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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 DECEMBER 31, 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 ONY 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: 214,871,410 shares
of common stock, $.001 par value per share, as of December 31, 2004.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DECEMBER 31, 2004
(UNAUDITED)
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
(Unaudited)
December 31, June 30,
2004 2004
------------ ------------
CURRENT ASSETS
Cash $ 360,502 $ 113,789
Accounts receivable, net 230,986 254,895
Inventories 377,730 168,636
------------ ------------
TOTAL CURRENT ASSETS 969,218 537,320
Property and equipment, net 18,954 14,012
Capitalized software development costs 1,165,532 2,544,207
Other assets 26,765 26,246
------------ ------------
TOTAL ASSETS $ 2,180,469 $ 3,121,785
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,338,003 $ 1,817,284
Related party payables 1,443,510 1,228,070
Unearned revenue 22,279 74,628
Convertible debt, net of discount 3,104,600 3,304,600
Notes payable to related parties 15,000 30,000
Put liability related to warrant issuance 163,760 163,760
Liabilities subject to compromise 732,470 732,544
------------ ------------
TOTAL CURRENT LIABILITIES 6,819,622 7,350,886
------------ ------------
Equity intstruments subject to rescission 5,800,000 6,200,000
------------ ------------
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; 214,873,410 and 158,482,171
shares issued and outstanding, respectively 214,874 158,482
Additional paid in capital 17,768,150 12,046,817
Accumulated deficit (28,422,177) (22,634,400)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (10,439,153) (10,429,101)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,180,469 3,121,785
============ ============
- --------------------------------------------------------------------------------
Page F-1 The accompanying notes are an integral part of these consolidated
financial statements
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Month Periods Ended December 31, 2004 and 2003
(Unaudited)
December 31, December 31,
2004 2003
------------- -------------
NET SALES $ 361,337 $ 361,232
COST OF SALES 257,458 142,503
------------- -------------
GROSS PROFIT 103,879 218,729
OPERATING EXPENSES
General and administrative 1,516,158 1,072,367
Professional fees 641,210 21,542
------------- -------------
2,157,368 1,093,909
------------- -------------
OPERATING LOSS (2,053,489) (875,180)
OTHER EXPENSES
Interest, net 47,216 1,517,842
Loss on disposal of investment -- 1,200,000
------------- -------------
47,216 2,717,842
------------- -------------
NET LOSS $ (2,100,705) $ (3,593,022)
============= =============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.01) $ (0.03)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 198,431,960 121,925,669
============= =============
- --------------------------------------------------------------------------------
Page F-2 The accompanying notes are an integral part of these consolidated
financial statements
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Six Month Periods Ended December 31, 2004 and 2003
(Unaudited)
December 31, December 31,
2004 2003
------------ ------------
NET SALES 816,340 361,232
COST OF SALES 547,069 142,503
------------ ------------
GROSS PROFIT 269,271 218,729
OPERATING EXPENSES
General and administrative 3,136,552 2,043,460
Professional fees 2,527,666 53,066
------------ ------------
5,664,218 2,096,526
------------ ------------
OPERATING LOSS (5,394,947) (1,877,797)
INTEREST EXPENSE, NET
Interest, net 392,830 2,127,915
Loss on disposal of investment -- 1,200,000
------------ ------------
392,830 3,327,915
------------ ------------
NET LOSS (5,787,777) (5,205,712)
============ ============
BASIC AND DILUTED LOSS
PER COMMON SHARE (0.03) (0.05)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 187,904,328 117,531,278
============ ============
- --------------------------------------------------------------------------------
Page F-3 The accompanying notes are an integral part of these consolidated
financial statements
ACCUPOLL HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended December 31, 2004 and 2003
(Unaudited)
December 31, December 31,
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(5,787,777) $(5,205,712)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,384,860 4,209
Amortization of estimated fair market value of
warrants granted and beneficial conversion
feature in connection with the issuance of
convertible notes payable 312,500 1,533,686
Amortization of beneficial conversion feature
in connectionn with the issuance of
subordinated convertible notes -- 500,000
Options and warrants granted for services 1,430,390 304,545
Common stock issued for services 237,009 34,980
Loss on disposal of investment -- 1,200,000
Changes in operating assets and liabilities: --
Accounts receivable 23,909 122,286
Inventories (209,094) (1,609)
Prepaid expenses and other assets (519) (37,765)
Accounts payable and accrued expenses (479,355) 38,809
Related party payables 215,440 516,510
Deferred income (52,349) --
----------- -----------
Net cash used in operating activities (2,924,986) (990,061)
----------- -----------
Cash flows from investing activities:
Purchase of propert and equipment (5,766) (8,959)
Increase in capitalized software development costs (5,361) (816,480)
Cash of acquired company -- 2,368
----------- -----------
Net cash used in investing activities (11,127) (823,071)
----------- -----------
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 (15,000) (55,000)
Proceeds from issuance of convertible debt 825,000 890,000
Principal payments on convertible debt (312,500) --
Proceeds from the issuance of notes payable -- 7,496
Proceeds from the issuance of common stock, net 2,199,900 25,000
Proceeds from issuance of common stock upon exercise of options 71,926 75,000
Proceeds from issuance of common stock upon exercise of warrants, net 413,500 784,982
----------- -----------
Net cash provided by financing activities 3,182,826 1,818,971
----------- -----------
Net increase (decrease) in cash 246,713 5,839
Cash at beginning of period 113,789 --
----------- -----------
Cash at end of period $ 360,502 $ 5,839
=========== ===========
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-4 The accompanying notes are an integral part of these consolidated
financial statements
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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 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 and six
months periods ended December 31, 2004 are not necessarily indicative of the
results that may be expected for the entire fiscal year.
