Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
---------
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 0-25148
-------
Global Payment Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2974651
- --------------------------------- ---------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
425B Oser Avenue, Hauppauge, New York 11788
- ---------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
(631) 231-1177
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not applicable
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 ___ NO _X_
As of January 26, 2005, the registrant had a total of 5,765,490 Common Shares
outstanding.
Global Payment Technologies, Inc.
---------------------------------
Index
-----
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Page Number
-----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December
31, 2004 (unaudited) and September 30, 2004 3
Condensed Consolidated Statements of Operations -
Three Months ended December 31, 2004 and 2003
(unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Three Months ended December 31, 2004 and 2003
(unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits 19
SIGNATURES 19
- ----------
2
GLOBAL PAYMENT TECHNOLOGIES, INC.
---------------------------------
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Dollar amounts in thousands, except share data)
December 31, September 30,
2004 2004
------------- -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 4,021 $ 3,453
Accounts receivable, less allowance for
doubtful accounts of $262 and $250,
respectively 813 385
Accounts receivable from affiliates 3,739 3,780
Inventory 2,674 2,573
Prepaid expenses and other current assets 509 404
Income taxes receivable - 115
---------- ----------
Total current assets 11,756 10,710
Investments in unconsolidated affiliates 1,882 1,811
Property and equipment, net 1,971 2,134
Capitalized software costs, net 1,444 1,612
---------- ----------
Total assets $ 17,053 $ 16,267
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt, net of
discount $ 106 $ 253
Accounts payable 2,650 2,273
Accrued expenses and other current
liabilities 1,180 1,280
---------- ----------
Total current liabilities 3,936 3,806
Long-term debt, net of discount 1,290 1,354
---------- ----------
Total liabilities 5,226 5,160
---------- ----------
Shareholders' equity:
Common Stock, par value $0.01; authorized
20,000,000 shares; Issued 5,981,474 and
5,880,750, respectively 60 59
Additional paid-in capital 11,230 10,800
Retained earnings 1,463 1,283
Accumulated other comprehensive income 573 464
---------- ----------
13,326 12,606
Less: Treasury stock, at cost, 278,984
shares (1,499) (1,499)
---------- ----------
Total shareholders' equity 11,827 11,107
---------- ----------
Total liabilities and shareholders' equity $ 17,053 $ 16,267
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
GLOBAL PAYMENT TECHNOLOGIES, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
-----------
Three Months ended December 31,
------------------------------
2004 2003
---------- ----------
(Dollar amounts in thousands,
except share and per share data)
Net sales
Affiliates $ 2,541 $ 1,307
Non-affiliates 5,211 3,026
---------- ----------
7,752 4,333
Cost of sales 5,728 3,518
---------- ----------
Gross profit 2,024 815
Operating expenses 1,675 1,852
---------- ----------
Income (loss) from operations 349 (1,037)
---------- ----------
Other (expense) income:
Equity in income of unconsolidated affiliates 80 87
Interest expense, net (246) (32)
---------- ----------
Total other (expense) income, net (166) 55
---------- ----------
Income (loss) before provision for income taxes 183 (982)
Provision for income taxes 3 6
---------- ----------
Net income (loss) $ 180 ($ 988)
========== ==========
Net income (loss) per share:
Basic $ .03 ($ .18)
========== ==========
Diluted $ .03 ($ .18)
========== ==========
Common shares used in computing net income (loss)
per share amounts:
Basic 5,625,359 5,550,516
========== ==========
Diluted 5,780,798 5,550,516
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
GLOBAL PAYMENT TECHNOLOGIES, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
Three Months ended December 31,
------------------------------
2004 2003
---------- ----------
(Dollar amounts in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 180 ($ 988)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in income of unconsolidated
affiliates (80) (87)
Depreciation and amortization 681 314
Provision for losses on accounts receivable 15 14
Provision for inventory obsolescence 45 45
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable (342) 83
Decrease in accounts receivable from
affiliates 41 2,466
(Increase) decrease in inventory (130) 6
Increase in prepaid expenses and other
assets (124) (84)
Decrease (increase) in income taxes
receivable 115 (16)
Increase (decrease) in accounts payable 377 (470)
Decrease in accrued expenses and other
current liabilities (100) (482)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 678 801
---------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment (113) (79)
Investments in unconsolidated affiliates - (51)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (113) (130)
---------- ----------
FINANCING ACTIVITIES:
Net repayments of notes payable (50) (393)
Proceeds from the exercise of stock options 53 -
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 3 (393)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 568 278
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,453 1,220
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,021 $ 1,498
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest $ 34 $ 32
========== ==========
Income taxes $ 7 $ 11
========== ==========
NON-CASH FINANCING ACTIVITIES
Reduction of convertible term note and increase
in common stock and additional paid-in capital
due to conversion of note $ 373 $ -
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2004
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited interim condensed consolidated financial statements
of Global Payment Technologies, Inc. (the "Company"), including the September
30, 2004 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-month period ended December 31, 2004 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 2005.
