UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the quarterly period ended March 31, 2008
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to
Commission File Number 1-31955
CASH SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
87-0398535
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification Number)
|
7350 Dean Martin Drive, Suite 309
Las Vegas, NV 89139
(Address of principal executive offices) (Zip Code)
(702) 987-7169
(Registrants 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
þ
No
o
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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
þ
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
|
|
|
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
þ
As of April 29, 2008, there were 18,481,580 shares of the registrants common stock, $0.001 par
value per share, issued and outstanding.
CASH SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
For the Quarter Ended March 31, 2008
|
|
|
|
|
|
|
Page No.
|
|
PART I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
Item 1. Consolidated Financial Statements
|
|
|
3
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
CASH SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash (Note 3)
|
|
$
|
13,408,127
|
|
|
$
|
16,617,643
|
|
Restricted cash (Note 7)
|
|
|
630,906
|
|
|
|
625,059
|
|
Current portion of prepaid commissions (Note 2)
|
|
|
428,908
|
|
|
|
394,096
|
|
Current portion of loans receivable (Note 2)
|
|
|
1,441,815
|
|
|
|
331,005
|
|
Settlements due from credit card processors (Note 5)
|
|
|
5,630,035
|
|
|
|
14,779,241
|
|
Settlements due from ATM processors (Note 5)
|
|
|
12,425,412
|
|
|
|
12,094,482
|
|
Other current assets (Note 4)
|
|
|
7,930,474
|
|
|
|
7,409,494
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
41,895,677
|
|
|
|
52,251,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET (Note 2)
|
|
|
7,098,945
|
|
|
|
7,087,436
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Goodwill (Note 6)
|
|
|
4,077,700
|
|
|
|
4,077,700
|
|
Intangible assets, net (Note 6)
|
|
|
4,024,359
|
|
|
|
4,289,024
|
|
Long-term prepaid commissions, net of current portion
(Note 2)
|
|
|
456,847
|
|
|
|
385,876
|
|
Long-term loans receivable, net of current portion (Note 2)
|
|
|
191,855
|
|
|
|
265,504
|
|
Restricted cash (Note 7)
|
|
|
396,158
|
|
|
|
211,317
|
|
Other
|
|
|
93,655
|
|
|
|
308,061
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
9,240,574
|
|
|
|
9,537,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
58,235,196
|
|
|
$
|
68,875,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Checks issued in excess of cash in bank (Note 8)
|
|
$
|
8,031,664
|
|
|
$
|
15,205,390
|
|
Short-term debt, net (Note 13)
|
|
|
12,100,000
|
|
|
|
12,100,000
|
|
Accounts payable trade
|
|
|
1,922,469
|
|
|
|
1,754,781
|
|
Credit card cash advance fees payable
|
|
|
1,696,789
|
|
|
|
1,667,462
|
|
ATM commissions payable
|
|
|
2,556,061
|
|
|
|
2,028,940
|
|
Credit card chargebacks payable
|
|
|
620,452
|
|
|
|
326,563
|
|
Check cashing commissions payable
|
|
|
235,117
|
|
|
|
223,785
|
|
Deferred
Revenues (Note 2)
|
|
|
459,526
|
|
|
|
|
|
Other accrued expenses (Note 9)
|
|
|
20,398,760
|
|
|
|
23,395,403
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
48,020,838
|
|
|
|
56,702,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Long-term debt, net (Note 13)
|
|
|
12,100,000
|
|
|
|
9,900,000
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
60,120,838
|
|
|
|
66,602,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value of $0.001, 50,000,000
shares authorized, 18,776,913 and 18,776,913 shares
issued,
18,481,580 and 18,446,163 shares outstanding (Note 13)
|
|
|
18,483
|
|
|
|
18,447
|
|
Additional paid-in capital (Note 13)
|
|
|
30,022,124
|
|
|
|
29,535,292
|
|
Accumulated deficit
|
|
|
(31,926,249
|
)
|
|
|
(27,280,125
|
)
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
(1,885,642
|
)
|
|
|
2,273,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
58,235,196
|
|
|
$
|
68,875,938
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
CASH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Commissions on credit card cash advances, ATMs and check
cashing services
|
|
$
|
27,066,228
|
|
|
$
|
25,156,145
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
15,400,617
|
|
|
|
14,196,324
|
|
Processing costs
|
|
|
4,325,779
|
|
|
|
4,305,903
|
|
Check cashing costs
|
|
|
2,073,227
|
|
|
|
923,502
|
|
Armored carrier services
|
|
|
302,253
|
|
|
|
277,360
|
|
Payroll, benefits and related taxes
|
|
|
3,189,093
|
|
|
|
2,822,429
|
|
Professional fees
|
|
|
530,371
|
|
|
|
398,885
|
|
Other general and administrative expenses
|
|
|
1,261,678
|
|
|
|
1,654,609
|
|
Depreciation and amortization
|
|
|
847,241
|
|
|
|
845,154
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,930,259
|
|
|
|
25,424,166
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(864,031
|
)
|
|
|
(268,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,207,422
|
)
|
|
|
(1,169,180
|
)
|
Loss on extinguishment of debt
|
|
|
(2,615,480
|
)
|
|
|
|
|
Interest and other income
|
|
|
40,809
|
|
|
|
11,246
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(3,782,093
|
)
|
|
|
(1,157,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(4,646,124
|
)
|
|
|
(1,425,955
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,646,124
|
)
|
|
$
|
(1,425,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.25
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.25
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,454,603
|
|
|
|
18,055,350
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
18,454,603
|
|
|
|
18,055,350
|
|
See accompanying notes to consolidated financial statements.
4
CASH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,646,124
|
)
|
|
$
|
(1,425,955
|
)
|
Adjustments to reconcile net loss to cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
847,241
|
|
|
|
845,154
|
|
Share-based compensation expense
|
|
|
178,573
|
|
|
|
45,691
|
|
Loss on extinguishment of debt
|
|
|
2,615,480
|
|
|
|
|
|
Amortization of debt issuance costs and original issue discount
|
|
|
6,163
|
|
|
|
116,848
|
|
Change in interest receivable on loans receivable
|
|
|
|
|
|
|
(3,970
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid commissions
|
|
|
(34,812
|
)
|
|
|
(1,708
|
)
|
Settlements due from credit card processors
|
|
|
9,149,206
|
|
|
|
2,951,310
|
|
Settlements due from ATM processors
|
|
|
(330,930
|
)
|
|
|
6,144,910
|
|
Other current assets
|
|
|
(520,980
|
)
|
|
|
(2,097,902
|
)
|
Long-term prepaid commission
|
|
|
(70,971
|
)
|
|
|
78,216
|
|
Restricted cash
|
|
|
(190,688
|
)
|
|
|
(7,222
|
)
|
Other assets
|
|
|
101,058
|
|
|
|
(107,524
|
)
|
Accounts payable trade
|
|
|
167,688
|
|
|
|
(2,710,644
|
)
|
Credit card cash advance fees payable
|
|
|
29,327
|
|
|
|
(8,131
|
)
|
ATM commissions payable
|
|
|
527,121
|
|
|
|
312,913
|
|
Credit card chargebacks payable
|
|
|
293,889
|
|
|
|
293,925
|
|
Check cashing commissions payable
|
|
|
11,332
|
|
|
|
(130,664
|
)
|
Deferred revenue
|
|
|
459,526
|
|
|
|
|
|
Other accrued expenses
|
|
|
(2,996,643
|
)
|
|
|
(3,866,796
|
)
|
|
|
|
|
|
|
|
Cash flows provided from operating activities
|
|
|
5,595,456
|
|
|
|
428,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(594,085
|
)
|
|
|
(669,665
|
)
|
Proceeds (advances) from loans receivable, net
|
|
|
(1,037,161
|
)
|
|
|
32,991
|
|
Patent acquisition costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
(1,631,246
|
)
|
|
|
(636,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Checks issued in excess of cash in bank
|
|
|
(7,173,726
|
)
|
|
|
(8,663,288
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
1,765,980
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities
|
|
|
(7,173,726
|
)
|
|
|
(6,897,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash
|
|
|
(3,209,516
|
)
|
|
|
(7,105,531
|
)
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
16,617,643
|
|
|
|
24,880,233
|
|
|
|
|
|
|
|
|
|
Cash, end
of period
|
|
$
|
13,408,127
|
|
|
$
|
17,774,702
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for financing costs and interest expense, net of
amortization of original issue discount and debt issuance costs
|
|
$
|
1,231,061
|
|
|
$
|
996,309
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Reclassification of warrant derivative liability to additional paid
in capital (Note 13)
|
|
|
|
|
|
$
|
777,011
|
|
See accompanying notes to consolidated financial statements.
5
CASH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2008
1. Nature of Business
Cash Systems, Inc. and subsidiaries (the Company or CSI) is engaged in three primary
products: credit/debit card cash advances, automatic teller machines (ATMs) and check cashing
solutions. The credit/debit card cash advances product and ATMs have been installed in casinos and
other businesses throughout the United States and in some Caribbean countries.
2. Summary of Significant Accounting Policies
Accounting Principles
The consolidated financial statements and accompanying notes are prepared in accordance
with accounting principles generally accepted in the United States of America.
Principles of Consolidation
The consolidated unaudited and audited balance sheet as of March 31, 2008 and
December 31, 2007, respectively, the unaudited consolidated statements of operations for the three
months ended March 31, 2008 and 2007, and the unaudited consolidated statements of cash flows for
the three months ended March 31, 2008 and 2007 have been prepared by the Company. All significant
intercompany transactions and balances have been eliminated in consolidation.
Basis of Presentation
The consolidated financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States have been condensed
or omitted pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. In the opinion of
management, all adjustments (which include normal recurring adjustments) necessary for a fair
presentation of results for the interim period have been made. The results for the three months
ended March 31, 2008 are not necessarily indicative of results to be expected for the full year.
These unaudited consolidated financial statements should be read in conjunction with the
annual consolidated financial statements and notes thereto included within the Companys Annual
Report on Form 10-K for the year ended December 31, 2007.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of expenses during the reporting period. Actual results could differ from those
estimates.
Cash Concentrations
Bank balances exceeded federally insured levels during the three months ended March 31,
2008 and 2007 and exceeded federally insured levels at March 31, 2008 and December 31, 2007.
Generally, these balances may be redeemed upon demand and therefore bear minimal risk. There were
no short-term investments as of March 31, 2008 and December 31, 2007.
Income Taxes
Differences between accounting rules and tax laws cause differences between the basis of
certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects
of these differences, to the extent they are temporary, are recorded as deferred tax assets and
liabilities under Statement of Financial Accounting Standards (SFAS) 109. Temporary differences
relate primarily to net operating losses, depreciation and accrued expenses not currently
deductible. Deferred tax assets are reduced by a valuation allowance to the extent the realization
of the related deferred tax asset is not assured.
