Global Axcess 10Q 2011 Q2 Quarterly report

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, 2011

¨ 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 165
JACKSONVILLE, 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, 2011, the registrant had 22,575,326 shares outstanding of its common stock, $0.001 par value.

TABLE OF CONTENTS		Page No.

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	38
Item 4.	Controls and Procedures	38

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	[Removed and Reserved]	39
Item 5.	Other Information	39
Item 6.	Exhibits	39

SIGNATURES		41

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 2011.

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.

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements (unaudited).

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)			(Audited)
	June 30, 2011			December 31, 2010
ASSETS
Current assets
Cash and cash equivalents	$	1,440,957		$	1,743,562
Accounts receivable, net of allowance of $5,257 in 2011 and $4,354 in 2010		949,342			410,956
Inventory, net of allowance for obsolescence of $182,572 in 2011 and 2010		2,063,212			1,389,606
Deferred tax asset - current		363,926			363,926
Prepaid expenses and other current assets		206,412			139,551
Total current assets		5,023,849			4,047,601

Fixed assets, net		9,226,857			9,581,561

Other assets
Merchant contracts, net		11,853,370			10,879,029
Intangible assets, net		4,195,074			4,219,216
Deferred tax asset - non-current		1,611,285			1,611,285
Other assets		97,134			66,807

Total assets	$	32,007,569		$	30,405,499

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities	$	5,215,880		$	4,604,837
Notes payable - related parties - current portion, net		31,375			29,740
Notes payable - current portion		22,795			21,777
Senior lenders' notes payable - current portion, net		3,590,482			2,426,915
Capital lease obligations - current portion		347,708			455,188
Total current liabilities		9,208,240			7,538,457

Long-term liabilities
Interest rate swap contract		244,515			-
Notes payable - related parties - long-term portion, net		27,920			43,694
Notes payable - long-term portion		39,878			51,476
Senior lenders' notes payable - long-term portion, net		6,911,863			6,622,539
Capital lease obligations - long-term portion		83,077			205,275
Total liabilities		16,515,493			14,461,441

Stockholders' equity
Preferred 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, 23,015,788 and 22,292,469 shares issued and 22,575,326 and 22,139,444 shares outstanding at June 30, 2011 and December 31, 2010, respectively		22,625			22,188
Additional paid-in capital		23,493,474			23,202,338
Accumulated other comprehensive loss		(244,515	)		-
Accumulated deficit		(7,558,997	)		(7,198,502	)
Treasury stock; 440,462 and 153,025 shares of common stock at cost at June 30, 2011 and December 31, 2010, respectively		(220,511	)		(81,966	)
Total stockholders' equity		15,492,076			15,944,058
Total liabilities and stockholders' equity	$	32,007,569		$	30,405,499

See Accompanying Notes to Condensed Consolidated Financial Statements

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended
	June 30, 2011			June 30, 2010

Revenues	$	8,293,743		$	5,506,905

Cost of revenues		5,232,206			2,996,094
Gross profit		3,061,537			2,510,811

Operating expenses
Depreciation expense		572,190			321,205
Amortization of intangible merchant contracts		291,220			199,332
Selling, general and administrative		1,854,866			1,602,709
Restructuring charges		27,221			-
Stock compensation expense		17,828			55,224
Total operating expenses		2,763,325			2,178,470
Operating income from operations before items shown below		298,212			332,341

Interest expense, net		(178,604	)		(109,562	)
Gain on sale of assets		63,541			-
Loss on early extinguishment of debt		-			(102,146	)
Net income	$	183,149		$	120,633

Income per common share - basic:
Net income per common share	$	0.01		$	0.01

Income per common share - diluted:
Net income per common share	$	0.01		$	0.01

Weighted average common shares outstanding:
Basic		22,556,526			21,943,940
Diluted		23,180,752			23,751,471

See Accompanying Notes to Condensed Consolidated Financial Statements

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Six Months Ended
	June 30, 2011			June 30, 2010

Revenues	$	16,243,814		$	10,886,983

Cost of revenues		10,108,376			5,854,028
Gross profit		6,135,438			5,032,955

Operating expenses
Depreciation expense		1,147,514			631,100
Amortization of intangible merchant contracts		579,658			398,664
Selling, general and administrative		3,818,512			3,128,572
Restructuring charges		512,261			-
Stock compensation expense		39,528			102,379
Total operating expenses		6,097,473			4,260,715
Operating income from operations before items shown below		37,965			772,240

Interest expense, net		(349,501	)		(230,893	)
Gain on sale of assets		63,541			-
Other non-operating expense		(112,500	)		-
Loss on early extinguishment of debt		-			(102,146	)
Net income (loss)	$	(360,495	)	$	439,201

Income (loss) per common share - basic:
Net income (loss) per common share	$	(0.02	)	$	0.02

Income (loss) per common share - diluted:
Net income (loss) per common share	$	(0.02	)	$	0.02

Weighted average common shares outstanding:
Basic		22,424,358			21,918,189
Diluted		22,424,358			23,759,084

See Accompanying Notes to Condensed Consolidated Financial Statements

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended
	June 30, 2011			June 30, 2010

Cash flows from operating activities:
Income (loss) from operations	$	(360,495	)	$	439,201
Adjustments to reconcile net income (loss) from operations to net cash provided by operating activities:
Stock based compensation		39,528			102,379
Loss on early extinguishment of debt		-			61,508
Depreciation expense		1,147,514			631,100
Amortization of intangible merchant contracts		579,658			398,664
Amortization of capitalized loan fees		37,447			12,940
Allowance for doubtful accounts		(13,148	)		10,468
Allowance for inventory obsolescence		-			(12,000	)
Gain on sale of assets		(63,541	)		-
Changes in operating assets and liabilities, net of effects of acquisition of Tejas:
Change in accounts receivable, net		(458,988	)		38,313
Change in inventory, net		(465,477	)		(417,292	)
Change in prepaid expenses and other current assets		(66,861	)		(1,417,358	)
Change in other assets		(30,327	)		(42,500	)
Change in intangible assets, net		(13,305	)		(154,587	)
Change in interest rate swap contract		244,515			-
Change in accounts payable and accrued liabilities		366,528			623,676
Net cash provided by operating activities		943,048			274,512

Cash flows from investing activities:
Cash paid for Tejas acquisition		(1,375,000	)		-
Proceeds from sale of property and equipment		61,250			-
Costs of acquiring merchant contracts		(187,315	)		(110,626	)
Purchase of property and equipment		(950,582	)		(1,643,340	)
Net cash used in investing activities		(2,451,647	)		(1,753,966	)

Cash flows from financing activities:
Proceeds from issuance of common stock		7,500			-
Proceeds from senior lenders' notes payable		2,799,658			7,116,684
Proceeds from notes payable		-			710,533
Change in restricted cash		-			800,000
Principal payments on senior lenders' notes payable		(1,346,767	)		(5,128,572	)
Principal payments on notes payable		(10,580	)		(720,132	)
Principal payments on notes payable - related parties		(14,139	)		(12,620	)
Principal payments on capital lease obligations		(229,678	)		(388,672	)
Net cash provided by financing activities		1,205,994			2,377,221
Increase (decrease) in cash		(302,605	)		897,767
Cash, beginning of period		1,743,562			2,007,860
Cash, end of the period	$	1,440,957		$	2,905,627

Cash paid for interest	$	313,740		$	220,333

See Accompanying Notes to Condensed Consolidated Financial Statements

Supplemental schedule of non-cash investing and financing activities:

	For the Six Months Ended
SUPPLEMENTAL CASH FLOW INFORMATION	June 30, 2011			June 30, 2010

The 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	$	119,213		$	(60,604	)
Non-cash accrued interest expenses on swap agreement with senior lender		244,515			-
Total non-cash operating activities	$	363,728		$	(60,604	)

Investing activities:
Purchase of assets under capital lease obligations	$	-		$	202,209
Net transfer of de-installed net fixed assets (to) from inventory		(119,213	)		60,604
Total non-cash investing activities	$	(119,213	)	$	262,813

Acquisition of assets of Tejas:
Computer equipment	$	25,400		$	-
DVD inventory		88,916			-
Merchant contracts		1,366,684			-
Assets acquired		1,481,000			-
Common stock issued, subject to restrictions		(106,000	)		-
Cash paid for Tejas acquisition	$	1,375,000		$	-

Financing activities:
Settlement of stock option exercises through issuance of treasury stock:
Repurchase of treasury stock, 287,437 and 33,374 shares of common stock at cost for the six month periods ended June 30, 2011 and 2010, respectively	$	(138,545	)	$	(30,000	)
Total non-cash financing activities	$	(138,545	)	$	(30,000	)

See Accompanying Notes to Condensed Consolidated Financial Statements

GLOBAL AXCESS CORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2011

(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, filed with the SEC, for the year ended December 31, 2010 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, 2011 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.

2.	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Global Axcess Corp is a Nevada corporation organized in 1984. The Company, 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 services. 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 a total of approximately 5,200 ATMs and DVD kiosks in its national network spanning 43 states.

