USA Technologies, Inc.
USA TECHNOLOGIES INC (Form: 10-Q, Received: 05/10/2017 08:09:25)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

OR

 

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

 

For the transition period from                           to                          

 

Commission file number 001-33365

 

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 300, Malvern, Pennsylvania

    

19355

(Address of principal executive offices)

 

(Zip Code)

 

(610) 989-0340


(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer ◻

Accelerated filer ☒

Non-accelerated filer ◻

 

Smaller reporting company ◻

Emerging growth company ◻ 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ◻

 

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

As of April 24, 2017, there were 40,331,645 shares of Common Stock, no par value, outstanding.

 

 

 

 


 

Table of Contents

USA TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

Part I - Financial Information  

    

 

 

 

 

Item 1.  

Consolidated Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets (unaudited) – March 31, 2017 and June 30, 2016 (audited)

 

3

 

 

 

 

 

Consolidated Statements of Operations (unaudited) – Three and nine months ended March 31, 2017 and 2016

 

4

 

 

 

 

 

Consolidated Statement of Shareholders’ Equity (unaudited) – Nine months ended March 31, 2017

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) – Three and nine months ended March 31, 2017 and 2016

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

Item 4.  

Controls and Procedures

 

36

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

 

 

 

 

Item 1.  

Legal Proceedings

 

37

 

 

 

 

Item 3.  

Defaults upon Senior Securities  

 

37

 

 

 

 

Item 6.  

Exhibits

 

37

 

 

 

 

 

Signatures

 

38

 

 

2


 

Table of Contents

Part I. Financial Information

Item 1. Consolidated Financial Statements

 

USA Technologies, Inc.

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

March 31, 

 

June 30, 

($ in thousands, except shares)

    

2017

    

2016

 

 

(unaudited)

 

(audited)

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

17,780

 

$

19,272

Accounts receivable, less allowance for doubtful accounts of $2,851 and $2,814, respectively

 

 

6,734

 

 

4,899

Finance receivables, less allowance for credit losses of $25 and $0, respectively

 

 

2,057

 

 

3,588

Inventory, net

 

 

4,147

 

 

2,031

Prepaid expenses and other current assets

 

 

1,628

 

 

987

Deferred income taxes

 

 

2,271

 

 

2,271

Total current assets

 

 

34,617

 

 

33,048

   

 

 

 

 

 

 

Finance receivables, less current portion

 

 

7,548

 

 

3,718

Other assets

 

 

137

 

 

348

Property and equipment, net

 

 

9,173

 

 

9,765

Deferred income taxes

 

 

25,359

 

 

25,453

Intangibles, net

 

 

666

 

 

798

Goodwill

 

 

11,492

 

 

11,703

Total assets

 

$

88,992

 

$

84,833

   

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

11,529

 

$

12,354

Accrued expenses

 

 

3,111

 

 

3,458

Line of credit, net

 

 

7,021

 

 

7,119

Current obligations under long-term debt

 

 

786

 

 

629

Income taxes payable

 

 

 —

 

 

18

Warrant liabilities

 

 

 —

 

 

3,739

Deferred gain from sale-leaseback transactions

 

 

255

 

 

860

Total current liabilities

 

 

22,702

 

 

28,177

   

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Long-term debt, less current portion

 

 

1,239

 

 

1,576

Accrued expenses, less current portion

 

 

52

 

 

15

Deferred gain from sale-leaseback transactions, less current portion

 

 

 —

 

 

40

Total long-term liabilities

 

 

1,291

 

 

1,631

 

 

 

 

 

 

 

Total liabilities

 

 

23,993

 

 

29,808

   

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, no par value:

 

 

 

 

 

 

Authorized shares- 1,800,000 Series A convertible preferred- Authorized shares- 900,000  Issued and outstanding shares- 445,063 with liquidation preference of $18,775 and $18,108, respectively

 

 

3,138

 

 

3,138

Common stock, no par value: Authorized shares- 640,000,000 Issued and outstanding shares- 40,327,675 and 37,783,444, respectively

 

 

245,463

 

 

233,394

Accumulated deficit

 

 

(183,602)

 

 

(181,507)

 

 

 

 

 

 

 

Total shareholders’ equity

 

 

64,999

 

 

55,025

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

88,992

 

$

84,833

 

See accompanying notes.

