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 March 31, 2005
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 0-25148
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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
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(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 May 3, 2005, the registrant had a total of 6,189,529 Common Shares
outstanding.
Global Payment Technologies, Inc.
---------------------------------
Index
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PART I. FINANCIAL INFORMATION
- ------ ---------------------
Page Number
-----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2005 (unaudited)
and September 30, 2004 3
Condensed Consolidated Statements of Operations - Six Months ended
March 31, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Operations - Three Months ended
March 31, 2005 and 2004 (unaudited) 5
Condensed Consolidated Statements of Cash Flows - Six Months ended
March 31, 2005 and 2004 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7 - 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15 -21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
- --------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits 22
SIGNATURES 22
- ----------
2
GLOBAL PAYMENT TECHNOLOGIES, INC.
---------------------------------
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Dollar amounts in thousands, except share data)
------------------------------------------------
March 31, September 30,
-------------- --------------
2005 2004
-------------- --------------
(Unaudited)
- ------
Current Assets:
Cash and cash equivalents $ 3,583 $ 3,453
Accounts receivable, less allowance for doubtful
accounts of $109 and $250, respectively 1,113 385
Accounts receivable from affiliates 4,106 3,780
Inventory 3,581 2,573
Prepaid expenses and other current assets 339 404
Income taxes receivable - 115
-------------- --------------
Total current assets 12,722 10,710
Investments in unconsolidated affiliates 2,030 1,811
Property and equipment, net 1,867 2,134
Capitalized software costs, net 1,300 1,612
-------------- --------------
Total assets $ 17,919 $ 16,267
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt, net of discount $ - $ 253
Accounts payable 2,882 2,273
Accrued expenses and other current liabilities 975 1,280
-------------- --------------
Total current liabilities 3,857 3,806
Long-term debt, net of discount 299 1,354
-------------- --------------
Total liabilities 4,156 5,160
-------------- --------------
Shareholders' equity:
Common stock, par value $0.01; authorized 20,000,000 shares;
issued 6,426,713 and 5,880,750, respectively 64 59
Additional paid-in capital 13,143 10,800
Retained earnings 1,341 1,283
Accumulated other comprehensive income 714 464
-------------- --------------
15,262 12,606
Less: Treasury stock, at cost, 278,984 shares (1,499) (1,499)
-------------- --------------
Total shareholders' equity 13,763 11,107
-------------- --------------
Total liabilities and shareholders' equity $ 17,919 $ 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)
-----------
Six Months ended March 31,
--------------------------------
2005 2004
-------------- --------------
(Dollar amounts in thousands,
except share and per share data)
Net sales
Affiliates $ 6,605 $ 2,459
Non-affiliates 9,092 7,586
-------------- --------------
15,697 10,045
Cost of sales 11,337 8,205
-------------- --------------
Gross profit 4,360 1,840
Operating expenses 3,414 3,657
-------------- --------------
Income (loss) from operations 946 (1,817)
-------------- --------------
Other (expense) income:
Equity in (loss) income of unconsolidated
affiliates (266) 128
Gain on sale of investment in unconsolidated
affiliate - 78
Interest expense, net (617) (77)
-------------- --------------
Total other (expense) income, net (883) 129
-------------- --------------
Income (loss) before provision for income taxes 63 (1,688)
Provision for income taxes 5 11
-------------- --------------
Net income (loss) $ 58 $ (1,699)
============== ==============
Net income (loss) per share:
Basic $ 0.01 $ (0.31)
============== ==============
Diluted $ 0.01 $ (0.31)
============== ==============
Common shares used in computing net income (loss)
per share amounts:
Basic 5,744,175 5,555,518
============== ==============
Diluted 5,976,725 5,555,518
============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
GLOBAL PAYMENT TECHNOLOGIES, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
-----------
Three Months ended March 31,
--------------------------------
2005 2004
-------------- --------------
(Dollar amounts in thousands,
except share and per share data)
Net sales
Affiliates $ 4,064 $ 1,152
Non-affiliates 3,881 4,560
-------------- --------------
7,945 5,712
Cost of sales 5,609 4,687
-------------- --------------
Gross profit 2,336 1,025
Operating expenses 1,739 1,805
-------------- --------------
