UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

-------------------------

 

FORM 10-Q

 

(MARK ONE)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2012

 

OR

 

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

 

000-17874

(Commission file number)

 

-------------------------

GLOBAL AXCESS CORP

(Exact name of registrant as specified in its charter)

 

 

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

 

(904) 280-3950

(Registrant's telephone number, including area code)

-------------------------

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large accelerated Filer ¨	Accelerated Filer ¨
Non-accelerated Filer ¨	Smaller reporting Company x

 

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of Exchange Act). Yes ¨ No x

 

As of August 20, 2012, the registrant had 22,738,885 shares outstanding of its common stock, $0.001 par value.

 

 

 

TABLE OF CONTENTS		Page No.
PART  I	FINANCIAL INFORMATION
Item  1.	Financial Statements (unaudited)	4
Item  2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item  3.	Quantitative and Qualitative Disclosure About Market Risk	40
Item  4.	Controls and Procedures	41
PART II	OTHER INFORMATION
Item  1.	Legal Proceedings	41
Item  1A.	Risk Factors	41
Item  2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item  3.	Defaults Upon Senior Securities	41
Item  4.	Mine Safety Disclosures	41
Item  5.	Other Information	41
Item  6.	Exhibits	42
SIGNATURES		43

 

 

Forward-Looking Statements

 

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

 

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q that have been or are to be filed in 2012.

 

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

 

Estimates of future financial results are inherently unreliable.

 

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

 

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

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements (unaudited).

 

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		(Unaudited)				(Audited)
		June 30, 2012				December 31, 2011
ASSETS
Current assets
Cash and cash equivalents		$	301,251			$	975,363
Accounts receivable, net of allowance of $36,797 in 2012 and $26,451 in 2011			1,206,977				1,034,938
Inventory, net of allowance for obsolescence of $182,572 in 2012 and 2011			1,361,799				1,898,732
Deferred tax asset - current			13,968				315,960
Prepaid expenses and other current assets			175,423				115,602
Total current assets			3,059,418				4,340,595
Fixed assets, net			10,151,352				9,241,824
Other assets
Merchant contracts, net			11,847,092				12,435,353
Intangible assets, net			4,369,314				4,459,334
Deferred tax asset - non-current			1,961,243				1,659,251
Other assets			130,249				692,027
Total assets		$	31,518,668			$	32,828,384
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	5,334,698			$	5,704,245
Note payable - related party  - current portion, net			28,488				33,100
Notes payable - current portion			18,299				18,922
Senior lenders' notes payable - current portion, net			2,952,641				3,715,796
Capital lease obligations - current portion			344,980				316,377
Total current liabilities			8,679,106				9,788,440
Long-term liabilities
Interest rate swap contract			665,701				605,479
Note payable - related party - long-term portion			-				11,229
Notes payable - long-term portion			16,371				25,651
Senior lenders' notes payable - long-term portion			9,246,050				8,633,960
Capital lease obligations - long-term portion			68,151				46,979
Total liabilities			18,675,379				19,111,738
Stockholders' equity
Preferred stock; $0.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding			-				-
Common stock; $0.001 par value; 45,000,000 shares authorized,
23,205,358 and 23,174,108 shares issued and 22,728,795 and 22,712,977 shares
outstanding at June 30, 2012 and December 31, 2011, respectively			22,779				22,763
Additional paid-in capital			23,670,573				23,606,308
Accumulated other comprehensive loss			(665,701	)			(605,479	)
Accumulated deficit			(9,943,103	)			(9,075,687	)
Treasury stock; 476,563 and 461,131 shares of common stock at cost
at June 30, 2012 and December 31, 2011, respectively			(241,259	)			(231,259	)
Total stockholders' equity			12,843,289				13,716,646
Total liabilities and stockholders' equity		$	31,518,668			$	32,828,384

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
Revenues		$	8,155,130			$	8,293,743
Cost of revenues			5,741,341				5,232,206
Gross profit			2,413,789				3,061,537
Operating expenses
Depreciation expense			680,790				572,190
Amortization of intangible merchant contracts			325,435				291,220
Selling, general and administrative			1,584,718				1,832,866
Restructuring charges			47,551				27,221
Stock compensation expense			26,945				17,828
Total operating expenses			2,665,439				2,741,325
Operating income (loss)  from operations
before items shown below			(251,650	)			320,212
Interest expense, net			(301,248	)			(178,604	)
Gain (loss) on sale of assets			(710	)			63,541
Income (loss) from operations before income tax expense			(553,608	)			205,149
Income tax expense			(22,500	)			(22,000	)
Net income (loss)		$	(576,108	)		$	183,149
Income (loss) per common share - basic:
Net income (loss) per common share		$	(0.03	)		$	0.01
Income (loss) per common share - diluted:
Net income (loss) per common share		$	(0.03	)		$	0.01
Weighted average common shares outstanding:
Basic			22,728,795				22,556,526
Diluted			22,728,795				23,180,752

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
Net income (loss)		$	(576,108	)		$	183,149
Other comprehensive loss:
Unrealized losses on cash flow hedges			(78,420	)			(244,515	)
Total Other comprehensive loss			(78,420	)			(244,515	)
Total Comprehensive income (loss)		$	(654,528	)		$	(61,366	)

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
Revenues		$	16,451,430			$	16,243,814
Cost of revenues			11,378,149				10,108,376
Gross profit			5,073,281				6,135,438
Operating expenses
Depreciation expense			1,295,975				1,147,514
Amortization of intangible merchant contracts			652,279				579,658
Selling, general and administrative			3,319,691				3,774,512
Restructuring charges			47,551				512,261
Stock compensation expense			44,140				39,528
Total operating expenses			5,359,636				6,053,473
Operating income (loss) from operations
before items shown below			(286,355	)			81,965
Interest expense, net			(555,844	)			(349,501	)
Gain on sale of assets			19,783				63,541
Other non-operating expense, net			-				(112,500	)
Loss from operations before income tax benefit			(822,416	)			(316,495	)
Income tax expense			(45,000	)			(44,000	)
Net loss		$	(867,416	)		$	(360,495	)
Loss per common share - basic:
Net loss per common share		$	(0.04	)		$	(0.02	)
Loss per common share - diluted:
Net loss per common share		$	(0.04	)		$	(0.02	)
Weighted average common shares outstanding:
Basic			22,726,014				22,424,358
Diluted			22,726,014				22,424,358

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
Net loss		$	(867,416	)		$	(360,495	)
Other comprehensive loss:
Unrealized losses on cash flow hedges			(60,222	)			(244,515	)
Total Other comprehensive loss			(60,222	)			(244,515	)
Total Comprehensive loss		$	(927,638	)		$	(605,010	)

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

GLOBAL AXCESS CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
Cash flows from operating activities:
Net loss		$	(867,416	)		$	(360,495	)
Adjustments to reconcile net loss from operations
to net cash provided by operating activities:
Stock based compensation			44,140				39,528
Stock options issued to consultants in lieu of cash compensation			10,141				-
Depreciation expense			1,295,975				1,147,514
Amortization of intangible merchant contracts			652,279				579,658
Amortization of capitalized loan fees			95,743				37,447
Allowance for doubtful accounts			(10,346	)			(13,148	)
Gain on sale of assets			(19,783	)			(63,541	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Change in accounts receivable, net			(161,693	)			(458,988	)
Change in inventory, net			78,833				(465,477	)
Change in prepaid expenses and other current assets			(59,821	)			(66,861	)
Change in other assets			(16,300	)			(30,327	)
Change in intangible assets, net			(5,723	)			(13,305	)
Change in interest rate swap contract			-				244,515
Change in accounts payable and accrued liabilities			630,453				366,528
Net cash provided by operating activities			1,666,482				943,048
Cash flows from investing activities:
Cash paid for Tejas acquisition			-				(1,375,000	)
Proceeds from sale of property and equipment			-				61,250
Cash paid for Kum and Go acquisition			(1,000,000	)			-
Costs of acquiring merchant contracts			(64,018	)			(187,315	)
Purchase of fixed assets			(871,059	)			(950,582	)
Net cash used in investing activities			(1,935,077	)			(2,451,647	)
Cash flows from financing activities:
Proceeds from issuance of common stock			-				7,500
Proceeds from senior lenders'  notes payable			1,402,219				2,799,658
Principal payments on senior lenders'  notes payable			(1,553,284	)			(1,346,767	)
Principal payments on notes payable			(9,903	)			(10,580	)
Principal payments on note payable - related party			(15,841	)			(14,139	)
Principal payments on capital lease obligations			(228,708	)			(229,678	)
Net cash provided by (used in) financing activities			(405,517	)			1,205,994
Decrease in cash and cash equivalents			(674,112	)			(302,605	)
Cash and cash equivalents, beginning of period			975,363				1,743,562
Cash and cash equivalents, end of the period		$	301,251			$	1,440,957
Cash paid for interest		$	378,253			$	313,740

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

Supplemental schedule of non-cash investing and financing activities:

 

		For the Six Months Ended
SUPPLEMENTAL CASH FLOW INFORMATION		June 30, 2012				June 30, 2011
The significant non-cash investing and financing activities of the Company were as follows:
Operating activities:
Net transfer of de-installed net fixed assets to (from) inventory		$	477,883				119,213
Non-cash accrued interest expenses on swap agreement with senior lender			60,222				244,515
Total non-cash operating activities		$	538,105			$	363,728
Investing activities:
Purchase of assets under capital lease obligations		$	278,483			$	-
Net transfer of de-installed net fixed assets (to) from inventory			(477,883	)			(119,213	)
Total non-cash investing activities		$	(199,400	)		$	(119,213	)
Acquisition of assets of Tejas:
Computer equipment		$	-			$	25,400
DVD inventory			-				88,916
Merchant contracts			-				1,366,684
Assets acquired			-				1,481,000
Common stock issued, subject to restrictions			-				(106,000	)
Cash paid for Tejas acquisition		$	-			$	1,375,000
Financing activities:
Settlement of stock option exercises through issuance of treasury stock:
Repurchase of treasury stock, 15,432 and 287,437  shares of common stock at
cost for the years ended June 30, 2012 and 2011, respectively		$	(10,000	)		$	(138,545	)
Total non-cash financing activities		$	(10,000	)		$	(138,545	)

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

GLOBAL AXCESS CORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2012

(Unaudited)

 

1. BASIS OF PRESENTATION

 

The Accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Securities and Exchange Commission (the “SEC”) requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the Form 10-K, filed with the SEC, for the year ended December 31, 2011 of Global Axcess Corp and its subsidiaries (the “Company”).