 

3


 

Table of Contents

 

USA Technologies, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

March 31, 

 

March 31, 

 

($ in thousands, except shares and per share data)

    

2017

    

2016

    

2017

    

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

License and transaction fees

 

$

17,459

 

$

14,727

 

$

50,463

 

$

41,326

 

Equipment sales

 

 

9,001

 

 

5,634

 

 

19,341

 

 

14,138

 

Total revenues

 

 

26,460

 

 

20,361

 

 

69,804

 

 

55,464

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of sales/revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

11,876

 

 

9,703

 

 

34,508

 

 

27,475

 

Cost of equipment

 

 

7,959

 

 

4,986

 

 

16,170

 

 

11,787

 

Total costs of sales/revenues

 

 

19,835

 

 

14,689

 

 

50,678

 

 

39,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

6,625

 

 

5,672

 

 

19,126

 

 

16,202

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,947

 

 

6,094

 

 

18,649

 

 

15,652

 

Depreciation and amortization

 

 

259

 

 

173

 

 

774

 

 

439

 

Total operating expenses

 

 

6,206

 

 

6,267

 

 

19,423

 

 

16,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

419

 

 

(595)

 

 

(297)

 

 

111

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

114

 

 

67

 

 

387

 

 

138

 

Interest expense

 

 

(188)

 

 

(180)

 

 

(601)

 

 

(403)

 

Change in fair value of warrant liabilities

 

 

 -

 

 

(4,805)

 

 

(1,490)

 

 

(5,692)

 

Total other expense, net

 

 

(74)

 

 

(4,918)

 

 

(1,704)

 

 

(5,957)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

345

 

 

(5,513)

 

 

(2,001)

 

 

(5,846)

 

(Provision) benefit for income taxes

 

 

(209)

 

 

93

 

 

(94)

 

 

(88)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

136

 

 

(5,420)

 

 

(2,095)

 

 

(5,934)

 

Cumulative preferred dividends

 

 

(334)

 

 

(334)

 

 

(668)

 

 

(668)

 

Net loss applicable to common shares

 

$

(198)

 

$

(5,754)

 

$

(2,763)

 

$

(6,602)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.00)

 

$

(0.16)

 

$

(0.07)

 

$

(0.18)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number of common shares outstanding

 

 

40,327,697

 

 

36,161,626

 

 

39,703,690

 

 

35,972,633

 

 

See accompanying notes.

 

 

 

4


 

Table of Contents

USA Technologies, Inc.

Consolidated Statement of Shareholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Accumulated

 

 

 

($ in thousands, except shares)

    

Shares

    

Amount

    

Shares

    

Amount

    

Deficit

    

Total

Balance, June 30, 2016

 

445,063

 

$

3,138

 

37,783,444

 

$

233,394

 

$

(181,507)

 

$

55,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclass of fair value of warrant liability upon exercise of warrants

 

 

 

 

 

 

 

 

 

5,229

 

 

 

 

 

5,229

Exercise of warrants

 

 

 

 

 

 

2,401,408

 

 

6,193

 

 

 

 

 

6,193

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 Stock Incentive Plan

 

 

 

 

 

 

149,356

 

 

288

 

 

 

 

 

288

2014 Stock Option Incentive Plan

 

 

 

 

 

 

 

 

 

155

 

 

 

 

 

155

2015 Equity Incentive Plan

 

 

 

 

 

 

 

 

 

235

 

 

 

 

 

235

Retirement of common stock

 

 

 

 

 

 

(6,533)

 

 

(31)

 

 

 

 

 

(31)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(2,095)

 

 

(2,095)

Balance, March 31, 2017

 

445,063

 

$

3,138

 

40,327,675

 

$

245,463

 

$

(183,602)

 

$

64,999

 

See accompanying notes.

