Cash Systems 10Q 2007 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, 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 (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 1, 2007, there were 18,442,413 shares of the registrant’s common stock, $0.001 par value per share, outstanding.

CASH SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the Quarter Ended June 30, 2007


		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	3

	Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006	3

	Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006	4

	Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 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	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4.	Controls and Procedures	19

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Submission of Matters to a Vote of Security Holders	20

Item 5.	Other Information	20

Item 6.	Exhibits	20

SIGNATURES		21

EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

CASH SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2007			2006
	(Unaudited)			(Audited)
ASSETS
CURRENT ASSETS
Cash (Note 3)	$	17,907,899		$	24,792,099
Current portion of prepaid commissions (Note 2)		392,700			285,019
Current portion of loans receivable (Note 2)		482,462			395,277
Settlements due from credit card processors (Note 5)		8,083,744			13,212,907
Settlements due from ATM processors (Note 5)		6,751,583			12,144,380
Other current assets (Note 4)		10,741,543			5,093,771

Total Current Assets		44,359,931			55,923,452


PROPERTY AND EQUIPMENT, NET (Note 2)		7,665,390			7,407,903

OTHER ASSETS
Goodwill (Note 6)		4,077,700			4,077,700
Intangible assets, net (Note 6)		5,382,792			6,060,448
Long-term prepaid commissions, net of current portion (Note 2)		484,289			640,722
Long-term loans receivable, net of current portion (Note 2)		259,702			86,564
Restricted cash (Note 7)		644,055			438,135
Other		127,584			1,880,624

Total Other Assets		10,976,122			13,184,193


TOTAL ASSETS	$	63,001,443		$	76,515,548


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Checks issued in excess of cash in bank	$	12,206,538		$	21,235,168
Short term debt, net (Note 12)		19,438,733			—
Accounts payable — trade		990,943			4,059,972
Credit card cash advance fees payable		1,722,544			1,812,283
ATM commissions payable		2,189,820			1,946,749
Credit card chargebacks payable		197,159			102,403
Check cashing commissions payable		174,068			356,054
Other accrued expenses (Note 8)		12,801,114			12,902,828

Total Current Liabilities		49,720,919			42,415,457


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

Total Liabilities		49,720,919			62,450,854


STOCKHOLDERS’ EQUITY
Common stock, par value of $0.001, 50,000,000 shares authorized, 18,726,913 and 17,991,413 shares issued, 18,442,413 and 17,923,913 shares outstanding (Note 10)		18,443			17,924
Additional paid-in capital (Note 10 and 12)		28,505,570			25,943,860
Accumulated deficit		(15,243,489	)		(11,897,090	)

Total Stockholders’ Equity		13,280,524			14,064,694


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	63,001,443		$	76,515,548

See accompanying notes to consolidated financial statements.

CASH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Commissions on credit card cash advances, ATMs and check cashing services	$	26,595,032			24,146,610		$	52,119,799			44,625,735

Operating expenses
Commissions		15,508,846			12,964,402			30,073,792			23,809,255
Processing costs		4,623,015			4,552,645			8,928,918			8,461,165
Check cashing costs		763,154			957,612			1,686,656			2,234,805
Armored carrier services		275,378			192,878			552,738			379,741
Payroll, benefits and related taxes		2,949,438			3,013,018			5,771,867			5,639,909
Professional fees		334,971			384,769			733,856			1,369,290
Other general and administrative expenses		1,841,543			1,800,462			3,496,152			3,387,416
Depreciation and amortization		896,576			718,942			1,741,730			1,238,184

Total operating expenses		27,192,921			24,584,728			52,985,709			46,519,765

Loss from operations		(597,889	)		(438,118	)		(865,910	)		(1,894,030	)


Other income (expense)
Interest expense		(1,342,367	)		(879,522	)		(2,511,547	)		(1,408,233	)
Interest and other income		19,812			10,098			31,058			11,806

Total other income (expense)		(1,322,555	)		(869,424	)		(2,480,489	)		(1,396,427	)


Loss before income taxes		(1,920,444	)		(1,307,542	)		(3,346,399	)		(3,290,457	)

Benefit from income taxes		—			(503,400	)		—			(1,266,800	)


Net loss	$	(1,920,444	)	$	(804,142	)	$	(3,346,399	)	$	(2,023,657	)


Net loss per common share:
Basic	$	(0.10	)	$	(0.05	)	$	(0.18	)	$	(0.12	)

Diluted	$	(0.10	)	$	(0.05	)	$	(0.18	)	$	(0.12	)

Weighted average common shares outstanding:
Basic		18,437,162			17,610,795			18,249,104			17,382,017

Diluted		18,437,162			17,610,795			18,249,104			17,382,017

See accompanying notes to consolidated financial statements.

