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| GAXC > SEC Filings for GAXC > Form 10-Q on 20-Aug-2012 | All Recent SEC Filings |
20-Aug-2012
Quarterly Report
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto.
Overview
Global Axcess Corp, through its wholly owned subsidiaries, owns or leases, operates or manages Automated Teller Machines ("ATM"s) and DVD kiosks with locations primarily in the eastern and southwestern United States of America.
ATM Business Services
Our revenues are principally derived from two types of fees, which we charge for processing transactions on our ATM network. We receive an interchange fee from the issuer of the credit or debit card for processing a transaction when a cardholder uses an ATM in our network. In addition, in most cases we receive a surcharge/convenience fee from the cardholder when the cardholder makes a cash withdrawal from an ATM in our network.
Interchange fees are processing fees that are paid by the issuer of the credit or debit card used in a transaction. Interchange fees vary for cash withdrawals, balance inquiries, account transfers or uncompleted transactions, which are the primary types of transactions that are currently processed on ATMs in our network. The maximum amount of the interchange fees is established by the national and regional card organizations and credit card issuers with whom we have a relationship. We receive interchange fees for transactions on ATMs that we own, but sometimes we rebate a portion of the fee to the owner of the ATM location under the applicable lease for the ATM site. We also receive the interchange fee for transactions on ATMs owned by third party vendors included within our network, but we rebate all or a portion of each fee to the third party vendor based upon negotiations between us. The interchange fees received by us vary from network to network and, to some extent, from issuer to issuer, but generally range from $0.15 to $0.55 per cash withdrawal. Interchange fees for balance inquiries, account transfers and denied transactions are generally substantially less than fees for cash withdrawals. The interchange fees received by us from the card issuer are independent of the service fees charged by the card issuer to the cardholder in connection with ATM transactions. Service fees charged by card issuers to cardholders in connection with transactions through our network range from zero to $2.50 per transaction. We do not receive any portion of these service fees.
In most markets we impose a surcharge/convenience fee for cash withdrawals. Surcharge/convenience fees are a substantial additional source of revenue for us and other ATM network operators. The surcharge/convenience fee for most of the ATMs in our network ranges between $1.50 and $2.95 per withdrawal. The surcharge/convenience fee for other ATMs in our network ranges between $0.50 and $7.50 per withdrawal. We receive the full surcharge/convenience fee for cash withdrawal transactions on ATMs that we own, but often we rebate a portion of the fee to the owner of the ATM location under the applicable lease for the ATM site. We also receive the full surcharge/convenience fee for cash withdrawal transactions on ATMs owned by third party vendors included within our network, but we rebate all or a portion of each fee to the third party vendor based upon a variety of factors, including transaction volume and the party responsible for supplying vault cash to the ATM and only record earned revenues based upon the Company's contracts with the third party vendors.
In addition to revenues derived from interchange and surcharge/convenience fees, we also derive revenues from providing network management services to third parties owning ATMs included in our ATM network. These services include 24 hour transaction processing, monitoring and notification of ATM status and cash condition, notification of ATM service interruptions, in some cases dispatch of field service personnel for necessary service calls and cash settlement and reporting services. The fees for these services are paid by the owners of the ATMs.
Interchange fees are credited to us by networks and credit card issuers on a monthly basis and are paid to us in the following month between the 5th and 15th business day. Surcharge/convenience fees are charged to the cardholder and credited to us by networks and credit card issuers on a daily basis. We rebate a portion of these fees to ATM owners and owners of ATM locations as commission payments as per their contractual terms. Fees for network management services are generally paid to us on a monthly basis.
We compete in a fragmented industry; in which no one firm has a significant market share and can strongly influence the industry outcome. Our industry is populated by a large number of financial institutions and ISOs which deploy ATMs. Our industry is also characterized by essentially undifferentiated services.
There are underlying economic causes as to why our industry is fragmented. For example:
· Low overall entry barriers;
· Absence of national economies of scale;
· Seasonal and geographic volume fluctuations;
· The need for local presence in some market segments; and
· The need for low overhead.
