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 March 31, 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  ̈ NO  ̈





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 May 11, 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
24PART II
OTHER INFORMATIONITEM 5.
OTHER INFORMATION
25ITEM 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)March 31, 2011


December 31, 2010AssetsCurrent assets:Cash

$
3,107


$
2,421Restricted cash


602



601Accounts receivable, net


1,810



2,552Leases receivable, net


172



163Inventories


1,299



917Prepaid expenses and other


350



440Deferred financing costs


44



44Total current assets


7,384



7,138Property and equipment, net


2,323



2,445Intangible assets, net


1,252



1,368Goodwill


10,559



10,559Deferred financing costs, long term


155



166Other assets


474



473Total assets

$
22,147


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

$
6,445


$
5,667Accrued expenses


7,091



6,940Term loans - current portion, net


1,068



1,131Total current liabilities


14,604



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


17,332



17,590Warrants


161



587Total liabilities


32,097



31,915Shareholders’ deficit:Common stock, $0.001 par value - 70,000,000 shares authorized; 33,213,652 and 33,205,318 shares issued as of March 31, 2011 and December 31, 2010, respectively, and 33,153,811 and 33,146,333 shares outstanding at March 31, 2011 and December 31, 2010, respectively


33



33Preferred stock - 5,000 shares authorized, none issued and outstanding


-



-Additional paid-in capital


138,720



138,681Treasury stock


(21
)


(21
)Accumulated deficit


(148,682
)


(148,459
)Total shareholders’ deficit


(9,950
)


(9,766
)Total liabilities and shareholders’ deficit

$
22,147


$
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 March 31,2011


2010Revenues:Transaction-based revenues

$
19,031


$
20,600ATM equipment and other revenues


599



1,603Net revenues


19,630



22,203Cost of revenues:Cost of ATM operating revenues


16,944



17,355Cost of ATM equipment and other revenues


411



1,535Total cost of revenues


17,355



18,890Gross profit


2,275



3,313Selling, general and administrative expense


2,500



2,585Operating (loss) income


(225
)


728Interest expense


491



757Amortization of debt issuance costs


11



559Other expense (income)


(79
)


(11
)Change in fair value of warrants (income) expense


(426
)


139Net loss before income taxes

$
(222
)

$
(716
)Provision (benefit) for income taxes


-



-Net loss

$
(222
)

$
(716
)Net loss per common share – basic and diluted

$
(0.01
)

$
(0.03
)Weighted average common shares outstanding -basic and diluted


33,148



22,086





See accompanying notes to condensed consolidated financial statements.




3





Access to Money, Inc.


Condensed Consolidated Statements of Cash Flows


(In thousands)


(Unaudited)





Three Months ended March 31,2011


2010Cash flows from operating activities:Net loss

$
(222
)

$
(716
)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation


267



322Amortization


176



731Non-cash share-based compensation


38



50Loss on disposal or retirement of equipment


2



7Provision for doubtful accounts


6



38Change in warrant value


(426
)


139Changes in assets and liabilities, net of acquisitionsRestricted cash


(1
)


-Accounts receivable


736



(1,222
)Leases receivable


(9
)


39Inventories


(382
)


(223
)Prepaid expenses and other


90



(64
)Accounts payable


779



1,545Accrued expenses


153



414Cash provided by operating activities


1,207



1,060Cash flows from investing activities:Capital expenditures


(149
)


(92
)Acquisition of intangible and other assets


(50
)


-Cash used in investing activities


(199
)


(92
)Cash flows from financing activities:Payment on term loans


(322
)


(869
)Cash used in financing activities


(322
)


(869
)Net increase (decrease) in cash and cash equivalents


686



99Beginning cash and cash equivalents


2,421



5,770Ending cash and cash equivalents

$
3,107


$
5,869Supplemental cash flow information:Cash paid for interest

$
90


$
64Cash paid for taxes

$
-


$
-





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 March 31, 2011, we had approximately 10,359 ATMs under contract.





