form10q.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
Quarterly
Report Pursuant
to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
quarterly period ended June 30, 2007
Or
o
|
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
SECURE
ALLIANCE HOLDINGS CORPORATION
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 x
NO o
Indicate
by check mark whether the
registrant is a large accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes o
No
x
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act). Yes o
No x
Indicate
by check mark whether the registrant is a non-accelerated filer (as defined
in
Rule 12b-2 of the Exchange Act). Yes x
No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes x
No o
The
number of shares of Common Stock outstanding as of the close of business on
August 3, 2007 was 19,441,524.
(A
DEVELOPMENT STAGE COMPANY)
TABLE
OF CONTENTS
|
Page
|
|
|
PART I.
FINANCIAL INFORMATION
|
|
3
|
|
3
|
|
4
|
|
5
|
|
6
|
|
8
|
|
15
|
|
21
|
|
21
|
PART
II. OTHER INFORMATION
|
|
22
|
|
22
|
|
22
|
|
23
|
|
23
|
|
24
|
Certification
Pursuant to Section 302
|
|
Certification
Pursuant to Section 906
|
|
ITEM
1. FINANCIAL STATEMENTS
SECURE
ALLIANCE HOLDINGS CORPORATION
(A
DEVELOPMENT STAGE COMPANY)
CONDENSED
BALANCE SHEETS
|
|
June
30,
2007
|
|
|
September
30,
2006
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,162,564
|
|
|
$ |
1,264,463
|
|
Certificates
of deposit
|
|
|
11,177,567
|
|
|
|
—
|
|
Restricted
cash
|
|
|
—
|
|
|
|
5,400,000
|
|
Marketable
securities held-to-maturity
|
|
|
—
|
|
|
|
4,899,249
|
|
Marketable
securities available-for-sale
|
|
|
707,700
|
|
|
|
851,939
|
|
Interest
and other receivables
|
|
|
116,036
|
|
|
|
220,689
|
|
Prepaid
expenses and other assets
|
|
|
48,970
|
|
|
|
132,036
|
|
Assets
held for sale, net of accumulated depreciation of $0 and $1,353,463,
respectively
|
|
|
—
|
|
|
|
6,312,663
|
|
Total
current assets
|
|
|
13,212,837
|
|
|
|
19,081,039
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
21,500
|
|
|
|
4,000
|
|
Total
assets
|
|
$ |
13,234,337
|
|
|
$ |
19,085,039
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
61,483
|
|
|
$ |
221,295
|
|
Accrued
interest payable
|
|
|
—
|
|
|
|
2,000,000
|
|
Shares
subject to redemption
|
|
|
—
|
|
|
|
5,400,000
|
|
Other
accrued liabilities
|
|
|
—
|
|
|
|
61,610
|
|
Income
tax payable
|
|
|
266,934
|
|
|
|
88,584
|
|
Liabilities
held for sale
|
|
|
—
|
|
|
|
3,636,369
|
|
Total
current liabilities
|
|
|
328,417
|
|
|
|
11,407,858
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 19,441,524 shares and 38,677,210 shares,
respectively
|
|
|
194,415
|
|
|
|
386,772
|
|
Additional
paid-in capital
|
|
|
29,948,226
|
|
|
|
30,782,187
|
|
Accumulated
deficit
|
|
|
(17,644,421 |
) |
|
|
(24,043,717 |
) |
Accumulated
other comprehensive income
|
|
|
407,700
|
|
|
|
551,939
|
|
Total
shareholders’ equity
|
|
|
12,905,920
|
|
|
|
7,677,181
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
13,234,337
|
|
|
$ |
19,085,039
|
|
See
accompanying Notes to Condensed Financial Statements.
(A
DEVELOPMENT STAGE COMPANY)
CONDENSED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
Selling,
general and administrative
|
|
|
288,932
|
|
|
|
662,730
|
|
|
|
909,853
|
|
|
|
2,655,647
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,678
|
|
Operating
loss
|
|
|
(288,932 |
) |
|
|
(662,730 |
) |
|
|
(909,853 |
) |
|
|
(2,658,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
fee paid to Laurus
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,508,963 |
) |
|
|
—
|
|
Gain
on disposal of investment in 3CI pursuant to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
class-action
settlement
|
|
|
—
|
|
|
|
4,210,577
|
|
|
|
—
|
|
|
|
4,210,577
|
|
Interest
income
|
|
|
167,161
|
|
|
|
21,960
|
|
|
|
484,386
|
|
|
|
140,891
|
|
Interest
expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,314,503 |
) |
Gain
on collection of receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
598,496
|
|
Gain
on CCC bankruptcy settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105,000
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,455 |
) |
Total
other income (expense)
|
|
|
167,161
|
|
|
|
4,232,537
|
|
|
|
(6,024,577 |
) |
|
|
733,006
|
|
Income
(loss) from continuing operations
|
|
|
(121,771 |
) |
|
|
3,569,807
|
|
|
|
(6,934,430 |
) |
|
|
(1,925,319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
—
|
|
|
|
683,119
|
|
|
|
—
|
|
|
|
1,833,411
|
|
Gain
(loss) on sale of ATM business
|
|
|
—
|
|
|
|
(76,403 |
) |
|
|
—
|
|
|
|
3,536,106
|
|
Gain
on sale of Cash Security business, net of taxes of
$271,340
|
|
|
52,610
|
|
|
|
—
|
|
|
|
13,333,726
|
|
|
|
—
|
|
Total
discontinued operations
|
|
|
52,610
|
|
|
|
606,716
|
|
|
|
13,333,726
|
|
|
|
5,369,517
|
|
Net
income (loss)
|
|
$ |
(69,161 |
) |
|
$ |
4,176,523
|
|
|
$ |
6,399,296
|
|
|
$ |
3,444,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
(0.01 |
) |
|
$ |
0.09
|
|
|
$ |
(0.35 |
) |
|
$ |
(0.06 |
) |
Income
from discontinued operations
|
|
|
—
|
|
|
|
0.02
|
|
|
|
0.68
|
|
|
|
0.17
|
|
Net
income (loss)
|
|
$ |
(0.01 |
) |
|
$ |
0.11
|
|
|
$ |
0.33
|
|
|
$ |
0.11
|
|
Weighted
average common shares outstanding
|
|
|
19,441,524
|
|
|
|
38,677,210
|
|
|
|
19,604,535
|
|
|
|
31,754,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
(0.01 |
) |
|
$ |
0.09
|
|
|
$ |
(0.35 |
) |
|
$ |
(0.06 |
) |
Income
from discontinued operations
|
|
|
—
|
|
|
|
0.02
|
|
|
|
0.68
|
|
|
|
0.17
|
|
Net
income (loss)
|
|
$ |
(0.01 |
) |
|
$ |
0.11
|
|
|
$ |
0.33
|
|
|
$ |
(0.11 |
) |
Weighted
average common and dilutive shares outstanding
|
|
|
19,441,524
|
|
|
|
38,710,044
|
|
|
|
19,673,148
|
|
|
|
31,786,967
|
|
See
accompanying Notes to Condensed
Financial Statements.