Income (loss) from operations 597 (780)
-------------- --------------
Other (expense) income:
Equity in (loss) income of unconsolidated affiliates (346) 41
Gain on sale of investment in unconsolidated
affiliate - 78
Interest expense, net (371) (45)
-------------- --------------
Total other (expense) income, net (717) 74
-------------- --------------
Loss before provision for income taxes (120) (706)
Provision for income taxes 2 5
-------------- --------------
Net loss $ (122) $ (711)
============== ==============
Net loss per share:
Basic $ (0.02) $ (0.13)
============== ==============
Diluted $ (0.02) $ (0.13)
============== ==============
Common shares used in computing net loss
per share amounts:
Basic 5,865,634 5,560,577
============== ==============
Diluted 5,865,634 5,560,577
============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
GLOBAL PAYMENT TECHNOLOGIES, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
-----------
Six Months ended March 31,
------------------------------
2005 2004
------------- -------------
(Dollar amounts in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 58 $ (1,699)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Equity in loss (income) of unconsolidated affiliates 266 (128)
Gain on sale of unconsolidated affiliate - (78)
Depreciation and amortization 1,445 672
Provision for losses on accounts receivable 26 40
Provision for inventory obsolescence 90 90
Issuance of stock options to a consultant 32 -
Changes in operating assets and liabilities:
Increase in accounts receivable (738) (499)
(Increase) decrease in accounts receivable from
affiliates (594) 2,860
Increase in inventory (1,081) (212)
Increase in prepaid expenses and other assets (2) (320)
Decrease (increase) in income taxes receivable 115 (12)
Increase (decrease) in accounts payable 609 (218)
Decrease in accrued expenses and other current
liabilities (305) (476)
------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (79) 20
------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment (232) (184)
Proceeds from sale of investment in unconsolidated
affiliate - 154
Investments in unconsolidated affiliates - (51)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (232) (81)
------------- -------------
FINANCING ACTIVITIES:
Net repayments of notes payable (50) (1,793)
Proceeds from the issuance of convertible debt - 2,250
Proceeds from the exercise of stock options 491 124
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 441 581
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 130 520
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,453 1,220
------------- -------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 3,583 $ 1,740
============= =============
CASH PAID DURING THE PERIOD FOR:
Interest $ 54 $ 58
============= =============
Income Taxes $ 7 $ -
============= =============
NON-CASH FINANCING ACTIVITIES
Reduction of convertible notes and increase in common
stock and additional paid-in capital due to conversion of
notes $ 1,826 $ -
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005
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 six-month period ended March 31, 2005 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 ("APB")
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 Six Months Ended
March 31, March 31,
2005 2004 2005 2004
--------- ----------- ---------- ------------
(Unaudited)
(In thousands, except per share data)
Net (loss) income attributable to common stock as
reported $(122) $(711) $58 $(1,699)
Deduct: Total stock-based employee compensation
expense determined under fair value method for all
awards,net of related tax effects (139) (159) (257) (257)
--------- ----------- ---------- ------------
Pro forma net loss, attributable to common stock $(261) $(870) $(199) $(1,956)
Net (loss) income per common share:
Basic - as reported $(0.02) $(0.13) $0.01 $(0.31)
Basic - pro forma $(0.04) $(0.16) $(0.03) $(0.35)
Diluted - as reported $(0.02) $(0.13) $0.01 $(0.31)
Diluted - pro forma $(0.04) $(0.16) $(0.03) $(0.35)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
7
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005
NOTE C - CASH AND CASH EQUIVALENTS
- ----------------------------------
A significant portion of the Company's cash balance in the amount of
$908,000 and $770,000, as of March 31, 2005 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)
March September
31, 2005 30, 2004
---------- -----------
Raw Materials $2,438 $1,339
Work-in-process 307 458
Finished Goods 836 776
---------- -----------
$3,581 $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 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. At September 30, 2004, $1,425,000
was outstanding under the CTN. During the six months ended March 31, 2005, the
Company repaid $50,000 and Laurus converted the remaining $1,375,000 of the CTN
into 323,000 shares of common stock, resulting in the full repayment of the CTN.
