Cash Systems 10Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-31955

CASH SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)


Delaware		87-0398535
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

7350 Dean Martin Drive, Suite 309
Las Vegas, NV 89139
(Address of principal executive offices) (Zip Code)
(702) 987-7169
(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. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filero Accelerated filerþ Non-accelerated filero

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

As of April 30, 2007, there were 18,436,579 shares of the registrant’s common stock, $0.001 par value per share, issued and outstanding.

CASH SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the Quarter Ended March 31, 2007


		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements		3

	Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006		3

	Unaudited Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006		4

	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006		5

	Notes to Unaudited Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21

Item 4.	Controls and Procedures		22

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		23

Item 1A.	Risk Factors		23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24

Item 3.	Defaults Upon Senior Securities		24

Item 4.	Submission of Matters to a Vote of Security Holders		24

Item 5.	Other Information		24

Item 6.	Exhibits		24

SIGNATURES			25

EXHIBIT 10.1

EXHIBIT 10.2

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32.1

EXHIBIT 32.2

CASH SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2007			2006
	(Unaudited)			(Audited)
ASSETS
CURRENT ASSETS
Cash (Note 3)	$	17,774,702		$	24,880,233
Current portion of prepaid commissions (Note 2)		286,727			285,019
Current portion of loans receivable (Note 2)		399,247			395,277
Settlements due from credit card processors (Note 5)		10,261,597			13,212,907
Settlements due from ATM processors (Note 5)		5,999,470			12,144,380
Other current assets (Note 4)		7,191,673			5,093,771

Total Current Assets		41,913,416			56,011,587


PROPERTY AND EQUIPMENT, NET (Note 2)		7,570,214			7,407,903

OTHER ASSETS
Goodwill (Note 6)		4,077,700			4,077,700
Intangible assets, net (Note 6)		5,722,648			6,060,448
Long-term prepaid commissions, net of current portion (Note 2)		562,506			640,722
Long-term loans receivable, net of current portion (Note 2)		53,573			86,564
Restricted cash (Note 7)		357,222			350,000
Other		1,898,671			1,880,624

Total Other Assets		12,672,320			13,096,058


TOTAL ASSETS	$	62,155,950		$	76,515,548


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank	$	12,571,880		$	21,235,168
Accounts payable — trade		1,349,328			4,059,972
Credit card cash advance fees payable		1,804,152			1,812,283
ATM commissions payable		2,259,662			1,946,749
Credit card chargebacks payable		396,328			102,403
Check cashing commissions payable		225,390			356,054
Other accrued expenses (Note 8)		9,036,032			12,902,828

Total Current Liabilities		27,642,772			42,415,457


LONG-TERM LIABILITIES
Long-term debt, net (Note 12)		19,405,889			19,258,386
Derivative warrant instrument (Note 12)		—			777,011

Total Liabilities		47,048,661			62,450,854


STOCKHOLDERS’ EQUITY
Common stock, par value of $0.001, 50,000,000 shares authorized, 18,567,413 and 17,991,413 shares issued, 18,436,579 and 17,923,913 shares outstanding (Note 10)		18,437			17,924
Additional paid-in capital (Note 10)		28,411,897			25,943,860
Accumulated deficit		(13,323,045	)		(11,897,090	)

Total Stockholders’ Equity		15,107,289			14,064,694


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	62,155,950		$	76,515,548

See accompanying notes to consolidated financial statements.

CASH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended
	March 31,
	2007			2006
Commissions on credit card cash advances, ATMs and check cashing services	$	25,524,767			20,479,125
Operating expenses
Commissions		14,564,946			10,844,853
Processing costs		4,305,903			3,908,520
Check cashing costs		1,017,972			1,228,775
Armored carrier services		277,360			186,863
Payroll, benefits and related taxes		2,822,429			2,626,891
Professional fees		398,885			984,521
Other general and administrative expenses		1,560,139			1,635,372
Depreciation and amortization		845,154			519,242

Total operating expenses		25,792,788			21,935,037

Loss from operations		(268,021	)		(1,455,912	)


Other income (expense)
Interest expense		(1,169,180	)		(528,711	)
Interest and other income		11,246			1,708

Total other income (expense)		(1,157,934	)		(527,003	)


Loss before income taxes		(1,425,955	)		(1,982,915	)

Benefit from income taxes		—			(763,400	)


Net loss	$	(1,425,955	)	$	(1,219,515	)


Net loss per common share:
Basic	$	(0.08	)	$	(0.07	)

Diluted	$	(0.08	)	$	(0.07	)

Weighted average common shares outstanding:
Basic		18,055,350			17,124,294

Diluted		18,055,350			17,124,294

See accompanying notes to consolidated financial statements.

CASH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW

(Unaudited)


	Three Months Ended
	March 31,
	2007			2006
Cash flows from operating activities:
Net loss		(1,425,955	)		(1,219,515	)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization		845,154			519,242
Share-based compensation expense		45,691			126,437
Amortization of debt issuance costs and original issue discount		116,848			7,546
Deferred income taxes		—			(720,000	)
Change in interest receivable on loans receivable		(3,970	)		1,614
Changes in operating assets and liabilities:
Prepaid commissions		(1,708	)		47,952
Settlements due from credit card processors		2,951,310			2,920,536
Settlements due from ATM processors		6,144,910			—
Other current assets		(2,097,902	)		(1,727,549	)
Long-term prepaid commission		78,216			26,508
Restricted cash		(7,222	)		—
Other assets		(107,524	)		—
Accounts payable — trade		(2,710,644	)		438,254
Credit card cash advance fees payable		(8,131	)		546,994
ATM commissions payable		312,913			570,127
Credit card chargebacks payable		293,925			20,074
Check cashing commissions payable		(130,664	)		106,533
Other accrued expenses		(3,866,796	)		1,275,512

Cash flows provided from operating activities		428,451			2,940,265


Cash flows from investing activities:
Purchase of certain assets of Indian Gaming Services		—			(12,206,042	)
Purchases of property and equipment		(669,665	)		(285,330	)
Loans receivable, net		32,991			82,433

Cash flows used in investing activities		(636,674	)		(12,408,939	)


Cash flows from financing activities:
Checks issued in excess of cash in bank		(8,663,288	)		(8,517,895	)
Line of credit — bank, net		—			7,586,404
Issuance of common stock		—			4,470,160
Exercise of stock options		1,765,980			—

Cash flows provided from (used in) financing activities		(6,897,308	)		3,538,669


Decrease in cash		(7,105,531	)		(5,930,005	)

Cash, beginning of period		24,880,233			30,247,119


Cash, end of period	$	17,774,702		$	24,317,114


SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for financing costs and interest expense, net of amortization of original issue discount and debt issuance costs	$	996,309		$	418,035

NONCASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of warrant derivative liability to additional paid in capital (see Note 15)		777,011			—

See accompanying notes to consolidated financial statements.

