$GPTX UNITED STATES SECURITIES AND EXCHANGE COMMI
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$GPTX UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 0-25148
Global Payment Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2974651
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
170 Wilbur Place, Bohemia, New York 11716
(Address of Principal Executive Offices) (Zip Code)
(631) 563-2500
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ X ]
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 the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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 the Exchange Act). Yes [ ] No [X]
As of August 12, 2008, the registrant had a total of 7,722,185 shares of Common Stock outstanding.
Global Payment Technologies, Inc.
Index
PART I. FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -June 30, 2008 (unaudited)
and September 30, 2007 3
Condensed Consolidated Statements of Operations (unaudited) - Three
and Nine Months ended June 30, 2008 and 2007 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Nine
Months ended June 30, 2008 and 2007 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits 19-24
SIGNATURES 20
2
GLOBAL PAYMENT TECHNOLOGIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share and per share data)
June 30, September 30,
2008 2007
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 648 $ 879
Accounts receivable, less allowance for doubtful
accounts of $ 76 and $ 86, respectively 1,103 1,030
Inventory, net 3,409 3,768
Prepaid expenses and other current assets 101 178
Total current assets 5,261 5,855
Property and equipment, net 541 822
Capitalized software costs, net 55 89
Other assets - 36
Total assets $ 5,857 $ 6,802
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowing under debt facility $ - $ 353
Current portion of long-term debt - 40
Note payable, related party 440 -
Accounts payable 2,596 2,003
Accrued expenses and other current liabilities 1,088 936
Total current liabilities 4,124 3,332
Commitments and Contingencies (Note M)
Shareholders' equity:
Preferred stock, par value $0.01; authorized 2,000,000 shares; 20 -
issued 2,000,000 shares and - shares, respectively
Common stock, par value $0.01; authorized 20,000,000 shares;
issued 7,772,185 shares and 6,772,185 shares respectively 78 68
Additional paid-in capital 14,679 13,912
Accumulated deficit (11,588) (9,024)
Accumulated other comprehensive income 43 13
3,232 4,969
Less treasury stock, at cost, 278,984 shares (1,499) (1,499)
Total shareholders' equity 1,733 3,470
Total liabilities and shareholders' equity $ 5,857 $ 6,802
=================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
3
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
Three Months ended Nine Months ended
June 30, June 30,
2008 2007 2008 2007
Net sales $ 3,809 $ 3,103 $ 9,242 $ 9,869
Cost of sales 3,066 2,818 7,397 8,246
Gross profit 743 285 1,845 1,623
Operating expenses 1,228 1,863 4,264 5,752
Loss from operations (485) (1,578) (2,419) (4,129)
Other expense:
Interest expense, net (74) (14) (136) (40)
Total other expense, net (74) (14) (136) (40)
Loss before provision for income taxes (559) (1,592) (2,555) (4,169)
Provision for income taxes 2 14 10 18
Net loss $ (561) $ (1,606) $ (2,565) $ (4,187)
============== ================ ============= =============
Net loss per share:
Basic $ (0.08) $ (0.26) $ (0.37) $ (0.67)
============== ================ ============= =============
Diluted $ (0.08) $ (0.26) $ (0.37) $ (0.67)
============== ================ ============= =============
Common shares used in computing net loss
per share amounts:
Basic 7,443,201 6,264,355 6,878,238 6,233,586
============== ================ ============= =============
Diluted 7,443,201 6,264,355 6,878,238 6,233,586
============== ================ ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
4
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Nine Months ended June 30,
2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,565) $ (4,187)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 326 871
Amortization of debt discount 107 -
Debt cost amortization 63 17
Provision for losses on accounts receivable 21 5
Provision for inventory obsolescence 120 -
Share based compensation expense 99 173
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (77) 265
Decrease in inventory 255 949
Decrease in prepaid expenses and other assets 49 37
Increase (decrease) in accounts payable 593 (1)
Increase in accrued expenses and other current
liabilities 151 77
NET CASH USED IN OPERATING ACTIVITIES (858) (1,794)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10) (112)
NET CASH USED IN INVESTING ACTIVITIES (10) (112)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease (40) (45)
Proceeds from issuance of convertible note 400 -
Proceeds from issuance of secured note 440 -
Proceeds from issuance of stock 190 -
Net (repayments) borrowing from debt facility (353) 1,243
NET CASH PROVIDED BY FINANCING ACTIVITIES 637 1,198
NET DECREASE IN CASH AND CASH EQUIVALENTS (231) (708)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 879 2,270
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 648 $ 1,562
============== ==============
CASH PAID DURING THE PERIOD FOR:
Interest $ 62 $ 60
============== ==============
Income Taxes $ - $ -
============== ==============
NON-CASH FINANCING ACTIVITES
Restricted common stock and warrant issued in connection
with extension of debt facility $ - $ 207
============== ==============
The accompanying notes are an integral part of these condensed consolidated financial
statements (unaudited).
5
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements June 30, 2008
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements of Global Payment Technologies, Inc. (the "Company"
, including the September 30, 2007 consolidated balance sheet which has been derived from audited financial statements, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for the three and nine month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2008. We recommend that you refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2007.
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations. Accordingly, the Company will be required to identify additional revenue resources, raise additional capital and/or significantly reduce its expenses in order to pay its obligations as they become due. The Company entered into a debt financing agreement and is undertaking a corporate restructuring to attempt to improve operating results and develop new products. There can be no assurance, however, that such plans will be successful. These uncertainties raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amount and classification of assets or the amount and classification of liabilities that might result from the outcome of these uncertainties.
NOTE B - EMPLOYEE STOCK-BASED COMPENSATION
In the nine months ended June 30, 2008 and 2007, the Company recorded share-based compensation for options attributable to employees, officers and directors of $99,000 and $173,000, respectively, which are included in the Company's net loss for the periods.
6
A summary of the Company's stock option plan activity as of June 30, 2008 and changes during the nine months then ended is as follows:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term (years) (in thousands)
Outstanding, October 1, 2007 711,360 $3.18
Granted 1,125,500 0.20
Forfeited (48,150) 1.77
Expired (75,500) 3.83
Outstanding, June 30, 2008 1,713,210 $1.21 5.6 $ -
============ ========== ============ ==============
Vested or expected to vest, June 30, 2008 782,293 $2.01 4.7 $ -
============ ========== ============ ==============
Exercisable, June 30, 2008 782,293 $2.01 4.7 $ -
============ ========== ============ ==============
Compensation costs for stock options with graded vesting are recognized ratably over the vesting period. As of June 30, 2008, there was $131,000 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over a weighted average period of 2.43 years.
NOTE C - CASH AND CASH EQUIVALENTS
A significant portion of the Company's cash balance in the amount of $427,000 and $498,000, as of June 30, 2008 and September 30, 2007, respectively, consists of currency used to test the Company's products. Translation gains or losses on foreign currency amounts used for test purposes are included in loss from operations.
NOTE D - INVENTORY
The following is a summary of the composition of inventory:
(in thousands)
June September
30, 2008 30, 2007
Raw Materials $ 2,350 $ 2,457
Work-in-process 309 544
Finished Goods 750 767
$ 3,409 $ 3,768
================ ================
The Company recorded a provision for inventory obsolescence of $120,000 and $60,000 for the nine months ended June 30, 2008 and for the fiscal year ended September 30, 2007, respectively.
7
NOTE E - DEBT
The Company's credit facility with Laurus Master Fund Ltd. was paid in full and terminated on the maturity date of November 15, 2007.
On January 15, 2008, the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement" with Exfair Pty Ltd, an Australian company ("Exfair"
and Global Payment Technologies Australia Pty Ltd. ("GPTA"; companies controlled by Mr. Andre Soussa. GPTA is the Company's largest customer. The transactions contemplated thereunder were consummated at two closings (as discussed below).
First Closing
At the first closing on January 15, 2008 (the "First Closing", the Company issued to GPTA a one-year secured term note in the principal amount of $440,000 (the "Secured Note" that bears interest at a rate equal to the prime rate plus 3.0% (provided, that the interest rate shall not be less than 9.0%) and is secured by all the assets of the Company pursuant to a Security Agreement (the "Security Agreement".
Second Closing
At the second closing, on February 5, 2008 (the "Second Closing", the Company issued (i) a convertible note (the "Convertible Note" in the principal amount of $400,000 to Exfair, which note was converted into 2,000,000 shares of Series A Convertible Preferred Stock, par value $0.01 per share, of the Company (the "Preferred Stock" and (ii) a four-year Common Stock Purchase Warrant (the "Warrant" to purchase 5,784,849 shares of Common Stock of the Company at an exercise price of $0.28 per share.
