USA Technologies, Inc.
USA TECHNOLOGIES INC (Form: 424B4, Received: 07/20/2017 17:24:18)

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-219201
 
PROSPECTUS
 
8,333,333 Shares
Common Stock
 
 
USA TECHNOLOGIES, INC.

We are offering 8,333,333 shares of our common stock. Our common stock is quoted on The NASDAQ Global Market under the symbol “USAT.” On July 19, 2017, the closing price of our common stock as reported on The NASDAQ Global Market was $4.80 per share.

Investing in our common stock involves risks.  You should read the section entitled “Risk Factors,” beginning on page 9 of this prospectus, and all other information included in this prospectus in connection with an investment in our common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
   
Per Share
   
Total
 
Public offering price
  $ 4.50     $ 37,499,999  
Underwriting discounts and commissions (1)
  $ 0.27     $ 2,250,000  
Proceeds to us, before expenses
  $ 4.23     $ 35,249,999  


(1)
See the section entitled "Underwriting," beginning on page 82 of this prospectus, for additional information regarding underwriting compensation.

We have granted the underwriters an option to buy up to an additional 1,249,999 shares of common stock to cover over-allotments at the public offering price less underwriting discounts and commissions. The underwriters may exercise this option at any time during the 30-day period from the date of this prospectus.

The underwriters are offering the shares of common stock for sale on a firm commitment basis. The underwriters expect to deliver the shares of common stock to the purchasers on or about July 25, 2017.
 
Sole Book-Running Manager

William Blair
__________________________

Craig-Hallum Capital Group
   
     
 
Northland Capital Markets
 
     
   
Barrington Research
 
The date of this prospectus is July 19, 2017
 

TABLE OF CONTENTS

2
9
19
20
21
Dividend Policy 22
23
25
27
29
50
61
64
76
Certain Relationships and Related Transactions 79
80
82
85
85
85
F-1
 
You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with information that is different. We are offering to sell shares of our common stock, and seeking offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information in this prospectus is complete and accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

This prospectus and any related free writing prospectus, if any, do not constitute an offer to sell or the solicitation of an offer to buy any securities other than the registered securities to which they relate, nor do this prospectus or any related free writing prospectus, if any, constitute an offer to sell or the solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. You should not assume that the information contained in this prospectus, or any related free writing prospectus is accurate on any date subsequent to the date set forth on the front of the document, even though this prospectus or any related free writing prospectus is delivered or the applicable securities are sold on a later date.
 
Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “USA Technologies,” “USAT,”  the “Company,” “we,” “us,” “our” and similar references refer to USA Technologies, Inc. USA Technologies® and our other logos and trademarks are the property of USA Technologies, Inc. All other trademarks, registered marks and trade names appearing in this prospectus are the property of their respective holders. Our use or display of other parties’ trademarks, trade dress or products in this prospectus does not imply that we have a relationship with, or the endorsement or sponsorship of, the trademark or trade dress owners.
 
PROSPECTUS SUMMARY

This prospectus summary contains basic information about us and this offering.  Because it is a summary, it does not contain all of the information that you should consider before deciding whether or not you should purchase shares of our common stock.  Therefore, you should read the entire prospectus carefully, especially the sections entitled “Risk Factors,” “Selected Consolidated Financial Data and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock. The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this registration statement.

Our Company

USA Technologies, Inc. (the “Company,” “we,” “USAT,” or “our”) provides wireless networking, cashless transactions, asset monitoring, and other value-added services principally to the small ticket, unattended Point of Sale (“POS”) market. Our ePort technology can be installed and/or embedded into everyday devices such as vending machines, a variety of kiosks, amusement games, and commercial laundry via either our ePort hardware or our Quick Connect solution. Our associated service, ePort Connect, is a Payment Card Industry Data Security Standard (PCI DSS)-compliant, comprehensive service that includes simplified credit card processing and support, consumer engagement services as well as telemetry, Internet of Things (“IoT”) and machine-to-machine (“M2M”) services, including the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions.

We are a leading provider in the small ticket, beverage and food vending industry and are expanding our solutions and services to other unattended market segments, such as amusement, commercial laundry, kiosk and others. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments through the use of credit or debit cards or other emerging contactless forms, such as mobile payment.

We generate revenue from the sale of equipment and from license and transaction fees. During the fiscal year ended June 30, 2016, we derived 73.0% of our revenues from recurring license and transaction fees related to our ePort Connect service and 27.0% of our revenue from equipment sales. Connections to our service stem from the sale or lease of our POS electronic payment devices or certified payment software or the servicing of similar third-party installed POS terminals. Connections to the ePort Connect service are the most significant driver of the our revenues, particularly the recurring revenues from license and transaction fees. We believe that our service-approach business model, including our value added services, could create a high-margin stream of recurring revenues that could create a foundation for long-term value and continued growth.
 
Our Industry

We operate primarily in the unattended POS market. Our solutions and services facilitate electronic payments in industries that have traditionally relied on cash transactions. We believe the following industry trends are driving growth in demand for electronic payment systems in general and more specifically within the markets we serve:

Shift toward electronic payment transactions and away from cash and checks There has been an ongoing shift away from paper-based methods of payment, including cash and checks, towards electronic-based methods of payment. According to The Nilson Report, December 2015, paper-based methods of payment continued to decline in 2014, representing 28.07% of transaction dollars measured compared to 30.61% in 2013. The four card-based systems—credit, debit, prepaid, and electronic benefits transfer—generated $5.29 trillion in the United States in 2014, 57.34% of transaction dollars measured, compared to 42.3% in 2006. The Nilson Report projects that, by 2019, spending at merchants in the U.S. from the four card-based systems will grow to 67.03% of total transaction dollars measured.

Increase in Consumer Demand for Electronic Payments . The unattended, vending and kiosk POS market has historically been dominated by cash purchases. We believe electronic payment system providers such us that can meet consumers’ demand within the unattended market will be able to offer retailers, card associations, card issuers and payment processors and business owners an expanding value proposition at the POS.

Increase in Merchant/Operator Demand for Electronic Payments . We believe that, increasingly, merchants and operators of unattended payment locations (e.g., vending machines, laundry, tabletop games, etc.) are utilizing electronic payment alternatives as a means to improve business results. We work with our customers to help them drive increased revenue of their distributed assets through this expanded market opportunity. In addition, electronic payment systems can provide merchants and operators real-time sales and inventory data utilized for back-office reporting and forecasting, like our solutions and services, helping them to manage their business more efficiently.
 
Increase in Demand for Integrated Payment Solutions.   We believe that merchant have come to value payment solutions that are integrated or bundled with other solutions and software.  Offering an integrated solution allows us to provide a single source solution for our products and results in better customer retention, less focus on price and a better overall experience for our customers.  We also view our integrated solutions as a significant competitive advantage as competitors will need fully integrated solutions to compete.

Increase in Demand for Networked Assets . Machine-to-machine (“M2M”) technology includes capturing value from wireless modules and electronic devices to improve business productivity and customer service. In addition, networked assets can provide valuable information regarding consumers’ purchasing patterns and payment preferences, allowing operators to more effectively tailor their offerings to consumers. Gartner, Inc. forecasts that 6.4 billion connected things will be in use worldwide in 2016, with 5.5 million new things getting connected every day, and will reach 20.8 billion by 2020.

POS Technology and NFC Equipped Mobile Phone Payment Improvements . Near Field Communication (“NFC”) is a short range wireless connectivity technology that uses electromagnetic radio fields to enable communication between devices when there is a physical touch, or when they are within close proximity to one another. We believe that   POS contactless terminals that are enabled to accept NFC payments and digital wallet applications, such as Google Wallet, Chase Pay, Apple Pay, the recently introduced Android Pay, and others, stand to benefit from these evolving trends in mobile payment. Digital wallet is essentially a digital service, accessed via the web or a mobile phone application that serves as a substitute for the traditional credit or debit card. Providers can also market directly to targeted consumers with coupons and loyalty programs.  As approximately 400,000 of our connections are contactless enabled to accept NFC payments (in addition to magnetic stripe cards) as of June 30, 2017, we believe that we are well-positioned to benefit from this emerging space.

Our Connection Base
 
As of June 30, 2016 and March 31, 2017, we had 429,000 and 504,000 connections, respectively, to our ePort Connect service. These connections represented a 29% and 25.7% increase from connections as of June 30, 2015 and March 31, 2016, respectively. During the fiscal year ended June 30, 2016, we processed approximately 316 million cashless transactions totaling approximately $584 million in transaction dollars, representing a 46% increase in transaction volume and a 50% increase in dollars processed during the previous fiscal year ended June 30, 2015.
 
As of March 31, 2017, we had approximately 12,400 customers. Our customers range from global food service organizations to small businesses that operate primarily in the self-serve, small ticket retail markets including beverage and food vending, amusement and arcade machines, smartphones via our ePort Online solution, commercial laundry, tolls, and various other self-serve kiosk applications as well as equipment developers or manufacturers who incorporate our ePort Connect service into their product offerings. We estimate that there are approximately 13 million to 15 million potential connections in this self-serve, small ticket retail market. We estimate that our current customers represent approximately 2 million of these potential connections.
 
Our customers can obtain POS electronic payment devices from us in the following ways:

·
Purchasing devices directly from our or one of our authorized resellers;
 
·
Financing devices under the Company’s QuickStart Program, which are non-cancellable sixty month sales-type leases, through an unrelated equipment financing company, if available, or directly from the Company; and
 
·
Renting devices under our  JumpStart Program, which are cancellable month-to-month operating leases.

Our Solutions
 
Our solutions and services have been designed to simplify the transition to cashless for traditionally cash-only based businesses. As such, they are turn-key and include our comprehensive ePort Connect service and POS electronic payment devices or certified payment software, which are able to process traditional magnetic stripe credit and debit cards, contactless credit and debit cards and mobile payments. Standard services through ePort Connect are maintained on our proprietary operating systems and include merchant account setup on behalf of the customer, automatic processing and settlement, sales reporting and 24x7 customer support. Other value-added services that customers can choose from include things such as cashless deployment planning, cashless performance review and loyalty products and services. Our solutions also provide flexibility to execute a variety of payment applications on a single system, transaction security, connectivity options, compliance with certification standards, and centralized, accurate, real-time sales and inventory data to manage distributed assets (wireless telemetry and M2M).
 
Our ePort® Interactive is a cloud-based interactive media and content delivery management system that provides enhanced vendor management system (VMS) integration and consumer product information, including nutritional data. The technology is NFC enabled and compatible with mobile wallets including Apple Pay and Android Pay, and supports instant refunds, couponing, advertising and real-time consumer feedback to the owner and operator.
 
Our Competitive Strengths

We believe that we benefit from a number of advantages gained through our nearly twenty-five year history in our industry. They include:

·
One-Stop Shop, End-to-End Solution . We offer our customers one point of contact through a bundled cashless payment solution.