CASH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2007

1. Nature of Business

Cash Systems, Inc. and subsidiaries (the “Company”) is engaged in three primary products: credit/debit card cash advances, automatic teller machines (ATMs) and check cashing solutions. The credit/debit card cash advances product and ATMs have been installed in casinos and other businesses throughout the United States and Caribbean countries.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated unaudited and audited balance sheet as of March 31, 2007 and December 31, 2006, respectively, the unaudited consolidated statements of operations for the three months ended March 31, 2007 and 2006, and the unaudited consolidated statements of cash flows for the three months ended March 31, 2007 and 2006 have been prepared by the Company. All significant intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation

The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim period have been made. The results for the three months ended March 31, 2007 are not necessarily indicative of results to be expected for the full year.

These unaudited consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto included within the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2006.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Software Development Costs

Statement of Position 98-1 (SOP 98-1), “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” requires the capitalization of direct costs incurred in connection with developing or obtaining software for internal use, including external direct costs of materials and services and payroll and payroll related costs for employees who are directly associated with and devote time to an internal use software development project. During the three months ended March 31, 2007 and 2006, the Company capitalized $330,836 and $37,228 of costs related to the implementation of SOP 98-1, respectively. These costs are amortized over the estimated useful lives of three to five years using the straight-line method upon being placed in service. Amortization expense related to software costs was $116,774 and $63,386 for the three months ended March 31, 2007 and 2006, respectively.

Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” the Company reviews its long-lived assets and intangibles related to those assets periodically to determine potential impairment by comparing the carrying value of the long-lived assets outstanding with estimated future cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future cash flows be less than the carrying value, the Company would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the long-lived assets and intangibles. To date, management has determined that no impairment of long-lived assets exists.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of assets acquired. The Company adopted the provisions of FASB Statement No. 142 (SFAS 142), “Goodwill and Other Intangible Assets,” as of February 28, 2006 in conjunction with the purchase of Indian Gaming Services (IGS). Pursuant to SFAS 142, goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. The Company completes its annual impairment test during fiscal year end. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” Intangible assets consist of patents, customer relationships and employment/non-compete agreements. Intangible assets are amortized using the straight-line method over their

estimated useful lives ranging from 1 1/2 to 7 1/2 years. The Company reviews intangible assets for impairment as changes in circumstances or the occurrence of events suggest the remaining value is not recoverable.

Cash Concentrations

Bank balances exceeded federally insured levels during the three months ended March 31, 2007 and 2006 and exceeded federally insured levels at March 31, 2007 and December 31, 2006. Generally, these balances may be redeemed upon demand and therefore bear minimal risk. There were no short-term investments as of March 31, 2007 and December 31, 2006.

Debt Issuance Costs

Debt issuance costs are amortized over the life of the related loan of two to five years using the straight-line method, which approximates the interest method. Debt issuance costs were $1,619,529 and $47,792 as of March 31, 2007 and 2006, respectively, and are included in other assets on the consolidated balance sheets. Estimated future amortization for the remainder of fiscal year 2007 is $268,430, $357,907 for each of the years ending December 31, 2008 through 2010, and $277,378 for the year ending December 31, 2011. Amortization expense for the three months ended March 31, 2007 and 2006 was $89,477 and $7,546, respectively.

Loans Receivable

The Company has advanced funds relating to strategic investments or advances of funds relating to service contracts. Some of the advances were reviewed with and approved by the Company’s board of directors, while other transactions were initiated and authorized by management. The loans bear interest at negotiated rates with negotiated terms. The collectibility of individual loans is reviewed throughout the life of the loan and a reserve, if required, is recorded for the loan. Management believes that the loans receivable recorded on the consolidated financial statements as presented are properly stated. Total outstanding loans receivable at March 31, 2007 and December 31, 2006 was $452,820 and $481,841, respectively, which includes interest receivable of $13,955 and $9,986, respectively.

Prepaid Commissions

The Company has advanced commissions relating to service contracts. The advances are initiated and authorized by management. The prepaid commissions are tied to the service contracts and are amortized or deducted against commissions earned by those contracts over the term of the contracts. In the event that the contracts are terminated early, which is not anticipated, the prepaid commission would be returned to the Company. The collectibility of individual prepaid commissions is reviewed throughout the life of the contract and a reserve, if required, would be recorded for the commission. Management believes that the prepaid commissions recorded on the consolidated financial statements as presented are properly stated.

Revenue Recognition

The Company’s revenue recognition policy is significant because the amount and timing of revenue is a key component of the Company’s results of operations. The Company follows the guidance of Staff Accounting Bulletin No. 104 (“SAB 104”), which requires that a strict series of criteria are met in order to recognize revenue related to services provided. If these criteria are not met, the associated revenue is deferred until the criteria are met. We recognize commission revenue when evidence of a transaction exists, services have been rendered, our price is fixed or determinable and collectibility is reasonably assured. The reasonable assurance is based on the transactions being authorized and preapproved by credit card vendors or third parties. We evaluate our commissions revenue streams for proper timing of revenue recognition.

Credit card cash advance revenue is comprised of upfront patron transaction fees assessed at the time the transaction is initiated and a percentage of the face amount of the cash advance. Credit card cash advance revenue is recognized at the point that a negotiable check instrument is generated by the casino cashier or cash cage operation based upon authorization of the transaction.

ATM fees are comprised of upfront patron transaction fees or surcharges assessed at the time the transactions are initiated. Upfront patron transaction fees are recognized when a transaction is authorized.

Check cashing services revenue is generally contractual, based upon a percentage of the face amount of total checks warranted. The Company engages an independent third party to guarantee the collectability of the checks. The Company records a receivable for all guaranteed checks returned for insufficient funds.

The Company has determined that the accounting policies for income recognition described above are in accordance with the Financial Accounting Standards Board Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”.

The Company has recorded an accrual for known and potential chargebacks for possible charges against a gaming patron’s credit card for which the Company is unable to establish the validity of the transaction. The accrual for chargebacks is estimated based on historical information and management’s estimates. The chargeback accrual at March 31, 2007 and December 31, 2006 was $396,328 and $102,403, respectively.