(A
DEVELOPMENT STAGE COMPANY)
CONDENSED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
|
Nine
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
Income (loss)
|
|
$ |
(69,161 |
) |
|
$ |
4,176,523
|
|
|
$ |
6,399,296
|
|
|
$ |
3,444,198
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on marketable securities available-for-sale
|
|
|
(40,440 |
) |
|
|
581,414
|
|
|
|
(144,239 |
) |
|
|
581,414
|
|
Unrealized
gain on investment in 3CI
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90,855
|
|
Comprehensive
income (loss)
|
|
$ |
(109,601 |
) |
|
$ |
4,757,937
|
|
|
$ |
6,255,057
|
|
|
$ |
4,116,467
|
|
See
accompanying Notes to Condensed Financial Statements.
(A
DEVELOPMENT STAGE COMPANY)
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
6,399,296
|
|
|
$ |
3,444,198
|
|
Amortization
of stock options issued to officers
|
|
|
79,709
|
|
|
|
—
|
|
Expense
related to issuance of stock pursuant to consulting
agreement
|
|
|
10,000
|
|
|
|
—
|
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
2,678
|
|
Amortization
of debt discount and financing costs
|
|
|
—
|
|
|
|
4,078,738
|
|
Gain
on disposal of investment in 3CI pursuant to class-action
settlement
|
|
|
—
|
|
|
|
(4,210,577 |
) |
Loss
on disposal of fixed assets
|
|
|
—
|
|
|
|
7,455
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
accounts receivable, net
|
|
|
—
|
|
|
|
250,000
|
|
Interest
and other receivables
|
|
|
104,653
|
|
|
|
(925 |
) |
Prepaid
expenses and other assets
|
|
|
65,566
|
|
|
|
128,521
|
|
Income
taxes payable
|
|
|
178,350
|
|
|
|
—
|
|
Accounts
payable and accrued liabilities
|
|
|
(2,221,422 |
) |
|
|
(246,393 |
) |
Net
cash flows used in discontinued operations
|
|
|
(13,552,456 |
) |
|
|
(5,329,076 |
) |
Net
cash used in operating activities
|
|
|
(8,936,304 |
) |
|
|
(1,875,381 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
|
Increase
in time deposits
|
|
|
(11,177,567 |
) |
|
|
—
|
|
Decrease
in marketable securities held-to-maturity
|
|
|
4,899,249
|
|
|
|
—
|
|
Proceeds
from class-action settlement on investment in 3CI
|
|
|
—
|
|
|
|
4,489,963
|
|
Net
cash flows provided by discontinued investing activities
|
|
|
16,228,750
|
|
|
|
10,440,000
|
|
Net
cash provided by investing activities
|
|
|
9,950,432
|
|
|
|
14,929,963
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from continuing financing activities:
|
|
|
|
|
|
|
|
|
Redemption
of shares held by Laurus
|
|
|
(6,545,340 |
) |
|
|
—
|
|
Proceeds
from exercise of warrants and options
|
|
|
29,313
|
|
|
|
—
|
|
Repayments
of notes payable
|
|
|
—
|
|
|
|
(2,767,988 |
) |
Borrowings
on revolver
|
|
|
—
|
|
|
|
1,204,391
|
|
Payments
on revolver
|
|
|
—
|
|
|
|
(1,204,391 |
) |
Change
in restricted cash
|
|
|
5,400,000
|
|
|
|
(5,400,000 |
) |
Net
cash flows provided by discontinued financing activities
|
|
|
—
|
|
|
|
—
|
|
Net
cash used in financing activities
|
|
|
(1,116,027 |
) |
|
|
(8,167,988 |
) |
Net
change in cash and cash equivalents
|
|
|
(101,899 |
) |
|
|
4,886,594
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,264,463
|
|
|
|
1,003,663
|
|
Cash
and cash equivalents at end of period
|
|
$ |
1,162,564
|
|
|
$ |
5,890,257
|
|
See
accompanying Notes to Condensed Financial Statements.
(A
DEVELOPMENT STAGE COMPANY)
CONDENSED
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
—
|
|
|
$ |
371,492
|
|
Cash
paid for taxes
|
|
$ |
94,402
|
|
|
$ |
—
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
Conversion
of debt into common stock held for redemption
|
|
$ |
—
|
|
|
$ |
5,400,000
|
|
Unrealized
(gain) loss on marketable securities available-for-sale
|
|
$ |
(144,239 |
) |
|
$ |
581,414
|
|
Unrealized
gain on 3CI investment
|
|
$ |
—
|
|
|
$ |
90,855
|
|
Forgiveness
of trade receivable in exchange for investment in available-for-sale
securities
|
|
$ |
—
|
|
|
$ |
300,000
|
|
See
accompanying Notes to Condensed Financial Statements.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(1)
|
Organization
and Summary of
Significant Accounting
Policies
|
Organization
and Basis of Presentation
Secure
Alliance Holdings Corporation (the “Company,” “we,” “us,” or “our”) is a
Delaware corporation which, through its wholly-owned subsidiaries, developed,
manufactured, sold and supported 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 were designed for the management of cash within various
specialty retail markets, primarily in the United States.
We
completed the sale of our ATM business on January 3, 2006 and the sale of our
Cash Security business on October 2, 2006 as described more fully in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2006. On October
2,
2006, we became a shell public company and have had substantially no operations
since that time. It is the present intention of the Company to review its
financial position and consider all available alternatives including without
limitation the acquisition of a new business or alternatively, the possible
dissolution of the Company and liquidation of its assets, the discharge of
any
remaining liabilities, and the eventual distribution of the remaining assets
to
shareholders. As management currently does not expect to liquidate the Company,
we have classified the Company as a development stage company.
The
accompanying condensed 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, and are unaudited. In the opinion of management, the
unaudited condensed interim financial statements include all adjustments,
consisting only of normal, recurring adjustments, necessary for a fair
presentation of the financial position as of June 30, 2007, the statements
of
operations and comprehensive income (loss) and the statements of cash flows
for
the nine months ended June 30, 2007 and 2006. Although management believes
the
unaudited interim disclosures in these condensed 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 nine months ended June 30, 2007 are not necessarily
indicative of the results to be expected for any quarterly period or for the
entire year ending September 30, 2007. The unaudited interim financial
statements included herein should be read in conjunction with the audited
financial statements and notes thereto included in our Annual Report on Form
10-K for the fiscal year ended September 30, 2006.
Securities
held-to-maturity and securities available-for-sale
Securities
held-to-maturity are carried at amortized cost. Securities are designated as
held-to-maturity only if the Company has the positive intent and ability to
hold
these securities to maturity. Securities available-for-sale are carried at
fair
value with the resulting unrealized gains or losses recorded in equity, net
of
tax. Premiums are amortized and discounts are accreted using the interest method
over the estimated remaining term of the underlying security.
