing elsewhere herein. Factors that could
cause or contribute to differences from the condensed consolidated financial
statements include, but are not limited to, risks and uncertainties related to
the need for additional funds, the growth of our operations and our ability to
operate profitably in the future.
OUR BUSINESS IS SUBJECT TO NUMEROUS RISKS AND UNCERTAINTIES, YOU ARE STRONGLY
URGED TO CONSIDER CAREFULLY THE RISKS AND UNCERTAINTIES DESCRIBED IN "RISK
FACTORS".
GENERAL
AccuPoll Holding Corp. ("AccuPoll", "we" or "us") seeks to become a leader in
developing and marketing computerized voting machines and their associated
products and services for use in federal, state local and private elections. We
believe that we are currently the only publicly traded company focused solely on
the election industry.
We have developed a direct recording electronic (DRE) voting system that
provides a voter-verified paper audit trail that is both human and machine
readable. Our system was qualified as meeting the federal voting system
standards on March 25, 2004 and we believe that it is currently the only
electronic voting system providing these features that is so qualified. Key
benefits of our voting system include: an intuitive touch screen interface, an
audit capability that includes multiple copies of the electronic records and a
voter-verified paper audit trail (VVPAT) that is both human and machine
readable. Additional benefits include the ability to support multiple languages,
to provide under/over-vote warnings, the use of software based on open source
products (E.G., Linux) and open standards (E.G., XML, Unicode, Java), and the
use of non-proprietary hardware.
As of May 17, 2004, our DRE voting system was certified by the states of
Arkansas, South Dakota and Utah. Currently, we are in the process of applying
for certification in additional states.
Our objective is to protect an individual's right to vote by insuring access,
accuracy, privacy and integrity in the voting process and in so doing to become
the leading provider of polling place electronic voting solutions that are
reliable, accurate, immediate, confidential, secure, easy-to-use and auditable.
PLAN OF OPERATIONS
As of March 31, 2004, we have only generated revenues from our operations since
our acquisition of our subsidiary Z prompt, Inc. recorded for accounting
purposes in November 2003. We do not expect to report any significant revenue
until the successful development and marketing of our DRE voting system.
Additionally, after the launch of our products and services, there can be no
assurance that we will generate positive cash flow and there can be no
assurances as to the level of revenues, if any, that we may actually achieve
from our planned operations.
1
In accordance with Statement of Financial Accounting Standards Number 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" (SFAS 86), the cost of purchased computer software to be sold, leased
or otherwise marketed that has no alternative future use shall be accounted for
the same as the costs incurred to develop such software internally, as
specified. Per SFAS 86, all costs incurred to establish the technological
feasibility are research and development costs. In accordance with this
provision, we have expensed approximately $176,000 of research and development
related expenses from inception through September 2001. The expensed costs
related to the creation of a working model from a white paper created by the
founders, mainly related to the labor of the technicians and programmers, with a
small portion related to various computer components. We reached technological
feasibility, a working model, in September 2001, which was the product's first
independent usage. Costs incurred subsequent to September 2001 have been
capitalized.
Our success depends on our ability to obtain government contracts, primarily
through counties in the United States, to replace their current voting systems
with our DRE voting system.
In April 2003, we entered into an agreement to acquire all of the issued and
outstanding shares of Z prompt, Inc. Because the shareholders of Z prompt had a
right of rescission, this transaction was not recorded for accounting purposes
until November 2003. On March 23, 2004, Z prompt filed for relief under Chapter
11 of the United States Bankruptcy Code.
SELECTED FINANCIAL DATA COMPARISONS
Net sales for the quarter ended March 31, 2004 were $620,140 compared to $0 for
the quarter ended March 31, 2003. Net sales for the nine months ended March 31,
2004 were $981,372 compared to $0 for the nine months ended March 31, 2003. The
change in net sales resulted from our consolidation with our subsidiary, Z
prompt, Inc.
Cost of sales for the quarter ended March 31, 2004 were $604,572, compared to $0
for the quarter ended March 31, 2003. Cost of sales for the nine months ended
March 31, 2004 were $1,002,185, compared to $0 for the nine months ended March
31, 2003. The change in cost of sales resulted from our consolidation with our
subsidiary, Z prompt, Inc. beginning November 2003.
General and administrative expenses for the quarter ended March 31, 2004 were
$536,122, an increase of 172.44% from general and administrative expenses for
the quarter ended March 31, 2003 of $196,788. General and administrative
expenses for the nine months ended March 31, 2004 were $1,230,157, an increase
of 24.80% from general and administrative expenses for the nine months ended
March 31, 2003 of $985,670. The increase is due to our consolidation with Z
prompt, Inc. and non-cash expenses for stock based compensation of warrants
which are in the money, that are granted to consultants.
Professional fees for the quarter ended March 31, 2004 were $637,982, a decrease
of 18.88% from professional fees for the quarter ended March 31, 2003 of
$786,457. Professional fees for the nine months ended March 31, 2004 were
$1,590,385, a decrease of 25.87% from professional fees for the nine months
ended March 31, 2003 of $2,145,346. This decrease is due to our payment of lower
political consultant fees.
Salaries for the quarter ended March 31, 2004 were $253,651, an increase of
92.24% from salaries for the quarter ended March 31, 2003 of $131,942. Salaries
for the nine months ended March 31, 2004 were $448,629, an increase of 16.10%
from salaries for the nine months ended March 31, 2003 of $386,423. The increase
in salaries is primarily due to our hiring of additional staff and our
consolidation with our subsidiary Z prompt, Inc. beginning November 2003.
Impairment of goodwill for the quarter ended March 31, 2004 was $2,542,752,
compared to $0 for the quarter ended March 31, 2003. Impairment of goodwill for
the nine months ended March 31, 2004 was $2,542,754, compared to $0 for the nine
months ended March 31, 2003. The impairment resulted from the voluntary Chapter
11 bankruptcy filing of Z prompt, Inc.