Segment Reporting

A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. Revenues from customers are from a similar customer base, mainly at casinos. Management believes that the Company meets the criteria for aggregating its operating segments into a single reporting segment.

Research and Development

The Company expenses research and development as costs are incurred. For the three months ended March 31, 2007 and 2006, the Company expensed $179,107 and $0, which is included in other general and administrative expenses on the consolidated statements of operations.

Reclassifications

Certain reclassifications have been made in the prior period consolidated financial statements to conform to the presentation used at and for the three months ended March 31, 2007. These reclassifications had no effect on the Company’s consolidated net loss or stockholders’ equity for the quarter ended March 31, 2007.

Recently Issued Accounting Pronouncements

SFAS No. 159

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option may only be made at initial recognition of the asset or liability or upon a re-measurement event that gives rise to new-basis accounting. The decision about whether to elect the fair value option is applied on an instrument-by-instrument basis, is irrevocable and is applied only to an entire instrument and not only to specified risks, cash flows or portions of that instrument. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company believes the adoption of SFAS No. 159 will not have a material impact on its consolidated financial statements.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding plus all additional common stock that would have been outstanding if potentially dilutive common stock related to stock options and warrants had been issued. Due to the net loss, options and warrants for March 31, 2007 and 2006 were not dilutive.

The following table presents a reconciliation of the denominators used in the computation of net loss per common share — basic, and net loss per common share — diluted, for the three months ended March 31, 2007 and 2006, respectively:


	Three Months Ended
	March 31,
	2007		2006
Weighted shares of common stock outstanding — basic		18,055,350		17,124,294
Weighted shares of common stock assumed upon exercise of stock options, restricted stock awards and warrants		—		—

Weighted shares of common stock outstanding — diluted		18,055,350		17,124,294

The Company uses the treasury method for calculating the dilutive effect of the stock options and warrants (using the average market price).

Stock-Based Compensation

Share-based compensation expense recorded under SFAS 123(R) “Share-Based Payment” for the three months ended March 31, 2007 and 2006 was $45,691 and $126,437, respectively.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statement of Operations.

Share-based compensation expense recognized for periods after the adoption of SFAS 123(R) is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. As of December 31, 2005, all share-based awards were fully vested therefore, no share-based compensation expense was recognized in the Company’s Consolidated Statement of Operations for the three months ended March 31, 2006 related to awards granted prior to January 1, 2006. The Company did not grant any options during the three months ended March 31, 2007.

During the three months ended March 31, 2007, three restricted stock awards were granted totaling 80,000 shares of common stock at a fair value on the date of grant with vesting terms of two, three, and four years. The effect of this action was an additional non-cash expense totaling $8,171 which was recorded during the quarter ended March 31, 2007.

The Company uses the Black-Scholes option-pricing model (Black-Scholes model) for the Company’s stock based compensation expense recognized under SFAS 123(R). The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the eighteen month period prior to the grant date of the awards, and actual and projected employee stock option exercise behaviors and forfeitures.

3. Funding Arrangement

Vault Cash Agreements

In February 2000, the Company entered into an agreement with Fidelity Bank to provide the funding for cash inside its ATMs. The agreement required the Company to pay fees, on the balance of the funds provided, equal to the bank’s prime rate of interest plus 2% or 10%, whichever is greater.

Effective December 1, 2006, the Company entered into a new vault cash agreement with Fidelity Bank. The new vault cash arrangement with Fidelity Bank requires that we pay tiered fees based on the average monthly balance of the funds provided in an amount equal to the prime rate of interest, prime rate minus 1.25%, or prime rate minus 1.50%, depending on the average monthly balance of total cash utilized under the agreement. The interest rate can be no less than 6.0% under any tier. At March 31, 2007, the prime rate was 8.25% and the effective rate under the agreement was 6.75%.

The Company assumes the risk of loss and agrees to reimburse the financial institution for any loss occurring from the point in time at which the funds leave the bank. The Company must provide armored carrier services and bear the cost of such services. The Company obtains insurance coverage for the funds provided. The armored carrier company carries the usual bond insurance coverage on its employees. Employees of the Company do not have access to the funds in the cash machines. Under this agreement, Fidelity Bank receives settled funds for ATM transactions related to Fidelity funded ATMs as well as certain casino funded ATMs from the network processor. Fidelity Bank then transfers the Company’s and the customers’ portion of funds, to a Company bank account. The Company then distributes the funds to various casino customer accounts the same or next day. In 2005, all cash provided by Fidelity Bank remained the sole property of Fidelity Bank at all times until dispensed. Because it was never an asset of the Company, supplied cash was not reflected on the Company’s balance sheet. Because Fidelity Bank’s portion of the settlement funds was never held by the Company, there was no liability corresponding to the supplied cash reflected on the Company’s balance sheet.

We have an additional vault cash arrangement with Wilmington Savings Fund Society FSB (“WSFS”) effective December 11, 2002 which requires that we pay fees based on the number of ATMs serviced or amount of cash provided in an amount equal to the prime rate of interest plus 1.0%-3.0%. The interest rate can be no less than 7.0%. The interest rate was prime plus 1.0% (or 9.25% and 8.5%) for the three months ended March 31, 2007 and 2006, respectively.

Site Funded ATMs

The Company operates ATMs at certain customer locations where the Company provides the cash required for ATM operational needs. As of March 31, 2007 and December 31, 2006, the Company operated 31 and 59 ATMs, respectively, that were site funded.

4. Other Current Assets

Other current assets consisted of the following at March 31, 2007 and December 31, 2006:


	March 31,		December 31,
	2007		2006
Receivable from casinos	$	1,127,272	$	515,060
Receivable from bank		1,681,388		2,357,363
Income taxes receivable		65,497		65,497
Prepaid expenses		458,612		464,194
Receivable for check guarantees, net of reserve of $1,554,448 and $820,212, respectively		2,379,752		1,396,831
Holdback reserve from credit card processor, net of reserve of $780,825		—		—
Other receivables, net of reserve of $1,545,979 and $1,719,799, respectively		1,479,152		294,826

Total other current assets	$	7,191,673	$	5,093,771

Receivable from casinos

The Company has receivables from certain customers as a result of chargeback disputes which are refunded to the Company and related to check cashing fees. We also have receivables from certain casinos for which we fund ATMs. There were approximately $0.7 million in receivables at March 31, 2007 which did not exist as of December 31, 2006 relating to two of our Oklahoma based casinos. The Company has not recorded an allowance related to these receivables since the Company considers the balances 100% collectible.

