10-Q 1 g10q-29503.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 _ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ____________to _____________ Commission file number 0-21489 International Dispensing Corporation ------------------------------------ (Exact name of small business issuer as specified in its charter) Delaware 13-3856324 -------- ---------- (State of other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1111 Benfield Blvd., Suite 230, Millersville, Maryland 21108 ------------------------------------------------------------ (Address of principal executive offices) (410) 729-0125 (Issuer's telephone number) Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 - _ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 9,728,396 shares of Common Stock as of August 8, 2002 Transitional Small Business Disclosure Format (Check One): Yes No X _ - International Dispensing Corporation (A Development Stage Company) Table of Contents

The accompanying notes are an integral part of these financial statements 4.

The accompanying notes are an integral part of these financial statements 5.

The accompanying notes are an integral part of these statements. 6B International Dispensing Corporation (A Development Stage Company) Notes to the financial statements (UNAUDITED) 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES The balance sheet as of June 30, 2002, and the statements of operations, statements of cash flows and statement of stockholders equity for the three and six months then ended have been prepared by International Dispensing Corporation (the "Company") without audit. The results should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001. Results of operations for the three and six-months ended June 30, 2002 are not necessarily indicative of the operating results for the full year. Interim statements are prepared on a basis consistent with year-end statements. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary for a fair presentation of the results of operations of the Company. All such adjustments are of a normal recurring nature. 2. GOING CONCERN The Company's financial statements have been presented on the basis that it is a going concern. The Company's development stage activities have resulted in an accumulated deficit since inception through June 30, 2002 of approximately $15.2 million and losses are continuing. The Company's primary source of funds since inception has been from the sale of its common and preferred stock. Management does not believe it will be necessary to undertake significant private placements of equity securities in 2002, which in the past have provided funding to allow the Company to continue its development of its new technology. The Company expects to have additional sales of its patented Beverage Carafe and its aseptic Gravity Flow Valve in 2002 as the Company's efforts to market its products continue to increase. . In addition, management has taken certain steps and made management changes in an effort to reduce operating expenses of the Company. Further, during July 2002, the Company secured a $250,000 revolving line of credit with a bank. This line has a one-year term and is secured by the assets of the Company. The interest rate on this line is based on prime + .5%. Management believes that such planned sales, reduction of expenses and financing will allow the Company to maintain sufficient liquidity to continue as a going concern in 2002. However, there is significant uncertainty of this plan and there can be no assurance in this regard. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities or any other adjustments that might result should the Company be unable to continue as a going concern. 3. Private Placements PREFERRED STOCK SERIES A OFFERINGS During 1999, the Company designated 2,000 shares of the authorized Preferred Stock as Series A Voting Redeemable Convertible Preferred Stock (the "Series A Stock") and entered into a Preferred Stock Subscription Agreement (the "Subscription Agreement") with certain Directors of the Company and a third party (collectively, the "Series A Investors"). 7. The Series A Stock accrues cumulative dividends at the annual rate of 12%. These dividends accrue and accumulate from the date of issuance and are payable quarterly on the last day of March, June, September and December, commencing on the last day of the quarter of the date of issuance. Dividends for the six months ended June 30, 2002 were not yet paid as of June 30, 2002. Cumulative dividends are payable in cash or additional shares of Series A Stock, at the discretion of the Company. Each share of Series A Stock is convertible any time at the holder's option into approximately 9,100 shares of common stock of the Company, plus additional shares of common stock for accrued but unpaid dividends at the conversion rate of $0.22 per share. Each share of Series A Stock is redeemable at the option of the Company for $2,000 per share plus accrued and unpaid dividends, if certain conditions are met. The Series A Stock carries a liquidation preference of $2,000 per share plus accrued and unpaid dividends. Pursuant to the Subscription Agreement, the Series A Investors agreed, subject to certain conditions, to buy a maximum of 1,000 shares at a price of $2,000 per share through August 31, 2000. Through December 31, 2001, the Series A Investors purchased 560 shares of Series A Stock, resulting in total net proceeds to the Company of $1,120,000. There were no purchases of Series A stock during the six months ended June 30, 2002. SERIES B OFFERINGS During 2000, the Company designated 1,500 shares of the authorized Preferred Stock as Series B Voting Redeemable Convertible Preferred Stock (the "Series B Stock") and entered into an amendment to the Subscription Agreement (the "Series B Amendment") with the Series A