Tidel Technologies 10-Q 03-31-2006
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-Q
(Mark
One)
T
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the
Securities Exchange
Act of 1934
|
For
the quarterly period ended March 31, 2006
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 Number 000-17288
TIDEL
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
75-2193593
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
2900
Wilcrest Drive, Suite 105
|
|
|
Houston,
Texas
|
|
77042
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (713) 783-8200
________________
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 requirement
for
the past 90 days. YES T
NO
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act). Yes o
No
T
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
T
The
number of shares of Common Stock outstanding as of the close of business on
April 30, 2006 was 38,677,210.
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
|
Item
1.
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Item
2.
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Item
3.
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Item
4.
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PART
II. OTHER INFORMATION
|
Item
1.
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Item
1A.
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Item
2.
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Item
6.
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Certification
Pursuant to Section 302
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Certification
Pursuant to Section 906
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|
PART
I. FINANCIAL INFORMATION
ITEM
1.
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
March
31, 2006
|
|
September
30, 2005
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,852,530
|
|
$
|
1,003,663
|
|
Restricted
cash
|
|
|
5,400,000
|
|
|
—
|
|
Trade
accounts receivable, net
|
|
|
—
|
|
|
250,000
|
|
Notes
and other receivables
|
|
|
17,513
|
|
|
12,965
|
|
Prepaid
expenses and other
|
|
|
86,857
|
|
|
170,231
|
|
Assets
held for sale, net of accumulated depreciation of $1,303,436 and
$5,236,167, respectively (See Note 2)
|
|
|
4,952,426
|
|
|
15,471,113
|
|
Total
current assets
|
|
|
12,309,326
|
|
|
16,907,972
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
—
|
|
|
55,641
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
(42,848
|
)
|
Net
property and equipment
|
|
|
—
|
|
|
12,793
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
674,411
|
|
|
615,763
|
|
Total
assets
|
|
$
|
12,983,737
|
|
$
|
17,536,528
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
—
|
|
$
|
2,325,000
|
|
Accounts
payable
|
|
|
390,091
|
|
|
431,876
|
|
Accrued
interest payable
|
|
|
2,000,000
|
|
|
2,135,852
|
|
Shares
subject to redemption (See Note 1)
|
|
|
5,400,000
|
|
|
—
|
|
Other
accrued expenses
|
|
|
18,836
|
|
|
290,871
|
|
Liabilities
related to assets held for sale (See Note 2)
|
|
|
3,552,961
|
|
|
7,993,154
|
|
Total
current liabilities
|
|
|
11,361,888
|
|
|
13,176,753
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities and debt discount of $3,746,531 at
September 30, 2005
|
|
|
—
|
|
|
2,096,457
|
|
Total
liabilities
|
|
|
11,361,888
|
|
|
15,273,210
|
|
|
|
|
|
|
|
|
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Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 38,677,210 shares and 20,677,210 shares,
respectively
|
|
|
386,772
|
|
|
206,772
|
|
Additional
paid-in capital
|
|
|
30,782,187
|
|
|
30,962,187
|
|
Accumulated
deficit
|
|
|
(29,638,135
|
)
|
|
(28,905,810
|
)
|
Accumulated
other comprehensive income
|
|
|
91,025
|
|
|
169
|
|
Total
shareholders’ equity
|
|
|
1,621,849
|
|
|
2,263,318
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
12,983,737
|
|
$
|
17,536,528
|
|
See
accompanying notes to condensed consolidated financial statements.
TIDEL
TECHNOLOGIES, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
618,893
|
|
|
375,334
|
|
|
1,992,917
|
|
|
682,533
|
|
Depreciation
and amortization
|
|
|
1,312
|
|
|
1,299
|
|
|
2,678
|
|
|
2,171
|
|
Operating
(loss)
|
|
|
(620,205
|
)
|
|
(376,633
|
)
|
|
(1,995,595
|
)
|
|
(684,704
|
)
|
|
|
|
|
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|
|
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|
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Other
income (expense):
|
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|
|
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|
|
|
|
|
|
|
|
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Interest
expense, net of approximately 112,000 interest of income
|
|
|
(3,033,161
|
)
|
|
(1,165,173
|
)
|
|
(4,195,572
|
)
|
|
(4,239,516
|
)
|
Gain
on collection of receivable previously reserved
|
|
|
598,496
|
|
|
—
|
|
|
598,496
|
|
|
—
|
|
Additional
income and expenses related to the CCC bankruptcy
settlement
|
|
|
(75,000
|
)
|
|
—
|
|
|
105,000
|
|
|
—
|
|
Other
|
|
|
(7,455
|
)
|
|
—
|
|
|
(7,455
|
)
|
|
—
|
|
Total
other income (expense)
|
|
|
(2,517,120
|
)
|
|
(1,165,173
|
)
|
|
(3,499,531
|
)
|
|
(4,239,516
|
)
|
Loss
before taxes
|
|
|
(3,137,325
|
)
|
|
(1,541,806
|
)
|
|
(5,495,126
|
)
|
|
(4,924,220
|
)
|
|
|
|
|
|
|
|
|
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|
|
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Income
tax expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss
from continuing operations
|
|
|
(3,137,325
|
)
|
|
(1,541,806
|
)
|
|
(5,495,126
|
)
|
|
(4,924,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/
(loss) discontinued operations
|
|
|
(38,714
|
)
|
|
410,174
|
|
|
1,150,292
|
|
|
2,637,024
|
|
Gain
on sale of ATM business
|
|
|
3,612,509
|
|
|
—
|
|
|
3,612,509
|
|
|
—
|
|
Total
income from discontinued operations
|
|
|
3,573,795
|
|
|
410,174
|
|
|
4,762,801
|
|
|
2,637,024
|
|
Net
income (loss)
|
|
$
|
436,470
|
|
$
|
(1,131,632
|
)
|
$
|
(732,325
|
)
|
$
|
(2,287,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
$
|
(0.19
|
)
|
$
|
(0.25
|
)
|
Income
(loss) from discontinued operations
|
|
|
0.10
|
|
|
0.02
|
|
|
0.17
|
|
|
0.14
|
|
Net
income (loss)
|
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic common shares outstanding
|
|
|
36,077,210
|
|
|
20,677,210
|
|
|
28,292,595
|
|
|
19,906,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
$
|
(0.19
|
)
|
$
|
(0.25
|
)
|
Income
(loss) from discontinued operations
|
|
|
0.10
|
|
|
0.02
|
|
|
0.17
|
|
|
0.14
|
|
Net
income (loss)
|
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.11
|
)
|
Weighted
average common and dilutive shares outstanding
|
|
|
36,137,192
|
|
|
20,677,210
|
|
|
28,292,595
|
|
|
19,906,270
|
|
See
accompanying notes to condensed consolidated financial statements.
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Income (loss)
|
|
$
|
436,470
|
|
$
|
(1,131,632
|
)
|
$
|
(732,325
|
)
|
$
|
(2,287,196
|
)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on investment in 3CI
|
|
|
(48,922
|
)
|
|
(377,400
|
)
|
|
90,855
|
|
|
181,860
|
|
Comprehensive
income (loss)
|
|
$
|
387,548
|
|
$
|
(1,509,032
|
)
|
$
|
(641,470
|
)
|
$
|
(2,105,336
|
)
|
See
accompanying notes to condensed consolidated financial statements.
TIDEL
TECHNOLOGIES,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(732,325
|
)
|
$
|
(2,287,196
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,678
|
|
|
2,171
|
|
Amortization
of debt discount and financing costs
|
|
|
4,078,738
|
|
|
1,844,525
|
|
Gain
on sale of ATM business
|
|
|
(3,612,509
|
)
|
|
—
|
|
Other
|
|
|
7,455
|
|
|
—
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
accounts receivable, net
|
|
|
250,000
|
|
|
—
|
|
Notes
and other receivables
|
|
|
(4,548
|
)
|
|
981,892
|
|
Prepaid
expenses and other
|
|
|
(216,625
|
)
|
|
11,082
|
|
Accounts
payable and accrued expenses
|
|
|
(449,672
|
)
|
|
1,963,274
|
|
Net
cash flows used in discontinued operations
|
|
|
(746,337
|
)
|
|
(3,934,177
|
)
|
Net
cash used in operating activities
|
|
|
(1,423,145
|
)
|
|
(1,418,429
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of ATM business
|
|
|
10,440,000
|
|
|
—
|
|
Purchases
of property and equipment
|
|
|
—
|
|
|
(10,866
|
)
|
Net
cash flows provided by discontinued investing activities
|
|
|
—
|
|
|
—
|
|
Net
cash provided by (used in) investing activities
|
|
|
10,440,000
|
|
|
(10,866
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
—
|
|
|
2,100,000
|
|
Repayments
of notes payable
|
|
|
(2,767,988
|
)
|
|
(150,000
|
)
|
Borrowings
on revolver
|
|
|
1,204,391
|
|
|
2,250,000
|
|
Payments
on revolver
|
|
|
(1,204,391
|
)
|
|
(1,250,628
|
)
|
Increase
in restricted cash
|
|
|
(5,400,000
|
)
|
|
(59,080
|
)
|
Increase
in deferred financing costs
|
|
|
—
|
|
|
(280,567
|
)
|
Net
cash flows provided by discontinued financing activities
|
|
|
—
|
|
|
—
|
|
Net
cash provided by (used in) financing activities
|
|
|
(8,167,988
|
)
|
|
2,609,725
|
|
Net
increase in cash and cash equivalents
|
|
|
848,867
|
|
|
1,180,430
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,003,663
|
|
|
258,120
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,852,530
|
|
$
|
1,438,550
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
371,492
|
|
|
258,920
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Conversion
of debt to common stock
|
|
$
|
5,400,000
|
|
$
|
—
|
|
Discount
on issuance of debt with beneficial conversion premium and detachable
warrants
|
|
$
|
—
|
|
$
|
840,448
|
|
Issuance
of shares to lender in payment of fees
|
|
$
|
—
|
|
$
|
638,010
|
|
Issuance
of shares in connection with settlement of class-action
litigation
|
|
$
|
—
|
|
$
|
1,564,490
|
|
Unrealized
gain on 3CI investment
|
|
$
|
90,855
|
|
$
|
181,860
|
|
See
accompanying notes to condensed consolidated financial statements.
TIDEL
TECHNOLOGIES,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
Organization and Summary of Significant Accounting
Policies
Organization
and Basis of Presentation
Tidel
Technologies, Inc. (the “Company,” “we,” “us,” or “our”) is a Delaware
corporation which, through its wholly owned subsidiaries, develops,
manufactures, sells and supports electronic cash security systems, consisting
of
the Timed Access Cash Controller (“TACC”) products and the Sentinel products
(together, the “Cash Security” products), which are designed for the management
of cash within various specialty retail markets, primarily in the United States.
Sales of Cash Security products are generally made to end-users as well as
distributors and manufacturers’ representatives.