Receivable from bank

The Company recorded a receivable of $1,489,663 and $2,172,952 from its vault cash provider for standard ATM settlements and related surcharges owed at March 31, 2007 and December 31, 2006, respectively. In addition, the Company recorded a receivable for Debit POS fees that are owed by the vault cash provider relating to the newly acquired Indian Gaming Service locations amounting to $191,725 and $184,411 at March 31, 2007 and December 31, 2006, respectively. All fees relating to this receivable are sent to the Company on a weekly basis and are considered 100% collectible.

Receivable for check guarantees

The Company has an agreement with a vendor for the guarantee of the funds to be paid on personal checks cashed at the various casino locations. The Company records a receivable for all guaranteed checks returned for insufficient funds and recognizes the revenue associated with these checks as there is no further obligation from the Company. In addition to the third party guaranteed transactions, the Company has self-guaranteed the remaining funds paid on personal checks cashed at various casino locations. The Company has an agreement with a third party agency for collections on self-guaranteed checks. The Company has reserved for amounts that are not collectible.

Holdback reserve from credit card processor

During 2005, the Company’s current credit card processor improperly withheld transaction fees of $780,825. The Company

believes the processor had no basis for assessing these fees. A demand was made of the processor’s new parent company for repayment of the withheld fees on November 14, 2006. A response was received as of December 8, 2006, which stated the new owners were investigating the claim. There was no resolution of the matter as of March 31, 2007. Due to the legal status of this matter and the potential accounting treatment, the Company increased its reserve by $585,825 during 2006 to fully reserve for the entire balance of $780,825.

5. Settlements Due From Processors

Settlements due from credit card processors

The Company processes transactions with its credit card processor which are usually reimbursed to the Company within three to five days of the date of the advance occurring and is recorded as a receivable. At times, the Company may be required to provide additional support to the credit card processor to collect money related to the authorized transactions. As of March 31, 2007 and December 31, 2006, the balance of settlements due from credit card processors was $10,261,597 and $13,212,907, respectively.

Settlements due from ATM processors

The Company processes transactions with its ATM processor which are usually reimbursed to the Company within one to three days of the date of the advance occurring for Company funded ATMs as well as certain casino funded ATMs. The entire amount reimbursed from the processor directly to the Company is recorded as a receivable from the ATM processor, while amounts for casino funded ATMs received from the processor are recorded as a payable as more fully described in Note 8. At times, the Company may be required to provide additional support to the ATM processor to collect money related to the authorized transactions. As of March 31, 2007 and December 31, 2006, the balance of settlements due from ATM processors was $5,999,470 and $12,144,380, respectively.

6. Goodwill and Intangible Assets

As of March 31, 2007, goodwill was $4,077,700 which related to the acquisition of Indian Gaming Services. Other identifiable intangible assets are as follows:


	As of March 31, 2007
							Estimated
	Carrying		Accumulated				Useful
	Amount		Amortization		Net		Lives
Patents	$	20,560	$	4,112	$	16,448	5 years
Customer relationships (relates to IGS)		7,110,000		1,442,133		5,667,867	1 1/2 to 7 1/2 years

Employment and non-compete agreements (relates to IGS)		60,000		21,667		38,333	3 years

	$	7,190,560	$	1,467,912	$	5,722,648

Total amortization expense for the three months ended March 31, 2007 and 2006 was $337,800 and $109,730, respectively. As of

March 31, 2007, we expect amortization expense in future periods to be as shown below:


Fiscal year
Remainder of 2007		984,191
2008		1,255,324
2009		874,769
2010		798,657
Thereafter		1,809,707

Total expected amortization expense	$	5,722,648

7. Restricted Cash

Under our new vault cash agreement with Fidelity Bank effective December 1, 2006, the Company maintains restricted cash in the amount of $350,000 with Fidelity to cover potential cash losses for which the Company is responsible under the terms of the agreement. The restricted cash earns interest at the lowest interest rate as defined in the agreement and the interest is credited to a bank account designated by the Company.

8. Other Accrued Expenses

Other accrued expenses consisted of the following at March 31, 2007 and December 31, 2006:


	March 31,		December 31,
	2007		2006
Accrued payroll and related items	$	312,603	$	611,688
Accrued interest		600,064		544,041
Amounts due casinos		2,433,835		3,251,046
Amounts due for ATM processing		5,630,880		8,409,320
Other		58,650		86,733

Total other accrued expenses	$	9,036,032	$	12,902,828

Amounts due casinos represent funds owed to various casinos for reimbursement on credit card cash advance and ATM transactions once the Company receives settlement funds.

Due to a transition to internal processing, the Company now receives settled funds for ATM transactions from the network processor for ATM transactions processed by the Company for Company funded ATMs and certain casino funded ATMs. The Company distributes the funds to various casino accounts the same or next day. The Company records a payable during the period the funds are held (Amounts due for ATM processing) and a receivable from the ATM processor as more fully described in Note 5.

9. Commitments and Contingencies

Legal Proceedings

The Company is involved in various legal actions in the ordinary course of its business. Although the outcome of any such legal action cannot be predicted, management believes that there are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Major Customer

During the three months ended March 31, 2007, two of our customers each accounted for more than 10% of our total revenues and together accounted for 36% of our total revenues. During the three months ended March 31, 2006, one customer accounted for more than 30% of our total revenues.

CEO Contract Renewal

On March 6, 2007, the Company entered into an Executive Employment Agreement with Michael Rumbolz effective March 6, 2007, pursuant to which Chief Executive Officer Michael Rumbolz would also serve as the Company’s Chairman of the Board and President. Under the terms of the employment agreement, Mr. Rumbolz receives an annual base salary of $350,000 and is entitled to an annual bonus and other usual benefits. Mr. Rumbolz was granted 65,000 shares of restricted stock vesting in four equal annual installments, such bonus compensation as determined by the Company’s Board of Directors, no less than two weeks paid annual vacation, and reimbursement for any and all ordinary and necessary business expenses that he reasonably incurs in connection with the business of the Company. The agreement is for a two year term. Upon the expiration of the initial two year term and each anniversary thereafter, Mr. Rumbolz and the Company may agree in writing to renew the agreement for an additional year. In the event that the Company terminates Mr. Rumbolz’s employment without cause prior to the expiration of the agreement, Mr. Rumbolz will be entitled to base compensation, bonus compensation and benefits through the end of the term of the agreement.

Stock Repurchase Program

In January 2005, the Company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of our common stock. During the three months ended March 31, 2007 and 2006, the Company did not repurchase any equity securities.