CASH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOW

(Unaudited)


	Six Months Ended
	June 30,
	2007			2006
Cash flows from operating activities:
Net loss	$	(3,346,399	)	$	(2,023,657	)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization		1,741,730			1,238,184
Share-based compensation expense		139,370			494,988
Tax benefit associated with employee stock option exercises		—			7,895
Amortization of debt issuance costs and original issue discount		239,168			15,092
Deferred income taxes		—			(1,248,000	)
Change in interest receivable on loans receivable		—			2,505
Changes in operating assets and liabilities:
Prepaid commissions		(107,681	)		107,422
Settlements due from credit card processors		5,129,163			5,144,954
Settlements due from ATM processors		5,392,797			—
Other current assets		(4,117,720	)		(1,368,714	)
Long-term prepaid commission		156,433			(287,387	)
Restricted cash		(205,920	)		—
Other assets		44,035			(137,267	)
Accounts payable — trade		(3,069,029	)		321,928
Credit card cash advance fees payable		(89,739	)		593,770
ATM commissions payable		243,071			537,202
Credit card chargebacks payable		94,756			(88,000	)
Check cashing commissions payable		(181,986	)		79,749
Other accrued expenses		(101,714	)		384,585

Cash flows provided from operating activities		1,960,335			3,775,249


Cash flows from investing activities:
Purchase of certain assets of Indian Gaming Services		—			(12,304,558	)
Purchases of property and equipment		(1,321,561	)		(1,319,134	)
Proceeds (advances) from loans receivable, net		(260,323	)		133,908

Cash flows used in investing activities		(1,581,884	)		(13,489,784	)


Cash flows from financing activities:
Checks issued in excess of cash in bank		(9,028,630	)		(8,973,910	)
Line of credit — bank, net		—			4,586,404
Issuance of common stock		—			4,470,160
Exercise of stock options		1,765,980			28,000
Exercise of stock warrants		—			12,186

Cash flows provided from (used in) financing activities		(7,262,650	)		122,840


Decrease in cash		(6,884,199	)		(9,591,695	)

Cash, beginning of period		24,792,098			30,247,119


Cash, end of period	$	17,907,899		$	20,655,424


SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for financing costs and interest expense, net of amortization of original issue discount and debt issuance costs	$	2,213,157		$	1,164,414

NONCASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of warrant derivative liability to additional paid in capital (Note 12)	$	777,011		$	—

See accompanying notes to consolidated financial statements.

CASH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 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 June 30, 2007 and December 31, 2006, respectively, the unaudited consolidated statements of operations for the three and six months ended June 30, 2007 and 2006, and the unaudited consolidated statements of cash flows for the six months ended June 30, 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 and six months ended June 30, 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. The Company capitalized $364,212 and $320,690 of costs related to the implementation of SOP 98-1 during the three months ended June 30, 2007 and 2006, respectively, while $695,048 and $357,918 were capitalized during the six months ended June 30, 2007 and 2006, 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 $165,752 and $71,530 for the three months ended June 30, 2007 and 2006, respectively, and $282,526 and $134,916 for the six months ended June 30, 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 and six months ended June 30, 2007 and 2006 and exceeded federally insured levels at June 30, 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 June 30, 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 $1,530,052 and $40,246 as of June 30, 2007 and 2006, respectively, and are included in current assets on the consolidated balance sheet at June 30, 2007 as more fully described in Note 12. Estimated future amortization for the remainder of fiscal year 2007 is $178,953, $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 and six months ended June 30, 2007 was $89,476 and $178,953, and $7,546 and $15,092 for the same periods ended June 30, 2006, 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. During the three months ended June 30, 2007, the Company entered into a new loan agreement in connection with one of its service contracts totaling $450,000 at an annual interest rate of 10%. Principal and interest are to be paid in equal monthly installments of $17,025 through September 20, 2009. Total outstanding loans receivable at June 30, 2007 and December 31, 2006 was $742,163 and $481,841, respectively, which includes interest receivable of $13,840 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 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 or money order is generated by the casino cashier or booth operations 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. For self-guaranteed checks, the Company contracts with a third party agency for collections, records a receivable, and reserves for amounts that are not collectible.

