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EXCEL - IDEA: XBRL DOCUMENT - GLOBAL AXCESS CORP | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - GLOBAL AXCESS CORP | v313015_ex31-2.htm |
EX-32.2 - EXHIBIT 32.2 - GLOBAL AXCESS CORP | v313015_ex32-2.htm |
EX-31.1 - EXHIBIT 31.1 - GLOBAL AXCESS CORP | v313015_ex31-1.htm |
EX-32.1 - EXHIBIT 32.1 - GLOBAL AXCESS CORP | v313015_ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to ___________
000-17874
(Commission file number)
GLOBAL AXCESS CORP
(Exact name of registrant as specified in its charter)
NEVADA | 88-0199674 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No). |
7800 BELFORT PARKWAY, SUITE 165 | |
JACKSONVILLE, FLORIDA | 32256 |
(Address of principal executive offices) | (Zip Code) |
(904) 280-3950
(Registrant's telephone number, including area code)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer ¨ | Accelerated Filer ¨ | |
Non-accelerated Filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act). Yes ¨No x
As of May 10, 2012, the registrant had 22,728,795 shares outstanding of its common stock, $0.001 par value.
TABLE OF CONTENTS | Page No. | |
PART I | FINANCIAL INFORMATION | |
Item 1. | Financial Statements (unaudited) | 4 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 21 |
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 29 |
Item 4. | Controls and Procedures | 30 |
PART II | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 30 |
Item 1A. | Risk Factors | 30 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30 |
Item 3. | Defaults Upon Senior Securities | 30 |
Item 4. | Mine Safety Disclosures | 30 |
Item 5. | Other Information | 30 |
Item 6. | Exhibits | 31 |
SIGNATURES | 32 |
2 |
Forward-Looking Statements
Unless the context indicates otherwise, all references in this document to “we,” “us”, “our” and the “Company” refer to Global Axcess Corp and its subsidiaries.
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q that have been or are to be filed in 2012.
When used in this report, the words “outlook”, "expects," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
Estimates of future financial results are inherently unreliable.
From time to time, representatives of the Company may make public predictions or forecasts regarding the Company's future results, including estimates regarding future revenues, expense levels, earnings or earnings from operations. Any forecast regarding the Company's future performance reflects various assumptions. These assumptions are subject to significant uncertainties and, as a matter of course, many of them will prove to be incorrect. Further, the achievement of any forecast depends on numerous factors (including those described in this discussion), many of which are beyond the Company's control. As a result, there can be no assurance that the Company's performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse. Investors are cautioned not to base their entire analysis of the Company's business and prospects upon isolated predictions, but instead are encouraged to utilize the entire available mix of historical and forward-looking information made available by the Company, and other information affecting the Company and its products, when evaluating the Company's prospective results of operations.
In addition, representatives of the Company may occasionally comment publicly on the perceived reasonableness of published reports by independent analysts regarding the Company's projected future performance. Such comments should not be interpreted as an endorsement or adoption of any given estimate or range of estimates or the assumptions and methodologies upon which such estimates are based. Undue reliance should not be placed on any comments regarding the conformity, or lack thereof, of any independent estimates with the Company's own present expectations regarding its future results of operations. The methodologies employed by the Company in arriving at its own internal projections and the approaches taken by independent analysts in making their estimates are likely different in many significant respects. Although the Company may presently perceive a given estimate to be reasonable, changes in the Company's business, market conditions or the general economic climate may have varying effects on the results obtained through the use of differing analyses and assumptions. The Company expressly disclaims any continuing responsibility to advise analysts or the public markets of its view regarding the current accuracy of the published estimates of outside analysts. Persons relying on such estimates should pursue their own independent investigation and analysis of their accuracy and the reasonableness of the assumptions on which they are based.
3 |
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited).
GLOBAL AXCESS CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | (Audited) | |||||||
March 31, 2012 | December 31, 2011 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 739,223 | $ | 975,363 | ||||
Accounts receivable, net of allowance of $28,740 in 2012 and $26,451 in 2011 | 1,140,023 | 1,034,938 | ||||||
Inventory, net of allowance for obsolescence of $182,572 in 2012 and 2011 | 1,821,118 | 1,898,732 | ||||||
Deferred tax asset - current | 278,973 | 315,960 | ||||||
Prepaid expenses and other current assets | 98,446 | 115,602 | ||||||
Total current assets | 4,077,783 | 4,340,595 | ||||||
Fixed assets, net | 9,964,345 | 9,241,824 | ||||||
Other assets | ||||||||
Merchant contracts, net | 12,134,970 | 12,435,353 | ||||||
Intangible assets, net | 4,417,345 | 4,459,334 | ||||||
Deferred tax asset - non-current | 1,696,238 | 1,659,251 | ||||||
Other assets | 113,949 | 692,027 | ||||||
Total assets | $ | 32,404,630 | $ | 32,828,384 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 5,176,964 | $ | 5,704,245 | ||||
Note payable - related party - current portion, net | 33,997 | 33,100 | ||||||
Notes payable - current portion | 19,141 | 18,922 | ||||||
Senior lenders' notes payable - current portion, net | 4,294,448 | 3,715,796 | ||||||
Capital lease obligations - current portion | 295,871 | 316,377 | ||||||
Total current liabilities | 9,820,421 | 9,788,440 | ||||||
Long-term liabilities | ||||||||
Interest rate swap contract | 587,281 | 605,479 | ||||||
Note payable - related party - long-term portion | 2,523 | 11,229 | ||||||
Notes payable - long-term portion | 20,232 | 25,651 | ||||||
Senior lenders' notes payable - long-term portion | 8,484,325 | 8,633,960 | ||||||
Capital lease obligations - long-term portion | 24,046 | 46,979 | ||||||
Total liabilities | 18,938,828 | 19,111,738 | ||||||
Stockholders' equity | ||||||||
Preferred stock; $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
Common stock; $0.001 par value; 45,000,000 shares authorized, 23,205,358 and 23,174,108 shares issued and 22,728,795 and 22,712,977 shares outstanding at March 31, 2012 and December 31, 2011, respectively | 22,779 | 22,763 | ||||||
Additional paid-in capital | 23,638,558 | 23,606,308 | ||||||
Accumulated other comprehensive loss | (587,281 | ) | (605,479 | ) | ||||
Accumulated deficit | (9,366,995 | ) | (9,075,687 | ) | ||||
Treasury stock; 476,563 and 461,131 shares of common stock at cost at March 31, 2012 and December 31, 2011, respectively | (241,259 | ) | (231,259 | ) | ||||
Total stockholders' equity | 13,465,802 | 13,716,646 | ||||||
Total liabilities and stockholders' equity | $ | 32,404,630 | $ | 32,828,384 |
See Accompanying Notes to Condensed Consolidated Financial Statements
4 |
GLOBAL AXCESS CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Revenues | $ | 8,296,300 | $ | 7,950,071 | ||||
Cost of revenues | 5,636,808 | 4,876,170 | ||||||
Gross profit | 2,659,492 | 3,073,901 | ||||||
Operating expenses | ||||||||
Depreciation expense | 615,185 | 575,324 | ||||||
Amortization of intangible merchant contracts | 326,844 | 288,438 | ||||||
Selling, general and administrative | 1,734,973 | 1,941,646 | ||||||
Restructuring charges | - | 485,040 | ||||||
Stock compensation expense | 17,195 | 21,700 | ||||||
Total operating expenses | 2,694,197 | 3,312,148 | ||||||
Operating loss from operations | ||||||||
before items shown below | (34,705 | ) | (238,247 | ) | ||||
Interest expense, net | (254,596 | ) | (170,897 | ) | ||||
Gain on sale of assets | 20,493 | - | ||||||
Other non-operating expense | - | (112,500 | ) | |||||
Loss from operations before income tax benefit | (268,808 | ) | (521,644 | ) | ||||
Income tax expense | (22,500 | ) | (22,000 | ) | ||||
Net loss | $ | (291,308 | ) | $ | (543,644 | ) | ||
Loss per common share - basic: | ||||||||
Net loss per common share | $ | (0.01 | ) | $ | (0.02 | ) | ||
Loss per common share - diluted: | ||||||||
Net loss per common share | $ | (0.01 | ) | $ | (0.02 | ) | ||
Weighted average common shares outstanding: | ||||||||
Basic | 22,723,233 | 22,287,759 | ||||||
Diluted | 22,723,233 | 22,287,759 |
See Accompanying Notes to Condensed Consolidated Financial Statements
5 |
GLOBAL AXCESS CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Net loss | $ | (291,308 | ) | $ | (543,644 | ) | ||
Other comprehensive income: | ||||||||
Unrealized gains on cash flow hedges | 18,198 | - | ||||||
Total Other comprehensive income | 18,198 | - | ||||||
Total Comprehensive loss | $ | (273,110 | ) | $ | (543,644 | ) |
See Accompanying Notes to Condensed Consolidated Financial Statements
6 |
GLOBAL AXCESS CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (291,308 | ) | $ | (543,644 | ) | ||
Adjustments to reconcile net loss from operations to net cash provided by operating activities: | ||||||||
Stock based compensation | 17,195 | 21,700 | ||||||
Stock options issued to consultants in lieu of cash compensation | 5,071 | - | ||||||
Depreciation expense | 615,185 | 575,324 | ||||||
Amortization of intangible merchant contracts | 326,844 | 288,438 | ||||||