The
accompanying condensed unaudited consolidated interim financial statements
have
been prepared in accordance with accounting principles generally accepted in
the
United States of America, assuming we continue as a going concern, which
contemplates the realization of the assets and the satisfaction of liabilities
in the normal course of business. In the opinion of management, the unaudited
condensed consolidated interim financial statements include all adjustments,
consisting only of normal, recurring adjustments, necessary for a fair
presentation of the consolidated financial position as of March 31, 2006, the
consolidated statements of operations and comprehensive income (loss) for the
three months and the six months ended March 31, 2006 and 2005, and the
consolidated statements of cash flows for the six months ended March 31, 2006
and 2005. Although management believes the unaudited interim disclosures in
these condensed consolidated interim financial statements are adequate to make
the information presented not misleading, certain information and footnote
disclosures normally included in annual audited consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules of the Securities and
Exchange Commission (the “SEC”). The unaudited consolidated results of
operations for the three months and six months ended March 31, 2006 are not
necessarily indicative of the results to be expected for any quarterly period
or
for the entire year ending September 30, 2006. The unaudited consolidated
interim financial statements included herein should be read in conjunction
with
the audited consolidated financial statements and notes thereto included in
our
Annual Report on Form 10-K for the fiscal year ended September 30,
2005.
Status
of Tidel Technologies, Inc.
Sale
of ATM Business
During
the quarter ended December 31, 2004, we committed to a plan to sell our ATM
business. On February 19, 2005, the Company and its wholly-owned subsidiary,
Tidel Engineering, L.P., entered into an asset purchase agreement (the “NCR
Asset Purchase Agreement”) with NCR EasyPoint LLC f/k/a NCR Texas LLC (“NCR
EasyPoint”), a wholly owned subsidiary of NCR Corporation, for the sale of our
ATM Business (the “ATM Business Sale”).
On
December 28, 2005, the holders of 62.2% of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The total purchase price
was approximately $10.4 million, of which $8.2 million was paid to
Laurus Master Fund, Ltd., (“Laurus”) into a collateral account to be held
by Laurus as collateral for the satisfaction of all monetary obligations payable
to Laurus, $0.5 million was initially paid into an escrow account and has since
been released to the Company, and the remaining $1.7 million was paid to the
Company to be used for necessary working capital. This termination resulted
in a
book gain of approximately $3.6 million during the quarter ended March 31,
2006.
Sale
of the Cash Security Business and Related Agreements with
Laurus
We
entered into an asset purchase agreement, dated January 12, 2006 (the “Cash
Security Asset Purchase Agreement”), with Sentinel Operating, L.P., a purchaser
controlled by a management buyout group led by Mark K. Levenick, our Interim
Chief Executive Officer and a member of our Board, and Raymond Landry, a member
of our Board, for the sale of substantially all of the assets of our Cash
Security business (the “Cash Security Business Sale”). The two members of our
Board who are unaffiliated with the management buyout group negotiated the
terms
of the Cash Security Asset Purchase Agreement with the management buyout
group.
Pursuant
to the terms of an exercise and conversion agreement we entered into with Laurus
on January 13, 2006 , as amended on February 28, 2006, Laurus converted
$5,400,000 in aggregate principal amount of convertible Company debt it held
into 18,000,000 shares of our common stock. Following such conversion of such
debt, Laurus held 19,251,000 shares representing approximately 49.8% of our
outstanding common stock. The exercise and conversion agreement was amended
as
of February 28, 2006. We currently are in negotiations with Laurus to amend
the
exercise and conversion agreement so as to extend the dates contained
therein.
On
January 13, 2006, we repaid all of our remaining outstanding debt to Laurus
in
the principal amount of $2,617,988 plus accrued but unpaid interest in the
amount of $113,333. In connection therewith, we paid a prepayment penalty to
Laurus in the amount of $59,180.
On
January 12, 2006, we entered into a stock redemption agreement with Laurus.
Pursuant to the terms of the stock redemption agreement, we have agreed to
repurchase from Laurus, upon the closing of the Cash Security Business Sale,
all
shares of our common stock held by Laurus at a per share price not less than
$.20 per share nor greater than $.34 per share following the determination
of
our assets in accordance with the formula set forth therein. We have classified
the $5,400,000 of convertible debt converted by Laurus into common stock as
a
liability under the caption “shares subject to redemption” on the March 31, 2006
consolidated balance sheet.
Pursuant
to the terms of the stock redemption agreement with Laurus, Laurus has agreed
(i) to the cancellation as of the closing date of the Cash Security Business
Sale of the outstanding warrants that it holds to purchase 4,750,000 shares
of
our common stock at an exercise price of $.30 per share, and (ii) not to
exercise such warrants prior to the earlier to occur of May 31, 2006 and the
date on which the Cash Security Asset Purchase Agreement is terminated. The
stock redemption agreement was amended as of February 28, 2006. We currently
are
in negotiations with Laurus to amend the stock redemption agreement so as to
extend the dates contained therein.
Following
the share repurchase under the stock redemption agreement with Laurus, Laurus
will cease to hold any equity interest in the Company. If the Cash Security
Business Sale does not occur by May 31, 2006, then pursuant to the terms of
the
exercise and conversion agreement we entered into with Laurus, we have agreed
to
immediately redeem from Laurus the 18,000,000 shares of our common stock issued
to Laurus upon Laurus’ conversion pursuant to the exercise and conversion
agreement of $5,400,000 of our convertible debt.
We
also
entered into a cash collateral deposit letter and a reaffirmation, ratification
and confirmation agreement with Laurus dated January 12, 2006. Pursuant to
the
cash collateral deposit letter, on January 12, 2006, we applied a portion of
the
$8,200,000 of cash proceeds (the "Deposit Amount") from the ATM Business Sale
that were on deposit with Laurus for repayment of outstanding Company
indebtedness to Laurus to repay all amounts owing to Laurus under (i) the
portion of the note, dated November 25, 2003, in the initial principal amount
of
$6,450,000, together with an additional $292,987 principal amount added thereto
on November 26, 2004, remaining after Laurus’ conversion of $5,400,000 of
indebtedness into shares of our common stock, (ii) a convertible term note,
dated November 26, 2004 in the aggregate principal amount of $600,000, which
was
convertible into shares of common stock of the Company at a conversion price
of
$0.30 per share and (iii) a convertible term note, dated November 26, 2004,
in
the aggregate principal amount of $1,500,000, which was convertible into shares
of common stock of the Company at a conversion price of $3.00 per share
(collectively, the "Notes"). Thereafter, the Notes were deemed to have been
indefeasibly repaid and the Deposit Amount was reduced to $5,330,507. Under
the
cash collateral deposit letter, the remaining Deposit Amount together with
an
additional cash deposit of $69,493 from the Company, for an aggregate amount
of
$5,400,000, will be used as collateral to secure our obligations to Laurus
under, among other things, the stock redemption agreement and the exercise
and
conversion agreement. Pursuant to the reaffirmation, ratification and
confirmation agreement, we acknowledged and reaffirmed our obligation to pay
to
Laurus simultaneously with the closing of the Cash Security Business Sale the
fees payable to Laurus pursuant to the Agreement Regarding the NCR Transaction
and Other Asset Sales dated November 26, 2004.
The
purchaser under the Cash Security Asset Purchase Agreement has contacted us
regarding a possible amendment to certain terms of the Cash Security Asset
Purchase Agreement, including a possible reduction to the purchase price payable
thereunder. We presently are in discussions with the purchaser but no definitive
agreement has been reached at this time.
Each
of
Laurus and our officers and directors entered into voting agreements with
Sentinel Technologies, Inc., an affiliate of the purchaser under the Cash
Security Asset Purchase Agreement, as of January 12, 2006, under which Laurus
and our officers and directors agreed to vote all of the shares of Company
common stock that Laurus and each such person owns and any shares over which
Laurus and each such person exercises voting control in favor of the approval
and adoption of the Cash Security Asset Purchase Agreement, the Cash Security
Business Sale and related transactions and against any competing transactions
proposed to the Company’s shareholders. The Laurus voting agreement was amended
as of February 28, 2006. We currently are in negotiations with Laurus to amend
the Laurus voting agreement so as to extend the dates contained
therein.
Major
Customers and Credit Risk
We
generally retain a security interest in our underlying equipment that is sold
to
customers until we receive payment in full. We would incur an accounting loss
equal to the carrying value of the accounts receivable, less any amounts
recovered from liquidation of collateral, if a customer failed to perform
according to the terms of our credit arrangements with them.
Sales
of
Sentinel cash security systems are currently to a small number of customers.
The
loss of a single customer could have an adverse effect on our sales. During
the
second quarter of fiscal year 2006, we sold 237 Sentinel units compared with
421
units during the same period last year. The decrease was primarily a result
of
sales to our largest Sentinel customer being significantly lower compared with
the same period last year. This resulted in a decrease in sales of approximately
$1.1 million during the second quarter of 2006 compared with the second quarter
of 2005.
The
majority of our sales during the second quarter of fiscal year 2006 were to
customers within the United States. Foreign sales accounted for only 5% and
10%
of the Company’s total sales for the quarters ending March 31, 2006 and 2005,
respectively, all of which were to one foreign distributor. All sales are
transacted in U.S. dollars.
In
September 2004, our subsidiary entered into separate supply and credit facility
agreements (the “Supply Agreement”, the “Facility Agreement” and the “Share
Warrant Agreement” respectively) with a foreign distributor related to our ATM
products. The Supply Agreement required the distributor, during the initial
term
of the agreement, to purchase ATMs only from us, effectively making us its
sole
supplier of ATMs. During each of the subsequent terms, the distributor was
required to purchase from us not less than 85% of all ATMs purchased by the
distributor. The initial term of the agreement was set as of the earlier of:
(i)
the expiration or termination of the debenture, (ii) a termination for default,
(iii) the mutual agreement of the parties, and (iv) August 15,
2009.
The
Facility Agreement provided a credit facility in an aggregate amount not to
exceed $2,280,000 to the distributor with respect to outstanding invoices
already issued to the distributor and with respect to invoices which may be
issued in the future related to the purchase of our ATM products. Repayment
of
the credit facility is set by schedule for the last day of each month beginning
November 2004 and continuing through August 2005. The distributor fell into
default due to non-payment during February 2005. In July of 2005, we collected
a
partial payment of approximately $350,000, and we received a commitment that
commenced August 5, 2005, from the distributor to submit at least approximately
$35,000 per week until the balance is paid in full. We received 16 weekly
payments totaling approximately $560,000, pursuant to that commitment. During
the quarter ended December 31, 2005, the distributor stopped making payments
to
us pursuant to that commitment.
The
Share
Warrant Agreement provides for the issuance to our subsidiary of a warrant
to
purchase up to 5% of the issued and outstanding Share Capital of the
distributor. The warrant restricts the distributor from (i) creating or issuing
a new class of stock or allotting additional shares, (ii) consolidating or
altering the shares, (iii) issuing a dividend, (iv) issuing additional warrants
and (v) amending articles of incorporation. Upon our exercise of the warrant,
the distributor balance outstanding under the Facility Agreement would be
reduced by $300,000. We exercised this option during December 2005, thereby
reducing the receivable by $300,000, which resulted in a balance of $833,000
of
which $598,496 was reserved at December 31, 2005.
On
March
31, 2006, we received approximately $950,000 from the distributor resulting
in
full payment of the outstanding receivable of $833,000 and interest of $117,000.
We recognized income of $598,496, due to reversal of related bad debt reserve
and $117,000 of interest income during the quarter ended March 31,
2006.
Share
Based Compensation
The
Company currently sponsors a stock-based compensation plan as described below.
Effective October 1, 2005, the Company adopted the provisions of Statement
of
Financial Accounting Standards (“SFAS”) No. 123 (Revised), “Share-Based Payment”
“(SFAS No. 123(R)”). Under the fair value recognition provisions of SFAS No.