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, 2007 and December 31, 2006 was $197,159 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 and six months ended June 30, 2007, the Company expensed $129,687 and $308,794, respectively. The Company had no research and development expenses for the three and six months ended June 30, 2006. Research and development costs are 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 and six months ended June 30, 2007. These reclassifications had no effect on the Company’s consolidated net loss or stockholders’ equity for the three and six months ended June 30, 2007.

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 potentially 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, 2007 and 2006:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Weighted shares of common stock outstanding –		18,437,162		17,610,795		18,249,104		17,382,017
Weighted shares of common stock assumed upon exercise of stock options and warrants, and vesting of unvested restricted stock awards		—		—		—		—

Weighted shares of common stock outstanding –		18,437,162		17,610,795		18,249,104		17,382,017

The Company uses the treasury method for calculating the dilutive effect of the stock options and warrants (using the average market price). All options, warrants, and unvested restricted stock were antidilutive for the three and six months ended June 30, 2007 and 2006, respectively.

Stock-Based Compensation

Share-based compensation expense recorded under SFAS 123(R) “Share-Based Payment” for the three months ended June 30, 2007 and 2006 was $93,679 and $368,551; and $139,370 and $494,988 for the six months ended June 30, 2007 and 2006, 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 and six months ended June 30, 2007 and 2006 related to awards granted prior to January 1, 2006. The Company did not grant any options during the three and six months ended June 30, 2007.

During the three months ended June 30, 2007, 14 restricted stock awards were granted totaling 159,500 shares of common stock at a fair value on the date of grant with vesting terms of three years. The effect of this action was an additional non-cash expense totaling $22,330 which was recorded during the quarter ended June 30, 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 the Company 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 fees can be no less than 6.0% under any tier and requires fees in an amount equal to the prime rate plus 1.25% on balances over a certain maximum threshold. At June 30, 2007, the prime rate was 8.25%. The Company paid fees totaling $751,647 and $514,492 for the three months ended June 30, 2007 and 2006; and $1,441,385 and $773,958 for the six months ended June 30, 2007 and 2006.

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. All cash provided by Fidelity Bank remains the sole property of Fidelity Bank at all times until dispensed. Since the cash was never an asset of the Company, supplied cash was not reflected on the Company’s balance sheet. Fidelity Bank’s portion of the settlement funds was never held by the Company; therefore, there was no liability corresponding to the supplied cash reflected on the Company’s balance sheet.

For two customer locations, the Company has a secondary vault cash arrangement with Wilmington Savings Fund Society FSB (“WSFS”) effective December 11, 2002 which requires that it 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 fees can be no less than 7.0%. At June 30, 2007, the prime rate was 8.25%. The Company paid fees totaling $94,428 and $71,531 for the three months ended June 30, 2007 and 2006; and $180,917 and $140,171 for the six months ended June 30, 2007 and 2006.

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, 2007 and December 31, 2006, the Company operated 29 and 59 ATMs, respectively, that were site funded.

4. Other Current Assets

Other current assets consisted of the following at June 30, 2007 and December 31, 2006:


	June 30,		December 31,
	2007		2006
Receivable from casinos	$	3,014,172	$	515,060
Receivable from bank		1,553,991		2,357,363
Income taxes receivable		12,830		65,497
Prepaid expenses		327,106		464,194
Receivable for check guarantees, net of reserve of $1,457,645 and $820,212, respectively		3,540,638		1,396,831
Debt issuance costs		1,530,052		—
Other receivables, net of reserve of $305,839 and $1,719,799, respectively		762,754		294,826

Total other current assets	$	10,741,543	$	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. The Company periodically orders cash directly from casinos in order to fund its various booth locations. As there is a lag between the time cash is ordered and the cash is received by the booths, the Company records a receivable for cash that is in transit and includes these amounts in receivables from casinos. The balance as of June 30, 2007 increased compared to year end due to more such receivables at the Company’s Oklahoma booth locations. 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 $1,406,649 and $2,172,952 from its vault cash provider for standard ATM settlements and related surcharges owed at June 30, 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 Indian Gaming Service locations amounting to $147,342 and $184,411 at June 30, 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 and has reserved for amounts that are not collectible. During the first six months of 2007, the Company has steadily expanded its self-guarantee of cashed checks to various casino locations and consequently, has increased its use of the third party collection agency.