Software Development Costs
Statement of Position 98-1 (SOP 98-1), Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use requires the capitalization of direct costs incurred in
connection with developing or obtaining software for internal use, including external direct costs
of materials and services and payroll and payroll related costs for employees who are directly
associated with and devote time to an internal use software development project. During the three
months ended March 31, 2008 and 2007, the Company capitalized
$230,619 and $330,836 of costs related
to the implementation of SOP 98-1, respectively. These costs are amortized over the estimated
useful lives of three to five years using the straight-line method upon being placed in service.
Amortization expense related to software costs was $264,390 and $116,774 for the three months ended
March 31, 2008 and 2007, respectively.
Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, the Company reviews its long-lived assets and intangibles
related to those assets periodically to determine potential impairment by comparing the carrying
value of the long-lived assets outstanding with estimated future cash flows expected to result from
the use of the assets, including cash flows from disposition. Should the sum of the expected future
cash flows be less than the carrying value, the Company would recognize an impairment loss. An
impairment loss would be measured by comparing the amount by which the carrying value exceeds the
fair value of the long-lived assets and intangibles. To date, management has determined that no
impairment of long-lived assets exists.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of assets
acquired. The Company adopted the provisions of FASB Statement No. 142 (SFAS 142), Goodwill and
Other Intangible Assets, as of February 28, 2006 in conjunction with the purchase of Indian Gaming
Services (IGS). Pursuant to SFAS 142, goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are not amortized, but
instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with FASB Statement No. 144 (SFAS 144), Accounting for Impairment or
Disposal of Long-Lived Assets. Intangible assets consist of patents, customer relationships and
employment/non-compete agreements. Intangible assets are amortized using the straight-line method
over their estimated useful lives ranging from 1 1/2 to 7 1/2 years. The Company reviews long-lived
and intangible assets for impairment as changes in circumstances or the occurrence of events
suggest the remaining value is not recoverable.
6
Debt Issuance Costs
Debt issuance costs are amortized over the life of the related loan of two to five years
using the straight-line method, which approximates the interest method. Debt issuance costs were
$26,461 and $113,347 as of March 31, 2008 and December 31, 2007, respectively, and are included in other
assets on the consolidated balance sheets. Estimated future amortization for the remainder of
fiscal year 2008 is $5,621, $7,495 for each of the years ending December 31, 2009 through 2010, and
$5,850 for the year ending December 31, 2011. Amortization expense for the three months ended
March 31, 2008 and 2007 was $6,163 and $89,477, respectively. See Note 13 related to the write-off of
debt issuance costs of $107,185 during the three months ended March 31, 2008 in connection with the
loss on extinguishment of debt.
Loans Receivable
The Company has advanced funds relating to strategic investments or advances of funds
relating to service contracts. Some of the advances were reviewed with and approved by the
Companys board of directors, while other transactions were initiated and authorized by management.
The loans bear interest at negotiated rates with negotiated terms. The collectibility of individual
loans is reviewed throughout the life of the loan and a reserve, if required, is recorded for the
loan. Management believes that the loans receivable recorded on the consolidated financial
statements as presented are properly stated.
During January 2008, the Company amended its financial services agreement dated December 7,
2006 with NACSF to specify the amount of ATM surcharge to be paid to the Seminole Tribe of Florida
and the amount of commissions to be paid to NACSF, and to loan NACSF $1.5 million at an annual
interest rate of 6% pursuant to the terms and conditions of a secured promissory note and security
agreement. Principal and interest are to be paid in equal monthly installments of $129,100 with
payments ending in December 2008. The loan is secured by any and all assets of NACSF, including but
not limited to, all commissions, fees, or other revenues due NACSF.
Prepaid Commissions
The Company has advanced commissions relating to service contracts. The advances were
initiated and authorized by management. The prepaid commissions are tied to the service contracts
and are amortized or deducted against commissions earned by those contracts over the term of the
contracts. In the event that the contracts are terminated early, which is not anticipated, the
prepaid commission would be returned to the Company. The collectibility of individual prepaid
commissions is reviewed throughout the life of the contract and a reserve, if required, would be
recorded for the commission. Management believes that the prepaid commissions recorded on the
consolidated financial statements as presented are properly stated.
Revenue Recognition
The Companys revenue recognition policy is significant because the amount and timing of
revenue is a key component of the Companys results of operations. The Company follows the guidance
of Staff Accounting Bulletin No. 104 (SAB 104), which requires that a strict series of criteria
are met in order to recognize revenue related to services provided. If these criteria are not met,
the associated revenue is deferred until the criteria are met. The Company recognizes commission
revenue when evidence of a transaction exists, services have been rendered, our price is fixed or
determinable and collectibility is reasonably assured. The reasonable assurance is based on the
transactions being authorized and pre-approved by credit card vendors or third parties. The Company
evaluates its commissions revenue streams for proper timing of revenue recognition.
Credit and debit card cash advance revenue is comprised of upfront patron transaction
fees assessed at the time the transaction is initiated at a percentage of the face amount of the
cash advance (plus a fixed fee for debit card cash advances). Credit and debit card cash advance
revenue is recognized at the point that a negotiable check instrument is generated by the casino
cashier or cash cage operation based upon authorization of the transaction.
ATM fees are comprised of upfront patron transaction fees or surcharges assessed at the
time the transactions are initiated. Upfront patron transaction fees are recognized when a
transaction is authorized.
Check cashing services revenue is generally contractual, based upon a percentage of the
face amount of total checks. The Company self guarantees a majority of its checks and engages an
independent third party for collections as well as engages an independent third party to guarantee
the collectability of a smaller portion of its checks. The Company records a receivable from
collection agency for all self-guaranteed checks returned for insufficient funds until determined
to be uncollectible.
The Company also derives revenues from licensing software and providing technical support
and product updates, otherwise known as maintenance, relating to its new cashless gaming product.
The Companys software license and maintenance agreement provides for a one-time fee to use the
Companys cashless gaming product over a specified term and is based on the number of gaming
devices operational with the product. The Company licenses its software bundled with maintenance,
which is priced as a percentage of the software license fees and provides for technical support and
product updates on a when-and-if available basis. The Company recognizes revenue under the
requirements of Statement of Position No. 97-2 Software Revenue Recognition (SOP 97-2), as
amended by Statement of Position No. 98-9, Software Revenue Recognition with Respect to Certain
Arrangements, when the following revenue recognition criteria have been met:
|
|
|
persuasive evidence of an arrangement exists;
|
|
|
|
|
delivery has occurred;
|
|
|
|
|
the fee is fixed or determinable; and
|
|
|
|
|
collection is probable.
|
Under SOP 97-2, revenue is recognized in a multiple element arrangement when
vendor-specific objective evidence (VSOE) of fair value exists for all of the elements in the
arrangement and all revenue recognition criteria have been met. If sufficient VSOE does not exist
to allocate the fee to the separate elements and the only undelivered element is maintenance, the
entire arrangement fee should be recognized ratably over the contractual maintenance period (for
those arrangements with explicit rights to maintenance). Since evidence of fair value cannot be
established for the undelivered element of the license agreement (i.e. maintenance) as it is
bundled with the software license (i.e. license and maintenance are not sold separately), the
Company recognizes license revenue ratably over the initial one-year term and recognizes
maintenance revenue ratably over each one year maintenance period assuming all other
revenue recognition criteria have been met.
For powercash transactions, the Company and its two joint venture partners also earn a
convenience fee for each completed transaction. The Company records its portion of the convenience
fee upon authorization of a transaction. The Company has determined that the accounting policies
for income recognition described above are in accordance with the Financial Accounting Standards
Board Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent.
The Company has recorded an accrual for known and potential chargebacks for possible
charges against a gaming patrons credit card for which the Company is unable to establish the
validity of the transaction. The accrual for chargebacks is estimated based on historical
information and managements estimates. The chargeback accrual at March 31, 2008 and December 31,
2007 was $620,452 and $326,563, respectively.
Segment Reporting
A business segment is a distinguishable component of an enterprise that is engaged in
providing an individual product or service or a group of related products or services and that is
subject to risks and returns that are different from those of other business segments. Revenues
from customers are from a similar customer base, mainly at casinos. Management believes that the
Company meets the criteria for aggregating its operating segments into a single reporting segment.
Research and Development
The Company expenses research and development as costs are incurred. For the three months
ended March 31, 2008 and 2007, the Company expensed $12,486 and $179,107, which is included in
other general and administrative expenses on the consolidated statements of operations.
Reclassifications
Certain reclassifications have been made in the prior period consolidated financial statements
to conform to the presentation used at and for the three months ended March 31, 2008. These reclassifications relate to certain other general and administrative costs that were reclassed
to check cashing costs of $94,470 for the three months ended
March 31, 2007, to better reflect the nature of the expenses, and commissions revenues and commissions expenses of $368,622 for the three
months ended March 31, 2007.
These reclassifications had no effect on the Companys
consolidated net loss for the three months ended March 31, 2007.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments requires disclosure
of the estimated fair value of financial instruments as follows:
Short-term Assets and Liabilities:
The fair values of cash, settlements due from processors, other assets, accounts payable,
and accrued liabilities approximate their carrying values due to the short-term nature of these
financial instruments.
Long-term debt:
The fair value of long-term debt approximates the carrying amounts based upon the
Companys expected borrowing rate for debt with similar remaining maturities and comparable risk.
7
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Diluted net loss per common share is
computed by dividing net loss by the weighted average number of common shares outstanding plus all
additional common stock that would have been outstanding if potentially dilutive common stock
related to stock options and warrants had been issued or restricted stock vested. As of March 31,
2008 and 2007, options, warrants, and restricted stock were not dilutive due to the net
loss.
The following table presents a reconciliation of the denominators used in the computation
of net loss per common share basic, and net loss per common share diluted, for the three months
ended March 31, 2008 and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net loss
|
|
$
|
(4,646,124
|
)
|
|
$
|
(1,425,955
|
)
|
Weighted average shares of common stock outstanding
|
|
|
18,454,603
|
|
|
|
18,055,350
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Weighted average shares of common and dilutive stock outstanding
|
|
|
18,454,603
|
|
|
|
18,055,350
|
|
Net loss per basic share
|
|
$
|
(0.25
|
)
|
|
$
|
(.08
|
)
|
Net loss per diluted share
|
|
$
|
(0.25
|
)
|
|
$
|
(.08
|
)
|
The Company uses the
treasury method for calculating the dilutive effect of stock
options, warrants, and restricted stock (using the average market price).
Stock-Based Compensation
Share-based compensation expense recorded under SFAS 123(R) Share-Based Payment for the
three months ended March 31,
2008 and 2007 was $178,573 ($0.01) per share and $45,691 ($0.00) per
share, respectively.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards
on the date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service periods in the
Companys consolidated statement of operations.
8
Share-based compensation expense recognized for periods after the adoption of SFAS 123(R)
is based on the value of the portion of share-based payment awards that is ultimately expected to
vest during the period. As of December 31, 2005, all share-based awards were fully vested
therefore; no share-based compensation expense was recognized in the Companys consolidated
statement of operations for the three months ended March 31, 2008 and 2007 related to awards
granted prior to January 1, 2006. The Company did not grant any options or restricted stock awards
during the three months ended March 31, 2008. Typically, when the Company grants restricted stock
awards, such awards are granted at fair value on the date of grant with vesting terms of two,
three, or four years.