Amortization of capitalized loan fees | 47,712 | 17,800 | ||||||
Allowance for doubtful accounts | (6,580 | ) | (5,052 | ) | ||||
Gain on sale of assets | (20,493 | ) | - | |||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||
Change in accounts receivable, net | (98,505 | ) | (538,358 | ) | ||||
Change in inventory, net | 182,083 | (459,607 | ) | |||||
Change in prepaid expenses and other current assets | 17,156 | 31,154 | ||||||
Change in other assets | - | (29,162 | ) | |||||
Change in intangible assets, net | (5,723 | ) | (7,877 | ) | ||||
Change in accounts payable and accrued liabilities | 472,719 | 621,061 | ||||||
Net cash provided by (used in) operating activities | 1,261,356 | (28,223 | ) | |||||
Cash flows from investing activities: | ||||||||
Cash paid for Tejas acquisition | - | (875,000 | ) | |||||
Cash paid for Kum and Go acquisition | (1,000,000 | ) | - | |||||
Costs of acquiring merchant contracts | (26,461 | ) | (55,596 | ) | ||||
Purchase of fixed assets | (773,486 | ) | (317,400 | ) | ||||
Net cash used in investing activities | (1,799,947 | ) | (1,247,996 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from senior lenders' notes payable | 1,196,964 | 1,907,775 | ||||||
Principal payments on senior lenders' notes payable | (767,947 | ) | (586,485 | ) | ||||
Principal payments on notes payable | (5,200 | ) | (5,231 | ) | ||||
Principal payments on note payable - related party | (7,809 | ) | (6,969 | ) | ||||
Principal payments on capital lease obligations | (113,557 | ) | (119,583 | ) | ||||
Net cash provided by financing activities | 302,451 | 1,189,507 | ||||||
Decrease in cash and cash equivalents | (236,140 | ) | (86,712 | ) | ||||
Cash and cash equivalents, beginning of period | 975,363 | 1,743,562 | ||||||
Cash and cash equivalents, end of the period | $ | 739,223 | $ | 1,656,850 | ||||
Cash paid for interest | $ | 204,255 | $ | 151,302 |
See Accompanying Notes to Condensed Consolidated Financial Statements
7 |
Supplemental schedule of non-cash investing and financing activities:
For the Three Months Ended | ||||||||
SUPPLEMENTAL CASH FLOW INFORMATION | March 31, 2012 | March 31, 2011 | ||||||
The significant non-cash investing and financing activities of the Company were as follows: | ||||||||
Operating activities: | ||||||||
Net transfer of de-installed net fixed assets to (from) inventory | $ | (83,976 | ) | - | ||||
Fair value adjustment on swap agreement with senior lender | 18,198 | - | ||||||
Total non-cash operating activities | $ | (65,778 | ) | $ | - | |||
Investing activities: | ||||||||
Purchase of assets under capital lease obligations | $ | 70,118 | $ | - | ||||
Net transfer of de-installed net fixed assets (to) from inventory | 83,976 | - | ||||||
Total non-cash investing activities | $ | 154,094 | $ | - | ||||
Acquisition of assets of Tejas: | ||||||||
Computer equipment | $ | - | $ | 25,400 | ||||
DVD inventory | - | 88,916 | ||||||
Merchant contracts | - | 1,366,684 | ||||||
Assets acquired | - | 1,481,000 | ||||||
Common stock issued, subject to restrictions | - | (106,000 | ) | |||||
Accounts payable and accrued liabilities | - | (500,000 | ) | |||||
Cash paid for Tejas acquisition | $ | - | $ | 875,000 | ||||
Financing activities: | ||||||||
Settlement of stock option exercises through issuance of treasury stock: | ||||||||
Repurchase of treasury stock, 15,432 and 287,437 shares of common stock at cost for the years ended March 31, 2012 and 2011, respectively | $ | (10,000 | ) | $ | (138,545 | ) | ||
Total non-cash financing activities | $ | (10,000 | ) | $ | (138,545 | ) |
See Accompanying Notes to Condensed Consolidated Financial Statements
8 |
GLOBAL AXCESS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2012
(Unaudited)
1. | BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Securities and Exchange Commission (the “SEC”) requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the Form 10-K, filed with the SEC, for the year ended December 31, 2011 of Global Axcess Corp and its subsidiaries (the “Company”).
The condensed consolidated financial statements present the condensed consolidated balance sheets, statements of operations, and cash flows of the Company. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for the presentation of interim financial statements.
The condensed consolidated financial information is unaudited. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2012 and the results of operations and cash flows presented herein have been included in the condensed consolidated financial statements. Interim results are not necessarily indicative of results of operations for the full year.
2. | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Description of Business
Global Axcess Corp is a Nevada corporation organized in 1984. The Company, primarily through its wholly owned subsidiaries, Nationwide Money Services, Inc., Nationwide Ntertainment Services, Inc. and EFT Integration Inc., is an independent provider of self-service kiosk services. Nationwide Ntertainment Services, Inc. was formed during fiscal 2009. These solutions include ATM and DVD kiosk management and support services focused on serving the self-service kiosk needs of merchants, grocers, retailers and financial institutions nationwide. It is a one-stop gateway for unattended self-service kiosk management services. The Company currently owns, manages or operates a total of approximately 5,200 ATMs and DVD kiosks in its national network spanning 43 states.
Reclassifications
Certain amounts in the fiscal year 2011 consolidated financial statements have been reclassified to conform to the fiscal year 2012 presentation. Such reclassifications had no effect on the net income or shareholders’ equity as previously reported.
Total Revenue and Total Cost of Revenues Presentation
The Company presents “Revenues” and “Cost of Revenues” as a single line item in the condensed consolidated statements of operations. The following tables set forth the revenue and cost of revenues sources included in the single line items presented for the three-month periods ended March 31, 2012 and 2011:
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Revenues:
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
ATM Surcharge / Convenience Fee revenue | $ | 4,922,052 | $ | 3,794,384 | ||||
ATM Interchange revenue | 1,841,779 | 1,707,164 | ||||||
ATM Processing revenue | 42,512 | 45,647 | ||||||
ATM Sales revenue | 87,883 | 52,121 | ||||||
Other ATM revenue | 334,842 | 347,261 | ||||||
DVD Rental revenue | 1,067,232 | 2,003,494 | ||||||
Total revenue | $ | 8,296,300 | $ | 7,950,071 |
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
ATM Operating revenue | $ | 7,141,185 | $ | 5,894,456 | ||||
ATM Sales revenue | 87,883 | 52,121 | ||||||
DVD Operating revenue | 1,067,232 | 2,003,494 | ||||||
Total revenue | $ | 8,296,300 | $ | 7,950,071 |
Cost of Revenues:
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
ATM Merchant residual / commission costs | $ | 3,135,457 | $ | 1,901,119 | ||||
ATM Cost of cash | 797,446 | 686,382 | ||||||
ATM Processing costs | 275,325 | 282,104 | ||||||
ATM Communication costs | 115,095 | 101,915 | ||||||
ATM Sales costs | 40,585 | 39,391 | ||||||
Other ATM cost of revenues | 431,795 | 384,792 | ||||||
DVD operating costs | 841,105 | 1,480,467 | ||||||
Total cost of revenues | $ | 5,636,808 | $ | 4,876,170 |
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Cost of ATM Operating revenue | $ | 4,755,118 | $ | 3,356,312 | ||||
ATM Sales costs | 40,585 | 39,391 | ||||||
Cost of DVD Operating revenue | 841,105 | 1,480,467 | ||||||
Total cost of revenues | $ | 5,636,808 | $ | 4,876,170 |
Inventory
The components of inventory for the periods ended March 31, 2012 and December 31, 2011, respectively, are as follows: |
10 |
March 31, 2012 | December 31, 2011 | |||||||
ATM parts and supplies | $ | 183,199 | $ | 150,585 | ||||
Automated teller machines | 173,542 | 197,971 | ||||||
DVD rental kiosks | 1,040,570 | 1,106,338 | ||||||
DVD library | 606,379 | 626,410 | ||||||
2,003,690 | 2,081,304 | |||||||
Less: reserve for inventory obsolescence | 182,572 | 182,572 | ||||||
Inventory, net | $ | 1,821,118 | $ | 1,898,732 |
Fixed Assets
The components of fixed assets for the periods ended March 31, 2012 and December 31, 2011, respectively, are as follows: |
March 31, 2012 | December 31, 2011 | |||||||
Automated teller machines | $ | 13,959,918 | $ | 12,839,512 | ||||
DVD rental kiosks | 3,546,330 | 3,446,242 | ||||||
Furniture and fixtures | 455,787 | 455,787 | ||||||
Computers, equipment and software | 3,552,667 | 3,450,568 | ||||||
Automobiles | 473,641 | 473,641 | ||||||
Leasehold equipment | 72,533 | 72,533 | ||||||
22,060,876 | 20,738,283 | |||||||
Less: accumulated depreciation and amortization | 12,096,531 | 11,496,459 | ||||||
Fixed assets, net | $ | 9,964,345 | $ | 9,241,824 |
Intangible Assets – Goodwill and Merchant Contracts
The following table summarizes Intangible Assets and Merchant Contracts at March 31, 2012:
Gross Carrying Value | Accumulated Amortization | Net | ||||||||||
Goodwill | $ | 4,189,646 | $ | 168,286 | $ | 4,021,360 | ||||||
Other intangible assets | 557,251 | 161,266 | 395,985 | |||||||||
Merchant contracts, net | 18,495,194 | 6,360,224 | 12,134,970 | |||||||||
Total intangible assets, net and merchant contracts, net | $ | 23,242,091 | $ | 6,689,776 | $ | 16,552,315 |
Earnings per Share
In calculating basic income per share, net income is divided by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed based on the weighted average number of common shares outstanding during the period increased by the effect of dilutive stock options and stock purchase warrants using the treasury stock method. No such conversion is assumed where the effect is anti-dilutive, such as when there is a net loss from operations or when the exercise price of the potentially dilutive securities is greater than the market value of the Company’s stock.
