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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: _______________
ACCUPOLL HOLDING CORP.
------------------------------------------------------
(Exact name of registrant 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. SUITE # 220, TUSTIN, CA 92780
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(949) 200-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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. [X] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). [X] YES [ ] NO
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act fo 1934 subsequent to the distribution of securities under a plan
confirmed under a plan confirmed by a court. [ ] YES [ ] 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: 186,589,504 shares
of common stock, $.001 par value per share, as of October 14, 2004.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
(Unaudited)
September 30, 2004 June 30, 2004
------------------ ---------------
CURRENT ASSETS
Cash $ 773,961 $ 113,789
Accounts receivable, net 303,895 254,895
Inventories 375,548 168,636
------------ ------------
TOTAL CURRENT ASSETS 1,453,404 537,320
Property and equipment, net 14,174 14,012
Capitalized software development costs 1,855,532 2,544,207
Other assets 26,765 26,246
------------ ------------
TOTAL ASSETS $ 3,349,875 $ 3,121,785
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,693,461 $ 1,817,284
Related party payables 1,214,070 1,228,070
Unearned revenue 35,387 74,628
Convertible debt, net of discount 3,817,100 3,304,600
Notes payable to related parties 20,000 30,000
Put liability related to warrant issuance 163,760 163,760
Liabilities subject to compromise 732,470 732,544
------------ ------------
TOTAL CURRENT LIABILITIES 7,676,248 7,350,886
------------ ------------
Put liability related to warrant issuances
Equity intstruments subject to rescission 6,300,000 6,200,000
Equity interest of stockholders in consolidated affiliate
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Convertible Series A preferred stock, $0.001 par value,
80,000 shares authorized, zero shares issued or outstanding
Common stock, par value of $0.001, 600,000,000 shares authorized;
186,589,506 and 112,945,963 shares issued and outstanding, respectively 181,454 158,482
Additional paid in capital 15,513,645 12,046,817
Accumulated deficit (26,321,472) (22,634,400)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (10,626,373) (10,429,101)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,349,875 3,121,785
============ ============
- ---------------------------------------------------------------------------------------------------------------------
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 September 30, 2004 and 2003
- --------------------------------------------------------------------------------
(Unaudited)
September 30, September 30,
2004 2003
----------- -----------
NET SALES 494,244
COST OF SALES 329,357
---------- ----------
GROSS PROFIT 164,887
OPERATING EXPENSES
General and administrative 1,315,155 915,290
Professional fees 2,191,277 87,327
---------- ----------
3,506,432 1,002,617
---------- ----------
OPERATING LOSS (3,341,545) (1,002,617)
INTEREST EXPENSE, NET 345,527 610,073
---------- ----------
NET LOSS (3,687,072) (1,612,690)
========== ==========
BASIC AND DILUTED LOSS
PER COMMON SHARE (0.02) (0.01)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 175,165,060 113,236,887
========== ==========
- --------------------------------------------------------------------------------
Page F-2 See notes to these condensed consolidated financial statements
- --------------------------------------------------------------------------------
ACCUPOLL HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
----------------- -----------------
Cash flows from operating activities:
Net loss $ (3,687,072) $ (1,612,690)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 693,874 -
Amortization of estimated fair market value of warrants
granted and beneficial conversion feature in connection with
the issuance of convertible notes payable - 110,033
Amortization of beneficial conversion feature in connectionn
with the issuance of subordinated convertible notes - 500,000
Beneficial conversion feature expense 312,500 -
Estimated fair market value of options and warrants granted
for services - 168,000
Vesting of previously issued stock options - 136,545
Estimated fair market value of common stock issued
for services - 32,930
Options and warrants granted for services 1,462,900 -
Changes in operating assets and liabilities: - -
Accounts receivable (49,000) -
Inventories 68,863 -
Prepaid expenses and other assets (276,294) (37,765)
Accounts payable and accrued expenses (123,823) 225,971
Related party payables (14,000) 61,490
Deferred income (39,241) -
----------------- -----------------
Net cash used in operating activities (1,651,293) (415,486)
----------------- -----------------
Cash flows from investing activities:
Increase in deferred acquisition costs - (81,000)
Increase in capitalized software development costs (5,361) (360,330)
----------------- -----------------
Net cash used in investing activities (5,361) (441,330)
----------------- -----------------
Cash flows from financing activities:
Proceeds from the issuance of notes payable to related parties - 50,000
Principal payments on notes payable to related parties (10,000) -
Proceeds from issuance of convertible subordinated debt - 500,000
Proceeds from issuance of convertible notes payable 512,500 200,000
Proceeds from the issuance of notes payable - -
Proceeds from the issuance of common stock, net of commissions 1,774,896 25,000
Proceeds from issuance of common stock upon exercise of warrants,
net of commissions 39,430 152,786
----------------- -----------------
Net cash provided by financing activities 2,316,826 927,786
----------------- -----------------
Net increase (decrease) in cash 660,172 70,970
Cash at beginning of period 113,789 -
----------------- -----------------
Cash at end of period $ 773,961 $ 70,970
================= =================
Supplemental disclosure of non-cash financing and operating activities
See accompanying notes to the condensed consolidated financial statements for additional information relating to non-cash investing
and financing activities.
- ------------------------------------------------------------------------------------------------------------------------------------
Page F-3
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 set of 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-K/A annual report of the Company, as amended, for the year ended
June 30, 2004. In the opinion of management, all adjustments (which consist only
of normal and recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the three month
period ended September 30, 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 will continue as 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 its 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 September 30, 2004, the Company has an accumulated deficit approximating
$26,321,000 Further, the Company has not generated any revenues from its Voting
System operations,and there is no assurance of any future revenues.