·
Trusted Brand Name . Our ePort Connect solution has a strong national reputation for quality, reliability, and innovation.

·
Market Leadership . With 568,000 connections to our network as of June 30, 2017, we believe we have the largest installed base of unattended POS electronic payment systems in the unattended small ticket retail market for food and beverage and we are continuing to expand to other adjacent markets.

·
Attractive Value Proposition for Our Customers . We believe that our solutions provide our customers an attractive value proposition by reducing costs, improve operating efficiencies, and increasing the purchases of their consumers machines.

·
Increasing Scale and Financial Stability . During the 2016 fiscal year, 73% of our revenues came from licensing and processing fees which are recurring in nature.

·
Customer-Focused Research and Development . We have generated considerable intellectual property and know-how with 73 patents (US and International) as of June 30, 2017.
 
Our Growth Opportunity

Our primary objective is to continue to enhance our position as a leading provider of technology that enables electronic payment transactions and value-added services.  We plan to execute this growth strategy organically and through strategic acquisitions.  Key elements of our strategy are to:

·
Leverage and further penetrate our existing customers/partners

·
Expand distribution and sales reach

·
Further penetrate attractive adjacent markets

·
Capitalize on opportunities in international markets

·
Capitalize on the emerging NFC and growing mobile payments trends

·
Continuously enhance our solutions and services through innovation

·
Provide comprehensive service and support

·
Leverage intellectual property consisting of 73 U.S. and foreign patents
 
Our Acquisition Strategy

We have historically, and expect to continue to, drive growth in connections and expand the value of our services through strategic acquisitions of businesses, products, or technologies.  We intend to pursue acquisitions of businesses that are accretive and complementary to our current product and service offerings by broadening our customer base, expanding our geographic footprint, and acquiring strategic technologies or otherwise complementing our current or future business.
 
Recent Developments
 
Our financial closing procedures for the quarter and fiscal year ended June 30, 2017 are not yet complete. Our consolidated financial statements for the fiscal year ended June 30, 2017 are not yet available and our independent registered public accounting firm has not completed its audit of the consolidated financial statements for such period. Set forth below are certain preliminary estimates that we expect to report for the quarter and fiscal year ended June 30, 2017. Our actual results may differ materially from these estimates.
                                       
The following are estimates for the quarter ended June 30, 2017:
                                            
·
Revenues of between $32 million to $34 million, representing an increase of between 46% to 55% over revenues for the fourth quarter ended June 30, 2016;
·
Net income (loss) of between $(400,000) to $400,000, representing an improvement of between 54% to 146% over net loss for the fourth quarter ended June 30, 2016;
·
Adjusted EBITDA of between $2.3 million to $3.1 million, representing an increase of between 267% and 395% over Adjusted EBITDA for the fourth quarter ended June 30, 2016; and
·
Net new connections of 64,000, representing an increase of 129% over net new connections during our fiscal quarter ended June 30, 2016. The number of net new connections added to our service during the fiscal fourth quarter ended June 30, 2017 reflected a significant order received from an existing customer related to the customer’s efforts to attain a 100% cashless presence in the marketplace.
                                                           
The following are estimates for the fiscal year ended June 30, 2017:
                                                       
·
Revenues of between $102 million to $104 million, representing an increase of between 32% to 34% over revenues during our fiscal year ended June 30, 2016;
·
Net loss of between $(2.5) million to $(1.7) million representing an improvement of between 63% to 75% over net loss for our fiscal year ended June 30, 2016;
·
Adjusted EBITDA of between $6.5 million to $7.3 million, representing an increase of between 9% and 22% over Adjusted EBITDA for the fiscal year ended June 30, 2016; and
·
Net new connections of 139,000, representing an increase of 45% over net new connections during our fiscal year ended June 30, 2016, reflecting the significant order referred to above.

During our fiscal year ended June 30, 2017, we estimate that approximately 66% of our revenues consisted of license and transaction fees, and approximately 34% of our revenues consisted of equipment sales.

During the fiscal year ended June 30, 2017, our dollar transaction volume was approximately $800 million, which is an increase of approximately 37% over our dollar transaction volume during the fiscal year ended June 30, 2016. Based upon our dollar transaction volume during the fourth fiscal quarter ended June 30, 2017, our annualized dollar transaction volume would be approximately $900 million, which is an increase of approximately 32% over our dollar transaction volume during the fourth quarter ended June 30, 2016.
                                                   
Adjusted EBITDA Description and Reconciliation

We consider Adjusted EBITDA as net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, non-recurring fees and charges that were incurred in connection with the integration of the VendScreen business, change in fair value of warrant liabilities and stock-based compensation expense. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash gain or charge that is not related to our operations. We have excluded the non-cash expense, stock-based compensation, as it does not reflect our cash-based operations. We have excluded the non-recurring costs and expenses incurred in connection with the VendScreen transaction in order to allow more accurate comparison of the financial results to historical operations.
 
Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. Adjusted EBITDA is presented because we believe it is useful as a measure of comparative operating performance. Additionally, we utilize Adjusted EBTIDA as a metric in our executive officer and management incentive compensation plans.

The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings.

The following tables reconcile estimated preliminary Adjusted EBITDA to estimated preliminary net income (loss) for the three months and fiscal year ended June 30, 2017, and actual Adjusted EBITDA to net income (loss) for the three months and fiscal year ended June 30, 2016:

   
Three months ended
   
Twelve months ended
 
   
6/30/2017
   
6/30/2016
   
6/30/2017
   
6/30/2016
 
($ in thousands)
 
(Preliminary)
   
(Actual)
   
(Preliminary)
   
(Actual)
 
Net income (loss)
 
$
(400) - 400
 
$
(872
)
 
$
(2,500 - (1,700
)  
$
(6,806
)
Less interest income
   
(100
)
   
(182
)
   
(500
)
   
(320
)
Plus interest expenses
   
300
     
197
     
900
     
600
 
Plus income tax provision / (Less income tax benefit)
   
50
     
(703
)
   
150
     
(615
)
Plus depreciation expense
   
1,850
     
1,272
     
5,400
     
5,135
 
Plus amortization expense
   
50
     
44
     
200
     
88
 
EBITDA
   
1,750 - 2,550
     
(244
)
   
3,650 - 4,450
     
(1,918
)
                                 
Plus loss on fair value of warrant liabilities / (Less gain on fair value of warrant liabilities)
   
-
     
(18
)
   
1,500
     
5,674
 
Plus stock-based compensation
   
550
     
198
     
1,200
     
849
 
Plus intangible asset impairment
   
-
     
432
     
-
     
432
 
Plus VendScreen non-recurring charges
   
-
     
258
     
100
     
842
 
Plus Litigation related professional fees
   
-
     
-
     
50
     
105
 
Adjustments to EBITDA
   
550
     
870
     
2,850
     
7,902
 
Adjusted EBITDA
 
$
2,300 - 3,100
   
$
626
   
$
6,500 - 7,300
   
$
5,984
 
 
 
Risk Factors Associated with our Business
 
Our business is subject to numerous risks and uncertainties, including those highlighted in the section captioned “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:
 
·
We have a history of losses since inception and if we continue to incur losses, the price of our shares can be expected to fall.
 
·
Our products may fail to gain substantial increased market acceptance. As a result, we may not generate sufficient revenues or profit margins to achieve our financial objectives or growth plans.
 
·
The loss of one or more of our key customers could significantly reduce our revenues, results of operations, and net income.
 
·
Competition from others could prevent us from increasing revenue and achieving our growth plans.
 
·
Substantially all of the network service contracts with our customers are terminable for any or no reason upon thirty to sixty days’ advance notice.
 
·
Our products and services may be vulnerable to security breach.
 
·
Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could cause a loss of confidence in our financial reporting and adversely affect the trading price of our common stock.
 
Corporate Information
                                                                    
We were incorporated in the Commonwealth of Pennsylvania in 1992. Our principal executive offices are located at 100 Deerfield Lane, Suite 300, Malvern, Pennsylvania 19355, and our phone number is (610) 989-0340. Additional information regarding our company, including our audited financial statements and description of our business, is contained in this prospectus. See “Where You Can Find More Information.” Our web site is www.usatech.com. Information on our website is not incorporated in this prospectus and is not a part of this prospectus.
 
 
                                                                 
Summary of This Offering
                                                                
Securities Offered
8,333,333 shares of common stock, at $4.50 per share, with an aggregate public offering price of $37,499,999 (or 9,583,332 shares of common stock if the underwriters exercise their over-allotment option in full, with an aggregate public offering price of $43,124,994).
                                                                       
Over-allotment option
The underwriters have an option for a period of 30 days after the date of this prospectus to purchase up to an additional 1,249,999 shares of common stock, on the same terms and conditions as set forth above, to cover any over-allotments.
                                                                     
Shares Outstanding after
Completion of this
Offering
48,664,978 shares of our common stock will be outstanding (49,914,977 shares if the underwriters exercise their option to purchase additional shares in full). These amounts exclude series A convertible preferred stock and outstanding options and warrants convertible into or exercisable for shares of common stock.
                                                                   
Use of Proceeds
The proceeds from this offering, less fees and expenses incurred by us in connection with the offering, are intended to be used for general corporate purposes and working capital to support anticipated growth. These purposes may include, among other things, future acquisitions of businesses, products and technologies, or establishing strategic alliances that we believe will complement our current or future business. See “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering.
                                                                       
Risk Factors
You should read the “Risk Factors” section beginning on page 9 and other information included in this prospectus for a discussion of factors you should carefully consider before investing in our securities.
                                             
Trading Symbol
Our common stock is quoted on The NASDAQ Global Market under the symbol “USAT.”
                                                               
The number of shares of common stock to be outstanding after this offering is based on 40,331,645 shares of common stock outstanding as of June 30, 2017, and excludes, in each case as of such date:

·
23,978 shares of common stock underlying warrants issued by the Company to our bank lender at an exercise price of $5.00 per share in connection with the loan agreement;
·
(i) 198,000 shares of common stock issuable upon the exercise of outstanding stock options issued under the 2015 Equity Incentive Plan, and (ii) 715,220 shares of common stock issuable upon the exercise of outstanding stock options issued under the 2014 Stock Option Incentive Plan;
·
(i) 1,052,000 shares of common stock reserved for issuance under the 2015 Equity Incentive Plan, (ii) 1,447 shares of common stock underlying stock options reserved for issuance under the 2014 Stock Option Incentive Plan, and (iii) 9,004 shares of common stock reserved for issuance under the Company’s 2013 Stock Incentive Plan;
·
100,333 shares issuable upon the conversion of outstanding preferred stock and cumulative preferred stock dividends; and
·
140,000 shares issuable to our former chief executive officer upon the occurrence of certain fundamental transactions involving the Company.
 