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, 2004.
NOTE B - EMPLOYEE STOCK-BASED COMPENSATION
- ------------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," allows the fair value of stock-based compensation to
be included in expense over the period earned; alternatively, if the fair value
of stock-based compensation awards is not included in expense, SFAS 123 requires
disclosure of net income (loss), on a pro forma basis, as if expense treatment
had been applied. As permitted by SFAS 123, the Company continues to account for
such compensation under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, pursuant to which
no compensation cost has 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. Had the Company elected to recognize
compensation expense for the stock option plan, consistent with the method
prescribed by SFAS 123, the Company's net income (loss) for the periods
presented would have changed to the pro forma amounts as follows:
Three Months Ended
December 31
2004 2003
---------- ----------
(Unaudited)
(In thousands, except per share data)
Net income (loss) attributable to common
stock as reported $180 ($988)
Deduct: Total stock-based employee
compensation expense determined under fair
value method for all awards, net of related
tax effects (118) (98)
---------- ----------
Pro forma net earnings (loss), attributable
to common stock $62 ($1,086)
Net income (loss) per common share:
Basic - as reported $0.03 ($0.18)
Basic - pro forma $0.01 ($0.18)
Diluted - as reported $0.03 ($0.20)
Diluted - pro forma $0.01 ($0.20)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
6
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2004
NOTE C - CASH AND CASH EQUIVALENTS
- ----------------------------------
A significant portion of the Company's cash balance in the amount of $838,000
and $770,000, as of December 31, 2004 and September 30, 2004, 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 operating income (loss).
NOTE D - INVENTORY
- ------------------
The following is a summary of the composition of inventory:
(in thousands)
December September
31, 2004 30, 2004
---------- ----------
Raw Materials $ 1,601 $ 1,339
Work-in-progess 285 458
Finished Goods 788 776
---------- ----------
$ 2,674 $ 2,573
========== ==========
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 is 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 is collateralized by substantially all assets of the Company. As of
December 31, 2004, the CTN provides for monthly principal payments of $53,193
for October 2005 and $55,833 from November 2005 to March 2007. However, due to
the conversion of an additional $260,000 of the CTN subsequent to the balance
sheet date, the next payment is $16,241 for February 2006 followed by monthly
payments of $55,833 from March 2006 to March 2007. Interest is 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.