Consequently, the Company will require substantial additional funding for
continuing the development, obtaining regulatory approval, and commercialization
of its product. There is no assurance that the Company will be able to obtain
sufficient additional funds when needed or that such funds, if available, will
be obtainable on terms satisfactory to the Company.
Management has taken actions to address these matters, which include:
o Retention of experienced management personnel with particular skills
in the commercialization of such products;
o Attainment of technology to develop such products and additional
products; and
o Raising additional funds through the sale of debt and/or equity
securities.
Federal, State and various foreign government regulations govern the sale of the
Company's products. There can be no assurance that the Company will receive the
regulatory approval required to market its proposed products.
The Company has incurred losses through September 30, 2004, has negative working
capital at that date of approximately $6.2 million, and has a lack of
operational history which, among other factors, raise substantial doubt about
its ability to continue as a going concern. The Company intends to fund
operations through sales of the Voting System, but there is no commitment by any
entities for the purchase of any of the proposed products. In the absence of
significant sales and profits, the Company may seek to raise additional funds to
meet its working capital requirements through debt and/or equity financing
Page F-4
arrangements. Management believes that such arrangements, combined with the net
proceeds from planned capital transactions will be sufficient to fund the
Company's capital expenditures, working capital needs and other cash
requirements for the year ending June 30, 2005. The successful outcome of future
activities cannot be determined at this time, and there is no assurance that, if
achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
These circumstances, combined with other potential liabilities raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
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 not been consolidated for the
three months ended September 30, 2004 (see "De-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 for bankruptcy protection 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. In addition, as described herein, the
Company and certain of its officers and principal stockholders are presently
involved in civil litigation with certain former stockholders and officers of Z
prompt. Management has determined that it would not be meaningful to
de-consolidate the accounts of Z prompt at this time because the Company (a) has
a substantial investment in Z prompt as of September 30, 2004, and (b) expects
to re-gain control of this subsidiary based on the expectation that Z prompt
will be able to negotiate a confirmed reorganization plan and emerge from
bankruptcy by approximately March of 2005. See Note 3 for additional information
regarding Z prompt. Accordingly, the Company has not deconsolidated the accounts
of Z Prompt in its September 30, 2004 consolidated financial statements.
NATURE OF OPERATIONS
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 reverse
merger with a publicly traded company in May 2002 and its common stock is quoted
on the Over-The-Counter 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.
Page F-5
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.
STOCK-BASED EMPLOYEE COMPENSATION
As of September 30, 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 September 30,
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 for the three month periods
ended September 30, 2004 and 2003
Three Months Ended
September 30,
---------------------------
2004 2003
------------- ------------
Net loss available to common $(3,687,072) $(1,321,023)
stockholders, as reported *
Pro forma compensation expense (181,710) (355,000)
------------- ------------
Pro forma net loss available to
common stockholders $(3,868,782) $(1,676,023)
============= ============
Loss per common share, as reported
Basic and diluted $ (0.02) $ (0.01)
============= ============
Loss per common share, pro forma
Basic and diluted $ (0.02) $ (0.01)
============= ============
* These amounts include interest related to certain equity instruments subject
to rescission (see Note 2).
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.
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 sheets.
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.
Page F-6
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.
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 market 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.
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 month periods
ended September 30, 2004 and 2003:
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2004 2003
-------------- ------------
Net loss $ (3,687,072) $(1,321,023)
Interest related to equity
instruments subject to rescission (100,000) --
-------------- ------------
Dilutive net loss available to
common stockholders $ (3,787,082) $(1,321,023)
============== ============
Shares used to compute loss per
common share 175,165,060 113,236,887
============== ============
Basic and diluted loss per common
share: $ (0.02) $ (0.01)
============== ============
* These amounts include interest related to certain equity instruments subject
to rescission (See Note 2).
DE-CONSOLIDATION OF WTI
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
Page F-7
"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, 2004 consolidated financial
statements previously filed with the SEC in amended Form 10-K/A, the Company is
associated with WTI through common ownership; however, in addition, even though
the Company was virtually WTI's only customer for software development services,
the master services agreement with the Company expired March 31, 2004. Since
that date, the Company has not used the services of WTI because the software for
the Voting System is now substantially complete; any additional computer
programming that may be necessary will be provided by Company employees (some of
whom are former WTI employees). At this time, WTI is virtually a dormant entity
with just two minor customers and only a few employees. Although the Company's
September 30, 2004 payable to WTI is a substantial amount (see the preceding
paragraph), there is no intent to pay this liability in the foreseeable future.
Given its minimal operations at this time, management believes that WTI is no
longer dependent for its continued existence upon additional subordinated
financial support from the Company or its controlling stockholders. For these
reasons, management has concluded that the Company is no longer the primary
beneficiary of WTI . Accordingly, the accompanying financial statements do not
include the accounts of WTI.
SEGMENT INFORMATION
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information,"
changed the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
It also requires entity-wide disclosures about the products and services an
entity provides, the foreign countries in which it holds significant assets and
its major customers. At September 30, 2004 and 2003, the Company operates in one
segment, as disclosed in the accompanying consolidated statements of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current year presentation.
NOTE 2: EQUITY INSTRUMENTS SUBJECT TO RESCISSION
Management discovered that the Company may be subject to possible claims
rescission with respect to the sale or other issuances of common stock, options
and warrants.
