The accompanying notes are an integral part of these condensed consolidated
financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
of Global Payment Technologies, Inc. (the "Company"), including the September
30, 2006 consolidated balance sheet which has been derived from audited
financial statements, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The operating results for
the three and six-month periods ended March 31, 2007 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2007. We recommend that you refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended September 30, 2006.
As of March 31, 2007, the Company had $463,000 outstanding on the line of credit
("LOC") with Laurus (as said terms are defined in Note E). On February 8, 2007
Laurus agreed to a 60 day extension of the LOC for a 1% fee or $25,000. All
other terms and conditions remained the same. On May 16, 2007, the Company
received an additional extension to May 22, 2007. The Company is developing new
products for its market and will need to obtain additional capital in order to
continue to fund its development costs and capital expenses related to tooling
and marketing. The Company has not replaced its line of credit with Laurus or
extended the expiration date beyond May 22, 2007. The Company is in the process
of negotiating a further extension of its LOC, however, there is no assurance
that an extension will be granted beyond May 22, 2007 and if granted on terms
that are acceptable to the Company. Accordingly, it may be required to repay all
amounts due under the LOC. In these circumstances, the Company would have to
stop its research and development and significantly curtail its operations and
reduce its costs and expenses. These conditions would have an adverse impact on
the Company's liquidity and operations, and may indicate that it may be unable
to continue as a going concern. No adjustments have been made to the financial
statements as a result of this uncertainty.
NOTE B - EMPLOYEE STOCK-BASED COMPENSATION
Effective October 1, 2005, the Company adopted Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share Based Payment ("SFAS No.
123R"), which requires a public entity to measure the cost of employee, officer
and director services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. SFAS No. 123R supersedes the
Company's previous accounting under SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), which permitted the Company to account for such
compensation under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25"). Pursuant to APB No. 25, and related
interpretations, no compensation cost had been recognized in connection with the
issuance of stock options, as all options granted under the Company's stock
option plans had an exercise price equal to or greater than the market value of
the underlying common stock on the date of the grant.
In advance of implementing the requirements of SFAS No. 123R, the Company, in
September 2005, accelerated the vesting of all unvested stock options previously
awarded to employees, officers and directors in order to avoid the recognition
of compensation expense under SFAS No.123R, with respect to these options. Any
option grants since then would result in compensation expense.
6
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
The Company adopted SFAS No. 123R using the modified prospective transition
method, which requires that compensation cost be recorded as earned for all
unvested stock options outstanding at the beginning of the first fiscal year of
adoption of SFAS No. 123R, based upon the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123 and for compensation
cost for all share-based payments granted subsequent to the adoption, based on
the grant date fair value estimated in accordance with the provisions of SFAS
No. 123R. The Company's consolidated financial statements as of and for the six
months ended March 31, 2007 and 2006 reflect the impact of SFAS No. 123R. In the
three months ended March 31, 2007 and 2006, the Company recorded share-based
compensation for options attributable to employees, officers and directors of
$58,000 and $22,000, respectively, which are included in the Company's net loss
for the period. In the six months ended March 31, 2007 and 2006 the Company
recorded share-based compensation for options attributable to employees,
officers and directors of $115,000 and $34,000, respectively, which is included
in the company's net loss for this period.
The Company has several stock option plans in effect covering in the aggregate
3,500,000 shares of the Company's common stock pursuant to which officers,
directors and key employees of the Company and consultants to the Company are
eligible to receive incentive and/or nonqualified stock options. The 1994 and
1996 stock option plans expired on October 17, 2004 and March 18, 2006,
respectively, and the 2000 and 2006 stock option plans expire on January 25,
2010 and March 7, 2016, respectively, after which no additional option grants
may be issued under such plans. The stock option plans are all administered by
the Compensation Committee of the Board of Directors. The selection of
participants, grant of options, determination of price and other conditions
relating to the exercise of options are determined by the Compensation Committee
of the Board of Directors and administered in accordance with the stock option
plans as approved by the shareholders.
Incentive stock options granted under these various plans are exercisable for a
period of up to 10 years from the date of grant at an exercise price which is
not less than the fair market value of the common stock on the date of the
grant, except that the term of an incentive stock option granted under each of
the plans to a shareholder owning more than 10% of the outstanding common stock
may not exceed five years and its exercise price may not be less than 110% of
the fair market value of the common stock on the date of the grant.
Options granted under these various plans generally vest over three or four
years and expire seven or ten years from the date of grant, while certain
options vest over one and one-half years and expire seven years from the date of
grant. The Company expects to issue new shares upon stock option exercises, but
has treasury shares that could be used for this purpose.