Interest expense, net for the quarter ended March 31, 2004 was $327,354,
compared to $0 for the quarter ended March 31, 2003. Interest expense for the
nine months ended March 31, 2004 was $2,455,269, an increase of 12,176.35% from
interest expense for the nine months ended March 31, 2003 of $20,000. The
primary reason for the
2
increase is related to the non-cash beneficial conversion charge relating to
securities issued by us during the nine months ended March 31, 2004, that have
conversion features that are at prices below market.
LIQUIDITY AND CAPITAL RESOURCES
From August 2001, the date of our inception, through March 31, 2004, we have
raised net proceeds approximating $8,500,000 from the sale of common stock, and
other equity securities.
Our cash was approximately $1,850,000 at March 31, 2004.
In November 2003, we secured a $5 million dollar revolving credit facility, in
the form of two seven-month convertible notes. The notes bear interest at an
annual rate of 10% and mature on June 30, 2004. The notes are convertible on 90
days written notice by the holders at the lesser of (i) 50% of the average three
lowest closing prices for our common stock for the twenty days immediately
preceding the conversion date or (ii) $.0625 per share. At May 24, 2004, the
amount of principal and accrued but unpaid interest under such notes equaled
approximately $1,100,000.
We have a convertible debenture with Palisades Holdings, LLC whereby Palisades
Holdings, at its discretion, may provide us loans of up to $1,250,000. The
convertible debenture bears interest at an annual rate of 10% and matures on
June 30, 2004. The debenture is convertible on 90 days written notice by
Palisades Holdings at the lesser of (i) 50% of the average three lowest closing
prices for our common stock for the twenty days immediately preceding the
conversion date or (ii) $.0625 per share. At May 24, 2004, the amount of
principal and accrued but unpaid interest under such debenture equaled
approximately $760,000.
On December 19, 2002 we issued a $165,000 note to an individual investor. The
note bears interest at an annual rate of 8% and is payable upon demand. At May
24, 2004, the amount of principal and accrued but unpaid interest under such
debenture equaled approximately $55,000.
In July 2003, we borrowed $500,000 from Pan American Management pursuant to a
subordinated convertible note. The note accrued interest at 7% per annum. In
January 2004, this note, in its entirety, was converted into our common stock at
a conversion price of $.30 per share.
Between June 2003 and July 2003, we issued warrants to consultants to purchase
an aggregate of 550,000 shares of our common stock at exercise prices ranging
from $.90 to $.91 per share. The warrants provide the holders with the right to
sell any unexercised warrants back to us after July 15, 2006 at prices ranging
from $.1667 to $.455 per share.
We have offered and sold a substantial number of shares of common stock and
warrants and options to purchase common stock without registration under the
Securities Act of 1933, as amended, or qualification under state securities
laws. If any offer or sale were not exempt from, or otherwise not subject to,
federal and state registration and qualification requirements, the purchaser
would have a number of remedies, including the right to rescind the purchase.
The Securities Act of 1933, as amended, requires that any claim for rescission
be brought within one year of the violation. We have sold approximately
16,233,718 shares of common stock and warrants and options to purchase
approximately 12,937, 970 shares of common stock in the United States within one
year of May 31, 2004. The time periods within which claims for rescission must
be brought under state securities laws vary and may be two years or more from
the date of the violation. We have sold approximately 17,143,009 shares of
common stock and warrants and options to purchase approximately 14,028,810
shares of common stock in the United States within two years of May 31, 2004.
Further, we cannot assure you that courts will not apply equitable or other
doctrines to extend the period within which purchasers may bring their claims.
The number of warrants and options described above does not include] warrants
and options to purchase 3,600,000 shares of common stock issued within two years
of May 31, 2004 to our chief executive officer, Dennis Vadura and our president,
Frank Wiebe and a warrant to purchase 12,400,000 shares of common stock for
which the holder has agreed in writing that it will not assert any right to
rescission that it may have. However, we can not assure you that this agreement
is enforceable. See "Risk Factors - Risks Relating to Our Securities".
3
Our management believes that we will not generate significant revenues in the
next few months, nor will we have sufficient cash to fund our operations. As a
result, our success will largely depend on our ability to secure additional
funding through the sale of our common stock, debt and/or other securities.
There can be no assurance, however, that we will be able to consummate any
financing in a timely manner, or on a basis favorable to us or at all.
CAPITAL EXPENDITURES
We anticipate certain capital expenditures related to developing and testing
subsequent versions of our DRE voting system hardware and software. We estimate
our capital expenditures for hardware to be approximately $500,000 and an
additional $500,000 for software over the course of the fiscal year ending June
30, 2004. We will be reliant on future fund raising in order to pay for
development and testing of these subsequent versions.
GOING CONCERN
Our independent certified public accountants have stated in their audit report
included in our Form 10-KSB/A, as filed with the Securities and Exchange
Commission, that we incurred losses from operations, negative working capital,
and lack of operational history. These conditions, among others, raise
substantial doubt about our ability to continue as a going concern.
INFLATION
Our management believes that inflation has not had a material effect on our
results of operations.
NEED FOR ADDITIONAL FINANCING
We will require substantial additional financing to complete the capitalization
of our business plan and we plan to seek additional financing from sales of our
securities or additional borrowings. The additional financing will be used
primarily for payment of past due liabilities and for the establishment and
implementation of marketing programs. We can give no assurance that we will
successfully negotiate or obtain additional financing, or that we will obtain
financing on terms favorable or acceptable to us. Our ability to obtain
additional capital depends on market conditions, the global economy and other
factors outside its control. If we do not obtain adequate financing or such
financing is not available on acceptable terms, our ability to satisfy our
liabilities, finance our expansion, develop or enhance products and services or
respond to competitive pressures would be significantly limited. Our failure to
secure necessary financing could have a material adverse effect on our business,
prospects, financial condition and results of operations.