 

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

 

The condensed consolidated financial information is unaudited. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2012 and the results of operations and cash flows presented herein have been included in the condensed consolidated financial statements. Interim results are not necessarily indicative of results of operations for the full year.

 

2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

Global Axcess Corp is a Nevada corporation organized in 1984. The Company, primarily through its wholly owned subsidiaries, Nationwide Money Services, Inc., Nationwide Ntertainment Services, Inc. and EFT Integration Inc., is an independent provider of self-service kiosk services. Nationwide Ntertainment Services, Inc. was formed during fiscal 2009. These solutions include ATM and DVD kiosk management and support services focused on serving the self-service kiosk needs of merchants, grocers, retailers and financial institutions nationwide. It is a one-stop gateway for unattended self-service kiosk management services. The Company currently owns, manages or operates a total of approximately 5,200 ATMs and DVD kiosks in its national network spanning 43 states.

 

Reclassifications

 

Certain amounts in the fiscal year 2011 consolidated financial statements have been reclassified to conform to the fiscal year 2012 presentation. Such reclassifications had no effect on the net income or stockholders’ equity as previously reported.

 

Total Revenue and Total Cost of Revenues Presentation

 

The Company presents “Revenues” and “Cost of Revenues” as a single line item in the condensed consolidated statements of operations. The following tables set forth the revenue and cost of revenues sources included in the single line items presented for the three-month and six-month periods ended June 30, 2012 and 2011:

 

 

Revenues:

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
ATM Surcharge / Convenience Fee revenue		$	4,884,609			$	4,092,768
ATM Interchange revenue			1,725,437				1,732,246
ATM Processing revenue			41,518				45,238
ATM Sales revenue			114,891				83,343
Other ATM revenue			285,353				341,114
DVD Rental revenue			1,103,322				1,999,034
Total revenue		$	8,155,130			$	8,293,743

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
ATM Operating revenue		$	6,936,917			$	6,211,366
ATM Sales revenue			114,891				83,343
DVD Operating revenue			1,103,322				1,999,034
Total revenue		$	8,155,130			$	8,293,743

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
ATM Surcharge / Convenience Fee revenue		$	9,806,661			$	7,887,152
ATM Interchange revenue			3,567,216				3,439,410
ATM Processing revenue			84,030				90,885
ATM Sales revenue			202,774				135,464
Other ATM revenue			620,195				688,375
DVD Rental revenue			2,170,554				4,002,528
Total revenues		$	16,451,430			$	16,243,814

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
ATM Operating revenue		$	14,078,102			$	12,105,822
ATM Sales revenue			202,774				135,464
DVD Operating revenue			2,170,554				4,002,528
Total revenues		$	16,451,430			$	16,243,814

 

 

Cost of Revenues:

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
ATM Merchant residual / commission costs		$	3,215,198			$	2,020,837
ATM Cost of cash			729,831				669,110
ATM Processing costs			251,031				294,200
ATM Communication costs			115,412				100,743
ATM Sales costs			66,390				79,416
Other ATM cost of revenues			573,609				410,703
DVD operating costs			789,870				1,657,197
Total cost of revenues		$	5,741,341			$	5,232,206

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
Cost of ATM Operating revenue		$	4,885,081			$	3,495,593
ATM Sales costs			66,390				79,416
Cost of DVD Operating revenue			789,870				1,657,197
Total cost of revenues		$	5,741,341			$	5,232,206

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
ATM Merchant residual / commission costs		$	6,350,655			$	3,921,956
ATM Cost of cash			1,527,277				1,355,492
ATM Processing costs			526,356				576,304
ATM Communication costs			230,507				202,658
ATM Sales costs			106,975				118,807
Other ATM cost of revenues			1,005,404				795,495
DVD operating costs			1,630,975				3,137,664
Total cost of revenues		$	11,378,149			$	10,108,376

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
Cost of ATM Operating revenue		$	9,640,199			$	6,851,905
ATM Sales costs			106,975				118,807
Cost of DVD Operating revenue			1,630,975				3,137,664
Total cost of revenues		$	11,378,149			$	10,108,376

 

 

Inventory

 

The components of inventory as of June 30, 2012 and December 31, 2011, respectively, are as follows: 

 

		June 30, 2012				December 31, 2011
ATM parts and supplies		$	197,341			$	150,585
Automated teller machines			179,312				197,971
DVD rental kiosks			646,661				1,106,338
DVD library			521,057				626,410
			1,544,371				2,081,304
Less: reserve for inventory obsolescence			182,572				182,572
Inventory, net		$	1,361,799			$	1,898,732

 

Fixed Assets

 

The components of fixed assets for the periods ended June 30, 2012 and December 31, 2011, respectively, are as follows: 

 

		June 30, 2012				December 31, 2011
Automated teller machines		$	14,350,584			$	12,839,512
DVD rental kiosks			4,109,200				3,446,242
Furniture and fixtures			455,787				455,787
Computers, equipment and software			3,601,772				3,450,568
Automobiles			473,641				473,641
Leasehold equipment			84,946				72,533
			23,075,930				20,738,283
Less: accumulated depreciation and amortization			12,924,578				11,496,459
Fixed assets, net		$	10,151,352			$	9,241,824

 

Intangible Assets – Goodwill and Merchant Contracts

 

The following table summarizes Intangible Assets and Merchant Contracts at June 30, 2012:

 

		Gross Carrying Value				Accumulated Amortization				Net
Goodwill		$	4,189,646			$	168,286			$	4,021,360
Other intangible assets			557,251				209,297				347,954
Merchant contracts, net			18,532,752				6,685,660				11,847,092
Total intangible assets, net and merchant contracts, net		$	23,279,649			$	7,063,243			$	16,216,406

 

Earnings per Share

 

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

 

For the three months ended June 30, 2012 there were stock options outstanding to acquire 987,510 shares of the Company’s common stock, and stock warrants to purchase 30,000 shares of common stock which were excluded from the calculation of its diluted earnings per share as their effect would be anti-dilutive. For the three months ended June 30, 2011 there were stock options outstanding to acquire 667,763 shares of the Company’s common stock which were excluded from the calculation of its diluted earnings per share as their effect would be anti-dilutive.

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
Numerator
Income (loss) from continuing operations		$	(576,108	)		$	183,149
Numerator for diluted income (loss) per share
available to common stockholders		$	(576,108	)		$	183,149
Denominator
Weighted average shares			22,728,795				22,556,526
Effect of dilutive securities:
Treasury method, effect of employee stock options & warrants			-				624,226
Denominator for diluted income (loss) per share adjusted
weighted shares after assumed exercises			22,728,795				23,180,752
Income (loss) per common share - basic:
Net income (loss) per common share		$	(0.03	)		$	0.01
Income (loss) per common share - diluted:
Net income (loss) per common share		$	(0.03	)		$	0.01

 

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
Numerator
Loss from continuing operations		$	(867,416	)		$	(360,495	)
Numerator for diluted loss per share
available to common stockholders		$	(867,416	)		$	(360,495	)
Denominator
Weighted average shares			22,726,014				22,424,358
Effect of dilutive securities:
Treasury method, effect of employee stock options & warrants			-				-
Denominator for diluted loss per share adjusted
weighted shares after assumed exercises			22,726,014				22,424,358
Loss per common share - basic:
Net loss per common share		$	(0.04	)		$	(0.02	)
Loss per common share - diluted:
Net loss per common share		$	(0.04	)		$	(0.02	)

 

 

 

Deferred Tax Asset

 

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

 

The Company had net deferred tax assets of $1,975,211 at June 30, 2012. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

The ultimate realization of the deferred tax assets are primarily dependent on generating sufficient future taxable income or being able to carryback any taxable losses and claim refunds against previously paid income taxes. Even though the Company incurred a loss in fiscal 2011 and 2010, it had taxable income for the two years prior and believes that based upon its business plan, it will return to future profitability, and as such, a portion of its net deferred income tax assets at June 30, 2012, is realizable. If future operating results generate taxable losses, it may be necessary to increase valuation allowances to reduce the amount of the deferred income tax assets to realizable value. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, operating results or other factors.

 

Recent Accounting Pronouncements

 

In September 2011, the FASB amended the guidance on the annual testing of goodwill for impairment. The amended guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. We adopted this guidance effective January 1, 2012. The adoption of this guidance did not have a material effect on our financial statements.

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. For annual periods, an entity has the option to present the components of comprehensive income (loss) either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. For interim periods, total comprehensive income (loss) is required to be disclosed either below net income (loss) on the income statement or as a separate statement. The ASU does not change the items that must be reported as other comprehensive income (loss). Whether presenting two separate statements or one continuous statement in annual periods, the ASU required entities to present reclassifications from other comprehensive income (loss) in the statement reporting net income (loss). In December 2011, however, the FASB deferred this requirement when it issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which has the same effective date as ASU 2011-05. Companies must continue to disclose reclassifications from other comprehensive income (loss) on the statement that reports other comprehensive income (loss), or in the notes to the financial statements. We adopted this guidance effective January 1, 2012, and included a statement of comprehensive income in our interim financial statements. The adoption of this guidance did not have a material effect on our financial statements.