10. Equity Transactions

During the three months ended March 31, 2007, 496,000 options were exercised for cash of $1,765,980 at a weighted average exercise price of $3.56 per share.

11. Income Taxes

At March 31, 2007, the Company’s federal and state net operating loss carryforwards were approximately $14,874,000 and $9,859,000, respectively. The Company recorded a provision for (benefit from) income taxes of $0 and ($763,400) for the three months ended March 31, 2007 and 2006, respectively.

FIN No. 48

The Financial Accounting Standards Board has published FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes,” to address the non-comparability in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting Standards No. 109 (SFAS 109), “Accounting for Income Taxes,” on the uncertainty in income taxes recognized in an enterprise’s financial statements. Specifically, FIN No. 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosure and transition. FIN No. 48 will apply to fiscal years beginning after December 15, 2006, with earlier adoption permitted. The Company has completed its evaluation of the effects of FIN No. 48 and has concluded that the adoption of FIN No. 48 did not impact the consolidated financial statements for the quarter ended March 31, 2007.

12. Senior Convertible Secured Notes

On October 10, 2006, the Company has issued and sold to certain institutional accredited investors an aggregate of $20.0 million in principal amount of senior secured convertible notes and five-year warrants (immediately exercisable) to purchase an aggregate of 312,500 shares of the Company’s common stock at $8 per share. The notes bear interest at the rate of 6.50% per annum, payable quarterly in arrears commencing on January 10, 2007. This interest rate is subject to adjustment up to 12.0% per annum upon the occurrence of certain events of default. As of March 31, 2007, the Company was in compliance with its covenants under the Notes. In addition, the interest rate is subject to adjustment to 7.50% in the event of certain interest test failures which are based on financial thresholds relating to Consolidated Revenue, Consolidated Earnings Before Interest, Tax, Depreciation, and Amortization (“EBITDA”), and Total Debt to EBITDA Ratio. The Company had an interest rate failure as of March 31, 2007 and therefore, the Notes have an interest rate of 7.50% beginning in the second quarter of 2007 until cured as defined in the Notes. The maturity date of the notes is October 10, 2011. The Company’s obligations under the Notes are collateralized by a security interest in substantially all of the Company’s assets. The Company used proceeds from the issuance and sale of the Notes for repayment of its two-year line of credit with Bank of America, N.A. At March 31, 2007 and December 31, 2006, the Company was in compliance with all financial covenants as defined in the agreements.

Pursuant to EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” the gross proceeds of $20.0 million were allocated between the convertible notes and the common stock warrants based on the relative fair values of the securities at the time of issuance. The common stock warrants were valued using the Black-Scholes pricing model with the resulting original issue discount being amortized over the term of the notes, which approximates the interest method. The notes are convertible into common shares at a conversion price of $8 per share. Based on the fair market value of the stock on the date of the agreement for the notes of $6.30 per share, there was not a beneficial conversion noted.

In connection with the financing, the Company agreed to file with the SEC a registration statement by February 7, 2007, covering the issuance or resale of the shares of common stock underlying the warrants issued to the note holders. The Company filed the registration statement on December 7, 2006 and the registration statement was declared effective on January 11, 2007.

With the registration statement requirement of the agreement, the Company evaluated the terms of the agreement in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments, Indexed to, and Potentially Settled in a Company’s Own Stock.” As a result, the Company recorded a derivative liability related to the warrants during 2006 as a payment penalty of 2% was required if the registration statement was ever deemed ineffective.

In accordance with guidance from FASB Staff Position No. EITF 00-19-2 (FSP), the Company noted upon the adoption of this FSP, a payment under the registration agreement is not probable. If the registration agreement had not been part of the terms of the original agreement, the warrant would have been classified as an equity instrument under other applicable GAAP rules for all periods. The Company reclassified $656,879 to additional paid-in capital and $120,132 to the note discount at January 1, 2007. The Company determined that the income statement effect on 2006 was not material.

13. Acquisition

Effective February 28, 2006, the Company acquired certain assets of Indian Gaming Services (IGS), a San Diego-based cash-access provider to the gaming industry and a division of Borrego Springs Bank, N.A. The results of IGS have been included in the consolidated financial statements since the date of acquisition of February 28, 2006. Unaudited pro forma results of operations for the three months ended March 31, 2007 and 2006 are included below. Such pro forma information assumes that the above acquisition had occurred as of January 1, 2005. This summary is not necessarily indicative of what our results of operations would have been had we been a combined entity during the period ended March 31, 2006, nor does it purport to represent results of operations for any future periods. Pro forma adjustments consist primarily of amortization of intangible assets.


	Three Months Ended
	March 31,
	2006
Commissions on credit card cash advances, ATMs and check cashing services	$	23,571,000
Net income (loss)	$	(1,148,000	)
Net income (loss) per common share:
Basic	$	(0.07	)
Diluted	$	(0.07	)

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

The following discussion is intended to help the reader understand our results of operations and financial condition and is provided as a supplement to, and should be read in conjunction with, our financial statements, the accompanying notes to financial statements, and the other information included or incorporated by reference herein.

Overview

The Company provides credit/debit card cash advance (“CCCA”), ATM and check cashing solutions (“Cash Access Services”) to casinos, a majority of which are owned and operated by Native American tribes. These products are the primary means by which casinos make cash available to gaming patrons. The Company also provides casinos with ancillary services such as on-line reporting, which enhances their ability to monitor player activity and market to gaming patrons.

Credit Card Cash Advances and POS Debit Card Transactions

Our CCCA products, which are comprised of both “All-In-1 ATMs” and Company kiosks which house point-of-sale (“POS”) terminals, have been installed at 122 gaming and 21 retail locations. Our CCCA products allow gaming patrons to obtain cash from their credit card, or checking account in the case of debit transactions, through the use of our software and equipment.

A gaming patron can initiate a CCCA transaction through one of our “All-In-1 ATMs” or kiosks. The “All-In-1 ATM” or kiosk terminal will prompt the gaming patron to swipe his/her credit or debit card and enter the dollar amount requested. The “All-In-1 ATM” or kiosk terminal will then dial the appropriate bank for an authorization or denial. If authorized, the “All-In-1 ATM” or kiosk terminal will direct the gaming patron to a casino cage. Once at the cage, the gaming patron will present his/her credit/debit card and driver’s license. A cage cashier will swipe the credit/debit card in a Company terminal to obtain information for the transaction initiated at the “All-In-1 ATM” or kiosk terminal. The purpose of the second swipe is for identification purposes only. After finding the approved transaction, the cage terminal will provide the cashier with two options in order to obtain the gaming patron’s address, driver’s license and telephone number, which must be imprinted on each check or voucher. The first option is to swipe the gaming patron’s driver’s license if it contains a magnetic strip. The second option is to manually enter the information into the terminal. After one of these options is selected, a printer attached to the cage terminal will generate a Company check or voucher. The cashier will give the gaming patron cash in the amount requested after he/she signs the Company check or voucher.