Investors and one new investor (collectively, the "Series B Investors"). Series B Stock accrues cumulative dividends at the annual rate of 12%. These dividends accrue and accumulate from the date of issuance and shall be payable quarterly on the last day of March, June, September and December, commencing on the last day of the quarter of the date of issuance. Dividends for the six months ended June 30, 2002 were not yet paid as of June 30, 2002. Cumulative dividends are payable in cash or additional shares of Series B Stock, at the discretion of the Company. Each share of Series B Stock is convertible at the holder's option into approximately 5,700 shares of common stock of the Company, plus additional shares of common stock for accrued but unpaid dividends at the conversion rate of $0.35 per share. Each share of Series B Stock is redeemable at the option of the Company for $2,000 per share plus accrued and unpaid dividends, if certain conditions are met. Series B Stock carries a liquidation preference of $2,000 per share plus accrued and unpaid dividends. Pursuant to the Series B Amendment, the Series B Investors purchased 440 shares of Series B Stock instead of the remaining 440 shares of unsubscribed Series A. The purchase of Series B Stock resulted in total net proceeds to the Company of $880,000. There were no purchases of Series B stock during the six months ended June 30, 2002. SERIES C OFFERINGS Also, during 2000, the Company designated 700 shares of the authorized Preferred Stock as Series C Voting Redeemable Convertible Preferred Stock (the "Series C Stock") and entered into a Subscription Agreement (the "Series C Subscription Agreement") with certain investors (the "Series C Investors"). Series C Stock accrues cumulative dividends at an annual rate of 12%. These dividends accrue and accumulate from the date of issuance and shall be payable quarterly on the last day of March, June, September and December, commencing on the last day of the quarter of the date of issuance. Dividends for the six months ended June 30, 2002 were not yet paid as of June 30, 2002. Cumulative dividends are payable in cash or additional shares of Series C Stock, at the discretion of the Company. 8. Each share of Series C Stock is convertible at the holder's option into approximately 6,667 shares of common stock of the Company, plus additional shares of common stock for accrued but unpaid dividends at the conversion rate of $0.30 per share. Each share of Series C Stock is redeemable at the option of the Company for $2,000 per share plus accrued and unpaid dividends, if certain conditions are met. The Series C Stock carries a liquidation preference of $2,000 per share plus accrued and unpaid dividends. Pursuant to the Series C Subscription Agreement, in August and December 2000, the Series C Investors purchased an aggregate of 350 shares of Series C Stock and warrants to purchase an additional 350 shares of Series C Stock at a price of $2,000 per share. The purchased Series C Stock during 2000 resulted in net proceeds to the Company of $700,000. As of December 31, 2000, 175 of these warrants expired. As of June 30, 2001, 150 of the remaining warrants were exercised for an aggregate purchase price of $300,000 and the remaining warrants expired on June 30, 2001. In January 2001, the Company sold to one investor 50 shares of the Series C Stock and warrants to purchase an additional 50 shares of Series C Stock, for an aggregate purchase price of $100,000. These warrants expired on June 30, 2001. In May and June 2001, the Company sold to investors an aggregate of 100 shares of the Series C Stock and warrants to purchase an additional 100 shares of Series C Stock, for an aggregate purchase price of $200,000. These warrants entitle the holder to purchase shares of Series C Stock for a price of $2,000 per share. As of June 30, 2001, 25 of these warrants were exercised for an aggregate purchase price of $50,000. In December 2001, the remaining 75 warrants for Class C stock were exercised for an aggregate purchase price of $150,000. There were no purchases of Series C stock during the six months ended June 30, 2002. SERIES D OFFERING In July 2001, the Company designated 3,000 shares of the authorized Preferred Stock as Series D Voting Redeemable Convertible Preferred Stock (the "Series D Stock") and entered into a Subscription Agreement (the "Series D Subscription Agreement") with one investor who purchased 1,500 shares of Series D Stock for an aggregate purchase price of $3.0 million dollars. The Series D Stock accrues cumulative dividends at an annual rate of 12%. These dividends accrue and accumulate from the date of issuance and shall be payable quarterly on the last day of March, June, September and December, commencing on the last day of the quarter of the date of issuance. Dividends for the six months ended June 30, 2002 were not yet paid as of June 30, 2002. Cumulative dividends are payable in cash or additional shares of Series D Stock, at the discretion of the Company. Each share of Series D Stock is convertible at the holder's option into approximately 2,000 shares of common stock of the Company, plus additional shares of common stock for accrued but unpaid dividends at the conversion rate of $1.00 per share. Each share of Series D Stock is redeemable at the option of the Company for $2,000 per share plus accrued and unpaid dividends, if certain conditions are met. The Series D Stock carries a liquidation preference of $2,000 per share plus accrued and unpaid dividends. There were no purchases of Series D stock during the six months ended June 30, 2002. PREFERRED STOCK DIVIDENDS In December 2001 the Board of Directors authorized the payment, in additional shares, of all outstanding dividends through December 31, 2001 on all series of preferred stock and increased the number of designated shares of Series C Preferred Stock to 4,000 shares. The Company's management believes that all preferred stock dividends will be paid in stock. 9. The following is a summary of the Company's preferred stock as of June 30, 2002 and December 31, 2001:

4. STOCK TRANSACTIONS During the second quarter of 2002 the Company granted 220,000 stock options to purchase common stock to key consultants and suppliers that vested immediately. These options are exercisable through June 2012 at an exercise price of $1.14 per share. These options were issued as compensation for services rendered to the Company by such consultants and suppliers. Total expense for the three and six month periods ended June 30,2002 related to the issuance of these options was valued in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" using the Black Scholes pricing model with the following assumptions: risk free interest rate of 3.33 %, dividend yield of 0%, expected life of 5 years and a volatility factor of 128%. Total expense for the three and six-month periods ended June 30, 2002 related to the issuance of these options amounted to $215,734 and is included in general and administrative expenses. 5. RELATED PARTY TRANSACTION During the second quarter of 2002, the Company entered into a marketing and public relations services contract with a company whose president is the brother of an officer of the Company. Terms of the agreement include the issuance of 62,500 shares of common stock in lieu of cash upon completion of services performed over a five-month period ending August 2002. The Company has accrued $28,125 of expense, based on the quoted market prices of common stock as of June 30, 2002, of expenses for the three and six-month periods ended June 30, 2002 which is included in general and administrative expenses. 10. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion and analysis should be read in conjunction with the Company's financial statements, beginning on Page 3 and financial information included elsewhere in this report. The Company generated modest revenues during the three and six months ended June 30, 2002 of $52,779 and $133,888 respectively. As of June 30, 2002, the Company has no debt and management plans for the Company to be cash flow neutral in the fourth quarter of 2002, although there can be no assurance in this regard. The Company hopes it will achieve this milestone as a result of forecasted gross profit from sales of the Company's Aseptic Gravity Flow Valve and Beverage Carafe sales revenues and gross profit contributions. The Company also plans to introduce at least one (1) new product in 2002. The Company has completed the design and has received patent protection on a new Beverage Carafe that can safely transport up to 96 ounces of a hot beverage. The beverage carafe allows consumers and food service providers to safely transport multiple cups of coffee while maintaining the product's hot temperature. The Company has also completed the design for a new Fresh Flow System dispensing system that maintains the commercial sterility of a beverage concentrate. The Fresh Flow System is a beverage dispensing system that mixes viscous concentrates with water or another dilutent to produce ready-to-drink juice, dairy, and coffee or tea beverage. The Fresh Flow System has been designed to eliminate the need for a peristaltic pump to portion out the beverage concentrate. The Company has completed the design for a Portion Control Pump dispensing system that will attach to flexible packaging and dispense flowable foods. The Company is in discussions with a global packaging company to adapt the Company's proprietary dispensing technology to their package. The Company is also subject to the availability of sufficient financing to meet its future cash requirements and the uncertainty of future product development and regulatory approval and market acceptance of proposed products. Additionally, other risk factors such as loss of key personnel, lack of manufacturing capabilities, difficulty in establishing new intellectual property rights and preserving and enforcing existing intellectual property rights as well as product obsolescence due to the development of competing technologies could impact the future results of the Company. For further information concerning the business conducted by the Company, see Item 1. "Description of Business" in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001. Results of Operations THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2001 Revenue - For the three and six months ended June 30, 2002, the Company generated $52,779 and $133,888 respectively, in revenue, and had a negative gross profit of $ 30,491 and $46,729, respectively. The Company did not generate revenues in the three or six months ended June 30, 2001. The negative gross profit in 2002 is due to the single cavity tooling utilized in manufacturing. The Company anticipates multi-cavity tooling, which is expected to decrease production costs, to be on-line on or before the fourth quarter of 2002. Operating Expenses - For the three and six months ended June 30, 2002, the Company had operating expenses of $858,490 and $1,357,591, respectively, representing an increase of $485,802 and $770,489, respectively, versus the same period last year. The increase represents the increase in salary expense over the same period last year as a result of the hiring of additional personnel, an increase in engineering 11. costs relating to the tooling for the multi-cavity tools, as well as engineering costs for the assembly and testing equipment relating to the aseptic Gravity Flow Valve and Beverage Carafe and an increase in consulting fees. Net Loss - For the three and six months ended June 30, 2002 the Company had a net loss of $881,929 and $1,386,887, respectively, representing an increase of $510,547 and $804,092, respectively, versus the same period last year. The increased loss for the three and six month period is principally due to the Company's recognition of negative gross profit and additional salary, design engineering and consulting expenses. Financial Condition As reflected in the Company's financial statements, the Company has experienced continuing net losses and negative cash flows from operations from inception through June 30, 2002. The Company's continuing existence is dependent on its ability to achieve and maintain profitable operations. The Company continues to be in the development stage, but is currently generating modest operating revenue. The Company's plan is to generate sufficient sales in the fourth quarter of the fiscal year ending December 31, 2002 to have neutral cash flow from operations for the fourth quarter of 2002. The Company has orders under contract for the delivery of aseptic Gravity Flow Valves and the Beverage Carafe. The Company will need to obtain additional contracts during 2002 to meet the cash flow targets. However, there can be no assurance with regard to the Company's ability to obtain such contracts or to improve its cash flow from operations. On July 2, 2002, the Company established a secured, one year, variable rate based on prime +.5%, revolving line of credit for $250,000 with Commercefirst bank. This line is secured by the current and fixed assets of the Company. As of August 13, 2002, no amounts are outstanding on this line of credit. As of June 30, 2002, the Company had working capital of approximately $886,192. The Company's spending rate from January to June 2002 was approximately $169,000 per month. The Company anticipates that for the third quarter of 2002 the monthly spending rate will be approximately $145,000 per month. The majority of the Company's remaining expenditures will be related to sales and marketing as well as the Company's new product lines and new product development efforts. In addition, the Company will also incur capital expenditures for multi-cavity molds and steel dyes as well as expenditures for raw materials and the cost to manufacture the products. The Company does not anticipate the need for additional external sources of funding during next twelve months; however, this will be dependent upon the Company's ability to generate increasing revenues and sufficient gross margins in 2002. The Company does not plan to need additional external sources of funding during next twelve months; however, this will be dependent upon the Company's ability to generate increasing revenues and sufficient gross margins in 2002 and beyond. If the Company is not able to increase revenues and produce positive income from operations and cash flows by the end of 2002 and beyond, the Company will need additional external funding to continue as a going concern. There can be no assurance that the Company will be able to obtain additional external funding in the future. Critical Accounting Policies and Estimates The following policies identified below have been identified as critical to the Company's business operations and the understanding of the Company's results of operations. For a detailed discussion on the application of these and other accounting policies, see the Notes to the Company's audited financial statements for the year ended December 31, 2001 included in the Company's Form 10-K. REVENUE RECOGNITION. The Company records revenue at agreed upon prices when product is shipped to customers or when services are provided. 12. ALLOWANCE FOR DOUBTFUL ACCOUNTS. When necessary, the Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the economy and/or the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make their payments, an allowance may be required. INVENTORY. Inventory is accounted for at the lower of cost or market. Cost is determined using the first in, first out method. PART II OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders An Annual Meeting of Stockholders of the Company was held on June 7, 2002. The stockholders approved an amendment to the Company's 1998 Stock Option Plan to increase the number of shares of the Company's Common Stock, which may be issued upon exercise of all options under the 1998 Stock Option Plan from 2,500,000 to 5,000,000. The number of votes cast in favor of the amendment was 16,431,730. The number of votes cast against the amendment was none. There were no votes abstaining and no broker non-votes on such matter. In addition, Gary Allanson and Frank Carillo were elected as Class 1 directors to serve for a term expiring at the 2005 Meeting of Stockholders or until there successors are duly elected and qualified. Greg Abbott was elected as a Class 3 director to serve for a term expiring at the 2004 Meeting of Stockholders or until his successor is duly elected and qualified. (16,431,730 shares voted in favor of the election of Gary Allanson, Frank Carillo and Greg Abbott; there were no votes cast against the election of any of such persons and no abstentions). The term of George Kriste as director continued after the meeting. Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) The Company filed a current report on Form 8K on May 30, 2002 to report in Item 4 thereof, a change in the Company's certifying accountant to Ernst & Young, LLP. (B) Exhibit 99.1, Certification under Sarbanes-Oxley act of 2002. 13. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL DISPENSING CORPORATION Date: August 13, 2002 By: /s/ Gary Allanson ------------------------------------------ Gary Allanson Chief Executive Officer & President (Principal Executive) By: /s/ Edwin S. Tharp ------------------------------------------ Edwin S. Tharp Chief Operating Officer & Chief Financial Officer (Principal Accounting and Financial Officer) 14.

INTERNATIONAL DISPENSING CORP 10-Q