As a result of the CTN being fully repaid, $29,000 of unamortized closing costs
related to the CTN were charged to operations in the three and six months ended
March 31, 2005.
The value allocated to the warrants resulted in a debt discount of $506,000
that was 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
was recognized as interest expense over the term of the CTN. Interest expense
was computed utilizing the interest method, which results in an effective yield
over the term of the CTN. As the CTN was converted, the unamortized discount
related to the amount converted was immediately recognized as interest expense
and charged to operations. Amortization for the three and six months ended March
31, 2005 was $356,000 and $568,000, respectively. Amortization amounted to
$19,000 for the three and six months ended March 31, 2004. As of March 31, 2005,
the entire amount of debt discount has been recognized as interest expense and
charged to operations.
8
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
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%. During the six
months ended March 31, 2005, Laurus converted $451,000 of the MBN into 106,000
shares of common stock. At March 31, 2005, $299,000 was outstanding under the
MBN. Subsequent to March 31, 2005, Laurus converted $239,000 of the MBN into
56,100 shares of common stock. At March 31, 2005, 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 March 31, 2005 is as follows:
(in thousands)
Amount
--------------------
Total debt $299
Less unamortized debt discount -
--------------------
Net 299
Less current portion -
--------------------
Long term debt $299
====================
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.
9
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005
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
and six months ended March 31, 2005 and 2004, the Company's comprehensive income
(loss) is as follows:
(in thousands) (in thousands)
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
------------ ------------ ------------- -------------
Net (loss) income $(122) $(711) $58 $(1,699)
Other comprehensive
income (a) 141 238 250 378
------------ ------------ ------------- -------------
Comprehensive income (loss) $19 $(473) $308 $(1,321)
============ ============ ============= =============
(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:
(in thousands) (in thousands)
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
--------------- ---------------- ---------------- ----------------
Stock options 921 679 146 679
Stock warrants 200 200 - 200
Convertible Debt 70 528 70 528
--------------- ---------------- ---------------- ----------------
Total 1,191 1,407 216 1,407
=============== ================ ================ ================
10
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations is as follows:
Six Months Ended Six Months Ended
March 31, 2005 March 31, 2004
(In thousands, except (In thousands, except
per share data) per share data)
---------------------------------- ---------------------------------
Net income Shares Per Net income Shares Per
Share Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- ------- ----------- ------------- -------
Net income (loss) $58 $(1,699)
Basic EPS
- --------
Net income (loss) attributable to 58 5,744.2 $0.01 (1,699) 5,555.5 $(0.31)
Common stock
Effect of dilutive securities
- -----------------------------
Stock options and warrants - 232.5 - - - -
----------- ------------- ------- ----------- ------------- -------
Diluted EPS
- -----------
Net income (loss) attributable to
Common stock and assumed option
and warrant exercises $58 5,976.7 $0.01 $(1,699) 5,555.5 $(0.31)
=========== ============= ======= =========== ============= =======
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
(In thousands, except (In thousands, except
per share data) per share data)
---------------------------------- ---------------------------------
Net income Shares Per Net income Shares Per
Share Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- ------- ----------- ------------- -------
Net loss $(122) $(711)
Basic EPS
- ---------
Net loss attributable to (122) 5,865.6 $(0.02) (711) 5,560.6 $(0.13)
Common stock
Effect of dilutive securities
- -----------------------------
Stock options and warrants - - - - - -
----------- ------------- ------- ----------- ------------- -------
Diluted EPS
- -----------
Net loss attributable to
Common stock and assumed option
and warrant exercises $(122) 5,865.6 $(0.02) $(711) 5,560.6 $(0.13)
=========== ============= ======= =========== ============= =======
11
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005
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:
(in thousands) (in thousands)
Net sales to affiliates Net sales to affiliates
Three months ended March 31, Six months ended March 31,
2005 2004 2005 2004
----------- ----------- ------------ ----------------------
Australia $4,064 $1,104 $6,604 $2,141
Abacus-UK - - 1 -
South Africa - 48 - 318
----------- ----------- ------------ ----------------------
$4,064 $1,152 $6,605 $2,459
=========== =========== ============ ======================
(in thousands)
Accounts receivable
from affiliates:
March September
31, 2005 30, 2004
----------- -----------
Australia $4,106 $3,632
Abacus-UK - 148
South Africa - -
----------- -----------
$4,106 $3,780
=========== ===========
Effective January 15, 2004, the Company's remaining interest in its South
Africa affiliate was sold. Sales through January 14, 2004 are included in the
affiliate sales data. Accounts receivable from affiliates at March 31, 2005 and
September 30, 2004 exclude amounts from such entity.