The Company uses the Black-Scholes option-pricing model (Black-Scholes model) for the
Companys stock based compensation expense recognized under SFAS 123(R). The Companys
determination of fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by the Companys stock price as well as assumptions regarding a
number of highly complex and subjective variables. These variables include, but are not limited to
the Companys expected stock price volatility over the eighteen month period prior to the grant
date of the awards, and actual and projected employee stock option exercise behaviors and
forfeitures.
Liquidity and Capital Resources
At March 31, 2008, we had cash of $13.4 million compared to $16.6 million at December 31, 2007 and
cash net of Checks issued in excess of cash in bank of $5.4 million and $1.4 million at March 31,
2008 and December 31, 2007, respectively. Cash provided by operations totaled $5.6 million and $0.4
million during the three months ended March 31, 2008 and 2007,
respectively. The increase in cash provided by operations is
primarily due to timing of receivables from processors. We had working capital
deficits of $6.1 million and $4.5 million at March 31, 2008 and December 31, 2007, respectively.
Operating working capital includes Settlements due from credit card processors totaling $5.6
million and $14.8 million, and Settlements due from ATM processor totaling $12.4 million and
$12.1 million as of March 31, 2008 and December 31, 2007, respectively. We estimate capital
expenditures for the remainder of fiscal year 2008 of approximately $1.5 million related to
software development, ATM purchases for new customers or existing customer expansion, and related
costs. In addition to meeting operating capital needs, our note holders relating to our Second
Amended and Restated Notes currently have the right of optional redemption pursuant to which, on
October 10, 2008, such note holders may require the Company to redeem a portion of the Second
Amended and Restated Notes in an amount not to exceed $12.1 million in the aggregate. Further, if
our common stock is delisted from The NASDAQ Global Market resulting in an event of default under
the Second Amended and Restated Notes, as more fully described in Item 1A of Part II of
this Form 10-Q, our note holders would be entitled to, among other things,
accelerate the maturity of the outstanding balance of the Second Amended and Restated Notes. If the
Company is unable to secure alternative financing or raise additional capital to repay this
outstanding balance at maturity, the note holders would be entitled to foreclose on substantially
all of the Companys assets, which secure the Second Amended and Restated Notes.
We anticipate that our existing capital resources will enable us to continue operations through
approximately October 2008, unless prior to that date payments of certain other accrued expenses
are accelerated, our common stock is delisted from The NASDAQ Global
Market as more
fully described in Item 1A of Part II of this Form 10-Q and our note holders
elect to accelerate the maturity of the outstanding balance of the Second Amended and Restated
Notes, or unforeseen events or circumstances arise that negatively affect our liquidity. If we fail
to raise additional capital prior to the earlier of October 2008 and the occurrence of any of these
events, we may be forced to cease operations. Management is taking steps to reduce operating
expenses and may consider reducing the scope of our operations, planned product development, and
expansion efforts, which could harm our business, financial condition, and operating results.
Management may also request that the note holders further amend the Second Amended and Restated
Notes to, among other things, modify their right to require the Company to redeem up to $12.1
million in aggregate on October 10, 2008 and/or waive an event of default resulting from the
delisting of our common stock from The NASDAQ Global Market.
The Company is exploring strategic alternatives to maximize shareholder value. There can be no
assurance that this process will result in any specific transaction. Further, there can be no
assurance that the Company will be able to achieve profitable operations, generate sufficient cash
from operations, obtain additional funding, modify the Second Amended and Restated Notes in a
beneficial manner, repay the redemption option of our note holders of up to $12.1 million should
they exercise their redemption right, or repay the outstanding balance of the Second Amended and
Restated Notes if our note holders elect to exercise their remedies upon an event of default,
including following a delisting of our common stock from The NASDAQ Global Market.
Going Concern
We have net losses in consecutive years, have generated $5.6 million and $0.4 million of cash from
operations during the three months ended March 31, 2008 and 2007, and have an accumulated deficit
of $31.9 and $27.3 million and net working capital deficits of $6.1 million and $4.5 million at
March 31, 2008 and December 31, 2007, respectively. Because we have not identified sources of
capital and due to recurring losses, negative net cash flows, and accumulated deficit, the report
of our independent registered public accounting firm dated March 28, 2008 expressed substantial
doubt about our ability to continue as a going concern. In addition, the holders of our Second
Amended and Restated Notes have the right to require us to redeem a portion of such notes on
October 10, 2008 in an amount not to exceed $12.1 million in the aggregate, and will have the right
to accelerate the maturity of the outstanding balance of the Second Amended and Restated Notes upon
an event of default, including following a delisting of our common stock from The NASDAQ Global
Market. We anticipate that our existing capital resources will enable us to continue operations
through approximately October 2008, unless prior to that date payments of certain other accrued
expenses are accelerated, our common stock is delisted from The
NASDAQ Global Market which could occur as early as July 31,
2008, and our note
holders elect to accelerate the maturity of the outstanding balance of the Second and Amended and
Restated Notes, or unforeseen events or circumstances arise that negatively affect our liquidity.
Management will need to take immediate steps to reduce operating expenses, which may include
seeking concessions from customers and vendors in the meantime. If we fail to raise additional
capital prior to the earlier of October 2008 and the occurrence of any of these events, we may be
forced to cease operations.
9
3. Funding Arrangement
Vault Cash Agreements
Effective December 1, 2006, the Company entered into a vault cash agreement with Fidelity
Bank. The vault cash arrangement with Fidelity Bank requires that the Company pay tiered fees based
on the average monthly balance of the funds provided in an amount equal to the prime rate of
interest, prime rate minus 1.25%, or prime rate minus 1.50% depending on the average monthly
balance of total cash utilized under the agreement. The vault cash agreement requires fees in an amount equal to the prime rate plus 1.25% on
balances over a certain maximum threshold. At March 31, 2008 and December 31, 2007, the prime rate
was 5.25% and 7.25%, respectively. The Company paid Fidelity vault cash fees totaling $586,840 and
$689,738 for the three months ended March 31, 2008 and 2007, respectively.
The Company assumes the risk of loss and agrees to reimburse the financial institution
for any loss occurring from the point in time at which the funds leave the bank. The Company must
provide armored carrier services and bear the cost of such services. The Company obtains insurance
coverage for the funds provided. The armored carrier company carries the usual bond insurance
coverage on its employees. Employees of the Company do not have access to the funds in the cash
machines. Under this agreement, Fidelity Bank receives settled funds for ATM transactions related
to Fidelity funded ATMs as well as certain casino funded ATMs from the network processor. Fidelity
Bank then transfers the Companys and the customers portion of funds, to a Company bank account.
The Company then distributes the funds to various casino customer accounts the same or next day. All
cash provided by Fidelity Bank remains the sole property of Fidelity Bank at all times
until dispensed. Because it is never an asset of the Company,
supplied cash is not reflected on the Companys balance sheet. Because Fidelity Banks
portion of the settlement funds is never held
by the Company, there is no liability corresponding to the supplied cash reflected on the
Companys balance sheet.
The Company and its primary vault cash provider, Fidelity Bank, have agreed to reduce and
eventually eliminate the ATM cash levels described in the Fidelity vault cash agreement dated
December 1, 2006. The ATM cash reduction schedule will terminate by July 2008 by which time the
Company expects to have its primary vault cash needs fully
transitioned to our new third party
financial services provider.
Effective April 10, 2008, we entered into a new vault cash agreement
with another third party financial institution to replace our primary vault cash agreement. The new
vault cash agreement requires that we pay fees based on the average monthly cash balance and the
prime rate of interest minus 1.25% or prime rate minus 1.50%, depending on the average monthly cash
balance. At March 31, 2008, the prime rate was 5.25%. The Company does not anticipate the change in
providers to have a substantial impact on the Company.
For two customer locations, the Company has a secondary vault cash arrangement with
Wilmington Savings Fund Society FSB (WSFS) effective December 11, 2002 which requires that the
Company pay fees based on the number of ATMs serviced or amount of cash provided in an amount equal
to the prime rate of interest plus 1.0% to 3.0%. At March 31,
2008 and December 31, 2007, the prime rate was 5.25% and 7.25%, respectively. The Company paid fees
totaling $184,018 and $87,055 for the three months ended March 31, 2008 and 2007, respectively.
Site Funded ATMs
The Company operates ATMs at certain customer locations where the Company provides the
cash required for ATM operational needs. The Company operated 37 and 32 ATMs that were site funded
as of March 31, 2008 and December 31, 2007, respectively. The Company had $2,145,020 and
$$1,952,670 in ATM cash as of March 31, 2008 and December 31, 2007, respectively. The majority of
the Companys site funded ATMs are at two customer locations.
10
4. Other Current Assets
Other current assets consisted of the following at March 31, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Receivable
from casinos, net of reserve of $219,247 and $374,888, respectively
|
|
$
|
2,627,860
|
|
|
$
|
2,652,348
|
|
Receivable from bank
|
|
|
685,162
|
|
|
|
543,449
|
|
Income taxes receivable
|
|
|
12,830
|
|
|
|
12,830
|
|
Prepaid expenses
|
|
|
467,583
|
|
|
|
545,552
|
|
Receivable
from collection agency, net of reserve of $7,419,918 and
$6,134,405, respectively
|
|
|
2,575,166
|
|
|
|
2,841,702
|
|
Other receivables, net of reserve of $468,529 and $470,929, respectively
|
|
|
1,561,873
|
|
|
|
813,613
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
$
|
7,930,474
|
|
|
$
|
7,409,494
|
|
|
|
|
|
|
|
|
Receivable from casinos
The Company has receivables from certain customers as a result of chargeback disputes
which are refunded to the Company and related to check cashing fees. We also have receivables from
certain casinos for which we fund ATMs. The Company periodically orders cash directly from casinos
in order to fund its various booth locations. As there is a lag between the time cash is ordered
and the cash is received by the booths, the Company records a receivable for cash that is in
transit and includes these amounts in receivables from casinos. The Company has recorded a reserve
related to the receivables for amounts that are not deemed collectible.
Receivable from bank
The
Company recorded a receivable of $558,390 and $449,692 from its vault cash provider
for standard ATM settlements and related surcharges owed at March 31, 2008 and December 31, 2007,
respectively. In addition, the Company recorded a receivable for Debit POS fees that are owed by
the vault cash provider relating to the newly acquired Indian Gaming Service locations amounting to
$126,772 and $93,757 at March 31, 2008 and December 31, 2007, respectively. All fees relating to
this receivable are sent to the Company on a weekly basis and are considered 100% collectible.
