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GAXC > SEC Filings for GAXC > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for GLOBAL AXCESS CORP


15-May-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 $0.14 to $0.70 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.

During March 2013, the Company informed The Exchange, its primary customer in the DVD business that the Company intends to sell its DVD business. In response to the Company's request that The Exchange assign its contract when the appropriate time dictates. On March 26, 2013, the Company received notification from The Exchange that they are terminating its contract with the Company effective June 24, 2013. The Exchange contract accounts for nearly all of the Company's revenue from its DVD business services.

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
                                                           March 31, 2013           March 31, 2012

Revenues                                                             100.0 %                  100.0 %
Cost of revenues                                                      76.1 %                   67.9 %
Gross profit                                                          23.9 %                   32.1 %
Operating expenses
Depreciation expense                                                   7.4 %                    7.4 %
Amortization of intangible merchant contracts                          4.5 %                    3.9 %
Impairment of assets and long-lived assets                           154.8 %                    0.0 %
Selling, general and administrative                                   20.6 %                   20.9 %
Stock compensation expense                                             0.4 %                    0.2 %
Total operating expenses                                             187.7 %                   32.5 %
Operating loss from operations before items shown below             (163.7 )%                  (0.4 )%

Interest expense, net                                                 (7.3 )%                  (3.1 )%
Debt restructuring charges                                            (1.4 )%                   0.0 %
Gain on sale of assets                                                 0.0 %                    0.2 %
Other non-operating expense, net                                       0.0 %                    0.0 %
Income tax expense                                                    (0.3 )%                  (0.3 )%
Net loss                                                            (172.7 )%                  (3.5 )%
EBITDA (1)                                                          (153.2 )%                  11.2 %

(1) See "-EBITDA" sections in: "Comparison of Results of Operations for the Three Months Ended March 31, 2013 and 2012".

Comparison of Results of Operations for the Three Months Ended March 31, 2013 and 2012:

Revenues

The Company reported total operating revenue from operations of $7,013,746 for the three-month period ended March 31, 2013 as compared to $8,296,300 for the three-month period ended March 31, 2012, a decrease of 15.5% year over year.

Revenue from our ATM services business decreased approximately 15.8% compared to the first quarter of 2012. We ended March 31, 2013 with 342 fewer ATMs than we ended with on March 31, 2012, and processed 10.6% fewer surcharge transactions in the first quarter of 2013 as compared to the first quarter of 2012. The decrease in surcharge transactions resulted in a decrease of approximately $590,000 of surcharge revenue year over year. A decrease in total transactions along with a decrease in interchange revenue paid to us by card networks occurring subsequent the first quarter of 2012 resulted in approximately $375,000 less interchange revenue year over year.

Revenue from our DVD services business decreased approximately $140,000 from the first quarter of 2012. This decrease was due to decreased rental activity year over year.

Cost of Revenues

Our total cost of revenues from operations decreased from $5,636,808 to $5,334,119 for the three-month period ended March 31, 2012 to the three-month period ended March 31, 2013. The decrease was the result of approximately $225,000 of decreased cost of revenues related to our ATM business, and approximately $77,000 of decreased cost of revenues related to our DVD business. Cost of revenues in our ATM services business decreased mostly due to decreased revenues, partially offset by increased commission share resulting from renewals of new customer contracts. The decrease in cost of revenues from our DVD services business was a function of decreased DVD rental revenue along with lower DVD title amortization stemming from lower trailing twelve month purchasing volumes.

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 $225,000 decrease was mainly due to decreased revenues partially off-set by increased commissions (or revenue share) as a result of new terms in certain customer renewal agreements.

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 cost of revenues from our DVD services business was a function of decreased DVD rental revenue along with lower DVD title amortization stemming from lower trailing twelve month purchasing volumes.

Gross Profit

Gross profit from operations as a percentage of revenue for the three-month periods ended March 31, 2013 and 2012 were approximately 23.9% or $1,679,627, and approximately 32.1%, or $2,659,492, respectively. The decreased gross profit for the first quarter of 2013 versus the same period in 2012 was mainly attributable to the margin compression 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 first quarter of 2013 was 24.9%, which is lower than the 33.7% gross profit for the same period in 2012. The decrease in gross profit percentage for the ATM services business was attributable to the margin compression discussed above.