Debt issuance costs

The Company reclassified $1,530,052 of debt issuance costs from long term to short term as more fully described in Note 12. These costs may be written-off if the Company fails to obtain a default waiver, the note holders elect to call the debt, or the debt is extinguished.

Other receivables

Other receivables consist of miscellaneous processor and bank receivables, ATM interchange income, employee advances, and security deposits. The Company has recorded a reserve for amounts that are not deemed collectible.

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 June 30, 2007 and December 31, 2006, the balance of settlements due from credit card processors was $8,083,744 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 June 30, 2007 and December 31, 2006, the balance of settlements due from ATM processors was $6,751,583 and $12,144,380, respectively.

6. Goodwill and Intangible Assets

As of June 30, 2007, goodwill was $4,077,700 which related to the acquisition of Indian Gaming Services. Other identifiable intangible assets are as follows:


	As of June 30, 2007
							Estimated
	Carrying		Accumulated				Useful
	Amount		Amortization		Net		Lives
Patents	$	20,560	$	6,168	$	14,392	5 years
Customer relationships (relates to IGS)		7,110,000		1,774,933		5,335,067	1 1/2 to 7 1/2 years
Employment and non-compete agreements (relates to IGS)		60,000		26,667		33,333	3 years

	$	7,190,560	$	1,807,768	$	5,382,792

Total amortization expense was $339,856 and $342,726 for the three months ended June 30, 2007 and 2006; and $677,656 and $452,456 for the six months ended June 30, 2007 and 2006, respectively. As of

June 30, 2007, we expect amortization expense in future periods to be as shown below:


Fiscal year
Remainder of 2007	$	644,335
2008		1,255,324
2009		874,769
2010		798,657
Thereafter		1,809,707

Total expected amortization expense	$	5,382,792

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 $363,268 as of June 30, 2007 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. The Company also maintains two cash reserves totaling $280,787 at June 30, 2007 with its card association sponsor bank as required for card association compliance as well as to cover potential losses due to chargebacks.

8. Other Accrued Expenses

Other accrued expenses consisted of the following at June 30, 2007 and December 31, 2006:


	June 30,		December 31,
	2007		2006
Accrued payroll and related items	$	596,403	$	611,688
Accrued interest		603,263		544,041
Amounts due casinos		4,971,880		3,251,046
Amounts due for ATM processing		6,561,000		8,409,320
Other		68,568		86,733

Total other accrued expenses	$	12,801,114	$	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 and six months ended June 30, 2007, two of our customers each accounted for more than 10% of our total revenues and together accounted for 36% of total revenues during both periods. During the three and six months ended June 30, 2006, one customer accounted for more than 10% of our total revenues (or 26% and 28% of total revenues, respectively).

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 six months ended June 30, 2007 and 2006, the Company did not repurchase any equity securities.

10. Equity Transactions

During the six months ended June 30, 2007, 496,000 options were exercised for cash of $1,765,980 at a weighted average exercise price of $3.56 per share.

During the six months ended June 30, 2007, the Company recorded $139,370 in stock compensation expense relating to restricted stock awards.

11. Income Taxes

At June 30, 2007, the Company’s federal and state net operating loss carryforwards were approximately $18,030,000 and $12,001,000, respectively. The Company had a benefit from income taxes of $0 and ($503,400) for the three months ended June 30, 2007 and 2006; and $0 and ($1,266,800) for the six months ended June 30, 2007 and 2006, respectively.

FIN 48

The Financial Accounting Standards Board has published FASB Interpretation 48 (FIN 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 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. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expenses on the consolidated statement of operations. FIN 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 48 and has concluded that the adoption of FIN 48 did not impact the consolidated financial statements for the quarter ended June 30, 2007. The Company’s federal and state tax returns are potentially open to examinations for fiscal years 2003-2006.

