USA Technologies, Inc.
USA TECHNOLOGIES INC (Form: 10-K, Received: 09/27/2011 17:31:33)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2011

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934

For the transition period from ____________________ to _____________________

Commission file number 000-50054

 
USA Technologies, Inc.
 
(Exact name of registrant as specified in its charter)
 
 
Pennsylvania
 
   
23-2679963
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
100 Deerfield Lane, Suite 140, Malvern, Pennsylvania
 
   
19355
 
(Address of principal executive offices)
 
(Zip Code)
 
 
(610) 989-0340
 
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of Each Class
 
   
Name Of Each Exchange On Which Registered
 
Common Stock, no par value
Series A Convertible Preferred Stock
Warrants to Purchase Common Stock
 
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  o No x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large accelerated filer  o Accelerated filer  o Non-accelerated filer  o Smaller reporting company x

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

The aggregate market value of the voting common equity securities held by non-affiliates of the Registrant was $26,186,473 as of the last business day of the most recently completed second fiscal quarter, December 31, 2010, based upon the closing price of the Registrant’s Common Stock on that date.

As of August 31, 2011, there were 32,285,690 outstanding shares of Common Stock, no par value.
 


 
 
 
 
 
USA TECHNOLOGIES, INC.

TABLE OF CONTENTS

           
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, the anticipated financial and operating results of the 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;

 
the ability of the Company to generate sufficient sales to generate operating profits, or to sell products at a profit;

 
the ability of the Company to raise funds in the future through sales of securities;

 
the ability of the Company to obtain commercial acceptance of its products and services;

 
the ability of the Company to compete with its competitors to obtain market share;

 
whether the Company’s customers purchase or rent ePort devices or our other products in the future at levels currently anticipated by our Company, including our Jump Start Program;

 
whether the Company’s customers continue to operate or commence operating ePorts received under the Jump Start Program or otherwise at levels currently anticipated by the 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’ notices;

 
whether the recent significant increase in the interchange fees to be charged by Visa and MasterCard for small ticket debit card transactions would adversely affect our business, including our revenues, gross profits, and anticipated future connections to our network;

 
whether the Company would be able to pass along to its customers the recent significant increase in interchange fees charged by Visa and MasterCard for small ticket debit card transactions without those customers cancelling their contracts with us;
 
 
the ability of the Company to obtain sufficient funds through operations or otherwise to repay its debt obligations, or to fund development and marketing of its products;

 
the ability of the Company to satisfy its trade obligations included in accounts payable and accrued liabilities;

 
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 and the lack of established revenues;

 
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; and

 
as a result of the slowdown in the economy and/or the tightening of the capital and credit markets, our customers may modify, delay or cancel plans to purchase our products or services, and suppliers may increase their prices, reduce their output or change their terms of sale.

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 and in the “Risk Factors” section of this Form 10-K. 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 Form 10-K speaks only as of the date of this Form 10-K. 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 Form 10-K or to reflect the occurrence of unanticipated events.
 
 
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USA TECHNOLOGIES, INC.
 
PART I

Item 1. Business.

OVERVIEW

We are a provider of technology-enabled solutions that facilitate electronic payment transactions and value-added services within the unattended Point of Sale (“POS”) market and a leading provider in the small ticket, beverage and food vending industry. Since our founding in 1992, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as the ability to remotely monitor, control and report on the results of distributed assets such as vending machines, kiosks, personal computers, photocopiers, and laundry equipment. 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 such as through the use of a credit card. We derive revenues from the sale, lease and rental of our POS terminals, from license and/or service fees and transaction fees on installed POS terminals. As of June 30, 2011, the Company had approximately 119,000 devices connected to its network. The Company counts its ePort connections upon shipment of an active terminal to a customer under contract, at which time activation on its network is performed by the Company, and the terminal is capable of conducting business via the Company's network and related services. An ePort connection does not necessarily mean that the unit is actually installed by the customer on a vending machine, or that the unit has begun processing transactions, or that the Company has begun receiving monthly service fees in connection with the unit. At the time of shipment of the ePort, the customer becomes obligated to pay the one-time activation fee, and is obligated to pay monthly service fees in accordance with the terms of the customer's contract with the Company. During the year ended June 30, 2011, the Company processed approximately 72 million cashless transactions totaling approximately $120 million, representing a 95% increase in transaction volume and a 76% increase in dollars processed from the 37 million cashless transactions totaling over $68 million in the previous fiscal year ended June 30, 2010. Pursuant to its agreements with customers, the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company, which are included as licensing and transaction processing revenues in its Consolidated Statements of Operations. The Company’s transaction processing volume is not indicative of the gross profit from license and transaction fees which is based upon the monthly service fees and transaction processing fees paid to us by our customers.

Our solutions consist predominately of POS electronic payment devices, proprietary operating systems, certified payment software and reporting and communication capabilities. Our solutions are able to process traditional magnetic stripe credit and debit cards, contactless credit and debit cards, as well as near-field communication (“NFC”) equipped mobile phones where consumers could make payments with their cell phones. Our proprietary POS solutions enable electronic micro-payments at unattended POS locations.

Our customers primarily consist of beverage and food vending machine owners and operators; commercial laundry operators servicing colleges, universities and multi-family housing; brand marketers wishing to provide their products or services via kiosks or vending machines; equipment manufacturers that would like to incorporate our networked devices (e.g., remote monitoring, reporting and control as well as cashless payments) into their products; and business center operators, which include hotels and audio visual companies. The functionality of our solutions includes the 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.
 
The Company also manufactures and sells energy management products which reduce the electrical power consumption of equipment, such as refrigerated vending machines and glass front coolers, thus reducing the electrical energy costs associated with operating this equipment. We derive equipment revenues from our energy management products through the sale of the product.
 
We have a nineteen year history in our industry, a recognized brand name, value proposition for our customers, and reputation of innovation in our product and services. We believe that the foregoing positions us to capitalize on industry trends.
 
THE INDUSTRY

We operate in the small ticket electronic payments industry and more specifically the unattended POS market. Our solutions facilitate electronic payments in industries that have traditionally relied on cash transactions. In addition, our solutions provide electronic monitoring and online reporting for distributed assets. We believe the following industry trends will drive growth in demand for electronic payment systems in general and more specifically within the markets we serve:

 
the shift toward electronic payment transactions and away from cash and checks;

 
the increase in both consumer and merchant/operator demand for electronic transaction functionality; and

 
improving POS technology and NFC equipped mobile phone payment technology.

 
 
 
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Shift toward electronic payment transactions and away from cash and checks

There has been a shift away from paper-based methods of payment, including cash and checks, towards electronic-based methods of payment. While consumers continue to use checks and cash to pay for goods and services, there is a migration towards the use of card-based payment to purchase items. According to The Nilson Report, a news and research publication on consumer payment systems, electronic payment transaction volume surpassed paper-based transaction volume for the first time in 2006, continuing the trend of migration of consumer transactions from paper-based to electronic payments. According to the December 2009 Nilson Report, the four card-based systems—credit, debit, prepaid, and electronic benefits transfer—generated $3.59 trillion in the United States in 2009. The number of payment transactions using credit cards, debit cards, prepaid cards, and EBT cards totaled 66.74 billion in 2008—up 6.7% from 2007. By 2013, card-based purchases are projected to reach nearly $4.5 trillion, with over 89 billion transactions projected for this same period.
 
(BAR CHART)
 
Increase in Consumer and Merchant/Operator Demand for Electronic Payments

Increase in Consumer Demand . The unattended, vending and kiosk POS market has historically been dominated by cash purchases. However, oftentimes, cash purchases at unattended POS locations represent a cumbersome transaction for the consumer because they do not have the correct monetary value (paper or coin), or the consumer does not have the ability to convert their bills into coins. We believe electronic payment system providers such as USA Technologies 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 . Increasingly, merchants and operators of unattended payment locations (e.g., vending machines, car wash, tabletop games, etc.) are utilizing electronic payment alternatives. Several of the Company’s customers have been able to drive increased revenue of their distributed assets through this expanded market opportunity. Furthermore, owners have demonstrated the ability to increase the price of their goods with little to no decline in transaction volume. In addition, electronic payment systems provide merchants and operators real-time sales and inventory data utilized for back-office reporting and forecasting, helping them to manage their business.

Increase in Demand for Networked Assets . M2M technology includes capturing value from wireless modules and electronic devices to improve business productivity and customer service. The term M2M describes any kind of 2-way communication system between geographically distributed devices through a centrally managed software application without human intervention. According to M2M Magazine (“Is it Touching Our Everyday Lives?”, M2M, November 18, 2008), there are over 50 billion machines capable of being networked.

Networked assets provide improved internal business processes such as energy management systems capable of collecting diagnostic information and communicating with the operator’s host information system to optimize energy consumption. Networked assets also have the ability to remotely monitor merchandise to maximize sales and track inventory in real-time. In addition, networked assets provide valuable information regarding consumers’ purchasing patterns and payment preferences allowing operators to more effectively reach and satisfy consumers. Networked assets allow information to be centralized and reported in electronic format enabling the data to be more accurately and thoroughly analyzed and digitally presented and available online. According to the M2M Magazine article cited above, the networked asset industry is in its nascency, and electronic solution providers that can provide interconnectivity between distributed assets offer consumers, retailers, machine operators and manufacturers an expanded value proposition by optimizing the capabilities of a distributed asset.
 
 
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POS Technology and NFC Equipped Mobile Phone Payment Improvements

Advances in Computing . History has shown that advances in microprocessing technology, storage capacity and software are enabling increasing complexity and functionality of electronic payment systems at unattended POS locations. Such advances are expanding the range of services and functionality offered by electronic payment systems, including credit and debit, prepaid cards, gift cards and loyalty card programs, electronic bill payment and electronic check truncation. In addition, advances in technology, computing and telecommunications over the past decade have reduced the cost of production and operations of more sophisticated electronic payment systems, thereby reducing the barrier of adoption for merchants and operators.

Card Innovation at the POS . Recent industry developments such as the emergence of NFC or contactless equipped mobile phone payment have resulted in the POS becoming an important area of differentiation for card associations, card issuers and payment processors. As the market for issuing credit cards has become more saturated in the U.S., card associations and card issuers are differentiating their brands by expanding their offerings. Payment processors are also differentiating themselves by expanding their offerings as front-end authorization and back-end clearing and settlement have become more commoditized. Card associations, card issuers and payment processors are differentiating their offerings, in part, by offering value-added applications and incorporating innovative technologies including contactless / NFC equipped mobile phone payment technology.

Payment Terminal Innovations at the POS . NFC and mobile payments are projected to continue on an upward trajectory, with 65% of total tablets and smartphones equipped with NFC payment capabilities and as many as 800 million consumers with NFC-enabled handsets by 2014 (Goldman Sachs Equity Research Report, June 9, 2011). This same report cites that Google believes that there are approximately 300,000 existing POS terminals worldwide that are compatible with the Google Wallet, with about 120,000 of those in the US. With approximately 50,000 NFC and mobile payments ready ePorts shipped to our customers, we believe that the continued increase in consumer preferences towards contactless payments may represent a significant growth opportunity for the Company.
 
SPECIFIC MARKETS WE SERVE

Our current customers are primarily in the self-serve, small ticket retail markets including beverage and food vending and kiosk, commercial laundry, car wash, amusement and gaming, and office coffee. While these industry sectors represent only a small fraction of our total market potential, as depicted below, these are the areas where we have gained the most traction. In addition to being our primary markets, these sectors serve as a proof-of-concept for other unattended POS industry applications.
 
(PIE CHART)
 
 
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Vending. According to Vending Times’ 2010 Census of the Industry, annual U.S. sales in the vending industry sector were estimated to be approximately $43 billion. The market segment can be addressed by our end-to-end solution consisting primarily of vended products retailing for $1.00 or greater. According to this census, the vending industry experienced a 6% decline in 2010 versus 2009, due in large part to the downturn in the economy and the decrease in serviceable locations such as manufacturing plants, but the contraction of growth prompted operators to look for additional ways to make up revenue. According to Automatic Merchandiser State of the Industry Report 2011, operators increased their investment in technology to improve business efficiencies and increase margins.  Among these technology investments, 3.5% of operators surveyed indicated that they had invested in cashless payments system while 1.7% indicated they had installed a remote monitoring system. With the continued shift to electronic payments and the advancement in mobile and POS technology, we believe the traditional beverage and food vending industry will continue to look to cashless payments systems to increase sales and margins and help growth.

Kiosk . According to IHL Consulting Group Market Study dated July 1, 2010, approximately $678 billion was transacted through self service kiosks in 2009, which represents an increase of 9.7% from the previous year. Furthermore, IHL projects that spending at self-service kiosks will grow approximately 10% during 2010 and that demand for self-service kiosks should push sales at these terminals to over $1 trillion by 2014. Kiosks are becoming increasingly popular as self-service “specialty” shops within larger retail environments. Value-added services, such as photo enlargement and custom imaging are a prominent example, located within many major retailers. As merchants continue to seek new ways to reach their customers outside of retail locations and mobile and electronic payment technology make this expansion more plausible, we believe electronic payment system providers who can service the payment needs of kiosk-driven transactions will be able to offer retailers, card associations, card issuers and payment processors an expanding value proposition at the POS.

In 2008/2009, Single Cup/Office Coffee Service (“OCS”) sales posted a five percentage point decline from the prior 12-month period, marking the first setback since 2003/2004. OCS revenues totaled $3.73 billion in 2009/2010, according to the 2010 Automatic Merchandiser State of the Coffee Service Industry Report, September 2010. According to this same publication, the 4-year gain from 2003/2004 to 2007/2008 was the longest consistent growth trend in the industry’s history, driven by higher pricing and investment in better quality products and equipment, and the decline in sales was a direct result of declining worksite populations and employer cost cutting. According to the National Coffee Association’s 2008 National Coffee Drinking Trends survey, 2007 was the first year that daily coffee consumption among adults surpassed soft drink consumption.  The 2011 study listed 40% of the 18-24 year olds who responded as drinking coffee daily, up from 31% in 2010 with a total of 58% of the population surveyed saying they drank coffee in the past day, up from 56% in 2010 but down 60% in 2009. In October 2008, entered into a three year contract with Starbucks pursuant to which Starbucks will offer coffee in unattended kiosk locations using the ePort G-8 cashless payment system. As of the date hereof, there are a couple of hundred ePort devices being deployed in unattended kiosks pursuant to this agreement.