 
                                                           
Summary Financial Data and Other Data
 
The following tables summarize our financial data and should be read together with the sections in this prospectus entitled “Selected Consolidated Financial Data and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
We have derived the summary condensed consolidated statement of operations data for the years ended June 30, 2016 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statement of operations data for the nine months ended March 31, 2017 and the summary condensed consolidated balance sheet data as of March 31, 2017 from our unaudited interim consolidated financial statements included elsewhere in this prospectus.
 
We have prepared the unaudited interim consolidated financial statements on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and interim results are not necessarily indicative of the results that should be expected for the full year or any other period.
 
   
Nine Months
Ended
March 31,
2017
   
As of and for the
Year ended June 30,
 
($ in thousands, except per share data and as otherwise noted)
       
2016
   
2015
 
OPERATIONS DATA:
                 
                   
Revenues
 
$
69,804
   
$
77,408
   
$
58,077
 
                         
Operating income (loss)
 
$
(297
)
 
$
(1,467
)
 
$
(240
)
                         
Net Income (loss)
 
$
(2,095
)
 
$
(6,806
)
 
$
(1,089
)
                         
Cumulative preferred dividends
   
(668
)
   
(668
)
   
(668
)
Net income (loss) applicable to common shares
 
$
(2,763
)
 
$
(7,474
)
 
$
(1,757
)
                         
Net earnings (loss) per common share - basic and diluted (1)
 
$
(0.07
)
 
$
(0.21
)
 
$
(0.05
)
                         
Cash dividends per common share
   
-
     
-
     
-
 
                         
BALANCE SHEET DATA:
                       
                         
Total assets
 
$
88,992
   
$
84,833
   
$
75,134
 
Long-term debt
 
$
1,239
   
$
1,576
   
$
1,854
 
Shareholders’ equity
 
$
64,999
   
$
55,025
   
$
53,311
 
                         
CASH FLOW DATA:
                       
                         
Net cash provided by (used in) operating activities
 
$
(4,295
)
 
$
6,468
   
$
(1,698
)
                         
Net cash provided by (used in) investing activities
   
(2,713
)
   
(5,772
)
   
3,354
 
                         
Net cash provided by (used in) financing activities
   
5,516
     
7,202
     
646
 
                         
Net increase (decrease) in cash and cash equivalents
   
(1,492
)
   
7,898
     
2,302
 
                         
Cash and cash equivalents at beginning of period
   
19,272
     
11,374
     
9,072
 
                         
Cash and cash equivalents at end of period
 
$
17,780
   
$
19,272
   
$
11,374
 
                         
CONNECTIONS AND TRANSACTION DATA (UNAUDITED):
                       
                         
Net New Connections #
   
75,000
     
96,000
     
67,000
 
Total Connections #
   
504,000
     
429,000
     
333,000
 
                         
New Customers Added #
   
1,350
     
1,450
     
2,300
 
Total Customers #
   
12,400
     
11,050
     
9,600
 
                         
Total Number of Transactions (millions)
   
300.2
     
315.8
     
216.6
 
Transaction Volume (millions) #
   
577.3
     
584.4
     
388.9
 
 
(1)
See note 2 to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net income (loss) per share of common stock.
 
RISK FACTORS

Investing in our common stock involves risks. Before making an investment decision, please carefully review the risks described below, together with all other information in this prospectus, and in any free writing prospectus that we have authorized for use in connection with this offering. The occurrence of any of those risks could materially and adversely affect our business, prospects, financial condition, results of operations or cash flow. Other risks and uncertainties that we do not now consider to be material or of which we are not now aware may become important factors that affect us in the future. Any of these risks could cause the trading price of our common stock to decline, resulting in a loss of all or part of your investment. Please also read carefully the section entitled “Special Note Regarding Forward-Looking Statements.”

Risks Relating to Our Business

We have a history of losses since inception and if we continue to incur losses, the price of our shares can be expected to fall.

We experienced losses from inception through June 30, 2012, with net income for the years ended June 30, 2013 and June 30, 2014. However, we experienced losses for the fiscal years 2015 and 2016, and continued profitability is not assured. From our inception through June 30, 2016, our cumulative losses from operations are approximately $181 million. Until the Company’s products and services can generate sufficient annual revenues, the Company will be required to use its cash and cash equivalents on hand, its line of credit, and may raise capital to meet its cash flow requirements including the issuance of common stock or debt financing. For the years ended June 30, 2016 and 2015, we incurred a net loss of $6.8 million and $1.1 million, respectively. If we continue to incur losses in the future, the price of our common stock can be expected to fall.

The occurrence of material unanticipated expenses may require us to divert our cash resources from achieving our business plan, adversely affecting our financial performance and resulting in the decline of our stock price.

In the event we incur any material unanticipated expenses, we may be required to divert our cash resources from our operating activities in order to fund any such expenses. Any such occurrence may cause our anticipated connections, revenues, gross profits, and other financial metrics for the 2017 fiscal year and beyond to be materially adversely affected. In such event, the price of our common stock could be expected to fall.

The inability of our customers to utilize third party leasing companies under our QuickStart program would materially adversely affect our cash generated from operating activities and/or attaining our business plan.

The use of third party leasing companies by our customers under our QuickStart program positively affects our net cash provided by operating activities because we receive the purchase price from the leasing company at the time of the sale. There can be no assurance that we will be able to obtain such third party leasing companies. To the extent that third party leasing companies would not be available, we would lease the equipment directly to our customers. In such event, our net cash from operating activities would be adversely affected and we may be required to incur additional equity or debt financing to fund operations. In the alternative, we would not be able to attain our business plan, including anticipated connections and revenues.

We may require additional financing or find it necessary to raise capital to sustain our operations and without it we may not be able to achieve our business plan.

At March 31, 2017, we had net working capital of $11.9 million. We had net cash provided by operating activities of $6.5 million, $(1.7) million and $7.1 million for the fiscal years ended June 30, 2016, 2015 and 2014, respectively. Although we believe that we have adequate existing resources to provide for our funding requirements over the next 12 months, there can be no assurances that we will be able to continue to generate sufficient funds thereafter. Unless we maintain or grow our current level of operations, we may need additional funds to continue these operations. We may also need additional capital to update our technology or respond to unusual or unanticipated non-operational events. Should the financing that we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could have a material adverse effect on our business, operating results, financial condition and prospects.

Our future operating results may fluctuate.

Our future operating results will depend significantly on our ability to continue to drive revenues from license and transaction fees and our ability to develop and commercialize new products and services. Our operating results may fluctuate based upon many factors, including:

 
fluctuations in revenue generated by our business;

 
fluctuations in operating expenses;
 
our ability to establish or maintain effective relationships with significant partners and suppliers on acceptable terms;

the amount of debit or credit card interchange rates that are charged by Visa and MasterCard;

the fees that we charge our customers for processing services;

the successful operation of our network;

the commercial success of our customers, which could be affected by such factors as general economic conditions;

the level of product and price competition;

the timing and cost of, and our ability to develop and successfully commercialize, new or enhanced products and services;

activities of, and acquisitions or announcements by, competitors;

the impact from any impairment of inventory, goodwill, fixed assets or intangibles;

the impact of any changes of valuation allowance on deferred tax assets;

the ability to increase the number of customer connections to our network;

marketing programs which delay realization by us of monthly service fees on our new connections;

the material breach of security of any of the Company’s systems or third party systems utilized by the Company; and

the anticipation of and response to technological changes.
 
Our products may fail to gain substantial increased market acceptance. As a result, we may not generate sufficient revenues or profit margins to achieve our financial objectives or growth plans.

There can be no assurances that demand for our products will be sufficient to enable us to generate sufficient revenue or become profitable on a sustainable basis. Likewise, no assurance can be given that we will be able to have a sufficient number of ePorts ® connected to our network or sell or lease equipment utilizing our network to enough locations to achieve significant revenues. Alternatively, the locations which utilize the network may not be successful locations and our revenues would be adversely affected. We may lose locations utilizing our products to competitors, or may not be able to install our products at competitors’ locations, or may not obtain future locations which would be obtained by our competitors. In addition, there can be no assurance that our products could evolve or be improved to meet the future needs of the marketplace. In any such event, we may not be able to achieve our growth plans, including anticipated connections and revenue growth.

We may be required to incur further debt to meet future capital requirements of our business. Should we be required to incur additional debt, the restrictions imposed by the terms of such debt could adversely affect our financial condition and our ability to respond to changes in our business.
 
If we incur additional debt, we may be subject to the following risks:

our vulnerability to adverse economic conditions and competitive pressures may be heightened;
our flexibility in planning for, or reacting to, changes in our business and industry may be limited;
our debt covenants may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;
a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and therefore, may be able to take advantage of opportunities that our indebtedness would prevent us from pursuing;
the covenants contained in the agreements governing our outstanding indebtedness may limit our ability to borrow additional funds, dispose of assets and make certain investments;
a significant portion of our cash flows could be used to service our indebtedness;
we may be sensitive to fluctuations in interest rates if any of our debt obligations are subject to variable interest rates; and
 
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.
 
We cannot assure you that our leverage and such restrictions will not materially and adversely affect our ability to finance our future operations or capital needs or to engage in other business activities. In addition, we cannot assure you that additional financing will be available when required or, if available, will be on terms satisfactory to us.
 
Our bank borrowing agreement contains restrictions which may limit our flexibility in operating and growing our business.
 
Our bank borrowing agreement contains covenants regarding our maintenance of a minimum quarterly adjusted EBITDA as defined in our loan agreement and certain numbers of connections. Our loan agreement also includes covenants that limit our ability to engage in specified types of transactions, including among other things:

·
incur additional indebtedness or issue equity;
·
pay dividends on, repurchase or make distributions in respect of our common stock;
·
make certain investments (including acquisitions) and distributions;
·
sell certain assets;
·
create liens;
·
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
·
enter into certain transactions with respect to our affiliates;
·
ability to enter into business combinations; and
·
certain other financial and non-financial covenants.
 
We were in compliance with these covenants as of March 31, 2017. Failure to be in compliance with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all or a portion of our outstanding indebtedness, which would have a material adverse effect on our business, financial condition and results of operations.
 
The loss of one or more of our key customers could significantly reduce our revenues, results of operations, and net income.
 