12. Senior Secured Convertible Notes

On October 10, 2006, the Company issued and sold to certain institutional accredited investors an aggregate of $20.0 million in principal amount of senior secured convertible notes (the “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 “Warrants”). 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 and 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 (when applicable). 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.

As of June 30, 2007, the Company had a financial covenant default as defined under the Notes based on failure to meet the financial threshold relating to Consolidated EBITDA. On August 9, 2007, the note holders agreed to waive the default. Under the terms of the waiver, the note holders agreed to waive the default until August 20, 2007 to provide a reasonable period of time for the Company and the note holders to reach a final agreement on amending the Notes and the Warrants to modify the quarterly Consolidated EBITDA financial threshold, increase the interest rate on the Notes from 6.5% to 7.5%, increase the face amount of the Notes, grant the note holders the right to require the Company to redeem a portion of the Notes at face value on October 10, 2008, grant the Company the right to redeem a portion of the Notes at 130% of face value on October 10, 2008, modify the exercise price of the Warrants to 120% of the volume-weighted average price of the Company’s common stock for the three day period ending August 14, 2007, with a floor price of $7.25 and a ceiling price of $8.00, and issue new warrants to purchase an additional 175,000 shares. In the event the Company and the note holders are unable to execute such an agreement on or prior to August 20, 2007, the Company will be in default under the Notes and the note holders will be entitled to, among other things, accelerate the maturity of the outstanding balance of the Notes. If the Company is unable to secure alternative financing or raise additional capital to repay this outstanding balance at maturity, the note holders would be entitled to foreclose on substantially all of the Company’s assets, which secure the Notes. As a result of the default, the Company has reclassified the Notes from long term to short term debt as well as reclassified debt issuance costs from long term to current assets which are included in other current assets on the consolidated balance sheet. Unless and until the Company and the note holders reach a final agreement on amending the Notes and the Warrants as discussed above, the Notes will continue to be classified as short term debt and the debt issuance costs will continue to be classified as current assets on the consolidated balance sheet. Based on preliminary discussions with its outside auditors, the Company currently believes that the amendment would be treated as an extinguishment of debt resulting in a write off in the third quarter of 2007 of approximately $1.5 million of debt issuance costs and $1.7 million representing the difference between the fair market value of the original Notes and Warrants and the fair market value of the amended Notes and Warrants. At this time, we can give no assurance regarding the treatment or the amount of the write-offs that would result from the amendment.

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 Notes and the Warrants based on the relative fair values of the securities at the time of issuance. The 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. Amortization expense on the original issue discount was $27,371 and $60,215 for the three and six months ended June 30, 2007.

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 and six months ended June 30, 2006 are included below. Such pro forma information assumes that the above acquisition had occurred as of January 1, 2006. 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, 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			2006
Commissions on credit card cash advances, ATMs and check cashing services	$	24,146,610		$	47,713,963
Net loss	$	(804,142	)	$	(2,067,642	)
Net loss per common share:
Basic	$	(0.05	)	$	(0.12	)
Diluted	$	(0.05	)	$	(0.12	)

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 124 gaming and 19 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 June 30, 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 has ended. 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. We will continue to 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 card association rules.

The Company incurred research and development costs relating to the development of its Joint Venture product. The Company expensed $129,606 and $0 for the three months ended June 30, 2007 and 2006; and $298,749 and $0 for the six months ended June 30, 2007 and 2006. Research and development costs relating to the Joint Venture product are 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 June 30, 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 92% of the Company’s ATM devices were operating on an internal Company-owned switch as of June 30, 2007. The new internal processing switch enables the Company to eliminate certain third party processing costs .

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.

Recent Events

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 June 30, 2007 compared to June 30, 2006

Revenues for the quarter ended June 30, 2007 were $26.6 million compared to $24.1 million for the same period in 2006. The $2.5 million increase, which represents a 10% increase in 2007 revenues over 2006 revenues, is primarily 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 quarter ended June 30, 2007 was $878 million compared to $727 million during the same period in 2006. We expand and win business relationships based on the Company’s focus on technology and superior service.