A summary of the Company's stock option plans activity as of March 31, 2007 and
changes during the six months then ended is as follows:
Weighted Aggregate
Weighted average intrinsic
average remaining value
exercise contractual (in
Shares price term (years) thousands)
--------- -------- ----------- -----------
Outstanding, October 1, 2006 1,290,550 $ 3.12
Granted - -
Exercised - -
Forfeited (27,373) 4.08
Expired (25,650) 8.75
--------- --------
Outstanding, March 31, 2007 1,237,527 $ 2.98 5.0 $ -
========= ======== =========== ===========
Vested or expected to vest,
March 31, 2007 1,237,527 $ 2.98 5.0 $ -
========= ======== =========== ===========
Exercisable, March 31, 2007 490,860 $ 4.17 3.4 $ -
========= ======== =========== ===========
|
7
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
In connection with the adoption of SFAS No. 123R, the Company reassessed its
valuation technique and related assumptions. The Company estimates the fair
value of stock options using a Black-Scholes valuation model, consistent with
the provisions of SFAS No. 123R, Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 107 and the Company's prior period pro forma disclosures
of net earnings, including the fair value of stock-based compensation. Key input
assumptions used to estimate the fair value of stock options include the
expected term until exercise of the option, expected volatility of the Company's
stock, the risk free interest rate, option forfeiture rates and dividends, if
any. The expected term of the options is calculated using the midpoint of the
vesting date and the expected life of the grant. The expected volatility is
derived from the historical volatility of the Company's stock for a period that
matches the expected life of the option. The risk-free rate interest rate is the
yield from a treasury bond or note that is comparable in term to the expected
life of the option. Option forfeiture rates are based on the Company's
historical forfeiture rates. Expected dividends are based on the Company's
history and the likelihood of future dividends.
Compensation costs for stock options with graded vesting are recognized ratably
over the vesting period. As of March 31, 2007, there was $389,000 of total
unrecognized compensation costs related to stock options. These costs are
expected to be recognized over a weighted average period of 1.9 years.
The weighted-average grant-date fair value of options granted for the six months
ended March 2006 was $1.01.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Six Months Ended
----------------
March 31
----------------
2006
----------------
Expected volatility 40.5%-50%
Weighted-average volatility 40.7%
Expected dividends 0.0%
Expected term (in years) 3.5
Risk-free interest rate 4.54%
|
NOTE C - CASH AND CASH EQUIVALENTS
A significant portion of the Company's cash balance in the amount of $731,000
and $659,000, as of March 31, 2007 and September 30, 2006, respectively,
consists of currency used to test the Company's products, and although it could
be available, it is not anticipated to be utilized for working capital purposes
in the normal course of business. Translation gains or losses on foreign
currency amounts used for test purposes are included in (loss) from operations.
NOTE D - INVENTORY
The following is a summary of the composition of inventory:
8
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
(in thousands)
March 31, September 30,
2007 2006
---------- -------------
Raw Materials $ 3,413 $ 4,104
Work-in-process 319 358
Finished Goods 1,123 578
---------- -------------
$ 4,855 $ 5,040
========== =============
|
The Company recorded a provision for inventory obsolescence of $78 for the six
months ended March 31, 2006.
NOTE E - DEBT
On March 16, 2004, the Company received aggregate proceeds of $1,500,000 from
the sale to Laurus Master Fund Ltd. ("Laurus") of a $1,500,000 principal amount
secured convertible term note due in March 2007 (the "CTN"), pursuant to a
Securities Purchase Agreement. The CTN was convertible into common stock of the
Company at any time at the rate of $4.26 of principal for one share of common
stock and was collateralized by substantially all assets of the Company.
Interest was payable monthly at the prime rate plus 1.5%, with a minimum rate of
6%. In addition, Laurus received 7 year warrants to purchase an aggregate of
200,000 shares of the Company's common stock at prices of $4.87, $5.28 and $5.68
for 100,000, 60,000 and 40,000 warrants, respectively. Under the agreement, the
Company is restricted from paying dividends or purchasing treasury stock. The
Company utilized approximately $1,200,000 of the proceeds to repay amounts
outstanding under a previous credit agreement.
On March 16, 2004, the Company also entered into a Security Agreement with
Laurus which provides for a credit facility of $2,500,000 consisting of a
secured revolving note of $1,750,000 (the "RN") and a secured convertible
minimum borrowing note of $750,000 (the "MBN"), both of which were originally
due in March 2007 and which have been extended through May 22, 2007 (the RN and
the MBN collectively referred to as the "LOC"). At closing, the Company borrowed
$750,000 under the MBN. Funds available under the LOC are determined by a
borrowing base equal to 85% and 70% of eligible domestic and foreign accounts
receivable, respectively, and 50% of eligible inventory. Outstanding amounts
under the RN and MBN are convertible into common stock of the Company at any
time at the rate of $4.26 of principal for one share of common stock and are
collateralized by substantially all assets of the Company. Interest is payable
monthly at the prime rate plus 1.5%, with a minimum rate of 6%. At March 31,
2007 and September 30, 2006, $463,000 and $0 were outstanding, respectively,
under the LOC.