The value allocated to the warrants resulted in a debt discount of $506,000 that
is being recognized as interest expense over the term of the CTN. Additionally,
by allocating value to the warrants, Laurus received a beneficial conversion
feature in the amount of $304,000 that resulted in additional debt discount that
is being recognized as interest expense over the term of the CTN. Interest
expense is computed utilizing the interest method, which results in an effective
yield over the term of the CTN. In the event that the CTN, or any portion of the
CTN, is converted prior to maturity, the unamortized discount related to the
amount converted will be immediately recognized as interest expense and charged
to operations. During the three months ended December 31, 2004, Laurus converted
$373,000 of the CTN into 87,000 shares of common stock, which resulted in
7
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2004
additional amortization of $122,000 being recognized as interest expense. For
the three months ended December 31, 2004 and 2003, amortization expense was
$212,000 and $0, respectively. As of December 31, 2004, the unamortized debt
discount amounted to approximately $356,000. Amortization of debt discount for
the next four fiscal quarters, assuming no further conversions of the CTN, will
approximate $61,000, $61,000, $61,000 and 54,000, which will be charged to
operations. However, subsequent to the balance sheet date, Laurus converted
$260,000 of the CTN into 61,000 shares of common stock and as such, the
unamortized discount related to the amount converted will be immediately
recognized as interest expense and charged to operations during the quarter
ending March 31, 2005.
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 due in March 2007 (both
notes 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 December 31,
2004, no amounts were outstanding under the RN.
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.
Outstanding debt to Laurus as of December 31, 2004 is as follows:
(in thousands)
Amount
----------
Total debt $ 1,752
Less unamortized debt discount (356)
----------
Net 1,396
Less current portion (106)
----------
Long-term debt $ 1,290
----------
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.
8
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2004
NOTE G - COMPREHENSIVE INCOME
- -----------------------------
Comprehensive income is the total of net income (loss) 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. For the three
months ended December 31, 2004 and 2003, the Company's comprehensive income
(loss) is as follows:
(in thousands)
2004 2003
---------- ----------
Net income (loss) $180 ($988)
Other comprehensive income (a) 109 140
---------- ----------
Comprehensive income (loss) $289 ($848)
========== ==========
(a) Consisting of cumulative translation adjustments related to the
Company's investments in affiliates.
NOTE H - NET INCOME (LOSS) PER COMMON SHARE
- -------------------------------------------
Net income (loss) per common share amounts (basic EPS) are computed by dividing
net income (loss) by the weighted average number of common shares, excluding any
potential dilution. Net income (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. Potentially dilutive shares that are not included in
EPS because including them would be anti-dilutive are as follows:
For the three months ended December 31,
(in thousands)
2004 2003
---------- ----------
Stock options 218 747
Stock warrants 200 ---
Convertible Debt 411 ---
---------- ----------
Total 829 747
========== ==========
9
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2004
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:
Three Months Ended Three Months Ended
December 31, 2004 December 31, 2003
(In thousands, except per share data) (In thousands, except per share data)
-------------------------------------------- --------------------------------------------
Net income Shares Per Share Net income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
-------------- --------------- ----------- -------------- --------------- -----------
Net income (loss) $180 ($988)
Basic EPS
- ---------
Net income (loss) attributable to 180 5,625.4 $0.03 (988) 5,550.5 ($0.18)
common stock
Effect of dilutive securities
- -----------------------------
Stock options and warrants 0 155.4 0 0 0 0
-------------- --------------- ----------- -------------- --------------- -----------
Diluted EPS
- -----------
Net income (loss) attributable to
common stock and assumed option
and warrant exercises $180 5,780.8 $0.03 ($988) 5,550.5 ($0.18)
============== =============== =========== ============== =============== ===========
NOTE I - ACCOUNTS RECEIVABLE AND SALES DATA FOR UNCONSOLIDATED AFFILIATES
- -------------------------------------------------------------------------
Net sales to unconsolidated affiliates and accounts receivable from
unconsolidated affiliates for the respective periods are as follows:
Net sales to affiliates
(in thousands)
Three months ended:
12/31/2004 12/31/2003
---------- ----------
Australia $ 2,540 $ 1,037
Abacus-UK 1 -
South Africa - 270
---------- ----------
$ 2,541 $ 1,307
========== ==========
Accounts receiveable
from affiliates
(in thousands)
12/31/2004 9/30/2004
---------- ----------
Australia $ 3,591 $ 3,632
Abacus-UK 148 148
South Africa - -
---------- ----------
$ 3,739 $ 3,780
========== ==========
Effective January 15, 2004, the Company's remaining interest in its South Africa
affiliate was sold and therefore it is no longer an affiliate. Sales through
January 14, 2004 are included in the affiliate sales data. Accounts receivable
from affiliates at December 31, 2004 exclude amounts from such entity.