(2)
|
Discontinued
Operations
|
Sale
of ATM Business
On
February 19, 2005, the Company and its wholly-owned subsidiary, Secure Alliance,
L.P., entered into an Asset Purchase Agreement with NCR EasyPoint, a wholly
owned subsidiary of NCR Corporation, for the sale of our ATM
business.
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 paid into an escrow
account pending a post closing net asset value adjustment, and the remaining
$1.7 million was paid to the Company to be used for necessary working capital.
This transaction resulted in a book gain of approximately $3.5
million.
An
analysis of the discontinued operations of the ATM business is as
follows:
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
Sales
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
3,847,874
|
|
Cost
of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,592,268
|
|
Gross
Profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,255,606
|
|
Selling,
general and administrative
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
880,941
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46,048
|
|
Operating
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
328,617
|
|
Non-operating
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
income
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
328,617
|
|
Sale
of Cash Security Business and Related Agreements with
Laurus
On
September 25, 2006, the holders of a majority of shares of our outstanding
common stock approved the sale of our electronic cash security business,
consisting of (a) timed access cash controllers, (b) the Sentinel products,
(c)
the servicing, maintenance and repair of the timed access cash controllers
or
Sentinel products and (d) all other assets and business operations associated
with the foregoing (the “Cash Security Business Sale”) to Sentinel Operating,
L.P., a purchaser led by a management buyout team that included our former
director and Interim Chief Executive Officer, Mark K. Levenick, and our former
director, Raymond P. Landry. The Cash Security Asset Purchase Agreement provided
for a cash purchase price of $15,500,000, less $100,000 as consideration for
the
Buyer assuming certain potential liability in connection with ongoing
litigation, and less a working capital deficit adjustment of $1,629,968,
resulting in a net purchase price of $13,770,032. In addition, Sentinel
Operating L.P. paid a cash adjustment of $2,458,718 to the Company at closing.
The Cash Security Business Sale was completed on October 2, 2006. During the
nine months ended June 30, 2007, we recorded a gain on the sale of the Cash
Security business of $13,333,726, which is net of taxes of
$271,340.
Pursuant
to the Agreement Regarding the NCR Transaction and Other Asset Sales, dated
November 26, 2004 (the “Asset Sales Agreement”), by and between the Company and
Laurus Master Fund, Ltd. (“Laurus”), the Company agreed to pay to Laurus a
portion of the excess net proceeds from the ATM business sale and the Cash
Security Business Sale.
On
June
9, 2006, we and Laurus entered into the Laurus Termination Agreement which,
among other things, provided for the payment of a sale fee of $8,508,963 to
Laurus (the “Sale Fee”) in full satisfaction of all amounts payable to Laurus
under the Asset Sales Agreement, including fees payable in respect of the ATM
business sale and the Cash Security Business Sale. The Laurus Termination
Agreement further provided that, upon payment of the Sale Fee and performance
by
the Company of its obligations under the Stock Redemption Agreement described
below, neither the Company nor any of its subsidiaries will have any further
obligation to Laurus. Further, each of the Company and Laurus has granted each
other and their respective affiliates and subsidiaries reciprocal releases
from
and against any claims and causes of action that may exist.
We
and
Laurus entered a Stock Redemption Agreement on January 12, 2006 and as
subsequently amended. Pursuant to the terms of the Stock Redemption Agreement:
we agreed, among other things, (i) to repurchase from Laurus, upon the closing
of the Cash Security Business Sale, all shares of our common stock held by
Laurus, and (ii) Laurus agreed to the cancellation as of the closing date of
the
Cash Security Business Sale of warrants it holds to purchase 4,750,000 shares
of
our common stock at an exercise price of $.30 per share, and not to exercise
such warrants prior to the earlier to occur of September 30, 2006 and the date
on which the Asset Purchase Agreement is terminated.
Following
the Cash Security Business Sale, on October 2, 2006, the Company applied the
net
purchase price, the cash adjustment, and $5,400,000 in proceeds (together with
accrued interest of $206,799) from the ATM business sale, to pay the following
amounts to Laurus: (i) $8,508,963 pursuant to the terms of the Laurus
Termination Agreement and (ii) $6,545,340 representing the purchase from Laurus
by the Company of 19,251,000 shares of Company common stock pursuant to the
terms of the Stock Redemption Agreement. Following both such payments to Laurus,
the Company received $6,781,246 in net proceeds from the Cash Security Business
Sale.
On
October 2, 2006, following the foregoing payments to Laurus pursuant to the
terms of the Laurus Termination Agreement and the Stock Redemption Agreement,
no
further fees remained payable by the Company to Laurus and, to our knowledge,
Laurus does not own any shares of the Company.
We
classified the Cash Security business as a discontinued operation for the three
months and nine months ended June 30, 2006. We classified the Cash Security
business as Assets Held for Sale as of September 30, 2006.
An
analysis of the discontinued operations of the Cash Security business is as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
June
30,
2007
|
|
|
September
30,
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
—
|
|
|
$ |
2,048,275
|
|
Trade
accounts receivable, net of allowance of approximately $0 and $45,000,
respectively
|
|
|
—
|
|
|
|
1,591,522
|
|
Inventories
|
|
|
—
|
|
|
|
2,051,764
|
|
Prepaid
expenses and other
|
|
|
—
|
|
|
|
73,089
|
|
Total
current assets
|
|
|
—
|
|
|
|
5,764,650
|
|
Property,
plant and equipment, at cost
|
|
|
—
|
|
|
|
316,608
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
|
(18,595 |
) |
Net
property, plant and equipment
|
|
|
—
|
|
|
|
298,013
|
|
Other
assets
|
|
|
—
|
|
|
|
250,000
|
|
Total
assets
|
|
$ |
—
|
|
|
$ |
6,312,663
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities
|
|
$ |
—
|
|
|
$ |
1,981
|
|
Accounts
payable
|
|
|
—
|
|
|
|
1,514,731
|
|
Other
accrued expenses
|
|
|
—
|
|
|
|
2,098,675
|
|
Total
current liabilities
|
|
|
—
|
|
|
|
3,615,387
|
|
Long-term
debt, net of current maturities
|
|
|
—
|
|
|
|
20,982
|
|
Total
liabilities
|
|
$ |
—
|
|
|
$ |
3,636,369
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
|
Nine
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
Sales
|
|
$ |
—
|
|
|
$ |
4,256,773
|
|
|
$ |
—
|
|
|
$ |
11,986,516
|
|
Cost
of sales
|
|
|
—
|
|
|
|
2,464,820
|
|
|
|
—
|
|
|
|
7,292,293
|
|
Gross
Profit
|
|
|
—
|
|
|
|
1,791,953
|
|
|
|
—
|
|
|
|
4,694,223
|
|
Selling,
general and administrative
|
|
|
—
|
|
|
|
1,084,417
|
|
|
|
—
|
|
|
|
3,159,182
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
23,972
|
|
|
|
—
|
|
|
|
28,685
|
|
Operating
income
|
|
|
—
|
|
|
|
683,564
|
|
|
|
—
|
|
|
|
1,506,356
|
|
Non-operating
expense
|
|
|
—
|
|
|
|
(445 |
) |
|
|
—
|
|
|
|
(1,562 |
) |
Net
income
|
|
$ |
—
|
|
|
$ |
683,119
|
|
|
$ |
—
|
|
|
$ |
1,504,794
|
|
(3)
|
Accounting
policies related to
Discontinued Operations which are Classified as 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 were 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 accrued liabilities and is charged to operations at the time of
sale.