For the three months ended March 31, 2012 there were stock options outstanding to acquire 1,053,570 shares of the Company’s common stock, and stock warrants to purchase 30,000 shares of common stock which were excluded from the calculation of its diluted earnings per share as their effect would be anti-dilutive. For the three months ended March 31, 2011 there were stock options and warrants outstanding to acquire 1,172,892 and 30,000 shares, respectively, of the Company’s common stock which were excluded from the calculation of its diluted earnings per share as their effect would be anti-dilutive.
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For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Numerator | ||||||||
Loss from continuing operations | $ | (291,308 | ) | $ | (543,644 | ) | ||
Numerator for diluted loss per share available to common stockholders | $ | (291,308 | ) | $ | (543,644 | ) | ||
Denominator | ||||||||
Weighted average shares | 22,723,233 | 22,287,759 | ||||||
Effect of dilutive securities: | ||||||||
Treasury method, effect of employee stock options & warrants | - | - | ||||||
Denominator for diluted loss per share adjusted weighted shares after assumed exercises | 22,723,233 | 22,287,759 | ||||||
Loss per common share - basic: | ||||||||
Net loss per common share | $ | (0.01 | ) | $ | (0.02 | ) | ||
Loss per common share - diluted: | ||||||||
Net loss per common share | $ | (0.01 | ) | $ | (0.02 | ) |
Deferred Tax Asset
In accordance with Financial Accounting Standards Board (“FASB”) guidance, we use the liability method of accounting for income taxes. Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance that is recorded or released against our deferred tax assets.
The Company had net deferred tax assets of $1,975,211 at March 31, 2012. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The ultimate realization of the deferred tax assets are primarily dependent on generating sufficient future taxable income or being able to carryback any taxable losses and claim refunds against previously paid income taxes. Even though the Company incurred a loss in fiscal 2011 and 2010, it had taxable income for the three years prior and believes that based upon its business plan, it will return to future profitability, and as such, a portion of its net deferred income tax assets at March 31, 2012, is realizable. If future operating results generate taxable losses, it may be necessary to increase valuation allowances to reduce the amount of the deferred income tax assets to realizable value. For purposes of assessing realizability of the deferred tax assets, a projected cumulative financial reporting loss position is considered significant negative evidence the Company will not be able to fully realize the deferred tax assets in the future. The Company reviews a rolling thirty-six month calculation of earnings to determine if the Company is in a cumulative loss position. As of March 31, 2012, the Company is not in a net cumulative loss position. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, operating results or other factors.
Recent Accounting Pronouncements
In September 2011, the FASB amended the guidance on the annual testing of goodwill for impairment. The amended guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. We adopted this guidance effective January 1, 2012. The adoption of this guidance did not have a material effect on our financial statements.
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In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. For annual periods, an entity has the option to present the components of comprehensive income (loss) either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. For interim periods, total comprehensive income (loss) is required to be disclosed either below net income (loss) on the income statement or as a separate statement. The ASU does not change the items that must be reported as other comprehensive income (loss). Whether presenting two separate statements or one continuous statement in annual periods, the ASU required entities to present reclassifications from other comprehensive income (loss) in the statement reporting net income (loss). In December 2011, however, the FASB deferred this requirement when it issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which has the same effective date as ASU 2011-05. Companies must continue to disclose reclassifications from other comprehensive income (loss) on the statement that reports other comprehensive income (loss), or in the notes to the financial statements. We adopted this guidance effective January 1, 2012, and included a statement of comprehensive income in our interim financial statements. The adoption of this guidance did not have a material effect on our financial statements.
3. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
Accounts payable and accrued liabilities consisted of the following as of March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||
Accounts payable | $ | 1,508,975 | $ | 2,457,270 | ||||
Accrued commissions/residual payments | 2,321,253 | 1,404,360 | ||||||
Accrued cost of cash and cash replenishment expenses | 358,768 | 415,330 | ||||||
Accrued payroll | 269,693 | 333,669 | ||||||
Accrued severance | 138,813 | 237,391 | ||||||
Accrued audit fees | 90,575 | 88,700 | ||||||
Accrued interest | 4,202 | 1,573 | ||||||
Accrued legal fees | 30,100 | 59,858 | ||||||
Asset retirement obligation | 99,430 | 99,430 | ||||||
Accrued taxes | 162,870 | 249,164 | ||||||
Other | 192,285 | 357,500 | ||||||
Accounts payable and accrued liabilities | $ | 5,176,964 | $ | 5,704,245 |
4. | SENIOR LENDERS’ NOTES PAYABLE |
The components of senior lenders’ notes payable for the periods presented are as follows:
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March 31, 2012 | December 31, 2011 | |||||||
Fifth Third Bank, term loan (1) | $ | 2,291,667 | $ | 2,500,000 | ||||
Fifth Third Bank, equipment finance line (2) | 6,935,861 | 6,538,897 | ||||||
Fifth Third Bank, draw loan (3) | 443,342 | 743,150 | ||||||
Fifth Third Bank, draw loan #2 (4) | 730,376 | 827,782 | ||||||
Fifth Third Bank, $1.65 million draw loan (5) | 1,094,333 | 1,211,416 | ||||||
Fifth Third Bank, $3.0 million contract facility (6) | 89,412 | 92,400 | ||||||
Fifth Third Bank, $1.0 million contract facility (7) | 970,413 | 200,000 | ||||||
Fifth Third Bank, $250 thousand contract facility (8) | 223,369 | 236,111 | ||||||
12,778,773 | 12,349,756 | |||||||
Less: current portion | 4,294,448 | 3,715,796 | ||||||
Long-term portion, net of senior lenders' notes payable | $ | 8,484,325 | $ | 8,633,960 |
On June 18, 2010, the Company, entered into a $17.0 million credit facility with Fifth Third Bank ("Fifth Third"). The credit facility consists of three components: (i) a term loan of $5.0 million, (ii) a draw loan of up to $2.0 million, and (iii) an equipment finance line of up to $10.0 million.
The term loan and the draw loan are covered by a Loan and Security Agreement, dated as of June 18, 2010 (the "Loan Agreement"), among the Company, Nationwide Money Services, Inc., Nationwide Ntertainment Services, Inc., EFT Integration, Inc. (all subsidiaries of the Company) and Fifth Third.
The Loan Agreement contains customary representations, warranties and covenants, including covenants on the following: (1) due authorization; (2) compliance with laws; (3) absence of breach; (4) collateral ownership and limitation of liens; (5) preparation of financial statements; (6) litigation and taxes; (7) events of default; (8) ERISA obligations; (9) use of loan proceeds; (10) limitations on indebtedness, liens and certain investments; (11) limitations on changes in ownership structure; (12) dividends; (13) repurchases of shares; and (14) maintenance of certain accounts with Fifth Third. The Loan Agreement, Term Promissory Note, and Draw Promissory Note also include customary default provisions, including, without limitation, payment defaults, cross-defaults to other material indebtedness, and bankruptcy and insolvency. In general, upon an event of default, Fifth Third may, among other things, declare the outstanding principal and interest immediately due and payable.
Pursuant to the terms of the Loan Agreement and the Lease Agreement, the Company granted Fifth Third a security interest in all of its assets, and the agreements are cross-collateralized.
(1). On the day of closing of the Loan Agreement, the Company issued a promissory note (the "Term Promissory Note") in the amount of $5.0 million to Fifth Third covering the amount disbursed pursuant to the term loan. The Term Promissory Note was available to the Company as a single principal advance. Principal and interest payable under the Term Promissory Note were to be paid in the amount borrowed over 36 months, beginning July 1, 2010, with 36 monthly principal payments plus accrued interest, with the final payment to be made on May 31, 2013. On January 6, 2012, the Company entered into a modification (the “Modification”) of the Term promissory Note with Fifth Third. As part of the Modification, the Company re-amortized the principal balance of the $2.5 million on this note (as of December 31, 2011) from 17 months remaining to 36 months remaining. The Term Promissory Note carries interest of LIBOR plus up to 400 basis points based on a ratio of the Company’s indebtedness to EBITDA or 5.5%, whichever is greater. As of March 31, 2012, Term Promissory Note had an outstanding principal balance of $2,291,667 and an interest rate of 5.5%.
(2). The equipment finance line is covered by a Master Equipment Lease Agreement, dated as of June 18, 2010 (the "Lease Agreement"), among the Company, Nationwide Money Services, Inc., Nationwide Ntertainment Services, Inc., and Fifth Third. The Lease Agreement and the corresponding equipment finance line available from Fifth Third are used to fund the purchases of up to $10.0 million of equipment (ATM and DVD kiosks), from time to time, and is available to the Company over a five year period. The line is secured by any equipment that is purchased pursuant to the line. The equipment line may also be used to support IT infrastructure. Borrowings made by the Company pursuant to this equipment line carry a term of one-year interest-only followed by an amortization of three years subsequent to each closing of a drawdown schedule. During an interim period between drawdowns and the closing of a drawdown schedule, the line carries interest-only payments. Currently, the interest rate on this line is calculated on the same formula as that in the Term Promissory Note and the Draw Promissory Note. On March 31, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on a $3,976,531 equipment lease schedule with Fifth Third Bank which will fix its LIBOR interest rate at 2.45% as of April 1, 2012. The Company expects that by fixing the LIBOR rate on its equipment lease schedule at 2.45% effective April 1, 2012, it will be fixing the interest rate paid on the $3,976,531 equipment lease schedule at 6.45% beginning April 1, 2012, and until then, will remain on an interest-only schedule. As of March 31, 2012, the Company had drawn down a total of $6,935,861 against the Lease Agreement. $2,959,330 of the total draw down will be on an interim interest-only schedule. The interest rate on the balances under the Lease Agreement at March 31, 2012 was 5.5%.