Reclassifications

Certain amounts in the 2010 condensed consolidated financial statements have been reclassified to conform to the 2011 presentation. Such reclassifications had no effect on the net income or stockholders’ equity as previously reported.

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, 2011 and 2010:

Revenues:

	For the Three Months Ended
	June 30, 2011		June 30, 2010

ATM Surcharge / Convenience Fee revenue	$	4,092,768	$	3,187,650
ATM Interchange revenue		1,732,246		1,788,370
ATM Processing revenue		45,238		43,861
ATM Sales revenue		83,343		73,982
Other ATM revenue		341,114		353,097
DVD Rental revenue		1,999,034		59,945
Total revenue	$	8,293,743	$	5,506,905

	For the Three Months Ended
	June 30, 2011		June 30, 2010

ATM Operating revenue	$	6,211,366	$	5,372,978
ATM Sales revenue		83,343		73,982
DVD Operating revenue		1,999,034		59,945
Total revenue	$	8,293,743	$	5,506,905

	For the Six Months Ended
	June 30, 2011		June 30, 2010

ATM Surcharge / Convenience Fee revenue	$	7,887,152	$	6,272,816
ATM Interchange revenue		3,439,410		3,602,530
ATM Processing revenue		90,885		88,151
ATM Sales revenue		135,464		139,610
Other ATM revenue		688,375		681,061
DVD Rental revenue		4,002,528		102,815
Total revenue	$	16,243,814	$	10,886,983

	For the Six Months Ended
	June 30, 2011		June 30, 2010

ATM Operating revenue	$	12,105,822	$	10,644,558
ATM Sales revenue		135,464		139,610
DVD Operating revenue		4,002,528		102,815
Total revenue	$	16,243,814	$	10,886,983

Cost of Revenues:

	For the Three Months Ended
	June 30, 2011		June 30, 2010

ATM Merchant residual / commission costs	$	2,020,837	$	1,579,236
ATM Cost of cash		669,110		554,515
ATM Processing costs		294,200		270,401
ATM Communication costs		100,743		134,459
ATM Sales costs		79,416		64,336
Other ATM cost of revenues		410,703		287,019
DVD operating costs		1,657,197		106,128
Total cost of revenues	$	5,232,206	$	2,996,094

	For the Three Months Ended
	June 30, 2011		June 30, 2010

Cost of ATM Operating revenue	$	3,495,593	$	2,825,630
ATM Sales costs		79,416		64,336
Cost of DVD Operating revenue		1,657,197		106,128
Total cost of revenues	$	5,232,206	$	2,996,094

	For the Six Months Ended
	June 30, 2011		June 30, 2010

ATM Merchant residual / commission costs	$	3,921,956	$	3,092,754
ATM Cost of cash		1,355,492		1,093,094
ATM Processing costs		576,304		503,849
ATM Communication costs		202,658		299,076
ATM Sales costs		118,807		131,894
Other ATM cost of revenues		795,495		567,703
DVD operating costs		3,137,664		165,658
Total cost of revenues	$	10,108,376	$	5,854,028

	For the Six Months Ended
	June 30, 2011		June 30, 2010

Cost of ATM Operating revenue	$	6,851,905	$	5,556,476
ATM Sales costs		118,807		131,894
Cost of DVD Operating revenue		3,137,664		165,658
Total cost of revenues	$	10,108,376	$	5,854,028

Inventory

The components of inventory for the periods ended June 30, 2011 and December 31, 2010, respectively, are as follows:

	June 30, 2011		December 31, 2010

ATM Parts and supplies	$	174,403	$	127,495
Automated teller machines		207,452		202,482
DVD rental kiosks		262,155		222,942
DVD library		1,601,774		1,019,259
		2,245,784		1,572,178
Less: reserve for inventory obsolescence		182,572		182,572
Inventory, net	$	2,063,212	$	1,389,606

Intangible Assets – Goodwill and Merchant Contracts

The following table summarizes Intangible Assets and Merchant Contracts at June 30, 2011:

	Gross Carrying Value		Accumulated Amortization		Net

Goodwill	$	4,189,645	$	168,286	$	4,021,359
Other intangible assets		235,866		62,151		173,715
Merchant contracts, net		17,440,566		5,587,196		11,853,370
Total intangible assets, net and merchant contracts, net	$	21,866,077	$	5,817,633	$	16,048,444

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 net income per common share is computed based on the weighted average number of common shares outstanding during the period increased by the effect of dilutive stock options and stock purchase warrants using the treasury stock method. No such conversion is assumed where the effect is anti-dilutive, such as when there is a net loss from operations or when the exercise price of the potentially dilutive securities is less than the market value of the Company’s stock.

For the three months ended June 30, 2011 there were stock options outstanding to acquire 667,763 shares of the Company’s common stock which were excluded from the calculation of its diluted earnings per share as their effect would be anti-dilutive. For the three months ended June 30, 2010 there were stock options and warrants outstanding to acquire 295,243 and 135,000 shares, respectively, of the Company’s common stock which were excluded from the calculation of its diluted earnings per share as their effect would be anti-dilutive.

	For the Three Months Ended
	June 30, 2011			June 30, 2010
Numerator
Income from continuing operations	$	183,149		$	120,633

Numerator for diluted income per share available to common stockholders	$	183,149		$	120,633

Denominator
Weighted average shares		22,556,526			21,943,940
Effect of dilutive securities:
Treasury method, effect of employee stock options & warrants		624,226			1,807,531

Denominator for diluted income per share adjusted weighted shares after assumed exercises		23,180,752			23,751,471

Income per common share - basic:
Net Income per common share	$	0.01		$	0.01

Income per common share - diluted:
Net Income per common share	$	0.01		$	0.01

	For the Six Months Ended
	June 30, 2011			June 30, 2010
Numerator
Income (loss) from operations	$	(360,495	)	$	439,201

Numerator for diluted income (loss) per share available to common stockholders	$	(360,495	)	$	439,201

Denominator
Weighted average shares		22,424,358			21,918,189
Effect of dilutive securities:
Treasury method, effect of employee stock options & warrants		-			1,840,895

Denominator for diluted income (loss) per share adjusted weighted shares after assumed exercises		22,424,358			23,759,084

Income (loss) per common share - basic:
Net Income (loss) per common share	$	(0.02	)	$	0.02

Income (loss) per common share - diluted:
Net Income (loss) per common share	$	(0.02	)	$	0.02

Deferred Tax Asset

In accordance with FASB guidance, we use the liability method of accounting for income taxes. Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance that is recorded or released against our deferred tax assets.

We continue to evaluate quarterly the positive and negative evidence regarding the realization of net deferred tax assets. The carrying value of our net deferred tax assets is based on our belief that it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets. A valuation allowance has been established for some of our net deferred tax asset as we do not believe it meets the “more likely than not” criteria. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws or other factors. If any of the assumptions and related estimates change in the future, it may increase or decrease the valuation allowance and related income tax expense in the same period.

During the fourth quarter of 2009, recurring annual profits for previous periods allowed the Company to determine that it was not in a cumulative loss position. Based on this positive evidence, we concluded that it was more likely than not that some of the Company’s net deferred tax asset would be realizable. As a result, a $1.1 million reduction in the net deferred tax valuation allowance was recorded in 2009. For purposes of assessing realizability of the deferred tax assets, a cumulative financial reporting loss position is considered significant negative evidence the Company will not be able to fully realize the deferred tax assets in the future. The Company reviews a rolling thirty-six month calculation of earnings to determine if the Company is in a cumulative loss position. As of June 30, 2011, the Company is not in a net cumulative loss position. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, operating results or other factors.

Uncertain Income Tax Positions

In accordance with Financial Accounting Standards Board (“FASB”) guidance, we account for uncertainty in income taxes, using a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition and measurement would result in recognition of a tax benefit and/or an additional charge to the tax provision.

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The ASU was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards ("IFRS"). ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. ASU 2011-04 will be effective for the Company beginning January 1, 2012, with early adoption permitted, and will be applied prospectively. The Company does not believe that the adoption of this standard will have a material impact on its consolidated financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05 which provides new guidance on the presentation of comprehensive income (FASB ASC Topic 220) in financial statements. Entities are required to present total comprehensive income either in a single, continuous statement of comprehensive income or in two separate, but consecutive, statements. Under the single-statement approach, entities must include the components of net income, a total for net income, the components of other comprehensive income and a total for comprehensive income. Under the two-statement approach, entities must report an income statement and, immediately following, a statement of other comprehensive income. Under either method, entities must display adjustments for items reclassified from other comprehensive income to net income in both net income and other comprehensive income. The provisions for this pronouncement are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We will adopt this pronouncement for our fiscal year beginning January 1, 2012. We are currently evaluating the impact of the adoption of ASU 2011-05 on our consolidated financial statements.