We have derived, and believe we may continue to derive, a significant portion of our revenues from one large customer or a limited number of large customers. Customer concentrations for the years ended June 30, 2016, 2015 and 2014 were as follows:
 
   
2016
   
2015
   
2014
 
Trade account and finance receivables - one customer
   
18
%
   
35
%
   
22
%
License and transaction processing revenues - one customer
   
16
%
   
21
%
   
26
%
Equipment sales revenue - one customer
   
28
%
   
17
%
 
< 10
%
 
Our customers may buy less of our products or services depending on their own technological developments, end-user demand for our products and internal budget cycles. A major customer in one year may not purchase any of our products or services in another year, which may negatively affect our financial performance. We have offered, and may in the future offer, discounts to our large customers to incentivize them to continue to utilize our products and services. If we are required to sell products to any of our large customers at reduced prices or unfavorable terms, our results of operations and revenue could be materially adversely affected. Further, there is no assurance that our customers will continue to utilize our transaction processing and related services as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice.

We depend on our key personnel and, if they leave us, our business could be adversely affected .

We are dependent on key management personnel, particularly the Chairman and Chief Executive Officer, Stephen P. Herbert. The loss of services of Mr. Herbert or other officers could dramatically affect our business prospects. Our executive officers and certain of our officers and employees are particularly valuable to us because:

they have specialized knowledge about our company and operations;

they have specialized skills that are important to our operations; or

they would be particularly difficult to replace.

We have entered into an employment agreement with Mr. Herbert, which contains confidentiality and non-compete provisions. The agreement provided for an initial term continuing through January 1, 2013, which is automatically renewed for consecutive one year periods unless terminated by either Mr. Herbert or the Company upon at least 90 days’ notice prior to the end of the initial term or any one-year extension thereof.
 
We also may be unable to retain other existing senior management, sales personnel, and development and engineering personnel critical to our ability to execute our business plan, which could result in harm to key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs.

Our dependence on proprietary technology and limited ability to protect our intellectual property may adversely affect our ability to compete.

Challenge to our ownership of our intellectual property could materially damage our business prospects. Our technology may infringe upon the proprietary rights of others. Our ability to execute our business plan is dependent, in part, on our ability to obtain patent protection for our proprietary products, maintain trade secret protection and operate without infringing the proprietary rights of others.

Through June 30, 2017, we had 14 pending United States and foreign patent applications, and will consider filing applications for additional patents covering aspects of our future developments, although there can be no assurance that we will do so. In addition, there can be no assurance that we will maintain or prosecute these applications. The United States Government and other countries have granted us 95 patents as of June 30, 2017. There can be no assurance that:

any of the remaining patent applications will be granted to us;

we will develop additional products that are patentable or do not infringe the patents of others;

any patents issued to us will provide us with any competitive advantages or adequate protection for our products;

any patents issued to us will not be challenged, invalidated or circumvented by others; or

any of our products would not infringe the patents of others.

If any of our products or services is found to have infringed any patent, there can be no assurance that we will be able to obtain licenses to continue to manufacture, use, sell, and license such product or service or that we will not have to pay damages and/or be enjoined as a result of such infringement. Even if a patent application is granted for any of our products, there can be no assurance that the patented technology will be a commercial success or result in any profits to us.

If we are unable to adequately protect our proprietary technology or fail to enforce or prosecute our patents against others, third parties may be able to compete more effectively against us, which could result in the loss of customers and our business being adversely affected. Patent and proprietary rights litigation entails substantial legal and other costs, and diverts Company resources as well as the attention of our management. There can be no assurance we will have the necessary financial resources to appropriately defend or prosecute our intellectual property rights in connection with any such litigation.

Competition from others could prevent the Company from increasing revenue and achieving its growth plans.

While we are a leading provider and believe we have the largest installed base of unattended POS electronic payment systems in the small ticket, beverage and food vending industry, our competitors are increasingly and actively marketing products and services that compete with our products and services in this vending space. The competition includes manufacturers who may include in their new vending machines their own (or another third party’s) cashless payment systems and services other than our systems and services. While we believe our products and services are superior to our competitors, many of our competitors are much larger enterprises and have substantially greater revenues. In addition to these competitors, there are also numerous credit card processors that offer card processing services to traditional retail establishments that could decide to offer similar services to the industries that we serve. Competition from other companies, including those that are well established and have substantially greater resources, may reduce our profitability or reduce our business opportunities. Competition may result in lower profit margins on our products or may reduce potential profits or result in a loss of some or all of our customer base. To the extent that our competitors are able to offer more attractive technology, our ability to compete could be adversely affected.

The termination of any of our relationships with third parties upon whom we rely for supplies and services that are critical to our products could adversely affect our business and delay achievement of our business plan.

We depend on arrangements with third parties for a variety of component parts used in our products. We have contracted with various suppliers to assist us to develop and manufacture our ePort® products. For other components, we do not have supply contracts with any of our third-party suppliers and we purchase components as needed from time to time. We have contracted with a third-party data system recovery vendor to host our network in a secure, 24/7 environment to ensure the reliability of our network services. We also have contracted with multiple land-based telecommunications providers to ensure the reliability of our land-based network. If these business relationships are terminated, the implementation of our business plan may be delayed until an alternative supplier or service provider can be retained. If we are unable to find another source or one that is comparable, the content and quality of our products could suffer and our business, operating results and financial condition could be harmed.
 
A disruption in the manufacturing capabilities of our third-party manufacturers, suppliers or distributors would negatively impact our ability to meet customer requirements.

We depend upon third-party manufacturers, suppliers and distributors to deliver components free from defects, competitive in functionality and cost, and in compliance with our specifications and delivery schedules. Since we generally do not maintain large inventories of our products or components, any termination of, or significant disruption in, our manufacturing capability or our relationship with our third-party manufacturers or suppliers may prevent us from filling customer orders in a timely manner.

We have occasionally experienced, and may in the future experience, delays in delivery of products and delivery of products of inferior quality from third-party manufacturers. Although alternate manufacturers and suppliers are generally available to produce our products and product components, the number of manufacturers or suppliers of some of our products and components is limited, and a qualified replacement manufacturer or supplier could take several months. In addition, our use of third-party manufacturers reduces our direct control over product quality, manufacturing timing, yields and costs. Disruption of the manufacture or supply of our products and components, or a third-party manufacturer’s or supplier’s failure to remain competitive in functionality, quality or price, could delay or interrupt our ability to manufacture or deliver our products to customers on a timely basis, which would have a material adverse effect on our business and financial performance.

Substantially all of the network service contracts with our customers are terminable for any or no reason upon thirty to sixty days’ advance notice.

Substantially all of our customers may terminate their network service contracts with us for any or no reason upon providing us with thirty or sixty days’ advance notice. Accordingly, consistent demand for and satisfaction with our products by our customers is critical to our financial condition and future success. Problems, defects, or dissatisfaction with our products or services or competition in the marketplace could cause us to lose a substantial number of our customers with minimal notice. If a substantial number of our customers were to exercise their termination rights, it would result in a material adverse effect to our business, operating results, and financial condition.

Our reliance on our wireless telecommunication service provider exposes us to a number of risks over which we have no control, including risks with respect to increased prices and termination of essential services.

The operation of our wireless networked devices depends upon the capacity, reliability and security of services provided to us by our wireless telecommunication services providers, AT&T Mobility and Verizon Wireless. We have no control over the operation, quality or maintenance of these services or whether the vendor will improve or reduce its services or continue to provide services that are essential to our business. In addition, subject to our existing contracts with them, our wireless telecommunication services providers may increase their prices, which would increase our costs. If our wireless telecommunication services providers were to cease to provide essential services or to significantly increase prices, we could be required to find alternative vendors for these services. With a limited number of vendors, we could experience significant delays in obtaining new or replacement services, which could lead to slowdowns or failures of our network. In addition, we may have to replace our existing ePort ® devices that are already installed in the marketplace and which are utilizing the existing vendor’s services. This could significantly harm our reputation and could cause us to lose customers and revenues.

We may not be able to adapt to changing technology and our customers’ technology needs.

We face rapidly changing technology and frequent new service offerings that can render existing services obsolete or unmarketable. Our future depends, in part, on our ability to enhance existing services and to develop, introduce and market, on a timely and cost effective basis, new services that keep pace with technological developments and customer requirements. Developing new products and technologies is a complex, uncertain process requiring innovation and accurate anticipation of technological and market trends. When changes to the product line are announced, we will be challenged to manage possible shortened life cycles for existing products and continue to sell existing products. Our inability to respond effectively to any of these challenges may have a material adverse effect on our business and financial success.
 
Security is vital to our customers and therefore breaches in the security of transactions involving our products or services could adversely affect our reputation and results of operations.

Protection against fraud is of key importance to purchasers and end-users of our products. We incorporate security features, such as encryption software and secure hardware, into our products to protect against fraud in electronic payment transactions and to ensure the privacy and integrity of consumer data. We design and test our products to industry security standards and our products and methodologies are under periodic review and improvement. Our products and services and third party products and services that are utilized by us may be vulnerable to breaches in security due to defects in our security mechanisms, the operating system and applications in our hardware platform. Security vulnerabilities could jeopardize the security of information transmitted or stored using our products. If the security of the information in our products is compromised, our reputation and marketplace acceptance of our products will be adversely affected, which would adversely affect our results of operations, and subject us to potential liability. If our security applications are breached and sensitive data is lost or stolen, we could incur significant costs to not only assess and repair any damage to our systems, but also to reimburse customers for losses that occur from the fraudulent use of the data. We may also be subject to fines and penalties from the credit card associations in the event of the loss of confidential card information.

Our products and services may be vulnerable to security breach.

Credit card issuers have promulgated credit card security guidelines as part of their ongoing efforts to battle identity theft and credit card fraud. We continue to work with credit card issuers to assure that our products and services comply with these rules. There can be no assurances, however, that our products and services or third party products and services utilized by us are invulnerable to unauthorized access or hacking. When there is unauthorized access to credit card data that results in financial loss, there is the potential that parties could seek damages from us, and our business reputation and results of operations would be materially adversely affected.

If we fail to adhere to the standards of the Visa and MasterCard credit card associations, our registrations with these associations could be terminated and we could be required to stop providing payment processing services for Visa and MasterCard.

Substantially all of the transactions handled by our network involve Visa or MasterCard. If we fail to comply with the applicable requirements of the Visa and MasterCard credit card associations, Visa or MasterCard could suspend or terminate our registration with them. The termination of our registration with them or any changes in the Visa or MasterCard rules that would impair our registration with them could require us to stop providing payment processing services through our network. In such event, our business plan and/or competitive advantages in the market place would be materially adversely affected.

We rely on other card payment processors; if they fail or no longer agree to provide their services, our customer relationships could be adversely affected and we could lose business.

We rely on agreements with other large payment processing organizations, primarily Chase Paymentech, to enable us to provide card authorization, data capture, settlement and merchant accounting services and access to various reporting tools for the customers we serve. The termination by our card processing providers of their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect our relationships with the customers whose accounts we serve and may cause those customers to terminate their processing agreements with us.

We are subject to laws and regulations that affect the products, services and markets in which we operate. Failure by us to comply with these laws or regulations would have an adverse effect on our business, financial condition, or results of operations.

