Cash Systems 10Q 2006 Q2 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 June 30, 2006


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 (State or other jurisdiction of incorporation or organization)		87-0398535 (I.R.S. Employer 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 August 2, 2006, there were 17,743,913 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 June 30, 2006


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements		3

	Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005		3

	Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005		4

	Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005		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		25

Item 6.	Exhibits		25

SIGNATURES			26

EXHIBIT 31.1

EXHIBIT 31.2

EHXIBIT 32.1

EXHIBIT 32.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CASH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2006			2005
	(Unaudited)			(Audited)
ASSETS
CURRENT ASSETS
Cash	$	20,655,424		$	30,247,119
Current portion of prepaid commissions		393,921			501,343
Current portion of loans receivable		785,661			874,133
Deferred income taxes		538,000			1,677,000
Settlements due from credit card processors		2,538,463			7,683,417
Other current assets		4,375,594			3,006,880

Total Current Assets		29,287,063			43,989,892


PROPERTY AND EQUIPMENT, NET		7,062,386			5,258,980

OTHER ASSETS
Goodwill		4,013,056			—
Intangible assets, net		6,738,104			20,560
Deferred income taxes		3,016,000			629,000
Long-term prepaid commissions, net of current portion		628,406			341,019
Long-term loans receivable, net of current portion		0			47,941
Other		177,513			55,338

Total Other Assets		14,573,079			1,093,858


TOTAL ASSETS	$	50,922,528		$	50,342,730


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Checks issued in excess of cash in bank	$	12,794,950		$	21,768,860
Line of credit — bank		9,786,404			5,200,000
Accounts payable — trade		2,863,324			2,541,396
Credit card cash advance fees payable		1,452,833			859,063
ATM commissions payable		1,721,700			1,184,498
Credit card chargebacks payable		138,184			226,184
Check cashing commissions payable		184,833			105,084
Other accrued expenses		1,806,148			1,273,065

Total Current Liabilities	$	30,748,376			33,158,150


Total Liabilities	$	30,748,376			33,158,150


STOCKHOLDERS’ EQUITY
Common stock, par value of $0.001, 50,000,000 shares authorized, 17,628,913 and 16,879,738 shares issued and outstanding		17,629			16,879
Additional paid-in capital		24,058,858			19,046,379
Accumulated deficit		(3,902,335	)		(1,878,678	)

Total Stockholders’ Equity		20,174,152			17,184,580


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	50,922,528		$	50,342,730

See accompanying notes to consolidated financial statements.

CASH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Commissions on credit card cash advances, ATMs and check
cashing services	$	24,146,610		$	16,036,555		$	44,625,735		$	29,686,868

Operating expenses
Commissions		12,964,402			7,788,440			23,809,255			14,544,912
Processing costs		4,552,645			4,619,875			8,461,165			7,127,478
Check cashing costs		1,239,482			1,755,308			2,468,257			2,656,607
Armored carrier services		192,878			128,880			379,741			244,138
Payroll, benefits and related taxes		3,013,018			1,916,467			5,639,909			3,503,163
Professional fees		384,769			794,050			1,369,290			1,035,815
Other general and administrative expenses		1,518,592			1,403,138			3,153,964			2,205,493
Depreciation and amortization		718,942			316,904			1,238,184			600,136

Total operating expenses		24,584,728			18,723,062			46,519,765			31,917,742

Loss from operations		(438,118	)		(2,686,507	)		(1,894,030	)		(2,230,874	)


Other income (expense)
Interest expense		(879,522	)		(115,817	)		(1,408,233	)		(224,234	)
Interest and other income		10,098			89,539			11,806			128,724

Total other income (expense)		(869,424	)		(26,278	)		(1,396,427	)		(95,510	)


Loss before income taxes		(1,307,542	)		(2,712,785	)		(3,290,457	)		(2,326,384	)

Benefit from income taxes		(503,400	)		(1,044,400	)		(1,266,800	)		(895,600	)


Net loss	$	(804,142	)	$	(1,668,385	)	$	(2,023,657	)	$	(1,430,784	)


Net loss per common share:
Basic	$	(0.05	)	$	(0.10	)	$	(0.12	)	$	(0.09	)

Diluted	$	(0.05	)	$	(0.10	)	$	(0.12	)	$	(0.09	)

Weighted average common shares outstanding:
Basic		17,610,795			16,527,573			17,382,017			16,434,676

Diluted		17,610,795			16,527,573			17,382,017			16,434,676

See accompanying notes to consolidated financial statements.

CASH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)


	Six Months Ended			Six Months Ended
	June 30,			June 30,
	2006			2005
Cash flows from operating activities:
Net loss		(2,023,657	)		(1,430,784	)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization		1,238,184			600,136
Share-based compensation expense		494,988			—
Tax benefit associated with employee stock option exercises		7,895			390,000
Amortization of debt issuance costs		15,092			—
Deferred income taxes		(1,248,000	)		(1,173,000	)
Allowance for uncollectible settlements due from credit card processors		—			1,558,000
Change in interest receivable on loans receivable		2,505			(107,088	)
Changes in operating assets and liabilities:
Related parties receivable		—			99,885
Prepaid commissions		107,422			(145,833	)
Other receivables		—			645,006
Settlements due from credit card processors		5,144,954			(737,866	)
Other current assets		(1,368,714	)		(896,548	)
Long-term prepaid commission		(287,387	)		174,300
Other assets		(137,267	)		—
Accounts payable — trade		321,928			224,733
Credit card cash advance fees payable		593,770			163,141
ATM commissions payable		537,202			273,385
Check cashing commissions payable		79,749			15,561
Credit card chargebacks payable		(88,000	)		—
Due to related party		—			(211,846	)
Other accrued expenses		384,585			120,462