Principles of Consolidation





The consolidated financial statements include the accounts of Access to Money, Inc. and its subsidiaries.  At March 31, 2011, our subsidiaries consisted of Access to Money ATM Corporation, Access to Money Acquisition Corporation, LJR Consulting Corp., 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, net sales previously reported exclude commissions of approximately $14.2 million and $14.6 million for the three months ended March 31, 2011 and 2010, respectively, which are now included as a cost of ATM operating revenues. A detailed table of cost of ATM revenues is included in "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations." Also in 2011 we made a reclassification of network revenue and other revenues into transaction related revenues from ATM equipment and other revenues in the amounts of $483,000 and $416,000 for the three-month periods ending March 31, 2011 and 2010, respectively. These changes had no impact on shareholders' deficit or previously reported gross profit, net income or 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 March 31, 2011, the majority of our debt had fixed interest rates and the fair value was estimated at $22.7 million.  This amount includes approximately $4.3 million of accured 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.  The Company maintains 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 March 31, 2011 and December 31, 2010, there was $602,000 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.  While we expect to derive a minimal profit on the sale of equipment, there are circumstances in which no profit or a loss may be recognized at the time of the sale.





We have contracts with regional and national merchants and numerous independent store operators.  As of March 31, 2011 and December 31, 2010, we had one customer which accounted for approximately 25.1% and 22.0%, respectively, of our transaction-based revenue.




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





The Company reviews the accounts receivable on a regular basis to determine the collectability of each account.  The Company maintains allowances for doubtful accounts for estimated losses which may result from the failure of its clients to make required payments.  During each reporting period, the Company evaluates the adequacy of the allowance for doubtful accounts and calculates appropriate changes based on historical experience, credit evaluations, specific client collection issues and the length of time a receivable has been past due.  When the Company deems the receivable to be uncollectible, the Company charges the receivable against the allowance.  Accounts receivable are shown net of the allowance of $31,000 and $78,000 at March 31, 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):





March 31, 2011


December 31, 2010Machines

$
981


$
753Parts


318



164$
1,299


$
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 March 31, 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):





March 31, 2011


December 31, 2010Gross

carrying

amount


Accumulated

amortization


Net


Gross

carrying

amount


Accumulated

amortization


NetSubject to amortizationNon-compete agreement

$
175


$
(172
)

$
3


$
175


$
(157
)

$
18Customer contracts


1,382



(874
)


508



1,382



(793
)


589Distributor agreements


225



(111
)


114



225



(101
)


124Non-contractual customer base


250



(123
)


127



250



(113
)


1372,032



(1,280
)


752



2,032



(1,164
)


868Trademarks not subject to amortization


500



-



500



500



-



500$
2,532


$
(1,280
)

$
1,252


$
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 $165,000 and $172,000 for the three months ended March 31, 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 March 31, 2011 or December 31, 2010, as the Company's 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 Loss Per Share





Basic earnings per share is computed using the weighted average number of common shares outstanding during the period.  It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which the market price exceeds exercise price, less shares which we could have purchased with related proceeds.  All outstanding options and warrants were excluded from the calculation of diluted earnings per share for 2010 and 2011 because their inclusion would have been antidilutive.




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 is effective for the Company beginning January 1, 2011 and early adoption is not permitted.  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):





March 31, 2011


December 31, 2010Accrued payroll expenses

$
142


$
125Accrued interest expense


4,347



3,946Accrued ATM maintenance and other expenses


165



206Other accrued expenses


2,437



2,663$
7,091


$
6,940





4.         TERM LOANS AND OTHER DEBT:





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





March 31, 2011


December 31, 2010Sovereign Bank

$
5,027


$
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


118



202Total

$
18,400


$
18,721Less:  current portion


1,068



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

$
17,332


$
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 company did not meet the pre-amended covenant requirements as of March 31, 2011, however the violations were waived as of March 31, 2011 and through the effective date of the Second Amendment. The Second Amendment modified the financial covenants, starting in the quarter ended 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 to 1 for quarters ending on or after September 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 Company did not meet the pre-amended covenant requirements as of March 31, 2011, however the violations were waived as of March 31, 2011 and through the effective date of the Second Amendment. The Second Amendment modified the financial covenants, starting in the quarter ended 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.





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 $3.9 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

$
8272012


1,0512013


1,1252014


1,1962015


14,2012016 and beyond


-$
18,400





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.




10




Following the exchange agreements, we still 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 March 31, 2011 (in thousands).





Balance as of January 1, 2011

$
587Decrease in fair value of warrants


426Balance as of March 31, 2011

$
161





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 three months ending March 31, 2011, the rental rate pertaining to the use of vault cash was 2.75% and the average monthly amount of cash used to vault our ATMs was $33.2 million.