Commercial Laundry . According to a 2010 Report on Dry Cleaning and Laundry Services published by Anything Research, the current size of the laundry services market is $22.4 billion, and although the industry experienced a revenue decline of 5% in 2009 compared to 2008, long term forecasts for the industry project positive growth. The Dry Cleaning and Laundry Facilities Industry Profile published by First Research dated July 11, 2011, states that the laundry services industry includes about 30,000 companies with combined annual revenue of approximately $10 billion. Major companies include Coinmach Service, DRYCLEAN USA, Mac-Gray, and Martin Franchises. The industry includes about 20,000 companies that provide retail laundry and dry cleaning services, and 10,000 that provide services through coin-operated laundromats. The coin-laundry segment is fragmented: the 50 largest firms generate about 40% of revenue. This segment of the business is made up of both coin-operated laundries and coin-operated machines located in multi-family housing developments such as apartments, condominiums and universities. The Coin Laundry Association’s website, www.coinlaundry.org, points out that “...coin laundries thrive in periods of both growth and recession. During periods of recession, when home ownership decreases, the self-service laundry market expands as more people are unable to afford to repair, replace or purchase new washers and dryers, or as they move to apartment housing with inadequate or nonexistent laundry facilities.” The self-service laundry market consists of an estimated primary customer base of approximately 96 million people living in rental housing, as of the 2010 U.S. Census. A secondary customer base consists of the over 2 million resident college and university students in the US (U.S. Census Bureau, 2004). We reach our target market primarily via the seven largest laundry operators in the US.

Business Centers . According to the American Hotel & Lodging Association, the hotel and lodging industry was a nearly $134 billion industry with approximately 47,000 hotels in the United States and 300,000 worldwide in 2008. With the increased globalization of our economies and the increased need for travel for both personal and business reasons, there remains a demand for unattended business center availability in hotels, with ever-greater percentages of travelers needing and expecting use of computers, printers, fax machines, copiers, and other business services.
 
OUR COMPETITIVE STRENGTHS

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

Trusted Brand Name. The USA Technologies brand has a strong national reputation for quality, reliability and innovation. We believe that card associations, payment processors and merchants/operators trust our system solutions to handle financial transactions in a secure operating environment. Our trusted brand name is best exemplified through several one-way exclusive relationships, each averaging three years in duration, which we have solidified with several leading organizations within the unattended POS industry, including Merit/AMI Entertainment and Air-Serv.
 
 
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Large Installed Base. We have a large installed base of unattended POS electronic payment systems. As of June 30, 2011, we had approximately 119,000 connections to our network. Our technology provides POS payment solutions as well as real-time POS and diagnostic data to our customers. Our customers maintain both the payment solution as well as the real-time data with one provider rather than through multiple providers. Our installed base supports our sales and marketing infrastructure by enhancing our ability to establish or expand our market position. Finally, our installed base provides several opportunities for referrals for new business, either from the merchant or operator of the deployed asset or through one of our several strategic relationships.

Attractive Value Proposition for Our Customers . We believe that our solutions provide our customers an attractive value proposition. Our solutions make possible increased purchases by consumers who in the past were limited to the physical cash value on hand while making a purchase at an unattended terminal. Rather than search for coins or dollar bills to feed a vending machine, customers have the option of paying by card. We believe our solutions make possible increased convenience and a broader universe of potential customers – those with cash or electronic forms of payment. Furthermore, the cost of our solution continues to decrease making it more economically attractive for our customers to install our devices in their machines. Our historical data demonstrates that approximately 26% of all of the transactions on traditional beverage and food vending machines utilizing our ePort ® terminals consist of credit/debit card transactions.

Large and Increasing Scale. During the year ended June 30, 2011, we generated total licensing and processing fees of $16.4 million, successfully processed approximately 72 million transactions accounting for more than $120 million in purchases and, as of June 30, 2011 had approximately 119,000 connections to our network. We believe that our scale and footprint enable us to market and distribute our products more effectively and in more markets than most of our competitors, and to provide our customers with innovative, comprehensive and reliable system solutions.

Leading Research and Development. Our research and development initiatives focus on adding features and functionality to our system solutions through the development and utilization of our processing and reporting network and new technology. Since we began operations in 1992, we have been granted 81 patents and currently have 12 patent applications pending. We have developed innovative and reliable unattended POS electronic payment devices and solutions over the past several years. For example, our most recent cashless vending solution, the ePort EDGE™, was made available for sale to our customers during the fourth quarter of the 2009 fiscal year. Our ePortG-8 is an integrated one-piece design, combining the card-reader and processor while enabling magnetic swipe card transactions and NFC equipped mobile phone payment, and is 65% smaller than our previous G-7 model.

NFC Ready. USA Technologies’ ePort G series and ePort Connect service would accept and process NFC and/or mobile payments at the point of sale. The Company partnered with Visa, MasterCard and others for a significant rollout of these devices, resulting in approximately 50,000 NFC and mobile-ready ePort devices shipped to our customers. The Company continues to connect its current G-series model, the ePort G8 to its network, putting it in a position to benefit from any growth in consumer adoption of these payment methods.

One-Stop Shop, End-to-End Solution. We believe that our ability to bundle the services included in our cashless payment solution, as well as the ability to tailor them to individual customer needs, makes it easy and efficient for our customers to adopt and deploy our technology, and results in a service unmatched in the small ticket self-service retail vending market today. Other cashless payment solutions available in the market today require the operator to set up their own accounts for cashless processing, manage multiple service providers (i.e. hardware terminal manufacturer, wireless network provider and credit card processor), as well as to implement their own cashless systems. Our solution provides all of the following, under one cohesive service umbrella;

 
A broad product line of devices or software, consisting of the ePort G8 which can accept multiple forms of cashless payment, from swipe and contactless and the 2010 National Automatic Merchandising Association (“NAMA”) -Innovation-Award-winning ePort EDGE.

 
Unique payment programs such as our JumpStart and leasing programs, which help operators acquire the ePort hardware without an up-front capital investment.

 
Our comprehensive end-to-end ePort Connect cashless payment service which includes merchant account set-up, wireless activation, merchant services, over-the-air updates, and 24x7 customer service and support.

 
Business deployment planning services to help operators successfully deploy cashless payment systems. This program is based on extensive market data, which helps guide operators to the locations where cashless vending machines would be most successful.
 
 
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OUR GROWTH OPPORTUNITY

Our objective is to enhance our position as a leading provider of technology that enables electronic payment transactions and value-added services at small-ticket, self-service, retail locations such as traditional beverage and food vending, kiosks and commercial laundry. The key elements of our strategy are to:
 
Leverage Existing Customers/Partners. We have a solid base of key customers across multiple markets (vending, kiosk, etc.) that have deployed our solutions. We have worked to build these relationships, drive future deployments, and develop customized network interfaces. Our customers have seen the benefits of our products and services first-hand and represent the largest opportunity to scale our solution. These customers are a key component of our plan to drive sales.

Expand Distribution in Core Markets. We have worked to develop a strong market presence in the vending and energy markets. Increasing sales and distribution to our largest customers is important to the long-term success of the Company, but we are intently focused on building a broader base of customers within these core markets to drive long term revenue and value. Our efforts in this regard have led to the addition of approximately 900 new customers during the fiscal year 2011.

Further Penetrate Attractive Adjacent Markets. We plan to continue to increase the functionality of our system solutions to address the specific needs of various markets. We currently focus on specific segments of unattended POS markets, including traditional beverage and food vending, kiosk, commercial laundry and business center industry sectors. We believe we have the ability to penetrate a much larger addressable market by selling or licensing our technologies to equipment makers of everyday devices such as toll booths, tire inflation and vacuum equipment, car washes and countless other devices. Using wired and/or wireless networks and centralized, server-based software applications, managers can remotely monitor, control, and optimize a network of devices regardless of where they are located. Networked devices enable cashless transactions, sales analysis, remote monitoring, and optimized machine maintenance.

New Product Innovation. We are a leading innovator of technology that enables electronic payment transactions and value-added services at the unattended POS locations. We will continue enhancing our solutions in order to satisfy our customers and the end-consumers relying on our products at the POS locations. Our product innovation team enhances the design, size, and speed of data transmission, as well as security and compatibility with other electronic payment solution providers’ technologies. We believe our continued product innovation will lead to further adoption in the unattended POS payments market. For example, our newer ePort G-8™ solution is 65% smaller than our previous model, and the current retail cost of the ePort EDGE™ is $199 per device.

Leverage Intellectual Property . We have been granted 81 patents which assert various claims, including claims relating to unattended payment processing, networking and energy management devices. In addition, we own numerous trademarks, copyrights, design rights and trade secrets. We will continue to leverage this intellectual property to add value for customers, attain an increased share of the market, address competition and attempt to generate licensing revenues.

Capitalize on High Growth Opportunities in International Markets . We are currently focused on the U.S. and Canadian market for our ePort devices and related network but may seek to establish a presence in emerging, high growth electronic payment markets in Europe, Asia and Latin America. In order to do so, we would have to invest in additional sales and marketing and research and development resources targeted towards these regions. Our energy management devices have been shipped to customers located in the U.S., Canada, Mexico, United Kingdom, Germany, France, Japan, Australia, and the Philippines.

Capitalize on the growing NFC and mobile payments trends. NFC and mobile payments are projected to continue on an upward trajectory, with 65% of total tablets and smartphones equipped with NFC payment capabilities and as many as 800 million consumers with NFC-enabled handsets by 2014 (Goldman Sachs Equity Research Report, June 9, 2011). This same report cites that Google believes that there are approximately 300,000 existing POS terminals worldwide that are compatible with the Google Wallet, with about 120,000 of those in the U.S. With approximately 50,000 NFC and mobile payments ready ePorts shipped to our customers, the Company believes that the continued increase in consumer preferences towards contactless payments represents a significant growth opportunity for the Company.
 
OUR PRODUCTS

Our products are available in several distinctive modular configurations, offering our customers flexibility to install a POS solution that best fits their needs and customer demands.

Intelligent Vending and Kiosk . As of June 30, 2011, we have approximately 110,000 ePort ® and other cashless devices that are connected to our ePort Connect ® solution for the vending and kiosks industries. Our ePort Connect ® solution for the vending and kiosk industries enables cashless payments at unattended POS machines. ePort Connect ® is an end-to-end suite of cashless payment and telemetry services for the self service retail industries.

The Company counts its ePort connections upon shipment of an active terminal to a customer under contract, at which time activation on its network is performed by the Company, and the terminal is capable of conducting business via the Company s network and related services. An ePort connection does not necessarily mean that the unit is actually installed by the customer on a vending machine, or that the unit has begun processing transactions, or that the Company has begun receiving monthly service fees in connection with the unit. At the time of shipment of the ePort, the customer becomes obligated to pay the one-time activation fee, and is obligated to pay monthly service fees in accordance with the terms of the customer's contract with the Company.
 
 
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Intelligent Vending™. Our latest improvement to Intelligent Vending™ is our ePort® G-8, which provides the same benefits as the G-7, plus important new features at a lower price. The G-8 solution is 65% smaller than the G-7 and combines traditional magnetic strip and NFC equipped mobile phone payment capabilities. In addition, our ePort Edge™ product became available for sale to customers during the fourth quarter of the 2009 fiscal year. The ePort Edge™ is a one-piece design and is intended for those in the vending industry who want a magnetic swipe-only cashless system at a current retail price of $199 per device.

Kiosk . We provide an ePort ® solution that utilizes our ePort ® or software client, USALive ® , and our comprehensive technology support and customer service to offer an electronic payment option and web-based remote monitoring and management for all kiosk types. Our ePort ® solution enables kiosks to sell an increased variety of items and at a higher price point as compared to cash-only kiosks as consumers are typically limited to the amount of available cash-on-hand. Kiosks permit a host of new services to become available at the point-of-demand, such as Sony’s self-service and Picture Station kiosks, where consumers can produce prints from their own digital media. In addition, our ePort ® solution powers the POS solutions for unattended kiosk providers such as Merit Megatouch, Fantasy Photobooth and AIR-serv. In October 2008 Starbucks chose our ePort ® mobile solution to deliver their product to customers through coffee kiosks. 
 
eSuds ™. eSuds™ is our solution developed for the commercial laundry industry. eSuds™ offers an e-mail alert system to notify users regarding machine availability, cycle completion, and other events and supports a variety of value-added services such as custom advertising or subscription-based payments.

Our eSuds™ system enables laundry operators to provide customers cashless transactions via the use of their credit cards, debit cards and other payment mediums such as student IDs. In addition, our eSuds™ service reduces operational costs through utilization of our remote monitoring technology, thereby maximizing the scheduling of service visits and increasing machine up-time. The system increases customer satisfaction through improved maintenance, higher machine availability, specialized services (i.e., e-mail alerts to indicate that laundry cycle is finished) and the convenience of non-cash transactions.

Installations of our eSuds™ product have been completed at 56 college and universities and are serviced on approximately 7,600 washer and dryer machines. For example, installations of our eSuds™ product have been completed at Carnegie Mellon University, Rutgers University, Case Western Reserve, Johns Hopkins University, Temple University and others. We are working with resellers and distributors, such as Caldwell & Gregory, to install eSuds™ at other colleges and universities. The Company also has a presence in the multi-family-housing laundry market through its relationship with CoinMach, a firm which has indicated that it operates approximately 850,000 laundry machines in North America.

As of June 30, 2011, we had 830 eSuds™ room controllers servicing approximately 7,600 washer and dryer machines. We count an eSuds as a connection upon actual installation of our device on a washer or dryer or room controller.

Business Express®. We originally developed Business Express® to provide self-service business center solutions to the Hotel and Motel industry. With the introduction of the ePort® SDK and ePort® Transact® our target market has expanded to include printer and copier dealers and manufacturers. The Business Express® solution includes the ePort® SDK for computer-based transactions such as a Public PC®, and the ePort® Transact®, which enables printers and copiers to accept credit and debit cards for payment. These products are coupled with our customer service support and ePort Connect® back-end system for payment processing and other value-added services.
 
ePort® Transact®, which became available in March 2010, is the latest version of our original payment technology system developed for self-service business center devices such as printers and copy machines. It is a cashless-transaction-enabling terminal that permits customers to use office equipment with a swipe of their credit or debit card. The ePort® Transact® can be sold as a stand-alone device to hotel, motel and other locations with business center needs, or to printer and copier dealers and manufacturers to be sold to their customers with the cashless option already installed.

As of June 30, 2011, we have several hundred Business Express® units installed nationwide with several of the major hotel chains.

Energy Management Products . Our Company offers energy conservation products (“Energy Misers” ® ) that reduce the electrical power consumption of various types of existing equipment, such as vending machines, glass front coolers and other “always-on” appliances by allowing the equipment to selectively operate in a power saving mode when the full power mode is not necessary. Each of the Company’s Energy Miser ® products utilizes occupancy sensing technology to determine when the surrounding area is vacant or occupied. The Energy Miser ® then utilizes occupancy data, room and product temperatures, and an energy saving algorithm to selectively control certain high-energy components (e.g. compressor and fan) to realize electrical power savings over the long-term use of the equipment. Customers of our VendingMiser ® product benefit from reduced energy consumption costs, depending on regional energy costs, machine type, and utilization of the machine. Our Energy Misers ® also reduce the overall stress loads on the equipment, helping to reduce associated maintenance costs.
 
 
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The Energy Miser ® family of energy-control devices includes:

VendingMiser® - installs in a cold drink vending machine and reduces the electrical power consumption of the vending machine.
 
CoolerMiser™ - reduces the electrical energy used by sliding glass or pull open glass-front coolers that contain non-perishable goods.