At the Company's 2007 Annual Meeting of Stockholders held on June 24, 2008, stockholders approved an amendment to our Certificate of Incorporation to increase our authorized capital stock by 2,000,000 shares of preferred stock. As a result all outstanding amounts owed under the Convertible Note were automatically converted into shares of Series A Preferred Stock.
NOTE F - MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in the consolidated financial statements are the allowance for doubtful accounts, recoverability of inventory, deferred income taxes, capitalized software and provisions for warranties. Actual results could differ from those estimates.
NOTE G - COMPREHENSIVE LOSS
Comprehensive loss is the total of net loss and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains/losses on securities classified as available-for-sale, currency translation adjustments and minimum pension liability adjustments. The Company's comprehensive loss is as follows:
8
Three months ended June 30, Nine months ended June 30,
2008 2007 2008 2007
Net loss $ (561) $ (1,606) $ (2,565) $ (4,187)
Other comprehensive
income (loss) (a) (3) (23) 31 (63)
Comprehensive loss $ (564) $ (1,629) $ (2,534) $ (4,250)
============= ============== =========== ============
(a) Consists of translation adjustments which relate to the Company's subsidiary located in the United Kingdom.
NOTE H - NET LOSS PER COMMON SHARE
Net loss per common share amounts (basic and diluted EPS) are computed by dividing net loss by the weighted average number of outstanding common shares. For the three and nine months ended June 30, 2008 and June 30, 2007, potentially dilutive shares were not included in diluted EPS because including them would be anti-dilutive. Potentially dilutive shares are as follows:
(in thousands) (in thousands)
Three months ended June 30, Nine months ended June 30,
2008 2007 2008 2007
Stock options 1,713 1,238 1,713 1,238
Stock warrants 7,265 200 7,265 200
Convertible debt - 109 - 109
Preferred Stock 2,000 - 2,000 -
Total 10,978 1,547 10,978 1,547
============= ============ =========== ==========
NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board (the"FASB" issued Interpretation ("FIN" No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and requires increased disclosures.
Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2007, the Company has not recorded any unrecognized tax benefits. The Company's policy, if it had unrecognized benefits, is to recognize accrued interest in interest expense and penalties in operating expenses.
Effective October 1, 2007, the Company adopted the provisions of FIN 48. The Company's tax years ranging from 2003 through 2006 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired. As a result of the transactions subsequent to December 31, 2007, the Company will evaluate the effect on its deferred tax asset for accounting purposes in accordance with Section 382 limitations.
In September 2006, the FASB issued Statement of Financial Accounting Standards ("FAS" No. 157, "Fair Value Measurements." FAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. FAS No. 157 is partially effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of FAS No. 157 will have on its consolidated financial position and results of operations.
9
In February 2007, the FASB issued Financial Accounting Standard ("FAS" No. 159, "The Fair Value for Financial Assets and Financial Liabilities". FAS No. 159 permits entities to choose to measure financial assets and liabilities, with certain exceptions, at fair value at specified election dates. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. FAS No. 159 is effective for the Company in its fiscal year beginning October 1, 2008. The Company is currently evaluating the impact of FAS No. 159 on its consolidated financial position and results of operations.
In December 2007, the FASB issued FAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51". FAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. FAS No. 160 is effective for the Company in its fiscal year beginning October 1, 2009. The Company is currently evaluating the impact of FAS No. 160 on its consolidated financial position and results of operations.
In December 2007, the FASB issued FAS No. 141 R "Business Combinations". FAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. FAS No. 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS No. 141R is effective for the Company in its fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that FAS No. 141R will have on its consolidated financial position and results of operations, the Company will be required to expense costs related to any acquisitions after September 30, 2009.
NOTE J - WARRANTY OBLIGATIONS
The Company recognizes and historically has recognized the estimated cost associated with its standard warranty on products at the time of sale. The estimate is based on historical failure rates and current claim cost experience. The following is a summary of the changes in the Company's accrued warranty obligation (which is included in accrued expenses) for the period October 1, 2007 through June 30, 2008:
(in thousands)
Amount
Beginning Balance as of October 1, 2007 $ 108
Deduct: Payments (21)
Add: Provision 15
Ending Balance as of June 30, 2008 $ 102
NOTE K - SHAREHOLDERS' EQUITY
During the nine months ended June 30, 2008, the Company received $190,000 through the sale of 950,000 shares of common stock through a private transaction. In addition, the investors received 950,000 stock purchase warrants which are exercisable at $.28 per share and expire in March 2012. The investors included two of the Company's Directors as well as an individual related to the CEO of the Company.
10
The Company charged $99,000 and $173,000 to operations during the nine months ended June 30, 2008 and 2007, respectively, representing the fair value of stock options granted to officers and board of directors during the period with a corresponding increase to additional paid-in capital in accordance with the provisions of SFAS No. 123R.
The following are the changes in shareholders' equity during the nine months ended June 30, 2008 (in thousands):
Balance, October 1, 2007 $3,470
Share-based compensation 99
Issuance of warrants 400
Preferred Stock 108
Proceeds from issuance of stock 190
Other comprehensive income 31
Net loss (2,565)
Balance, June 30, 2008 $1,733
NOTE L - CONCENTRATIONS
The Company's largest customers for the three and nine months ended June 30, 2008 and 2007 represent the following percentages of net sales and accounts receivable:
Three months ended June 30, Nine months ended June 30,
2008 2007 2008 2007
Net sales:
Customer A 36% 52% 35% 41%
Customer B 13% * 10% *
June 30, September 30,
2008 2007
Accounts Receivable:
Customer A 31% 71%
Customer B * *
* Represents less than 10% for the period
NOTE M -COMMITMENTS AND CONTINGENCIES
Employment Contracts
On February 5, 2008 the Company entered into an Employment Agreement with Mr. Andre Soussa, pursuant to which he is employed as the Company's Chief Executive Officer. William McMahon resigned as a director of the Company and as its Chief Executive Officer, but remains at the Company as its President and Chief Financial Officer and has also entered into an employment agreement with the Company. The agreements provide for an aggregate annual salary of $500,000 and expire in February 2010; in addition the executives were granted stock options to purchase an aggregate of 750,000 shares of common stock.
11
Litigation
The Company is a defendant in a matter which arose in the ordinary course of business. In the opinion of management, the ultimate resolution of this matter would not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company believes that an adequate provision therefore has been made in the consolidated financial statements.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Recent Developments
On February 5, 2008, the Company issued to Exfair Pty Ltd (i) a Convertible Note in the principal amount of $400,000, which note may be converted into two million shares of Series A Convertible Preferred Stock, par value $0.01 per share, of the Company and (ii) a four-year Common Stock Purchase Warrant to purchase 5,784,849 shares of Common Stock of the Company at an exercise price of $0.28 per share. The Convertible Note matures in June 2009.
At the Company's 2007 Annual Meeting of Stockholders held on June 24, 2008, stockholders approved an amendment to our Certificate of Incorporation to increase our authorized capital stock by 2,000,000 shares of preferred stock. As a result all outstanding amounts owed under the Convertible Note will be automatically converted into shares of Series A Preferred Stock.
On February 5, 2008 the Company entered into an Employment Agreement with Mr. Andre Soussa, pursuant to which he is employed as the Company's Chief Executive Officer. William McMahon resigned as a director of the Company and as its Chief Executive Officer, but will remain at the Company as its President and Chief Financial Officer and has also entered into an employment agreement with the Company.
The Board of Directors on January 22, 2008 awarded Richard Gerzof, Chairman of the Board of the Company, immediately exercisable options to purchase 250,000 shares of Common Stock of the Company at an exercise price of $0.20 per share, the fair market value as of the date of grant. The Board of Directors also awarded Elliott Goldberg, Matthew Dollinger and William Wood, directors, immediately exercisable options to purchase 103,500, 18,500 and 3,500 shares of Common Stock, respectively, at the exercise price of $0.20 per share, the fair market value as of the date of grant. The options expire on January 21, 2015.
The Board of Directors also amended the previously granted stock options to Messrs Gerzof, Goldberg, Dollinger and Woods to eliminate the requirement that options must be exercised, to the extent they were exercisable, within a three month period following the date of termination of employment or directorship, even if by disability or death.
Three months ended June 30, 2008 compared with three months ended June 30, 2007
Sales
Net sales increased by 22.8%, or $706,000, to $3,809,000 in the three months ended June 30, 2008 as compared with $3,103,000 in the comparative prior-year period. This sales increase was due to increased sales in the gaming market.
Gross Profit
Gross profit increased to $743,000, or 19.5% of net sales, in the three months ended June 30, 2008 as compared with $285,000, or 9.2% of net sales, in the comparative prior-year period. The most significant factor affecting the Company's gross profit percentage is the unit sales levels achieved and their relationship to manufacturing costs.