Our check or voucher is then deposited by the casino into its account for payment from a Company account and we debit the gaming patron’s credit or debit card. This transaction can be accomplished without the gaming patron using a personal identification number (“PIN”). Gaming patrons pay a service charge typically between 6%-7% for credit card advances and a fixed fee of $1.95 plus 2% for POS debit card withdrawals.

ATM Cash Withdrawals

The Company offers a full menu of ATM services to casinos and retailers. Through the Company’s standard ATMs and our “All-In-1 ATMs,” vault cash for the operation of the ATM can be provided by the Company or directly by the casino or retailer. The Company processes ATM transactions through ATM networks with which the Company has licensing agreements. In addition, the Company provides ATM vault cash, maintenance and armored car service. In an ATM cash withdrawal, a gaming patron directly withdraws funds from his or her bank account by swiping an ATM card through one of the Company’s standard ATMs or “All-In-1 ATMs.” The Company’s processor then routes the transaction request through an electronic funds transfer network to the gaming patron’s bank. If the transaction is authorized, the ATM dispenses the cash to the gaming patron. Gaming patrons pay a fixed fee for ATM cash withdrawals.

Check Cashing Solutions

The Company also offers two check cashing solutions to the gaming industry. First, the Company provides casinos with full service check cashing. With full service check cashing, the Company is given space within a casino to operate a check cashing booth. The Company’s employees manage the booth, the Company’s cash is used to cash checks, and the Company retains customer fees from check cashing. Gaming patrons pay a service charge based on the amount of the transaction for our check cashing services. At March 31, 2007, there were 21 casinos utilizing our full service check cashing services. Second, we self-guarantee checks via internal check cashing technology as well as provide check guarantee services with the assistance of third party providers and check verification services.

Joint Venture and Cashclub Product

In April 2006, the Company entered into a joint venture agreement with Bally Technologies, Inc. and Scotch Twist, Inc. (“Joint Venture”). Through the Joint Venture, the Company anticipates developing products that allow customers to fund player accounts using credit and debit cards tied to a players club card, such that the player’s club card can be used in place of a credit or debit card to effectuate transactions within a casino for gaming, dining, retail purchases, and lodging under a license to a portfolio of patents from Scotch Twist. If and when this cashless product is developed, Bally Technologies and Cash Systems will work together to market and sell the product, initially for use exclusively with Bally’s hardware and software interface and accounting systems, and will allocate

the fees generated from the use of the jointly developed products among the Joint Venture partners. We do not anticipate that the development costs related to the Joint Venture will be material to us.

As an initial step in the development of the Joint Venture’s cashless product and to test gaming patron acceptance of a players club card, in October 2006, the Company commenced beta testing of the cashclub™ product, which enables cash access through the use of a players club card at an ATM or Kiosk. Initial beta testing may be ended soon. We are working with the card associations to ensure that the cashclub™ product and process will comply with the card association rules prior to full deployment into the marketplace. We do not expect the revenues from the cashclub™ product in the beta phase to be material to the Company. Prior to implementation of the Joint Venture’s cashless product, we will work with the card associations to ensure that the cashless product and process will comply with the card association rules. At this time, we can give no assurance that we will be able to implement the cashless product in a manner that will comply with the cash association rules.

The Company incurred research and development costs relating to the development of its Joint Venture product. For the three months ended March 31, 2007 and 2006, the Company expensed $169,144, and $0, which is included in other general and administrative expenses on the consolidated statement of operations.

Internal Transaction Processing

In the past, the Company’s CCCA, POS Debit Card and ATM transactions were settled with its network payers through third party processing providers. In May 2006, the Company beta-tested its own internal processing switch at its Florida based properties. As of March 31, 2007, with the exception of a few minor properties, all CCCA and POS Debit Card transactions are processed through an internal Company-owned switch. For ATM transactions, approximately 89% of the Company’s ATM devices were operating on an internal Company-owned switch as of March 31, 2007. The new internal processing switch enables the Company to eliminate third party processing costs by settling transactions directly with its network payers.

Due to the change to internal processing, a one to three day timing lag exists between the time the advance occurs and the Company is reimbursed. The effect of this change has been reflected in the Company’s consolidated balance sheets as settlements due from credit card and ATM processors as well as the associated payables due to customer accounts which are reflected in other accrued expenses.

Critical Accounting Policies and Estimates

Our discussion and analysis is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting period, and related disclosures of contingent assets and liabilities for the periods indicated. The notes to the consolidated financial statements contained herein describe our significant accounting policies used in the preparation of the consolidated financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to collectibility of loans receivable, the lives and continued usefulness of property, equipment, software, and intangibles, stock-based compensation and contingencies. Due to uncertainties, however, it is at least reasonably possible that management’s estimates will change during the next year, which cannot be estimated. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions.

Results of Operations

Three months ended March 31, 2007 compared to March 31, 2006

Revenues for the quarter ended March 31, 2007 were $25.5 million compared to $20.5 million for the same period in 2006. The $5.0 million increase, which represents a 25% increase in 2007 revenues over 2006 revenues, is due to the continued expansion of products and services at existing locations and additional gaming operations as well as a full quarter of revenue from the acquisition of Indian Gaming Services compared to one month during the same prior year period. The volume of transactions processed through our Cash Access Services during the quarter ended March 31, 2007 was $849.6 million compared to $614.9 million during the same period in 2006. We expand and win business relationships based on the Company’s focus on technology and superior service and expect to be successful in our bids to win new contracts as well as expand offerings under existing contracts.