We are, among other things, subject to banking regulations and credit card association regulations. Failure to comply with these regulations may result in the suspension of our business, the limitation, suspension or termination of service, and/or the imposition of fines that could have an adverse effect on our financial condition. Additionally, changes to legal rules and regulations, or interpretation or enforcement thereof, could have a negative financial effect on us or our product offerings. To the extent this occurs, we could be subject to additional technical, contractual or other requirements as a condition of our continuing to conduct our payment processing business. These requirements could cause us to incur additional costs, which could be significant, or to lose revenues to the extent we do not comply with these requirements.

New legislation could be enacted regulating the basis upon which interchange rates are charged for debit or credit card transactions, which could increase the debit or credit card interchange fees charged by bankcard networks. An example of such legislation is the so-called “Durbin Amendment,” to the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. The Durbin Amendment regulates the basis upon which interchange rates for debit card transactions are made to ensure that interchange rates are “reasonable and proportionate to costs.” Pursuant to regulations that were promulgated by the Federal Reserve, Visa and MasterCard have significantly increased their interchange fees for small ticket debit card transactions.
 
As of November 14, 2014, we entered into a three-year agreement with Visa U.S.A. Inc. (“Visa”), pursuant to which Visa has agreed to continue to make available to the Company certain promotional interchange reimbursement fees for small ticket debit and credit card transactions. Similarly, MasterCard International Incorporated ("MasterCard") has agreed to make available to us reduced interchange rates for small ticket debit card transactions pursuant to a three-year MasterCard Acceptance Agreement dated January 12, 2015, as amended by a First Amendment thereto dated April 27, 2015. If the foregoing agreements with Visa and MasterCard are not extended, our financial results would be materially adversely affected unless we are able to pass these significant additional charges to our customers.

Increases in card association and debit network interchange fees could increase our operating costs or otherwise adversely affect our operations. If we do not pass along to our customers any future increases in credit or debit card interchange fees, assessments and transaction fees, our gross profits would be reduced.

We are obligated to pay interchange fees and other network fees set by the bankcard networks to the card issuing bank and the bankcard networks for each transaction we process through our network. From time to time, card associations and debit networks increase the organization and/or processing fees, known as interchange fees that they charge. Under our processing agreements with our customers, we are permitted to pass along these fee increases to our customers through corresponding increases in our processing fees. Passing along such increases could result in some of our customers canceling their contracts with us. Consequently, it is possible that competitive pressures will result in our Company absorbing some or all of the increases in the future, which would increase our operating costs, reduce our gross profit and adversely affect our business.

During the term of the Visa Agreement, the Company does not anticipate accepting any debit cards with interchange fees that are higher than the rates provided under the Visa Agreement. The Company will continue to accept Visa- and MasterCard- branded debit cards in addition to all major credit cards, including Visa, MasterCard, Discover and American Express at its current processing rates. If the Visa or MasterCard Agreements are not extended, our financial results would be materially adversely affected unless we are able to pass these significant additional charges to our customers.

The ability to recruit, retain and develop qualified personnel is critical to the Company’s success and growth.

For the Company to successfully compete and grow, it must retain, recruit and develop the necessary personnel who can provide the needed expertise required in its business. In addition, the Company must develop its personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and the Company may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. The Company’s effort to retain and develop personnel may also result in significant additional expenses. The Company cannot assure that key personnel, including executive officers, will continue to be employed or that it will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on the Company.

We incur chargeback liability when our customers refuse or cannot reimburse chargebacks resolved in favor of consumers. Any increase in chargebacks not paid by our customers may adversely affect our results of operations, financial condition and cash flows.

In the event a dispute between a cardholder and a customer is not resolved in favor of the customer, the transaction is normally charged back to the customer and the purchase price is credited or otherwise refunded to the cardholder. If we are unable to collect such amounts from the customer's account, or if the customer refuses or is unable, due to closure, bankruptcy or other reasons, to reimburse us for a chargeback, we bear the loss for the amount of the refund paid to the cardholder. We may experience significant losses from chargebacks in the future. Any increase in chargebacks not paid by our customers could have a material adverse effect on our business, financial condition, results of operations and cash flows. We have policies to manage customer-related credit risk and attempt to mitigate such risk by monitoring transaction activity. Notwithstanding our programs and policies for managing credit risk, it is possible that a default on such obligations by one or more of our customers could have a material adverse effect on our business.

Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could cause a loss of confidence in our financial reporting and adversely affect the trading price of our common stock.

Effective internal control over financial reporting is necessary for us to provide accurate financial information. Section 404 of the Sarbanes-Oxley Act requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K. We identified a material weakness in our internal controls over financial reporting as of June 30, 2016 and June 30, 2015. The significant deficiencies that when aggregated resulted in these material weaknesses were described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (the “2016 Form 10-K”). During our fiscal quarter ended September 30, 2016, we identified a significant deficiency related to our accounting treatment of two capital leases. During the quarter ended December 31, 2016, we identified a significant deficiency relating to our accounting treatment of advertising rebates. There can be no assurance that the remediation of the control deficiencies that gave rise to the material weakness will be effective or successful. If we fail to maintain the adequacy of our internal control, we may not be able to conclude and report that we have effective internal control over financial reporting. If we are unable to adequately maintain our internal control over financial reporting, we may not be able to accurately report our financial results, which could cause investors to lose confidence in our reported financial information, negatively affecting the trading price of our common stock, or our ability to access the capital markets.
 
As a result of the material weakness in our internal controls over financial reporting described in our 2016 Form 10-K, we concluded that our disclosure controls and procedures were not effective as of June 30, 2016, and as of September 30, 2016, December 31, 2016, and March 31, 2017. Disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, are accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Risks Relating to Our Common Stock

We do not expect to pay cash dividends in the foreseeable future and therefore investors should not anticipate cash dividends on their investment.

The holders of our common stock and series A convertible preferred stock are entitled to receive dividends when, and if, declared by our board of directors. Our Board of Directors does not intend to pay cash dividends in the foreseeable future, but instead intends to retain any and all earnings to finance the growth of the business. To date, we have not paid any cash dividends on our common stock or our series A convertible preferred stock and there can be no assurance that cash dividends will ever be paid on our common stock.

Our articles of incorporation prohibit the declaration of any dividends on our common stock unless and until all unpaid and accumulated dividends on the series A convertible preferred stock have been declared and paid. In addition, our loan agreement with our bank prohibits us from paying dividends without the prior consent of our bank. Through the date of this prospectus, the unpaid and cumulative dividends on the series A convertible preferred stock are $14.03 million. Through the date of this prospectus, each share of series A convertible preferred stock was convertible into 0.1940 of a share of common stock at the option of the holder and is subject to further adjustment as provided in our articles of incorporation. The unpaid and cumulative dividends on the series A convertible preferred stock are convertible into shares of our common stock at the rate of $1,000 per share at the option of the holder. During the year ended June 30, 2016, none of our series A convertible preferred stock and no cumulative preferred dividends were converted into shares of common stock.

Our articles of incorporation also provide that the preferred stock has a liquidation preference over the common stock in the amount of $10 per share plus accrued and unpaid dividends. Through the date of this prospectus, the liquidation preference was $18.78 million.

Upon certain fundamental transactions involving the Company, such as a merger or sale of substantially all of our assets, we may be required to distribute the liquidation preference then due to the holders of our series A preferred stock which would reduce the amount of the distributions otherwise to be made to the holders of our common stock in connection with such transactions.

Our articles of incorporation provide that upon a merger or sale of substantially all of our assets or upon the disposition of more than 50% of our voting power, the holders of at least 60% of the preferred stock may elect to have such transaction treated as a liquidation and be entitled to receive their liquidation preference. Upon our liquidation, the holders of our preferred stock are entitled to receive a liquidation preference prior to any distribution to the holders of common stock which through the date of this prospectus is equal to $18.78 million.

Our stock price may be volatile.

The trading price of our common stock is expected to be subject to significant fluctuations in response to various factors including, but not limited to, the following:

variations in operating results and achievement of key business metrics;

changes in earnings estimates by securities analysts, if any;

any differences between reported results and securities analysts’ published or unpublished expectations;

announcements of new contracts, service offerings or technological innovations by us or our competitors;

market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors;

demand for our services and products;

shares of common stock being sold pursuant to Rule 144 or upon exercise of warrants;

regulatory matters;

concerns about our financial position, operating results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights;

potential dilutive effects of future sales of shares of common stock by shareholders and by the Company;

the amount of average daily trading volume in our common stock;

our ability to obtain working capital financing; and
 
general economic or stock market conditions unrelated to our operating performance.
 
The securities market in recent years has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations, as well as general economic conditions, may also materially and adversely affect the market price of our common stock.

Director and officer liability is limited.

As permitted by Pennsylvania law, our by-laws limit the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our by-law provisions and Pennsylvania law, shareholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our by-laws and indemnification agreements entered into by the Company with each of the officers and directors provide that we shall indemnify our directors and officers to the fullest extent permitted by law.

Our publicly-filed reports are reviewed by the SEC from time to time and any significant changes required as a result of any such review may result in material liability to us, and have a material adverse impact on the trading price of our common stock.

The reports of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying and to assess their compliance with applicable disclosure requirements and to enhance the overall effectiveness of companies’ public filings, and comprehensive reviews of such reports are now required at least every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports will comply in all material respects with the published SEC rules and regulations, we could be required to modify or reformulate information contained in prior filings as a result of an SEC review. Any modification or reformulation of information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of our common stock.

Risks Relating to the Offering

Management will have broad discretion as to the use of the proceeds from this offering, and we may not use the proceeds effectively.
 
Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the growth of our business, and cause the price of our common stock to decline.
 
You will experience immediate and substantial dilution in the net tangible book value per share of the common stock you purchase.
 
Since the price per share of our common stock being offered is substantially higher than the net tangible book value per share of our common stock, you will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering. Based on the public offering price of $4.50 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and based on a net tangible book value of our common stock of $1.32 per share as of March 31, 2017, if you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of $2.70 per share in the net tangible book value of common stock.
 
You may experience future dilution as a result of future equity offerings.
 
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may not be the same as the price per share in this offering. We cannot assure you that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater than the price per share paid by investors in this offering, and investors purchasing shares or other securities in the future could have rights superior to existing shareholders, including investors who purchase shares of common stock in this offering. The price per share at which we sell additional shares of our common stock or securities convertible into common stock in future transactions may be higher or lower than the price per share in this offering.
 
If securities and/or industry analysts fail to continue publishing research about our business, if they change their recommendations adversely, or if our results of operations do not meet their expectations, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. In addition, it is likely that, in some future period, our operating results will be below the expectations of securities analysts or investors. If one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.

