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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 MARCH 31, 2005
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.
----------------------
(Name of small business issuer in its charter)
NEVADA 11-2751630
------ ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
15101 RED HILL AVE. SUITE # 220, TUSTIN, CA 92780
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (949) 200-4000
--------------
WITH COPIES TO:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
(212) 930-9700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of May 9, 2005,
the issuer had 235,943,670 outstanding shares of Common Stock, $.001 par value
per share.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....28
Item 4. Controls and Procedures........................................28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....30
Item 3. Defaults Upon Senior Securities................................30
Item 4. Submission of Matters to a Vote of Security Holders............30
Item 5. Other Information..............................................30
Item 6. Exhibits.......................................................31
SIGNATURES...................................................................32
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
March 31, 2005
(Unaudited) June 30, 2004
------------ -------------
CURRENT ASSETS
Cash $ 72,848 $ 113,789
Accounts receivable, net 157,970 254,895
Inventories 60,624 168,636
------------ ------------
Total Current Assets 291,442 537,320
Property and equipment, net 21,650 14,012
Capitalized software development costs 1,415,064 2,544,207
Other assets 30,211 26,246
------------ ------------
TOTAL ASSETS $ 1,758,367 $ 3,121,785
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,069,204 $ 1,817,284
Related party payables 1,431,510 1,228,070
Unearned revenue 10,512 74,628
Convertible debt, net of discount 2,910,000 3,304,600
Notes payable to related parties 95,000 30,000
Put liability related to warrant issuance 163,760 163,760
Liabilities subject to compromise 394,912 732,544
------------ ------------
Total Current Liabilities 7,074,898 7,350,886
------------ ------------
EQUITY INSTRUMENTS SUBJECT TO RESCISSION 5,100,000 6,200,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Convertible Series A preferred stock, $0.01 par value,
80,000 shares authorized, 8,471 and zero shares issued
and outstanding, respectively (liquidation preference of zero) -- --
Common stock, par value of $0.001, 600,000,000 shares authorized;
235,943,670 and 158,482,171 shares issued and outstanding, respectively 235,944 158,482
Additional paid in capital 19,953,974 12,046,817
Stock subscription receivable (158,000) --
Accumulated deficit (30,448,449) (22,634,400)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (10,416,531) (10,429,101)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,758,367 $ 3,121,785
============ ============
- --------------------------------------------------------------------------------
See Notes to These Condensed Consolidated Financial Statements
2
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Month Periods Ended March 31, 2005 and 2004
- --------------------------------------------------------------------------------
March 31, 2005 March 31, 2004
(Unaudited) (Unaudited)
------------- -------------
NET SALES $ 348,902 $ 620,140
COST OF SALES 228,164 534,572
------------- -------------
GROSS PROFIT 120,738 85,568
OPERATING EXPENSES
General and administrative 1,029,580 789,773
Professional fees 432,965 637,982
Impairment of goodwill -- 2,542,752
------------- -------------
1,462,545 3,970,507
------------- -------------
OPERATING LOSS (1,341,807) (3,884,939)
OTHER INCOME (EXPENSE)
Other income 1,675 --
Interest expense (32,724) (327,354)
Legal settlement cost (653,545) --
------------- -------------
(684,594) (327,354)
------------- -------------
NET LOSS $ (2,026,401) $ (4,212,293)
============= =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.01) $ (0.03)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 222,519,129 135,466,634
============= =============
- --------------------------------------------------------------------------------
See Notes to These Condensed Consolidated Financial Statements
3
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Nine Month Periods Ended March 31, 2005 and 2004
- --------------------------------------------------------------------------------
March 31, 2005 March 31, 2004
(Unaudited) (Unaudited)
------------- -------------
NET SALES $ 1,217,592 $ 981,372
COST OF SALES 619,402 932,185
------------- -------------
GROSS PROFIT 598,190 49,187
OPERATING EXPENSES
General and administrative 4,656,429 1,678,786
Professional fees 2,679,020 1,590,385
Impairment of goodwill -- 2,542,752
------------- -------------
7,335,449 5,811,923
------------- -------------
OPERATING LOSS (6,737,259) (5,762,736)
OTHER INCOME ( EXPENSE)
Other income 1,675 --
Interest expense (424,920) (2,455,629)
Legal settlement cost (653,545) --
------------- -------------
(1,076,790) (2,455,629)
------------- -------------
NET LOSS (7,814,049) $ (8,218,005)
------------- =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.04) $ (0.07)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 198,889,273 126,105,261
============= =============
- --------------------------------------------------------------------------------
See Notes to These Condensed Consolidated Financial Statements
4
ACCUPOLL HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 2005 AND 2004
- --------------------------------------------------------------------------------
2005 2004
Cash flows from operating activities: (Unaudited) (Unaudited)
----------- -----------
Net loss $(7,814,049) $(8,218,005)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,082,803 6,439
Amortization of estimated fair market value of warrants granted and beneficial
conversion feature in connection with the issuance of convertible notes payable -- 1,786,843
Amortization of beneficial conversion feature in connectionn with the issuance of
subordinated convertible notes 312,500 500,000
Estimated fair market value of equity instruments granted for services 2,067,399 417,870
Impairment of goodwill -- 2,542,752
Changes in operating assets and liabilities:
Accounts receivable 96,925 25,067
Inventories 108,012 (30,699)
Prepaid expenses and other assets (3,965) (48,765)
Accounts payable and accrued expenses 251,921 275,482
Unearned revenue (64,117) --
Related party payables 203,440 516,510
Liabilities subject to compromise (337,632) 64,605
----------- -----------
Net cash used in operating activities (3,096,763) (2,161,901)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (11,393) (11,589)
Increase in capitalized software development costs (949,905) (1,066,480)
Cash of acquired Company -- 2,368
----------- -----------
Net cash used in investing activities (961,298) (1,075,701)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of notes payable to related parties 80,000 91,493
Principal payments on notes payable to related parties (15,000) (125,000)
Proceeds from issuance of convertible subordinated debt -- 500,000
Proceeds from issuance of convertible notes payable 844,400 640,000
Principal payments on convertible notes payable (312,500) --
Proceeds from the issuance of notes payable -- 7,496
Principal payments on notes payable -- (10,000)
Proceeds from the issuance of common stock, net of commissions 2,729,363 838,697
Net increase in line of credit -- 75,000
Proceeds from issuance of common stock upon exercise of warrants/options, net of commissions 690,857 3,075,596
----------- -----------
Net cash provided by financing activities 4,017,120 5,093,282
----------- -----------
Net increase (decrease) in cash (40,941) 1,855,680
Cash at beginning of period 113,789 --
----------- -----------
Cash at end of period $ 72,848 $ 1,855,680
=========== ===========
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.