123(R), stock-based compensation is measured at the grant date based on the
value of the awards and is recognized as expense over the requisite service
period (usually a vesting period). The Company selected the modified prospective
method of adoption described in SFAS No. 123(R). The fair values of the stock
awards recognized under SFAS No. 123(R) are determined based on the vested
portion of the awards; however, the total compensation expense is recognized
on
a straight-line basis over the vesting period.
In
accordance with the provisions of SFAS No. 123(R), total stock-based
compensation expense in the amount of $2,400 was recorded for the three months
ended March 31,006 and $4,900 for the six months ended March 31, 2006. The
total
stock-based compensation expense was recorded in selling, general and
administrative expense.
Prior
to
October 1, 2005, the Company accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.
Under APB Opinion No. 25, no compensation expense was recognized for stock
options issued to employees because the grant price equaled or was above the
market price on the date of grant for options issued by the
Company.
Stock
Option and Incentive Plans
The
Company maintains a stock option plan (the “Option Plan”) under which the
Company may issue incentive stock options to employees and non-employee
directors. Under the Option Plan, a maximum of 2,000,000 shares of our common
stock was approved to be issued or transferred to certain non-employee
directors, officers and employees pursuant to stock based awards granted. As
of
March 31, 2006, 866,220 shares remain available for grant under the Option
Plan.
Stock
options have been granted with exercise prices at the market price on the date
of grant. The granted options have vested generally over four years for
non-employee directors and ratably over four years for officers and employees.
The granted options generally have ten year contractual terms.
Compensation
expense of $19,433 related to previously granted stock option awards which
are
non-vested had not yet been recognized at March 31, 2006. This compensation
expense is expected to be recognized over a weighted-average period of
approximately 20 months.
The
following summarizes stock option activity for the three months ended March
31,
2006.
|
|
Number
of Options
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
Aggregate
Intrinsic Value (000’s)
|
|
Balance
at December 31, 2005
|
|
|
1,092,730
|
|
$
|
1.28
|
|
|
5.09
|
|
|
—
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled
or expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2006
|
|
|
1,092,730
|
|
$
|
1.28
|
|
|
4.84
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2006
|
|
|
706,800
|
|
$
|
1.74
|
|
|
4.84
|
|
$
|
—
|
|
Pro
Forma
Effects
If
compensation expense for the stock options that we granted had been recognized
based upon the estimated fair value on the grant date under the fair value
methodology prescribed by SFAS No. 123, as amended by SFAS No. 148 and SFAS
No.
123(R), our net loss and net loss per share for the three and six months ended
March 31, 2005 would have been as follows:
|
|
Three
Months Ended March 31,
2005
|
|
Six
Months Ended March 31,
2005
|
|
Net
loss as reported
|
|
$
|
(1,131,632
|
)
|
$
|
(2,287,196
|
)
|
Deduct:
Total stock-based employee compensation expense determined under
FAS 123,
net of taxes
|
|
|
(6,431
|
)
|
|
(6,570
|
)
|
Net
loss, pro forma
|
|
|
(1,138,063
|
)
|
|
(2,293,766
|
)
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
Pro
forma
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
Pro
forma
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
The
fair
value of each stock option granted under the Company’s stock option plans was
estimated on the date of grant using the Black-Scholes option-pricing model.
The
following key assumptions were used to value the option grants issued at March
31, 2005.
|
|
Weighted
Average Risk Free Rate
|
|
Average
Expected Life
|
|
Expected
Volatility
|
|
Expected
Dividend Yield
|
|
2005
|
|
|
3.42
|
%
|
|
4
Years
|
|
|
160
|
%
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No
options were granted during the three month period ended March 31,
2006.
The
Company recognized the pro forma fair value compensation cost on a straight-line
basis over the requisite service period for each separately vesting portion
of
the awards.
2.
Discontinued Operations
The
Company sold its ATM business on January 3, 2006 and classified its Cash
Security Business as a discontinued operation on December 31, 2004.
Net
Income from discontinued operations for the three and six months ended March
31,
2006 were $3,573,795 and $4,762,801, respectively, which includes approximately
$3,612,000 gain from the sale of the ATM business. Net Income from discontinued
operations for the three and six months ended March 31, 2005 were $410,174
and
$2,637,024, respectively.
Sale
of ATM Business
During
the first quarter ended December 31, 2004, we committed to a plan to sell our
ATM business. On February 19, 2005, the Company and its wholly-owned subsidiary,
Tidel Engineering, L.P., entered into the NCR Asset Purchase Agreement with
NCR
EasyPoint, a wholly owned subsidiary of NCR Corporation, for the sale of our
ATM
Business. See Note 1, Status of Tidel Technologies, Inc. - Sale of ATM Business
for more detail.
On
December 28, 2005, the holders of 62.2% of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The total purchase price
was approximately $10.4 million of which $8.2 million was paid to
Laurus into a collateral account to be held by Laurus as collateral for the
satisfaction of all monetary obligations payable to Laurus, $0.5 million was
initially paid into an escrow account and has subsequently been released to
the
Company, and the remaining $1.7 million was paid to the Company to be used
for
necessary working capital. This termination resulted in a book gain of
approximately $3.6 million during the quarter ended March 31, 2006.
The
following is a summary of the unaudited ATM net assets sold as initially
determined at December 31, 2004 and as finally reported on the closing date
of
January 3, 2006:
|
|
January
3, 2006
|
|
September
30, 2005
|
|
Assets
held for sale:
|
|
|
|
|
|
|
|
Trade
accounts receivable (net of allowances for bad debt)
|
|
$
|
1,857,192
|
|
$
|
2,310.262
|
|
Inventories
(net of reserve or obsolescence)
|
|
|
7,126,918
|
|
|
7,323,439
|
|
Prepaid
expense and other assets
|
|
|
—
|
|
|
392,972
|
|
Property
and equipment, at cost (net of depreciation)
|
|
|
79,056
|
|
|
121,525
|
|
Other
Assets
|
|
|
27,297
|
|
|
27,297
|
|
Total
assets held for sale
|
|
$
|
9,090,463
|
|
$
|
10,175,495
|
|
Liabilities
held for sale:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,627,748
|
|
|
1,681,288
|
|
Other
accrued expenses
|
|
|
636,174
|
|
|
1,814,634
|
|
Liabilities
held for sale
|
|
$
|
2,263,922
|
|
$
|
3,495,922
|
|
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Sales
|
|
$
|
—
|
|
$
|
3,424,078
|
|
$
|
3,847,874
|
|
$
|
7,099,321
|
|
Cost
of sales
|
|
|
—
|
|
|
2,417,375
|
|
|
2,592,268
|
|
|
4,899,757
|
|
Gross
Profit
|
|
|
—
|
|
|
1,006,703
|
|
|
1,255,606
|
|
|
2,199,564
|
|
Selling,
general and administrative
|
|
|
—
|
|
|
1,795,951
|
|
|
880,941
|
|
|
2,783,335
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
72,963
|
|
|
46,048
|
|
|
145,926
|
|
Operating
income
|
|
|
—
|
|
|
(862,211
|
)
|
|
328,617
|
|
|
(729,697
|
)
|
Non-operating
(income) expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
—
|
|
$
|
(862,211
|
)
|
$
|
328,617
|
|
$
|
(729,697
|
)
|
*
There
were no operations from the ATM business during the quarter ended March 31,
2006; however, $3,612,509 was recognized as a gain on sale of the ATM business
in this quarter.
Cash
Security Business
We
entered into the Cash Security Asset Purchase Agreement with Sentinel Operating,
L.P., a purchaser controlled by a management buyout team led by Mark K.
Levenick, our Interim Chief Executive Officer and a member of our Board, and
Raymond Landry, a member of our Board, for the sale of substantially all of
the
assets of our Cash Security business. See Note 1, Status of Tidel Technologies,
Inc.; Sale of our Cash Security Business and Related Agreements with Laurus
for
more detail.
An
analysis of the discontinued operations of the Cash Security business is as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
March
31, 2006
|
|
September
30, 2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
429,875
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of approximately $60,200 and
$7,500,
respectively
|
|
|
1,974,470
|
|
|
1,856,523
|
|
Inventories
|
|
|
2,056,271
|
|
|
3,137,818
|
|
Prepaid
expenses and other
|
|
|
94,636
|
|
|
198,057
|
|
Total
current assets
|
|
|
4,555,252
|
|
|
5,192,398
|
|
Property
and equipment, at cost
|
|
|
1,424,979
|
|
|
1,097,604
|
|
Accumulated
depreciation
|
|
|
(1,303,436
|
)
|
|
(1,020,015
|
)
|
Net
property and equipment
|
|
|
121,543
|
|
|
77,589
|
|
Other
assets
|
|
|
275,631
|
|
|
25,631
|
|
Total
assets
|
|
$
|
4,952,426
|
|
$
|
5,295,618
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
$
|
5,843
|
|
$
|
1,852
|
|
Accounts
payable
|
|
|
1,401,246
|
|
|
1,397,394
|
|
Other
accrued expenses
|
|
|
2,124,890
|
|
|
3,069,278
|
|
Total
current liabilities
|
|
|
3,531,979
|
|
|
4,468,524
|
|
Long-term
debt, net of current maturities
|
|
|
20,982
|
|
|
28,708
|
|
Total
liabilities
|
|
$
|
3,552,961
|
|
$
|
4,497,232
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Sales
|
|
$
|
2,983,867
|
|
$
|
4,745,769
|
|
$
|
7,729,743
|
|
$
|
11,258,311
|
|
Cost
of sales
|
|
|
1,939,014
|
|
|
2,523,256
|
|
|
4,827,473
|
|
|
5,991,029
|
|
Gross
Profit
|
|
|
1,044,853
|
|
|
2,222,513
|
|
|
2,902,270
|
|
|
5,267,282
|
|
Selling,
general and administrative
|
|
|
1,070,305
|
|
|
942,754
|
|
|
2,074,765
|
|
|
1,885,155
|
|
Depreciation
and amortization
|
|
|
12,239
|
|
|
7,374
|
|
|
4,713
|
|
|
14,748
|
|
Operating
income (loss)
|
|
|
(37,691
|
)
|
|
1,272,385
|
|
|
822,792
|
|
|
3,367,379
|
|
Non-operating
income (expense)
|
|
|
(1,023
|
)
|
|
—
|
|
|
(1,117
|
)
|
|
657
|
|
Net
income (loss)
|
|
$
|
(38,714
|
)
|
$
|
1,272,385
|
|
$
|
821,675
|
|
$
|
3,366,722
|
|
3.
Accounting policies related to Discontinued Operations which are Classified
as
Assets Held For Sale, Liabilities Related to the Assets Held for Sale and
Discontinued Operations
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the standard
cost method and includes materials, labor and production overhead which
approximates an average cost method. Reserves are provided to adjust any slow
moving materials or goods to net realizable values.
Warranties
Certain
products are sold under warranty against defects in materials and workmanship
for a period of one to two years. A provision for estimated warranty costs
is
included in other accrued expenses and is charged to operations at the time
of
sale.