GOING CONCERN CONSIDERATIONS
The accompanying 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 December 31, 2004, the Company has an accumulated deficit approximating
$28,422,000. 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.
2
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
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 December 31, 2004, had negative working
capital at that date of approximately $5.8 million, and has a lack of
operational history which, among other factors, raise 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 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 and beyond. 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 (including the
liability discussed in Note 2) raise 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 accompanying 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 and six months ended December 31, 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, at December 31, 2004
herein, the Company and certain of its officers and principal stockholders were
involved in civil litigation with certain former stockholders and officers of Z
prompt. In January 2004, the litigation has been settled. 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 negative investment
in Z prompt as of December 31, 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. The Bankruptcy cas has
been dismissed on January 2004. See Note 3 for additional
3
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
information regarding Z prompt. Accordingly, the Company has not deconsolidated
the accounts of Z Prompt in its December 31, 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.OB"
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.
STOCK-BASED EMPLOYEE COMPENSATION
As of October 18, 2004, the Company has adopted a 2004 Incentive Stock Plan, a
stock-based employee compensation plan. The Company reserved 12,500,000 shares
of the Corporation` Common stock. As of December 31, 2004, no common stock has
been issued under the 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 incurred no stock-based
employee compensation cost for the six months ended December 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 Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss available to common $(2,200,705) $(3,727,022) $(5,987,777) $(5,478,712)
stockholders, as reported *
Pro forma compensation expense (182,000) (355,000) (364,000) (150,000)
----------- ----------- ----------- -----------
4
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Pro forma net loss available to
common stockholders $(2,382,705) $(4,082,022) $(6,351,777) $(6,178,712)
=========== =========== =========== ===========
Loss per common share, as reported
Basic and diluted $ (0.01) $ (0.03) $ (0.03) $ (0.05)
=========== =========== =========== ===========
Loss per common share, pro forma
Basic and diluted $ (0.01) $ (0.03) $ (0.03) $ (0.05)
=========== =========== =========== ===========
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 method. 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 believes that the Company's revenue recognition accounting policy
conforms to SAB 104.
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
5
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
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 and six month
periods ended September 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss $ (2,100,705) $ (3,593,022) $ (5,787,777) $ (5,205,712)
Interest related to equity
instruments subject to rescission (100,000) (134,000) (200,000) (273,000)
------------- ------------- ------------- -------------
Dilutive net loss available to $ (2,200,705) $ (3,727,022) $ (5,987,777) $ (5,478,712)
common stockholders ============= ============= ============= =============
Shares used to compute loss per
common share: 198,431,960 121,825,669 187,904,328 117,531,278
============= ============= ============= =============
Basic and diluted loss per
common share: $ (0.01) $ (0.03) $ (0.03) $ (0.05)
============= ============= ============= =============
* 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
"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
6
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
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, 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 December 31,
2004 payable to WTI is a substantial amount (see Note 9), 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 December 31, 2004 and 2003, the Company operates in one
segment, as disclosed in the accompanying condensed consolidated statements of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material. In
Chapter 4 of ARB 43, paragraph five previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and re-handling costs may be so abnormal as to require treatment as
current period charges...." SFAS No. 151 requires that such items be recognized
as current-period expenses, regardless of whether they meet the criterion of "so
abnormal" (an undefined term). This pronouncement also requires that allocation
of fixed production overhead to the costs of conversion be based on the normal
7
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred in years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment", which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123-R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, "Accounting
for Stock-Based Compensation", and supersedes Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". As
originally issued, SFAS No. 123 established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that pronouncement permitted entities to continue applying the
intrinsic-value-based model of APB Opinion 25, provided that the financial
statements disclosed the pro forma net income or loss based on the preferable
fair-value method.
SFAS No. 123-R is required to be applied in the first interim or annual
reporting period that begins after June 15, 2005. Thus, the Company's
consolidated financial statements will reflect an expense for (a) all
share-based compensation arrangements granted after July 1, 2005 and for any
such arrangements that are modified, cancelled, or repurchased after that date,
and (b) the portion of previous share-based awards for which the requisite
service has not been rendered as of that date, based on the grant-date estimated
fair value.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that exchanges of non-monetary assets should be measured using the estimated
fair value of the assets exchanged. SFAS No. 153 eliminates the narrow exception
for non-monetary exchanges of similar productive assets, and replaces it with a
broader exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has "commercial substance" if the
future cash flows of the entity are expected to change significantly as a result
of the transaction. This pronouncement is effective for non-monetary exchanges
in fiscal periods beginning after June 15, 2005.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed
by management to have a material impact on the Company's present or future
consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current year presentation.
8
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE 2: EQUITY INSTRUMENTS SUBJECT TO RESCISSION
The Company may be subject to possible claims for rescission with respect to the
sale or other issuances of certain 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 (the "Securities Act"), 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 requires that any claim for rescission be brought within one
year of the violation. The Company has sold approximately 9,774,000 shares of
common stock and warrants and options to purchase shares of common stock in the
United States within one year of December 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. The Company sold
approximately 14,024,000 shares of common stock and warrants and options to
purchase shares of common stock in the United States within two years of
December 31, 2004.