Cash flows provided from (used in) operating activities		3,775,249			(438,356	)


Cash flows from investing activities:
Purchase of certain assets of Indian Gaming Services		(12,304,558	)		—
Purchases of property and equipment		(1,319,134	)		(1,977,447	)
Loans receivable, net		133,908			80,080

Cash flows used in investing activities		(13,489,784	)		(1,897,367	)


Cash flows from financing activities:
Checks issued in excess of cash in bank		(8,973,910	)		3,846,174
Line of credit — bank, net		4,586,404			—
Issuance of common stock		4,470,160			—
Exercise of stock options		28,000			698,500
Exercise of warrants		12,186			190,900

Cash flows provided from financing activities		122,840			4,735,574


Increase/(Decrease) in cash		(9,591,695	)		2,399,851

Cash, beginning of period		30,247,119			13,043,874


Cash, end of period	$	20,655,424		$	15,443,725


SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for financing costs and interest expense, net of amortization of original issue discount and debt issuance costs	$	1,164,414		$	216,080

See accompanying notes to consolidated financial statements.

CASH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2006

1. Nature of Business

Cash Systems, Inc. and subsidiaries (the “Company” or “CSI”) 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 balance sheets as of June 30, 2006 and December 31, 2005, the consolidated statements of operations for the three and six months ended June 30, 2006 and 2005, and the consolidated statements of cash flows for the six months ended June 30, 2006 and 2005 have been prepared by the Company and are unaudited. 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 and six months ended June 30, 2006 are not necessarily indicative of results to be expected for the full fiscal 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 for the fiscal year ended December 31, 2005, previously filed with the Securities and Exchange Commission.

ATM Funding Agreement

The Company obtains some of the cash required to operate its ATMs through an ATM Funding Agreement described in Note 3. Under the terms of this agreement, neither the cash utilized within the ATMs nor the receivables generated for the amount of cash dispensed through transactions on the ATMs are owned or controlled by CSI. Therefore, these amounts have been excluded from the consolidated balance sheets.

Income Taxes

Differences between accounting rules and tax laws cause differences between the basis of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities under Statement of Financial Accounting Standards (SFAS) 109. Temporary differences relate primarily to net operating losses, depreciation and accrued expenses not currently deductible.

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. $320,690 and $233,343 of costs related to the implementation of SOP 98-1 were capitalized during the three months ended June 30, 2006 and 2005, respectively, while $357,918 and $748,653 were capitalized during the six months ended June 30, 2006 and 2005, 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 $71,530 and $62,300 for the three months ended June 30, 2006 and 2005, respectively, and $134,916 and $124,481 for the six months ended June 30, 2006 and 2005, respectively.

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. 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 and six months ended June 30, 2006 and 2005 and exceeded federally insured levels at June 30, 2006 and December 31, 2005. Generally, these balances may be redeemed upon demand and therefore bear minimal risk. There were no short-term investments as of June 30, 2006 and December 31, 2005.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Significant estimates incorporated in the unaudited consolidated financial statements include the estimated useful lives for depreciable and amortizable assets, estimated cash flows in assessing the recoverability of long-lived assets, allowance for doubtful accounts, and estimated liabilities for chargebacks, litigation, claims and assessments. Actual results could differ from these estimates.

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, would be recorded for the loan. Management believes that the loans receivable recorded on the consolidated financial statements as presented are properly stated.

Prepaid Commissions

The Company has advanced commissions relating to service contracts. The advances were 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 pre-approved 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.

The Company provides cash through wire transfers to certain casinos for ATMs and records a receivable from the casinos. 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 collectibility 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 June 30, 2006 and December 31, 2005 was $138,184 and $226,184, 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.

Reclassifications

Certain reclassifications have been made in the prior period consolidated financial statements to conform to the presentation used at and for the three and six months ended June 30, 2006. These reclassifications had no effect on the Company’s consolidated net loss for the three and six months ended June 30, 2006.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share is computed using the treasury stock method to compute the weighted average common stock outstanding assuming the conversion of potential dilutive common shares. 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 and six month periods ended June 30, 2006 and 2005:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Weighted shares of common stock outstanding –		17,610,795		16,527,573		17,382,017		16,434,676
Weighted shares of common stock assumed upon exercise of stock options, restricted stock awards and warrants		—		—		—		—

Weighted shares of common stock outstanding –		17,610,795		16,527,573		17,382,017		16,434,676

The Company uses the treasury method for calculating the dilutive effect of the stock options and warrants (using the average market price). All options and warrants were antidilutive for the three and six months ended June 30, 2005 and 2006, respectively.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, (SFAS 123(R)) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB 25) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were outstanding on January 1, 2006, that are subsequently modified, repurchased or cancelled. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recorded under SFAS 123(R) for the three and six months ended June 30, 2006 was $368,551and $494,988, 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. Prior to the adoption of SFAS 123(R), the Company accounted for share-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(SFAS 123). Under the intrinsic value method, no share-based compensation expense had been recognized in the Company’s Consolidated Statement of Operations, other than as related to restricted stock grants, because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