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(3). Also on the day of the closing of the Loan Agreement, the Company issued a promissory note (the "Draw Promissory Note") to Fifth Third covering any amounts which might be disbursed pursuant to the draw loan, which can be a maximum of $2.0 million. The Company can request disbursement from the draw loan in $200,000 increments at any time after the delivery of the Draw Promissory Note. The Company will repay any amounts borrowed pursuant to the Draw Promissory Note over 18 months, beginning on the first day of the month following any draw, with 18 monthly principal payments plus accrued interest. The Draw Promissory Note carries interest of LIBOR plus up to 400 basis points based on a ratio of the Company’s indebtedness to EBITDA or 5.5%, whichever is greater. The proceeds of any amounts disbursed pursuant to the draw loan will be used to purchase DVD inventory for the Company’s DVD kiosk business line. As of March 31, 2012, the Company had drawn down a total of $1,994,678 against the Draw Promissory Note and had an outstanding principal balance of $443,342 and an interest rate of 5.5%.
(4). On September 28, 2011, the Company issued a promissory note (the "Draw Promissory Note # 2") to Fifth Third covering any amounts which might be disbursed pursuant to the draw loan, which can be a maximum of $960,000. The Company can request disbursement from the draw loan in $200,000 increments at any time after the delivery of the Draw Promissory Note. The Company will repay any amounts borrowed pursuant to the Draw Promissory Note over 18 months, beginning on the first day of the month following any draw, with 18 monthly principal payments plus accrued interest. The Draw Promissory Note carries interest of LIBOR plus up to 900 basis points based on a ratio of the Company’s indebtedness to EBITDA or 5.5%, whichever is greater. The proceeds of any amounts disbursed pursuant to the draw loan will be used to purchase DVD inventory for the Company’s DVD kiosk business line. As of March 31, 2012, the Company had drawn down a total of $960,000 against the Draw Promissory Note # 2 and had an outstanding principal balance of $730,376 and an interest rate of 9.2%.
(5). On December 17, 2010, the Company and Fifth Third entered into a First Amendment (the “Amendment”) to the Loan Agreement. Pursuant to the Amendment, the Company and Fifth Third modified the draw loan aspect of the Loan Agreement to permit for additional financing in the amount of $1,650,000 under the terms of the draw loan for the purposes of purchasing certain assets and customer contracts connected with recent acquisition agreements. The Amendment increased the maximum aggregate credit availability pursuant to the Loan Agreement from $17.0 million to $18.65 million. The draw loan maturity date is the earlier of 36 months (December 15, 2013) or the expiration or earlier termination of the customer agreements that were acquired with the proceeds of the draw loan. As security for the loan to be extended under the Amendment, in addition to that which was granted under the Loan Agreement, the Company granted security interests in the assets to be acquired pursuant to the recent acquisition agreements. The Amendment carries interest of LIBOR plus up to 400 basis points based on a ratio of the Company’s indebtedness to EBITDA or 5.5%, whichever is greater. As of March 31, 2012, the Company had drawn down $1,500,718 against the Amendment and had an outstanding principal balance of $1,094,333. The interest rate on the balances under the Amendment at March 31, 2012 was 5.5%.
(6). On December 29, 2011, the Company, entered into a $3.0 million credit facility (“$3.0m credit facility”) with Fifth Third Bank. The credit facility consists of a draw loan of up to $3.0 million. On the day of closing of the Loan Agreement, the Company issued two promissory notes (the “Draw Loan C Promissory Notes”) in the amount of $40,800 and $51,600, respectively, to Fifth Third covering an initial disbursal pursuant to the draw loan. The Company will repay the amount borrowed on each of the Draw Loan C Promissory Notes, beginning on February 29, 2012, on the date which is the earlier of (i) 45 months following the date of the note, and (ii) the expiration date or earlier termination of the Customer Agreements; but, in any event, on either note, not later than May 31, 2015. The Draw Loan C Promissory Notes carry interest of LIBOR plus up to 600 basis points or 6.0%, whichever is greater. The proceeds of the Draw Loan C Promissory Notes were used to purchase certain identified customer contracts. The proceeds from any future draw loans made pursuant to the Loan Agreement shall be used for the acquisition of identified customer agreements, and purchases of ATM related equipment and inventory. As of March 31, 2012, the Company had an outstanding principal balance of $89,412 against the $3.0m credit facility. The interest rate on the balances under the $3.0m credit facility at March 31, 2012 was 6.3%.
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(7). On November 23, 2011, the Company, entered into a $1.0 million credit facility (“$1.0m credit facility”) with Fifth Third Bank. The credit facility consists of a draw loan of up to $1.0 million. On the day of closing of the $1.0m credit facility, the Company issued a promissory note in the amount of $200,000 to fund an acquisition of customer agreements. The Company will repay the amount borrowed on the date which is the earlier of (i) 38 months following the date of the note, and (ii) the expiration date or earlier termination of the Customer Agreements; but, in any event, on either note, not later than May 31, 2015. The promissory notes carry interest of LIBOR plus up to 600 basis points or 6.0%, whichever is greater. The proceeds from any future draw loans made pursuant to the $1.0m credit facility shall be used for the acquisition of identified customer agreements. As of March 31, 2012, the Company had an outstanding principal balance of $970,413 against the $1.0m credit facility. The interest rate on the balances under the $1.0m credit facility at March 31, 2012 was 6.2%.
(8). On November 21, 2011, the Company, entered into a $250,000 credit facility (“$250 thousand credit facility”) with Fifth Third Bank. The credit facility consists of a draw loan of up to $250,000. On the day of closing the $250 thousand credit facility, the Company paid $250,000 to fund an acquisition of customer ATMs. The Company will repay the amount borrowed on the date which is the earlier of (i) 36 months following the date of the note, and (ii) the expiration date or earlier termination of the Customer Agreements; but, in any event, on either note, not later than December 1, 2014. The promissory notes carry interest of LIBOR plus up to 600 basis points or 6.0%, whichever is greater. As of March 31, 2012, the Company had an outstanding principal balance of $223,369 against the $250 thousand credit facility. The interest rate on the balances under the $250 thousand credit facility at March 31, 2012 was 6.2%.
On May 26, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on $20 million with Fifth Third Bank which will swap the interest rate on the Company’s vault cash. The effective date of the rate swap is June 1, 2012 and until then, the Company will continue to pay its variable interest rate on the $20 million of vault cash.
As of March 31, 2012, the Company was in compliance with all applicable covenants and ratios under its loan agreement with Fifth Third.
5. | COMMITMENTS AND CONTINGENCIES |
We lease ATMs and back office computer equipment under capital lease agreements that expire between 2012 and 2013. The average interest rate paid on these lease payments is approximately 9.6% per annum. During the three-month period ended March 31, 2012, we extended two of our capital lease obligations. These extensions expire in the second quarter of 2013. As of March 31, 2012, $319,917 of capital lease obligations were included in the Company’s condensed consolidated balance sheet.
6. | LITIGATION AND CLAIMS |
From time to time, the Company and its subsidiaries may be parties to, and their property is subject to, ordinary, routine litigation incidental to their business. We know of no material, active or pending legal proceedings against the Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
7. | INCOME TAXES |
The effective tax rates for the three months ended March 31, 2012 and 2011 were 8.37% and 4.22%, respectively. While there is no difference in the effective tax rate for the three months ended March 31, 2012 over the respective previous periods, the effective tax rates for the three months ended March 31, 2012 differs from our expected tax rates for the periods then-ended primarily due to the tax effects from the change in valuation allowance established for net deferred tax assets.
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In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not, that some portion or all of the deferred tax assets will not be realized. The valuation allowance at March 31, 2012 is related to deferred tax assets arising from net operating loss carryforwards. Management believes that based upon its projection of future taxable income for the foreseeable future, it is more likely than not that the Company will not be able to realize the full benefit of the net operating loss carryforwards before they expire.
At December 31, 2011, the Company had net operating loss carryforwards remaining of approximately $25.5 million that may be offset against future taxable income through 2031.
For the three months ended March 31, 2012, there was no change in gross unrecognized tax benefits. Our total gross unrecognized tax benefit at March 31, 2012 was $1,147,200, of which, if recognized, would favorably affect the effective income tax rate in any future period.
Our continuing practice is to recognize interest and/or penalties related to uncertain income tax matters in income tax expense. However, the type of uncertain income tax matters involved would not forseeably subject the Company to interest and/or penalties. As such, we had $0 (net of federal tax benefit) accrued for interest and $0 accrued for penalties at March 31, 2012.
There were no income tax audits during the three months ended March 31, 2012. With limited exception, the Company’s federal and state tax returns are open for examination for the tax year ending 2007, and all subsequent years.
8. | CHANGES IN STOCKHOLDERS' EQUITY |
See the table below for all the equity transactions for the three-month period ended March 31, 2012:
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | Total | |||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Comprehensive | Treasury | Stockholders' | ||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Loss | Stock | Equity | |||||||||||||||||||||||||
Balances, December 31, 2011 | 22,712,977 | $ | 22,763 | $ | 23,606,308 | $ | (9,075,687 | ) | $ | (605,479 | ) | $ | (231,259 | ) | $ | 13,716,646 | ||||||||||||||||
Stock compensation expense | - | - | 17,195 | - | - | - | - | 17,195 | ||||||||||||||||||||||||
Stock options exercised, cashless | 15,818 | 16 | 9,984 | - | - | - | (10,000 | ) | - | |||||||||||||||||||||||
Stock options exercised | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Stock options issued to consultants in lieu of cash compensation | - | - | 5,071 | - | - | - | - | 5,071 | ||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 18,198 | 18,198 | - | 18,198 | ||||||||||||||||||||||||
Net loss | - | - | - | (291,308 | ) | - | (291,308 | ) | - | (291,308 | ) | |||||||||||||||||||||
(273,110 | ) | |||||||||||||||||||||||||||||||
Balances, March 31, 2012 | 22,728,795 | $ | 22,779 | $ | 23,638,558 | $ | (9,366,995 | ) | $ | (587,281 | ) | $ | (241,259 | ) | $ | 13,465,802 |
9. | FAIR VALUE MEASUREMENT |
The Company uses the three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
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Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
On March 31, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on a $3,976,531 equipment lease schedule with Fifth Third Bank which will fix its LIBOR interest rate at 2.45% as of April 1, 2012. The Company expects that by fixing the LIBOR rate on its equipment lease schedule at 2.45% effective April 1, 2012, it will be fixing the interest rate paid on the $3,976,531 equipment lease schedule at 6.45% beginning April 1, 2012 and until then, will remain on an interest-only schedule. Our derivative financial instruments are interest rate swap agreements, which are observable at commonly quoted intervals for the full term of the derivatives and therefore considered a level 2 input.