Commissions increased by $3.7 million which was directly related to the Company’s revenue growth from the increased amount of transactions between the periods. Total processing and check cashing costs increased by $0.2 million compared to the same period last year. The slight increase in these costs relative to the 25% increase in revenues reflects the results of our efforts in transitioning to internal processing and greater utilization of our internal check cashing technologies at more properties which has resulted in lower costs associated with our third party check guarantor. Armored carrier services increased by $0.1 million primarily due to increases in our cash volume and expansion of armored carrier services to certain Florida based properties. Payroll and related costs increased by $0.2 million primarily due to the increase in the number of booth operations personnel as well as the addition of higher paid technical engineers required for our new product development. Other general and administrative expense decreased by $0.2 million primarily due to legal and business process consulting fees during the first quarter of last year. Depreciation and amortization increased by approximately $0.3 million primarily due to the acquired assets of IGS. Professional fees decreased by $0.6 million due to less reliance on outside professional services, including expenditures for SOX 404 compliance work compared to the same prior year period. Total operating expenses for the quarter ended March 31, 2007 were $25.8 million compared to $21.9 million for 2006 (or a $3.9 million increase representing an 18% increase in total operating expenses).

Interest expense increased by approximately $0.6 million due to the increased amount of vault cash required to fund our ATMs, interest related to the Senior Secured Convertible Notes, and amortization of the original issuance discount in connection with the Senior Secured Convertible Notes. The Company expects to be able to better leverage its operating costs in the future through the expansion of product offerings and technology applications.

We expect revenues to continue to increase in 2007 over 2006 which should result in a decrease in operating expenses as a percentage of revenues. The Company plans to do this through the expansion of product offerings and technology applications which will make the overall operation more cost effective. As part of the new product offerings and technology applications, we continue to explore cashless gaming through internal development and alliances with other parties as well as progress towards complete implementation and utilization of our new internal processing switch.

Loss before taxes was ($1,425,955) for the quarter ended March 31, 2007 as compared to ($1,982,915) for the same prior year

period. In prior year, the Company recorded a tax benefit of $763,400 for the first quarter of 2006. This was written off in the fourth quarter of 2006 when it was determined it was more likely than not the deferred tax assets would not be realized and therefore, a full valuation allowance was recorded.

On a fully diluted basis, after-tax net loss of ($1,425,955) for the quarter ended March 31, 2007 was 6% of sales or ($0.08) per diluted common share, as compared to a net loss of ($1,219,515) which was 6.0% of sales or ($0.07) per diluted common share for the same prior year period.

Liquidity and Capital Resources

At March 31, 2007, we had cash and cash equivalents of $17.8 million compared to $24.9 million at December 31, 2006. As of March 31, 2007, the Company had cash net of “Checks issued in excess of cash in bank” of $5.2 million. Cash provided from operations totaled $0.4 million and $2.9 million during the quarter ended March 31, 2007 and 2006, respectively.

On November 10, 2005, we obtained from Bank of America, N.A. a two-year line of credit of up to $13,000,000 secured by substantially all of our assets. The line of credit along with certain other liabilities were subsequently paid off on October 10, 2006, as the Company issued and sold to certain institutional accredited investors an aggregate of $20.0 million in principal amount of the Company’s Senior Secured Convertible Notes (the “Notes”) and warrants to purchase an aggregate of 312,500 shares of the Company’s common stock (the “Warrants”) in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D as promulgated by the SEC under the Securities Act. The Notes bear interest at the rate of 6.50% per annum, payable quarterly in arrears commencing on January 10, 2007. This interest rate is subject to adjustment up to 12.0% per annum upon the occurrence of certain events of default. As of March 31, 2007, the Company was in compliance with its covenants under the Notes. In addition, the interest rate is subject to adjustment to 7.50% in the event of certain interest test failures which are based on financial thresholds relating to Consolidated Revenue, Consolidated Earnings Before Interest, Tax, Depreciation, and Amortization (“EBITDA”), and Total Debt to EBITDA Ratio. The Company had an interest rate failure as of March 31, 2007 and therefore, the Notes have an interest rate of 7.50% beginning in the second quarter of 2007 until cured as defined in the Notes. The maturity date of the Notes is October 10, 2011. The Company’s obligations under the Notes are secured by a security interest in substantially all of the Company’s assets.

We had working capital of approximately $14.3 million at March 31, 2007 compared to working capital of $13.6 million at December 31, 2006. We expect our operating working capital requirements to increase in fiscal 2007 as our sales and product development increase. We expect to fund any such increase primarily with cash flow from operations for at least the next 12 months. Settlements due from credit card processors were $10.3 million at March 31, 2007 compared to $13.2 million at December 31, 2006. As a result of transitioning to internal ATM transactions processing, the Company also receives settlement funds from its ATM processor. Settlements due from ATM processors were $6.0 million and $12.1 million as of March 31, 2007 and December 31, 2006, respectively.

For 2007, we estimate capital expenditures of approximately $2.3 million related to software development, ATM purchases for new customers or existing customer expansion, and related costs. We expect to fund these capital expenditures primarily with cash flow from operations.

We anticipate that we will continue to experience growth in our income and expenses for the foreseeable future and that our operating expenses will be a material use of cash resources. We believe that the existing sources of liquidity and the results of our operations will provide cash to fund operations for at least the next 12 months.

Off-Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements.

Recently Issued Accounting Pronouncements

SFAS No. 159

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, or the Act. Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “hopes,” “assumes,” “may,” and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined in the Act. Forward-looking statements are based upon expectations and projections about future events and are subject to assumptions, risks and uncertainties about, among other things, the Company and economic and market factors.

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements due to a number of factors. The principal factors that could cause the Company’s actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, our failure to develop products or services that achieve market acceptance or regulatory approval; our failure to accurately evaluate the assumptions underlying our estimates of the useful lives for depreciable and amortizable assets, our estimates of cash flows in assessing the recoverability of long-lived assets, and estimated liabilities for chargebacks, litigation, claims and assessments; competitive forces or unexpectedly high increases in interchange and processing costs that preclude us from passing such costs on to our customers through increased surcharges or reduced commissions; unanticipated changes to applicable tax rates or laws or changes in our tax position; regulatory forces, competitive forces or market contraction that affect our cash advance business; failure to accurately estimate our future cash flows from operations, our inability to satisfy conditions to borrow additional funds, if required or unanticipated operating capital needs that cause our cash flows from operations and possible borrowing facilities to be insufficient to provide sufficient capital to continue our operations; our failure to accurately estimate our operating cash flows and our failure to accurately predict our working capital and capital expenditure needs; our inability to obtain additional financing through bank borrowings or debt or equity financings at all or on terms that are favorable to us; competitive pressures that prevent us from commanding higher prices for our Cash Access Services than other providers; actions taken by our technology partners or the failure of our technology partners to service our needs; our failure to renew our contracts with our top customers; changes in the rules and regulations of credit card associations that require the discontinuation of or material changes to our products or services; and our inability to identify or form joint ventures with partners that result in products that are commercially successful; and other factors or conditions described or referenced under the caption “Risk Factors” of Item 1A of Part II of this Quarterly Report on Form 10-Q. The Company’s past performance or past or present economic conditions are not indicative of future performance or conditions. Undue reliance should not be placed on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to projections over time unless required by federal securities law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

During the normal course of our business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest and currency rate movements, collectibility of accounts and notes receivable, and recoverability of residual asset values. We constantly assess these risks and have established policies and practices designed to protect against the adverse effects of these and other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurances can be made that material losses will not be incurred in these areas in the future.