Accounts
Receivable
We
have
significant investments in billed receivables as of March 31, 2006 and September
30, 2005. Billed receivables represent amounts billed upon the shipments of
our
products under our standard contract terms and conditions. Allowances for
doubtful accounts and estimated non-recoverable costs primarily provide for
losses that may be sustained on uncollectible receivables and claims. In
estimating the allowance for doubtful accounts, we evaluate our contract
receivables and thoroughly review historical collection experience, the
financial condition of our customers, billing disputes and other factors. When
we ultimately conclude that a receivable is uncollectible, the balance is
charged against the allowance for doubtful accounts. As of March 31, 2006 and
September 30, 2005, the allowance for doubtful contract receivables was $60,200
and $1,076,200, respectively.
Revenue
Recognition
Revenues
are recognized at the time products are shipped to customers. We have no
continuing obligation to provide services or upgrades to our products, other
than a warranty against defects in materials and workmanship. We only recognize
such revenues if there is persuasive evidence of an arrangement for a fixed
or
determinable sales price and a reasonable assurance of our ability to collect
from the customer.
Our
products contain imbedded software that is developed for inclusion within the
equipment. We have not licensed, sold, leased or otherwise marketed such
software separately. We have no continuing obligations after the delivery of
our
products and we do not enter into post-contract customer support arrangements
related to any software embedded into our equipment.
Research
and Development Cost
Research
and development costs are expensed as incurred. Research and development costs
charged to expense were approximately $229,000 and $174,000 for the quarters
ended March 31, 2006 and 2005, respectively.
Shipping
and Handling Cost
Shipping
and handling costs billed to customers totaled $73,174 and $79,789 for the
quarters ended March 31, 2006 and 2005, respectively. We incurred shipping
and
handling costs of $77,478 and $85,786 for the quarters ended March 31, 2006
and
2005 respectively. The net expense of $4,304 and $5,997 is included in selling,
general and administrative expenses in the accompanying consolidated statements
of operations for the quarters ended March 31, 2006 and 2005,
respectively.
4.
Earnings Per Share
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per share computation:
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income(loss) from Continuing operations
|
|
$
|
(3,137,325
|
)
|
|
(1,541,806
|
)
|
|
(5,495,126
|
)
|
|
(4,924,220
|
)
|
Net
income(loss) from Discontinued operations
|
|
|
3,573,795
|
|
|
410,174
|
|
|
4,762,801
|
|
|
2,637,024
|
|
Net
income(loss)
|
|
|
436,470
|
|
$
|
(1,131,632
|
)
|
$
|
(732,325
|
)
|
$
|
(2,287,196
|
)
|
Weighted
average common shares outstanding denominator for basic earnings
(loss)
per share
|
|
|
36,077,210
|
|
|
20,677,210
|
|
|
28,292,595
|
|
|
19,906,270
|
|
Dilutive
shares outstanding
|
|
|
59,982
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
36,137,192
|
|
|
20,677,210
|
|
|
28,292,595
|
|
|
19,906,270
|
|
Basic
earnings (loss) per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
$
|
(0.19
|
)
|
$
|
(0.25
|
)
|
From
discontinued operations
|
|
$
|
0.10
|
|
$
|
0.02
|
|
$
|
0.17
|
|
$
|
0.14
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.07
|
)
|
$
|
(0.19
|
)
|
$
|
(0.25
|
)
|
From
discontinued operations
|
|
$
|
0.10
|
|
$
|
0.02
|
|
$
|
0.17
|
|
$
|
0.14
|
|
Earnings
(loss) per share data for all periods presented have been computed pursuant
to
SFAS No. 128; “Earnings Per Share” that requires a presentation of basic
earnings (loss) per share (basic EPS) and diluted earnings (loss) per share
(diluted EPS). Basic EPS excludes dilution and is determined by dividing income
(loss) available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities and other contracts to issue common
stock were exercised or converted into common stock. As of March 31, 2006,
we
had outstanding options covering an aggregate of 1,092,730 shares of common
stock, of which 706,800 shares of stocks were exercisable. We also had
outstanding warrants covering an aggregate of 5,890,000 shares of common stock.
Included in the computation of diluted EPS for the three months ended March
31,
2006 are options to purchase 363,810 shares of common stock at a weighted
average of $0.25 per share and excluded from the computation are 728,920 options
to purchase our common stock as they would be anti-dilutive. Also excluded
from
the computation of diluted EPS for the three months ended March 31, 2006 are
warrants covering an aggregate of 5,890,000 shares of common stock with a
remaining exercise price ranging from $.30 to $.40 as they would be
anti-dilutive. Excluded from the computation of diluted EPS for the six months
ended March 31, 2006 are options to purchase 1,092,730 shares to purchase common
stock at a weighted average of $1.20 per share and outstanding warrants covering
an aggregate of 5,890,000 shares of common stock with a remaining exercise
price
ranging from $.30 to $.40 as they would be anti-dilutive. Excluded from
computation of diluted EPS for the three and six months ended March 31,2005
are
786,000 shares to purchase common stock at an average price of $1.66 per share
and 6,079,473 warrants, with a remaining exercise price ranging from $.30 to
$.40, as they would also be anti-dilutive.
5.
Shareholders’ Equity
Pursuant
to the terms of the exercise and conversion agreement we entered into with
Laurus on January 13, 2006, as amended on February 28, 2006, Laurus converted
$5,400,000 in aggregate principal amount of convertible Company debt it held
into 18,000,000 shares of our common stock. Following such conversion, Laurus
held 19,251,000 common shares, representing approximately 49.8%, of our
outstanding common stock.
In
addition, we entered into a stock redemption agreement with Laurus, dated
January 12, 2006, as amended on February 28, 2006. See Note 1, Status of Tidel
Technologies, Inc. - Sale of our Cash Security Business and Related Agreements
with Laurus.
6.
Long-Term Debt and Convertible Debentures
Long-term
debt related to continued operations consisted of the following:
|
|
March
31, 2006
|
|
September
30, 2005
|
|
Convertible
notes issued to Laurus, net of discount of $ 0 and $3,746,531,
respectively
|
|
$
|
—
|
|
$
|
4,421,457
|
|
Total
short-term and long-term debt
|
|
|
—
|
|
|
4,421,457
|
|
Less:
current maturities
|
|
|
—
|
|
|
(2,325,000
|
)
|
Long-term
debt, less current maturities
|
|
$
|
—
|
|
$
|
2,096,457
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND CONSOLIDATED
RESULTS OF OPERATION
You
should read the following discussion and analysis together with
our consolidated
financial statements and notes thereto and the discussion “Management’s
Discussion and Analysis of Consolidated Financial Condition and Consolidated
Results of Operations”
and “Cautionary Statements” included in our 2005 Annual Report
on Form
10-K for the Fiscal Year Ended September 30, 2005. The following information
contains forward-looking
statements, which are subject to risks and uncertainties. Should
one or more of these risks or uncertainties materialize, actual
results may
differ from those expressed or implied by the forward-looking
statements.
General
Our
liquidity has historically been negatively impacted by our inability to collect
outstanding receivables and claims as a result of the bankruptcy of JRA222,
Inc.
d/b/a Credit Card Center (“CCC”), the inability to collect outstanding
receivables from certain customers, and under-absorbed fixed costs associated
with the low utilization of our production facilities and reduced sales of
our
products resulting from general difficulties in the ATM market. In order to
meet
our liquidity needs during the past four years, we have incurred a substantial
amount of debt. On January 3, 2006, the Company completed the ATM Business
Sale.
The total purchase price was approximately $10.4 million of which $8.2 million
was funded into a collateral account for the benefit of Laurus to be applied
towards the repayment of our outstanding loans to Laurus. On January 13, 2006,
we utilized proceeds from the ATM Business Sale held in the collateral account
to repay outstanding convertible debt to Laurus in the principal amount of
$2,617,988 plus accrued but unpaid interest in the amount of $113,333. In
connection therewith, we paid a prepayment penalty to Laurus in the amount
of
$59,180. On January 13, 2006, Laurus converted the remaining outstanding
indebtedness of $5,400,000 into 18,000,000 shares of our common
stock.
We
entered into an the Cash Security Asset Purchase Agreement, with Sentinel
Operating, L.P. as of January 12, 2006, for the sale of substantially all of
the
assets of our Cash Security business.
The
Cash
Security Asset Purchase Agreement is subject to customary representations and
warranties and covenants and the satisfaction of several customary closing
conditions, including our obtaining shareholder approval. The closing under
the
Cash Security Asset Purchase Agreement is expected to occur in the third fiscal
quarter of 2006. The purchase price payable under the Cash Security
Business Sale is subject to the reorganization fee and the other amounts payable
to Laurus under the terms of the Agreement Regarding the NCR Transaction and
Other Asset Sales dated November 26, 2004.
(the
“Sale Agreement”).
Pursuant
to the terms of an exercise and conversion agreement we entered into with Laurus
on January 13, 2006, as amended on February 28, 2006, Laurus converted
$5,400,000 in aggregate principal amount of convertible Company debt it held
into 18,000,000 shares of our common stock. Following such conversion of such
debt, Laurus holds 19,251,000 shares representing approximately 49.8%, of our
outstanding common stock. We currently are in negotiations with Laurus to amend
the exercise and conversion agreement so as to extend the dates contained
therein.
On
January 13, 2006, we repaid all of our remaining outstanding debt to Laurus
in
the principal amount of $2,617,988 plus accrued but unpaid interest in the
amount of $113,333. In connection therewith, we paid a prepayment penalty to
Laurus in the amount of $59,180.
On
January 12, 2006, we entered into a stock redemption agreement with Laurus.
Pursuant to the terms of the stock redemption agreement, we have agreed to
repurchase from Laurus, upon the closing of the Cash Security Business Sale,
all
shares of our common stock held by Laurus at a per share price not less than
$.20 per share nor greater than $.34 per share following the determination
of
our assets in accordance with the formula set forth therein. We have classified
the $5,400,000 of convertible debt converted by Laurus into common stock as
a
liability under the caption “shares subject to redemption” on the March 31, 2006
balance sheet.
Pursuant
to the terms of the stock redemption agreement with Laurus, Laurus has agreed
(i) to the cancellation as of the closing date of the Cash Security Business
Sale of the outstanding warrants that it holds to purchase 4,750,000 shares
of
our common stock at an exercise price of $.30 per share, and (ii) not to
exercise such warrants prior to the earlier to occur of May 31, 2006 and the
date on which the Cash Security Asset Purchase Agreement is terminated. The
stock redemption agreement was amended as of February 28, 2006. We currently
are
in negotiations with Laurus to amend the stock redemption agreement so as to
extend the dates contained therein.
Following
the share repurchase under the stock redemption agreement with Laurus, Laurus
will cease to hold any equity interest in the Company. If the Cash Security
Business Sale does not occur by May 31, 2006, then pursuant to the terms of
the
exercise and conversion agreement we entered into with Laurus, we have agreed
to
immediately redeem from Laurus the 18,000,000 shares of our common stock issued
to Laurus upon Laurus’ conversion pursuant to the exercise and conversion
agreement of $5,400,000 of our debt.