The Company has 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
Page F-8
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. The Company has sold approximately
9,768,000 shares of common stock and warrants and options to purchase shares of
common stock in the United States within one year of September 30, 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. The Company sold approximately 13,995,000 shares of common stock and
warrants and options to purchase shares of common stock in the United States
within two years of September 30, 2004.
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 Company accounts for common stock and other equity instruments that may be
subject to rescission claims as a put liability based on estimated fair value in
accordance with the SEC's promulgated accounting rules and interpretive
releases. Since equity instruments subject to rescission are redeemable at the
holder's option or upon the occurrence of an uncertain event not solely within
the Company's control, such equity instruments are outside thescope of SFAS No.
150 and its related interpretations. Under the SEC's interpretation of GAAP,
reporting such claims outside of stockholders' equity (as "mezzanine equity") is
required, regardless of how remote the redemption event may be.Thus, the Company
has reported approximately $6.3 million as "mezzanine equity" in the
accompanying September 30, 2004 condensed consolidated balance sheet.
As previously reported, the Company's prior year financial statements were
restated. In addition, all financial information included in these notes to
consolidated financial statements for the first quarter of fiscal 2003 has been
adjusted.
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.
The accompanying consolidated financial statements have been prepared in
accordance with GAAP applicable to a going concern, which 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.
Page F-9
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 September 30, 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. 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.
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 September 30,
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 September 30, 2004 condensed consolidated financial statements.
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.
Page F-10
Condensed balance sheet information of Z prompt as of September 30, 2004 and
June 30, 2004 and results of operations for the three months ended September 30,
2004 is presented below. No comparable information is presented for the three
months ended September 30, 2003 as Z Prompt was acquired effective October 2003.
Z PROMPT INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS September 30, 2004 June 30, 2004
(unaudited) (unaudited)
CURRENT ASSETS
Cash $ 48,675 $ 34,010
Accounts receivable, net 296,699 254,895
Inventories 44,723 20,667
------------------ -------------
390,097 309,572
OTHER, net 7,950 2,512
------------------ -------------
TOTAL ASSETS $ 398,047 $ 312,084
================== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 216,865 $ 301,734
Loan from parent company 823,380 620,395
Deferred revenues 35,387 74,628
Liabilities subject to compromise 732,470 732,544
------------------ -------------
TOTAL LIABILITIES 1,808,102 1,729,301
------------------ -------------
STOCKHOLDERS' DEFICIT (1,410,055) (1,417,217)
------------------ -- ----------
TOTAL LIABILITIES AND DEFICIT $ 398,047 $312,084
================== =============
Z PROMPT INC.
STATEMENT OF OPERATIONS (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 2004
NET SALES $ 494,244
COST OF SALES 329,357
-----------
GROSS PROFIT 164,187
EXPENSES
General and administrative 99,872
Salaries and related 54,967
Interest 3,128
-----------
157,697
-----------
PRETAX INCOME $ 7,190
===========
The September 30, 2004 balances of Z Prompt's liabilities that became subject to
compromise on March 23, 2004 are as follows:
Accounts payable and accrued expenses $ 336,470
Line of credit payable to a financial institution (Note 5) 225,000
Notes payables to related parties 171,000
-------------
Total $ 732,470
=============
Page F-11
NOTE 4: CAPITALIZED SOFTWARE DEVELOPMENT COSTS
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards ("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 software development
costs are amortized on a straight-line basis over the three-year estimated
economic life of the products, beginning (as applicable) with the general
product release to customers or when the Voting System qualified under certain
federal standards. Research and development costs incurred prior to establishing
technological feasibility and costs incurred subsequent to the events described
in the preceding sentence 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. At September 30, 2004, management believes that no
revisions to the remaining useful lives or write-down of capitalized software
development costs are required. The Company began amortizing its capitalized
software development costs in April 2004, following the March 2004 qualification
of its Voting System as complying with certain federal voting system standards;
at September 30, 2004, accumulated amortization approximated $925,000.
NOTE 5: LINE OF CREDIT
The Company has a revolving line of credit agreement (the "Line") with a
financial institution that matured 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 guaranteed the Line. The terms of the Line
provided for borrowings of up to $280,000. At September 30, 2004, the Company's
outstanding borrowings totaled $225,000, which are included in liabilities
subject to compromise on the accompanying September 30, 2004 condensed
consolidated balance sheet.
NOTE 6: CONVERTIBLE DEBT
On July 2nd 2004, through a Private Placement Memorandum, the Company acquired
$625,000 convertible debenture. The "Convertible Note" bears interest at 8% per
annum On September 08, 2004, Accupoll Inc. returned $312,500. The balance was
converted into 2,395,833 common stock, at a price value of $0.15 per share in
October 2004.
The convertible feature of this note payable provides for a rate of conversion
that is below market value of the common stock. This feature is normally
characterized as a beneficial conversion feature ("BCF"). Pursuant to Emerging
Issues Task Force ("EITF") Issue No. 98-5 ("EITF 98-5"), "Accounting For
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratio," and EITF Issue No. 00-27, "Application of EITF
Issue No. 98-5 To Certain Convertible Instruments," the Company has estimated
the fair value of such BCF to approximate $312,500 which has been amortized into
interest expense for the quarter ended September 30, 2004.
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
Page F-12
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.
NOTE 8: STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
On September 13, 2004, the Company completed a private placement
transaction with 11 accredited investors, pursuant to which the Company sold an
aggregate of 3,666,447 shares of common stock. The Company received gross
proceeds totaling $1,749,900. The Company issued three warrants for each two
shares of common stock sold to the accredited investors. (See warrants below for
further description.)