7.         SHARE-BASED COMPENSATION





The Company calculates the fair value of stock-based instruments awarded to employees on the date of grant and recognizes 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 the Company’s Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2011 and 2010 (in thousands):





Three Months ended March 31,2011


2010Option grants

$
-


$
14Restricted shares


38



36Total share-based compensation expense

$
38


$
50




11




Options:  The following table summarizes stock option activity during the three months ended March 31, 2011 and 2010, as follows:





Number of

shares


Weighted average exercise priceOptions Outstanding December 31, 2010


322,500


$
1.13Granted


-



-Exercised


-



-Cancelled


-



-Options Outstanding March 31, 2011


322,500


$
1.13





As of March 31, 2011, options to acquire 322,500 shares at a weighted average exercise price of $1.13 per share were exercisable.





The weighted average per share fair value price of options granted during the three months ended March 31, 2011 and 2010 was $0 and $0, respectively.  The total intrinsic value of options exercised the three months ended March 31, 2011 and 2010 was $0 and $0, respectively.





Restricted Stock.The following table summarizes restricted stock activity during the three months ended March 31, 2011, as follows:





SharesRestricted shares January 1, 2011


353,333Granted


0Vested


(8,334
)Forfeited


0Restricted shares March 31, 2011


344,999





8.           PROVISION FOR INCOME TAXES





We have not recorded an income tax benefit for the three-month periods ending March 31, 2011 or 2010 because we are uncertain that we will be able to realize the benefit of our net operating loss carryforwards.  As of March 31, 2011, we have net operating losses of approximately $80.1 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 March 31, 2011 concerning shareholders deficit (in thousands):





Common


Treasury


Additional

Paid-in


Accumulated


Total

ShareholdersShares


Amounts


Shares


Amounts


Capital


Deficit


DeficitBalances, December 31, 2010


33,146


$
33



59


$
(21
)

$
138,682


$
(148,460
)

$
(9,766
)Net income


-



-



-



-



-



(222
)


(222
)Share-based compensation


-



-



-



-



38



-



38Shares issued


8



-



1



-



-



-



-Balances March 31, 2011


33,154


$
33



60


$
(21
)

$
138,720


$
(148,682
)

$
(9,950
)





10.          SUBSEQUENT EVENTS





On May 11, 2011, we entered into the Second Amendment to the Loan and Security Agreement with Sovereign Bank and Second Amendment to the Loan and Security Agreement with Lampe.  Please see Note 4 - Term Loans and Other Debt for a more complete description.


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 March 31, 2011, we manage, own and operate 10,359 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 include:


·
Deployment of ATMs at Dunkin Donuts franchise locations nationwide;
  ·
Expansion of our surcharge free offerings 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 also continue to evaluate the profitability of our ATMs on a regular basis and make decisions to maximize the value of each unit.





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 have yet to be finalized but are currently required to be finalized on or before July 31, 2011.  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.





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.




15




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 Elan 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 periods ended March 31, 2011 and 2010:





Three Months Ended March 31,2011


2010Total transactions


9,220,744



10,186,904Withdrawal transactions


7,353,244



8,194,709Average number of transacting ATMs


10,339



10,983Average withdrawals per ATM per month


237



249Average gross transaction-based revenue per withdrawal

$
2.59


$
2.51Average commission per withdrawal

$
1.93


$
1.78Average net transaction-based revenue per withdrawal

$
.66


$
.73





The average number of transacting ATMs in our network during the three months ended March 31, 2011 decreased by 644 from 10,983 in the three months ended March 31, 2010 compared to 10,339 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 which occurred in June 2010.  The decrease in the number of transacting machines contributed to an 841,465, or 10.3%, decrease in the number of withdrawal transactions between the first three months of 2011 and 2010.





The number of transacting ATMs in our network at March 31, 2011 was 10,359 compared to 11,029 at March 31, 2010.





We experienced a decrease in the average net transaction-based revenue per withdrawal of $0.07 to $0.66 in the three months ended March 31, 2011 from $0.73 in the three months ended March 31, 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 in 2010 due to 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 March 31,2011


2010%


%Revenues:Transaction-based revenue


96.9



92.8ATM equipment and other revenue


3.1



7.2Total revenues


100.0



100.0Cost of revenues:Cost of ATM operating revenue


89.0



84.3Cost of ATM equipment and other revenue


68.6



95.8Total cost of revenue


88.4



85.1Gross profit


11.6



14.9Selling, general and administrative expenses


12.7



11.6Operating income


(1.1
)


3.3Net loss


(1.1
)


(3.2
)





Comparison of Results of Operations for the Three-Month Period Ended March 31, 2011 to the Three-Month Period Ended March 31, 2010.