VM2IQ® and CM2IQ® - the second generation of the VendingMiser ® and CoolerMiser™ devices that is installed directly inside the machine and has the capability to control the cooling system and the advertising lights separately.

SnackMiser® - reduces the amount of electricity used by non-refrigerated snack vending machines.
 
PlugMiser™ - reduces the amount of electricity used by all types of plug loads including those found in personal or modular offices (printers, personal heaters, and radios), video arcade games, and more.

We do not consider our energy management products as connections to our network.
 
OUR SERVICES

Through ePort Connect ® , we offer end-to-end services to support our ePort devices and ePort SDK.

The ePort Connect ® service includes card payment and processing services and M2M operational data such as:

Card Processing Services . Through our existing relationships with card processors and card associations, we provide merchant account and terminal ID set up, pre-negotiated discounted fees on small ticket purchases and direct electronic funds transfers EFTs to our customer’s bank account for all settled card transactions as well as ensure compliance with current processing regulations.

Wireless Connectivity. We manage the wireless SIM account activation, distribution, and the relationship with wireless providers for our customers.

Customer/Consumer Services . We support our installed base by providing 24-hour help desk support, repairs, and replacement of impaired system solutions. In addition, as the merchant of record on all transactions, all inbound billing inquiries are handled through a 24-hour help desk, thereby eliminating the need for merchants and operators to be bothered with customer billing inquiries and potential chargebacks.

Online Sales Reporting and Remote Management . Effective remote management is essential to cost effective deployment, maintenance and management of unattended POS locations. Via the USALive online reporting system, we provide reporting of credit and cash transactions, user configuration, reporting by machine and region, by date range and transaction type, data reports for operations and finance, graphical reporting for sales and to customers, and condition monitoring for equipment service as well as activation of new devices and location redeployments.

Over-the-Air Update Capabilities. Automatic over-the-air updates to software, settings, and security protocol from our network to our ePort card reader keep our customers’ hardware up-to-date and enable customers to benefit from any advancement made after their hardware or software purchase.

We enter into a processing and licensing agreement, or ePort Connect Services Agreement, with our customers pursuant to which we act as the exclusive provider of cashless financial services for the customer’s distributed asset, and the customer agrees to pay us an activation fee, monthly service fees, and transaction processing fees. Our agreements are generally cancelable by the customer upon thirty to sixty days notice to us.
 
OUR TECHNOLOGY-BASED SOLUTION

We believe that our ability to bundle our products and services, as well as the ability to tailor them to individual customer needs, makes it easy and efficient for our customers to adopt and deploy our technology, and results in a service unmatched in the vending market today. This one-stop-shop solution includes the ePort Connect ® end-to-end payment and processing services and our cashless payment device or software for distributed assets such as vending machines, kiosks, laundry equipment, car wash, amusement and gaming, office coffee and other small-ticket, self-service industries.

The Client . The Company offers its customers several different devices or software to connect their distributed assets. These range from software to hardware devices consisting of control boards, magnetic strip card readers, and NFC readers. The devices or software can be embedded inside the host equipment, such as ePort SDK software residing in the central processing unit of a Kiosk or table-top game; it can be integrated as part of the host equipment, such as our ePort ® G8 or EDGE hardware that can be attached to the door of a vending machine, at a payment hub in a self service car wash; or it can be a peripheral, stand-alone terminal, such as our eTransAct ® terminal for Copier Express.

ePort ® is the Company’s core device, which is currently being utilized in vending and commercial laundry applications. Our ePort ® product facilitates cashless payments by capturing the payment media and transmitting the information to our network for authorization with the payment system (e.g. credit card processors). Additional capabilities of our ePort ® consist of control/access management by authorized users, collection of audit information (e.g. product or service sold, date and time of sale and sales amount), diagnostic information of the host equipment, and transmission of this data back to our network for web-based reporting.

ePort TransAct ® is the latest version of the Company’s original cashless, transaction-enabling device developed for self-service business center equipment such as PCs, fax machines and copiers. Similar to the ePort ® , the ePort TransAct ® capabilities include control/access management, collection of sales data (e.g. date and time of sale, sales amount and product or service purchased), and transmission back to our network for reporting to customers.
 
 
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The Connectivity Mediums . Our solutions are interconnected for the transfer of our customers’ data through our USALive ® network, providing multiple connectivity options such as phone line, ethernet or wireless. Increasing wireless connectivity options, coverage and reliability have allowed us to service a greater number of customer locations. Additionally, we make it easy for our customers to deploy wireless solutions by acting as a single point of contact. We have contracted with Verizon Wireless and AT&T in the United States and Rogers Wireless in Canada in order to supply our customers with wireless network coverage.

The Network . Our USALive ® network is responsible for transmitting payment information from our terminals for processing as well as transmitting sales and diagnostic data for storage and reporting to our customers. Also, the network, through server-based software applications, provides remote management information and enables control of the networked device’s functionality. Through our network we have the ability to upload software and update devices remotely enabling us to manage the devices (e.g., change protocol functionality, software upgrades, and change terminal display messages).

USALive ® is the enabler of turnkey cashless payment processing for our customers. The network is certified with several cashless payment systems, such as credit card processors and property management systems, facilitating the authorization and settlement of credit cards, debit cards, hotel room keys and student identification cards. The network also has the capability to act as its own payment processing system for other cashless payment media, such as on-line stored value or employee payroll deduction. The network authorizes transactions, occurring at the host equipment, with the appropriate payment system and sends approval or decline responses back to the networked device to allow or terminate the transaction for the purchase of the product or service. The network consolidates successfully approved transactions from multiple devices, batches, and then transmits these batched transactions to the payment system for settlement.

Data Security. Visa has listed the Company as a PCI DSS Compliant Service Provider in the North American region as a result of validation conducted by a third party as of January 1, 2011. The USAT listing on Visa’s list of compliant companies can be found online at http://usa.visa.com/download/merchants/cisp-list-of-pcidss-compliant-service-providers.pdf .
 
SALES AND MARKETING

The Company’s sales strategy includes both direct sales and channel development, depending on the particular dynamics of each of our markets. Our marketing strategy is diversified and includes media relations, direct mail, conferences and client referrals. As of August 31, 2011, the Company was marketing and selling its products through its full time staff consisting of eleven people.

Direct Sales

We sell directly to the major operators in each of our target markets. Each of our target markets is dominated by a handful of large companies, and these companies comprise our primary customer base. In the small ticket beverage and food vending sector, approximately ten large operators dominate the sector; in the commercial laundry sector, seven operators currently control the majority of the market. We also work directly with hoteliers for our eTransAct ® and Business Express® products.

Within the small ticket beverage and food vending industry, our customers include soft drink bottlers and independent vending operators throughout the United States and Canada. On the soft drink bottler side, we are attempting to secure additional distribution agreements and servicing our existing customer’s requirements for cashless locations and the related network services.

Indirect Sales/ Distribution

We have entered into agreements with resellers and distributors in connection with our energy management products. We also have agreements with select resellers in the car wash, amusement and gaming and vending markets in an effort of broaden our reach and subsidize direct sales efforts in these markets.

Marketing

Our marketing strategy consists of building our brand by creating a company and product presence at industry conferences and events in order to raise visibility within our industry, create opportunity to conduct product demonstrations, and consult with potential customers one-on-one; sponsoring educational workshops with trade associations such as National Automated Merchandiser Association (“NAMA”), to educate the industry on the importance and benefits of our solution and establish our position as the industry leader; develop several case studies to illustrate the value of our products; the use of direct mail campaigns; and advertising in vertically-oriented trade publications such as Vending Times, Automatic Merchandiser and Energy User News.
 
 
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IMPORTANT RELATIONSHIPS

AT&T Mobility

In November 2009, we signed an amendment to our existing agreement to use AT&T’s digital wireless wide area network for transport of data, including credit card transactions and inventory management data. The initial term of the amendment is three years, expiring November 2012. At the end of the initial term, the agreement automatically renews for successive one year terms unless terminated by either party. AT&T is a provider of advanced wireless voice and data services for consumers and businesses, operating the largest digital wireless network in North America and the fastest nationwide wireless data network in the United States. We offer AT&T’s wireless services in connection with our ePort ® devices which are utilized in the traditional small ticket beverage and food vending market in the United States.

Verizon Wireless

In April 2011, we signed an agreement to use Verizon’s digital wireless wide area network for transport of data, including credit card transactions and inventory management data. The initial term of the agreement is three years, expiring April 2014. At the end of the initial term, the agreement automatically renews for successive one month periods unless terminated by either party upon thirty day’s notice. Verizon Wireless operates the nation’s fastest, most advanced 4G network and largest, most reliable 3G network. The company serves 104 million total wireless connections, including more than 88 million retail customers. We offer Verizon’s wireless services in connection with our ePort® devices which are utilized in the traditional small ticket beverage and food vending market in the United States.
 
On September 21, 2011, the Company and Verizon entered into a Joint Marketing Addendum (the “Verizon Agreement”) which amended the three year agreement described above. Pursuant to the Verizon Agreement, the Company and Verizon would work together to help identify business opportunities for the Company’s products and services. Verizon may introduce the Company to existing or potential Verizon customers that Verizon believes are potential purchasers of the Company’s products or services, and may attend sales calls with the Company made to these customers. The Company and Verizon would collaborate on marketing and communications materials that would be used by each of them to educate and inform customers regarding their joint marketing work. Verizon has the right to list the Company’s products and services in its Data Solutions Guide for use by its sales and marketing employees and in its external website. The Company has agreed to pay to Verizon a one-time referral fee for each customer introduced to the Company by Verizon that would become a customer of the Company. The Verizon Agreement is terminable by either party upon 45 days notice after six months.

Crane Payment Solutions

In December 2010, Crane Payment Solutions (“Crane”), a business unit within the Merchandising Systems Segment of Crane Co. and the Company entered into a three-year Strategic Partnership Agreement to deliver a combined cashless vending solution to Crane customers in North America. Under the agreement, USA Technologies will become the lead provider and supplier of all card processing, wireless communications and data services for Crane’s customers in conjunction with the new Currenza® cashless bill validator card reader. In addition to the card processing capabilities of the Company, the Company will provide certain hardware solutions and grant Crane a license for designated USAT patents as a part of the relationship.

VISA

On April 1, 2009 we entered into a Contactless Terminal Support Agreement with VISA U.S.A. INC. (“VISA”), pursuant to which VISA would pay us the amount of $200 for each ePort ® that we deployed prior to December 31, 2009. The agreement covered up to a maximum of 4,000 ePorts ® . These ePorts ® would accept credit and debit cards utilizing VISA’s contactless technology as well as VISA’s magnetic stripe payment cards. In June 2009, the agreement was amended to provide funding for up to an additional 2,500 ePorts® which may be installed on vending machines owned by The Compass Group. VISA would pay us an aggregate of $800,000 if all 4,000 ePorts ® were timely deployed. Our customer (i.e., the location owner) would enter into a three-year exclusive processing agreement with us in connection with the vending machine utilizing the ePort ® . The Company deployed a total of 2,961 units, or $592,200, under this agreement during the period of July 1, 2009 through December 31, 2009.

On August 16, 2010, we entered into an Acceptance and Promotional Agreement with VISA. Pursuant to the agreement, VISA agreed, among other things, to pay to the Company up to $250,000 per year, for total payments of up to $750,000. The payments to the Company are to be used by the Company over the three year term of the agreement to support and promote the installation and deployment of at least 50,000 additional ePort®, or other payment terminals, in vending machines. If the Company does not install at least 50,000 ePorts®, or other payment terminals, over the term of the three year agreement, the Company would be required to refund a pro-rata portion of the funds. Through June 30, 2011, we have installed and made operational approximately 33,000 units under this agreement.

Compass/Foodbuy

On June 30, 2009, we entered into a Master Purchase Agreement (“MPA”) with Foodbuy, LLC (“Foodbuy”), the procurement company for Compass Group USA, Inc. (“Compass”) and other customers. As per its website, Compass is a $9.9 billion organization with locations throughout the US, Mexico, and Canada, is the leader in vending, foodservice management and support services, is the largest national vending operating company, operating 200 branches, has 18,000 locations, and is one of the leading owners and operators of vending machines in the United States. Compass is a division of UK-based Compass Group PLC.

The MPA provides, among other things, that for a period of thirty-six months, Foodbuy on behalf of Compass shall utilize USAT as the sole credit or debit card vending system hardware and related software and connect services provider for not less than seventy-five percent of the vending machines of Compass utilizing cashless payments solutions. The MPA also provides that for a period of thirty-six months, USAT shall be a preferred supplier and provider to Foodbuy and its customers, including Compass, of USAT’s products and services. The MPA provides for initial pricing for the ePort hardware and monthly service and DEX telemetry fees at USAT’s standard pricing. Foodbuy’s customers have the right under the MPA to acquire USAT’s G-8 or Edge ePort devices through USAT’s Quick Start Program. The MPA also provides for the ability of the customer to obtain DEX telemetry services from USAT in connection with vending machines utilizing the ePort devices.
 
 
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On July 1, 2009, USAT and Compass, in conjunction with the MPA described above, entered into a Quick Start Master Lease Agreement pursuant to which Compass could purchase USAT’s G-8 or Edge ePort devices utilizing USAT’s Quick Start Program. The Quick Start Program enables Compass to acquire USAT’s ePort through a 36 month non-cancellable lease. Under the Quick Start Program, Compass will pay USAT a monthly amount, per terminal, that includes the lease of the ePort hardware and activation fee. The total monthly payment due under the Quick Start Program would be deducted by USAT directly out of the gross revenues generated from the Compass vending machines. Compass would be able to utilize the Quick Start Program to acquire ePorts during the three year term of the Master Purchase Agreement referred to above.

On July 1, 2009, USAT and Compass, in conjunction with the MPA described above, also entered into a new three year ePort Connect Services Agreement pursuant to which USAT will provide Compass with all card processing, data, network, communications and financial services, and DEX telemetry data services required in connection with all Compass vending machines utilizing ePorts.

Merit/AMI Entertainment

In October of 2008, we entered into an exclusive three-year agreement for the supply of ePort ® devices and ePort Connect ® cashless services with Merit Entertainment (“Merit”). Merit is the provider of Megatouch countertop entertainment systems and selected the ePort ® software and ePort Connect ® Services to help give Megatouch players the ability to pay with their debit or credit cards. Under this agreement every newly manufactured Megatouch system will include our ePort Connect ® software. Merit has indicated to us that it currently has an installed base of over 250,000 touch screen games.
 
JUMP START PROGRAM

In December 2009, the Company commenced a program for its customers referred to as the Jump Start Program (“Jump Start”). Pursuant to the Jump Start Program, the Company would continue to own the ePort device utilized by its customer. At the time of the shipment of the ePort device, the customer is obligated to pay to the Company the standard one-time activation fee, is obligated to pay monthly service fees  in accordance with the terms of the customer's contract with the Company, and the Company receives transaction processing fees generated from the device. The Jump Start Program also includes the ePort Connect® services package for wireless connectivity, card processing, consumer services, online reporting, and over-the-air machine alerts.

