UNITED STATES


SECURITIES AND EXCHANGE COMMISSION





Washington, D.C. 20549





FORM 10-Q





x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2011





 ̈  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    0-19657





ACCESS TO MONEY, INC.


(Exact Name of Registrant as Specified in Its Charter)





Delaware

93-0809419(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)





1101 Kings Highway N, Suite G100


Cherry Hill, New Jersey  08034





(Address of principal executive offices) (Zip Code)





(856) 414-9100





(Registrant’s telephone number, including area code)





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 requirements for the past 90 days).   YES x   NO  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES o   NO x





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.





Large accelerated filer
 ̈
Accelerated filer
 ̈Non-accelerated filer
 ̈
Smaller reporting company
x(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


YES    ̈     NO   x





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  33,294,348 shares of common stock outstanding at August 12, 2011.





TABLE OF CONTENTS
Page No.PART I
FINANCIAL INFORMATIONITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
2ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
13ITEM 4.
CONTROLS AND PROCEDURES
25PART II
OTHER INFORMATIONITEM 6.
EXHIBITS
26


i


PART I - FINANCIAL INFORMATION





ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED).





Access to Money, Inc.


Condensed Consolidated Balance Sheets


(In thousands, excluding share and per share amounts)





(Unaudited)June 30, 2011


December 31, 2010AssetsCurrent assets:Cash

$
1,706


$
2,421Restricted cash


603



601Accounts receivable, net


1,833



2,552Leases receivable, net


155



163Inventories


1,035



917Prepaid expenses and other


257



440Deferred financing costs


44



44Total current assets


5,633



7,138Property and equipment, net


3,434



2,445Intangible assets, net


1,147



1,368Goodwill


10,559



10,559Deferred financing costs, long term


144



166Other assets


563



473Total assets

$
21,480


$
22,149Liabilities and Shareholders’ DeficitCurrent liabilities:Accounts payable

$
6,589


$
5,667Accrued expenses


7,231



6,940Term loans – current portion, net


1,005



1,131Total current liabilities


14,825



13,738Long term liabilities:Term loans and other debt – long term portion, net


17,070



17,590Warrants


149



587Total liabilities


32,044



31,915Shareholders’ deficit:Common stock, $0.001 par value - 70,000,000 shares authorized; 33,363,652 and 33,205,318 shares issued as of June 30, 2011 and December 31, 2010, respectively, and 33,294,348 and 33,146,333 shares outstanding at June 30, 2011 and December 31, 2010, respectively


33



33Preferred stock, $0.001 par value 5,000,000 shares authorized, none issued and outstanding


-



-Additional paid-in capital


138,728



138,681Treasury stock


(21
)


(21
)Accumulated deficit


(149,304
)


(148,459
)Total shareholders’ deficit


(10,564
)


(9,766
)Total liabilities and shareholders’ deficit

$
21,480


$
22,149





See accompanying notes to condensed consolidated financial statements.


2


Access to Money, Inc.


Condensed Consolidated Statements of Operations


(In thousands, except per share amounts)


(Unaudited)





Three months ended

June 30,


Six months ended

June 30,2011


2010


2011


2010Revenues:Transaction-based revenues

$
18,836


$
21,453


$
37,867


$
42,053ATM equipment and other revenues


805



534



1,404



2,137Net revenues


19,641



21,987



39,271



44,190Cost of revenues:Cost of ATM operating revenues


16,600



18,019



33,544



35,374Cost of ATM equipment and other revenues


676



275



1,087



1,811Total cost of revenues


17,276



18,294



34,631



37,185Gross profit


2,365



3,693



4,640



7,005Selling, general and administrative expense


2,516



2,816



5,016



5,401Operating (loss) income


(151
)


877



(376
)


1,604Interest expense


504



759



995



1,516Amortization of debt issuance costs


11



560



22



1,119Other expense (income)


(31
)


(8
)


(110
)


(21
)Change in fair value of warrants (income) expense


(12
)


(2,482
)


(438
)


(2,342
)Net income (loss) before income taxes


(623
)


2,048



(845
)


1,332Provision (benefit) for income taxes


-



-



-



-Net income (loss)

$
(623
)

$
2,048


$
(845
)

$
1,332Net income (loss) per common share – basic

$
(.02
)

$
.09


$
(.03
)

$
.06Net income (loss) per common share – diluted

$
(.02
)

$
.07


$
(.03
)

$
.05Weighted average common shares outstanding:Basic


33,267



22,252



33,207



22,163Diluted


33,267



29,620



33,207



28,706





See accompanying notes to condensed consolidated financial statements.


3


Access to Money, Inc.


Condensed Consolidated Statements of Cash Flows


(In thousands)


(Unaudited)





Six months ended

June 30, 2011


Six months ended

June 30, 2010Cash flows from operating activities:Net income (loss)

$
(845
)

$
1,332Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation


553



633Amortization


306



1,470Non-cash share-based compensation


47



58Loss on disposal or retirement of equipment


5



9Provision for doubtful accounts


(2
)


132Change in warrant value


(438
)


(2,342
)Changes in assets and liabilities, net of acquisitions:Restricted cash


(2
)


-Accounts receivable


721



(68
)Lease receivable


8



36Inventories


(119
)


(517
)Prepaid expenses


183



(192
)Other assets


(151
)


-Accounts payable


922



694Accrued expenses


291



276Cash provided by operating activities


1,479



1,521Cash flows from investing activities:Capital expenditures


(1,548
)


(630
)Acquisition of intangible assets


-



(339
)Cash (used in) investing activities


(1,548
)


(969
)Cash flows from financing activities:Payment of term loans


(646
)


(950
)Cash (used in) financing activities


(646
)


(950
)Net (decrease) increase in cash and cash equivalents


(715
)


(398
)Beginning cash and cash equivalents


2,421



5,770Ending cash and cash equivalents

$
1,706


$
5,372Supplemental cash flow information:Cash paid for interest

$
176


$
797





See accompanying notes to condensed consolidated financial statements.


4


ACCESS TO MONEY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1.
BASIS OF PRESENTATION





The accompanying unaudited condensed consolidated financial statements of Access to Money, Inc. and its subsidiaries (collectively, the "Company," "we" or "us") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial statements, and reflect all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods.  These condensed consolidated financial statements should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2010.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to such rules and regulations.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for any subsequent interim period or for the year ending December 31, 2011.





2.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





General Description of Business





We are an independent automated teller machine ("ATM") deployer, or "IAD", acting as the source for businesses to purchase, operate and service automated teller machines, or ATMs.  We entered the ATM business in 1999 and expanded our ATM operations through internal growth and acquisitions.  At June 30, 2011, we had approximately 10,382 ATMs under contract.





Principles of Consolidation





The condensed consolidated financial statements include the accounts of Access to Money, Inc. and its subsidiaries.  At June 30, 2011, our subsidiaries consisted of Access to Money ATM Corporation, Access to Money Acquisition Corporation, and Access to Money-SL, Inc.  All significant intercompany transactions and accounts are eliminated.





Financial Statement Reclassifications





Certain financial statement reclassifications have been made to prior period amounts to conform to the current period presentation.  In 2011, we made a reclassification to include commissions paid to merchants as a cost of ATM operating revenues to classify them with other costs associated with transaction-based revenues.  As a result of this change, both net revenues and cost of revenues previously reported exclude commissions of approximately $14.9 million and $29.5 million for the three and six months ended June 30, 2010, respectively, and are now included as a cost of ATM operating revenues.  Also in 2011 we made a reclassification of network revenue and other ATM transaction related revenues into transaction related revenues from ATM equipment and Service and other revenues, in the amounts of $435,000 and $918,000 for the three and six months ending June 30, 2010, respectively.  These changes had no impact on shareholders' deficit or the previously reported gross profit and net income (loss).





Use of Estimates





The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, sales, costs and expenses, and the disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates and judgments, including those related to impairments, depreciation, intangible assets, accounts receivable, inventories, and taxes.  We base our estimates and judgments on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.


5





Fair Value Measurements





We measure and disclose the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by U.S. GAAP.  The fair value hierarchy has three levels which are based on reliable available inputs of observable data.  The hierarchy requires the use of observable market data when available.  The levels are defined as follows:





·
Level 1- quoted prices for identicalinstruments in active markets;




·
Level2 - quoted prices for similarinstruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and




·
Level3 - fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.