The number of warrants and options described above does not include warrants and
options to purchase a total of 3,600,000 shares of common stock issued within
two years of December 31, 2004 to our chief executive officer, Dennis Vadura and
our president, Frank Wiebe or 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 cannot assure you that this
agreement is enforceable.
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 $5.8 million as "mezzanine equity" in the
accompanying December 31, 2004 condensed consolidated balance sheet.
9
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
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 second quarter of fiscal 2004 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 (absent a stipulation to the contrary) 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 December 31, 2004 condensed consolidated balance sheet. 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.
The bankruptcy case has been dismissed in January 2005.
10
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
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 December 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 December 31, 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.
Condensed balance sheet information of Z prompt as of December 31, 2004 and
results of operations for the three and six months then ended are presented
below. The acquisition of Z Prompt was recorded for accounting purposes in
November 2003.
11
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(Unaudited)
Z PROMPT INC.
BALANCE SHEETS
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
(Unaudited)
December 31, June 30,
2004 2004
----------- ------------
CURRENT ASSETS
Cash $ 98,962 $ 34,010
Accounts receivable, net 230,986 254,895
Inventories 49,289 20,667
----------- -----------
TOTAL CURRENT ASSETS 379,237 309,572
Other, net 1,802 2,512
TOTAL ASSETS $ 381,039 $ 312,084
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 115,357 $ 301,734
Loan from parent co 930,710 620,395
Unearned revenue 22,279 74,628
Liabilities subject to compromise 732,470 732,544
----------- -----------
TOTAL LIABILITIES 1,800,816 1,729,301
----------- -----------
STOCKHOLDERS' DEFICIT (1,419,777) (1,417,217)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 381,039 $ 312,084
=========== ===========
- -------------------------------------------------------------------------------
12
Z PROMPT INC.
STATEMENTS OF OPERATIONS
For The Three Month and Six Month Periods Ended December 31, 2004
Three Month ended Six Month Ended
December 31, 2004 December 31, 2004
(Unaudited) (Unaudited)
----------------------------------------
NET SALES 361,337 855,581
COST OF SALES 257,458 586,815
-------- --------
GROSS PROFIT 103,879 268,766
OPERATING EXPENSES
General and administrative 59,904 159,506
Salaries and Related 53,726 108,693
-------- --------
113,630 268,199
-------- --------
OPERATING LOSS (9,751) 567
INTEREST EXPENSE, NET 30 3,158
-------- --------
NET LOSS (9,781) (2,591)
======== ========
- --------------------------------------------------------------------------------
The December 31, 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
========
13
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
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
14
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
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 December 31, 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 December 31, 2004, accumulated amortization approximated $1,615,000.
NOTE 5: LINE OF CREDIT
The Company had 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 December 31, 2004, the Company's
outstanding borrowings totaled $225,000, which are included in liabilities
subject to compromise on the accompanying December 31, 2004 condensed
consolidated balance sheet.
NOTE 6: CONVERTIBLE DEBT
On July 2nd 2004, through a private placement Memorandum, the Company issued a
$625,000 convertible debenture to 4 accredited investors. The "Convertible Note"
bears interest at 8% per annum. On September 08, 2004, Accupoll Inc. repaid
$312,500. The balance was converted into 3,125,000 shares of common stock in
October 2004 at a price of $0.15 per share.
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 six months ended December 31, 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
will pay the Company $250,000 upon the Company's execution of a lease for
15
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
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 of December 31, 2004, the Company did not fulfill its obligations
related to the agreement. Therefore, starting March 2004, the Agreement is in
default and the funds are due for repayment.
NOTE 8: STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Holders of our common stock: (i) have equal ratable rights to dividends from
funds legally available therefore, when, as and if declared by the Board of
Directors; (ii) are entitled to share ratably in all of our assets available for
distribution to stockholders upon liquidation, dissolution or winding up of our
affairs; (iii) do not have preemptive, subscription or conversion rights, nor
are there any redemption or sinking fund provisions applicable thereto; and (iv)
are entitled to one vote per share on all matters on which stockholders may vote
at all shareholder meetings. The common stock does not have cumulative voting
rights, which means that the holders of more than fifty percent of the common
stock voting for election of directors can elect one hundred percent of our
directors if they choose to do so.
Preferred Stock
The Company`s Articles of Incorporation authorize 80,000 shares of preferred
stock, $.01 par value per share. The Company`s 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 ability of the Company Board of Directors to designate and
issue such 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 the common
stock.
The Company has not filed a certificate of designation with respect to any
series of preferred stock. During the year ended June 30, 2003, we agreed to
issue a total of 71,529 shares of Series A Preferred Stock as collateral for
secured notes. The parties have subsequently agreed to cancel the transaction.
On December 31, 2003, the Company agreed to issue 8,471 shares of Series A
Preferred Stock to two stockholders of record in exchange for 3,325,000 shares
of common stock of Material Technologies, Inc. On May 7, 2004, the Company
rescinded this transaction. Accordingly, the Company currently do not have any
shares of preferred stock issued or outstanding.
16
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
July 2004 Private Placement
In July 2004, the Company completed a private placement transaction
with four accredited investors, pursuant to which the company sold (1) an
aggregate of $625,000 principal amount 8% convertible debentures, and (2)
warrants to purchase 312,500 shares of our common stock. From this private
placement the Company received gross proceeds of $625,000. On September 13,
2004, the company repaid $312,500 of the principal amount of the 8% convertible
debentures and the remaining $312,500 principal amount was converted into
3,125,000 shares of our common stock. Also on September 13, 2004, all of the
warrants were exercised at a price of $0.15 per share into 312,500 shares of our
common stock. The issuance of the 8% convertible debentures, the warrants, and
the shares of common stock upon conversion and exercise of the 8% convertible
debentures and warrants was exempt from registration under Rule 506 of
Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended. J.P.