Commissions increased by $2.5 million during the quarter ended June 30, 2007 to $15.5 million compared to $13.0 million during the same period in 2006, reflecting the rise in lower margin renewal and new customer contracts. Total processing costs increased by only $0.1 million compared to the same period last year, despite the 10% increase in revenues, reflecting the results of our efforts in transitioning to internal processing. Total check cashing costs decreased by $0.2 million compared to the same period last year reflecting 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 decreased by $0.1 million reflecting stabilization in corporate headcount. Other general and administrative expense remained largely unchanged showing a slight increase due to research and development expenses relating to our Joint Venture product offset by lower legal fees during the quarter. Depreciation and amortization increased by approximately $0.2 million primarily due to depreciation on our newly implemented internal processing switch and more terminals added to new and existing locations. Professional fees remained consistent with the same period last year due to less reliance on outside professional services during both periods, including expenditures for SOX 404 compliance work. Total operating expenses for the quarter ended June 30, 2007 were $27.2 million compared to $24.6 million for 2006 (or a $2.6 million increase representing an 11% increase in total operating expenses).

Interest expense increased by approximately $0.5 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.

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, we, along with our Joint Venture partners, continue to work toward completing our cashless gaming product for introduction into the market place during 2007 and have undertaken meetings to this end with the card associations and other interested parties.

Loss before taxes was $1,920,444 for the quarter ended June 30, 2007 as compared to a net loss of $1,307,542 for the same prior year period. In prior year, the Company recorded a tax benefit of $503,400 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 $1,920,444 for the quarter ended June 30, 2007 was 7% of sales or ($0.10) per diluted common share, as compared to a net loss of $804,142 which was 3% of sales or ($0.05) per diluted common share for the same prior year period.

Six months ended June 30, 2007 compared to June 30, 2006

Revenues for the six months ended June 30, 2007 were $52.1 million compared to $44.6 million for the same period in 2006. The $7.5 million increase, which represents a 17% increase in 2007 revenues over 2006 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, 2007 was $1,728 million compared to $1,342 million during the same period in 2006. 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, 2007 were $53.0 million compared to $46.5 million for 2006. The $6.5 million increase, which represents a 14% increase in operating expenses, was primarily due to the expansion of our business to additional locations. Commissions increased by $6.3 million during the six months ended June 30, 2007 to $30.1 million compared to $23.8 million during the same period in 2006, reflecting the increase in lower margin renewal and new customer contracts. Total processing costs increased by $0.5 million compared to the same period last year, despite the 17% increase in revenues, reflecting the results of our efforts in transitioning to internal processing. Total check cashing costs decreased by $0.5 million compared to the same period last year reflecting 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 $0.2 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 $0.1 million for the six month period reflecting stabilization in corporate headcount. Professional fees decreased by $0.6 million from the same period last year due to less reliance on outside professional services, including expenditures for SOX 404 compliance work, during the current period. Depreciation and amortization increased by approximately $0.5 million primarily due to depreciation on our newly implemented internal processing switch and more terminals added to new and existing locations. Interest expense increased by approximately $1.1 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.

On a fully diluted basis, after-tax net loss of $3,346,399 for the six months ended June 30, 2007 was 6% of sales or ($0.18) per diluted common share, as compared to a net loss of $2,023,657 which was 5% of sales or ($0.12) per diluted common share for the same prior year period.

Liquidity and Capital Resources

At June 30, 2007, we had cash and cash equivalents of $17.9 million compared to $24.8 million at December 31, 2006. As of June 30, 2007, the Company had cash net of “Checks issued in excess of cash in bank” of $5.7 million. Cash provided from operations totaled $2.0 million and $3.8 million during the six months ended June 30, 2007 and 2006, respectively.