 

 

 

3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consisted of the following as of June 30, 2012 and December 31, 2011:

 

		June 30, 2012				December 31, 2011
Accounts payable		$	1,736,985			$	2,457,270
Accrued commissions/residual payments			2,104,833				1,404,360
Accrued cost of cash and cash replenishment expenses			455,135				415,330
Accrued payroll			269,429				333,669
Accrued severance			85,566				237,391
Accrued audit fees			63,750				88,700
Accrued interest			86,050				1,573
Accrued legal fees			53,568				59,858
Asset retirement obligation			99,430				99,430
Accrued taxes			189,262				249,164
Other			190,690				357,500
Accounts payable and accrued liabilities		$	5,334,698			$	5,704,245

 

4. SENIOR LENDERS’ NOTES PAYABLE

 

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

 

		June 30, 2012				December 31, 2011
Fifth Third Bank, term loan (1)		$	2,083,333			$	2,500,000
Fifth Third Bank, equipment finance line (2)			7,037,457				6,538,897
Fifth Third Bank, draw loan (3)			306,345				743,150
Fifth Third Bank, draw loan #2 (4)			570,376				827,782
Fifth Third Bank, $1.65 million draw loan (5)			996,545				1,211,416
Fifth Third Bank, $3.0 million contract facility (6)			85,880				92,400
Fifth Third Bank, $1.0 million contract facility (7)			916,219				200,000
Fifth Third Bank, $250 thousand contract facility (8)			202,536				236,111
			12,198,691				12,349,756
Less: current portion			2,952,641				3,715,796
Long-term portion, net of senior lenders' notes payable		$	9,246,050			$	8,633,960

 

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

 

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

 

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

 

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

 

 

Effective June 1, 2012 the Company entered into a refinancing agreement on several of its credit facilities that effectively extended the amortization of principal from an average of 36 months to an average of 48 months. Additionally, this amendment called for no principal payments for June and July 2012 on select facilities; with principal payments on these facilities reset to August 1. In exchange for the extension of the amortization, the interest rate on all affected debt increased to one month LIBOR plus 750 basis points through March 2013. The affected facilities listed below are (2), (3), (5), (6), and (7).

 

(1). On the day of closing of the Loan Agreement, the Company issued a promissory note (the "Term Promissory Note") in the amount of $5.0 million to Fifth Third covering the amount disbursed pursuant to the term loan. The Term Promissory Note was available to the Company as a single principal advance. Principal and interest payable under the original Term Promissory Note were to be paid in the amount borrowed over 36 months, beginning July 1, 2010, with 36 monthly principal payments plus accrued interest, with the final payment to be made on May 31, 2013. On January 6, 2012, the Company entered into a modification (the “Modification”) of the Term promissory Note with Fifth Third. As part of the Modification, the Company re-amortized the principal balance of the $2.5 million on this note (as of December 31, 2011) from 17 months remaining to 36 months remaining. The original Term Promissory Note carries interest of LIBOR plus up to 400 basis points based on a ratio of the Company’s indebtedness to EBITDA or 5.5%, whichever is greater. As of June 30, 2012, Term Promissory Note had an outstanding principal balance of $2,083,333 and an interest rate of 5.5%.

 

(2). The equipment finance line is covered by a Master Equipment Lease Agreement, dated as of June 18, 2010 (the "Lease Agreement"), among the Company, Nationwide Money Services, Inc., Nationwide Ntertainment Services, Inc., and Fifth Third. The Lease Agreement and the corresponding equipment finance line available from Fifth Third are used to fund the purchases of up to $10.0 million of equipment (ATM and DVD kiosks), from time to time, and is available to the Company over a five year period. The line is secured by any equipment that is purchased pursuant to the line. The equipment line may also be used to support IT infrastructure. Borrowings made by the Company pursuant to this equipment line carry a term of one-year interest-only followed by an amortization of three years subsequent to each closing of a drawdown schedule. During an interim period between drawdowns and the closing of a drawdown schedule, the line carries interest-only payments. On March 31, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on a $3,976,531 equipment lease schedule with Fifth Third Bank which effectively fixed its LIBOR interest rate at 2.45% as of April 1, 2012. By fixing the LIBOR rate on its equipment lease schedule at 2.45% effective April 1, 2012, interest rate paid on the $3,976,531 equipment lease schedule was 6.45% beginning April 1, 2012. The Company entered into a minor modification of terms with this hedge in association with the June 1, 2012 refinancing agreement. This amendment was made in order to reflect the waiver that reset principal payments originally due in June and July of 2012 to August 1, 2012. All other terms of the hedge remained as originally agreed upon. As of June 30, 2012, the Company had drawn down a total of $7,203,916 against the Lease Agreement. $3,227,385 of the total draw down will be on an interim interest-only schedule. The interest rate on the $3,976,531 lease schedule at June 30, 2012 was 5.5%. The interest rate on the other leases under this master agreement as of June 30, 2012 is 7.75%, and the balance outstanding was $7,037,457.

 

(3). Also on the day of the closing of the Loan Agreement, the Company issued a promissory note (the "Draw Promissory Note") to Fifth Third covering any amounts which might be disbursed pursuant to the draw loan, which can be a maximum of $2.0 million. The Company can request disbursement from the draw loan in $200,000 increments at any time after the delivery of the Draw Promissory Note. The Company will repay any amounts borrowed pursuant to the Draw Promissory Note over 18 months, beginning on the first day of the month following any draw, with 18 monthly principal payments plus accrued interest. The original Draw Promissory Note carries interest of LIBOR plus up to 400 basis points based on a ratio of the Company’s indebtedness to EBITDA or 5.5%, whichever is greater. The amended promissory note carries interest of one month LIBOR plus 750 basis points. The proceeds of any amounts disbursed pursuant to the draw loan will be used to purchase DVD inventory for the Company’s DVD kiosk business line. As of June 30, 2012, the Company had drawn down a total of $1,994,678 against the Draw Promissory Note and had an outstanding principal balance of $306,345 and an interest rate of 7.75%.

 

(4). On September 28, 2011, the Company issued a promissory note (the "Draw Promissory Note # 2") to Fifth Third covering any amounts which might be disbursed pursuant to the draw loan, which can be a maximum of $960,000. The Company can request disbursement from the draw loan in $200,000 increments at any time after the delivery of the Draw Promissory Note. The Company will repay any amounts borrowed pursuant to the Draw Promissory Note over 18 months, beginning on the first day of the month following any draw, with 18 monthly principal payments plus accrued interest. The Draw Promissory Note carries interest of LIBOR plus up to 900 basis points based on a ratio of the Company’s indebtedness to EBITDA or 5.5%, whichever is greater. The proceeds of any amounts disbursed pursuant to the draw loan will be used to purchase DVD inventory for the Company’s DVD kiosk business line. As of June 30, 2012, the Company had drawn down a total of $960,000 against the Draw Promissory Note # 2 and had an outstanding principal balance of $570,376 and an interest rate of 9.2%.

 

 

(5). On December 17, 2010, the Company and Fifth Third entered into a First Amendment (the “Amendment”) to the Loan Agreement. Pursuant to the Amendment, the Company and Fifth Third modified the draw loan aspect of the Loan Agreement to permit for additional financing in the amount of $1,650,000 under the terms of the draw loan for the purposes of purchasing certain assets and customer contracts connected with recent acquisition agreements. The Amendment increased the maximum aggregate credit availability pursuant to the Loan Agreement from $17.0 million to $18.65 million. The draw loan maturity date is the earlier of 36 months (December 15, 2013) or the expiration or earlier termination of the customer agreements that were acquired with the proceeds of the draw loan. As security for the loan to be extended under the Amendment, in addition to that which was granted under the Loan Agreement, the Company granted security interests in the assets to be acquired pursuant to the recent acquisition agreements. The Amendment carries interest of LIBOR plus up to 400 basis points based on a ratio of the Company’s indebtedness to EBITDA or 5.5%, whichever is greater. Additionally, this draw loan was part of the refinancing amendment effective June 1, 2012. The amended promissory note as of June 1, 2012 increased interest to one month LIBOR plus 750 basis points. As of June 30, 2012, the Company had drawn down $1,500,718 against the Amendment and had an outstanding principal balance of $996,545. The interest rate on the balances under the Amendment at June 30, 2012 was 7.75%.

 

(6). On December 29, 2011, the Company, entered into a $3.0 million credit facility (“$3.0m credit facility”) with Fifth Third Bank. The credit facility consists of a draw loan of up to $3.0 million. On the day of closing of the Loan Agreement, the Company issued two promissory notes (the “Draw Loan C Promissory Notes”) in the amount of $40,800 and $51,600, respectively, to Fifth Third covering an initial disbursal pursuant to the draw loan. The Company will repay the amount borrowed on each of the Draw Loan C Promissory Notes, beginning on February 29, 2012, on the date which is the earlier of (i) 45 months following the date of the note, and (ii) the expiration date or earlier termination of the Customer Agreements; but, in any event, on either note, not later than May 31, 2015. The original Draw Loan C Promissory Notes carry interest of LIBOR plus up to 600 basis points or 6.0%, whichever is greater. The amended promissory notes carry interest of one month LIBOR plus 750 basis points. The proceeds of the Draw Loan C Promissory Notes were used to purchase certain identified customer contracts. The proceeds from any future draw loans made pursuant to the Loan Agreement shall be used for the acquisition of identified customer agreements, and purchases of ATM related equipment and inventory. As of June 30, 2012, the Company had an outstanding principal balance of $85,880 against the $3.0 m credit facility. The interest rate on the balances under the $3.0m credit facility at June 30, 2012 was 7.75%.

 

(7). On November 23, 2011, the Company, entered into a $1.0 million credit facility (“$1.0m credit facility”) with Fifth Third Bank. The credit facility consists of a draw loan of up to $1.0 million. On the day of closing of the $1.0m credit facility, the Company issued a promissory note in the amount of $200,000 to fund an acquisition of customer agreements. The Company will repay the amount borrowed on the date which is the earlier of (i) 38 months following the date of the note, and (ii) the expiration date or earlier termination of the Customer Agreements; but, in any event, on either note, not later than May 31, 2015. The original promissory note carries interest of LIBOR plus up to 600 basis points or 6.0%, whichever is greater. The amended promissory note carries interest of one month LIBOR plus 750 basis points. The proceeds from any future draw loans made pursuant to the $1.0m credit facility shall be used for the acquisition of identified customer agreements. As of June 30, 2012, the Company had an outstanding principal balance of $916,219 against the $1.0m credit facility. The interest rate on the balances under the $1.0m credit facility at June 30, 2012 was 7.75%.