If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads, market capitalization rates, etc.  The primary valuation model we use is the Black-Scholes model.





Financial instruments, including cash equivalents, accounts receivable and accounts payable approximate fair market value because of the short maturity of these instruments.  Fair value approximates the carrying value of our borrowings under our variable-rate long-term debt, based upon interest rates available for the same or similar instruments.  At June 30, 2011, the majority of our debt had fixed interest rates and the fair value was estimated at $22.8 million.  This amount includes approximately $4.8 million of accrued interest expense accounted for in accrued expenses in addition to our term loans and other debt.





Cash and Cash Equivalents





For purposes of reporting financial condition and cash flows, cash and cash equivalents include cash in bank and short-term deposit sweep accounts.  We maintain cash on deposit with a bank that is pledged in support of a specific contract related to our vault cash provider.  This balance is classified as restricted cash in current assets on the Consolidated Balance Sheets.  As of June 30, 2011 and December 31, 2010, there was $603,000 and $601,000, respectively, of restricted cash.





Revenue Recognition and Presentation





We record and report revenue pertaining to the use and operation of ATMs including transaction-based revenue, service revenue, and ATM equipment revenue.  For revenue we generate from ATM transactions, we receive daily electronic transaction reports from processing companies pertaining to the ATMs we own and operate in addition to machines owned and operated by merchants who contract with us.  During a month, we accumulate daily transaction data and record the transaction-based revenue related to those transactions.  We recognize ATM transaction-based revenue upon receipt of transaction data reported by the processing companies which generally correlates with consummation of the transaction.





In addition to transaction revenue, we earn revenue from the sale of ATMs and other related equipment and provide service to ATM owners who need repairs to their equipment.  For ATM equipment sales, we recognize revenue when the title and risk of loss transfers to the customer, which is typically when the related equipment is shipped.





We have contracts with regional and national merchants and numerous independent store operators.  We had one customer which accounted for approximately 25.8% and 22.8%, respectively, of our transaction-based revenue for the six-month period ending June 30, 2011 and 2010, respectively.


6





In situations in which our arrangements combine multiple elements, we allocate revenue to each element based on its fair value and we limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of services or future performance obligations.





Accounts Receivable and Allowance for Doubtful Accounts





We review our accounts receivable on a regular basis to determine the collectability of each account.  We maintain allowances for doubtful accounts for estimated losses which may result from the failure of its clients to make required payments.  During each reporting period, we evaluate the adequacy of the allowance for doubtful accounts and calculate appropriate changes based on historical experience, credit evaluations, specific client collection issues and the length of time a receivable has been past due.  When we deem the receivable to be uncollectible, we charge the receivable against the allowance.  Accounts receivable are shown net of the allowance of approximately $16,000 and $78,000 at June 30, 2011 and December 31, 2010, respectively.





Inventory





Inventory is stated at the lower of cost (first-in, first-out method) or market.  Inventory consists primarily of ATMs and related parts and equipment.  ATMs and parts available for sale are classified as inventory until such time they are sold or installed.  Once the ATM or part is sold, it is relieved to cost of sales.





The following table summarizes inventories (in thousands):





June 30, 2011


December 31, 2010Machines

$
698


$
753Parts


337



164$
1,035


$
917





Fixed Assets





Fixed assets are recorded at cost plus installation costs.  Depreciation begins when assets are placed in service and is generally calculated using the straight-line method over the estimated remaining useful lives of the particular asset.  Estimated useful lives are as follows:





ATMs
3-5 yearsComputer equipment
2-5 yearsFurniture and fixtures
5-7 years





Upon the sale or disposition of an asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in gain/(loss) on sale of assets.





Goodwill





As of June 30, 2011 and December 31, 2010, our assets included goodwill of $10.6 million.  Goodwill is tested for impairment annually or whenever a triggering event is identified that may indicate an impairment has occurred.  Potential impairment indicators include a significant decline in revenues or a decline in our capitalization below carrying value.  Goodwill is tested by comparing the estimated fair value of a reporting unit containing goodwill to its carrying value.


7





Intangible Assets





The following table summarizes Intangible assets (in thousands):





June 30, 2011


December 31, 2010Gross

carrying

amount


Accumulated

amortization


Net


Gross

carrying

amount


Accumulated

amortization


NetSubject to amortizationNon-compete agreement

$
175


$
(175
)

$
0


$
175


$
(157
)

$
18Customer contracts


1,382



(957
)


425



1,382



(793
)


589Distributor agreements


225



(120
)


105



225



(101
)


124Non-contractual customer base


250



(133
)


117



250



(113
)


1372,032



(1,385
)


647



2,032



(1,164
)


868Trademarks not subject to amortization


500



-



500



500



-



500$
2,532


$
(1,385
)

$
1,147


$
2,532


$
(1,164
)

$
1,368





Amortization of intangible and other assets, which is included in selling, general and administrative expense in operations was approximately $134,000 and $180,000 for the three months ended June 30, 2011 and 2010, respectively, and $300,000 and $352,000 for the six months ended June 30, 2011 and 2010, respectively.





Income Taxes





We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement reporting balances of assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or reversed.  There were no uncertain tax positions at June 30, 2011 or December 31, 2010, as our tax positions for open years meet the recognition thresholds of more likely than not to be sustained upon examination.





Share-Based Compensation





Share-based compensation is measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest and is recorded over a defined service period.  The fair value is based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares, and a risk-free interest rate.  Compensation expense is recognized based on the estimated grant date fair value method using a Black-Scholes valuation model.





Warrants





Our warrants include provisions that protect the holders from changes in our stock price.  These protection provisions reduce the exercise price of the warrants if an issuer either issues equity shares for a price that is lower than the exercise price of the warrants or issues new warrants or convertible instruments that have a lower exercise price.  As a result of this determination we recognize these warrants as a liability at their respective fair values on each reporting date.





Net Income (Loss) Per Share





The Company reports its earnings per share under both the basic and diluted methods.  When calculating basic income (loss) per share, net income (loss) is divided by the weighted average number of common shares outstanding for the period.  Diluted income per share reflects the assumed exercise or conversion of all dilutive securities, such as options, restricted shares and warrants.  No such exercise or conversion is assumed where the effect is anti-dilutive, such as when there is a net loss from operations or when the exercise price of the potentially dilutive securities is greater than the market price of the Company's stock.  For the three and six month periods ended June 30, 2011, the Company incurred net losses and the exercise price for outstanding warrants and options was greater than the average market price.  Accordingly, all were excluded from the calculation of diluted earning per share as their impact on the net loss available to common stockholders was anti-dilutive.  Dilutive securities consisting of 6.8 million warrants, 411,980 shares of restricted stock, and 128,333 stock options were included in the calculation of diluted income per share for the three months ended June 30, 2010 since the Company reported net income for this period.  Dilutive securities consisting of 6.0 million warrants, 397,479 shares of restricted stock, and 121,429 stock options were included in the calculation of diluted income per share for the six months ended June 30, 2010.




8





Recent Accounting Pronouncements





In December 2010, the FASB issued ASU 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.  The ASU does not prescribe a specific method of calculating the carrying value of a reporting unit in the performance of step 1 of the goodwill impairment test (i.e. equity-value-based method or enterprise-value-based method).  However, it requires entities with a zero or negative carrying value to assess, considering qualitative factors such as those used to determine whether a triggering event would require an interim goodwill impairment test (listed in ASC 350-20-35-30, Intangibles – Goodwill and Other – Subsequent Measurement), whether it is more likely than not that a goodwill impairment exists and perform step 2 of the goodwill impairment test if so concluded.  ASU 2010-28 was effective for the Company beginning January 1, 2011.  The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.