- --------------------------------------------------------------------------------
5
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
nine months periods ended March 31, 2005 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 March 31, 2005, the Company has an accumulated deficit approximating
$30,448,449. The Company has also generated its first revenues from its Voting
System operations; however, these revenues are not substantial and there is no
assurance of additional future revenues at this time. Consequently, the Company
will require substantial additional funding for obtaining regulatory approval,
commercialization of its product, and for continued product improvement. There
is no assurance that the Company will be able to obtain sufficient additional
funds when needed or that such funds, if available, will be obtainable on terms
satisfactory to the Company.
Management has taken actions to address these matters, which include:
o Retention of experienced management personnel with particular skills
in the commercialization of such products;
o Attainment of technology to develop such products and additional
products; and
o Raising additional funds through the sale of debt and/or equity
securities.
Federal, State and various foreign government regulations govern the sale of the
Company's products.
On May 10, 2005, AccuPoll was issued the NASED Qualification number
N-2-13-22-22-001 (2002), which confirms that AccuPoll's Voting System Product
Version 2.5 has successfully completed the ITA qualification process and has
been certified by NASED under the 2002 FEC Voting System Standards.
The Federal qualification number will allow AccuPoll to pursue certification in
states that require voting system qualification under the 2002 FEC Voting System
Standards.
As of May 10, 2005, the Company's Voting System product is certified in nine
states (Alabama, Arkansas, Ohio, South Dakota, Utah, Kansas, Kentucky, Louisiana
and West Virginia), and the Company has pending state certification applications
in Pennsylvania, Texas, New Mexico and Missouri, while Delaware and Mississippi
require only federal qualification. Given the new Federal qualification event,
the Company's ability to market its product is not longer at risk. There is
however, no assurance that the Company will be able to secure state
certification in all of the additional state jurisdictions where the Company may
wish to market it's products in the future.
6
The Company has incurred losses through March 31, 2005, had negative working
capital at that date of approximately $7.8 million, and has a lack of
operational history that, among other factors, raises doubt about its ability to
continue as a going concern. The Company intends to fund operations through
sales of its Voting System and associated services. As of May 10, 2005 the
Company has only been able to sell election services to the Long Beach Chapter
of the UAW Local 148 and has no firm commitment by any other entities for the
purchase of any of its products or services. 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 fund raising
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 nine months ended March 31, 2005 (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."
In January 2005, the bankruptcy of Z prompt Inc. was dismissed; consequently, Z
prompt Inc. has been consolidated in the accompanying financial statements for
all periods presented. In addition, in January 2005, the Company settled the
civil litigation with two of the former stockholders and officers of Z prompt.
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 printer service programs, as well as
customized printer service programs, that fit the special needs of its
customers. Z prompt, Inc. offers printer related 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
providing software engineering services with an emphasis on Linux and Java.
7
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 March 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 three and nine month periods ending March 31,
2005 and 2004 under APB Opinion No. 25. The following table illustrates three
months and nine months pro-forma effect on net loss and loss per common share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss available to common $ (2,026,401) $ (4,451,293) $ (7,814,049) $ (9,930,005)
stockholders, as reported *
Pro forma compensation expense (182,000) (355,000) (546,000) (1,065,000)
------------ ------------ ------------ ------------
Pro forma net loss $ (2,208,401) $ (4,806,293) $ (8,360,049) $(10,995,005)
* These amounts include interest related to certain equity instruments
subject to rescission (see Note 2).
INVENTORIES
Inventories are stated at the lower of cost or estimated market and consist
entirely of finished goods. Cost is determined on a weighted average basis that
approximates the first-in, first-out 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
unearned 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
(excluding goodwill and intangible assets with indefinite useful lives) 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
8
and for Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Effects of the Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 also amends Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation of a subsidiary when control is likely
to be temporary.