Accounts
Receivable
We
had
significant investments in billed receivables as of September 30, 2006. 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.
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, the products
have been delivered; there is 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 Costs
Research
and development costs are expensed as incurred. Research and development costs
charged to expense were $0 and $239,642 for the quarters ended June 30, 2007
and
2006, respectively.
Shipping
and Handling Costs
There
were no Shipping and handling costs billed to customers during the quarter
ended
June 30, 2007 and a total of $107,070 for the quarter ended June 30, 2006.
We
incurred no shipping and handling costs for the quarter ended June 30, 2007
and
$118,324 for the quarter ended June 30, 2006. The net expense of $0 and $11,254
is included in selling expenses in the accompanying statement of operations
for
the quarters ended June 30, 2007 and 2006, respectively.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computation:
|
|
Three
Months Ended June 30,
|
|
|
Nine
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Income
(loss) from continuing operations
|
|
$ |
(121,771 |
) |
|
$ |
3,569,807
|
|
|
$ |
(6,934,430 |
) |
|
$ |
(1,925,319 |
) |
Income
from discontinued operations
|
|
|
52,610
|
|
|
|
606,716
|
|
|
|
13,333,726
|
|
|
|
5,369,517
|
|
Net
income (loss)
|
|
$ |
(69,161 |
) |
|
$ |
4,176,523
|
|
|
$ |
6,399,296
|
|
|
$ |
3,444,198
|
|
Weighted
average common shares outstanding (denominator for basic earnings
per
share)
|
|
|
19,441,524
|
|
|
|
38,677,210
|
|
|
|
19,604,535
|
|
|
|
31,754,133
|
|
Dilutive
shares outstanding
|
|
|
—
|
|
|
|
32,834
|
|
|
|
68,613
|
|
|
|
32,834
|
|
Weighted
average common and dilutive shares outstanding
|
|
|
19,441,524
|
|
|
|
38,710,044
|
|
|
|
19,673,148
|
|
|
|
31,786,967
|
|
Basic
earnings per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.01 |
) |
|
$ |
0.09
|
|
|
$ |
(0.35 |
) |
|
$ |
(0.06 |
) |
From
discontinued operations
|
|
$ |
—
|
|
|
$ |
0.02
|
|
|
$ |
0.68
|
|
|
$ |
0.17
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$ |
(0.01 |
) |
|
$ |
0.09
|
|
|
$ |
(0.35 |
) |
|
$ |
(0.06 |
) |
From
discontinued operations
|
|
$ |
—
|
|
|
$ |
0.02
|
|
|
$ |
0.68
|
|
|
$ |
0.17
|
|
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 stock.
As
of
June 30, 2007, we had outstanding options to purchase 1,900,000 shares, of
which
none were exercisable, and we had outstanding warrants to purchase 697,500
shares at exercise prices ranging from $0.40 to $0.68 per
share. Excluded from the computation of diluted EPS for the three
months ended June 30, 2007 were warrants to purchase 500,000 shares at an
exercise price of $0.68 per share as they would be anti-dilutive. Excluded
from
the computation of diluted EPS for the nine months ended June 30, 2007 were
options to purchase 1,900,000 shares of common stock at a weighted average
price
of $0.62 per share, options to purchase 620,900 shares of common stock at a
weighted average price of $1.28 per share and warrants to purchase 500,000
shares of common stock at an exercise price of $0.68, as they would be
anti-dilutive. Included in the computation of diluted EPS for the nine months
ended June 30, 2007 are options to purchase 27,250 shares at an exercise price
of $0.25 per share, warrants to purchase 50,000 shares of common stock at an
exercise price of $0.45, and warrants to purchase 197,500 shares of common
stock
at an exercise price of $0.40.
As
of
June 30, 2006, we had outstanding options covering an aggregate of 648,150
shares of common stock, of which 424,000 shares 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 June
30,
2006 are options to purchase 199,150 shares of common stock at a weighted
average price of $0.25 per share and excluded from the computation are options
to purchase 449,000 shares of common stock as they would be anti-dilutive.
Excluded from the computation of diluted EPS for the three months ended June
30,
2006 are warrants covering an aggregate of 5,890,000 shares of common stock
with
exercise prices ranging from $.30 to $.40 as they would be anti-dilutive.
Excluded from the computation of diluted EPS for the nine months ended June
30,
2006 are options to purchase 199,150 shares of common stock with a weighted
average price of $0.25 per share and outstanding warrants covering an aggregate
of 5,890,000 shares of common stock with exercise prices ranging from $.30
to
$.40 as they would be anti-dilutive.
(5)
|
Marketable
Securities Available-
for- Sale
|
We
owned
2,022,000 shares of the common stock of Cashbox plc pursuant to our exercise
of
the Share Warrant Agreement in September 2005. On or about March 27, 2006,
shares of Cashbox plc began trading on the AIM Market of the London Stock
Exchange (the “Exchange”). Prior to Cashbox plc going public, we considered
their shares not marketable, thus the shares were carried at cost. Since the
shares are now public and market value is readily available, we determined
the
market value of the shares as of June 30, 2007 and pursuant to SFAS No. 115
“Accounting for Investments in Equity and Debt Securities” we classified these
shares as available for sale. Pursuant to the SFAS No. 115 the unrealized change
in fair value during the three months and nine months ended June 30, 2007 was
excluded from earnings and recorded net of tax as other comprehensive
income.
At
June
30, 2007, our common stock in Cashbox plc was recorded at a fair value of
$707,700. Unrealized losses on these shares of common stock were added to
shareholders’ equity and were $(40,440) and $(144,239) for the three months and
nine months ended June 30, 2007, respectively.
As
of
June 30, 2007, we were restricted from selling any shares until the second
anniversary of its admission to the Exchange unless we (i) consult with
Cashbox’s primary broker prior to the disposal of any shares and (ii) effect the
disposal of the shares through Cashbox’s primary broker from time to time and in
such manner as such broker may require with a view to the maintenance of an
orderly market in the shares of Cashbox.
(6)
|
Stock-Based
Compensation
|
In
December 2004, the FASB issued SFAS No. 123(R), which amends SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123(R) requires compensation expense
to
be recognized for all share-based payments made to employees based on the fair
value of the award at the date of grant, eliminating the intrinsic value
alternative allowed by SFAS No. 123. Generally, the approach to determining
fair
value under the original pronouncement has not changed. However, there are
revisions to the accounting guidelines established, such as accounting for
forfeitures that will change our accounting for stock-based awards in the
future.
