SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________________
FORM
10-Q/A
(Mark
One)
|
R
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
quarterly period ended March 31, 2005
or
|
£
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
transition period from _______________ to __________________
Commission
file Number 000-17288
TIDEL
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
75-2193593
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
2900
Wilcrest Drive, Suite 205
|
|
|
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 £
NO T
The
number of shares of Common Stock outstanding as of the close of business
on July
6, 2005 was 20,677,210.
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
Description
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Page
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PART
I. FINANCIAL INFORMATION
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Item
1.
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3
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3
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4
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5
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6
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7
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Item
2.
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12
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Item
3.
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17
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Item
4.
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18
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PART
II. OTHER INFORMATION
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Item
1.
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19
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Item
6.
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20
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21
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Certification
Pursuant to Section 302
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23
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Certification
Pursuant to Section 906
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25
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PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31,
2005
|
|
September
30,
2004
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,438,550
|
|
$
|
258,120
|
|
Restricted
cash
|
|
|
59,080
|
|
|
—
|
|
Trade
accounts receivable, net of allowance of $32,614 and $6,230,
respectively
|
|
|
5,808,258
|
|
|
1,313,918
|
|
Notes
and other receivables, net of
|
|
|
21,831
|
|
|
1,016,167
|
|
Inventories
|
|
|
2,038,720
|
|
|
1,350,630
|
|
Prepaid
expenses and other
|
|
|
285,284
|
|
|
135,240
|
|
Assets
held for sale, net of accumulated depreciation of $4,127,513 and
$3,977,412
|
|
|
6,134,294
|
|
|
5,910,752
|
|
Total
current assets
|
|
|
15,786,017
|
|
|
9,984,827
|
|
Property,
plant and equipment, at cost
|
|
|
1,185,375
|
|
|
1,151,898
|
|
Accumulated
depreciation
|
|
|
(1,044,336
|
)
|
|
(1,027,417
|
)
|
Net
property, plant and equipment
|
|
|
141,039
|
|
|
124,481
|
|
Other
assets
|
|
|
904,142
|
|
|
668,936
|
|
Total
assets
|
|
$
|
16,831,198
|
|
$
|
10,778,244
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
maturities, net of debt discount of $0 and $725,259,
respectively
|
|
$
|
3,104,833
|
|
$
|
183,692
|
|
Accounts
payable
|
|
|
1,732,438
|
|
|
1,711,630
|
|
Accrued
interest payable
|
|
|
2,061,301
|
|
|
793,577
|
|
Reserve
for settlement of class action litigation
|
|
|
—
|
|
|
1,564,490
|
|
Other
accrued expenses
|
|
|
3,690,998
|
|
|
1,384,675
|
|
Liabilities
held for sale
|
|
|
1,885,262
|
|
|
2,523,022
|
|
Total
current liabilities
|
|
|
12,474,832
|
|
|
8,161,086
|
|
Long-term
debt, net of current maturities and debt discount of $5,599,141
and
$5,767,988, respectively
|
|
|
947,555
|
|
|
28,709
|
|
Total
liabilities
|
|
|
13,422,387
|
|
|
8,189,795
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 20,677,210 shares and 17,426,210 shares,
respectively
|
|
|
206,772
|
|
|
174,262
|
|
Additional
paid-in capital
|
|
|
30,993,862
|
|
|
28,100,674
|
|
Accumulated
deficit
|
|
|
(27,907,084
|
)
|
|
(25,619,888
|
)
|
Receivable
from officer
|
|
|
(31,675
|
)
|
|
(31,675
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
146,936
|
|
|
(34,924
|
)
|
Total
shareholders’ equity
|
|
|
3,408,811
|
|
|
2,588,449
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
16,831,198
|
|
$
|
10,778,244
|
|
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,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,745,769
|
|
$
|
1,643,157
|
|
$
|
11,258,311
|
|
$
|
4,679,084
|
|
Cost
of sales
|
|
|
2,523,256
|
|
|
1,139,304
|
|
|
5,991,029
|
|
|
3,031,101
|
|
Gross
profit
|
|
|
2,222,513
|
|
|
503,853
|
|
|
5,267,282
|
|
|
1,647,983
|
|
Selling,
general and administrative
|
|
|
1,318,088
|
|
|
1,201,196
|
|
|
2,567,689
|
|
|
2,406,817
|
|
Depreciation
and amortization
|
|
|
8,673
|
|
|
10,122
|
|
|
16,919
|
|
|
21,026
|
|
Operating
income (loss)
|
|
|
895,752
|
|
|
(707,465
|
)
|
|
2,682,674
|
|
|
(779,860
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,823,000
|
|
Gain
on sale of securities
|
|
|
—
|
|
|
1,798,492
|
|
|
—
|
|
|
1,798,492
|
|
Interest
expense, net
|
|
|
(1,165,173
|
)
|
|
(1,034,809
|
)
|
|
(4,240,173
|
)
|
|
(1,840,324
|
)
|
Total
other income (expense)
|
|
|
(1,165,173
|
)
|
|
763,683
|
|
|
(4,240,173
|
)
|
|
18,781,168
|
|
Income
(loss) before discontinued operations
|
|
|
(269,421
|
)
|
|
56,218
|
|
|
(1,557,499
|
)
|
|
18,001,308
|
|
Discontinued
operations
|
|
|
(862,211
|
)
|
|
(217,431
|
)
|
|
(729,697
|
)
|
|
(192,016
|
)
|
Net
income(loss)
|
|
$
|
(1,131,632
|
)
|
$
|
(161,213
|
)
|
$
|
(2,287,196
|
)
|
$
|
17,809,292
|
|
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before discontinued operations
|
|
$
|
(0.01
|
)
|
$
|
—
|
|
$
|
(0.08
|
)
|
$
|
1.03
|
|
Income
(loss) from discontinued operations
|
|
|
(0.04
|
)
|
|
(0.01
|
)
|
|
(0.03
|
)
|
|
(0.01
|
)
|
Net
income (loss)
|
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
$
|
(0.11
|
)
|
$
|
1.02
|
|
Weighted
average common shares outstanding
|
|
|
20,677,210
|
|
|
17,426,210
|
|
|
19,906,270
|
|
|
17,426,210
|
|
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before discontinued operations
|
|
$
|
(0.01
|
)
|
$
|
—
|
|
$
|
(0.08
|
)
|
$
|
0.42
|
|
Income