As of June 30, 2007, the Company had a financial covenant default as defined under the Notes based on failure to meet the financial threshold relating to Consolidated EBITDA. On August 9, 2007, the note holders agreed to waive the default. Under the terms of the waiver, the note holders agreed to waive the default until August 20, 2007 to provide a reasonable period of time for the Company and the note holders to reach a final agreement on amending the Notes and the Warrants to modify the quarterly Consolidated EBITDA financial threshold, increase the interest rate on the Notes from 6.5% to 7.5%, increase the face amount of the Notes, grant the note holders the right to require the Company to redeem a portion of the Notes at face value on October 10, 2008, grant the Company the right to redeem a portion of the Notes at 130% of face value on October 10, 2008, modify the exercise price of the Warrants to 120% of the volume-weighted average price of the Company’s common stock for the three day period ending August 14, 2007, with a floor price of $7.25 and a ceiling price of $8.00, and issue new warrants to purchase an additional 175,000 shares. In the event the Company and the note holders are unable to execute such an agreement on or prior to August 20, 2007, the Company will be in default under the Notes and the note holders will be entitled to, among other things, accelerate the maturity of the outstanding balance of the Notes. If the Company is unable to secure alternative financing or raise additional capital to repay this outstanding balance at maturity, the note holders would be entitled to foreclose on substantially all of the Company’s assets, which secure the Notes. As a result of the default, the Company has reclassified the notes from long term to short term debt as well as reclassified debt issuance costs from long term to current assets. That reclassification will remain unless and until the Company and the note holders reach a final agreement on amending the Notes and the Warrants as discussed above. As a result, the Company had a working capital deficit of approximately $5.4 million at June 30, 2007, compared to working capital of $13.6 million at December 31, 2006.

Notwithstanding the aforementioned, we expect our operating working capital requirements to increase in fiscal 2007 as our sales and product development increase. Operating working capital includes settlements due from credit card processors totaling $8.1 million and $13.2 million, and settlement funds due from our ATM processor totaling $6.8 million and $12.1 million as of June 30, 2007 and December 31, 2006, respectively. We estimate capital expenditures for the second half of fiscal year 2007 of approximately $1.0 to $2.0 million related to software development, ATM purchases for new customers or existing customer expansion, and related costs. While we believe our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for daily operations and capital expenditures for at least the remaining fiscal year, we may seek alternative methods of raising additional capital subject to the terms of the Notes and the Warrants. If additional financing is necessary and we are unable to obtain such financing, we may be required to reduce the scope of our planned product development and expansion efforts, which could harm our business, financial condition and operating results. In the meantime, we will continue to manage our cash resources in a manner designed to ensure that we have adequate cash to fund our operations as well as explore capital savings measures such as leasing ATMs.

Off-Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements.

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 $19.4 million in borrowings outstanding under our Senior Secured Convertible Notes (the “Notes”) at June 30, 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 and 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 (when applicable).

As of June 30, 2007, the Company had a financial covenant default as defined under the Notes based on failure to meet the financial threshold relating to Consolidated EBITDA. On August 9, 2007, the note holders agreed to waive the default. Under the terms of the waiver, the note holders agreed to waive the default until August 20, 2007 to provide a reasonable period of time for the Company and the note holders to reach a final agreement on amending the Notes and the Warrants to modify the quarterly Consolidated EBITDA financial threshold, increase the interest rate on the Notes from 6.5% to 7.5%, increase the face amount of the Notes, grant the note holders the right to require the Company to redeem a portion of the Notes at face value on October 10, 2008, grant the Company the right to redeem a portion of the Notes at 130% of face value on October 10, 2008, modify the exercise price of the Warrants to 120% of the volume-weighted average price of the Company’s common stock for the three day period ending August 14, 2007, with a floor price of $7.25 and a ceiling price of $8.00, and issue new warrants to purchase an additional 175,000 shares. In the event the Company and the note holders are unable to execute such an agreement on or prior to August 20, 2007, the Company will be in default under the Notes and the note holders will be entitled to, among other things, accelerate the maturity of the outstanding balance of the Notes. If the Company is unable to secure alternative financing or raise additional capital to repay this outstanding balance at maturity, the note holders would be entitled to foreclose on substantially all of the Company’s assets, which secure the Notes. The 100 basis points increase, with all other factors remaining constant, would decrease earnings by approximately $0.2 million on a pre-tax basis. In the event of default under the Notes, the interest rate would increase to 12.0% beginning on the date of default. The 450 basis points increase, if effective for an entire year and with all other factors remaining constant, would decrease earnings by approximately $0.9 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 fees can be no less than 6.0% under any tier and requires fees in an amount equal to the prime rate plus 1.25% on balances over a certain maximum threshold. At June 30, 2007, the prime rate was 8.25%. 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 fees can be no less than 7.0%. At June 30, 2007, the prime rate was 8.25%. 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 June 30, 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 June 30, 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 June 30, 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. During the three months ended June 30, 2007, we completed implementation of the following changes to strengthen our internal control over financial reporting:

	•		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 were 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.