During the three-month period ended September 30, 2004, the Company
issued 18,806,248 shares of common stock in connection with a cashless exercise
of warrants. The aggregate value of the warrants was $1,175,000 based on a
Black-Scholes valuation model.
WARRANTS
On September 13, 2004, the Company completed a private placement
transaction with 11 accredited investors, pursuant to which the Company issued
1,833,227 Series A Warrants, 1,833,227 Series B Warrants and 1,833,227 Series C
Warrants.
The Company agreed to file with the Securities and Exchange Commission
not later than 30 days after the closing date, and cause to be effective within
120 days after the closing date, a registration statement in order to register
the shares of common stock issued to the investors and the shares underlying the
warrants, including warrant shares issuable upon exercise of warrants issued to
the placement agent (the "Registration Statement"). In addition, on one
occasion, for a period commencing 91 days after the closing date, but not later
than two years after the closing date, upon written request of the holders of
more than 50% of the shares and warrant shares actually issued upon exercise of
warrants, the Company is required to prepare and file a Registration Statement.
The The A Warrants expire 150 days from the date the Registration Statement is
declared effective by the Securities and Exchange Commission and are exercisable
at $0.12 per share. The B Warrants expire four years after the date the
Registration Statement is declared effective by the Securities and Exchange
Commission and are exercisable at $0.15 per share. The C Warrants expire three
years after the date the Registration Statement is declared effective by the
Securities and Exchange Commission and are exercisable at $0.50 per share.
The Company may call the warrants beginning 30 trading days after the
effective date of the Registration Statement and ending 30 trading days before
effective date of the Registration Statement and ending 30 trading days before
the expiration of the warrants. A call notice may be given by AccuPoll for the A
Warrants only within five trading days after the common stock has had a closing
price as reported for the principal market of $0.24 or higher for 15 consecutive
trading days. A call notice may be given by AccuPoll for the B Warrants only
within five trading days after the common stock has had a closing price as
reported for the principal market of $0.30 or higher for 15 consecutive trading
days. A call notice may be given by the Company for the C Warrants only within
five trading days after the common stock has had a closing price as reported for
the principal market of $1.00 or higher for 15 consecutive trading days.
Page F-13
NOTE 9: SUBSEQUENT EVENTS
On November 4, 2004, the Company. completed a private placement
transaction with 11 accredited investors, pursuant to which it sold an aggregate
of 6,050,000 shares of common stock, 3,025,000 Series A Warrants, 3,025,000
Series B Warrants and 3,025,000 Series C Warrants. The Company received gross
proceeds totaling $605,000. For each two shares of common stock, AccuPoll issued
investors one A Warrant, one B Warrant and one C Warrant. Each two shares and
three warrants were sold at a price of $0.20. The private placement was deemed
exempt from registration requirements under Rule 506 of Regulation D under the
Securities Act of 1933.
In addition, the Company issued the placement agents warrants to
purchase 756,250 shares of common stock, exercisable for five years at an
exercise price of $0.18 per share.
The Company agreed to file with the Securities and Exchange Commission
not later than 30 days after the closing date, and cause to be effective within
120 days after the closing date, a registration statement in order to register
the shares of common stock issued to the investors and the shares underlying the
warrants, including warrant shares issuable upon exercise of warrants issued to
the placement agent (the "Registration Statement"). See Current Report on Form
8-K filed by the Company in November 2004 for further information.
NOTE 10: RELATED PARTY PAYABLES
At September 30, 2004, the Company owes $1,214,070 to WTI, an
affiliated company for services under a master services agreement. WTI is
affiliated with the Company through common ownership. The obligation is
noninterest bearing and not subject to a maturity date.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERTIONS.
GENERAL
We are in the business of developing and marketing computerized voting
machines and their associated products and services for use in federal, state,
local and private elections. 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.
As of November 1, 2004, our DRE voting system was certified by the states of
Alabama, Arkansas, Kentucky, Mississippi, Ohio, South Dakota, Utah and West
Virginia. We currently are in the process of applying for certification in
additional states.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
Revenues:
Net Sales for the quarter ending September 30, 2004 were $494,244 as
compared to net sales for the three months ending September 30, 2003 of $0. The
increase in net sales is solely due to the acquisition of Zprompt, Inc. which
was consolidated beginning October 31, 2003.
Cost of goods sold:
Cost of goods sold for the quarter ending September 30, 2004 were
$329,357, as compared to $0 for the quarter ending September 30, 2003. The
increase in net sales is solely due to the acquisition of Zprompt, Inc. which
was consolidated beginning October 31, 2003.
General and Administrative Expenses:
General and Administrative expenses for the quarter ended September 30,
2004 were $1,315,155 as compared to $915,290 for the quarter ended September 30,
2003, and increase of 44%. The increase is a result of fees associated with our
September private placement, and increased salary expenses resulting from the
acquisition of Zprompt Inc.
Professional Fees:
Professional Fees for the quarter ended September 30, 2004 were
$2,191,277 as compared to $87,327 for the quarter ended September 30, 2003, an
increase of 2,400%. The increase is a result of charges of expenses associated
with various warrants which were granted beginning in May of 2002, and exercised
during this quarter.
2
Interest Expense:
Interest Expenses for the quarter ended September 30, 2004 were
$345,527 as compared to $610,073 for the quarter ended September 30, 2003, a
decrease of 77%. The decrease is a result of less expenses incurred in this
quarter, compared to the prior year period, related to beneficial conversion
features of equity instruments issued at below market.