SFAS No. 144 requires impairment losses to be recorded on long-lived assets used
in operations, including amortizable intangible assets when indicators of
impairment are present. Indicators of impairment include an economic downturn or
a change in the assessment of future operations. In the event a condition is
identified that may indicate an impairment issue, an assessment is performed
using a variety of methodologies, including analysis of undiscounted future cash
flows, estimates of sales proceeds and independent appraisals. If such assets
are impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the asset exceeds the estimated fair market value of the
assets. Assets to be disposed of are reported at the lower of the carrying value
or estimated fair market value, less cost to sell.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, " Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and
other intangible assets with indefinite useful lives are not amortized, but are
reviewed annually for impairment or more frequently if impairment indicators
arise. Separable intangible assets that have finite lives are amortized over
their useful lives. Goodwill which arose from the Z prompt Inc. acquisition
totaling approximately $2,543,000, was evaluated for impairment in accordance
with SFAS No. 142 and written off in the third quarter of 2004.
LOSS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per common share computations for the three and nine
month periods ended March 31, 2005 and 2004:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net loss, as reported $ (2,026,401) $ (4,282,293) $ (7,814,049) $ (9,488,005)
Interest related to equity
instruments subject to rescission (200,000) (169,000) (200,000) (442,000)
------------- ------------- ------------- -------------
Dilutive net loss available to
common stockholders $ (2,226,401) $ (4,451,293) $ (8,014,049) $ (9,930,005)
============= ============= ============= =============
Shares used to compute loss per
common share: 222,519,129 135,466,634 198,889,273 126,105,261
============= ============= ============= =============
Basic and diluted loss per common
share: $ (0.01) $ (0.03) $ (0.03) $ (0.08)
============= ============= ============= =============
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
entity's activities without receiving additional subordinated
9
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 software development 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 March 31, 2005
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 March 31, 2005 and 2004, 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
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 January 1, 2006. Thus, the Company's consolidated
financial statements will reflect an expense for (a) all share-based
compensation
10
arrangements granted after December 31, 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
No reclassifications have been made to the prior period consolidated financial
statements to conform to the current year presentation.
NOTE 2: EQUITY INSTRUMENTS SUBJECT TO RESCISSION
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 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.
At March 31, 2005, approximately 5 million shares of common stock, options and
warrants are subject to rescission, with a potential liability approximating
$5.1 million including interest at 10% per annum. 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 March 31,
2005 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.
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.
11
The bankruptcy case was dismissed in January 2005. The Company` legal
representatives sent letters to Z prompt creditors, in order to settle the
remaining outstanding debts. As of May 10, 2005, none of the creditors have
responded. Therefore, the ultimate amount and settlement terms of Z prompt
liabilities under such debts are not presently determinable.
Condensed balance sheet information of Z prompt as of March 31, 2005 and results
of operations for the three and nine months then ended are presented below. The
acquisition of Z prompt was recorded for accounting purposes in November 2003.
Z PROMPT INC.
BALANCE SHEETS
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
(Unaudited)
March 31, June 30,
2005 2004
----------- -----------
CURRENT ASSETS
Cash $ 22,704 $ 34,010
Accounts receivable, net 157,970 254,895
Inventories 60,624 20,667
----------- -----------
TOTAL CURRENT ASSETS 241,298 309,572
Other, net 14,702 2,512
----------- -----------
TOTAL ASSETS $ 256,000 $ 312,084
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 66,425 $ 301,734
Loan from parent co 1,059,151 620,395
Unearned revenue 10,512 74,628
Liabilities subject to compromise 394,912 732,544
----------- -----------
TOTAL LIABILITIES 1,531,000 1,729,301
STOCKHOLDERS' DEFICIT (1,275,000) (1,417,217)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 256,000 $ 312,084
=========== ===========
12
Z PROMPT INC.
STATEMENTS OF OPERATIONS
For The Three Month and Nine Month Periods Ended March 31, 2005
Three Month ended Nine Month Ended
March 31, 2005 March 31, 2005
(Unaudited) (Unaudited)
----------------------------------------
NET SALES 348,902 1,217,592
COST OF SALES 228,164 573,360
--------- ---------
GROSS PROFIT 120,738 644,231
OPERATING EXPENSES
General and administrative 30,092 244,977
Salaries and Related 109,755 371,668
--------- ---------
TOTAL OPERATING EXPENSES 139,847 616,645
OPERATING INCOME (19,109) 27,586
INTEREST EXPENSE 7,338 10,583
--------- ---------
LIABILITY RELIEVED AS PART OF
LEGAL SETTLEMENT
(See Note 10) 171,583 171,583
NET INCOME 145,136 188,586
========= =========
- --------------------------------------------------------------------------------
The March 31, 2005 balances of Z prompt's liabilities that became subject to
compromise which has not been settled at March 31, 2005 are as follows:
Accounts payable and accrued expenses $335,887
Line of credit payable to a financial institution (Note 5) 59,025
--------
Total $394,912
========
During the quarter ended March 31, 2005, Z prompt paid $165,000 to reduce the
balance of its credit facility and settled a $172,000 liability with a former
stockholder as part of the parent company's litigation settlement in January
2005.
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
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.
13
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.
