USA Technologies, Inc.
USA TECHNOLOGIES INC (Form: 10-Q, Received: 11/09/2017 06:07:48)

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 September 30, 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 (Do not check if a smaller reporting company)

 

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 October 31, 2017 there were 50,196,531 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 (unaudited)

 

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Operations

4

 

 

 

 

Consolidated Statement of Shareholders’ Equity

5

 

 

 

 

Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

 

Item 2.  

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

15

 

 

 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

 

 

 

Item 4.  

Controls and Procedures

24

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

 

Item 1.  

Legal Proceedings

24

 

 

 

Item 3.  

Defaults upon Senior Securities  

25

 

 

 

Item 6.  

Exhibits

25

 

 

 

 

Signatures

26

 

 

 


 

Table of Contents

Part I. Financial Information

Item 1. Consolidated Financial Statements

 

USA Technologies, Inc.

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

September 30, 

 

June 30, 

($ in thousands, except shares)

 

2017

 

2017

 

 

(unaudited)

 

(audited)

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,870

 

$

12,745

Accounts receivable, less allowance of $3,445 and $3,149, respectively

 

 

10,288

 

 

7,193

Finance receivables, less allowance of $22 and $19, respectively

 

 

3,082

 

 

11,010

Inventory

 

 

8,240

 

 

4,586

Prepaid expenses and other current assets

 

 

1,122

 

 

968

Total current assets

 

 

74,602

 

 

36,502

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

Finance receivables, less current portion

 

 

7,742

 

 

8,607

Other assets

 

 

750

 

 

687

Property and equipment, net

 

 

11,850

 

 

12,111

Deferred income taxes

 

 

28,205

 

 

27,670

Intangibles, net

 

 

578

 

 

622

Goodwill

 

 

11,492

 

 

11,492

Total non-current assets

 

 

60,617

 

 

61,189

 

 

 

 

 

 

 

Total assets

 

$

135,219

 

$

97,691

   

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

14,211

 

$

16,054

Accrued expenses

 

 

3,795

 

 

4,130

Line of credit, net

 

 

7,051

 

 

7,036

Capital lease obligations and current obligations under long-term debt

 

 

2,649

 

 

3,230

Income taxes payable

 

 

10

 

 

10

Deferred gain from sale-leaseback transactions

 

 

197

 

 

239

Total current liabilities

 

 

27,913

 

 

30,699

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Capital lease obligations and long-term debt, less current portion

 

 

1,049

 

 

1,061

Accrued expenses, less current portion

 

 

62

 

 

53

Deferred gain from sale-leaseback transactions, less current portion

 

 

99

 

 

100

Total long-term liabilities

 

 

1,210

 

 

1,214

 

 

 

 

 

 

 

Total liabilities

 

$

29,123

 

$

31,913

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, no par value, 1,800,000 shares authorized, no shares issued

 

 

 —

 

 

 —

Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $19,109 and $18,775 at September 30, 2017 and June 30, 2017, respectively

 

 

3,138

 

 

3,138

Common stock, no par value, 640,000,000 shares authorized, 50,194,731 and 40,331,645 shares issued and outstanding at September 30, 2017 and June 30, 2017, respectively

 

 

286,463

 

 

245,999

Accumulated deficit

 

 

(183,505)

 

 

(183,359)

Total shareholders’ equity

 

 

106,096

 

 

65,778

Total liabilities and shareholders’ equity

 

$

135,219

 

$

97,691

 

See accompanying notes.

 

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Table of Contents

USA Technologies, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

September 30, 

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

    

2017

    

2016

Revenues:

 

 

 

 

 

 

License and transaction fees

 

$

19,944

 

$

16,365

Equipment sales

 

 

5,673

 

 

5,223

Total revenues

 

 

25,617

 

 

21,588

 

 

 

 

 

 

 

Costs of sales:

 

 

 

 

 

 

Cost of services

 

 

13,326

 

 

11,243

Cost of equipment

 

 

5,090

 

 

4,178

Total costs of sales

 

 

18,416

 

 

15,421

 

 

 

 

 

 

 

Gross profit

 

 

7,201

 

 

6,167

   

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Selling, general and administrative

 

 

6,746

 

 

6,808

Integration and acquisition costs

 

 

762

 

 

101

Depreciation and amortization

 

 

245

 

 

208

Total operating expenses

 

 

7,753

 

 

7,117

 

 

 

 

 

 

 

Operating loss

 

 

(552)

 

 

(950)

   

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Interest income

 

 

80

 

 

73

Interest expense

 

 

(209)

 

 

(212)

Change in fair value of warrant liabilities

 

 

 -

 

 

(1,490)

Total other expense, net

 

 

(129)

 

 

(1,629)

 

 

 

 

 

 

 

Loss before income taxes

 

 

(681)

 

 

(2,579)

Benefit for income taxes

 

 

468

 

 

115

 

 

 

 

 

 

 

Net loss

 

 

(213)

 

 

(2,464)

Preferred dividends

 

 

(334)

 

 

(334)

Net loss applicable to common shares

 

$

(547)

 

$

(2,798)

Net loss per common share - basic and diluted

 

 

(0.01)

 

 

(0.07)

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic and diluted

 

 

47,573,364

 

 

38,488,005

 

See accompanying notes.