Receivable from collection agency
During 2007, the Company significantly expanded its self-guarantee of funds on cashed
checks to various casino locations, while decreasing its reliance on a third party vendor to
guarantee such funds. For returned self-guaranteed checks, the Company forwards the checks to the
collections agency which attempts to collect on the checks for certain periods based on terms set
forth in the service contract. When the collection agency has exhausted its collection efforts
(which generally applies to all checks that have been outstanding for more than 120 days), the
checks are forwarded to a third party attorney network for legal action. The total gross amount of
checks sent to the collection agency during the three months ended March 31, 2008 was $4,441,950 of
which $2,799,962 remained in the gross receivable at March 31, 2008. As of March 31, 2008 and
December 31, 2007, the gross receivables balance for checks sent to the collection agency was
$9,893,022 and $8,887,360 with reserves for uncollectible amounts of
$7,419,918 and $6,134,405,
respectively. For guaranteed checks and checks with insufficient funds from the Companys booth
locations, the gross receivables balance as of March 31, 2008 and December 31, 2007 was $102,062
and $88,747, respectively. The Company adjusts its reserve for uncollectible accounts on receivable from
collection agency based on historical data and current market conditions.
Other receivables
Other receivables consist of miscellaneous processor and bank receivables, ATM
interchange income, employee advances, and security deposits. In
addition, Other receivables includes a $271,500 receivable from a
former customer of our Tampa, Florida property. The Company has recorded a reserve
for amounts that are not deemed collectible.
11
5. Settlements Due From Processors
Settlements due from credit card processors
The Company processes transactions with its credit card processor which are usually
reimbursed to the Company within three to five days of the date of the advance occurring and is
recorded as a receivable. At times, the Company may be required to provide additional support to
the credit card processor to collect money related to the authorized transactions. As of March 31,
2008 and December 31, 2007, the balance of settlements due from credit card processors was
$5,630,035 and $14,779,241, respectively.
Settlements due from ATM processors
The Company processes transactions with its ATM processor which are usually reimbursed to
the Company within one to three days of the date of the advance occurring for Company funded ATMs
as well as certain casino funded ATMs. The entire amount reimbursed from the processor directly to
the Company is recorded as a receivable from the ATM processor, while amounts for casino funded
ATMs received from the processor are recorded as a payable as more fully described in Note 9. At
times, the Company may be required to provide additional support to the ATM processor to collect
money related to the authorized transactions. As of March 31, 2008 and December 31, 2007, the
balance of settlements due from ATM processors was $12,425,412 and $12,094,482, respectively.
6. Goodwill and Intangible Assets
As of March 31, 2008 and December 31, 2007, goodwill was $4,077,700 which related to the
acquisition of Indian Gaming Services. Other identifiable intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Estimated Useful
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Lives
|
|
Patents
|
|
$
|
20,560
|
|
|
$
|
9,252
|
|
|
$
|
11,308
|
|
|
5 years
|
Customer relationships (relates to IGS)
|
|
|
7,110,000
|
|
|
|
3,115,282
|
|
|
|
3,994,718
|
|
|
|
1.5 to 7.5 years
|
|
Employment and non-compete agreements
(relates to IGS)
|
|
|
60,000
|
|
|
|
41,667
|
|
|
|
18,333
|
|
|
3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,190,560
|
|
|
$
|
3,166,201
|
|
|
$
|
4,024,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Useful Lives
|
|
Patents
|
|
$
|
20,560
|
|
|
$
|
8,224
|
|
|
$
|
12,336
|
|
|
5 years
|
Customer relationships (relates to IGS)
|
|
|
7,110,000
|
|
|
|
2,856,645
|
|
|
|
4,253,355
|
|
|
|
1.5 to 7.5 years
|
|
Employment and non-compete agreements
(relates to IGS)
|
|
|
60,000
|
|
|
|
36,667
|
|
|
|
23,333
|
|
|
3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,190,560
|
|
|
$
|
2,901,536
|
|
|
$
|
4,289,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consist of patents, customer relationships and employment/non-compete
agreements. Intangible assets are amortized using the straight-line method over their estimated
useful lives ranging from 1 1/2 to 7 1/2 years. The Company reviews intangible assets for
impairment as changes in circumstances or the occurrence of events suggest the remaining value is
not recoverable.
Total amortization expense for the three months ended March 31, 2008 and 2007 was
$264,665 and $337,800, respectively. Accumulated amortization as of
March 31, 2008 and December 31, 2007 includes
an impairment charge of $449,444 from a previous reporting period.
12
As of March 31, 2008, we expect amortization expense in future periods to be as shown
below:
|
|
|
|
|
Fiscal year
|
|
|
|
|
|
Remainder of 2008
|
|
$
|
613,992
|
|
2009
|
|
|
801,991
|
|
2010
|
|
|
798,657
|
|
2011
|
|
|
743,030
|
|
2012
|
|
|
640,000
|
|
Thereafter
|
|
|
426,689
|
|
|
Total expected amortization expense
|
|
$
|
4,024,359
|
|
7. Restricted Cash
Under our vault cash agreement with Fidelity Bank effective December 1, 2006, the Company
maintains restricted cash with Fidelity to cover potential cash losses for which the Company is
responsible under the terms of the agreement in the amount of $380,906 and $375,059 as of March 31,
2008 and December 31, 2007, respectively. The restricted cash earns interest at the lowest interest
rate as defined in the agreement and the interest is credited to a bank account designated by the
Company. The Company also maintains cash reserves totaling $391,158 and $206,317 at March 31, 2008
and December 31, 2007, respectively, with its card association sponsor bank as required for card
association compliance as well as to cover potential losses due to chargebacks.
The Company maintains a $250,000 and $5,000 letter of credit with a lending institution
to secure performance under a regulatory application. To secure these letters of credit, the
Company is required to maintain a cash position with the issuing lending institution in an amount
equal to the letter of credit. The $250,000 and $5,000 letters of credit expire December 31, 2008
and 2010, respectively.
8. Checks Issued in Excess of Cash in Bank
The Companys credit card cash advance and check cashing business results in timing
differences between funds availability and funding commitments. These timing differences result in
operating deficits in select bank accounts, which do not have a right of offset, which have been
classified as a liability at the end of the reporting period.
9. Other Accrued Expenses
Other accrued expenses consisted of the following at March 31, 2008 and December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Accrued payroll and related items
|
|
$
|
572,918
|
|
|
$
|
676,820
|
|
Accrued interest
|
|
|
692,283
|
|
|
|
722,085
|
|
Amounts due casinos
|
|
|
8,112,150
|
|
|
|
8,484,213
|
|
Amounts due for ATM processing
|
|
|
10,998,579
|
|
|
|
13,473,093
|
|
Other
|
|
|
22,830
|
|
|
|
39,192
|
|
|
|
|
|
|
|
|
Total other accrued expenses
|
|
$
|
20,398,760
|
|
|
$
|
23,395,403
|
|
|
|
|
|
|
|
|
Amounts due casinos represent funds owed to various casinos for reimbursement on credit
card cash advance and ATM transactions. Generally, the Company pays
these amounts once the Company receives settlement funds. However,
from time to time, the Company defers payment to manage its available
cash. In such cases, payment is due upon demand of the casino
customer.
The Company receives settled funds
for ATM transactions from the network processor for ATM transactions processed by the Company for
Company funded ATMs and certain casino funded ATMs. The Company distributes the funds to various
casino accounts the same or next day. The Company records a payable during the period the funds are
held (Amounts due for ATM processing) and a receivable from the ATM processor as more fully
described in Note 5.
13
10. Commitments and Contingencies
Legal Proceedings
The Company is involved in various legal actions in the ordinary course of its business.
Although the outcome of any such legal action cannot be predicted, management believes that there
are no pending legal proceedings against or involving the Company for which the outcome is likely
to have a material adverse effect on the Companys consolidated financial position, results of
operations or cash flows.
Major Customer
During the three months ended March 31, 2008 and 2007, two of our customers each
accounted for more than 10% of our total revenues and together accounted for 39% and 36% of our
total revenues.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2008
|
|
2007
|
Major Customer
|
|
% of Revenue
|
|
% of Revenue
|
The Seminole Tribe of Florida
|
|
|
28
|
%
|
|
|
26
|
%
|
Chickasaw Nation
|
|
|
11
|
%
|
|
|
10
|
%
|
|
Total
|
|
|
39
|
%
|
|
|
36
|
%
|
We contract with The Seminole
Tribe of Florida through a third party affiliated with The
Seminole Tribe of Florida and we contract with Chickasaw Nation directly. We have provided Cash
Access Services to The Seminole Tribe of Florida since November 2001 and have renewed our contract
with the third party affiliated with The Seminole Tribe of Florida effective December 2006. We have
provided Cash Access Services to Chickasaw Nation since March 2005. There can be no assurance that
these contracts will be renewed after their terms expire.
On February 6, 2008, Michael D. Rumbolz, CEO of the Company was appointed to serve on the
Board of Directors of Seminole Hard Rock Entertainment, Inc. and as a Manager of Seminole Hard Rock
International, LLC.
Stock Repurchase Program
In January 2005, our Board of Directors authorized the repurchase of up to 1,000,000 shares of
our common stock as part of the Companys overall strategy to prudently allocate resources to
enhance shareholder value. This stock repurchase program does not have an expiration date. The
Company did not repurchase any shares of its common stock during the three months ended March 31,
2008. Our Second Amended and Restated Notes prohibit us from repurchasing shares of our common stock
without the prior written consent of the note holders representing not less than two-thirds of the
aggregate principal amount of the then outstanding notes.
11. Equity Transactions
During the three months ended March 31, 2008, no options were exercised and the Company
recorded $178,573 in stock compensation expense relating to restricted stock awards.
12. Income Taxes
The Financial Accounting Standards Board has published FASB Interpretation No. 48 (FIN
No. 48), Accounting for Uncertainty in Income Taxes, to address the non-comparability in
reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement
of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes, on the
uncertainty in income taxes recognized in an enterprises financial statements. Specifically, FIN
No. 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return, and provides related guidance on derecognition, classification, interest and
penalties, accounting interim periods, disclosure and transition. To the extent interest and
penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts
would be accrued and classified as a component of income tax expenses on the consolidated statement
of operations. FIN No. 48 applies to fiscal years beginning after December 15, 2006, with earlier
adoption permitted. The Company has evaluated the effects of FIN No. 48 and found its adoption to
not have a material impact on the consolidated financial statements. The Companys federal and
state tax returns are potentially open to examinations for fiscal years 2004 through 2006.
13. Senior Secured Convertible Notes
On October 10, 2006, the Company issued and sold to certain institutional accredited
investors an aggregate of $20.0 million in principal amount of senior secured convertible notes
(the Original Notes) and five-year warrants (immediately exercisable) to purchase an aggregate of
312,500 shares of the Companys common stock at $8 per share (the Original Warrants). The
Original Notes bore interest at the rate of 6.50% per annum, payable quarterly in arrears
commencing on January 10, 2007. This interest rate was subject to adjustment up to 12.0% per annum
upon the occurrence of certain events of default and 7.50% in the event of certain interest test
failures which were based on financial thresholds relating to Consolidated Revenue, Consolidated
Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA), and Total Debt to EBITDA
Ratio (when applicable). The maturity date of the Original Notes was October 10, 2011. The
Companys obligations under the Original Notes were collateralized by a security interest in
substantially all of the Companys assets. The Company used proceeds from the issuance and sale of
the Original Notes for repayment of its two-year line of credit with Bank of America, N.A.