Turner & Company, LLC acted as placement agent for this transaction. For its
services as placement agent, the Company issued J.P. Turner & Company, LLC a
warrant to purchase 520,833 shares of common stock, exercisable for three years
at an exercise price of $0.12 per share.
September 2004 Private Placement
On September 13, 2004, the Company completed a private placement
transaction with eleven accredited investors, pursuant to which the Company 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 (the "First
Closing"). The Company received gross proceeds approximating $1,650,000. For
each two shares of common stock, the Company issued investors one A Warrant, one
B Warrant and one C Warrant. Each two shares and three warrants were sold at a
total price of $0.90. The private placement was exempt from registration under
Rule 506 of Regulation D of the Securities Act of 1933, as amended.
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 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.
17
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
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.
The shares of common stock sold and the common stock underlying the
warrants issued to the investors and the placement agent described herein are
restricted stock as defined in Rule 144 of the Securities Act of 1933 (as
amended) until the Registration Statement is declared effective by the SEC.
On November 4, 2004, certain of the terms of the September 2004 private
placement were amended with the November 2004 private placement.
November 2004 Private Placement
On November 4, 2004, the Company completed a private placement
transaction with the same investors from the First Closing, pursuant to which
the Company 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 "Second Closing"). The Company received gross proceeds totaling $605,000.
For each two shares of common stock, the company issued investors one A Warrant,
one B Warrant and one C Warrant. Each two shares and three warrants were sold at
a total price of $0.20. The private placement was deemed exempt from
registration requirements under Rule 506 of Regulation D of the Securities Act
of 1933.
The Second Closing triggered certain repricing adjustments to the terms
of the First Closing. Accordingly, the purchase price for the First Closing was
adjusted to $0.20 for each two shares and three warrants that were sold. As
adjusted, the Company is obligated to issue an additional 12,832,552 shares of
common stock, 6,233,501. Series A Warrants, 6,233,501 Series B Warrants and
6,233,501 Series C Warrants. The terms of the Series A Warrants, the Series B
Warrants and the Series C Warrants, as adjusted are as follows:
The Company agreed to file with the Securities and Exchange Commission
not later than 30 days after the closing date of the Second Closing, and cause
to be effective within 120 days after the closing date of the Second Closing, a
registration statement "rs" in order to register the shares of common stock
issued to the investors and the shares underlying the warrants, including the
shares issuable upon exercise of warrants issued to the placement agent. The
Company agreed to file with the Securities and Exchange Commission not later
than 30 days after the closing date of the Second Closing, and cause to be
effective within 120 days after the closing date of the Second Closing, a
registration statement in order to register the shares of common stock issued to
18
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
the investors and the shares underlying the warrants, including the shares
issuable upon exercise of warrants issued to the placement agent. If the
registration statement is not filed on or before the required filing date or if
the registration statement is not declared effective on or before the required
effective date, then the Company must pay as liquidated damages, an amount equal
to 1.5% for each 30 days or part thereof, and thereafter 2% for each 30 days of
past thereof of the purchase price of the shares and warrant shares. The Company
must pay any liquidated damages in cash. The warrants further provide that if
the required filing and registration dates are not met, upon written demand by a
holder, the Company must pay to such holder, in lieu of delivering common stock,
a sum in cash equal to the closing price of our common stock on the trading date
immediately preceeding the date notice is given by the holder, less the exercise
price, for each share of common stock designated in the notice from such holder.
In addition, on one occasion, for a period commencing 91 days after the closing
date of the Second Closing, but not later than two years after the closing date
of the Second Closing, 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 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 the
expiration of the warrants. A call notice may be given by us 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 us 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 us 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.
Beginning November 4, 2004 and until the registration statement has
been effective for 150 days, the investors must be given at least ten business
days prior written notice of any proposed sale by us of common stock or other
securities or debt obligations except in connection with (a) employee stock
options or compensation plans, (b) documented legal fees, or (c) our already
issued and outstanding shares of common stock as of the closing date. Such
proposed sales are referred to as "excepted issuances."
Other than the excepted issuances, if at any time until the
registration statement has been effective for 150 days, the Company offer, issue
or agree to issue any common stock or securities convertible into or exercisable
for shares of common stock (or modify any of the foregoing which may be
outstanding at any time prior to the closing date) to any person or entity at a
price per share or conversion or exercise price per share which shall be less
19
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
than $0.10, without the consent of each investor, then the Company is required
to issue, for each such occasion, additional shares of common stock to each
investor so that the average per share purchase price of the shares of common
stock and the warrants issued to the investor (of only the common stock or
warrant shares still owned by the investor) is equal to such other lower price
per share. For purposes of this issuance and adjustment, the issuance of any
security carrying the right to convert such security into shares of common stock
will result in the issuance of the additional shares of common stock upon the
issuance of such convertible security, warrant, right or option and again upon
any subsequent issuances of shares of common stock upon exercise of such
conversion or purchase rights if such issuance is at a price lower than $0.10.