Net Loss:
Net loss for the quarter ended September 30, 2004 was $3,687,072 as
compared to $1,612,690 for the quarter ended September 30, 2003, a 129%
increase. The increase is primarily due to non-cash professional fees associated
with the cashless exercise of warrants.
LIQUIDITY AND CAPITAL RESOURCES
From August 2001, the date of our inception, through September 30,
2004, we have raised a total of approximately $11.3 million from the sale of
common stock and convertible notes and other securities.
As of September 30, 2004 we had cash of approximately $773,961 and a
working capital deficiency of approximately $6.2 million. Our accumulated
deficit as of September 30, 2004 was approximately $26.3 million.
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 originally matured on June 30, 2004, but
have been extended to December 31, 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 September 30, 2004,
we had borrowed $2,380,000 under such notes.
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 originally
matured on June 30, 2004, but has been extended to December 31, 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 September 30, 2004, we had borrowed $836,000 under such
debenture.
We have a convertible debenture with C&S Consolidated Services Hong
Kong. The convertible debenture bears interest at an annual rate of 7% and
matures on October 14, 2004. The debenture is convertible in to shares of common
stock of $0.35 per share. At September 30, 2004, we had balance of $288,600
under such debenture.
We have a convertible debenture with 5 accredited investors.. The
convertible debenture bears interest at an annual rate of 8% and matures on July
2, 2007. The debenture is convertible in to shares of common stock of $.15 per
share. At September 30, 2004, we had balance of $312,500 under such debenture.
CAPITAL EXPENDITURES
We anticipate certain capital expenditures related to developing and
testing subsequent versions of the voting system hardware and software. We
estimate such capital expenditures for hardware to be approximately $250,000 and
an additional $250,000 for software over the course of the fiscal year ending
June 30, 2005. We will rely on future fund raising in order to pay for
development and testing of these subsequent versions.
3
GOING CONCERN
We have incurred losses from operations since inception, have negative
working capital of approximately $6.2 million at September 30, 2004, and lack
operational history. These conditions, among others, raise substantial doubt
about our ability to continue as a going concern.
We have not generated any revenues from our Voting System operations,
and there is no assurance of any future revenues. We will require substantial
additional funding for continuing the development, obtaining regulatory
approval, and commercialization of our product. There is no assurance that we
will be able to obtain sufficient additional funds when needed or that such
funds, if available, will be obtainable on satisfactory terms.
Management has taken the following actions to address these matters:
o Retention of experienced management personnel with particular skills
in the commercialization of such products;
o Attainment of technology to develop such products and additional
products; and
o Raising additional funds through the sale of debt and/or equity
securities.
Federal, State and various foreign government regulations govern the
sale of our products. There can be no assurance that we will receive the
regulatory approval required to market our proposed products.
The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. As stated above, we have incurred losses through
September 30, 2004, have negative working capital at that date and have a lack
of operational history which, among other factors, raise substantial doubt about
our ability to continue as a going concern. We intend to fund operations through
sales of the Voting System, but there is no commitment by any entities for the
purchase of any of the proposed products. In the absence of significant sales
and profits, we may seek to raise additional funds to meet our working capital
requirements through debt and/or equity financing arrangements. Management
believes that such arrangements will be sufficient to fund our capital
expenditures, working capital needs and other cash requirements for the year
ending June 30, 2005. The successful outcome of future activities cannot be
determined at this time, and there is no assurance that, if achieved, we will
have sufficient funds to execute our intended business plan or generate positive
operating results.
These circumstances, combined with the potential liability associated
with certain equity instruments subject to rescission (see Note 2 to the
accompanying financial statements for additional information), raise substantial
doubt about our ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
INFLATION
Our management believes that inflation has not had a material effect on
our results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
4
CONTRACTUAL OBLIGATIONS
As of September 30, 2004, we had the following contractual obligations:
Payments due by period
-----------------------------------------------------------
Less than More than 5
Contractual Obligations TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
- -------------------------------------- ----- --------- --------- --------- -----------
Operating Lease Obligations
Greenberg Farrow Architecture
- Tustin office $132,000 $132,000 $ - $ -
Olen Lease - Irvine facility $39,911 $39,911
Amarillo Grant - Texas facility $250,000 $250,000
Long-Term Debt
Bank of America Line of Credit $225,000 $225,000
Notes Payable $191,583 $191,583
Convertible Debt $3,504,600 $3,504,600
Consulting Agreements
National Strategies Inc. $60,000 $60,000
---------- ---------- --------- --------- -----------
Total $4,403,094 $4,271,094 $132,000 $ - $ -
========== ========== ========= ========= ===========
BUSINESS TRENDS
There are three business trends evident in the market today that are
material to our operations. The first is the delay in the procurement cycle
until after the November 2004 election. This trend was influenced by two
factors: 1) the delay in the distribution of the federal funds by the United
States Election Assistance Commission, and 2) the November 2004 Presidential
Election. The delay in the distribution of the federal funds was caused by the
delay in nominating and confirming the Election Assistance Commissioners
(scheduled to be completed by April 2003, but instead was completed in December
2003), and the delay on the part of some states in meeting all the requirements
for the funds to be released by the Election Assistance Commission. With the
delay in funding until June 2004, less than five months before the November 2004
election, the majority of counties have decided not to risk making any changes
until after the November 2004 election.
The second business trend is the growing momentum of the movement for a
VOTER VERIFIED PAPER AUDIT TRAIL (VVPAT). As of September 2004, eighteen states
(Alabama, Alaska, Arizona, California, Connecticut, Georgia, Illinois, Maine,
Maryland, Minnesota, New Hampshire, New Jersey, New York, Ohio, Vermont,
Virginia, West Virginia and Wisconsin) have either passed or are actively
considering legislation that would make it a requirement for any direct
recording electronic (DRE) voting system used in the state to produce a VVPAT.