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 and therefore; no share-based compensation expense was recognized in the Company’s Consolidated Statement of Operations for the three and six months ended June 30, 2006 related to awards granted prior to January 1, 2006. During the quarter ended June 30, 2006, 30,000 stock options were granted to each of the three independent members of the Board of Directors at a fair value on the date of grant with immediate vesting. The cumulative effect of this action was an additional non-cash expense of $339,300. During the same period, two restricted stock awards were granted totaling 17,500 shares of common stock at a fair value on the date of grant with vesting terms of 1/3 annually. The effect of this action (including a 50,000 grant of restricted stock from the prior quarter) was an additional non-cash expense totaling $29,251 which was recorded in the quarter ended June 30, 2006. During the three months ended March 31, 2006, the Company modified the terms of 150,000 options to extend the exercise period from 90 days from the date of termination to twelve months from the date of termination. The effect of these actions was an additional non-cash expense of $124,000 which was recorded in the quarter ended March 31, 2006. During the first quarter of 2006, a restricted stock award was granted for 50,000 shares of common stock at a fair value on the date of grant with vesting terms of 1/3 annually. The effect of this action was an additional non-cash expense of $2,437 which was recorded in the quarter ended March 31, 2006. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

The Company uses the Black-Scholes option-pricing model (Black-Scholes model) for the Company’s pro forma information required under SFAS 123 and 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.

Stock Option Plans

During 2001, the Company adopted the 2001 Stock Option Plan (the “2001 Plan”); pursuant to which share-based awards to acquire an aggregate of 1,000,000 shares of the Company’s common stock may be granted. The 2001 Plan was amended on March 4, 2004 to increase the number of authorized shares to 2,500,000. In general, options vest over a period of up to three years and expire ten years from the date of grant.

On April 20, 2005, the Board of Directors adopted the Cash Systems, Inc. 2005 Equity Incentive Plan (the “2005 Plan”), which was approved by our stockholders. Upon stockholder approval of the 2005 Plan, no further options were granted under the Company’s 2001 Plan. The 2005 Plan provides for the issuance of up to 1,000,000 shares of Common Stock of the Company for equity incentive instruments. In general, options vest over a period of up to three years and expire no more than ten years from the date of grant. In general, restricted stock vests over a period of three years.

General Option Information

Option activity under the 2001 and 2005 Plans for the six months ended June 30, 2006 is summarized as follows:


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Options outstanding, beginning of period		2,105,500		$	6.02
Granted		90,000			6.30
Exercised		(7,000	)		4.00
Canceled		(20,000	)		6.55

Options outstanding, end of period		2,168,500		$	6.03		8.28	$	2,954,835

Options exercisable		2,168,500		$	6.03		8.28	$	2,954,835

Shares available for future grant		257,000

The aggregate intrinsic value in the preceding table represent the total pretax intrinsic value, based on the Company’s closing stock price of $7.29 as of June 30, 2006, which theoretically could have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of June 30, 2006 was 1,473,500.

Restricted Stock Awards

Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the awardee leaves the Company before the restrictions lapse. The holder of a restricted stock award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a shareholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The value of such stock was established by the market price on the date of the grant. Compensation expense is being recorded over the applicable restricted stock vesting periods, generally three years, using straight line vesting. A summary of the Company’s restricted stock activity during the quarter ended June 30, 2006 is presented in the following table:


			Weighted		Weighted
			Average		Average
			Grant		Remaining
			Date Fair		Contractual
	Shares		Value		Term
Unvested, beginning of period		50,000	$	6.80
Granted		17,500		6.30
Vested		—		—
Forfeited		—		—

Unvested, end of period		67,500	$	6.67		9.80

As of June 30, 2006, there was $418,562 of total unrecognized compensation costs related to the outstanding restricted stock awards which is expected to be recognized over a weighted average period of 2.80 years.

Pro Forma Information under SFAS 123 for Periods Prior to Fiscal 2006

The following table illustrates the effect on net loss and loss per common share if the Company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, to share-based employee compensation.


	Three Months			Six Months
	Ended			Ended
	June 30, 2005			June 30, 2005
Net loss, as reported	$	(1,668,385	)	$	(1,430,784	)
Deduct share-based compensation expense under the fair value based method for all awards, net of tax		(200,101	)		(738,490	)


Pro forma net loss	$	(1,868,486	)	$	(2,169,274	)


Basic loss per common share, as reported	$	(0.10	)	$	(0.09	)
Pro forma basic loss per common share	$	(0.11	)	$	(0.13	)
Diluted loss per common share, as reported	$	(0.10	)	$	(0.09	)
Pro forma diluted loss per common share	$	(0.11	)	$	(0.13	)

For employee or non-employee stock options granted during the three and six months ended June 30, 2005, the Company determined pro forma compensation expense under the provisions of SFAS No. 123 using the Black-Scholes pricing model and the following assumptions: 1) an expected dividend yield of 0%, 2) an expected stock price volatility of 64.08% to 64.22%, 3) a risk-free interest rate of 4.12% and 4.05% and, 4) an expected life of 6.5 years.

3. Funding Arrangement

Fidelity Bank Agreement

In February 2000, the Company entered into an agreement with Fidelity Bank to provide the funding for cash inside its ATMs. The agreement requires the Company to pay fees, on the balance of the funds provided, equal to the bank’s prime rate of interest plus 2% (10.25% at June 30, 2006) or 10%, whichever is greater. At June 30, 2006 and December 31, 2005, the rate was 10.25% and 10%, respectively. The Company at no time has access to the funds provided and the financial institution is the sole owner of the funds prior to the withdrawal by cardholders from the ATMs. No such amounts are recorded as liabilities on the consolidated financial statements of the Company. However, the Company does assume 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.