10
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2004
NOTE J - SUMMARY FINANCIAL INFORMATION FOR UNCONSOLIDATED INVESTEES
- -------------------------------------------------------------------
Financial information with respect to the Company's Australian affiliates is
included in the accompanying financial statements based on the affiliates'
results for the three months ended September 30, 2004 and 2003. The following
summary financial information reflects the combined assets and liabilities of
GPTA and eCash as of September 30, 2004 and 2003 and the combined operating
results for the three months ended September 30, 2004 and 2003. The accompanying
consolidated results of operations include the Company's equity in the results
of operations of these affiliates in the amounts of ($7,000) and $7,000 for the
three months ended September 30, 2004 and 2003 respectively. For the three
months ended September 30, 2004 and 2003, the Company increased its equity in
income of unconsolidated affiliates by $87,000 and $80,000, respectively, which
represents the recognition of the Company's share of the gross profits on
intercompany sales to its affiliates that have been recognized by these
affiliates. Deferred gross profit of $415,000 and $502,000 as of December 31,
2004 and September 30, 2004, respectively, is shown as a reduction of accounts
receivable from affiliates in the accompanying balance sheets. Summarized
financial information for GPT Australia and eCash, in which the Company owns a
50% and 35% non controlling interest, respectively, is as follows:
All figures are in U.S. dollars (in thousands).
Three Months Ended
September 30, September 30,
2004 2003
--------------- ---------------
Net sales $ 3,496 $ 3,467
Operating loss (33) 72
Net loss (28) 56
September 30, September 30,
2004 2003
--------------- ---------------
Current assets $ 9,258 $ 10,082
Non-current assets 535 158
Current liabilities 5,854 6,623
Non-current liabilities - -
--------------- ---------------
Net assets $ 3,939 $ 3,617
=============== ===============
NOTE K - RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------------
SFAS No. 123 (revised 2004), Share-Based Payment, issued in December 2004, is a
revision of FASB Statement 123, Accounting for Stock-Based Compensation, and
supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. The Statement focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. SFAS 123 (revised 2004) requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award. This
statement is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 and the Company will adopt the
standard in the fourth quarter of fiscal 2005. The Company has not determined
the impact, if any, that this statement will have on its consolidated financial
statements.
11
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
December 31, 2004
NOTE L - 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,
2004 through December 31, 2004:
(in thousands)
Amount
----------
Beginning Balance as of October 1, 2004 $ 298
Deduct: Payments (25)
Add: Provision 43
----------
Ending Balance as of December 31, 2004 $ 316
==========
NOTE M - SHAREHOLDERS' EQUITY
- -----------------------------
During the quarter ended December 31, 2004, the Company issued 13,000 common
shares and received proceeds of $53,000 upon exercise of stock options and
issued 87,000 common shares upon conversion of the CTN in the principal amount
of $373,000. In addition, during the quarter ended December 31, 2004, the
Company granted 60,000 stock options to a consultant for the purchase of the
Company's common stock at $4.20 per share. The options vest over two years and
expire in 2007. The Company charged $6,000 to operations during the period
representing the value of the options earned with a corresponding increase to
additional paid-in capital.
NOTE N - CONCENTRATIONS
- -----------------------
During the quarter ended December 31, 2004, the Company had three customers that
accounted for approximately 33%, 26%, and 11% of net sales. During the quarter
ended December 31, 2003, the Company had a customer that accounted for
approximately 24% of net sales. There were no other customers that accounted for
10% or more of net sales in either period.