The agreements provide that Laurus will not convert debt or exercise warrants to
the extent that such conversion or exercise would result in Laurus, together
with its affiliates, beneficially owning more than 4.99% of the number of
outstanding shares, including warrants, of the Company's common stock at the
time of conversion or exercise.
Registration rights agreements were entered into with Laurus which require the
Company to file registration statements for the resale of the common stock
issuable upon conversion of the notes and upon the exercise of the warrants and
to use commercially reasonable efforts to have the registration statements
declared effective by the end of a specified grace period. In addition, the
Company is required to use commercially reasonable efforts to maintain the
effectiveness of the registration statements until all such common stock has
been sold or may be sold without volume restrictions pursuant to Rule 144(k) of
the Securities Act. If the Company fails to have the registration statements
declared effective within the grace period or if effectiveness is not
maintained, the agreements require cash payments of liquidated damages by the
Company to Laurus at 1.0% per month, with respect to the CTN or the warrants,
and 2.0% per month, with respect to the MBN, of the respective original
principal amounts until the failure is cured. The registration statement was
filed and declared effective within the specified grace period.
9
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
As of September 30, 2006 the Company accounted for the registration rights
agreements as separate free-standing financial instruments and accounted for the
liquidated damages provisions therein as a derivative liability subject to the
provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"). Accordingly, the liability was recorded at
estimated fair value based on an estimate of the probability and costs of
potential cash penalties and was revalued at each balance sheet date with
changes in value recorded in other income. As of September 30, 2006 no liability
was outstanding as the Company deemed the fair value of any potential cash
settlement relating to maintaining effectiveness of the registration statements
to be nominal.
On December 21, 2006, the Financial Accounting Standards Board ("FASB") Staff
Position EITF 00-19-2 Accounting for Registration Payment Arrangements ("FSP")
was issued. The FSP specifies that the contingent obligation to make future
payments under a registration payment arrangement should be separately
recognized and measured in accordance with FASB Statement No. 5, Accounting for
Contingencies and that such arrangement is not subject to SFAS No. 133.
Accordingly, a liability would be recognized at the time a payment under the
arrangement becomes probable and can be reasonably estimated. The Company
adopted the FSP effective October 1, 2006. Adoption of the FSP had no effect on
the Company's financial statements.
In May 2005, the Company entered into a capital lease agreement for machinery in
the amount of $130,000. The note is to be repaid in monthly installments of
$4,040 over a three year period. Interest is being charged at a rate of 7.44%
per annum. The balance at March 31, 2007 and September 30, 2006 was $54,000 and
$76,000, respectively.
In March 2006, the Company entered into a capital lease agreement for machinery
in the amount of $31,000. The note is to be repaid in monthly installments of
$1,381 over a two year period. Interest is being charged at a rate of 7.25% per
annum. The balance at March 31, 2007 and September 30, 2006 was $16,000 and
$24,000, respectively.
Outstanding debt with respect to the LOC and capital leases as of March 31, 2007
and September 30, 2006 is as follows (in thousands):
March 31, 2007 September 30, 2006
--------------- -------------------
Total debt $ 536 $ 106
Less amount representing interest 3 (6)
--------------- -------------------
Net 533 100
Less current portion 525 (60)
--------------- -------------------
Long-term debt $ 8 $ 40
=============== ===================
|
NOTE F - MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Among the more significant estimates included in
the consolidated financial statements are the allowance for doubtful accounts,
recoverability of inventory, deferred income taxes, capitalized software and
provisions for warranties. Actual results could differ from those estimates.
10
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
NOTE G - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of net (loss) income and all other
non-owner changes in equity (or other comprehensive income) such as unrealized
gains/losses on securities classified as available-for-sale, currency
translation adjustments and minimum pension liability adjustments. The Company's
comprehensive (loss) is as follows:
(in thousands) (in thousands)
Three months ended Six months ended
March 31, March 31,
2007 2006 2007 2006
--------- ------- --------- ---------
Net (loss) $ (1,330) $ (543) $ (2,579) $ (1,333)
Other comprehensive income
(loss)(a) (15) (117) (40) (100)
--------- ------- --------- ---------
Comprehensive (loss) $ (1,345) $ (660) $ (2,619) $ (1,433)
========= ======= ========= =========
|
(a) Translation adjustments in 2006 related primarily to the Company's
investments in affiliates.