The exercise price of the warrants is also subject to adjustment in the
event the Company effect a reorganization, consolidation or merger, or transfer
all or substantially all of our properties or assets. Also, until the expiration
date of the warrants, if the Company issue any common stock other than excepted
issuances, prior to the complete exercise of the warrants for a consideration
less than the warrant exercise price that would be in effect at the time of such
issue, then the exercise price shall be reduced to such other lower issue price.
For purposes of this adjustment, the issuance of any security or debt instrument
carrying the right to convert such security or debt instrument into common stock
or of any warrant, right or option to purchase common stock shall result in an
adjustment to the exercise price upon the issuance of the above-described
security, debt instrument, warrant, right, or option.
The shares of common stock sold and the common stock underlying the
warrants issued to the investors and the placement agent described herein are
restricted stock as defined in Rule 144 of the Securities Act of 1933 (as
amended) until the Registration Statement is declared effective by the SEC.
Placement Agent Fee for the First Closing
J.P. Turner & Company, LLC acted as placement agent for the First
Closing and for the Second Closing. For the First Closing, the company agreed to
pay J.P. Turner & Company a cash fee of 8% of the aggregate purchase price. The
company will also pay J.P. Turner & Company 8% of the cash proceeds received
from the exercise of warrants issued in connection with the placement. In
addition, the company issued J.P. Turner & Company a warrant to purchase 458,306
shares of common stock, exercisable for five years at an exercise price of $0.54
per share. Due to the price adjustments caused by the Second Closing, this
warrant was cancelled and the Company issued J.P. Turner & Company a warrant to
purchase 1,100,000 shares of common stock, exercisable for five years at an
exercise price of $0.12 per share. Further, J.P. Turner & Company will receive:
(a) one Placement Agent's A Warrant, exercisable at $0.14 per share, for each
eight A Warrants exercised by an investor on a cash basis; (b) one Placement
Agent's B Warrant, exercisable at $0.18 per share, for each eight B Warrants
exercised by an investor on a cash basis; and (c) one Placement Agent's C
Warrant, exercisable at $0.60 per share, for each eight C Warrants exercised by
an investor on a cash basis. All Placement Agent's Warrants are exercisable for
five years after the respective issue dates, are not subject to call and may be
exercised on a cashless basis.
Placement Agent Fee for the Second Closing
20
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
For the Second Closing, the Company agreed to pay J.P. Turner & Company
a cash fee of 10% of the aggregate purchase price. The Company will also pay
J.P. Turner & Company 8% of the cash proceeds received from the exercise of
warrants issued in connection with the placement. In addition, the Company
issued J.P. Turner & Company warrants to purchase 504,167 shares of common
stock, exercisable for five years at an exercise price of $0.12 per share.
Further, J.P. Turner & Company will receive: (a) one Placement Agent's A
Warrant, exercisable at $0.14 per share, for each eight A Warrants exercised by
an investor on a cash basis; (b) one Placement Agent's B Warrant, exercisable at
$0.18 per share, for each eight B Warrants exercised by an investor on a cash
basis; and (c) one Placement Agent's C Warrant, exercisable at $0.60 per share,
for each eight C Warrants exercised by an investor on a cash basis. All
Placement Agent's Warrants are exercisable for five years after the respective
issue dates, are not subject to call and may be exercised on a cashless basis.
NOTE 9: RELATED PARTY PAYABLE
At December 31, 2004, the Company owes $1,443,510 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.
NOTE 10: SUBSEQUENT EVENTS
The Company filed with the Securities and Exchange Commission 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 registration statement on Form S-1 filed by the
Company in January 2005 for further information.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 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 January 31, 2005, our DRE voting system was certified by the states of
Alabama, Arkansas, Kansas, 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 DECEMBER 31, 2004 TO THREE MONTHS ENDED
DECEMBER 31, 2003
REVENUES:
Net Sales for the quarter ended December 31, 2004 were $361,337, solely
provided by our subsidiary, Z Prompt, Inc. and remained at approximately the
same level of net sales for the three months ended December 31, 2003 of
$361,232.
22
COST OF GOODS SOLD:
Cost of goods sold for the quarter ended December 31, 2004 were
$257,458, as compared to $142,503 for the quarter ended December 31, 2003. The
increase in cost of goods sold is 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 December 31,
2004 were $1,516,158 as compared to $1,072,367 for the quarter ended December
31, 2003, an increase of 41%. The increase is a result of the Acquisition of Z
Prompt Inc, which was consolidated beginning October 31, 2003 and to other fees
associated with our September and November private placement.
PROFESSIONAL FEES:
Professional Fees for the quarter ended December 31, 2004 were $641,210
as compared to $21,542 for the quarter ended December 31, 2003, an increase of
$619,668. The increase is a result of increase in legal and accounting fees due
to the Z Prompt legal bankruptcy proceedings, three lawsuits aginst Accupoll
Inc, and to the filing of a registration statement in January 2005. The total
legal fees for this quarter reached approximately $290,000 (paid in cash or
stock issuance) and $100,000 for accounting fees.
INTEREST EXPENSE:
Interest Expenses for the quarter ended December 31, 2004 were $47,216
as compared to $1,517,842 for the quarter ended December 31,2003, a decrease of
$1,470,626. 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 December 31, 2004 was $(2,100,705) as
compared to $(3,593,022) for the quarter ended December 31, 2003, a 41%
decrease. The decrease is primarily due to reduced interest expenses.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2004 TO SIX MONTHS ENDED
DECEMBER 31, 2003
REVENUES:
Net Sales for the six months ended December 31, 2004 were $816,340 as
compared to net sales for the six months ended December 31, 2003 of $361,232.