Additionally, our industry is showing increasing signs of being an industry in decline. Reasons for this market decline include:
· Emergence of debit cards, "pay pass" machines and RFID as substitutes for cash in making purchases;
· Increasing acceptance of debit cards by younger demographics; and
· Market saturation of prime ATM locations in the United States.
Should the signs of industry decline come to fruition, it could negatively impact our results of operations by decreasing revenues and placing downward pressure on earnings. It could also make the availability of capital resources more difficult to obtain and could negatively impact our ability to more aggressively pay down debt, both of which could affect our results of operations.
The demand for our ATM services is primarily a function of population growth and new business creation to serve that population growth. New opportunities may exist:
· As our competitors seek to exit the business;
· As our competitors encounter financial and regulatory difficulties; and
· As financial institutions seek to reduce their costs of managing an ATM channel during a period of decreasing ATM usage.
Opportunities may also exist to leverage our existing customer base by selling additional products and services to them.
DVD Business Services
Nationwide Ntertainment Services, Inc., a wholly owned subsidiary of the Company formed during the fiscal year ended December 31, 2009, is engaged in the business of operating a network of DVD rental kiosks. We offer self-service DVD rentals through kiosks where consumers can rent or purchase movies or games. Our current DVD kiosks are installed primarily at military bases within the United States. Our DVD kiosks, through our brand InstaFlix, serve as a mini video rental store and occupy an area of less than ten square feet. Consumers use a touch screen to select their DVD, swipe a valid credit or debit card, and rent movies or games in some kiosks. The process is designed to be fast, efficient and fully automated with no upfront or membership fees.
Results of Operations
The following tables set forth certain consolidated statement of operations data
as a percentage of revenues for the periods indicated. Percentages may not add
due to rounding.
For the Three Months Ended
June 30, 2012 June 30, 2011
Revenues 100.0 % 100.0 %
Cost of revenues 70.4 % 63.1 %
Gross profit 29.6 % 36.9 %
Operating expenses
Depreciation expense 8.3 % 6.9 %
Amortization of intangible merchant contracts 4.0 % 3.5 %
Selling, general and administrative 19.4 % 22.1 %
Restructuring charges 0.6 % 0.3 %
Stock compensation expense 0.3 % 0.2 %
Total operating expenses 32.7 % 33.1 %
Operating income (loss) from operations
before items shown below (3.1 %) 3.9 %
Interest expense, net (3.7 %) (2.2 %)
Gain (loss) on sale of assets (0.0 %) 0.8 %
Income tax expense (0.3 %) (0.3 %)
Net income (loss) (7.1 %) 2.2 %
EBITDA (1) 9.2 % 15.0 %
For the Six Months Ended
June 30, 2012 June 30, 2011
Revenues 100.0 % 100.0 %
Cost of revenues 69.2 % 62.2 %
Gross profit 30.8 % 37.8 %
Operating expenses
Depreciation expense 7.9 % 7.1 %
Amortization of intangible merchant contracts 4.0 % 3.6 %
Selling, general and administrative 20.2 % 23.2 %
Restructuring charges 0.3 % 3.2 %
Stock compensation expense 0.3 % 0.2 %
Total operating expenses 32.6 % 37.3 %
Operating income (loss) from operations
before items shown below (1.7 %) 0.5 %
Interest expense, net (3.4 %) (2.2 %)
Gain on sale of assets 0.1 % 0.4 %
Other non-operating expense, net (0.0 %) (0.7 %)
Income tax expense (0.3 %) (0.3 %)
Net loss (5.3 %) (2.2 %)
EBITDA (1) 10.2 % 10.8 %
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(1) See "-EBITDA" sections in: "Comparison of Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011".
Comparison of Results of Operations for the Three Months Ended June 30, 2012 and 2011:
Revenues
The Company reported total operating revenue from operations of $8,155,130 for the three-month period ended June 30, 2012 as compared to $8,293,743 for the three-month period ended June 30, 2011, a decrease of 1.7% year over year.
Revenue from our ATM services business was up approximately 12.0% from the second quarter of 2011. We ended June 30, 2012 with 193 more ATMs than we ended with on June 30, 2011, and processed 8.2% more surcharge transactions in the second quarter of 2012 as compared to the second quarter of 2011.