NOTE H - NET (LOSS) PER COMMON SHARE
Net (loss) per common share amounts (basic EPS) are computed by dividing net
(loss) by the weighted average number of common stock shares, excluding any
potential dilution. Net (loss) per common share amounts, assuming dilution
(diluted EPS), are computed by reflecting the potential dilution from the
exercise of stock options and stock warrants and the conversion into common
stock of convertible loans. For the three months ended December 31, 2007 and
2006, potentially dilutive shares were not included in EPS because including
them would be anti-dilutive. Potentially dilutive shares are as follows:
(in thousands) (in thousands)
Three months ended Six months ended
March 31, March 31,
2007 2006 2007 2006
------ ------ ------ ------
Stock options 1,238 1,054 1,238 1,054
Stock warrants 200 200 200 200
Convertible Debt 109 - 109 -
------ ------ ------ ------
Total 1,547 1,254 1,547 1,254
====== ====== ====== ======
|
11
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
NOTE I - SUMMARY FINANCIAL INFORMATION FOR UNCONSOLIDATED INVESTEES
Financial information with respect to the Company's two former Australian
affiliates, the interests in which were sold effective August 31, 2006, is
included in the accompanying 2006 financial statements based on the affiliates'
results for the six months ended December 31, 2005. The accompanying
consolidated results of operations include the Company's equity in the results
of operations of these affiliates in the amounts of $624,000 for the three
months ended March 31, 2006 and $682,000 for the six months ended March 31,
2006. The Company increased its equity in income of unconsolidated affiliates by
$70,000 and $235,000 for the three months and six months ended March 31, 2006,
respectively, which represents the recognition of the Company's share of the
gross profits on intercompany sales to its affiliates that had been recognized
by these affiliates during such period.
Summarized financial information for the two former Australian affiliates, in
which the Company had a 50% and 35% non controlling interest at March 31, 2006,
is as follows:
All figures are in U.S. dollars (in thousands).
Three Months Ended Six Months Ended
December 31, December 31,
2005 2005
------------------ ----------------
Net sales $ 3,511 $ 7,462
Operating income (152) 62
Net income 1,711* 1,874*
|
*Net income for the three and six months ended December 31, 2005 includes a gain
by the Company's eCash affiliate resulting from the sale in October 2005 of its
automated teller machine rental business, net of Australia income taxes, of
approximately $1,775,000, of which the Company's share was approximately
$621,000 which is included in equity income of affiliates for the three and six
months ended March 31, 2006.
NOTE J - RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
U.S. generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company is
currently evaluating the effect that the adoption of SFAS No. 157 will have on
its financial position and results of operations.
In February, 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities including an amendment of FASB Statement 115.
This statement provides companies with an option to report selected financial
assets and liabilities at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 with early adoption permitted. The Company is
currently evaluating the effect that the adoption of SFAS No. 159 will have on
its financial position and results of operations.
12
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
NOTE K - WARRANTY OBLIGATIONS
The Company recognizes and historically has recognized the estimated cost
associated with its standard warranty on products at the time of sale. The
estimate is based on historical failure rates and current claim cost experience.
The following is a summary of the changes in the Company's accrued warranty
obligation (which is included in accrued expenses) for the period October 1,
2006 through March 31, 2007:
(in thousands)
Amount
--------------
Beginning Balance as of October 1, 2006 $ 309
Deduct: Payments (12)
Add: Provision 0
--------------
Ending Balance as of March 31, 2007 $ 297
==============
|
NOTE L - SHAREHOLDERS' EQUITY
The Company charged $115,000 and $34,000 to operations during the six
months ended March 31, 2007 and 2006, respectively, representing the fair value
of stock options earned by officers during the period with a corresponding
increase to additional paid-in capital in accordance with the provisions of SFAS
No. 123R.
NOTE M - CONCENTRATIONS
The Company's largest customers for the three and six months ended March 31,
2007 and 2006 represent the following percentages of net sales and accounts
receivable:
Three months ended Six months ended
March 31, March 31,
2007 2006 2007 2006
---------- ------------- ------ ------
Net sales:
Customer A 30% 21% 36% 27%
Customer B * 14% * 14%
Customer C * 14% * *
March 31, September 30,
2007 2006
---------- -------------
Accounts Receivable:
Customer A 60% 80%
|
* Represents less than 10% for the period
13
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
There were no other customers that represented 10% or more of net sales
respectively, in any of the periods presented. Customer A was the Company's
former unconsolidated affiliate in Australia, which interest was sold in the
fourth quarter of fiscal 2006.