On May 26, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on $20 million with Fifth Third Bank which will swap the interest rate on the Company’s vault cash. The effective date of the rate swap is June 1, 2012 and until then, the Company will continue to pay its variable interest rate on the $20 million of vault cash. Our derivative financial instruments are interest rate swap agreements, which are observable at commonly quoted intervals for the full term of the derivatives and therefore considered a level 2 input.
The following tables summarize the Company's assets and liabilities carried at fair value measured on a recurring basis using the fair value hierarchy prescribed by U.S. GAAP:
Fair Value Measurements at March 31, 2012 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
$ | - | $ | - | $ | - | $ | - | |||||||||
Liabilities: | ||||||||||||||||
Liabilities associated with interest rate swaps | $ | 587,281 | $ | - | $ | 587,281 | $ | - |
On a recurring basis, we measure our interest rate swap agreements at fair value using an income approach and Level 2 inputs in the fair value hierarchy. The income approach consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts incorporating observable market inputs as of the reporting date such as prevailing interest rates. Both the counterparty’s credit risk and our credit risk are considered in the fair value determination.
Interest rate swaps. The fair value of the Company's interest rate swaps was a liability of $587,281 as of March 31, 2012. These financial instruments are carried at fair value, calculated as the present value of amounts estimated to be received or paid to a marketplace participant in a selling transaction.
Cash Flow Hedging Strategy
For each derivative instrument that is designated and qualifies as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) ("OCI"). Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components that are excluded from the assessment of effectiveness are recognized in earnings. However, because the Company currently only utilizes fixed-for-floating interest rate swaps in which the underlying pricing terms agree, in all material respects, including the pricing terms of the Company's vault cash rental obligations, the amount of ineffectiveness associated with such interest rate swap contracts has historically been immaterial. Accordingly, no ineffectiveness amounts associated with the Company's cash flow hedges have been recorded in the Company's consolidated financial statements. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the consolidated statements of income.
The interest rate swap contract entered into with respect to the Company's equipment lease schedule effectively modifies the Company's exposure to interest rate risk by converting the Company's monthly floating LIBOR rate to a fixed rate. This contract is in place through March 31, 2015 for $3,976,531.
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The interest rate swap contract entered into with respect to the Company's vault cash rental obligations effectively modifies the Company's exposure to interest rate risk by converting a portion of the Company's monthly floating rate vault cash rental expense to a fixed rate. Such contracts are in place from June 1, 2012 through June 1, 2014 for $20 million of the Company's vault cash rental obligations. By converting such amounts to a fixed rate, the impact of future interest rate changes (both favorable and unfavorable) on the Company's monthly vault cash rental expense amounts have reduced. The interest rate swap contract typically involves the receipt of floating rate amounts from the Company's counterparties that match, in all material respects, the floating rate amounts required to be paid by the Company to its vault cash provider for the portions of the Company's outstanding vault cash obligations that have been hedged. In return, the Company typically pays the interest rate swap counterparties a fixed rate amount per month based on the same notional amounts outstanding.
At no point is there an exchange of the underlying principal or notional amounts associated with the interest rate swaps. Additionally, none of the Company's existing interest rate swap contracts contain credit-risk-related contingent features.
10. BUSINESS SEGMENT INFORMATION
FASB requires that companies report separately in the financial statements certain financial and descriptive information about segment revenues, income and assets. The method for determining what information is reported is based on the way that management organizes the operating segments for making operational decisions and assessments of financial performance. In computing operating loss and net loss for the DVD services business and the ATM services business, no allocations of general corporate expenses have been made and these are included in the Corporate Support services business.
The following table summarizes our revenues, gross profit, SG&A, stock compensation expenses, depreciation and amortization, impairment of assets and long-lived assets, restructuring charges, operating income (loss), net income (loss) and Adjusted EBITDA by segment for the periods indicated below.
EBITDA (a non-GAAP measure) is defined as earnings before net interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA from operations before restructuring charges, stock compensation expense and gain on sale of assets.
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For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Revenues: | ||||||||
ATM Services | $ | 7,229,068 | $ | 5,946,577 | ||||
DVD Services - The Exchange | 1,067,232 | 1,068,886 | ||||||
DVD Services - Other | - | 934,608 | ||||||
Corporate Support | - | - | ||||||
Consolidated revenues | $ | 8,296,300 | $ | 7,950,071 | ||||
Gross profit: | ||||||||
ATM Services | $ | 2,433,364 | $ | 2,550,874 | ||||
DVD Services - The Exchange | 226,128 | 544,819 | ||||||
DVD Services - Other | - | (21,792 | ) | |||||
Corporate Support | - | - | ||||||
Consolidated gross profit | $ | 2,659,492 | $ | 3,073,901 | ||||
SG&A: | ||||||||
ATM Services | $ | 1,061,579 | $ | 1,076,567 | ||||
DVD Services - The Exchange | 185,006 | 195,537 | ||||||
DVD Services - Other | - | 287,268 | ||||||
Corporate Support | 488,388 | 382,274 | ||||||
Consolidated SG&A | $ | 1,734,973 | $ | 1,941,646 | ||||
Stock compensation expense: | ||||||||
ATM Services | $ | - | $ | - | ||||
DVD Services - The Exchange | - | - | ||||||
DVD Services - Other | - | - | ||||||
Corporate Support | 17,195 | 21,700 | ||||||
Consolidated stock compensation expense | $ | 17,195 | $ | 21,700 | ||||
Depreciation & Amortization: | ||||||||
ATM Services | $ | 599,678 | $ | 479,216 | ||||
DVD Services - The Exchange | 265,764 | 40,622 | ||||||
DVD Services - Other | - | 267,651 | ||||||
Corporate Support | 76,587 | 76,273 | ||||||
Consolidated depreciation & amortization | $ | 942,029 | $ | 863,762 | ||||
Restructuring charges: | ||||||||
ATM Services | $ | - | $ | 24,218 | ||||
DVD Services - The Exchange | - | - | ||||||
DVD Services - Other | - | - | ||||||
Corporate Support | - | 460,822 | ||||||
Consolidated restructuring charges | $ | - | $ | 485,040 | ||||
Operating income (loss): | ||||||||
ATM Services | $ | 772,107 | $ | 970,873 | ||||
DVD Services - The Exchange | (224,642 | ) | 308,660 | |||||
DVD Services - Other | - | (576,711 | ) | |||||
Corporate Support | (582,170 | ) | (941,069 | ) | ||||
Consolidated operating loss | $ | (34,705 | ) | $ | (238,247 | ) | ||
Net income (loss): | ||||||||
ATM Services | $ | 742,332 | $ | 933,125 | ||||
DVD Services - The Exchange | (205,371 | ) | 308,660 | |||||
DVD Services - Other | - | (539,211 | ) | |||||
Corporate Support | (828,269 | ) | (1,246,218 | ) | ||||
Consolidated net loss | $ | (291,308 | ) | $ | (543,644 | ) | ||
Adjusted EBITDA: | ||||||||
ATM Services | $ | 1,371,785 | $ | 1,452,307 | ||||
DVD Services - The Exchange | 41,122 | 349,282 | ||||||
DVD Services - Other | - | (309,060 | ) | |||||
Corporate Support | (488,388 | ) | (382,274 | ) | ||||
Consolidated Adjusted EBITDA | $ | 924,519 | $ | 1,110,255 |
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The following table summarizes total assets by segment for the periods indicated:
March 31, 2012 | December 31, 2011 | |||||||
Assets: | ||||||||
ATM Services | $ | 27,890,865 | $ | 28,062,465 | ||||
DVD Services | 4,513,765 | 4,765,919 | ||||||
Consolidated assets | $ | 32,404,630 | $ | 32,828,384 |
11. RESTRUCTURING CHARGES
On February 28, 2011, the Company and George McQuain, the Company’s former Chief Executive Officer, agreed to a mutual separation of Mr. McQuain’s employment. As of February 28, 2011, Mr. McQuain is no longer employed as Chief Executive Officer, Director or in any other capacity, by the Company or any of its subsidiaries. The Company intends to pay Mr. McQuain the severance payments detailed in his Employment Agreement.
As of March 31, 2012, the Company had accrued $138,813 for severance obligations to Mr. McQuain included in accounts payable and accrued liabilities on the condensed consolidated balance sheet.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto.
Overview
Global Axcess Corp, through its wholly owned subsidiaries, owns or leases, operates or manages Automated Teller Machines ("ATM"s) and DVD kiosks with locations primarily in the eastern and southwestern United States of America.
ATM Business Services
Our revenues are principally derived from two types of fees, which we charge for processing transactions on our ATM network. We receive an interchange fee from the issuer of the credit or debit card for processing a transaction when a cardholder uses an ATM in our network. In addition, in most cases we receive a surcharge/convenience fee from the cardholder when the cardholder makes a cash withdrawal from an ATM in our network.