Sales





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





Three Months March 31,2011


2010


% ChangeRevenues:Transaction-based revenues

$
19,031


$
20,600



(7.6
)Service and other revenues


180



273



(34.1
)ATM equipment revenues


419



1,330



(68.5
)Net revenues

$
19,630


$
22,203



(11.6
)





Transaction-based revenues were approximately $19.0 million during the three months ended March 31, 2011 compared to $20.6 million for the corresponding period of 2010.  This $1.6 million, or 7.6%, decrease was primarily attributable to fewer transacting units between the periods.


18


Service and other revenues decreased by $93,000, or 34.1%, to $180,000 during the three-month period ended March 31, 2011 compared to $273,000 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 decreased by $911,000, or 68.5%, to approximately $419,000 during the three months ended March 31, 2011 from $1.3 million during the corresponding period of 2010.  This decrease was the result of hardware sales to several large customers in 2010 that were not repeated 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 March 31,2011


2010


% ChangeCost of ATM operating revenues:Commissions

$
14,228


$
14,572



(2.4
)Processing costs


745



449



65.9Armored car service


515



475



8.4Cost of cash


435



513



(15.2
)Service costs


697



858



(18.8
)Machine depreciation


172



231



(25.5
)Communication costs


116



228



(49.1
)Other costs


36



29



24.1Total cost of ATM operating revenues

$
16,944


$
17,355



(2.4
)Cost ATM equipment and other revenues:ATM equipment cost


329



1,394



(76.4
)Other revenue cost


82



141



(41.8
)Total cost of ATM equipment and other revenues

$
411


$
1,535



(73.2
)Total cost of revenues

$
17,355


$
18,890



(8.1
)





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 $411,000, or 2.4%, to $16.9 million during the three months ended March 31, 2011 compared to $17.4 million in the same period in 2010.





Commissions decreased from $14.6 million during the three-month period ended March 31, 2010 to $14.2 million in the three-month period ended March 31, 2011.  This decrease of approximately $344,000, or 2.4%, resulted primarily from fewer withdrawal transactions due, in part, to the loss of a principal customer in June 2010.  As a percentage of transaction-based revenue, commissions increased to 74.8% in the three-month period ended March 31, 2011 from 70.7% during the corresponding period in 2010.  The average commission per withdrawal transaction increased to $1.93 for the three-month period ended March 31, 2011 as compared to $1.78 for the three-month period ended March 31, 2010.  The higher commission per withdrawal was the result of a higher percentage of transactions with higher commission rates.





Processing fees increased $296,000, or 65.9%, to approximately $745,000, in the three months ended March 31, 2011 compared to $449,000 in the corresponding period of 2010.  The increase is due to higher fees being charged by the networks which facilitate ATM transactions.  These charges are partially offset by a corresponding increase in network pass-thru fee revenue which represents the amount of the increased fees we pass along to the ATM operators under our merchant-owned program.


19




Armored car costs increased $40,000, or 8.4%, to $515,000 in the three months ended March 31, 2011 from $475,000 in the corresponding period of 2010.  This increase is attributable to an increase in the number of cash deliveries and costs related to changing armored car providers on selected units based on requests from our vault cash provider.





Our cost of vault cash decreased by $78,000, or 15.2%, to $435,000 during the three months ended March 31, 2011 from $513,000 in the same period of 2010.  This decrease is the result of using approximately 27.2%, or $12.4 million, less cash for ATMs we operated in the first three months of 2011.  This decrease was partially offset by an increase in the insurance premium paid per machine per month assessed by our vault cash provider commencing in the second quarter of 2010.  The interest rate on ourvault cash facility remained constant at 2.75%.





Maintenance and third party service costs decreased $161,000, or 18.8%, to approximately $697,000 during the first quarter of 2011 compared to $858,000 in the first quarter of 2010.  The reduction is primarily attributable to the removal of 465 ATMs under a contract that was not renewed in June 2010.





ATM equipment revenue cost decreased $1.1 million, or 76.4%, to $329,000 in the first quarter of 2011 from approximately $1.4 million in the first quarter of 2010 due to equipment sales to several large customers in 2010.