Site Funded ATMs

The Company operates ATMs at certain customer locations where the Company provides the cash required for ATM operational needs. As of June 30, 2006 and December 31, 2005, the Company operated 54 and 71 ATMs, respectively, that were site funded. The Company had approximately $6.1 million and $7.8 million of cash in ATMs at June 30, 2006 and December 31, 2005, respectively.

4. Other Current Assets

Other current assets consisted of the following at June 30, 2006 and December 31, 2005:


	June 30,		December 31,
	2006		2005
Receivable from casinos	$	746,513	$	819,593
Receivable from bank		756,176		—
Income taxes receivable		317,818		260,714
Prepaid expenses		147,535		224,801
Receivable for check guarantees		566,526		301,535
Holdback reserve from credit card processor, net of reserve of $195,000		585,825		585,825
Other receivables, net of reserve of approximately $188,000 and $49,000		1,255,201		814,412

Total other current assets	$	4,375,594	$	3,006,880

Receivable from casinos

The Company has receivables from certain customers as a result of chargeback disputes which are refunded to the Company. We also, have receivables from certain casinos in which we fund their ATMs. The Company has not recorded an allowance related to these receivables since the Company considered the balances 100% collectible.

Receivable from bank

Our vault cash provider is in possession of a portion of our Debit POS fees from our newly acquired Indian Gaming Service locations amounting to $756,176 at June 30, 2006. These fees are sent to us 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 approximately 80% 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 20% of funds paid on personal checks cashed at various casino locations. The increase in the percentage of self-guaranteed checks (i.e. 5% prior quarter to 20% current quarter) is primarily due to the acquisition of Indian Gaming Services where all check-cashing is self-guaranteed. The Company has an agreement with a third party agency for collections on these checks.

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. The Company has recorded a reserve of $195,000 related to costs which may be required in final settlement from the credit card processor.

5. 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. 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 June 30, 2006 and December 31, 2005, the balance of settlements due from credit card processors was $2,538,463 and $7,683,417, respectively.

6. Loans Receivable

During September 2004, the Company advanced $375,000 and an additional $200,000 in March 2005 to a possible acquisition candidate. In addition, the parent of the acquisition candidate is a co-maker of the loan receivable. The loan receivable had an original maturity date of February 15, 2005, which was extended by the Company under written agreement to September 30, 2005.

Effective March 24, 2006, based on a Loan Modification and Assumption Agreement and Consent to Sale of Assets (this “Agreement”), executed on July 13, 2006, the acquisition candidate is selling all of its assets, including the collateral, to a new borrower. Acquisition candidate and the new borrower requested that the Company allow the sale of the assets and extend the maturity date of the note to June 2007. The Company, although under no obligation to do so, consented to the sale of the assets and extended the maturity date of the note, subject to the terms and conditions as set forth in the Agreement. Upon execution of the Agreement, the new borrower paid an initial payment on the note in the amount of $184,203 in July 2006, including accrued interest of 6% since March 24, 2006. Subsequent payments are due quarterly beginning September 30, 2006, until paid in full. New UCC filings are being filed in Texas to perfect the Company’s secured position in the assets of new borrower.

The Company has not recorded a reserve for uncollectibility of this note receivable as the secured collateral, particularly equipment owned by the debtor, has a fair market value that exceeds the note balance. The balance outstanding including interest as of June 30, 2006 and December 31, 2005 was $606,217.

During the first quarter of 2005, the Company entered into an unsecured, non-interest bearing loan for approximately $403,000 with a customer for the purchase and installation of ATMs. Fifty percent (50%) of the loan is to be repaid to the Company upon installation of the ATM machines at the ATM sites. The Company received $189,059 during 2005, $35,208 during the first quarter of 2006, and $23,471 during the second quarter of 2006. The balance outstanding as of June 30, 2006 and December 31, 2005 was $155,262 and $213,941, respectively, of which $25,170 is due upon the final installation of ATM machines at the ATM sites and the remaining balance to be repaid over 36 months.

During 2004, the Company advanced approximately $390,000 to sales agents in the form of unsecured loans receivable bearing interest ranging from 5% to 10% due through December 2006. At June 30, 2006 and December 31, 2005, the remaining balance was $24,182 and $101,916, respectively, including interest.

Total outstanding loans receivable at June 30, 2006 and December 31, 2005 was $785,661 and $922,074, respectively, which includes interest receivable of $31,927 and $34,431, respectively.

7. Goodwill and Intangible Assets

As of June 30, 2006, goodwill was $4,013,056 which related to the acquisition of Indian Gaming Services. Other identifiable intangible assets are as follows:


	As of June 30, 2006
	Carrying		Accumulated					Estimated
	Amount		Amortization			Net		Useful Lives
Patents	$	20,560	$	(2,056	)	$	18,504	5 years

Customer relationships		7,110,000		(443,733	)		6,666,267	1 1/2 to 7 1/2 years
Employment and non-compete agreements		60,000		(6,667	)		53,333	3 years

	$	7,190,560	$	(452,456	)	$	6,738,104

Total amortization expense for the three and six months ended June 30, 2006 was $342,726 and $452,456, respectively. As of June 30, 2006, we expect amortization expense in future periods to be as shown below:


Fiscal year
Remainder of 2006	$	677,662
2007		1,321,991
2008		1,255,324
2009		874,769
2010		798,657
Thereafter		1,809,701

Total expected amortization expense	$	6,738,104

8. Checks Issued in Excess of Cash in Bank

The Company’s credit card cash advance and check cashing business results in timing differences between funds availability and funding commitments. These timing differences result in operating deficits in select bank accounts, which do not have a right of offset, which have been classified as a liability at the end of the reporting period.