RISK FACTORS
BEFORE DECIDING TO INVEST IN US OR TO MAINTAIN OR INCREASE YOUR INVESTMENT, YOU
SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION TO OTHER
INFORMATION CONTAINED IN THIS REPORT. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
HARMED. IN THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND
YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS
WE HAVE INCURRED SIGNIFICANT LOSSES TO DATE AND MAY NEVER BE PROFITABLE.
We began our current operations on August 9, 2001 and have incurred significant
operating losses during each fiscal period since that date. We had no revenues
during the period from commencement of our operations through the acquisition of
Z prompt in November 2003. At March 31, 2004, we had an accumulated deficit of
approximately $16.7 million from our operations. We expect that we will incur
significant operating losses and negative cash flows from operations for the
foreseeable future. If our losses continue and we are unable to commercialize,
4
manufacture and market our products successfully, we may never generate
sufficient revenues to achieve profitability or positive cash flows from
operations.
OUR AUDITORS HAVE INCLUDED A GOING CONCERN PARAGRAPH IN THEIR AUDIT REPORT ON
OUR FINANCIAL STATEMENTS FOR OUR FISCAL YEAR ENDED JUNE 30, 2003.
We have prepared our consolidated financial statements for the year ended June
30, 2003 on a going-concern basis, which contemplates the realization of assets
and satisfaction of liabilities and other commitments in the normal course of
business. However, the report from our independent auditors with respect to our
consolidated financial statements for the year ended June 30, 2003 states that
our losses from operations, negative working capital and lack of operational
history, among other factors, raise "substantial doubt" about our ability to
continue as a going concern.
OUR SUBSIDIARY, Z PROMPT, INC., HAS FILED PETITION FOR RELIEF UNDER CHAPTER 11
OF THE UNITED STATES BANKRUPTCY CODE AND WE MAY LOSE OUR ENTIRE INTEREST IN IT.
On March 23, 2004, our wholly-owned subsidiary, Z prompt, Inc., filed a petition
for relief under Chapter 11 of the United States Bankruptcy Code. Z prompt
continues to conduct business activities as a debtor-in-possession. We cannot
predict the outcome of this proceeding and it involves numerous risks and
uncertainties, such as:
o The appointment of a trustee;
o The ability of creditors to obtain relief from the automatic stay:
o The continued willingness of customers to do business with Z prompt;
o The ability of Z prompt to obtain financing on acceptable terms;
o The outcome of any adversary proceedings that have been or may be
commenced by or against Z prompt;
o The possible conversion of the case to liquidation under Chapter 7 of
the Bankruptcy Code or dismissal of the case;
o The ability to obtain confirmation of a plan of reorganization on
terms acceptable to us; and
o The ability of Z prompt to successfully execute any confirmed plan of
reorganization.
In addition, Z prompt will incur legal and other fees and expenses in connection
with the bankruptcy proceedings and we may be unable to fund these costs. Z
prompt has been our only source of consolidated revenues since November 1, 2003,
the date on which the acquisition was recognized for accounting purposes. If Z
prompt is unable to reorganize successfully, we could lose our entire interest
in it.
WE WILL NEED SIGNIFICANT ADDITIONAL FINANCING TO CONTINUE OPERATIONS.
We require substantial additional financing in order to be able to continue
operations. In the past, our capital requirements have been met through sales of
our common stock and convertible notes. We cannot assure you that we will be
able to raise new capital or that sources of capital will be available to us on
terms that we find acceptable. If we are unable to obtain additional financing
on acceptable terms, we will be unable to continue operations. Moreover, if we
raise additional capital through borrowing or other debt financing, we would
incur substantial interest expense. Sales of additional equity securities or
securities convertible into equity securities will result in dilution to our
present stockholders.
WE ARE IN THE EARLY STAGE OF DEVELOPMENT WITH AN UNPROVEN BUSINESS STRATEGY AND
HAVE ONLY A LIMITED OPERATING HISTORY FOR YOU TO REVIEW IN EVALUATING OUR
BUSINESS AND PROSPECTS.
5
At March 31, 2004, we had generated no revenues from the sale of our DRE voting
systems. Our limited operating history makes it difficult to evaluate our
prospects. With the exception of our DRE voting system, all of our products are
in the early stages of development. We cannot assure you that we will be able to
achieve significant sales of our products or maintain product sales.
WE EXPECT THAT OUR OPERATING RESULTS MAY FLUCTUATE SUBSTANTIALLY, WHICH MAY
MATERIALLY AFFECT OUR BUSINESS AND THE MARKET PRICE OF OUR COMMON STOCK.
You should not rely on period-to-period results as an indication of our future
performance. We expect that our operating results will fluctuate substantially
as a result of a number of factors, many of which will be beyond our control
such as the following:
o When our products are qualified as compliant with the federal voting
system standards and certified by the states;
o When public agencies schedule procurements of electronic voting
systems and the timing associated with the procurements;
o Delays in the development and introduction of our products;
o Delays in the manufacture and delivery of our products;
o The adoption of new or amended federal voting system standards, state
certification requirements, or other legal mandates applicable to our
products;
o The hiring, retention and utilization of our personnel;
o The financial impacts associated with future business acquisitions, if
any;
o The receipt of additional financing;
o General economic conditions; and
o The occurrence of other events or circumstances described in these
risk factors.
Fluctuations in our operating results could affect the market price of our stock
and could cause the price to decline. As a result, we may be unable to finance
future growth through sales of our equity securities.
IF WE ARE UNABLE TO EXPAND OUR SALES, MARKETING, DISTRIBUTION AND SERVICE
CAPABILITIES OR ENTER INTO AGREEMENTS WITH THIRD PARTIES TO DO SO, WE WILL BE
UNABLE TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS.
