USA Technologies, Inc.
USA TECHNOLOGIES INC (Form: 10-Q, Received: 02/09/2017 06:10:25)

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 December 31, 2016

 

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, 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 ◻

Accelerated filer ☒

Non-accelerated filer ◻

 

Smaller reporting company ◻

 

 

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

 

As of February 1, 2017, there were 40,327,675 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

 

 

 

 

 

 

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

 

 

 

 

 

 

Consolidated Statements of Operations (unaudited) – Three and six months ended December 31, 2016 and 2015

 

 

 

 

 

 

Consolidated Statement of Shareholders’ Equity (unaudited) – Six months ended December 31, 2016

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) – Three and six months ended December 31, 2016 and 2015

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

 

 

Item 2.  

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

 

18 

 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

37 

 

 

 

 

Item 4.  

Controls and Procedures

 

37 

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

38 

 

 

 

 

Item 5.  

Other Information

 

38 

 

 

 

 

Item 6.  

Exhibits

 

38 

 

 

 

 

 

Signatures

 

39 

 

 

2


 

Table of Contents

Part I. Financial Information

Item 1. Consolidated Financial Statements

 

USA Technologies, Inc.

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

December 31,

 

June 30,

($ in thousands, except shares)

    

2016

    

2016

 

 

(unaudited)

 

(audited)

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

18,034

 

$

19,272

Accounts receivable, less allowance for doubtful accounts of $2,546 and $2,814, respectively

 

 

6,796

 

 

4,899

Finance receivables, less allowance for credit losses of $29 and $0, respectively

 

 

1,442

 

 

3,588

Inventory, net

 

 

4,786

 

 

2,031

Prepaid expenses and other current assets

 

 

1,764

 

 

987

Deferred income taxes

 

 

2,271

 

 

2,271

Total current assets

 

 

35,093

 

 

33,048

   

 

 

 

 

 

 

Finance receivables, less current portion

 

 

3,956

 

 

3,718

Other assets

 

 

145

 

 

348

Property and equipment, net

 

 

9,433

 

 

9,765

Deferred income taxes

 

 

25,568

 

 

25,453

Intangibles, net

 

 

711

 

 

798

Goodwill

 

 

11,492

 

 

11,703

Total assets

 

$

86,398

 

$

84,833

   

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

9,090

 

$

12,354

Accrued expenses

 

 

2,912

 

 

3,458

Line of credit, net

 

 

7,078

 

 

7,119

Current obligations under long-term debt

 

 

766

 

 

629

Income taxes payable

 

 

6

 

 

18

Warrant liabilities

 

 

 —

 

 

3,739

Deferred gain from sale-leaseback transactions

 

 

470

 

 

860

Total current liabilities

 

 

20,322

 

 

28,177

   

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Long-term debt, less current portion

 

 

1,394

 

 

1,576

Accrued expenses, less current portion

 

 

52

 

 

15

Deferred gain from sale-leaseback transactions, less current portion

 

 

 —

 

 

40

Total long-term liabilities

 

 

1,446

 

 

1,631

 

 

 

 

 

 

 

Total liabilities

 

 

21,768

 

 

29,808

   

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $18,442 and $18,108, respectively

 

 

3,138

 

 

3,138

Common stock, no par value: Authorized shares- 640,000,000 Issued and outstanding shares- 40,321,941 and 37,783,444, respectively

 

 

245,230

 

 

233,394

Accumulated deficit

 

 

(183,738)

 

 

(181,507)

 

 

 

 

 

 

 

Total shareholders’ equity

 

 

64,630

 

 

55,025

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

86,398

 

$

84,833

 

See accompanying notes.

 

3


 

Table of Contents

USA Technologies, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

December 31,

 

December 31,

 

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

    

2016

    

2015

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

License and transaction fees

 

$

16,639

 

$

13,674

 

$

33,004

 

$

26,599

 

Equipment sales

 

 

5,117

 

 

4,829

 

 

10,340

 

 

8,504

 

Total revenues

 

 

21,756

 

 

18,503

 

 

43,344

 

 

35,103

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of sales/revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

11,389

 

 

9,067

 

 

22,632

 

 

17,772

 

Cost of equipment

 

 

4,033

 

 

3,953

 

 

8,211

 

 

6,801

 

Total costs of sales/revenues

 

 

15,422

 

 

13,020

 

 

30,843

 

 

24,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

6,334

 

 

5,483

 

 

12,501

 

 

10,530

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,793

 

 

4,762

 

 

12,702

 

 

9,558

 

Depreciation and amortization

 

 

307

 

 

127

 

 

515

 

 

266

 

Total operating expenses

 

 

6,100

 

 

4,889

 

 

13,217

 

 

9,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

234

 

 

594

 

 

(716)

 

 

706

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

200

 

 

20

 

 

273

 

 

71

 