During the second quarter of 2012, we benefited from having ATM transactions from ATM portfolios acquired subsequent to second quarter 2011. For the second quarter of 2012, we earned approximately $7,000 less interchange fees than we earned in the second quarter of 2011. This was due to an interchange reduction implemented by network sponsors during the second quarter of 2012. This interchange reduction was mostly offset by higher machine count and higher transactions per machine. Revenue from our DVD services business decreased approximately $896,000 from the second quarter of 2011. The decrease in DVD services revenue was due primarily to cancellation of a contract with a major customer resulting in removal of our DVD kiosks from this customer's sites in December of 2011. This cancellation was the result of the customer's bankruptcy proceedings. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).
Cost of Revenues
Our total cost of revenues from operations increased from $5,232,206 to $5,741,341 for the three-month period ended June 30, 2011 to the three-month period ended June 30, 2012. The increase was the result of approximately $1,380,000 of increased cost of revenues related to our ATM business. This increase was partially offset by approximately $870,000 of decreased cost of revenues related to our DVD business. Cost of revenues in our ATM services business increased primarily due to increased revenues, increased commission share resulting from renewals of new customer contracts, as well as an increase in ATM maintenance costs. The decrease in cost of revenues from our DVD services business was a function of decreased DVD rental revenue, and other reductions in cost of sales discussed below.
The principal components of cost of revenues in the ATM services business are retailer, merchant and distributor commissions (or revenue share), cost of cash, cash replenishment, ATM vault cash insurance, field maintenance, transaction processing charges, telecommunication costs and equipment costs on related equipment sales. The $1,380,000 increase was mainly due to increased commissions (or revenue share) due to higher revenues, new terms in certain customer renewal agreements, and increased first line and second line maintenance costs. Our cost of cash replenishment increased during the second quarter of 2012 from 2011 mainly due to the increased number of Company-owned ATMs in 2012 as compared to 2011. Cost of cash decreased year over year, due to a lower interest rate from our cash provider. First line and second line maintenance fees also increased over last year due to the increase in Company-owned ATMs as well as due to more aggressive billings by our ATM maintenance vendors.
The principal components of cost of revenues in the DVD services business are retailer and merchant commissions (or revenue share), amortization of our DVD library, DVD replenishment, field maintenance, credit card processing charges and telecommunication costs. The decrease in DVD services cost of sales was a function of decreased DVD rental revenue due primarily to cancellation of a contract with a major customer, which resulted in removal of our DVD kiosks from customer sites in December of 2011. Additionally, the Company reduced DVD library amortization due to the impairment of DVD titles in the third quarter of 2011, decreased DVD title purchases, and reduced processing costs. The contract cancellation was the result of the customer's bankruptcy proceedings. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).
Gross Profit
Gross profit from operations as a percentage of revenue for the three-month periods ended June 30, 2012 and 2011 were approximately 29.6% or $2,413,789, and approximately 36.9%, or $3,061,537, respectively. The decreased gross profit for the second quarter of 2012 versus the same period in 2011 was mainly attributable to the increased cost of sales for the ATM services business and the decreased rental revenue from DVD services discussed above.
Gross profit percentage in the ATM services business for the second quarter of 2012 was 29.8%, which is lower than the 43.2% gross profit for the same period in 2011. The decrease in gross profit percentage for the ATM services business was attributable to the increased cost of revenues discussed above.
Gross profit percentage in the DVD services business for the second quarter of 2012 was 28.4%, which is higher than the 17.1% gross profit for the same period in 2011. The increase in gross profit percentage for the DVD services business was attributable to the decreased cost of revenues discussed above.
Operating Expenses
Our total operating expenses for the three months ended June 30, 2012 and 2011 were $2,665,435 and $2,741,325 respectively. The principal components of operating expenses are general and administrative expenses such as professional and legal fees, administrative salaries and benefits, consulting and audit fees, occupancy costs, sales and marketing expenses and administrative expenses. Operating expenses also include depreciation, amortization of intangible merchant contracts and stock compensation expenses.