The
statement allows companies to adopt its provisions using either of the following
transition alternatives:
§
|
The
modified prospective method,
which results in the recognition of compensation expense using SFAS
123(R)
for all share-based awards granted after the effective date and the
recognition of compensation expense using SFAS 123 for all previously
granted share-based awards that remain unvested at the effective
date;
or
|
§
|
The
modified retrospective
method, which results in applying the modified prospective method
and
restating prior periods by recognizing the financial statement impact
of
share-based payments in a manner consistent with the pro forma disclosure
requirements of SFAS No. 123. The modified retrospective method may
be
applied to all prior periods presented or previously reported interim
periods of the year of
adoption.
|
We
adopted SFAS No. 123(R) on October 1, 2005, using the modified prospective
method. This change in accounting has not materially impacted our financial
position. We applied the fair-value criteria established by SFAS No. 123(R)
to
stock option grants which was a decrease to net income of approximately $69,499
and $79,709 for the three months and nine months ended June 30,
2007. The total unrecognized compensation cost for unvested stock
options outstanding at June 30, 2007 is $966,176. Approximately
$30,000 per month will be recognized over the subsequent thirty-two months,
resulting in an expense period of three years.
We
recognize expense related to stock options and other types of equity-based
compensation and such cost must be recognized over the period during which
an
employee is required to provide service in exchange for the award. The requisite
service period is usually the vesting period. The standard also requires us
to
estimate the number of instruments that will ultimately be issued, rather than
accounting for forfeitures as they occur.
Common
Stock Options issued during the nine months ended June 30,
2007:
|
|
Options
|
|
Expiration
Date
|
|
Exercise
Price
|
|
|
Relative
Fair
Value
(1)
|
|
Jerrell
G. Clay (1)
|
|
|
950,000
|
|
03/21/2017
|
|
|
0.62
|
|
|
$ |
543,472
|
|
Stephen
P. Griggs (1)
|
|
|
950,000
|
|
03/21/2017
|
|
|
0.62
|
|
|
|
543,472
|
|
Outstanding
options as of June 30, 2007
|
|
|
1,900,000
|
|
|
|
|
|
|
|
$ |
1,086,944
|
|
Value
calculated using Black-Scholes:
|
|
Stock
Price
At
Issuance
|
|
Expected
Term
|
|
Volatility
|
|
|
Risk
Free Rate
|
|
(1)
Variables
|
|
$ |
0.62
|
|
3
years
|
|
|
198 |
% |
|
|
7.5 |
% |
Employee
Stock Option Plan
We
adopted a Long-Term Incentive Plan in 1997 (the “1997 Plan”) pursuant to which
our Board of Directors may grant stock options to officers and key employees.
The 1997 Plan, as amended, authorizes grants of options to purchase up to
2,000,000 shares of our common stock. Options are granted with an exercise
price
equal to the fair market value of the common stock at the date of grant. Options
granted under the 1997 Plan vest over four-year periods and expire no later
than
10 years from the date of grant. Under the 1997 Plan, there were 648,150 options
outstanding and 1,310,800 shares available for grant at September 30, 2006.
During the nine months ended June 30, 2007, 620,900 options were canceled,
27,250 options were exercised and 1,900,000 options were granted leaving 28,450
shares available for stock option grants as of June 30, 2007. The fair value
of
the 1,900,000 options granted during the nine months ended June 30, 2007 was
$0.57 per share.
Combined
stock option activity during the nine months ended June 30, 2007 was as
follows:
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance
at September 30, 2006
|
|
|
648,150
|
|
|
$ |
1.24
|
|
Granted
|
|
|
1,900,000
|
|
|
|
0.62
|
|
Exercised
|
|
|
(27,250 |
) |
|
|
0.25
|
|
Canceled
|
|
|
(620,900 |
) |
|
|
1.28
|
|
Balance
at June 30, 2007
|
|
|
1,900,000
|
|
|
|
0.62
|
|
It
is the
present intention of the Company to review its financial position and consider
all available alternatives including without limitation the acquisition of
a new
business or alternatively, the possible dissolution of the Company and
liquidation of its assets, the discharge of any remaining liabilities, and
the
eventual distribution of the remaining assets to shareholders. Although
management currently does not expect to liquidate the Company, if it later
determines that liquidation is in the best interest of shareholders, such action
will require the approval of the holders of a majority of the Company’s then
outstanding shares of common stock. If liquidation does occur there can be
no
assurances as to the amount of liquidation proceeds that might eventually be
distributed to shareholders.
You
should read the following discussion and analysis together with our financial
statements and notes thereto and the discussion “Management’s
Discussion and Analysis of Financial Condition and Results
of Operations,” “Risk Factors” and “Forward-Looking Statements”
included in our 2006 Annual Report on Form 10-K for the Fiscal
Year Ended September 30, 2006. 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
On
October 2, 2006 we completed the Cash Security Business Sale. The Cash Security
Asset Purchase Agreement provided for a cash purchase price of $15,500,000,
less
$100,000 as consideration for the buyer, Sentinel Operating, L.P. assuming
certain potential liability in connection with ongoing litigation and less
a
working capital deficit adjustment of $1,629,968, which resulted in a net
purchase price of $13,770,032. In addition, Sentinel Operating, L.P. paid a
cash
adjustment of $2,458,718 to us at closing. We applied the net purchase price,
the cash adjustment, and $5,400,000 in proceeds (together with accrued interest
of $206,799) from the ATM business sale, to pay the following amounts to Laurus:
(i) $8,508,963 pursuant to the terms of the Laurus Termination Agreement and
(ii) $6,545,340 representing the purchase from Laurus by us of 19,251,000 shares
of our common stock pursuant to the terms of the Stock Redemption Agreement.
Following both such payments to Laurus, we received $6,781,245 in net proceeds
from the Cash Security Business Sale.
At
June
30, 2007, we had approximately $12.3 million of cash, cash equivalents and
certificates of deposit.
Results
of Operations
Since
October 2, 2006, we have had substantially no operations.