(loss) from discontinued operations
|
|
|
(0.04
|
)
|
|
(0.01
|
)
|
|
(0.03
|
)
|
|
—
|
|
Net
income (loss)
|
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
$
|
(0.11
|
)
|
$
|
0.42
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
20,677,210
|
|
|
17,426,210
|
|
|
19,906,270
|
|
|
42,955,637
|
|
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,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,131,632
|
)
|
$
|
(161,213
|
)
|
$
|
(2,287,196
|
)
|
$
|
17,809,292
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on investment in 3CI
|
|
|
(377,400
|
)
|
|
27,939
|
|
|
181,860
|
|
|
27,939
|
|
Comprehensive
income (loss)
|
|
$
|
(1,509,032
|
)
|
$
|
(133,274
|
)
|
$
|
(2,105,336
|
)
|
$
|
17,837,231
|
|
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,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Cash
flows from continuing operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(2,287,196
|
)
|
$
|
17,809,292
|
|
Results
of discontinued operations
|
|
|
729,697
|
|
|
192,016
|
|
Income
(loss) from continuing operations
|
|
|
(1,557,499
|
)
|
|
18,001,308
|
|
Adjustments
to reconcile income (loss) from continuing operations to net cash
used in
continuing operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
16,919
|
|
|
21,026
|
|
Amortization
of debt discount and financing costs
|
|
|
1,844,525
|
|
|
1,292,456
|
|
Gain
on extinguishment of convertible debentures
|
|
|
—
|
|
|
(18,823,000
|
)
|
Gain
on sale of securities
|
|
|
—
|
|
|
(1,798,492
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
accounts receivable, net
|
|
|
(4,494,340
|
)
|
|
(374,412
|
)
|
Notes
and other receivables
|
|
|
994,336
|
|
|
(5,822
|
)
|
Inventories
|
|
|
(688,090
|
)
|
|
(290,735
|
)
|
Prepaid
expenses and other assets
|
|
|
(150,044
|
)
|
|
(77,741
|
)
|
Accounts
payable and accrued expenses
|
|
|
4,232,865
|
|
|
28,356
|
|
Net
cash used in continuing operating activities
|
|
|
198,672
|
|
|
(2,027,056
|
)
|
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment, net
|
|
|
(33,477
|
)
|
|
6,849
|
|
Gain
from sale of securities
|
|
|
—
|
|
|
2,331,924
|
|
Net
cash provided by (used in) investing activities
|
|
|
(33,477
|
)
|
|
2,338,773
|
|
Cash
flows from continuing financing activities:
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
2,100,000
|
|
|
7,370,000
|
|
Repayments
of notes payable
|
|
|
(153,491
|
)
|
|
(3,220,000
|
)
|
Borrowing
on revolver
|
|
|
2,250,000
|
|
|
—
|
|
Repayments
of revolver
|
|
|
(1,250,628
|
)
|
|
—
|
|
Repayments
of convertible debentures
|
|
|
—
|
|
|
(6,000,000
|
)
|
(Increase)
decrease in restricted cash
|
|
|
(59,080
|
)
|
|
2,200,000
|
|
Increase
in deferred financing costs
|
|
|
(280,567
|
)
|
|
(595,765
|
)
|
Net
cash provided (used) in continuing financing activities
|
|
|
2,606,234
|
|
|
(245,765
|
)
|
Net
change in cash and cash equivalents from continuing
operations
|
|
|
2,771,429
|
|
|
65,952
|
|
Net
change in cash and cash equivalents from discontinued
operations
|
|
|
(1,590,999
|
)
|
|
(195,806
|
)
|
Net
change in cash and cash equivalents
|
|
|
1,180,430
|
|
|
(129,854
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
258,120
|
|
|
915,097
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,438,550
|
|
$
|
785,243
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
258,920
|
|
$
|
173,676
|
|
Cash
paid for taxes
|
|
$
|
—
|
|
$
|
—
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
Discount
on issuance of debt with beneficial conversion premium and detachable
warrants
|
|
$
|
723,198
|
|
$
|
6,899,181
|
|
Warrants
issued for deferred financing costs
|
|
$
|
—
|
|
$
|
229,180
|
|
Issuance
of shares to lender in payment of fees
|
|
$
|
638,010
|
|
$
|
—
|
|
Issuance
of shares and warrants in connection with settlement of class-action
litigation
|
|
$
|
1,564,490
|
|
$
|
—
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
TIDEL
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO 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 automated teller machines (“ATMs”) and
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 ATM and
Cash
Security products are generally made on a wholesale basis to more than 200
distributors and manufacturers’ representatives. TACC and Sentinel products are
often sold directly to end-users as well as distributors.
The
accompanying condensed consolidated interim financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America, assuming we continues as a going concern, which
contemplates the realization of the assets and the satisfaction of liabilities
in the normal course of business, and are unaudited. In the opinion of
management, the unaudited consolidated interim financial statements include
all
adjustments, consisting only of normal recurring adjustments, necessary for
a
fair presentation of the financial position as of March 31, 2005, the statements
of operations and comprehensive income (loss) for the three and six months
ended
March 31, 2005 and 2004, and the statements of cash flows for the six months
ended March 31, 2005 and 2004. Although management believes the unaudited
interim disclosures in these consolidated interim financial statements are
adequate to make the information presented not misleading, certain information
and footnote disclosures normally included in annual audited 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 results of operations for the
three and six months ended March 31, 2005 are not necessarily indicative
of the
results to be expected for the entire year ending September 30, 2005. 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 2004 Comprehensive Annual Report on Form
10-K.
Status
of Tidel Technologies, Inc.
Our
ability to continue as a going concern is dependent on generating sufficient
cash flows from operations for meeting our liquidity needs, servicing our
debt
requirements and meeting financial covenants. During the past four years
and for
the first six months of 2005, we have experienced operating and net losses.
Also, our inability to collect outstanding receivables continues to impact
our
liquidity. On November 25, 2003, we completed a $6,850,000 financing transaction
(the “Financing”) with Laurus Master Fund, Ltd. (“Laurus”), and we also
completed a $3,350,000 financing transaction (the “Additional Financing”) on
November 26, 2004 with Laurus in order to meet our current liquidity needs.
We
have substantial debt obligations of approximately $9,651,529 as of March
31,
2005.