Interest expense

 

 

(201)

 

 

(104)

 

 

(413)

 

 

(223)

 

Change in fair value of warrant liabilities

 

 

 —

 

 

(1,230)

 

 

(1,490)

 

 

(887)

 

Total other income (expense), net

 

 

(1)

 

 

(1,314)

 

 

(1,630)

 

 

(1,039)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

233

 

 

(720)

 

 

(2,346)

 

 

(333)

 

Benefit (provision) for income taxes

 

 

 —

 

 

(154)

 

 

115

 

 

(181)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

233

 

 

(874)

 

 

(2,231)

 

 

(514)

 

Cumulative preferred dividends

 

 

 —

 

 

 —

 

 

(334)

 

 

(334)

 

Net income (loss) applicable to common shares

 

$

233

 

$

(874)

 

$

(2,565)

 

$

(848)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share - basic

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

 

Net earnings (loss) per common share - diluted

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding

 

 

40,308,934

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

 

Diluted weighted average number of common shares outstanding

 

 

40,730,712

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

 

 

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 warranty 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

 

 

 

 

 

 

143,622

 

 

194

 

 

 

 

 

194

2014 Stock Option Incentive Plan

 

 

 

 

 

 

 —

 

 

95

 

 

 

 

 

95

2015 Equity Incentive Plan

 

 

 

 

 

 

 —

 

 

156

 

 

 

 

 

156

Retirement of common stock

 

 

 

 

 

 

(6,533)

 

 

(31)

 

 

 

 

 

(31)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(2,231)

 

 

(2,231)

Balance, December 31, 2016

 

445,063

 

$

3,138

 

40,321,941

 

$

245,230

 

$

(183,738)

 

$

64,630

 

See accompanying notes.

 

 

 

5


 

Table of Contents

USA Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

December 31, 

 

December 31, 

 

($ in thousands)

    

2016

    

2015

    

2016

    

2015

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

233

 

$

(874)

 

$

(2,231)

 

$

(514)

 

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

 

 

237

 

 

445

 

 

509

 

Gain on disposal of property and equipment

 

 

(31)

 

 

(41)

 

 

(31)

 

 

(42)

 

Non-cash interest

 

 

(79)

 

 

 —

 

 

26

 

 

 —

 

Bad debt expense

 

 

352

 

 

238

 

 

450

 

 

474

 

Depreciation

 

 

1,220

 

 

1,323

 

 

2,477

 

 

2,673

 

Amortization of intangible assets

 

 

43

 

 

 —

 

 

87

 

 

 —

 

Change in fair value of warrant liabilities

 

 

 —

 

 

1,230

 

 

1,490

 

 

887

 

Deferred income taxes, net

 

 

 —

 

 

154

 

 

(115)

 

 

181

 

Recognition of deferred gain from sale-leaseback transactions

 

 

(215)

 

 

(215)

 

 

(430)

 

 

(430)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,309)

 

 

(448)

 

 

(2,347)

 

 

(409)

 

Finance receivables

 

 

2,125

 

 

214

 

 

2,119

 

 

(370)

 

Inventory

 

 

(467)

 

 

649

 

 

(2,689)

 

 

868

 

Prepaid expenses and other assets

 

 

(318)

 

 

(254)

 

 

(542)

 

 

(206)

 

Accounts payable

 

 

397

 

 

(1,623)

 

 

(3,266)

 

 

(2,667)

 

Accrued expenses

 

 

(1,061)

 

 

(13)

 

 

(574)

 

 

(15)

 

Income taxes payable

 

 

(1)

 

 

(70)

 

 

(12)

 

 

(70)

 

Net cash provided/(used) by operating activities

 

 

1,122

 

 

507

 

 

(5,143)

 

 

869

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase and additions of property and equipment

 

 

(441)

 

 

(118)

 

 

(609)

 

 

(167)

 

Purchase of property for rental program

 

 

(693)

 

 

 —

 

 

(1,335)

 

 

 —

 

Proceeds from sale of property and equipment

 

 

61

 

 

101

 

 

61

 

 

105

 

Net cash used by investing activities

 

 

(1,073)

 

 

(17)

 

 

(1,883)

 

 

(62)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used for the retirement of common stock

 

 

 —

 

 

(40)

 

 

(31)

 

 

(11)

 

Proceeds from exercise of common stock warrants

 

 

 —

 

 

 —

 

 

6,193

 

 

 —

 

Proceeds (payments) from line of credit, net

 

 

 —

 

 

3,000

 

 

 —

 

 

3,000

 

Repayment of long-term debt

 

 

(213)

 

 

(233)

 

 

(374)

 

 

(361)

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided/(used) by financing activities

 

 

(213)

 

 

2,727

 

 

5,788

 

 

2,628

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(164)

 

 

3,217

 

 

(1,238)

 

 

3,435

 