We
also
entered into a cash collateral deposit letter and a reaffirmation, ratification
and confirmation agreement with Laurus dated January 12, 2006. Pursuant to
the
cash collateral deposit letter, on January 13, 2006, we applied a portion of
the
$8,200,000 of proceeds (the "Deposit Amount") from the ATM Business Sale that
were on deposit with Laurus for repayment of outstanding Company indebtedness
to
Laurus to repay all amounts owing to Laurus under (i) the portion of the note,
dated November 25, 2003, in the initial principal amount of $6,450,000, together
with an additional $292,987 principal amount added thereto on November 26,
2004,
remaining after Laurus’ conversion of $5,400,000 of indebtedness into shares of
our common stock, (ii) a convertible term note, dated November 26, 2004 in
the
aggregate principal amount of $600,000, which was convertible into shares of
common stock of the Company at a conversion price of $0.30 per share and (iii)
a
convertible term note, dated November 26, 2004, in the aggregate principal
amount of $1,500,000, which was convertible into shares of common stock of
the
Company at a conversion price of $3.00 per share (collectively, the "Notes").
Thereafter, the Notes were deemed to have been indefeasibly repaid and the
Deposit Amount was reduced to $5,330,507. Under the cash collateral deposit
letter, the remaining Deposit Amount together with an additional cash deposit
of
$69,493 from the Company, for an aggregate amount of $5,400,000, will be used
as
collateral to secure our obligations to Laurus under, among other things, the
stock redemption agreement and the exercise and conversion agreement. Pursuant
to the reaffirmation, ratification and confirmation agreement, we acknowledged
and reaffirmed our obligation to pay to Laurus simultaneously with the closing
of the Cash Security Business Sale the fees payable to Laurus pursuant to the
Sale Agreement.
Each
of
Laurus and our officers and directors entered into voting agreements with
Sentinel Technologies, Inc., an affiliate of the purchaser under the Cash
Security Asset Purchase Agreement, as of January 12, 2006, under which Laurus
and our officers and directors agreed to vote all of the shares of Company
common stock that Laurus and each such person owns and any shares over which
Laurus and each such person exercises voting control in favor of the approval
and adoption of the Cash Security Asset Purchase Agreement, the Cash Security
Business Sale and related transactions and against any competing transactions
proposed to the Company’s shareholders. The Laurus voting agreement was amended
and extended on February 28, 2006.
Critical
Accounting Policies
This
discussion and analysis of our consolidated financial condition and consolidated
results of operations is based upon our condensed consolidated unauited
financial statements. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts.
On an ongoing basis, we evaluate our estimates, including those related to
bad
debts, inventories, intangible assets, assets held for sale, long-lived assets,
income taxes, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions and factors that we
believe to be reasonable under the circumstances. Based on our ongoing review,
we make adjustments we consider appropriate under the facts and circumstances.
The accompanying condensed consolidated financial statements are prepared using
the same critical accounting policies discussed in our 2005 Annual Report on
Form 10-K.
Share
Based Compensation
The
Company currently sponsors a stock-based compensation plan as described below.
Effective October 1, 2005, the Company adopted the provisions of Statement
of
Financial Accounting Standards (“SFAS”) No. 123 (Revised), “Share-Based Payment”
“(SFAS No. 123(R)”). Under the fair value recognition provisions of SFAS No.
123(R), stock-based compensation is measured at the grant date based on the
value of the awards and is recognized as expense over the requisite service
period (usually a vesting period). The Company selected the modified prospective
method of adoption described in SFAS No. 123(R). The fair values of the stock
awards recognized under SFAS No. 123(R) are determined based on the vested
portion of the awards; however, the total compensation expense is recognized
on
a straight-line basis over the vesting period.
In
accordance with the provisions of SFAS No. 123(R), total stock-based
compensation expense in the amount of $2,400 was recorded for the three months
ended March 31,006 and $4,900 for the six months ended March 31, 2006. The
total
stock-based compensation expense was recorded in selling, general and
administrative expense.
Prior
to
October 1, 2005, the Company accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.
Under APB Opinion No. 25, no compensation expense was recognized for stock
options issued to employees because the grant price equaled or was above the
market price on the date of grant for options issued by the
Company.
Stock
Option and Incentive Plans
The
Company maintains a stock option plan (the “Option Plan”) under which the
Company may issue incentive stock options to employees and non-employee
directors. Under the Option Plan, a maximum of 2,000,000 shares of our common
stock was approved to be issued or transferred to certain non-employee
directors, officers and employees pursuant to stock based awards granted. As
of
March 31, 2006, 866,220 shares remain available for grant under the Option
Plan.
The
Company’s policy regarding issuance upon share option exercise takes into
consideration the optionee’s eligibility and vesting status.
Stock
options have been granted with exercise prices at the market price on the date
of grant. The granted options have vested generally over four years for
non-employee directors and ratably over four years for officers and employees.
The granted options generally have ten year contractual terms.
Compensation
expense of $19,433 related to previously granted stock option awards which
are
non-vested had not yet been recognized at March 31, 2006. This compensation
expense is expected to be recognized over a weighted-average period of
approximately 20 months.
The
following summarizes stock option activity for the three months ended March
31,
2006.
|
|
Number
of Options
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
Aggregate
Intrinsic Value (000’s)
|
|
Balance
at December 31, 2005
|
|
|
1,092,730
|
|
$
|
1.28
|
|
|
5.09
|
|
|
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled
or expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2006
|
|
|
1,092,730
|
|
$
|
1.28
|
|
|
4.84
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2006
|
|
|
706,800
|
|
$
|
1.74
|
|
|
4.84
|
|
$
|
—
|
|
Pro
Forma
Effects
If
compensation expense for the stock options that we granted had been recognized
based upon the estimated fair value on the grant date under the fair value
methodology prescribed by SFAS No. 123, as amended by SFAS No. 148 and SFAS
No.
123(R), our net loss and net loss per share for the three and six months ended
March 31, 2005 would have been as follows:
|
|
Three
Months Ended
March
31, 2005
|
|
Six
Months Ended
March
31, 2005
|
|
Net
income (loss) as reported
|
|
$
|
(1,131,632
|
)
|
$
|
(2,287,196
|
)
|
Deduct:
Total stock-based employee compensation expense determined under
FAS 123,
net of taxes
|
|
|
(6,431
|
)
|
|
(6,570
|
)
|
Net
income (loss), pro forma
|
|
|
(1,138,063
|
)
|
|
(2,293,766
|
)
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
Pro
forma
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
Pro
forma
|
|
|
(0.05
|
)
|
|
(0.11
|
)
|
The
fair
value of each stock option granted under the Company’s stock option plans was
estimated on the date of grant using the Black-Scholes option-pricing model.
The
following key assumptions were used to value the option grants issued at March
31, 2005.
|
|
Weighted
Average Risk Free Rate
|
|
Average
Expected Life
|
|
Expected
Volatility
|
|
Expected
Dividend Yield
|
|
2005
|
|
|
3.42
|
%
|
|
4
Years
|
|
|
160
|
%
|
|
0.00
|
%
|
2006
No
options were granted during the three month
Period
ended March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No
options were granted during the three month period ended March 31,
2006.
The
Company recognized the pro forma fair value compensation cost on a straight-line
basis over the requisite service period for each separately vesting portion
of
the awards.
Results
of Operations
Operating
Segments
We
conduct business within one operating segment, principally in the United
States.
Product
Net Sales for ATM Business and Cash Security Business
A
breakdown of net sales by individual product line is provided in the following
table:
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
ATM
Business
|
|
$
|
—
|
|
$
|
3,424,078
|
|
$
|
3,847,874
|
|
$
|
7,099,321
|
|
Cash
Security Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TACC
|
|
|
979,589
|
|
|
1,387,727
|
|
|
1,880,693
|
|
|
2,540,085
|
|
Sentinel
|
|
|
1,639,283
|
|
|
2,905,600
|
|
|
5,000,998
|
|
|
7,803,419
|
|
Parts
& Other
|
|
|
364,995
|
|
|
452,442
|
|
|
848,052
|
|
|
914,807
|
|
Total
Cash Security Business
|
|
$
|
2,983,867
|
|
$
|
4,745,769
|
|
$
|
7,729,743
|
|
$
|
11,258,311
|
|
Gross
Profit, Operating Expenses and Non-Operating Items
Continuing
Operations
Due
to
the requirement to classify our only one remaining product line as discontinued
operations, the results of continuing operations consist primarily of the
corporate overhead and debt-related costs.
An
analysis of continuing operations and assets and liabilities is provided in
the
following tables:
CONTINUING
OPERATIONS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
March
31, 2006
|
|
September
30, 2005
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1.852,530
|
|
$
|
1,003,663
|
|
Restricted
cash
|
|
|
5,400,000
|
|
|
—
|
|
Trade
accounts receivable, net of allowances of $0
|
|
|
—
|
|
|
250,000
|
|
Notes
and other receivables
|
|
|
17,513
|
|
|
12,965
|
|
Prepaid
expenses and other
|
|
|
86,857
|
|
|
170,231
|
|
Total
current assets
|
|
|
7,356,900
|
|
|
1,436,859
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
—
|
|
|
55,641
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
(42,848
|
)
|
Net
property and equipment
|
|
|
—
|
|
|
12,793
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
674,411
|
|
|
615,763
|
|
Total
assets
|
|
$
|
8,031,311
|
|
$
|
2,065,415
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
$
|
—
|
|
$
|
2,325,000
|
|
Accounts
payable
|
|
|
390,091
|
|
|
431,876
|
|
Accrued
interest payable
|
|
|
2,000,000
|
|
|
2,135,852
|
|
Shares
to be redeemed
|
|
|
5,400,000
|
|
|
—
|
|
Other
accrued liabilities
|
|
|
18,836
|
|
|
290,871
|
|
Total
current liabilities
|
|
|
7,808,927
|
|
|
5,183,599
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities and debt discount of $3,746,531 at
September 30, 2005
|
|
|
—
|
|
|
2,096,457
|
|
Total
liabilities
|
|
$
|
7,808,927
|
|
$
|
7,280,056
|
|
CONTINUING
OPERATIONS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Selling,
general and administrative
|
|
|
618,893
|
|
|
375,334
|
|
|
1,992,917
|
|
|
682,533
|
|
Depreciation
and amortization
|
|
|
1,312
|
|
|
1,299
|
|
|
2,678
|
|
|
2,171
|
|
Operating
loss
|
|
|
(620,205
|
)
|
|
(376,633
|
)
|
|
(1,995,595
|
)
|
|
(684,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net of interest income
|
|
|
(3,033,161
|
)
|
|
(1,165,173
|
)
|
|
(4,195,572
|
)
|
|
(4,239,516
|
)
|
Gain
on collection of receivable previously reserved
|
|
|
598,496
|
|
|
—
|
|
|
598,496
|
|
|
—
|
|
Additional
income and expenses related to the CCC bankruptcy
settlement
|
|
|
(75,000
|
)
|
|
—
|
|
|
105,000
|
|
|
—
|
|
Other
|
|
|
(7,455
|
)
|
|
—
|
|
|
(7,455
|
)
|
|
—
|
|
Total
other income (expense)
|
|
|
(2,517,120
|
)
|
|
(1,165,173
|
)
|
|
(3,499,531
|
)
|
|
(4,239,516
|
)
|
Loss
before taxes
|
|
|
(3,137,325
|
)
|
|
(1,541,806
|
)
|
|
(5,495,126
|
)
|
|
(4,924,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income
(loss) from continuing operations
|
|
$
|
(3,137,325
|
)
|
$
|
1,541,806
|
)
|
$
|
(5,495,126
|
)
|
$
|
(4,924,220
|
)
|
Quarter
Ended March 31, 2006 Compared to the Quarter Ended March 31,
2005
Selling,
general and administrative expense
for the
quarter ended March 31, 2006 was $618,893 compared to $375,334 for the quarter
ended March 31, 2005. The increase is primarily related to the costs associated
with the ATM Business Sale and preparation for the sale of the Cash Security
business.