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. Such risks have not materially changed since December 31, 2006 except as described below.

We are not in compliance with certain financial performance covenants under our Senior Secured Convertible Notes

Our $20.0 million senior secured convertible notes contain strict financial covenants. Among other things, these covenants require us to maintain certain Consolidated Revenue, Consolidated Earnings Before Interest, Tax, Depreciation, and Amortization (“EBITDA”), and Total Debt to EBITDA Ratio (when applicable) as of each quarter end. At June 30, 2007, we had a financial covenant default as defined under the note agreements based on failure to meet the financial covenant relating to Consolidated EBITDA. On August 9, 2007, the note holders agreed to waive the default. Under the terms of the waiver, the note holders agreed to waive the default until August 20, 2007 to provide a reasonable period of time for the Company and the note holders to reach a final agreement on amending the Notes and the Warrants to modify the quarterly Consolidated EBITDA financial threshold, increase the interest rate on the Notes from 6.5% to 7.5%, increase the face amount of the Notes, grant the note holders the right to require the Company to redeem a portion of the Notes at face value on October 10, 2008, grant the Company the right to redeem a portion of the Notes at 130% of face value on October 10, 2008, modify the exercise price of the Warrants to 120% of the volume-weighted average price of the Company’s common stock for the three day period ending August 14, 2007, with a floor price of $7.25 and a ceiling price of $8.00, and issue new warrants to purchase an additional 175,000 shares. In the event the Company and the note holders are unable to execute such an agreement on or prior to August 20, 2007, the Company will be in default under the Notes and the note holders will be entitled to, among other things, accelerate the maturity of the outstanding balance of the Notes. If the Company is unable to secure alternative financing or raise additional capital to repay this outstanding balance at maturity, the note holders would be entitled to foreclose on substantially all of the Company’s assets, which secure the Notes.


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 June 30, 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. This stock repurchase program does not have an expiration date.


ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

As of June 30, 2007, the Company had a financial covenant default as defined under the Security Purchases Agreement based on failure to meet the financial threshold relating to Consolidated EBITDA. On August 9, 2007, the note holders agreed to waive the default. Under the terms of the waiver, the note holders agreed to waive the default until August 20, 2007 to provide a reasonable period of time for the Company and the note holders to reach a final agreement on amending the Notes and the Warrants to modify the quarterly Consolidated EBITDA financial threshold, increase the interest rate on the Notes from 6.5% to 7.5%, increase the face amount of the Notes, grant the note holders the right to force the Company to redeem a portion of the Notes at face value on October 10, 2008, grant the Company the right to redeem a portion of the Notes at 130% of face value on October 10, 2008, modify the strike price of the Warrants to 120% of the volume-weighted average price of the Company’s common stock for the three day period ending August 14, 2007, with a floor price of $7.25 and a ceiling price of $8.00, and issue new warrants to purchase an additional 175,000 shares. In the event the Company and the note holders are unable to execute such an agreement on or prior to August 20, 2007, the Company will be in default under the Notes and the note holders will be entitled to, among other things, accelerate the maturity of the outstanding balance of the Notes. If the Company is unable to secure alternative financing or raise additional capital to repay this outstanding balance at maturity, the note holders would be entitled to foreclose on substantially all of the Company’s assets, which secure the Notes.


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

Our Annual Meeting of Stockholders was held on June 6, 2007. There were two proposals up for approval. The results of voting are as follows:

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		15,170,771		1,583,487
Patrick R. Cruzen (1)(2)(3)	Director		16,690,621		63,637
Donald D. Snyder (1)(3)	Director		16,689,121		65,137
Patricia W. Becker (1)(3)	Director		16,689,121		65,137
Don R. Kornstein (1)(3)	Director		16,687,121		67,137


(1)		Member of the Audit Committee.

(2)		Audit Committee financial expert.

(3)		Member of the Compensation Committee.

To ratify the appointment of Virchow, Krause & Company, LLP as independent certified public accountants for the year ending December 31, 2007.


Total	Total
Votes For	Votes Against	Abstain
16,718,777	17,945	17,536


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 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: August 9, 2007



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

DATE: August 9, 2007

EXHIBIT INDEX
CASH SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2007


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. junior Avg

Cash Systems (CKNN) Inactive 10-Q2007 Q2 Quarterly report

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