 

 

 

5


 

Table of Contents

USA Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

March 31, 

 

March 31, 

 

($ in thousands)

    

2017

    

2016

    

2017

    

2016

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

136

 

$

(5,420)

 

$

(2,095)

 

$

(5,934)

 

Adjustments to reconcile net income (loss) to net cash provided/(used) by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges incurred in connection with the vesting and issuance of common stock and common stock options for employee and director compensation

 

 

233

 

 

142

 

 

678

 

 

651

 

Gain on disposal of property and equipment

 

 

(28)

 

 

(15)

 

 

(59)

 

 

(57)

 

Amortization of deferred financing fees

 

 

72

 

 

 -

 

 

98

 

 

 -

 

Bad debt expense

 

 

127

 

 

506

 

 

577

 

 

980

 

Depreciation

 

 

1,165

 

 

1,190

 

 

3,642

 

 

3,863

 

Amortization of intangible assets

 

 

45

 

 

44

 

 

132

 

 

44

 

Change in fair value of warrant liabilities

 

 

 -

 

 

4,805

 

 

1,490

 

 

5,692

 

Deferred income taxes, net

 

 

209

 

 

(93)

 

 

94

 

 

88

 

Recognition of deferred gain from sale-leaseback transactions

 

 

(216)

 

 

(215)

 

 

(646)

 

 

(645)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(41)

 

 

(1,660)

 

 

(2,388)

 

 

(2,070)

 

Finance receivables

 

 

(4,232)

 

 

(366)

 

 

(2,113)

 

 

(735)

 

Inventory

 

 

647

 

 

250

 

 

(2,042)

 

 

1,118

 

Prepaid expenses and other assets

 

 

136

 

 

(160)

 

 

(406)

 

 

(366)

 

Accounts payable

 

 

2,441

 

 

4,154

 

 

(825)

 

 

1,487

 

Accrued expenses

 

 

160

 

 

1,166

 

 

(414)

 

 

1,151

 

Income taxes payable

 

 

(6)

 

 

 -

 

 

(18)

 

 

(70)

 

Net cash provided/(used) by operating activities

 

 

848

 

 

4,328

 

 

(4,295)

 

 

5,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase and additions of property and equipment

 

 

(183)

 

 

(164)

 

 

(792)

 

 

(331)

 

Purchase of property for rental program

 

 

(691)

 

 

 -

 

 

(2,026)

 

 

 -

 

Proceeds from sale of property and equipment

 

 

44

 

 

19

 

 

105

 

 

124

 

Cash paid for assets acquired from VendScreen

 

 

 -

 

 

(5,625)

 

 

 -

 

 

(5,625)

 

Net cash used by investing activities

 

 

(830)

 

 

(5,770)

 

 

(2,713)

 

 

(5,832)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used for the retirement of common stock

 

 

 -

 

 

 -

 

 

(31)

 

 

(40)

 

Payment of deferred financing costs

 

 

(90)

 

 

 -

 

 

(90)

 

 

 -

 

Proceeds from exercise of common stock warrants

 

 

 -

 

 

1,652

 

 

6,193

 

 

1,681

 

Proceeds (payments) from line of credit, net

 

 

 -

 

 

33

 

 

 -

 

 

3,033

 

Repayment of long-term debt

 

 

(182)

 

 

(151)

 

 

(556)

 

 

(512)

 

Net cash (used)/provided by financing activities

 

 

(272)

 

 

1,534

 

 

5,516

 

 

4,162

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash

 

 

(254)

 

 

92

 

 

(1,492)

 

 

3,527

 

Cash at beginning of period

 

 

18,034

 

 

14,809

 

 

19,272

 

 

11,374

 

Cash at end of period

 

$

17,780

 

$

14,901

 

$

17,780

 

$

14,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information :

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid in cash

 

$

59

 

$

191

 

$

528

 

$

404

 

Depreciation expense allocated to cost of services

 

$

950

 

$

1,051

 

$

3,000

 

$

3,436

 

Reclass of rental program property to inventory, net

 

$

 8

 

$

347

 

$

74

 

$

845

 

Prepaid items financed with debt

 

$

 -

 

$

-

 

$

54

 

$

103

 

Equipment and property acquired under capital lease

 

$

54

 

$

409

 

$

326

 

$

444

 

Disposal of property and equipment

 

$

87

 

$

189

 

$

748

 

$

526

 

Fair value of common stock warrants at issuance recorded as a debt discount

 

$

 -

 

$

52

 

$

 -

 

$

52

 

Debt financing cost financed with debt

 

$

 -

 

$

79

 

$

 -

 

$

79

 

 

See accompanying notes.