9. Other Accrued Expenses

Other accrued expenses consisted of the following at June 30, 2006 and December 31, 2005:


	June 30,		December 31,
	2006		2005
Accrued payroll and related items	$	529,278	$	658,591
Accrued interest		380,413		212,874
Amounts due casinos		844,449		380,000
Other		52,008		21,600

Total other accrued expenses	$	1,806,148	$	1,273,065

10. 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.

Letter of Credit

The Company maintains a $250,000 letter of credit with a lending institution to secure performance under a regulatory application. To secure this letter of credit, the Company is required to maintain a cash position with the issuing lending institution in an amount equal to the letter of credit. The letter of credit expired on June 1, 2006 and the Company is in the process of obtaining an extension.

Major Customer

The Company had sales to one customer of approximately 26%, 28%, 28%, and 29% of total revenues of Commissions on Credit Card Cash Advances, ATMs and Check Cashing Services for the three and six months ended June 30, 2006 and 2005, respectively. The Company had sales to an additional customer of approximately 10% and 11% of total revenues for the three and six months ended June 30, 2005.

Employment Agreement

The Company entered into an employment agreement with its Chief Financial Officer (CFO) during the first quarter with a term of three years. The agreement requires annual compensation of $250,000, plus an annual bonus as defined in the agreement and payment of any unpaid salary through the end of the agreement if the CFO is terminated without cause.

11. Line of Credit

On November 10, 2005, the Company entered into a Credit Agreement and a Security Agreement with Bank of America, N.A. The loan documents provide for a two-year line of credit of up to $13,000,000 collateralized by substantially all of the Company’s assets with the outstanding balance due on the expiration of the line of credit on November 9, 2007. The Company may request future increases in the amount of the line of credit subject to the Company’s compliance with various covenants on a pro forma basis after such increase. Amounts outstanding under the line of credit bear interest, payable monthly, at a rate equal to the bank’s “prime rate” plus a margin of up to 1% based on the Company’s ratio of funded debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”). Alternatively, the Company may elect a LIBOR-based interest rate plus a margin of between 1.25% and 2.25%. The loan documents contain various financial and other covenants. The Company paid an up-front loan fee and will also pay a commitment fee based on the unused portion of the loan commitment and the Company’s ratio of funded debt to EBITDA. $5,500,000 of the Credit Agreement is available for the Company’s working capital needs. $7,500,000 of the Credit Agreement was available for the Company’s acquisition of Indian Gaming Services from Borrego Springs Bank, N.A., described below in

Footnote 15 — Acquisition. The Company had outstanding borrowings of $9,786,404 at an interest rate of 7.35% at June 30, 2006 and $5,200,000 at an interest rate of 7.25% at December 31, 2005.

At June 30, 2006, we were not in compliance with three covenants contained in our credit agreement with Bank of America, N.A. related to funded debt to EBITDA, minimum EBITDA and minimum Fixed Charge Coverage Ratio. In connection with the covenant breaches, we made a $3 million payment during the quarter. We also sought and were granted a waiver of these three covenants subsequent to the period ended June 30, 2006 under an amendment entered into on August 8, 2006. Under the terms of the amendment, the interest rate was raised by 350 basis points effective from the date of the amendment. In addition, we are required to pay a waiver fee of $150,000 and make a $2 million payment of our outstanding balance. Both amounts are due and payable on or before September 30, 2006.

12. Equity Transactions

On February 28, 2006, the Company received cash proceeds of $4,470,160 upon the issuance and sale in a private offering of 710,000 shares of the Company’s common stock at a price of $6.296 per share to The Viejas Band of Kumeyaay Indians, a federally recognized Indian tribe which owns 100% of Borrego Springs Bank, N.A.

During the six months ended June 30, 2006, a total of 30,000 warrants having an exercise price of $1.50 were exercised on a “cashless” or “net exercise” basis (based on the average market price of the Company’s common stock prior to exercise) resulting in the issuance of 24,050 shares of common stock.

During the six months ended June 30, 2006, a total of 8,125 warrants were exercised for cash of $12,186 at a weighted average exercise price of $1.50 per share.

During the six months ended June 30, 2006, 7,000 options were exercised for cash of $28,000 at a weighted average exercise price of $4.00 per share.

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 first six months of 2006 and 2005, the Company did not repurchase any equity securities.

13. Income Taxes

At June 30, 2006, the Company’s federal and state net operating loss carryforwards were $10,590,000 and $7,168,000, respectively. The Company recorded a benefit from income taxes of $503,400, $1,044,400, $1,266,800 and $895,600 for the three and six months ended June 30, 2006 and 2005, respectively.

14. Deferred Income Taxes

The Company’s deferred income tax assets and liabilities are recognized for the difference between the financial statement and income tax reporting basis of the assets and liabilities based upon currently enacted rates and laws. These differences include depreciation, amortization and accrued liabilities. The Company’s deferred tax asset as of June 30, 2006 and December 31, 2005 was $4,733,000 and $3,398,000, respectively. The deferred tax liability as of June 30, 2006 and December 31, 2005 was $1,179,000 and $1,092,000, respectively, which has been offset against the long-term deferred tax asset.