Because Jump Start is designed to help vending operators and bottlers acquire the ePort cashless terminal at no upfront cost, paying only a low monthly service fee, and avoiding the need to make a major upfront capital investment, the Company anticipates that the Jump Start Program will accelerate adoption in the marketplace of its ePort technology as well as increase its license and transaction fee revenues.

When the program was commenced, the Company anticipated that the Jump Start Program would consist of at least 15,000 ePort Edge devices. In May 2010, the Company expanded the program to include the ePort G8 terminal. In July 2010, the Company expanded the program to an aggregate of 35,000 ePort terminals and the program terminated in December 2010. During the Spring of 2011, the Company reintroduced the Jump Start Program and anticipates approximately 40,000 Jump Start units to be connected during the 2012 fiscal year.
 
MANUFACTURING

The Company utilizes independent third party companies for the manufacturing of its products. The Company purchases other components of its business center (computers, printers, fax and copy machines) through various manufacturers and resellers. Our manufacturing process mainly consists of quality assurance of materials and testing of finished goods received from our contract manufacturers. We have not entered into a long-term contract with our contract manufacturers, nor have we agreed to commit to purchase certain quantities of materials or finished goods beyond those submitted under routine purchase orders, typically covering short-term forecasts.

COMPETITION

The cashless vending, remote business service and energy conservation industries are competitive markets. While the Company offers unique products and services within smaller niche markets of these industries, a number of competitors in the broader market may offer products and services within our niche market in the future. In the cashless vending market, we are not aware of any direct competitor that provides a complete end-to-end solution, offering a cashless/remote monitoring device and turnkey service, which includes card processing services. We are aware of four competitors that offer a cashless hardware device, MEI, Coin Acceptors Inc. (Coinco), Cantaloupe Systems, Inc. and InOne Technology, LLC. We are aware of four competitors that offer a remote monitoring device, MEI, Cantaloupe Systems, Inc, InOne Technology, LLC, and Crane Streamware. We are aware of one direct competitor that offers a wireless service for cashless processing, Apriva. In addition, there are 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.
 
 
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In May 2010, NAMA, an association serving the vending, coffee service and foodservice management industries, announced a cashless vending program for their members. As described by NAMA on their website, the goal of the program is to enable NAMA members to offer their customers the convenience of cashless payments at a reasonable cost across small and large average transaction pricing in a variety of industry segments. They further describe the NAMA Cashless Solution program as a networked end-to-end solution that is hardware neutral, works with qualified communication suppliers and card associations for payment reconciliation and account management. In addition, NAMA states they are working to provide members with a broad range of preferential financial services. This program includes one or more of the competitors to the Company referred to in the preceding paragraph.

In the cashless laundry market, we are aware of one direct competitor, Mac-Gray Corporation. In the automated business center market, we are aware of three direct competitors. In the energy management market, we are aware of one direct competitor for our Energy Miser products in the United States of America; and, we are aware of one competitor for energy management products in Europe. The businesses which have developed unattended, credit card activated control systems currently in use in non-vending machine applications ( e.g. , gasoline dispensing, public telephones, prepaid telephone cards and ticket dispensing machines), might be capable of developing products or utilizing their existing products in direct competition with our ePort ® control systems targeted to the vending industry. The Company is also aware of several businesses that make available use of the Internet and use of personal computers to hotel guests in their hotel rooms. Such services might compete with the Company’s Business Express, and the locations may not order the Business Express, or if ordered, the hotel guest may not use it. Finally, the production of highly efficient vending machines and glass front coolers or alternative energy conservation products may reduce or replace the need for our energy management products.

The Company’s key competitive factors include our unique products, our integrated services, product performance and price. In addition, it includes our ability to deliver these as a one-stop-shop, which we believe makes our technology easier to adopt and deploy for the operator. Our competitors are well established, have substantially greater resources than the Company and have established reputations for success in the development, sale and service of high quality products. Any increase in competition in the future may result in reduced sales and/or lower percentages of gross revenues being retained by the Company, or otherwise may reduce potential profits or result in a loss of some or all of its customer base.
 
CUSTOMER CONCENTRATIONS

Financial instruments that subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts and finance receivables. The Company maintains cash and cash equivalents with various financial institutions. Approximately 22% and 52% of the Company’s accounts and finance receivables at June 30, 2011 and 2010, respectively, were concentrated with one and two (28% with one and 24% with another) customer(s), respectively. Approximately 48%, 52%, and 44% of the Company’s license and transaction processing revenues for the years ended June 30, 2011, 2010, and 2009, respectively, were concentrated with two (25% with one and 23% with another), two (35% with one and 17% with another), and one customer(s), respectively. There was no concentration of equipment sales revenue for the year ended June 30, 2011. For each of the years ended June 30, 2010 and 2009 approximately 11% of the Company’s equipment sales revenue was concentrated with one customer. The Company’s customers are principally located in the United States.
 
TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS

The Company received federal registration approval of the following trademarks: Blue Light Sequence®, CM2iQ®, EnergyMiser®, ePort®, ePort Connect®, ePort Edge®, Intelligent Vending®, PC Express®, Public PC®, SnackMiser®, The Office That Never Sleeps®, TransAct®, USA Technologies & Design®, USALive®, VendingMiser®, and VM2iQ®. The Company has three trademarks pending registration, Pay Dot™, Creating Value Through Innovation™ and eSuds™.

Much of the technology developed or to be developed by the Company is subject to trade secret protection. To reduce the risk of loss of trade secret protection through disclosure, the Company has entered into confidentiality agreements with its key employees. There can be no assurance that the Company will be successful in maintaining such trade secret protection, that they will be recognized as trade secrets by a court of law, or that others will not capitalize on certain aspects of the Company’s technology.

Through June 30, 2011, 73 United States patents and 8 foreign patents have been issued to the Company, and 5 United States and 7 foreign patent applications are pending.

The list of issued patents that remain in force is as follows:

 
U.S. Patent No. 6,856,820 entitled “An in-vehicle device for wirelessly connecting a vehicle to the internet and for transacting e-commerce and e-business”;

 
U.S. Patent No. 5,844,808 entitled “Apparatus and methods for monitoring and communicating with a plurality of networked vending machines”;
 
 
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U.S. Patent No. 7,690,495 entitled “Card reader assembly”;

 
U.S. Patent No. 7,076,329 entitled “Cashless vending transaction management by a Vend Assist mode of operation”;

 
U.S. Patent No. 7,464,867 entitled “Cashless vending transaction management by a Vend Assist mode of operation”;

 
U.S. Patent No. 7,131,575 C1 entitled “Cashless vending transaction management by a Vend Assist mode of operation”;

 
U.S. Patent No. 7,693,602 entitled “Cashless vending transaction management by a vend assist mode of operation”;

 
U.S. Patent No. 6,615,186 entitled “Communicating interactive digital content between vehicles and internet based data processing resources for the purpose of transacting e-commerce or conducting e-business”;

 
U.S. Patent No. 7,003,289 entitled “Communication interface device for managing wireless data transmission between a vehicle and the internet”;

 
Canadian Patent No. 2,207,603 entitled “Credit and debit card operated vending machine”;

 
U.S. Patent No. 5,637,845 entitled “Credit Card and Bank Issued Debit Card Operated System and Method for Controlling a Prepaid Card Encoding/Dispensing Machine”;

 
U.S. Patent No. 6,119,934 entitled “Credit Card and Bank Issued Debit Card Operated System and Method for Controlling a Prepaid Card Encoding/Dispensing Machine”;

 
U.S. Patent No. 6,152,365 entitled “Credit Card and Bank Issued Debit Card Operated System and Method for Controlling a Vending Machine (as Amended)”;

 
U.S. Patent No. 5,619,024 entitled “Credit Card and Bank Issued Debit Card Operated System and Method for Controlling and Monitoring Access of Computer and Copy Equipment”;

 
U.S. Patent No. D423,474 entitled “Dataport”;

 
U.S. Patent No. 6,754,641 entitled “Dynamic identification interchange method for exchanging one form of identification for another”;

 
U.S. Patent No. D428,444 entitled “Electronic Commerce Terminal Enclosure for a Vending Machine”;

 
U.S. Patent No. D437,890 entitled “Electronic Commerce Terminal Enclosure for a Vending Machine”;

 
U.S. Patent No. D441,401 entitled “Electronic Commerce Terminal Enclosure with Brackets”;

 
U.S. Patent No. D428,047 entitled “Electronic Commerce Terminal Enclosure”;

 
U.S. Patent No. 6,243,626 entitled “External power management device with current monitoring precluding shutdown during high current”;
 
 
U.S. Patent No. D415,742 entitled “Laptop Data Port Enclosure”;

 
U.S. Patent No. 7,286,907 entitled “Method and Apparatus for Conserving Power Consumed by a Refrigerated Appliance Utilizing Audio Signal Detection”;

 
U.S. Patent No. 6,021,626 entitled “Method and Apparatus for Forming, Packaging, Storing, Displaying and Selling Clothing Articles”;

 
U.S. Patent No. 6,975,926 entitled “Method and Apparatus for Power Management Control of a Compressor-Based Appliance that Reduces Electrical Power Consumption of an Appliance”;

 
U.S. Patent No. 7,200,467 entitled “Method and Apparatus for Power Management Control of a Compressor-Based Appliance that Reduces Electrical Power Consumption of an Appliance”;
 
 
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U.S. Patent No. 6,622,124 entitled “Method of transacting an electronic mail, an electronic commerce, and an electronic business transaction by an electronic commerce terminal operated on a transportation vehicle”;

 
U.S. Patent No. 6,606,605 entitled “Method to obtain customer specific data for public access electronic commerce services”;

 
U.S. Patent No. D480,948 entitled “Mounting bracket for mounting a cashless payment terminal to a vending machine”;

 
U.S. Patent No. D475,750 entitled “Paper guide for a point of sale terminal”;

 
U.S. Design Patent No. D543,588 entitled “Point of Sale Terminal Mountable on a Vending Machine’;

 
U.S. Patent No. 6,801,836 entitled “Power-conservation based on indoor/outdoor and ambient-light”;

 
European Patent No. 1419425 entitled “Power-Conservation System based on Indoor/Outdoor and Ambient-Light” (validated in Germany, Spain, France, the United Kingdom, and Italy);

 
U.S. Patent No. 5,477,476 entitled “Power conservation system for computer peripherals”;

 
U.S. Patent No. D475,414 entitled “Printer bracket for point of sale terminal”;

 
U.S. Patent No. D476,036 entitled “Printer bracket for point of sale terminal”;

 
Australian Patent No. 2001263356 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
Mexican Patent No. 234363 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
U.S. Patent No. 6,389,822 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
U.S. Patent No. 6,581,396 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
U.S. Patent No. 6,898,942 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
U.S. Patent No. 6,931,869 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
U.S. Patent No. D418,878 entitled “Sign Holder”;

 
U.S. Patent No. 7,630,939 entitled “System and method for locally authorizing cashless transactions at point of sale”;

 
U.S. Patent No. 6,056,194 entitled “System and Method for Networking and Controlling Vending Machines”;

 
U.S. Patent No. 6,321,985 entitled “System and Method for Networking and Controlling Vending Machines”;

 
U.S. Patent No. 6,505,095 entitled “System for Providing Remote Audit, Cashless Payment, and Interactive Transaction Capabilities in a Vending Machine” (Stitch);

 
Canadian Patent No. 2,409,228 entitled “Temperature controller for a refrigerated vending machine”;

 
U.S. Patent No. 6,389,337 entitled “Transacting E-commerce and Conducting E-business Related to Identifying and Procuring Automotive Service and Vehicle Replacement Parts” (Stitch);

 
U.S. Patent No. D478,577 entitled “Transceiver base unit”;

 
U.S. Patent No. 6,609,102 entitled “Universal interactive advertising and payment system for public access electronic commerce and business related products and services”;
 
 
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U.S. Patent No. 6,604,085 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,601,038 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,604,086 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,601,037 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,611,810 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,606,602 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,601,039 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,604,087 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,615,183 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,601,040 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,609,103 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,629,080 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 7,089,209 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,643,623 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,684,197 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,807,532 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,763,336 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
Canadian Patent No. 2,291,015 entitled “Universal interactive advertising and payment system for public access electronic commerce and business related products and services”;

 
U.S. Patent No. D475,751 entitled “User interface bracket for a point of sale terminal”;

 
U.S. Patent No. D476,037 entitled “User interface bracket for a point of sale terminal”;

 
U.S. Patent No. 6,895,310 entitled “Vehicle related wireless scientific instrumentation telematics”;

 
U.S. Patent No. 6,853,894 entitled “Vehicle related wireless scientific instrumentation telematics”;

 
U.S. Patent No. D477,030 entitled “Vending machine cashless payment terminal”;

 
U.S. Patent No. 7,593,897 entitled “Wireless system for communicating cashless vending transaction data and vending machine audit data to remote locations”;
 
 
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U.S. Patent No. 7,502,672 entitled “Wireless Vehicle Diagnostics Device and Method with Service and Part Determination Capabilities (as amended)”;

 
U.S. Patent No. 7,805,338 entitled “Method of constructing a digital content play list for transmission and presentation on a public access electronic terminal”;

 
U.S. Patent No. 7,856,289 entitled “Method and apparatus for conserving power consumed by a vending machine utilizing audio signal detection”; and

 
U.S. Patent No. 7,865,430 entitled “Cashless transaction payment module”.
 
The Company believes that one or more of its patents, including U.S. Patent No. 6,505,095 entitled “System for providing remote audit, cashless payment, and interactive transaction capabilities in a vending machine” and U.S. Patent No. 7.131.575 entitled “MDB Transaction String Effectuated Cashless Vending”, are important in protecting its intellectual property used in its e-Port ® control system targeted to the vending industry. The aforesaid patent expires in July 2021. 

The Company filed for reexamination of U.S. Patent No. 7,131,575 (Reexamination Control No. 90/008,437) and for reexamination of U.S. Patent No. 6,505,095 (Reexamination Control No. 90/008,448). On January 6, 2009, the U.S. Patent Office issued an Ex Parte Reexamination Certificate in connection with U.S. Patent No. 7.131.575 confirming patentability without any amendment to the claims. On August 11, 2009, the U.S. Patent Office issued an Ex Parte Reexamination Certificate in connection with U.S. Patent No. 6,505,095 which, among other things, approved amendments to certain of the prior claims and approved twelve new claims, for a total of 43 claims.
 
RESEARCH AND DEVELOPMENT

Research and development expenses, which are included in selling, general and administrative expense in the Consolidated Statements of Operations, were approximately $997,000, $1,864,000, and $2,691,000, for the years ended June 30, 2011, 2010, and 2009, respectively.
 
EMPLOYEES

On August 31, 2011, the Company had 42 full-time employees and three part-time employees.
 
 
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Item 1A. Risk Factors.