Operating Expenses
Operating expenses decreased to $1,228,000, or 32.2% of sales, in the three months ended June 30, 2008 as compared with $1,863,000, or 60% of sales, in the comparative prior-year period. This decrease of $635,000 is primarily the result of lower payroll, travel, and consulting expenses. The Company also reduced its operating expenses by moving to a smaller facility, which is more appropriate to the size of the business in July 2007. The Company charged $22,000 to operations during the three months ended June 30, 2008 and $58,000 during the three months ended June 30, 2007 representing the fair value of stock options granted to employees, officers and directors.
13
Interest Expense
Interest expense increased to $74,000 as compared to interest expense of $14,000 in the comparable prior-year period. The increase was primarily associated with the issuance to GPTA of a one-year secured term note in the principal amount of $440,000 that bears interest at a rate equal to the prime rate plus 3.0% and the amortization of the warrants issued in connection with the convertible note of $400,000. The convertible note converted to 2,000,000 shares of preferred stock. As a result there will be no additional amortization of the warrants issued in connection with the convertible note.
Income Taxes
With respect to the provision for income taxes, the effective rate was 0.9% as compared with 0.1% in the prior-year period. The Company provided a full valuation allowance against its deferred income tax assets in the fourth quarter of fiscal 2003 and continues to provide a full valuation allowance at June 30, 2008. The valuation allowance is subject to adjustment based upon the Company's ongoing assessment of its future taxable income and may be wholly or partially reversed in the future.
Net Loss
Net loss for the quarter ended June 30, 2008 was $561,000, or $0.07 per share, as compared with $1,606,000, or $0.26 per share, in the comparative prior-year period.
Nine months ended June 30, 2008 compared with nine months ended June 30, 2007
Sales
Net sales decreased by 6.4%, or $627,000, to $9,242,000 in the nine months ended June 30, 2008 as compared with $9,869,000 in the comparative prior-year period. This sales decrease was due to $270, 000 decreased sales to the gaming market and $357,000 decreased sales to the beverage and vending market.
Gross Profit
Gross profit increased to $1,845,000, or 20.0% of net sales, in the nine months ended June 30, 2008 as compared with $1,623,000, or 16.4.8% of net sales, in the comparative prior-year period. The most significant factor affecting the Company's gross profit percentage is the unit sales levels achieved and their relationship to manufacturing costs.
Operating Expenses
Operating expenses decreased to $4,264,000, or 46.1% of sales, in the nine months ended June 30, 2008 as compared with $5,752,000, or 58.2% of sales, in the comparative prior-year period. This decrease of $1,488,000 is primarily the result of lower payroll, travel, and consulting expenses. The Company also reduced its operating expenses by moving to a smaller facility, which is more appropriate to the size of the business in July 2007. The Company charged $99,000 to operations during the nine months ended June 30, 2008 as compared to $173,000 in the prior year representing the fair value of stock options granted to employees, officers and directors.
Interest Expense
Interest expense increased to $136,000 as compared to interest expense of $40,000 in the comparable prior-year period. The increase was primarily associated with the issuance to GPTA of a one-year secured term note in the principal amount of $440,000 that bears interest at a rate equal to the prime rate plus 3.0% and the amortization of the warrants issued in connection with the convertible note of $400,000 The convertible note converted to 2,000,000 shares of preferred stock. As a result there will be no additional amortization of the warrants issued in connection with the convertible note.
Income Taxes
With respect to the provision for income taxes, the effective rate was 0.9% as compared with 0.1% in the prior-year period. The Company provided a full valuation allowance against its deferred income tax assets in the fourth quarter of fiscal 2003 and continues to provide a full valuation allowance at June 30, 2008. The valuation allowance is subject to adjustment based upon the Company's ongoing assessment of its future taxable income and may be wholly or partially reversed in the future.
14
Net Loss
Net loss for the nine months ended June 30, 2008 was $2,565,000, or $0.36 per share, as compared with $4,187,000, or $0.67 per share, in the comparative prior-year period.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations. Accordingly, the Company will be required to identify additional revenue resources, raise additional capital and/or significantly reduce its expenses in order to pay its obligations as they become due. The Company entered into a debt financing agreement and is undertaking a corporate restructuring to attempt to improve operating results and develop new products. There can be no assurance, however, that such plans will be successful. These uncertainties raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amount and classification of assets or the amount and classification of liabilities that might result from the outcome of these uncertainties.
In connection with the Company's cost reduction initiative and corporate restructuring, two senior management positions were eliminated during the quarter ended June 30, 2008, and subsequent to June 30, 2008, the Company further reduced its headcount by an additional eleven employees. This represented approximately 16% of the Company's total employees, resulting in an estimated annualized reduction in payroll and related expenses of approximately $800,000. In addition, the Company's top two senior executives took a voluntary pay cut aggregating $100,000 annually. The reductions mentioned above are in addition to the operating expense reductions currently in place.
The Company's capital requirements consist primarily of those necessary to continue to expand and improve product development and manufacturing capabilities, sales and marketing operations, fund inventory purchase commitments, and service principal and interest payments on the Company's indebtedness. At June 30, 2008, the Company's cash and cash equivalents were $648,000 as compared with $879,000 at September 30, 2007. A significant portion of the Company's cash balance in the amount of $427,000 and $498,000, as of June 30, 2008 and September 30, 2007, respectively, consisted of currency used to test the Company's products.
The borrowings under Company's credit facility with Laurus Master Fund Ltd. were paid in full on the maturity date of November 15, 2007.
On January 15, 2008, the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement" with Exfair Pty Ltd, an Australian company ("Exfair"
and Global Payment Technologies Australia Pty Ltd. ("GPTA"; companies controlled by Mr. Andre Soussa. GPTA is the Company's largest customer. The transactions contemplated thereunder were consummated at two closings (as discussed below).
First Closing
At the first closing on January 15, 2008 the Company issued to GPTA a one-year secured term note in the principal amount of $440,000 that bears interest at a rate equal to the prime rate plus 3.0% (provided, that the interest rate shall not be less than 9.0%) and is secured by all the assets of the Company pursuant to a Security Agreement. Additionally, the Company entered into a Voting Agreement with Exfair and certain director-stockholders of the Company, wherein such stockholders agreed to vote in favor of (i) the election of certain persons to the Board of Directors of the Company and (ii) an amendment to Company's Certificate of Incorporation establishing a class of Preferred Stock (as discussed below). Additionally, the Company entered into a Technology License Agreement with GPTA, pursuant to which the Company has agreed to grant a license to GPTA to utilize certain databases and proprietary operating systems if the Company is unable or unwilling to continue to provide support for such databases and operating systems of the Company, and the parties thereto further agreed that if the Company commences bankruptcy proceedings, then the Company would permit GPTA to duplicate any of the Company's intellectual property as of the
15
commencement of such bankruptcy proceedings. GPTA and the Company also agreed to make certain technical amendments to the Distribution Agreement dated September 1, 2006.
Second Closing
At the second closing, on February 5, 2008, the Company issued (i) a Convertible Note (the "Convertible Note" in the principal amount of $400,000 to Exfair, which note was converted into two million shares of Series A Convertible Preferred Stock, par value $0.01 per share, of the Company (the "Preferred Stock" and (ii) a four-year Common Stock Purchase Warrant to purchase 5,784,849 shares of Common Stock of the Company at an exercise price of $0.28 per share. The Convertible Note matures in June 2009. Effective as of the consummation of the Second Closing, all the Company directors except Richard Gerzof resigned and new directors were appointed. In addition, the Company entered into an Employment Agreement with Mr. Andre Soussa, pursuant to which he is employed as the Company's Chief Executive Officer for a two-year term at an annual base salary of $300,000. Mr. Soussa was also awarded options to purchase 500,000 shares of the Company's Common Stock at an exercise price of $0.20 per share in accordance with the Company's stock option plan. Further Mr. William McMahon resigned as a director of the Company and as its Chief Executive Officer. Mr. McMahon remains at the Company as its President and Chief Financial Officer and entered into a new Employment Agreement with the Company for a two-year term with an annual base salary of $200,000. Mr. McMahon was awarded options to purchase 250,000 shares of the Company's Common Stock at an exercise price of $0.20 per share in accordance with the Company's stock option plan.