In another five states (California, Missouri, Oregon, New Hampshire and Nevada),
the Secretary of State has issued a directive mandating VVPAT in the state.
The third business trend is the growing list of states that are
requiring DRE voting systems to be qualified under the 2002 federal voting
system standards. This requirement is primarily focused in states where
electronic voting systems have not been previously used (e.g., Illinois,
Missouri, Iowa and North Carolina).
Overall the net impact of these trends on AccuPoll is positive.
AccuPoll already has a DRE voting system with a VVPAT qualified under the 1990
federal voting system standards. We are currently in the process of testing our
DRE voting system under the 2002 federal voting system standards. We expect to
complete federal qualification testing under the 2002 federal voting system
standards by January 1, 2005. This places AccuPoll in position as one of the few
vendors with a DRE voting system that is federally qualified under the 2002
voting system standards and has a VVPAT in time for the beginning of the
procurement cycle after the November 2004 election. This is especially important
in states like Missouri and Illinois that have not previously authorized DRE
voting systems to be used in the state, but must at a minimum meet the
accessibility requirements under the Help America Vote Act of 2002 (i.e., one
DRE voting machine per polling place).
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 September 30, 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
5
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) 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 September 30, 2004.
This evaluation was carried out under the supervision and with the participation
of our management, including our principal (chief) executive officer and
principal (chief) financial officer. Based upon the evaluation, our principal
(chief) executive officer and principal (chief) financial officer concluded that
our disclosure controls and procedures were of limited effectiveness at the
reasonable assurance level at September 30, 2004.
There have been no changes in our internal control over financial
reporting during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
During the year ended June 30, 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, 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.
In December 2003, Paul Musco, the ex-President of our wholly-owned
subsidiary, Z prompt, Inc. filed suit against us and Z prompt in Superior Court
of California, County of Orange, California. The claim alleged breach of
contract, fraud and misrepresentation stemming from our acquisition of, and his
termination of his employment with, Z prompt. Mr. Musco is seeking damages in
excess of $800,000, plus punitive damages. We believe that Mr. Musco breached
his agreements with Z prompt and we have filed a cross complaint for breach of
contract, fraud, negligence and breach of fiduciary duty seeking $2,000,000. Mr.
Musco has since filed his own cross-complaint against us, Dennis Vadura, Frank
Wiebe and Craig Hewitt alleging fraud and tortious interference with contract.
Paul Musco has also modified his complaint to include additional damages for
alleged losses resulting from his inability to sell his shares of AccuPoll
Holding Corp. In addition, Michael Shockett, a former employee, has joined the
suit and filed a cross complaint against us, Z prompt, Dennis Vadura, Frank
Wiebe and Craig Hewitt alleging fraud, tortuous interference with contract and
wrongful termination. Michael Shockett was terminated from employment with us in
April 2004 for cause. Although no assurance can be given that we will prevail on
the merits, we will vigorously defend these allegations. The case is set for
trial in early January, 2005. The case is currently in discovery.
In October 2003, a former employee of Z prompt, Nathalie Luu, filed
suit against us and Z prompt in Superior Court of California, County of Orange,
California. The complaint claims wrongful termination, intentional infliction of
emotional distress and retaliatory discharge, based on allegations that the
plaintiff was terminated for reporting to management alleged fraudulent
accounting practices by Z prompt management. The former employee is
6
seeking $112,000 in monetary damages including loss of wages, plus punitive
damages. The case is currently in discovery.
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 in the
United States Bankruptcy Court, Central District of California. As of September
30, 2004, Z prompt had not filed a proposed Plan of Reorganization. The Company
is currently in the process of preparing it's disclosure statement, and a draft
of the proposed plan of re-organization.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Common Stock
On September 13, 2004, we completed a private placement transaction
with 11 accredited investors, pursuant to which we sold an aggregate of
3,666,447 shares of common stock, and an aggregate of 1,833,227 Series A
Warrants, 1,833,227 Series B Warrants and 1,833,227 Series C Warrants. We
received gross proceeds totaling $1,749,900. The private placement was exempt
from registration under Rule 506 of Regulation D under the Securities Act of
1933, as amended.
During the three-month period ended September 30, 2004, we issued
18,806,248 shares of common stock in connection with a cashless exercise of
warrants. These warrants had originally been issued under a June 2002 consulting
agreement, and the aggregate value of the warrants is approximately $1,175,000.
The transaction was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
Warrants
Subsequent Events
During October, 2004 Hyde Investments converted $200,000 of their
convertible debt into 3,200,000 shares of common stock. The transaction was
exempt from registration under Regulation S under the Securities Act of 1933, as
amended.
In November, 2004, we completed a private placement transaction with 11
accredited investors, pursuant to which we sold an aggregate of 6,050,000 shares
of common stock, and 6,050,000 Series A warrants, 6,050,000 Series B warrants,
and 6,050,000 Series C warrants. We received gross proceeds totaling $605,000.
This private placement also triggered a reset to exercise prices of warrants
sold pursuant to the September 13, 2004 private placement described above. The
private placement was exempt from registration under Rule 506 of Regulation D
under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no matter submitted to a vote of security holders during the
period covered by this report.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
7
EXHIBIT NUMBER DESCRIPTION
- -------------- --------------------------------------------------------------
2.1 Reorganization Agreement dated April 9, 2003 between AccuPoll
and Z prompt, Inc. (Incorporated by reference from Exhibit 1
to Form 8-K, filed April 23, 2003)
2.2 Agreement and Plan of Reorganization dated June 30, 2004 by
and among AccuPoll Holding Corp., NTSD Acquisition, Inc., NTS
Data Services Corp., NTS Data Services, Inc., Matthew M.