 

6


 

Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. BUSINESS

 

USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”) was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutions and value-added services that facilitate electronic payment transactions primarily within the unattended Point of Sale (“POS”) market. We are a leading provider in the small ticket, beverage and food vending industry and are expanding our solutions and services to other unattended market segments, such as amusement, commercial laundry, kiosk and others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as telemetry Internet of Things (“IoT”) and machine-to-machine (“M2M”) services, which include the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions. 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 credit or debit cards or other emerging contactless forms, such as mobile payment.

 

INTERIM FINANCIAL INFORMATION

The accompanying unaudited consolidated financial statements of USA Technologies, Inc. have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2016. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the three and nine months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending June 30, 2017. The balance sheet at June 30, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

 

2. ACCOUNTING POLICIES

 

CONSOLIDATION

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

USE OF ESTIMATES

 

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

CASH AND CASH EQUIVALENTS

 

Cash equivalents represent all highly liquid investments with original maturities of three months or less.  Cash equivalents are comprised of money market funds.  The Company maintains its cash in bank deposit accounts, which may exceed federally insured limits at times. 

 

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

 

Accounts receivable include amounts due to the Company for sales of equipment, other amounts due from customers, merchant service receivables, and unbilled amounts due from customers, net of the allowance for uncollectible accounts.

 

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Table of Contents

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

 

The allowance is determined through an analysis of various factors including the aging of the accounts receivable, the strength of the relationship with the customer, the capacity of the customer transaction fund flow to satisfy the amount due from the customer, an assessment of collection costs and other factors. The allowance for doubtful accounts receivable is management’s best estimate as of the respective reporting date. The Company writes off accounts receivable against the allowance when management determines the balance is uncollectible and the Company ceases collection efforts. Management believes that the allowance recorded is adequate to provide for its estimated credit losses.

 

FINANCE RECEIVABLES

 

The Company offers extended payment terms to certain customers for equipment sales under its Quick Start Program. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification® (“ASC”) Topic 840, “Leases”, agreements under the Quick Start Program qualify for sales-type lease accounting. Accordingly, the future minimum lease payments are classified as finance receivables in the Company’s consolidated balance sheets. Finance receivables for Quick Start leases are generally for a sixty month term. Finance receivables are carried at their contractual amount and charged off against the allowance for credit losses when management determines that recovery is unlikely and the Company ceases collection efforts. The Company recognizes a portion of the note or lease payments as interest income in the accompanying consolidated financial statements based on the effective interest rate method.

 

INVENTORY, Net

 

Inventory consists of finished goods and packaging materials. The Company’s inventory is stated at the lower of cost (average cost basis) or market.

 

PROPERTY AND EQUIPMENT, Net

 

Property and equipment are recorded at cost. Property and equipment are depreciated on the straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on the straight-line basis over the lesser of the estimated useful life of the asset or the respective lease term.

 

GOODWILL AND INTANGIBLE ASSETS

 

The Company’s intangible assets include goodwill, non-compete agreements, brand, developed technology and customer relationships.

 

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. 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.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The FASB issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (“Topic 820”): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends certain disclosure requirements of Subtopic 820-10. This ASU provides additional disclosures for transfers in and out of Levels 1 and 2 and for activity in Level 3. This ASU also clarifies certain other existing disclosure requirements including level of desegregation and disclosures around inputs and valuation techniques.

 

The Company’s financial assets and liabilities are accounted for in accordance with ASC 820 “Fair Value Measurement.” Under ASC 820 the Company uses inputs from the three levels of the fair value hierarchy to measure its financial assets and liabilities. The three levels are as follows:

 

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Level 1- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2- Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

Level 3- Inputs are unobservable and reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.

 

The Company’s financial instruments, principally accounts receivable, short-term finance receivables, prepaid expenses and other assets, accounts payable and accrued expenses, are carried at cost which approximates fair value due to the short-term maturity of these instruments. The fair value of the Company’s obligations under its long-term debt agreements and the long-term portion of its finance receivables approximates their carrying value as such instruments are at market rates currently available to the Company.

 

REVENUE RECOGNITION

 

Revenue from the sale or QuickStart lease of equipment is recognized on the terms of freight-on-board shipping point. Activation fee revenue, if applicable, 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 and license and transaction fee refunds on a monthly basis. The company makes an adjustment for rebates and product returns.