NOTE N - OTHER
On January 17, 2007, the Company received a notice from the NASDAQ Stock Market
(the "Notice") that it was no longer in compliance with the minimum $10,000,000
stockholders' equity requirement for continued listing on the NASDAQ Global
Market set forth on Marketplace Rule 4450 (a)(3). The Notice requested that the
Company provide on or before February 1, 2007, a specific plan to achieve and
sustain compliance with all NASDAQ Global Market listing requirements. NASDAQ
subsequently extended the response time to February 8, 2007.
On February 8, 2007 the Company filed an application to transfer its listing
from the NASDAQ Global Market to the NASDAQ Capital Market which was accepted.
The Company's ticker symbol remained the same.
Note O-RESTATEMENT
The Company has determined that it had made an error in the second quarter of
2007 in the application of Generally Accepted Accounting Principles ("GAAP") by
improperly reversing $130,000 of its allowance for inventory obsolescence which
had been recorded in the prior year related to inventory which had not been sold
by March 31, 2007. Under GAAP, the reduced carrying value of inventory is to be
considered its cost for subsequent accounting periods.
The restatement for the three and six months ended March 31, 2007 reflects the
following:
Three Months Six Months
Ended Ended
March 31, March 31,
2007 2007
Net loss, as reported $ (1,200) $ (2,449)
Net loss, as restated (1,330) (2,579)
Loss per basic and diluted share, as reported (.19) (.39)
Loss per basic and diluted share, as restated (.21) (.41)
|
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Recent Developments
On January 17, 2007, the Company received a notice from the NASDAQ Stock Market
(the "Notice") that it was no longer in compliance with the minimum $10,000,000
stockholders' equity requirement for continued listing on the NASDAQ Global
Market set forth on Marketplace Rule 4450 (a)(3). The Notice requested that the
Company provide on or before February 1, 2007, a specific plan to achieve and
sustain compliance with all NASDAQ Global Market listing requirements. NASDAQ
subsequently extended the response time to February 8, 2007. On February 8, 2007
the Company filed an application to transfer its listing from the NASDAQ Global
Market to the NASDAQ Capital Market which was accepted. The Company's ticker
symbol did not change.
On May 16, 2007, Laurus agreed to an extension of its LOC to May 22, 2007. The
Company is in the process of negotiating a further extension, however, there is
no assurance that a further extension will be granted, and if granted on terms
acceptable to the Company. Accordingly, it may be required to repay all amounts
due under the LOC. In these circumstances, the Company would have to stop its
research and development costs and significantly curtail its operations and
reduce its costs and expenses, which would have an adverse impact on its
liquidity, including its ability to continue as a going concern.
Three months ended March 31, 2007 compared with three months ended March 31,
2006
Sales
Net sales decreased by 30.4%, or $1,225,000, to $2,802,000 in the three months
ended March 31, 2007 as compared with $4,027,000 in the comparative prior-year
period. This sales decrease was primarily due to $810,000 decreased sales to the
beverage and vending market. Last year's sales included special incentives to
customers in order to reduce inventory levels in the Company's Aurora product.
Beverage and vending sales for the three months ended March 31, 2007 were
$405,000, or 14.4% of sales, as compared with $1,214,000, or 30.1% of sales, in
the prior year period. Gaming sales for the three months ended March 31, 2007
were $2,397,000, or 85.5% of sales, as compared with $2,813,000, or 69.9% of
sales, in the prior year period.
Gross Profit
Gross profit was $627,000, or 22.4% of net sales for the three months ended
March 31, 2007 as compared with $628,000, or 15.6% of net sales, in the
comparative prior-year period.
Operating Expenses
Operating expenses increased to $1,939,000, or 69.2% of sales, in the three
months ended March 31, 2007 as compared with $1,875,000, or 46.6% of sales, in
the comparative prior-year period. This increase of $64,000 is primarily the
result of $200,000 of expenses resulting from the development and testing of the
Company's new products - Falcon and Eagle - partially offset by lower payroll,
commissions and travel. The Company charged $58,000 to operations during the
three months ended March 31, 2007 as compared to $22,000 in the prior year
representing the fair value of stock options earned by employees, officers and
directors.
15
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
Other (Expense) Income
During fiscal 2006, the Company sold its interests in its affiliated customers.
Prior to such dispositions, the Company recognized revenue upon shipment and
passage of title to its affiliated customers, but deferred its proportionate
share of the related gross profit on product sales until sales were made by the
affiliated customers to third-party end users (customers). Included in the
results of operations for the three months ended March 31, 2006 were the
Company's share of net profits of these affiliates of $694,000, which included
$70,000 of the Company's proportionate share of the related gross profit on
product sales to its affiliates which had been sold by the affiliates to third
party end users. Excluding this intercompany gross profit adjustment, the
Company's share of net income of these unconsolidated affiliates was $624,000.