The increase in net sales is solely due to the acquisition of Zprompt, Inc.,
which was consolidated beginning October 31, 2003.
23
COST OF GOODS SOLD:
Cost of goods sold for the six months ended December 31, 2004 were
$547,069, as compared to $142,503 for the six months ended December 31, 2003.
The increase in cost of goods sold is due to the acquisition of Zprompt, Inc.,
which was consolidated beginning October 31, 2003.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and Administrative expenses for the six months ended December
31, 2004 were $3,136,552 as compared to $2,043,460 for the six months ended
December 31, 2003, an increase of 53%. The increase is a result of Acquisition
of Z Prompt Inc, which was consolidated beginning October 31, 2003 and to other
fees associated with our September and November private placement.
PROFESSIONAL FEES:
Professional Fees for the six months ended December 31, 2004 were
$2,527,666 as compared to $53,066 for the six months ended December 31, 2003, an
increase of $2,474,600. The increase is a result of 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 period, increase in legal
and accounting fees due to the Z Prompt legal bankruptcy proceedings, three
lawsuits aginst Accupoll Inc, and to the preparing for a registration statement
filed in January 2005.
INTEREST EXPENSE:
Interest Expenses for the six months ended December 31, 2004 were
$392,830 as compared to $2,127,915 for the six months ended December 31,2003, a
decrease of $1,735,085. The decrease is a result of less expenses incurred in
this period, compared to the prior year period, related to beneficial conversion
features of equity instruments issued at below market.
NET LOSS:
Net loss for the six months ended December 31, 2004 was $(5,877,277) as
compared to $(5,205,712) for the six months ended December 31, 2003, a 12%
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 December 31, 2004,
we have raised a total of approximately $19.9 million from the sale of common
stock and convertible notes and other securities.
As of December 31, 2004 we had cash of $360,502 and a working capital
deficiency of approximately $5.8 million. Our accumulated deficit as of December
31, 2004 was approximately $28.5 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. The
maturity was extended to December 31, 2004 and a further extension of these
notes is currently in negotiation. 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 December 31, 2004, we had a
balance of 1,980,000 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. The maturity was extended to December 31, 2004 and a
further extension of the debenture is currently in negotiation. The debenture is
convertible on 90 days written notice by Palisades Holdings, LLC 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 December 31, 2004, we had a balance of $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
matured on October 14, 2004. Management is currently negotiating terms for
conversion of the debenture. The debenture is convertible in to shares of common
stock of $0.35 per share. At December 31, 2004, we had balance of $288,600 under
such debenture.
24
We had a convertible debenture with four accredited investors. The
convertible debenture accrued interest at an annual rate of 8% and matured on
July 2, 2004. In October 2004, the debenture was converted into 3,125,000 shares
of common stock of $.10 per share.
On September 13, 2004, we completed a private placement transaction
with eleven 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
approximating $1,650,000. 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 total price of $0.90. The private placement was
exempt from registration under Rule 506 of Regulation D of the Securities Act of
1933, as amended.
On November 4, 2004, we completed a private placement transaction with
eleven accredited investors, pursuant to which we 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. We received gross proceeds totaling $605,000.
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
total price of $0.20. The private placement was exempt from registration
requirements under Rule 506 of Regulation D of the Securities Act of 1933.
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 alleged violation. We have sold approximately
9,774,000 shares of common stock and warrants and options to purchase common
stock in the United States within one year of December 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 alleged
violation. We have sold approximately 14,024,000 shares of common stock and
warrants and options to purchase shares of common stock in the United States
within two years of December 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 a total of 3,600,000
shares of common stock issued within two years of December 31, 2004 to our Chief
Executive Officer, Dennis Vadura, and our President, Frank Wiebe, or 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 cannot assure you that this agreement is enforceable.
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.
GOING CONCERN
We have incurred losses from operations since inception, have negative
working capital of approximately $5.8 million at December 31, 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
25
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
December 31, 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.
26
CONTRACTUAL OBLIGATIONS
As of December 31, 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 $19,956 $19,956
Amarillo Grant - Texas facility $250,000 $250,000
Long-Term Debt
Bank of America Line of Credit $225,000 $225,000
Notes Payable Accupoll $15,000 $15,000
Z Prompt 171,583 171,583
Convertible Debt $3,104,600 $3,104,600
Consulting Agreements
National Strategies Inc. $45,000 $45,000
Total $3,963,139 $3,831,139 $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. As of Feb. 6, 2005 the DOJ has informed
the Secretaries of State that they must be in compliance with the statues of
HAVA as scheduled. This creates a strong message to begin purchasing voting
machine as required.
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, 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. As recently as
February 1, 2005 both Arizona and Texas have introduced legislation requiring a
VVPAT with bills being considered in Louisiana and Washington. 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
27
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 March 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).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make judgments, assumptions and
estimates that affect the amounts reported in our consolidated financial
statements and the accompanying notes. The amount of assets and liabilities
reported on our balance sheet and the amount of revenues and expenses reported
for each of our fiscal periods are affected by estimates and assumptions, which
are used for, but not limited to, the accounting for equity instruments subject
to rescission, software development costs, estimated allowance for doubtful
accounts, the realizability of our investments in affiliated companies and the
valuation of deferred tax assets. Actual results could differ from these
estimates. The following critical accounting policies are significantly affected
by judgments, assumptions and estimates used in the preparation of the financial
statements:
Equity Instruments Subject to Rescission
We account 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 the Securities and Exchange
Commission's promulgated accounting rules and interpretive releases. Under the
Securities and Exchange Commission's interpretation of GAAP, reporting such
claims outside of stockholders' equity is required, regardless of how remote the
redemption event may be.