Pursuant to EITF 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments, the gross proceeds of $20.0 million were allocated between the Original Notes and the
Original Warrants based on the relative fair values of the securities at the time of issuance. The
Original Warrants were valued using the Black-Scholes pricing model with the resulting original
issue discount being amortized over the term of the Original Notes, which approximates the interest
method. The Original Notes are convertible into common shares at a conversion price of $8 per
share. Based on the fair market value of the stock on the date of the agreement for the Original
Notes of $6.30 per share, there was not a beneficial conversion noted.
In connection with the financing, the Company agreed to file with the SEC a registration
statement by February 7, 2007, covering
the issuance or resale of the shares of common stock underlying the Original Warrants issued to the
note holders. The Company filed the registration statement on December 7, 2006 and the registration
statement was declared effective on January 11, 2007.
With the registration statement requirement of the agreement, the Company evaluated the
terms of the agreement in accordance with EITF 00-19, Accounting for Derivative Financial
Instruments, Indexed to, and Potentially Settled in a Companys Own Stock. As a result, the
Company recorded a derivative liability related to the Original Warrants during 2006 as a payment
penalty of 2% was required if the registration statement was ever deemed ineffective.
In accordance with guidance from FASB Staff Position No. EITF 00-19-2 (FSP), the Company
noted upon the adoption of this FSP, a payment under the registration agreement is not probable. If
the registration agreement had not been part of the terms of the original agreement, the Original
Warrants would have been classified as an equity instrument under other applicable GAAP rules for
all periods. The Company reclassified $656,879 to additional paid-in capital and $120,132 to the
note discount at January 1, 2007. The Company determined that the income statement effect on 2006
was not material. Amortization expense on the original issue discount
was $0 and $27,371 for the three
months ended March 31, 2008 and 2007, respectively.
On August 8, 2007, the note holders waived until August 20, 2007 any event of default
arising under the Original Notes or any other note related documents as a result of the Companys
failure as of June 30, 2007 to meet the quarterly financial threshold in the note agreements
relating to Consolidated EBITDA. The waiver was designed to provide a reasonable period of time for
the Company and the note holders to reach an agreement on amending the Original Notes and the other
related documents.
On August 20, 2007, the Company entered into an amendment with each of its note holders
as contemplated by the waiver. Pursuant to the amendment, the Company and each of the note holders
agreed to, among other things, amend and restate the Original Notes (as amended, the First Amended
and Restated Notes), amend and restate the Original Warrants (as amended, the First Amended and
Restated Warrants), and amend certain provisions of other related documents.
The First Amended and
Restated Notes differed from the Original Notes in certain material
respects, including, without limitation, (i) the aggregate principal amount was increased from
$20.0 million to $22.0 million, (ii) the interest rate was increased from 6.5% per annum to 7.5%
per annum, (iii) each note holder was given an additional right of optional redemption pursuant to
which, on October 10, 2008, each note holder may require the Company to redeem a portion of the
Conversion Amount (as defined in the First Amended and Restated Notes) in an amount not to exceed
the Maximum Redemption Amount, which is the portion of a First Amended and Restated Note equal to
the product of (x) $8 million and (y) the quotient of (a) the principal amount outstanding under
such note holders Amended Note and (b) the aggregate principal amount outstanding under all of the
amended notes, at a price equal to the Conversion Amount being redeemed, (iv) the Company was given
the right of mandatory redemption, pursuant to which, on October, 10, 2008, the Company may, if
certain conditions set forth in the amended notes are satisfied or waived, redeem a portion of the
Conversion Amount then remaining under the First Amended and Restated Notes in an amount not to
exceed the Maximum Redemption Amount, as described above, at a price equal to the product of
(x) 130% and (y) the Conversion Amount being redeemed.
The First Amended and
Restated Warrants differed from the Original Warrants in certain
material respects, including, without limitation, (i) the aggregate number of shares of common
stock underlying such warrants was increased from 312,500 shares to 487,500 shares, and (ii) the
exercise price was reduced from $8.00 per share to $7.38 per share.
The Company applied EITF 96-19,
Debtors Accounting for a Modification or Exchange of
Debt Instruments
, and determined that since the modified debt had substantially different terms, it
should be treated as an extinguishment of debt. As a result, the Company recorded a debt
extinguishment loss of $4.3 million representing the difference between the carrying value of the
Original Notes and Original Warrants and the fair market value of the
First Amended and Restated Notes and First Amended and Restated Warrants during 2007. The $4.3 million debt extinguishment loss resulted from a $2.0 million
increase in the aggregate principal amount of the Original Notes, $1.5 million and $0.5 million in
write-offs of debt issuance costs and original issue discount relating to the Original Notes,
respectively, and a $0.3 million increase in the value of the First Amended and Restated Warrants and fair value of
the additional warrants granted.
The Company used the Black-Scholes pricing model (Black-Scholes) as of the grant date of
the First Amended and Restated Warrants to determine the fair market value of the First Amended and
Restated Warrants. The Companys determination of fair value using Black Scholes is affected by the
Companys stock price as well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to the Companys expected stock price
volatility over the eighteen month period prior to the grant date of the First Amended and Restated
Warrants.
The original issue discount relating to the Original Notes was expensed and there was no
discount or beneficial conversion relating to the First Amended and Restated Notes as of
December 31, 2007.
On March 14, 2008, the Company entered into a Second Amendment and Exchange Agreement
with each of its note holders (each, a Second Amendment and Exchange Agreement and collectively,
the Second Amendment and Exchange Agreements) pursuant to which the Company and each of the note
holders agreed to, among other things, amend and restate the First Amended and Restated Notes, amend and
restate the First Amended and Restated Warrants, and amend
certain provisions of other related documents.
The senior secured convertible notes, as amended and restated on March 14, 2008 (the
Second Amended and Restated Notes) differ from the First Amended and Restated Notes in certain
material respects, including, without limitation, (i) the aggregate principal amount was increased
from $22.0 million to $24.2 million, (ii) the conversion price was reduced from $8.00 per share to
$2.51 per share, (iii) the aggregate amount that the note holders may require the Company to redeem,
and the aggregate amount that the Company may elect to redeem, on October 10, 2008 was increased
from $8 million to $12.1 million, (iv) the financial covenants based on Consolidated Total Debt to
EBITDA (as defined in the First Amended and Restated Notes) were eliminated and the financial
covenants based on Consolidated Revenue and Consolidated EBITDA (as defined in the Second Amended
and Restated Notes) were modified to apply starting with the quarter ending March 31, 2009, and
(v) the interest rate will be increased by 1.5% per annum from and after the occurrence of any
Dilutive Issuance Event (as defined in the
Second Amended and Restated Notes). As a result of the March 14, 2008 amendment and restatement of
the notes, the Company reclassified $12.1 million of the Second Amended and Restated Notes from
long term to short term debt on the consolidated balance sheet. The Warrants to Purchase Common Stock, as
amended and restated on March 14, 2008 (the
Second Amended and Restated Warrants) differ from the First Amended and Restated Warrants in
certain material respects, including, without limitation, the exercise price was reduced from
$7.38 per share to $2.49 per share. As a result of the note holders failure to reduce the conversion
price of the Second Amended and Restated Notes and the
exercise price of the Second Amended and Restated Warrants
to 120% of the arithmetic average of the weighted average
price of the Companys common stock for each day during
the period commencing on March 18, 2008 and ending on April 15,
2008, the conversion price of the Second Amended and
Restated Notes continues to be $2.51 per share and the
exercise price of the Second Amended and Restated
Warrants continues to be $2.49 per share.
The Second
Amended and Restated Notes and the Second Amended and Restated Warrants
contain various limitations on the number of shares of our common stock that may be issued upon
conversion of the Second Amended and Restated Notes and upon exercise of the Second Amended and
Restated Warrants. For example, no note holder may convert its Second Amended and Restated Notes or exercise its
Second Amended and Restated Warrants to the extent such conversion or exercise would cause such
holder, together with such holders affiliates, to own more than 9.99% of our common stock
following such conversion or exercise.
The Company applied EITF 96-19,
Debtors Accounting for a Modification or Exchange of
Debt Instruments
, to evaluate the financial statement effect of the March 14, 2008 amendment and
restatement of the notes and warrants during the quarter ended March 31, 2008 and determined that
since the modified debt had substantially different terms, it should be treated as an
extinguishment of debt. As a result, the Company recorded a debt extinguishment loss of
$2.6 million representing the difference between the carrying value of the First Amended and
Restated Notes and Warrants and the fair market value of the Second Amended and Restated Notes and
Warrants during 2008. The $2.6 million debt extinguishment loss resulted primarily from a
$2.2 million increase in the aggregate principal amount of the First Amended and Restated Notes,
$107,185 in write-offs of debt issuance costs relating to the First Amended and Restated Notes, and a $308,295
increase in the value of the First Amended and Restated Warrants.
14
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to help the reader understand our results of
operations and financial condition and is provided as a supplement to, and should be read in
conjunction with, our financial statements, the accompanying notes to the financial statements, and
the other information included or incorporated by reference herein.
Overview
The Company provides credit/debit card cash advance (CCCA), ATM and check cashing
solutions (Cash Access Services) to casinos, a majority of which are owned and operated by Native
American tribes. These products are the primary means by which casinos make cash available to
gaming patrons. The Company also provides casinos with ancillary services such as on-line
reporting, which enhances their ability to monitor player activity and market to gaming patrons.
Credit Card Cash Advances and POS Debit Card Transactions
Our CCCA products, which are comprised of both All-In-1 ATMs and Company kiosks which
house point-of-sale (POS) terminals, have been installed at 113 gaming and 19 retail locations.
Our CCCA products allow gaming patrons to obtain cash from their credit card, or checking account
in the case of debit transactions, through the use of our software and equipment.
A gaming patron can initiate a CCCA transaction through one of our All-In-1 ATMs or
kiosks. The All-In-1 ATM or kiosk terminal will prompt the gaming patron to swipe his/her credit
or debit card and enter the dollar amount requested. The All-In-1 ATM or kiosk terminal will then
dial the appropriate bank for an authorization or denial. If authorized, the All-In-1 ATM or
kiosk terminal will direct the gaming patron to a casino cage. Once at the cage, the gaming patron
will present his/her credit/debit card and drivers license. A cage cashier will swipe the
credit/debit card in a Company terminal to obtain information for the transaction initiated at the
All-In-1 ATM or kiosk terminal. The purpose of the second swipe is for identification purposes
only. After finding the approved transaction, the cage terminal will provide the cashier with two
options in order to obtain the gaming patrons address, drivers license and telephone number,
which must be imprinted on each check or voucher. The first option is to swipe the gaming patrons
drivers license if it contains a magnetic strip. The second option is to manually enter the
information into the terminal. After one of these options is selected, a printer attached to the
cage terminal will generate a Company check or voucher. The cashier will give the gaming patron
cash in the amount requested after he/she signs the Company check or voucher.