 

(8). On November 21, 2011, the Company, entered into a $250,000 credit facility (“$250 thousand credit facility”) with Fifth Third Bank. The credit facility consists of a draw loan of up to $250,000. On the day of closing the $250 thousand credit facility, the Company paid $250,000 to fund an acquisition of customer ATMs. The Company will repay the amount borrowed on the date which is the earlier of (i) 36 months following the date of the note, and (ii) the expiration date or earlier termination of the Customer Agreements; but, in any event, on either note, not later than December 1, 2014. The promissory notes carry interest of LIBOR plus up to 600 basis points or 6.0%, whichever is greater. As of June 30, 2012, the Company had an outstanding principal balance of $202,536 against the $250 thousand credit facility. The interest rate on the balances under the $250 thousand credit facility at June 30, 2012 was 6.2%.

 

 

On May 26, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on $20 million with Fifth Third Bank which swapped the interest rate on the Company’s vault cash. The effective date of the rate swap was June 1, 2012. Beginning in June, the Company began realizing the difference between its variable rate, and effectively fixed rate of 3.05%.

 

As of June 30, 2012, the Company was out of compliance with two of its bank covenants and has received a waiver from Fifth Third Bank. See Financial Footnote #12 “Subsequent Events” regarding the details of this waiver along with other related information pertaining to an amended debt agreement.

 

5. COMMITMENTS AND CONTINGENCIES

 

We lease ATMs and back office computer equipment under capital lease agreements that expire between 2012 and 2013. The average interest rate paid on these lease payments is approximately 9.6% per annum. During the three-month period ended June 30, 2012, we extended two of our capital lease obligations and entered into one new capital lease. As of June 30, 2012, $413,131 of capital lease obligations were included in the Company’s condensed consolidated balance sheet.

 

6. LITIGATION AND CLAIMS

 

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

 

7. INCOME TAXES

 

The effective tax rates for the six months ended June 30, 2012 and 2011 were -5.47% and -13.90%, respectively. While there is no difference in the effective tax rate for the six months ended June 30, 2012 over the respective previous periods, the effective tax rates for the six months ended June 30, 2012 differs from our expected tax rates for the periods then-ended primarily due to the tax effects from the change in valuation allowance established for net deferred tax assets.

 

In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not, that some portion or all of the deferred tax assets will not be realized. The valuation allowance at June 30, 2012 is related to deferred tax assets arising from net operating loss carryforwards. Management believes that based upon its projection of future taxable income for the foreseeable future, it is more likely than not that the Company will not be able to realize the full benefit of the net operating loss carryforwards before they expire.

 

At December 31, 2011, the Company had net operating loss carryforwards remaining of approximately $25.5 million that may be offset against future taxable income through 2031.

 

For the six months ended June 30, 2012, there was no change in gross unrecognized tax benefits. Our total gross unrecognized tax benefit at June 30, 2012 was $1,147,200, of which, if recognized, would favorably affect the effective income tax rate in any future period.

 

Our continuing practice is to recognize interest and/or penalties related to uncertain income tax matters in income tax expense. However, the type of uncertain income tax matters involved would not forseeably subject the Company to interest and/or penalties. As such, we had $0 (net of federal tax benefit) accrued for interest and $0 accrued for penalties at June 30, 2012.

 

There were no income tax audits during the six months ended June 30, 2012. With limited exception, the Company’s federal and state tax returns are open for examination for the tax year ending 2008, and all subsequent years.

 

 

 

8. CHANGES IN STOCKHOLDERS' EQUITY

 

See the table below for all the equity transactions for the three-month period ended June 30, 2012:

 

																		Accumulated
										Additional								Other				Total								Total
		Common Stock								Paid-in				Accumulated				Comprehensive				Comprehensive				Treasury				Stockholders'
		Shares				Amount				Capital				Deficit				Loss				Loss				Stock				Equity
Balances, March 31, 2012			22,728,795			$	22,779			$	23,638,558			$	(9,366,995	)		$	(587,281	)						$	(241,259	)		$	13,465,802
Stock compensation expense			-				-				26,945				-				-				-				-				26,945
Stock options issued to consultants in lieu of cash compensation			-				-				5,070				-				-				-				-				5,070
Other comprehensive loss			-				-				-				-				(78,420	)			(78,420	)			-				(78,420	)
Net loss			-				-				-				(576,108	)			-				(576,108	)			-				(576,108	)
																							(654,528	)
Balances, June 30, 2012			22,728,795			$	22,779			$	23,670,573			$	(9,943,103	)		$	(665,701	)						$	(241,259	)		$	12,843,289

 

9. FAIR VALUE MEASUREMENT

 

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

 

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

 

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

 

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

 

On March 31, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on a $3,976,531 equipment lease schedule with Fifth Third Bank which will fix its LIBOR interest rate at 2.45% as of April 1, 2012. The Company expects that by fixing the LIBOR rate on its equipment lease schedule at 2.45% effective April 1, 2012, it will be fixing the interest rate paid on the $3,976,531 equipment lease schedule at 6.45% beginning April 1, 2012 and until then, will remain on an interest-only schedule. Our derivative financial instruments are interest rate swap agreements, which are observable at commonly quoted intervals for the full term of the derivatives and therefore considered a level 2 input.

 

On May 26, 2011 the Company entered into a 12-month forward looking interest rate swap agreement on $20 million with Fifth Third Bank which will swap the interest rate on the Company’s vault cash. The effective date of the rate swap is June 1, 2012 and until then, the Company will continue to pay its variable interest rate on the $20 million of vault cash. Our derivative financial instruments are interest rate swap agreements, which are observable at commonly quoted intervals for the full term of the derivatives and therefore considered a level 2 input.

 

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

 

 

						Fair Value Measurements at June 30, 2012
		Total				Level 1				Level 2				Level 3
Assets:
		$	-			$	-			$	-			$	-
Liabilities:
Liabilities associated with interest rate swaps		$	665,701			$	-			$	665,701			$	-

 

On a recurring basis, we measure our interest rate swap agreements at fair value using an income approach and Level 2 inputs in the fair value hierarchy. The income approach consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts incorporating observable market inputs as of the reporting date such as prevailing interest rates. Both the counterparty’s credit risk and our credit risk are considered in the fair value determination.

 

Interest rate swaps. The fair value of the Company's interest rate swaps was a liability of $665,701 as of June 30, 2012. These financial instruments are carried at fair value, calculated as the present value of amounts estimated to be received or paid to a marketplace participant in a selling transaction.

 

Cash Flow Hedging Strategy

 

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

 

The interest rate swap contract entered into with respect to the Company's equipment lease schedule effectively modifies the Company's exposure to interest rate risk by converting the Company's monthly floating LIBOR rate to a fixed rate. This contract is in place through March 31, 2015 for $3,976,531. The Company entered into a minor modification of terms with this hedge in association with the June 1, 2012 refinancing agreement. This amendment was made in order to reflect the waiver that reset principal payments originally due in June and July of 2012 to August 1, 2012. See Financial Footnote #4 “Senior Lender Notes’ Payable” regarding the details of this amendment. The interest rate swap contract entered into with respect to the Company's vault cash rental obligations effectively modifies the Company's exposure to interest rate risk by converting a portion of the Company's monthly floating rate vault cash rental expense to a fixed rate. Such contracts are in place from June 1, 2012 through June 1, 2014 for $20 million of the Company's vault cash rental obligations. By converting such amounts to a fixed rate, the impact of future interest rate changes (both favorable and unfavorable) on the Company's monthly vault cash rental expense amounts have reduced. The interest rate swap contract typically involves the receipt of floating rate amounts from the Company's counterparties that match, in all material respects, the floating rate amounts required to be paid by the Company to its vault cash provider for the portions of the Company's outstanding vault cash obligations that have been hedged. In return, the Company typically pays the interest rate swap counterparties a fixed rate amount per month based on the same notional amounts outstanding.

 

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

 

 

10. BUSINESS SEGMENT INFORMATION

 

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

 

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

 

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

 

 