We currently have limited sales, marketing or distribution capabilities and
limited service capabilities. If we are unable to expand these capabilities
either by developing our own sales, marketing, distribution or service
organization or by entering into agreements with others at a competitive cost,
we will be unable to market and sell successfully our products. We plan to enter
into strategic relationships with other companies to provide services relating
to our products, including product roll-out support, election worker education,
help desk, and break/fix support. We cannot assure you that we will be able to
develop and maintain successful relationships on terms acceptable to us. The
failure to do so could materially and adversely affect the marketing and sale of
our products.
WE RELY ON A THIRD-PARTY MANUFACTURER.
We currently rely, and expect to continue to rely, on a third party to
manufacture our product. Our agreement requires us to acquire the product
exclusively from this manufacturer unless the manufacturer is unable to produce
and deliver on time our required quantity. To the extent that this manufacturer
experiences financial or operational
6
difficulties, our business could be interrupted. These difficulties could
inhibit our ability to provide products in sufficient quantities with acceptable
quality and at an acceptable cost to our customers. Any disruption in supply of
our product from this manufacturer would cause us to delay delivery to our
customers that could lead to a loss of sales and revenues.
WE FACE SUBSTANTIAL EXISTING COMPETITION AND POTENTIAL COMPETITION FROM OTHERS
WHO HAVE SIGNIFICANTLY GREATER FINANCIAL AND OTHER RESOURCES.
We expect significant competition from existing competitors and potential
competitors. We may not have the financial resources, technical expertise, sales
and marketing abilities or support capabilities to compete successfully. Many of
our existing competitors have greater market penetration, brand-name
recognition, market presence, engineering and marketing capabilities, and
financial, technological and personnel resources than we do. As a result, many
of our competitors have several significant advantages over us as we seek to
market and sell our products.
OUR FUTURE SUCCESS DEPENDS UPON RETAINING KEY PERSONNEL AND ATTRACTING NEW
EMPLOYEES.
Our future performance depends significantly upon the continued contributions of
both Mr. Dennis Vadura, our chief executive officer, and Mr. Frank J. Wiebe, our
president. The loss of the services of Mr. Vadura or Mr. Wiebe or any of our
senior management or key personnel could materially and adversely affect our
business. We may not be able to retain these employees and searching for their
replacements could divert attention from senior management and delay our ability
to implement our business strategy. All of our senior management and key
employees can terminate his or her relationship with us at any time.
If we are successful in implementing and developing our business, among other
things, we expect that we will need to increase our workforce. Accordingly, our
future success will likely depend on our ability to attract, hire, train and
retain highly skilled management, technical, sales, marketing and customer
support personnel. Competition for qualified employees is intense and our
financial resources are limited. Consequently, we may not be successful in
attracting, hiring, training and retaining the people we need, which would
impede our ability to implement our business strategy.
WE HAVE ENGAGED IN TRANSACTIONS WITH A COMPANY OWNED BY TWO INDIVIDUALS WHO ARE
DIRECTORS, OFFICERS AND SHAREHOLDERS.
In April 2002, we entered into a master services agreement with a company, Web
Tools International, Inc., that is owned and operated by Messrs. Dennis Vadura
and Frank Wiebe. Each of these individuals is a director, officer and
shareholder with respect to both us and Web Tools International. The agreement
terminated on March 31, 2004. The financial results of Web Tools International
were consolidated with our results from January 1, 2004 through March 31, 2004.
We owed Web Tools International $1,567,550 at March 31, 2004.
WE WILL NEED TO CONTINUE TO IMPROVE AND DEVELOP PRODUCTS IN ORDER TO BE
SUCCESSFUL.
We expect that the pace of technological advances in the computer voting machine
industry will rapidly increase. Our ability to compete successfully is heavily
dependent upon our ability to ensure a continuing and timely flow of competitive
products and technology to the marketplace. We cannot assure you that we will be
successful in the timely development of new and improved technologies.
WE ARE SUBJECT TO CURRENT LITIGATION.
We are defendants in two separate lawsuits. In addition, we may be subject to
litigation in the future. For a description of this litigation, please see "ITEM
3 - LEGAL PROCEEDINGS" of our annual report on Form 10-KSB/A with respect to the
year ended June 30, 2003.
WE MAY ACQUIRE OTHER BUSINESSES AND OUR BUSINESS COULD BE MATERIALLY AND
ADVERSELY AFFECTED AS A RESULT OF ANY OF THESE ACQUISITIONS.
7
We are looking for strategic opportunities to grow our product offerings through
acquisitions or strategic investments. In this regard, during the year ended
June 30, 2003, we entered into an agreement to purchase all of the outstanding
shares of Z prompt, Inc. that was recognized for accounting purposes during our
fiscal quarter ended December 31, 2003. In November 2003, we entered into a
non-binding letter of intent to acquire a company that provides consulting,
software, support and services to the election industry in the United States. At
May 31, 2004, we continued to negotiate the terms of a definitive agreement. In
the future, we may acquire or make strategic investments in other complementary
businesses. We have limited experience in acquiring or investing in other
businesses and we may not be successful in completing, financing, or integrating
an acquired business into our existing operations.
Any such acquisitions could involve the dilutive issuance of equity securities
and the incurrence of debt. In addition, the acquisition of Z prompt, Inc. and
future acquisitions may involve numerous additional risks, such as:
o unanticipated costs associated with the acquisition or investment;
o diversion of management time and resources;
o problems in assimilating and integrating the new business operations;
o potential loss of key customers or personnel of an acquired company;
o increased legal and compliance costs; and
o unanticipated liabilities of an acquired company.
Even when an acquired company has already developed and marketed products, we
can not assure you that the products will continue to be successful, that
product enhancements will be made in a timely fashion or that pre-acquisition
due diligence will have identified all possible issues that might arise with
respect to the acquired company or its products and that could materially and
adversely affect us.