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 six months ended December 31, 2004 and 2003. The following
summary financial information reflects the combined assets and liabilities of
Global Payment Technologies Australia Pty Limited ("GPTA") and eCash Management
Pty Limited ("eCash") as of December 31, 2004 and 2003 and the combined
operating results for the six months ended December 31, 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 $9,000 and
$16,000 for the three months ended March 31, 2005 and 2004, respectively, and
$2,000 and $23,000 for the six months ended March 31, 2005 and 2004
respectively. For the three months ended March 31, 2005 and 2004, the Company
(decreased) increased its equity in income of unconsolidated affiliates by
($355,000) and $25,000, respectively and for the six months ended March 31, 2005
and 2004, the Company (decreased) increased its equity in income of
unconsolidated affiliates by ($268,000) and $105,000, respectively, which
represents the (deferral) recognition of the Company's share of the gross
profits on intercompany sales to its affiliates that (have not) have been
recognized by these affiliates. Deferred gross profit of $770,000 and $502,000
as of March 31, 2005 and September 30, 2004, respectively, is shown as a
reduction of accounts receivable from affiliates in the accompanying balance
sheets. Summarized financial information for GPTA and eCash, in which the
Company owns a 50% and 35% non controlling interest, respectively, is as
follows:
12
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005
All figures are in U.S. dollars (in thousands).
Six Months Ended December 31,
2004 2003
-------------------- ---------------------
Net sales $8,292 $7,477
Operating income (43) 246
Net income (34) 204
December 31, 2004 December 31, 2003
-------------------- ---------------------
Current assets $9,370 $7,554
Non-current assets 541 175
Current liabilities 5,904 3,537
Non-current
liabilities - -
-------------------- ---------------------
Net assets $4,007 $4,192
==================== =====================
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 (as amended in April 2005) is effective as of the beginning of the
first annual reporting period that begins after June 15, 2005 and the Company
will adopt the standard in the first quarter of fiscal 2006. The Company has not
determined the impact, if any, that this statement will have on its consolidated
financial statements.
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 March 31, 2005:
(in thousands)
Amount
--------------
Beginning Balance as of October 1, 2004 $298
Deduct: Payments (69)
Add: Provision 75
--------------
Ending Balance as of March 31, 2005 $304
==============
13
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2005
NOTE M - SHAREHOLDERS' EQUITY
- -----------------------------
During the six months ended March 31, 2005, the Company issued 117,000
common shares and received proceeds of $491,000 upon exercise of stock options,
issued 323,000 common shares upon conversion of the CTN in the principal amount
of $1,375,000, and issued 106,000 common shares upon conversion of the MBN in
the principal amount of $451,000. In addition, during the six months ended March
31, 2005, 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 and $26,000 to
operations during the three months and six months ended March 31, 2005,
representing the value of the options earned with a corresponding increase to
additional paid-in capital.
NOTE N - CONCENTRATIONS
- -----------------------
The Company's largest customers for three and six months ended March 31,
2005 represent the following percentages of net sales:
(in thousands) (in thousands)
Three months Six months
ended ended
March 31, March 31,
2005 2004 2005 2004
----- ----- ----- -----
Net sales:
Customer A 51% 19% 42% 21%
Customer B 10% * 18% *
Customer C * 14% * 10%
Customer D * 11% * 10%
* Represents less than 10% for the period
There were no other customers that represented 10% or more of net sales
respectively, in any of the periods presented. Customer A is one of the
Company's unconsolidated affiliates in Australia (see Note I).