Gross profit percentage in the DVD services business for the first quarter of 2013 was 17.5%, which is lower than the 21.2% gross profit for the same period in 2012. The decrease in gross profit percentage for the DVD services business was mainly attributable to fixed cost of revenues absorbed by decreased revenues for the period.

Operating Expenses

Our total operating expenses for the three months ended March 31, 2013 and 2012 were $13,162,084 and $2,694,197 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, impairment of assets and long lived assets 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          2013 to 2012      2013 to 2012
                                        March 31, 2013       March 31, 2012        $ Change          % Change

Depreciation expense                    $       518,230     $        615,185     $     (96,955 )           (15.8 )%
Amortization of intangible merchant
contracts                                       316,033              326,844           (10,811 )            (3.3 )%
Impairment of assets and long-lived
assets                                       10,858,155                    -        10,858,155             100.0 %
Selling, general and administrative           1,444,839            1,734,973          (290,134 )           (16.7 )%
Stock compensation expense                       24,827               17,195             7,632              44.4 %
Total operating expenses                $    13,162,084     $      2,694,197     $  10,467,887             388.5 %

See explanation of operating expenses below:

Depreciation Expense

Depreciation expense from operations decreased for the three-month period ended March 31, 2013 to $518,230 from $615,185 for the same period in 2012. This decrease in depreciation expense was mainly due to an impairment of Company owned DVD kiosks in the fourth quarter of 2012. (See Financial Statement Footnote #23 "Impairment of Long-Lived Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2012 for more on this Impairment).

Amortization of Intangible Merchant Contracts

Amortization of intangible merchant contracts from operations decreased for the three-month period ended March 31, 2013 to $316,033 from $326,844 for the same period in 2012. The decrease was attributable to previously capitalized merchant contract costs becoming fully amortized during the fourth quarter of 2012 and during the first quarter of 2013.

Impairment of Assets and Long-lived Assets

During the first quarter of fiscal 2013, the Company determined that additional sufficient indicators of potential impairment existed to require an impairment analysis for the DVD business. Based on the analyses, the Company recorded an impairment charge of $997,726 on its DVD kiosks.

Since June 30, 2012, the Company's market capitalization had decreased significantly. According to accounting literature, a significant decline in market capitalization is a triggering event which requires impairment analysis on the assets of the business.

Additionally, since the third quarter of 2012, the Company has been operating under several forbearance agreements with its senior lender, Fifth Third Bank (See Financial Footnote #4 "Senior Lenders' Notes Payable" regarding the details of the agreement) due to the Company's poor financial performance and negative cash flow. As such, during the first quarter of 2013, the Company determined that sufficient additional indicators of potential impairment existed to require a further impairment analysis for the ATM business.

The Company estimated the fair value of the assets in ATM business utilizing a combination of market multiple valuation metrics used in our industry, the present value of discounted cash flows, and analysis of most recent purchase offers by third-parties. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable companies with similar operating and investment characteristics as the reporting unit.

Based on the Company's analyses, the implied fair value of the ATM assets was lower than the carrying value of the ATM assets for the ATM business unit. As a result, the Company recorded an impairment charge of $9,860,429 during the first quarter of 2013.

Selling, General and Administrative ("SG&A") Expenses

Our total SG&A expenses from operations decreased to $1,444,839, or 20.6% of revenue for the three-month period ended March 31, 2013 from $1,734,973 or 20.9% of revenue for the three-month period ended March 31, 2012. The decrease in SG&A expenses was mainly due to approximately $210,000 of decreased headcount, salary related, and director's fees expense, as well as another $80,000 reduction in other miscellaneous SG&A expenses

Stock Compensation Expense

For the three months ended March 31, 2013, we recorded stock compensation expense of $24,827, mainly relating to executive and director stock option grants during fiscal years 2007 through 2012. For the three months ended March 31, 2012, we recorded stock compensation expense of $17,195.

Interest Expense, Net

Interest expense, net, increased for the three-month period ended March 31, 2013 to $511,286 from $254,596 for the three-month period ended March 31, 2012. The increase was mainly due to default interest, late payment interest and payment in kind interest accrued in the first quarter of 2013, in association with the Forbearance Agreement and the Second Forbearance Agreement entered into with Fifth Third, along with increased debt balances year over year. (See Financial Footnote #4 "Senior Lenders' Notes Payable" regarding the details of the debt balances).