3.	ACQUISITION OF ASSETS

Effective January 1, 2011, the Company acquired certain assets of Tejas Video Partners, LTD (“Tejas”), an owner and operator of unattended DVD rental kiosks. Under the terms of the agreement, the Company acquired the right, title, and interest in a merchant contract, DVD inventories and certain computer equipment for approximately $1,481,000. The purchase price consists of approximately $1,375,000 in cash (with $875,000 paid at closing and $500,000 paid on April 14, 2011) and $106,000 in shares of the Company’s common stock, subject to restrictions. In addition to the base purchase price, for a period of five years following the closing, the Company will pay an additional purchase price (“Earn-out”) to Tejas of $3,500 for each new DVD kiosk site that is (i) installed by the Company pursuant to an acquired customer agreement, and (ii) which site generates $2,000 or more of gross revenues for any calendar month (the “Earn-out Threshold”). The Earn-out will be paid by the Company on an annual basis, within forty-five days of each of the first five anniversaries following the closing. Each annual payment will be calculated based on newly installed kiosks that met the Earn-out Threshold during the twelve month period ending on the preceding anniversary of the closing.

The allocation of the purchase price is based upon estimates of the assets acquired in accordance with the relevant accounting guidance. The acquisition of Tejas is based on management’s consideration of past and expected future performance. The allocation of the aggregate purchase price of this acquisition is as follows:

Computer equipment	$	25,400
DVD inventory		88,916
Merchant contract		1,366,684
Assets acquired	$	1,481,000

The assets acquired in the Tejas acquisition serve as collateral for borrowings as discussed in Financial Footnote #5 “Senior Lenders’ Notes Payable.”

4.	ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following as of June 30, 2011 and December 31, 2010:

	June 30, 2011		December 31, 2010

Accounts payable	$	1,554,816	$	1,688,818
Accrued commissions/residual payments		1,474,478		1,216,266
Accrued cost of cash and cash replenishment expenses		414,000		303,027
Accrued payroll		311,242		204,086
Accrued severance		372,031		-
Accrued audit fees		49,750		84,500
Accrued interest		30,948		22,995
Accrued legal fees		2,657		54,056
Asset retirement obligation		87,902		88,074
Accrued taxes		263,583		226,336
Other		654,473		716,679
Accounts payable and accrued liabilities	$	5,215,880	$	4,604,837

5.	SENIOR LENDERS’ NOTES PAYABLE

On March 31, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on a $3,976,531 equipment lease schedule with Fifth Third Bank which will fix its LIBOR interest rate at 2.45% as of April 1, 2012. The Company expects that by fixing the LIBOR rate on its equipment lease schedule at 2.45% effective April 1, 2012, it will be fixing the interest rate paid on the $3,976,531 equipment lease schedule at 6.45% beginning April 1, 2012, and until then, will remain on an interest-only schedule. As of June 30, 2011, the Company had drawn down a total of $4,437,691 against the Lease Agreement. $461,160 of the total draw down will be on an interim interest-only schedule. The Company anticipates that it will close this $461,160 drawdown amount on a subsequent schedule during the third quarter of 2011.

As of June 30, 2011, the Company was in compliance with all applicable covenants and ratios under the Loan Agreement with Fifth Third. The interest rate on all components of senior lenders’ notes payable at June 30, 2011 was 5.5%. As of June 30, 2011, the Company had $5,810,687 of available funds remaining on its senior lender’s notes payable.

The components of senior lenders’ notes payable for the periods presented are as follows:

	June 30, 2011		December 31, 2010

Fifth Third Bank, term loan	$	3,333,333	$	4,166,668
Fifth Third Bank, equipment lease line		4,437,691		3,725,158
Fifth Third Bank, draw loan		1,289,884		824,567
Fifth Third Bank, $1.65 million draw loan		1,441,437		333,061
		10,502,345		9,049,454
Less: current portion		3,590,482		2,426,915
Long-term portion, net of senior lenders' notes payable	$	6,911,863	$	6,622,539

6.	COMMITMENTS AND CONTINGENCIES

We lease ATMs and back office computer equipment under capital lease agreements that expire between 2011 and 2013. The average interest rate paid on these lease payments is 10.04% per annum. During the three-month period ended June 30, 2011, we did not enter into any new capital lease obligations. As of June 30, 2011, $430,785 of capital lease obligations were included in the Company’s condensed consolidated balance sheet.

7.	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.

8.	INCOME TAXES

The effective tax rates for the three months ended June 30, 2011 and 2010 were approximately 0.0%. While there is no difference in the effective tax rate for the three months ended June 30, 2011 over the respective previous periods, the effective tax rates for the three months ended June 30, 2011 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, 2011 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, 2010, the Company had net operating loss carryforwards remaining of approximately $23.6 million that may be offset against future taxable income through 2030. As part of management’s tax strategies, they will be reviewing the use of the net operating loss carryforwards.

At December 31, 2010, we had approximately $1,147,200 of total gross unrecognized tax benefits. Of this total, $1,147,200 (net of federal benefit on state tax issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. There is no balance of gross unrecognized tax benefits at December 31, 2010 related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next 12 months.

For the six months ended June 30, 2011, there was no change in gross unrecognized tax benefits. Our total gross unrecognized tax benefit at June 30, 2011 was $1,147,200.

Our continuing practice is to recognize interest and/or penalties related to uncertain income tax matters in income tax expense. However, the type of uncertain income tax matters involved would not forseeably subject the Company to interest and/or penalties. As such, we had $0 (net of federal tax benefit) accrued for interest and $0 accrued for penalties at December 31, 2010. The total amount accrued for interest and penalties at June 30, 2011 was $0.

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 2007, to international examinations for years before 2006 and, with few exceptions, to state examinations before 2006.

9.	CHANGES IN STOCKHOLDERS' EQUITY

See the table below for all the equity transactions for the three-month period ended June 30, 2011:

										Accumulated
					Additional					Other			Total						Total
	Common Stock				Paid-in		Accumulated			Comprehensive			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Capital		Deficit			Loss			Loss			Stock			Equity

Balances, March 31, 2011		22,544,726	$	22,594	$	23,468,177	$	(7,742,146	)	$	-		$	(7,742,146	)	$	(220,511	)	$	15,528,114

Stock compensation expense		-		-		17,828		-			-			-			-			17,828

Shares issued in Tejas Acquisition		600		1		599		-			-			-			-			600

Stock options exercised		30,000		30		6,870		-			-			-			-			6,900

Other comprehensive loss		-		-		-		-			(244,515	)		(244,515	)		-			(244,515	)

Net Income		-		-		-		183,149			-			183,149			-			183,149

Balances, June 30, 2011		22,575,326	$	22,625	$	23,493,474	$	(7,558,997	)	$	(244,515	)	$	(7,803,512	)	$	(220,511	)	$	15,492,076

On April 12, 2011, the board of directors (the “Board”) of the Company made several determinations with respect to compensatory arrangements for certain named executive officers of the Company. Lock Ireland and Michael I. Connolly, both directors of the Company, are serving as interim co-Chief Executive Officers of the Company. In order to reward Mr. Ireland and Mr. Connolly for their service as officers of the Company, and to increase alignment to our multi-year strategic plans, the Board determined to grant certain performance-based stock options to these individuals. The performance based stock options were awarded under the terms of The Global Axcess Corp 2004 Stock Plan. Both Mr. Ireland and Mr. Connolly were each awarded 125,000 stock options as part of this grant, with an exercise price of $0.43.

The performance-based options are separated into two categories: (i) “operating performance-based options”, and (ii) “other performance based options”. The operating performance-based options represent 50% of the total award and are based on the Company’s achievement of certain specified financial targets. The other performance based options represent 50% of the total award and are based on the Company’s achievement of certain other operating goals designated by the Board.

The performance-based options vest in percentage tranches based on the following:

Operating Performance-Based Options (50% of total) – Based on the Company’s financial achievement against target plan. The achievement will be measured by the end of the most recent full quarter’s year-to-date (“YTD”) financial results in the quarter during the termination of their Co-CEO role:

Twenty percent (20%) for at or above YTD achievement of the Company’s revenue targets in the approved 2011 Business Plan.

Thirty percent (30%) for at or above YTD achievement of the Company’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”) targets in the approved 2011 Business Plan.

Other Performance-Based Options (50% of total) – Based on other objectives specified by the Board (with partial achievement of each awarded as determined by the Board). Objectives must be achieved on or before December 31, 2011 or they expire.

10.	FAIR VALUE MEASUREMENT

The Company uses the three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

On March 31, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on a $3,976,531 equipment lease schedule with Fifth Third Bank which will fix its LIBOR interest rate at 2.45% as of April 1, 2012. The Company expects that by fixing the LIBOR rate on its equipment lease schedule at 2.45% effective April 1, 2012, it will be fixing the interest rate paid on the $3,976,531 equipment lease schedule at 6.45% beginning April 1, 2012 and until then, will remain on an interest-only schedule. 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.

On May 26, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on $20 million with Fifth Third Bank which will swap the interest rate on the Company’s vault cash. The effective date of the rate swap is June 1, 2012 and until then, the Company will continue to pay its variable interest rate on the $20 million of vault cash. 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.