Because we do not intend to declare cash dividends on our shares of common stock in the foreseeable future, shareholders must rely on appreciation of the value of our common stock for any return on their investment.
 
We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of our existing debt agreements preclude and future debt agreements may preclude us from paying dividends, and our articles of incorporation prohibit the declaration of any dividends on our common stock unless and until all unpaid and accumulated dividends on the series A convertible preferred stock have been declared and paid. Through the date of this prospectus, the unpaid and cumulative dividends on the series A convertible preferred stock are $14.03 million. As a result, we expect that only an appreciation of the price of our common stock, if any, will provide a return to investors in this offering for the foreseeable future.
 
18

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of our company.  For this purpose, forward-looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate,” “could,” “should,” “would,” “likely,” “may,” “will,” “plan,” “intend,” “believes,” “expects,” “anticipates,” “projected,” or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that could cause the Company’s actual results to differ materially from those projected, include, for example:

·
general economic, market or business conditions unrelated to our operating performance;
·
the ability of the Company to raise funds in the future through sales of securities or debt financing in order to sustain its operations if an unexpected or unusual event would occur;
·
the ability of the Company to compete with its competitors to obtain market share;
·
whether the Company’s current or future customers purchase, lease, rent or utilize ePort devices or our other products in the future at levels currently anticipated by our Company;
·
whether the Company’s customers continue to utilize the Company’s transaction processing and related services, as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice;
·
the ability of the Company to maintain or increase the margins realized by the Company in connection with its services or products;
·
the ability of the Company to sell to third party lenders all or a portion of our finance receivables;
·
the ability of a sufficient number of our customers to utilize third party financing companies under our QuickStart program in order to improve our net cash used by operating activities;
·
the incurrence by us of any unanticipated or unusual non-operating expenses which would require us to divert our cash resources from achieving our business plan;
·
the ability of the Company to predict or estimate its future quarterly or annual revenues and expenses given the developing and unpredictable market for its products;
·
the ability of the Company to retain key customers from whom a significant portion of its revenues is derived;
·
the ability of a key customer to reduce or delay purchasing products from the Company;
·
the ability of the Company to obtain widespread commercial acceptance of its products and service offerings such as ePort QuickConnect, mobile payment and loyalty programs;
·
whether any patents issued to the Company will provide the Company with any competitive advantages or adequate protection for its products, or would be challenged, invalidated, infringed or circumvented by others;
·
the ability of the Company to operate without infringing the intellectual property rights of others;
·
the ability of our products and services to avoid unauthorized hacking or credit card fraud;
·
whether our remediation of the control deficiencies that gave rise to the material weakness that we identified in our internal controls over financial reporting, and which was reflected in our annual report on Form 10-K for the fiscal year ended June 30, 2016, will be effective or successful;
·
whether we experience additional material weaknesses in our internal controls over financial reporting in the future, and are not able to accurately or timely report our financial condition or results of operations;
·
whether our suppliers would increase their prices, reduce their output or change their terms of sale; and
·
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above. We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.

Any forward-looking statement made by us in this prospectus speaks only as of the date of such document. Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this prospectus or to reflect the occurrence of unanticipated events.
 
USE OF PROCEEDS

We estimate that our net proceeds from the sale of our shares of common stock offered hereby, after deducting the underwriting discounts and commissions and estimated expenses payable by us, will be approximately $34.69 million, or approximately $39.99 million if the underwriters exercise their over allotment option in full.

We intend to use the net proceeds received from the offering for general corporate purposes and working capital to support anticipated growth. These purposes may include, among other things, future acquisitions of businesses, products and technologies, or establishing strategic alliances, that we believe will complement our current or future business. We evaluate these opportunities from time to time, and engage in discussions in connection with potential opportunities. While we have no existing agreements, commitments or understandings for any specific future acquisitions or strategic alliances at this time, we may use a portion of the net proceeds for these purposes.

We will retain broad discretion in the allocation of the net proceeds of this offering. Pending the uses described above, we intend to invest the net proceeds of this offering in short-term interest-bearing securities.
 
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Our common stock is traded on The NASDAQ Global Market under the symbol “USAT.”

The high and low sales prices on The NASDAQ Global Market for the common stock were as follows:

Year ended June 30, 2017
 
High
   
Low
 
First Quarter (through September 30, 2016)
 
$
5.81
   
$
4.05
 
Second Quarter (through December 31, 2016)
 
$
5.77
   
$
3.55
 
Third Quarter (through March 31, 2017)
 
$
4.85
   
$
3.80
 
Fourth Quarter (through June 30, 2017)
 
$
5.60
   
$
3.95
 
                 
Year ended June 30, 2016
 
High
   
Low
 
First Quarter (through September 30, 2015)
 
$
3.52
   
$
1.70
 
Second Quarter (through December 31, 2015)
 
$
3.40
   
$
2.18
 
Third Quarter (through March 31, 2016)
 
$
4.54
   
$
2.69
 
Fourth Quarter (through June 30, 2016)
 
$
4.73
   
$
3.50
 

On July 19, 2017, the closing price of our common stock was $4.80. As of June 30, 2017, there were approximately 576 holders of record of our common stock. This number does not include stockholders for whom shares were held in a “nominee” or “street” name.
 
DIVIDEND POLICY

The holders of our common stock are entitled to receive such dividends as our Board of Directors may from time to time declare out of funds legally available for payment of dividends. We have never declared or paid dividends on our common stock and do not contemplate paying any such cash dividend in the foreseeable future.  No dividend may be paid on the common stock until all accumulated and unpaid dividends on the preferred stock have been paid.  As of the date of this prospectus, such accumulated unpaid dividends amounted to $14.03 million. In addition, our loan agreement with our bank prohibits us from paying dividends without the prior consent of our bank.

We currently intend to retain available cash for use in our business to finance ongoing operations and the potential growth of our business.  Payments of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion and any other factors the Board of Directors may deem relevant, and subject to any restrictions contained in our financing and bank agreements.
 
CAPITALIZATION

The following table sets forth our capitalization, cash and cash equivalents:

·
on an actual basis as of March 31, 2017; and

·
on an as adjusted basis to give effect to the sale of 8,333,333 shares in this offering, at the offering price of $4.50 per share,  our receipt of the net proceeds from that sale after deducting estimated offering expenses payable by us and the application of the net proceeds from this offering as described in “Use of Proceeds.”

You should consider this table in conjunction with our consolidated financial statements and the notes to those consolidated financial statements included elsewhere in this prospectus.
($ in thousands)
 
   
At March 31, 2017
 
   
Actual
   
As Adjusted
 
($ in thousands)
       
(Unaudited)
 
Cash and Cash Equivalents
 
$
17,780
   
$
52,480  
Total Liabilities   $ 23,993     $ 23,993  
Shareholders’ equity:
             
Preferred stock, no par value:
             
Authorized shares- 1,800,000; Series A convertible preferred- authorized shares- 900,000; issued and outstanding shares- 445,063, actual and as adjusted, with liquidation preference of $18,775
 
$
3,138
      3,138  
Common stock, no par value:
             
Authorized shares- 640,000,000, issued and outstanding shares- 40,327,675, actual; shares issued and outstanding- 48,661,008, as adjusted
 
$
245,463
      280,163  
Accumulated deficit
 
$
(183,602
)
    (183,602
Total shareholders’ equity
 
$
64,999
   
$
99,699  
Total capitalization
 
$
88,992
   
$
123,692  
 
The number of shares of common stock to be outstanding after this offering is based on 40,327,675 shares of common stock outstanding as of March 31, 2017, and excludes, in each case as of March 31, 2017:

·
23,978 shares of common stock underlying warrants issued by the Company to our bank lender at an exercise price of $5.00 per share in connection with the loan agreement;
·
(i) 20,000 shares of common stock issuable upon the exercise of outstanding stock options issued under the 2015 Equity Incentive Plan, and (ii) 715,220 shares of common stock issuable upon the exercise of outstanding stock options issued under the 2014 Stock Option Incentive Plan;
·
(i) 1,230,000 shares of common stock reserved for issuance under the 2015 Equity Incentive Plan, (ii) 1,447 shares of common stock underlying stock options reserved for issuance under the 2014 Stock Option Incentive Plan, and (iii) 9,004 shares of common stock reserved for issuance under the Company’s 2013 Stock Incentive Plan;
·
100,333 shares issuable upon the conversion of outstanding preferred stock and cumulative preferred stock dividends; and
·
140,000 shares issuable to our former chief executive officer upon the occurrence of certain fundamental transactions involving the Company.
 
SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER DATA

You should read the following selected consolidated financial data together with the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included in this prospectus. We have derived the condensed consolidated statement of operations data for the years ended June 30, 2016, 2015 and 2014 and the selected condensed consolidated balance sheet data as of June 30, 2016 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. The  condensed consolidated statement of operations data for the years ended June 30, 2013 and 2012  have been derived from our audited consolidated financial information that have not been included in this prospectus. We have derived the selected unaudited consolidated statement of operations data for the nine months ended March 31, 2017 and 2016 and the selected condensed consolidated balance sheet data as of March 31, 2017, from our unaudited interim consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited interim consolidated financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and interim results are not necessarily indicative of the results that should be expected for the full year or any other period.