RISKS RELATING TO OUR TECHNOLOGY
SHOULD OUR PRODUCTS FAIL TO PERFORM PROPERLY, OUR REPUTATION COULD BE DAMAGED,
WE COULD LOSE SALES AND CUSTOMERS AND WE COULD POTENTIALLY INCUR LIABILITIES.
Our products incorporate a number of intricate computer software programs and
hardware components that must work seamlessly in order for our product to
function correctly. While we expect our product to perform to the federal voting
system standards, we cannot assure you that our product will function properly
at all times. If our system's software programs or hardware components
experience failure or malfunction or are alleged to have failed or
malfunctioned, we are likely to receive significant adverse publicity -
particularly if the failure is alleged to have had an effect on the outcome of
an election. As a result, our reputation could be damaged, we could lose sales
and customers and we could potentially incur liabilities.
IF WE FAIL TO SECURE OR PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS
MAY BE ABLE TO USE OUR TECHNOLOGIES.
We have applied to the United States Patent and Trademark Office for a patent
with respect to our electronic voting system that produces an official voter
verifiable paper ballot and for trademark registration with respect to the
AccuPoll name and logo. We cannot assure you that a patent will be issued or our
trademarks will be registered. If issued, we cannot assure you that we will be
able to defend or enforce the patent, trademark or other intellectual property
rights that we may have in our products, name or logo. Although we may initiate
litigation to stop infringement, intellectual property litigation is often
expensive and could consume our limited financial resources. Additionally, third
parties may be better able to sustain the costs of litigation. If we are unable
to defend or enforce our rights, other parties may be able to use our
technologies without paying any compensation to us. Furthermore, we cannot
assure you that our competitors will not design around any issued patents, or
improve upon our
8
technology, or that we will be able to detect infringements. If we are unable to
establish, defend or enforce rights to our technology, our business may be
materially damaged.
SHOULD WE USE TECHNOLOGIES THAT CONFLICT WITH THE RIGHTS OF THIRD-PARTIES, OUR
BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED.
Our competitors and others may have or acquire patent or other intellectual
property rights that they could attempt to enforce against us. If they do so,
the following could occur:
o We could be sued and required to defend ourselves in time-consuming
and costly litigation (even if it is ultimately determined that the
claim is without merit);
o We may be adjudged liable for substantial damages for past
infringement, including possible treble damages if it is found that we
have willfully infringed;
o We may be prohibited from selling or licensing our product without a
license which may not be available on commercially acceptable terms,
if at all, or that may require us to pay substantial royalties;
o We may have to redesign our products so that they do not infringe and
such redesign may not be possible or may be costly and time-consuming.
If any of the foregoing occurs, our business is likely to be materially and
adversely affected.
RISKS RELATING TO REGULATION
EACH OF OUR VOTING SYSTEM PRODUCTS MUST MEET QUALIFICATION AND CERTIFICATION
STANDARDS BEFORE WE WILL BE ABLE TO SELL THEM.
In the United States, our ability to sell our voting system products depends on
the qualification of each product through independent testing for compliance
with the federal voting system standards. In addition, most states require
state-level certification before we may sell our products to local jurisdictions
in those states. Moreover, local jurisdictions may require acceptance level
testing. In March 2004, our DRE voting system was qualified as complying with
the 1990 federal voting system standards, as to hardware, and 2002 federal
voting system standards, as to software, and has been subsequently certified by
the states of South Dakota and Utah. We are seeking qualification of our
hardware under the 2002 federal voting system standards but cannot assure you
that we will obtain that qualification. We cannot assure you that our products
will be certified by additional states. If we are unable to obtain certification
in additional states, we may not be able to generate sufficient revenues to
achieve profitability.
STATE ELECTION OFFICIALS MAY DECERTIFY OUR PRODUCTS.
If certified in a state, our products will be subject to ongoing review by the
state which may withdraw certification. For example, the California Secretary of
State recently issued an order withdrawing certification of certain of our
competitors' products. We cannot assure you that a state will not withdraw
certification of our products on the basis that the product is defective,
obsolete or otherwise unacceptable for use. If certification is withdrawn, we
will not be able to continue to sell the product in the state and are likely to
receive significant adverse publicity. As a result, our reputation could be
materially damaged, causing us to lose sales and customers in other
jurisdictions.
WE EXPECT FEDERAL VOTING SYSTEM STANDARDS, STATE CERTIFICATION AND OTHER LEGAL
REQUIREMENTS PERTAINING TO OUR PRODUCTS TO CHANGE.
The market for computerized voting machines and related equipment for use in
federal, state, local and other elections, is changing as new technical
standards are considered. We expect that federal voting system standards, state
certification and other legal requirements will change. We may not be able to
anticipate new standards or
9
changes to existing standards and we cannot assure you that our products will
comply, or can be modified to comply with, any new or changed standards or
requirements that may be adopted. If our products do not comply and cannot be
modified to comply with new or changed standards or requirements, we may not be
able to sell some or all of our products.
WE MAY NOT BE ABLE TO OBTAIN FEDERAL AND STATE CERTIFICATION OF PRODUCTS IN A
TIMELY MANNER, WHICH COULD DELAY THE MARKETING AND SALES OF OUR PRODUCTS.
Independent testing authorities test and certify our products. There are a
limited number of testing authorities able to test and certify our products in
accordance with the federal voting system standards. These companies also
conduct testing and certification for our competitors. Any delays or disruptions
in the services provided by our independent testing authorities is likely to
affect our ability to market and sell our products and could materially and
adversely impact our sales and our ability to achieve profitability.
IF OUR PRODUCTS ARE NOT ACCEPTED BY FEDERAL, STATE, LOCAL AND FOREIGN
GOVERNMENTS AND VOTERS AS REPLACEMENTS FOR CURRENT VOTING SYSTEMS, WE WILL NOT
BE SUCCESSFUL.