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; Starting June 30, 2004, the
Company accelerated the amortization over a year. At March 31, 2005, accumulated
amortization approximated $2,305,166.
NOTE 5: LINE OF CREDIT
Z prompt Inc. 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. During the quarter ended March 31,
2005, Z prompt repaid approximately $165,000. At March 31, 2005, the outstanding
borrowings totaled $59,025, which are included in liabilities subject to
compromise on the accompanying March 31, 2005 condensed consolidated balance
sheet.
NOTE 6: CONVERTIBLE DEBT
In November 2003, we secured a $5 million dollar revolving credit facility, in
the form of two seven-month convertible notes. The notes bear interest at an
annual rate of 10% and originally matured on June 30, 2004, but have been
extended to December 31, 2004. The notes are convertible on 90 days written
notice by the holders at the lesser of (i) 50% of the average three lowest
closing prices for our common stock for the twenty days immediately preceding
the conversion date or (ii) $.0625 per share. At March 31, 2005, we had a
balance of 1,900,000 under such notes. Currently, the notes are in default.
Management is negotiating the terms for an extension. The Company may be subject
to liquidated damages and other costs to secure the extension.
We have a convertible debenture with Palisades Holdings, LLC whereby Palisades
Holdings, at its discretion, may provide us loans of up to $1,250,000. The
convertible debenture bears interest at an annual rate of 10% and originally
matured on June 30, 2004, but has been extended to December 31, 2004. The
debenture is convertible on 90 days written notice by Palisades Holdings at the
lesser of (i) 50% of the average three lowest closing prices for our common
stock for the twenty days immediately preceding the conversion date or (ii)
$.0625 per share. At March 31, 2004, we had a balance of $702,000 under such
debenture. Currently, the note is in default. The management is negotiating the
terms for an extension. Management is negotiating the terms for an extension.
The Company may be subject to liquidated damages and other costs to secure the
extension.
We have a convertible debenture with C&S Consolidated Services Hong Kong. The
convertible debenture bears interest at an annual rate of 7% payable
semi-annually in cash with an original maturity date of October 14, 2004. The
maturity date of the debenture was extended to June 30, 2005 with a further
extension available to December 31, 2005. The debenture is convertible in to
shares of common stock of $0.10 per share. At March 31, 2005, we had balance of
$308,000 under such debenture.
NOTE 7: OTHER COMMITMENTS AND CONTINGENCIES
In November 2002, the Company entered into a Location Incentives Agreement (the
"Agreement") with the Amarillo Economic Development Corporation ("AEDC") to
establish the Company's customer service center and voting machine repair
operations in Amarillo, Texas. According to the terms of the Agreement, AEDC
will pay the Company $250,000 upon the Company's execution of a lease for
facilities in Amarillo. The funds advanced under the Agreement are to be used
solely for the operations in Amarillo. If the Company does not meet certain
minimum employment requirements, as defined, it will be required to repay all
amounts advanced. In connection with the Agreement, the Company granted warrants
to purchase 250,000 shares of the Company's restricted common stock at an
exercise price of $1.04 per share, valued at approximately $205,000 (based on
the Black-Scholes pricing model), which was expensed upon issuance. In January
2003, the Company received the $250,000 and has included such amount in accounts
payable and accrued expenses in the accompanying condensed consolidated balance
sheets. As
14
of March 31, 2005, the Company did not fulfill its obligations related to the
agreement, consequently, 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, as of May 10, 2005 the Company does not
have any shares of preferred stock issued or outstanding.
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
15
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. 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 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. 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
16
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
preceding 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 the Company 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 the Company 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.
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 offers, issues or agrees
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 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 effects 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.
17
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
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.
In January 2005, various European investors exercised 931,525 warrants and
purchase stock at an aggregate price of $0.10 per share. The original warrant
exercise price was $.75 and $.1224. The exercise was made at $0.10 because of
the previous quarter Private Placements. The Company issued 2,783,930 common
shares for total proceeds of $274,000. For every warrant exercised, the Company
issued a 5-year replacement warrant at $0.12.
On January 20, 2005, $80,000 of the Hyde Investments, convertible debenture was
converted into 2,285,714 shares of common stock.
In March 2005, various European investors exercised 7,416,000 warrants at an
exercise price of $0.06 per share. The proceeds raised from this transaction
were $445,000. An additional 1,000,000 warrants were exercised by another
European investor at an exercise price of $0.10 per share for proceeds of
$100,000.
In March 2005, a Canadian investor purchased 1.5 million shares for a price of
$0.10 per share for proceeds of $150,000.
On March 22, 2005, Palisades Holdings, LLC converted $134,000 of its convertible
debenture into 2,144,000 shares of common stock.
NOTE 9: RELATED PARTY PAYABLE
As of March 31, 2005, the Company owes $1,431,510 to WTI, an affiliated company
for services under a master services agreement. WTI is affiliated with the
Company through common ownership. The obligation is non-interest bearing and not
subject to a maturity date.
18
NOTE 10: LEGAL SETTLEMENT COSTS
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. On or about January 25, 2005, the Company 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 addition, a liability to Mr.