The Company's share of net income for the three months ended March 31, 2006
included a gain by the Company's eCash affiliate resulting from the sale of its
automatic teller machine rental business, net of Australian income taxes, of
approximately $1,775,000, of which the Company's share was approximately
$621,000.
Interest expense increased to $16,000 as compared to interest income of $6,000
in the comparable prior-year period which reflected the costs of borrowing under
the LOC.
Income Taxes
With respect to the provision for income taxes, the effective rate was 0.2% as
compared with 0.7% in the prior-year period. The Company provided a full
valuation allowance against its deferred income tax assets in the fourth quarter
of fiscal 2003 and continues to provide a full valuation allowance at March 31,
2007. The valuation allowance is subject to adjustment based upon the Company's
ongoing assessment of its future taxable income and may be wholly or partially
reversed in the future.
Net (Loss)
Net loss for the quarter ended March 31, 2007 was ($1,330,000), or ($0.2119) per
share, as compared with ($543,000), or ($0.09) per share, in the comparative
prior-year period. The increase in net loss was due to the items discussed
above.
Six months ended March 31, 2007 compared with six months ended March 31, 2006
Sales
Net sales decreased by 14.7%, or $1,166,000, to $6,766,000 in the six months
ended March 31, 2007 as compared with $7,932,000 in the comparative prior-year
period. This sales decrease was primarily due to $930,000 decreased sales to the
beverage and vending market. Last year's sales included special incentives to
customers in order to reduce inventory levels in the Company's Aurora product.
Beverage and vending sales for the first half of fiscal 2007 were $1,057,000, or
15.6% of sales, as compared with $1,987,000, or 25.1 % of sales, in the prior
year period. Gaming sales for the first half of fiscal 2007 were $5,709,000, or
84.4% of sales, as compared with $5,945,000, or 74.9% of sales, in the prior
year period.
Gross Profit
Gross profit increased to $1,339,000, or 19.8% of net sales, in the six months
ended March 31, 2007 as compared with $1,313,000, or 16.6% of net sales, in the
comparative prior-year period. The increase in gross profit was primarily the
result of lower margins in the prior year period as a result of sales incentives
granted to reduce Aurora inventory levels.
16
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
Operating Expenses
Operating expenses increased to $3,889,000, or 57.5% of sales, in the six months
ended March 31, 2007 as compared with $3,580,000, or 45.1% of sales, in the
comparative prior-year period. This increase of $309,000 is primarily the result
of $490,000 of expenses resulting from the development and testing of its new
products - Falcon and Eagle - partially offset by lower payroll, commissions and
travel. The Company charged $115,000 to operations during the six months ended
March 31, 2007 as compared to $34,000 in the prior year representing the fair
value of stock options earned by employees, officers and directors.
Other (Expense) Income
During fiscal 2006, the Company sold its interests in its affiliated customers.
Prior to such dispositions, the Company recognized revenue upon shipment and
passage of title to its affiliated customers, but deferred its proportionate
share of the related gross profit on product sales until sales were made by the
affiliated customers to third-party end users (customers). Included in the
results of operations for the six months ended March 31, 2006 were the Company's
share of net profits of these affiliates of $917,000, which included $235,000 of
the Company's proportionate share of the related gross profit on products sales
to its affiliates which had been sold by the affiliates to third party end
users. Excluding this intercompany gross profit adjustment, the Company's share
of net income of these unconsolidated affiliates was $682,000. The Company's
share of net income for the six months ended March 31, 2006 included a gain by
the Company's eCash affiliate resulting from the sale of its automatic teller
machine rental business, net of Australian income taxes, of approximately
$1,775,000, of which the Company's share was approximately $621,000.
Interest expense increased to $25,000 as compared to interest income of $15,000
in the comparable prior-year period which reflected the costs of borrowing under
the LOC.
Income Taxes
With respect to the provision for income taxes, the effective rate was a
provision of 0.2% as compared with a provision of 0.1% in the prior-year period.
The Company provided a full valuation allowance against its deferred income tax
assets in the fourth quarter of fiscal 2003 and continues to provide a full
valuation allowance at March 31, 2007. The valuation allowance is subject to
adjustment based upon the Company's ongoing assessment of its future taxable
income and may be wholly or partially reversed in the future.
Net (Loss)
Net (loss) for the six months ended March 31, 2007 was ($2,579,000), or ($0.41)
per share, as compared with $(1,333,000), or ($0.21) per share, in the
comparative prior-year period. The increase in net loss was due to the items
discussed above.