NOTE O - SUBSEQUENT EVENTS
- --------------------------
Subsequent to March 31, 2005, the principal amount of $239,000 of the MBN
was converted into 56,100 shares of common stock (see Note E).
14
Global Payment Technologies, Inc.
March 31, 2005
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Six months ended March 31, 2005 compared with six months ended March 31, 2004
- -----------------------------------------------------------------------------
Sales
Net sales increased by 56.3%, or $5,652,000, to $15,697,000 in the six
months ended March 31, 2005 as compared with $10,045,000 in the comparative
prior-year period. This improvement was due to increased sales of $6,689,000 to
the gaming market, primarily the result of increased demand from the Company's
Australian affiliate and in Russia, partially offset by decreased sales of
$1,037,000 to the beverage and vending market, as a result of significant
cigarette tax increases in Germany. Gaming sales for the first half of fiscal
2005 were $14,454,000, or 92.1% of sales, as compared with $7,765,000, or 77.3%
of sales, in the prior year period. Beverage and vending sales for the first
half of fiscal 2005 were $1,243,000, or 7.9% of sales, as compared with
$2,280,000, or 22.7 % of sales, in the prior year period.
Gross Profit
Gross profit increased to $4,360,000, or 27.8% of net sales, in the six
months ended March 31, 2005 as compared with $1,840,000, or 18.3% 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 56.3% sales
increase while at the same time leveraging off of existing fixed manufacturing
costs and achieving substantial improvements in purchasing costs of the
Company's Aurora product. In the future, it is expected that margins will be
most affected by the Company's sales volumes, and to a lesser extent product or
customer mix.
Operating Expenses
Operating expenses decreased to $3,414,000, or 21.7% of sales, in the six
months ended March 31, 2005 as compared with $3,657,000, or 36.4% of sales, in
the comparative prior-year period. This decrease of $243,000 is primarily the
result of the Company's completion of its cost reduction initiatives completed
in December 2003.
Income Taxes
With respect to the provision for income taxes, the effective rate was a
provision of 7.9% as compared with a provision of 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 March 31, 2005. 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 six months ended March 31, 2005 was $58,000, or
$0.01 per share, as compared with ($1,699,000), or ($0.31) 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. Included in the results of operations
for the six months ended March 31, 2005 and 2004 are the Company's share of net
(losses) profits of these affiliates of ($266,000) and $128,000, respectively,
which includes ($268,000) and $105,000, respectively, of the Company's
proportionate share of the related gross profit on product sales to its
affiliates which (have not) have 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 $2,000 and $23,000 for the
six months ended March 31, 2005 and 2004, respectively. In addition, on January
15, 2004, the
15
Global Payment Technologies, Inc.
March 31, 2005
Company sold its remaining 5% ownership interest in its investment in its
South African affiliate and recognized a gain on the sale of $78,000. Included
in interest expense for the six months ended March 31, 2005 is $568,000 as a
result of the amortization of debt discount. As of March 31, 2005 the term loan
is fully repaid and the debt discount is fully amortized.
Three months ended March 31, 2005 compared with three months ended March
- ------------------------------------------------------------------------
31, 2004
- --------
Sales
Net sales increased by 39.1%, or $2,233,000, to $7,945,000 in the three
months ended March 31, 2005 as compared with $5,712,000 in the comparative
prior-year period. This improvement was due to increased sales of $2,900,000 to
the gaming market, primarily the result of demand from the Company's Australian
affiliate, partially offset by decreased sales of $667,000 to the beverage and
vending market, as a result of significant cigarette tax increases in Germany.
Gaming sales for the three months ended March 31, 2005 were $7,223,000, or 90.9%
of sales, as compared with $4,323,000, or 75.7% of sales, in the prior year
period. Beverage and vending sales for the three months ended March 31, 2005
were $722,000, or 9.1% of sales, as compared with $1,389,000, or 24.3 % of
sales, in the prior year period.