The following tables summarize the Company's assets and liabilities carried at fair value measured on a recurring basis using the fair value hierarchy prescribed by U.S. GAAP:

			Fair Value Measurements at June 30, 2011
	Total		Level 1		Level 2		Level 3

Assets:
	$	-	$	-	$	-	$	-

Liabilities:
Liabilities associated with interest rate swaps	$	244,515	$	-	$	244,515	$	-

Interest rate swaps. The fair value of the Company's interest rate swaps was a liability of $244,515 as of June 30, 2011. These financial instruments are carried at fair value, calculated as the present value of amounts estimated to be received or paid to a marketplace participant in a selling transaction.

Cash Flow Hedging Strategy

For each derivative instrument that is designated and qualifies as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) ("OCI"). Gains and losses on the derivative instrument representing either hedge ineffectiveness or hedge components that are excluded from the assessment of effectiveness are recognized in earnings. However, because the Company currently only utilizes fixed-for-floating interest rate swaps in which the underlying pricing terms agree, in all material respects, including the pricing terms of the Company's vault cash rental obligations, the amount of ineffectiveness associated with such interest rate swap contracts has historically been immaterial. Accordingly, no ineffectiveness amounts associated with the Company's cash flow hedges have been recorded in the Company's consolidated financial statements. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the Consolidated Statements of Operations.

The interest rate swap contract entered into with respect to the Company's equipment lease schedule effectively modifies the Company's exposure to interest rate risk by converting the Company's monthly floating LIBOR rate to a fixed rate. This contract is in place through March 31, 2015 for $3,976,531.

The interest rate swap contract entered into with respect to the Company's vault cash rental obligations effectively modifies the Company's exposure to interest rate risk by converting a portion of the Company's monthly floating rate vault cash rental expense to a fixed rate. Such contracts are in place through June 1, 2014 for $20 million of the Company's vault cash rental obligations. By converting such amounts to a fixed rate, the impact of future interest rate changes (both favorable and unfavorable) on the Company's monthly vault cash rental expense amounts has been reduced. The interest rate swap contract typically involves the receipt of floating rate amounts from the Company's counterparties that match, in all material respects, the floating rate amounts required to be paid by the Company to its vault cash provider for the portions of the Company's outstanding vault cash obligations that have been hedged. In return, the Company typically pays the interest rate swap counterparties a fixed rate amount per month based on the same notional amounts outstanding.

At no point is there an exchange of the underlying principal or notional amounts associated with the interest rate swaps. Additionally, none of the Company's existing interest rate swap contracts contain credit-risk-related contingent features.

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 loss and net loss for the DVD services business and the ATM services business, no allocations of general corporate expenses have been made and these are included in the Corporate Support services business.

The following table summarizes our revenue, gross profit, SG&A, stock compensation expenses, depreciation and amortization, restructuring charges, operating income (loss), net income (loss) and Adjusted EBITDA by segment for the periods indicated below.

EBITDA (a non-GAAP measure) is defined as earnings before net interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA from operations stock compensation expense, restructuring charges, other non-operating expense, gain on sale of assets and loss on early extinguishment of debt.

	For the Three Months Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010

Revenue:
ATM Services	$	6,294,709		$	5,446,960		$	12,241,286		$	10,784,168
DVD Services		1,999,034			59,945			4,002,528			102,815
Corporate Support		-			-			-			-
Consolidated revenue	$	8,293,743		$	5,506,905		$	16,243,814		$	10,886,983

Gross profit:
ATM Services	$	2,719,700		$	2,556,994		$	5,270,574		$	5,095,798
DVD Services		341,837			(46,183	)		864,864			(62,843	)
Corporate Support		-			-			-			-
Consolidated gross profit	$	3,061,537		$	2,510,811		$	6,135,438		$	5,032,955

SG&A:
ATM Services	$	981,591		$	1,044,267		$	2,080,158		$	2,100,378
DVD Services		454,688			221,340			937,493			315,020
Corporate Support		418,587			337,102			800,861			713,174
Consolidated SG&A	$	1,854,866		$	1,602,709		$	3,818,512		$	3,128,572

Stock compensation expense:
ATM Services	$	-		$	-		$	-		$	-
DVD Services		-			-			-			-
Corporate Support		17,828			55,224			39,528			102,379
Consolidated stock compensation expense	$	17,828		$	55,224		$	39,528		$	102,379

Depreciation & Amortization:
ATM Services	$	481,890		$	416,993		$	961,106		$	830,132
DVD Services		304,977			25,308			613,250			40,459
Corporate Support		76,543			78,236			152,816			159,173
Consolidated depreciation & amortization	$	863,410		$	520,537		$	1,727,172		$	1,029,764

Restructuring charges:
ATM Services	$	38,520		$	-		$	62,738		$	-
DVD Services		-			-			-			-
Corporate Support		(11,299	)		-			449,523			-
Consolidated restructuring charges	$	27,221		$	-		$	512,261		$	-

Operating income (loss):
ATM Services	$	1,217,699		$	1,095,734		$	2,166,572		$	2,165,288
DVD Services		(417,828	)		(292,831	)		(685,879	)		(418,322	)
Corporate Support		(501,659	)		(470,562	)		(1,442,728	)		(974,726	)
Consolidated operating income (loss)	$	298,212		$	332,341		$	37,965		$	772,240

Net income (loss):
ATM Services	$	1,204,923		$	1,067,237		$	2,138,048		$	2,108,013
DVD Services		(354,288	)		(292,831	)		(584,839	)		(418,322	)
Corporate Support		(667,486	)		(653,773	)		(1,913,704	)		(1,250,490	)
Consolidated net income (loss)	$	183,149		$	120,633		$	(360,495	)	$	439,201

Adjusted EBITDA:
ATM Services	$	1,738,109		$	1,512,727		$	3,190,416		$	2,995,420
DVD Services		(112,851	)		(267,523	)		(72,629	)		(377,863	)
Corporate Support		(418,587	)		(337,102	)		(800,861	)		(713,174	)
Consolidated Adjusted EBITDA	$	1,206,671		$	908,102		$	2,316,926		$	1,904,383

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

	June 30,		December 31,
	2011		2010
Assets:
ATM Services	$	25,921,708	$	24,944,071
DVD Services		6,085,861		5,461,428
Consolidated assets	$	32,007,569	$	30,405,499

12. RESTRUCTURING CHARGES

On February 28, 2011, the Company and George McQuain, the Company’s Chief Executive Officer, agreed to a mutual separation of Mr. McQuain’s employment. As of February 28, 2011, Mr. McQuain is no longer employed as Chief Executive Officer, Director or in any other capacity, by the Company or any of its subsidiaries. The Company intends to pay Mr. McQuain the severance payments detailed in his Employment Agreement. From February 2011 through June 2011 several other headcounts were reduced as part of the corporate restructuring. For the six month period ended June 30, 2011, the Company recorded restructuring charges of $512,261 for severance-related expenses. As of June 30, 2011, the Company had accrued $372,031 for severance obligations included in accounts payable and accrued liabilities on the condensed consolidated balance sheet.

13. LOSS ON EARLY EXTINGUISHMENT OF DEBT

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 two previous lenders.

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:

	For the Six Months Ended
Item description	June 30, 2010

Accelerated amortization of capitalized loan fees	$	61,508

Prepayment fees on debt settlement	$	40,638

Total loss on early extinguishment of debt	$	102,146

14. SUBSEQUENT EVENT

During July 2011, the Company decided to begin removing all but approximately 95 DVD kiosks from its grocery store chain customer in the northeastern part of the United States. The majority of the kiosks removed from the grocery store chain will be redeployed at the military bases associated with the Tejas acquisition. The removal of the DVD kiosks is expected to be completed during August 2011. As a consequence of the removal of these DVD kiosks, the Company anticipates recording an impairment charge of approximately $150,000 during the third quarter of 2011, related to the acquisition costs of the grocery store contract.

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

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

Overview

Global Axcess Corp, through its wholly owned subsidiaries, owns or leases, operates or manages Automated Teller Machines ("ATM"s) and DVD kiosks with locations primarily in the eastern and southwestern United States of America.

ATM Business Services

Our revenues are principally derived from two types of fees, which we charge for processing transactions on our ATM network. We receive an interchange fee from the issuer of the credit or debit card for processing a transaction when a cardholder uses an ATM in our network. In addition, in most cases we receive a surcharge/convenience fee from the cardholder when the cardholder makes a cash withdrawal from an ATM in our network.

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

In most markets we impose a surcharge/convenience fee for cash withdrawals. Surcharge/convenience fees are a substantial additional source of revenue for us and other ATM network operators. The surcharge/convenience fee for most of the ATMs in our network ranges between $1.50 and $2.95 per withdrawal. The surcharge/convenience fee for other ATMs in our network ranges between $0.50 and $7.50 per withdrawal. We receive the full surcharge/convenience fee for cash withdrawal transactions on ATMs that we own, but often we rebate a portion of the fee to the owner of the ATM location under the applicable lease for the ATM site. We also receive the full surcharge/convenience fee for cash withdrawal transactions on ATMs owned by third party vendors included within our network, but we rebate all or a portion of each fee to the third party vendor based upon a variety of factors, including transaction volume and the party responsible for supplying vault cash to the ATM and only record earned revenues based upon the Company’s contracts with the third party vendors.