		For the Three Months Ended								For the Six Months Ended
		June 30, 2012				June 30, 2011				June 30, 2012				June 30, 2011
Revenues:
ATM Services		$	7,051,808			$	6,294,709			$	14,280,876			$	12,241,286
DVD Services - The Exchange			1,103,322				1,103,589				2,170,554				2,172,475
DVD Services - Other			-				895,445				-				1,830,053
Corporate Support			-				-				-				-
Consolidated revenues		$	8,155,130			$	8,293,743			$	16,451,430			$	16,243,814
Gross profit:
ATM Services		$	2,100,338			$	2,719,700			$	4,533,702			$	5,270,574
DVD Services - The Exchange			313,451				460,575				539,579				1,005,394
DVD Services - Other			-				(118,738	)			-				(140,530	)
Corporate Support			-				-				-				-
Consolidated gross profit		$	2,413,789			$	3,061,537			$	5,073,281			$	6,135,438
SG&A:
ATM Services		$	988,439			$	959,591			$	2,050,018			$	2,036,158
DVD Services - The Exchange			184,629				167,229				369,635				362,766
DVD Services - Other			-				287,459				-				574,727
Corporate Support			411,650				418,587				900,038				800,861
Consolidated SG&A		$	1,584,718			$	1,832,866			$	3,319,691			$	3,774,512
Stock compensation expense:
ATM Services		$	-			$	-			$	-			$	-
DVD Services - The Exchange			-				-				-				-
DVD Services - Other			-				-				-				-
Corporate Support			26,945				17,828				44,140				39,528
Consolidated stock compensation expense		$	26,945			$	17,828			$	44,140			$	39,528
Depreciation & Amortization:
ATM Services		$	615,267			$	481,890			$	1,214,945			$	961,106
DVD Services - The Exchange			314,904				44,986				580,668				85,608
DVD Services - Other			-				259,991				-				527,642
Corporate Support			76,055				76,543				152,641				152,816
Consolidated depreciation & amortization		$	1,006,225			$	863,410			$	1,948,254			$	1,727,172
Restructuring charges:
ATM Services		$	47,551			$	38,520			$	47,551			$	62,738
DVD Services - The Exchange			-				-				-				-
DVD Services - Other			-				-				-				-
Corporate Support			-				(11,299	)			-				449,523
Consolidated restructuring charges		$	47,551			$	27,221			$	47,551			$	512,261
Operating income (loss):
ATM Services		$	449,081			$	1,239,699			$	1,221,188			$	2,210,572
DVD Services - The Exchange			(186,082	)			248,360				(410,724	)			557,020
DVD Services - Other			-				(666,188	)			-				(1,242,899	)
Corporate Support			(514,649	)			(501,659	)			(1,096,819	)			(1,442,728	)
Consolidated operating income (loss)		$	(251,650	)		$	320,212			$	(286,355	)		$	81,965
Net income (loss):
ATM Services		$	416,359			$	1,204,923			$	1,158,691			$	2,138,048
DVD Services - The Exchange			(184,834	)			248,360				(390,205	)			557,020
DVD Services - Other			-				(602,648	)			-				(1,141,859	)
Corporate Support			(807,633	)			(667,486	)			(1,635,902	)			(1,913,704	)
Consolidated net income (loss)		$	(576,108	)		$	183,149			$	(867,416	)		$	(360,495	)
Adjusted EBITDA:
ATM Services		$	1,111,899			$	1,738,109			$	2,483,684			$	3,190,416
DVD Services - The Exchange			128,822				293,346				169,944				642,628
DVD Services - Other			-				(406,197	)			-				(715,257	)
Corporate Support			(411,650	)			(418,587	)			(900,038	)			(800,861	)
Consolidated Adjusted EBITDA		$	829,071			$	1,206,671			$	1,753,590			$	2,316,926

 

 

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

 

		June 30, 2012				December 31, 2011
Assets:
ATM Services		$	27,462,232			$	28,062,465
DVD Services			4,056,436				4,765,919
Consolidated assets		$	31,518,668			$	32,828,384

 

11. RESTRUCTURING CHARGES

 

On February 28, 2011, the Company and George McQuain, the Company’s former Chief Executive Officer, agreed to a mutual separation of Mr. McQuain’s employment. As of February 28, 2011, Mr. McQuain is no longer employed as Chief Executive Officer, Director or in any other capacity, by the Company or any of its subsidiaries. The Company intends to pay Mr. McQuain the severance payments detailed in his Employment Agreement. The result of this separation coupled with other reductions in headcount was a restructuring charge of $512,261 recorded during the six month period ending June 30, 2011.

 

As of June 30, 2012, the Company had accrued $72,991 for severance obligations to Mr. McQuain included in accounts payable and accrued liabilities on the condensed consolidated balance sheet.

 

During the six-month period ended June 30, 2012, the Company incurred restructuring expenses due to headcount reductions of $47,551.

 

12. SUBSEQUENT EVENTS

 

Bank Amendment

 

On August 13, 2012, the Company entered into a waiver and amendment relating to several existing credit facilities with Fifth Third Bank.  The Waiver and Amendment relates to facilities entered into in connection with loan and lease facilities.  Principal payments relating to these facilities originally due in August of 2012, were reset with a due date matching the maturity date of the respective loan and lease agreements.    The following conditions apply to this amendment:

 

(a)

Waiver and Amendment Fee.  In consideration of waiver and amendment, the Company agrees to pay Fifth Third Bank a waiver and amendment fee of $100,000.  This fee is fully earned and due to Fifth Third as of August 13, 2012, but is not  payable until the earlier of the date on which all obligations to Fifth Third Bank are otherwise being repaid in full in cash and December 1, 2012.

 

(b)

Consultant. On or before August 16, 2012, the Company shall retain a consultant acceptable to Fifth Third Bank pursuant to an engagement agreement that is satisfactory to the bank.  All fees and expenses of the consultant shall be solely the responsibility of the Company.

 

(c)

Initial Consultant Report.  On or before August 31, 2012, the Company shall cause the consultant to deliver to Fifth Third Bank a written report prepared by the consultant summarizing the Company’s  current liquidity position, a 13-week budget in form and substance satisfactory to Fifth Third Bank and a written analysis of strategic alternatives regarding full repayment of all obligations owing to the bank and its affiliates.

 

(d)

Collateral Questionnaire.  On or before August 31, 2012, the Company shall deliver to Fifth Third Bank  a completed collateral questionnaire.

 

(e)

Investment Bankers Identification.  On or before August 31, 2012, the Company shall deliver to Fifth Third Bank the identities of not less than three investment bankers, along with proposed terms of engagement which the Company would be agreeable to retaining and engaging in connection with such strategic alternatives as the consultant and/or Fifth Third Bank may identify that are acceptable to the bank.

 

  

The Company is currently evaluating the impact this waiver will have, if any, on the future treatment of the equipment lease facility hedge.

  

CEO Appointment

 

On August 20, 2012, the Company announced that the Board of Directors has appointed Kevin L. Reager as President and Chief Executive Officer of the Company and as a director of the Company, effective August 21, 2012.

 

 

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

 

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

 

Overview

 

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

 

ATM Business Services

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

·

Low overall entry barriers;

 

·

Absence of national economies of scale;

 

·

Seasonal and geographic volume fluctuations;

 

·

The need for local presence in some market segments; and

 

·

The need for low overhead.

 

Additionally, our industry is showing increasing signs of being an industry in decline. Reasons for this market decline include:

 

·

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

 

·

Increasing acceptance of debit cards by younger demographics; and

 

·

Market saturation of prime ATM locations in the United States.

 

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

 

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

 

·

As our competitors seek to exit the business;

 

·

As our competitors encounter financial and regulatory difficulties; and

 

·

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

 

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

 

DVD Business Services

 

Nationwide Ntertainment Services, Inc., a wholly owned subsidiary of the Company formed during the fiscal year ended December 31, 2009, is engaged in the business of operating a network of DVD rental kiosks. We offer self-service DVD rentals through kiosks where consumers can rent or purchase movies or games. Our current DVD kiosks are installed primarily at military bases within the United States. Our DVD kiosks, through our brand InstaFlix, serve as a mini video rental store and occupy an area of less than ten square feet. Consumers use a touch screen to select their DVD, swipe a valid credit or debit card, and rent movies or games in some kiosks. The process is designed to be fast, efficient and fully automated with no upfront or membership fees.

 

 

Results of Operations

 

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

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
Revenues			100.0	%			100.0	%
Cost of revenues			70.4	%			63.1	%
Gross profit			29.6	%			36.9	%
Operating expenses
Depreciation expense			8.3	%			6.9	%
Amortization of intangible merchant contracts			4.0	%			3.5	%
Selling, general and administrative			19.4	%			22.1	%
Restructuring charges			0.6	%			0.3	%
Stock compensation expense			0.3	%			0.2	%
Total operating expenses			32.7	%			33.1	%
Operating income (loss) from operations
before items shown below			(3.1	%)			3.9	%
Interest expense, net			(3.7	%)			(2.2	%)
Gain (loss) on sale of assets			(0.0	%)			0.8	%
Income tax expense			(0.3	%)			(0.3	%)
Net income (loss)			(7.1	%)			2.2	%
EBITDA (1)			9.2	%			15.0	%

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
Revenues			100.0	%			100.0	%
Cost of revenues			69.2	%			62.2	%
Gross profit			30.8	%			37.8	%
Operating expenses
Depreciation expense			7.9	%			7.1	%
Amortization of intangible merchant contracts			4.0	%			3.6	%
Selling, general and administrative			20.2	%			23.2	%
Restructuring charges			0.3	%			3.2	%
Stock compensation expense			0.3	%			0.2	%
Total operating expenses			32.6	%			37.3	%
Operating income (loss) from operations
before items shown below			(1.7	%)			0.5	%
Interest expense, net			(3.4	%)			(2.2	%)
Gain on sale of assets			0.1	%			0.4	%
Other non-operating expense, net			(0.0	%)			(0.7	%)
Income tax expense			(0.3	%)			(0.3	%)
Net loss			(5.3	%)			(2.2	%)
EBITDA (1)			10.2	%			10.8	%

 

(1) See “—EBITDA” sections in: “Comparison of Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011”.

 

 

Comparison of Results of Operations for the Three Months Ended June 30, 2012 and 2011:

 

Revenues

 

The Company reported total operating revenue from operations of $8,155,130 for the three-month period ended June 30, 2012 as compared to $8,293,743 for the three-month period ended June 30, 2011, a decrease of 1.7% year over year.

 

Revenue from our ATM services business was up approximately 12.0% from the second quarter of 2011. We ended June 30, 2012 with 193 more ATMs than we ended with on June 30, 2011, and processed 8.2% more surcharge transactions in the second quarter of 2012 as compared to the second quarter of 2011.

 

During the second quarter of 2012, we benefited from having ATM transactions from ATM portfolios acquired subsequent to second quarter 2011. For the second quarter of 2012, we earned approximately $7,000 less interchange fees than we earned in the second quarter of 2011. This was due to an interchange reduction implemented by network sponsors during the second quarter of 2012. This interchange reduction was mostly offset by higher machine count and higher transactions per machine. Revenue from our DVD services business decreased approximately $896,000 from the second quarter of 2011. The decrease in DVD services revenue was due primarily to cancellation of a contract with a major customer resulting in removal of our DVD kiosks from this customer’s sites in December of 2011. This cancellation was the result of the customer’s bankruptcy proceedings. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).