Management’s
Current Plans with Regard to Our Liquidity Include the
Following:
Proposed
Sale of ATM Business
On
February 19, 2005, the Company and its wholly-owned subsidiary Tidel
Engineering, L.P. (together with the Company, the “Sellers”) entered into an
asset purchase agreement with NCR Texas LLC, a single member Delaware limited
liability company (“NCR”) that is a wholly-owned subsidiary of NCR Corporation,
a Maryland corporation, for the sale of the registrant’s ATM business (the
“Asset Purchase Agreement”). The purchase price for our ATM business is
$10,175,000 plus the assumption of certain liabilities related to the ATM
business and subject to certain adjustments as provided in the Asset Purchase
Agreement (the “Purchase Price”). The Purchase Price is also subject to
adjustment based upon the actual value of the assets delivered, to the extent
the value of the assets delivered is 5% greater than or less than a
predetermined value as stated in the Asset Purchase Agreement. The Asset
Purchase Agreement contains customary representations, warranties, covenants
and
indemnities. The proceeds of the sale of the Sellers’ ATM business will be
applied towards the repayment of our outstanding loans from Laurus Master
Fund,
Ltd.
Engagement
of Investment Banker to Evaluate Strategic Alternatives for the
Sale of
the Cash Security Business
We
engaged Stifel, Nicolaus & Company, Inc. (“Stifel”) in October 2004, to
assist the Board of Directors in connection with the proposed sale of our
Cash
Security business, deliver a fairness opinion, and render such additional
assistance as we may reasonably request in connection with the proposed sale
of
our Cash Security business. We are currently working with Stifel in connection
with such a proposed sale.
Major
Customers and Credit Risk
We
generally retain a security interest in the underlying equipment that is
sold to
customers until it receives 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.
The
concentration of customers in our market may impact our overall credit exposure,
either positively or negatively, since these customers may be similarly affected
by changes in economic or other conditions. Sales of Sentinel cash security
systems are currently to a small number of customers as well. The loss of
a
single customer could have an adverse effect on our net income. During the
second quarter of fiscal year 2005, we shipped 421 Sentinel units to a national
convenience store operator. This generated sales revenue of $3,203,639, or
67.5%
of total revenue for the quarter which had a significant positive impact
on our
working capital.
The
majority of our sales during the second quarter 2005 were to customers within
the United States. Foreign sales accounted for 10% and 25% of the Company’s
total sales during the three months ended March 31, 2005 and 2004, respectively.
Those sales represent 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 is
required to purchase from Tidel 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. During the first six months
of
2005, we increased the reserve to approximately $830,000 due to the delinquency
of payment for the majority of the invoices issued in the fiscal year 2005.
In
July of 2005, we collected a partial payment of approximately $350,000 related
to the 2004 billings. This collection reduced the outstanding balance on
this
facility to approximately $1,700,000, of which we have reserved a total of
$830,000 as of March 31, 2005. We have also received a commitment from the
distributor to submit at least approximately $35,000 per week commencing
August
5, 2005 until the balance is paid in full.
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 its articles of incorporation. Upon our exercise of the
warrant, the distributors balance outstanding under the Facility Agreement
would
be reduced by $300,000.
Stock
Based Compensation
Statement
of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), requires companies to recognize stock-based
expense based on the estimated fair value of employee stock options.
Alternatively, SFAS No. 123 allows companies to retain the current approach
set
forth in APB Opinion 25, “Accounting for Stock Issued to Employees,” provided
that expanded footnote disclosure is presented. We apply APB Opinion No.
25 in
accounting for our Plans and, accordingly, no compensation cost has been
recognized for our stock options in the consolidated financial statements.
Had
we determined compensation cost based on the fair value at the grant date
for
our stock options and warrants under SFAS No. 123, our net income (loss)
would
have been reduced to the pro forma amounts indicated as
follows:
|
|
Three
Months
Ended
March 31,
|
|
Six
Months
Ended
March 31,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) as reported
|
|
$
|
(1,131,632
|
)
|
$
|
(161,213
|
)
|
$
|
(2,287,196
|
)
|
$
|
17,809,292
|
|
Deduct:
Total stock-based employee compensation expense determined under
FAS 123,
net of taxes
|
|
|
(6,431
|
)
|
|
(348
|
)
|
|
(6,570
|
)
|
|
(696
|
)
|
Net
income (loss), pro forma
|
|
$
|
(1,138,063
|
)
|
$
|
(161,561
|
)
|
$
|
(2,293,766
|
)
|
$
|
17,808,596
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.05
|
)
|
|
(0.01
|
)
|
|
(0.11
|
)
|
|
1.02
|
|
Pro
forma
|
|
|
(0.05
|
)
|
|
(0.01
|
)
|
|
(0.11
|
)
|
|
1.02
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
|
(0.05
|
)
|
|
(0.01
|
)
|
|
(0.11
|
)
|
|
0.42
|
|
Pro
forma
|
|
|
(0.05
|
)
|
|
(0.01
|
)
|
|
(0.11
|
)
|
|
0.42
|
|
During
the quarter ended March 31, 2005, we granted options to purchase 363,810
shares
of common stock to certain employees. The options vest over four years and
have
an exercise price of $.25 per share, which was the fair market value on the
date
of grant. We used the Black-Scholes method, assuming no dividends, as well
as
the weighted average assumptions included in the following table:
|
|
Three
and Six Months
Ended
March
31, 2005
|
|
Expected
option life (in years)
|
|
|
4.0
|
|
Expected
volatility
|
|
|
80.0
|
%
|
Risk-free
interest rate
|
|
|
3.42
|
%
|
Discontinued
Operations
We
committed to a plan to sell the ATM business during the first quarter ended
December 31, 2004. On February 19, 2005, we entered into an Asset Purchase
Agreement with NCR Texas, a wholly-owned subsidiary of NCR Corporation, a
Maryland corporation, for the sale of our ATM business. We have classified
the
ATM business as a discontinued operation since that time, including for the
comparative period in the prior year. This division manufactures and sells
automated teller machines primarily in the United States. The results of
this
operation are segregated on the accompanying statements of operations as
income
or loss from discontinued operations and reflected as Assets and Liabilities
Held for Sale on the accompanying balance sheets.
Tidel
recorded a net loss of $(1,131,632) and $(161,213) for the second quarters
ended
March 31, 2005 and 2004, respectively. The ATM business recorded a loss of
$(862,211) and $(217,431) for the quarters ended March 31, 2005 and March
31,
2004, respectively.
For
the
six months ended March 31, 2005 and 2004, the company recorded a net loss
of
$(2,287,196) and net income of $17,809,292, respectively. The ATM business
recorded a loss of $(729,697) and $(192,016) for the six months ended March
31,
2005 and 2004, respectively.
The
sale
of this division is expected to be consummated sometime after the fourth
quarter
of 2005.
An
analysis of the discontinued operations is as follows:
Assets
held for sale:
|
|
|
|
Trade
accounts receivable, Net of Allowance
|
|
$
|
699,555
|
|
Inventories
|
|
|
5,089,521
|
|
Prepaid
expenses and other assets
|
|
|
165,037
|
|
Property,
plant and equipment, at cost net of depreciation
|
|
|
152,884
|
|
Other
assets
|
|
|
27,297
|
|
Assets
held for sale
|
|
$
|
6,134,294
|
|
Liabilities
held for sale:
|
|
|
|
|
Accounts
payable
|
|
$
|
1,226,207
|
|
Other
accrued expenses
|
|
|
659,055
|
|
Liabilities
held for sale
|
|
$
|
1,885,262
|
|
Revenues
for the three and six month periods ended March 31, 2005 and 2004 were
$3,424,078 and $8,278,333 (for 2005); and $3,660,425 and $7,099,321 (for
2004),
respectively.
On
November 26, 2004, we completed a $3,350,000 financing transaction (the
“Additional Financing”) with Laurus pursuant to that certain Securities Purchase
Agreement by and between the Company and Laurus, dated as of November 26,
2004
(the “2004 SPA”). 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 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 1,251,000 shares
of
common stock, or approximately 7% of the total shares outstanding, (the “2003
Fee Shares”) 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 sale of the 2003 Fee Shares, we recorded an additional charge
in
fiscal 2004 of $638,010 based on the market value of the stock on November
26,
2004. 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.
THE
NOTES
AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL FINANCING ARE
CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES OF OUR COMMON STOCK AND,
WHEN
COUPLED WITH THE 2003 FEE SHARES, REPRESENT APPROXIMATELY 60% OF OUR OUTSTANDING
COMMON STOCK SUBJECT TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS.
IF
THESE NOTES AND WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY LAURUS,
THEN THE OTHER EXISTING SHAREHOLDERS’ OWNERSHIP IN THE COMPANY WOULD BE
SIGNIFICANTLY DILUTED TO APPROXIMATELY 40% OF THEIR PRESENT OWNERSHIP
POSITION.
In
connection with the Financing, Laurus required that we covenant to become
current in our filings with the Securities and Exchange Commission according
to
a predetermined schedule. Effective November 26, 2004, the Additional Financing
documents require, among other things, that we provide evidence of filing
to
Laurus of our fiscal 2003, fiscal 2004 and year-to-date interim 2005 filings
with the Securities and Exchange Commission on or before July 31, 2005. The
10-K
for the fiscal year ended September 30, 2002 (the “2002 10-K”) was filed on
February 1, 2005, in accordance with Additional Financing documents
requirements. Fourteen (14) days following such time as we become current
in our
filings with the Securities and Exchange Commission, we must deliver to Laurus
evidence of the listing of our common stock on the Nasdaq Over The Counter
Bulletin Board (the “Listing Requirement”).
On
February 4, 2005, we received a letter from the Securities and Exchange
Commission stating that the Division of Corporate Finance of the SEC would
not
object to the Company filing a comprehensive annual report on Form 10-K which
covers all of the periods during which it has been a delinquent filer, together
with its filing all Forms 10-Q which are due for quarters subsequent to the
latest fiscal year included in that comprehensive annual report. However,
the
SEC Letter also stated that, upon filing such a comprehensive Form 10-K,
the
Company would not be considered “current” for purposes of Regulation S, Rule 144
or filing on Forms S-8, and that the Company would not be eligible to use
Forms
S-2 or S-3 until a sufficient history of making timely filings is established.
Laurus consented to the filing of such a comprehensive annual report in
satisfaction of the Filing Requirements mandated on or before July 31, 2005.
Laurus also consented to a modification of the requirement that a Registration
Statement be filed within 20 days of satisfaction of the Filing Requirements
to
instead require that the Registration Statement be filed by September 20,
2006.
Pursuant
to the terms of the Financing and the Additional Financing, an Event of Default
occurs if, among other things, we do not complete our filings with the
Securities and Exchange Commission on the timetable set forth in the Additional
Financing documents, or we do not comply with the Listing Requirement or
any
other material covenant or other term or condition of the 2003 SPA, the 2004
SPA, the notes we issued to Laurus or any of the other documents related
to the
Financing or the Additional Financing. If there is an Event of Default,
including any of the items specified above or in the transaction documents,
Laurus may declare all unpaid sums of principal, interest and other fees
due and
payable within five (5) days after we receive a written notice from Laurus.
If
we cure the Event of Default within that five (5) day period, the Event of
Default will no longer be considered to be occurring.
If
we do
not cure such Event of Default, Laurus shall have, among other things, the
right
to have two (2) of its designees appointed to our Board, and the interest
rate
of the notes shall be increased to the greater of 18% or the rate in effect
at
that time.
On
November 26, 2004, in connection with the Additional Financing, we entered
into
an agreement with Laurus (the “Asset Sales Agreement”) whereby we agreed to pay
a fee in the amount of at least $2,000,000 (the “Reorganization Fee”) to Laurus
upon the occurrence of certain events as specified below and therein, which
Reorganization Fee is secured by all of our assets, and is guaranteed by
our
subsidiaries. The Asset Sales Agreement provides that (i) once our obligations
to Laurus have been paid in full (other than the Reorganization Fee), we
shall
be able to seek additional financing in the form of a non-convertible bank
loan
in an aggregate principal amount not to exceed $4,000,000, subject to Laurus’s
right of first refusal; (ii) the net proceeds of an asset sale to the party
named therein shall be applied to our obligations to Laurus under the Financing
and the Additional Financing, as described above (collectively, the
“Obligations”), but not to the Reorganization Fee; and (iii) the proceeds of any
of our subsequent sales of equity interests or assets or of our subsidiaries
consummated on or before the fifth anniversary of the Assets Sales Agreement
(each, a “Company Sale”) shall be applied first to any remaining obligations,
then paid to Laurus pursuant to an increasing percentage of at least 55.5%
set
forth therein, which amount shall be applied to the Reorganization Fee. Under
this formula, the existing shareholders could receive less than 45% of the
proceeds of any sale of our assets or equity interests, after payment of
the
Additional Financing and Reorganization Fee as defined. The Reorganization
Fee
shall be $2,000,000 at a minimum, but could equal a higher amount based upon
a
percentage of the proceeds of any company sale, as such term is defined in
the
Asset Sales Agreement. In the event that Laurus has not received the full
amount
of the Reorganization Fee on or before the fifth anniversary of the date
of the
Asset Sales Agreement, then we shall pay any remaining balance due on the
Reorganization Fee to Laurus. We have recorded a $2,000,000 charge in the
first
quarter of fiscal 2005 to interest expense.
Earnings
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 per
share (basic EPS) and diluted earnings per share (diluted EPS). Basic EPS
excludes dilution and is determined by dividing income available to common
stockholders 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. As of March 31, 2005, we had outstanding options covering an
aggregate of 1,100,500 shares of common stock, of which 638,500 shares were
exercisable. We also had outstanding warrants covering an aggregate of 6,079,473
shares of common stock. Excluded from the computation of diluted EPS for
the
three and six months ended March 31, 2005 are options to purchase 1,100,500
shares to purchase common stock at a weighted average of $1.21 per share
and
6,079,473 warrants, with a remaining exercise price ranging from$0.30 to
$0.40,
as they would be anti-dilutive. Excluded from the computation of diluted
EPS for
the three and six months ended March 31, 2004 are options to purchase 786,000
shares to purchase common stock at a weighted average of $1.66 per share
and
6,079,473 warrants, with a remaining exercise price ranging from$0.30 to
$0.40,
as they would be anti-dilutive.
Existing
shareholders’ ownership in the company will be significantly diluted due to
outstanding warrants. The notes and warrants issued in the Financing and
the
Additional Financing are convertible into an aggregate of 28,226,625 shares
of
our common stock and, when coupled with the 2003 Fee Shares, represent
approximately 60% of our outstanding common stock, subject to adjustment
as
provided in the transaction documents. If these notes and warrants were
completely converted to common stock by Laurus, then the other existing
shareholders’ ownership in the Company would be significantly diluted to
approximately 40% of their present ownership position
During
the six months ended March 31, 2005, we issued issued 2,000,000 shares of
our
common stock related to the settlement of the class action litigation. In
addition, we issued 1,251,000 shares of our common stock to Laurus (see note
2)
related to settlement of late filing penalties. As of September 30, 2004,
we
accrued $1,564,490 for the settlement of the class action litigation and
$638,010 for the settlement of the late filing penalties.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
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 Financial Condition and Results of Operations”
and “Cautionary Statements” included in our 2004 Annual Report
on Form
10-K for the Fiscal Years Ended September 30, 2003 and September 30,
2004 (the
“‘03/’04
Annual Report”). 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
During
the past three years, we have experienced operating losses. Our liquidity
has
been negatively impacted by our inability to collect outstanding receivables
and
claims as a result of the bankruptcy of our former largest customer, JRA
222,
Inc. d/b/a Credit Card Center (“CCC”) the inability to collect outstanding
receivables from certain customers, under-absorbed fixed costs associated
with
the 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 three years, we have incurred a substantial amount of debt.
This
decline in financial condition is significant, and if the operating conditions
do not improve there can be no assurance we will continue
operations.
Critical
Accounting Policies
This
discussion and analysis of our financial condition and results of operations
is
based upon our consolidated financial statements. The preparation of these
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 ‘03/’04
Annual Report.
Results
of Operations:
Quarter
Ended March 31, 2005 Compared to the Quarter Ended March 31,
2004
We
recorded revenues from continuing operations of $4,745,769 and $1,643,157.
This
represents an increase of 3,102,612 or 189%. The increase is primarily a
result
of the increased sales of TACC units and the sales of 616 Sentinel units
during
the quarter ended March 31, 2005 compared with only 113 units sold during
the
same period last year.
We
had a
net loss of $(1,131,632) for the three months ended March 31, 2005, compared
to
a net loss of $(161,213) in the same quarter of the prior year.
Operating
Segments
We
conduct business within one operating segment, principally in the United
States.
Product
Revenues
A
breakdown of net sales by individual product line is provided in the following
table, excluding discontinued operations:
|
|
(Dollars
in 000’s)
|
|
|
|
For
the Three Months
Ended
March 31,
|
|
For
the Six Months
Ended
March 31,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
CASH
SECURITY BUSINESS
|
|
$
|
4,294
|
|
$
|
1,436
|
|
$
|
10,344
|
|
$
|
4,233
|
|
OTHER
|
|
|
451
|
|
|
207
|
|
|
914
|
|
|
446
|
|
|
|
$
|
4,745
|
|
$
|
1,643
|
|
$
|
11,258
|
|
$
|
4,679
|
|
Gross
Profit, Operating Expenses and Non-Operating Items
A
comparison of certain operating information is provided in the following
table:
|
|
(Dollars
in 000’s)
|
|
|
|
Three
Months Ended
March
31,
|
|
Six
Months Ended
March
31,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Gross
profit
|
|
$
|
2,222
|
|
$
|
504
|
|
$
|
5,267
|
|
$
|
1,648
|
|
Selling,
general and administrative
|
|
|
1,318
|
|
|
1,201
|
|
|
2,567
|
|
|
2,407
|
|
Depreciation
and amortization
|
|
|
9
|
|
|
10
|
|
|
17
|
|
|
21
|
|
Operating
income/(loss)
|
|
$
|
895
|
|
$
|
(707
|
)
|
$
|
2,683
|
|
$
|
(780
|
)
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,823
|
|
Gain
on sale of securities
|
|
|
—
|
|
|
1,798
|
|
|
—
|
|
|
1,798
|
|
Interest
expense, net
|
|
|
(1,165
|
)
|
|
(1034
|
)
|
|
(4,240
|
)
|
|
(1,840
|
)
|
Income/(Loss)
from continuing operations
|
|
$
|
(270
|
)
|
$
|
57
|
|
$
|
(1,557
|
)
|
$
|
18,001
|
|
Income/Loss
from discontinued operations
|
|
|
(862
|
)
|
|
(218
|
)
|
|
(730
|
)
|
|
(192
|
)
|
Net
Income/(Loss)
|
|
$
|
(1,132
|
)
|
$
|
(161
|
)
|
$
|
(2,287
|
)
|
$
|
17,809
|
|
Gross
profit on
product sales for the quarter ended March 31, 2005 increased $1,718,660 from
the
same quarter a year ago. Gross profit as a percentage of sales was 47% in
the
quarter ended March 31, 2005, compared to only 31 % in the same quarter of
the
previous year. The improvement is directly related to the increase in the
volume
of Sentinel units produced during the quarter ended March 31, 2005.
Selling,
general and administrative expenses
for the quarter ended March 31, 2005 increased 9.7 % from the same quarter
of
the previous year. This is primarily related to costs associated with becoming
current with our SEC filings and cost associated with our marketing
efforts.
Depreciation
and amortization for
the
quarter ended March 31, 2005 and 2004 was $8,673 and $10,122,
respectively.