The Company has agreed to seek the approval of the stockholders of the Company to amend the Certificate of Incorporation to authorize a class of Preferred Stock. Upon the approval of such amendment and the filing thereof with the Secretary of State of the State of Delaware, the Convertible Note will automatically be converted into 2,000,000 shares of Convertible Preferred Stock, par value $0.01 per share, with such rights and preferences, including, but not limited to:
At the Company's 2007 Annual Meeting of Stockholders held on June 24, 2008, stockholders approved an amendment to our Certificate of Incorporation, to increase our authorized capital stock by 2,000,000 shares of preferred stock. As a result all outstanding amounts owed under the Convertible Note was converted into shares of Series A Preferred Stock.
(a) Voting Rights. During the first 18 months after the designation of the Preferred Stock, each holder of shares of the Preferred Stock shall be entitled to five (5) times the number of votes equal to the number of shares of Common Stock into which such holder's shares of Preferred Stock could be converted and after such first 18 month period, each holder of shares of the Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such holder's shares of Preferred Stock could be converted. During the first 18 months after the designation of the Preferred Stock, so long as any shares of Preferred Stock are outstanding, the holders of Preferred Stock shall be entitled to designate three (3) members of the Board of Directors. During the first 18 months after the Preferred Stock has been designated, if the number of members of the Board of Directors is increased to more than five (5), the number of directors designated by the holders of Preferred Stock shall increase such that the Preferred Stock shall designate a majority of the number of authorized Board of Director members.
(b) Dividends. The Preferred Stock will, with respect to payment of dividends and rights upon liquidation, dissolution or winding-up of the affairs of the Company, rank senior and prior to the Common Stock of the Company, and any additional series of preferred stock which may in the future be issued by the Company and are designated in the amendment to the Certificate of Incorporation or the certificate of designation establishing such additional preferred stock as ranking junior to the Preferred Stock. The holders of the Preferred Stock will be entitled to receive dividends if, when and as declared by the Board of Directors from time to time, and in amounts determined by the Board of Directors; provided, however, no dividends shall be paid on any share of Common Stock unless a dividend is paid with respect to all outstanding shares of Preferred Stock in an amount for each such share of Preferred Stock equal to or greater than the aggregate amount of such dividends for all shares of Common Stock into which each such share of Preferred Stock could then be converted.
16
(c) Liquidation Value. The liquidation value per share of Series A Preferred Stock, in case of the voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company, will be an amount equal to $0.20, subject to adjustment in the event of a stock split, stock dividend or similar event applicable to the Preferred Stock.
(d) Additional Issuances of Securities. Except for certain issuances by the Company if at any time while the Preferred Stock is outstanding, the Company sells or grants any option to purchase or sells or grants any right to reprice its securities, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock equivalents entitling any person to acquire shares of Common Stock at an effective price per share that is lower than the then applicable conversion price, then the conversion price shall be reduced to such lower price.
(e) Modification of Preferred Stock. So long as any shares of Preferred Stock remain outstanding, the Company, shall not, without the vote or written consent by the holders of more than fifty percent (50.0%) of the outstanding Preferred Stock, voting together as a single class, and unless approved by the Board of Directors: (i) redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking or other analogous fund for such purpose) any share or shares of its Capital Stock, except for conversion into or exchange for stock junior to the Preferred Stock; (ii) alter, modify or amend the terms of the Preferred Stock in any way; or (iii) create or issue any Capital Stock of the Company ranking pari passu with or senior to the Preferred Stock either as to the payment of dividends or rights in liquidation, dissolution or winding-up of the affairs of the Company; increase the authorized number of shares of the Preferred Stock; or re-issue any shares of Preferred Stock which have been converted or otherwise acquired by the Company.
Net cash used in operating activities was $858,000 in the nine months ended June 30, 2008. This amount was due to a net loss for the period, adjusted for non-cash items, of $736,000, increased accounts receivable of $77,000, decreased prepaid expenses and other current assets of $49,000, increased accrued expenses and other liabilities of $151,000, decreased inventory of $255,000, and increased accounts payable of $593,000.
Net cash provided by financing activities amounted to $637,000 in the nine months ended June 30, 2008 as compared with net cash provided by financing activities of $1,198,000 in the prior comparable period. Net cash provided by financing activities consisted primarily of proceeds from issuance of convertible debt of $400,000, proceeds from issuance of secured note of $440,000 and proceeds from issuance of stock of $190,000 offset by net repayments of bank borrowings of $353,000 for the nine months ended June 30, 2008 as compared with net borrowings of $1,243,000 in the nine months ended June 30, 2007.
Future minimum payments under non-cancelable operating leases including the Company's new Bohemia facility, and principal payments to be made for long-term debt maturing over the next five years are as follows:
(in thousands)
Fiscal Year Operating Lease Debt Repayments
2008 $ 70
2009 242 440
2010 249
2011 255
2012 263
Thereafter 591
$ 1,670 $ 440
================ ==================
17
In addition to the chart above, and in the normal course of business, purchase orders are generated which obligate the Company for future inventory requirements. As of June 30, 2008, purchase order commitments approximated $3.0 million and will be used for production requirements during fiscal 2008 and beyond.
Critical Accounting Policies
There were no changes in critical accounting policies since the filing of the Company's Annual Report on Form 10-K for the year ended September 30, 2007.
Special Note Regarding Forward-Looking Statements: A number of statements contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. These risks and uncertainties include, but are not limited to: the Company's dependence on a limited base of customers for a significant portion of sales; the Company's dependence on the paper currency validator market and its potential vulnerability to technological obsolescence; the possible impact of competitive products and pricing; the risks that its current and future products may contain errors or defects that would be difficult and costly to detect and correct; potential manufacturing difficulties; possible risks of product inventory obsolescence; uncertainties with respect to the Company's business strategy; general economic conditions in the domestic and international market in which the Company operates; potential shortages of key parts and/or raw materials; potential difficulties in managing growth; dependence on key personnel; the relative strength of the United States currency; and other risks described in the Company's Securities and Exchange Commission filings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's quantitative and qualitative disclosures about market risk since the filing of the Company's Annual Report on Form 10-K for the year ended September 30, 2007.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management in a timely manner. The Company's Chief Executive Officer and the Company's Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report and believe that the system is operating effectively to ensure appropriate disclosure. There have been no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's 2007 Annual Meeting of Stockholders held on June 24, 2008, stockholders:
a) Elected the following two persons to serve as Class I Directors of the Company by the following vote:
FOR WITHHELD
---
Richard E. Gerzof 4,379,563 2,523,351
Robert W. Nader 6,734,280 168,634
b) Approved an amendment to our Certificate of Incorporation to increase our authorized capital stock by authorizing 2,000,000 shares of preferred stock.
As of February 5, 2008, consummation of the Second Closing, new directors were appointed. Class II Directors David Crompton and Steven H. Crisp continue to serve as directors. Class III Director Andre Soussa continues to serve as director. Class II Directors' term expires at the 2009 Annual Meeting and The Class III Directors' term expires as the 2010 Annual Meeting.
ITEM 6. EXHIBITS
Exhibit Number Description
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.
Date: August 14, 2008
GLOBAL PAYMENT TECHNOLOGIES, INC.
/s/ Andre Soussa
Andre Soussa
Chief Executive Officer
/s/ William McMahon
William McMahon
Chief Financial Officer
20
Exhibit 31.1
CERTIFICATION
I, Andre Soussa, certify that:
1. I have reviewed this Quarterly Report of Global Payment Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2008
/s/ Andre Soussa
Andre Soussa
Chief Executive Officer (Principal Executive Officer)
21
Exhibit 31.2
CERTIFICATION
I, William McMahon, certify that:
1. I have reviewed this Quarterly Report of Global Payment Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2008
/s/ William McMahon
William McMahon
Chief Financial Officer (Principal Financial and
Accounting Officer)
22
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Global Payment Technologies, Inc. (the "Company" on Form 10-Q for the quarter ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report", I, Andre Soussa, Chief Executive Officer (Principal Executive Officer) of the Company, certify, pursuant to 18 U.S.C. ss. 1350, adopted pursuant to Section 906 of the Sarbanes--Oxley Act of 2002 that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 14, 2008
/s/ Andre Soussa
Andre Soussa
Chief Executive Officer (Principal
Executive Officer)
A signed original of this written statement required by Section 906 has been provided to Global Payment Technologies, Inc.and will be retained by Global Payment Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
23
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Global Payment Technologies, Inc. (the "Company" on Form 10-Q for the quarter ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report", I, William McMahon, Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, certify, pursuant to 18 U.S.C. ss. 1350, adopted pursuant to Section 906 of the Sarbanes--Oxley Act of 2002 that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 14, 2008
/s/ William McMahon
William McMahon
Chief Financial Officer (Principal Financial Officer)
A signed original of this written statement required by Section 906 has been provided to Global Payment Technologies, Inc. and will be retained by Global Payment Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
24
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 0-25148
Global Payment Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2974651
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
170 Wilbur Place, Bohemia, New York 11716
(Address of Principal Executive Offices) (Zip Code)
(631) 563-2500
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ X ]
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 the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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 the Exchange Act). Yes [ ] No [X]
As of August 12, 2008, the registrant had a total of 7,722,185 shares of Common Stock outstanding.