Biondi and John F. Jennings (Incorporated by reference from
Exhibit 10.1 to Form 8-K, filed July 1, 2004).
3.1 Articles of Incorporation dated January 25, 1985 (Incorporated
by reference from Exhibit 3(i) to Form 10-KSB for fiscal year
ended June 30, 2000, filed September 8, 2000)
3.2 Amendment to Articles of Incorporation dated November 4, 1985
(Incorporated by reference from Exhibit 3(ii) to Form 10-KSB
for the fiscal year ended June 30, 2000, filed September 8,
2000)
3.3 Certificate of Amendment to Articles of Incorporation dated
May 2, 2002 (Incorporated by reference from Exhibit 3.3 to
Form 10-K/A for the fiscal year ended June 30, 2004, filed
October 6, 2004)
3.4 Certificate of Amendment to Articles of Incorporation dated
May 23, 2002 (Incorporated by reference from Exhibit 3.4 to
Form 10-K/A for the fiscal year ended June 30, 2004, filed
October 6, 2004)
3.5 Certificate of Amendment to Articles of Incorporation dated
June 2, 2003 (Incorporated by reference from Exhibit 3.5 to
Form 10-K/A for the fiscal year ended June 30, 2004, filed
October 6, 2004)
3.6 Bylaws (Incorporated by reference to Exhibit 3(iii) to Form
10-KSB for the fiscal year ended June 30, 2000, filed
September 8, 2000)
3.7 Amendment to Bylaws dated April 20, 2000 (Incorporated by
reference from Exhibit 3.7 to Amendment No. 1 to Form 10-K for
the fiscal year ended June 30, 2004, filed October 6, 2004)
4.1 Debenture, dated June 20, 2003 between AccuPoll and Palisades
Holdings, LLC (Incorporated by reference from Exhibit 4.1 to
Form 10-KSB/A for the fiscal year ended June 30, 2003, filed
June 8, 2004)
4.2 Debenture, dated November 20, 2003, by and between AccuPoll
Holding Corp., AccuPoll, Inc. and Hyde Investments, Ltd, as
amended (Incorporated by reference from Exhibit 10.1 to Form
10-Q/A for the quarter ended December 31, 2003, filed June 8,
2004)
4.3 Debenture, dated November 20, 2003, by and between AccuPoll
Holding Corp., AccuPoll, Inc. and Livingston Investments,
Ltd., as amended (Incorporated by reference from Exhibit 10.1
to Form 10-Q/A for the quarter ended December 31, 2003, filed
June 8, 2004)
4.4 Convertible Note, dated July 2003, between AccuPoll and Pan
American Management (Incorporated by reference from Exhibit
10.1 to Form 10-Q/A for the quarter ended September 30, 2003,
filed June 8, 2004)
4.5 Subscription Agreement, dated September 8, 2004 (Incorporated
by reference from Exhibit 4.1 to Form 8-K, filed September 17,
2004)
4.6 Form of Common Stock Purchase Warrant A (Incorporated by
reference from Exhibit 4.2 to Form 8-K, filed September 17,
2004)
8
EXHIBIT NUMBER DESCRIPTION
- -------------- --------------------------------------------------------------
4.7 Form of Common Stock Purchase Warrant B (Incorporated by
reference from Exhibit 4.3 to Form 8-K, filed September 17,
2004)
4.8 Form of Common Stock Purchase Warrant C (Incorporated by
reference from Exhibit 4.4 to Form 8-K, filed September 17,
2004)
4.9 Form of Placement Agent Warrant (Incorporated by reference
from Exhibit 4.5 to Form 8-K, filed September 17, 2004)
4.10 Form of Funds Escrow Agreement (Incorporated by reference from
Exhibit 4.6 to Form 8-K, filed September 17, 2004)
4.11 Subscription Agreement, dated November 4, 2004 (Incorporated
by reference from Exhibit 4.1 to Form 8-K, filed November 10,
2004)
4.12 Form of Common Stock Purchase Warrant A (Incorporated by
reference from Exhibit 4.2 to Form 8-K, filed November 10,
2004)
4.13 Form of Common Stock Purchase Warrant B (Incorporated by
reference from Exhibit 4.3 to Form 8-K, filed November 10,
2004)
4.14 Form of Common Stock Purchase Warrant C (Incorporated by
reference from Exhibit 4.4 to Form 8-K, filed November 10,
2004)
4.15 Form of Placement Agent Warrant (Incorporated by reference
from Exhibit 4.5 to Form 8-K, filed November 10, 2004)
4.16 Form of Funds Escrow Agreement (Incorporated by reference
from Exhibit 4.6 to Form 8-K, filed November 10, 2004)
9.1 Proxy in favor of Dennis Vadura and Frank Wiebe from Picasso,
LLC (Incorporated by reference from Exhibit 10.9 to the Form
10-KSB for the fiscal year ended June 30, 2002, filed October
7, 2002)
9.2 Proxy in favor of Dennis Vadura and Frank Wiebe from
ViperTrust (Incorporated by reference from Exhibit 10.10 to
the Form 10-KSB for the fiscal year ended June 30, 2002, filed
October 7, 2002)
9.3 Proxy in favor of Dennis Vadura and Frank Wiebe from Aramis
Investment, LLC (Incorporated by reference from Exhibit 9.3 to
Form 10-KSB/A for the fiscal year ended June 30, 2003, filed
June 8, 2004)
9.4 Proxy in favor of Dennis Vadura and Frank Wiebe from The
Glacier Trust (Incorporated by reference from Exhibit 9.4 to
Form 10-KSB/A for the fiscal year ended June 30, 2003, filed
June 8, 2004)
9.5 Proxy in favor of Dennis Vadura and Frank Wiebe from Morpheus