Interest
expense,
was
$1,165,173 for the quarter ended March 31, 2005, compared to $1,034,809 for
the
same quarter of the previous year. This is as a result of increased level
of
debt related to our revolving line of credit.
Income
tax expense (benefit).
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. The Company has 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.
Discontinued
operations (Net of Tax).
During
the first quarter of 2005, we committed to a plan to sell our ATM business.
For
more information about the Additional Financing, see Note 1 to the “Notes to
Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly
Report.
On
February 19, 2005, the Company and its wholly-owned subsidiary entered into
the
Asset Purchase Agreement with NCR Texas for the sale of the Company’s ATM
business. For additional information, see Note 1,
“Organization
and Summary of Significant Accounting Policies” in the “Notes to Consolidated
Financial Statements” included in Part I, Item 1 of this Quarterly Report. The
ATM division has been classified as a discontinued operation since the execution
of the Asset Purchase Agreement. This division manufactures and sells automated
teller machines primarily in the United States. The results of this operation
are segregated on the accompanying financial statements as income or loss
from
discontinued operations.
We
recorded a net loss from continuing operations of $(1,131,632) and $(161,213)
for the quarters ended March 31, 2005 and 2004, respectively. The ATM division
recorded a loss of $(862,211) and $(217,431) for the three months ended March
31, 2005 and 2004, respectively.
Six
Months Ended June 30, 2004 Compared to the Six Months Ended June 30,
2003
The
Company’s revenues were $11,258,311 for the six months ended March 31, 2005,
representing an increase of $6,579,227, or 141%, from revenues of $4,679,084
in
the same period of the prior year. The improvement is directly related to
the
increase in the volume of Cash Security products produced during the six
months
ended March 31, 2005. The improvement is directly related to the increase
in the
volume of TACC units and Sentinel units during the six months ended March
31,
2005 compared with the six months ended March 31, 2004. We sold 994 Sentinel
units during the fist six months of 2005 compared with only 114 units sold
during the same period last year
Gross
profit on
product sales for the six months ended March 31, 2005 increased $3,619,299
compared to the same period of the prior year. Gross profit as a percentage
of
sales was 46.8% for the six months ended March 31, 2005, compared to 35.2%
for
the six months ended March 31, 2004. The increase in the overall gross profit
is
primarily a result of increased sales of the Sentinel units during the six
months ended March 31, 2005 compared with the six months ended March 31,
2004.
Selling,
general and administrative expenses
for the six months ended March 31, 2005 increased 6.7% from the same period
of
the previous year. This is primarily related to costs associated with becoming
current with our SEC filings.
Depreciation
and amortization for
the
six months ended March 31, 2005 and 2004 were 16,919 and 21,026,
respectively.
Interest
expense net
of
interest income, was $4,240,173 for the six months ended March 31, 2005 compared
with $1,840,324 for the same period of the previous year. This is as a result
of
increased level of debt related to the Laurus financing.
Income
tax expense (benefit).
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.
Discontinued
Operations
We
committed to a plan to sell the ATM business during the first quarter ended
December 31, 2004. On February 19, 2005, we entered into an Asset Purchase
Agreement with NCR Texas, a wholly-owned subsidiary of NCR Corporation, a
Maryland corporation, for the sale of our ATM business. The ATM division
has
been classified as a discontinued operation since that time, including the
comparative period in prior year. This division manufactures and sells automated
teller machines primarily in the United States. The results of this operation
are segregated on the accompanying statements of operations as income or
loss
from discontinued operations and reflected as Assets and Liabilities Held
for
Sale on the accompanying balance sheets.
For
the
six months ended March 31, 2005 and 2004, the company recorded a net loss
of
$(2,287,196) and net income of $17,809,292, respectively. The ATM business
recorded a loss of $(729,697) and $(192,016) for the six months ended March
31,
2005 and 2004, respectively.
The
sale
of this division is expected to be consummated sometime during the fourth
quarter of 2005.
An
analysis of the discontinued operations is as follows:
Assets
held for sale:
|
|
|
|
Trade
accounts receivable
|
|
$
|
699,555
|
|
Inventories
|
|
|
5,089,521
|
|
Prepaid
expenses and other assets
|
|
|
165,037
|
|
Property,
plant and equipment, at cost net of depreciation
|
|
|
152,884
|
|
Other
assets
|
|
|
27,297
|
|
Total
assets held for sale
|
|
$
|
6,134,294
|
|
Liabilities
held for sale:
|
|
|
|
|
Accounts
payable
|
|
$
|
1,226,207
|
|
Other
accrued expenses
|
|
|
659,055
|
|
Total
liabilities held for sale
|
|
$
|
1,885,262
|
|
Revenues
for the three and six month periods ended March 31, 2005 and 2004 were
$3,424,078 and $8,278,333 (for 2005); and $3,660,425 and $7,099,321 (for
2004),
respectively.
Liquidity
and Capital Resources
General
During
the past three years, we have experienced operating losses. 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 customers, under-absorbed fixed costs associated
with
the 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 three years, we have incurred a substantial amount of
debt.
|
|
(Dollars
in 000’s)
|
|
|
|
March
31,
2005
|
|
September
30,
2004
|
|
Cash
|
|
$
|
1,439
|
|
$
|
258
|
|
Working
capital (deficit)
|
|
|
3,311
|
|
|
1,824
|
|
Total
assets
|
|
|
16,831
|
|
|
10,788
|
|
Total
short-term notes payable and long-term debt, net of debt discount
of
$5,599 and $6,493, respectively
|
|
|
4,052
|
|
|
212
|
|
Shareholders’
equity
|
|
$
|
3,409
|
|
$
|
2,588
|
|
Cash
provided by continuing operations was $198,672 for the six months ended March
31, 2005 compared to cash used in continuing operations of $(2,027,086) for
the
six months ended March 31, 2004. Cash providing by operations is primarily
attributable to the increase in production of our Cash Security products
as a
result of our sale of 922 Sentinel units to a major convenience store
chain.
Cash
provided by financing activities was $2,606,234 for the six months ended
March
31, 2005 compared to cash used by financing activities of $(245,765) for
same
period of 2004. This is primarily related to our increased borrowings under
our
Laurus facilities.
After
several months of unsuccessful efforts to remedy its financial difficulties,
Credit Card Center (“CCC”) filed for protection under Chapter 11 of the United
States Bankruptcy Code on June 6, 2001. At that time, we had accounts and
a note
receivable due from CCC totaling approximately $27 million. The proceeding
was
subsequently converted to a Chapter 7 proceeding and a Trustee was appointed
in
April 2002. We have written off substantially all of the $24.1 million owed
to
us by CCC against the remaining balance of the note and trade accounts
receivable, resulting in a $250,000 balance in accounts receivable as of
December 31, 2004. Our management intends to continue monitoring this matter
and
to take all actions that it determines to be necessary based upon its findings.