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

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

We compete in a fragmented industry, in which no one firm has a significant market share and can strongly influence the industry outcome. Our industry is populated by a large number of financial institutions and Independent Sales Organizations (“ISOs”) which deploy ATMs. Our industry is also characterized by essentially undifferentiated services.

There are underlying economic causes as to why our industry is fragmented. For example:

Low overall entry barriers;

Absence of national economies of scale;

Seasonal and geographic volume fluctuations;

The need for local presence in some market segments; and

The need for low overhead.

Additionally, our industry is a mature and competitive segment. Examples of the market being mature include:

Emergence of debit cards, “pay pass” machines and RFID as substitutes for cash in making purchases;

Increasing acceptance of debit cards by younger demographics; and

Market saturation of prime ATM locations in the United States.

Should the signs of industry decline come to fruition, it could negatively impact our results of operations by decreasing revenues and placing downward pressure on earnings. It could also make the availability of capital resources more difficult to obtain and could negatively impact our ability to more aggressively pay down debt, both of which could affect our results of operations.

The demand for our ATM services is primarily a function of population growth and new business creation to serve that population growth. In addition, opportunities exist:

As our competitors seek to exit the business;

As our competitors encounter financial and regulatory difficulties; and

As financial institutions seek to reduce their costs of managing an ATM channel during a period of decreasing ATM usage.

Opportunities may also exist to leverage our existing customer base by selling additional products and services to them.

Recent Events – ATM Business Services

Revenue Trends - The interchange rates paid to independent ATM deployers, such as ourselves, are set by the various Electronic Financial Transfer 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 reduced our ATM operating gross profits by over $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 I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.

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 included provisions that (1) established a new Bureau of Consumer Financial Protection, (2) limited the activities that banking entities may engage in, and (3) gave the Federal Reserve the authority to regulate interchange transaction fees charged by electronic funds transfer networks for electronic debit transactions. On June 22, 2011, the Federal Reserve issued certain regulations affecting debit interchange and network routing rules required under the Act. While the Act's regulations governing interchange fees for electronic debit transactions do not apply to ATM cash withdrawal transactions, the regulations do allow merchants additional flexibility to allow certain point-of-sale transactions to be paid for in cash rather than with debit or credit cards. This change may result in the increased use of cash at the point-of-sale for some merchants, and thus, could positively impact the Company's future revenues and operating profits (through increased transaction levels at the Company's ATMs). Conversely, with point-of-sale debit transaction rates now regulated, this could cause a shift in behavior by merchants, banks or consumers, which could in turn impact the Company's volume of ATM transactions. Effectively, as a result of the regulated point-of-sale interchange rates, if merchants, banks or consumers are more likely to increase their point-of-sale debit transactions, the Company could in turn experience a decline in cash withdrawal transactions. Finally, the newly issued regulations require debit cards to be recognized (or authorized) over at least two non-affiliated networks and provide for rules that would allow merchants greater flexibility in routing transactions across networks that are more economical for the merchant. While the Federal Reserve had requested comments as to whether these new anti-exclusivity and routing provisions should apply to ATM transactions, the issued regulations did not apply them to ATM transactions.

DVD Business Services

Nationwide Ntertainment Services, Inc., a wholly owned subsidiary of the Company formed during fiscal 2009, is engaged in the business of operating a network of DVD rental kiosks. We offer self-service DVD rentals through kiosks where consumers can rent or purchase movies or games. Our current DVD kiosks are installed primarily at grocery stores, and, through our acquisition of Tejas, on locations at military bases. 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.

Results of Operations

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

	For the Three Months Ended
	June 30, 2011			June 30, 2010

Revenues		100.0	%		100.0	%
Cost of revenues		63.1	%		54.4	%
Gross profit		36.9	%		45.6	%

Depreciation expense		6.9	%		5.8	%
Amortization of intangible merchant contracts		3.5	%		3.6	%
Selling, general and administrative		22.4	%		29.1	%
Restructuring charges		0.3	%		0.0	%
Stock compensation expense		0.2	%		1.0	%
Total operating expenses		33.3	%		39.6	%
Operating income from operations before items shown below		3.6	%		6.0	%

Interest expense, net		(2.2	)%		(2.0	)%
Gain on sale of assets		0.8	%		0.0	%
Loss on early extinguishment of debt		0.0	%		(1.9	)%
Net income		2.2	%		2.2	%
EBITDA (1)		14.8	%		13.6	%

	For the Six Months Ended
	June 30, 2011			June 30, 2010

Revenues		100.0	%		100.0	%
Cost of revenues		62.2	%		53.8	%
Gross profit		37.8	%		46.2	%

Depreciation expense		7.1	%		5.8	%
Amortization of intangible merchant contracts		3.6	%		3.7	%
Selling, general and administrative		23.5	%		28.7	%
Restructuring charges		3.2	%		0.0	%
Stock compensation expense		0.2	%		0.9	%
Total operating expenses		37.5	%		39.1	%
Operating income from operations before items shown below		0.2	%		7.1	%

Interest expense, net		(2.2	)%		(2.1	)%
Gain on sale of assets		0.4	%		0.0	%
Other non-operating income		(0.7	)%		0.0	%
Loss on early extinguishment of debt		0.0	%		(0.9	)%
Net income (loss)		(2.2	)%		4.0	%
EBITDA (1)		10.6	%		15.6	%

(1) See “—EBITDA” sections in: ”Comparison of Results of Operations for the Three Months Ended June 30, 2011 and 2010” and:”Comparison of Results of Operations for the Six Months Ended June 30, 2011 and 2010”.

Comparison of Results of Operations for the Three Months Ended June 30, 2011 and 2010:

Revenues

The Company reported total operating revenue from operations of $8,293,743 for the three-month period ended June 30, 2011 as compared to $5,506,905 for the three-month period ended June 30, 2010, an increase of 50.6% year over year.

Revenue from our ATM services business was up approximately 15.6% from the second quarter of 2010. We ended June 30, 2011 with 78 more ATMs than we ended with on June 30, 2010 and processed 3.3% more surcharge transactions in the second quarter of 2011 as compared to the second quarter of 2010. During the second quarter of 2011, we benefited from having a full quarter’s ATM transactions from the ATM portfolio acquisition closed during December 2010 which contributed to the increase in transactions year over year. Additionally, we raised surcharge fees during the first quarter of 2011 which helped grow our ATM surcharge revenue by 28.3% year over year. Offsetting the increase was the impact of lower revenue year over year due to the reduced interchange fees we received since April 2010 (see “Recent Events” in Item 2 “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of this filing.) For the second quarter of 2011, we earned approximately $56,000 less interchange fees than we earned in the second quarter of 2010.

Revenue from our DVD services business was up nearly $1.9 million from the second quarter of 2010. The increase in DVD services revenue was twofold. First, we deployed our first major client in the DVD services business during the summer of 2010 which contributed incremental DVD services revenue during the quarter. Second, we acquired Tejas effective January 1, 2011 (see Financial Footnote #3 “Acquisition of Assets” for details of this acquisition) which contributed approximately $1.1 million of DVD services revenue for the quarter.

Cost of Revenues

Our total cost of revenues from operations increased from $2,996,094 to $5,232,206 for the three-month period ended June 30, 2010 to the three-month period ended June 30, 2011. Approximately $1.6 million of the increase in cost of revenues year over year related to our DVD business. Approximately $700,000 of the increase in cost of revenues year over year related to our ATM business.

The principal components of cost of revenues in the ATM services business are retailer, merchant and distributor commissions (or revenue share), cost of cash, cash replenishment, ATM vault cash insurance, field maintenance, transaction processing charges, telecommunication costs and equipment costs on related equipment sales. Cost of revenues in our ATM services business increased 23.7% in the second quarter of 2011 as compared to the same period in 2010. The $700,000 increase was mainly due to increased commissions (or revenue share) due to the higher revenues, increased ATM insurance fees, increased first line and second line maintenance costs and higher cash costs. In September 2010, we received notice of an increase in our ATM vault cash insurance costs due to alleged criminal activity at a Northeastern U.S. armored carrier. While we suffered no losses as a result of this crime, our vault cash insurance rates increased by approximately $14,000 per month beginning September 1, 2010. Our cost of cash and cash replenishment costs increased during the second quarter in 2011 from 2010 mainly due to the increased number of company-owned ATMs in 2011 as compared to 2010. We ended June 30, 2011 with 78 more ATMs than we ended with on June 30, 2010. This increase was offset by a service-only contract for 127 ATMs that expired during the early months of the quarter. These 127 service-only ATMs had contributed approximately $6,000 per month of gross margin. Excluding the loss of the service-only ATMs, our ATM count would have increased by approximately 205 year over year. 140 of that would-be increase was the result of the acquisition of the FMi portfolio (see Financial Footnote #3 “Acquisition of Assets” included in our Annual Report on Form 10-K for the year ended December 31, 2010 for information regarding this acquisition). The increase of non-service-only ATMs year-over-year resulted in the increased cost of cash and cash replenishment expenses. First line and second line maintenance fees also increased over last year due to the increase in company-owned ATMs as well as due to more aggressive billings by our ATM maintenance vendor.