Gross Profit
Gross profit increased to $2,336,000, or 29.4% of net sales, in the three
months ended March 31, 2005 as compared with $1,025,000, or 17.9% 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 39.1% sales
increase while at the same time leveraging off of existing fixed manufacturing
costs and achieving substantial improvements in purchasing costs of the
Company's Aurora product. Historically, the Company's gross profit as a
percentage of sales for the quarters ended March 2004, June 2004, September
2004, December 2004 and March 2005 was 17.9%, 23.6%, 25.2%, 26.1% and 29.4%,
respectively. In the future, it is expected that margins will be most affected
by the Company's sales volumes, and to a lesser extent product or customer mix.
Operating Expenses
Operating expenses decreased to $1,739,000, or 21.9% of sales, in the three
months ended March 31, 2005 as compared with $1,805,000, or 31.6% of sales, in
the comparative prior-year period. This decrease of $66,000 is primarily the
result of the Company's additional professional fees incurred with
respect to the issuance of the convertible debt during the three months ended
March 31, 2004.
Income Taxes
With respect to the provision for income taxes, the effective rate was a
provision of 1.6% as compared with a provision of 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, 2005. 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 was ($122,000), or ($0.02) per share, as compared
with ($711,000), or ($0.13) 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.
Included in the results of operations for the three months ended March 31, 2005
and 2004 are the Company's share of net (losses) profits of these affiliates of
($346,000) and $41,000, respectively, which includes ($355,000) and $25,000,
respectively, of the Company's proportionate share of the related gross profit
on product sales to its affiliates, which (have not) have been sold by the
affiliates to third party end users. Excluding this intercompany gross profit
adjustment, the Company's
16
Global Payment Technologies, Inc.
March 31, 2005
share of net income of these unconsolidated affiliates was $9,000 and
$16,000 for the three months ended March 31, 2005 and 2004, respectively. In
addition, on January 15, 2004, the Company sold its remaining 5% ownership
interest in its investment in its South African affiliate and recognized a gain
on the sale of $78,000. Included in interest expense for the three months ended
March 31, 2005 is $356,000 as a result of the amortization of debt discount. As
of March 31, 2005 the term loan is fully repaid and the debt discount is fully
amortized.
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, 2005, the Company's cash
and cash equivalents were $3,583,000 as compared with $3,453,000 at September
30, 2004. A significant portion of the Company's cash balance in the amount of
$908,000 and $770,000, as of March 31, 2005 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 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. The Company utilized
approximately $1,200,000 of the proceeds to repay amounts outstanding under a
previous credit agreement. At September 30, 2004, $1,425,000 was outstanding
under the CTN. During the six months ended March 31, 2005, the Company repaid
$50,000 and Laurus converted the remaining $1,375,000 of the CTN into 323,000
shares of common stock, resulting in the full repayment of the CTN. As a result
of the CTN being fully repaid, $29,000 of unamortized closing costs related to
the CTN were charged to operations in the three and six months ended March 31,
2005.
The value allocated to the warrants resulted in a debt discount of $506,000
that was 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 was being recognized as interest expense over the term of the CTN.
Interest expense was computed utilizing the interest method, which results in an
effective yield over the term of the CTN. Amortization for the three and six
months ended March 31, 2005 was $356,000 and $568,000, respectively.
Amortization amounted to $19,000 for the three and six months ended March 31,
2004. As of March 31, 2005, the entire amount of debt discount has been
recognized as interest expense and charged to operations.
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
17
Global Payment Technologies, Inc.