To aid in the understanding of our discussion and analysis of our operating expenses, the following table summarizes the amount and percentage change in the amounts from the previous year for certain operating expense line items:
For the Three Months Ended 2012 to 2011 2012 to 2011
June 30, 2012 June 30, 2011 $ Change % Change
Depreciation expense $ 680,790 $ 572,190 $ 108,600 19.0 %
Amortization of
intangible merchant
contracts 325,435 291,220 34,215 11.7 %
Selling, general and
administrative 1,584,718 1,832,866 (248,148 ) (13.5 %)
Restructuring charges 47,551 27,221 20,330 74.7 %
Stock compensation
expense 26,945 17,828 9,117 51.1 %
Total operating expenses $ 2,665,439 $ 2,741,325 $ (75,886 ) (2.8 %)
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See explanation of operating expenses below:
Depreciation Expense
Depreciation expense from operations increased for the three-month period ended June 30, 2012 to $680,790 from $572,190 for the same period in 2011. This increase in depreciation expense was mainly due to an increase of Company owned kiosks, as well as re-introduction of previously suspended DVD kiosk depreciation to coincide with re-deployment of warehoused machines. The warehousing of these machines was the result of cancellation of a contract with a major customer. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).
Amortization of Intangible Merchant Contracts
Amortization of intangible merchant contracts from operations increased for the three-month period ended June 30, 2012 to $325,435 from $291,220 for the same period in 2011. The increase from 2011 was due to the amortization of contracts in the ATM services business acquired subsequent to the second quarter of 2011.
Selling, General and Administrative ("SG&A") Expenses
Our total SG&A expenses from operations decreased to $1,584,718, or 19.4% of revenue for the three-month period ended June 30, 2012 from $1,832,866 or 22.1% of revenue for the three-month period ended June 30, 2011. The decrease in SG&A expenses was mainly due to approximately $134,000 of decreased headcount and other salary related expenses, approximately $60,000 in reduced SG&A expenses related to cost of DVD kiosks leased in 2011 and $30,000 in reduced travel expenses.
Restructuring Charges
The Company incurred restructuring expenses due to headcount reductions of $47,551 for the three months ended June 30, 2012 and $27,221 for the three months ended June 30, 2011.
Stock Compensation Expense
For the three months ended June 30, 2012, we recorded stock compensation expense of $26,945, mainly relating to executive and director stock option grants during fiscal years 2007 through 2012. For the three months ended June 30, 2011, we recorded stock compensation expense of $17,828.
Interest Expense, Net
Interest expense, net, increased for the three-month period ended June 30, 2012 to $301,248 from $178,604 for the three-month period ended June 30, 2011. The increase was mainly due to portions of our two cash flow hedges becoming effective during the second quarter of 2012, as well as increased debt balances year over year. See Financial Footnote #4 "Senior Lenders' Notes Payable" regarding the details of the debt balances.
Gain (Loss) on Sale of Assets
During the three-month period ended June 30, 2012, the Company recorded a loss on the sale of assets of $710.
The Company accounts for the impairment of long-lived assets in accordance with GAAP. The following impairment was recognized during the fourth quarter of 2010:
When the Company entered into the DVD services business line in 2009, it acquired DVD rental kiosks and related software from a certain manufacturer and placed those kiosks at merchant locations. During the first and second quarters of 2010, the Company concluded that the manufacturers' DVD rental kiosk would not be able to meet the future growth demands of the Company, and as such, the Company decided to purchase future DVD rental kiosks from an alternate manufacturer, thus running its DVD services business with two distinct and different hardware and software platforms. During the fourth quarter of 2010, the Company made the decision that operating both DVD platforms would not be an operationally efficient manner to run the DVD services business, and as such, decided that by the end of fiscal 2011, the Company would migrate any business from the original platform to its new platform and would attempt to find a buyer for the 49 DVD rental kiosks and related software operating under the original platform. Upon evaluation and research, the Company concluded that the carrying amount of these assets was not fully recoverable and during fiscal 2010, the following amounts were charged to impairment of long-lived assets:
Estimated
Net Book proceeds Impairment
from
Long-lived asset description Value disposition Charge
DVD rental kiosks and related
software $ 604,493 $122,500 $ 481,993
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$ 481,993
During the three-month period ended June 30, 2011, the Company sold these machines for a net gain on sale of $63,541.