Musco totaling approximately $172,000 was extinguished as part of the
settlement. Accordingly, net legal settlement costs of $603,000 were expensed in
this quarter and reflected in the accompanying consolidated statements of
operations. The cash amount is payable over four months, of which $156,000 has
been paid through March 31, 2005. 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 the Company in Superior Court of California, County of
Orange, California. The dispute was settled in March 2005 for a payment of
$50,000 due 60 days from the date of the settlement. Accordingly, net legal
settlement costs of $50,000 were expensed in this quarter and reflected in the
accompanying consolidated statements of operations.
NOTE 11: SUBSEQUENT EVENTS
On April 21, 2005, the Company made the second payment under the Musco
settlement described in Note 10.
On April 21, 2005 the Company entered into a 6-month debenture for $300,000, and
bearing interest at 10% per annum.
On April 26, 2005, the Board of Directors approved an increase to 35 million of
the number of shares reserved for the Company 2004 Stock Option Plan and
approved the distribution of 27,818,000 option shares. As of May 10, 2005, the
Company has not issued any option grants under the plan.
On May 10, 2005, AccuPoll was issued the NASED Qualification number
N-2-13-22-22-001 (2002), which confirms that AccuPoll's Voting System Product
Version 2.5 has successfully completed the ITA qualification process and has
been certified by NASED under the 2002 FEC Voting System Standards.
As of May 10, 2005, additional funds of $120,000 were loaned to the company by
one of it's officers.
The federal qualification number allows AccuPoll to pursue certification in
states that require voting system qualification under the 2002 Federal Election
Commission Voting System Standards.
19
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 the 1990 Federal Election
Commission (FEC) voting system standards on March 25, 2004, and was qualified
under the 2002 FEC Voting System Standards on May 10, 2005. The Company,
believes that it is currently the only electronic voting system providing these
features that is so qualified.
As of May 10, 2005, the Company's Voting System product is certified in nine
states (Alabama, Arkansas, Ohio, South Dakota, Utah, Kansas, Kentucky, Louisiana
and West Virginia), and the Company has pending state certification applications
in Pennsylvania, Texas, New Mexico and Missouri, while Delaware and Mississippi
require only federal qualification.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 TO THREE MONTHS ENDED
MARCH 31, 2004
REVENUES:
Net sales for the quarter ended March 31, 2005 were $348,902. Net sales for the
quarter ended March 31, 2004 were $620,140. The sales are solely provided by our
subsidiary, Z prompt, Inc. The 43.7% decrease is a result of the loss of a
significant customer of Z prompt in November 2004.
COST OF GOODS SOLD:
Cost of goods sold for the quarter ended March 31, 2005 were $228,164, as
compared to $534,572 for the quarter ended March 31, 2004. The decrease in cost
of goods sold is due to the decrease of sales and to better management of Z
prompt's operations. In January 2005, management completed the process of
restructuring service delivery thereby resulting in a per-call saving of
approximately 25%.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the quarter ended March 31,2005 were
$1,029,580 as compared to $789,773 for the quarter ended March 31, 2004, an
increase of $239,807. The increase is primarily a result of the amortization
expense for software development assets starting April 2004.
PROFESSIONAL FEES:
Professional fees for the quarter ended March 31, 2005 were $432,965 as compared
to $637,982 for the quarter ended March 31, 2004, a decrease of 32%. The 2004
expense was higher due to $213,000 in amortization of the market value of equity
instruments issued for services. In the period ended March 31, 2005 the Company
incurred expenses for business evaluation and lobbying efforts of $418,000.
INTEREST EXPENSE:
Interest expense for the quarter ended March 31, 2005 was $32,724 as compared to
$327,354 for the quarter ended March 31, 2004, a decrease of 90%. The decrease
is primarily a result of a reduction of approximately $286,000 in expenses for
beneficial conversion features of equity instruments issued at below market
prices in the quarter ended March 31, 2005.
20
LEGAL SETTLEMENT COSTS:
In the three months ended March 31, 2005, AccuPoll incurred $653,000 in legal
settlement costs ($825,000 in cash and common stock less $172,000 liability
relieved). The cash amounts are payable over four months beginning March 2005.
The settlement represents the culmination of litigation against the former
stockholder of Z prompt.
NET LOSS:
Net loss for the quarter ended March 31, 2005 was $2,026,401 as compared to net
loss of $4,212,293 for the quarter ended March 31, 2004, a 56% decrease. The
decrease is primarily due to a $2,542,752 impairment of goodwill expenses
incurred in the quarter ended March 31, 2004, and the impact of legal settlement
costs of $703,000, reduced interest expense and an increase of 41% in our gross
profit or $35,170.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 2005 TO NINE MONTHS ENDED
MARCH 31, 2004
REVENUES:
Net sales for the nine months ended March 31, 2005 were $1,217,592 as compared
to net sales for the nine months ended March 31, 2003 of $981,372. The increase
in net sales is solely due to the acquisition of Z prompt, Inc., which was
consolidated beginning November 1, 2003.