The principal components of cost of revenues in the DVD services business are retailer and merchant commissions (or revenue share), amortization of our DVD library, DVD replenishment, field maintenance, credit card processing charges and telecommunication costs. During fiscal 2010, the company signed and deployed its first major client in the DVD services business, and as such, all costs during the second quarter of 2011 were substantially higher than the costs in the DVD services business for 2010. Likewise, with the addition of the business acquired from Tejas effective January 1, 2011 (see Financial Footnote #3 “Acquisitions of Assets” for details of this acquisition), we incurred additional cost of revenues in the DVD services business.

Gross Profit

Gross profit from operations as a percentage of revenue for the three-month periods ended June 30, 2011 and 2010 were approximately 36.9%, or $3,061,537, and approximately 45.6%, or $2,510,811, respectively. The increased gross profit for the second quarter of 2011 versus the same period in 2010 was mainly attributable to the increased business from DVD services discussed above.

Gross profit in the ATM services business for the second quarter of 2011 was 43.2%, which is lower than the 46.9% gross profit for the same period in 2010. The decrease in gross profit in the ATM services business was attributable to the increased cost of revenues discussed above.

The DVD services business had positive gross margin during the second quarter of 2011 due to the increased revenue, mainly from the acquisition of the Tejas business.

Operating Expenses

Our total operating expenses from operations for the three months ended June 30, 2011 and 2010 were $2,763,325 and $2,178,470, respectively. The principal components of operating expenses are general and administrative expenses such as professional and legal fees, administrative salaries and benefits, consulting and audit fees, occupancy costs, sales and marketing expenses and administrative expenses. Operating expenses also include depreciation, amortization of intangible merchant contracts and stock compensation expenses.

To aid in the understanding of our discussion and analysis of our operating expenses, the following table summarizes the amount and percentage change in the amounts from the previous year for certain operating expense line items:

	For the Three Months Ended				2011 to 2010			2011 to 2010
	June 30, 2011		June 30, 2010		$ Change			% Change

Depreciation expense	$	572,190	$	321,205	$	250,985			78.1	%
Amortization of intangible merchant contracts		291,220		199,332		91,888			46.1	%
Selling, general and administrative		1,854,866		1,602,709		252,157			15.7	%
Restructuring charges		27,221		-		27,221			100.0	%
Stock compensation expense		17,828		55,224		(37,396	)		(67.7	)%
Total operating expenses	$	2,763,325	$	2,178,470	$	584,855			26.8	%

See explanation of operating expenses below:

Depreciation Expense

Depreciation expense from operations increased for the three-month period ended June 30, 2011 to $572,190 from $321,205 for the same period in 2010. This increase in depreciation expense was mainly due to depreciation expenses relating to our DVD services business.

Depreciation expense in the DVD services business increased from approximately $25,000 in the second quarter of 2010 to approximately $305,000 in 2011.

Amortization of Intangible Merchant Contracts

Amortization of intangible merchant contracts from operations increased for the three-month period ended June 30, 2011 to $291,220 from $199,332 for the same period in 2010. The increase from 2010 was due to the amortization of contracts, both in the ATM services business and the DVD services business, acquired during 2010 and during the first quarter of 2011.

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

Our total SG&A expenses from operations increased to $1,854,866, or 22.4% of revenue for the three-month period ended June 30, 2011 from $1,602,709, or 29.1% of revenue for the three-month period ended June 30, 2010. The increase in SG&A expenses was mainly due to approximately $233,000 of increased SG&A expenses incurred in connection with our DVD business services. Of the increased SG&A expenses, $167,000 was attributable to the overlay of the acquired operations from Tejas Video Partners. During the second quarter of 2011, we had 17 full-time employees in the DVD services business, along with a part-time consultant.

Restructuring Charges

During the second quarter of 2011, we reduced several headcount as part of the corporate restructuring. For the three month period ended June 30, 2011, the Company recorded restructuring charges of $27,221 for severance-related expenses. As of June 30, 2011, the Company had accrued $372,031 for severance obligations included in accounts payable and accrued liabilities on the condensed consolidated balance sheet.

Stock Compensation Expense

For the three months ended June 30, 2011, we recorded stock compensation expense of $17,828, mainly relating to executive and director stock option grants during fiscal years 2007 through 2011. For the three months ended June 30, 2010, we recorded stock compensation expense of $55,224.

Interest Expense, Net

Interest expense, net, increased for the three-month period ended June 30, 2011 to $178,604 from $109,562 for the three-month period ended June 30, 2010. The increase was mainly due to our increased debt balances. See Financial Footnote #5 “Senior Lenders’ Notes Payable” regarding the details of the debt balances.

Gain on Sale of Assets

The Company accounts for the impairment of long-lived assets in accordance with GAAP. The following impairment was recognized during the fourth quarter of 2010:

When the Company entered into the DVD services business line in 2009, it acquired DVD rental kiosks and related software from a certain manufacturer and placed those kiosks at merchant locations. During the first and second quarters of 2010, the Company concluded that the manufacturers’ DVD rental kiosk would not be able to meet the future growth demands of the Company, and as such, the Company decided to purchase future DVD rental kiosks from an alternate manufacturer, thus running its DVD services business with two distinct and different hardware and software platforms. During the fourth quarter of 2010, the Company made the decision that operating both DVD platforms would not be an operationally efficient manner to run the DVD services business, and as such, decided that by the end of fiscal 2011, the Company would migrate any business from the original platform to its new platform and would attempt to find a buyer for the 49 DVD rental kiosks and related software operating under the original platform. Upon evaluation and research, the Company concluded that the carrying amount of these assets was not fully recoverable and during fiscal 2010, the following amounts were charged to impairment of long-lived assets:

	Net Book		Estimated proceeds		Impairment
Long-lived asset description	Value		from disposition		Charge

DVD rental kiosks and related software	$	604,493	$	122,500	$	481,993

					$	481,993

During the three-month period ended June 30, 2011, the company sold these machines for a net gain on sale of $63,541.

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 Financial Footnote #13 “Loss on Early Extinguishment of Debt” for detail of these charges.

Net Income

We had a net income of $183,149 for the three-month period ended June 30, 2011, as compared to net income of $120,633 for the three-month period ended June 30, 2010.

EBITDA

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

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

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

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

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

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

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

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

The following table sets forth a reconciliation of net income from operations to EBITDA from operations for the three months ended June 30, 2011 and 2010:

	For the Three Months Ended
	June 30, 2011		June 30, 2010

Net income from operations	$	183,149	$	120,633
Interest expense, net		178,604		109,562
Depreciation expense		572,190		321,205
Amortization of intangible merchant contracts		291,220		199,332
EBITDA from operations	$	1,225,163	$	750,732

Our EBITDA from operations increased to $1,225,163 for the second quarter of fiscal 2011 from $750,732 for the second quarter of fiscal 2010. EBITDA from operations as a percentage of revenues increased to 14.8% for the second quarter of fiscal 2011 from 13.6% for the second quarter of fiscal 2010.

The following table sets forth a reconciliation of net income from operations to EBITDA from operations before stock compensation expense, restructuring charges, gain on sale of assets and loss on early extinguishment of debt (“Adjusted EBITDA”) for the three months ended June 30, 2011 and 2010:

	For the Three Months Ended
	June 30, 2011			June 30, 2010

Net income from operations	$	183,149		$	120,633
Interest expense, net		178,604			109,562
Depreciation expense		572,190			321,205
Amortization of intangible merchant contracts		291,220			199,332
Restructuring charges		27,221			-
Stock compensation expense		17,828			55,224
Gain on sale of assets		(63,541	)		-
Loss on early extinguishment of debt		-			102,146
Adjusted EBITDA from operations	$	1,206,671		$	908,102

Our Adjusted EBITDA increased to $1,206,671 for the second quarter of fiscal 2011 from $908,102 for the second quarter of fiscal 2010. Adjusted EBITDA as a percentage of revenues decreased to 14.5% for the second quarter of fiscal 2011 from 16.4% for the second quarter of fiscal 2010. The increase in Adjusted EBITDA from operations was due to lower negative Adjusted EBITDA contributed by our DVD services business for the second quarter of 2011 as compared to the negative Adjusted EBITDA contributed by our DVD services business for the second quarter of 2010. Additionally, Adjusted EBITDA from our ATM services business increased by over $200,000 from the second quarter of 2010. See Financial Footnote #11 “Business Segment Information” for financial details of our DVD services business segment.

Comparison of Results of Operations for the Six Months Ended June 30, 2011 and 2010:

Revenues

The Company reported total operating revenue from operations of $16,243,814 for the six-month period ended June 30, 2011 as compared to $10,886,983 for the six-month period ended June 30, 2010, an increase of 49.2% year over year.