 

ePort hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party financing company for the devices. The Company utilizes its best estimate of selling price when calculating the revenue to be recorded under these leases. The leases qualify for sales type lease accounting. Accordingly, the Company recognizes a portion of lease payments as interest income for leases not placed with a third-party financing company. At the end of the lease period, the customer would have the option to purchase the device at its residual value.

 

PREFERRED STOCK

 

The Company adopted the provisions of ASU 2014-16 in determining whether the Company’s Series A Convertible Preferred Stock (“preferred stock”) is more equity-like or debt-like, and whether derivatives embedded in the preferred stock, if any, must be bifurcated and accounted for separately from its host contract. Based upon management’s review of the preferred stock features, management has determined that the preferred stock is more equity-like and that the embedded derivatives do not require bifurcation. As such, the adoption of this standard did not have a material impact on the company's financial statements.

 

ACCOUNTING FOR EQUITY AWARDS

 

In accordance with the ASC Topic 718, the cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award and allocated over the vesting period of the award.

 

INCOME TAXES

 

The Company follows the ASC Topic 740, “Accounting for Uncertainty in Income Taxes”,   which   provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the consolidated financial statements. Accordingly, tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of ASC Topic 740 and in subsequent periods.

 

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Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent that, based on available evidence, it is more likely than not such benefits will be realized. The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general and administrative expenses. No interest or penalties related to uncertain tax positions were accrued or incurred during the three and nine months ended March 31, 2017 and 2016.

 

EARNINGS (LOSS) PER COMMON SHARE

 

Basic earnings (loss) per share are calculated by dividing income (loss) applicable to common shares by the weighted average common shares outstanding for the period. Diluted earnings per share are calculated by dividing income (loss) applicable to common shares by the weighted average common shares outstanding for the period plus the effect of potential common shares unless such effect is anti-dilutive.

 

SOFTWARE DEVELOPMENT COSTS

 

The Company follows the ASC Topic 350-40, “Accounting for the Cost of Computer Software Developed or obtained for Internal Use”, which provides for guidance for what costs can be capitalized for internal use.

 

Capitalized costs for internal-use software are included in fixed assets in the consolidated balance sheet and are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

The Company is evaluating whether the effects of the following recent accounting will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

In January 2017, the FASB issued ASU 2017-04 – “Intangibles-Goodwill and Other (Topic 350): Simplifying the test for Goodwill Impairment.

 

RECLASSIFICATION

 

Commencing with the June 30, 2016 financial statements, the Company changed the manner in which it presents certain unfunded finance receivables in its consolidated balance sheets and the related statements of cash flows. These finance receivables have yet to be and are expected to be funded by a third-party funding source. The previous accounting classification recorded these amounts as accounts receivable in the consolidated balance sheets and the related statements of cash flows. The impact of this change on the Statement of Cash Flows is as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

March 31, 2016

 

March 31, 2016

 

 

 

Accounts

 

Finance

 

Accounts

 

Finance

 

 

    

Receivable

    

Receivables

    

Receivable

 

Receivables

Per Original Statement of Cash Flows

 

 

$

(1,872)

 

$

(154)

 

$

(3,352)

 

$

547

Reclass of Unfunded Leases, beginning of period (starting BS)

 

 

 

(2,096)

 

 

2,096

 

 

(1,026)

 

 

1,026

Reclass of Finance Receivables, end of period

 

 

 

2,308

 

 

(2,308)

 

 

2,308

 

 

(2,308)

Impact from the reclassification

 

 

 

212

 

 

(212)

 

 

1,282

 

 

(1,282)

Adjusted Statement of Cash Flows

 

 

$

(1,660)

 

$

(366)

 

$

(2,070)

 

$

(735)

 

 

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3. FINANCE RECEIVABLES

 

Finance receivables consist of the following:

 

 

 

 

 

 

 

 

   

 

March 31, 

 

June 30, 

($ in thousands)

    

2017

    

2016

 

 

(unaudited)

 

 

 

Total finance receivables

 

$

9,605

 

$

7,306

Less current portion

 

 

2,057

 

 

3,588

Non-current portion of finance receivables

 

$

7,548

 

$

3,718

 

The Company collects monthly payments of its finance receivables from the customers’ transaction fund flow. Accordingly, as the fund flow from these customers’ transactions is generally sufficient to satisfy the amount due to the Company, the risk of loss is considered low and the Company has provided for an allowance for credit losses for finance receivables of $25 thousand and zero as of March 31, 2017 and June 30, 2016, respectively.  The number of Finance Receivables that are in a loss position is nine and zero as of March 31, 2017 and June 30, 2016 respectively.