15. Acquisition

Effective February 28, 2006, the Company acquired certain assets and assumed certain liabilities of Indian Gaming Services, a San Diego-based cash-access provider to the gaming industry and a division of Borrego Springs Bank, N.A. The acquisition provides the Company with additional ATM, check cashing and credit and debit services to 11 casino facilities. In addition, the acquisition provides the Company with access to other credit and debit processing opportunities. The $12 million purchase price was funded at closing with a combination of (i) funds borrowed under the Company’s $13 million credit facility with Bank of America, N.A., a national banking association, (ii) cash proceeds received upon the issuance and sale in a private offering of 710,000 shares of the Company’s common stock at a price of $6.296 per share to The Viejas Band of Kumeyaay Indians, a federally recognized Indian tribe which owns 100% of Borrego Springs Bank, N.A., and (iii) cash on hand. The transaction was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.”

The purchase price of the acquisition was:


Cash consideration	$	12,000,000
Costs associated with the transaction		453,056
Liabilities assumed		(148,498	)

	$	12,304,558

Purchase Price Allocation

The purchase price was allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values at the acquisition date. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:


Property, plant and equipment	$	1,270,000
Identifiable intangible assets:
Customer relationships		7,110,000
Employment and non-compete agreements		60,000
Goodwill		4,013,056
Liabilities assumed		(148,498	)

	$	12,304,558

The allocation of the purchase price was based, in part, on a third-party valuation of the fair value of identifiable intangible assets, and certain property, plant and equipment. The cost of the identifiable intangible assets will be amortized on a straight-line basis over periods ranging from 1 1/2 to 7 1/2 years. We expect that substantially all of the amount allocated to goodwill will be deductible for tax purposes. We expect that we will incur additional costs associated with the transaction during 2006, which costs will be allocated to goodwill.

The results of Indian Gaming Services 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 and six months ended June 30, 2006 and 2005 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 June 30, 2006 and 2005, 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						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Commissions on credit card cash advances, ATMs and check cashing services	$	24,146,610		$	20,279,643		$	47,713,963		$	37,960,057

Net loss	$	(804,142	)	$	(1,844,397	)	$	(2,067,642	)	$	(1,666,761	)
Net loss per common share:

Basic	$	(0.05	)	$	(0.11	)	$	(0.12	)	$	(0.10	)

Diluted	$	(0.05	)	$	(0.11	)	$	(0.12	)	$	(0.10	)

16. Recent Accounting Pronouncement

The Financial Accounting Standards Board has published FASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes”, to address the noncomparability 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 does not expect the adoption of FIN No. 48 to have a material impact on the consolidated financial statements.

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. With our February 28, 2006 acquisition of Indian Gaming Services, the Company added 11 casinos as customers and obtained access to other credit and debit processing opportunities.

Credit Card Cash Advances and POS Debit Card Transactions

The Company’s 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 over 90 casinos. The Company’s 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 disapproval. 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 which communicates with 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. 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. The cashier will give the gaming patron cash in the amount requested after he/she signs the Company check. Our check 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 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. If the casino or retailer provides the vault cash, the Company pays a fee to the casino or retailer for the use of such cash. The Company processes ATM transactions through ATM networks with which the Company has licensing agreements. In addition, through lease agreements, 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

business. 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 June 30, 2006, there were approximately 21 casinos utilizing our full service check cashing services. Second, the Company provides check guarantee services with the assistance of third party providers and check verification services.

The Company continually seeks to develop new technology that will make cash advance transactions more convenient for customers. For example, we previously created a wireless cash advance system that allows gaming patrons to complete a transaction from remote areas of the casino, such as a slot machine or gaming table. The Company is placing an emphasis on expanding our wireless cash advance system and cashless gaming systems.

Over the past two years, we have entered into strategic alliances with Certegy, TDN Money Systems, Progressive Gaming International and Western Money Systems. These alliances have allowed us to expand our product offerings and enter into markets that we have not previously serviced. The Company continues to look for additional partnerships and alliances as we move ahead as part of our overall growth strategy.

On April 12, 2006 the Company announced that we have entered into a joint venture agreement with Bally Technologies, Inc. and Scotch Twist, Inc. (“Joint Venture”).

Through the Joint Venture, the Company hopes to develop products that allow customers to fund player accounts using credit and debit cards at the gaming device under a license to a portfolio of patents from Scotch Twist. If and when developed, Bally Technologies and Cash Systems will work together to market and sell such access systems, initially for use exclusively with Bally’s hardware 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.

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 and equipment and software 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.

We account for research and development costs in accordance with several accounting pronouncements, including SFAS No. 2,Accounting for Research and Development Costs, and SFAS No. 86,Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. SFAS No. 86 specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, we expense all research and development costs when incurred.

Results of Operations

Three months ended June 30, 2006 compared to June 30, 2005
Revenues for the quarter ended June 30, 2006 were $24.1 million compared to $16.0 million for the same period in 2005. The $8.1 million increase, which represents a 51% increase in 2006 revenues over 2005 revenues, is primarily due to the continued expansion of products and services to additional gaming operations and includes the accretive effect of acquiring IGS during the prior quarter. The volume of transactions processed through our Cash Access Services during the quarter ended June 30, 2006 was $727.5 million compared to $495.2 million during the same period in 2005. We expand and win business relationships based on the Company’s focus on technology and superior service.

Operating expenses for the quarter ended June 30, 2006 were $24.6 million compared to $18.7 million for 2005. The $5.9 million increase, which represents a 31% increase in operating expenses, was primarily due to the expansion of our business to additional locations and the acquisition of IGS. Commissions increased by $5.2 million which was directly related to the Company’s revenue growth from the increased amount of transactions between the periods. Payroll and related costs increased by nearly $1.1 million.