Global Payment Technologies, Inc.
Index
PART I. FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -June 30, 2008 (unaudited)
and September 30, 2007 3
Condensed Consolidated Statements of Operations (unaudited) - Three
and Nine Months ended June 30, 2008 and 2007 4
Condensed Consolidated Statements of Cash Flows (unaudited) - Nine
Months ended June 30, 2008 and 2007 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits 19-24
SIGNATURES 20
2
GLOBAL PAYMENT TECHNOLOGIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share and per share data)
June 30, September 30,
2008 2007
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 648 $ 879
Accounts receivable, less allowance for doubtful
accounts of $ 76 and $ 86, respectively 1,103 1,030
Inventory, net 3,409 3,768
Prepaid expenses and other current assets 101 178
Total current assets 5,261 5,855
Property and equipment, net 541 822
Capitalized software costs, net 55 89
Other assets - 36
Total assets $ 5,857 $ 6,802
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowing under debt facility $ - $ 353
Current portion of long-term debt - 40
Note payable, related party 440 -
Accounts payable 2,596 2,003
Accrued expenses and other current liabilities 1,088 936
Total current liabilities 4,124 3,332
Commitments and Contingencies (Note M)
Shareholders' equity:
Preferred stock, par value $0.01; authorized 2,000,000 shares; 20 -
issued 2,000,000 shares and - shares, respectively
Common stock, par value $0.01; authorized 20,000,000 shares;
issued 7,772,185 shares and 6,772,185 shares respectively 78 68
Additional paid-in capital 14,679 13,912
Accumulated deficit (11,588) (9,024)
Accumulated other comprehensive income 43 13
3,232 4,969
Less treasury stock, at cost, 278,984 shares (1,499) (1,499)
Total shareholders' equity 1,733 3,470
Total liabilities and shareholders' equity $ 5,857 $ 6,802
=================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
3
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
Three Months ended Nine Months ended
June 30, June 30,
2008 2007 2008 2007
Net sales $ 3,809 $ 3,103 $ 9,242 $ 9,869
Cost of sales 3,066 2,818 7,397 8,246
Gross profit 743 285 1,845 1,623
Operating expenses 1,228 1,863 4,264 5,752
Loss from operations (485) (1,578) (2,419) (4,129)
Other expense:
Interest expense, net (74) (14) (136) (40)
Total other expense, net (74) (14) (136) (40)
Loss before provision for income taxes (559) (1,592) (2,555) (4,169)
Provision for income taxes 2 14 10 18
Net loss $ (561) $ (1,606) $ (2,565) $ (4,187)
============== ================ ============= =============
Net loss per share:
Basic $ (0.08) $ (0.26) $ (0.37) $ (0.67)
============== ================ ============= =============
Diluted $ (0.08) $ (0.26) $ (0.37) $ (0.67)
============== ================ ============= =============
Common shares used in computing net loss
per share amounts:
Basic 7,443,201 6,264,355 6,878,238 6,233,586
============== ================ ============= =============
Diluted 7,443,201 6,264,355 6,878,238 6,233,586
============== ================ ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
4
GLOBAL PAYMENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Nine Months ended June 30,
2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,565) $ (4,187)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 326 871
Amortization of debt discount 107 -
Debt cost amortization 63 17
Provision for losses on accounts receivable 21 5
Provision for inventory obsolescence 120 -
Share based compensation expense 99 173
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (77) 265
Decrease in inventory 255 949
Decrease in prepaid expenses and other assets 49 37
Increase (decrease) in accounts payable 593 (1)
Increase in accrued expenses and other current
liabilities 151 77
NET CASH USED IN OPERATING ACTIVITIES (858) (1,794)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10) (112)
NET CASH USED IN INVESTING ACTIVITIES (10) (112)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease (40) (45)
Proceeds from issuance of convertible note 400 -
Proceeds from issuance of secured note 440 -
Proceeds from issuance of stock 190 -
Net (repayments) borrowing from debt facility (353) 1,243
NET CASH PROVIDED BY FINANCING ACTIVITIES 637 1,198
NET DECREASE IN CASH AND CASH EQUIVALENTS (231) (708)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 879 2,270
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 648 $ 1,562
============== ==============
CASH PAID DURING THE PERIOD FOR:
Interest $ 62 $ 60
============== ==============
Income Taxes $ - $ -
============== ==============
NON-CASH FINANCING ACTIVITES
Restricted common stock and warrant issued in connection
with extension of debt facility $ - $ 207
============== ==============
The accompanying notes are an integral part of these condensed consolidated financial
statements (unaudited).
5
Global Payment Technologies, Inc.
Notes to Condensed Consolidated Financial Statements June 30, 2008
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements of Global Payment Technologies, Inc. (the "Company"
, including the September 30, 2007 consolidated balance sheet which has been derived from audited financial statements, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for the three and nine month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2008. We recommend that you refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2007. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations. Accordingly, the Company will be required to identify additional revenue resources, raise additional capital and/or significantly reduce its expenses in order to pay its obligations as they become due. The Company entered into a debt financing agreement and is undertaking a corporate restructuring to attempt to improve operating results and develop new products. There can be no assurance, however, that such plans will be successful. These uncertainties raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amount and classification of assets or the amount and classification of liabilities that might result from the outcome of these uncertainties.
NOTE B - EMPLOYEE STOCK-BASED COMPENSATION
In the nine months ended June 30, 2008 and 2007, the Company recorded share-based compensation for options attributable to employees, officers and directors of $99,000 and $173,000, respectively, which are included in the Company's net loss for the periods.
6
A summary of the Company's stock option plan activity as of June 30, 2008 and changes during the nine months then ended is as follows:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term (years) (in thousands)
Outstanding, October 1, 2007 711,360 $3.18
Granted 1,125,500 0.20
Forfeited (48,150) 1.77
Expired (75,500) 3.83
Outstanding, June 30, 2008 1,713,210 $1.21 5.6 $ -
============ ========== ============ ==============
Vested or expected to vest, June 30, 2008 782,293 $2.01 4.7 $ -
============ ========== ============ ==============
Exercisable, June 30, 2008 782,293 $2.01 4.7 $ -
============ ========== ============ ==============
Compensation costs for stock options with graded vesting are recognized ratably over the vesting period. As of June 30, 2008, there was $131,000 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over a weighted average period of 2.43 years.
NOTE C - CASH AND CASH EQUIVALENTS
A significant portion of the Company's cash balance in the amount of $427,000 and $498,000, as of June 30, 2008 and September 30, 2007, respectively, consists of currency used to test the Company's products. Translation gains or losses on foreign currency amounts used for test purposes are included in loss from operations.
NOTE D - INVENTORY
The following is a summary of the composition of inventory:
(in thousands)
June September
30, 2008 30, 2007
Raw Materials $ 2,350 $ 2,457
Work-in-process 309 544
Finished Goods 750 767
$ 3,409 $ 3,768
================ ================
The Company recorded a provision for inventory obsolescence of $120,000 and $60,000 for the nine months ended June 30, 2008 and for the fiscal year ended September 30, 2007, respectively.
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NOTE E - DEBT
The Company's credit facility with Laurus Master Fund Ltd. was paid in full and terminated on the maturity date of November 15, 2007.
On January 15, 2008, the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement"
with Exfair Pty Ltd, an Australian company ("Exfair" and Global Payment Technologies Australia Pty Ltd. ("GPTA"
; companies controlled by Mr. Andre Soussa. GPTA is the Company's largest customer. The transactions contemplated thereunder were consummated at two closings (as discussed below). First Closing
At the first closing on January 15, 2008 (the "First Closing"
, the Company issued to GPTA a one-year secured term note in the principal amount of $440,000 (the "Secured Note" that bears interest at a rate equal to the prime rate plus 3.0% (provided, that the interest rate shall not be less than 9.0%) and is secured by all the assets of the Company pursuant to a Security Agreement (the "Security Agreement". Second Closing
At the second closing, on February 5, 2008 (the "Second Closing"
, the Company issued (i) a convertible note (the "Convertible Note" in the principal amount of $400,000 to Exfair, which note was converted into 2,000,000 shares of Series A Convertible Preferred Stock, par value $0.01 per share, of the Company (the "Preferred Stock" and (ii) a four-year Common Stock Purchase Warrant (the "Warrant" to purchase 5,784,849 shares of Common Stock of the Company at an exercise price of $0.28 per share. At the Company's 2007 Annual Meeting of Stockholders held on June 24, 2008, stockholders approved an amendment to our Certificate of Incorporation to increase our authorized capital stock by 2,000,000 shares of preferred stock. As a result all outstanding amounts owed under the Convertible Note were automatically converted into shares of Series A Preferred Stock.