 

Cost of Revenues

 

Our total cost of revenues from operations increased from $5,232,206 to $5,741,341 for the three-month period ended June 30, 2011 to the three-month period ended June 30, 2012. The increase was the result of approximately $1,380,000 of increased cost of revenues related to our ATM business. This increase was partially offset by approximately $870,000 of decreased cost of revenues related to our DVD business. Cost of revenues in our ATM services business increased primarily due to increased revenues, increased commission share resulting from renewals of new customer contracts, as well as an increase in ATM maintenance costs. The decrease in cost of revenues from our DVD services business was a function of decreased DVD rental revenue, and other reductions in cost of sales discussed below.

 

The principal components of cost of revenues in the ATM services business are retailer, merchant and distributor commissions (or revenue share), cost of cash, cash replenishment, ATM vault cash insurance, field maintenance, transaction processing charges, telecommunication costs and equipment costs on related equipment sales. The $1,380,000 increase was mainly due to increased commissions (or revenue share) due to higher revenues, new terms in certain customer renewal agreements, and increased first line and second line maintenance costs. Our cost of cash replenishment increased during the second quarter of 2012 from 2011 mainly due to the increased number of Company-owned ATMs in 2012 as compared to 2011. Cost of cash decreased year over year, due to a lower interest rate from our cash provider. First line and second line maintenance fees also increased over last year due to the increase in Company-owned ATMs as well as due to more aggressive billings by our ATM maintenance vendors.

 

The principal components of cost of revenues in the DVD services business are retailer and merchant commissions (or revenue share), amortization of our DVD library, DVD replenishment, field maintenance, credit card processing charges and telecommunication costs. The decrease in DVD services cost of sales was a function of decreased DVD rental revenue due primarily to cancellation of a contract with a major customer, which resulted in removal of our DVD kiosks from customer sites in December of 2011. Additionally, the Company reduced DVD library amortization due to the impairment of DVD titles in the third quarter of 2011, decreased DVD title purchases, and reduced processing costs. The contract cancellation was the result of the customer’s bankruptcy proceedings. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).

 

 

Gross Profit

 

Gross profit from operations as a percentage of revenue for the three-month periods ended June 30, 2012 and 2011 were approximately 29.6% or $2,413,789, and approximately 36.9%, or $3,061,537, respectively. The decreased gross profit for the second quarter of 2012 versus the same period in 2011 was mainly attributable to the increased cost of sales for the ATM services business and the decreased rental revenue from DVD services discussed above.

 

Gross profit percentage in the ATM services business for the second quarter of 2012 was 29.8%, which is lower than the 43.2% gross profit for the same period in 2011. The decrease in gross profit percentage for the ATM services business was attributable to the increased cost of revenues discussed above.

 

Gross profit percentage in the DVD services business for the second quarter of 2012 was 28.4%, which is higher than the 17.1% gross profit for the same period in 2011. The increase in gross profit percentage for the DVD services business was attributable to the decreased cost of revenues discussed above.

 

Operating Expenses

 

Our total operating expenses for the three months ended June 30, 2012 and 2011 were $2,665,435 and $2,741,325 respectively. The principal components of operating expenses are general and administrative expenses such as professional and legal fees, administrative salaries and benefits, consulting and audit fees, occupancy costs, sales and marketing expenses and administrative expenses. Operating expenses also include depreciation, amortization of intangible merchant contracts and stock compensation expenses.

 

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

 

		For the Three Months Ended								2012 to 2011				2012 to 2011
		June 30, 2012				June 30, 2011				$ Change				% Change
Depreciation expense		$	680,790			$	572,190			$	108,600				19.0	%
Amortization of intangible merchant contracts			325,435				291,220				34,215				11.7	%
Selling, general and administrative			1,584,718				1,832,866				(248,148	)			(13.5	%)
Restructuring charges			47,551				27,221				20,330				74.7	%
Stock compensation expense			26,945				17,828				9,117				51.1	%
Total operating expenses		$	2,665,439			$	2,741,325			$	(75,886	)			(2.8	%)

 

See explanation of operating expenses below:

 

Depreciation Expense

 

Depreciation expense from operations increased for the three-month period ended June 30, 2012 to $680,790 from $572,190 for the same period in 2011. This increase in depreciation expense was mainly due to an increase of Company owned kiosks, as well as re-introduction of previously suspended DVD kiosk depreciation to coincide with re-deployment of warehoused machines. The warehousing of these machines was the result of cancellation of a contract with a major customer. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).

 

Amortization of Intangible Merchant Contracts

 

Amortization of intangible merchant contracts from operations increased for the three-month period ended June 30, 2012 to $325,435 from $291,220 for the same period in 2011. The increase from 2011 was due to the amortization of contracts in the ATM services business acquired subsequent to the second quarter of 2011.

 

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

 

Our total SG&A expenses from operations decreased to $1,584,718, or 19.4% of revenue for the three-month period ended June 30, 2012 from $1,832,866 or 22.1% of revenue for the three-month period ended June 30, 2011. The decrease in SG&A expenses was mainly due to approximately $134,000 of decreased headcount and other salary related expenses, approximately $60,000 in reduced SG&A expenses related to cost of DVD kiosks leased in 2011 and $30,000 in reduced travel expenses.

 

 

Restructuring Charges

 

The Company incurred restructuring expenses due to headcount reductions of $47,551 for the three months ended June 30, 2012 and $27,221 for the three months ended June 30, 2011.

 

Stock Compensation Expense

 

For the three months ended June 30, 2012, we recorded stock compensation expense of $26,945, mainly relating to executive and director stock option grants during fiscal years 2007 through 2012. For the three months ended June 30, 2011, we recorded stock compensation expense of $17,828.

 

Interest Expense, Net

 

Interest expense, net, increased for the three-month period ended June 30, 2012 to $301,248 from $178,604 for the three-month period ended June 30, 2011. The increase was mainly due to portions of our two cash flow hedges becoming effective during the second quarter of 2012, as well as increased debt balances year over year. See Financial Footnote #4 “Senior Lenders’ Notes Payable” regarding the details of the debt balances.

 

Gain (Loss) on Sale of Assets

 

During the three-month period ended June 30, 2012, the Company recorded a loss on the sale of assets of $710.

 

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

 

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

 

		Net Book				Estimated proceeds		Impairment
Long-lived asset description		Value				from disposition		Charge
DVD rental kiosks and related software		$	604,493			$122,500		$	481,993
								$	481,993

 

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

 

 

EBITDA

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The following table sets forth a reconciliation of net income (loss) to EBITDA from operations for the three months ended June 30, 2012 and 2011:

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
Net income (loss)		$	(576,108	)		$	183,149
Income tax expense			22,500				22,000
Interest expense, net			301,248				178,604
Depreciation expense			680,790				572,190
Amortization of intangible merchant contracts			325,435				291,220
EBITDA from operations		$	753,865			$	1,247,163

 

Our EBITDA from operations decreased to $753,865 for the second quarter of fiscal 2012 from $1,247,163 for the second quarter of fiscal 2011. The decrease was primarily due to approximately $620,000 of decreased margin from the ATM business coupled with approximately $30,000 of decreased margin from the DVD business as well as a decrease of approximately $60,000 of gain on sale of asset. These factors were partially offset by a decrease in SG&A expense of approximately $250,000 year over year.

 

The following table sets forth a reconciliation of net income (loss) to EBITDA from operations before restructuring charges, stock compensation expense, and (gain) loss on sale of assets (“Adjusted EBITDA”) for the three months ended June 30, 2012 and 2011:

 

 

		For the Three Months Ended
		June 30, 2012				June 30, 2011
Net income (loss)		$	(576,108	)		$	183,149
Income tax expense			22,500				22,000
Interest expense, net			301,248				178,604
Depreciation expense			680,790				572,190
Amortization of intangible merchant contracts			325,435				291,220
Restructuring charges			47,551				27,221
Stock compensation expense			26,945				17,828
(Gain) loss on sale of assets			710				(63,541	)
Adjusted EBITDA from operations		$	829,071			$	1,228,671

 

Our Adjusted EBITDA decreased to $829,071 for the second quarter of fiscal 2012 from $1,228,671 for the second quarter of fiscal 2011. Adjusted EBITDA as a percentage of revenues decreased to 10.2% for the second quarter of fiscal 2012 from 14.8% for the second quarter of fiscal 2011. The decrease in Adjusted EBITDA from operations was due to lower gross margin contributed by our ATM and DVD services business for the second quarter of 2012 as compared to the gross margin contributed by our ATM and DVD services business for the second quarter of 2011, partially offset by a decrease in SG&A.

 

Comparison of Results of Operations for the Six Months Ended June 30, 2012 and 2011:

 

Revenues

 

The Company reported total operating revenue of $16,451,430 for the six-month period ending June 30, 2012 as compared to $16,243,814 for the six month period ended June 30, 2011, an increase of 1.3% year over year.

 

Revenue from our ATM services business was up approximately 16.7% year over year for the six month period ending June 30, 2012. We ended June 30, 2012 with 193 more ATMs than we ended with on June 30, 2011, and processed 9.8% more surcharge transactions for the six month period ending June 2012 as compared to the six month period ending June 2011. During the six months ending June 30, 2012, we benefited from having ATM transactions from ATM portfolios acquired subsequent to the six months ending June 30, 2011. Additionally, we raised surcharge fees during the first quarter of 2011 which helped grow our ATM surcharge revenue by 24.3% year over year as the six months ending June 30, 2012 benefitted from a full quarter of this increase. We earned approximately $128,000 more interchange fees for six months ending June 30, 2012 than we earned for the six months ending June 30, 2011, due to a higher machine count and higher transactions per machine. Revenue from our DVD services business decreased approximately $1,830,000 for the six months ending June 30, 2012, compared to the six months ending June 30, 2011. The decrease in DVD services revenue was due primarily to cancellation of a contract with a major customer resulting in removal of our DVD kiosks from this customer’s sites in December of 2011. This cancellation was the result of the customer’s bankruptcy proceedings. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).