Interchange fees are processing fees that are paid by the issuer of the credit or debit card used in a transaction. Interchange fees vary for cash withdrawals, balance inquiries, account transfers or uncompleted transactions, which are the primary types of transactions that are currently processed on ATMs in our network. The maximum amount of the interchange fees is established by the national and regional card organizations and credit card issuers with whom we have a relationship. We receive interchange fees for transactions on ATMs that we own, but sometimes we rebate a portion of the fee to the owner of the ATM location under the applicable lease for the ATM site. We also receive the interchange fee for transactions on ATMs owned by third party vendors included within our network, but we rebate all or a portion of each fee to the third party vendor based upon negotiations between us. The interchange fees received by us vary from network to network and, to some extent, from issuer to issuer, but generally range from $0.15 to $0.55 per cash withdrawal. Interchange fees for balance inquiries, account transfers and denied transactions are generally substantially less than fees for cash withdrawals. The interchange fees received by us from the card issuer are independent of the service fees charged by the card issuer to the cardholder in connection with ATM transactions. Service fees charged by card issuers to cardholders in connection with transactions through our network range from zero to $2.50 per transaction. We do not receive any portion of these service fees.
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In most markets we impose a surcharge/convenience fee for cash withdrawals. Surcharge/convenience fees are a substantial additional source of revenue for us and other ATM network operators. The surcharge/convenience fee for most of the ATMs in our network ranges between $1.50 and $2.95 per withdrawal. The surcharge/convenience fee for other ATMs in our network ranges between $0.50 and $7.50 per withdrawal. We receive the full surcharge/convenience fee for cash withdrawal transactions on ATMs that we own, but often we rebate a portion of the fee to the owner of the ATM location under the applicable lease for the ATM site. We also receive the full surcharge/convenience fee for cash withdrawal transactions on ATMs owned by third party vendors included within our network, but we rebate all or a portion of each fee to the third party vendor based upon a variety of factors, including transaction volume and the party responsible for supplying vault cash to the ATM and only record earned revenues based upon the Company’s contracts with the third party vendors.
In addition to revenues derived from interchange and surcharge/convenience fees, we also derive revenues from providing network management services to third parties owning ATMs included in our ATM network. These services include 24 hour transaction processing, monitoring and notification of ATM status and cash condition, notification of ATM service interruptions, in some cases dispatch of field service personnel for necessary service calls and cash settlement and reporting services. The fees for these services are paid by the owners of the ATMs.
Interchange fees are credited to us by networks and credit card issuers on a monthly basis and are paid to us in the following month between the 5th and 15th business day. Surcharge/convenience fees are charged to the cardholder and credited to us by networks and credit card issuers on a daily basis. We rebate a portion of these fees to ATM owners and owners of ATM locations as commission payments as per their contractual terms. Fees for network management services are generally paid to us on a monthly basis.
We compete in a fragmented industry; in which no one firm has a significant market share and can strongly influence the industry outcome. Our industry is populated by a large number of financial institutions and ISOs which deploy ATMs. Our industry is also characterized by essentially undifferentiated services.
There are underlying economic causes as to why our industry is fragmented. For example:
· | Low overall entry barriers; |
· | Absence of national economies of scale; |
· | Seasonal and geographic volume fluctuations; |
· | The need for local presence in some market segments; and |
· | The need for low overhead. |
Additionally, our industry is showing increasing signs of being an industry in decline. Reasons for this market decline include:
· | Emergence of debit cards, “pay pass” machines and RFID as substitutes for cash in making purchases; |
· | Increasing acceptance of debit cards by younger demographics; and |
· | Market saturation of prime ATM locations in the United States. |
Should the signs of industry decline come to fruition, it could negatively impact our results of operations by decreasing revenues and placing downward pressure on earnings. It could also make the availability of capital resources more difficult to obtain and could negatively impact our ability to more aggressively pay down debt, both of which could affect our results of operations.
The demand for our ATM services is primarily a function of population growth and new business creation to serve that population growth. New opportunities may exist:
· | As our competitors seek to exit the business; |
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· | As our competitors encounter financial and regulatory difficulties; and |
· | As financial institutions seek to reduce their costs of managing an ATM channel during a period of decreasing ATM usage. |
Opportunities may also exist to leverage our existing customer base by selling additional products and services to them.
DVD Business Services
Nationwide Ntertainment Services, Inc., a wholly owned subsidiary of the Company formed during the fiscal year ended December 31, 2009, is engaged in the business of operating a network of DVD rental kiosks. We offer self-service DVD rentals through kiosks where consumers can rent or purchase movies or games. Our current DVD kiosks are installed primarily at military bases within the United States. Our DVD kiosks, through our brand InstaFlix, serve as a mini video rental store and occupy an area of less than ten square feet. Consumers use a touch screen to select their DVD, swipe a valid credit or debit card, and rent movies or games in some kiosks. The process is designed to be fast, efficient and fully automated with no upfront or membership fees.
Results of Operations
The following tables set forth certain consolidated statement of operations data as a percentage of revenues for the periods indicated. Percentages may not add due to rounding.
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Revenues | 100.0 | % | 100.0 | % | ||||
Cost of revenues | 67.9 | % | 61.3 | % | ||||
Gross profit | 32.1 | % | 38.7 | % | ||||
Operating expenses | ||||||||
Depreciation expense | 7.4 | % | 7.2 | % | ||||
Amortization of intangible merchant contracts | 3.9 | % | 3.6 | % | ||||
Selling, general and administrative | 20.9 | % | 24.4 | % | ||||
Restructuring charges | 0.0 | % | 6.1 | % | ||||
Stock compensation expense | 0.2 | % | 0.3 | % | ||||
Total operating expenses | 32.5 | % | 41.7 | % | ||||
Operating loss from operations before items shown below | (0.4 | )% | (3.0 | )% | ||||
Interest expense, net | (3.1 | )% | (2.1 | )% | ||||
Gain on sale of assets | 0.2 | % | 0.0 | % | ||||
Other non-operating expense, net | 0.0 | % | (1.4 | )% | ||||
Income tax expense | (0.3 | )% | (0.3 | )% | ||||
Net loss | (3.5 | )% | (6.8 | )% | ||||
EBITDA (1) | 11.2 | % | 6.5 | % |
(1) See “—EBITDA” sections in: “Comparison of Results of Operations for the Three Months Ended March 31, 2012 and 2011”.
Comparison of Results of Operations for the Three Months Ended March 31, 2012 and 2011:
Revenues
The Company reported total operating revenue from operations of $8,296,300 for the three-month period ended March 31, 2012 as compared to $7,950,071 for the three-month period ended March 31, 2011, an increase of 4.4% year over year.
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Revenue from our ATM services business was up approximately 21.6% from the first quarter of 2011. We ended March 31, 2012 with 204 more ATMs than we ended with on March 31, 2011, and processed 11.5% more surcharge transactions in the first quarter of 2012 as compared to the first quarter of 2011. The increase in machine count was offset by a service-only contract for 127 ATMs that expired during the second quarter of 2011. Excluding the loss of the service-only ATMs, our ATM count would have increased by approximately 330 year over year.
During the first quarter of 2012, we benefited from having ATM transactions from ATM portfolios acquired subsequent to first quarter 2011. Additionally, we raised surcharge fees during the first quarter of 2011 which helped grow our ATM surcharge revenue by 29.7% year over year as the first quarter of 2012 benefitted from a full quarter of this increase. For the first quarter of 2012, we earned approximately $135,000 more interchange fees than we earned in the first quarter of 2011, due to a higher machine count and higher transactions per machine. Revenue from our DVD services business decreased approximately $936,000 from the first quarter of 2011. The decrease in DVD services revenue was due primarily to cancellation of a contract with a major customer resulting in removal of our DVD kiosks from this customer’s sites in December of 2011. This cancellation was the result of the customer’s bankruptcy proceedings. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).
Cost of Revenues
Our total cost of revenues from operations increased from $4,876,170 to $5,636,808 for the three-month period ended March 31, 2011 to the three-month period ended March 31, 2012. The increase was the result of approximately $1,400,000 of increased cost of revenues related to our ATM business. This increase was partially offset by approximately $639,000 of decreased cost of revenues related to our DVD business. Cost of revenues in our ATM services business increased primarily due to increased commission share resulting from renewals of new customer contracts, as well as an increase in ATM maintenance costs. The decrease in cost of revenues from our DVD services business was a function of decreased DVD rental revenue.
The principal components of cost of revenues in the ATM services business are retailer, merchant and distributor commissions (or revenue share), cost of cash, cash replenishment, ATM vault cash insurance, field maintenance, transaction processing charges, telecommunication costs and equipment costs on related equipment sales. The $1,400,000 increase was mainly due to increased commissions (or revenue share) due to higher revenues, new terms in certain customer renewal agreements, and increased first line and second line maintenance costs. Our cost of cash replenishment and insurance costs increased during the first quarter of 2012 from 2011 mainly due to the increased number of company-owned ATMs in 2012 as compared to 2011. The increase of ATMs year-over-year resulted in the increased cost of cash and cash replenishment expenses. First line and second line maintenance fees also increased over last year due to the increase in company-owned ATMs as well as due to more aggressive billings by our ATM maintenance vendor.
The principal components of cost of revenues in the DVD services business are retailer and merchant commissions (or revenue share), amortization of our DVD library, DVD replenishment, field maintenance, credit card processing charges and telecommunication costs. The decrease in DVD services cost of sales was a function of decreased DVD rental revenue due primarily to cancellation of a contract with a major customer, which resulted in removal of our DVD kiosks from customer sites in December of 2011. This cancellation was the result of the customer’s bankruptcy proceedings. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).