EBITDA
EBITDA (a non-GAAP measure) is defined as earnings before net interest, taxes, depreciation and amortization. EBITDA has some inherent limitations in measuring operating performance due to the exclusion of certain financial elements such as depreciation and is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. Furthermore, EBITDA is not intended to be a substitute for cash flows from operating activities, as a measure of liquidity, or an alternative to net income in determining our operating performance in accordance with GAAP. Our use of EBITDA should be considered within the following context:
• We acknowledge that our depreciable assets are necessary to earn revenue based on our current business.
• Our use of EBITDA as a measure of operating performance is not based on our belief about the reasonableness of excluding depreciation when measuring financial performance.
• Our use of EBITDA is supported by the importance of EBITDA to the following key stakeholders:
• Analysts - who estimate our projected EBITDA and other EBITDA-based metrics in their independently developed financial models for investors;
• Creditors - who evaluate our operating performance based on compliance with certain EBITDA-based debt covenants;
• Investment Bankers- who use EBITDA and other EBITDA-based metrics in their written evaluations and comparisons of companies within our industry; and
• Board of Directors and Executive Management - who use EBITDA as an essential metric for evaluating management performance relative to our operating budget and bank covenant compliance, as well as our ability to service debt and raise capital for growth opportunities which are a critical component to our strategy.
The following table sets forth a reconciliation of net income (loss) to EBITDA from operations for the three months ended June 30, 2012 and 2011:
For the Three Months Ended
June 30, 2012 June 30, 2011
Net income (loss) $ (576,108 ) $ 183,149
Income tax expense 22,500 22,000
Interest expense, net 301,248 178,604
Depreciation expense 680,790 572,190
Amortization of intangible merchant contracts 325,435 291,220
EBITDA from operations $ 753,865 $ 1,247,163
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Our EBITDA from operations decreased to $753,865 for the second quarter of fiscal 2012 from $1,247,163 for the second quarter of fiscal 2011. The decrease was primarily due to approximately $620,000 of decreased margin from the ATM business coupled with approximately $30,000 of decreased margin from the DVD business as well as a decrease of approximately $60,000 of gain on sale of asset. These factors were partially offset by a decrease in SG&A expense of approximately $250,000 year over year.
The following table sets forth a reconciliation of net income (loss) to EBITDA
from operations before restructuring charges, stock compensation expense, and
(gain) loss on sale of assets ("Adjusted EBITDA") for the three months ended
June 30, 2012 and 2011:
For the Three Months Ended
June 30, 2012 June 30, 2011
Net income (loss) $ (576,108 ) $ 183,149
Income tax expense 22,500 22,000
Interest expense, net 301,248 178,604
Depreciation expense 680,790 572,190
Amortization of intangible merchant contracts 325,435 291,220
Restructuring charges 47,551 27,221
Stock compensation expense 26,945 17,828
(Gain) loss on sale of assets 710 (63,541 )
Adjusted EBITDA from operations $ 829,071 $ 1,228,671
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Our Adjusted EBITDA decreased to $829,071 for the second quarter of fiscal 2012 from $1,228,671 for the second quarter of fiscal 2011. Adjusted EBITDA as a percentage of revenues decreased to 10.2% for the second quarter of fiscal 2012 from 14.8% for the second quarter of fiscal 2011. The decrease in Adjusted EBITDA from operations was due to lower gross margin contributed by our ATM and DVD services business for the second quarter of 2012 as compared to the gross margin contributed by our ATM and DVD services business for the second quarter of 2011, partially offset by a decrease in SG&A.
Comparison of Results of Operations for the Six Months Ended June 30, 2012 and 2011:
Revenues
The Company reported total operating revenue of $16,451,430 for the six-month period ending June 30, 2012 as compared to $16,243,814 for the six month period . . .
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