Gross Profit(in thousands, except for percentages)





Three Months Ended March 31,2011


2010


% ChangeGross profit

$
2,275


$
3,313



(31.3
)





During the three months ended March 31, 2011, gross profit was approximately $2.3 million compared to $3.3 million in the same period of 2010.  The reasons for the decreases have been discussed above in sales and costs.





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





Three Months Ended March 31,2011


2010


% ChangeSelling, general and administrative

$
2,500


$
2,585



(3.3
)





Selling, general and administrative expense decreased by $85,000, or 3.3%, to $2.5 million for the three months ended March 31, 2011 from approximately $2.6 million for the three months ended March 31, 2010.  Selling, general and administrative expense as a percent of total revenues net sales increased to 12.7% in the first quarter of 2011 from 11.6% in the first quarter of 2010.





We experienced decreases in non-cash compensation, repairs and maintenance, license fees, office related, legal, accounting travel, marketing, and other expenses of approximately $225,000 in the first quarter of 2011 compared to the first quarter of 2010.  These reductions were partially offset by a combined increase of approximately $137,000 of costs related to payroll, rent and professional fees in the three months ended March 31, 2011 compared to the corresponding period of 2010.





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





Three Months Ended March 31,2011


2010


% ChangeOperating (loss) income

$
(225
)

$
728



(130.9
)




20




During the three months ended March 31, 2011, we had an operating loss of $225,000, compared to operating income of $728,000 for the three months ended March 31, 2010.  The reasons for the decreases have been discussed above in sales and costs.





Depreciation and Amortization(in thousands, except for percentages)





Three Months Ended March 31,2011


2010


% ChangeDepreciation expense

$
267


$
322



(17.1
)Amortization expense

$
176


$
731



(75.9
)





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-month periods ended March 31, 2011 and 2010 was the result of a write-off of equipment and its corresponding depreciation in December 2010.  This write-off has lowered depreciation in the first quarter of 2011.  The decrease in amortization expense is directly related to 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 March 31,2011


2010


% ChangeInterest expense

$
491


$
757



35.1Amortization – debt issuance


11



559



98.0Total interest related expense

$
502


$
1,316



61.9





Total interest related expense for the three months ended March 31, 2011 decreased by $814,000, or 61.9%, to $502,000 from $1.3 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.


21




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 December 31, 2010 (in thousands).





Balance as of January 1, 2011

$
587Decrease in fair value of warrants


426Balance as of March 31, 2010

$
161





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 1.07%, and a historical volatility of 140.8%.





Net Loss(in thousands, except for percentages)





Our net losses in 2011 and 2010 were impacted by accounting associated with warrant valuations.  The following table provides a reconciliation of net loss to adjusted net loss to show the impact to the warrant valuation.





Three Months Ended March 31,2011


2010


% ChangeNet loss

$
(222
)

$
(716
)


(69.0
)(Loss) gain on warrant value


426



(139
)


406.5Net loss after adjustments

$
(648
)

$
(577
)


(12.5
)





We recognized a net loss after adjustments of approximately $648,000 for the three months ended March 31, 2011 compared to an adjusted net loss after adjustments of $577,000 for the same 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 quarter ended March 31, 2011 was $1.2 million compared to net cash provided by operating activities during the quarter ended March 31, 2010 of $1.0 million.  During the first quarter of 2011 the principal non-cash adjustments to our operating loss were depreciation and amortization, change in warrant value.  In addition, we experienced an increase in accounts payable.





Net cash used in investing activities during the quarter ended March 31, 2011 was $199,000 compared to $92,000 in the first quarter of 2010.  Cash used in both periods consisted primarily of capital expenditures for ATMs and equipment.





Net cash used in financing activities was $322,000 during the three months ended March 31, 2011 and consisted of repayment of term loans.  Net cash used in financing during the three months ended March 31, 2010 was $869,000 and consisted of the payment of term loans.





We had cash and cash equivalents of approximately $3.1 million at March 31, 2011 compared to $5.9 million at March 31, 2010.  At March 31, 2011, we had a net working capital deficit of $7.2 million compared to a net working capital deficit of $1.6 million at March 31, 2010.  We believe that our cash balances and cash generated from our operating activities will be sufficient to operate our business for the foreseeable future.


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On September 3, 2010, we obtained $5.5 million via the Senior Loan with Sovereign Bank to restructure the $11.0 million principal amount senior secured notes issued in 2008 (the "2008 Notes").  The Senior Loan, as amended, 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.