Gross Profit
Gross profit from operations as a percentage of revenue for the three-month periods ended March 31, 2012 and 2011 were approximately 32.1% or $2,659,492, and approximately 38.7%, or $3,073,901, respectively. The decreased gross profit for the first quarter of 2012 versus the same period in 2011 was mainly attributable to the increased cost of sales and the decreased rental revenue from DVD services discussed above.
Gross profit in the ATM services business for the first quarter of 2012 was 33.7%, which is lower than the 42.9% gross profit for the same period in 2011. The decrease in gross profit in the ATM services business was attributable to the increased cost of revenues discussed above.
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Gross profit in the DVD services business for the first quarter of 2012 was 21.2%, which is lower than the 26.1% gross profit for the same period in 2011. The decrease in gross profit in the DVD services business was attributable to decreased rental revenue discussed above.
Operating Expenses
Our total operating expenses from operations for the three months ended March 31, 2012 and 2011 were $2,694,197 and $3,312,148 respectively. The principal components of operating expenses are general and administrative expenses such as professional and legal fees, administrative salaries and benefits, consulting and audit fees, occupancy costs, sales and marketing expenses and administrative expenses. Operating expenses also include depreciation, amortization of intangible merchant contracts and stock compensation expenses.
To aid in the understanding of our discussion and analysis of our operating expenses, the following table summarizes the amount and percentage change in the amounts from the previous year for certain operating expense line items:
For the Three Months Ended | 2012 to 2011 | 2012 to 2011 | ||||||||||||||
March 31, 2012 | March 31, 2011 | $ Change | % Change | |||||||||||||
Depreciation expense | $ | 615,185 | $ | 575,324 | $ | 39,861 | 6.9 | % | ||||||||
Amortization of intangible merchant contracts | 326,844 | 288,438 | 38,406 | 13.3 | % | |||||||||||
Selling, general and administrative | 1,734,973 | 1,941,646 | (206,673 | ) | (10.6 | )% | ||||||||||
Restructuring charges | - | 485,040 | (485,040 | ) | (100.0 | )% | ||||||||||
Stock compensation expense | 17,195 | 21,700 | (4,505 | ) | (20.8 | )% | ||||||||||
Total operating expenses | $ | 2,694,197 | $ | 3,312,148 | $ | (617,951 | ) | (18.7 | )% |
See explanation of operating expenses below:
Depreciation Expense
Depreciation expense from operations increased for the three-month period ended March 31, 2012 to $615,185 from $575,324 for the same period in 2011. This increase in depreciation expense was mainly due to an increase of company owned kiosks.
Amortization of Intangible Merchant Contracts
Amortization of intangible merchant contracts from operations increased for the three-month period ended March 31, 2012 to $326,844 from $288,438 for the same period in 2011. The increase from 2011 was due to the amortization of contracts in the ATM services business acquired subsequent to the first quarter of 2011.
Selling, General and Administrative (“SG&A”) Expenses
Our total SG&A expenses from operations decreased to $1,734,973, or 20.9% of revenue for the three-month period ended March 31, 2012 from $1,941,646, or 24.4% of revenue for the three-month period ended March 31, 2011. The decrease in SG&A expenses was mainly due to approximately $125,000 of decreased headcount-related expenses in our DVD business coupled with approximately $40,000 in reduced SG&A expenses related to cost of DVD kiosks leased in 2011. These kiosks were replaced by company owned machines throughout the fourth quarter of 2011.
Restructuring Charges
On February 28, 2011, the Company and George McQuain, the Company’s former Chief Executive Officer, agreed to a mutual separation of Mr. McQuain’s employment. As of February 28, 2011, Mr. McQuain is no longer employed as Chief Executive Officer, Director or in any other capacity, by the Company or any of its subsidiaries. The Company intends to pay Mr. McQuain the severance payments detailed in his Employment Agreement. The result of this separation coupled with other reductions in headcount was a restructuring charge of $485,040 recorded during the first quarter of 2011.
As of March 31, 2012, the Company had accrued $138,813 for severance obligations to Mr. McQuain included in accounts payable and accrued liabilities on the condensed consolidated balance sheet.
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Stock Compensation Expense
For the three months ended March 31, 2012, we recorded stock compensation expense of $17,195, mainly relating to executive and director stock option grants during fiscal years 2007 through 2012. For the three months ended March 31, 2011, we recorded stock compensation expense of $21,700.
Interest Expense, Net
Interest expense, net, increased for the three-month period ended March 31, 2012 to $254,596 from $170,897 for the three-month period ended March 31, 2011. The increase was mainly due to our increased debt balances. See Financial Footnote #4 “Senior Lenders’ Notes Payable” regarding the details of the debt balances.
Gain on Sale of Assets
During the three-month period ended March 31, 2012, the Company recorded a gain on the sale of assets of approximately $20,493. This was the result of fully amortized DVD’s sold for cash.
EBITDA
EBITDA (a non-GAAP measure) is defined as earnings before net interest, taxes, depreciation and amortization. EBITDA has some inherent limitations in measuring operating performance due to the exclusion of certain financial elements such as depreciation and is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. Furthermore, EBITDA is not intended to be a substitute for cash flows from operating activities, as a measure of liquidity, or an alternative to net income in determining our operating performance in accordance with GAAP. Our use of EBITDA should be considered within the following context:
• We acknowledge that our depreciable assets are necessary to earn revenue based on our current business.
• Our use of EBITDA as a measure of operating performance is not based on our belief about the reasonableness of excluding depreciation when measuring financial performance.
• Our use of EBITDA is supported by the importance of EBITDA to the following key stakeholders:
• Analysts — who estimate our projected EBITDA and other EBITDA-based metrics in their independently developed financial models for investors;
• Creditors — who evaluate our operating performance based on compliance with certain EBITDA-based debt covenants;
• Investment Bankers — who use EBITDA and other EBITDA-based metrics in their written evaluations and comparisons of companies within our industry; and
• Board of Directors and Executive Management — who use EBITDA as an essential metric for evaluating management performance relative to our operating budget and bank covenant compliance, as well as our ability to service debt and raise capital for growth opportunities which are a critical component to our strategy.
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The following table sets forth a reconciliation of net loss to EBITDA from operations for the three months ended March 31, 2012 and 2011:
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Net loss | $ | (291,308 | ) | $ | (543,644 | ) | ||
Income tax expense | 22,500 | 22,000 | ||||||
Interest expense, net | 254,596 | 170,897 | ||||||
Depreciation expense | 615,185 | 575,324 | ||||||
Amortization of intangible merchant contracts | 326,844 | 288,438 | ||||||
EBITDA from operations | $ | 927,817 | $ | 513,015 |
Our EBITDA from operations increased to $927,817 for the first quarter of fiscal 2012 from $513,015 for the first quarter of fiscal 2011. The increase was primarily due to $485,040 of one time charges in the first quarter of 2011 that were not incurred in the first quarter of 2012. (See Financial Footnote #11 “Restructuring Charges” for financial details of these charges).
The following table sets forth a reconciliation of net loss to EBITDA from operations before restructuring charges, stock compensation expense, gain on sale of assets and other non-operating expense (“Adjusted EBITDA”) for the three months ended March 31, 2012 and 2011:
For the Three Months Ended | ||||||||
March 31, 2012 | March 31, 2011 | |||||||
Net loss | $ | (291,308 | ) | $ | (543,644 | ) | ||
Income tax expense | 22,500 | 22,000 | ||||||
Interest expense, net | 254,596 | 170,897 | ||||||
Depreciation expense | 615,185 | 575,324 | ||||||
Amortization of intangible merchant contracts | 326,844 | 288,438 | ||||||
Restructuring charges | - | 485,040 | ||||||
Stock compensation expense | 17,195 | 21,700 | ||||||
Gain on sale of assets | (20,493 | ) | - | |||||
Other non-operating expense | - | 112,500 | ||||||
Adjusted EBITDA from operations | $ | 924,519 | $ | 1,132,255 |
Our Adjusted EBITDA decreased to $924,519 for the first quarter of fiscal 2012 from $1,132,255 for the first quarter of fiscal 2011. Adjusted EBITDA as a percentage of revenues decreased to 11.1% for the first quarter of fiscal 2012 from 14.3% for the first quarter of fiscal 2011. The decrease in Adjusted EBITDA from operations was due to lower gross margin contributed by our ATM and DVD services business for the first quarter of 2012 as compared to the gross margin contributed by our ATM and DVD services business for the first quarter of 2011, partially offset by a decrease in SG&A.
Seasonality – ATM Services
We have traditionally experienced higher transaction volumes per machine in the second and third quarters than in the first and fourth quarters. The increased volumes in the summer months coincide with increased vacation travel in the United States.
Seasonality – DVD Services
Through our limited operating history in DVD Services, we have experienced seasonality in our revenue from our DVD Services segment. The summer months have historically been high rental months for our DVD Services segment followed by lower revenue in September and October, due in part to the beginning of the school year and the introduction of the new television season. We expect our lowest quarterly revenue for the DVD services business in the first quarter and our highest quarterly revenue and earnings in the second and third quarters.
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Liquidity and Capital Resources
Financial Condition
For the Three Months Ended | 2012 to 2011 | 2012 to 2011 | ||||||||||||||
March 31, 2012 | March 31, 2011 | $ Change | % Change | |||||||||||||
Net cash provided by (used in) operating activities | $ | 1,261,356 | $ | (28,223 | ) | $ | 1,289,579 | 4569.2 | % | |||||||
Net cash used in investing activities | (1,799,947 | ) | (1,247,996 | ) | (551,951 | ) | (44.2 | )% | ||||||||
Net cash provided by financing activities | 302,451 | 1,189,507 | (887,056 | ) | (74.6 | )% | ||||||||||
Decrease in cash | $ | (236,140 | ) | $ | (86,712 | ) | $ | (149,428 | ) |
Operating Activities
During the first three months of 2012 net cash provided by operating activities amounted to $1,261,356. Net cash used by operating activities amounted to $28,223 during the first three months of 2011. This increase was the result of a lower net loss, less inventory spending, and a lower increase in accounts receivable in the first quarter of 2012, partially offset by a decrease in accounts payable when compared to the first quarter of 2011.