Cash at beginning of period

 

 

18,198

 

 

11,592

 

 

19,272

 

 

11,374

 

Cash at end of period

 

$

18,034

 

$

14,809

 

$

18,034

 

$

14,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information :

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid in cash

 

$

382

 

$

107

 

$

469

 

$

213

 

Depreciation expense allocated to cost of services

 

$

967

 

$

1,186

 

$

2,050

 

$

2,385

 

Reclass of rental program property to inventory, net

 

$

(55)

 

$

777

 

$

(66)

 

$

498

 

Prepaid items financed with debt

 

$

 —

 

$

 —

 

$

54

 

$

103

 

Equipment and property acquired under capital lease

 

$

18

 

$

 —

 

$

272

 

$

35

 

Disposal of property and equipment

 

$

570

 

$

238

 

$

570

 

$

337

 

 

See accompanying notes.

 

 

 

6


 

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 six-month periods ended December 31, 2016 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

 

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.

 

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.

 

7


 

Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

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:

 

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.

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USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

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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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

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 six months ended December 31, 2016 and 2015.

 

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 October 2016, the (“FASB”) issued (“ASU”) 2016-19 – “Technical Corrections and Improvements”.

 

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

 

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

Six months ended

 

 

December 31, 2015

 

December 31, 2015

 

 

Accounts

 

Finance

 

Accounts

 

Finance

 

    

Receivable

    

Receivables

    

 

Receivable

 

    

Receivables

Per Original Statement of Cash Flows

 

$

(767)

 

$

533

 

$

(1,480)

 

$

701

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact from the reclassification

 

 

319

 

 

(319)

 

 

1,071

 

 

(1,071)

Adjusted Statement of Cash Flows

 

$

(448)

 

$

214

 

$

(409)

 

$

(370)

 

 

 

3. EARNINGS PER SHARE CALCULATION

 

The calculation of basic earnings per share (“eps”) and diluted earnings per share are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

December 31, 

 

December 31, 

($ in thousands, except per share data)

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic earnings per share - Net  income (loss) available to common shareholders

 

$

233

 

$

(874)

 

$

(2,565)

 

$

(848)

Gain recorded for reduction in fair value of warrants*

 

 

 —

 

 

 

 

 —

 

 

 —

Numerator for diluted earnings per share - Net income (loss) available to common shareholders

 

$

233

 

$

(874)

 

$

(2,565)

 

$

(848)

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share - Weighted average shares outstanding

 

 

40,308,934

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

Effect of dilutive potential common shares*

 

 

421,778

 

 

 —

 

 

 —

 

 

 —

Denominator for diluted earnings per share - Adjusted weighted average shares outstanding

 

 

40,730,712

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

Diluted earnings (loss) per share

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

* No adjustment necessary for the three months ended December 31, 2015 and the six months ended December 31, 2016 and 2015 as the effects would be anti-dilutive.

 

4. FINANCE RECEIVABLES

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USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Finance receivables consist of the following:

 

 

 

 

 

 

 

 

   

 

December 31, 

 

June 30, 

($ in thousands)

    

2016

    

2016

 

 

(unaudited)

 

 

 

Total finance receivables

 

$

5,398

 

$

7,306

Less current portion

 

 

1,442

 

 

3,588

Non-current portion of finance receivables

 

$

3,956

 

$

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 $29 thousand and $0 as of December 31, 2016 and June 30, 2016, respectively.    The aggregate amount of unrealized losses on Finance Receivables was $33 thousand and $0 as of December 31, 2016 and June 30, 2016, respectively.  The number of Finance Receivables that are in a loss position is twelve and zero as of December 31, 2016 and June 30, 2016 respectively.

 

 

Credit Quality Indicators

 

 

 

 

 

 

 

 

Credit risk profile based on payment activity:

 

December 31, 

 

June 30, 

($ in thousands)

    

2016

    

2016

 

 

(unaudited)

 

 

 

Performing

 

$

5,309

 

$

7,174

Nonperforming

 

 

89

 

 

132

Total

 

$

5,398

 

$

7,306

 

Age Analysis of Past Due Finance Receivables

As of December 31, 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

 

$

5

 

$

5

 

$

46

 

$

56

 

$

5,342

 

$

5,398

 

 

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

 

 

 

5. 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 $5.625 million and the corresponding goodwill recorded was $4.040 million. In December 2016, the company finalized the opening balance sheet of VendScreen

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

and recorded a reduction of goodwill for $211 thousand and increase finance receivables for the same amount. The final goodwill amount related to VendScreen opening balance sheet is $3.829 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

During the three and six months ended December 31, 2016, there was $43 thousand and $87 thousand, respectively, of amortization expense relating to acquired intangible assets. There was no amortization expense relating to acquired intangible assets during the three and six months ended December 31, 2015. Intangible asset balances consisted of the following: