UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(MARK
ONE)





x   QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2010





OR





 ̈   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ___________    to     
 ___________





000-17874(Commission
      file number)GLOBAL
      AXCESS CORP(Exact
      name of registrant as specified in its charter)





NEVADA
              88-0199674(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)7800
      BELFORT PARKWAY, SUITE 165JACKSONVILLE,
      FLORIDA
              32256(Address
      of principal executive offices)
              (Zip
      Code)





(904)
280-3950


(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 Regulation 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 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





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


Yes  ̈ No x





As of
August 09, 2010, the registrant had 21,943,940 shares outstanding of the common
stock ($0.001 par value).








TABLE
      OF CONTENTS
                Page
      No.PART 
      I
                
                FINANCIAL
      INFORMATIONItem 
      1.
                
                Financial
      Statements (unaudited)
                4Item 
      2.
                
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                26Item 
      3.
                
                Quantitative
      and Qualitative Disclosure About Market Risk
                36Item 
      4.
                
                Controls
      and Procedures
                36Item 
      4T.
                
                Controls
      and Procedures
                36PART 
      II
                
                OTHER
      INFORMATIONItem 
      1.
                
                Legal
      Proceedings
                36Item 
      1A.
                
                Risk
      Factors
                36Item 
      2.
                
                Unregistered
      Sale of Equity Securities and Use of Proceeds
                37Item 
      3.
                
                Defaults
      Upon Senior Securities
                38Item 
      4.
                
                [Removed
      and Reserved]
                38Item 
      5.
                
                Other
      Information
                38Item 
      6.
                
                Exhibits
                38SIGNATURES
                
                
                39


2





Forward-Looking
Statements





Unless
the context indicates otherwise, all references in this document to “we,” “us”
and “our” refer to Global Axcess Corp and its subsidiaries.





In
addition to historical information, this Quarterly Report on Form 10-Q contains
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially. Factors that might cause or contribute to
such differences include, but are not limited to, those discussed in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations." You should carefully review the risks described in other
documents we file from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q that have been or are to be filed
in 2010.





When
used in this report, the words "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "targets," "estimates," and similar expressions are
generally intended to identify forward-looking statements. You should not place
undue reliance on the forward-looking statements, which speak only as of the
date of this Quarterly Report on Form 10-Q. We undertake no obligation to
publicly release any revisions to the forward-looking statements or reflect
events or circumstances after the date of this document.





Estimates
of future financial results are inherently unreliable.





From
time to time, representatives of Global Axcess Corp (the “Company”) may make
public predictions or forecasts regarding the Company's future results,
including estimates regarding future revenues, expense levels, earnings or
earnings from operations. Any forecast regarding the Company's future
performance reflects various assumptions. These assumptions are subject to
significant uncertainties and, as a matter of course, many of them will prove to
be incorrect. Further, the achievement of any forecast depends on numerous
factors (including those described in this discussion), many of which are beyond
the Company's control. As a result, there can be no assurance that the Company's
performance will be consistent with any management forecasts or that the
variation from such forecasts will not be material and adverse. Investors are
cautioned not to base their entire analysis of the Company's business and
prospects upon isolated predictions, but instead are encouraged to utilize the
entire available mix of historical and forward-looking information made
available by the Company, and other information affecting the Company and its
products, when evaluating the Company's prospective results of
operations.





In
addition, representatives of the Company may occasionally comment publicly on
the perceived reasonableness of published reports by independent analysts
regarding the Company's projected future performance. Such comments should not
be interpreted as an endorsement or adoption of any given estimate or range of
estimates or the assumptions and methodologies upon which such estimates are
based. Undue reliance should not be placed on any comments regarding the
conformity, or lack thereof, of any independent estimates with the Company's own
present expectations regarding its future results of operations. The
methodologies employed by the Company in arriving at its own internal
projections and the approaches taken by independent analysts in making their
estimates are likely different in many significant respects. Although the
Company may presently perceive a given estimate to be reasonable, changes in the
Company's business, market conditions or the general economic climate may have
varying effects on the results obtained through the use of differing analyses
and assumptions. The Company expressly disclaims any continuing responsibility
to advise analysts or the public markets of its view regarding the current
accuracy of the published estimates of outside analysts. Persons relying on such
estimates should pursue their own independent investigation and analysis of
their accuracy and the reasonableness of the assumptions on which they are
based.


3


PART
I - FINANCIAL INFORMATION





ITEM
1. Financial Statements (unaudited)





GLOBAL
AXCESS CORP AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)
                  
                  
                  (Audited)June 30, 2010
                  
                  
                  December 31, 2009ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  2,905,627
                  
                  
                  $
                  2,007,860Automated
      teller machine vault cash
                  
                  
                  250,000
                  
                  
                  
                  250,000Accounts
      receivable, net of allowance of $4,765 in 2010 and $12,616 in
      2009
                  
                  
                  796,219
                  
                  
                  
                  845,000Inventory,
      net of allowance for obsolescence of$82,572 in 2010
      and $94,572 in 2009
                  
                  
                  676,719
                  
                  
                  
                  308,031Deferred
      tax asset - current
                  
                  
                  868,848
                  
                  
                  
                  868,848Prepaid
      expenses and other current assets
                  
                  
                  1,549,458
                  
                  
                  
                  132,100Total
      current assets
                  
                  
                  7,046,871
                  
                  
                  
                  4,411,839Fixed
      assets, net
                  
                  
                  6,574,714
                  
                  
                  
                  5,299,661Other
      assetsMerchant
      contracts, net
                  
                  
                  10,377,575
                  
                  
                  
                  10,665,613Intangible
      assets, net
                  
                  
                  4,176,050
                  
                  
                  
                  4,095,911Deferred
      tax asset - non-current
                  
                  
                  813,618
                  
                  
                  
                  813,618Restricted
      cash
                  
                  
                  -
                  
                  
                  
                  800,000Other
      assets
                  
                  
                  72,807
                  
                  
                  
                  30,307Total
      assets
                  
                  $
                  29,061,635
                  
                  
                  $
                  26,116,949LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued liabilities
                  
                  $
                  3,607,259
                  
                  
                  $
                  2,983,583Automated
      teller machine vault cash payable
                  
                  
                  250,000
                  
                  
                  
                  250,000Notes
      payable - related parties  - current portion, net
                  
                  
                  28,191
                  
                  
                  
                  26,722Notes
      payable - current portion
                  
                  
                  20,575
                  
                  
                  
                  19,803Senior
      lenders' notes payable - current portion, net
                  
                  
                  1,798,323
                  
                  
                  
                  1,828,572Capital
      lease obligations - current portion
                  
                  
                  527,780
                  
                  
                  
                  667,233Total
      current liabilities
                  
                  
                  6,232,128
                  
                  
                  
                  5,775,913Long-term
      liabilitiesNotes
      payable - related parties - long-term portion, net
                  
                  
                  58,601
                  
                  
                  
                  72,690Notes
      payable - long-term portion
                  
                  
                  62,749
                  
                  
                  
                  73,120Senior
      lenders' notes payable - long-term portion, net
                  
                  
                  5,318,361
                  
                  
                  
                  3,300,000Capital
      lease obligations - long-term portion
                  
                  
                  282,304
                  
                  
                  
                  329,314Total
      liabilities
                  
                  
                  11,954,143
                  
                  
                  
                  9,551,037Stockholders'
      equityPreferred
      stock; $0.001 par value; 5,000,000 shares authorized, no shares issued and
      outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock; $0.001 par value; 45,000,000 shares authorized, 22,025,536 and
      21,931,786 shares issued and 21,943,940 and 21,883,924 shares outstanding
      at 06/30/10 and 12/31/09, respectively
                  
                  
                  21,992
                  
                  
                  
                  21,932Additional
      paid-in capital
                  
                  
                  23,033,199
                  
                  
                  
                  22,900,880Accumulated
      deficit
                  
                  
                  (5,905,733
                  )
                  
                  
                  (6,344,934
                  )Treasury
      stock; 81,596 and 47,862 shares of common stock at cost at 06/30/10 and
      12/31/09, respectively
                  
                  
                  (41,966
                  )
                  
                  
                  (11,966
                  )Total
      stockholders' equity
                  
                  
                  17,107,492
                  
                  
                  
                  16,565,912Total
      liabilities and stockholders' equity
                  
                  $
                  29,061,635
                  
                  
                  $
                  26,116,949





See
Accompanying Notes to Condensed Consolidated Financial
Statements


4





GLOBAL
AXCESS CORP AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





For the Three Months EndedJune 30, 2010
                    
                    
                    June 30, 2009Revenues
                    
                    $
                    5,506,905
                    
                    
                    $
                    5,369,408Cost
      of revenues
                    
                    
                    2,996,094
                    
                    
                    
                    2,813,944Gross
      profit
                    
                    
                    2,510,811
                    
                    
                    
                    2,555,464Operating
      expensesDepreciation
      expense
                    
                    
                    321,205
                    
                    
                    
                    289,848Amortization
      of intangible merchant contracts
                    
                    
                    199,332
                    
                    
                    
                    195,067Selling,
      general and administrative
                    
                    
                    1,602,709
                    
                    
                    
                    1,334,271Stock
      compensation expense
                    
                    
                    55,224
                    
                    
                    
                    29,374Total
      operating expenses
                    
                    
                    2,178,470
                    
                    
                    
                    1,848,560Operating
      income from continuing operations before items shown below
                    
                    
                    332,341
                    
                    
                    
                    706,904Interest
      expense, net
                    
                    
                    (109,562
                    )
                    
                    
                    (149,873
                    )Loss
      on early extinguishment of debt
                    
                    
                    (102,146
                    )
                    
                    
                    -Net
      Income
                    
                    $
                    120,633
                    
                    
                    $
                    557,031Income
      per common share - basic:Net
      Income per common share
                    
                    $
                    0.01
                    
                    
                    $
                    0.03Income
      per common share - diluted:Net
      Income per common share
                    
                    $
                    0.01
                    
                    
                    $
                    0.03Weighted
      average common shares outstanding:Basic
                    
                    
                    21,943,940
                    
                    
                    
                    21,873,924Diluted
                    
                    
                    23,751,471
                    
                    
                    
                    22,321,389





See
Accompanying Notes to Condensed Consolidated Financial
Statements


5





GLOBAL
AXCESS CORP AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





For the Six Months EndedJune 30, 2010
                
                
                June 30, 2009Revenues
                
                $
                10,886,983
                
                
                $
                10,783,842Cost
      of revenues
                
                
                5,854,028
                
                
                
                5,669,823Gross
      profit
                
                
                5,032,955
                
                
                
                5,114,019Operating
      expensesDepreciation
      expense
                
                
                631,100
                
                
                
                559,342Amortization
      of intangible merchant contracts
                
                
                398,664
                
                
                
                388,684Selling,
      general and administrative
                
                
                3,128,572
                
                
                
                2,627,234Stock
      compensation expense
                
                
                102,379
                
                
                
                55,085Total
      operating expenses
                
                
                4,260,715
                
                
                
                3,630,345Operating
      income from continuing operations before items shown below
                
                
                772,240
                
                
                
                1,483,674Interest
      expense, net
                
                
                (230,893
                )
                
                
                (362,490
                )Loss
      on early extinguishment of debt
                
                
                (102,146
                )
                
                
                (467,391
                )Net
      Income
                
                $
                439,201
                
                
                $
                653,793Income
      per common share - basic:Net
      Income per common share
                
                $
                0.02
                
                
                $
                0.03Income
      per common share - diluted:Net
      Income per common share
                
                $
                0.02
                
                
                $
                0.03Weighted
      average common shares outstanding:Basic
                
                
                21,918,189
                
                
                
                21,428,924Diluted
                
                
                23,759,084
                
                
                
                21,428,924




See Accompanying Notes to Condensed
Consolidated Financial Statements




6




GLOBAL
AXCESS CORP AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





For the Six Months EndedJune 30, 2010
                
                
                June 30, 2009Cash
      flows from operating activities:Income
      from continuing operations
                
                $
                439,201
                
                
                $
                653,793Adjustments
      to reconcile net income from continuing operations to net cash provided by
      continuing operating activities:Stock
      based compensation
                
                
                102,379
                
                
                
                55,085Loss
      on early extinguishment of debt
                
                
                61,508
                
                
                
                467,391Depreciation
      expense
                
                
                631,100
                
                
                
                559,342Amortization
      of intangible merchant contracts
                
                
                398,664
                
                
                
                388,684Amortization
      of capitalized loan fees
                
                
                12,940
                
                
                
                16,657Allowance
      for doubtful accounts
                
                
                10,468
                
                
                
                (2,984
                )Allowance
      for inventory obsolescence
                
                
                (12,000
                )
                
                
                44,718Non-cash
      interest income on swap agreement with senior lender
                
                
                -
                
                
                
                (7,921
                )Accretion
      of discount on notes payable
                
                
                -
                
                
                
                44,354Changes
      in operating assets and liabilities:Change
      in automated teller machine vault cash
                
                
                -
                
                
                
                (250,000
                )Change
      in accounts receivable
                
                
                38,313
                
                
                
                525Change
      in inventory
                
                
                (417,292
                )
                
                
                (165,187
                )Change
      in prepaid expenses and other current assets
                
                
                (1,417,358
                )
                
                
                17,883Change
      in other assets
                
                
                (42,500
                )
                
                
                (130,621
                )Change
      in intangible assets, net
                
                
                (154,587
                )
                
                
                (70,696
                )Change
      in accounts payable and accrued liabilities
                
                
                623,676
                
                
                
                273,132Change
      in automated teller machine vault cash payable
                
                
                -
                
                
                
                250,000Net
      cash provided by continuing operating activities
                
                
                274,512
                
                
                
                2,144,155Cash
      flows from investing activities:Costs
      of acquiring merchant contracts
                
                
                (110,626
                )
                
                
                (29,968
                )Purchase
      of property and equipment
                
                
                (1,643,340
                )
                
                
                (215,662
                )Net
      cash used in investing activities
                
                
                (1,753,966
                )
                
                
                (245,630
                )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                
                
                -
                
                
                
                9,100Proceeds
      from senior lenders'  notes payable
                
                
                7,116,684
                
                
                
                5,000,000Proceeds
      from notes payable
                
                
                710,533
                
                
                
                -Change
      in restricted cash
                
                
                800,000
                
                
                
                (800,000
                )Principal
      payments on senior lenders'  notes payable
                
                
                (5,128,572
                )
                
                
                (5,457,143
                )Principal
      payments on notes payable
                
                
                (720,132
                )
                
                
                (3,182
                )Principal
      payments on notes payable - related parties
                
                
                (12,620
                )
                
                
                (11,263
                )Principal
      payments on capital lease obligations
                
                
                (388,672
                )
                
                
                (431,225
                )Net
      cash provided by (used in) financing activities
                
                
                2,377,221
                
                
                
                (1,693,713
                )Increase
      in cash
                
                
                897,767
                
                
                
                204,812Cash,
      beginning of period
                
                
                2,007,860
                
                
                
                1,560,910Cash,
      end of the period
                
                $
                2,905,627
                
                
                $
                1,765,722Cash
      paid for interest
                
                $
                220,333
                
                
                $
                308,179





See
Accompanying Notes to Condensed Consolidated Financial
Statements


7





Supplemental
schedule of non-cash investing and financing activities:





For the Six Months EndedJune 30, 2010
                
                
                June 30, 2009SUPPLEMENTAL
      CASH FLOW INFORMATIONThe
      significant non-cash investing and financing activities of the Company
      were as follows:Operating
      activities:Net
      transfer of de-installed net fixed assets to (from)
    inventory
                
                $
                (60,604
                )
                
                $
                (55,238
                )Total
      non-cash operating activities
                
                $
                (60,604
                )
                
                $
                (55,238
                )Investing
      activities:Purchase
      of assets under capital lease obligations
                
                $
                202,209
                
                
                $
                76,950Net
      transfer of de-installed net fixed assets (to) from
    inventory
                
                
                60,604
                
                
                
                55,238Total
      non-cash investing activities
                
                $
                262,813
                
                
                $
                132,188Financing
      activities:Settlement
      of stock option exercises through issuance of treasury
    stock:Repurchase
      of treasury stock, 33,734 shares of common stock at cost
                
                $
                (30,000
                )
                
                $
                -Treasury
      Shares in lieu of cash for stock option exercises
                
                
                -
                
                
                
                -Total
      non-cash financing activities
                
                $
                (30,000
                )
                
                $
                -





See
Accompanying Notes to Condensed Consolidated Financial
Statements


8


GLOBAL
AXCESS CORP AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AS
OF JUNE 30, 2010


(Unaudited)





1. 
  BASIS OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Securities and Exchange Commission (“the “SEC”)
requirements for interim financial statements. Therefore, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
These condensed consolidated financial statements should be read in conjunction
with the Form 10-K for the year ended December 31, 2009 of Global Axcess Corp
and its subsidiaries (the “Company").





The
condensed consolidated financial statements present the condensed consolidated
balance sheets, statements of operations, and cash flows of the Company. The
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.





The
condensed consolidated financial information is unaudited. In the opinion of
management, all adjustments (consisting of only normal recurring
adjustments)  necessary to present fairly the financial position as of June
30, 2010 and the results of operations and cash flows presented herein have been
included in the condensed consolidated financial statements. Interim results are
not necessarily indicative of results of operations for the full
year.





All
fiscal 2010 adjustments are of normal recurring nature.





2. 
  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Description of
Business





Global
Axcess Corp, primarily through its wholly owned subsidiaries, Nationwide Money
Services, Inc., Nationwide Ntertainment Services, Inc. and EFT Integration Inc.,
is an independent provider of self-service kiosk solutions.  Nationwide
Ntertainment Services, Inc. was formed during fiscal 2009.  These solutions
include ATM and DVD kiosk management and support services focused on serving the
self-service kiosk needs of merchants, grocers, retailers and financial
institutions nationwide. It is a one-stop gateway for unattended self-service
kiosk management services.  The Company currently owns, manages or operates
approximately 4,600 self-service kiosks in its national network spanning 43
states.





Significant Accounting
Policies





The
preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles (“GAAP”) accepted in the United States
of America and requires management to make judgments, assumptions and estimates
that affect the amounts reported in the Company’s condensed consolidated
financial statements and accompanying notes. The Company bases its estimates and
judgments on historical experience and on various other assumptions that it
believes are reasonable under the circumstances. However, future events are
subject to change, and the best estimates and judgments routinely require
adjustment. The amounts of assets and liabilities reported in its condensed
consolidated balance sheets, and the amounts of revenues and expenses reported
for each of its fiscal periods, are affected by estimates and assumptions which
are used for, but not limited to, the accounting for allowance for doubtful
accounts, goodwill and intangible asset impairments,  inventory and income
taxes. Actual results could differ from these estimates. The following
accounting policies are significantly affected by judgments, assumptions and
estimates used in the preparation of the Company’s consolidated financial
statements.


9


Cash and Cash
Equivalents





The
Company considers all highly-liquid investments with a maturity of three months
or less when purchased to be cash equivalents.





Principles of
Consolidation





The
condensed consolidated financial statements include the accounts of Global
Axcess Corp and its subsidiaries. Global Axcess Corp has the following
subsidiaries:  Nationwide Money Services, Inc. (“Nationwide”), Nationwide
Ntertainment Services, Inc. and EFT Integration, Inc. (“EFTI”).  All
significant intercompany transactions and accounts have been eliminated in
consolidation.





Revenue
Recognition





Transaction
service and processing fees are recognized in the period that the service is
performed.  The Company receives two types of fees: 
surcharge/convenience fees paid by consumers utilizing certain ATMs owned or
managed by the Company; and interchange fees paid by their banks.   
Processing fees are generally charged on a per transaction basis, depending on
the contractual arrangement with the client.  ATM sales revenue is
recognized when the ATM is shipped and installed.  Revenue from managing
ATMs for others is recognized each month when the services are
performed.





Branding
fees are generated by the Company’s bank branding arrangements, under which
financial institutions pay a fixed monthly fee per ATM to the Company to have
their brand name on selected ATMs within the Company’s ATM portfolio. In return
for such fees, the bank’s customers can use those branded ATMs without paying a
surcharge fee.  Branding fees are recognized in the period that the service
is performed. None of the branding fees are subject to escalation clauses. 
Should the Company include escalation clauses in its future branding contracts,
pursuant to GAAP guidelines for revenue recognition, the monthly per ATM
branding fees, which would be subject to escalation clauses within the
agreements, would be recognized as revenues on a straight-line basis over the
term of the agreement. In most of its branding agreements, the Company does not
receive any one-time set-up fees in addition to the monthly branding fees. The
Company has received immaterial one-time set-up fees per ATM. This set-up fee is
separate from the recurring, monthly branding fees and is meant to compensate
the Company for the burden incurred related to the initial set-up of a branded
ATM versus the on-going monthly services provided for the actual branding. Since
any and all one-time set up fees have been immaterial to date, the Company has
recorded the fee upon contract signing.  Should any future branding
agreements contain material set-up fees, in accordance with GAAP, the Company
would defer these set-up fees (as well as the corresponding costs associated
with the initial set-up) and recognize such amounts as revenue (and expense)
over the terms of the underlying bank branding agreements.





Additionally,
the Company recognizes revenue on breached contracts when cash is
received.  During the six-month period ended June 30, 2010, the Company did
not book any revenue on breached contracts.





In
connection with the Company’s merchant-owned ATM operating/processing
arrangements, the Company typically pays the surcharge fees that it earns to the
merchant as fees for providing, placing, and maintaining the ATM unit. In
accordance with GAAP, the Company has recorded such payments as a direct
reduction of revenue.





The
Company follows GAAP in reporting revenue gross as a principal versus net as an
agent for its merchant contracts. In accordance with GAAP, if the Company
performs as an agent or broker without assuming the risks and rewards of
ownership of the goods, sales should be and are reported on a net
basis.





The
Company is not exposed to similar financial obligations and risks on
merchant-owned ATM contracts as it is on its company-owned ATM contracts. 
For example, under a merchant-owned arrangement, the merchant is responsible for
most of the operating expenses of the ATM such as maintenance, cash management
and loading, supplies, signage and telecommunication services. As such, the
Company reports the surcharge/convenience fees relating to merchant-owned ATM
arrangements on a net basis.


10





Through
our wholly-owned subsidiary, Nationwide Ntertainment Services, Inc., we are also
engaged in the business of operating a network of DVD rental kiosks. We offer
self-service DVD rentals through kiosks where consumers can rent or purchase
movies or games. Our current DVD kiosks are installed primarily at grocery
stores. Our DVD kiosks, through our brand InstaFlix,  serve as a mini video
rental store and occupy an area of less than ten square feet.  Consumers
use a touch screen to select their DVD, swipe a valid credit or debit card, and
rent movies or games in some kiosks. The process is designed to be fast,
efficient and fully automated with no upfront or membership fees. Typically, the
DVD rental price is a flat fee plus tax for one night and if the consumer
chooses to keep the DVD for additional nights, they are automatically charged
for the additional fee. We generate revenue primarily through fees charged to
rent or purchase a DVD, and pay our retail partners a percentage of our
revenue.





Net
revenue from DVD movie rentals is recognized on a ratable basis during the term
of a consumer's rental transaction. On rental transactions for which the related
DVDs have not yet been returned to the kiosk at month-end, revenue is recognized
with a corresponding receivable recorded in the balance sheet, net of a reserve
for potentially uncollectible amounts. We record revenue net of refunds to
consumers.





During
the three-month and six-month periods ended June 30, 2010, revenues generated
from our DVD rental kiosks were $59,945 and $102,815, respectively.





Total Revenue and Total Cost
of Revenues Presentation





The
Company presents “Revenues” and “Cost of revenues” as a single line item in the
condensed consolidated statements of operations.  The following tables set
forth the revenue and cost of revenues sources included in the single line items
presented for the three-month and six-month periods ended June 30, 2010 and
2009:


11





Revenues:





For the Three Months EndedJune 30, 2010
                    
                    
                    June 30, 2009ATM
      Surcharge / Convenience Fee revenue
                    
                    $
                    3,187,650
                    
                    
                    $
                    2,999,346ATM
      Interchange revenue
                    
                    
                    1,788,370
                    
                    
                    
                    1,841,682ATM
      Processing revenue
                    
                    
                    43,861
                    
                    
                    
                    52,793ATM
      Sales revenue
                    
                    
                    73,982
                    
                    
                    
                    103,012Other
      ATM revenue
                    
                    
                    353,097
                    
                    
                    
                    372,575DVD
      Rental revenue
                    
                    
                    59,945
                    
                    
                    
                    -Total
      revenue
                    
                    $
                    5,506,905
                    
                    
                    $
                    5,369,408





For the Three Months EndedJune 30, 2010
                  
                  
                  June 30, 2009ATM
      Operating revenue
                  
                  $
                  5,372,978
                  
                  
                  $
                  5,266,396ATM
      Sales revenue
                  
                  
                  73,982
                  
                  
                  
                  103,012DVD
      Operating revenue
                  
                  
                  59,945
                  
                  
                  
                  -Total
      revenue
                  
                  $
                  5,506,905
                  
                  
                  $
                  5,369,408





For the Six Months EndedJune 30, 2010
                  
                  
                  June 30, 2009ATM
      Surcharge / Convenience Fee revenue
                  
                  $
                  6,272,816
                  
                  
                  $
                  5,977,945ATM
      Interchange revenue
                  
                  
                  3,602,530
                  
                  
                  
                  3,681,002ATM
      Processing revenue
                  
                  
                  88,151
                  
                  
                  
                  116,584ATM
      Sales revenue
                  
                  
                  139,610
                  
                  
                  
                  204,044Other
      ATM revenue
                  
                  
                  681,061
                  
                  
                  
                  804,267DVD
      Rental revenue
                  
                  
                  102,815
                  
                  
                  
                  -Total
      revenue
                  
                  $
                  10,886,983
                  
                  
                  $
                  10,783,842





For the Six Months EndedJune 30, 2010
                  
                  
                  June 30, 2009ATM
      Operating revenue
                  
                  $
                  10,644,558
                  
                  
                  $
                  10,579,798ATM
      Sales revenue
                  
                  
                  139,610
                  
                  
                  
                  204,044DVD
      Operating revenue
                  
                  
                  102,815
                  
                  
                  
                  -Total
      revenue
                  
                  $
                  10,886,983
                  
                  
                  $
                  10,783,842


12





Cost
of Revenues:





For the Three Months EndedJune 30, 2010
                  
                  
                  June 30, 2009ATM
      Merchant residual / commission costs
                  
                  $
                  1,579,236
                  
                  
                  $
                  1,681,502ATM
      Cost of cash
                  
                  
                  554,515
                  
                  
                  
                  418,142ATM
      Processing costs
                  
                  
                  270,401
                  
                  
                  
                  217,598ATM
      Communication costs
                  
                  
                  134,459
                  
                  
                  
                  150,542ATM
      Sales costs
                  
                  
                  64,336
                  
                  
                  
                  106,139Other
      ATM cost of revenues
                  
                  
                  287,019
                  
                  
                  
                  240,021DVD
      operating costs
                  
                  
                  106,128
                  
                  
                  
                  -Total
      cost of revenues
                  
                  $
                  2,996,094
                  
                  
                  $
                  2,813,944





For the Three Months EndedJune 30, 2010
                  
                  
                  June 30, 2009Cost
      of ATM Operating revenue
                  
                  $
                  2,825,630
                  
                  
                  $
                  2,707,805ATM
      Sales costs
                  
                  
                  64,336
                  
                  
                  
                  106,139Cost
      of DVD Operating revenue
                  
                  
                  106,128
                  
                  
                  
                  -Total
      cost of revenues
                  
                  $
                  2,996,094
                  
                  
                  $
                  2,813,944





For the Six Months EndedJune 30, 2010
                  
                  
                  June 30, 2009ATM
      Merchant residual / commission costs
                  
                  $
                  3,092,754
                  
                  
                  $
                  3,385,049ATM
      Cost of cash
                  
                  
                  1,093,094
                  
                  
                  
                  831,117ATM
      Processing costs
                  
                  
                  503,849
                  
                  
                  
                  425,351ATM
      Communication costs
                  
                  
                  299,076
                  
                  
                  
                  282,160ATM
      Sales costs
                  
                  
                  131,894
                  
                  
                  
                  202,425Other
      ATM cost of revenues
                  
                  
                  567,703
                  
                  
                  
                  543,721DVD
      operating costs
                  
                  
                  165,658
                  
                  
                  
                  -Total
      cost of revenues
                  
                  $
                  5,854,028
                  
                  
                  $
                  5,669,823





For the Six Months EndedJune 30, 2010
                  
                  
                  June 30, 2009Cost
      of ATM Operating revenue
                  
                  $
                  5,556,476
                  
                  
                  $
                  5,467,398ATM
      Sales costs
                  
                  
                  131,894
                  
                  
                  
                  202,425Cost
      of DVD Operating revenue
                  
                  
                  165,658
                  
                  
                  
                  -Total
      cost of revenues
                  
                  $
                  5,854,028
                  
                  
                  $
                  5,669,823





Inventory





Inventory
is stated at the lower of cost (first-in, first-out method) or market. 
Inventory consists primarily of ATMs, other self-service kiosks and related
parts and equipment.  Parts given to merchants for no charge are recorded
to Merchant Contracts when the part is placed into service and the merchant
signs a term extension to an existing contract.  The cost of the part will
subsequently be amortized over the life of the contract extension.  ATMs
and parts available for sale are classified as inventory until such time as the
machine or part is sold or installed and in service. Once the ATM or part is
sold, it is relieved to cost of revenues.





Also
included in inventory is the library of DVDs in the Company’s DVD rental
kiosks.  DVDs are initially recorded at cost and are amortized into cost of
sales over an assumed useful life to their estimated salvage value and
substantially all of the amortization expense is recognized within six months to
one year of the assumed life of the DVDs.


13





At June
30, 2010, the Company's inventory, net of an allowance for obsolescence of
$82,572, totaled $676,719.  Of the $759,291 of gross inventory at June 30,
2010, $467,988 related to DVD library.





The
components of inventory for the period ended June 30, 2010 are as
follows:





June 30, 2010ATM
      Parts and supplies
                    
                    $
                    122,258Automated
      teller machines
                    
                    
                    169,045DVD
      library
                    
                    
                    467,988759,291Less:
      reserve for inventory obsolescence
                    
                    
                    82,572Inventory,
      net
                    
                    $
                    676,719





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 resulting from the failure of its clients to make
required payments. At each reporting period, the Company evaluates the adequacy
of the allowance for doubtful accounts and calculates the appropriate allowance
based on historical experience, credit evaluations, specific client collection
issues and the length of time a receivable is past due. The Company records an
allowance for doubtful accounts for any billed invoice aged past 60 days. When
the Company deems the receivable to be uncollectible, the Company charges the
receivable against the allowance for doubtful accounts. As of June 30, 2010, the
Company had bad debt reserves totaling $4,765 against gross accounts receivable
totaling $800,984.





Fixed
Assets





Fixed
assets are stated at cost, less accumulated depreciation and amortization.
Depreciation is calculated principally on the straight-line method over the
estimated useful lives of the assets, which generally range from three to 10
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or the life of the asset.  The cost of repairs
and maintenance is charged to expense as incurred. Expenditures for property
improvements and renewals are capitalized if they extend the useful life of the
related asset. Upon the sale or other disposition of a depreciable asset, cost
and accumulated depreciation are removed from the accounts and any gain or loss
is reflected in gain (loss) on sale of assets.





The
Company periodically evaluates whether events and circumstances have occurred
that may warrant revision of the estimated useful life of fixed assets or
whether the remaining balance of fixed assets should be evaluated for possible
impairment. The Company uses an estimate of the related undiscounted cash flows
over the remaining life of the fixed assets in measuring their recoverability,
as well as historical age, to estimate useful economic lives and values. 
The Company reviews fixed assets for impairment and if it finds impairment, the
Company accounts for the impairment in accordance with GAAP.





Depreciation
is recognized using the straight-line method over the following approximate
useful lives.





Useful LifeATMs
                
                10
      yearsDVD
      kiosks
                
                5
      yearsComputers
                
                5
      yearsOffice
      furniture and equipment
                
                5
      yearsVehicles
                
                5
      yearsLeasehold
      improvements
                
                shorter
      of lease term or useful life
      of
improvement


14





Intangible Assets – Goodwill
and Merchant Contracts





GAAP
requires that the Company complete a two-step goodwill impairment test annually.
The first step compares the fair value of each reporting unit to its carrying
amount, including goodwill. If the fair value of a reporting unit exceeded its
carrying amount, goodwill is not considered to be impaired and the second step
is not required. If the carrying amount of a reporting unit exceeds its fair
value, the second step is performed to measure the amount of impairment loss.
The second step compares the implied fair value of goodwill to the carrying
value of a reporting unit's goodwill. The implied fair value of goodwill is
determined in a manner similar to accounting for a business combination with the
allocation of the assessed fair value determined in the first step to the assets
and liabilities of the reporting unit. The excess of the fair value of the
reporting unit over the amounts assigned to the assets and liabilities is the
implied fair value of goodwill. This allocation process is only performed for
purposes of evaluating goodwill impairment and does not result in an entry to
adjust the value of any assets or liabilities. An impairment loss is recognized
for any excess in the carrying value of goodwill over the implied fair value of
goodwill.





Intangible
assets with finite lives and merchant contracts are stated at cost, net of
accumulated amortization, and are subject to impairment testing under certain
circumstances in accordance with GAAP. These assets are amortized on the
straight-line method over their estimated useful lives or period of expected
benefit. These assets are subject to periodic impairment testing.





The
Company’s merchant contracts are made up of contracts with automatic renewable
lives.  The Company has determined after review of its contracts that the
economic life of the contracts is extended and estimated over 21 years (or three
times renewal) based on historical and expected useful lives of similar
assets.   The Company amortizes the merchant contracts over their
estimated useful lives of 21 years.  The Company uses a two step valuation
process to determine if there has been any impairment on the value of the
merchant contract assets.  Additionally, when the Company gives away an ATM
part to induce a contract extension from the merchant, the Company records the
value of the ATM part to Merchant Contracts and amortizes the value of the part
over the life of the contract extension.





The first
step is to periodically assess the remaining contract lives, including expected
renewals.  If the periodic assessment results in a determination that the
economic lives of the merchant contracts are less than 21 years, the Company
adjusts the remaining amortization lives of the merchant contracts.  The
Company’s merchant contracts have an average initial term of approximately seven
years.  While the Company has historically experienced a higher turnover
rate among its merchant-owned clients than with its company-owned portfolio, the
Company is currently experiencing an average of 2.2 renewals on its current
merchant-owned contracts acquired through the end of fiscal 2005.  In
accordance with GAAP, an entity shall consider its own historical experience
about renewal or extension used to determine the useful life of a recognized
intangible asset.  Until such time when the Company’s historical experience
does not support the useful and economic life of the merchant contracts, the
Company concludes that the current economic life of 21 years is
appropriate.





The
second step is to compare the estimated future undiscounted cash flows of each
reporting unit to the carrying amount of the merchant contracts, thus testing
the impairment of the value of the contracts.  An impairment loss is
recognized for any excess in the carrying value of merchant contracts over the
assessed fair value of merchant contracts. To date, the Company’s testing has
indicated that there is no impairment of its goodwill and merchant
contracts.


15




The
following table summarizes Intangible Assets and Merchant Contracts at June 30,
2010:





Gross Carrying Value
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      NetGoodwill
                      
                      $
                      4,189,645
                      
                      
                      $
                      168,286
                      
                      
                      $
                      4,021,359Other
      Intangible Assets
                      
                      
                      154,691
                      
                      
                      
                      -
                      
                      
                      
                      154,691Merchant
      contracts
                      
                      
                      14,928,919
                      
                      
                      
                      4,551,344
                      
                      
                      
                      10,377,575Total
      Intangible assets and merchant contracts
                      
                      $
                      19,273,255
                      
                      
                      $
                      4,719,630
                      
                      
                      $
                      14,553,625





Fair Value of Financial
Instruments




The
carrying amounts of the Company’s long-term liabilities approximate the
estimated fair values at June 30, 2010, based upon the Company’s ability to
acquire similar debt at similar maturities. The carrying values of all other
financial instruments approximate their fair value because of the short-term
maturities of these instruments.





Automated Teller Machine
Vault Cash and Automated Teller Machine Vault Cash Payable




Automated
teller machine vault cash consists of funds collected from a branded bank
partner to be utilized in managing the cash in a selected number of their
ATMs.  These funds are reported as automated teller machine vault cash
on the condensed consolidated balance sheet with an offsetting amount reported
as automated teller machine vault cash payable.  As of June 30, 2010
and December 31, 2009, automated teller machine vault cash and automated teller
machine vault cash payable both totaled $250,000.





Earnings per
Share




In
calculating basic income per share, net income 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 and warrants.  No such exercise or conversion is
assumed where the effect is anti-dilutive, such as when there is a net loss from
continuing operations or when the exercise price of the potentially dilutive
securities is greater than the market value of the Company’s
stock.  Stock options to purchase 295,243 shares of common stock and
stock warrants to purchase 135,000 shares of common stock that were outstanding
at June 30, 2010 were not included in the computation of diluted earnings per
share for the three months ended June 30, 2010 because the exercise prices of
these stock options were greater than the average share price of the Company’s
common stock and; therefore, the effect would have been
anti-dilutive.  Stock options to purchase 364,800 shares of common
stock and stock warrants to purchase 135,000 shares of common stock that were
outstanding at June 30, 2009 were not included in the computation of diluted
earnings per share for the three months ended June 30, 2009 because the exercise
prices of these stock options were greater than the average share price of the
Company’s common stock and; therefore, the effect would have been
anti-dilutive.


16




For the Three Months EndedJune 30, 2010
                                                                              
                                                                              
                                                                              June 30, 2009NumeratorIncome
      from continuing operations
                                                                              
                                                                              $
                                                                              120,633
                                                                              
                                                                              
                                                                              $
                                                                              557,031Numerator
      for diluted income per shareavailable to common
      stockholders
                                                                              
                                                                              $
                                                                              120,633
                                                                              
                                                                              
                                                                              $
                                                                              557,031DenominatorWeighted
      average shares
                                                                              
                                                                              
                                                                              21,943,940
                                                                              
                                                                              
                                                                              
                                                                              21,873,924Effect
      of dilutive securities:Treasury
      method, effect of employee stock options & warrants
                                                                              
                                                                              
                                                                              1,807,531
                                                                              
                                                                              
                                                                              
                                                                              447,465Denominator
      for diluted income per share adjusted weighted shares after assumed
      exercises
                                                                              
                                                                              
                                                                              23,751,471
                                                                              
                                                                              
                                                                              
                                                                              22,321,389Income
      per common share - basic:Net
      Income per common share
                                                                              
                                                                              $
                                                                              0.01
                                                                              
                                                                              
                                                                              $
                                                                              0.03Income
      per common share - diluted:Net
      Income per common share
                                                                              
                                                                              $
                                                                              0.01
                                                                              
                                                                              
                                                                              $
                                                                              0.03




17




For
      the Six Months EndedJune
      30, 2010
                                                              
                                                              
                                                              June
      30, 2009NumeratorIncome
      from continuing operations
                                                              
                                                              $
                                                              439,201
                                                              
                                                              
                                                              $
                                                              653,793Income
      from discontinued operations
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Numerator
      for diluted income per shareavailable to common
      stockholders
                                                              
                                                              $
                                                              439,201
                                                              
                                                              
                                                              $
                                                              653,793DenominatorWeighted
      average shares
                                                              
                                                              
                                                              21,918,189
                                                              
                                                              
                                                              
                                                              21,428,924Effect
      of dilutive securities:Treasury
      method, effect of employee stock options & warrants
                                                              
                                                              
                                                              1,840,895
                                                              
                                                              
                                                              
                                                              -Denominator
      for diluted income per share adjustedweighted shares after assumed
      exercises
                                                              
                                                              
                                                              23,759,084
                                                              
                                                              
                                                              
                                                              21,428,924Income
      per common share - basic:Net
      Income per common share
                                                              
                                                              $
                                                              0.02
                                                              
                                                              
                                                              $
                                                              0.03Income
      per common share - diluted:Net
      Income per common share
                                                              
                                                              $
                                                              0.02
                                                              
                                                              
                                                              $
                                                              0.03




Income
Taxes





The
Company accounts for its income taxes in accordance with GAAP which requires
recognition of deferred tax assets and liabilities for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and tax credit
carry-forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.





Repairs and Maintenance
Costs





Repairs
and maintenance costs are expensed as incurred.  Repairs and
maintenance pertaining to the Company’s ATMs are recorded in cost of
revenues.  The Company records repairs and maintenance costs relating
to general office and backend related equipment to general and administrative
costs.





Stock-based
Compensation





GAAP
requires that all stock-based compensation be recognized as an expense in the
financial statements and that such cost be measured at the fair value of the
award. Under this method, compensation expense is recognized to reflect the
remaining service period of share-based awards.  The stock-based
compensation expense is included in operating expenses in the condensed
consolidated statements of operations. During the three-month periods ended June
30, 2010 and 2009, the Company recorded $55,224 and $29,374, respectively, of
stock compensation expenses.  During the six-month periods ended June
30, 2010 and 2009, the Company recorded $102,379 and $55,085, respectively, of
stock compensation expenses.


18





Performance Based 401k
Contribution Plan





Effective
fiscal 2007, the Company implemented a performance based incentive program
matching 401k contributions.  For each quarter the Company achieves
its net income budget, the Company will match up to 50% of the first 6% of an
employee’s 401k contributions during that respective quarter.  During
the three-month periods ended June 30, 2010 and 2009, the Company recorded
$10,963 and $10,329, respectively, of expenses relating to this
plan.  During the six-month periods ended June 30, 2010 and 2009, the
Company recorded $23,495 and $21,050, respectively, of expenses relating to this
plan.





Performance Based Incentive
Bonus Plan





Effective
fiscal 2008, the Company implemented a performance based incentive program for
employees and management of the Company.  A quarterly cash bonus pool
is funded by the Company’s achievement of net profits.





During
the three-month period ended June 30, 2010, the Company did not record any
amounts pertaining to this plan.  During the three-month period ended
June 30, 2009, the Company recorded $51,601 of expenses relating to this
plan.





During
the six-month period ended June 30, 2010, the Company recorded $26,716 of bonus
and estimated payroll tax expenses relating to this plan.  Of the
$26,716 recorded during the six-month period ended June 30, 2010, $9,487 is held
back and will be paid upon achievement of fiscal 2010 net
profits.  During the six-month period ended June 30, 2009, the Company
recorded $107,189 of expenses relating to this plan.





Recent Accounting
Pronouncements





Recent
accounting pronouncements: In January 2010, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update No. 2010-06 (“ASU 2010-06”),
Improving Disclosures about Fair Value Measurements. ASU 2010-06 provides
amendments to FASB ASC 820-10 that requires new fair value disclosures and
clarifies existing fair value disclosures required under FASB ASC 820-10. The
new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for certain disclosures about purchases, sales, issuances, and settlements in
the roll forward activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The adoption of the new provisions
within ASU 2010-06 did not have an impact on our consolidated financial
position, results of operations, cash flows, or disclosures.





3.
            ACCOUNTS
      PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities consisted of the following as of June 30, 2010
and December 31, 2009:


19





June 30, 2010
                  
                  
                  December 31,2009Accounts
      payable
                  
                  $
                  1,341,358
                  
                  
                  $
                  624,874Accrued
      commissions/residual payments
                  
                  
                  1,258,880
                  
                  
                  
                  1,223,734Accrued
      cost of cash and cash replenishment expenses
                  
                  
                  326,455
                  
                  
                  
                  440,043Accrued
      payroll
                  
                  
                  284,225
                  
                  
                  
                  332,117Accrued
      audit fees
                  
                  
                  47,250
                  
                  
                  
                  84,000Asset
      Retirement Obligation
                  
                  
                  63,074
                  
                  
                  
                  63,074Accrued
      taxes
                  
                  
                  51,414
                  
                  
                  
                  64,500Other
                  
                  
                  234,603
                  
                  
                  
                  151,241Accounts
      payable and accrued liabilities
                  
                  $
                  3,607,259
                  
                  
                  $
                  2,983,583





4.
            SENIOR
      LENDERS’ NOTES PAYABLE AND NOTES
PAYABLE





On June
18, 2010, the Company, entered into a $17.0 million credit facility with Fifth
Third Bank  ("Fifth Third").  The credit facility consists
of three components:  (i) a term loan of $5.0 million, (ii) a draw
loan of up to $2.0 million, and (iii) an equipment finance line of up to $10.0
million.





The term
loan and the draw loan are covered by a Loan and Security Agreement, dated as of
June 18, 2010 (the "Loan Agreement"), among the Company, Nationwide Money
Services, Inc., Nationwide Ntertainment Services, Inc., EFT Integration, Inc.
(all subsidiaries of the Company) and Fifth Third.





On the
day of closing of the Loan Agreement, the Company issued a promissory note (the
"Term Promissory Note") in the amount of $5.0 million to Fifth Third covering
the amount disbursed pursuant to the term loan.   The Company
will repay the amount borrowed over 36 months, beginning July 1, 2010, with 36
monthly principal payments plus accrued interest, with the final payment to be
made on May 31, 2013.  The Term Promissory Note carries interest of
LIBOR plus up to 400 basis points based on a ratio of the Company’s indebtedness
to EBITDA or 5.5%, whichever is greater.





Upon
entering into the Loan Agreement, the Company repaid in full all outstanding
borrowings under and terminated its (1) Credit and Security Agreement, dated as
of December 23, 2009, with SunTrust Bank ("SunTrust") (the "First Prior Loan
Agreement"), and (2) Loan and Security Agreement, dated as of December 29, 2009
(the "Second Prior Loan Agreement"), with Proficio Bank
(“Proficio”).  See Note #10 “Loss on Early Extinguishment of Debt” for
detail of the charges relating to the extinguishment of these
debts.





Also on
the day of the closing of the Loan Agreement, the Company issued a promissory
note (the "Draw Promissory Note") to Fifth Third covering any amounts which
might be disbursed pursuant to the draw loan, which can be a maximum of $2.0
million.  The Company can request disbursement from the draw loan in
$200,000 increments at any time after the delivery of the Draw Promissory
Note.  The Company will repay any amounts borrowed pursuant to the
Draw Promissory Note over 18 months, beginning on the first day of the month
following any draw, with 18 monthly principal payments plus accrued interest,
with the final payment to be made no later than November 30,
2011.  The Draw Promissory Note carries interest of LIBOR plus up to
400 basis points based on a ratio of the Company’s indebtedness to EBITDA or
5.5%, whichever is greater.  The proceeds of any amounts disbursed
pursuant to the draw loan will be used to purchase DVD inventory for the
Company’s DVD kiosk business line.  As of June 30, 2010, the Company
had drawn down $200,372 against the Draw Promissory Note.





The
equipment finance line is covered by a Master Equipment Lease Agreement, dated
as of June 18, 2010 (the "Lease Agreement"), among the Company, Nationwide Money
Services, Inc., Nationwide Ntertainment Services, Inc., and Fifth
Third.  The Lease Agreement and the corresponding equipment finance
line available from Fifth Third, will be used to fund the purchases of up to
$10.0 million of equipment (ATM and DVD kiosks), from time to time, and is
available to the Company over a five year period.  The equipment line
may also be used to support IT infrastructure. Borrowings made by the Company
pursuant to this equipment line carry a term of one-year interest-only followed
by an amortization of three years subsequent to each
drawdown.  Currently, the interest rate on this line is calculated on
the same formula as that in the Term Promissory Note and the Draw Promissory
Note, but the Company anticipates entering into a SWAP agreement to lock in the
interest rate on the equipment line.  The line is secured by any
equipment that is purchased pursuant to the line.  As of June 30,
2010, the Company had drawn down $1,916,312 against the Lease
Agreement.


20





The Loan
Agreement contains customary representations, warranties and covenants,
including covenants on the following:  (1) due authorization; (2)
compliance with laws; (3) absence of breach; (4) collateral ownership and
limitation of liens; (5) preparation of financial statements; (6) litigation and
taxes; (7) events of default; (8) ERISA obligations; (9) use of loan proceeds;
(10) limitations on indebtedness, liens and certain investments; (11)
limitations on changes in ownership structure; (12) dividends; (13) repurchases
of shares; and (14) maintenance of certain accounts with Fifth
Third.  The Loan Agreement, Term Promissory Note, and Draw Promissory
Note also include customary default provisions, including, without limitation,
payment defaults, cross-defaults to other material indebtedness, and bankruptcy
and insolvency.  In general, upon an event of default, Fifth Third
may, among other things, declare the outstanding principal and interest
immediately due and payable.





Pursuant
to the terms of the Loan Agreement and the Lease Agreement (as defined and
described below), the Company granted Fifth Third a security interest in all of
its assets, and the agreements are cross-collateralized.





As of
June 30, 2010, the Company was in compliance with all applicable covenants and
ratios under the Loan Agreement with Fifth Third.





On March
27, 2009, the Company entered into a credit and security agreement (the “Credit
Agreement”) with SunTrust Bank (“SunTrust”).  The Credit Agreement
provided for a maximum term loan of up to $5 million.  On March 27,
2009, the Company borrowed $5 million under the Credit Agreement and issued a
promissory note in such amount to SunTrust.  The proceeds were used to
repay CAMOFI Master LDC (“CAMOFI”) in connection with the settlement agreement,
effective as of March 17, 2009, between the Company and CAMOFI, and to repay the
outstanding principal balance under a loan agreement with Wachovia
Bank.  Upon entering into the Credit Agreement, the Company repaid in
full all outstanding borrowings under and terminated (1) its Fourth Amended and
Restated Loan Agreement, entered into as of September 28, 2007 (the “Prior Loan
Agreement”), by and between the Company and Wachovia Bank, and (2) its
Consolidated Renewal Promissory Note issued on September 28, 2007 (the “Renewal
Note”) to Wachovia Bank.  See Note #10 “Loss on Early Extinguishment
of Debt” for detail of the charges relating to the extinguishment of these
debts.





5.
            COMMITMENTS
      AND CONTINGENCIES





We lease
ATMs and back office computer equipment under capital lease agreements that
expire between 2010 and 2012 and provide for lease payments at interest rates
from 5.99% up to 12.11% per annum. See Financial Footnote #12 to the Company’s
Consolidated Financial Statements in the Annual Report on Form 10-K for fiscal
2009.





During
the three-month period ended June 30, 2010, we entered into $202,209 of new
capital lease obligations.  As of June 30, 2010, approximately
$810,100 of capital lease obligations were included in the Company’s condensed
consolidated balance sheet.





6.
            LITIGATION
      AND CLAIMS





From time
to time, the Company and its subsidiaries may be parties to, and their property
is subject to, ordinary, routine litigation incidental to their business. We
know of no material, active or pending legal proceedings against the Company,
nor are we involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any of our directors, officers or
affiliates, or any registered or beneficial shareholder, is an adverse party or
has a material interest adverse to our interest.


21





7.
              INCOME
      TAXES





The
effective tax rates for the three months ended June 30, 2010 and 2009 were
approximately 0.0% and 0.0%; respectively. The effective tax rates for the six
months ended June 30, 2010 and 2009 were approximately 0.0% and 0.0%;
respectively. While there is no difference in the effective tax rate for the
three months and six months ended June 30, 2010 over the respective previous
periods, the effective tax rates for the three months and six months ended June
30, 2010 differs from our expected tax rates for the periods then-ended
primarily due to the tax benefit recognized from the decrease in valuation
allowance established for net deferred tax assets.





In
assessing the realizability of the deferred tax assets, management considers
whether it is more likely than not, that some portion or all of the deferred tax
assets will not be realized.  The valuation allowance at June 30, 2010
is related to deferred tax assets arising from net operating loss
carryforwards.  Management believes that based upon its projection of
future taxable income for the foreseeable future, it is more likely than not
that the Company will not be able to realize the full benefit of the net
operating loss carryforwards before they expire due to the amortization and
depreciation losses from the projected acquisition assets.





At
December 31, 2009, the Company had net operating loss carryforwards remaining of
approximately $22.7 million that may be offset against future taxable income
through 2028.  As part of management’s tax strategies they will be
reviewing the use of the net operating loss carryforwards. The Company is
reviewing its tax depreciation methods for future utilization of the net
operating loss.





At
December 31, 2009, we had approximately $1,147,200 of total unrecognized tax
benefits. There were no changes to the unrecognized tax benefits during
2010.  We are subject to the income tax jurisdictions of the U.S., as
well as income tax of multiple state jurisdictions. We believe we are no longer
subject to U.S. federal income tax examinations for years before 2006, to
international examinations for years before 2005 and, with few exceptions, to
state examinations before 2005.





8.
            CHANGES
      IN STOCKHOLDERS' EQUITY





See the
table below for all the equity transactions for the three-month period ended
June 30, 2010:





Additional
                      
                      
                      
                      
                      
                      
                      
                      
                      TotalCommon Stock
                      
                      
                      Paid-in
                      
                      
                      Accumulated
                      
                      
                      Treasury
                      
                      
                      Stockholders'Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Deficit
                      
                      
                      Stock
                      
                      
                      EquityBalances,
      March 31, 2010
                      
                      
                      21,943,940
                      
                      
                      $
                      21,992
                      
                      
                      $
                      22,977,975
                      
                      
                      $
                      (6,026,366
                      )
                      
                      $
                      (41,966
                      )
                      
                      $
                      16,931,635Stock
      compensation expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      55,224
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      55,224Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      120,633
                      
                      
                      
                      -
                      
                      
                      
                      120,633Balances,
      June 30, 2010
                      
                      
                      21,943,940
                      
                      
                      $
                      21,992
                      
                      
                      $
                      23,033,199
                      
                      
                      $
                      (5,905,733
                      )
                      
                      $
                      (41,966
                      )
                      
                      $
                      17,107,492





9.
            FAIR
      VALUE MEASUREMENT




On
January 1, 2008, we adopted FASB guidance regarding fair value measurements
which defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and expands disclosures about fair value
measurements.  The statement applies whenever other statements require
or permit assets or liabilities to be measured at fair value.  The
guidance is effective for fiscal years beginning after November 15, 2007, except
for nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis for which application
has been deferred for one year.





The
guidance established the following fair value hierarchy that prioritizes the
inputs used to measure fair value:





Level 1:
Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date.  Active markets are those in
which transactions for the asset or liability occur in sufficient frequency and
volume to provide pricing information on an ongoing basis.  Level 1
primarily consists of financial instruments such as exchange-traded derivatives,
listed equities and U.S. government treasury securities.


22





Level 2:
Pricing inputs are other than quoted prices in active markets included in Level
1, which are either directly or indirectly observable as of the reporting
date.  Level 2 includes those financial instruments that are valued
using models or other valuation methodologies.  These models are
primarily industry-standard models that consider various assumptions, including
quoted forward prices for commodities, time value, volatility factors, and
current market and contractual prices for the underlying instruments, as well as
other relevant economic measures.  Substantially all of these
assumptions are observable in the marketplace throughout the full term of the
instrument, can be derived from observable data or are supported by observable
levels at which transactions are executed in the
marketplace.  Instruments in this category include non-exchange-traded
derivatives such as over the counter forwards, options and repurchase
agreements.





Level 3:
Pricing inputs include significant inputs that are generally less observable
from objective sources.  These inputs may be used with internally
developed methodologies that result in management’s best estimate of fair
value.   At each balance sheet date, we perform an analysis of
all instruments subject in accordance with GAAP and include in Level 3 all of
those whose fair value is based on significant unobservable inputs.





As of
June 30, 2010, there were no financial assets and liabilities that were
accounted for at fair value on a recurring basis.





Our
derivative financial instruments are interest rate swap agreements, which are
observable at commonly quoted intervals for the full term of the derivatives and
therefore considered a level 2 input.  During the six-month period
ended June 30, 2009, we recorded $7,921 of income relating to the interest rate
swap which is included in the interest expense, net in our condensed
consolidated statements of operations.  The interest rate swap
agreement was terminated on March 27, 2009 upon the Company entering into the
Credit Agreement with SunTrust Bank.





10.
            LOSS
      ON EARLY EXTINGUISHMENT OF DEBT





As
discussed in Note #4 “Senior Lenders’ Notes Payable and Notes Payable,” on June
18, 2010 the Company entered into the Loan Agreement with Fifth Third
Bank.  The proceeds were used to repay outstanding principal balances
under loan agreements with SunTrust and Proficio.





Also, as
discussed in Note #4 “Senior Lenders’ Notes Payable and Notes Payable,” on March
27, 2009 the Company entered into the Credit Agreement with SunTrust
Bank.  The proceeds were used to repay CAMOFI in connection with a
settlement agreement, effective as of March 17, 2009, between the Company and
CAMOFI, and to repay the outstanding principal balance under a loan agreement
with Wachovia Bank.





In
accordance with GAAP, the net carrying amount of the extinguished debt should be
recognized currently in income of the period of extinguishment as losses or
gains and identified as a separate item.





The
following summarizes the amounts charged to loss on early extinguishment of debt
for the six-month periods ended June 30, 2010 and June 30, 2009:




23





For the Six Months EndedItem description
                      
                      June 30, 2010
                      
                      
                      June 30, 2009Accelerated
      accretion of discount on notes payable
                      
                      $
                      -
                      
                      
                      $
                      249,419Accelerated
      amortization of capitalized loan fees
                      
                      $
                      61,508
                      
                      
                      $
                      76,493Accelerated
      expense of prepaid loan fees
                      
                      $
                      -
                      
                      
                      $
                      6,400Stock
      expense relating to repriced warrants on debt settlement
                      
                      $
                      -
                      
                      
                      $
                      107,025Stock
      expense relating to warrants issued to subordinated note
      holders
                      
                      $
                      -
                      
                      
                      $
                      28,054Prepayment
      fees on debt settlement
                      
                      $
                      40,638
                      
                      
                      $
                      -Total
      loss on early extinguishment of debt
                      
                      $
                      102,146
                      
                      
                      $
                      467,391





11.
            BUSINESS
      SEGMENT INFORMATION





FASB
requires that companies report separately in the financial statements certain
financial and descriptive information about segment revenues, income and assets.
The method for determining what information is reported is based on the way that
management organizes the operating segments for making operational decisions and
assessments of financial performance. In computing operating profit and net
income for the DVD services business, no allocations of general corporate
expenses have been made and therefore these are included in the ATM services
business as the DVD services business only includes expenses directly related to
its business.





The
following table summarizes our revenue, gross profit, SG&A, depreciation,
operating income and net income by segment for the periods
indicated:


24





For the Three Months Ended
                  
                  
                  For the Six Months EndedJune 30, 2010
                  
                  
                  June 30, 2009
                  
                  
                  June 30, 2010
                  
                  
                  June 30, 2009Revenue:ATM
      Services
                  
                  $
                  5,446,960
                  
                  
                  $
                  5,369,408
                  
                  
                  $
                  10,784,168
                  
                  
                  $
                  10,783,842DVD
      Services
                  
                  
                  59,945
                  
                  
                  
                  -
                  
                  
                  
                  102,815
                  
                  
                  
                  -Consolidated
      revenue
                  
                  $
                  5,506,905
                  
                  
                  $
                  5,369,408
                  
                  
                  $
                  10,886,983
                  
                  
                  $
                  10,783,842Gross
      profit:ATM
      Services
                  
                  $
                  2,556,994
                  
                  
                  $
                  2,555,464
                  
                  
                  $
                  5,095,798
                  
                  
                  $
                  5,114,019DVD
      Services
                  
                  
                  (46,183
                  )
                  
                  
                  -
                  
                  
                  
                  (62,843
                  )
                  
                  
                  -Consolidated
      gross profit
                  
                  $
                  2,510,811
                  
                  
                  $
                  2,555,464
                  
                  
                  $
                  5,032,955
                  
                  
                  $
                  5,114,019SG&A:ATM
      Services
                  
                  $
                  1,381,369
                  
                  
                  $
                  1,334,271
                  
                  
                  $
                  2,813,552
                  
                  
                  $
                  2,627,234DVD
      Services
                  
                  
                  221,340
                  
                  
                  
                  -
                  
                  
                  
                  315,020
                  
                  
                  
                  -Consolidated
      SG&A
                  
                  $
                  1,602,709
                  
                  
                  $
                  1,334,271
                  
                  
                  $
                  3,128,572
                  
                  
                  $
                  2,627,234Depreciation:ATM
      Services
                  
                  $
                  295,897
                  
                  
                  $
                  289,848
                  
                  
                  $
                  590,641
                  
                  
                  $
                  559,342DVD
      Services
                  
                  
                  25,308
                  
                  
                  
                  -
                  
                  
                  
                  40,459
                  
                  
                  
                  -Consolidated
      depreciation
                  
                  $
                  321,205
                  
                  
                  $
                  289,848
                  
                  
                  $
                  631,100
                  
                  
                  $
                  559,342Operating
      income (loss):ATM
      Services
                  
                  $
                  625,171
                  
                  
                  $
                  706,904
                  
                  
                  $
                  1,190,561
                  
                  
                  $
                  1,483,674DVD
      Services
                  
                  
                  (292,830
                  )
                  
                  
                  -
                  
                  
                  
                  (418,321
                  )
                  
                  
                  -Consolidated
      operating income
                  
                  $
                  332,341
                  
                  
                  $
                  706,904
                  
                  
                  $
                  772,240
                  
                  
                  $
                  1,483,674Net
      income (loss):ATM
      Services
                  
                  $
                  413,463
                  
                  
                  $
                  557,031
                  
                  
                  $
                  857,522
                  
                  
                  $
                  653,793DVD
      Services
                  
                  
                  (292,830
                  )
                  
                  
                  -
                  
                  
                  
                  (418,321
                  )
                  
                  
                  -Consolidated
      net income
                  
                  $
                  120,633
                  
                  
                  $
                  557,031
                  
                  
                  $
                  439,201
                  
                  
                  $
                  653,793





The
following table summarizes total assets by segment for the periods
indicated:





(Unaudited)
                  
                  
                  (Audited)June 30
                  
                  
                  December 312010
                  
                  
                  2009Assets:ATM
      Services
                  
                  $
                  25,511,003
                  
                  
                  $
                  25,627,067DVD
      Services
                  
                  
                  3,550,632
                  
                  
                  
                  489,882Consolidated
      assets
                  
                  $
                  29,061,635
                  
                  
                  $
                  26,116,949


25





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





The
following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.





Summary





The
Company, through its wholly-owned subsidiaries, owns, manages or operates
self-service kiosks  with Automated Teller Machines ("ATMs”) locations
primarily in the eastern and southwestern United States of America. Our revenues
are principally derived from two types of fees, which we charge for processing
transactions on our ATM network. We receive an interchange fee from the issuer
of the credit or debit card for processing a transaction when a cardholder uses
an ATM in our network. In addition, in most cases we receive a
surcharge/convenience fee from the cardholder when the cardholder makes a cash
withdrawal from an ATM in our network.