Our check or voucher is then deposited by the casino into its account for payment from a
Company account and we debit the gaming patrons credit or debit card. This transaction can be
accomplished without the gaming patron using a personal identification number (PIN). Gaming
patrons pay a service charge typically between 6%-7% for credit card advances and a fixed fee of
$1.95 plus 2% for POS debit card withdrawals.
ATM Cash Withdrawals
The Company offers a full menu of ATM services to casinos and retailers. Through the
Companys standard ATMs and our All-In-1 ATMs, vault cash for the operation of the ATM can be
provided by the Company or directly by the casino or retailer. The Company processes ATM
transactions through ATM networks with which the Company has licensing agreements. In addition, the
Company provides ATM vault cash, maintenance and armored car service. In an ATM cash withdrawal, a
gaming patron directly withdraws funds from his or her bank account by swiping an ATM card through
one of the Companys standard ATMs or All-In-1 ATMs. The Companys processor then routes the
transaction request through an electronic funds transfer network to the gaming patrons bank. If
the transaction is authorized, the ATM dispenses the cash to the gaming patron. Gaming patrons pay
a fixed fee for ATM cash withdrawals.
Check Cashing Solutions
The Company also offers two check cashing solutions to the gaming industry. First, the
Company provides casinos with full service check cashing. With full service check cashing, the
Company is given space within a casino to operate a check cashing booth. The Companys employees
manage the booth, the Companys cash is used to cash checks, and the Company retains customer fees
from check cashing. Gaming patrons pay a service charge based on the amount of the transaction for
our check cashing services. At March 31, 2008, there were 17 casinos utilizing our full service
check cashing services. Second, we self-guarantee checks via internal check cashing technology as
well as provide check guarantee services with the assistance of third party providers and check
verification services.
Joint Venture Agreement and Powercash Product
In April 2006, the Company entered into a joint venture agreement with Bally
Technologies, Inc. and Scotch Twist, Inc. (Joint Venture). Through the Joint Venture, the Company
has developed a product that allows customers to fund player accounts using credit and debit cards
tied to a players club card, such that the players club card can be used in place of a credit or
debit card to effectuate transactions within a casino for gaming, dining, retail purchases, and
lodging under a license to a portfolio of patents from Scotch Twist. Bally Technologies and the
Company have worked together to develop the cashless product as well as market and sell the
product, initially for use exclusively with Ballys hardware and software interface and accounting
systems, and will allocate the fees generated from the use of the cashless product among the Joint
Venture partners. The Company has worked with the card associations to ensure that the cashless
product and process comply with the card associations rules prior to full deployment into the
marketplace.
As an initial step in the development of the Joint Ventures cashless product and to test
gaming patron acceptance of a players club card, in October 2006, the Company commenced beta
testing of the cashclub product, which enables cash access through the use of a players club card
at an ATM or kiosk. Initial beta testing ended in April 2007. Revenues from the cashclub product
in the beta phase were not material to the Company.
On November 26, 2007, the Company announced the implementation of the Joint Ventures
cashless product at Fantasy Springs Resort Casino. Once patrons enroll in the casino players club
program with the Companys powercash functionality, they are able to access funds from their
desired credit, debit or checking accounts while sitting at the gaming device. Players can request
funds from
the designated financial account, transfer those funds into their players club account and then
transfer down to the gaming device the amount of money that they want to use.
The Company incurred research and development costs relating to the development of its
Joint Venture product which became fully operational at Fantasy
Springs Resort Casino during the first quarter of 2008. For the three months ended March 31,
2008 and 2007, the Company expensed
$7,184 and $169,144, respectively, which is included in other general and administrative expenses
on the consolidated statement of operations. We do not anticipate that future research and
development costs related to the Joint Venture will be material to us.
Internal Transaction Processing
In the past, the Companys CCCA, POS Debit Card and ATM transactions were settled with
its network payers through third party processing providers. In May 2006, the Company beta-tested
its own internal processing switch at its Florida based properties. As of March 31, 2008, with the
exception of a few minor properties, all CCCA and POS Debit Card transactions are processed through
an internal Company-owned switch. For ATM transactions, virtually all of the Companys ATM devices
are operating on an internal Company-owned switch as of March 31, 2008. The internal processing
switch enables the Company to eliminate third party processing costs by settling transactions
directly with its network payers.
Due to the change to internal processing, a one to three day timing lag exists between
the time the advance occurs and the Company is reimbursed by the network payers. The effect of this
change has been reflected in the Companys consolidated balance sheets as settlements due from
credit card and ATM processors as well as the associated payables due to customer accounts which
are reflected in other accrued expenses.
15
Second Amended and Restated Notes and Warrants
On March 14, 2008, the Company entered into a Second Amendment and Exchange Agreement
with each of its note holders (each, a Second Amendment and Exchange Agreement and collectively,
the Second Amendment and Exchange Agreements) pursuant to which the Company and each of the note
holders agreed to, among other things, amend and restate the First Amended and Restated Notes, amend and
restate the First Amended and Restated Warrants, and amend
certain provisions of other related documents.
The senior secured convertible notes, as amended and restated on March 14, 2008 (the
Second Amended and Restated Notes) differ from the First Amended and Restated Notes in certain
material respects, including, without limitation, (i) the aggregate principal amount was increased
from $22.0 million to $24.2 million, (ii) the conversion price was reduced from $8.00 per share to
$2.51 per share, (iii) the aggregate amount that the note holders may require the Company to redeem,
and the aggregate amount that the Company may elect to redeem, on October 10, 2008 was increased
from $8 million to $12.1 million, (iv) the financial covenants based on Consolidated Total Debt to
EBITDA (as defined in the First Amended and Restated Notes) were eliminated and the financial
covenants based on Consolidated Revenue and Consolidated EBITDA (as defined in the Second Amended
and Restated Notes) were modified to apply starting with the quarter ending March 31, 2009, and
(v) the interest rate will be increased by 1.5% per annum from and after the occurrence of any
Dilutive Issuance Event (as defined in the Second Amended and Restated Notes). As a result of the
March 14, 2008 amendment and restatement of the notes, the Company reclassified $12.1 million of
the Second Amended and Restated Notes from long term to short term debt on the consolidated balance
sheet. The Warrants to Purchase Common Stock, as amended and restated on March 14, 2008 (the
Second Amended and Restated Warrants) differ from the First Amended and Restated Warrants in
certain material respects, including, without limitation, the exercise price was reduced from
$7.38 per share to $2.49 per share. As a result of the note holders failure to reduce the conversion
price of the Second Amended and Restated Notes and the
exercise price of the Second Amended and Restated Warrants
to 120% of the arithmetic average of the weighted average
price of the Companys common stock for each day during
the period commencing on March 18, 2008 and ending on April 15,
2008, the conversion price of the Second Amended and
Restated Notes continues to be $2.51 per share and the
exercise price of the Second Amended and Restated
Warrants continues to be $2.49 per share.
The Company applied EITF 96-19,
Debtors Accounting for a Modification or Exchange of
Debt Instruments
, to evaluate the financial statement effect of the March 14, 2008 amendment and
restatement of the notes and warrants during the quarter ended March 31, 2008 and determined that
since the modified debt had substantially different terms, it should be treated as an
extinguishment of debt. As a result, the Company recorded a debt extinguishment loss of
$2.6 million representing the difference between the carrying value of the First Amended and
Restated Notes and Warrants and the fair market value of the Second Amended and Restated Notes and
Warrants during 2008. The $2.6 million debt extinguishment loss resulted primarily from a
$2.2 million increase in the aggregate principal amount of the
First Amended and Restated Notes,
$107,185 in write-offs of debt issuance costs relating to the First
Amended and Restated Notes,
and a $308,295 increase in the value of the First Amended and Restated Warrants.
The Second Amended and Restated Notes and the Second Amended and Restated Warrants
contain various limitations on the number of shares of our common stock that may be issued upon
conversion of the Second Amended and Restated Notes and upon exercise of the Second Amended and
Restated Warrants. For example, no note holder may convert its Second Amended and Restated Notes or exercise its
Second Amended and Restated Warrants to the extent such conversion or exercise would cause such
holder, together with such holders affiliates, to own more than 9.99% of our common stock
following such conversion or exercise.
Liquidity and Capital Resources
At March 31, 2008, we had cash of $13.4 million compared to $16.6 million at December 31, 2007 and
cash net of Checks issued in excess of cash in bank of $5.4 million and $1.4 million at March 31,
2008 and December 31, 2007, respectively. Cash provided by operations totaled $5.6 million and $0.4
million during the three months ended March 31, 2008 and 2007,
respectively. The increase in cash provided by operations is
primarily due to timing of receivables from processors. We had working capital
deficits of $6.1 million and $4.5 million at March 31, 2008 and December 31, 2007, respectively.
Operating working capital includes Settlements due from credit card processors totaling $5.6
million and $14.8 million, and Settlements due from ATM processor totaling $12.4 million and
$12.1 million as of March 31, 2008 and December 31, 2007, respectively. We estimate capital
expenditures for the remainder of fiscal year 2008 of approximately $1.5 million related to
software development, ATM purchases for new customers or existing customer expansion, and related
costs. In addition to meeting operating capital needs, our note holders relating to our Second
Amended and Restated Notes currently have the right of optional redemption pursuant to which, on
October 10, 2008, such note holders may require the Company to redeem a portion of the Second
Amended and Restated Notes in an amount not to exceed $12.1 million in the aggregate. Further, if
our common stock is delisted from The NASDAQ Global Market resulting in an event of default under
the Second Amended and Restated Notes, as more fully described in Item 1A of Part II of
this Form 10-Q, our note holders would be entitled to, among other things,
accelerate the maturity of the outstanding balance of the Second Amended and Restated Notes. If the
Company is unable to secure alternative financing or raise additional capital to repay this
outstanding balance at maturity, the note holders would be entitled to foreclose on substantially
all of the Companys assets, which secure the Second Amended and Restated Notes.
We anticipate that our existing capital resources will enable us to continue operations through
approximately October 2008, unless prior to that date payments of certain other accrued expenses
are accelerated, our common stock is delisted from The NASDAQ Global Market as more fully described in
Item 1A of Part II of this Form 10-Q and our note holders
elect to accelerate the maturity of the outstanding balance of the Second Amended and Restated
Notes, or unforeseen events or circumstances arise that negatively affect our liquidity. If we fail
to raise additional capital prior to the earlier of October 2008 and the occurrence of any of these
events, we may be forced to cease operations. Management is taking steps to reduce operating
expenses and may consider reducing the scope of our operations, planned product development, and
expansion efforts, which could harm our business, financial condition, and operating results.
Management may also request that the note holders further amend the Second Amended and Restated
Notes to, among other things, modify their right to require the Company to redeem up to $12.1
million in aggregate on October 10, 2008 and/or waive an event of default resulting from the
delisting of our common stock from The NASDAQ Global Market.