Our success depends on the acceptance of our products as replacements for
current voting systems both in the United States and abroad. Even if our
products satisfy applicable qualification and certification requirements, local
governments may elect not to purchase them for a number of reasons, including,
but not limited to, voter acceptance of our technology. In recent years, there
has been significant public controversy regarding the reliability, benefits and
costs of various alternative voting systems, including electronic voting
systems. We have expended a significant amount of our time and financial
resources demonstrating our product capabilities to various state and local
government officials. If our products do not achieve significant market
acceptance among state and local governments, we may not be able to generate
sufficient revenues to achieve profitability. In addition, if foreign
governments do not accept our products, the long-term growth of our business
will be limited.
WE WILL BE SUBJECT TO LAWS, REGULATIONS AND OTHER PROCEDURES WITH RESPECT TO
GOVERNMENT PROCUREMENT.
Because we plan to sell our products to government agencies, we will be subject
to laws, regulations and other procedures that govern procurement and contract
implementation by those agencies. These agencies are likely to impose vendor
qualification requirements, such as requirements with respect to financial
condition, insurance and history. We have limited experience with government
procurement and cannot assure you that we will be able to meet existing or
future procurement laws, regulations and procedures or that we will be able to
qualify as a vendor. Some procurement processes could involve an extensive
period of product evaluation, including evaluation by the public. Compliance
with government procurement and qualification requirements could significantly
delay sales of our products. Delays could also occur due to protests of bid
specifications or challenges to contract awards. If we fail to comply with an
agency's procurement or vendor qualification requirements or procedures, we will
be unable to market and sell our products to that agency. Government agencies
may also impose contractual terms and conditions, such as warranty, termination
and indemnification provisions, that are unfavorable to us.
OUR COSTS WILL INCREASE AS A RESULT OF NEW AND AMENDED SECURITIES REGULATIONS.
New and amended regulations adopted by the Securities and Exchange Commission
will increase our accounting, legal and compliance costs as these changes become
effective. Additionally, we expect increased accounting, legal and compliance
costs because for periods beginning after June 30, 2003, we will no longer be
subject to the less extensive disclosure requirements applicable to a "small
business issuer" as defined by the Securities and Exchange Commission.
RISKS RELATING TO OUR SECURITIES
SOME HOLDERS OF OUR SECURITIES MAY HAVE THE RIGHT TO RESCIND THEIR PURCHASES.
We have offered and sold a substantial number of shares of common stock and
warrants and options to purchase common stock without registration under the
Securities Act of 1933, as amended, or qualification under state
10
securities laws. If any offer or sale were not exempt from, or otherwise not
subject to, federal and state registration and qualification requirements, the
purchaser would have a number of remedies, including the right to rescind the
purchase. The Securities Act of 1933, as amended, requires that any claim for
rescission be brought within one year of the violation. We have sold
approximately 16,233,718 shares of common stock and warrants and options to
purchase approximately 12,937, 970 shares of common stock in the United States
within one year of May 31, 2004. The time periods within which claims for
rescission must be brought under state securities laws vary and may be two years
or more from the date of the violation. We have sold approximately 17,143,009
shares of common stock and warrants and options to purchase approximately
14,028,810 shares of common stock in the United States within two years of May
31, 2004. Further, we cannot assure you that courts will not apply equitable or
other doctrines to extend the period within which purchasers may bring their
claims. The number of warrants and options described above does not include]
warrants and options to purchase 3,600,000 shares of common stock issued within
two years of May 31, 2004 to our chief executive officer, Dennis Vadura and our
president, Frank Wiebe and a warrant to purchase 12,400,000 shares of common
stock for which the holder has agreed in writing that it will not assert any
right to rescission that it may have. However, we can not assure you that this
agreement is enforceable.
Should federal or state securities regulators deem it necessary to bring
administrative or legal actions against us based upon a failure to register or
qualify, the defense of any enforcement action is likely to be costly,
distracting to our management and if unsuccessful could result in the imposition
of significant penalties. The filing of a claim for rescission or enforcement
action against us or our officers or directors could materially and adversely
impact our stock price, generate significant adverse publicity that materially
affects our sales and materially impairs our ability to raise capital through
future sales of our securities. We may also incur significant expenses should we
determine that it is advisable to register shares issuable upon exercise of
outstanding warrants or options or upon conversion of outstanding notes.
WE HAVE NOT FILED OR SENT INFORMATION STATEMENTS IN CONNECTION WITH STOCKHOLDER
ACTIONS BY WRITTEN CONSENT.
In 2002, we effected a 1 for 5 reverse split of our issued and outstanding
shares of common stock and filed amendments to Article IV of our articles of
incorporation to provide for a class of preferred stock. Each of these actions
required the approval of our stockholders that we believe was given by written
consent. In connection with these written consents, we did not file with the
Securities and Exchange Commission written information statements containing the
information specified in its proxy rules. Also, we did not send information
statements in advance of the action as required by the proxy rules of the
Securities and Exchange Commission. Accordingly, it is possible that a
stockholder could challenge the validity of these actions and the Securities and
Exchange Commission could take enforcement action against us. The defense of any
challenge or enforcement action is likely to be costly, distracting to our
management and could in the case of an enforcement action result in the
imposition of significant penalties. The filing of a stockholder challenge or an
enforcement action could materially and adversely impact our stock price,
generate significant adverse publicity that materially affects our sales, and
materially impair our ability to raise capital through future sales of our
securities.
SOME OF THE HOLDERS OF OUR COMMON STOCK MAYBE SUBJECT TO DILUTION.