We may be subject to possible claims for rescission with respect to the
sale or other issuances of certain common stock, options and warrants. The
consolidated balance sheets included elsewhere herein reflect an adjustment for
the matter described below.
Approximately 13,705,000 shares of our 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 December 31, 2004 may be subject to rescission. 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 conversion of debt, (c) the fair value of the stock options and
warrants on their grant dates, and (d) an independent valuation. Based in part
28
on advice of counsel, the fair value of these options and warrants was estimated
using the Black-Scholes option-pricing model. Based on these measurement
criteria, our potential liability directly associated with the aforementioned
securities transactions is estimated to approximate $5.8 million (including
interest) at December 31, 2004 plus legal fees and any fines or penalties that
might be assessed by regulatory agencies.
Based on advice of counsel, the potential liability discussed above does not
include options to purchase a total of 3.6 million shares of common stock issued
to our president and to our chief executive officer because these two
individuals are also principal stockholders; acting together, they have the
ability to control us.
Management is unable to determine at this time whether any claim for
rescission may be filed against us; however, there can be no assurance that such
claims will not be asserted. In addition, regulatory agencies could launch a
formal investigation and/or institute an enforcement proceeding against us.
Capitalized 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," we capitalize 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 are
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. We periodically evaluate 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 December 31, 2004, we believe that no revisions to the remaining
useful lives or write-down of capitalized software development costs are
required. Our systems were qualified as meeting certain federal voting system
standards in late March 2004. We began amortizing the capitalized software
development costs beginning April 2004.
Stock Based Compensation
We account for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by ACcounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock issued to Employees." Under the
intrinsic value based method, compensation expense is the excess, if any, of the
fair value of the stock at the grant date, or other measurement date over the
amount an employee must pay to acquire the stock. Compensation expense, if any,
is recognized over the applicable service period, which is usually the vesting
period.
29
SFAS 123, "Accounting for Stock-Based Compensation," if fully adopted,
changes the method of accounting for employee stock-based compensation plans to
the fair value based method. For stock options and warrants, fair value is
estimated using an option pricing model that takes into account the stock price
at the grant date, the exercise price, the expected life of the option or
warrant, stock volatility and the annual rate of quarterly dividends.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period.
The adoption of the accounting methodology of SFAS 123 is optional and
we have elected to continue accounting for stock-based compensation issued to
employees using APB 25; however, pro forma disclosures, as if we adopted the
cost recognition requirement under SFAS 123, are required to be presented. For
stock-based compensation issued to non-employees, we use the fair value method
of accounting under the provisions of SFAS 123.
Financial ACcounting Standards Board (FASB) Interpretation No. 44 (FIN
44), "Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB 25" clarifies the application of APB 25 for (A) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. We believe that we account for
transactions involving stock compensation in accordance with FIN 44.
SFAS 148, "Accounting for Stock-Based Compensation- Transition and
Disclosure, an amendment of SFAS No. 123," provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
Financial Reporting Related to Web Tools International, Inc.
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), and how to determine when and which business enterprise should
consolidate the variable interest entity. 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 variable interest entity make additional
disclosures. As amended in December 2003, the effective dates of FIN No. 46 for
30
us 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 variable
interest entities: the first period ended after March 15, 2004.
As disclosed in the notes to our accompanying condensed consolidated
financial statements, we are associated with Web Tools International, Inc.
through common ownership; in addition, we were virtually Web Tools
International's only customer for software development services in fiscal 2003.
Based on these and other factors, we determined that (1) Web Tools International
is a variable interest entity and (2) we were its primary beneficiary as of
January 1, 2004. Therefore, effective January 1, 2004, the accounts of Web Tools
International were consolidated with those of AccuPoll. For reasons explained in
the notes to our June 30, 2004 consolidated financial statements, the accounts
of Web Tools International were de-consolidated effective April 1, 2004.
The Continued Consolidation of a Subsidiary in Bankruptcy
As discussed in the notes to our accompanying consolidated financial
statements, Z prompt (a wholly owned subsidiary) filed bankruptcy in March 2004.
We are the single largest pre-petition creditor of Z prompt. Management has
determined that it would not be meaningful to de-consolidate the accounts of Z
prompt at this time because we (a) have a substantial negative investment in Z
prompt as of December 31, 2004 and (b) expect to regain control of this
subsidiary after Z prompt will emerge from bankruptcy. The case has been
dismissed in January 2004.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material. In
Chapter 4 of ARB 43, paragraph five previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and re-handling costs may be so abnormal as to require treatment as
current period charges...." SFAS No. 151 requires that such items be recognized
as current-period expenses, regardless of whether they meet the criterion of "so
abnormal" (an undefined term). This pronouncement also requires that allocation
of fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred in years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment", which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123-R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, "Accounting
for Stock-Based Compensation", and supersedes Accounting Principles Board
31
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". As
originally issued, SFAS No. 123 established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that pronouncement permitted entities to continue applying the
intrinsic-value-based model of APB Opinion 25, provided that the financial
statements disclosed the pro forma net income or loss based on the preferable
fair-value method.