 

Cost of Revenues

 

Our total cost of revenues from operations increased from $10,108,376 to $11,378,149 for the six-month period ended June 30, 2011 to the six-month period ended June 30, 2012. The increase was the result of approximately $2,776,000 of increased cost of revenues related to our ATM business. This increase was partially offset by approximately $1,507,000 of decreased cost of revenues related to our DVD business. Cost of revenues in our ATM services business increased primarily due to increased revenues, increased commission share resulting from renewals of customer contracts, as well as an increase in ATM maintenance costs. The decrease in cost of revenues from our DVD services business was a function of decreased DVD rental revenue, and other reductions in cost of sales discussed below.

 

 

The principal components of cost of revenues in the ATM services business are retailer, merchant and distributor commissions (or revenue share), cost of cash, cash replenishment, ATM vault cash insurance, field maintenance, transaction processing charges, telecommunication costs and equipment costs on related equipment sales. The $2,776,000 increase was mainly due to increased commissions (or revenue share) due to higher revenues, new terms in certain customer renewal agreements, and increased first line and second line maintenance costs. Our cost of cash replenishment increased for the six months ending June 30, 2012, from the same period in 2011 mainly due to the increased number of Company-owned ATMs in 2012 as compared to 2011. Cost of cash decreased year over year, due to a lower interest rate from our cash provider. First line and second line maintenance fees also increased over last year due to the increase in Company-owned ATMs as well as due to more aggressive billings by our ATM maintenance vendor.

 

The principal components of cost of revenues in the DVD services business are retailer and merchant commissions (or revenue share), amortization of our DVD library, DVD replenishment, field maintenance, credit card processing charges and telecommunication costs. The decrease in DVD services cost of sales was a function of decreased DVD rental revenue due primarily to cancellation of a contract with a major customer, which resulted in removal of our DVD kiosks from customer sites in December of 2011. Additionally, the Company reduced DVD library amortization due to the impairment of DVD titles in the third quarter of 2011, decreased DVD title purchases, and reduced processing costs. The contract cancellation was the result of the customer’s bankruptcy proceedings. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).

 

Gross Profit

 

Gross profit from operations as a percentage of revenue for the six-month periods ended June 30, 2012 and 2011 were approximately 30.8% or $5,073,281 and approximately 37.8%, or $6,135,438 respectively. The decreased gross profit for the second quarter of 2012 versus the same period in 2011 was mainly attributable to increased ATM cost of sales and the decreased rental revenue from DVD services discussed above.

 

Gross profit in the ATM services business for the six-month period ended June 30, 2012 was 31.7%, which is lower than the 43.1% gross profit for the same period in 2011. The decrease in gross profit percentage in the ATM services business was attributable to the increased cost of revenues discussed above.

 

Gross profit in the DVD services business for the six-month period ended June 30, 2012 was 24.9%, which is higher than the 21.6% gross profit for the same period in 2011. The increase in gross profit percentage for the DVD services business was attributable to the decreased cost of revenues discussed above.

 

Operating Expenses

 

Our total operating expenses for the six months ended June 30, 2012 and 2011 were $5,359,636 and $6,053,473 respectively. The principal components of operating expenses are general and administrative expenses such as professional and legal fees, administrative salaries and benefits, consulting and audit fees, occupancy costs, sales and marketing expenses and administrative expenses. Operating expenses also include depreciation, amortization of intangible merchant contracts and stock compensation expenses.

 

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

 

		For the Six Months Ended								2012 to 2011				2012 to 2011
		June 30, 2012				June 30, 2011				$ Change				% Change
Depreciation expense		$	1,295,975			$	1,147,514			$	148,461				12.9	%
Amortization of intangible merchant contracts			652,279				579,658				72,621				12.5	%
Selling, general and administrative			3,319,691				3,774,512				(454,821	)			(12.0	%)
Restructuring charges			47,551				512,261				(464,710	)			(90.7	%)
Stock compensation expense			44,140				39,528				4,612				11.7	%
Total operating expenses		$	5,359,636			$	6,053,473			$	(693,837	)			(11.5	%)

 

See explanation of operating expenses below:

 

 

Depreciation Expense

 

Depreciation expense from operations increased for the six-month period ended June 30, 2012 to $1,295,975 from $1,147,514 for the same period in 2011. This increase in depreciation expense was mainly due to an increase of Company owned kiosks, as well as re-introduction of previously suspended DVD kiosk depreciation to coincide with re-deployment of warehoused machines. The warehousing of these machines was the result of cancellation of a contract with a major customer. (See Financial Statement Footnotes #24 and #25 "Impairment of Long-Lived Assets" and "Impairment of Assets" included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more on the impact of this cancellation).

 

Amortization of Intangible Merchant Contracts

 

Amortization of intangible merchant contracts from operations increased for the six-month period ended June 30, 2012 to $652,279 from $579,658 for the same period in 2011. The increase from 2011 was due to the amortization of contracts in the ATM services business acquired subsequent to the second quarter of 2011.

 

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

 

Our total SG&A expenses from operations decreased to $3,319,691, or 20.2% of revenue for the six-month period ended June 30, 2012 from $3,774,512 or 23.2% of revenue for the six-month period ended June 30, 2011. The decrease in SG&A expenses was mainly due to approximately $270,000 of decreased headcount-related expenses, approximately $120,000 in reduced SG&A expenses related to cost of DVD kiosks leased in 2011 and $50,000 in reduced travel expenses.

 

Restructuring Charges

 

On February 28, 2011, the Company and George McQuain, the Company’s former Chief Executive Officer, agreed to a mutual separation of Mr. McQuain’s employment. As of February 28, 2011, Mr. McQuain is no longer employed as Chief Executive Officer, Director or in any other capacity, by the Company or any of its subsidiaries. The Company intends to pay Mr. McQuain the severance payments detailed in his Employment Agreement. The result of this separation coupled with other reductions in headcount was a restructuring charge of $512,261 recorded during the six month period ending June 30, 2011.

 

As of June 30, 2012, the Company had accrued $72,991 for severance obligations to Mr. McQuain included in accounts payable and accrued liabilities on the condensed consolidated balance sheet.

 

During the six-month period ended June 30, 2012, the Company incurred restructuring expenses due to headcount reductions of $47,551.

 

Stock Compensation Expense

 

For the six months ended June 30, 2012, we recorded stock compensation expense of $44,140, mainly relating to executive and director stock option grants during fiscal years 2007 through 2012. For the six months ended June 30, 2011, we recorded stock compensation expense of $39,528.

 

Interest Expense, Net

 

Interest expense, net, increased for the six-month period ended June 30, 2012 to $555,844 from $349,501 for the six-month period ended June 30, 2011. The increase was mainly due to portions of our two cash flow hedges becoming effective during the second quarter of 2012, as well as increased debt balances year over year. See Financial Footnote #4 “Senior Lenders’ Notes Payable” regarding the details of the debt balances.

Gain on Sale of Assets

 

During the six-month period ended June 30, 2012, the Company recorded a gain on the sale of assets of approximately $20,493. This was the result of fully amortized DVD’s sold for cash. This gain was partially offset by a loss on sale of assets for approximately $710.

 

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

 

 

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

 

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

 

EBITDA

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

The following table sets forth a reconciliation of net loss to EBITDA from operations for the six months ended June 30, 2012 and 2011:

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
Net loss		$	(867,416	)		$	(360,495	)
Income tax expense			45,000				44,000
Interest expense, net			555,844				349,501
Depreciation expense			1,295,975				1,147,514
Amortization of intangible merchant contracts			652,279				579,658
EBITDA from operations		$	1,681,682			$	1,760,178

 

Our EBITDA from operations decreased to $1,681,682 for the first six months of fiscal 2012 from $1,760,178 for the first six months of fiscal 2011. The decrease was primarily due to approximately $737,000 of decreased margin from the ATM business coupled with approximately $325,000 of decreased margin from the DVD business as well as a decrease of approximately $44,000 from gain on sale of assets. These factors were partially offset by a decrease in SG&A expense of approximately $455,000 year over year, along with year over year decrease in restructuring charges of approximately $465,000.

 

The following table sets forth a reconciliation of net loss to EBITDA from operations before restructuring charges, stock compensation expense, gain on sale of assets and other non-operating expense (“Adjusted EBITDA”) for the six months ended June 30, 2012 and 2011:

 

		For the Six Months Ended
		June 30, 2012				June 30, 2011
Net loss		$	(867,416	)		$	(360,495	)
Income tax expense			45,000				44,000
Interest expense, net			555,844				349,501
Depreciation expense			1,295,975				1,147,514
Amortization of intangible merchant contracts			652,279				579,658
Restructuring charges			47,551				512,261
Stock compensation expense			44,140				39,528
Gain on sale of assets			(19,783	)			(63,541	)
Other non-operating expense, net			-				112,500
Adjusted EBITDA from operations		$	1,753,590			$	2,360,926

 

Our Adjusted EBITDA decreased to $1,753,590 for the six month period ending June 30, 2012 from $2,360,926 for the six month period ending June 30, 2011. Adjusted EBITDA as a percentage of revenues decreased to 10.7% for the six month period ending June 30, 2012 from 14.5% for the six month period ending June 30, 2011. The decrease in Adjusted EBITDA from operations was due to lower gross margin contributed

by our ATM and DVD services business for the second quarter of 2012 as compared to the gross margin contributed by our ATM and DVD services business for the second quarter of 2011, partially offset by a decrease in SG&A.

 

Seasonality – ATM Services

 

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

 

 

Seasonality – DVD Services

 

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

 

Liquidity and Capital Resources

 

Financial Condition

 

		For the Six Months Ended								2012 to 2011				2012 to 2011
		June 30, 2012				June 30, 2011				$ Change				% Change
Net cash provided by operating activities		$	1,666,482			$	943,048			$	723,434				76.7	%
Net cash used in investing activities			(1,935,077	)			(2,451,647	)			516,570				(21.1	%)
Net cash provided by (used in) financing activities			(405,517	)			1,205,994				(1,611,511	)			(133.6	%)
Decrease in cash		$	(674,112	)		$	(302,605	)		$	(371,507	)

 

Operating Activities

 

During the first six months of 2012 net cash provided by operating activities amounted to $1,666,482. Net cash provided by operating activities amounted to $943,048 during the first six months of 2011. This increase was the result of lower inventory spending, a lower increase in accounts receivable in the first quarter of 2012, as well as an increase in accounts payable when compared to the first six months quarter of 2011.