Interest
expense
was
approximately $3.0 million for the quarter ended March 31, 2006 compared with
approximately $1.2 million for the same quarter of the previous year. The
increase was primarily related to the charge to interest expense of
approximately $3.1 million representing the total remaining unamortized debt
discount and other deferred debt issuance costs related to the early
extinguishment of the Laurus debt.
Income
tax expense. In
assessing the realizability of deferred tax asset, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will be realized. We have established a valuation allowance for such deferred
tax assets to the extent such amounts are not utilized to offset existing
deferred tax liabilities reversing in the same periods.
We
recorded a net loss from continuing operations of $(3,137,325) and
$(1,541,806) for the quarters ended March 31, 2006 and 2005, respectively.
The
change was primarily related to the interest expense of approximately $3.1
million representing the total remaining unamortized debt discount and other
deferred debt issuance costs due to early extinguishment of the Laurus debt.
This was partially offset by the gain recorded due to the collection of
receivables related to the supply and credit facility agreement with a foreign
distributor.
Six
Months Ended March 31, 2006 Compared to the Six Months Ended March 31,
2005
Selling,
general and administrative expense
for the six months ended March 31, 2006 were approximately $2.0 million compared
with approximately $683,000 for the six months ended March 31, 2005. This
increase of 193% is primarily related to accounting and legal costs associated
with the ATM Business Sale and preparation for the sale of the Cash Security
business.
Interest
expense net
were
approximately $4.2 million for the six months ended March 31, 2006 and the
six
months ended March 31, 2005. The net interest expense is approximately the
same
in total for both periods; however, the six months ended March 31, 2006 included
$985,827 representing only three months of amortization related to the debt
discount and other deferred debt charges and a one time charge of approximately
$3.1 million related to unamortized debt related accounts during the second
quarter as a result of the early extinguishment of the Laurus debt. The six
months ended March 31, 2005 consisted primarily of 6 months of amortization
of
the debt discount and other deferred debt issuance costs related to the Laurus
debt.
Income
tax expense. In
assessing the realizability of deferred tax asset, management considers whether
it is more likely than not some portion or all of the deferred tax assets will
be realized. We have established a valuation allowance for such deferred tax
assets to the extent such amounts are not utilized to offset existing deferred
tax liabilities reversing in the same periods.
We
recorded a net loss from continuing operations of $(5.5) million and $(4.9)
million for the six months ended March 31, 2006 and 2005, respectively. The
significant change in net loss is primarily related to accounting and legal
cost
associated the ATM Business Sale and preparation for the sale of the Cash
Security business. This was partially offset by the gain recorded due to the
collection of receivables related to the supply and credit facility agreement
with a foreign distributor.
Discontinued
Operations (ATM Business)
During
the first quarter ended December 31, 2004, we committed to a plan to sell our
ATM business. On February 19, 2005, the Company and its wholly-owned subsidiary,
Tidel Engineering, L.P., entered into the NCR Asset Purchase Agreement with
NCR
EasyPoint, a wholly owned subsidiary of NCR Corporation.
On
December 28, 2005, the holders of 62.2% of our shares of outstanding common
stock approved the NCR Asset Purchase Agreement.
On
January 3, 2006, we completed the ATM Business Sale. The total purchase price
was approximately $10.4 million of which $8.2 million was paid to Laurus
into a collateral account held by Laurus as collateral for the satisfaction
of
all monetary obligations payable to Laurus, $0.5 million was initially paid
into
an escrow account and has subsequently been released to the Company, and the
remaining $1.7 million was paid to the Company to be used for necessary working
capital. This termination resulted in a book gain of approximately $3.6 million
during the quarter ended March 31, 2006. Subsequently, on January 13, 2006
Laurus converted $5,400,000 in aggregate principal amount of convertible Company
debt it holds into 18,000,000 shares of our common stock. Following Laurus’
conversion of such debt, Laurus holds shares representing approximately 49.8%
of
our common stock.
The
following is a summary of the net assets sold as initially determined at
December 31, 2004 and as finally reported on the closing date of January 3,
2006:
|
|
January
3, 2006
|
|
September
30, 2005
|
|
Assets
held for sale:
|
|
|
|
|
|
|
|
Trade
accounts receivable (net of allowances for bad debt)
|
|
$
|
1,857,192
|
|
$
|
2,310,262
|
|
Inventories
(net of reserve or obsolescence)
|
|
|
7,126,918
|
|
|
7,323,439
|
|
Prepaid
expense and other assets
|
|
|
—
|
|
|
392,972
|
|
Property,
plant and equipment, at cost net of depreciation
|
|
|
79,056
|
|
|
121,525
|
|
Other
Assets
|
|
|
27,297
|
|
|
27,297
|
|
Total
assets held for sale
|
|
$
|
9,090,463
|
|
$
|
10,175,495
|
|
|
|
|
|
|
|
|
|
Liabilities
held for sale:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,627,748
|
|
|
1,681,288
|
|
Other
accrued expenses
|
|
|
636,174
|
|
|
1,814,634
|
|
Liabilities
held for sale
|
|
$
|
2,263,922
|
|
$
|
3,495,922
|
|
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Sales
|
|
$
|
—
|
|
$
|
3,424,078
|
|
$
|
3,847,874
|
|
$
|
7,099,321
|
|
Cost
of sales
|
|
|
—
|
|
|
2,417,375
|
|
|
2,592,268
|
|
|
4,899,757
|
|
Gross
Profit
|
|
|
—
|
|
|
1,006,703
|
|
|
1,255,606
|
|
|
2,199,564
|
|
Selling,
general and administrative
|
|
|
—
|
|
|
1,795,951
|
|
|
880,941
|
|
|
2,783,335
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
72,963
|
|
|
46,048
|
|
|
145,926
|
|
Operating
income (loss)
|
|
|
—
|
|
|
(862,211
|
)
|
|
328,617
|
|
|
(729,697
|
)
|
Non-operating
(income) expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
—
|
|
$
|
(862,211
|
)
|
$
|
328,617
|
|
$
|
(729,697
|
)
|
There
were no operations from the ATM business during the quarter ended March 31,
2006; however $3,612,509 was recognized as a gain on sale of the ATM business
in
this quarter.
Discontinued
Operations (Cash Security Business)
An
analysis of the discontinued operations of the Cash Security business is as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
March
31, 2006
|
|
September
30, 2005
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
429,825
|
|
$
|
—
|
|
Trade
accounts receivable, net of allowance of approximately $60,200 and
$7,500,
respectively
|
|
|
1,974,470
|
|
|
1,856,523
|
|
Inventories
|
|
|
2,056,271
|
|
|
3,137,818
|
|
Prepaid
expenses and other
|
|
|
94,636
|
|
|
198,057
|
|
Total
current assets
|
|
|
4,555,202
|
|
|
5,192,398
|
|
Property
and equipment, at cost
|
|
|
1,424,979
|
|
|
1,097,604
|
|
Accumulated
depreciation
|
|
|
(1,303,436
|
)
|
|
(1,020,015
|
)
|
Net
property and equipment
|
|
|
121,543
|
|
|
77,589
|
|
Other
assets
|
|
|
275,631
|
|
|
25,631
|
|
Total
assets
|
|
$
|
4,952,426
|
|
$
|
5,295,618
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities
|
|
$
|
5,843
|
|
$
|
1,852
|
|
Accounts
payable
|
|
|
1,401,246
|
|
|
1,397,394
|
|
Other
accrued expenses
|
|
|
2,124,890
|
|
|
3,069,278
|
|
Total
current liabilities
|
|
|
3,531,979
|
|
|
4,468,524
|
|
Long-term
debt, net of current maturities
|
|
|
20,982
|
|
|
28,708
|
|
Total
liabilities
|
|
$
|
3,552,961
|
|
$
|
4,497,232
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
Six
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
Sales
|
|
$
|
2,983,867
|
|
$
|
4,745,769
|
|
$
|
7,729,743
|
|
$
|
11,258,311
|
|
Cost
of sales
|
|
|
1,939,014
|
|
|
2,523,256
|
|
|
4,827,473
|
|
|
5,991,029
|
|
Gross
Profit
|
|
|
1,044,853
|
|
|
2,222,513
|
|
|
2,902,270
|
|
|
5,267,282
|
|
Selling,
general and administrative
|
|
|
1,070,305
|
|
|
942,754
|
|
|
2,074,765
|
|
|
1,885,155
|
|
Depreciation
and amortization
|
|
|
12,239
|
|
|
7,374
|
|
|
4,713
|
|
|
14,748
|
|
Operating
income (loss)
|
|
|
(37,691
|
)
|
|
1,272,385
|
|
|
822,792
|
|
|
3,367,379
|
|
Non-operating
income (expense)
|
|
|
(1,023
|
)
|
|
—
|
|
|
(1,117
|
)
|
|
657
|
|
Net
income (loss)
|
|
$
|
(38,714
|
)
|
$
|
1,272,385
|
|
$
|
821,675
|
|
$
|
3,366,722
|
|
Quarter
Ended March 31, 2006 Compared to the Quarter Ended March 31, 2005- Cash Security
Business
Net
Sales from
the
Cash Security business were approximately $3.0 million for the quarter ended
March 31, 2006 compared with net sales of approximately $4.7 million for the
quarter ended March 31, 2005. During the second quarter of fiscal year 2006,
we
sold 237 Sentinel units compared with sales of 421 units during the same period
last year. The decrease was primarily a result of significantly lower sales
to
our largest Sentinel customer compared with the same period last
year.
Gross
profit for
the
quarter ended March 31, 2006 was approximately $1.0 million, or 35% as a
percentage of sales, compared with gross profit of $2.2 million, or 47% as
a
percentage of sales, for the quarter ended March 31, 2005. The decrease is
primarily a result of a change in product mix and competitive
pricing.
Selling,
general and administrative expense
for the
quarter ended March 31, 2006 were $1,070,305 compared with $942,754 for the
same
period last year. This increase is primarily related to an increase in both
the
bad debt and inventory reserves.
Six
Months Ended March 31, 2006 Compared to the Six Months Ended March 31,
2005
Our
net
sales generated from the Cash Security business were $7.7 million for the six
months ended March 31, 2006 compared with net sales of approximately $11.3
million in the same period of the prior year. The decrease was primarily a
result of sales to our largest Sentinel customer being significantly lower
compared with the same period last year. During the six months ended March
31,
2006, we sold 673 Sentinel units compared with sales of 994 units during the
same period last year.
Gross
profit on
product sales for the six months ended March 31, 2006 decreased approximately
$2.4 million compared with the same period of the prior year. The decrease
in
the overall gross profit is primarily a result of fixed manufacturing costs
that
were no longer being shared with the ATM business.
Selling,
general and administrative expenses
for the
six months ended March 31, 2006 increased $189,160 from the same period last
year. This is primarily related to costs associated with increases in reserves,
bonus expenses and legal expenses.
Liquidity
and Capital Resources
General
Our
liquidity has been negatively impacted by our inability to collect outstanding
receivables and claims as a result of CCC’s bankruptcy, the inability to collect
outstanding receivables from certain other customers, under-absorbed fixed
costs
associated with the low utilization of our production facilities and reduced
sales of our products resulting from general difficulties in the ATM market.