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 have experienced losses since inception. We expect to continue to incur losses for the foreseeable future as we expend substantial resources on sales, marketing, and research and development of our products. From our inception through June 30, 2011, our cumulative losses from operations are approximately $194 million. For our fiscal years ended June 30, 2011, 2010, and 2009, we have incurred net losses of $6,457,067, $11,571,495, and $13,731,818, respectively. Our revenues have not been sufficient to sustain our operations. If we continue to incur losses, the price of our common stock can be expected to fall. No assurances can be given that we will ever be profitable.

We may require additional financing to sustain our operations and without it we may not be able to continue operations.

At June 30, 2011, we had working capital of $11,546,502. We had an operating cash flow deficit of $5,171,529, $12,347,182, and $8,477,680, for the fiscal years ended June 30, 2011, 2010, and 2009, respectively. Based upon past business operations, we may not currently have sufficient financial resources to fund our operations after July 1, 2012. Therefore, we may need additional funds to continue these operations. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.

Our existence is dependent on our ability to raise capital that may not be available.

There can be no assurance that our business will prove financially profitable or generate sufficient revenues to cover our expenses. From inception, we have generated funds primarily through the sale of securities. Although we believe that we have adequate existing resources to provide for our funding requirements through at least July 1, 2012, there can be no assurances that we will be able to continue to generate sufficient funds thereafter. We expect to raise funds in the future through sales of our debt or equity securities until such time, if ever, as we are able to operate profitably. Subsequent to July 1, 2012, our inability to obtain needed funding can be expected to have a material adverse effect on our operations and our ability to achieve profitability. If we fail to generate increased revenues or fail to sell additional securities, you may lose all or a substantial portion of your investment.

Our products may fail to gain widespread market acceptance. As a result, we may not generate sufficient revenues or profit margins to become successful.

There can be no assurances that demand for our products will be sufficient to enable us to generate sufficient revenue or become profitable. Likewise, no assurance can be given that we will be able to achieve a sufficient number of ePorts ® connected to our network or sell equipment utilizing our network or our energy management products to enough locations to achieve significant revenues or that our operations can be conducted profitably. Alternatively, the locations which would utilize the network may not be successful locations and our revenues would be adversely affected. We may in the future 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.

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, pay dividends and make certain investments;
 
 
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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.

Current conditions in the global financial markets and the distressed economy may materially adversely affect our business, results of operations and ability to raise capital.

Our business and results of operations may be materially adversely affected by the continued adverse conditions in the financial markets and the economy generally. Declining business and consumer confidence and the risks of increased or continued unemployment, have precipitated an economic slowdown and ongoing recession. These events and the continuing market upheavals may have an adverse effect on us, our suppliers and our customers. The demand for our products could be adversely affected in an economic downturn and our revenues may decline under such circumstances.

We rely on the equity markets for funding our business by issuing equity securities. We may find it difficult, or we may not be able, to access the equity markets, or we may experience higher funding costs as a result of the current adverse market conditions. Continued instability in these markets may limit our ability to access the capital we may require to fund and grow our business.

The loss of one or more of our key customers could significantly reduce our revenues and profits.

We have derived, and believe we may continue to derive, a significant portion of our revenues from a limited number of large customers. Approximately 22% and 52% of the Company’s accounts and finance receivables at June 30, 2011 and 2010, respectively, were concentrated with one and two (28% with one customer and 24% with another customer) customer(s), respectively. Approximately 48%, 52%, and 44% of the Company’s license and transaction processing revenues for the years ended June 30, 2011, 2010, and 2009, respectively, were concentrated with two (25% with one and 23% with another), two (35% with one and 17% with another), and one customer(s), respectively. There was no concentration of equipment sales revenue for the year ended June 30, 2011. For each of the years ended June 30, 2010 and 2009 approximately 11% of the Company’s equipment sales revenue was concentrated with one customer. The Company’s customers are principally located in the United States.

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. If any of our large customers significantly reduce or delay purchases from us or if we are required to sell products to them at reduced prices or unfavorable terms, our results of operations and revenue could be materially adversely affected.

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

We are dependent on key management personnel, particularly the Chairman and Chief Executive Officer, George R. Jensen, Jr. The loss of services of Mr. Jensen or other executive officers would dramatically affect our business prospects. Certain of our 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. Jensen that expires on June 30, 2014. We have also entered into employment agreements with other executive officers, each of which contain confidentiality and non-compete agreements. We have obtained a key man life insurance policy in the amount of $1,000,000 on Mr. Jensen and a key man life insurance policy in the amount of $1,000,000 on our President, Stephen P. Herbert. We do not have and do not intend to obtain key man life insurance coverage on any of our other executive officers. As a result, we are exposed to the costs associated with the death of these key employees.

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.
 
 
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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, 2011, we had 12 pending United States and foreign patent applications, and intend to file applications for additional patents covering our future products, 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 81 patents as of June 30, 2011. 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 the products are found to have infringed any patent, there can be no assurance that we will be able to obtain licenses to continue to manufacture and license such product or that we will not have to pay damages 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, 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 rights in connection with any such litigation.

Competition from others could prevent the Company from increasing revenue and achieving profitability.

Competition from other companies, including those that are well established and have substantially greater resources may reduce our profitability or reduce our business opportunities. Many of our competitors have established reputations for success in the development, sale and service of high quality products. We face competition from the following groups:

 
companies offering automated, credit card activated control systems in connection with facsimile machines, personal computers, debit card purchase/revalue stations, vending machines, and use of the Internet and e-mail which directly compete with our products;

 
companies which have developed unattended, credit card activated control systems currently used in connection with public telephones, prepaid telephone cards, gasoline dispensing machines, or vending machines and are capable of developing control systems in direct competition with the Company;

 
businesses which provide access to the Internet and personal computers to hotel guests. Although these services are not credit card activated, such services would compete with the Company’s Business Express®; and

 
two direct competitors, Elstat Electronics Ltd. and Automatic Retailing Ltd., in the energy management industry.

In addition, it is also possible that a company not currently engaged in any of the businesses described above could develop services and products that compete with our services and products. 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. As stated above under “Business-Competition”, The National Automatic Merchandising Association (‘NAMA”), an association serving the vending, coffee service, and food service management industries has announced a cashless vending program for their members which offers the products and services of one or more of the Company’s current competitors.
 
 
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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 and with various suppliers to manufacture our Energy Miser ® 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 DBSi 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 30 to 60 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 30 or 60-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 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 wirelessly 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 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.

Our products may contain defects that may be difficult or even impossible to correct, which could result in lost sales, additional costs and customer erosion.

We offer technically complex products which, when first introduced or released in new versions, may contain software or hardware defects that are difficult to detect and correct. The existence of defects and delays in correcting them could result in negative consequences, including the following:

 
delays in shipping products;

 
cancellation of orders;
 
 
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additional warranty expense;

 
delays in the collection of receivables;

 
product returns;

 
the loss of market acceptance of our products;

 
diversion of research and development resources from new product development; and

 
inventory write-downs.

Even though we test all of our products, defects may continue to be identified after products are shipped. In past periods, we have experienced various issues in connection with product launches, including the need to rework certain products and stabilize product designs. Correcting defects can be a time-consuming and difficult task. Software errors may take several months to correct, and hardware errors may take even longer.

We may accumulate excess or obsolete inventory that could result in unanticipated price reductions and write downs and adversely affect our financial results.

Managing the proper inventory levels for components and finished products is challenging. In formulating our product offerings, we have focused our efforts on providing products with greater capability and functionality, which requires us to develop and incorporate the most current technologies in our products. This approach tends to increase the risk of obsolescence for products and components we hold in inventory and may compound the difficulties posed by other factors that affect our inventory levels, including the following:

 
the need to maintain significant inventory of components that are in limited supply;

 
buying components in bulk for the best pricing;

 
responding to the unpredictable demand for products;

 
responding to customer requests for short lead-time delivery schedules;

 
failure of customers to take delivery of ordered products; and

 
product returns.

If we accumulate excess or obsolete inventory, price reductions and inventory write-downs may result, which could adversely affect our results of operation and financial condition.

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 by competitors 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, continue to sell existing products and prevent customers from returning 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. Our products may be vulnerable to breaches in security due to defects in the security mechanisms, the operating system and applications or the hardware platform. Security vulnerabilities could jeopardize the security of information transmitted or stored using our products. In general, liability associated with security breaches of a certified electronic payment system belongs to the institution that acquires the financial transaction. In addition, we have not experienced any material security breaches affecting our business. However, 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. Adverse publicity raising concerns about the safety or privacy of electronic transactions, or widely reported breaches of our or another provider’s security, have the potential to undermine consumer confidence in the technology and could have a materially adverse effect on our business.
 
 
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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 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.

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.

We rely on other card payment processors and service providers; 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 Elavon, Inc. (“Elavon”), 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. Many of these organizations and service providers are our competitors and our agreements are subject to termination by them.

The termination by our service 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 or revocation 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. The payment processing industry may become subject to regulation as a result of recent data security breaches that have exposed consumer data to potential fraud. 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 was recently enacted and regulates the basis upon which interchange rates for debit card transactions are made to ensure that interchange rates are “reasonable and proportionate to costs.” As discussed elsewhere in this Form 10-K, pursuant to regulations that were recently promulgated by the Federal Reserve, our credit and debit card processor has notified us that effective October 1, 2011, Visa and MasterCard are significantly increasing their interchange fees for small ticket debit card transactions. During the 2011 fiscal year, debit card transactions represented 82% of the number of transactions handled by our network. At the present time, the impact on our business is still uncertain. We anticipate that these significant increases would be passed on to our customers or we would cease to accept debit cards in our ePort and other devices. In either such event, there is the possibility that our customers would cancel their agreements with us resulting in a significant reduction in our licensing and transaction fee revenues. In addition, there is the possibility that customers would not order ePorts or other devices in the future at the levels currently anticipated by us.
 
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 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.
 
 
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Visa and MasterCard have indicated that, effective October 1, 2011, their interchange fees for small ticket category transactions paid for through debit cards issued by regulated banks would increase from 1.55% of a transaction plus 4 cents, to 0.5% of a transaction plus 22 cents, which represents an increase of approximately 247% based on a transaction of $1.67, which was the average transaction experienced by the Company during fiscal year 2011. During the fiscal year ended June 30, 2011, approximately 82% of the transactions handled by our network consisted of small ticket debit card transactions. If we are not able to pass along such interchange fee increase to our customers or take steps to recover these increased fees, our gross profit from license and transaction fee revenues and our financial performance would be materially adversely affected.
 
Risks Related 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.

In addition, 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 August 31, 2011, the unpaid and cumulative dividends on the series A convertible preferred stock are $10,599,646. Each share of series A convertible preferred stock is convertible into 1/100th of a share of common stock at the option of the holder. 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 years ended June 30, 2011, a total of 1,500 shares of our series A convertible preferred stock and $33,000 worth of cumulative preferred dividends were converted into 15 and 33 shares of common stock, respectively.

We may issue additional shares of our common stock, which could depress the market price of our common stock and dilute your ownership.

As of August 31, 2011, we had issued and outstanding options to purchase 90,666 shares of our common stock and warrants to purchase 15,562,649 shares of our common stock. The shares underlying none of these options, and 14,595,432 of these warrants have been registered and may be freely sold. From inception, we have financed our business primarily through the sale of our common stock. Market sales of large amounts of our common stock, or the potential for those sales even if they do not actually occur, may have the effect of depressing the market price of our common stock. In addition, if our future financing needs require us to issue additional shares of common stock or securities convertible into common stock, the supply of common stock available for resale could be increased which could stimulate trading activity and cause the market price of our common stock to drop, even if our business is doing well. Furthermore, the issuance of any additional shares of our common stock including those pursuant to the exercise of warrants by the holders thereof, or securities convertible into our common stock could be substantially dilutive to holders of our common stock if they do not invest in future offerings.

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:

 
quarterly 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 being sold pursuant to Rule 144 or upon exercise of warrants;

 
regulatory matters;
 
 
26

 
 
 
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, and subsequent sale of common stock by the holders of warrants and options;

 
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.

The substantial market overhang of our shares will tend to depress the market price of our shares.

The substantial number of our shares currently eligible for sale in the open market will tend to depress the market price of our shares. As of August 31, 2011, these shares consisted of the following:

 
32,285,690 shares of common stock;

 
442,968 shares of series A convertible preferred stock;

 
10,600 shares issuable upon conversion of the accrued and unpaid dividends on the series A convertible preferred stock;

 
15,562,649 shares underlying common stock warrants;

 
190,082 shares issuable under our 2010 Stock Incentive Plan; and

 
300,000 shares issuable under our 2011 Stock Incentive Plan.

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 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.
 
 
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Item 2. Properties.

The Company conducts its operations from various facilities under operating leases. The Company leases 17,249 square feet of space located in Malvern, Pennsylvania for its principal executive office and used for general administrative functions, sales activities, and product development. The lease term expires on April 30, 2016. As of June 30, 2011, the Company’s rent payment for this facility is $29,000 per month.

The Company also leases 13,377 square feet of space, located in Malvern, Pennsylvania for its product warehousing, shipping and customer support. The lease term expires December 31, 2011. As of June 30, 2011, the Company’s rent payment for this facility is $14,500 per month with escalating rental payments through the remainder of the lease.
 
Item 3. Legal Proceedings.

The Company is not a party to any legal proceedings.
 
 
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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The common stock of the Company trades on The NASDAQ Global Market under the symbol USAT. The high and low bid prices on The NASDAQ Global Market for the common stock were as follows:
 
Year ended June 30, 2011
 
High
   
Low
 
First Quarter (through September 30, 2010)
    1.50       0.46  
Second Quarter (through December 31, 2010)
    1.60       0.97  
Third Quarter (through March 31, 2011)
    2.75       1.04  
Fourth Quarter (through June 30, 2011)
    3.74       1.93  
                 
Year ended June 30, 2010
 
High
   
Low
 
First Quarter (through September 30, 2009)
    3.01       1.35  
Second Quarter (through December 31, 2009)
    1.82       1.50  
Third Quarter (through March 31, 2010)
    1.77       1.04  
Fourth Quarter (through June 30, 2010)
    1.29       0.48  
 
On August 31, 2011, there were 632 record holders of the Common Stock and 364 record holders of the Preferred Stock.

The holders of the Common Stock are entitled to receive such dividends as the Board of Directors of the Company may from time to time declare out of funds legally available for payment of dividends. Through the date hereof, no cash dividends have been declared on the Company’s Common Stock or Preferred Stock. No dividend may be paid on the Common Stock until all accumulated and unpaid dividends on the Preferred Stock have been paid. As of August 31, 2011, such accumulated unpaid dividends amounted to $10,599,646.

