Item 1. Financial Statements
Notes to Condensed Consolidated Financial Statements
December 31, 2007
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
of Global Payment Technologies, Inc. (the "Company"), including the September
30, 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 month period ended December 31, 2007 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. As discussed in Note
N-Subsequent Events, 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,
including the shareholder approval of the Preferred Stock, 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 three months ended December 31, 2007 and 2006, the Company recorded
share-based compensation for options attributable to employees, officers and
directors of $19,000 and $58,000, respectively, which are included in the
Company's net loss for the periods.
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A summary of the Company's stock option plan activity as of December 31, 2007
and changes during the three 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 - -
Exercised - -
Forfeited (13,325) 4.27
Expired - -
---------------- -------------
Outstanding, December 31, 2007 698,035 $ 3.16 3.6 $ -
================ ============= ============= ==============
Vested or expected to vest, December 31, 2007 698,035 $ 3.16 3.6 $ -
================ ============= ============= ==============
Exercisable, December 31, 2007 477,718 $ 3.75 2.8 $ -
================ ============= ============= ==============
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Compensation costs for stock options with graded vesting are recognized ratably
over the vesting period. As of December 31, 2007, there was $91,000 of total
unrecognized compensation costs related to stock options. These costs are
expected to be recognized over a weighted average period of 1.40 years.
NOTE C - CASH AND CASH EQUIVALENTS
A significant portion of the Company's cash balance in the amount of $504,000
and $498,000, as of December 31, 2007 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)
December September
31, 2007 30, 2007
--------------- ---------------
Raw Materials $ 2,334 $ 2,457
Work-in-process 364 544
Finished Goods 607 767
--------------- ---------------
$ 3,305 $ 3,768
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The Company recorded a provision for inventory obsolescence of $40,000 and
$39,000 for the three months ended December 31, 2007 and 2006, respectively.
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NOTE E - DEBT
The Company's credit facility with Laurus Master Fund Ltd. was paid in full
on the maturity date of November 15, 2007. The facility was terminated.
On January 15, 2008 the Company entered into a Securities Purchase
Agreement. See Note N- Subsequent Events.
Outstanding debt as of December 31, 2007 and September 30, 2007 was as follows
(in thousands):
December 31, 2007 September 30, 2007
----------------- ------------------
Total debt $ 24 $ 394
Less amount representing interest - (1)
----------------- ------------------
Net 24 393
Less current portion 24 393
----------------- ------------------
Long-term debt $ - $ -
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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:
(in thousands)
Three months ended December 31,
2007 2006
------------------- -----------------------
Net loss $ (944) $ (1,249)
Other comprehensive
income (loss) (a) 39 (25)
------------------- -----------------------
Comprehensive loss $ (905) $ (1,274)
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(a) Translation adjustments in 2007 and 2006 relate to the Company's subsidiary
located in the United Kingdom.
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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 months ended December 31, 2007 and 2006, potentially dilutive
shares were not included in diluted EPS because including them would be
anti-dilutive. Potentially dilutive shares are as follows:
(in thousands)
Three months ended December 31,
2007 2006
---------------------- ----------------------
Stock options 698 1,283
Stock warrants 275 200
Convertible debt - 200
---------------------- ----------------------
Total 973 1,683
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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
("SFAS") No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in U.S. generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 is 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 SFAS No. 157 will have on
its consolidated financial position and results of operations.
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.
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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 December 31, 2007:
(in thousands)
Amount
-----------------
Beginning Balance as of October 1, 2007 $ 108
Deduct: Payments (4)
Add: Provision 7
-----------------
Ending Balance as of December 31, 2007 $ 111
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NOTE K - SHAREHOLDERS' EQUITY
The Company charged $19,000 and $58,000 to operations during the three months
ended December 31, 2007 and 2006, respectively, representing the fair value of
stock options granted to officers 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 three months
ended December 31, 2007 (in thousands):
Balance, October 1, 2007 $3,470
Share-based compensation 19
Other comprehensive income 39
Net loss (944)
-----
Balance, December 31, 2007 $2,584
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NOTE L - CONCENTRATIONS
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The Company's largest customer for the three months ended December 31, 2007 and
2006 represented 27% and 40% of net sales and at December 31, 2007 and 2006
represented 24% and 71% respectively of accounts receivable.
There were no other customers that represented 10% or more of net sales
respectively, in any of the periods presented.
NOTE M - CONTINGENCIES
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 therefor has been made in the consolidated financial
statements.
NOTE N - SUBSEQUENT EVENTS
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"). 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
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 "Second Closing"), the Company
issued (i) a Convertible Note (the "Convertible Note") in the principal amount
of $400,000 to Exfair, which note may be 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 (the
"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 current 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 will remain 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.
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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:
(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.
(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 Preferred Stock which have been converted or
otherwise acquired by the Company in accordance with the terms hereof.
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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.
The accounting for the transactions described above is expected to result in
substantial charges to future operations.
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