 

Investing Activities

 

Net cash used in investing activities from operations for the first six months of 2012 was $1,935,077. This compares to net cash used in investing activities of $2,451,647 for the six-month period ended June 30, 2011. The decrease in cash used in investing activities from fiscal 2011 was mainly due to a decrease of cash paid for acquisitions of $375,000 from the first six months of 2011 compared to the first six months of 2012.

 

Financing Activities

 

Net cash used in financing activities was $405,517 due to pay-down of senior lender notes (discussed in Financial Footnote #4 “Senior Lenders’ Notes Payable”) and capital leases during the first six months of 2012. This compared to funds provided by financing activities of $1,205,994 for the same period in fiscal 2011.

 

Working Capital

 

As of June 30, 2012, the Company had current assets of $3,059,418 and current liabilities of $8,679,106, which results in negative working capital of $5,619,688. This compares to a working capital deficit of $5,447,845 that existed at December 31, 2011. In order to overcome these working capital constraints and to meet our obligations, the Company may need to raise additional funds through debt or equity offerings. There can be no assurance as to the availability of any needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to management. In interim period(s) prior to this potential procurement of capital, the Company may need additional waivers from our bank in the form of principal payment forbearance, as well as waivers on meeting certain covenants.

 

Significant Changes in Balance Sheet Accounts

 

As of June 30, 2012, cash and cash equivalents decreased $674,112 to $301,251 from the December 31, 2011 balance of $975,363. The decrease was primarily due to decreased profit margin stemming from higher revenue share from renewals of two major customer contracts.

 

As of June 30, 2012, accounts payable and accrued liabilities, decreased $369,547 to $5,334,698 from the December 31, 2011 balance of $5,704,245. The decrease was mainly due to $1,000,000 of accounts payable paid during the first quarter 2012 relating to the purchase of the Rocky Mountain ATM portfolio (Kum and Go). (See Financial Footnote #3 “Acquisitions of Assets” included in our Annual Report on Form 10-K for the year ended December 31, 2011 for information regarding this acquisition). This decrease was partially offset by increases in other trade accounts payable.

 

 

As of June 30, 2012, inventory decreased $536,933 to $1,361,799 from the December 31, 2011 balance of $1,898,732. This was the result of re-deploying DVD kiosks during the quarter, that were in the warehouse at the end of fiscal 2011. This redeployment also contributed to the $909,528 increase in net fixed assets from the end of fiscal 2011 to June, 30 2012.

 

Additional Funding Sources

 

The Company does not use its own funds for vault cash, but rather relies upon third party sources. The Company, in general, rents the vault cash from financial institutions and pays a negotiated interest rate for the use of the money. The vault cash is never in the possession of, controlled or directed by the Company, but, rather, cycles from the bank to the armored car carrier and to the ATM. Each day’s withdrawals are settled back to the owner of the vault cash on the next business day. Both Nationwide and its customers (the merchants) sign a document stating that the vault cash belongs to the financial institution and that neither party has any legal rights to the funds. The required vault cash is obtained under the following arrangements:

 

·

Wilmington Savings Fund Society (“WSFS”). Beginning in September 2004, the Company began an arrangement with Wilmington Savings Fund Society allowing us to obtain up to $20,000,000 in vault cash. The WSFS contract may be terminated by WSFS at any time upon breach by us and upon the occurrence of certain other events. The contract currently in place with WSFS expires on October 31, 2012, with a one year automatic renewal period unless one party gives 60 days notice of their intention not to renew. As of June 30, 2012, the Company had 250 ATMs funded by WSFS with a vault cash outstanding balance of approximately $10,005,000 in connection with this arrangement.

 

·

Elan. On September 1, 2011, we entered into an amendment to our Cash Provisioning Agreement (through our sub-agreements with vault cash carriers) with Elan allowing us to obtain up to $100,000,000 in vault cash. The Elan contract may be terminated by Elan at any time upon breach by us and upon the occurrence of certain other events. As of June 30, 2012, the Company had 2,043 ATMs funded by Elan with a vault cash outstanding balance of approximately $44,877,000.

 

·

Various Branded Cash Partners. Nationwide has partnered with numerous banks and credit unions to market specific Nationwide ATMs to the cardholders of these institutions. We add signage and marketing material to the ATM so that the ATM is easily identified as being associated with the bank or credit union, and the cardholders of these institutions receive surcharge free transactions at the designated ATMs. This provides the bank or credit union additional marketing power and another point of access to funds for their cardholders. In return for this benefit, the bank or credit union, provides and manages the vault cash in the specified ATM(s), as well as provides and pays for cash replenishment and first line maintenance. The advantage to Nationwide is that this reduces the costs associated with vault cash, cash replenishment and first line maintenance by approximately 50%. Another advantage is that with a branded ATM, transaction volumes traditionally increase more than at non-branded ATMs. As of June 30, 2012, Nationwide had 37 branded financial partners, which funded 351 ATMs.

 

Impact of Inflation and Changing Prices

 

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

 

 

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.

 

Not applicable.

 

 

ITEM 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report, we have carried out an evaluation of the effectiveness of the design and operation of our Company’s disclosure controls and procedures. Under the direction of our Interim President and Interim Chief Executive Officer and our Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of June 30, 2012.

 

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

 

Changes in Internal Control Over Financial Reporting

 

There were no changes to internal controls over financial reporting that occurred during the three months ended June 30, 2012 that have materially affected, or are reasonably likely to materially impact, our internal controls over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings.

 

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

 

ITEM 1A. Risk Factors.

 

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

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

 

None.

 

ITEM 3. Defaults Upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

ITEM 5. Other Information

 

None.

 

 

ITEM 6. Exhibits

   

Exhibit
Number	Description
3.1	Articles of Incorporation - Restated and Amended May 30, 2001 (Incorporated by reference to Form 10KSB, filed with the SEC on March 31, 2003).
3.2	By-Laws of Global Axcess Corp - As Amended and Restated (Incorporated by reference to Form 8-K, filed with the SEC on April 6, 2010).
3.3	Amendment to the Articles of Incorporation (Incorporated by reference to Form 10-K/A ,filed with the SEC on January 28, 2011).
4.1	Amendment to Global Axcess Loan and Security Agreement, entered May 10, 2012, effective as of January 1, 2012, by and between Global Axcess Corp. (and affiliates) and Fifth Third Bank (Incorporated by reference to Form 8-K, filed with the SEC on May 15, 2012).
4.2	Amendment to Four Certain Global Axcess Loan and Security Agreements, entered May 31, 2012, by and between Global Axcess Corp. (and affiliates) and Fifth Third Bank (Incorporated by reference to Form 8-K, filed with the SEC on June 6, 2012).
4.3	Amendment to Master Equipment Lease Agreement and Equipment Schedule – No.001, entered May 31, 2012, by and between Global Axcess Corp. (and affiliates) and Fifth Third Equipment Finance Company (Incorporated by reference to Form 8-K, filed with the SEC on June 6, 2012).*
4.4	Amendment to Four Certain Global Axcess Loan and Security Agreements, entered June 30, 2012, by and between Global Axcess Corp. (and affiliates) and Fifth Third Bank (Incorporated by reference to Form 8-K, filed with the SEC on July 6, 2012).
31.1	Certification of the Chief Executive Officer of Global Axcess Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of the Chief Financial Officer of Global Axcess Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of the Chief Executive Officer of Global Axcess Corp pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification of the Chief Financial Officer of Global Axcess Corp pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

  

*Filed herewith.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as of August 20, 2012 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

GLOBAL AXCESS CORP

 

By: /s/ Lock Ireland

---------------------------------

Lock Ireland

Interim Chief Executive Officer, Vice Chairman and Director

(interim principal executive officer)

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 20th day of August, 2012.

 

 

Signature	Title
/S/ Michael J. Loiacono	Chief Financial Officer and Chief Accounting Officer
Michael J. Loiacono	(principal financial officer and principal accounting officer)
/S/ Lock Ireland	Interim Chief Executive Officer, Vice Chairman and Director
Lock Ireland	(interim principal executive officer)

 

 

EXHIBIT INDEX

 

Exhibit
Number	Description
3.1	Articles of Incorporation - Restated and Amended May 30, 2001 (Incorporated by reference to Form 10KSB, filed with the SEC on March 31, 2003).
3.2	By-Laws of Global Axcess Corp - As Amended and Restated (Incorporated by reference to Form 8-K, filed with the SEC on April 6, 2010).
3.3	Amendment to the Articles of Incorporation (Incorporated by reference to Form 10-K/A ,filed with the SEC on January 28, 2011).
4.1	Amendment to Global Axcess Loan and Security Agreement, entered May 10, 2012, effective as of January 1, 2012, by and between Global Axcess Corp. (and affiliates) and Fifth Third Bank (Incorporated by reference to Form 8-K, filed with the SEC on May 15, 2012).
4.2	Amendment to Four Certain Global Axcess Loan and Security Agreements, entered May 31, 2012, by and between Global Axcess Corp. (and affiliates) and Fifth Third Bank (Incorporated by reference to Form 8-K, filed with the SEC on June 6, 2012).
4.3	Amendment to Master Equipment Lease Agreement and Equipment Schedule – No.001, entered May 31, 2012, by and between Global Axcess Corp. (and affiliates) and Fifth Third Equipment Finance Company (Incorporated by reference to Form 8-K, filed with the SEC on June 6, 2012).*
4.4	Amendment to Four Certain Global Axcess Loan and Security Agreements, entered June 30, 2012, by and between Global Axcess Corp. (and affiliates) and Fifth Third Bank (Incorporated by reference to Form 8-K, filed with the SEC on July 6, 2012).
31.1	Certification of the Chief Executive Officer of Global Axcess Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of the Chief Financial Officer of Global Axcess Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of the Chief Executive Officer of Global Axcess Corp pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification of the Chief Financial Officer of Global Axcess Corp pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

*Filed herewith.