COST OF GOODS SOLD:
Cost of goods sold for the nine months ended March 31, 2005 were $619,402, as
compared to $932,185 for the nine months ended March 31, 2004. The decrease in
cost of goods sold is due to the decrease of sales and to better management of Z
prompt's operations. In January 2005, management completed the process of
restructuring service delivery thereby resulting in a per-call saving of
approximately 25% a also reduced head-count of 50%.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the nine months ended March 31, 2005
were $4,656,429 as compared to $1,678,786 for the nine months ended March 31,
2004, an increase of $2,977,643 or 177%. The increase is primarily a result of
approximately $2,079,000 in amortization expense for software development costs
for the nine months ended March 31, 2005, Z prompt consolidation costs of
$580,000, and $150,000 increase in salaries due to new hires.
PROFESSIONAL FEES:
Professional fees for the nine months ended March 31, 2005 were $2,679,020 as
compared to $1,590,385 for the nine months ended March 31, 2004, an increase of
68%. The increase is a result of approximately $2.1 million in charges
associated with various warrants issued for services during prior periods, and a
$203,000 expense representing the fair market value of 3,000,000 shares of
common stock issued for legal services.
INTEREST EXPENSE:
Interest expense for the nine months ended March 31, 2005 was $424,920 as
compared to $2,455,269 for the nine months ended March 31, 2004, a decrease of
$2,030,349 or 82.7%. The decrease is primarily the result of a reduction in
expenses incurred in fiscal 2004 related to beneficial conversion features of
equity instruments issued at below market.
21
LEGAL SETTLEMENT COST:
In the three months ended March 31, 2005, AccuPoll incurred $653,000 in legal
settlement costs ($825,000 in cash and common stock less $172,000 liability
relieved). The cash amounts are payable over four months beginning March 2005.
The settlement represents the culmination of litigation against the former
stockholder of Z prompt.
NET LOSS:
Net loss for the nine months ended March 31, 2005 was $7,814,049 as compared to
net loss of $8,218,005 for the nine months ended March 31, 2004. Comparing the
two periods, our net loss decreased by $403,956, or 4.9%. The decrease is
primarily due to a $549,003 increase in our gross profit.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had cash of $72,848 and a working capital deficiency of
$7.8 million. Our accumulated deficit was $30.4 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 March 31, 2005, we had a balance of 702,000
under such notes. During January 2005, $80,000 was converted to 2,285,714 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 March 31, 2005, we had a balance of $1,900,000 under such debenture.
During March 2005, $134,000 was converted to 2,144,000 shares of common stock.
We have a convertible debenture with C&S Consolidated Services Hong Kong. The
convertible debenture bears interest at an annual rate of 7% payable
semi-annually in cash with an original maturity date of October 14, 2004. The
maturity date of the debenture was extended to June 30, 2005 with a further
extension available to December 31, 2005. The debenture is convertible in to
shares of common stock of $0.10 per share. At March 31, 2005, we had balance of
$308,000 under such debenture.
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.
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.
In January 2005, various European investors exercised 931,525 warrants at an
exercise price of $0.10 per share. The original warrant exercise price of these
warrants was $.75 and $.1224. The exercise was made at $0.10 due to an
anti-dilution adjustment caused by our November 2004 private placement. Due to
the adjustment, the number of shares issuable under the warrants increased to
2,783,930 common shares, which provided total proceeds of
22
$274,000. As consideration for exercising the warrants, for every warrant
exercised the Company issued investors a 5-year replacement warrant at $0.12.
On January 20, 2005, $80,000 of the Hyde Investments, convertible debenture was
converted into 2,285,714 shares of common stock.
In March 2005, various European investors exercised 7,416,000 warrants at an
exercise price of $0.06 per share. The proceeds raised from this transaction
were $445,000. An additional 1,000,000 warrants were exercised by another
European investor at an exercise price of $0.10 per share for proceeds of
$100,000.
In March 2005, a Canadian investor purchased 1.5 million shares for a price of
$0.10 per share for proceeds of $150,000.
On March 22, 2005, Palisades Holdings, LLC converted $134,000 of its convertible
debenture into 2,144,000 shares of common stock.
CAPITAL EXPENDITURES
We anticipate certain capital expenditures related to developing and testing
subsequent versions of the voting system hardware. We estimate such capital
expenditures for hardware to be approximately $100,000 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. We currently
have no definitive plans to secure such financing.
GOING CONCERN
At March 31, 2005, the Company has an accumulated deficit approximating
$30,448,449. The Company has also generated its first revenues from its Voting
System operations; however, these revenues are not substantial and there is no
assurance of additional future revenues at this time. Consequently, the Company
will require substantial additional funding for obtaining regulatory approval,
commercialization of its product, and for continued product improvement. There
is no assurance that the Company will be able to obtain sufficient additional
funds when needed or that such funds, if available, will be obtainable on terms
satisfactory to the Company.
Management has taken actions to address these matters, which include:
o Retention of experienced management personnel with particular skills
in the commercialization of such products;
o Attainment of technology to develop such products and additional
products; and
o Raising additional funds through the sale of debt and/or equity
securities.
Federal, State and various foreign government regulations govern the sale of the
Company's products.
On May 10, 2005, AccuPoll was issued the NASED Qualification number
N-2-13-22-22-001 (2002), which confirms that AccuPoll's Voting System Product
Version 2.5 has successfully completed the ITA qualification process and has
been certified by NASED under the 2002 FEC Voting System Standards.
The Federal qualification number will allow AccuPoll to pursue certification in
states that require voting system qualification under the 2002 FEC Voting System
Standards.