Revenue from our ATM services business was up approximately 13.5% for the six month period ending June 2011 as compared to the six months of 2010. We ended June 30, 2011 with 78 more ATMs than we ended with on June 30, 2010 and processed 4.2% more surcharge transactions in the first six months of 2011 as compared to the same period in 2010. During the six months of 2011, we benefited from having the ATM transactions from the ATM portfolio acquisition closed during December 2010 which contributed to the increase in transactions year over year. Additionally, we raised surcharge fees during the first quarter of 2011 which helped grow our ATM surcharge revenue by 25.7% year over year. Offsetting the increase was the impact of lower revenue year over year due to the reduced interchange fees we received since April 2010 (see “Recent Events” in Item 2 “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of this filing.) For the second quarter of 2011, we earned approximately $56,000 less interchange fees than we earned in the second quarter of 2010.

Revenue from our DVD services business was up nearly $4.0 million for the six month period ending June 30, 2011. The increase in DVD services revenue was twofold. First, we deployed our first major client in the DVD services business during the summer of 2010 which contributed incremental DVD services revenue during the quarter. Second, we acquired Tejas effective January 1, 2011 (see Financial Footnote #3 “Acquisition of Assets” for details of this acquisition) which contributed approximately $2.2 million of DVD services revenue for the six-month period.

Cost of Revenues

Our total cost of revenues from operations increased from $5,854,028 to $10,108,376 for the six-month period ended June 30, 2010 to the six-month period ended June 30, 2011. Approximately $2,972,000 of the increase in cost of revenues year over year related to our DVD business. Approximately $1,282,000 of the increase in cost of revenues year over year related to our ATM business.

The principal components of cost of revenues in the ATM services business are retailer, merchant and distributor commissions (or revenue share), cost of cash, cash replenishment, ATM vault cash insurance, field maintenance, transaction processing charges, telecommunication costs and equipment costs on related equipment sales. Cost of revenues in our ATM services business increased 22.5% in the first six months of 2011 as compared to the same period in 2010. The $1,282,000 increase was mainly due to increased commissions (or revenue share) due to the higher revenues, increased ATM insurance fees, increased first line and second line maintenance costs and higher cash costs. In September 2010, we received notice of an increase in our ATM vault cash insurance costs due to alleged criminal activity at a Northeastern U.S. armored carrier. While we suffered no losses as a result of this crime, our vault cash insurance rates increased by approximately $14,000 per month beginning September 1, 2010. Our cost of cash and cash replenishment costs increased during the first six months of 2011 from 2010 mainly due to the increased number of company-owned ATMs in 2011 as compared to 2010. We ended June 30, 2011 with 78 more ATMs than we ended with on June 30, 2010. This increase was offset by a service-only contract for 127 ATMs that expired during the early months of the quarter. These 127 service-only ATMs had contributed approximately $6,000 per month of gross margin. Excluding the loss of the service-only ATMs, our ATM count would have increased by approximately 205 year over year. 140 of that would-be increase was the result of the acquisition of the FMi portfolio (see Financial Footnote # 3 “Acquisition of Assets” included in our Annual Report on Form 10-K for the year ended December 31, 2010 for information regarding this acquisition). The increase of non-service-only ATMs year-over-year resulted in the increased cost of cash and cash replenishment expenses. First line and second line maintenance fees also increased over last year due to the increase in company-owned ATMs as well as due to more aggressive billings by our ATM maintenance vendor.

Gross Profit

Gross profit from operations as a percentage of revenue for the six-month periods ended June 30, 2011 and 2010 were approximately 37.8%, or $6,135,438, and approximately 46.2%, or $5,032,955, respectively. The increased gross profit for the second quarter of 2011 versus the same period in 2010 was mainly attributable to the increased business from DVD services discussed above.

Gross profit in the ATM services business for the six months of 2011 was 43.2%, which is lower than the 47.3% gross profit in 2010. The decrease in gross profit in the ATM services business was attributable to the increased cost of revenues discussed above.

The DVD services business had positive gross margin during the six month of 2011 due to the increased revenue, mainly from the acquisition of the Tejas business.

Operating Expenses

Our total operating expenses from operations for the six months ended June 30, 2011 and 2010 were $6,097,473 and $4,260,715, 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.

	For the Six Months Ended				2011 to 2010			2011 to 2010
	June 30, 2011		June 30, 2010		$ Change			% Change

Depreciation expense	$	1,147,514	$	631,100	$	516,414			81.8	%
Amortization of intangible merchant contracts		579,658		398,664		180,994			45.4	%
Selling, general and administrative		3,818,512		3,128,572		689,940			22.1	%
Restructuring charges		512,261		-		512,261			100.0	%
Stock compensation expense		39,528		102,379		(62,851	)		(61.4	)%
Total operating expenses	$	6,097,473	$	4,260,715	$	1,836,758			43.1	%

See explanation of operating expenses below:

Depreciation Expense

Depreciation expense from operations increased for the six-month period ended June 30, 2011 to $1,147,514 from $631,100 for the same period in 2010. This increase in depreciation expense was mainly due to depreciation expenses relating to our DVD services business.

Depreciation expense in the DVD services business increased from approximately $40,459 for the six months of 2010 to approximately $484,545for the same period in 2011.

Amortization of Intangible Merchant Contracts

Amortization of intangible merchant contracts from operations increased for the six-month period ended June 30, 2011 to $579,658 from $398,664 for the same period in 2010. The increase from 2010 was due to the amortization of contracts, both in the ATM services business and the DVD services business, acquired during 2010 and during the first quarter of 2011.

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

Our total SG&A expenses from operations increased to $3,818,512, or 23.5% of revenue for the six-month period ended June 30, 2011 from $3,128,572, or 28.7% of revenue for the six-month period ended June 30, 2010. The increase in SG&A expenses was mainly due to approximately $622,000 of SG&A expenses incurred in connection with our DVD business services. Of the increased SG&A expenses, approximately $362,000 was attributable to the overlay of the acquired operations from Tejas Video Partners. At the end of the second quarter of 2011, we had 17 full-time employees in the DVD services business, along with a part-time consultant.

Restructuring Charges

On February 28, 2011, the Company and George McQuain, the Company’s Chief Executive Officer, agreed to a mutual separation of Mr. McQuain’s employment. As of February 28, 2011, Mr. McQuain is no longer employed as Chief Executive Officer, Director or in any other capacity, by the Company or any of its subsidiaries. The Company intends to pay Mr. McQuain the severance payments detailed in his Employment Agreement. During February 2011 through June 2011 several other headcounts were reduced as part of the corporate restructuring. For the six month period ended June 30, 2011, the Company recorded restructuring charges of $512,261 for severance-related expenses. As of June 30, 2011, the Company had accrued $372,031 for severance obligations included in accounts payable and accrued liabilities on the condensed consolidated balance sheet.

Stock Compensation Expense

For the six months ended June 30, 2011, we recorded stock compensation expense of $39,528, mainly relating to executive and director stock option grants during fiscal years 2007 through 2011. For the six months ended June 30, 2010, we recorded stock compensation expense of $102,379.

Gain on Sale of Assets

The Company accounts for the impairment of long-lived assets in accordance with GAAP. The following impairment was recognized during the fourth quarter of 2010:

	Net Book		Estimated proceeds		Impairment
Long-lived asset description	Value		from disposition		Charge

DVD rental kiosks and related software	$	604,493	$	122,500	$	481,993

					$	481,993

During the six-month period ended June 30, 2011, the company sold these machines for a net gain on sale of $63,541.

Loss on Early Extinguishment of Debt

During the six-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 Financial Footnote #13 “Loss on Early Extinguishment of Debt” for detail of these charges.

Interest Expense, Net

Interest expense, net, increased for the six-month period ended June 30, 2011 to $349,501 from $230,893 for the six-month period ended June 30, 2010. The increase was mainly due to our increased debt balances. See Financial Footnote #5 “Senior Lenders’ Notes Payable” regarding the details of the debt balances.

Net Income (loss)

We had a net loss of $360,495 for the six-month period ended June 30, 2011, as compared to net income of $439,201 for the six-month period ended June 30, 2010. Had we not had the non-recurring charges for restructuring and other non-operating expenses, we would have had net income of $264,266 for the six-month period ended June 30, 2011.

EBITDA

The following table sets forth a reconciliation of net income (loss) from operations to EBITDA from operations for the six months ended June 30, 2011 and 2010:

	For the Six Months Ended
	June 30, 2011			June 30, 2010

Net income (loss) from operations	$	(360,495	)	$	439,201
Interest expense, net		349,501			230,893
Depreciation expense		1,147,514			631,100
Amortization of intangible merchant contracts		579,658			398,664
EBITDA from operations	$	1,716,178		$	1,699,858

Our EBITDA from operations increased to $1,716,178 for the six months of fiscal 2011 from $1,699,858 for the six months of fiscal 2010. EBITDA from operations as a percentage of revenues decreased to 10.6% for the six months of fiscal 2011 from 15.6% for the six months of fiscal 2010.