Operating
Segments
We
conducted 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
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATM
Business
|
|
$ |
—
|
|
|
$ |
—
|
|
|
|
—
|
|
|
$ |
3,847,874
|
|
Cash
Security Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TACC
|
|
|
—
|
|
|
|
1,204,971
|
|
|
|
—
|
|
|
|
3,085,663
|
|
Sentinel
|
|
|
—
|
|
|
|
2,755,547
|
|
|
|
—
|
|
|
|
7,759,810
|
|
Parts
& Other
|
|
|
—
|
|
|
|
296,255
|
|
|
|
—
|
|
|
|
1,141,043
|
|
Total
Cash Security Business
|
|
$ |
—
|
|
|
$ |
4,256,773
|
|
|
|
—
|
|
|
$ |
11,986,516
|
|
Gross
Profit, Operating Expenses and Non-Operating Items
Continuing
Operations
Due
to
the sale of our ATM business and our Cash Security business, the results of
continuing operations consist of corporate overhead. An analysis of
continuing operations and assets and liabilities is provided in the following
tables:
CONTINUING
OPERATIONS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
June
30,
2007
|
|
|
September
30,
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,162,564
|
|
|
$ |
1,264,463
|
|
Certificates
of deposit
|
|
|
11,177,567
|
|
|
|
—
|
|
Restricted
cash
|
|
|
—
|
|
|
|
5,400,000
|
|
Marketable
securities held-to-maturity
|
|
|
—
|
|
|
|
4,899,249
|
|
Marketable
securities available-for-sale
|
|
|
707,700
|
|
|
|
851,939
|
|
Other
receivables
|
|
|
116,036
|
|
|
|
220,689
|
|
Prepaid
expenses and other
|
|
|
48,970
|
|
|
|
132,036
|
|
Total
current assets
|
|
|
13,212,837
|
|
|
|
12,768,376
|
|
Other
assets
|
|
|
21,500
|
|
|
|
4,000
|
|
Total
assets
|
|
$ |
13,234,337
|
|
|
$ |
12,772,376
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
61,483
|
|
|
|
221,295
|
|
Accrued
interest payable
|
|
|
—
|
|
|
|
2,000,000
|
|
Shares
subject to redemption
|
|
|
—
|
|
|
|
5,400,000
|
|
Income
tax payable
|
|
|
266,934
|
|
|
|
88,584
|
|
Other
accrued liabilities
|
|
|
—
|
|
|
|
61,610
|
|
Total
current liabilities
|
|
$ |
328,417
|
|
|
$ |
7,771,489
|
|
CONTINUING
OPERATIONS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
|
Nine
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
Selling,
general and administrative
|
|
|
288,932
|
|
|
|
662,730
|
|
|
|
909,853
|
|
|
|
2,655,647
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,678
|
|
Operating
loss
|
|
|
(288,932 |
) |
|
|
(662,730 |
) |
|
|
(909,853 |
) |
|
|
(2,658,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
fee paid to Laurus
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,508,963 |
) |
|
|
—
|
|
Interest
income
|
|
|
167,161
|
|
|
|
21,960
|
|
|
|
484,386
|
|
|
|
140,891
|
|
Interest
expense, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,314,503 |
) |
Gain
on investment in 3CI
|
|
|
—
|
|
|
|
4,210,577
|
|
|
|
—
|
|
|
|
4,210,577
|
|
Gain
on collection of receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
598,496
|
|
Gain
on CCC bankruptcy settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105,000
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,455 |
) |
Total
other income (expense)
|
|
|
167,161
|
|
|
|
4,232,537
|
|
|
|
(6,024,577 |
) |
|
|
733,006
|
|
Income
(loss) from continuing operations
|
|
$ |
(121,771 |
) |
|
$ |
3,569,807
|
|
|
$ |
(6,934,430 |
) |
|
$ |
(1,925,319 |
) |
Quarter
Ended June 30, 2007 Compared with the Quarter Ended June 30,
2006
Selling,
general and administrative expenses for the quarter ended June 30, 2007
deceased by $0.4 million due to lower professional fees as a result of the
sale
of both the ATM business and the Cash Security business.
Depreciation
and amortization expense for the quarters ended June 30, 2007 and 2006 was
$0. This was due to the closure of the corporate office on March 31,
2006.
Interest
income increased by $0.1 million from the quarter ended June 30, 2007 to
the quarter ended June 30, 2007. The increase was due to higher
levels of interest earned on surplus cash as a result of the ATM business
sale.
Income
tax expense (benefit). 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 had established
a
valuation allowance for 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 $0.1 million and $3.6 million
for the quarters ended June 30, 2007 and 2006, respectively.
Nine
Months Ended June 30, 2007 Compared to the Nine Months Ended June 30,
2006
Selling,
general and administrative expense for the nine months ended June 30, 2007
were $0.9 million compared with $2.7 million for the nine months ended June
30,
2006. This decrease is primarily related to lower professional fees as a result
of the sale of both the ATM business and the Cash Security
business.
Depreciation
and amortization for the nine months ended June 30, 2007 and 2006 were $0
and $2,678, respectively. The decrease was due to the closure of the corporate
office on March 31, 2006.
Interest
expense was $0 for the nine months ended June 30, 2007 and $4.2 million for
the nine months ended June 30, 2006. Interest expense for the nine
months ended June 30, 2006 included three months of amortization related to
debt
discount and other deferred debt issuance costs in the amount of $985,827,
and a
one-time charge in January 2006 of approximately $3.1 million of debt discount
and deferred debt issuance costs as a result of the early extinguishment of
the
Laurus debt.
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.
We
recorded a net loss from continuing operations of $(6.9) million and $(1.9)
million for the nine months ended June 30, 2007 and 2006, respectively. The
significant change in net loss is primarily a result of the $6.5 million
reorganization fee paid to Laurus partially offset by interest income of $0.5
million during the nine months ended June 30, 2007.
Discontinued
Operations (ATM Business)
An
analysis of the discontinued operations of the ATM business is as
follows:
DISCONTINUED
OPERATIONS — ATM BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
Sales
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
3,847,874
|
|
Cost
of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,592,268
|
|
Gross
Profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,255,606
|
|
Selling,
general and administrative
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
880,941
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46,048
|
|
Net
income
|
|
$ |
—
|
|
|
|
—
|
|
|
$ |
—
|
|
|
$ |
328,617
|
|
There
were no operations from the ATM business during the quarters ended June 30,
2007
and 2006 due to the sale of the ATM business on January 3, 2006; however
$3,536,105 was recognized as a gain on sale of the ATM business during the
nine
months ended June 30, 2006.