   
As of and for the Year ended June 30
 
($ in thousands, except per share data and as otherwise noted)
 
2016
   
2015
   
2014
   
2013
   
2012
 
OPERATIONS DATA:
                             
                               
Revenues
 
$
77,408
   
$
58,077
   
$
42,345
   
$
35,940
   
$
29,017
 
                                         
Operating income (loss)
 
$
(1,467
)
 
$
(240
)
 
$
437
   
$
714
   
$
(7,000
)
                                         
Net Income (loss) (1)
 
$
(6,806
)
 
$
(1,089
)
 
$
27,531
   
$
854
   
$
(5,211
)
                                         
Cumulative preferred dividends
   
(668
)
   
(668
)
   
(668
)
   
(668
)
   
(668
)
Net income (loss) applicable to common shares
 
$
(7,474
)
 
$
(1,757
)
 
$
26,863
   
$
186
   
$
(5,879
)
                                         
Net earnings (loss) per common share - basic and diluted (2)
 
$
(0.21
)
 
$
(0.05
)
 
$
0.77
   
$
0.01
   
$
(0.18
)
                                         
Cash dividends per common share
   
-
     
-
     
-
     
-
     
-
 
                                         
BALANCE SHEET DATA:
                                       
                                         
Total assets
 
$
84,833
   
$
75,134
   
$
70,717
   
$
36,576
   
$
33,220
 
Long-term debt
 
$
1,576
   
$
1,854
   
$
423
   
$
370
   
$
728
 
Shareholders’ equity
 
$
55,025
   
$
53,311
   
$
53,736
   
$
23,378
   
$
21,655
 
                                         
CASH FLOW DATA:
                                       
                                         
Net cash provided by (used in) operating activities
 
$
6,468
   
$
(1,698
)
 
$
7,085
   
$
6,039
   
$
78
 
                                         
Net cash provided by (used in) investing activities
   
(5,772
)
   
3,354
     
(7,917
)
   
(9,181
)
   
(6,233
)
                                         
Net cash provided by (used in) financing activities
   
7,202
     
646
     
3,923
     
2,696
     
(410
)
                                         
Net increase (decrease) in cash and cash equivalents
   
7,898
     
2,302
     
3,091
     
(446
)
   
(6,565
)
                                         
Cash and cash equivalents at beginning of period
   
11,374
     
9,072
     
5,981
     
6,427
     
12,992
 
                                         
Cash and cash equivalents at end of period
 
$
19,272
   
$
11,374
   
$
9,072
   
$
5,981
   
$
6,427
 
                                         
CONNECTIONS AND TRANSACTION DATA (UNAUDITED):
                                       
                                         
Net New Connections #
   
96,000
     
67,000
     
52,000
     
50,000
     
45,000
 
Total Connections #
   
429,000
     
333,000
     
266,000
     
214,000
     
164,000
 
                                         
New Customers Added #
   
1,450
     
2,300
     
2,250
     
1,750
     
1,350
 
Total Customers #
   
11,050
     
9,600
     
7,300
     
5,050
     
3,300
 
                                         
Total Number of Transactions (millions) #
   
315.8
     
216.6
     
168.5
     
129.1
     
102.7
 
Transaction Volume ($ millions)
 
$
584.4
   
$
388.9
   
$
293.8
   
$
219.0
   
$
171.3
 

(1)
Net income for the year ended June 30, 2014 includes an income tax benefit of $27.3 million for the reduction of tax valuation allowance.
 
(2)
See note 2 to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net income (loss) per share of common stock.
 
   
Nine Months Ended March 31,
 
($ in thousands, except per share data and as otherwise noted)
 
2017
   
2016
 
OPERATIONS DATA:
           
             
Revenues
 
$
69,804
   
$
55,464
 
                 
Operating income (loss)
 
$
(297
)
 
$
111
 
                 
Net Income (loss)
 
$
(2,095
)
 
$
(5,934
)
                 
Cumulative preferred dividends
   
(668
)
   
(668
)
Net income (loss) applicable to common shares
 
$
(2,763
)
 
$
(6,602
)
                 
Net earnings (loss) per common share - basic and diluted (1)
 
$
(0.07
)
 
$
(0.18
)
                 
Cash dividends per common share
   
-
     
-
 
                 
BALANCE SHEET DATA:
               
                 
Total assets
 
$
88,992
   
$
82,240
 
Long-term debt
 
$
1,239
   
$
1,742
 
Shareholders’ equity
 
$
64,999
   
$
50,427
 
                 
CASH FLOW DATA:
               
                 
Net cash provided by (used in) operating activities
 
$
(4,295
)
 
$
5,197
 
                 
Net cash provided by (used in) investing activities
   
(2,713
)
   
(5,832
)
                 
Net cash provided by (used in) financing activities
   
5,516
     
4,162
 
                 
Net increase (decrease) in cash and cash equivalents
   
(1,492
)
   
3,527
 
                 
Cash and cash equivalents at beginning of period
   
19,272
     
11,374
 
                 
Cash and cash equivalents at end of period
 
$
17,780
   
$
14,901
 
                 
CONNECTIONS AND TRANSACTION DATA (UNAUDITED):
               
                 
Net New Connections #
   
75,000
     
68,000
 
Total Connections #
   
504,000
     
401,000
 
                 
New Customers Added #
   
1,350
     
1,150
 
Total Customers #
   
12,400
     
10,750
 
                 
Total Number of Transactions (millions) #
   
300.2
     
227.2
 
Transaction Volume ($ millions)
 
$
577.3
   
$
415.7
 
 
(1)
See note 2 to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net income (loss) per share of common stock.
 
QUARTERLY FINANCIAL DATA

The following unaudited quarterly financial operations data for the years ended June 30, 2016 and June 30, 2015, and for the nine months ended March 31, 2017 is derived from the audited consolidated financial statements of USA Technologies, Inc. and its interim reports for the quarters therein. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.

($ in thousands, except per share data)
     
NINE MONTHS ENDED MARCH 31, 2017
 
First Quarter
(unaudited)
   
Second Quarter
(unaudited)
   
Third Quarter
(unaudited)
 
                   
Revenues
 
$
21,588
   
$
21,756
   
$
26,460
 
                         
Gross profit
 
$
6,167
   
$
6,334
   
$
6,625
 
                         
Operating income (loss)
 
$
(950
)
 
$
234
   
$
419
 
                         
Net income (loss)
 
$
(2,464
)
 
$
233
   
$
136
 
                         
Cumulative preferred dividends
 
$
(334
)
 
$
--
   
$
(334
)
                         
Net income (loss) applicable to common shares
 
$
(2,798
)
 
$
233
   
$
(198
)
                         
Net earnings (loss) per common share:
                       
                         
Basic (1)
 
$
(0.07
)
 
$
0.01
   
$
(0.00
)
                         
Diluted (1)
 
$
(0.07
)
 
$
0.01
   
$
(0.00
)
                         
Weighted average number of common shares outstanding:
                       
                         
Basic (1)
   
38,488,005
     
40,308,934
     
40,327,697
 
                         
Diluted (1)
   
38,488,005
     
40,730,712
     
40,327,697
 
 
(1)
See note 2 to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net income (loss) per share of common stock.
 
 ($ in thousands, except per share data)
 
UNAUDITED
         
YEAR ENDED JUNE 30, 2016
 
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
   
Year
(audited)
 
                               
Revenues
 
$
16,600
   
$
18,503
   
$
20,361
   
$
21,944
   
$
77,408
 
                                         
Gross profit
 
$
5,047
   
$
5,483
   
$
5,672
   
$
5,783
   
$
21,985
 
                                         
Operating income (loss)
 
$
112
   
$
594
   
$
(595
)
 
$
(1,578
)
 
$
(1,467
)
                                         
Net income (loss)
 
$
360
   
$
(874
)
 
$
(5,420
)
 
$
(872
)
 
$
(6,806
)
                                         
Cumulative preferred dividends
 
$
(334
)
 
$
-
   
$
(334
)
 
$
-
   
$
(668
)
                                         
Net income (loss) applicable to common shares
 
$
26
   
$
(874
)
 
$
(5,754
)
 
$
(872
)
 
$
(7,474
)
                                         
Net earnings (loss) per common share:
                                       
Basic (1)
 
$
0.00
   
$
(0.02
)
 
$
(0.16
)
 
$
(0.02
)
 
$
(0.21
)
                                         
Diluted (1)
 
$
0.00
   
$
(0.02
)
 
$
(0.16
)
 
$
(0.02
)
 
$
(0.21
)
                                         
Weighted average number of common shares outstanding:
                                       
Basic (1)
   
35,848,395
     
35,909,933
     
36,161,626
     
37,325,681
     
36,309,047
 
                                         
Diluted (1)
   
36,487,879
     
35,909,933
     
36,161,626
     
37,325,681
     
36,309,047
 
 
(1)
See note 2 to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net income (loss) per share of common stock.
 
 ($ in thousands, except per share data)
 
UNAUDITED
         
YEAR ENDED JUNE 30, 2015
 
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
   
Year
(audited)
 
                               
Revenues
 
$
12,253
   
$
12,821
   
$
15,358
   
$
17,645
   
$
58,077
 
                                         
Gross profit
 
$
3,135
   
$
3,733
   
$
5,146
   
$
4,809
   
$
16,823
 
                                         
Operating income (loss)
 
$
(667
)
 
$
51
   
$
731
   
$
(355
)
 
$
(240
)
                                         
Net income (loss)
 
$
(61
)
 
$
(261
)
 
$
(567
)
 
$
(200
)
 
$
(1,089
)
                                         
Cumulative preferred dividends
 
$
(334
)
 
$
-
   
$
(334
)
 
$
-
   
$
(668
)
                                         
Net income (loss) applicable to common shares
 
$
(395
)
 
$
(261
)
 
$
(901
)
 
$
(200
)
 
$
(1,757
)
                                         
Net earnings (loss) per common share
                                       
Basic (1)
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.03
)
 
$
(0.01
)
 
$
(0.05
)
                                         
Diluted (1)
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.03
)
 
$
(0.01
)
 
$
(0.05
)
                                         
Weighted average number of common shares outstanding:
                                       
Basic (1)
   
35,651,732
     
35,716,848
     
35,747,979
     
35,761,370
     
35,719,211
 
                                         
Diluted (1)
   
35,651,732
     
35,716,848
     
35,747,979
     
36,206,934
     
35,719,211
 
 
(1)
See note 2 to our consolidated financial statements appearing elsewhere in this prospectus for a description of the method used to calculate basic and diluted net income (loss) per share of common stock.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We provide wireless networking, cashless transactions, asset monitoring, and other value-added services principally to the small ticket, unattended Point of Sale (“POS”) market. Our ePort® technology can be installed and/or embedded into everyday devices such as vending machines, a variety of kiosks, amusement games, and commercial laundry via either our ePort hardware or our Quick Connect solution. Our associated service, ePort Connect®, is a PCI-compliant, comprehensive service that includes simplified credit/debit card processing and support, consumer engagement services as well as telemetry, Internet of Things (“IoT”), and machine-to-machine (“M2M”) services, including the ability to remotely monitor, control and report on the results of distributed assets containing our electronic payment solutions.

We generate revenue in multiple ways. During fiscal year 2016, we derived approximately 73% of our revenues from recurring license and transaction fees related to our ePort Connect service and approximately 27% of our revenue from equipment sales. Connections to our service stem from the sale or lease of our POS electronic payment devices or certified payment software or the servicing of similar third-party installed POS terminals. Connections to the ePort Connect service are the most significant driver of our revenues, particularly the recurring revenues from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:

  ·
Purchasing devices directly from us or one of our authorized resellers;
·
Leasing devices under our QuickStart Program, which are non-cancellable sixty month sales-type leases, through an unrelated equipment leasing company or directly from us; and
·
Renting devices under our JumpStart Program, which are cancellable month-to-month operating leases.

OTHER METRICS

We monitor the following unaudited key metrics and non-GAAP financial measures to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.