Liquidity and Capital Resources
The Company's capital requirements consist primarily of those necessary to
continue to expand and improve product development and manufacturing
capabilities, sales and marketing operations and service principal and interest
payments on the Company's indebtedness. At March 31, 2007, the Company's cash
and cash equivalents were $1,724,000 as compared with $2,270,000 at September
30, 2006. A significant portion of the Company's cash balance in the amount of
$677,000 and $659,000, as of March 31, 2007 and September 30, 2006,
respectively, consisted of currency used to test the Company's products and,
although it could be available, it is not anticipated to be utilized for working
capital purposes in the normal course of business. The Company has $280,000 of
cash held in escrow as a result of its sale on September 2, 2006 of the
Company's 50% interest in Global Payment Technologies Australia Pty Ltd
("GPTA"). The escrow will be released on the one year anniversary of the
transaction if, including among other things, the Company satisfies its
obligations under a new distribution agreement with GPTA. The Company's credit
facility with Laurus discussed below will expire on May 22, 2007. As of March
31, 2007, the Company had $463,000 outstanding on the LOC. On February 8, 2007
Laurus agreed to a 60 day extension, until May 16, 2007 of the LOC for a 1% fee
or $25,000 and on May 16, 2007 agreed to a further extension until May 22, 2007.
All other terms and conditions remained the same. The Company is in the process
of negotiating a further extension of its LOC, however, there is no assurance
that an extension will be granted, and if granted on terms that are acceptable
to the Company. The Company has had continuing discussions with various
financial institutions to replace the current line of credit. The Company
believes but has no assurance that it will replace this line. The Company
believes that with its current cash balances and the funds available under a
replacement line of credit if obtained, there would be sufficient resources to
meet its obligations as they become due and permit continuation of operations
for the next 12 months. The Company is developing new products for its market
and will need to obtain additional capital in order to continue to fund its
development costs and capital expenses related to tooling and marketing. The
Company has not replaced its line of credit with Laurus or extended the
expiration date beyond May 22, 2007. Accordingly, it may be required to repay
all amounts due under the LOC. In these circumstances, the Company would have to
stop its research and development costs and significantly curtail its operations
and reduce its costs and expenses, which would have an adverse impact on its
liquidity and operations, and may indicate that it may be unable to continue as
a going concern.
17
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
On March 16, 2004, the Company entered into a Security Agreement with Laurus
Master Fund Ltd. ("Laurus") which provides for a credit facility of $2,500,000
consisting of a secured revolving note of $1,750,000 (the "RN") and a secured
convertible minimum borrowing note of $750,000 (the "MBN"), both due in March
2007 (the RN and the MBN collectively referred to as the "LOC"). At closing, the
Company borrowed $750,000 under the MBN. Funds available under the LOC are
determined by a borrowing base equal to 85% and 70% of eligible domestic and
foreign accounts receivable, respectively, and 50% of eligible inventory.
Outstanding amounts under the RN and MBN are convertible into common stock of
the Company at any time at the rate of $4.26 of principal for one share of
common stock and are collateralized by substantially all assets of the Company.
Interest is payable monthly at the prime rate plus 1.5%, with a minimum rate of
6%. At March 31, 2007, $463,000 was outstanding under the LOC.
The agreement provides that Laurus will not convert debt or exercise warrants to
the extent that such conversion or exercise would result in Laurus, together
with its affiliates, beneficially owning more than 4.99% of the number of
outstanding shares, including warrants, of the Company's common stock at the
time of conversion or exercise.
Registration rights agreements were entered into with Laurus which require the
Company to file registration statements for the resale of the common stock
issuable upon conversion of the notes and upon the exercise of the warrants and
to use commercially reasonable efforts to have the registration statements
declared effective by the end of a specified grace period. In addition, the
Company is required to use commercially reasonable efforts to maintain the
effectiveness of the registration statements until all such common stock has
been sold or may be sold without volume restrictions pursuant to Rule 144(k) of
the Securities Act. If the Company fails to have the registration statements
declared effective within the grace period or if effectiveness is not
maintained, the agreements require cash payments of liquidated damages by the
Company to Laurus at 1.0% per month, with respect to the CTN or the warrants,
and 2.0% per month, with respect to the MBN, of the respective original
principal amounts until the failure is cured. The registration statement was
filed and declared effective within the specified grace period.
18
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
On December 21, 2006, FASB Staff Position EITF 00-19-2 "Accounting for
Registration Payment Arrangements" ("FSP") was issued. The FSP specifies that
the contingent obligation to make future payments under a registration payment
arrangement should be separately recognized and measured in accordance with FASB
Statement No. 5, "Accounting for Contingencies" and that such arrangement is not
subject to SFAS No. 133. Accordingly, a liability would be recognized at the
time a payment under the arrangement becomes probable and can be reasonably
estimated. The Company adopted the FSP effective October 1, 2006. Adoption of
the FSP had no effect on the Company's financial statements.