March 31, 2005
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%. During the six months ended March 31, 2005, Laurus converted
$451,000 of the MBN into 106,000 shares of common stock. At March 31, 2005,
$299,000 was outstanding under the MBN. Subsequent to March 31, 2005, Laurus
converted $239,000 of the MBN into 56,100 shares of common stock. At March 31,
2005, 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 used in operating activities was ($79,000) in the six months ended
March 31, 2005. This amount is due to net income for the period, adjusted for
non-cash items, of $1,917,000, increased accounts payable of $609,000, and
decreased income taxes receivable of $115,000, reduced by, increased accounts
receivable of $1,332,000, primarily due to a $685,000 sales increase from
$7,260,000 in the quarter ended September 30, 2004 to $7,945,000 in the quarter
ended March 31, 2005, as well as a shift in payment terms of cash in advance,
primarily in Russia and Latin America, to payment terms in excess of 60 days to
other parts of the world, increased prepaid expenses and other assets of $2,000,
increased inventory of $1,081,000, primarily the result of an increase in the
Company's Aurora product due to delays in Russian orders and the slowdown in the
German cigarette vending market, due to significant German tax increases,
coupled with the Company's commitment to receive inventory from its vendors, and
decreased accrued expenses and other current liabilities of $305,000. Net cash
provided by operating activities was $20,000 in the six months ended March 31,
2004. This amount was due to decreased accounts receivable of $2,361,000,
primarily due to lower sales this period and continued steady collections of
prior accounts receivable, offset, in part by, a net loss for the period,
adjusted for non-cash items, of ($1,103,000), decreased accrued expenses and
other current liabilities of $476,000, an increase in prepaid expenses and other
assets of $320,000 (primarily the result of $226,000 of bank closing fees paid
and being amortized over the life of the loan), decreased accounts payable of
$218,000, increased inventory of $212,000 and increased income taxes receivable
of $12,000.
Net cash used in investing activities for the six months ended March 31,
2005 amounted to $232,000 as compared with $81,000 in the prior-year period.
Investments in property and equipment in the six months ended March 31, 2005
amounted to $232,000 as compared with $184,000 in 2004. In addition, for the six
months ended March 31, 2004 the Company invested $51,000 in its South African
affiliate for working capital purposes. On January 15, 2004, the Company sold
its remaining 5% interest in its South African affiliate and received proceeds
of $154,000 and recognized a gain on the sale of $78,000.
Cash provided by (used in) financing activities in the six months ended
March 31, 2005 and 2004 includes net (repayments) borrowings of ($50,000) and
$457,000, respectively. As discussed above, on March 16, 2004, the Company
received proceeds of $1,500,000 from the sale of convertible debt and warrants
and also entered into a $2,500,000 credit facility, of which $2,201,000 was
available at March 31, 2005. In the six months ended March 31, 2005 and 2004,
the Company received $491,000 and $124,000, respectively, from the exercise of
stock options.
18
Global Payment Technologies, Inc.
March 31, 2005
At March 31, 2005, 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 $208 $-
2006 319 -
2007 - 299
Thereafter - -
---------------- ------------------
Total $527 $299
================ ==================
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, 2005, purchase order commitments approximated
$11.5 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.
19
Global Payment Technologies, Inc.
March 31, 2005
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.
20
Global Payment Technologies, Inc.
March 31, 2005
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 was 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 was being recognized as interest expense over the term of the CTN.
Interest expense was 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 six months ended March 31, 2005,
Laurus converted the remaining $1,375,000 of the CTN into 323,000 shares of
common stock, resulting in the full repayment of the CTN. As a result of the
conversion of the balance of the CTN, the entire amount of debt discount has
been recognized as interest expense and charged to operations.
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 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 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.
21
Global Payment Technologies, Inc.
March 31, 2005
PART II. OTHER INFORMATION
--------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Between March 30, 2005 and the date of this report, the Company issued
63,900 shares of its common stock to Laurus Master Fund, Ltd. ("Laurus") upon
the conversion of $272,000 of the aggregate principal amount of a $750,000
secured minimum borrowing note ("the MBN"), dated as of March 15, 2004, made by
the Company in favor of Laurus. The issuance of the MBN to Laurus and the
conversion terms of the MBN were previously reported by the Company in a Current
Report on Form 8-K dated March 16, 2004. No sales commissions were paid in
connection with this transaction. The shares of the Company's common stock
issued to Laurus upon the partial conversion of the MBN were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 2005 Annual Meeting of Stockholders held on March 10,
2005, stockholders elected the following two persons to serve as Class I
Directors of the Company by the following vote:
For Withheld
--- --------
Richard E. Gerzof 5,560,584 81,488
William H. Wood 5,537,284 104,788
Stephen Nevitt and Edward Seidenberg, Class II Directors, and Thomas
Oliveri, a Class III Director, continue to serve as directors.
The Class II Directors' terms expire at the 2006 Annual Meeting
and the Class III Director's term expires at the 2007 Annual
Meeting.
No other matters were voted upon at the meeting.
Item 6. 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: May 9, 2005
22