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 the 2008 Notes.  In connection with the closing of the Senior Loan,we entered into the Amended and Restated Lampe Loan and Security Agreement and new secured promissory notes (the "2010 Secured Notes").  The 2010 Secured Notes have a 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, are payable on September 3and March 3 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.





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 was subordinated to the payment in full of the 2008 Notes.  In connection with the foregoing transactions, we issued, the Subordinated Note to Mr. Falcone.  The Subordinated Note, as amended, 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.  For a more complete description of the Senior Loan, 2010 Secured Notes and note payable to Mr. Falcone, please see Note 4 of our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.





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





2011

$
8272012


1,0512013


1,1252014


1,1962015


14,2012016 and beyond


-$
18,400





Off-Balance Sheet Arrangements





As of March 31, 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 March 31, 2011 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2010.


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ITEM 4.
CONTROLS AND PROCEDURES





As of March 31, 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 March 31, 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 March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




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PART II – OTHER INFORMATION





ITEM 5.
OTHER INFORMATION





The information set forth below is included herein for the purpose of providing the disclosure required under "Item 1.01- Entry into a Material Definitive Agreement" and "Item 2.03 - Creation of a Direct Financial Obligation or an Obligation" of  Form 8-K.





Amendment to Loan and Security Agreement





On May 11, 2011, we and certain of its subsidiaries entered into a Second Amendment to Loan and Security Agreement (the "Amendment") with Sovereign Bank (the "Bank").  The Amendment amends the Loan and Security Agreement dated September 3, 2010, as amended to date (the "Senior Loan and Security Agreement"), by and among us, our subsidiaries and the Bank.  The Amendment revises certain financial covenants 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 to 1 for quarters ending on or after September 30, 2011.





Other than as revised by the Amendment, the terms and conditions set forth in the Senior Loan and Security Agreement remain in effect.





Amendment to Amended and Restated Loan and Security Agreement





On May 11, 2011, we and certain of our subsidiaries entered into a Second Amendment to Amended and Restated Loan and Security Agreement (the "Lampe Amendment") with LC Capital Master Fund, Ltd. ("LC Capital"), Cadence Special Holdings II, LLC ("Cadence"), and Lampe Conway & Co., LLC, as administrative agent and collateral agent ("Lampe").  The Lampe Amendment amends the Amended and Restated Loan and Security Agreement dated September 3, 2010, as amended to date (the "Amended and Restated Loan and Security Agreement"), by and among us, our subsidiaries, LC Capital, Cadence and Lampe, as administrative and collateral agent.  The Lampe Amendment revises certain financial covenants to require that we maintain (i) the 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 3, 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 as of the end of each fiscal quarter thereafter.





Other than as revised by the Lampe Amendment, the terms and conditions set forth in the Amended and Restated Loan and Security Agreement remain in effect.





The following is included for the purpose of providing information required to be disclosed during the fiscal quarter ended March 31, 2011 pursuant to Item 2.04 — Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement — of SEC Form 8-K





As of January 25, 2011, we were not in compliance with the minimum liquidity requirement included in our Loan and Security Agreement with Sovereign Bank (the "Loan Agreement").  In addition, as of the quarter ended March 31, 2011, we were not in compliance with the fixed charge coverage ratio or funded debt to EBITDA ratio required under the Loan Agreement.  Each of the foregoing constituted events of default under the Loan Agreement and were waived in connection with the execution of the Amendment described above.





As of the quarter ended March 31, 2011, we were not in compliance with the fixed charge coverage ratio or funded debt to EBITDA ratio required under our Loan and Security Agreement with LC Capital, Cadence and Lampe (the "Lampe Loan Agreement").  Each of the foregoing constituted an event of default under the Lampe Loan Agreement and were waived in connection with the execution of the Lampe Amendment described above.


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ITEM 6.
EXHIBITS





10.1
Second Amendment to Loan and Security Agreement dated May 11, 2011 by and among the Company, certain of the Company’s subsidiaries, and Sovereign Bank.





10.2
Second Amendment to Loan and Security Agreement, dated May 11, 2011, by and among the Company, certain of the Company’s subsidiaries, LC Capital Master Fund, LP, Cadence Special Holdings II, LLC, and Lampe Conway & Co., LLC, as administrative and collateral agent.





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.


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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:
May 16, 2011
By:
/s/ Michael J. DolanMichael J. DolanChief Financial Officer


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