3.
ACCRUED AND OTHER EXPENSES





The following table summarizes accounts payable and accrued liabilities (in thousands):





June 30, 2011


December 31, 2010Accrued payroll expenses

$
160


$
125Accrued interest expense


4,766



3,946Accrued ATM maintenance and other expenses


175



206Other accrued expenses


2,130



2,663$
7,231


$
6,940





4.
TERM LOANS AND OTHER DEBT:





The following table summarizes term loans and other debt (in thousands):





June 30, 2011


December 31, 2010Sovereign Bank

$
4,786


$
5,264Lampe Loan Facility


3,150



3,150Cadence Special Holdings II, LLC


350



350Note payable to former owner of LJR Consulting


9,755



9,755Other debt


34



202Total

$
18,075


$
18,721Less:  current portion


1,005



1,131Total long-term debt, excluding current portion

$
17,070


$
17,590





On September 3, 2010, we obtained $5.5 million via a senior secured loan, (the "Senior Loan"), pursuant to a Loan and Security Agreement (the "Senior Loan and Security Agreement"), by and among us, our subsidiaries, and Sovereign Bank.  The Senior Loan is due September 3, 2015, accrues interest at the rate of 6.81% per annum, requires monthly payments of principal and interest amortizing over a five year period, and is secured by substantially all of our assets.  We have the right to prepay the then outstanding balance, in whole or in part, at anytime.  If we prepay 50.0% or more of the then outstanding balance, we are required to pay a fee initially equal to 5.0% of the amount prepaid which reduces ratably on an annual basis to 1% of the amount prepaid four years after funding.  On October 21, 2010, we entered into a First Amendment to the Senior Loan and Security Agreement and on May 11, 2011, we entered into a Second Amendment to the Senior Loan and Security Agreement.  The Senior Loan and Security Agreement, as amended, contains standard and customary covenants including, prohibitions on incurring additional indebtedness, making loans or investments, granting security interests in any of our property, or acquiring any business or assets without the consent of Sovereign Bank.  The Second Amendment modified the financial covenants for the quarters ending on or after June 30, 2011, to require that we maintain (i) minimum liquidity of $1.0 million on deposit with Sovereign Bank, increasing to $1.5 million on December 31, 2011, (ii) a fixed charge coverage ratio of not less than .65 to 1 as of the quarter ending June 30, 2011, increasing to 1.25 to 1 for quarters ending on or after December 31, 2011, and (iii) a funded debt to EBITDA ratio of not more than 2.35 to 1 for the quarter ending June 30, 2011, decreasing to 2.0 to 1 for quarters ending on or after September 30, 2011.  We did not meet the fixed charge coverage ratio or the funded debt to EBITDA ratio for the quarter ending June 30, 2011, however the violations were waived by the lender.  We did meet the minimum liquidity covenant as of June 30, 2011.


9




The proceeds of the Senior Loan, together with $2.0 million of cash on hand, were used to repay $7.5 million of principal due on our existing $11.0 million Senior Secured Notes payable to  LC Capital Master Fund, Ltd. ("LC Capital") and Cadence Special Holdings II, LLC ("Cadence"), (the "2008 Notes").  The 2008 Notes accrued interest at the rate of 13.0% per annum, were secured by substantially all of our assets, and were due and payable in full on April 18, 2011.  In connection with the closing of the Senior Loan,we entered into an Amended and Restated Loan and Security Agreement, dated September 3, 2010, with LC Capital, Cadence and Lampe Conway & Co., LLC as administrative agent and collateral agent (the "Amended and Restated Lampe Loan and Security Agreement"), pursuant to which the 2008 Notes were amended and restated (the "2010 Secured Notes").  The 2010 Secured Notes in the aggregate principal amount of $3.5 million, are due October 3, 2015, are subordinated to the Senior Loan, accrue interest at the rate of 7.0% per annum if paid currently, or 10.0% if accrued, payable on March 3rd and September 3rd of each year, with each interest rate increasing .25% on the first anniversary of the closing, 1.0% on the second anniversary of the closing, 2.5% on the third anniversary of the closing, and 5.0% on the fourth anniversary of the closing, may be prepaid in whole or in part at anytime at our option, and are secured by substantially all of our assets, subject to the lien in favor of Sovereign Bank.  Pursuant to the Amended and Restated Lampe Loan and Security Agreement, as amended on October 21, 2010 and May 11, 2011, we are prohibited from paying interest on the 2010 Secured Notes unless we have a cash balance of $3.25 million after such payment.  The Second Amendment modified the financial covenants for the quarters ending on or after June 30, 2011, to require that we maintain (i) a minimum liquidity of $800,000 on deposit with Sovereign Bank increasing to $1.2 million on December 31, 2011, (ii) a fixed charge coverage ratio of not less than .525 to 1 as of the quarter ending June 30, 2011, increasing to 1.125 to 1 for quarters ending on or after December 31, 2011, and (iii) a funded debt to EBITDA ratio of not more than 2.55 to 1 for the quarter ending June 30, 2011, decreasing to 2.2 to 1 for quarters ending on or after September 30, 2011.  As of December 31, 2010, we were in compliance with all financial covenants.  We did not meet the fixed charge coverage ratio or the funded debt to EBITDA ratio for the quarter ending June 30, 2011, however the violations were waived by the lender.  We did meet the minimum liquidity covenant as of June 30, 2011.





Our existing note payable to Douglas B. Falcone, our Chief Operating Officer, in the principal amount of $9.75 million was also restructured.  The initial note accrued interest at the rate of 13.0% per annum payable quarterly with the principal balance due April 18, 2015, was unsecured, and subordinated to the payment in full of the 2008 Notes.  In connection with the foregoing transactions, we issued an Amended and Restated Subordinated Promissory Note to Mr. Falcone (the "Subordinated Note").  The Subordinated Note is due and payable in full October 3, 2015, is unsecured, and is subordinated in all respects to the Senior Loan and the 2010 Secured Notes.  The Subordinated Note accrues interest and contains payment terms substantially similar to the 2010 Secured Notes.  On October 21, 2010, we executed a First Allonge to the Subordinated Note (the "Allonge").  The Allonge amends the dates in which interest shall be paid from April 18 and October 18 of each year to March 3 and September 3 of each year.  Mr. Falcone has deferred approximately $4.8 million of interest payments under the note since its inception.  The accrued interest is represented in our Consolidated Balance Sheets under accrued expenses.





The following table summarizes future principal repayments of term loans and other debt (in thousands):





2011

$
5022012


1,0512013


1,1252014


1,1962015


14,201$
18,075




10





5.
WARRANTS





Common Stock Warrants





In connection with the Amended and Restated Lampe Loan Agreement, we entered into an Exchange Agreement with LC Capital (the "LC Capital Exchange Agreement") and an Exchange Agreement with Cadence (the "Cadence Exchange Agreement") and together with the LC Capital Exchange Agreement (the "Exchange Agreements").  Pursuant to the Exchange Agreements, the 2008 Notes and warrants to purchase an aggregate of 15.0 million shares of common stock issued in connection with the 2008 Notes were exchanged for the 2010 Secured Notes described above and an aggregate of 10,636,664 shares of common stock.





Following the exchange agreements, we have outstanding warrants to purchase up to an aggregate of 3.1 million shares of common stock upon exercise.  The warrants expire November 2013 and have an exercise price of $0.28.  The outstanding warrants are exercisable at any time and we have agreed to register the public resale of the shares issuable upon the exercise of the warrants.  Because these warrants contain provisions that protect the holder from declines in stock price, we recognize these warrants as liabilities at their respective fair value on each reporting date.  We use a Black-Scholes valuation model to estimate the fair value of the outstanding warrants.  The significant assumptions considered by the model were the amount of outstanding warrants, the remaining term of each warrant, the per share stock price of $0.22, a risk free rate of 0.91%, and a historical volatility of 183.8%.





The table below provides a reconciliation of the beginning and ending balances for our warrant liability and increase in fair value using significant unobservable inputs (Level 3) as of June 30, 2011 (in thousands).





Balance as of January 1, 2011

$
587Decrease in fair value of warrants


(438
)Balance as of June 30, 2011

$
149





6.
VAULT CASH





In general, we rent vault cash under a bailment arrangement from financial institutions and pay negotiated fees for the use of that money when it is placed in ATMs we operate.  Vault cash is controlled by employees of the financial institutions and armored car carriers who we contract to deliver the cash to our ATMs.  As cash withdrawals are made at the ATMs, processing companies settle the transactions and send the cash back to the financial institutions from which it was rented.  We have contracts with financial institutions and armored car carriers stating that the vault cash belongs to the bank and that neither we nor the armored car carrier has any legal rights to the funds.