In
order to meet our liquidity needs during the past four years, we have incurred
a
substantial amount of debt. On January 3, 2006, the Company completed the ATM
Business Sale.
Cash
Flows
Cash
used
in operations was $993,270 for the six months ended March 31, 2006 compared
with
cash used in operations of $1,418,429 for the same period last year. The
improvement during the six months of fiscal 2006 was primarily attributable
to
increased collections of trade accounts receivable compared to the same period
last year.
Working
Capital
As
of
March 31, 2006, we had working capital of approximately $0.9 million compared
with working capital of $3.7 million at September 30, 2005. The decrease in
working capital was primarily a result of $5.4 million of long-term indebtedness
to current liabilities for Laurus’ conversion of debt into common shares which
will be redeemed in the future.
Indebtedness
The
Laurus Financings
On
November 25, 2003, we completed the Financing a $6,850,000 financing transaction
with Laurus pursuant to the 2003 SPA. The Financing was comprised of a
three-year convertible note in the amount of $6,450,000 and a one-year
convertible note in the amount of $400,000, both of which bore interest at
a
rate of prime plus 2% and were convertible into our common stock at a conversion
price of $0.40 per share. In addition, Laurus received warrants to purchase
4,250,000 shares of our common stock at an exercise price of $0.40 per share.
The proceeds of the Financing were allocated to the notes and the related
warrants based on the relative fair value of the notes and the warrants, with
the value of the warrants resulting in a discount against the notes. In
addition, the conversion terms of the notes resulted in a beneficial conversion
feature, further discounting the carrying value of the notes. As a result,
we
were to record additional interest charges totaling $6,850,000 over the terms
of
the notes related to these discounts. Laurus was also granted registration
rights in connection with the shares of common stock issuable in connection
with
the Financing. Proceeds from the Financing in the amount of $6,000,000 were
used
to fully retire the $18,000,000 in Convertible Debentures issued to the two
holders thereof in September 2000, together with all accrued interest, penalties
and fees associated therewith. All of the warrants and convertible debentures
held by the holders were terminated and we recorded a gain from extinguishment
of debt of $18,823,000 (including accrued interest through the date of
extinguishment) in fiscal year 2004.
In
connection with the closing of the Financing, outstanding litigation was
dismissed, and the prior revolving credit facility was repaid through the
release of the restricted cash used as collateral for such
facility.
In
August
2004, Laurus notified us that an event of default had occurred and had continued
beyond any applicable grace period as a result of our non-payment of interest
and principal on the $6,450,000 convertible note as required under the terms
of
the Financing, as well as noncompliance with certain other covenants of the
Financing documents. In exchange for Laurus’s waiver of the event of default
until September 17, 2004, we agreed, among other things, to lower the conversion
price on the $6,450,000 convertible note and the exercise price of the warrants
from $0.40 per share to $0.30 per share.
On
November 26, 2004, we completed the Additional Financing, a $3,350,000 financing
transaction with Laurus pursuant to the securities purchase agreement. The
Additional Financing was comprised of (i) a three-year convertible note issued
to Laurus in the amount of $1,500,000, which bears interest at a rate of 14%
and
is convertible note into our common stock at a conversion price of $3.00 per
share (the “$1,500,000 Note”), (ii) a one-year convertible note in the amount of
$600,000 which bears interest at a rate of 10% and is convertible into our
common stock at a conversion price of $0.30 per share (the “$600,000 Note”),
(iii) a one-year convertible note of our subsidiary, Tidel Engineering, L.P.,
in
the amount of $1,250,000, which is a revolving working capital facility for
the
purpose of financing purchase orders of our subsidiary, Tidel Engineering,
L.P.,
(the “Purchase Order Note”), which bears interest at a rate of 14% and is
convertible into our common stock at a price of $3.00 per share and (iv) our
issuance to Laurus of the 2003 Fee Shares, which consisted of 1,251,000 shares
of common stock, or approximately 7% of the total shares outstanding, in
satisfaction of fees totaling $375,300 incurred in connection with the
convertible term notes issued in the Financing discussed above. As a result
of
the issuance of the 2003 Fee Shares, we recorded an additional charge in fiscal
2004 of $638,010. We also increased the principal balance of the original note
by $292,987, of which $226,312 bears interest at the default rate of 18%. This
amount represents interest accrued but not paid to Laurus as of August 1, 2004.
In addition, Laurus received warrants to purchase 500,000 shares of our common
stock at an exercise price of $0.30 per share. The proceeds of the Additional
Financing were allocated to the notes based on the relative fair value of the
notes and the warrants, with the value of the warrants resulting in a discount
against the notes. In addition, the conversion terms of the $600,000 Note
resulted in a beneficial conversion feature, further discounting the carrying
value of the notes. As a result, we will record additional interest charges
related to these discounts totaling $840,000 over the terms of the notes. Laurus
was also granted registration rights in connection with the 2003 Fee Shares
and
other shares issuable pursuant to the Additional Financing. The obligations
pursuant to the Additional Financing are secured by all of our assets and are
guaranteed by our subsidiaries. Net proceeds from the Additional Financing
in
the amount of $3,232,750 were primarily used for (i) general working capital
payments made directly to vendors, (ii) past due interest on Laurus’s $6,450,000
convertible note due pursuant to the Financing and (iii) the establishment
of an
escrow for future principal and interest payments due pursuant to the Additional
Financing.
On
January 13, 2006, the proceeds from the ATM Business Sale to NCR were applied
to
the repayment of approximately $2.6 million of indebtedness to Laurus and
Laurus’ remaining indebtedness of $5.4 million was converted into 18,000,000
shares of our common stock.
The
Supply, Facility and Share Warrant Agreements
In
September 2004, our subsidiary entered into separate supply and credit facility
agreements (the “Supply Agreement”, the “Facility Agreement” and the “Share
Warrant Agreement” respectively) with a foreign distributor related to our ATM
products. The Supply Agreement required the distributor, during the initial
term
of the agreement, to purchase ATMs only from us, effectively making us its
sole
supplier of ATMs. During each of the subsequent terms, the distributor is
required to purchase from us not less than 85% of all ATMs purchased by the
distributor. The initial term of the agreement was set as of the earlier of:
(i)
the expiration or termination of the debenture, (ii) a termination for default,
(iii) the mutual agreement of the parties, and (iv) August 15,
2009.
The
Facility Agreement provides a credit facility in an aggregate amount not to
exceed $2,280,000 to the distributor with respect to outstanding invoices
already issued to the distributor and with respect to invoices which may be
issued in the future related to the purchase of our ATM products. Repayment
of
the credit facility is set by schedule for the last day of each month beginning
November 2004 and continuing through August 2005. The distributor fell into
default due to non-payment during February 2005. In July of 2005, we collected
a
partial payment of approximately $350,000, and we received a commitment that
commenced August 5, 2005, from the distributor to pay approximately $35,000
per
week to us until the balance is paid in full. We received 16 weekly payments
totaling approximately $560,000, pursuant to that commitment. During the quarter
ended December 31, 2005, the distributor stopped making payments to us pursuant
to that commitment.
The
Share
Warrant Agreement provides for the issuance to our subsidiary of a warrant
to
purchase up to 5% of the issued and outstanding share capital of the
distributor. The warrant restricts the distributor from (i) creating or issuing
a new class of stock or allotting additional shares, (ii) consolidating or
altering the shares, (iii) issuing a dividend, (iv) issuing additional warrants
and (v) amending articles of incorporation. Upon our exercise of the warrant,
the distributors balance outstanding under the Facility Agreement would be
reduced by $300,000. We exercised this option during December of 2005, therefore
reducing the receivable by $300,000 resulting in a balance of $833,000 of which
$598,496 was reserved at December 31, 2005.
On
March
31, 2006, we received $950,295 from the distributor resulting in full payment
of
the outstanding receivable of $833,000 and interest of $117,000. We recognized
income of approximately $598,496 from the reversal of the bad debt reserve
and
$117,341 of interest income during the quarter ended March 31, 2006 from the
proceeds.
The
Development Agreement
In
August
2001, we entered into a Development Agreement (the “Development Agreement”) with
a national petroleum retailer and convenience store operator (the “Retailer”)
for the joint development of a new generation of “intelligent” TACCs, now known
as the Sentinel product. The Development Agreement provided for four phases
of
development with the first three phases to be funded by the Retailer at an
estimated cost of $800,000. In February 2002, we agreed to provide the Retailer
a rebate on each unit of the Sentinel product for the first 1,500 units sold,
provided the product successfully entered production, until the Retailer had
earned amounts equal to the development costs paid by the Retailer. The
development of the product was completed and production commenced. The aggregate
development costs for the Sentinel product paid for by the Retailer totaled
$651,500. As of September 30, 2005, we had credited back approximately $122,100
to the retailer resulting in an accrued liability of $529,400 for the benefit
of
the Retailer. As of March 31, 2006 the accrued liability was
$529,400.
Investment
in 3CI Complete Compliance Corporation
We
formerly owned 100% of 3CI Complete Compliance Corporation (“3CI”), a company
engaged in the transportation and incineration of medical waste, until we
divested our majority interest in February 1994. As of March 31, 2006, we
continued to own 698,889 shares of the common stock of 3CI (the “3CI
Shares”).
During
the quarter ended March 31, 2006, we received a notice of a class action
settlement in the matter of Larry F. Robb et al. v. Stericycle, Inc. et al.
for
the benefit of minority shareholders of 3CI that owned stock from September
30,
1998 through February 10, 2005. In February 2006, we submitted a proof of claim
as a class participant, together with the tender of the 3CI Shares. In March
2006, 3CI announced that the First Judicial District Court, Caddo Parish,
Louisiana issued a final judgment on March 14, 2006 approving the terms of
the
class action settlement and a plan of allocation of the settlement fund
established in connection thereto. Disbursements to class participants of the
settlement fund are expected to begin during the quarter ending June 30,
2006.
The
value
of our investment in 3CI was marked to the market values of $370,411 ($.53
per
share) and $279,556 ($0.40 per share) at March 31, 2006 and September 30, 2005,
respectively.
Investment
in Cashbox
Pursuant to
the
Share Warrant Agreement exercised in 2005, we own 2,022,000 shares of the common
stock of Cashbox plc. The investment is carried at cost in the amount of
$300,000. On or about March 27, 2006, shares of Cashbox plc began trading on
the
London Stock Exchange‘s Alternative Investment Market.
Off-Balance
Sheet Transactions
We
do not
have any significant off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on our consolidated
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Indebtedness
We
have
lease payment obligations under notes payable and operating leases for which
we
have material contractual cash obligations. Interest rates on our debt vary
from
prime rate plus 2% to 14%.
Long-term
debt including current maturities and debt discount was $0 as of March 31,
2006
and $8,167,988 as of September 30, 2005.
On
January 13, 2006, we utilized proceeds from the ATM Business Sale to repay
outstanding indebtedness to Laurus in the principal amount of $2,617,988 plus
accrued but unpaid interest in the amount of $113,333. In connection therewith,
we paid a prepayment penalty to Laurus in the amount of $59,180. On January
13,
2006, Laurus converted the remaining outstanding indebtedness of $5,400,000
into
18,000,000 shares of our common stock.