Net cash used in operating activities was ($933,000) in the six months
ended March 31, 2007. This amount is due to a net loss for the period, adjusted
for non-cash items of $(1,844,000), increased prepaid expenses and other assets
of ($22,000), a decrease in accrued expenses and other current liabilities of
($101,000); offset in part by decreased accounts receivable of $733,000,
decreased inventory of $170,000 and increase in accounts payable of $131,000.
Net cash used in operating activities was ($728,000) in the six months ended
March 31, 2006. This amount is due to a net loss for the period, adjusted for
non-cash items, of ($1,501,000), increased prepaid expenses and other assets of
($165,000), decreased accounts payable of ($1,005,000), and decreased accrued
expenses of ($10,000), offset, in part, by dividend distributions of $574,000
received from the Company's Australian affiliates, decreased accounts receivable
of $1,203,000, primarily due to lower sales in this period combined with a
continued steady collections of prior accounts receivable, decreased inventory
of $153,000, and decreased income taxes receivable of $23,000. The Company sells
its products primarily to international markets on terms generally greater than
30 days. The Company granted 90 day payment terms to its Australian distributor.
Based upon history, and the Company's current review of its accounts receivable,
it believes it is adequately reserved for potentially uncollectible accounts.
However, given the Company's sales and accounts receivable are concentrated to a
small group of customers and in certain markets, any changes in conditions could
cause a material impact to its net income (loss) and cash flow. Additionally,
the timing and size of the Company's future Aurora sales orders, as well as the
potential impact of current and future sales programs, could have an impact on
cash from operations and on gross profit percentages.
Cash used in investing activities for investing in property and equipment for
the six months ended March 31, 2007 amounted to ($46,000) as compared with
($78,000) in the prior-year period.
Cash provided by (used in) financing activities in the six months ended
March 31, 2007 and 2006 were $433,000 and ($22,000) respectively. The Company
had net long term debt repayments of ($30,000) and ($22,000) for the six months
ended March 31, 2007 and 2006, respectively. The Company had net borrowings on
its Line of Credit of $463,000 in the six months ended March 31, 2007.
19
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
At March 31, 2007, future minimum payments under non-cancelable operating
leases and principal payments to be made for long-term debt maturing over the
next five years are as follows:
(in thousands)
Fiscal Year Operating Lease Debt Repayments
----------- --------------- ---------------
2007 144 496
2008 30 40
Thereafter - -
--------------- ---------------
Total $ 174 $ 536
=============== ===============
|
In addition to the chart above, and in the normal course of business, purchase
orders are generated which obligate the Company for future inventory
requirements. As of March 31, 2007, purchase order commitments approximated $4.0
million and will be used for production requirements during fiscal 2007 and
beyond.
Critical Accounting Policies
There were no changes in critical accounting policies since the filing of the
Company's Annual Report on Form 10-K for the year ended September 30, 2006.
20
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
Special Note Regarding Forward-Looking Statements: A number of statements
contained in this report are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied in the applicable statements. These risks and uncertainties
include, but are not limited to: the Company's dependence on a limited base of
customers for a significant portion of sales; the Company's dependence on the
paper currency validator market and its potential vulnerability to technological
obsolescence; the possible impact of competitive products and pricing; the risks
that its current and future products may contain errors or defects that would be
difficult and costly to detect and correct; potential manufacturing
difficulties; possible risks of product inventory obsolescence; uncertainties
with respect to the Company's business strategy; general economic conditions in
the domestic and international market in which the Company operates; potential
shortages of key parts and/or raw materials; potential difficulties in managing
growth; dependence on key personnel; the relative strength of the United States
currency; and other risks described in the Company's Securities and Exchange
Commission filings.
21
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's quantitative and
qualitative disclosures about market risk since the filing of the Company's
Annual Report on Form 10-K for the year ended September 30, 2006.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is accumulated and communicated to
management in a timely manner. The Company's Chief Executive Officer and Chief
Financial Officer have evaluated this system of disclosure controls and
procedures as of the end of the period covered by this quarterly report and
believe that the system is operating effectively to ensure appropriate
disclosure. There have been no changes in the Company's internal control over
financial reporting during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
22
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holdings
At the Company's 2007 Annual Meeting of Shareholders held on April 25, 2007, the
stockholders elected the following person to serve as Class III Director of the
Company by the following vote:
FOR WITHHOLD
--- --------
Elliot H. Goldberg 6,042,662 113,506
|
Richard E. Gerzof, William H. Wood, Class I Directors and Matthew Dollinger and
Stephen Nevitt, Class II Directors continue to serve as directors. The Class I
Directors' term expires at the 2008 Annual Meeting and the Class II Directors'
term expires at the 2009 Annual Meeting.