 

Credit Quality Indicators

 

 

 

 

 

 

 

 

Credit risk profile based on payment activity:

 

March 31, 

 

June 30, 

($ in thousands)

    

2017

    

2016

 

 

(unaudited)

 

 

 

Performing

 

$

9,527

 

$

7,174

Nonperforming

 

 

78

 

 

132

Total

 

$

9,605

 

$

7,306

 

Age Analysis of Past Due Finance Receivables

As of March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 – 60

 

61 – 90

 

Greater than

 

 

 

 

 

 

Total

 

 

Days Past

 

Days   Past

 

90 Days Past

 

Total Past

 

 

 

Finance

($ in thousands)

    

Due

    

Due

    

Due

    

Due

    

Current

    

Receivables

QuickStart Leases

 

$

31

 

$

 1

 

$

21

 

$

53

 

$

9,552

 

$

9,605

 

 

Age Analysis of Past Due Finance Receivables

As of June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 – 60

 

61 – 90

 

Greater than

 

 

 

 

 

 

Total

 

 

Days Past

 

Days Past

 

90 Days Past

 

Total Past

 

 

 

Finance

($ in thousands)

    

Due

    

Due

    

Due

    

Due

    

Current

    

Receivables

QuickStart Leases

 

$

98

 

$

31

 

$

 3

 

$

132

 

$

7,174

 

$

7,306

 

 

 

4. GOODWILL AND INTANGIBLES

 

On January 15, 2016, the Company executed an Asset Purchase Agreement with VendScreen, Inc (“VendScreen”) a Portland, Oregon based developer of vending industry cashless payment technology, by which it acquired substantially all of VendScreen’s assets and assumed specified liabilities, for a cash payment of $5.62 million and the corresponding goodwill recorded was $4.0 million. In December 2016, the company finalized the opening balance sheet of VendScreen and recorded a reduction of goodwill for $211 thousand and increased finance receivables for the same amount. The final goodwill amount related to VendScreen opening balance sheet is $3.8 million.

 

The following table summarizes the final purchase price allocation to reflect the fair values of the assets acquired and liabilities assumed at the date of acquisition.

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Consideration:

 

 

 

 

 

       Fair value of total consideration paid in cash

 

 

 

$

5,625

 

 

 

 

 

 

Acquisition related costs:

 

 

 

$

842

 

 

 

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

       Accounts Receivable

 

 

 

 

 3

       Finance Receivables

 

 

 

 

839

       Other Current Assets

 

 

 

 

20

       Deferred Income Taxes

 

 

 

 

18

 

 

 

 

 

880

 

 

 

 

 

 

Property, Plant & Equipment

 

 

 

 

81

 

 

 

 

 

 

Identifiable Intangible Assets:

 

 

 

 

 

       Developed Technology

 

 

 

 

639

       Customer Relationships

 

 

 

 

149

       Brand

 

 

 

 

95

       Noncompete Agreement

 

 

 

 

 2

       Fair Value of Intangible Assets

 

 

 

 

885

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

       Accrued Liabilities

 

 

 

$

(50)

 

 

 

 

 

 

Total identifiable net assets

 

 

 

$

1,796

 

 

 

 

 

 

       Goodwill

 

 

 

$

3,829

 

 

 

 

 

 

Total Fair Value

 

 

 

$

5,625

 

During the three and nine months ending March 31, 2017, there was $45 thousand and $132 thousand, respectively, of amortization expense relating to acquired intangible assets. There was $44 amortization expense relating to acquired intangible assets during the three and nine months ended March 31, 2016. Intangible asset balances consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

Additions/

 

 

 

 

Balance

 

Amortization

($ in thousands)

    

June 30, 2016

    

Adjustments

    

Amortization

    

March 31, 2017

    

Period

Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

$

 1

 

$

 —

 

$

(1)

 

$

 —

 

2 years

Brand

 

 

79

 

 

 —

 

 

(24)

 

 

55

 

3 years

Developed technology

 

 

576

 

 

 —

 

 

(96)

 

 

480

 

5 years

Customer relationships

 

 

142