Investing Activities
Net cash used in investing activities from operations for the first three months of 2012 was $1,799,947. This compares to net cash used in investing activities of $1,247,996 for the three-month period ended March 31, 2011. The increase in cash used in investing activities from fiscal 2011 was mainly due to increased spending on fixed assets in the first quarter of 2012 combined with increased spending on acquisitions in the first quarter of 2012 as compared to 2011.
Financing Activities
Net cash provided by financing activities was $302,451 due to drawdown’s from the Loan Agreements (discussed in Financial Footnote #4 “Senior Lenders’ Notes Payable”) offset by paying back senior lender notes and capital leases during the first three months of 2012. This compared to funds provided by financing activities of $1,189,507 for the same period in fiscal 2011.
Working Capital
As of March 31, 2012, the Company had current assets of $4,077,783 and current liabilities of $9,820,421, which results in negative working capital of $5,742,638. This compares to a working capital deficit of $5,447,845 that existed at December 31, 2011. Despite the negative working capital, we believe that if we achieve our 2012 business plan, we will have sufficient working capital to meet our current obligations during 2012. Our business plan calls for the Company to achieve sufficient revenue, margin, EBITDA (earnings before interest, taxes, depreciation and amortization) and positive cash flows to meet our current and future obligations. Achieving that business plan is contingent upon being successful in securing new profitable ATM clients as well as maintaining profitability on existing ATM locations and achieving profitability on existing DVD locations. If that business plan is achieved, the Company will have sufficient working capital to meet our 2012 obligations. If our business plan is not achieved, the Company may need to raise additional funds through debt or equity offerings. There can be no assurance as to the availability of any needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to management.
Significant Changes in Balance Sheet Accounts
As of March 31, 2012, cash and cash equivalents decreased $236,140 to $739,223 from the December 31, 2011 balance of $975,363. The decrease was primarily due to decreased profit margin stemming from higher revenue share from renewals of two major customer contracts.
As of March 31, 2012, accounts payable and accrued liabilities, decreased $527,281 to $5,176,964 from the December 31, 2011 balance of $5,704,245. The decrease was mainly due to $1,000,000 of accounts payable paid during the first quarter 2012 relating to the purchase of the Rocky Mountain ATM portfolio (Kum and Go). (See Financial Footnote #3 “Acquisitions of Assets” included in our Annual Report on Form 10-K for the year ended December 31, 2011 for information regarding this acquisition). This decrease was partially offset by increases in other trade accounts payable.
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Additional Funding Sources
We currently have bank lines available for our short-term growth needs. The Company anticipates that it will be required to draw down up to approximately $1.6 million on its existing bank lease financing during fiscal 2012 to fund its short-term organic growth plans. We also may be required to draw down approximately $250,000 on our existing bank lease financing to fund new purchases of back office equipment.
The Company does not use its own funds for vault cash, but rather relies upon third party sources. The Company, in general, rents the vault cash from financial institutions and pays a negotiated interest rate for the use of the money. The vault cash is never in the possession of, controlled or directed by the Company, but, rather, cycles from the bank to the armored car carrier and to the ATM. Each day’s withdrawals are settled back to the owner of the vault cash on the next business day. Both Nationwide and its customers (the merchants) sign a document stating that the vault cash belongs to the financial institution and that neither party has any legal rights to the funds. The required vault cash is obtained under the following arrangements:
· | Wilmington Savings Fund Society (“WSFS”). Beginning in September 2004, the Company began an arrangement with Wilmington Savings Fund Society allowing us to obtain up to $20,000,000 in vault cash. The WSFS contract may be terminated by WSFS at any time upon breach by us and upon the occurrence of certain other events. The contract currently in place with WSFS expires on October 31, 2012, with a one year automatic renewal period unless one party gives 60 days notice of their intention not to renew. As of March 31, 2012, the Company had 258 ATMs funded by WSFS with a vault cash outstanding balance of approximately $10,278,000 in connection with this arrangement. |
· | Elan. On September 1, 2011, we entered into an amendment to our Cash Provisioning Agreement (through our sub-agreements with vault cash carriers) with Elan allowing us to obtain up to $100,000,000 in vault cash. The Elan contract may be terminated by Elan at any time upon breach by us and upon the occurrence of certain other events. The contract currently in place with Elan expires on August 11, 2012. As of March 31, 2012, the Company had 2,045 ATMs funded by Elan with a vault cash outstanding balance of approximately $42,015,000. |
· | Various Branded Cash Partners. Nationwide has partnered with numerous banks and credit unions to market specific Nationwide ATMs to the cardholders of these institutions. We add signage and marketing material to the ATM so that the ATM is easily identified as being associated with the bank or credit union, and the cardholders of these institutions receive surcharge free transactions at the designated ATMs. This provides the bank or credit union additional marketing power and another point of access to funds for their cardholders. In return for this benefit, the bank or credit union, provides and manages the vault cash in the specified ATM(s), as well as provides and pays for cash replenishment and first line maintenance. The advantage to Nationwide is that this reduces the costs associated with vault cash, cash replenishment and first line maintenance by approximately 50%. Another advantage is that with a branded ATM, transaction volumes traditionally increase more than at non-branded ATMs. As of March 31, 2012, Nationwide had 42 branded financial partners, which funded 376 ATMs. |
Impact of Inflation and Changing Prices
We were not impacted by inflation during the past two fiscal years in any material respect. Interest rate decreases have decreased the rental cost of our vault cash. As the interest rates increase and vault cash costs increase, this will have an unfavorable impact on the Company’s results of operations.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
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ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report, we have carried out an evaluation of the effectiveness of the design and operation of our Company’s disclosure controls and procedures. Under the direction of our Interim President and Interim Chief Executive Officer and our Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of March 31, 2012.
Disclosure controls and procedures and other procedures are designed to ensure that information required to be disclosed in our reports or submitted under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes to internal controls over financial reporting that occurred during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially impact, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
Information regarding legal proceedings is contained in Financial Footnote #6 (“Litigation and Claims”) to the Condensed Consolidated Financial Statements contained in this report and is incorporated herein by reference.
ITEM 1A. Risk Factors.
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
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ITEM 6. Exhibits
Exhibit | ||
Number | Description | |
3.1 | Articles of Incorporation - Restated and Amended May 30, 2001 (Incorporated by reference to Form 10KSB filed with the SEC on March 31, 2003). | |
3.2 | By-Laws of Global Axcess Corp - As Amended and Restated (Incorporated by reference to Form 8-K filed with the SEC on April 6, 2010). | |
3.3 | Amendment to the Articles of Incorporation (Incorporated by reference to Form 10-K/A filed with the SEC on January 28, 2011). | |
4.1 | Second Amendment to Loan and Security Agreement, dated as of January 4, 2012, by and among Global Axcess Corp (and subsidiaries) and Fifth Third Bank (Incorporated by reference to Form 10-K filed with the SEC on March 30, 2012). | |
31.1 | Certification of the Chief Executive Officer of Global Axcess Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
31.2 | Certification of the Chief Financial Officer of Global Axcess Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
32.1 | Certification of the Chief Executive Officer of Global Axcess Corp pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
32.2 | Certification of the Chief Financial Officer of Global Axcess Corp pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
101.INS | XBRL Instance Document*^ | |
101.SCH | XBRL Taxonomy Extension Schema Document*^ | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document*^ | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document*^ | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document*^ | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document*^ |
*Filed herewith.
^In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No. (101) to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific preference in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as of May 15, 2012 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GLOBAL AXCESS CORP | ||
By: /s/ Lock Ireland | ||
Lock Ireland | ||
Interim Chief Executive Officer, Vice Chairman and Director | ||
(interim principal executive officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 15th day of May, 2012.
Signature | Title | |
/S/ Michael J. Loiacono | Chief Financial Officer and Chief Accounting Officer | |
Michael J. Loiacono | (principal financial officer and principal accounting officer) | |
/S/ Lock Ireland | Interim Chief Executive Officer, Vice Chairman and Director | |
Lock Ireland | (interim principal executive officer) |
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EXHIBIT INDEX
Exhibit | ||
Number | Description | |
3.1 | Articles of Incorporation - Restated and Amended May 30, 2001 (Incorporated by reference to Form 10KSB filed with the SEC on March 31, 2003). | |
3.2 | By-Laws of Global Axcess Corp - As Amended and Restated (Incorporated by reference to Form 8-K filed with the SEC on April 6, 2010). | |
3.3 | Amendment to the Articles of Incorporation (Incorporated by reference to Form 10-K/A filed with the SEC on January 28, 2011). | |
4.1 | Second Amendment to Loan and Security Agreement, dated as of January 4, 2012, by and among Global Axcess Corp (and subsidiaries) and Fifth Third Bank (Incorporated by reference to Form 10-K filed with the SEC on March 30, 2012). | |
31.1 | Certification of the Chief Executive Officer of Global Axcess Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
31.2 | Certification of the Chief Financial Officer of Global Axcess Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
32.1 | Certification of the Chief Executive Officer of Global Axcess Corp pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
32.2 | Certification of the Chief Financial Officer of Global Axcess Corp pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
101.INS | XBRL Instance Document*^ | |
101.SCH | XBRL Taxonomy Extension Schema Document*^ | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document*^ | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document*^ | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document*^ | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document*^ |
*Filed herewith.
^In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No. (101) to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific preference in such filing.
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