Discontinued
Operations (Cash Security Business)
We
completed the Cash Security Business Sale on October 2, 2006. We classified
the
Cash Security business as a discontinued operation for the three months and
nine
months ended June 30, 2006. We classified the Cash Security business as Assets
Held for Sale as of September 30, 2006. An analysis of the
discontinued operations of the Cash Security business is as
follows:
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
BALANCE SHEET DATA
(UNAUDITED)
|
|
June
30,
2007
|
|
|
September
30,
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
—
|
|
|
$ |
2,048,275
|
|
Trade
accounts receivable, net of allowance of approximately $0 and $45,000,
respectively
|
|
|
—
|
|
|
|
1,591,522
|
|
Inventories
|
|
|
—
|
|
|
|
2,051,764
|
|
Prepaid
expenses and other
|
|
|
—
|
|
|
|
73,089
|
|
Total
current assets
|
|
|
—
|
|
|
|
5,764,650
|
|
Property,
plant and equipment, at cost
|
|
|
—
|
|
|
|
316,608
|
|
Accumulated
depreciation
|
|
|
—
|
|
|
|
(18,595 |
) |
Net
property, plant and equipment
|
|
|
—
|
|
|
|
298,013
|
|
Other
assets
|
|
|
—
|
|
|
|
250,000
|
|
Total
assets
|
|
$ |
—
|
|
|
$ |
6,312,663
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities
|
|
$ |
—
|
|
|
$ |
1,981
|
|
Accounts
payable
|
|
|
—
|
|
|
|
1,514,731
|
|
Other
accrued expenses
|
|
|
—
|
|
|
|
2,098,675
|
|
Total
current liabilities
|
|
|
—
|
|
|
|
3,615,387
|
|
Long-term
debt, net of current maturities
|
|
|
—
|
|
|
|
20,982
|
|
Total
liabilities
|
|
$ |
—
|
|
|
$ |
3,636,369
|
|
DISCONTINUED
OPERATIONS — CASH SECURITY BUSINESS
SELECTED
OPERATING DATA
(UNAUDITED)
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
Sales
|
|
$ |
—
|
|
|
$ |
4,256,773
|
|
|
$ |
—
|
|
|
$ |
11,986,516
|
|
Cost
of sales
|
|
|
—
|
|
|
|
2,464,820
|
|
|
|
—
|
|
|
|
7,292,291
|
|
Gross
Profit
|
|
|
—
|
|
|
|
1,791,953
|
|
|
|
—
|
|
|
|
4,694,225
|
|
Selling,
general and administrative
|
|
|
—
|
|
|
|
1,084,417
|
|
|
|
—
|
|
|
|
3,159,185
|
|
Depreciation
and amortization
|
|
|
—
|
|
|
|
23,972
|
|
|
|
—
|
|
|
|
28,685
|
|
Operating
income
|
|
|
—
|
|
|
|
683,564
|
|
|
|
—
|
|
|
|
1,506,355
|
|
Non-operating
expense
|
|
|
—
|
|
|
|
(445 |
) |
|
|
—
|
|
|
|
(1,561 |
) |
Net
income
|
|
$ |
—
|
|
|
$ |
683,119
|
|
|
$ |
—
|
|
|
$ |
1,504,794
|
|
Quarter
Ended June 30, 2007 Compared to the Quarter Ended June 30,
2006
Net
Sales from the Cash Security business were $0 for the quarter ended June
30, 2007 and $4.3 million for the quarter ended June 30, 2006. The decrease
is a
result of the completion of the Cash Security Business Sale.
Gross
profit on product sales for the quarter ended June 30, 2007 was $0 compared
with $1.8 million for the quarter ended June 30, 2006. Gross profit as a
percentage of sales was 42% for the quarter ended June 30, 2006. The decrease
in
gross profit is due to the completion of the Cash Security business
sale.
Selling,
general and administrative expenses were $0 for the quarter ended June 30,
2007 compared with $1.1 million for the same period of the prior year. The
decrease is due to the completion of the Cash Security Business
Sale.
Depreciation
and amortization expense for the quarters ended June 30, 2007 and June 30,
2006 was $0 and $23,972, respectively. The decrease is due to the completion
of
the Cash Security Business Sale.
Nine
Months Ended June 30, 2007 Compared to the Nine Months Ended June 30,
2006
Net
Sales from the Cash Security business were $0 for the nine months ended
June 30, 2007 compared with net sales of $12.0 million in the same period of
the
prior year. This decrease is due to the completion of the Cash Security Business
Sale.
Gross
profit on product sales was $0 for the nine months ended June 30, 2007
compared with $4.7 million during the same period of the prior year. The
decrease is due to the completion of the Cash Security Business Sale.
Gross profit as a percentage of sales was 39% for the nine months ended
June 30, 2006.
Selling,
general and administrative expenses were $0 and $3.2 million for the nine
months ended June 30, 2007 and 2006, respectively. This decrease is due to
the
completion of the Cash Security Business Sale.
Depreciation
and amortization for the nine months ended June 30, 2007 and 2006 were $0
and $28,685, respectively. This decrease is due to the completion of the Cash
Security Business Sale.
Liquidity
and Capital Resources
Completion
of the Cash Security Business Sale and Related Agreements with
Laurus
On
September 25, 2006, the holders of a majority of shares of our outstanding
common stock approved Cash Security Business Sale. The Cash Security Asset
Purchase Agreement provided for a cash purchase price of $15,500,000, less
$100,000 as consideration for the Buyer assuming certain potential liability
in
connection with ongoing litigation, and less a working capital deficit
adjustment of $1,629,968, resulting in a net purchase price of $13,770,032.
In
addition, the buyer, Sentinel Operating L.P., paid a cash adjustment of
$2,458,718 to the Company at closing. The Cash Security Business Sale was
completed on October 2, 2006. During the nine months ended June 30, 2006, we
recorded a gain on the sale of the Cash Security business of $13,333,726, which
is net of taxes of $271,340.
We
classified the Cash Security business as a discontinued operation for the three
months and nine months ended June 30, 2006.
Pursuant
to the Agreement Regarding the NCR Transaction and Other Asset Sales, dated
November 26, 2004 (the “Asset Sales Agreement”), by and between the Company and
Laurus Master Fund, Ltd. (“Laurus”), the Company agreed to pay to Laurus a
portion of the excess net proceeds from the ATM business sale and the Cash
Security Business Sale.
On
June
9, 2006, we and Laurus entered into the Laurus Termination Agreement which,
among other things, provided for the payment of a sale fee of $8,508,963 to
Laurus (the “Sale Fee”) in full satisfaction of all amounts payable to Laurus
under the Asset Sales Agreement, including fees payable in respect of the ATM
business sale and the Cash Security Business Sale. The Laurus Termination
Agreement further provided that, upon payment of the Sale Fee and performance
by
the Company of its obligations under the Stock Redemption Agreement described
below, neither the Company nor any of its subsidiaries will have any further
obligation to Laurus. Further, each of the Company and Laurus has granted each
other and their respective affiliates and subsidiaries reciprocal releases
from
and against any claims and causes of action that may exist.
We
and
Laurus entered a Stock Redemption Agreement on January 12, 2006 and as
subsequently amended. Pursuant to the terms of the Stock Redemption Agreement:
(i) we agreed, among other things, to repurchase from Laurus, upon the closing
of the Cash Security Business Sale, all shares of our common stock held by
Laurus, and (ii) Laurus agreed to the cancellation as of the closing date of
the
Cash Security Business Sale of warrants it holds to purchase 4,750,000 shares
of
our common stock at an exercise price of $.30 per share, and not to exercise
such warrants prior to the earlier to occur of September 30, 2006 and the date
on which the Asset Purchase Agreement is terminated.
Following
the Cash Security Business Sale, on October 2, 2006, the Company applied the
net
purchase price, the cash adjustment, and $5,400,000 in proceeds (together with
accrued interest of $206,799) from the ATM business sale, to pay the following
amounts to Laurus: (i) $8,508,963 pursuant to the terms of the Laurus
Termination Agreement and (ii) $6,545,340 representing the purchase from Laurus
by the Company of 19,251,000 shares of Company common stock pursuant to the
terms of the Stock Redemption Agreement. Following both such payments to Laurus,
the Company received $6,781,246 in net proceeds from the Cash Security Business
Sale.