The
following table summarizes our contractual cash obligations as of March 31,
2006:
|
|
Payments
Due By Fiscal Year
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Operating
leases
|
|
$
|
18,511
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
222,132
|
|
|
203,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,511
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
222,132
|
|
$
|
203,621
|
|
We
leased
an office and warehouse space, transportation equipment and other equipment
under terms of operating leases, which expired in 2005. We entered into a new
lease to relocate the Cash Security business on December 1, 2005. The terms
of
the new lease for the Cash Security business requires an annualized base rent
of
$222,132 expiring in 2011. Rental expense under these leases for the quarters
ended March 31, 2006 and 2005 was $40,623 and $ 127,150, respectively. Our
corporate office located in Houston is held on a month to month
lease.
Risk
Factors
Please
see the risk factors contained in our Annual Report on Form 10-K for the year
ended September 30, 2005, which are hereby incorporated by
reference.
Forward-Looking
Statements
In
addition to historical information, Management’s Discussion and Analysis of
consolidated Financial Condition and consolidated Results of Operations include
certain forward-looking statements regarding events and financial trends that
may affect our future consolidated operating results and consolidated financial
position. Some important factors that could cause actual results to differ
materially from the anticipated results or other expectations expressed in
our
forward-looking statements include the following:
•
|
the
uncertainty of our future prospects in light of the ATM Business
Sale and
the Cash Security Business Sale;
|
•
|
our
need for additional financing in the future;
|
•
|
the
potential receipt of an audit opinion with a “going concern” explanatory
paragraph from our independent registered public accounting
firm;
|
•
|
our
history of operating losses and our inability to make assurances
that we
will generate operating income in the
future;
|
•
|
our
compliance with the Sarbanes-Oxley Act of 2002 and the significant
expansion of securities law regulation of corporate governance, accounting
practices, reporting and disclosure that affects publicly traded
companies, particularly related to Section 404 dealing with our system
of
internal controls.
|
Many
of
these factors are beyond our ability to control or predict. We caution investors
not to place undue reliance on forward-looking statements. We disclaim any
intent or obligation to update the forward-looking statements contained in
this
report, whether as a result of receiving new information, the occurrence of
future events or otherwise.
These
and
other uncertainties related to the business are described in detail under the
headings of “Risk Factors” and “Forward-Looking Statements” in Item 7A of our
2005 Annual Report.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
At
March
31, 2006, we were not exposed to changes in interest rates as a result of the
debt repayment in January 2006 of the Company’s convertible debt payable to
Laurus. If market interest rates had increased 1% in the first half of fiscal
2006, there would have been no material impact on our consolidated results
of
operations or consolidated financial position.
ITEM
4. CONTROLS AND PROCEDURES
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
Mark
K.
Levenick, our Interim Chief Executive Officer, and Robert D. Peltier, our
Interim Chief Financial Officer, have evaluated the effectiveness of the design
and operation of our “disclosure controls and procedures”, as such term is
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). James T. Rash was Chief
Executive and Chief Financial Officer during the fiscal years ended 2002, 2003
and 2004. Mr. Rash died on December 19, 2004. Mr. Levenick was appointed Interim
Chief Executive Officer on December 22, 2004. During fiscal years 2002, 2003
and
2004, Mr. Levenick served as Chief Operating Officer and Director of the
Company, and President and Chief Executive Officer of Tidel Engineering, L.P.,
the Company's principal operating subsidiary. In February 2005, Mr. Robert
D.
Peltier joined the Company as Interim Chief Financial Officer. Mr. Peltier
began
his assessment of disclosure controls and internal controls without having
ever
been in a position of active management or knowledge over transactions during
fiscal years 2002, 2003 or 2004.
In
conducting the evaluation of disclosure controls and procedures and the
accounting controls and procedures, it was concluded that the Company had a
material weakness in its internal controls and procedures related to the
Company’s communication from its principal operating subsidiary, Tidel
Engineering, L.P to the corporate office regarding the recognition of revenues
as of September 30, 2005. The Company revised its revenue recognition policy
in
the fiscal year ended September 30, 2005 to recognize revenue at the time
products are shipped to customers. Approximately $2.0 million of revenues were
recognized from the sales of the Sentinel product in the fourth quarter of
the
fiscal year ended September 30, 2005 and the majority of the units that related
to the revenue had not been shipped as of September 30, 2005. These sales were
not communicated to the corporate office, and accordingly our interim Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s
internal controls and procedures were not effective as of the end of the year
ended September 30, 2005. We properly adjusted our 2005 consolidated financial
statements included in the Form 10-K for the fiscal year ended September 30,
2005 to be in compliance with our revenue recognition policy.
In
order
to remedy this material weakness, the Company implemented a new internal control
procedure, which requires the principal operating subsidiary to send a monthly
billing schedule to the corporate office for review by the Chief Financial
Officer. The Chief Financial Officer of the Company is then required to review
the monthly billings with our Chief Executive Officer of the principal operating
subsidiary to ensure that the monthly revenues recorded are consistent with
our
revenue recognition policy.
A
material weakness is a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations on all control systems,
no
evaluation of controls can provide absolute assurance that all errors, control
issues and instances of fraud, if any, with a company have been detected. The
design of any system of controls is also based in part on certain assumptions
regarding the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future
conditions. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and
presentation.
(b)
|
Changes
in internal control over financial
reporting
|
There
were no changes in our internal control over financial reporting that occurred
in the quarter ending March 31, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
June
9, 2005, Corporate Safe Specialists, Inc. (“CSS”) filed a lawsuit against Tidel
Technologies, Inc. and Tidel Engineering, L.P. The lawsuit, Civil Action No.
02-C-3421, was filed in the United States District Court of the Northern
District of Illinois, Eastern Division. CSS allege that the Sentinel product
sold by Tidel Engineering, L.P. infringed on one or more patent claims found
in
CSS patent U.S. Patent No. 6,885,281 (the ‘281 patent). CSS sought injunctive
relief against future infringement, unspecified damages for past infringement
and attorney’s fees and costs. Tidel Technologies, Inc. was released from this
lawsuit, but Tidel Engineering, L.P. remains a defendant. Tidel Engineering,
L.P. is vigorously defending this litigation.
Subsequently
we filed a motion to dismiss the case CSS filed in Illinois, and Tidel
Engineering, L.P. filed a motion to transfer the Illinois case to the Eastern
District of Texas. On August 15, 2005, the Court ordered the transfer of this
case to the Northern District of Texas. We also filed a declaratory judgment
action pending in the Eastern District of Texas. In that action, we are asking
the Eastern District of Texas to find, among other things that we have not
infringed on CSS's `281 patent. Both companies have also requested that an
injunction be issued by the Eastern District of Texas against CSS for
intentional interference with the sale or bid process for our cash security
business.
We
have
answered the suit denying that the Company's Sentinel products in any way
infringe upon the independent claims of CSS’s patent. We also filed a
counterclaim against CSS wherein the Company seeks to recover damages resulting
from CSS’s violation of a confidential agreement signed by CSS and the Company
and from CSS's intentional interference in the sale of the Sentinel product
line
and related assets. Further, we have filed a Motion for Partial Summary Judgment
("Summary Judgment Motion") and a Motion for Sanctions Pursuant to Rule 11
("Rule 11 Motion") whereby the Company alleges that CSS and/or its counsel
failed to perform the required investigation of the facts before bringing suit.
We have requested damages from both CSS and its counsel for failure to properly
investigate the validity of the claims by CSS.
Recently,
just days before the date by which time the CSS was to file its responses to
the
Company's Summary Judgment Motion and Rule 11 Motion, CSS instead filed a Motion
for Entry of Judgment ("CSS's Motion") claiming that we have destroyed evidence
and/or have obstructed the discovery process. We are in the process of preparing
a response to CSS’s Motion by which response the Company vigorously disputes
CSS's Motion and, as with all claims asserted by CSS, the Company intends to
vigorously defend all of CSS's claims.
On
April
12, 2006, twenty-seven former employees of the Company filed suit in state
district court alleging that they did not receive vacation benefits and/or
severance benefits from the Company which they were owed upon transfer of their
employment to NCR Corporation. This case has been moved to the Federal court
in
Dallas County. The Company has not yet answered the suit. However, the Company
intends to answer in a manner consistent with its vigorous defense of the damage
claims of $88,000 as well as the former employees’ request for a preliminary
injunction.
Our
Principal Stockholder, Laurus, Has Interests In The Cash Security Business
Sale
Which Are Different From, Or In Addition To, Our Other
Stockholders.
Upon
the
closing of the Cash Security Business Sale, Laurus, which holds 19,251,000,
or
49.8%, of our outstanding shares of common stock, will receive from the proceeds
of the Cash Security Business Sale payment of the reorganization fee and the
redemption price for its shares of common stock under the stock redemption
agreement. In addition, we understand that Laurus may provide debt financing
to
Buyer in order to fund Buyer’s purchase obligations under the Cash Security
Asset Purchase Agreement. In such event, Laurus will also receive fees from
Buyer as a result of providing such debt financing.
Following
the Cash Security Business Sale, the Company will have substantially no
operations. It is the present intention of our Board to review the Company’s
consolidated financial position at that time and consider all options including,
without limitation, to distribute the remaining proceeds to stockholders or
to
acquire a different business. There can be no assurance that the option chosen
will be beneficial to stockholders. Until the closing of the Cash Security
Business Sale, the Company’s revenue and profitability will depend on its
ability to maintain and generate additional customers and to maintain and grow
the Cash Security business. A reduction in demand for the products and services
of the Cash Security business would have a material adverse effect on the
Company’s business and prospects.
The
Cash Security Asset Purchase Agreement May Expose the Company To Contingent
Liabilities.
The
failure to complete the Cash Security Business Sale may result in a decrease
in
the market value of the Company’s common stock and may create substantial doubt
as to the Company’s ability to grow and implement its current business
strategies.
The
Cash
Security Business Sale is subject to a number of contingencies. As a result,
we
cannot ensure that the Cash Security Business Sale will be completed. If the
Cash Security Business Sale is not completed for any reason, the market price
of
the Company’s common stock may decline.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Pursuant
to the terms of the exercise and conversion agreement we entered into with
Laurus dated as of January 12, 2006 and amended as of February 28, 2006, Laurus
converted $5,400,000 in aggregate principal amount of our convertible notes
into
18,000,000 shares of our common stock.
In
addition, we entered into a stock redemption agreement with Laurus, dated
January 12, 2006 and amended as of February 28, 2006. See Part I, Item 1, Note
1, Status of Tidel Technologies, Inc. - Sale of the Cash Security Business
and
Related Agreements with Laurus for more detail.
*31.1
|
|
Certification
of Interim Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
*31.2
|
|
Certification
of Interim Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
*32.1
|
|
Certification
of Interim Chief Executive Officer pursuant to 18 U.S.C. Section
1350
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
*32.2
|
|
Certification
of Interim Chief Financial Officer pursuant to 18 U.S.C. Section
1350
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
____________
*
-Filed
herewith.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
TIDEL
TECHNOLOGIES, INC.
|
|
(Company)
|
|
|
May
22, 2006
|
/s/
MARK K. LEVENICK
|
|
Mark
K. Levenick
|
|
Interim
Chief Executive Officer
|
|
|
May
22, 2006
|
/s/
ROBERT D. PELTIER
|
|
Robert
D. Peltier
|
|
Interim
Chief Financial Officer
|
32