As of June 30, 2011, equity securities authorized for issuance by the Company with respect to compensation plans were as follows:

     
Number of
   
Weighted
   
Number of
 
     
Securities to be
   
average exercise
   
securities remaining
 
     
issued upon
   
price of
   
available for future
 
     
exercises of
   
outstanding
   
issuance (excluding
 
     
outstanding options
   
options and
   
securities reflected
 
     
and warrants
   
warrants
   
in column(a)
 
Plan category
       
(a)
   
(b)
      
(c)
 
Equity compensation plans approved by security holders
      -       -       490,082  (3)
                           
Equity compensation plans not approved by security holders
      90,666   (1)       7.53       140,000  (2)
                           
Total
      90,666       7.53       630,082  
 
1) Represents stock options outstanding as of June 30, 2011 for the purchase of shares of Common Stock of the Company expiring at various times from March 2012 through June 2013. All such options were granted to then current employees and directors of the Company. Exercise prices for all the options outstanding were at prices that were either equal to or greater than the market price of the Company’s Common Stock on the dates the options were granted. Shareholder approval of these options was not required because the options were granted prior to the Company’s shares being listed on The NASDAQ Stock Market LLC.

2) Represents shares of Common Stock issuable to the Company’s Chief Executive Officer under the terms of his employment agreement. Shareholder approval of the foregoing was not required because the employment agreement was entered into by the Company prior to the Company’s shares being listed on The NASDAQ Stock Market LLC.

3) Represents 190,082 shares of Common Stock issuable under the Company’s 2010 Stock Incentive Plan as approved by shareholders on June 15, 2010 and 300,000 shares of Common Stock issuable under the Company’s 2011 Stock Incentive Plan as approved by shareholders on June 13, 2011 for use in compensating employees, officers and directors. The shares either have been, or will be registered with the Securities and Exchange Commission as an employee benefit plan under Form S-8.
 
 
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As of August 31, 2011, shares of Common Stock reserved for future issuance were as follows:
 
-   90,666 shares issuable upon the exercise of stock options at exercise prices ranging from $7.50 to $8.00 per share;
   
 -   15,562,649 shares issuable upon the exercise of common stock warrants at exercise prices ranging from $1.13 to $7.70 per share; 11,298,649 of which were exercisable as of August 31, 2011 at prices ranging from $1.13 to $7.70 per share; and 4,264,000 will be exercisable beginning on September 18, 2011 at $2.6058 per share;
   
 -   15,030 shares issuable upon the conversion of outstanding Preferred Stock and cumulative Preferred Stock dividends;
   
 -   190,082 shares issuable under the 2010 Stock Incentive Plan;
   
 -   300,000 shares issuable under the 2011 Stock Incentive Plan; and
   
-   140,000 shares issuable to Mr. Jensen under his employment agreement upon the occurrence of a USA Transaction.
 
PERFORMANCE GRAPH

The following graph shows a comparison of the 5-year cumulative total shareholder return for our common stock with The NASDAQ Composite Index and the S&P 500 Information Technology Index for small cap companies in the United States. The graph assumes a $100 investment on June 30, 2006 in our common stock and in the NASDAQ Composite Index and the S&P 500 Information Technology Index, including reinvestment of dividends.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN

Among USA Technologies, Inc., The NASDAQ Composite Index and The S&P 500 Information Technology Index

(LINE GRAPH)
 
Total Return For:
 
Jun-06
   
Jun-07
   
Jun-08
   
Jun-09
   
Jun-10
   
Jun-11
 
USA Technologies, Inc.
  $ 100     $ 137     $ 77     $ 37     $ 6     $ 29  
NASDAQ Composite
    100       120       106       85       98       126  
S&P 500 Information Technology Index
    100       124       115       92       105       129  
 
The information in the performance graph is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such a filing. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
 
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The following selected financial data for the five years ended June 30, 2011 are derived from the audited consolidated financial statements of USA Technologies, Inc. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.
 
   
Year ended June 30
       
   
2011
   
2010
   
2009
   
2008
   
2007
   
2006
 
OPERATIONS DATA
                                   
                                     
Revenues
  $ 22,868,789     $ 15,771,106     $ 12,020,123     $ 16,103,546     $ 9,158,012     $ 6,414,803  
                                                 
Net loss
  $ (6,457,067 )   $ (11,571,495 )   $ (13,731,818 )   $ (16,417,893 )   $ (17,782,458 )   $ (14,847,076 )
                                                 
Cumulative preferred dividends
    (665,577 )     (735,139 )     (772,997 )     (780,588 )     (781,451 )     (783,289 )
Loss applicable to common shares
  $ (7,122,644 )   $ (12,306,634 )   $ (14,504,815 )   $ (17,198,481 )   $ (18,563,909 )   $ (15,630,365 )
                                                 
Loss per common share (basic and diluted)
  $ (0.26 )   $ (0.55 )   $ (0.95 )   $ (1.21 )   $ (2.13 )   $ (3.15 )
                                                 
Cash dividends per common share
    -       -       -       -       -       -  
                                                 
BALANCE SHEET DATA
                                               
Total assets
  $ 36,004,005     $ 29,848,424     $ 25,980,378     $ 40,055,651     $ 34,491,497     $ 23,419,466  
Long-term debt
  $ 253,061     $ 596,155     $ 820,059     $ 967,518     $ 1,029,745     $ 7,780,853  
Shareholders’ equity
  $ 26,125,531     $ 22,812,172     $ 19,972,272     $ 32,576,549     $ 28,084,206     $ 11,177,064  

 
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USA Technologies, Inc. provides wireless networking, cashless transactions, asset monitoring and energy management products and services. The Company markets and sells its products and services principally to the vending, hospitality, retail and laundry industries. Our technology, ePort ® and ePort SDK™, can be installed and/or embedded into everyday devices such as vending machines, kiosks and copiers, as well as our eSuds™ technology for washer and dryers. Our associated network service, ePort Connect ® , provides wireless connectivity that facilitates cashless transaction processing and remote monitoring of assets, through the collection of financial/sales and machine diagnostic data, which is made accessible to our customers via our USALive ® website. In addition, the Company provides energy management products, such as its VendingMiser ® and CoolerMiser™, which reduce energy consumption in vending machines and coolers.

The Company generates revenue in multiple ways. The Company generates revenue through the sale or rental of equipment and/or through the licensing of its technology. In addition, we generate recurring revenues through our associated services. The Company charges a monthly network service fee for each device that is connected to the Company’s network. In addition, we charge a transaction processing fee for cashless transactions we process. Since our energy management products are a stand-alone, non-networked device, we only generate revenue through the sale of equipment.
 
CRITICAL ACCOUNTING POLICIES

GENERAL

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe the policies and estimates related to revenue recognition, software development costs, impairment of long-lived assets, goodwill and intangible assets, and investments represent our critical accounting policies and estimates. Future results may differ from our estimates under different assumptions or conditions.

REVENUE RECOGNITION

Revenue from the sale of equipment is recognized on the terms of freight-on-board shipping point, or upon installation and acceptance of the equipment if installation services are purchased for the related equipment. Activation fee revenue is recognized when the Company’s cashless payment device is initially activated for use on the Company network. Transaction processing revenue is recognized upon the usage of the Company’s cashless payment and control network. License fees for access to the Company’s 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. The Company estimates an allowance for product returns at the date of sale.

IMPAIRMENT OF LONG LIVED ASSETS

In accordance with the Financial Accounting Standards Board Accounting Standards Codification ® ("ASC") Topic 360 “Impairment or Disposal of Long-lived Assets”, the Company reviews its 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, 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. The Company accounts 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. The Company tests goodwill for impairment using a two-step process. The first step screens for potential impairment, while the second step measures the amount of impairment. The Company uses a discounted cash flow analysis to complete the first step in this process. We also give consideration to our market capitalization. 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. The Company has selected April 1 as its annual test date. The Company has concluded there has been no impairment of goodwill as a result of its testing on April 1, 2011, April 1, 2010 and April 1, 2009.
 
 
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The Company trademarks with an indefinite economic life are not being amortized. The trademarks, not subject to amortization, are related to the miser asset group and consist of the following trademarks: 1) VendingMiser, 2) CoolerMiser, 3) PlugMiser and 4) SnackMiser. The Company tests 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. The Company uses a discounted cash flow 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. The Company has selected April 1 as its annual test date for its indefinite-lived intangible assets. The Company has concluded there was an impairment of its indefinite-lived trademarks as a result of its testing and has recorded a $581,900 impairment expense in fourth quarter of the fiscal year ended June 30, 2011 (see Note 5 to the Consolidated Financial Statements). There was no impairment expense recorded during fiscal years ended June 30, 2010 or 2009.

Patents and trademarks, 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. The Company reviews intangibles, subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset is considered to be impaired when the sum of the undiscounted future net cash flows resulting from the use of the asset and its eventual disposition is less than its carrying amount. The amount of the impairment loss, if any, is measured as the difference between the net book value of the asset and its estimated fair value. Other than described above, as of June 30, 2011 and 2010, the Company has concluded there has been no impairment of its other patents or trademarks that are subject to amortization.
 
 
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RESULTS OF OPERATIONS
 
We were recently notified by Elavon, our United States credit and debit card processor, that effective October 1, 2011, Visa and MasterCard will significantly raise their interchange fees for small ticket category transactions paid for through debit cards issued by regulated banks as defined under the “Durbin Amendment” to the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. If the Company continues to accept debit cards, then pursuant to our contract with Elavon, we are obligated to pay to Elavon the increases in these interchange rates. The interchange rate would increase from 1.55% of a transaction plus 4 cents, to 0.5% of a transaction plus 22 cents, which represents an increase of approximately 247% based on a transaction of $1.67, which was the average transaction experienced by the Company during fiscal year 2011. During the fiscal year ended June 30, 2011, approximately 82% of the transactions handled by our network consisted of small ticket debit card transactions. Of such debit card transactions, it is estimated that 70% of those were debit transactions from regulated banks. Therefore, we anticipate that approximately 57% of all our transactions handled would be affected by the new rate.

The Company, and its card processor (Elavon), are currently in discussions with the card associations to analyze the impact of the rate increases, in order to attempt to negotiate a viable rate structure.
 
In addition to these discussions, the Company has formulated steps that it is contemplating to enact, as it does not intend to incur the increase in these costs. Although we have not taken any definitive action at this time, one of these steps includes not accepting debit cards, so long as the rates remain at the newly announced level. At the present time, we cannot predict how not accepting debit cards, or other steps we are contemplating would affect our business.

We believe that if debit cards are not accepted, the reduction in debit card volume could be replaced by credit card use due to the number of credit cards in circulation in the United States. The number of credit cards and debit cards in circulation at the end of the 2010 calendar year in the United States was approximately 489 million and 520 million, respectively, according to www.CREDITCARDS.com. However, we cannot estimate at this time, if or to what extent the reduction in debit card volume would be replaced by credit cards.

If the amount of cashless volume handled by the Company decreases as a result of the steps taken by the Company, our license and transaction revenue would decline by an amount equal to the transaction processing rate the Company charges our customer per cashless transaction. In addition, the rate of future connections, and/or current connections to our network could be materially adversely affected. If connections are negatively impacted, we could experience a reduction in license and transaction fee revenue as a result of fewer network services fees collected as a result of reduced connections to our network. We cannot estimate a dollar amount at this time that a reduction in cashless processing volume or connections would have on our revenues, nor the future acceptance of the Company’s cashless products and services.
 
FISCAL YEAR ENDED JUNE 30, 2011 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2010

Revenues for the year ended June 30, 2011 were $22,868,789, consisting of $6,426,304 of equipment sales and $16,442,485 of license and transactions fees, compared to $15,771,106, consisting of $6,464,006 of equipment sales and $9,307,100 of license and transaction fees for the year ended June 30, 2010. The increase in total revenue of $7,097,683, or 45%, was primarily due to an increase in license and transaction fees of $7,135,385, or 77%, from the prior period, offset by a decrease in equipment sales of $37,702 or 1%, from the prior period. The increase in license and transaction fees was primarily due to the increase in the number of ePort ® units connected to our USALive ® network, and the associated fees generated by these connected units. License and transaction fee revenues consist of service fees and transaction processing fees. We anticipate that our license and transaction fee revenues would continue to increase if the number of connections to our network would continue to increase.

As of June 30, 2011, the Company had approximately 119,000 connections to our USALive® network (including approximately 13,000 third party devices, which are predominantly MEI devices purchased by customers ) as compared to approximately 82,000 connections to our USALive® network (including approximately 7,000 third party devices,  which are predominantly MEI devices purchased by customers ) as of June 30, 2010. During the year ended June 30, 2011, the Company added approximately 37,000 connections to our network. The Jump Start program units represented slightly above 60% and 45% of connections added during the June 2011 and June 2010 fiscal years, respectively.
 
During the year ended June 30, 2011, the Company processed approximately 72 million transactions totaling approximately $120 million of transaction processing volume compared to approximately 37 million transactions totaling approximately $68 million of transaction processing volume during the year ended June 30, 2010, an increase of approximately 95% in the number of transactions and approximately 76% in dollars processed. During the fiscal year ended June 30, 2011, approximately 82% of the transactions handled by our network consisted of small ticket debit card transactions. Pursuant to its agreements with customers, the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company, which are included as licensing and transaction processing revenues in its Consolidated Statements of Operations. The Company’s transaction processing volume is not indicative of the gross profit from license and transaction fees which is based upon the monthly service fees and transaction processing fees paid  to us by our  customers. 

In addition, our customer base increased with approximately 875 new ePort customers added to its USALive® network during the year ended June 30, 2011 bringing the total number of such customers to approximately 1,925 as of June 30, 2011. The Company added approximately 300 new ePort customers in the year ended June 30, 2010. By comparison, the Company had approximately 1,050 ePort customers as of June 30, 2010, representing an 83% increase during the past fiscal year. We count a customer as a new ePort customer upon shipment of the first ePort unit to the customer. When a reseller sells our ePort, we count a customer as a new ePort customer upon the signing of the applicable services agreement with the customer.

The $37,702 decrease in equipment sales was a result of an increase of approximately $365,000 related to Energy Miser products offset by a net decrease of approximately $157,000 in sales of ePort® products and fees and a decrease of approximately $246,000 in sales of the Business Center and eSuds® product lines combined. The net decrease in ePort® related sales revenue of $157,000 is attributable to reduced hardware sales of approximately $683,000, offset by increases of approximately $526,000 in revenue associated with other aspects of our ePort business described below. The decrease in hardware sale revenue is due mainly to a significant portion of the ePort® units shipped during the year ended June 30, 2011were part of the Jump Start Program, for which the Company records a one-time activation fee, but does not record an equipment (hardware) sale. The Jump Start Program began in December 2009, therefore most ePort® units shipped during the year ended June 30, 2010 were sold to our customers and an equipment (hardware) sale was recorded. Pursuant to the Jump Start Program, the Company is entitled to receive a one-time activation fee upon shipment of the device, a monthly service fee, generally commencing the month after shipment, and transactional processing fees due in connection with the cashless activity generated by the device. The decrease in hardware sales was offset by increases of (1) approximately $228,000 in activation related fees related to Jump Start Program units, (2) $225,000 of Visa support funding for installation and making operational Visa accepting ePorts, and (3) approximately $73,000 of revenue recognized under our May 2008 agreement with a customer.
 