The following table sets forth a reconciliation of net income (loss) from operations to EBITDA from operations before stock compensation expense, restructuring charges, other non-operating expense, gain on sale of assets and loss on early extinguishment of debt (“Adjusted EBITDA”) for the six months ended June 30, 2011 and 2010:

	For the Six Months Ended
	June 30, 2011			June 30, 2010

Net income (loss) from operations	$	(360,495	)	$	439,201
Interest expense, net		349,501			230,893
Depreciation expense		1,147,514			631,100
Amortization of intangible merchant contracts		579,658			398,664
Restructuring charges		512,261			-
Stock compensation expense		39,528			102,379
Gain on sale of assets		(63,541	)		-
Other non-operating expense		112,500			-
Loss on early extinguishment of debt		-			102,146
Adjusted EBITDA from operations	$	2,316,926		$	1,904,383

Our Adjusted EBITDA increased to $2,316,926 for the six-month period ended June 30, 2011, from $1,904,383 for the six-month period ended June 30, 2010. Adjusted EBITDA as a percentage of revenues decreased to 14.3% for the six-month period ended June 30, 2011 from 17.5% for the six-month period ended June 30, 2010. The increase in Adjusted EBITDA from operations was primarily due to significantly less negative adjusted EBITDA contributed by our DVD services business for the six-month period ended June 30, 2011, as compared to the negative adjusted EBITDA contributed by our DVD services business for the six-month period ended June 30, 2010. See Financial Footnote #11 “Business Segment Information” for financial details of our DVD services business segment.

Seasonality – ATM Services

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

Seasonality – DVD Services

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

Liquidity and Capital Resources

Financial Condition

	For the Six Months Ended						2011 to 2010			2011 to 2010
	June 30, 2011			June 30, 2010			$ Change			% Change

Net cash provided by operating activities	$	943,048		$	274,512		$	668,536			243.5	%
Net cash used in investing activities		(2,451,647	)		(1,753,966	)		(697,681	)		39.8	%
Net cash provided by financing activities		1,205,994			2,377,221			(1,171,227	)		(49.3	)%
Increase (decrease) in cash	$	(302,605	)	$	897,767		$	(1,200,372	)

Operating Activities

During the first six months of 2011 net cash provided by operating activities amounted to $943,048. Net cash provided by operating activities amounted to $274,512 during the first quarter of 2010. The increase in cash provided by operating activities was primarily due to the change in prepaid expenses and other current assets year over year. During the first six months of 2010, cash from operations was negatively impacted due to $1,341,105 that was prepaid to our DVD kiosk manufacturer for DVD kiosks and was delivered in July 2010. Had the timing of this prepayment not occurred in 2010, the net cash provided by operations for the first six months of 2010 would have been approximately $1.6 million, therefore showing a decrease year over year. The negative change in the operating cash impact of accounts receivable year over year was due to timing of receiving surcharge and interchange payments from our processors.

Investing Activities

Net cash used in investing activities from operations for the first six months of 2011 was $2,451,647. The increase from the $1,753,966 used in fiscal 2010 was mainly due to the cash paid for the acquisition of Tejas Video Partners offset by a reduction of purchased property and equipment year over year.

Financing Activities

Net cash provided by financing activities was $1,205,994 due to drawdowns from the Loan Agreement (discussed in Financial Footnote #5 “Senior Lenders’ Notes Payable”) offset by paying back senior lender notes and capital leases during the first six months of 2011. This compared to funds used in financing activities of $2,337,221 in fiscal 2010.

Working Capital

As of June 30, 2011, the Company had current assets of $5,023,849 and current liabilities of $9,208,240, which results in negative working capital of $4,184,391. This compares to a working capital deficit of $3,490,856 that existed at December 31, 2010. Despite the negative working capital, we believe that if we achieve our 2011 business plan, we will have sufficient working capital to meet our current obligations during 2011. Our business plan calls for the Company to achieve sufficient revenue, margin, EBITDA (earnings before interest, taxes, depreciation and amortization) and positive cash flows to meet our current and future obligations. Achieving that business plan is contingent upon being successful in securing new profitable ATM and DVD clients as well as maintaining profitability on existing ATM locations and achieving profitability on existing DVD locations. If that business plan is achieved, the Company will have sufficient working capital to meet our 2011 obligations. If our business plan is not achieved, the Company may need to raise additional funds through debt or equity offerings. There can be no assurance as to the availability of any needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to management.

Significant Changes in Balance Sheet Accounts

As of June 30, 2011, accounts receivable, net of allowance, increased $538,386 to $949,342 from the December 31, 2010 balance of $410,956. The increase was primarily due the early payment from our processor of interchange receivables usually paid in the month subsequent to when it is earned. During December 2010, our processor paid approximately $370,000 of interchange monies earned for December which normally would have been paid during January 2011. During June 2011, the processor did not pay the interchange revenue during June; rather it was paid in July 2011.

As of June 30, 2011, inventory, net of obsolescence, increased $673,606 to $2,063,212 from the December 31, 2010 balance of $1,389,606. The increase was mainly due to purchases of DVD inventory during the first six months of 2011, less amortization expenses of the DVD library during the six month period.

As of June 30, 2011, merchant contracts, net, increased $974,341 to $11,853,370 from the December 31, 2010 balance of $10,879,029. The increase was mainly due to the acquisition of merchant contracts in the Tejas acquisition, less amortization expenses recorded during the quarter.

As of June 30, 2011, accounts payable and accrued liabilities increased $611,043 to $5,215,880 from the December 31, 2010 balance of $4,604,837. Approximately $480,000 of the increase was related to severance and payroll-related accruals. Approximately $258,000 of the increase was due to increased accruals related to retailer, merchant and distributor commissions (or revenue share) resulting from increased ATM revenue during the second quarter of 2011 as compared to the fourth quarter of 2010.

As of June 30, 2011, senior lenders' notes payable increased $1,452,891 to $10,502,345 from the December 31, 2010 balance of $9,049,454. The increase was due to additional funding for the acquisition of Tejas, additional funding of our DVD library purchases and funding of ATMs and back-office hardware. See Financial Footnote #5 “Senior Lenders’ Notes Payable” for details of the balances.

Additional Funding Sources

We currently have bank lines available for our short-term growth needs. We estimate the Company will be required to draw down approximately $900,000 on its existing bank lease financing to fund new purchases of ATMs for organic growth within its ATM services business; will be required to draw down up to approximately $1,000,000 on its existing bank lease financing to fund new purchases of DVD kiosks for both its conversion of DVD kiosk equipment relating to the Tejas acquisition, for organic growth within its DVD services business and for purchases of DVDs. We also may be required to draw down approximately $250,000 on its existing bank lease financing to fund new purchases of back office equipment.

Our business plan for our DVD business is capital intensive. Equipment costs for DVD kiosks are much higher than the equipment costs for ATMs. If we achieve our business plan in the DVD business and as we sign new clients, we will need capital resources in order to purchase the kiosk equipment. On June 18, 2010, we entered into a Loan and Security Agreement with Fifth Third Bank which is intended to provide capital resources for growth in both our DVD business and ATM business. If we cannot raise adequate financing to satisfy our capital requirements, we may have to limit, delay, scale-back or eliminate future growth, which could negatively affect our results of operations.

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. 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 customers (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 began 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, 2011, with a one year automatic renewal period unless one party gives 60 days notice of their intention not to renew. As of June 30, 2011, the Company had 6 ATMs funded by WSFS with a vault cash outstanding balance of approximately $82,740 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 $100,000,000 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, 2012. As of June 30, 2011, the Company had 1,630 ATMs funded by Elan with a vault cash outstanding balance of about approximately $41,000,000.

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, provides and manages the vault cash in the specified ATM(s), as well as provides and pays 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, 2011, Nationwide had 45 branded financial partners, which funded 438 ATMs.

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 increase and vault cash costs increase, this will have an unfavorable impact on the Company’s results of operations.

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.

Not applicable.

ITEM 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report, we have carried out an evaluation of the effectiveness of the design and operation of our Company’s disclosure controls and procedures. Under the direction of our Interim President and Interim Co-Chief Executive Officer and our Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of June 30, 2011.

Disclosure controls and procedures and other procedures are designed to ensure that information required to be disclosed in our reports or submitted under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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, 2011 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 Financial Footnote #7 (“Litigation and Claims”) to the Condensed Consolidated Financial Statements contained in this report and is incorporated herein by reference.

ITEM 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. [Removed and Reserved]

ITEM 5. Other Information

None.

ITEM 6. Exhibits

Exhibit Number		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 10-K/A filed with the SEC on January 28, 2011).

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.

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

*In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No. (101) to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as of August 11, 2011 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GLOBAL AXCESS CORP

	By: /s/ Michael I. Connolly
	Michael I. Connolly
	Interim President and Interim Co-Chief Executive Officer
	(interim principal 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, 2011.

Signature		Title

/S/ Michael J. Loiacono		Chief Financial Officer and Chief Accounting Officer
Michael J. Loiacono		(principal financial officer and principal accounting officer)

/S/ Michael I. Connolly		Interim President, Interim Co-Chief Executive Officer and Director
Michael I. Connolly		(interim principal executive officer)

/S/ Lock Ireland
Lock Ireland		Interim Co-Chief Executive Officer, Vice Chairman and Director

EXHIBIT INDEX

Exhibit No.		Description

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.

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Global Axcess (GAXCQ) Inactive 10-Q2011 Q2 Quarterly report

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