During the six months ending June 30, 2011, the rental rate pertaining to the use of vault cash, for which the cost is recorded as a component of cost of revenue, was 2.75% and the average monthly amount of cash used to vault our ATMs was $38.3 million.





7.
SHARE-BASED COMPENSATION





We calculate the fair value of stock-based instruments awarded to employees on the date of grant and recognize the calculated fair value, net of estimated forfeitures, as compensation expense over the requisite service periods of the related awards.  The following table reflects the total share-based compensation expense included in selling, general and administrative expense of our Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2011 and 2010 (in thousands):





Three months ended

June 30,


Six months ended

June 30,2011


2010


2011


2010Options

$
-


$
-


$
-


$
14Restricted shares


9



20



47



55Total share-based compensation expense

$
9


$
20


$
47


$
69




11




Options:  The following table summarizes stock option activity during the three months ended June 30, 2011 and 2010, as follows:





Number of

shares


Weighted average

exercise priceOptions Outstanding December 31, 2010


322,500


$
1.13Granted


-



-Exercised


-



-Cancelled


-



-Options Outstanding June 30, 2011


322,500


$
1.13





As of June 30, 2011, options to acquire 322,500 shares at a weighted average exercise price of $1.13 per share were exercisable.





The Company did not grant any options during the six months ended June 30, 2011 and 2010, respectively.





Restricted Stock.The following table summarizes restricted stock activity during the six months ended June 30, 2011, as follows:





SharesRestricted shares December 31, 2010


353,333Granted


-Vested


(158,334
)Forfeited


(16,666
)Restricted shares June 30, 2011


178,333





8.
PROVISION FOR INCOME TAXES





We have not recorded an income tax benefit for the three-month periods ended June 30, 2011 or 2010 because we are uncertain that we will be able to realize the benefit of our net operating loss carryforwards.  As of June 30, 2011, we have net operating losses of approximately $82.6 million available to offset future taxable income for United States federal and state income tax purposes which expire in the years 2020 through 2028.  We have established a valuation allowance for all of our net deferred tax assets based on our review for expected utilization using the "more likely than not" approach in assessing the available positive and negative evidence surrounding their realization.





9.
CHANGES IN SHAREHOLDERS' DEFICIT





The following table provides the transactions for the three-month period ended June 30, 2011 concerning shareholders deficit (in thousands):





Common


Treasury


Additional

Paid-in


Accumulated


Total

ShareholdersShares


Amounts


Shares


Amounts


Capital


Deficit


DeficitBalances December 31, 2010


33,205


$
33



59


$
(21
)

$
138,681


$
(148,459
)

$
(9,766
)Net income


-



-



-



-



-



(845
)


(845
)Share-based compensation


-



-



-



-



47



-



47Shares issued


159



-



10



-



-



-



-Balances June 30, 2011


33,364


$
33



69


$
(21
)

$
138,728


$
(149,304
)

$
(10,564
)




10.
SUBSEQUENT EVENTS


On August, 15, 2011 we announced that we entered into a definitive merger agreement with Cardtronics USA, Inc. ("Cardtronics"), a wholly-owned subsidiary of Cardtronics, Inc. Under the terms of the agreement, Cardtronics will acquire all of the Company's outstanding shares for a cash payment of $0.285 per share and the satisfaction of our total indebtedness of $22.8 million.  The total cash consideration at closing will be approximately $21.2 million. The transaction is subject to approval by the Company's shareholders and the satisfaction of customary closing conditions.


12




ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





Cautionary Statements Regarding Forward-Looking Statements





This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  All statements other than statements of historical facts included or incorporated by reference in this quarterly report on Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements.  In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expects," "intends," "plans," "projects," "estimates," "anticipates," or "believes" or the negative thereof or any variation there on or similar terminology or expressions.





We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to: a decline in ATM transaction volume or fees, changes in technology standards, a failure by third parties to service our ATMs, regulatory changes, changes to interchange fees charged by electronic funds transfer networks, intense competition which could reduce net revenue per ATM or result in us deploying fewer ATMs, increases in interest rates, the inability to obtain cash for our ATMs, disruption of cash replenishment by armored car carriers to our ATMs, and statements of assumption underlying any of the foregoing, as well as other factors set forth in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2010, in other reports filed with the Securities and Exchange Commission, and in "Item 2 - Management’s Discussions and Analysis of Financial Condition and Results of Operation" below.





All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing.  Except as required by law, we assume no duty to update or revise our forward-looking statements.





Overview





We are an independent automated teller machine ("ATM") deployer, or "IAD" acting as the source for businesses to purchase and operate automated teller machines, or ATMs.  Since 1999, we have expanded our ATM sales, service and operations through internal growth and acquisitions.





As of June 30, 2011, we manage, own and operate 10,382 ATMs in the United States.  We locate our ATMs in high traffic retail environments through national merchants such as The Pantry, Inc., and through regional and locally-owned supermarkets, convenience and other stores.  In addition to providing our merchant customers with supplemental revenues from transaction fees, we believe that the presence of an ATM in a merchant’s store helps to promote higher foot traffic, increase impulse purchases and shopping times, and improve customer retention since the presence of an ATM will likely entice customers to make return visits to the retail site knowing they can obtain cash in the future.  We attempt to maximize ATM usefulness for our customers by participating in as many electronic funds transfer networks, or EFTNs, as practical, including NYCE, Visa, MasterCard, Cirrus, Plus, American Express, Discover/Novus, STAR, Allpoint, andMoneypass.





Products and Services





Historically we have deployed and operated ATMs under two programs, Full placement and Merchant-owned:


13





·
Full placement program.  Under this program there are three basic arrangements under which an ATM is operated:




·
We own the ATM and are responsible for all of the operating expenses including maintenance, cash management and loading, supplies, signage and telecommunication services;




·
We own the ATM and are responsible for all operational aspects of the unit except for cash management and loading; or




·
We are responsible for all operational aspects of the unit but the ATM is owned by another party.




·
Merchant-owned program.  Under this program, a merchant typically buys an ATM from us and is responsible for the operating expenses, such as maintenance, cash management, supplies, and telecommunication services.  We provide access to transaction processing services and act as a source for procuring maintenance services in the event a machine needs to be repaired.





In 2010, we began offering a third arrangement under which we deploy ATMs on a fully outsourced basis for a minimum fixed fee, primarily to local and community banks and regional credit unions.  While similar to the full placement model, these machines are typically located in professional settings such as office complexes, legal firms, hospitals, and other non-retail professional settings.  Our offering has provided participating financial institutions the ability to expand banking services to their customers with no capital outlay while giving customers the same benefits they would have banking at their local branch or member office.





We also offer prospective retailers a program under which they can rent an ATM and source maintenance support and supplies from us.





Strategic Outlook





During 2011, we will experience the full year impact of the loss of a major customer that occurred during the third quarter of 2010.  We believe our growth opportunities will be in the areas of:


·
Deployment of ATMs at nationwide franchise locations of a leading quick service restaurant (“QSR”) specializing in coffee and donuts;
  ·
Expansion of our surcharge free ATM solution at our full-placement locations with The Pantry;
  ·
The generation of alternative revenues by deploying content advertising; and
  ·
Placing fully outsourced ATMs in professional non-retail locations.





In addition to the activities listed above, we will continue to search for opportunities to:




·
Increase the number of deployed devices with existing as well as new merchant relationships;




·
Increase transaction levels at our existing locations; and




·
Acquire ATM portfolios that complement our installed base.




We continue to evaluate the profitability of our ATMs on a regular basis to maximize the value of each unit.


Recent Developments
 
 On August, 15, 2011 we announced that we entered into a definitive merger agreement with Cardtronics USA, Inc. ("Cardtronics"), a wholly-owned subsidiary of Cardtronics, Inc. Under the terms of the agreement, Cardtronics will acquire all of the Company's outstanding shares for a cash payment of $0.285 per share and the satisfaction of our total indebtedness of $22.8 million.  The total cash consideration at closing will be approximately $21.2 million.  T he transaction is subject to approval by the Company's shareholders and the satisfaction of customary closing conditions.