SFAS No. 123-R is required to be applied in the first interim or annual
reporting period that begins after June 15, 2005. Thus, the Company's
consolidated financial statements will reflect an expense for (a) all
share-based compensation arrangements granted after July 1, 2005 and for any
such arrangements that are modified, cancelled, or repurchased after that date,
and (b) the portion of previous share-based awards for which the requisite
service has not been rendered as of that date, based on the grant-date estimated
fair value.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that exchanges of non-monetary assets should be measured using the estimated
fair value of the assets exchanged. SFAS No. 153 eliminates the narrow exception
for non-monetary exchanges of similar productive assets, and replaces it with a
broader exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has "commercial substance" if the
future cash flows of the entity are expected to change significantly as a result
of the transaction. This pronouncement is effective for non-monetary exchanges
in fiscal periods beginning after June 15, 2005.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed
by management to have a material impact on the Company's present or future
consolidated financial statements.
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 December 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) 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
32
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 December 31, 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 December 31, 2004.
There was no change in our internal controls or in other factors that
could affect these controls during our last fiscal quarter that has materially
affected, or is 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 September 2003, we were served with a lawsuit filed in the Supreme
Court of New York, County of New York, by Stern & Co Communications LLC, d/b/a
Stern + Co. Stern alleging that we breached a contract with them by failing to
tender payment in full for services rendered. Stern sought to recover damages in
the amount of $35,000, and a warrant to purchase 36,000 shares of our common
stock. In November 2003, we entered into a stipulated settlement agreement with
Stern. In consideration for a full release of Stern's claims, we issued Stern
15,000 shares of common stock and granted a warrant to purchase 15,000 shares of
common stock at an exercise price equal to our closing stock price on the date
of issuance.
In October 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. On or about January 25, 2005, we settled this dispute in
consideration for our agreement to: (i) make total payments of $625,000 cash to
Mr. Musco and Mr. Shockett; and (ii) issue 1.5 million shares of common stock to
Mr. Musco and Mr. Shockett. In the event of default on the cash payment terms,
there will be an additional $250,000 cash amount added to the settlement amount.
In October 2003, a former employee of Z prompt, Nathalie Luu, filed
suit against Z prompt and us 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
33
seeking $112,000 in monetary damages including loss of wages, plus punitive
damages. The case is currently in settlement negotiations.
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
bankruptcy was dismissed on January 25, 2005 pursuant to a stipulation between Z
prompt, Inc. and the bankruptcy trustee.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On July 2nd 2004, through a private placement Memorandum, the Company
issued a $625,000 convertible debenture to 4 accredited investors. The
"Convertible Note" bears interest at 8% per annum. On September 08, 2004,
Accupoll Inc. repaid $312,500. The balance was converted into 3,125,000 shares
of common stock in October 2004 at a price of $0.15 per share.
During October 2004 Hyde Investments converted $200,000 of their
convertible debt into 3,200,000 shares of common stock. During December 2004,
Hyde Investments converted another $200,000 of their convertible debt into
3,350,000 shares of common stock. The transaction was exempt from registration
under Regulation S under the Securities Act of 1933, as amended.
In October 2004, our Executive Vice President of Sales and Marketing
exercise 287,701 common stock from his 500,000 Options granted on June 2003.
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.
In the Quarter ended December 31, 2004, we issued 1,900,000 shares of
common stock for legal services, and 200,000 shares of common stock for
consulting services related to production of our voting machines.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
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. The
maturity was extended to December 31, 2004 and a further extension of these
notes is currently in negotiation. 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 December 31, 2004, we had a
balance of 1,980,000 under such notes. During October and November, 2004,
$400,000 has been converted to 6,550,000 shares of common stock.
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. The maturity was extended to December 31, 2004 and a
further extension of the debenture is currently in negotiation. The debenture is
convertible on 90 days written notice by Palisades Holdings, LLC 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 December 31, 2004, we had a balance of $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
matured on October 14, 2004. Management is currently negotiating terms for
conversion of the debenture. The debenture is convertible in to shares of common
stock of $0.35 per share. At December 31, 2004, we had balance of $288,600 under
such debenture.
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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.
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------
4.1 Subscription Agreement, dated November 4, 2004 (Incorporated
by reference from Exhibit 4.1 to Form 8-K, filed November 9,
2004)
4.2 Form of Common Stock Purchase Warrant A (Incorporated by
reference from Exhibit 4.2 to Form 8-K, filed November 9,
2004)
4.3 Form of Common Stock Purchase Warrant B (Incorporated by
reference from Exhibit 4.3 to Form 8-K, filed November 9,
2004)
4.4 Form of Common Stock Purchase Warrant C (Incorporated by
reference from Exhibit 4.4 to Form 8-K, filed November 9,
2004)
4.5 Form of Placement Agent Warrant (Incorporated by reference
from Exhibit 4.5 to Form 8-K, filed November 9, 2004)
4.6 Form of Funds Escrow Agreement (Incorporated by reference from
Exhibit 4.6 to Form 8-K, filed November 9, 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
35
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: February 14, 2005 By: /s/ Dennis Vadura
-----------------------------------
Dennis Vadura,
Chief Executive Officer
and Director
Dated: February 14, 2005 By: /s/ Frank J. Wiebe
-----------------------------------
Frank J. Wiebe,
President, Secretary,
Treasurer and Director
Dated: February 14, 2005 By: /s/ Craig A. Hewitt
-----------------------------------
Craig A. Hewitt,
Chief Financial Officer
and Principal Accounting
Officer
36