Interest Rate Risk

We had approximately $20.0 million in borrowings outstanding under our Senior Secured Convertible Notes (the “Notes”) at March 31, 2007. The Notes bear interest at the rate of 6.50% per annum, payable quarterly in arrears commencing on January 10, 2007. This interest rate is subject to adjustment up to 12.0% per annum upon the occurrence of certain events of default or registration rights failures with the right to cure. Such interest rate adjustments are effective up through and including the date of cure of default or registration rights failure. In addition, the interest rate is subject to adjustment to 7.50% in the event of certain interest test failures which are based on financial thresholds relating to Consolidated Revenue, Consolidated Earnings Before Interest, Tax, Depreciation, and Amortization (“EBITDA”), and Total Debt to EBITDA Ratio. An interest rate default occurred as of March 31, 2007 and therefore, the Notes have an interest rate of 7.50% beginning in the second quarter of 2007 until cured as defined in the Notes agreements. The Company’s obligations under the Notes are secured by a security interest in substantially all of the Company’s assets. If the interest rates were to increase by 100 to 550 basis points for the entire fiscal year, earnings would decrease by approximately $0.2 to $1.1 million on a pre-tax basis.

In addition, our new vault cash arrangement with Fidelity Bank effective December 1, 2006 requires that we pay tiered fees based on the average monthly balance of the funds provided in an amount equal to the prime rate of interest, prime rate minus 1.25%, or prime rate minus 1.50%, depending on the average monthly balance tier. The interest rate can be no less than 6.0% under any tier. At March 31, 2007, the effective interest rate was 6.75%. If the prime rate were to increase by 100 basis points, with all other factors remaining constant, earnings would decrease by approximately $0.2 million on a pre-tax basis.

We have another vault cash arrangement with Wilmington Savings Fund Society FSB (“WSFS”) effective December 11, 2002 which requires that we pay fees based on the number of ATMs serviced or amount of cash provided in an amount equal to the prime rate of interest plus 1.0%-3.0%. The interest rate can be no less than 7.0%. The interest rate was prime plus 1.0% (or 9.25% and 8.5%) for the three months ended March 31, 2007 and 2006, respectively. If the prime rate were to increase by 100 basis points, with all other factors remaining constant, earnings would decrease by approximately $0.1 million on a pre-tax basis.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the quarter ended March 31, 2007, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was done under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.

Disclosure controls and procedures are defined in Securities and Exchange Commission (“SEC”) rules as controls and other procedures designed to ensure that information required to be disclosed in Securities and Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. While we believe that our disclosure controls and procedures have improved due to the scrutiny of the material weaknesses in internal control over financial reporting and revenue cycles as described in our Annual Report on Form 10-K/A for the year ended December 31, 2006, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that the design and operation of our disclosure controls and procedures were not effective at March 31, 2007. We note that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Notwithstanding management’s assessment that our disclosure controls and procedures were not effective as of March 31, 2007, we believe that the consolidated financial statements included in this Form 10-Q fairly present our financial condition, results of operations and cash flows for the fiscal years covered thereby in all material respects.

Changes in Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. As we reported in our Annual Report on Form 10-K/A for the year ended December 31, 2006, in connection with management’s assessment of the effectiveness of our system of internal control over financial reporting as of December 31, 2006, our management concluded that we had material weaknesses in internal controls over financial reporting relating to controls for the financial close and reporting and revenue cycles. Accordingly, and as reported in our Annual Report on Form 10-K/A for the year ended December 31, 2006, management intends to implement remediation measures during the course of 2007. We have made the following changes to strengthen our internal control over financial reporting during the three months ended March 31, 2007:

	•		We implemented procedures to ensure that controls surrounding monthly review of the balance sheet and use of the monthly close checklist were adequate.

	•		We implemented procedures to ensure that controls surrounding the review of spreadsheets used to record activity with our third party check guarantor and collections agency were sufficient.

	•		We implemented procedures to ensure that controls surrounding the review and approval of journal entries was sufficient.

	•		We altered our procedures to ensure cash received from our network processors are applied against the corresponding receivable on the date of actual receipt. In addition, we have enhanced transparency in the reconciliation of cash applications to accounts receivable by separating our reports by network processor which enables transactions to be properly matched.

Except as described above, there was no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

The Company’s Annual Report on Form 10-K/A for the year ended December 31, 2006 includes detailed disclosure about the risks faced by our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

Not applicable

Issuer Repurchases of Equity Securities

We did not repurchase any equity securities of Cash Systems, Inc. during the three months ended March 31, 2007. In January 2005, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our common stock as part of the Company’s overall strategy to prudently allocate resources to enhance shareholder value.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS


Exhibit
Number		Description
10.1		Executive Employment Agreement dated March 6, 2007 between Cash Systems, Inc. and Michael D. Rumbolz (1)

10.2		Form of Restricted Stock Agreement under the 2005 Equity Incentive Plan

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Previously filed as an exhibit to the Current Report on Form 8-K of Cash Systems, Inc. filed on March 7, 2007, and incorporated herein by this reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CASH SYSTEMS, INC.
	By:	/s/ Michael D. Rumbolz
		Michael D. Rumbolz
		Chief Executive Officer (principal executive officer)

DATE: May 15, 2007



	By:	/s/ Andrew Cashin
		Andrew Cashin
		Chief Financial Officer (principal financial officer)

DATE: May 15, 2007

EXHIBIT INDEX
CASH SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2007


Exhibit
Number		Description
10.1		Executive Employment Agreement dated March 6, 2007 between Cash Systems, Inc. and Michael D. Rumbolz (1)

10.2		Form of Restricted Stock Agreement under the 2005 Equity Incentive Plan

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Previously filed as an exhibit to the Current Report on Form 8-K of Cash Systems, Inc. filed on March 29, 2006, and incorporated herein by this reference.

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

Cash Systems (CKNN) Inactive 10-Q2007 Q1 Quarterly report

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