Developing Trends in the ATM Industry





Managed Services.  While many banks own significant networks of ATMs that serve as extensions of their branch networks and increase the level of service offered to their customers, large ATM networks are costly to operate and typically do not provide significant revenue for banks and smaller financial institutions.  Operating a network of ATMs is not a core competency for the majority of banks, other financial institutions, or retailers.  We believe there is an opportunity for large non-bank ATM operators with lower costs and an established operating history, to contract with financial institutions and retailers to manage their ATM networks.  Such outsourcing arrangements could reduce a financial institution’s operational costs while extending their customer service.




14


Decrease in Interchange Rates.The interchange rates paid to independent ATM deployers, are set by the various EFT networks over which the underlying transactions are routed.  Recently, certain networks have reduced the net interchange fees paid to ATM deployers for transactions routed through their networks.  If additional financial institutions move to take advantage of the lower interchange rate, or if additional networks reduce the interchange rates they currently pay to ATM deployers or increase their network fees, our future revenues and gross profits would be negatively impacted.





Financial Regulatory Reform in the United StatesThe Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"), which contains broad measures aimed at overhauling existing financial regulations within the United States, was signed into law on July 21, 2010.  Among many other things, the Act includes provisions that (1) call for the establishment of a new Bureau of Consumer Financial Protection, (2) limit the activities that banking entities may engage in, and (3) give the Federal Reserve the authority to regulate interchange transaction fees charged by electronic funds transfer networks for electronic debit transactions.  Many of the detailed regulations required under the Act are or have recently been finalized.  The Act, among other things, limits fees that financial institutions can charge retailers for use of debit cards.  Based on the interpretations of the current language contained within the Act, it appears that the regulation of interchange fees for electronic debit transactions will not apply to ATM cash withdrawal transactions.  While we do not believe that the regulations will have a material impact on our operations, if ATM cash withdrawals were to be considered a transaction that falls under the Act, interchange fees could be reduced from their current levels and negatively impact our future revenues and operating profits.  There is also language in the proposed regulations aimed at providing merchants with flexibility for point-of-sale transactions, for which cash would have to be paid versus payment by debit or credit cards.  Implementation of this change could result in increased use of cash and could positively impact our future revenues and operating profits (through increased transaction levels at our ATMs).  The Act also requires debit cards to be recognized (or authorized) over at least two non-affiliated networks and provides for rules that would allow merchants greater flexibility in routing transactions across networks which could be economical for the merchant.  The Federal Reserve requested comments as to whether these network and routing provisions should apply to ATM transactions.  If the final rules apply to ATM transactions and allow flexible routing, we and other ATM operators may be able to manage transactions so it is more economical for more parties.





Operational Metrics





Revenue Components





We derive most of our revenue from ATM transactions.  We also generate revenue from the sale of ATM equipment and service calls.  A description of these revenue sources is provided below.





Transaction-based revenue — sales we derive from withdrawal fees and interchange fees.





·
Withdrawal fees — fees we receive from a processor derived from a customer making an ATM withdrawal.  Withdrawal fees are sometimes referred to as surcharge or convenience fees in the industry.  We collect those fees on a daily basis via deposits from processing companies with whom we have contracts.




·
Interchange fees — fees that an EFTN charges the customer’s financial institution for routing a withdrawal transaction or an account balance inquiry.  The interchange fee is shared based on an agreement between us and the EFTN.  Interchange fees are typically earned on all transactions, in addition to withdrawal transactions, on ATMs owned by both us and our merchants.





Service and other revenue — fees we charge for providing repair, maintenance, other services, parts and supplies to merchants who purchase or rent ATMs from us.





ATM equipment revenue— sales of ATM equipment to an independent operator or merchant.


15





Cost of Sales





Our cost of sales primarily consists of costs directly associated with transactions that occur on ATMs we and our merchants own and operate.  These costs include commissions to merchants, vault cash rental expense, service costs, armored car costs, communications expense, transaction processing costs, ATM equipment costs, and other direct operations expense.





Commissions.  The principal cost related to the operation of an ATM is the commission we pay to a merchant or the ATM owner.  The amount of the commission paid is dependent on a number of factors the most important of which is whether we provide cash for the machine.  Under our merchant-owned model, the merchant supplies the ATM with cash to operate the unit and retains the majority or all of the surcharge which is the primary component of commission.  For ATMs we deploy under our full placement model where we pay the costs to operate the unit, the merchant receives a smaller amount of commission than those in our merchant-owned model.  Full placement machines typically generate more income on a per unit basis compared to a merchant-owned unit.





Vault Cash Rental Expense.  We pay a fee to our vault cash provider for renting cash that is used in our full-placement ATMs.  See Note 6 – Vault Cash in our Notes to Consolidated Financial Statements included in Part I Item 1 of this report, for more detail related to our vault cash.





Armored Car Costs.We contract with armored courier services to transport and transfer the cash we use to fill our full-placement ATMs.  We use industry leading armored couriers such as Brinks, Garda and Pendum.  Per our agreements, the armored couriers pick up bulk cash and, using instructions received from our cash management team, prepare the cash for delivery to each ATM on the designated fill day.  Following a predetermined schedule, the armored couriers visit each location on the designated fill day, load cash into each ATM by swapping out the remaining cash for a new fully loaded cassette, and then balance each machine and provide reporting to the vault cash provider who in turn provides us with information regarding the machine balances.





Service Costs.  Depending on the type of arrangement with the merchant, we may be responsible for the maintenance of ATMs we operate.  We typically use third parties with national operations to provide these services but also have staff technicians who perform repairs.  Our primary service vendors are NCR Corporation and Solvport.





Communications.  For our full-placement ATMs, we are responsible for providing telecommunications capabilities, allowing them to connect with the applicable EFT network.





Transaction Processing.  We pay fees to third-party processors to conduct transactions to EFT networks for authorization by the cardholders’ financial institutions and to settle transactions.  We have contracts with Fidelity Information Services , WorldPayTM and First Data Retail ATM Services, L.P.





Cost of ATM Equipment.In connection with the sale of equipment to merchants, we incur costs associated with purchasing equipment from manufacturers, as well as delivery and installation expenses.





Selling, General and Administrative Expense





Our sales, general and administrative expenses include salaries, benefits, advertising and marketing, depreciation, amortization of intangible assets, freight and postage, professional services such as legal and accounting, administrative costs, travel related expenses, telecommunications, and other corporate related costs.




Key Operating Metrics





We rely on certain key measures to monitor our operating performance, including total transactions, total withdrawal transactions, number of transacting ATMs, withdrawals per ATM per month, gross sales per withdrawal transaction, commission per withdrawal, and net transaction based sales per withdrawal per month.


16





The following table sets forth information regarding these key measures for the three-month and six-month periods ended June 30, 2011 and 2010:





Three Months Ended

June 30,

Six Months Ended

June 30,2011


2010


2011


2010Total transactions


9,537,704



10,633,907



18,758,448



20,820,811Withdrawal transactions


7,405,773



8,551,655



14,759,017



16,746,364Average number of transacting ATMs


10,406



11,014



10,373



10,999Average withdrawals per ATM per month


237



259



237



254Average gross transaction-based revenue per withdrawal

$
2.54


$
2.51


$
2.57


$
2.51Average commission per withdrawal

$
1.92


$
1.74


$
1.92


$
1.76Average net transaction-based revenue per withdrawal

$
.62


$
.77


$
.65


$
.75





The average number of transacting ATMs in our network during the three months ended June 30, 2011 decreased by 608 from 11,014 in the three months ended June 30, 2010 compared to 10,406 in 2011.  This decrease was primarily due to normal attrition and the removal of 465 ATMs due to the non-renewal of a customer contract in June 2010.  The decrease in the number of transacting machines contributed to 1.1 million, or 13.4%, decrease in the number of withdrawal transactions between the first six months of 2011 and 2010.





The number of transacting ATMs in our network at June 30, 2011 was 10,382 compared to 11,000 at June 30, 2010.