Interchange
fees are processing fees that are paid by the issuer of the credit or debit card
used in a transaction. Interchange fees vary for cash withdrawals, balance
inquiries, account transfers or uncompleted transactions, which are the primary
types of transactions that are currently processed on ATMs in our network. The
maximum amount of the interchange fees is established by the national and
regional card organizations and credit card issuers with whom we have a
relationship. We receive interchange fees for transactions on ATMs that we own,
but sometimes we rebate a portion of the fee to the owner of the ATM location
under the applicable lease for the ATM site. We also receive the interchange fee
for transactions on ATMs owned by third party vendors included within our
network, but we rebate all or a portion of each fee to the third party vendor
based upon negotiations between us. The interchange fees received by us vary
from network to network and to some extent from issuer to issuer, but generally
range from $0.15 to $0.55 per cash withdrawal. Interchange fees for balance
inquiries, account transfers and denied transactions are generally substantially
less than fees for cash withdrawals. The interchange fees received by us from
the card issuer are independent of the service fees charged by the card issuer
to the cardholder in connection with ATM transactions. Service fees charged by
card issuers to cardholders in connection with transactions through our network
range from zero to $2.50 per transaction. We do not receive any portion of these
service fees.





In most
markets we impose a surcharge/convenience fee for cash withdrawals.
Surcharge/convenience fees are a substantial additional source of revenue for us
and other ATM network operators. The surcharge/convenience fee for most of the
ATMs in our network ranges between $1.50 and $2.75 per withdrawal. The
surcharge/convenience fee for other ATMs in our network ranges between $0.50 and
$7.50 per withdrawal. We receive the full surcharge/convenience fee for cash
withdrawal transactions on ATMs that we own, but often we rebate a portion of
the fee to the owner of the ATM location under the applicable lease for the ATM
site. We also receive the full surcharge/convenience fee for cash withdrawal
transactions on ATMs owned by third party vendors included within our network,
but we rebate all or a portion of each fee to the third party vendor based upon
a variety of factors, including transaction volume and the party responsible for
supplying vault cash to the ATM, and only record earned revenues based upon the
Company’s contracts with the third party vendors.





In
addition to revenues derived from interchange and surcharge/convenience fees, we
also derive revenues from providing network management services to third parties
owning ATMs included in our ATM network. These services include 24 hour
transaction processing, monitoring and notification of ATM status and cash
condition, notification of ATM service interruptions, in some cases dispatch of
field service personnel for necessary service calls and cash settlement and
reporting services. The fees for these services are paid by the owners of the
ATMs.





Interchange
fees are credited to us by networks and credit card issuers on a monthly basis
and are paid to us in the following month between the 5th and 15th business day.
Surcharge/convenience fees are charged to the cardholder and credited to us by
networks and credit card issuers on a daily basis. We rebate the portion of
these fees to ATM owners and owners of ATM locations as commission payments as
per their contractual terms. Fees for network management services are generally
paid to us on a monthly basis.


26





Nationwide
Ntertainment Services, Inc., a wholly owned subsidiary of the Company formed
during fiscal 2009, and is engaged in the business of operating a network of DVD
rental kiosks. We offer self-service DVD rentals through kiosks where consumers
can rent or purchase movies or games. Our current DVD kiosks are installed
primarily at grocery stores. Our DVD kiosks, through our brand
InstaFlix,  serve as a mini video rental store and occupy an area of
less than ten square feet.  Consumers use a touch screen to select
their DVD, swipe a valid credit or debit card, and rent movies or games in some
kiosks. The process is designed to be fast, efficient and fully automated with
no upfront or membership fees. Typically, the DVD rental price is a flat fee
plus tax for one night and if the consumer chooses to keep the DVD for
additional nights, they are automatically charged for the additional fee. We
generate revenue primarily through fees charged to rent or purchase a DVD, and
pay our retail partners a percentage of our revenue.





Recent
Events





Revenue Trends - The
interchange rates paid to independent ATM deployers, such as ourselves, 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.  For example, effective April 1, 2010, a global network
brand reduced the interchange rates it pays to domestic ATM deployers for ATM
transactions routed across its debit network.  As a result, we have
recently seen certain financial institutions migrate their volume away from
other networks to take advantage of the lower pricing offered by these
networks.  Such rate change is expected to reduce our ATM operating
gross profits by approximately $20,000 - $25,000 a month beginning April 1,
2010.  Furthermore, if additional financial institutions move to take
advantage of this lower pricing, or if additional networks reduce the
interchange rates they currently pay to ATM deployers, our future revenues and
gross profits would be negatively impacted.  For additional details on
this rate change and other risks associated with interchange revenues, see Part
II, Item 1A. “Risk Factors”.





Financial Regulatory Reform in the
United States - The 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 (i)
call for the establishment of a new Bureau of Consumer Financial Protection,
(ii) limit the activities that banking entities may engage in, and (iii) 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 and will likely not be finalized for some
time.  Accordingly, at this point, we do not believe that the
regulations that are likely to arise from the Act will have a material impact on
our operations.  However, based on the current language contained
within the Act, it is uncertain whether the regulation of interchange fees for
electronic debit transactions will apply to ATM cash withdrawal
transactions.  If ATM cash withdrawal transactions were to fall under
the proposed regulatory framework, and the related interchange fees were reduced
from their current levels, such change would likely have a negative impact on
our future revenues and operating profits.  Conversely, additional
proposed regulations contained within the Act are aimed at providing merchants
with additional flexibility in terms of allowing certain point-of-sale
transactions to be paid for in cash rather than with debit or credit
cards.  Such a change would likely result in the increased use of cash
at the point-of-sale for some merchants, and thus, could positively impact our
future revenues and operating profits (through increased transaction levels at
our ATMs).





Results of Continuing
Operations





The
following tables set forth certain consolidated statement of continuing
operations data as a percentage of revenues for the periods
indicated.  Percentages may not add due to rounding.


27





For the Three Months EndedJune 30, 2010
                  
                  
                  June 30, 2009Revenues
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Cost
      of revenues
                  
                  
                  54.4
                  %
                  
                  
                  52.4
                  %Gross
      profit
                  
                  
                  45.6
                  %
                  
                  
                  47.6
                  %Depreciation
      expense
                  
                  
                  5.8
                  %
                  
                  
                  5.4
                  %Amortization
      of intangible merchant contracts
                  
                  
                  3.6
                  %
                  
                  
                  3.6
                  %Selling,
      general and administrative
                  
                  
                  29.1
                  %
                  
                  
                  24.8
                  %Stock
      compensation expense
                  
                  
                  1.0
                  %
                  
                  
                  0.5
                  %Total
      operating expenses
                  
                  
                  39.6
                  %
                  
                  
                  34.4
                  %Operating
      income from continuing operations before items shown below
                  
                  
                  6.0
                  %
                  
                  
                  13.2
                  %Interest
      expense, net
                  
                  
                  (2.0
                  )%
                  
                  
                  (2.8
                  )%Loss
      on early extinguishment of debt
                  
                  
                  (1.9
                  )%
                  
                  
                  0.0
                  %Net
      income
                  
                  
                  2.2
                  %
                  
                  
                  10.4
                  %EBITDA
      (1)
                  
                  
                  13.6
                  %
                  
                  
                  22.2
                  %





For the Six Months EndedJune 30, 2010
                  
                  
                  June 30, 2009Revenues
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Cost
      of revenues
                  
                  
                  53.8
                  %
                  
                  
                  52.6
                  %Gross
      profit
                  
                  
                  46.2
                  %
                  
                  
                  47.4
                  %Depreciation
      expense
                  
                  
                  5.8
                  %
                  
                  
                  5.2
                  %Amortization
      of intangible merchant contracts
                  
                  
                  3.7
                  %
                  
                  
                  3.6
                  %Selling,
      general and administrative
                  
                  
                  28.7
                  %
                  
                  
                  24.4
                  %Stock
      compensation expense
                  
                  
                  0.9
                  %
                  
                  
                  0.5
                  %Total
      operating expenses
                  
                  
                  39.1
                  %
                  
                  
                  33.7
                  %Operating
      income from continuing operations before items shown below
                  
                  
                  7.1
                  %
                  
                  
                  13.7
                  %Interest
      expense, net
                  
                  
                  (2.1
                  )%
                  
                  
                  (3.4
                  )%Loss
      on early extinguishment of debt
                  
                  
                  (0.9
                  )%
                  
                  
                  (4.3
                  )%Net
      income
                  
                  
                  4.0
                  %
                  
                  
                  6.0
                  %EBITDA
      (1)
                  
                  
                  15.6
                  %
                  
                  
                  18.2
                  %





(1) See
“—EBITDA”





Comparison of Results of
Operations for the Three Months Ended June 30, 2010 and
2009:





Revenues





The
Company reported total operating revenue from continuing operations of
$5,506,905 for the three-month period ended June 30, 2010 as compared to
$5,369,408 for the three-month period ended June 30, 2009.  The
increase was a result of higher ATMs and ATM transaction volumes during the
second quarter of 2010 as compared to 2009, offset by a decrease in interchange
revenue due to areduction in MasterCard’s
interchange rate.  Additionally, we recorded approximately $60,000 of
DVD rental revenue for the second quarter of 2010.


28





Cost of
Revenues





Our total
cost of revenues from continuing operations increased from
$2,813,944  to $2,996,094  for the three-month period ended
June 30, 2009 to the three-month period ended June 30,
2010.  Approximately $106,000 of the increase in cost of revenues year
over year related to our DVD business.





Gross
Profit





Gross
profit from continuing operations as a percentage of revenue for the three-month
periods ended June 30, 2010 and 2009 were approximately 45.6%, or $2,510,811,
and approximately 47.6%, or  $2,555,464, respectively. The decreased
gross profit and gross profit percentage for the second quarter of 2010 versus
the same period in 2009 was mainly attributable to the increased cost of
revenues discussed above.





Operating
Expenses





Our total
operating expenses from continuing operations for the three months ended June
30, 2010 and 2009 were $2,178,470  and $1,848,560, respectively. The
principal components of operating expenses are general and administrative
expenses such as professional and legal fees, administrative salaries and
benefits, consulting and audit fees, occupancy costs, sales and marketing
expenses and administrative expenses.  Operating expenses also include
depreciation, amortization of intangible merchant contracts and stock
compensation expenses. See explanation of the principal components of operating
expenses below:





Selling, General and
Administrative (“SG&A”) Expenses





Our total
SG&A expenses from continuing operations increased to $1,602,709, or 29.1%
of revenue for the three-month period ended June 30, 2010 from $1,334,271, or
24.8% of revenue for the three-month period ended June 30,
2009.   The increase in SG&A expenses was mainly due to
$221,340 of SG&A  expenses incurred in connection with our DVD
rental kiosk initiative.  Such DVD-related expenses included the costs
of  hired consultants and employees with industry expertise to
spearhead our efforts in this line of business, travel expenses and other
typical SG&A expenses such as marketing, professional fees, shipping,
etc.  Also contributing to the increase in SG&A expenses year over
year are investor relations expenses, expenses relating to the hiring of an
investment banking firm to evaluate possible merger and acquisitions, increases
in headcount-related expenses and increased state sales tax
accruals.





Depreciation
Expense





Depreciation
expense from continuing operations increased for the three-month period ended
June 30, 2010 to $321,205  from $289,848  for the same
period in 2009.  The increase was due to increased ATM and DVD kiosks
purchased during 2009 and 2010 to support new business in both business
lines.





Amortization of Intangible
Merchant Contracts





Amortization
of intangible merchant contracts from continuing operations increased for the
three-month period ended June 30, 2010 to $199,332 from $195,067 for the same
period in 2009.  See Note #2 “Description of Business and Summary of
Significant Accounting Policies” regarding the amortization of intangible
merchant contracts.





Stock Compensation
Expense





During
the three-month periods ended June 30, 2010 and 2009, we recorded stock
compensation expenses of $55,224 and $29,374, respectively.  The
increase was mainly due to increased stock option grants during the fourth
quarter fiscal 2009 and the first quarter of 2010.





Operating Income from
Continuing Operations





We had
operating income from continuing operations for the three-month period ended
June 30, 2010 in the amount of $332,341 as compared to operating income from
continuing operations of $706,904 in the three-month period ended June 30,
2009.  The decrease in operating income was primarily due to the
increased SG&A and depreciation expenses discussed above.


29





Interest Expense,
Net





Interest
expense, net, decreased for the three-month period ended June 30, 2010 to
$109,562 from $149,873 for the three-month period ended June 30,
2009.  The decrease was mainly due decreased debt balances at the
three-month period ended June 30, 2010, as compared to the debt balances at the
three-month period ended June 30, 2009.





For the Three Months EndedJune 30, 2010
                  
                  
                  June 30, 2009Interest
      expense, net
                  
                  $
                  109,562
                  
                  
                  $
                  147,017Accretion
      of discount on notes payable
                  
                  
                  -
                  
                  
                  
                  2,856Total
      interest expense, net
                  
                  $
                  109,562
                  
                  
                  $
                  149,873





Loss on early extinguishment
of debt





During
the three-month period ended June 30, 2010, we recorded $102,146 of expenses
relating to the payoff of debt balances with a senior lender and a note
payable.  See Note #10 “Loss on Early Extinguishment of Debt” for
detail of these charges.