($'s in thousands,
except as stated)
 
As of and for the
nine months
ended
March 31, 2017
   
Fiscal Year Ended
 
         
2016
   
2015
 
                   
Net New Connections
   
75,000
     
96,000
     
67,000
 
                         
Total Connections (at period end)
   
504,000
     
429,000
     
333,000
 
                         
Total Number of Transactions (millions)
   
300.2
     
315.8
     
216.6
 
                         
Transaction Volume ($ millions)
 
$
577.3
   
$
584.4
   
$
388.9
 
                         
Adjusted EBITDA
 
$
4,297
   
$
5,983
   
$
6,259
 
                         
Non-GAAP net (loss) income
 
$
(369
)
 
$
(713
)
 
$
(470
)
                         
Total Customers
   
12,400
     
11,050
     
9,600
 
 
For purposes of this discussion, each of the above unaudited key metrics and non-GAAP financial measures represents the following:
 
·
Net new connections is the number of customer connections added to our service less the number of any customer connections that have been deactivated or removed from our service during the applicable period.

·
Total connections is the number of customer connections to our service as of the applicable date.

·
Total number of transactions is the number of cashless payment transactions that have been processed through our service during the applicable period.

·
Transaction volume is the dollar amount of cashless payment transactions that have been processed through our service during the applicable period.

·
A djusted EBITDA is net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, non-recurring fees and charges that were incurred in connection with the integration of the VendScreen business, change in fair value of warrant liabilities and stock-based compensation expense. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash gain or charge that is not related to our operations. We have excluded the non-cash expense, stock-based compensation, as it does not reflect our cash-based operations. We have excluded the non-recurring costs and expenses incurred in connection with the VendScreen transaction in order to allow more accurate comparison of the financial results to historical operations. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, we utilize Adjusted EBTIDA as a metric in our executive officer and management incentive compensation plans.

·
Non-GAAP net income (loss) is GAAP net income (loss) excluding costs or benefits relating to any adjustment for fair value of warrant liabilities and non-cash portions of our income tax benefit (provision), non-recurring fees and charges that were incurred in connection with the integration of the VendScreen business, and professional fees incurred in connection with the class action litigation and the SLC Investigation. Non-GAAP net earnings (loss) per common share - diluted is calculated by dividing non-GAAP net income (loss) applicable to common shares by the number of diluted weighted average shares outstanding. Management believes that non-GAAP net income (loss) is an important measure of our business. Non-GAAP net income (loss) is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Management believes that non-GAAP net income (loss) and non-GAAP net earnings (loss) per share are important measures of our business. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. We believe that this non-GAAP financial measure serves as a useful metric for our management and investors because they enable a better understanding of the long-term performance of our core business and facilitate comparisons of our operating results over multiple periods, and when taken together with the corresponding GAAP financial measures and our reconciliations, enhance investors’ overall understanding of our current and future financial performance. Additionally, we utilize non-GAAP net income (loss) as a metric in its executive officer and management incentive compensation plans.

·
Total customers is the number of our customers as of the applicable date with whom we have entered into a processing and service agreement relating to that customer’s connections to our service.
 
Reconciliation of Net Income (Loss) to Adjusted EBITDA for the nine months ended March 31, 2017 and fiscal years ended June 30, 2016 and 2015
 
         
Fiscal Years Ended
 
($ in thousands)
 
Nine Months
Ended
March 31, 2017
   
June 30, 2016
   
June 30, 2015
 
Net income (loss)
 
$
(2,095
)
 
$
(6,806
)
 
$
(1,089
)
Less interest income
   
(387
)
   
(320
)
   
(83
)
Plus interest expenses
   
601
     
600
     
302
 
Plus income tax provision / (Less income tax benefit)
   
94
     
(615
)
   
289
 
Plus depreciation expense
   
3,642
     
5,135
     
5,731
 
Plus amortization expense
   
132
     
87
     
-
 
EBITDA
   
1,987
     
(1,919
)
   
5,150
 
                         
Plus loss on fair value of warrant liabilities / (Less gain on fair value of warrant liabilities)
   
1,490
     
5,674
     
393
 
Plus stock-based compensation
   
678
     
849
     
716
 
Plus intangible asset impairment
   
-
     
432
     
-
 
Plus VendScreen non-recurring charges
   
109
     
842
     
-
 
Plus litigation related professional fees
   
33
     
105
     
-
 
Adjustments to EBITDA
   
2,310
     
7,901
     
1,109
 
Adjusted  EBITDA
 
$
4,297
   
$
5,983
   
$
6,259
 
 
Reconciliation of Net Income (Loss) to Non-GAAP net income (loss) for the nine months ended March 31, 2017 and fiscal years ended June 30, 2016 and 2015
 
         
Fiscal Years Ended
 
($ in thousands)
 
Nine Months
Ended
March 31, 2017
   
June 30,
2016
   
June 30,
2015
 
Net income (loss)
 
$
(2,095
)
 
$
(6,806
)
 
$
(1,089
)
Non-GAAP adjustments:
                       
Non-cash portion of income tax provision
   
94
     
(579
)
   
226
 
Fair value of warrant adjustment
   
1,490
     
5,674
     
393
 
VendScreen non-recurring charges
   
109
     
842
     
-
 
Litigation related professional fees
   
33
     
156
     
-
 
Non-GAAP net income (loss)
 
$
(369
)
 
$
(713
)
 
$
(470
)
 
CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. Accounting policies currently deemed critical are listed below:

REVENUE RECOGNITION

Revenue from the sale or QuickStart lease of equipment is recognized on the terms of freight-on-board shipping point. Activation fee revenue is recognized when our cashless payment device is initially activated for use on our network. Transaction processing revenue is recognized upon the usage of our cashless payment and control network. License fees for access to our devices and network services are recognized on a monthly basis. In all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collection of the resulting receivable is reasonably assured. We estimate an allowance for product returns at the date of sale and estimates license and transaction fee refunds on a monthly basis.

ePort hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either us or a third-party leasing company for the devices. At the end of the lease period, the customer would have the option to purchase the device for a nominal fee.

LONG LIVED ASSETS

In accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”, we review our definite lived long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset will be written down to its fair value. In the period when the plan of sale criteria of ASC 360 are met, definite lived long-lived assets are reported as held for sale, depreciation and amortization cease, and the assets are reported at the lower of carrying value or fair value less costs to sell.

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. We account for goodwill in accordance with ASC 350, “Intangibles – Goodwill and Other”. Under ASC 350, goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. We have selected April 1 as our annual test date.

Our trademarks with an indefinite economic life are not being amortized. The trademarks, not subject to amortization, are related to the EnergyMiser asset group and consist of four trademarks. We test indefinite-lived intangible assets for impairment using a two-step process. The first step screens for potential impairment, while the second step measures the amount of impairment. We use a relief from royalty analysis to complete the first step in this process. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. We have selected April 1 as our annual test date for our indefinite-lived intangible assets. We concluded there was an impairment of our indefinite-lived trademarks as a result of our testing in fiscal year 2016, and we have recorded a $432 thousand impairment expense in the fourth quarter of the fiscal year ended June 30, 2016. This impairment expense reduced the carrying value of the trademarks to zero at June 30, 2016. There was no impairment expense recorded during the fiscal years ended June 30, 2015 and 2014.
 
Patents, non-compete agreements, brand, developed technology and customer relationships, with an estimated economic life, are carried at cost less accumulated amortization, which is calculated on a straight-line basis over their estimated economic life. We review intangibles, subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, including from a shortfall in the customer transaction fund flow from which we would normally collect amounts due.

The allowance is determined through an analysis of various factors including the aging of accounts receivable, the strength of the relationship with the customer, the capacity of the customer transaction fund flow to satisfy the amount due from the customer, an assessment of collection costs and other factors. The allowance for uncollectible accounts receivable is management’s best estimate as of the respective reporting period. If the factors described above were to deteriorate, additional amounts may need to be added to the allowance.

RESULTS OF OPERATIONS

TRENDING QUARTERLY FINANCIAL DATA

The following table shows certain financial and non-financial data over a five-quarter period that management believes give investors insight into certain trends and relationships about our financial performance.

Five Quarter Connections & Other Data

   
As of and for the three months ended
 
   
March 31,
2017
   
December 31,
2016
   
September 30,
2016
   
June 30,
2016
   
March 31,
2016
 
Connections:
                             
Gross New Connections
   
40,000
     
25,000
     
22,000
     
33,000
     
34,000
 
% from Existing Customer Base
   
88
%
   
80
%
   
86
%
   
83
%
   
91
%
Net New Connections
   
35,000
     
21,000
     
19,000
     
28,000
     
32,000
 
Total Connections
   
504,000
     
469,000
     
448,000
     
429,000
     
401,000
 
                                         
Customers:
                                       
New Customers Added
   
500
     
500
     
350
     
300
     
125
 
Total Customers
   
12,400
     
11,900
     
11,400
     
11,050
     
10,750
 
                                         
Volumes:
                                       
Total Number of Transactions (millions)
   
104.9
     
100.1
     
95.1
     
89.3
     
82.1
 
Transaction Volume (millions)
 
$
202.5
   
$
191.5
   
$
183.4
   
$
169.0
   
$
151.0
 
                                         
Financing Structure of Connections:
                                       
JumpStart
   
8.6
%
   
6.8
%
   
7.7
%
   
6.5
%
   
7.4
%
QuickStart & All Others *
   
91.4
%
   
93.2
%
   
92.3
%
   
93.5
%
   
92.6
%
Total
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
 

*
Includes credit sales with standard trade receivable terms
 
Highlights of our connections for the three months ended March 31, 2017 include:

·
35,000 net new connections to our ePort Connect service in the quarter; and
·
504,000 total connections to the ePort Connect service compared to the same quarter last year of approximately 401,000 total connections, an increase of 103,000 connections, or 25.7%.

Comparison of Three Months Ended March 31, 2017 and March 31, 2016

The following table sets forth our results of operations for the periods presented and as a percentage of our total revenues for those periods. The period-to-period comparison of our historical results is not necessarily indicative of the results that may be expected in the future.

   
For the three months ended March 31,
             
($ in thousands, except shares and per share data)
 
2017
   
% of Revenue
   
2016
   
% of Revenue
   
Change
   
% Change
 
                                     
Revenues:
                                   
License and transaction fees
 
$
17,459
     
66.0
%
 
$
14,727
     
72.3
%
 
$
2,732
     
18.6
%
Equipment sales
   
9,001
     
34.0
%
   
5,634
     
27.7
%
   
3,367
     
59.8
%
Total revenues
   
26,460
     
100.0
%
   
20,361
     
100.0
%
   
6,099
     
30.0
%
                                                 
Costs of sales/revenues:
                                               
Cost of services
   
11,876
     
68.0
%
   
9,703
     
65.9
%
   
2,173
     
22.4
%
Cost of equipment
   
7,959
     
88.4
%
   
4,986
     
88.5
%
   
2,973
     
59.6
%
Total costs of sales/revenues
   
19,835
     
75.0
%
   
14,689
     
72.1
%
   
5,146
     
35.0
%
                                                 
Gross profit
   
6,625
     
25.0