NOTE F - MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in the consolidated financial statements are the allowance for doubtful accounts, recoverability of inventory, deferred income taxes, capitalized software and provisions for warranties. Actual results could differ from those estimates.
NOTE G - COMPREHENSIVE LOSS
Comprehensive loss is the total of net loss and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains/losses on securities classified as available-for-sale, currency translation adjustments and minimum pension liability adjustments. The Company's comprehensive loss is as follows:
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Three months ended June 30, Nine months ended June 30,
2008 2007 2008 2007
Net loss $ (561) $ (1,606) $ (2,565) $ (4,187)
Other comprehensive
income (loss) (a) (3) (23) 31 (63)
Comprehensive loss $ (564) $ (1,629) $ (2,534) $ (4,250)
============= ============== =========== ============
(a) Consists of translation adjustments which relate to the Company's subsidiary located in the United Kingdom.
NOTE H - NET LOSS PER COMMON SHARE
Net loss per common share amounts (basic and diluted EPS) are computed by dividing net loss by the weighted average number of outstanding common shares. For the three and nine months ended June 30, 2008 and June 30, 2007, potentially dilutive shares were not included in diluted EPS because including them would be anti-dilutive. Potentially dilutive shares are as follows:
(in thousands) (in thousands)
Three months ended June 30, Nine months ended June 30,
2008 2007 2008 2007
Stock options 1,713 1,238 1,713 1,238
Stock warrants 7,265 200 7,265 200
Convertible debt - 109 - 109
Preferred Stock 2,000 - 2,000 -
Total 10,978 1,547 10,978 1,547
============= ============ =========== ==========
NOTE I - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board (the"FASB"
issued Interpretation ("FIN" No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and requires increased disclosures. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2007, the Company has not recorded any unrecognized tax benefits. The Company's policy, if it had unrecognized benefits, is to recognize accrued interest in interest expense and penalties in operating expenses.
Effective October 1, 2007, the Company adopted the provisions of FIN 48. The Company's tax years ranging from 2003 through 2006 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired. As a result of the transactions subsequent to December 31, 2007, the Company will evaluate the effect on its deferred tax asset for accounting purposes in accordance with Section 382 limitations.
In September 2006, the FASB issued Statement of Financial Accounting Standards ("FAS"
No. 157, "Fair Value Measurements." FAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. FAS No. 157 is partially effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of FAS No. 157 will have on its consolidated financial position and results of operations. 9
In February 2007, the FASB issued Financial Accounting Standard ("FAS"
No. 159, "The Fair Value for Financial Assets and Financial Liabilities". FAS No. 159 permits entities to choose to measure financial assets and liabilities, with certain exceptions, at fair value at specified election dates. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. FAS No. 159 is effective for the Company in its fiscal year beginning October 1, 2008. The Company is currently evaluating the impact of FAS No. 159 on its consolidated financial position and results of operations. In December 2007, the FASB issued FAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51". FAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. FAS No. 160 is effective for the Company in its fiscal year beginning October 1, 2009. The Company is currently evaluating the impact of FAS No. 160 on its consolidated financial position and results of operations.
In December 2007, the FASB issued FAS No. 141 R "Business Combinations". FAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. FAS No. 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS No. 141R is effective for the Company in its fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that FAS No. 141R will have on its consolidated financial position and results of operations, the Company will be required to expense costs related to any acquisitions after September 30, 2009.
NOTE J - WARRANTY OBLIGATIONS
The Company recognizes and historically has recognized the estimated cost associated with its standard warranty on products at the time of sale. The estimate is based on historical failure rates and current claim cost experience. The following is a summary of the changes in the Company's accrued warranty obligation (which is included in accrued expenses) for the period October 1, 2007 through June 30, 2008:
(in thousands)
Amount
Beginning Balance as of October 1, 2007 $ 108
Deduct: Payments (21)
Add: Provision 15
Ending Balance as of June 30, 2008 $ 102
NOTE K - SHAREHOLDERS' EQUITY
During the nine months ended June 30, 2008, the Company received $190,000 through the sale of 950,000 shares of common stock through a private transaction. In addition, the investors received 950,000 stock purchase warrants which are exercisable at $.28 per share and expire in March 2012. The investors included two of the Company's Directors as well as an individual related to the CEO of the Company.
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The Company charged $99,000 and $173,000 to operations during the nine months ended June 30, 2008 and 2007, respectively, representing the fair value of stock options granted to officers and board of directors during the period with a corresponding increase to additional paid-in capital in accordance with the provisions of SFAS No. 123R.
The following are the changes in shareholders' equity during the nine months ended June 30, 2008 (in thousands):
Balance, October 1, 2007 $3,470
Share-based compensation 99
Issuance of warrants 400
Preferred Stock 108
Proceeds from issuance of stock 190
Other comprehensive income 31
Net loss (2,565)
Balance, June 30, 2008 $1,733
NOTE L - CONCENTRATIONS
The Company's largest customers for the three and nine months ended June 30, 2008 and 2007 represent the following percentages of net sales and accounts receivable:
Three months ended June 30, Nine months ended June 30,
2008 2007 2008 2007
Net sales:
Customer A 36% 52% 35% 41%
Customer B 13% * 10% *
June 30, September 30,
2008 2007
Accounts Receivable:
Customer A 31% 71%
Customer B * *
* Represents less than 10% for the period
NOTE M -COMMITMENTS AND CONTINGENCIES
Employment Contracts
On February 5, 2008 the Company entered into an Employment Agreement with Mr. Andre Soussa, pursuant to which he is employed as the Company's Chief Executive Officer. William McMahon resigned as a director of the Company and as its Chief Executive Officer, but remains at the Company as its President and Chief Financial Officer and has also entered into an employment agreement with the Company. The agreements provide for an aggregate annual salary of $500,000 and expire in February 2010; in addition the executives were granted stock options to purchase an aggregate of 750,000 shares of common stock.
11
Litigation
The Company is a defendant in a matter which arose in the ordinary course of business. In the opinion of management, the ultimate resolution of this matter would not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company believes that an adequate provision therefore has been made in the consolidated financial statements.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Recent Developments
On February 5, 2008, the Company issued to Exfair Pty Ltd (i) a Convertible Note in the principal amount of $400,000, which note may be converted into two million shares of Series A Convertible Preferred Stock, par value $0.01 per share, of the Company and (ii) a four-year Common Stock Purchase Warrant to purchase 5,784,849 shares of Common Stock of the Company at an exercise price of $0.28 per share. The Convertible Note matures in June 2009.
At the Company's 2007 Annual Meeting of Stockholders held on June 24, 2008, stockholders approved an amendment to our Certificate of Incorporation to increase our authorized capital stock by 2,000,000 shares of preferred stock. As a result all outstanding amounts owed under the Convertible Note will be automatically converted into shares of Series A Preferred Stock.
On February 5, 2008 the Company entered into an Employment Agreement with Mr. Andre Soussa, pursuant to which he is employed as the Company's Chief Executive Officer. William McMahon resigned as a director of the Company and as its Chief Executive Officer, but will remain at the Company as its President and Chief Financial Officer and has also entered into an employment agreement with the Company.
The Board of Directors on January 22, 2008 awarded Richard Gerzof, Chairman of the Board of the Company, immediately exercisable options to purchase 250,000 shares of Common Stock of the Company at an exercise price of $0.20 per share, the fair market value as of the date of grant. The Board of Directors also awarded Elliott Goldberg, Matthew Dollinger and William Wood, directors, immediately exercisable options to purchase 103,500, 18,500 and 3,500 shares of Common Stock, respectively, at the exercise price of $0.20 per share, the fair market value as of the date of grant. The options expire on January 21, 2015.
The Board of Directors also amended the previously granted stock options to Messrs Gerzof, Goldberg, Dollinger and Woods to eliminate the requirement that options must be exercised, to the extent they were exercisable, within a three month period following the date of termination of employment or directorship, even if by disability or death.
Three months ended June 30, 2008 compared with three months ended June 30, 2007
Sales
Net sales increased by 22.8%, or $706,000, to $3,809,000 in the three months ended June 30, 2008 as compared with $3,103,000 in the comparative prior-year period. This sales increase was due to increased sales in the gaming market.