As of May 31, 2004, we had outstanding warrants and options to purchase
73,309,110 shares of common stock and notes convertible into 31,802,483 shares
of common stock, or approximately 42% of our outstanding shares of common stock
on a fully diluted as converted basis. The exercise price of the warrants and
options ranges from $.01 to $1.55 per share and the notes are currently
convertible at prices ranging from $.0625 to $.1224 per share. The number of
shares of common stock issuable upon conversion of certain of the notes may be
greater in the future because the conversion price is the lower of the specified
price in the note or 50% of the average three lowest closing prices for our
common stock for the twenty days immediately preceding the conversion date. The
exercise or conversion prices of these securities are generally substantially
lower than our stock price. Therefore, holders of our common stock and potential
investors are subject to substantial dilution if these securities are exercised
or converted. The terms on which we could obtain additional capital may be
adversely affected during the time that the warrants and options may be
exercised or the notes converted.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK
PRICE TO FALL.
11
Sales of a substantial number of shares of our common stock in the public market
could cause the market price of our common stock to decline. As of March 31,
2004 and May 31, 2004, we had 148,449,049 shares of common stock outstanding, of
which approximately 8,000,000 are freely tradable without restriction or further
registration under the Securities Act of 1933, as amended. As of March 31, 2004
and May 31, 2004, our affiliates held approximately 63,111,600 shares of our
common stock, which are transferable pursuant to Rule 144, as promulgated under
the Securities Act of 1933, as amended. Although we do not believe that our
affiliates have any present intentions to dispose of any shares of common stock
owned by them, there can be no assurance that such intentions will not change in
the future. We have filed a registration statement with the Securities and
Exchange Commission on Form S-8 covering up to 12,000,000 shares of our common
stock that are issuable upon exercise of outstanding warrants. The exercise of
those warrants, and the prompt resale of shares of our common stock received,
may result in downward pressure on the price of our common stock.
A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO RAISE
FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR ABILITY TO CONTINUE OUR NORMAL
OPERATIONS.
A prolonged decline in the price of our common stock could result in a reduction
in the liquidity of our common stock and a reduction in our ability to raise
capital. Because our operations primarily have been financed through the sale of
equity securities, a decline in the price of our common stock could be
especially detrimental to our liquidity and our operations. We may be forced to
reallocate funds from other planned uses and this would have a significant
negative effect on our business plans and operations, including our ability to
develop new products and continue our current operations. If our stock price
declines, there can be no assurance that we will be able to raise additional
capital or generate funds from operations sufficient to meet our obligations. If
we are unable to raise sufficient capital in the future, we may not have the
resources to continue our normal operations.
OUR CHIEF EXECUTIVE OFFICER AND OUR PRESIDENT EXERCISE SUBSTANTIAL CONTROL OVER
OUR AFFAIRS.
At March 31, 2004, Dennis Vadura, our chief executive officer, and Frank Wiebe,
our president, were the beneficial owners of approximately 35.9% and 24.4% of
our common stock, respectively, without taking into account an additional 14.7%
of our common stock which they share the right to vote by proxy. As a result,
Messrs. Vadura and Wiebe, acting together, are able to influence all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. The interests of Messrs. Vadura and Wiebe
may differ from those of our other stockholders and they may be able to take
actions that advance their respective interests to the detriment of our other
stockholders. This ability to exercise control over the election of the board of
directors may discourage, delay or prevent a merger or acquisition.
A MAJORITY OF OUR DIRECTORS ARE OFFICERS, EMPLOYEES AND SIGNIFICANT STOCKHOLDERS
AND WE DO NOT HAVE AN AUDIT COMMITTEE.
Our board of directors presently consists of three members, two of whom are
officers, employees and significant stockholders. Our board of directors has not
established an audit committee for the purpose of overseeing our accounting and
financial reporting processes and audits of our financial statements.
OUR COMMON STOCK IS QUOTED ON THE OTC BULLETIN BOARD AND TRADING MAY CONTINUE TO
BE SPORADIC AND VOLATILE.
Our common stock is quoted on the OTC Bulletin Board. Trading in stock quoted on
the OTC Bulletin Board is often thin and characterized by wide fluctuations in
trading prices, due to many factors that may have little to do with our
operations or business prospects. Moreover, the OTC Bulletin Board is not a
stock exchange, and trading of securities on the OTC Bulletin Board is often
more sporadic than the trading of securities listed on a quotation system or a
stock exchange.
THE PRICE OF OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE AND
STOCKHOLDERS COULD INCUR SUBSTANTIAL LOSSES.
12
The market price of our common stock has been, and in the future is likely to
be, highly volatile. This volatility could result in substantial losses for
stockholders. Our stock price may fluctuate widely for a number of reasons,
including:
o Media reports and announcements with respect to electronic voting
technology in general or our products or those of our competitors;
o Qualification or certification, or withdrawal of certification, of our
products or those of our competitors;
o Changes in federal voting system standards, state certification
standards or other legal requirements pertaining to our products;
o Litigation initiated by or against us, including litigation pertaining
to patents or other intellectual property rights;
o Dissemination of information about us by others, including on Internet
bulletin boards;
o Changes in our key personnel;
o General economic conditions; and
o The occurrence of other events or circumstances described in these
Risk Factors.
Companies are often sued by investors after periods of stock price volatility.
This type of litigation could be filed against us in the future which could
result in substantial expense and diversion of management's attention and, if
successful, substantial damage awards.
TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC'S "PENNY STOCK" REGULATIONS
WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR STOCK.
The Securities and Exchange Commission has adopted regulations which generally
define "penny stock" to be any equity security that has a market price less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. Our securities are covered by the penny stock rules, which
impose additional sales practice requirements on broker-dealers who sell to
persons other than established customers and accredited investors. The penny
stock rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document in a form prepared by the Securities and Exchange Commission that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure and
suitability requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that is subject to these penny
stock rules. Consequently, these penny stock rules may affect the ability of
broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our common stock.
OUR ARTICLES OF INCORPORATION AUTHORIZE THE BOARD OF DIRECTORS TO ISSUE AND
DESIGNATE THE RIGHTS OF SERIES OF PREFERRED STOCK WITHOUT ACTION BY THE
STOCKHOLDERS.