We experienced a decrease in the average net transaction-based revenue per withdrawal of $0.15 to $0.62 in the three months ended June 30, 2011 from $0.77 in the three months ended June 30, 2010.  This decrease was primarily due to the removal of units that contributed larger per unit margins and new contracts that were installed with higher commission structures.  We experienced a decrease in the average net transaction-based revenue per withdrawal of $0.10 to $0.65 in the six months ended June 30, 2011 from $0.75 in the six months ended June 30, 2010.  This decrease was primarily due to the removal of units that contributed larger per unit margins and new contracts that were installed with higher commission structures.  Net transaction-based revenues were also impacted by lower interchange revenue as a result of networks increasing their fees per transaction.  While a majority of these fees are being fully passed through to the ATM merchant/operator, the fee reduction directly reduces revenue on our full placement units.  We expect future network fee increases will impact margins on units on which the fees cannot be passed forward to the ATM merchant/operator.


17





Results of Operations





The following table sets forth our Consolidated Statements of Operations information as percentages.  The percentages for transaction-based revenue and ATM equipment and other revenue are calculated as a percentage of total revenues.  The percentages for cost of ATM operating revenue, cost of ATM equipment and other revenue, and total cost of revenue are a percentage of their corresponding revenue.  The percentages for gross profit, selling, general and administrative expenses, operating income, and net loss are calculated as a percentage of total revenues.  Percentages may not add due to rounding.





Three Months Ended

June 30,


Six Months Ended

June 30,2011


2010


2011


2010%


%


%


%Revenues:Transaction-based revenue


95.9



97.6



96.4



95.2ATM equipment and other revenue


4.1



2.4



3.6



4.8Total revenues


100.0



100.0



100.0



100.0Cost of revenues:Cost of ATM operating revenue


88.1



84.0



88.6



84.1Cost of ATM equipment and other revenue


84.0



51.5



77.5



84.7Total cost of revenue


88.0



83.2



88.2



84.1Gross profit


12.0



16.8



11.8



15.9Sales, general and administrative expenses


12.8



12.8



12.8



12.2Operating income (loss)


(0.8
)


4.0



(1.0
)


3.6Net income (loss)


(3.2
)


9.3



(2.2
)


3.0





Comparison of Results of Operations for the Three and Six Month Periods Ended June 30, 2011 to the Three and Six Month Periods Ended June 30, 2010.





Revenues





The following table sets forth selected information from our Condensed Consolidated Statements of Operations.  The results are in thousands, except for percentages.





Three Months Ended June 30,


Six Months Ended June 30,2011


2010


% Change


2011


2010


% ChangeRevenues:Transaction-based revenues

$
18,836


$
21,452



(12.2
)

$
37,867


$
42,053



(10.0
)Service and other revenues


153



287



(46.7
)


333



560



(40.5
)ATM equipment revenues


652



248



162.9



1,071



1,577



(32.1
)Total revenues

$
19,641


$
21,987



(10.7
)

$
39,271


$
44,190



(11.1
)





Transaction-based revenues were approximately $18.8 million during the three months ended June 30, 2011 compared to $21.1 million for the corresponding period of 2010.  This $2.6 million, or 12.2%, decrease was primarily attributable to fewer transacting units between the periods.


18





Transaction-based revenues were approximately $37.9 million during the six months ended June 30, 2011 compared to $42.1 million for the corresponding period of 2010.  This $4.2 million, or 10.0%, decrease was primarily attributable to fewer transacting units between the periods.





Service and other revenues decreased by $134,000, or 46.7%, to $153,000 during the three-month period ended June 30, 2011 compared to $287,000 in the corresponding period in 2010.  The decrease was primarily due to fewer billable service calls as a result of the replacement of older ATMs with newer equipment and lower build out revenue associated with installations of ATMs and other related equipment at financial institution locations.





Service and other revenues decreased by $227,000, or 40.5%, to $333,000 during the six-month period ended June 30, 2011 compared to $560,000 in the corresponding period in 2010.  The decrease was primarily due to fewer billable service calls as a result of the replacement of older ATMs with newer equipment and lower build out revenue associated with installations of ATMs and other related equipment at financial institution locations.





ATM equipment revenues increased by $404,000, or 162.9%, to approximately $652,000 during the three months June 30, 2011 from $248,000 during the corresponding period of 2010.  This increase was the result of hardware sales to several large customers in 2011 that were not made in 2010.





ATM equipment revenues decreased by $506,000, or 32.1%, to approximately $1.1 million during the six months June 30, 2011 from $1.6 million during the corresponding period of 2010.  This decrease was the result of hardware sales to several large customers in 2010 that were not made in 2011.





Cost of Revenues





The following table sets forth selected costs of sales data from our Condensed Consolidated Statements of Operations.  The results are in thousands, except for percentages.





Three Months Ended June 30,


Six Months Ended June 30,2011


2010


%

Change


2011


2010


%

ChangeCost of ATM operating revenues:Commissions

$
14,187


$
14,899



(4.8
)

$
28,415


$
29,471



(3.6
)Processing costs


727



647



12.4



1,472



1,096



34.3Armored car service


338



727



(53.5
)


853



1,203



(29.1
)Cost of cash


505



517



(2.3
)


940



1,030



(8.7
)Service costs


538



805



(33.2
)


1,235



1,663



(25.7
)Machine depreciation


193



219



(11.9
)


365



450



(18.9
)Communication costs


79



168



(53.0
)


195



396



(50.8
)Other costs


33



37



(10.8
)


69



65



6.2Total cost of ATM operating revenues

$
16,600


$
18,019



(7.9
)

$
33,544


$
35,374



(5.2
)Cost of ATM equipment and other revenues:ATM equipment cost


558



127



339.4



887



1,522



(41.7
)Other revenue cost


118



148



(20.3
)


200



289



(30.8
)Total cost of ATM equipment and other revenues

$
676


$
275



145.8


$
1,087


$
1,811



(40.0
)Total cost of revenues

$
17,276


$
18,294



(5.6
)

$
34,631


$
37,185



(6.9
)





Cost of ATM operating revenues consist primarily of commissions, cost of vault cash, service costs, processing costs, armored car service costs, communication costs and machine depreciation.  Cost of ATM equipment and other revenue is directly related to machine sales and varies period to period based on sales volumes.  Cost of ATM operating revenues decreased approximately $1.4 million, or 7.9%, to $16.6 million during the three months ended June 30, 2011 compared to $18.0 million in the same period in 2010.  Costs of ATM operating revenues decreased approximately $1.8 million, or 5.2%, to $33.5 million during the first six months of 2011 as compared to $35.4 million in the first six months of 2010.  The reasons for the changes between the three and six month periods ended June 30, 2011 and June 30, 2010 are described below.


19


Commissions decreased from $14.9 million during the three-month period ended June 30, 2010 to $14.2 million in the three-month period ended June 30, 2011.  This decrease of approximately $712,000, or 4.8%, resulted primarily from fewer withdrawal transactions due, in part, to the loss of a principal customer in June 2010.  Commissions decreased from $29.5 million during the six-month period ended June 30, 2010, to $28.4 million in the six-month period ended June 30, 2011.  This decrease of approximately $1.1 million, or 3.6%, resulted primarily from fewer withdrawal transactions due, in part, to the loss of a principal customer in June 2010.  Commissions as a percentage of transaction based sales were 75.3% and 69.4% for the three month periods ended June 30, 2011 and 2010, respectively, and 75.0% and 70.1% for the six month periods ended June 30, 2011 and 2010, respectively.





Processing fees increased $80,000, or 12.4%, to approximately $727,000, in the three months ended June 30, 2011 compared to $647,000 in the corresponding period of 2010.  The increase is due to higher fees being charged by the networks which facilitate ATM transactions.  Processing fees increased $376,000, or 34.3%, to approximately $1.5 million, in the six months ended June 30, 2011 compared to $1.1 million in the corresponding period of 2010.  These charges are partially offset by corresponding increases in network pass-thru fee revenue of $166,000 between the three months ended June 30, 2011 and 2010, and $295,000 between the six months ended June 30, 2011 and 2010, which represents the amount of the increased fees we pass along to the ATM operators under our merchant-owned program.





Armored car costs decreased $389,000, or 53.5%, to $338,000 in the three months ended June 30, 2011 from $727,000 in the corresponding period of 2010.  This decrease is attributable to the removal of approximately 465 ATMs from service in 2010 for which there is no corresponding cost in 2011.  Armored car costs decreased $350,000, or 29.1%, to $853,000 in the six months ended June 30, 2011 from $1.2 million in the corresponding period of 2010.  This decrease is attributable to the removal of approximately 460 ATMs from service in 2010 for which there is no corresponding cost in 2011.