A majority of this increase resulted from the build out of the accounting and finance infrastructure and expansion of executive and administrative staff to support the expanded business operations, while $0.4 million of this increase was attributable to stock compensation expense resulting from the grant of options to the Board of Directors. Depreciation and amortization also increased by approximately $0.4 million primarily due to the acquired assets of IGS. The development and build out of our infrastructure has enabled the Company’s transition to less reliance on outside professional services, including expenditures for compliance work associated with the Sarbanes-Oxley Act of 2002 (“SOX”). As a result, a decrease in professional fees of $0.4 million compared to the same period last year helped offset the overall increase in operating expenses. In addition, check cashing costs decreased by approximately $0.5 million; thus further offsetting the overall increase in operating expenses. Interest expense increased by approximately $0.8 million due to the increased amount of vault cash required to fund our ATMs, increased borrowing on our line of credit, and higher interest rates. The Company expects to be able to better leverage its operating costs in the future through the expansion of product offerings and technology applications.

On a fully diluted basis, after-tax net loss of ($804,142) for the second quarter of 2006 was 3% of sales or ($0.05) per diluted common share, as compared to a net loss of ($1,668,385) which was 10% of sales or ($0.10) per diluted common share for the same prior year period.

Six months ended June 30, 2006 compared to June 30, 2005
Revenues for the six months ended June 30, 2006 were $44.6 million compared to $29.7 million for the same period in 2005. The $14.9 million increase, which represents a 50% increase in 2006 revenues over 2005 revenues, is due to the continued expansion of products and services to additional gaming operations. The volume of transactions processed through our Cash Access Services during the six months ended June 30, 2006 was $1,342.4 million compared to $929.7 million during the same period in 2005. We expand and win business relationships based on the Company’s focus on technology and superior service.

Operating expenses for the six months ended June 30, 2006 were $46.5 million compared to $31.9 million for 2005. The $14.6 million increase, which represents a 46% increase in operating expenses, was primarily due to the expansion of our business to additional locations. Commissions, processing costs and check cashing costs increased by approximately $10.5 million which was directly related to the Company’s revenue growth from the increased amount of transactions between the periods. Payroll and related costs also increased by nearly $2.1 million resulting from the build out of the accounting and finance infrastructure, expansion of executive and administrative staff to support the expanded business operations, and increase in stock compensation expense. Interest expense increased by approximately $1.2 million due to the increased amount of vault cash required to fund our ATMs, increased borrowing on our line of credit, and higher interest rates. The Company expects to be able to better leverage its operating costs in the future through the expansion of product offerings and technology applications.

On a fully diluted basis, after-tax net loss of ($2,023,657) for the six months ended June 30, 2006 was 5% of sales or ($0.12) per diluted common share, as compared to a net loss of ($1,430,784) which was 5% of sales or ($0.09) per diluted common share for the same prior year period.

Liquidity and Capital Resources

At June 30, 2006, we had cash of $20.7 million compared to $30.2 million at December 31, 2005. Cash provided from operations totaled $3.8 million and cash used in operations totaled $0.4 million during the six months ended June 30, 2006 and 2005, 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. $5,500,000 of this line of credit is available for our working capital needs, and $7,500,000 of this line of credit was available for our acquisition of Indian Gaming Services from Borrego Springs Bank, N.A. Available credit under this line of credit for our working capital needs was $3,213,596 at June 30, 2006, compared to $300,000 at December 31, 2005.

We had a working capital deficit of approximately $1.5 million at June 30, 2006 compared to working capital of $10.8 million at December 31, 2005. We expect our operating working capital requirements to increase in fiscal 2006 as our sales and product development increase. We expect to fund any such increase primarily with cash flow from operations as well as borrowings under our bank credit facilities for at least the next 12 months. Settlements due from credit card processors were $2.5 million at June 30, 2006 compared to $7.7 million at December 31, 2005.

We have expended considerable resources in the form of personnel and cash expenditures and anticipate that the cost of compliance with SOX will continue to impact the coming fiscal year. These expenditures will be recorded as period expenses as incurred. In addition, we upgraded our accounting system during 2005 to provide for expanded management reporting and to accommodate the anticipated growth in operations over the coming years.

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.

During the first quarter of 2006, we completed the acquisition of Indian Gaming Services. We paid $12 million for certain of the assets of Indian Gaming Services. The purchase price was partially funded through a private placement of 710,000 shares of our common stock with a market value of approximately $4,470,160.

We may consider the utilization of debt or additional equity funding for strategic acquisitions. However, there can be no assurance that debt or additional equity funding will be available on terms acceptable to us or on any terms whatsoever.

Off-Balance Sheet Arrangements

We obtain currency to meet the normal operating requirements of certain of our ATMs pursuant to a vault cash agreement with Fidelity Bank. Under this agreement, all currency supplied by Fidelity Bank remains the sole property of Fidelity Bank at all times until it is dispensed, at which time Fidelity Bank obtains an interest in the corresponding settlement receivable. Because it is never an asset of ours, supplied cash is not reflected on our balance sheet. Because Fidelity Bank obtains an interest in our settlement receivables, there is no liability corresponding to the supplied cash reflected on our balance sheet since the cash is not in the Company’s control at any time. The fees that we pay to Fidelity Bank pursuant to the vault cash agreement are reflected as interest expense in our financial statements.