On
October 2, 2006, following the foregoing payments to Laurus pursuant to the
terms of the Laurus Termination Agreement and the Stock Redemption Agreement,
no
further fees remained payable by the Company to Laurus and, to our knowledge,
Laurus does not own any shares of the Company.
Cash
Flows
Cash
used
in operations was $(8.9) million for the nine months ended June 30, 2007
compared with cash used in operations of $(1.9) million for the same period
last
year.
Working
Capital
As
of
June 30, 2007, we had working capital of $12.9 million compared with working
capital of $6.3 million at June 30, 2006. The increase was due to the
completion of the Cash Security Business Sale.
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 financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources.
Indebtedness
We
had no
indebtedness or obligations under operating leases at June 30,
2007.
At
June
30, 2007, our exposure to market risk for changes in interest rates relates
to
our investment portfolio, which consists of taxable, short-term money market
instruments and certificates of deposit and debt securities with maturities
between 90 days and one year. We do not use derivative financial instruments
in
our investment portfolio. We place our investments with high-credit quality
issuers and we mitigate default risk by investing in only safe and high-credit
quality securities and by monitoring the credit rating of investment
issuers.
ITEM
4. CONTROLS AND PROCEDURES
(a)
|
Evaluation
of Disclosure Controls
and
Procedures
|
An
evaluation was performed by Jerrell G. Clay, our Chief Executive Officer, and
Stephen P. Griggs, our President, Chief Operating Officer, and Principal
Financial Officer of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934. Based on this evaluation,
our Chief Executive Officer and our President, Chief Operating Officer and
Principal Financial Officer concluded that our disclosure controls and
procedures at June 30, 2007 were effective to ensure that information required
to be disclosed by us in reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the timeframe specified
in
Securities and Exchange Commission rules and forms. Disclosure controls and
procedures include without limitation, controls and procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Exchange Act is accumulated and communicated to management,
including our Chief Executive Officer and our President, Chief Operating Officer
and Principal Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
(b)
|
Changes
in internal control over
financial reporting
|
There
were no changes in our internal controls over financial reporting during three
and nine months ended June 30, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
ITEM
1. LEGAL PROCEEDINGS
On
June
9, 2005, Corporate Safe Specialists, Inc. (“CSS”) filed a lawsuit against Secure
Alliance Holdings Corporation and our wholly owned subsidiary, Secure Alliance,
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 (the
“CSS
Lawsuit”). CSS alleges that the Sentinel product sold by Secure Alliance, L.P.
infringes on 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. Secure Alliance Holdings Corporation was released from this lawsuit,
but
Secure Alliance, L.P. remained a defendant.
As
part
of the Cash Security Business Sale, the buyer of the Cash Security business,
Sentinel Operating, L.P., agreed to undertake and have the sole right to direct
on behalf of itself and us, the defense of the CSS Lawsuit, with counsel of
its
choice, provided that in the event we incur any adverse consequences in
connection with the CSS Lawsuit subsequent to the Cash Security Business Sale,
then Sentinel Operating, L.P. will indemnify us from and against the entirety
of
any such adverse consequences to the extent they are incurred as a result of
the
breach of the Cash Security Asset Purchase Agreement or our negligent action
or
inaction.
On
March
31, 2007, CSS, Secure Alliance Holdings Corporation, Secure Alliance, L.P.
and
our predecessor, Tidel Engineering, L.P., entered into a settlement and mutual
release agreement whereby the parties jointly moved to dismiss all claims and
counterclaims in the CSS Lawsuit. The parties agreed to pay no monetary
settlement and each bear its own legal costs and expenses. Pursuant to the
settlement, we and our predecessor agreed not to make, use, sell or offer for
sale any safe that infringes upon the ‘281 patent during the period of time the
‘281 patent is valid; however, we and our predecessor may challenge, contest,
or
raise as a defense the validity of the ‘281 patent if CSS or any other party
files a claim against us asserting infringement of the ‘281 patent.
On
April
16, 2007, Fire King International, LLC (“Fire King”) filed a lawsuit against
Corporate Safe Specialists, Inc., Tidel Technologies, Inc. and Tidel
Engineering, LP. The lawsuit, Civil Action No. 03-07CV0655-G, was filed in
the
United States District Court of the Northern District of Texas, Dallas Division.
Fire King alleges that the Sentinel product previously sold by the Company’s
predecessor infringes on one or more patent claims found in Fire King patent
U.S. Patent No. 7,063,252 (the ‘252 patent). Fire King seeks injunctive relief
against future infringement, unspecified damages for past infringement and
attorney’s fees and costs. Secure Alliance Holdings Corporation believes that
this suit is without merit and intends to defend itself vigorously.
There
are
several risks inherent in our business including, but not limited to, the
following:
Following
the Cash Security Business Sale, we have no operations.
Following
the consummation of the ATM business sale on January 3, 2006 and the closing
of
the Cash Security Business Sale on October 2, 2006, we have substantially no
operations and no employees resulting in a development stage
operation.
We
have limited management and other resources.
Our
ability to manage any future operations effectively will require us to hire
new
employees, to integrate new management and employees into any future operations,
financial and management systems, controls and facilities. Our failure to handle
the issues we face effectively, including any failure to integrate new
management controls, systems and procedures, could materially adversely affect
our company, results of operations and financial condition.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
During
the quarter ended March 31, 2007, we issued 21,739 shares of our restricted
common stock with a value of $10,000 to a company pursuant to a consulting
agreement.
During
the quarter ended December 31, 2006, stock options issued pursuant to our 1997
Long-Term Incentive Plan were exercised by three individuals for 27,250 shares
of our common stock generating aggregate proceeds of $6,813. During the quarter
ended December 31, 2006, warrants were exercised by two holders for 56,825
shares of our common stock generating aggregate proceeds of
$22,500.
On
March
21, 2007, the Company awarded Messrs. Griggs and Clay each 950,000 stock options
to purchase our common stock at an exercise price of $0.62 per share pursuant
to
the Company's 1997 Long-Term Incentive Plan. Of this award, 34% of the options
vest on the first anniversary of the date of the grant, 33% of the options
vest
on the second anniversary of the date of the grant and the remaining 33% of
the
options vest on the third anniversary of the date of the grant. In addition,
100% of the options vest upon a change of control.
On
April
20, 2007, Robert D. Peltier and Leonard L. Carr submitted their resignations
as
Acting Chief Financial Officer and Secretary, respectively, effective
immediately. The Company accepted both resignations.
On
April
20, 2007, the board of directors unanimously approved the appointment of Stephen
P. Griggs as the Company’s Principal Financial Officer and Secretary in addition
to his existing positions of President and Chief Operating Officer.
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
Certification
of 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 Principal 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.
|
SECURE
ALLIANCE HOLDINGS CORPORATION
|
|
(Company)
|
|
|
August
14, 2007
|
/s/
JERRELL G. CLAY
|
|
Jerrell
G. Clay
|
|
Chief
Executive Officer
|
|
|
August
14, 2007
|
/s/
STEPHEN P. GRIGGS
|
|
Stephen
P. Griggs
|
|
Principal
Financial Officer
|
24