NOTE O - SUBSEQUENT EVENTS
- --------------------------
Subsequent to December 31, 2004, the principal amount of $260,000 of the CTN was
converted into 61,000 shares of common stock (see note E).
12
Global Payment Technologies, Inc.
December 31, 2004
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Three months ended December 31, 2004 compared with three months ended December
- ------------------------------------------------------------------------------
31, 2003
- --------
Sales
Net sales increased by 78.9%, or $3,419,000, to $7,752,000 in the three months
ended December 31, 2004 as compared with $4,333,000 in the comparative
prior-year period. This improvement was due to increased sales of $3,793,000 to
the gaming market, primarily the result of increased demand in Russia and from
the Company's Australian affiliate, partially offset by decreased sales of
$374,000 to the beverage and vending market. Gaming sales for the three months
ended December 31, 2004 were $7,231,000, or 93.3% of sales, as compared with
$3,438,000, or 79.3% of sales, in the prior year period. Beverage and vending
sales for the three months ended December 31, 2004 were $521,000, or 6.7% of
sales, as compared with $895,000, or 20.7 % of sales, in the prior year period.
Gross Profit
Gross profit increased to $2,024,000, or 26.1% of net sales, in the three months
ended December 31, 2004 as compared with $815,000, or 18.8% of net sales, in the
comparative prior-year period. The increase in gross profit, as a percentage of
sales, was primarily the result of achieving a 78.9% sales increase while at the
same time leveraging off of existing fixed manufacturing costs, offset slightly
by a decrease in margins due to the mix of products sold during the quarter.
Historically, the Company's gross profit as a percentage of sales for the
quarters ended December 2003, March 2004, June 2004, September 2004 and December
2004 was 18.8%, 17.9%, 23.6%, 25.2% and 26.1%, respectively. The Company is
continuing its efforts to further reduce costs and to improve the margin on its
Aurora product, and while improvements in purchasing costs and manufacturing
efficiencies have been achieved by the end of fiscal 2004, until such time as
these benefits are substantially realized during the quarter ended March 31,
2005, the margins will be affected by the mix of products as well as sales
volumes.
Operating Expenses
Operating expenses decreased to $1,675,000, or 21.6% of sales, in the three
months ended December 31, 2004 as compared with $1,852,000, or 42.7% of sales,
in the comparative prior-year period. This decrease of $177,000 is primarily the
result of the Company's completion of its cost reduction initiatives in December
2003, which consisted primarily of reductions in employee and employee related
expenses.
Income Taxes
With respect to the provision for income taxes, the effective rate was 1.7% as
compared with 0.6% 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 December
31, 2004. 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 Income (Loss)
Net income (loss) for the quarter was $180,000, or $0.03 per share, as compared
with ($988,000), or ($0.18) per share, in the comparative prior-year period. In
addition to its operations, the Company owns interests in unconsolidated
affiliates in Australia and the United Kingdom, which are accounted for using
the equity method, and South Africa, which was accounted for on a cost basis. On
January 15, 2004 the Company sold its remaining ownership interest in its South
African affiliate. In addition, the Company owns controlling interests in
consolidated subsidiaries in the United Kingdom, Russia, and the United States.
13
Global Payment Technologies, Inc.
December 31, 2004
Included in the results of operations for the three months ended December 31,
2004 and 2003 are the Company's share of net profits (losses) of these
affiliates of $80,000 and $87,000, respectively, which includes $87,000 and
$80,000, respectively, of the Company's proportionate share of the related gross
profit on product sales to its affiliates, which have been sold by the
affiliates to third party end users. Excluding this intercompany gross profit
adjustment, the Company's share of net (loss) income of these unconsolidated
affiliates was ($7,000) and $7,000 for the three months ended December 31, 2004
and 2003, respectively.