The Company entered into an Acceptance and Promotional Agreement with Visa USA, Inc. on August 16, 2010. Under the first program year of the agreement, the Company is entitled to receive up to $225,000 to be used to support the installation and making operational of up to 9,000 terminals, which accept the Visa brand, by no later than December 31, 2010. During the year ended June 30, 2011, the Company recorded $225,000 of revenue related to the support funding for installation and making operational of Visa accepting terminals. As required by the Visa agreement, the Company supported the installation and made operational at least 9,000 terminals by December 31, 2010.
 
 
34

 
 
Cost of sales consisted of equipment costs of $3,468,993 and $4,049,433 and network and transaction services related costs of $11,651,138 and $6,861,642 for the year ended June 30, 2011 and 2010, respectively. The increase in total cost of sales of $4,209,056 over the prior fiscal year was due to a decrease in equipment costs of $580,440, offset by an increase in network and transaction services of $4,789,496. The decrease in equipment costs was a direct result of shipping more units under the Jump Start Program. The costs associated with the Jump Start units were recorded to Property and Equipment on the Consolidated Balance Sheets. The Jump Start Program started in December 2009. The increase in network and transaction services costs was directly related to increases in units connected to the network and increases in processing volume, offset by decreases in third party supplier costs due to an amendment to a contract which occurred in the quarter ended March 31, 2010.

Gross profit (“GP”) for the year ended June 30, 2011 was $7,748,658 compared to gross profit of $4,860,031 for the previous fiscal year, an increase of $2,888,627, of which $542,738 is attributable to equipment sales and $2,345,889 is attributable to license and transaction fees. The increase in GP from equipment sales is predominately due to the increase in activation fees on Jump Start connections as compared to the prior fiscal year as well as the Visa support funding recorded during the year ended June 30, 2011. The increase in GP dollars from license and transaction fees was generated by additional devices connected to our network and a decrease in third party supplier costs related to the contract amendment referred to above. GP increased overall from 31% to 34%, equipment sales GP increased from 37% to 46% due mainly to (1) approximately $228,000 increase in activation related fees related to Jump Start Program units added during the fiscal year 2011 compared to the Jump Start Program units added during the year ended June 30, 2010, (2) $225,000 of Visa support funding for installation and making operational Visa accepting ePorts during the year ended June 30, 2011 and $0 during the year ended June 30, 2010, and (3) approximately $73,000 of revenue recognized under our May 2008 agreement with a customer during the year ended June 30, 2011, and license and transaction fees GP increased from 26% to 29% due mainly to the decrease in third party supplier costs related to the contract amendment referred to above.

Selling, general and administrative expenses (“SG&A”) of $11,430,610 for the year ended June 30, 2011, decreased by $3,455,075 or 23%, from the prior fiscal year, due to an approximate $2,300,000 decrease as a result of the Company’s expense reduction efforts and an approximate $1,156,000 decrease in proxy contest, litigation and settlement expenses. The Company’s expense reduction of $2,300,000 consisted of decreases in consulting and other professional services of approximately $1,511,000, compensation expenses of approximately $581,000, facility expenses of approximately $128,000, product development material costs of approximately $127,000, offset by net increases of approximately $47,000.

The consulting and other professional services decrease of approximately $1,511,000 was primarily due to $522,000 of reductions in costs of information technology, as well as reductions in costs of research and development of  approximately $496,000, legal costs of approximately $220,000, accounting charges of approximately $116,000 and expenses for other services of approximately $156,000, net. The compensation expense net decrease of approximately $581,000 was due to a decrease of approximately $664,000 in salaries, severances and commissions, as well as a decrease of approximately $143,000 in benefit costs, offset by an increase of approximately $226,000 related to  non-cash compensation expenses.

During the fiscal year ended June 30, 2011, the Company recorded an impairment charge of $581,900 on an intangible asset. The intangible asset impaired is related to the Miser energy products and consists of the trademarks: 1) VendingMiser, 2) CoolerMiser, 3) PlugMiser and 4) SnackMiser. This asset is unrelated to the Company’s core operations related to the ePort wireless, cashless products. The Company believes the impairment of this non-core asset, and the factors surrounding its impairment do not in any way effect the ongoing operations of the Company.

The year ended June 30, 2011 resulted in a net loss of $6,457,067 (including approximately $4.6 million of non-cash charges) compared to a net loss of $11,571,495 (including approximately $2 million of non-cash charges) for the year ended June 30, 2010, an improvement of $5,114,428, or 44%. Net loss for the year ended June 30, 2011 was the lowest net loss of any fiscal year since our shares became listed on The NASDAQ Stock Market in March 2007. For the year ended June 30, 2011, the loss per common share was $.26 as compared to a loss per common share of $.55 for the prior fiscal year.

 
35

 

FISCAL YEAR ENDED JUNE 30, 2010 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2009

Total revenues for the year ended June 30, 2010 were $15,771,106, consisting of $6,464,006 of equipment sales and $9,307,100 of license and transaction fees, compared to $12,020,123, consisting of $6,158,017 of equipment sales and $5,862,106 of license and transaction fees for the year ended June 30, 2009. The increase in total revenue of $3,750,983, or 31%, was primarily due to an increase in license and transaction fees of $3,444,994, or 59% from the prior period, and an increase in equipment sales of $305,989. The increase in license and transaction fees was primarily due to the increase in the number of ePort ® units connected to our USALive ® network as well as increased revenue on those connected units. As of June 30, 2010, the Company had approximately 82,000 devices connected to our USALive® network generating license fee revenue as compared to approximately 52,000 devices connected to our USALive network as of June 30, 2009. During the year ended June 30, 2010, the Company processed approximately 36.9 million transactions totaling approximately $67.6 million compared to approximately 22.4 million transactions totaling over $47.1 million during the year ended June 30, 2009, an increase of approximately 65% in transaction volume and approximately 44% in dollars processed.  During the fiscal year ended June 30, 2010, approximately 80% of the transactions handled by our network consisted of small ticket debit card transactions. Pursuant to its agreements with customers, the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company, which are included as licensing and transaction processing revenues in its Consolidated Statements of Operations. The Company’s transaction processing volume is not indicative of the GP from license and transaction fees which is based upon the monthly service fees and transaction processing fees paid  to us by our  customers. 

The $305,989 increase in equipment sales was derived from increases in sales of ePort ® and Energy Miser products of $488,545 and $234,888, respectively, offset by decreases in business center and other equipment sales of $359,339 and $58,105, respectively.

Cost of sales for the 2010 fiscal year consisted of equipment costs of $4,049,433 and network and transaction services related costs of $6,861,642. The increase in total cost of sales of $1,740,469 or 19% over the prior fiscal year was due to increases in network and transaction services of $2,181,555 offset by a decrease in equipment costs of $441,086. The increase in network and transaction services costs was directly related to increases in units connected to the network, processing volume, as well as increases in costs from third party transaction suppliers for the first six months of the 2010 fiscal year. The decrease in equipment costs was due to a decrease of approximately $331,000 in equipment costs related to lower equipment sales volume, and a decrease of approximately $110,000 related to our estimate for product warranty liabilities.

GP for the year ended June 30, 2010 was $4,860,031 compared to GP of $2,849,517 for the previous fiscal year, an increase of $2,010,514, of which $747,075 is attributable to equipment sales and $1,263,439 from license and transaction fees. The increase in equipment sales GP of approximately $750,000 was a result of an approximate $640,000 increase in GP on higher equipment sales and approximately $110,000 related to a reduction in product warranty liabilities. The approximate $1.26 million increase in GP related to license and transaction fee revenue was generated by additional devices connected to our network, offset by increased transaction supplier charges incurred during the first six months of the 2010 fiscal year. The reduction in supplier costs associated with a recently negotiated amendment to a supplier contract took effect in December 2009. Therefore, the full impact of the new negotiated agreement was not realized until the second half of the 2010 fiscal year. Percentage based total GP  increased overall from 24% to 31%, equipment sales GP increased from 27% to 37%, and license and transaction fees GP increased from 20% to 26%. Considering the reduction for product warranty liabilities and for comparability purposes, GP would have been as follows for the year ended June 30, 2010 had the change not been made – total GP would have increased to 30%, equipment sales GP would have increased to 36%, and license and transaction fees GP would have remained at 24% as it was not affected by the reduction.

Selling, general and administrative expense of $14,885,685, decreased by $298,162 or 2%, primarily due to a decrease in compensation and benefit expenses of approximately $1,042,000 and decreases in other professional services of approximately $635,000, travel and entertainment of approximately $137,000 and product development of approximately $186,000, offset by an increase in professional services related to the proxy contest and related litigation of approximately $1,579,000 (net of insurance carrier contribution). Of the approximate $1,579,000 in proxy contest and litigation costs (net of insurance carrier contribution), approximately $710,000 (net of insurance carrier contribution) was for the legal settlement, approximately $200,000 (net of insurance carrier contribution) was for legal expenses of the Company related to the litigation, and approximately $669,000 was for proxy contest costs. Selling, general and administrative expense excluding the proxy contest and litigation costs was $13,306,685 a decrease of $1,877,162 or 12% as compared to the prior fiscal year, primarily due to cost reduction measures taken by the Company during the third quarter of fiscal 2009.

Compensation expense decreased by approximately $1,042,000 primarily due to a decrease of approximately $1,486,000 in salaries and benefits as well as an increase of $419,000 in non-cash charges related to the Long-Term Equity Incentive Program (“LTIP” or “LTIP Program”).

The year ended June 30, 2010 resulted in a net loss of $11,571,495 (including approximately $2 million of non-cash charges) compared to a net loss of $13,731,818 (including approximately $2.6 million of non-cash charges) for the year ended June 30, 2009. As of June 30, 2010, net loss for the 2010 fiscal year was the lowest fiscal year net loss since our shares became listed on The NASDAQ Stock Market in March 2007.
 
 
36

 
 
FISCAL QUARTER ENDED JUNE 30, 2011 COMPARED TO FISCAL QUARTER ENDED JUNE 30, 2010
 
Revenues for the quarter ended June 30, 2011 were $6,888,630 compared to $4,479,106 for the quarter ended June 30, 2010. This $2,409,524 or 54% increase was primarily due to an increase in license and transaction fees of $2,099,046 and an increase in equipment sales of $310,478. The increase in license and transaction fees was primarily due to the increase in the number of ePort ® units connected to our USALive ® network, and the associated fees generated by these connected units. License and transaction fee revenues consist of service fees and transaction processing fees. We anticipate that our license and transaction fee revenues will continue to increase as the number of connections to our network continues to increase.

As of June 30, 2011, the Company had approximately 119,000 connections to our USALive® network (including approximately 13,000 third party devices, which are predominantly MEI devices purchased by customers ) as compared to approximately 82,000 connections to our USALive® network (including approximately 7,000 third party devices, which are predominantly MEI devices purchased by customers ) as of June 30, 2010. During the quarter ended June 30, 2011, the Company added approximately 7,000 connections to our network.
 
During the quarter ended June 30, 2011, the Company processed approximately 22.5 million transactions totaling approximately $37.4 million of transaction processing volume compared to approximately 11.7 million transactions totaling approximately $20.8 million of transaction processing volume during the quarter ended June 30, 2010, an increase of approximately 92% in the number of transactions and approximately 80% in dollars processed. During the quarter ended June 30, 2011, approximately  82% of the transactions handled by our network consisted of small ticket debit card transactions. Pursuant to its agreements with customers, the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company, which are included as licensing and transaction processing revenues in its Consolidated Statements of Operations. The Company’s transaction processing volume is not indicative of the GP from license and transaction fees which is based upon the monthly service fees and transaction processing fees paid  to us by our  customers. 

In addition, our customer base increased with approximately 275 new ePort customers added to its USALive® network during the quarter ended June 30, 2011 bringing the total number of such customers to approximately 1,925 as of June 30, 2011. Last year, the Company added approximately 75 new ePort customers in the quarter ended June 30, 2010. We count a customer as a new ePort customer upon shipment of the ePort unit to the customer. When a reseller sells our ePort, we count a customer as a new ePort customer upon the signing of the applicable services agreement with the customer.
 
The $310,478 increase in equipment sales was a result of an increases of approximately $348,000 in sales of ePort ® products and approximately $131,000 in sales of Energy Miser products, offset by a decrease of approximately $169,000 in other equipment sales.
 
Cost of sales consisted of equipment costs of $1,194,168 and $920,767 and network and transaction services related costs of $3,342,526 and $2,033,420 for the quarters ended June 30, 2011 and 2010, respectively. The increase in total cost of sales of approximately $1,583,000 over the prior fiscal quarter was due to an increase in equipment costs of approximately $273,000, and an increase in network and transaction services of approximately $1,309,000. The increase in equipment costs was a result of selling more units in the quarter ended June 30, 2011 than the same quarter in the prior fiscal year. The costs associated with the JumpStart units shipped in the quarters ended June 30, 2011 and 2010 were recorded to Property and Equipment on the Consolidated Balance Sheets. The increase in network and transaction service costs was related to increases in units connected to the network and increases in processing volume.

GP for the quarter ended June 30, 2011 was $2,351,936 compared to GP of $1,524,919 for the same quarter in the previous fiscal year, an increase of $827,017, of which $789,940 is attributable to license and transaction fees and $37,077 is from equipment sales. The increase in GP related to license and transaction fee revenue was generated by additional devices connected to our network as well as an increase in the average number of transactions per unit in the quarter ended June 30, 2011. Percentage based total GP stayed the same overall, while equipment sales GP decreased from 41% to 36% and license and transaction fee GP increased from 31% to 34%.
 
Selling, general and administrative expense of $3,394,072, increased by $132,268 or 4%, primarily due to non-cash increases in bad debt expense of approximately $138,000 and increased losses on disposal of property and equipment of approximately $102,000 offset by net decreases in compensation and benefit expenses of approximately $141,000 and other net increases of approximately $33,000.

During the quarter ended June 30, 2011, the Company recorded an impairment charge of $581,900 on an intangible asset. The intangible asset impaired is related to the Miser energy products and consists of the trademarks: 1) VendingMiser, 2) CoolerMiser, 3) PlugMiser and 4) SnackMiser. This asset is unrelated to the Company’s core operations related to the ePort wireless, cashless products. The Company believes the impairment of this non-core asset, and the factors surrounding its impairment do not in any way effect the ongoing operations of the Company.

The quarter ended June 30, 2011 resulted in a net loss of $1,923,055 (including approximately $1.8 million of non-cash charges) compared to a net loss of $2,089,801 (including approximately $0.5 million of non-cash charges) for the quarter ended June 30, 2010.
 
 
37

 
 
LIQUIDITY AND CAPITAL RESOURCES

For the year ended June 30, 2011, net cash of $5,171,529 was used by operating activities, primarily due to cash used related to changes in the Company’s operating assets and liabilities of $3,265,590 and the net loss of $6,457,067 offset by non-cash charges totaling $4,551,128, representing the change in fair value of common stock warrants, vesting and issuance of common stock for employee and director compensation, bad debt expense, loss on disposal of equipment, impairment on an intangible asset and the depreciation and amortization of assets.