Net
Income





We had
net income of $120,633 for the three-month period ended June 30, 2010, as
compared to net income of $557,031 for the three-month period ended June 30,
2009.  The decrease in net income year over year was primarily due to
the investment in our DVD business.





Comparison of Results of
Operations for the Six Months Ended June 30, 2010 and 2009:





Revenues





The
Company reported total operating revenue from continuing operations of
$10,886,983  for the six-month period ended June 30, 2010 as compared
to $10,783,842  for the six-month period ended June 30,
2009.  During the first quarter of 2010, we saw a softening of ATM
usage where severe winter weather impacted geographic locations with dense ATM
concentration.  Despite the softening of ATM usage during the first
quarter of 2010, we had a 3% increase in the number of ATM transactions for the
first six months of 2010 as compared to the first six months of
2009.  Revenue increases due to increased transaction have been
partially offset during the second quarter of 2010 by a decrease in interchange
revenue due to a reduction in MasterCard’s interchange
rate.  Additionally, we recorded approximately $103,000 of DVD rental
revenue for the six-month period ended June 30, 2010.





Cost of
Revenues





Our total
cost of revenues from continuing operations increased from $5,669,823 to
$5,854,028  for the six-month period ended June 30, 2009 to the
six-month period ended June 30, 2010. Approximately $165,700 of
the increase in cost of revenues year over year related to our DVD
business.





Gross
Profit





Gross
profit from continuing operations as a percentage of revenue for the six-month
periods ended June 30, 2010 and 2009 were approximately 46.2%, or $5,032,955,
and approximately 47.4%, or $5,114,019, respectively. The decreased gross profit
and gross profit percentage for the six-month period ended June 30, 2010 versus
the same period in 2009 was mainly attributable to the increased cost of
revenues discussed above.




30


Operating
Expenses





Our total
operating expenses from continuing operations for the six months ended June 30,
2010 and 2009 were $4,260,715  and $3,630,345, respectively. The
principal components of operating expenses are general and administrative
expenses such as professional and legal fees, administrative salaries and
benefits, consulting and audit fees, occupancy costs, sales and marketing
expenses and administrative expenses.  Operating expenses also include
depreciation, amortization of intangible merchant contracts and stock
compensation expenses. See explanation of the principal components of operating
expenses below:





Selling, General and
Administrative (“SG&A”) Expenses





Our total
SG&A expenses from continuing operations increased to $3,128,572, or 28.7%
of revenue for the six-month period ended June 30, 2010 from $2,627,234, or
24.4% of revenue for the six-month period ended June 30,
2009.   The increase in SG&A expenses was mainly due to
$315,020 of SG&A  expenses incurred in connection with our DVD
rental kiosk initiative.  Such DVD-related expenses included the costs
of  hired consultants and employees with industry expertise to
spearhead our efforts in this line of business, travel expenses and other
typical SG&A expenses such as marketing, professional fees, shipping,
etc.  Also contributing to the increase in SG&A expenses year over
year are investor relations expenses, expenses relating to the hiring of an
investment banking firm to evaluate possible merger and acquisitions, increases
in headcount-related expenses and increased state sales tax
accruals.





Depreciation
Expense





Depreciation
expense from continuing operations increased for the six-month period ended June
30, 2010 to $631,100 from $559,342 for the same period in 2009. The increase was
due to increased ATM and DVD kiosks purchased during 2009 and 2010 to support
new business in both business lines.





Amortization of Intangible
Merchant Contracts





Amortization
of intangible merchant contracts from continuing operations increased for the
six-month period ended June 30, 2010 to $398,664 from $388,684 for the same
period in 2009.  See Note #2 “Description of Business and Summary of
Significant Accounting Policies” regarding the amortization of intangible
merchant contracts.





Stock Compensation
Expense





During
the six-month periods ended June 30, 2010 and 2009, we recorded stock
compensation expenses of $102,379 and $55,085, respectively.  The
increase was mainly due to increased stock option grants during the fourth
quarter fiscal 2009 and the first quarter of 2010.





Operating Income from
Continuing Operations





We had
operating income from continuing operations for the six-month period ended June
30, 2010 in the amount of $772,240 as compared to operating income from
continuing operations of $1,483,674 in the six-month period ended June 30,
2009.





Interest Expense,
Net





Interest
expense, net, decreased for the six-month period ended June 30, 2010 to $230,893
from $362,490 for the six-month period ended June 30, 2009.  The
decrease was mainly due to the Company refinancing its debt in March 2009 to
lower interest rates combined with decreased debt balances at the six-month
period ended June 30, 2010, as compared to the debt balances at the six-month
period ended June 30, 2009. During the six-month period ended June 30, 2009 we
recorded interest income of $7,921 relating to the interest swap agreement we
entered into with our former senior lender.


31




For the Six Months EndedJune 30, 2010
                      
                      
                      June 30, 2009Interest
      expense, net
                      
                      $
                      230,893
                      
                      
                      $
                      318,136Accretion
      of discount on notes payable
                      
                      
                      -
                      
                      
                      
                      44,354Total
      interest expense, net
                      
                      $
                      230,893
                      
                      
                      $
                      362,490





Loss on early extinguishment
of debt





During
the six-month periods ended June 30, 2010 and 2009, we recorded expenses of
$102,146 and $467,391, respectively, relating to the payoff of debt balances
with a senior lender and notes payable.  See Note #10 “Loss on Early
Extinguishment of Debt” for detail of these charges.





Net
Income





We had
net income of $439,201 for the six months ended June 30, 2010, as compared to
net income of $653,793 for the six-month period ended June 30,
2009.





EBITDA





EBITDA (a
non-GAAP measure) is defined as earnings before net interest, taxes,
depreciation and amortization. EBITDA has some inherent limitations in measuring
operating performance due to the exclusion of certain financial elements such as
depreciation and is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method of
calculation. Furthermore, EBITDA is not intended to be a substitute for cash
flows from operating activities, as a measure of liquidity, or an alternative to
net income in determining our operating performance in accordance with GAAP. Our
use of EBITDA should be considered within the following context:





• We
acknowledge that our depreciable assets are necessary to earn revenue based on
our current business.





• Our use
of EBITDA as a measure of operating performance is not based on our belief about
the reasonableness of excluding depreciation when measuring financial
performance.





• Our use
of EBITDA is supported by the importance of EBITDA to the following key
stakeholders:





• Analysts — who
estimate our projected EBITDA and other EBITDA-based metrics in their
independently developed financial models for investors;





• Creditors — who
evaluate our operating performance based on compliance with certain EBITDA-based
debt covenants;





• Investment Bankers —
who use EBITDA and other EBITDA-based metrics in their written evaluations and
comparisons of companies within our industry; and





• Board of Directors and
Executive Management — who use EBITDA as an essential metric for
evaluating management performance relative to our operating budget and bank
covenant compliance, as well as our ability to service debt and raise capital
for growth opportunities which are a critical component to our
strategy.




32




The following table sets
forth a reconciliation of net income from continuing operations to EBITDA from
continuing operations for the three months ended June 30, 2010 and
2009:




For the Three Months EndedJune 30, 2010
                    
                    
                    June 30, 2009Net
      income from continuing operations
                    
                    $
                    120,633
                    
                    
                    $
                    557,031Interest
      expense, net
                    
                    
                    109,562
                    
                    
                    
                    149,873Depreciation
      expense
                    
                    
                    321,205
                    
                    
                    
                    289,848Amortization
      of intangible merchant contracts
                    
                    
                    199,332
                    
                    
                    
                    195,067EBITDA
      from continuing operations
                    
                    $
                    750,732
                    
                    
                    $
                    1,191,819




Our
EBITDA from continuing operations decreased to $750,732 for the second quarter
of fiscal 2010 from $1,191,819 for the second quarter of fiscal 2009. EBITDA
from continuing operations as a percentage of revenues decreased to 13.6% for
the second quarter of fiscal 2010 from 22.2% for the second quarter of fiscal
2009.





The following table sets
forth a reconciliation of net income from continuing operations to EBITDA from
continuing operations for the six months ended June 30, 2010 and
2009:





For the Six Months EndedJune 30, 2010
                    
                    
                    June 30, 2009Net
      income from continuing operations
                    
                    $
                    439,201
                    
                    
                    $
                    653,793Interest
      expense, net
                    
                    
                    230,893
                    
                    
                    
                    362,490Depreciation
      expense
                    
                    
                    631,100
                    
                    
                    
                    559,342Amortization
      of intangible merchant contracts
                    
                    
                    398,664
                    
                    
                    
                    388,684EBITDA
      from continuing operations
                    
                    $
                    1,699,858
                    
                    
                    $
                    1,964,309





Our
EBITDA from continuing operations decreased to $1,699,858 for the first six
months of fiscal 2010 from $1,964,309 for the first six months of fiscal
2009.  EBITDA from continuing operations as a percentage of revenues
decreased to 15.6% for the first six months of fiscal 2010 from 18.2% for the
first six months of fiscal 2009.





The following table sets
forth a reconciliation of net income from continuing operations to EBITDA from
continuing operations before stock compensation expense and loss on early
extinguishment of debt (“Adjusted EBITDA”)  for the three months ended
June 30, 2010 and 2009:




For the Three Months EndedJune 30, 2010
                    
                    
                    June 30, 2009Net
      income from continuing operations
                    
                    $
                    120,633
                    
                    
                    $
                    557,031Interest
      expense, net
                    
                    
                    109,562
                    
                    
                    
                    149,873Depreciation
      expense
                    
                    
                    321,205
                    
                    
                    
                    289,848Amortization
      of intangible merchant contracts
                    
                    
                    199,332
                    
                    
                    
                    195,067Stock
      compensation expense
                    
                    
                    55,224
                    
                    
                    
                    29,374Loss
      on early extinguishment of debt
                    
                    
                    102,146
                    
                    
                    
                    -Adjusted
      EBITDA
                    
                    $
                    908,102
                    
                    
                    $
                    1,221,193





Our
Adjusted EBITDA decreased to $908,102 for the second quarter of fiscal 2010 from
$1,221,193 for the second quarter of fiscal 2009. Adjusted EBITDA as a
percentage of revenues decreased to 16.5% for the second quarter of fiscal 2010
from 22.7% for the second quarter of fiscal 2009.


33


The following table sets
forth a reconciliation of net income from continuing operations to EBITDA from
continuing operations before stock compensation expense and loss on early
extinguishment of debt (“Adjusted EBITDA”)  for the six months ended
June 30, 2010 and 2009:





For the Six Months EndedJune 30, 2010
                  
                  
                  June 30, 2009Net
      income from continuing operations
                  
                  $
                  439,201
                  
                  
                  $
                  653,793Interest
      expense, net
                  
                  
                  230,893
                  
                  
                  
                  362,490Depreciation
      expense
                  
                  
                  631,100
                  
                  
                  
                  559,342Amortization
      of intangible merchant contracts
                  
                  
                  398,664
                  
                  
                  
                  388,684Stock
      compensation expense
                  
                  
                  102,379
                  
                  
                  
                  55,085Loss
      on early extinguishment of debt
                  
                  
                  102,146
                  
                  
                  
                  467,391Adjusted
      EBITDA
                  
                  $
                  1,904,383
                  
                  
                  $
                  2,486,785





Our
Adjusted EBITDA decreased to $1,904,383 for the first six months of fiscal 2010
from $2,486,785  for the first six months of fiscal 2009. Adjusted
EBITDA as a percentage of revenues decreased to 17.5% for the first six months
of fiscal 2010 from 23.1% for the first six months of fiscal 2009.





Seasonality





In our
ATM operations, we traditionally experience higher transaction volumes per
machine in the second and third quarters than in the first and fourth quarters.
The increased volumes in the summer months coincide with increased vacation
travel in the United States.





Liquidity and Capital
Resources





Our
primary liquidity and capital resource needs are to finance the costs of our
operations, to make capital expenditures and to service our debt.





Net cash
provided by continuing operating activities during the six-month period ended
June 30, 2010 was $274,512, compared to the net cash provided by continuing
operating activities during the six-month period ended June 30, 2009 of
$2,144,155.   The decrease was partly attributable to $1,341,105
which was prepaid to our DVD kiosk manufacturer for DVD kiosks that will be
delivered in July and installed at customer sites in July and August of
2010.





Net cash
provided by financing activities was $2,377,221 due to drawdowns from the Loan
Agreement (discussed in Note #4 “Senior Lenders’ Notes Payable and Notes
Payable,”) offset by paying back senior lender notes and capital leases during
the six-month period ended June 30, 2010.  This compared to funds used
in financing activities of $1,693,713 for the six-month period ended June 30,
2009.  During the six-month period ended June 30, 2010, we deposited
$800,000 into our cash account from a restricted cash deposit account pursuant
to the previous Credit Agreement with SunTrust Bank.





Net cash
used in investing activities was $1,753,966 during the six-month period ended
June 30, 2010, mainly representing net purchases of DVD rental kiosks and ATMs.
This compares to net cash used in investing activities of $245,630 for the
six-month period ended June 30, 2009, representing net purchases of
ATMs.