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 borrower 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 $9.8 million in borrowings outstanding under our bank credit facility at June 30, 2006. Amounts outstanding under this facility bear interest, payable monthly, at a rate equal to the bank’s “prime rate” plus a margin of up to 1% based on our ratio of funded debt to earnings before EBITDA. Alternatively, we may elect a LIBOR-based interest rate plus a margin of between 1.25% and 2.25%. The interest rate under this facility is currently set at

2.25% over the LIBOR rates. If the LIBOR rates were to increase or decrease by 100 basis points, with all other factors remaining constant, earnings would increase or decrease by approximately $0.1 million on a pre-tax basis.

In addition, our vault cash arrangement with Fidelity Bank requires that we pay fees on the balance of the funds provided in an amount equal to the bank’s prime rate of interest plus 2% (10.25% at June 30, 2006) or 10%, whichever is greater. At June 30, 2006 and December 31, 2005, the rate was 10.25% and 10%, respectively. If the prime rate were to increase by 100 basis points, with all other factors remaining constant, earnings would decrease by approximately $.2 million on a pre-tax basis.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the quarter ended June 30, 2006, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was performed 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 described in our Annual Report on Form 10-K for the year ended December 31, 2005, 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 June 30, 2006. 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.

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 for the year ended December 31, 2005, in connection with management’s assessment of the effectiveness of our system of internal control over financial reporting as of December 31, 2005, our management concluded that we had a material weakness in internal controls over financial reporting relating to controls for financial close and reporting. Accordingly, and as reported in our Annual Report on Form 10-K for the year ended December 31, 2005, management intends to implement remediation measures during the course of 2006. We have made the following changes to strengthen our internal control over financial reporting during the quarter ended June 30, 2006:

	•		We evaluated the accounting personnel responsible for financial reporting and control and the consultants hired to implement appropriate control activities.

	•		We hired a Financial Controller and Director of SEC Reporting and Compliance to implement changes to strengthen our internal control environment.

	•		We discussed and are in the process of implementing specific procedures to address the material weakness in internal control identified for financial close and reporting.

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 for the year ended December 31, 2005 includes detailed disclosure about the risks faced by our business. Such risks have not materially changed since December 31, 2005 except as described below.

We are not in compliance with certain financial performance covenants under our line of credit with Bank of America, N.A.

Our two-year line of credit of up to $13 million with Bank of America, N.A. contains strict financial covenants. Among other things, these covenants require us to maintain certain net income and net worth levels and a certain ratio of net income to fixed expenses as of each quarter end. At June 30, 2006, we were not in compliance with three covenants related to funded debt to EBITDA, minimum EBITDA and minimum fixed charge coverage. We sought and were granted a waiver of these three covenants subsequent to June 30, 2006. In the event that we continue to fail to comply with the covenants contained in the credit agreement and Bank of America, N.A. does not waive such non-compliance or agree to amend the terms of the credit agreement to bring us into compliance, Bank of America, N.A. would be entitled to accelerate the maturity of the outstanding balance. If we are unable to secure alternative financing or raise additional capital to repay this outstanding balance, Bank of America, N.A. would be entitled to foreclose on substantially all of our assets which secure the repayment of such outstanding balance.

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

Unregistered Sales of Equity Securities

During the three months ended June 30, 2006, a total of 30,000 warrants having an exercise price of $1.50 were exercised on a “cashless” or “net exercise” basis (based on the average market price of the Company’s common stock prior to exercise) resulting in the issuance of 24,050 shares. The issuance of the Company’s common stock was effected as a private placement pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

During the three months ended June 30, 2006, a total of 8,125 warrants were exercised for cash of $12,186 at a weighted average exercise price of $1.50 per share. The issuance of the Company’s common stock was effected as a private placement pursuant to an exemption from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

Issuer Repurchases of Equity Securities

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. This stock repurchase program does not have an expiration date. The Company did not repurchase any shares of its common stock during the quarter ended June 30, 2006. At June 30, 2006, the Company had authority to repurchase 1,000,000 shares of its common stock pursuant to this stock repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

Our Annual Meeting of Stockholders was held on June 21, 2006. There were two proposals up for approval. The results of voting are as follows:

1. To elect five (5) directors of the Company for the ensuing year.


		Total Votes For		Withheld
Michael D. Rumbolz	Chief Executive Officer, President, and Chairman of the Board		16,792,912		219,092
Christopher D. Larson	Chief Operating Officer and Director		16,715,132		296,872
Patrick R. Cruzen (1)(2)(3)	Director		16,982,297		29,707
Donald D. Snyder (1)(3)	Director		16,982,297		29,707
Patricia W. Becker (1)(3)	Director		16,982,297		29,707


(1)		Member of the Audit Committee.

(2)		Audit Committee financial expert.

(3)		Member of the Compensation Committee.

2. To ratify the appointment of Virchow, Krause & Company, LLP as independent certified public accountants for the year ending December 31, 2006.


Total	Total
Votes For	Votes Against	Abstain
16,984,305	17,400	10,300

ITEM 5. OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS


Exhibit
Number		Description
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

SIGNATURES

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


	CASH SYSTEMS, INC.

	By:	/s/ Michael D. Rumbolz

		Michael D. Rumbolz
		Chief Executive Officer
		(principal executive officer)

DATE: August 9, 2006

	By:	/s/ Andrew Cashin

		Andrew Cashin
		Chief Financial Officer
		(principal financial officer)
DATE: August 9, 2006

EXHIBIT INDEX

CASH SYSTEMS, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2006


Exhibit
Number		Description
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

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

Cash Systems (CKNN) Inactive 10-Q2006 Q2 Quarterly report

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