As of May 10, 2005, the Company's Voting System product is certified in nine
states (Alabama, Arkansas, Ohio, South Dakota, Utah, Kansas, Kentucky, Louisiana
and West Virginia), and the Company has pending state certification applications
in Pennsylvania, Texas, New Mexico and Missouri, while Delaware and Mississippi
require only federal qualification. Given the new Federal qualification event,
the Company's ability to market its product is not longer at risk. There is
however, no assurance that the Company will be able to secure state
23
certification in all of the additional state jurisdictions where the Company may
wish to market it's products in the future.
The Company has incurred losses through March 31, 2005, and we have negative
working capital at that date of approximately $7.8 million, and have a lack of
operational history that, among other factors, raises doubt about our ability to
continue as a going concern. The Company intends to fund operations through
sales of its Voting System and associated services. As of May 10, 2005 the
Company has only been able to sell election services to the Long Beach Chapter
of the UAW Local 148 and has no firm commitment by any other entities for the
purchase of any of its products or services. 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 fund raising
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.
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.
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.
CONTRACTUAL OBLIGATIONS
As of March 31, 2005, we had the following contractual obligations:
Contractual Obligations Payments due by period
Less than
Total 1 year 1-3 years
Operating Lease Obligations
Greenberg Farrow Architecture - AccuPoll - Tustin office Sublease $ 132,000 $ 132,000
Olen Lease - Z prompt - Irvine Leased facility $ 6,652 $ 6,652 $ 6,652
Amarillo Grant - AccuPoll - Texas facility $ 250,000 $ 250,000
Long-Term Debt
Z prompt Bank of America line of Credit $ 59,025 $ 59,025
Notes Payable $ 15,000 $ 15,000
$ --
Convertible Debt $ 308,000 $ 308,000
$2,602,000 $2,602,000
Consulting Agreements
National Strategies Inc. $ 45,000 $ 45,000
Total $3,417,677 $3,285,677 $ 132,000
24
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 presidential election in November 2004. The
delay in the distribution of the federal funds was caused by the delay in
nominating and confirming the Election Assistance Commissioners (originally
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 decided not to risk making any changes until
after the November 2004 election. At a public meeting of the Election Assistance
Commission on April 26, 2005 the following status was reported in regards to
distribution of Federal Funds under HAVA: As of April 22, 2005, over $1.7
billion of the $2.3 billion in federal funds appropriated under Title II of HAVA
has been distributed to the states and the remaining $600 million is waiting for
states to complete the HAVA state plan certification process. This is in
addition to the $650 million of the Title I funds appropriated under HAVA that
was distributed in 2003.
The second business trend is the growing momentum of the voter verified paper
ballot movement. As of May 5, 2005, seventeen states (Alaska, Arkansas,
California, Idaho, Illinois, Maine, Maryland, Montana, New Hampshire, New
Mexico, Nevada, Ohio, South Dakota, Utah, Vermont, Washington, and West
Virginia) have passed legislation requiring a voter verified paper ballot.
Another nineteen states (Arizona, Colorado, Connecticut, Florida, Georgia,
Hawaii, Indiana, Iowa, Kansas, Maryland, Minnesota, New Jersey, New York, North
Carolina, Oregon, South Carolina, Tennessee, Texas and Virginia) are actively
considering legislation that would make it a requirement. In addition, federal
legislation has been introduced in the U.S. House and U.S. Senate to amendment
HAVA to explicitly require a voter verified paper audit trail.
The third business trend is the growing list of states that are requiring direct
recording electronic voting systems to be qualified under the 2002 federal
voting system standards. This requirement is primarily focused in states where
electronic voting systems have not been previously used (e.g., Illinois,
Missouri, Iowa, Kentucky, and North Carolina).
Overall the net impact of these trends on the Company is positive. We already
have a direct recording electronic voting system with a voter verified paper
audit trail qualified under the 1990 and 2002 federal voting system standards.
This places us in a position as one of the few vendors with a direct recording
electronic voting system that is federally qualified under the 2002 voting
system standards and as the only vendor whose voting system is certified to the
2002 standards and provides a voter verified paper audit trail that is both
machine and human readable. This is especially important in states like
Missouri, Iowa, and Illinois that have not previously authorized direct
recording electronic voting systems to be used in the state, but must at a
minimum meet the accessibility requirements under HAVA (i.e., one direct
recording electronic 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
25
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
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 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.
At March 31, 2005, approximately 5 million shares of common stock, options and
warrants are subject to rescission, with a potential liability approximating
$5.1 million, including interest at 10% per annum. 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 March 31,
2005 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.
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
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.
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; Starting June 30, 2004, the
Company accelerated the amortization over one year. At March 31, 2005,
accumulated amortization approximated $2,305,166.
26
Stock Based 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 March 31, 2005, 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 nine months ended March 31, 2005 and 2004
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.
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 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 March 31, 2005 consolidated financial statements, the accounts of Web Tools
International were de-consolidated effective April 1, 2004.
The Continued Consolidation of the Subsidiary
As discussed in the notes to our accompanying consolidated financial statements,
Z prompt (a wholly owned subsidiary) filed bankruptcy in March 2004. In January
2005, the bankruptcy case was dismissed and Z prompt continues to be
consolidated in all reporting periods presented.