The $3,265,590 change in the Company’s operating assets and liabilities was primarily the result of $4,263,302 of inventory used in the Jump Start Program during the fiscal year, offset by a $1,067,631 increase in accounts payable.

During the year ended June 30, 2011, the Company used $291,390 in investing activities related to the purchase of network equipment and had $10,850,106 of net cash provided by financing activities mainly due to proceeds from stock issuances, which includes $1,390,006 from the exercise of warrants, less repayment of long-term debt.
 
The Company has incurred losses since inception. Our accumulated deficit through June 30, 2011 is composed of cumulative losses amounting to approximately $196,785,123, preferred dividends converted to common stock of approximately $2,723,000, and charges incurred for the open-market purchases of preferred stock of approximately $150,000. The Company has historically raised capital through equity offerings in order to fund operations.

In March 2011, the Company received net cash proceeds of $9,894,095 from the issuance of restricted common stock and common stock warrants (see Note 11 and Note 12 to the Consolidated Financial Statements) to accredited, institutional investors. Due largely to this cash infusion, and the $1,390,006 cash received from the exercise of warrants, the Company had $12,991,511 of cash and cash equivalents on hand, of which approximately $410,000 was cash received by the Company for transaction processing services which is payable to customers.

The proceeds from the March 2011 offering will be used primarily to support the continuation of the Company’s Jump Start Program which was reintroduced to our customers in April 2011.

During the 2012 fiscal year, the Company anticipates incurring capital expenditures of approximately $7,500,000 in connection with ePort units expected to be used in the Jump Start Program and additional capital expenditures of approximately $1,200,000 for property and equipment.

As a result of the connections added during the fiscal year 2011, recurring revenue from license and transaction fees increased from approximately $2,930,000 for the three months ended June 30, 2010 to approximately $5,029,000 for the three months ended June 30, 2011, an increase of 72%. In addition, total GP has increased from $1,525,000 for the three months ended June 30, 2010 to approximately $2,352,000 for the three months ended June 30, 2011, an increase of 54%.

Our average monthly SG&A expenses during the quarter ended June 30, 2011 were approximately $1,131,000. This included non-cash charges of approximately $106,000 for the loss on the disposal of property and equipment and approximately $293,000 of stock-based compensation, as well as cash expenses of approximately $180,000 related to legal expenses as a result of issues arising under the Settlement Agreement dated February 4, 2010 between the Company and Shareholders Advocates for Value Enhancement, which are not expected to continue in fiscal year 2012. Excluding these charges, our average monthly cash-based SG&A expenses during the quarter ended June 30, 2011 were approximately $938,000.

For fiscal year 2012, and subject to the unknown effects of the recent significant interchange fee increase by Visa and MasterCard for small ticket debit card transactions,  we expect revenues from license and transaction fees, as well as GP, to continue to increase as the Company’s connections to its network grow. Therefore, assuming our average monthly cash-based SG&A expenses incurred in the June 30, 2011 quarter continues, the Company believes its existing cash and cash equivalents as of June 30, 2011, will provide sufficient funds to meet its cash requirements, including capital for the Jump Start Program and capital expenditures, described above, and repayment of long-term debt, through at least July 1, 2012.
 
 
38

 
 
Reconciliation of net loss to Adjusted EBITDA loss for the years ended June 30, 2011, 2010 and 2009:
 
   
Year ended June 30,
 
   
2011
   
2010
   
2009
 
Net loss
  $ (6,457,067 )   $ (11,571,495 )   $ (13,731,818 )
                         
Less interest income
    (82,234 )     (85,144 )     (282,930 )
                         
Plus interest expense
    35,953       60,942       96,992  
                         
Plus income tax expense
    -       -       -  
                         
Plus depreciation expense
    1,553,978       783,415       632,408  
                         
Plus amortization expense
    1,034,400       1,034,400       1,040,379  
                         
Plus (less) change in fair value of warrant liabilities
    815,131       -       -  
                         
Plus stock-based compensation
    356,866       130,525       948,777  
                         
Plus intangible asset impairment
    581,900       -       -  
                         
Adjusted EBITDA loss
  $ (2,161,073 )   $ (9,647,357 )   $ (11,296,192 )
   

Reconciliation of net loss to Adjusted EBITDA loss for the quarters ended June 30, 2011 and 2010:

   
Three months ended
 
   
June 30,
 
   
2011
   
2010
 
Net loss
  $ (1,923,055 )   $ (2,089,801 )
                 
Less interest income
    (25,519 )     (48,281 )
                 
Plus interest expense
    3,529       12,184  
                 
Plus income tax expense
    -       -  
                 
Plus depreciation expense
    480,703       264,273  
                 
Plus amortization expense
    258,600       258,600  
                 
Less change in fair value of warrant liabilities
    (35,609 )     -  
                 
Plus (less) stock-based compensation
    293,381       (19,351 )
                 
Plus intangible asset impairment
    581,900       -  
                 
Adjusted EBITDA loss
  $ (366,070 )   $ (1,622,376 )
   

As used herein, Adjusted EBITDA represents net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, and change in fair value of warrant liabilities, stock-based compensation expense and impairment expense on intangible assets. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash charge that is not related to the Company’s operations. We have excluded the non-cash expenses, stock-based compensation and impairment expense on intangible assets, as they do not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). 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 the net income or net loss of the Company 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 the Company s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for changes in fair value of warrant liabilities, stock-based compensation expense and impairment expense on intangible assets.
 
 
39

 

CONTRACTUAL OBLIGATIONS

As of June 30, 2011, the Company had certain contractual obligations due over a period of time as summarized in the following table:
 
   
Payments due by period
 
       
         
Less Than
               
More than
 
Contractual Obligations
 
Total
   
1 year
   
1-3 years
   
3-5 years
   
5 years
 
Long-Term Debt Obligations
  $ 182,774     $ 87,680     $ 95,094     $ -     $ -  
Capital Lease Obligations
    88,136       79,331       8,805       -       -  
Operating Lease Obligations
    1,867,203       439,848       1,106,092       321,263       -  
Purchase Obligations
    -       -       -       -       -  
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP
    -       -       -       -       -  
Total
  $ 2,138,113     $ 606,859     $ 1,209,991     $ 321,263     $ -  
 

The Company’s exposure to market risks for interest rate changes is not significant. Interest rates on its long-term debt are generally fixed and its investments in cash equivalents are not significant. The Company has no exposure to market risks related to Available-for-sale securities. Market risks related to fluctuations of foreign currencies are not significant and the Company has no derivative instruments.
 
 
40

 

 
USA TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial Statements:
     
       
Report of Independent Registered Public Accounting Firm
    F-1  
Consolidated Balance Sheets
    F-2  
Consolidated Statements of Operations
    F-3  
Consolidated Statements of Shareholders’ Equity
    F-4  
Consolidated Statements of Cash Flows
    F-7  
Notes to Consolidated Financial Statements
    F-9  
 
 
41

 
 

Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders
USA Technologies, Inc.

We have audited the accompanying consolidated balance sheets of USA Technologies, Inc. and subsidiaries as of June 30, 2011 and 2010, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2011.  Our audits also included the financial statement schedule of USA Technologies, Inc. listed in Item 15(a).  These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above presents fairly, in all material respects, the financial position of USA Technologies, Inc. and subsidiaries as of June 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2011, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 
/s/ McGladrey & Pullen, LLP
 


New York, NY
September 27, 2011



 
 
F-1

 

USA Technologies, Inc.
Consolidated Balance Sheets
 
   
June 30
 
   
2011
   
2010
 
             
Assets
           
Current assets:
           
     Cash and cash equivalents
  $ 12,991,511     $ 7,604,324  
     Accounts receivable, less allowance for uncollectible accounts of $113,000 and $41,000, respectively
    1,634,719       2,048,421  
     Finance receivables
    285,786       242,452  
     Inventory
    2,670,332       2,633,971  
     Prepaid expenses and other current assets
    846,033       847,344  
Total current assets
    18,428,381       13,376,512  
                 
Finance receivables, less current portion
  $ 195,601     $ 339,341  
Property and equipment, net
    7,395,775       4,511,889  
Intangibles, net
    2,194,353       3,810,653  
Goodwill
    7,663,208       7,663,208  
Other assets
    126,687       146,821  
Total assets
  $ 36,004,005     $ 29,848,424  
                 
Liabilities and shareholders’ equity
               
Current liabilities:
               
     Accounts payable
  $ 5,638,361     $ 4,570,730  
     Accrued expenses
    1,088,090       1,869,367  
     Current obligations under long-term debt
    155,428       344,652  
Total current liabilities
    6,881,879       6,784,749  
                 
Long-term liabilities:
               
     Long-term debt, less current portion
    97,633       251,503  
     Accrued expenses, less current portion
    166,709       -  
     Warrant liabilities, non-current
    2,732,253       -  
Total long-term liabilities
    2,996,595       251,503  
Total liabilities
    9,878,474       7,036,252  
                 
Commitments and contingencies (Note 15)
               
                 
Shareholders’ equity:
               
Preferred stock, no par value:
               
Authorized shares- 1,800,000 Series A convertible preferred shares- 900,000 Issued and outstanding shares- 442,968 and 444,468, respectively (liquidation preference of $14,697,100 and $14,079,523, respectively)
    3,138,056       3,148,676  
Common stock, no par value: Authorized shares- 640,000,000 Issued and outstanding shares-  32,281,140  and 25,497,155, respectively
    219,772,598       209,958,552  
Accumulated deficit
    (196,785,123 )     (190,295,056 )
                 
Total shareholders’ equity
    26,125,531       22,812,172  
Total liabilities and shareholders’ equity
  $ 36,004,005     $ 29,848,424  
 
See accompanying notes.

 
F-2

 
 
USA Technologies, Inc.
Consolidated Statements of Operations
 
   
Year ended June 30
 
   
2011
   
2010
   
2009
 
                   
Revenues:
                 
     Equipment sales
  $ 6,426,304     $ 6,464,006     $ 6,158,017  
     License and transaction fees
    16,442,485       9,307,100       5,862,106  
Total revenues
    22,868,789       15,771,106       12,020,123  
                         
     Cost of equipment
    3,468,993       4,049,433       4,490,519  
     Cost of services
    11,651,138       6,861,642       4,680,087  
Gross profit
    7,748,658       4,860,031       2,849,517  
                         
Operating expenses:
                       
     Selling, general and administrative
    11,430,610       14,885,685       15,183,847  
     Depreciation and amortization
    1,424,365       1,570,043       1,583,426  
     Impairment of intangible asset
    581,900       -       -  
Total operating expenses
    13,436,875       16,455,728       16,767,273  
Operating loss
    (5,688,217 )     (11,595,697 )     (13,917,756 )
                         
Other income (expense):
                       
     Interest income
    82,234       85,144       282,930  
     Interest expense
    (35,953 )     (60,942 )     (96,992 )
     Change in fair value
    (815,131 )     -       -  
Total other income (expense), net
    (768,850 )     24,202       185,938  
Net loss
    (6,457,067 )     (11,571,495 )     (13,731,818 )
Cumulative preferred dividends
    (665,577 )     (735,139 )     (772,997 )
Loss applicable to common shares
  $ (7,122,644 )   $ (12,306,634 )   $ (14,504,815 )
Loss per common share (basic and diluted)
  $ (0.26 )   $ (0.55 )   $ (0.95 )
Weighted average number of common shares outstanding (basic and diluted)
    27,665,345       22,370,068       15,263,788  
                         
See accompanying notes.
                       

 
F-3

 

USA Technologies, Inc.
Consolidated Statements of Shareholders’ Equity
 
   
Series A
                   
   
Convertible
                   
   
Preferred
   
Common
   
Accumulated
       
   
Stock
   
Stock
   
Deficit
   
Total
 
                         
Balance, June 30, 2008
  $ 3,686,218     $ 193,733,104     $ (164,842,773 )   $ 32,576,549  
Retirement of 162,599 shares of common stock
    -       (375,584 )     -       (375,584 )
Retirement of 10,122 shares of preferred stock
    (71,664 )     -       (16,384 )     (88,048 )
Issuance of 56,487 fully-vested shares of common stock to employees and  vesting of shares granted under the 2007-A Stock Compensation Plan
    -       284,117       -       284,117  
Issuance of 239,253 fully-vested shares of common stock to officers and employees and vesting of shares granted under the 2008 Stock Incentive Plan
    -       1,040,526       -       1,040,526  
Issuance of 134,611 net shares of common stock for settlement of the Long-Term Equity Incentive Program liability for Fiscal Year 2008
    -       266,530       -       266,530  
                                 
Net loss
    -       -       (13,731,818 )     (13,731,818 )
                                 
Balance, June 30, 2009
  $ 3,614,554     $ 194,948,693     $ (178,590,975 )   $ 19,972,272  
                                 
See accompanying notes.
                               

 
F-4

 

USA Technologies, Inc.
Consolidated Statements of Shareholders’ Equity (Continued)
 
   
Series A
                   
   
Convertible
                   
   
Preferred
   
Common
   
Accumulated
       
   
Stock
   
Stock
   
Deficit
   
Total
 
                         
Retirement of 5,113 shares of common stock
  $ -     $ (9,668 )   $ -     $ (9,668 )
Retirement of 65,802 shares of preferred stock
    (465,878 )     -       (132,586 )     (598,464 )
Issuance of 40,000 fully-vested shares of common stock to officers and employees and vesting of shares granted under the 2008 Stock Incentive Plan
    -       87,354       -       87,354  
Issuance of 7,285,792 shares of common stock at $2.00 per share, less issuance costs of $1,613,425
    -       12,958,159       -       12,958,159  
Issuance of 2,753,454 shares of common stock at $0.90 per share, less issuance costs of $504,095
    -       1,974,014       -       1,974,014  
Net loss
    -       -       (11,571,495 )     (11,571,495 )
                                 
Balance, June 30, 2010
  $ 3,148,676     $ 209,958,552     $ (190,295,056 )   $ 22,812,172  
                                 
See accompanying notes.
                               

 
F-5

 
 
USA Technologies, Inc.
 
Consolidated Statements of Shareholders’ Equity (Continued)
 
   
Series A
                   
   
Convertible
                   
   
Preferred
   
Common
   
Accumulated
       
   
Stock
   
Stock
   
Deficit
   
Total
 
                         
Conversion of 1,500 shares of preferred stock into 15 shares of common stock
  $ (10,620 )   $ 10,620     $ -     $ -  
Conversion of $33,000 of preferred dividends into 33 shares of common stock at $1,000 per share
    -       33,000       (33,000 )     -  
Issuance of 261,953 shares of common stock at $0.90 per share less issuance cost of $230,087
    -       5,671       -       5,671  
Retirement of 2,217 shares of common stock
    -       (2,261 )     -       (2,261 )
Issuance of 20,747 fully-vested shares of common stock to employees and vesting of shares granted under the 2008 Stock Incentive Plan
    -       10,208       -       10,208  
Issuance of 109,918 fully-vested shares of common stock to employees and directors and vesting of shares granted under the 2010 Stock Incentive Plan
    -       292,263