Debt Restructuring Charges

During the three-month period ended March 31, 2013, the Company incurred debt restructuring expenses of $97,868. These expenses include legal expenses, as well as fees for consultants the company was required to hire as a condition of the bank forbearance agreements.

Gain on Sale of Assets

During the three-month period ended March 31, 2012, the Company recorded a gain on the sale of assets of $20,493.

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 loss to EBITDA from operations for the three months ended March 31, 2013 and 2012:

                                                     For the Three Months Ended
                                                 March 31, 2013       March 31, 2012

Net loss                                        $    (12,110,611 )   $       (291,308 )
Income tax expense                                        19,000               22,500
Interest expense, net                                    511,286              254,596
Depreciation expense                                     518,230              615,185
Amortization of intangible merchant contracts            316,033              326,844
EBITDA from operations                          $    (10,746,062 )   $        927,817

Our EBITDA from operations decreased to ($10,746,062) for the first quarter of fiscal 2013 from $927,817 for the first quarter of fiscal 2012. The decrease was primarily due to margin compression in the ATM business stemming from increased commissions paid to our customers, reduction in interchange paid by card networks occurring subsequent to the first quarter of 2012 and lower machine count year over year. Additionally, we recorded impairment of assets charges of $9,860,249 relating to our ATM business and $997,726 relating to our DVD business.

The following table sets forth a reconciliation of net loss to EBITDA from operations before impairment of assets and long-lived assets, debt restructuring charges, stock compensation expense, and (gain) loss on sale of assets ("Adjusted EBITDA") for the three months ended March 31, 2013 and 2012:

                                                     For the Three Months Ended
                                                 March 31, 2013       March 31, 2012

Net loss                                        $    (12,110,611 )   $       (291,308 )
Income tax expense                                        19,000               22,500
Interest expense, net                                    511,286              254,596
Depreciation expense                                     518,230              615,185
Amortization of intangible merchant contracts            316,033              326,844
Impairment of assets and long-lived assets            10,858,155                    -
Debt restructuring charges                                97,868                    -
Stock compensation expense                                24,827               17,195
Gain on sale of assets                                         -              (20,493 )
Adjusted EBITDA from operations                 $        234,788     $        924,519

Our Adjusted EBITDA decreased to $234,788 for the first quarter of fiscal 2013 from $924,519 for the first quarter of fiscal 2012. Adjusted EBITDA as a percentage of revenues decreased to 3.3% for the first quarter of fiscal 2013 from 11.1% for the first quarter of fiscal 2012. The decrease was primarily due to margin compression in the ATM business stemming from increased commissions paid to our customers, reduction in interchange paid by card networks occurring subsequent to the first quarter of 2012 and lower machine count year over year.

Seasonality - ATM Services

We have traditionally experienced higher transaction volumes per machine in the second and third quarters than in the first and fourth quarters. The increased volumes in the summer months coincide with increased vacation travel in the United States.

Seasonality - DVD Services

Through our limited operating history in DVD Services, we have experienced seasonality in our revenue from our DVD Services segment. The summer months have historically been high rental months for our DVD Services segment followed by lower revenue in September and October, due in part to the beginning of the school year and the introduction of the new television season. We expect our lowest quarterly revenue for the DVD services business in the first quarter and our highest quarterly revenue and earnings in the second and third quarters.

Liquidity and Capital Resources



Financial Condition



                                              For the Three Months Ended           2013 to 2012       2013 to 2012
                                         March 31, 2013        March 31, 2012        $ Change           % Change

Net cash provided by (used in)
operating activities                    $       (211,368 )    $      1,261,356     $  (1,472,724 )           (116.8 )%
Net cash used in investing activities            (55,787 )          (1,799,947 )       1,744,160               96.9 %
Net cash provided by (used in)
financing activities                             580,285               302,451           277,834               91.9 %
Increase (decrease) in cash             $        313,130      $       (236,140 )   $     549,270

Operating Activities

During the first three months of 2013 net cash used in operating activities amounted to $211,368. Net cash provided by operating activities amounted to $1,261,356 during the first three months of 2012. This decrease was primarily the result of lower margin contributed by the ATM business.

Investing Activities

Net cash used in investing activities from operations for the first three months of 2013 was $55,787. This compares to net cash used in investing activities of $1,799,947 for the three-month period ended March 31, 2012. The decrease in cash used in investing activities year over year was mainly due to a decrease of cash . . .

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