Our liquidity was negatively impacted by our inability to collect the
outstanding receivables and claims from CCC
Our
ability to continue as a going concern is dependent on generating sufficient
cash flows from operations for meeting our liquidity needs, servicing our
debt
requirements and meeting financial covenants. During the past four years
and for
the first six months of 2005, we have experienced operating and net losses.
Also, our inability to collect outstanding receivables continues to impact
our
liquidity. On November 25, 2003, we completed a $6,850,000 financing transaction
(the “Financing”) with Laurus Master Fund, Ltd. (“Laurus”), and we also
completed a $3,350,000 financing transaction (the “Additional Financing”) on
November 26, 2004 with Laurus in order to meet our current liquidity needs.
We
have substantial debt obligations of approximately $9,651,529 as of March
31,
2005.
As
of
July 31, 2005, we have $1,250,000 available for borrowing under the Purchase
Order Note through November 26, 2005. There can be no assurance that our
current
financing facilities will be sufficient to meet our current working capital
needs or that we will have sufficient working capital in the
future.
This,
coupled with increasing debt, has continued to negatively impact our financial
condition. If the operating conditions do not improve, there can be no assurance
we will continue operations. If we need to seek additional financing, there
can
be no assurances that we will obtain such additional financing for working
capital purposes. The failure to obtain such additional financing could cause
a
material adverse effect upon our financial condition
Notes
and Warrants
THE
NOTES
AND WARRANTS ISSUED IN THE FINANCING AND THE ADDITIONAL FINANCING, COUPLED
WITH
THE 2003 FEE SHARES, ARE CONVERTIBLE INTO AN AGGREGATE OF 28,226,625 SHARES
OF
OUR COMMON STOCK, OR APPROXIMATELY 65% OF OUR OUTSTANDING COMMON STOCK, SUBJECT
TO ADJUSTMENT AS PROVIDED IN THE TRANSACTION DOCUMENTS. IF THESE NOTES AND
WARRANTS WERE COMPLETELY CONVERTED TO COMMON STOCK BY LAURUS, THEN THE OTHER
EXISTING SHAREHOLDERS’ OWNERSHIP IN THE COMPANY WOULD BE SIGNIFICANTLY DILUTED
TO APPROXIMATELY 40% OF THEIR PRESENT OWNERSHIP POSITION.
Claims
and Litigation
As
discussed in our ‘03/’04 Annual Report, Corporate Safe Specialists, Inc. (“CSS”)
filed a lawsuit against Tidel Technologies, Inc. and Tidel Engineering, L.P.
Tidel Technologies, Inc. was released from this lawsuit, but Tidel Engineering,
L.P. remains a defendant. The Company continues to vigorously defend this
litigation as well as vigorously pursue the declaratory judgment action pending
in the Eastern District of Texas.
Off-Balance
Sheet Arrangements
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 financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources.
Contractual
Obligations and Capital Expenditures
We
have
fixed debt service and 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%.
The
following table summarizes our contractual cash obligations as of March 31,
2005:
PAYMENTS
DUE BY FISCAL YEAR
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Thereafter
|
|
Operating
leases
|
|
$
|
484,135
|
|
$
|
168,520
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Long-term
debt, including current portion (1)
|
|
|
1,483,541
|
|
|
3,000,000
|
|
|
3,667,988
|
|
|
1,500,000
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,967,676
|
|
$
|
3,168,520
|
|
$
|
3,667,988
|
|
$
|
1,500,000
|
|
$
|
—
|
|
$
|
—
|
|
____________
(1)
|
Total
debt was $9,651,529 as of March 31,
2005.
|
Planned
capital expenditures for 2005 and 2006 are estimated to be approximately
$200,000 per year. These expenditures will depend upon available funds, levels
of orders received and future operating activity
Risk
Factors
Please
see “Risk Factors” contained in Item 7A of our ‘03/’04 Annual Report.
Forward-Looking
Statements
In
addition to historical information, Management’s Discussion and Analysis of
Financial Condition and Results of Operations includes certain forward-looking
statements regarding events and financial trends that may affect our future
operating results and 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:
·
|
our
substantial current indebtedness continues to adversely affect
our
financial condition and the availability of cash to fund our working
capital needs;
|
·
|
our
ability to comply with our financial covenants in the future;
|
·
|
our
ability to meet our obligations under the terms of our
indebtedness;
|
·
|
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
would
likely adversely affect our
operations;
|
·
|
our
history of operating losses and our inability to make assurances
that we
will generate operating income in the
future;
|
·
|
the
outcome of the outstanding receivable from CCC;
|
·
|
the
levels of orders which are received and can be shipped in a
quarter;
|
·
|
customer
order patterns and seasonality;
|
·
|
costs
of labor, raw materials, supplies and equipment; technological
changes;
|
·
|
the
delisting of our common stock from the NASDAQ Small Cap Market,
effective
as of the close of business on March 26, 2003, and the possibility
of
devaluation of our common stock as a
result;
|
·
|
the
economic condition of the ATM industry and the possibility that
it is a
mature industry;
|
·
|
the
risks involved in the expansion of our operations into international
offshore oil and gas producing areas, where we have previously
not been
operating;
|
·
|
the
continued active participation of our executive officers and key
operating
personnel; and
|
·
|
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
heading “Cautionary Statements” in our ‘03/’04 Annual Report.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
At
March
31, 2005, we were exposed to changes in interest rates as a result of
significant financing through our issuance of variable-rate and fixed-rate
debt.
However, with the retirement of our 6% subordinated convertible debentures
subsequent to September 30, 2002, and the associated overall reduction in
outstanding debt balances, our exposure to interest rate risks has significantly
decreased. If market interest rates had increased up to 1% in the first three
months of fiscal 2005, there would have been no material impact on our
consolidated results of operations or financial position.