Included in interest expense for the three months ended December 31, 2004 is
$212,000 as a result of the amortization of debt discount, which included
accelerated amortization resulting from partial conversions on the Company's
$1.5 million secured convertible term note (see Note E of the Condensed
Consolidated Financial Statements).
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 December 31, 2004, the Company's cash
and cash equivalents were $4,021,000 as compared with $3,453,000 at September
30, 2004. A significant portion of the Company's cash balance in the amount of
$838,000 and $770,000, as of December 31, 2004 and September 30, 2004,
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 initiated
outsourcing some of its manufactured product in an effort to improve gross
margin percentages as well as its cash flow. In addition the Company has
realized significant savings from its cost reduction initiatives completed in
December 2003. As a result of these savings and the funds available under the
credit facility with Laurus discussed below, the Company believes that its
available resources should be sufficient to meet its obligations as they become
due and permit continuation of its planned product development and operations
for the next 12 months.
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 is 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 is collateralized by substantially all assets of the Company. As of
December 31, 2004, the CTN provides for monthly principal payments of $53,193
for October 2005 and $55,833 from November 2005 to March 2007. However, due to
the conversion of an additional $260,000 of the CTN subsequent to the balance
sheet date, the next payment is $16,241 for February 2006 followed by monthly
payments of $55,833 from March 2006 to March 2007. Interest is 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. The Company utilized approximately $1,200,000
of the proceeds to repay amounts outstanding under a previous credit agreement.
The value allocated to the warrants resulted in a debt discount of $506,000 that
is being recognized as interest expense over the term of the CTN. Additionally,
by allocating value to the warrants, Laurus received a beneficial conversion
feature in the amount of $304,000 that resulted in additional debt discount that
is being recognized as interest expense over the term of the CTN. Interest
expense is computed utilizing the interest method, which results in an effective
yield over the term of the CTN. For the three months ended December 31, 2004 and
2003, amortization expense was $212,000 and $0, respectively. As of December 31,
2004, the unamortized debt discount amounted to approximately $356,000.
Amortization of debt discount for the next four fiscal quarters, assuming no
further conversions of the CTN, will approximate $61,000, $61,000, $61,000 and
$54,000, which will be charged to operations. However, subsequent to the balance
sheet date, Laurus converted $260,000 of the CTN into 61,000 shares of common
14
Global Payment Technologies, Inc.
December 31, 2004
stock, and as such, the unamortized discount related to the amount converted
will be immediately recognized as interest expense and charged to operations
during the quarter ending March 31, 2005.
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 due in March 2007 (both
notes 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 December 31,
2004, no amounts were outstanding under the RN.
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.
Net cash provided by operating activities was $678,000 in the three months ended
December 31, 2004. This amount is due to net income for the period, adjusted for
non-cash items of $841,000, increased accounts payable of $377,000, and
decreased income taxes receivable of $115,000, offset, in part by, increased
accounts receivable of $301,000, primarily due to higher sales this period,
partially offset by continued steady collections of prior accounts receivable,
increased prepaid expenses and other assets of $124,000, increased inventory of
$130,000, and decreased accrued expenses and other current liabilities of
$100,000. Net cash provided by operating activities was $801,000 in the three
months ended December 31, 2003. This amount is due to decreased accounts
receivable of $2,549,000 and decreased inventory of $6,000, offset, in part by,
the net loss for the period, adjusted for non-cash items, of ($702,000),
increased prepaid expenses and other assets of $84,000, increased income taxes
receivable of $16,000, decreased accounts payable of $470,000, and decreased
accrued expenses and other current liabilities of $482,000.
Cash used in investing activities for the three months ended December 31, 2004
amounted to $113,000 as compared with $130,000 in the prior-year period.
Investments in property and equipment in the three months ended December 31,
2004 amounted to $113,000 as compared with $79,000 in 2003. In addition, for the
three months ended December 31, 2003 the Company invested $51,000 in its South
African affiliate for working capital purposes. Effective January 15, 2004, the
Company no longer has any investment in this entity.