Our cost of vault cash decreased by $12,000, or 2.3%, to $505,000 during the three months ended June 30, 2011 from $517,000 in the same period of 2010.  This decrease consisted of a $281,000 decrease associated with the reduction of units during 2010 which was offset by an increase in the cost of vault cash insurance and the addition of costs for new units that were added to replace the units which came out of service.  Our cost of vault cash decreased by $90,000, or 8.7%, to approximately $940,000 million during the first six months of 2011 from approximately $1.0 million in the first six months of 2010.  The reason for the decrease in this period is similar to that of the second quarter.  The average amount of vault cash we utilized for ATMs we supply cash to decreased by $8.2 million, or 18.6%, to $35.8 million for the first six months of 2011 from $44.0 million for the first six months of 2010.  The interest rate on ourvault cash facility remained constant at 2.75%.





Maintenance and third party service costs decreased $267,000, or 33.2%, to approximately $538,000 during the second quarter of 2011 compared to $805,000 in the second quarter of 2010.  The reduction is primarily attributable to the removal of 465 ATMs under a contract that was not renewed in June 2010.  Maintenance and third party service costs decreased $428,000, or 25.7%, to approximately $1.2 million in the first six months of 2011 compared to $1.6 million in the first six months of 2010.  The reduction in this period is similar to that of the second quarter.





ATM equipment cost of revenue increased $431,000, or 339.4%, to $558,000 in the second quarter of 2011 from approximately $127,000 in the second quarter of 2010 due to equipment sales to several large customers in 2011 which did not occur in 2010.  ATM equipment revenue cost decreased $635,000, or 41.7%, to $887,000 in the first six months of 2011 from approximately $1.5 million in the first six months of 2010 due to equipment sales to several large customers in 2010 that were not repeated in 2011.


20




Gross Profit(in thousands, except for percentages)





Three Months Ended June 30,


Six Months Ended June 30,2011


2010


% Change


2011


2010


% ChangeGross profit

$
2,365


$
3,693



(36.0
)

$
4,640


$
7,005



(33.8
)





During the three months ended June 30, 2011, gross profit was approximately $2.4 million compared to $3.6 million in the same period of 2010.





During the six months ended June 30, 2011, gross profit was approximately $4.7 million compared to $7.0 million in the same period of 2010.









Selling, General, and Administrative Expenses(in thousands, except for percentages)





Three Months Ended June 30,


Six Months Ended June 30,2011


2010


% Change


2011


2010


% ChangeSelling, general and administrative

$
2,516


$
2,816



(10.7
)

$
5,016


$
5,401



(7.1
)





Selling, general and administrative expense decreased by $300,000, or 10.7%, to $2.5 million for the three months ended June 30, 2011 from approximately $2.8 million for the three months ended June 30, 2010.  The primary reduction in selling, general and administrative expense was related to lower legal, accounting, and other expenses of approximately $223,000 for the three months ended June 30, 2011.  Selling, general and administrative expense as a percent of total revenues for the second quarters of 2011 and 2010 was 12.8%, respectively.





Selling, general and administrative expense decreased by $385,000, or 7.1%, to approximately $5.0 million in the first six months of 2011 from approximately $5.4 million in the first six months of 2010.  The primary reduction in selling, general and administrative expense was related to lower legal, accounting, and other expenses of approximately $343,000 in the first six months of 2011 compared to the first six months of 2010.  Selling, general and administrative expense as a percent of total revenues increased to 12.8% in the first six months of 2011 from 12.2% in the first six months of 2010.





Operating Income (Loss)(in thousands, except for percentages)





Three Months Ended June 30,


Six Months Ended June 30,2011


2010


% Change


2011


2010


% ChangeOperating income (loss)

$
(151
)

$
877



(117.2
)

$
(376
)

$
1,604



(123.4
)





During the three months ended June 30, 2011, we had an operating loss of $151,000, compared to operating income of $877,000 for the three months ended June 30, 2010.  The reasons for the decreases have been discussed above in sales and costs.  During the first six months of 2011, we had an operating loss of $376,000 compared to operating income of $1.6 million.




Depreciation and Amortization(in thousands, except for percentages)





Three Months Ended June 30,


Six Months Ended June 30,2011


2010


% Change


2011


2010


% ChangeDepreciation expense

$
286


$
311



(8.0
)

$
553


$
633



(12.6
)Amortization expense


129



739



(82.5
)


306



1,470



(79.2
)




21





Depreciation is accounted for in both cost of sales and selling, general and administrative expense.  Machine depreciation for ATMs that we own is included in cost of sales while all other depreciation related to furniture fixtures and equipment, computer related assets and automobiles is included in selling, general and administrative expense.  Amortization listed above is related to intangible assets and debt issuance.  Debt issuance amortization is accounted for below operating income and included in interest expense.





The decrease in depreciation between the three and six month periods ended June 30, 2011 and 2010 reflects additional depreciation for new equipment and lower depreciation as the result of equipment that was written off during 2010.





The decrease in amortization expense is the result of the acceleration of debt issuance amortization as a result of our debt refinancing in September of 2010.





Interest Expense(in thousands except for percentages)





Three Months Ended June 30,


Six Months Ended June 30,2011


2010


% Change


2011


2010


% ChangeInterest expense

$
504


$
759



(33.6
)

$
995


$
1,516



(34.4
)Amortization – debt issuance


11



560



(98.0
)


22



1,119



(98.0
)Total interest related expense

$
515


$
1,319



(61.0
)

$
1,017


$
2,635



(61.4
)





Interest expense for the three months ended June 30, 2011 decreased by $255,000, or 33.6%, to $504,000 from $759,000 in the corresponding period of 2010.  Interest expense for the six months ended June 30, 2011 decreased by $521,000, or 34.4%, to $995,000 from $1.5 million in the corresponding period of 2010.  This decrease was the result of refinancing our credit facility and restructuring other long-term indebtedness in the third quarter of 2010.





Change in Fair Value of Warrants





Effective January 1, 2009, we adopted new accounting guidance that can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price.  Protection provisions reduce the exercise price of a warrant or convertible instrument if the issuer either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.  We evaluated and determined that outstanding warrants to acquire our stock contain provisions that protect holders from declines in the stock price and as a result, recognized these warrants as liabilities at their respective fair values on each reporting date.  For a complete description of the loss on warrant value, see our consolidated financial statements contained elsewhere in this report.





We have outstanding warrants to purchase up to an aggregate of 3.1 million shares of common stock.  The warrants expire November 2013 and have an exercise price of $0.28.  The outstanding warrants are exercisable at any time and we have agreed to register the public resale of the shares issuable upon the exercise of the warrants.  We use a Black-Scholes valuation model to estimate the fair value of the outstanding warrants.





The table below provides a reconciliation of the beginning and ending balances for our warrant liability and increase in fair value using significant unobservable inputs (Level 3) as of June 30, 2011 (in thousands).





Balance as of January 1, 2011

$
587Decrease in fair value of warrants


438Balance as of June 30, 2011

$
149





We determined the fair value of our warrants using a Black-Scholes model.  The significant assumptions considered by the model were the amount of outstanding warrants, the remaining term of each warrant, the per share stock price of $0.09 a risk free rate of 0.43%, and a historical volatility of 138.4%.


22




Net Income (Loss)(in thousands, except for percentages)





We experienced a decrease in Net income (loss) between the three and six month periods ended June 30, 2011 and 2010 of approximately $2.7 million and $2.2 million.









Three Months Ended June 30,


Six Months Ended June 30,2011


2010


% Change


2011


2010


% ChangeNet income (loss)

$
(623
)

$
2,048



(130.4
)

$
(845
)

$
1,332



(163.4
)Change in warrant value


(12
)


(2,482
)


(99.5
)


(438
)


2,342
)


(81.3
)Adjusted net loss

$
(635
)

$
(434
)


46.3


$
(1,283
)

$
(1,010
)


27.0




We recognized an adjusted net loss after adjustments of approximately $635,000 for the three months ended June 30, 2011 compared to an adjusted net loss after adjustments of $434,000 for the corresponding period of 2010.