(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, having had
no
prior affiliation with the Company. 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 our evaluation of disclosure controls and procedures, our Chief
Executive Officer and our Chief Financial Officer made inquiries with
accounting, administrative and operational personnel and reviewed the historical
facts, including the Company’s failure to file its periodic reports on a timely
basis. Our Chief Executive Officer and our Chief Financial Officer noted
that
the Company had failed to file any periodic report required to be filed under
the Exchange Act from September 30, 2002 to February 1, 2005, on which date
we
filed our Form 10-K for the fiscal year ended September 30, 2002, which was
more
than two years late. Furthermore, it was noted that this Form 10-K for the
fiscal years ended September 2003 and 2004, and the Company’s Forms 10-Q for the
quarterly periods ended December 31, 2004 and March 31, 2005 were filed on
August 1, 2005, were each at least several months delinquent. In their
evaluation, our Chief Executive Officer and our Chief Financial Officer noted
that the Company’s periodic reporting failure was caused by (1) limited
financial and personnel resources at the times such forms were due that
restricted our ability to compile our financial statements and cause such
statements to be reviewed and/or audited by an independent registered public
accounting firm when such forms were due and (2) the prolonged illness and
death
of our former Chairman, Chief Executive Officer and Chief Financial Officer
during the year ended December 31, 2004. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the Company
had a
significant deficiency in its disclosure controls and procedures related
to
timely periodic reporting and such controls and procedures were not effective
as
of the end of the quarter ended March 31, 2005.
In
February 2005, in order to remedy this deficiency the Company began implementing
new disclosure controls and procedures, which consisted of: (1) the hiring
of a
new Chief Financial Officer to oversee the Company’s financial reporting
process, (2) the establishment of a reporting timetable to file all delinquent
reports by August 1, 2005 and return to timely periodic reporting by August
19,
2005, which was submitted and approved by our Board of Directors and (3)
the
establishment of new guidelines for completion of periodic accounting and
reporting tasks. Such implementation was completed by August 19, 2005, at
which
time we resumed the timely filing of our periodic reports. As of August 19,
2005, our Chief Executive Officer and our Chief Financial Officer believe
that
this significant deficiency has been remedied.
In
addition, in a report to the Audit Committee of the Board of Directors of
the
Company dated July 28, 2005, the Company’s independent registered public
accountants noted that the following significant deficiencies in our internal
controls and procedures were discovered during the course of their audit
of the
financial statements for fiscal years ended September 30, 2003 and 2004:
(1)
established credit policies were overridden on occasion by executive management
based on their business judgment at that time, (2) bookkeeping at the corporate
level was not administrated on a timely basis during 2003 and 2004 and (3)
the
Company’s accounts payable supervisor had access to the check signature and the
ability to prepare check runs without proper review prior to distribution.
In
examining the significant deficiencies, both the Company and our independent
registered public accountants performed expanded reviews of our procedures
and
mitigating controls to determine whether such deficiencies constituted a
material weakness. In the expanded reviews, both the Company and our independent
registered public accountants noted the following controls were in place
prior
to the audit of our financial statements for the fiscal years ended September
30, 2003 and 2004: (1) Management of the Company consistently performed weekly
and monthly reviews of actual and budgeted results during the periods, (2)
the
Audit Committee of the Board of Directors of the Company provided additional
oversight with respect to financial reporting beginning immediately after
the
death of our Chief Executive and Chief Financial Officer in December 2004,
and
(3) the Company hired a new Chief Financial Officer in February 2005 to oversee
the Company’s financial reporting process. We collectively concluded that since
such additional controls were in place the Company was able to conclude that
none of the deficiencies constituted a material weakness that resulted in
more
than a remote likelihood that a material misstatement of the annual or interim
financial statements would not be prevented or detected. Further, the report
of
the independent registered public accountants indicated no inappropriate
or
unauthorized activity during the periods reviewed.
In
August
2005, the Company began implementing revised internal controls and procedures
to
correct the significant deficiencies in our internal controls and procedures
noted by our independent registered public accountants, which consisted of:
(1)
the establishment of new credit approval policies, including Board-level
approval for certain amounts, (2) the establishment new guidelines for timely
administration of bookkeeping tasks at the corporate level, including the
implementation of monthly, quarterly and annual closing schedules and (3)
removal of check signature access from the Company’s accounts payable
supervisor. Such implementation was completed by August 30, 2005, and as
of that
date our Chief Executive Officer and our Chief Financial Officer believe
that
these significant internal controls and procedures deficiencies no longer
exist.
A
significant deficiency is a control deficiency, or a combination of control
deficiencies, that adversely affect the entity’s ability to authorize, initiate,
record, process or report external financial data reliably in accordance
with
generally accepted accounting principles in the United States such that there
is
more than a remote likelihood that a misstatement of the entity’s annual or
interim financial statements that is more than inconsequential will not be
prevented or detected.
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. Our Chief Executive Officer and our Chief Financial Officer
have
concluded that the Company’s disclosure controls and procedures are effective at
this reasonable assurance level as of August 19, 2005.
(b) Changes
in internal control over financial reporting
Following
the evaluations discussed above and the identification of significant
deficiencies, the Company took the actions and implemented the procedures
described above. Other than the hiring of a new Chief Financial Officer to
oversee the financial reporting process and the establishment of new guidelines
for completion of periodic accounting and reporting tasks discussed above,
there
were no changes in our internal control over financial reporting that occurred
in the quarter ending March 31, 2005 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
As
discussed in our ‘03/’04 Annual Report, 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 alleges that the Sentinel product sold by Tidel Engineering,
L.P.
infringes one or more patent claims found in CSS patent U.S. Patent No.
6,885,281 (the ‘281 patent). CSS seeks injunctive relief against future
infringement, unspecified damages for past infringement and attorney’s fees and
costs. We are vigorously defending this litigation.
Also
discussed in our ‘03/’04 Annual Report, we have filed a motion to dismiss the
case CSS filed in Illinois, and Tidel Engineering, L.P. has filed a motion
to
transfer the Illinois case to the Eastern District of Texas. We have 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 are vigorously pursuing this declaratory judgment
action.
|
|
Certification
of Interim Chief Executive Officer Pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certification
of Interim Chief Financial Officer pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
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.
|
|
|
|
|
|
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)
|
|
|
November
30, 2005
|
/s/
MARK
K. LEVENICK
|
|
Mark
K. Levenick
|
|
Interim
Chief Executive Officer
|
|
|
November
30, 2005
|
/s/
ROBERT
D. PELTIER
|
|
Robert
D. Peltier
|
|
Interim
Chief Financial Officer
|
James
T.
Rash, our former Chairman, Chief Executive Officer and Chief Financial Officer,
died on December 19, 2004. We appointed Mark K. Levenick to the position
of
Interim Chief Executive Officer but no permanent Chairman, Chief Executive
Officer or Chief Financial Officer has been hired or appointed as of the
date
hereof. Robert D. Peltier was appointed Interim Chief Financial Officer in
February 2005.
INDEX
TO EXHIBITS
Exhibits
|
|
Description
|
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.
|