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Our authorized capital stock consists of 600,000,000 shares of common stock and
80,000 shares of preferred stock. Our board of directors, without any action by
stockholders, is authorized to divide the authorized shares of preferred stock
into series and to designate the rights, qualifications, preferences,
limitations and terms of the shares of any series of preferred stock, including
but not limited to dividend, redemption, voting rights and preferences. The
rights of holders of shares of preferred stock that may be issued might be
superior to the rights granted to the holders of existing shares of common
stock. Further, the ability of our board of directors to designate and issue
series of preferred shares could impede or deter an unsolicited tender offer or
takeover proposal and the issuance of additional shares having preferential
rights could affect adversely the voting power and other rights of holders of
our common stock.
PROVISIONS OF NEVADA LAW COULD DISCOURAGE, DELAY OR PREVENT A MERGER,
ACQUISITION OR OTHER CHANGE IN CONTROL OF US, EVEN IF A CHANGE IN CONTROL WOULD
BENEFIT OUR STOCKHOLDERS.
At any time that we have 200 or more stockholders of record, we will be subject
to Nevada's statutes that prohibit us from engaging in specified business
combinations with "interested stockholders," including beneficial owners of 10%
or more of the voting power of our outstanding shares. Thereafter, combinations
may be permissible only if specified conditions are satisfied. Nevada law also
provides that directors may resist a change or potential change in control if
the directors determine that the change is opposed to, or not in the best
interest of, the corporation. Additionally, Nevada law permits directors and
officers in exercising their respective powers with a view to the interests of
the corporation, to consider: the interests of the corporation's employees,
suppliers, creditors and customers; the economy of the state and the nation; the
interests of community and society; and the long-term as well as short-term
interests of the corporation and its stockholders, including the possibility
that these interests may be best served by the continued independence of the
corporation. Accordingly, these statutory provisions could discourage potential
takeover attempts and could reduce the price that investors might be willing to
pay for shares of our common stock in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Changes in United States interest rates would affect the interest earned on our
cash and cash equivalents. Based on our overall interest rate exposure at March
31, 2004, a near-term change in interest rates, based on historical movements,
would not materially affect the fair value of interest rate sensitive
instruments. Our debt instruments have fixed interest rates and terms and,
therefore, a significant change in interest rates would not have a material
adverse effect on our financial position or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
that are designed to ensure that information required to be disclosed in our
periodic reports filed under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
We carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as of March 31, 2004. This evaluation was
carried out under the supervision and with the participation of our management,
including our principal (chief) executive and principal (chief) financial
officer. Based upon the evaluation, our principal (chief) executive and
principal (chief) financial officer concluded that our disclosure controls and
procedures were of limited effectiveness at the reasonable assurance level at
March 31, 2004.
There have been no changes in our internal control over financial reporting
during our quarter ended March 31, 2004 that have materially affected or are
reasonably likely to materially affect, our internal control over financial
reporting.
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Subsequent to March 31, 2004, we hired additional accounting personnel to
re-evaluate and revise our disclosure controls and procedures and to implement
new disclosure controls and procedures. As part of this plan and implementation,
we are re-evaluating and re-designing and documenting policies and procedures,
putting those procedures in operation and monitoring the effectiveness of the
procedures.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings that are discussed in our Annual
Report on Form 10-KSB/A for the fiscal year ended June 30, 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
AccuPoll sold the following unregistered securities during the three month
period ended March 31, 2004.
COMMON STOCK
Between February 2, 2004 and March 31, 2004, AccuPoll issued to various
investors an aggregate of 13,989,534 shares of common stock for proceeds of
$2,354,311. We relied upon an exclusion from registration under Regulation S
under the Securities Act of 1933, as amended (the "Securities Act").
In January 2004, the Company issued 1,724,167 shares of restricted common stock
in connection with the conversion of a note payable of $500,000, plus accrued
interest of $17,250.
WARRANTS
On January 20, 2004, AccuPoll issued to a consultant, in exchange for services,
a warrant to purchase 100,000 shares of common stock at an exercise price of
$1.54 per share. We relied on the exemption from registration under Section 4(2)
of the Securities Act.
On February 26, 2004, AccuPoll issued to a consultant, in exchange for services,
a warrant to purchase 260,000 shares of common stock at an exercise price of
$.90 per share. We relied on the exemption from registration under Section 4(2)
of the Securities Act.
On January 26, 2004, AccuPoll issued to a consultant, in exchange for services,
a warrant to purchase 1,045,752 shares of common stock at an exercise price of
$.1224 per share. We relied on the exemption from registration under Section
4(2) of the Securities Act.
On January 13, 2004, AccuPoll issued to a consultant, in exchange for services,
a warrant to purchase 50,000 shares of common stock at an exercise price of $.25
per share. We relied on the exemption from registration under Section 4(2) of
the Securities Act.
Between January 1, 2004 and March 4, 2004, AccuPoll issued to various investors
warrants to purchase an aggregate of 10,250,428 shares of common stock at
exercise prices ranging from $.1224 to $1.00 per share. We relied upon an
exclusion from registration under Regulation S under the Securities Act.
On January 4, 2004, AccuPoll issued to a consultant, in exchange for services, a
warrant to purchase 15,000 shares of common stock at an exercise price of $1.18
per share. We relied on the exemption from registration under Section 4(2) of
the Securities Act.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Reports on Form 8-K:
(2) Exhibits
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-4(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification by Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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.
June 7, 2004
AccuPoll Holding Corp.
By:/S/ Dennis Vadura By:/S/ Craig A. Hewitt
------------------------------------ -------------------------------------
Dennis Vadura Craig A. Hewitt, Chief Financial
Chairman of the Board, President Officer and principal financial
and Chief Executive Officer and accounting officer
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