We recognized an adjusted net loss after adjustments of approximately $1.3 million for the six months ended June 30, 2011 compared to an adjusted net loss after adjustments of $1.0 million for the corresponding period of 2010.





Provision for Income Taxes





We have recorded no benefit from our losses for the first quarters of 2011 and 2010 because we are uncertain that we will be able to realize the benefit of our net operating loss carryforwards.





Liquidity and Capital Resources





Our principal ongoing funding requirements are for working capital to finance operations, make debt payments, and fund capital expenditures.  We believe that our cash resources are adequate for our currently anticipated needs over the next twelve months.





Net cash provided by operating activities during the six months ended June 30, 2011 and 2010 was approximately $1.5 million.





Net cash used in investing activities during the six months ended June 30, 2011 was approximately $1.5 million compared to $969,000 in the six months ended June 30, 2010.  Cash used in both periods consisted primarily of capital expenditures for ATMs and equipment.





Net cash used in financing activities was $646,000 during the six months ended June 30, 2011 and consisted of repayment of term loans.  Net cash used in financing during the six months ended June 30, 2010 was $950,000 and consisted of repayment of term loans.





We had cash and cash equivalents of approximately $1.7 million at June 30, 2011 compared to $5.4 million at June 30, 2010.  At June 30, 2011, we had a net working capital deficit of approximately $9.0 million compared to a net working capital deficit of $6.6 million at December 31, 2010.





On August, 15, 2011 we entered into a definitive merger agreement with Cardtronics USA, Inc. ("Cardtronics"), a wholly-owned subsidiary of Cardtronics, Inc., a Houston, Texas, based provider of automated teller machine services.





Under the terms of the agreement, Cardtronics will acquire all of the outstanding shares of the Company for a cash payment of $0.285 per share and satisfy the Company's total indebtedness of $22.8 million.  The total cash consideration at closing will be approximately $21.2 million.  The companies expect an early fourth quarter completion date for the transaction.




On September 3, 2010, we obtained $5.5 million via a senior secured loan, (the "Senior Loan"), pursuant to a Loan and Security Agreement (the "Senior Loan and Security Agreement"), by and among us, our subsidiaries, and Sovereign Bank.  The Senior Loan is due September 3, 2015, accrues interest at the rate of 6.81% per annum, requires monthly payments of principal and interest amortizing over a five year period, and is secured by substantially all of our assets.  We have the right to prepay the then outstanding balance, in whole or in part, at anytime.  If we prepay 50.0% or more of the then outstanding balance, we are required to pay a fee initially equal to 5.0% of the amount prepaid which reduces ratably on an annual basis to 1% of the amount prepaid four years after funding.  On October 21, 2010, we entered into a First Amendment to the Senior Loan and Security Agreement and on May 11, 2011, we entered into a Second Amendment to the Senior Loan and Security Agreement.  The Senior Loan and Security Agreement, as amended, contains standard and customary covenants including, prohibitions on incurring additional indebtedness, making loans or investments, granting security interests in any of our property, or acquiring any business or assets without the consent of Sovereign Bank.  The Second Amendment modified the financial covenants starting for the quarters ending on or after June 30, 2011, to require that we maintain (i) minimum liquidity of $1.0 million on deposit with Sovereign Bank, increasing to $1.5 million on December 31, 2011, (ii) a fixed charge coverage ratio of not less than .65 to 1 as of the quarter ending June 30, 2011, increasing to 1.25 to 1 for quarters ending on or after December 31, 2011, and (iii) a funded debt to EBITDA ratio of not more than 2.35 to 1 for the quarter ending June 30, 2011, decreasing to 2.0 to 1 for quarters ending on or after September 30, 2011.  We did not meet the fixed charge coverage ratio or the funded debt to EBITDA ratio for the quarter ending June 30, 2011, however the violations were waived by the lender.  We did meet the minimum liquidity covenant as of June 30, 2011.




23


The proceeds of the Senior Loan, together with $2.0 million of cash on hand, were used to repay $7.5 million of principal due on our existing $11.0 million Senior Secured Notes payable to  LC Capital Master Fund, Ltd. ("LC Capital") and Cadence Special Holdings II, LLC ("Cadence"), (the "2008 Notes").  The 2008 Notes accrued interest at the rate of 13.0% per annum, were secured by substantially all of our assets, and were due and payable in full on April 18, 2011.  In connection with the closing of the Senior Loan,we entered into an Amended and Restated Loan and Security Agreement, dated September 3, 2010, with LC Capital, Cadence and Lampe Conway & Co., LLC as administrative agent and collateral agent (the "Amended and Restated Lampe Loan and Security Agreement"), pursuant to which the 2008 Notes were amended and restated (the "2010 Secured Notes").  The 2010 Secured Notes in the aggregate principal amount of $3.5 million, are due October 3, 2015, are subordinated to the Senior Loan, accrue interest at the rate of 7.0% per annum if paid currently, or 10.0% if accrued, payable on March 3rd and September 3rd of each year, with each interest rate increasing .25% on the first anniversary of the closing, 1.0% on the second anniversary of the closing, 2.5% on the third anniversary of the closing, and 5.0% on the fourth anniversary of the closing, may be prepaid in whole or in part at anytime at our option, and are secured by substantially all of our assets, subject to the lien in favor of Sovereign Bank.  Pursuant to the Amended and Restated Lampe Loan and Security Agreement, as amended on October 21, 2010 and May 11, 2011, we are prohibited from paying interest on the 2010 Secured Notes unless we have a cash balance of $3.25 million after such payment.  The Second Amendment modified the financial covenants starting for the quarters ending on or after June 30, 2011, to require that we maintain (i) a minimum liquidity of $800,000 on deposit with Sovereign Bank increasing to $1.2 million on December 31, 2011, (ii) a fixed charge coverage ratio of not less than .525 to 1 as of the quarter ending June 30, 2011, increasing to 1.125 to 1 for quarters ending on or after December 31, 2011, and (iii) a funded debt to EBITDA ratio of not more than 2.55 to 1 for the quarter ending June 30, 2011, decreasing to 2.2 to 1 for quarters ending on or after September 30, 2011.  As of December 31, 2010, we were in compliance with all financial covenants.  We did not meet the fixed charge coverage ratio or the funded debt to EBITDA ratio for the quarter ending June 30, 2011, however the violations were waived by the lender.  We did meet the minimum liquidity covenant as of June 30, 2011.





Our existing note payable to Douglas B. Falcone, our Chief Operating Officer, in the principal amount of $9.75 million was also restructured.  The initial note accrued interest at the rate of 13.0% per annum payable quarterly with the principal balance due April 18, 2015, was unsecured, and subordinated to the payment in full of the 2008 Notes.  In connection with the foregoing transactions, we issued an Amended and Restated Subordinated Promissory Note to Mr. Falcone (the "Subordinated Note").  The Subordinated Note is due and payable in full October 3, 2015, is unsecured, and is subordinated in all respects to the Senior Loan and the 2010 Secured Notes.  The Subordinated Note accrues interest and contains payment terms substantially similar to the 2010 Secured Notes.  On October 21, 2010, we executed a First Allonge to the Subordinated Note (the "Allonge").  The Allonge amends the dates in which interest shall be paid from April 18 and October 18 of each year to March 3 and September 3 of each year.  Mr. Falcone has deferred approximately $4.8 million of interest payments under the note since its inception.  The accrued interest is represented in our Consolidated Balance Sheets under accrued expenses.


24




The following table summarizes future principal repayments of term loans and other debt (in thousands):





2011

$
5022012


1,0512013


1,1252014


1,1962015


14,201$
18,075





Off-Balance Sheet Arrangements





As of June 30, 2011, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.





Critical Accounting Policies and Estimates





Our critical accounting policies and estimates as of June 30, 2011 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2010.




ITEM 4.
CONTROLS AND PROCEDURES





As of June 30, 2011, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2011, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.





There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




25




PART II - OTHER INFORMATION




ITEM 6.
EXHIBITS





31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


26




SIGNATURE





Pursuant to the requirements 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.





ACCESS TO MONEY, INC.Date:     August 15, 2011
By:
/s/ Michael J. DolanMichael J. DolanChief Financial Officer




27