The Company is exploring strategic alternatives to maximize shareholder value. There can be no
assurance that this process will result in any specific transaction. Further, there can be no
assurance that the Company will be able to achieve profitable operations, generate sufficient cash
from operations, obtain additional funding, modify the Second Amended and Restated Notes in a
beneficial manner, repay the redemption option of our note holders of up to $12.1 million should
they exercise their redemption right, or repay the outstanding balance of the Second Amended and
Restated Notes if our note holders elect to exercise their remedies upon an event of default,
including following a delisting of our common stock from The NASDAQ Global Market.
Going Concern
We have net losses in consecutive years, have generated $5.6 million and $0.4 million of cash from
operations during the three months ended March 31, 2008 and 2007, and have an accumulated deficit
of $31.9 and $27.3 million and net working capital deficits of $6.1 million and $4.5 million at
March 31, 2008 and December 31, 2007, respectively. Because we have not identified sources of
capital and due to recurring losses, negative net cash flows, and accumulated deficit, the report
of our independent registered public accounting firm dated March 28, 2008 expressed substantial
doubt about our ability to continue as a going concern. In addition, the holders of our Second
Amended and Restated Notes have the right to require us to redeem a portion of such notes on
October 10, 2008 in an amount not to exceed $12.1 million in the aggregate, and will have the right
to accelerate the maturity of the outstanding balance of the Second Amended and Restated Notes upon
an event of default, including following a delisting of our common stock from The NASDAQ Global
Market. We anticipate that our existing capital resources will enable us to continue operations
through approximately October 2008, unless prior to that date payments of certain other accrued
expenses are accelerated, our common stock is delisted from The
NASDAQ Global Market which could occur as early as July 31,
2008, and our note
holders elect to accelerate the maturity of the outstanding balance of the Second and Amended and
Restated Notes, or unforeseen events or circumstances arise that negatively affect our liquidity.
Management will need to take immediate steps to reduce operating expenses, which may include
seeking concessions from customers and vendors in the meantime. If we fail to raise additional
capital prior to the earlier of October 2008 and the occurrence of any of these events, we may be
forced to cease operations.
Critical Accounting Policies and Estimates
Our discussion and analysis is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements, the reported amounts of revenues and expenses during the
reporting period, and related disclosures of contingent assets and liabilities for the periods
indicated. The notes to the consolidated financial statements contained herein describe our
significant accounting policies used in the preparation of the consolidated financial statements.
On an on-going basis, we evaluate our estimates, including, but not limited to collectibility of
loans receivable, the lives and continued usefulness of property and equipment and software and
contingencies. Due to uncertainties, however, it is at least reasonably possible that managements
estimates will change during the next year, which cannot be estimated. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results could
differ from these estimates under different assumptions or conditions.
In accordance with Statement of Accounting Standards No. 154
Accounting Changes and Error
Corrections
, changes in accounting estimates that result in a material effect on income from
continuing operations, net income (or other appropriate captions of changes in the applicable net
assets or other performance indicator), and any related per-share amounts of the current period
shall be disclosed. In the prior period, we changed our method for estimating our reserve for
uncollectible accounts relating to our check cashing receivables. As a result of the recent
increase in bad debt expense, we have adopted a more conservative policy whereby we have increased
our reserve for uncollectible accounts to 74% for current receivables and 95% for receivables
greater than 180 days old. This change in reserve reflects changes in assumptions based on
additional historical data and current market conditions.
Our revenue recognition policy is significant because the amount and timing of revenue is a
key component of our results of operations. We follow the guidance of Staff Accounting Bulletin No.
104 (SAB 104) and Statement of Position No. 97-2 Software Revenue Recognition (SOP 97-2), as
amended by Statement of Position No. 98-9, Software Revenue Recognition with Respect to Certain
Arrangements, which requires that a strict series of criteria are met in order to recognize
revenue related to services or software provided. If these criteria are not met, the associated
revenue is deferred until the criteria are met. We recognize revenue when evidence of a transaction
exists, services/products have been rendered/delivered, our price is fixed or determinable and
collectibility is reasonably assured. The reasonable assurance is based on the transactions being
authorized and preapproved by credit card vendors or third parties or a valid contract is signed.
We evaluate our revenue streams for proper timing of revenue recognition.
Credit card cash advance revenue is comprised of upfront patron transaction fees assessed at
the time the transaction is initiated and a percentage of the face amount of the cash advance.
Credit card cash advance revenue is recognized at the point that a negotiable check instrument is
generated by the casino cashier or cash cage operation based upon authorization of the transaction.
ATM fees are comprised of upfront patron transaction fees or surcharges assessed at the time
the transactions are initiated. Upfront patron transaction fees are recognized when a transaction
is authorized. We provide cash through wire transfers to certain casinos for ATMs and record a
receivable from the casinos.
Check cashing services revenue is generally contractual, based upon a percentage of the face
amount of total checks. We self guarantee a majority of our checks and engage an independent third
party for collections as well as engage an independent third party to guarantee the collectability
of a smaller portion of our checks. We record a receivable from collection agency for all
self-guaranteed checks returned for insufficient funds until determined to be uncollectible. We
record a reserve of 74% for current receivables and 95% for receivables greater than 180 days old
based on historical data and current market conditions.
The Company also derives revenues from licensing software and providing technical support and
product updates, otherwise known as maintenance, relating to its new cashless gaming product.
For powercash transactions, the Company and its two joint venture partners earn a convenience
fee for each completed transaction. The Company records its portion of the convenience fee upon
authorization of a transaction.
We have determined that the accounting policies for income recognition described above are in
accordance with the Financial Accounting Standards Board Emerging Issues Task Force (EITF) Issue
No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.
We have recorded an accrual for known and potential chargebacks for possible charges against a
gaming patrons credit card that we are unable to establish the validity of the transaction. The
accrual for chargebacks is estimated based on historical information and managements estimates.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard No.
123 (revised 2004),
Share-Based Payment
(SFAS 123(R)), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors including employee stock options based on fair values. The Companys determination of
fair value of share-based payment awards is based on the date of grant using an option-pricing
model which incorporates a number of highly complex and subjective variables. These variables
include, but are not limited to, the Companys expect stock price volatility over the eighteen
month period prior to the grant date of the awards and estimates regarding projected employee stock
option exercise behaviors and forfeitures. The Company recognizes the expense related to the fair
value of the award straight-line over the vesting period.
Results of Operations
Three months ended March 31, 2007 compared to March 31, 2006
Revenue
for the quarter ended March 31, 2008 was $27.1 million compared to $25.2 million
for the same period in 2007. The $1.9 million increase, which
represents an 8% increase in 2008
revenue over 2007 revenue, is primarily due to an increase in overall transaction volume. The
volume of transaction dollars processed through our Cash Access Services during the three months
ended March 31, 2008 was $888.9 million compared to $849.6 million during the same period in 2007.
The volume increase was primarily driven by our ATM and check cashing transactions.
Commissions
increased by $1.2 million during the three months ended March 31, 2008 to
$15.4 million compared to $14.2 million during the same period in 2007 which was directly related
to the Companys increased transaction volume at existing locations as services were expanded.
Total processing costs remained constant compared to the same period
last year, despite the 7.0%
increase in revenues, reflecting the results of our switch to internal processing. Total check
cashing costs showed an overall increase of $1.1 million compared to the same period last year
primarily due to an increase in bad debt reserve on our receivables from collection agency,
slightly offset by lower costs associated with our third party check guarantor as we shifted from
using a third party check guarantor to using our own internal check cashing technologies to
guarantee checks and utilizing a third party for collections. We continue to monitor collection
rates and adjust bad debt reserve levels as appropriate based on historical data and current market
conditions. Armored carrier services were comparable with a slight
increase primarily due to increases
in our cash volume and expansion of armored carrier services to certain Florida based properties
compared to the same prior year period.
Payroll and related
costs increased by $0.4 million primarily due to more restricted
stock awards and corporate salary increases compared to the same prior
year period. Professional fees increased by
$0.1 million due to additional general legal fees. Other General and Administrative expenses
decreased by $0.4 million compared to the same period last year due to a reduction in a variety of
costs such as temporary labor, trade shows, utilities, telecommunications, and public relations
services. Depreciation and amortization remained constant.
Total operating expenses for the three months ended March 31, 2008 were $27.9 million
compared to $25.4 million for 2007 (or a $2.5 million
increase representing an 9.8% increase in
total operating expenses).
Interest expense
was comparable with a slight increase due to the increased amount of
vault cash required to fund our ATMs and interest related to the senior secured convertible notes
offset by a decrease in interest rates. The Company also recorded a loss on extinguishment of debt
during the three months ended March 31, 2008 in the amount of
$2.6 million representing the
difference between the carrying value of the First Amended and Restated Notes and Warrants and the
fair market value of the Second Amended and Restated Notes and Warrants.
On
a fully diluted basis, after-tax net loss of ($4,646,124) for the quarter ended
March 31, 2008 was 17% of sales or ($0.25) per diluted common share, as compared to a net loss of
($1,425,955) which was 6% of sales or ($0.08) per diluted common share for the same prior year
period.
16
Off-Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements.
17
Forward-Looking Statements
Certain statements
contained in this Quarterly Report on Form 10-Q, as well as some
statements by the Company in periodic press releases and some oral statements by Company officials
to securities analysts and stockholders during presentations about the Company are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, or the Act.
Statements which are predictive in nature, which depend upon or refer to future events or
conditions, or which include words such as expects, anticipates, intends, plans,
believes, estimates, hopes, assumes, may, and similar expressions constitute
forward-looking statements. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business strategies or prospects,
and possible future Company actions, which may be provided by management are also forward-looking
statements as defined in the Act. Forward-looking statements are based upon expectations and
projections about future events and are subject to assumptions, risks and uncertainties about,
among other things, the Company and economic and market factors.
Actual events and results may differ materially from those expressed or forecasted in the
forward-looking statements due to a number of factors. The principal factors that could cause the
Companys actual performance and future events and actions to differ materially from such
forward-looking statements include, but are not limited to, our failure to continue as a going
concern; our failure to explore strategic alternatives that result in a definitive transaction; the delisting of
our common stock from the NASDAQ Global Market; our
failure to develop products or services that achieve market acceptance or regulatory approval; our
failure to accurately evaluate the assumptions underlying our estimates of the useful lives for
depreciable and amortizable assets, our estimates of cash flows in assessing the recoverability of
long-lived assets, and estimated liabilities for chargebacks, litigation, claims and assessments;
competitive forces or unexpectedly high increases in interchange and processing costs that preclude
us from passing such costs on to our customers through increased surcharges or reduced commissions;
unanticipated changes to applicable tax rates or laws or changes in our tax position; regulatory
forces, competitive forces or market contraction that affect our cash advance business; our
inability to satisfy conditions to borrow additional funds, if required or unanticipated operating
capital needs that cause our cash flows from operations and possible borrowing facilities to be
insufficient to provide sufficient capital to continue our operations; our failure to accurately
estimate our operating cash flows and our failure to
accurately predict our working capital and capital expenditure needs; our inability to obtain
additional financing through bank borrowings or debt or equity financings at all or on terms that
are favorable to us; competitive pressures that prevent us from commanding higher prices for our
Cash Access Services than other providers; actions taken by our technology partners or the failure
of our technology partners to service our needs; our failure to renew our contracts with our top
customers; changes in the rules and regulations of credit card associations that require the
discontinuation of or material changes to our products or services; and our inability to identify
or form joint ventures with partners that result in products that are commercially successful; and
other factors or conditions described or referenced under the caption Risk Factors of Item 1A of
Part II of this Quarterly Report on Form 10-Q. The Companys past performance or past or present
economic conditions are not indicative of future performance or conditions. Undue reliance should
not be placed on forward-looking statements. In addition, the Company undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the occurrence of
anticipated or unanticipated events or changes to projections over time unless required by federal
securities law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks
During the normal course of our business, we are routinely subjected to a variety of
market risks, examples of which include, but are not limited to, interest and currency rate
movements, collectibility of accounts and notes receivable, and recoverability of residual asset
values. We constantly assess these risks and have established policies and practices designed to
protect against the adverse effects of these and other potential exposures. Although we do not
anticipate any material losses in these risk areas, no assurances can be made that material losses
will not be incurred in these areas in the future.