Recently,
the capital and credit markets have become increasingly volatile as a result of
adverse conditions that have caused the failure and near failure of a number of
large financial service companies. If the capital and credit markets continue to
experience volatility and the availability of funds remains limited, it is
possible that our ability to access the capital and credit markets may be
limited by these factors at a time when we would like to refinance maturing
debt.  Likewise, if the financial institutions listed below experience
similar failures, we would need to find other third party sources to fund our
vault cash discussed below.


34


The
Company does not use its own funds for vault cash, but rather relies upon third
party sources. The Company in general rents the vault cash from financial
institutions and pays a negotiated interest rate for the use of the money. Other
than the $250,000 of automated teller machine vault cash discussed in Note # 2
“Description of Business and Summary of Significant Accounting Policies“, the
vault cash is never in the possession of, controlled or directed by the Company
but rather cycles from the bank to the armored car carrier and to the ATM. Each
day’s withdrawals are settled back to the owner of the vault cash on the next
business day. Both Nationwide and its clients, the merchants, sign a document
stating that the vault cash belongs to the financial institution and that
neither party has any legal rights to the funds. The required vault cash is
obtained under the following arrangements:





·
            Wilmington
      Savings Fund Society (“WSFS”). Beginning in September 2004, the
      Company has an arrangement with Wilmington Savings Fund Society allowing
      us to obtain up to $20,000,000 in vault cash.   The WSFS
      contract may be terminated by WSFS at any time upon breach by us and upon
      the occurrence of certain other events. Under this arrangement, we are
      required to pay a monthly service fee on the outstanding amount equal to
      the prime rate of interest, plus a specified percentage, and must pay
      monthly "bank" and insurance fees. We are also required to maintain
      insurance on the vault cash. The contract currently in place with WSFS
      expires on October 31, 2010, with a one year automatic renewal period
      unless one party gives 60 days notice of their intention not to
      renew.  As of June 30, 2010, the Company had 7 ATMs funded by
      WSFS with a vault cash outstanding balance of approximately $97,260 in
      connection with this arrangement.





·
            Elan
      (formerly GenPass Technologies).  On November 24, 2006,
      we signed a Cash Provisioning Agreement with Elan allowing us to obtain up
      to $30,000,000 in vault cash.  The Elan contract may be
      terminated by Elan at any time upon breach by us and upon the occurrence
      of certain other events.  Under this arrangement, we are
      required to pay a monthly service fee on the average terminal balance plus
      a load factor.  In addition, we are required to maintain
      insurance on the vault cash.  The contract currently in place
      with Elan expires on August 11, 2010, with a one year automatic renewal
      period unless one party gives 180 days notice of their intention not to
      renew.  As of June 30, 2010, the Company had 1,457 ATMs funded
      by Elan with a vault cash outstanding balance of about approximately
      $36,107,792.





·
            Various
      Branded Cash Partners.  Nationwide has partnered with
      numerous banks and credit unions to market specific Nationwide ATMs to the
      cardholders of these institutions.  We add signage and marketing
      material to the ATM so that the ATM is easily identified as being
      associated with the bank or credit union, and the cardholders of these
      institutions receive surcharge free transactions at the designated
      ATMs.  This provides the bank or credit union additional
      marketing power and another point of access to funds for their
      cardholders.  In return for this benefit, the bank or credit
      union, provide and manage the vault cash in the specified ATM(s), as well
      as provide and pay for cash replenishment and first line
      maintenance.  The advantage to Nationwide is that this reduces
      the costs associated with vault cash, cash replenishment and first line
      maintenance by approximately 50%.  Another advantage is that
      with a branded ATM, transactions volumes traditionally increase more than
      at non-branded ATMs.  As of June 30, 2010, Nationwide had 50
      branded financial partners, which funded 496
  ATMs.





Working
Capital





As of
June 30, 2010, we had current assets of $7,046,871 and current liabilities of
$6,232,128, which results in working capital of $814,743 as compared to current
assets of $3,964,533 and current liabilities of $5,133,277, which results in a
negative working capital of $1,168,744 as of June 30, 2009. The ratio of current
assets to current liabilities increased to 1.13 at June 30, 2010 from 0.77 at
June 30, 2009.  The positive working capital as of June 30, 2010 was
mainly attributable to $1,341,105 worth of DVD kiosks currently booked to
prepaid expenses and other current assets, which represents monies paid to DVD
kiosk manufacturer in advance for DVD kiosks to be delivered during July and
August of 2010.  This amount will be moved to fixed assets when the
kiosks are installed at customer locations.  Excluding these
amounts,  we would have had a negative working capital of $526,362 as
of June 30, 2010.   Despite the adjusted negative working
capital, we believe that if we achieve our business plan, we will have
sufficient working capital to meet our remaining and current obligations during
2010.  As of June 30, 2010, we were in compliance with all applicable
covenants and ratios under the Loan Agreement with Fifth Third
Bank.


35


Impact of Inflation and
Changing Prices





We were
not impacted by inflation during the past two fiscal years in any material
respect.  Interest rate decreases have decreased the rental cost of
our vault cash.  As the interest rates decrease and vault cash costs
decrease, this will have a more favorable impact on the Company’s
income.





ITEM  3.
Quantitative and Qualitative Disclosure About Market Risk





Not
applicable.





ITEM  4.
Controls and Procedures





Not
applicable.





ITEM  4T.
Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





The
Company has established disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known on a timely basis to the officers who certify its
financial reports and to other members of senior management and the Company’s
board of directors. Based on their evaluation as of June 30, 2010, the principal
executive officer and principal financial officer of the Company have concluded
that the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
are effective to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.





Changes in Internal Control
Over Financial Reporting





There
were no changes to internal controls over financial reporting that occurred
during the three months ended June 30, 2010 that have materially affected, or
are reasonably likely to materially impact, our internal controls over financial
reporting.





PART
II - OTHER INFORMATION





ITEM
1. Legal Proceedings





Information
regarding legal proceedings is contained in Note #6 (“Litigation and Claims”) to
the Condensed Consolidated Financial Statements contained in this report and is
incorporated herein by reference.





ITEM
1A. Risk Factors





Other
than the risk factors discussed below, there have been no material changes from
risk factors previously disclosed in Risk Factors within “Item 1. Description of
Business” included in our Annual Report on Form 10-K for the year ended December
31, 2009.





Interchange fees,
which comprise a substantial portion of our transaction revenues, may be lowered
at the discretion of the various EFT networks through which our transactions are
routed, or through potential regulatory changes, thus reducing our future
revenues.  Interchange fees, which represented approximately
34% of our total ATM operating revenues for the year ended December 31, 2009,
are set by the various EFT networks through which transactions conducted on our
devices are routed.  Interchange fees are set by each network and
typically vary from one network to the next.  Accordingly, if some or
all of the networks through which our ATM transactions are routed were to reduce
the interchange rates paid to us or increase their transaction fees charged to
us for routing transactions across their network, or both, our future
transaction revenues could decline.


36


Recently,
certain networks have reduced the net interchange fees paid to ATM deployers for
transactions routed through their networks.  For example, effective
April 1, 2010, a global network brand reduced the interchange rates it pays to
domestic ATM deployers for ATM transactions routed across its debit
network.  As a result, we have recently seen certain financial
institutions migrate their volume away from other networks to take advantage of
the lower pricing offered by these networks.  Such rate change is
expected to reduce our ATM operating gross profits by approximately $20,000
-  $25,000 a month beginning April 1, 2010.  Furthermore, if
additional financial institutions move to take advantage of this lower pricing,
or if additional networks reduce the interchange rates they currently pay to ATM
deployers, our future revenues and gross profits would be negatively
impacted.





We depend upon
third-party manufacturers of our DVD rental kiosks and related
software.  We depend upon third-party manufacturers to
manufacture our kiosks. We intend to continue expanding our installed base in
the U.S. and such expansion may be limited by the manufacturing capacity of the
third-party manufacturers who may not be able to meet our manufacturing needs in
a satisfactory and timely manner. Furthermore, we are reliant on the third-party
manufacturer for the development of its core software technology. Any failure by
them to develop, produce and manufacture functional DVD rental kiosks and
related software could harm our business, financial condition and results of
operations.





We depend upon
third parties for the maintenance and servicing of our kiosks and the
fulfillment of our DVD titles.  We depend upon a third-party
distributors for the fulfillment of our DVD titles,  third-party
providers for payment processing and third-party service providers for the
maintenance and servicing of our kiosks.  Any failure by us to
maintain these existing relationships or to establish new relationships on a
timely basis or on acceptable terms could harm our business, financial condition
and results of operations.





Any significant
disruption in our computer systems or equipment could result in a loss of users.  The operation of our DVD rental kiosks is dependent on their
ability to connect to our back-end platform running in our datacenters. Our
reputation and ability to attract, retain and serve our users are dependent upon
the reliable performance of our network infrastructure and fulfillment
processes. Interruptions in these systems could hinder our ability to process
transactions, which could diminish the attractiveness of our service to existing
and potential users.





If we are unable
to build our brand, our ability to attract and retain users may be adversely
affected.  We are still developing our brand identity,
InstaFlix, and we must build strong brand identity to compete successfully. To
succeed, will have to compete for users against other brands that have greater
recognition, such as Redbox and NCR/Blockbuster Express. To the extent
dissatisfaction with our service is not adequately addressed, our brand may be
adversely impacted. If our efforts to promote and maintain our brand are not
successful, our operating results and our ability to attract and retain users of
our service may be adversely affected.





If we do not
manage our DVD inventory effectively, our business, financial condition and
results of operations could be materially and adversely affected. If we
do not acquire sufficient copies of popular DVDs, we may not satisfy user
demand, and our user satisfaction and results of operations could be adversely
affected.  Conversely, if we attempt to mitigate this risk and acquire
more copies than needed to satisfy our user demand, our inventory utilization
would become less effective and our gross margins would be adversely
affected.  Our ability to accurately predict user demand may impact
our ability to acquire appropriate quantities of certain DVDs.





ITEM
2. Unregistered Sale of Equity Securities and Use of Proceeds





None.


37


ITEM  3.
Defaults Upon Senior Securities





None.





ITEM  4.
[Removed and Reserved]





ITEM  5.
Other Information





None.





ITEM  6.
Exhibits





Exhibit
Description





3.1
              
              Articles
      of Incorporation - Restated and Amended May 30, 2001(Incorporated by
      reference to Form 10KSB filed with the SEC on March 31,
    2003).3.2
              
              By-Laws
      of Global Axcess Corp - As Amended and Restated (Incorporated by reference
      to Form 8-K filed with the SEC on April 6, 2010).3.3
              
              Amendment
      to the Articles of Incorporation  (Incorporated by reference to
      Form 8-K filed with the SEC on May 3, 2005).4.1
              
              Securities
      Purchase Agreement dated March 11, 2005 of Global Axcess Corp
      (Incorporated by reference to Form 8-K filed with the SEC on April 4,
      2005).4.2
              
              Form
      of Common Stock Purchase Warrant (Incorporated by reference to Form 8-K
      filed with the SEC on April 4, 2005).10.1
              
              Loan
      and Security Agreement, dated as of June 18, 2010, by and among Global
      Axcess Corp (and subsidiaries) and Fifth Third Bank (Incorporated by
      reference to Form 8-K filed with the SEC on June 22,
  2010).10.2
              
              Term
      Promissory Note, dated June 18, 2010, issued by Global Axcess Corp to
      Fifth Third Bank (Incorporated by reference to Form 8-K filed with the SEC
      on June 22, 2010).10.3
              
              Draw
      Promissory Note, dated June 18, 2010, issued by Global Axcess Corp to
      Fifth Third Bank (Incorporated by reference to Form 8-K filed with the SEC
      on June 22, 2010).10.4
              
              Master
      Equipment Lease Agreement, dated June 18, 2010, by and among Global Axcess
      Corp and Fifth Third Bank (Incorporated by reference to Form 8-K filed
      with the SEC on June 22, 2010).31.1
              
              Certification
      of the Chief Executive Officer of Global Axcess Corp pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.31.2
              
              Certification
      of the Chief Financial Officer of Global Axcess Corp pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.32.1
              
              Certification of the Chief
      Executive Officer of Global Axcess Corp pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
              
              Certification of the Chief
      Financial Officer of Global Axcess Corp pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.


38


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, as of August 11,
2010 the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





GLOBAL
      AXCESS CORPBy:
                      /s/ George A. McQuainGeorge
      A. McQuainPresident and Chief Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on the 11th day of
August, 2010.




Signature
                  
                  Title/S/
      Michael J. LoiaconoMichael
      J. Loiacono
                  
                  Chief Financial Officer and Chief Accounting Officer/s/George
      A. McQuainGeorge
      A. McQuain
                  
                  President,
      Chief Executive Officer and Director


39