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
27
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 January 1, 2006. Thus, the Company's
consolidated financial statements will reflect an expense for (a) all
share-based compensation arrangements granted after December 31, 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 March
31, 2005, 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
Rule 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.
As of the end of the period covered by this report, our management carried out
an evaluation, under the supervision and with the participation of our principal
(chief) executive officer and principal (chief) financial officer, of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Exchange Act). Based upon the evaluation, our principal (chief)
executive officer and principal (chief) financial officer concluded that our
disclosure controls and procedures are not effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, will be or have been detected. These inherent limitations include
28
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, and/or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions,
and/or the degree of compliance with the policies and procedures may
deteriorate. Because of the inherent limitations in a cost-effective internal
control system, misstatements due to error or fraud may occur and not be
detected.
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 reevaluating, redesigning, and documenting policies and procedures,
putting those procedures in operation and monitoring the effectiveness of the
procedures. Except as described above, there was no change in our internal
controls (as defined in Rule 13a-15(f) of the Exchange Act) 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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. 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 addition, a liability to Mr. Musco was
relieved. The cash amount is payable over 4 months. In the event of default on
the cash payment terms, an additional $250,000 cash amount will be 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 alleged 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. In March 2005, the dispute has been settled for a
payment of $50,000, due in 60 days from the date of settlement.
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. The bankruptcy was
dismissed on February 1, 2005 upon a motion of the US Trustee in the case.
AccuPoll Holding Corporation and its subsidiary, Z prompt, Inc. filed an action
for declaratory relief as of January 31, 2005 against Frank Ehret in Orange
County Superior Court, case # 05CC02714. Under the terms and conditions of the
purchase of Z prompt, Inc., Frank Ehret received 6,365,000 restricted shares
under rule 144. Ehret alleges that AccuPoll somehow prevented Ehret from selling
his shares. AccuPoll denies the allegations and seeks a judicial determination
on the matter. Mr. Ehret, upon receipt of this complaint filed an action in San
Francisco Superior Court, case# CGC-05-438410 for Breach of Contract, Breach of
the covenant of good faith and fair dealing, conversion and failure to make
payment due on a promissory note. On February 3, 2005, the factual basis is
identical to the declaratory relief action. AccuPoll and Z prompt subsequently
filed a motion to have the Ehret case transferred to Orange County Court. Ehret
then stipulated to have his case moved to Orange County. No discovery has taken
place.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In January 2005, various European investors exercised 931,525 warrants at an
exercise price of $0.10 per share. The original warrant exercise price of these
warrants was $.75 and $.1224. The exercise was made at $0.10 due to an
anti-dilution adjustment caused by our November 2004 private placement. Due to
the adjustment, the number of shares issuable under the warrants increased to
2,783,930 common shares, which provided total proceeds of $274,000. As
consideration for exercising the warrants, for every warrant exercised the
Company issued investors a 5-year replacement warrant at $0.12. These
transactions were exempt from registration pursuant to Regulation S promulgated
under the Securities Act of 1933, as amended.
In March 2005, various European investors exercised 7,416,000 warrants at an
exercise price of $0.06 per share. The proceeds raised from this transaction
were $445,000. An additional 1,000,000 warrants were exercised by another
European investor at an exercise price of $0.10 per share for proceeds of
$100,000. These transactions were exempt from registration pursuant to
Regulation S promulgated under the Securities Act of 1933, as amended.
In March 2005, a Canadian investor purchased 1.5 million shares for a price of
$0.10 per share for proceeds of $150,000. These transactions were exempt from
registration pursuant to Regulation S promulgated under the Securities Act of
1933, as amended.
In the Quarter ended March 31, 2005, the Company issued 3,000,000 shares of
common stock for legal services. Todd Becker, legal counsel for the Z-Prompt
bankruptcy, was issued a total of 1,500,000 shares in 500,000 share blocks on
January 10, 11 and February 28, 2005. Mark Shoemaker, litigation counsel for the
Musco case was issued a total of 1,500,000 shares as 1,000,000 shares on January
6, 2005, and 500,000 shares on February 28, 2005. These transactions were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
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 March 31, 2005, we had a balance of 702,000
under such notes. During January, 2005, $80,000 has been converted to 2,285,714
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 March 31, 2005, we had a balance of $1,900,000 under such debenture.
During March, 2005, $134,000 has been converted to 2,144,000 shares of common
stock.
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.
30
ITEM 6. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION
- -------------- --------------------------------------------------------------
31.1 Certification by Chief Executive Officer, required by Rule
13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer, required by Rule
13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer, required by Rule
13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
1350 of Chapter 63 of Title 18 of the United States Code,
promulgated pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification by Chief Financial Officer, required by Rule
13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
1350 of Chapter 63 of Title 18 of the United States Code,
promulgated pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
31
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: May 16, 2005 By: /s/ Dennis Vadura
------------------------------------------
Dennis Vadura,
Chief Executive Officer and Director
Dated: May 16, 2005 By: /s/ Frank J. Wiebe
------------------------------------------
Frank J. Wiebe,
President, Secretary, Treasurer
and Director
Dated: May 16, 2005 By: /s/ Diana Dimadi
------------------------------------------
Diana Dimadi,
Chief Financial Officer and Principal
Accounting Officer
32