Cash provided by (used in) financing activities in the three months ended
December 31, 2004 and 2003 includes net repayments of $50,000 and $393,000,
respectively. In the three months ended December 31, 2004 and 2003, the Company
received $53,000 and $0, respectively, from the exercise of stock options.
15
Global Payment Technologies, Inc.
December 31, 2004
At December 31, 2004, future minimum payments under noncancellable operating
leases and 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
------------- --------------- ---------------
2005 $ 312 $ -
2006 319 667
2007 - 1,085
Thereafter - -
--------------- ---------------
Total $ 631 $ 1,752
=============== ===============
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 December 31, 2004, purchase order commitments approximated
$15.7 million and will be used for production requirements during fiscal 2005
and beyond.
Critical Accounting Policies
- ----------------------------
Management's discussion and analysis is based on our consolidated financial
statements, which are prepared using certain critical accounting policies that
require management to make judgments and estimates that are subject to varying
degrees of uncertainty. While we believe that these accounting policies and
management's judgments and estimates are reasonable, actual future events can
and often do result in outcomes that can be materially different from
management's current judgments and estimates. We believe that the accounting
policies and related matters described in the paragraphs below are those that
depend most heavily on management's judgments and estimates.
Inventory:
- ----------
Inventory is stated at the lower of cost (first-in, first-out method) or net
realizable value. The Company analyzes the net realizable value of its inventory
on an ongoing basis. In determining whether the net realizable value of its
inventory is impaired, the Company considers historical sales performance and
expected future product sales, market conditions in which the Company
distributes its products, changes in product strategy and the potential for the
introduction of new technology or products by the Company and its competitors.
These items, as well as the introduction of new technology on products, could
result in future inventory obsolescence.
Capitalized Software Costs:
- ---------------------------
Based upon achieving technological feasibility through a detailed program design
for Argus(TM) and Aurora products, the Company has capitalized the cost of
software coding and development of these products, and reflects the amortization
of these costs in cost of sales. The annual amortization is calculated using the
greater of (a) the ratio that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product or (b)
the straight-line method over the remaining estimated economic life of the
product including the period being reported on. The estimation of both future
sales of products as well as the life of the product are critical estimates that
are affected by both internal and external factors that might affect the
Company's estimates. If the useful life is reduced, or sales projections fall
short of the estimation, amortization expense will increase.
Revenue Recognition:
- --------------------
The Company recognizes revenue upon shipment of products to its customers and
the passage of title, including shipments to its unconsolidated affiliates, or
at the time services are completed with respect to repairs not covered by
warranty agreements. With respect to sales to its unconsolidated affiliates, the
Company defers its pro rata share of gross profit on those sales until such time
as its affiliates sell to a third party customer. The timing of sales to
affiliates can have an effect on the Company's recognized profitability.
16
Global Payment Technologies, Inc.
December 31, 2004
Warranty Policy:
- ----------------
The Company provides for the estimated cost of product warranty at the time
related sales revenue is recognized. Furthermore, the Company warrants that its
products are free from defects in material and workmanship for a period of one
year, or almost two years relating to its Argus and Aurora products, from the
date of initial purchase. The warranty does not cover any losses or damage that
occurs as a result of improper installation, misuse or neglect and repair or
modification by anyone other than the Company and its appointed service centers.
Repair costs beyond the warranty period are charged to the Company's customers.
Reserve for Uncollectible Accounts Receivable:
- ----------------------------------------------
The Company's accounting policy is to reserve for the accounts receivable of
specific customers based on our assessment of certain customers' financial
condition. We make these assessments using our knowledge of the industry coupled
with current circumstances or known events and our past experiences. This policy
is based on our past collection experience. To the extent that our experience
changes, global economic conditions deteriorate or our customers experience
financial difficulty, our reserve may need to increase.