Gross Profit
Gross profit increased to $743,000, or 19.5% of net sales, in the three months ended June 30, 2008 as compared with $285,000, or 9.2% of net sales, in the comparative prior-year period. The most significant factor affecting the Company's gross profit percentage is the unit sales levels achieved and their relationship to manufacturing costs.
Operating Expenses
Operating expenses decreased to $1,228,000, or 32.2% of sales, in the three months ended June 30, 2008 as compared with $1,863,000, or 60% of sales, in the comparative prior-year period. This decrease of $635,000 is primarily the result of lower payroll, travel, and consulting expenses. The Company also reduced its operating expenses by moving to a smaller facility, which is more appropriate to the size of the business in July 2007. The Company charged $22,000 to operations during the three months ended June 30, 2008 and $58,000 during the three months ended June 30, 2007 representing the fair value of stock options granted to employees, officers and directors.
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Interest Expense
Interest expense increased to $74,000 as compared to interest expense of $14,000 in the comparable prior-year period. The increase was primarily associated with the issuance to GPTA of a one-year secured term note in the principal amount of $440,000 that bears interest at a rate equal to the prime rate plus 3.0% and the amortization of the warrants issued in connection with the convertible note of $400,000. The convertible note converted to 2,000,000 shares of preferred stock. As a result there will be no additional amortization of the warrants issued in connection with the convertible note.
Income Taxes
With respect to the provision for income taxes, the effective rate was 0.9% as compared with 0.1% in the prior-year period. The Company provided a full valuation allowance against its deferred income tax assets in the fourth quarter of fiscal 2003 and continues to provide a full valuation allowance at June 30, 2008. The valuation allowance is subject to adjustment based upon the Company's ongoing assessment of its future taxable income and may be wholly or partially reversed in the future.
Net Loss
Net loss for the quarter ended June 30, 2008 was $561,000, or $0.07 per share, as compared with $1,606,000, or $0.26 per share, in the comparative prior-year period.
Nine months ended June 30, 2008 compared with nine months ended June 30, 2007
Sales
Net sales decreased by 6.4%, or $627,000, to $9,242,000 in the nine months ended June 30, 2008 as compared with $9,869,000 in the comparative prior-year period. This sales decrease was due to $270, 000 decreased sales to the gaming market and $357,000 decreased sales to the beverage and vending market.
Gross Profit
Gross profit increased to $1,845,000, or 20.0% of net sales, in the nine months ended June 30, 2008 as compared with $1,623,000, or 16.4.8% of net sales, in the comparative prior-year period. The most significant factor affecting the Company's gross profit percentage is the unit sales levels achieved and their relationship to manufacturing costs.
Operating Expenses
Operating expenses decreased to $4,264,000, or 46.1% of sales, in the nine months ended June 30, 2008 as compared with $5,752,000, or 58.2% of sales, in the comparative prior-year period. This decrease of $1,488,000 is primarily the result of lower payroll, travel, and consulting expenses. The Company also reduced its operating expenses by moving to a smaller facility, which is more appropriate to the size of the business in July 2007. The Company charged $99,000 to operations during the nine months ended June 30, 2008 as compared to $173,000 in the prior year representing the fair value of stock options granted to employees, officers and directors.
Interest Expense
Interest expense increased to $136,000 as compared to interest expense of $40,000 in the comparable prior-year period. The increase was primarily associated with the issuance to GPTA of a one-year secured term note in the principal amount of $440,000 that bears interest at a rate equal to the prime rate plus 3.0% and the amortization of the warrants issued in connection with the convertible note of $400,000 The convertible note converted to 2,000,000 shares of preferred stock. As a result there will be no additional amortization of the warrants issued in connection with the convertible note.
Income Taxes
With respect to the provision for income taxes, the effective rate was 0.9% as compared with 0.1% in the prior-year period. The Company provided a full valuation allowance against its deferred income tax assets in the fourth quarter of fiscal 2003 and continues to provide a full valuation allowance at June 30, 2008. The valuation allowance is subject to adjustment based upon the Company's ongoing assessment of its future taxable income and may be wholly or partially reversed in the future.
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Net Loss
Net loss for the nine months ended June 30, 2008 was $2,565,000, or $0.36 per share, as compared with $4,187,000, or $0.67 per share, in the comparative prior-year period.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations. Accordingly, the Company will be required to identify additional revenue resources, raise additional capital and/or significantly reduce its expenses in order to pay its obligations as they become due. The Company entered into a debt financing agreement and is undertaking a corporate restructuring to attempt to improve operating results and develop new products. There can be no assurance, however, that such plans will be successful. These uncertainties raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of the carrying amount and classification of assets or the amount and classification of liabilities that might result from the outcome of these uncertainties.
In connection with the Company's cost reduction initiative and corporate restructuring, two senior management positions were eliminated during the quarter ended June 30, 2008, and subsequent to June 30, 2008, the Company further reduced its headcount by an additional eleven employees. This represented approximately 16% of the Company's total employees, resulting in an estimated annualized reduction in payroll and related expenses of approximately $800,000. In addition, the Company's top two senior executives took a voluntary pay cut aggregating $100,000 annually. The reductions mentioned above are in addition to the operating expense reductions currently in place.
The Company's capital requirements consist primarily of those necessary to continue to expand and improve product development and manufacturing capabilities, sales and marketing operations, fund inventory purchase commitments, and service principal and interest payments on the Company's indebtedness. At June 30, 2008, the Company's cash and cash equivalents were $648,000 as compared with $879,000 at September 30, 2007. A significant portion of the Company's cash balance in the amount of $427,000 and $498,000, as of June 30, 2008 and September 30, 2007, respectively, consisted of currency used to test the Company's products.
The borrowings under Company's credit facility with Laurus Master Fund Ltd. were paid in full on the maturity date of November 15, 2007.
On January 15, 2008, the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement"
with Exfair Pty Ltd, an Australian company ("Exfair" and Global Payment Technologies Australia Pty Ltd. ("GPTA"
; companies controlled by Mr. Andre Soussa. GPTA is the Company's largest customer. The transactions contemplated thereunder were consummated at two closings (as discussed below). First Closing
At the first closing on January 15, 2008 the Company issued to GPTA a one-year secured term note in the principal amount of $440,000 that bears interest at a rate equal to the prime rate plus 3.0% (provided, that the interest rate shall not be less than 9.0%) and is secured by all the assets of the Company pursuant to a Security Agreement. Additionally, the Company entered into a Voting Agreement with Exfair and certain director-stockholders of the Company, wherein such stockholders agreed to vote in favor of (i) the election of certain persons to the Board of Directors of the Company and (ii) an amendment to Company's Certificate of Incorporation establishing a class of Preferred Stock (as discussed below). Additionally, the Company entered into a Technology License Agreement with GPTA, pursuant to which the Company has agreed to grant a license to GPTA to utilize certain databases and proprietary operating systems if the Company is unable or unwilling to continue to provide support for such databases and operating systems of the Company, and the parties thereto further agreed that if the Company commences bankruptcy proceedings, then the Company would permit GPTA to duplicate any of the Company's intellectual property as of the
15
commencement of such bankruptcy proceedings. GPTA and the Company also agreed to make certain technical amendments to the Distribution Agreement dated September 1, 2006.
Second Closing
At the second closing, on February 5, 2008, the Company issued (i) a Convertible Note (the "Convertible Note"
in the principal amount of $400,000 to Exfair, which note was converted into two million shares of Series A Convertible Preferred Stock, par value $0.01 per share, of the Company (the "Preferred Stock" and (ii) a four-year Common Stock Purchase Warrant to purchase 5,784,849 shares of Common Stock of the Company at an exercise price of $0.28 per share. The Convertible Note matures in June 2009. Effective as of the consummation of the Second Closing, all the Company directors except Richard Gerzof resigned and new directors were appointed. In addition, the Company entered into an Employment Agreement with Mr. Andre Soussa, pursuant to which he is employed as the Company's Chief Executive Officer for a two-year term at an annual base salary of $300,000. Mr. Soussa was also awarded options to purchase 500,000 shares of the Company's Common Stock at an exercise price of $0.20 per share in accordance with the Company's stock option plan. Further Mr. William McMahon resigned as a director of the Company and as its Chief Executive Officer. Mr. McMahon remains at the Company as its President and Chief Financial Officer and entered into a new Employment Agreement with the Company for a two-year term with an annual base salary of $200,000. Mr. McMahon was awarded options to purchase 250,000 shares of the Company's Common Stock at an exercise price of $0.20 per share in accordance with the Company's stock option plan. The Company has agreed to seek the approval of the stockholders of the Company to amend the Certificate of Incorporation to authorize a class of Preferred Stock. Upon the approval of such amendment and the filing thereof with the Secretary of State of the State of Delaware, the Convertible Note will automatically be converted into 2,000,000 shares of Convertible Preferred Stock, par value $0.01 per share, with such rights and preferences, including, but not limited to:
At the Company's 2007 Annual Meeting of Stockholders held on June 24, 2008, stockholders approved an amendment to our Certificate of Incorporation, to increase our authorized capital stock by 2,000,000 shares of preferred stock. As a result all outstanding amounts owed under the Convertible Note was converted into shares of Series A Preferred Stock.
(a) Voting Rights. During the first 18 months after the designation of the Preferred Stock, each holder of shares of the Preferred Stock shall be entitled to five (5) times the number of votes equal to the number of shares of Common Stock into which such holder's shares of Preferred Stock could be converted and after such first 18 month period, each holder of shares of the Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such holder's shares of Preferred Stock could be converted. During the first 18 months after the designation of the Preferred Stock, so long as any shares of Preferred Stock are outstanding, the holders of Preferred Stock shall be entitled to designate three (3) members of the Board of Directors. During the first 18 months after the Preferred Stock has been designated, if the number of members of the Board of Directors is increased to more than five (5), the number of directors designated by the holders of Preferred Stock shall increase such that the Preferred Stock shall designate a majority of the number of authorized Board of Director members.
(b) Dividends. The Preferred Stock will, with respect to payment of dividends and rights upon liquidation, dissolution or winding-up of the affairs of the Company, rank senior and prior to the Common Stock of the Company, and any additional series of preferred stock which may in the future be issued by the Company and are designated in the amendment to the Certificate of Incorporation or the certificate of designation establishing such additional preferred stock as ranking junior to the Preferred Stock. The holders of the Preferred Stock will be entitled to receive dividends if, when and as declared by the Board of Directors from time to time, and in amounts determined by the Board of Directors; provided, however, no dividends shall be paid on any share of Common Stock unless a dividend is paid with respect to all outstanding shares of Preferred Stock in an amount for each such share of Preferred Stock equal to or greater than the aggregate amount of such dividends for all shares of Common Stock into which each such share of Preferred Stock could then be converted.
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(c) Liquidation Value. The liquidation value per share of Series A Preferred Stock, in case of the voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company, will be an amount equal to $0.20, subject to adjustment in the event of a stock split, stock dividend or similar event applicable to the Preferred Stock.
(d) Additional Issuances of Securities. Except for certain issuances by the Company if at any time while the Preferred Stock is outstanding, the Company sells or grants any option to purchase or sells or grants any right to reprice its securities, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock equivalents entitling any person to acquire shares of Common Stock at an effective price per share that is lower than the then applicable conversion price, then the conversion price shall be reduced to such lower price.
(e) Modification of Preferred Stock. So long as any shares of Preferred Stock remain outstanding, the Company, shall not, without the vote or written consent by the holders of more than fifty percent (50.0%) of the outstanding Preferred Stock, voting together as a single class, and unless approved by the Board of Directors: (i) redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking or other analogous fund for such purpose) any share or shares of its Capital Stock, except for conversion into or exchange for stock junior to the Preferred Stock; (ii) alter, modify or amend the terms of the Preferred Stock in any way; or (iii) create or issue any Capital Stock of the Company ranking pari passu with or senior to the Preferred Stock either as to the payment of dividends or rights in liquidation, dissolution or winding-up of the affairs of the Company; increase the authorized number of shares of the Preferred Stock; or re-issue any shares of Preferred Stock which have been converted or otherwise acquired by the Company.
Net cash used in operating activities was $858,000 in the nine months ended June 30, 2008. This amount was due to a net loss for the period, adjusted for non-cash items, of $736,000, increased accounts receivable of $77,000, decreased prepaid expenses and other current assets of $49,000, increased accrued expenses and other liabilities of $151,000, decreased inventory of $255,000, and increased accounts payable of $593,000.
Net cash provided by financing activities amounted to $637,000 in the nine months ended June 30, 2008 as compared with net cash provided by financing activities of $1,198,000 in the prior comparable period. Net cash provided by financing activities consisted primarily of proceeds from issuance of convertible debt of $400,000, proceeds from issuance of secured note of $440,000 and proceeds from issuance of stock of $190,000 offset by net repayments of bank borrowings of $353,000 for the nine months ended June 30, 2008 as compared with net borrowings of $1,243,000 in the nine months ended June 30, 2007.
Future minimum payments under non-cancelable operating leases including the Company's new Bohemia facility, and principal payments to be made for long-term debt maturing over the next five years are as follows:
(in thousands)
Fiscal Year Operating Lease Debt Repayments
2008 $ 70
2009 242 440
2010 249
2011 255
2012 263
Thereafter 591
$ 1,670 $ 440
================ ==================
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In addition to the chart above, and in the normal course of business, purchase orders are generated which obligate the Company for future inventory requirements. As of June 30, 2008, purchase order commitments approximated $3.0 million and will be used for production requirements during fiscal 2008 and beyond.
Critical Accounting Policies
There were no changes in critical accounting policies since the filing of the Company's Annual Report on Form 10-K for the year ended September 30, 2007.
Special Note Regarding Forward-Looking Statements: A number of statements contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. These risks and uncertainties include, but are not limited to: the Company's dependence on a limited base of customers for a significant portion of sales; the Company's dependence on the paper currency validator market and its potential vulnerability to technological obsolescence; the possible impact of competitive products and pricing; the risks that its current and future products may contain errors or defects that would be difficult and costly to detect and correct; potential manufacturing difficulties; possible risks of product inventory obsolescence; uncertainties with respect to the Company's business strategy; general economic conditions in the domestic and international market in which the Company operates; potential shortages of key parts and/or raw materials; potential difficulties in managing growth; dependence on key personnel; the relative strength of the United States currency; and other risks described in the Company's Securities and Exchange Commission filings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's quantitative and qualitative disclosures about market risk since the filing of the Company's Annual Report on Form 10-K for the year ended September 30, 2007.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management in a timely manner. The Company's Chief Executive Officer and the Company's Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report and believe that the system is operating effectively to ensure appropriate disclosure. There have been no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's 2007 Annual Meeting of Stockholders held on June 24, 2008, stockholders:
a) Elected the following two persons to serve as Class I Directors of the Company by the following vote:
FOR WITHHELD
---
Richard E. Gerzof 4,379,563 2,523,351
Robert W. Nader 6,734,280 168,634
b) Approved an amendment to our Certificate of Incorporation to increase our authorized capital stock by authorizing 2,000,000 shares of preferred stock.
As of February 5, 2008, consummation of the Second Closing, new directors were appointed. Class II Directors David Crompton and Steven H. Crisp continue to serve as directors. Class III Director Andre Soussa continues to serve as director. Class II Directors' term expires at the 2009 Annual Meeting and The Class III Directors' term expires as the 2010 Annual Meeting.
ITEM 6. EXHIBITS
Exhibit Number Description
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.
Date: August 14, 2008
GLOBAL PAYMENT TECHNOLOGIES, INC.
/s/ Andre Soussa
Andre Soussa
Chief Executive Officer
/s/ William McMahon
William McMahon
Chief Financial Officer
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Exhibit 31.1
CERTIFICATION
I, Andre Soussa, certify that:
1. I have reviewed this Quarterly Report of Global Payment Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2008
/s/ Andre Soussa
Andre Soussa
Chief Executive Officer (Principal Executive Officer)
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Exhibit 31.2
CERTIFICATION
I, William McMahon, certify that:
1. I have reviewed this Quarterly Report of Global Payment Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2008
/s/ William McMahon
William McMahon
Chief Financial Officer (Principal Financial and
Accounting Officer)
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Global Payment Technologies, Inc. (the "Company"
on Form 10-Q for the quarter ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report", I, Andre Soussa, Chief Executive Officer (Principal Executive Officer) of the Company, certify, pursuant to 18 U.S.C. ss. 1350, adopted pursuant to Section 906 of the Sarbanes--Oxley Act of 2002 that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 14, 2008
/s/ Andre Soussa
Andre Soussa
Chief Executive Officer (Principal
Executive Officer)
A signed original of this written statement required by Section 906 has been provided to Global Payment Technologies, Inc.and will be retained by Global Payment Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Global Payment Technologies, Inc. (the "Company"
on Form 10-Q for the quarter ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report", I, William McMahon, Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, certify, pursuant to 18 U.S.C. ss. 1350, adopted pursuant to Section 906 of the Sarbanes--Oxley Act of 2002 that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 14, 2008
/s/ William McMahon
William McMahon
Chief Financial Officer (Principal Financial Officer)
A signed original of this written statement required by Section 906 has been provided to Global Payment Technologies, Inc. and will be retained by Global Payment Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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