Trust (Incorporated by reference from Exhibit 9.5 to Form
10-KSB/A for the fiscal year ended June 30, 2003, filed June
8, 2004)
10.1 Stock Exchange Agreement dated May 20, 2002, between WIPC and
AccuPoll, Inc., Dennis Vadura and Frank Wiebe (Incorporated by
reference from Exhibit 1 to Form 8-K/A, filed May 28, 2002)
10.2 Employment Agreement, dated May 20, 2002, between Dennis
Vadura and AccuPoll (Incorporated by reference from Exhibit
10.2 to Form 10-KSB/A for the fiscal year ended June 30, 2003,
filed June 8, 2004)
10.3 Employment Agreement, dated May 20, 2002, between Frank Wiebe
and AccuPoll (Incorporated by reference from Exhibit 10.2 to
Form 10-KSB/A for the fiscal year ended June 30, 2003, filed
June 8, 2004)
9
EXHIBIT NUMBER DESCRIPTION
- -------------- --------------------------------------------------------------
10.4 Indemnification Agreement, between Dennis Vadura and AccuPoll
(Incorporated by reference from Exhibit 10.13 to the Form-KSB
for fiscal year ended June 30, 2002, filed October 7, 2002)
10.5 Indemnification Agreement, between Frank Wiebe and AccuPoll
(Incorporated by reference from Exhibit 10.14 to the Form-KSB
for fiscal year ended June 30, 2002, filed October 7, 2002)
10.6 Master Services Agreement dated April 2002 with Web Tools
International, Inc. (Incorporated by reference from Exhibit
10.7 to Form-KSB for fiscal year ended June 30, 2002, filed
October 7, 2002)
10.7 Consulting Agreement dated April 23, 2002 between AccuPoll and
GCH Capital, Ltd (Incorporated by reference from Exhibit 10.8
to Form-KSB for fiscal year ended June 30, 2002, filed October
7, 2002)
10.8 Consulting Agreement, dated May 29, 20002 between Craig Hewitt
and AccuPoll (Incorporated by reference from Exhibit 10.17 to
the Form-KSB for fiscal year ended June 30, 2002, filed
October 7, 2002)
10.9 AccuPoll 2002 Consultant Compensation Plan (Incorporated by
reference from Exhibit 10 to Form S-8 filed June 11, 2002)
10.10 Exclusive Territory and Compensation Agreement, November 4,
2003, by and between AccuPoll and AmCad, LLC (Incorporated by
reference from Exhibit 10.12 to Form 10-KSB/A for the fiscal
year ended June 30, 2003, filed June 8, 2004)
10.11 Standard Sublease dated July 23, 2003 between Greenberg Farrow
Architecture, Inc. and AccuPoll (Incorporated by reference
from Exhibit 10.14 to Form 10-KSB/A for the fiscal year ended
June 30, 2003, filed June 8, 2004)
10.12 Teaming Agreement dated July 9, 2004 by and between AccuPoll,
Inc. and Alternative Resources Corporation (Incorporated by
reference from Exhibit 10.12 to Form 10-K for the fiscal year
ended June 30, 2004, filed September 28, 2004)
10.13 Exclusive Supply Agreement dated December 20, 2001 by and
between Source Technologies, Inc. and Web Tools International,
Inc. (Incorporated by reference from Exhibit 10.13 to Form10-K
for the fiscal year ended June 30, 2004, filed September 28,
2004)
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(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
10
(B) REPORTS ON FORM 8-K.
On July 1, 2004, we filed a report on Form 8-K under Items 2 and 7,
reporting the acquisition of 100% of the issued and outstanding capital stock of
NTS Data Services, Inc. As of August 31, 2004 the transaction had not closed due
to certain conditions of the transaction not being met and NTS provided us a
letter expressing interest not to move forward with the contemplated
transaction.
On September 2, 2004, we filed a report on Form 8-K under Item 5.02,
reporting the appointment of Phil Trubey to our Board of Directors.
On September 17, 2004, we filed a report on Form 8-K under Items 1.01,
3.02 and 9.01, reporting the completion of a private placement transaction with
11 accredited investors, pursuant to which we sold an aggregate of 3,666,447
shares of common stock, 1,833,227 Series A Warrants, 1,833,227 Series B Warrants
and 1,833,227 Series C Warrants. We received gross proceeds totaling
$1,649,900.10. For each two shares of common stock, we issued investors one A
Warrant, one B Warrant and one C Warrant. Each two shares and three warrants
were sold at a price of $0.90. The private placement was exempt from
registration under Rule 506 of Regulation D under the Securities Act of 1933, as
amended.
11
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.
ACCUPOLL HOLDING CORP.
Dated: November 10, 2004 By: /s/ Dennis Vadura
-------------------------------------
Dennis Vadura,
Chief Executive Officer and Director
Dated: November 10, 2004 By: /s/ Frank J. Wiebe
-------------------------------------
Frank J. Wiebe,
President, Secretary, Treasurer
and Director
Dated: November 10, 2004 By: Craig A. Hewitt
-------------------------------------
Craig A. Hewitt,
Chief Financial Officer and Principal
Accounting Officer
12