18
Interest Rate Risk
We had $24.2 million in borrowings outstanding under our Second Amended and Restated
Notes entered into on March 14, 2008. The Second Amended and Restated Notes bear interest at the
rate of 7.50% per annum, payable quarterly in arrears. This interest rate is subject to adjustment
up to 12.0% per annum upon the occurrence of certain events of default. In the event of default
under the Second Amended and Restated Notes, the interest rate would increase to 12.0% beginning on
the date of default. In addition, the interest rate will be increased by 1.5% per annum from and
after the occurrence of any Dilutive Issuance Event (as defined in the Second Amended and Restated
Notes). The 600 basis points increase, if effective for an entire year and with all other factors
remaining constant, would decrease earnings by approximately $1.5 million on a pre-tax basis.
In addition, our vault cash arrangement with Fidelity Bank, effective December 1, 2006,
requires that we pay tiered fees based on the average monthly balance of the funds provided in an
amount equal to the prime rate of interest, prime rate minus 1.25%, or prime rate minus 1.50%,
depending on the average monthly balance tier. Also, fees are
required in an amount equal to the prime rate plus 1.25% on balances over a certain maximum
threshold. At March 31, 2008, the prime rate was 5.25%. If the prime rate were to increase by 100
basis points, with all other factors remaining constant, earnings would decrease by approximately
$0.6 million on a pre-tax basis.
Effective April 10, 2008, we entered into a new vault cash agreement with another third
party financial institution to replace our primary vault cash agreement with Fidelity Bank. The new
vault cash agreement requires that we pay fees based on the average monthly cash balance and the
prime rate of interest minus 1.25% or prime rate minus 1.50%, depending on the average monthly cash
balance. At March 31, 2008, the prime rate was 5.25%. If the prime rate were to increase by 100
basis points, with all other factors remaining constant, earnings would decrease by approximately
$0.6 million on a pre-tax basis.
We have another vault cash arrangement with Wilmington Savings Fund Society FSB effective
December 11, 2002 which requires that we pay fees based on the number of ATMs serviced or amount of
cash provided in an amount equal to the prime rate of interest plus 1.0%-3.0%. At March 31, 2008,
the prime rate was 5.25%. If the prime rate were to increase by
100 basis points, with all other factors remaining constant, earnings would decrease by
approximately $0.1 million on a pre-tax basis.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the quarter ended March 31, 2008, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. This evaluation was done under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer.
Disclosure controls and procedures are defined in Securities and Exchange Commission
(SEC) rules as controls and other procedures designed to ensure that information required to be
disclosed in Securities and Exchange Act of 1934 (the Exchange Act) reports is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms.
While we believe that our disclosure controls and procedures have improved due to the scrutiny of
the material weakness in internal control over financial reporting as described in our Annual
Report on Form 10-K for the year ended December 31, 2007, our management, including our Chief
Executive Officer and Chief Financial Officer, has concluded that the design and operation of our
disclosure controls and procedures were not effective at March 31, 2008. We note that a control
system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Notwithstanding managements assessment that our disclosure controls and procedures were
not effective as of March 31, 2008, we believe that the consolidated financial statements included
in this Form 10-Q fairly present our financial condition, results of operations and cash flows for
the fiscal years covered thereby in all material respects.
Changes in Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. As we
reported in our Annual Report on Form 10-K for the year ended December 31, 2007, in connection with
managements assessment of the effectiveness of our system of internal control over financial
reporting as of December 31, 2007, our management concluded that there was a material weakness in
internal controls over financial reporting relating to the financial close and reporting cycle.
Accordingly, and as reported in our Annual Report on Form 10-K for the year ended December 31,
2007, we have made the following changes to strengthen our internal control over financial
reporting during the three months ended March 31, 2008:
|
|
|
The Company changed its method for estimating reserves for
uncollectible accounts relating to the receivable from collection
agency. We adopted a more conservative policy whereby the Company
increased its reserve for uncollectible accounts to 74% for current
receivables and 95% for receivables greater than 180 days old. The
Company will continue to monitor and adjust its reserve for
uncollectible accounts based on historical data and current market
conditions as well as work with its collection agency to continue to
refine data and enhance contract related procedures.
|
|
|
|
|
Although the Companys internal controls detected the improper
recording of commissions revenue and commissions expense and the
quarterly effect of the adjustment was deemed immaterial through
internal investigation and analysis, the Companys internal controls
did not detect the error on a timely basis. Accordingly, the Company
took measures to re-train its accounting personnel, restrict revenue
recording responsibilities, and augment existing quarterly analytic
controls.
|
|
|
|
|
Although failure of controls related to commission contracts were
found to be immaterial and the Company believes that the debt
reclassification finding would have been detected by normal year end
review procedures, the Companys internal controls required
remediation in this area. Accordingly, the Company held meetings and
trained personnel as appropriate to establish procedures for and
heighten overall awareness on contract and debt agreement related
matters.
|
Except as described above, there was no change in our internal controls over financial
reporting (as defined in Rule 13a-15(f) of the Exchange Act) or in other factors that could affect
these controls during our last fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal actions in the ordinary course of its business.
Although the outcome of any such legal action cannot be predicted, management believes that there
are no pending legal proceedings against or involving the Company for which the outcome is likely
to have a material adverse effect on the Companys consolidated financial position, results of
operations or cash flows.
ITEM 1A. RISK FACTORS
The Companys Annual Report on Form 10-K for the year ended December 31, 2007 includes detailed
disclosure about the risks faced by our business. Such risks have not
materially changed since December 31, 2007 except as described
below:
Our common stock may be delisted from The NASDAQ Global Market (NASDAQ) if we fail to regain
compliance with the listing standards applicable to issuers listed on NASDAQ, which could
negatively impact the price of our common stock and would constitute an event of default under our
senior secured convertible notes.
Our common stock is listed on NASDAQ. The listing standards of NASDAQ provide, among other
things, that a company may be delisted if the bid price of its stock drops below $1.00 for a period
of 30 consecutive business days or if it does not maintain a minimum market value of publicly held
shares of $15,000,000. On May 1, 2008, the Company received a letter from NASDAQ indicating that
the Company failed to comply with the minimum bid price requirement for continued listing because
the bid price of our common stock closed under $1.00 for 30 consecutive business days. In addition,
on May 2, 2008, the Company received a letter from NASDAQ
indicating that our common
stock did not maintain a minimum market value of publicly held shares of $15,000,000. If we fail to
regain compliance with the listing standards applicable to issuers listed on NASDAQ, our common
stock may be delisted from NASDAQ. The delisting of our common stock would constitute an event of
default under our Second Amended and Restated Notes, as a result of which the note holders would be
entitled to, among other things, accelerate the maturity of the outstanding balance of the Second
Amended and Restated Notes. If the Company is unable to obtain a waiver of the event of default
from the note holders or secure the funding to repay this outstanding balance, the note holders
would be entitled to foreclose on substantially all of our assets, which secure the Second Amended
and Restated Notes. In addition, the delisting of our common stock would significantly affect the
ability of investors to trade our securities, would significantly negatively affect the value and
liquidity of our common stock, and could materially adversely affect our ability to raise capital
on terms acceptable to us or at all. Delisting from NASDAQ could also have other negative results,
including the potential loss of confidence by customers and employees, the loss of institutional
investor interest and fewer business development opportunities.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
Not applicable
Issuer Repurchases of Equity Securities
In January 2005, our Board of Directors authorized the repurchase of up to 1,000,000
shares of our common stock as part of the Companys overall strategy to prudently allocate
resources to enhance shareholder value. This stock repurchase program does not have an expiration
date. The Company did not repurchase any shares of its common stock during the three months ended
March 31, 2008. Our Second Amended and Restated Notes prohibit us from repurchasing shares of our
common stock without the prior written consent of the note holders representing not less than
two-thirds of the aggregate principal amount of the then outstanding notes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
10.1
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Portside Growth and Opportunity Fund (1)
|
|
|
|
10.2
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Highline Capital
Partners, LP (1)
|
|
|
|
10.3
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Highline Capital Partners QP, LP (1)
|
|
|
|
10.4
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Highline Capital International, Ltd. (1)
|
|
|
|
10.5
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Highbridge International LLC (1)
|
|
|
|
10.6
|
|
Form of Second Amended and Restated Senior Secured Convertible Note (1)
|
|
|
|
10.7
|
|
Form of Second Amended and Restated Warrant to Purchase Common Stock (1)
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(1)
|
|
Previously filed as an exhibit to the Current Report on Form 8-K of
Cash Systems, Inc. filed on March 18, 2008, and incorporated herein by
this reference.
|
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
CASH SYSTEMS, INC.
|
|
|
By:
|
/s/ Michael D. Rumbolz
|
|
|
|
Michael D. Rumbolz
|
|
|
|
Chief Executive Officer
(principal executive officer)
|
|
|
DATE: May 12, 2008
|
|
|
|
|
|
|
|
|
By:
|
/s/ Andrew Cashin
|
|
|
|
Andrew Cashin
|
|
|
|
Chief Financial Officer
(principal financial officer)
|
|
|
DATE: May 12, 2008
EXHIBIT INDEX
CASH SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2008
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
10.1
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Portside Growth and Opportunity Fund (1)
|
|
|
|
10.2
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Highline Capital
Partners, LP (1)
|
|
|
|
10.3
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Highline Capital Partners QP, LP (1)
|
|
|
|
10.4
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Highline Capital International, Ltd. (1)
|
|
|
|
10.5
|
|
Second Amendment and Exchange Agreement dated March 14, 2008 between Cash Systems, Inc. and Highbridge International LLC (1)
|
|
|
|
10.6
|
|
Form of Second Amended and Restated Senior Secured Convertible Note (1)
|
|
|
|
10.7
|
|
Form of Second Amended and Restated Warrant to Purchase Common Stock (1)
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(1)
|
|
Previously filed as an exhibit to the Current Report on Form 8-K of
Cash Systems, Inc. filed on March 18, 2008, and incorporated herein by
this reference.
|
21