Investments in Unconsolidated Affiliates:
- -----------------------------------------
The Company applies the equity method of accounting to its investments
(including advances) in entities where the Company has non-controlling ownership
interests of 50% or less and exercises a significant influence on that entity.
The Company's share of these affiliates' earnings or losses is included in the
consolidated statements of operations. The Company eliminates its pro rata share
of gross profit on sales to its affiliates for inventory on hand at the
affiliates at the end of each reporting period. For investments in which no
public market exists, the Company reviews the operating performance, financing
and forecasts for such entities in assessing the net realizable values of these
investments.
Long-Lived Assets:
- ------------------
The Company accounts for long-lived assets pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The Company reviews its long-lived assets, at
least annually, for indicators of impairment or upon actual impairment events or
indicators.
Income Taxes:
- -------------
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". SFAS No. 109 requires an asset and liability approach for financial
reporting for income taxes. Under SFAS No. 109, deferred taxes are provided for
temporary differences between the carrying values of assets and liabilities for
financial reporting and tax purposes at the enacted rates at which these
differences are expected to reverse. The effective tax rate for the Company is
affected by the income mix derived from the core business and from its share of
income from foreign affiliates that may have different tax rates. Realization of
deferred tax assets is primarily dependent upon the Company's future
profitability, and the Company has, consequently, provided a full valuation
allowance against its deferred income tax assets due to recurring losses and
uncertainty as to the ability to generate future taxable income to sufficiently
realize those assets. To the extent the Company's profitability improves, the
valuation allowance may be wholly or partially reversed. At such time that the
Company believes that it will realize sufficient taxable income the valuation
allowance will be reassessed.
17
Global Payment Technologies, Inc.
December 31, 2004
Debt Discounts:
- ---------------
Pursuant to the Securities Purchase Agreement in which the Company received
proceeds of $1,500,000 from the issuance of the CTN in the principal amount of
$1,500,000 and 7 year warrants to purchase 200,000 shares of the Company's
common stock. The value allocated to the warrants resulted in a debt discount of
$506,000 that is being recognized as interest expense over the term of the CTN.
Additionally, by allocating value to the warrants, the purchaser received a
beneficial conversion feature in the amount of $304,000 that resulted in
additional debt discount that is being recognized as interest expense over the
term of the CTN. Interest expense is computed utilizing the interest method,
which results in an effective yield over the term of the CTN. In the event that
the CTN, or any portion of the CTN, is converted prior to maturity, the
unamortized discount related to the amount converted will be immediately
recognized as interest expense and charged to operations. As of December 31,
2004, the unamortized debt discount amounted to approximately $356,000.
Special Note Regarding Forward-Looking Statements: A number of statements
contained in this discussion and analysis 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 the
paper currency validator market and its potential vulnerability to technological
obsolescence; the Company's dependence on a limited base of customers for a
significant portion of sales; 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; potential shortages of key parts and/or raw materials;
potential difficulties in managing growth; dependence on key personnel; the
possible impact of competitive products and pricing; uncertainties with respect
to the Company's business strategy; general economic conditions in the domestic
and international markets in which the Company operates; the relative strength
of the United States currency; and other risks described in the Company's
Securities and Exchange Commission filings.
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, 2004.
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 year that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
18
Global Payment Technologies, Inc.
December 31, 2004
PART II. OTHER INFORMATION
-------- -----------------
Item 6. Exhibits
a) Exhibits
Exhibit 31.1 - Rule 13a-14a Certification (Chief Executive Officer) (1)
Exhibit 31.2 - Rule 13a-14a Certification (Chief Financial Officer) (1)
Exhibit 32 - Section 1350 Certifications (1)
(1) filed herewith
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.
Global Payment Technologies, Inc.
---------------------------------
By: /s/ Thomas McNeill
---------------------------------
Vice President,
Chief Financial Officer and
Principal Accounting Officer
Dated: February 2, 2005
19