 

 

 

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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, 2017

  

445,063

  

$

3,138

  

40,331,645

  

$

245,999

  

$

(183,359)

  

$

65,778

Issuance of common stock in relation to public offering, net of offering costs incurred of $3,237 (a)

  

 

  

 

 

  

9,583,332

  

 

39,888

  

 

 

  

 

39,888

Stock based compensation

  

 

  

 

 

  

279,754

  

 

576

  

 

 

  

 

576

Excess tax benefit from stock plans (b)

  

 

  

 

 

  

 

  

 

 

  

 

67

  

 

67

Net loss

  

 

  

 

 

  

 

  

 

 

  

 

(213)

  

 

(213)

Balance, September 30, 2017

  

445,063

  

$

3,138

  

50,194,731

  

$

286,463

  

$

(183,505)

  

$

106,096


(a)

Refer to Note 11 regarding the public offering issued during July 2017.

(b)

Refer to Note 2 regarding the adoption of ASU 2016-09.

 

See accompanying notes.

 

 

 

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USA Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

September 30, 

($ in thousands)

    

2017

    

2016

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(213)

 

$

(2,464)

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

 

 

 

 

 

 

Non-cash stock based compensation

 

 

576

 

 

211

Gain on disposal of property and equipment

 

 

(18)

 

 

 -

Non-cash interest and amortization of debt discount

 

 

15

 

 

105

Bad debt expense

 

 

118

 

 

97

Depreciation and amortization

 

 

1,492

 

 

1,301

Change in fair value of warrant liabilities

 

 

 -

 

 

1,490

Excess tax benefits

 

 

67

 

 

 -

Deferred income taxes, net

 

 

(535)

 

 

(115)

Recognition of deferred gain from sale-leaseback transactions

 

 

(43)

 

 

(215)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(3,192)

 

 

(1,038)

Finance receivables

 

 

8,771

 

 

(5)

Inventory

 

 

(3,648)

 

 

(2,223)

Prepaid expenses and other current assets

 

 

(217)

 

 

(224)

Accounts payable and accrued expenses

 

 

(2,168)

 

 

(3,175)

Income taxes payable

 

 

 -

 

 

(10)

Net cash provided by (used in) operating activities

 

 

1,005

 

 

(6,265)

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment, including rentals

 

 

(992)

 

 

(810)

Proceeds from sale of property and equipment, including rentals

 

 

45

 

 

 -

Net cash used in investing activities

 

 

(947)

 

 

(810)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Cash used in retirement of common stock

 

 

 -

 

 

(31)

Proceeds from exercise of common stock warrants

 

 

 -

 

 

6,193

Issuance of common stock in public offering, net

 

 

39,888

 

 

 -

Repayment of capital lease obligations and long-term debt

 

 

(821)

 

 

(161)

Net cash provided by financing activities

 

 

39,067

 

 

6,001

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

39,125

 

 

(1,074)

Cash and cash equivalents at beginning of period

 

 

12,745

 

 

19,272

Cash and cash equivalents at end of period

 

$

51,870

 

$

18,198

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information :

 

 

 

 

 

 

Interest paid in cash

 

$

107

 

$

87

Income taxes paid in cash (refund), net

 

$

 -

 

$

 -

Supplemental disclosures of noncash financing and investing activities:

 

 

 

 

 

 

Equipment and software acquired under capital lease

 

$

227

 

$

254

 

See accompanying notes.

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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, 2017. 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 months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending June 30, 2018.  The balance sheet at June 30, 2017 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

BASIS OF PRESENTATION

Certain reclassifications of prior year’s data have been made to conform to current year’s presentation.  As disclosed in Note 13, the Company incurred integration and acquisition expenses during the current period and deemed it appropriate to have such costs individually captioned within the statement of operations.  Accordingly, the Company retrospectively reclassified integration and acquisition costs incurred in the corresponding period from the previous fiscal year to conform to the current period’s presentation.

 

2. ACCOUNTING POLICIES

RECENT ACCOUNTING PRONOUNCEMENTS

Accounting pronouncements adopted in fiscal year 2018 

In January 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2017-04 ("ASU 2017-04"), which eliminates Step 2 from the goodwill impairment test. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15,

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2019. We early adopted ASU 2017-04 for impairment tests to be performed on testing dates after July 1, 2017, which did not impact our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which modifies the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits are to be separately classified as an operating activity apart from other income tax cash flows. The standard also allows the Company to repurchase more of an employee’s vested shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows. The Company adopted this standard as of July 1, 2017.

The primary impact of adoption was the recognition of excess tax benefits in the Company's provision for income taxes which is applied prospectively starting July 1, 2017 in accordance with the guidance. Adoption of the new standard resulted in the recognition of $65 thousand of excess tax benefits in the Company's provision for income taxes for the three months ended September 30, 2017. Through June 30, 2017 excess tax benefits were reflected as a reduction of deferred tax assets via reducing actual operating loss carryforwards because such benefits had not reduced income taxes payable. Under the new standard the treatment of excess tax benefits changed and the cumulative excess tax benefits as of June 30, 2017 amounting to $67 thousand were credited to accumulated deficit.

The adoption of ASU No. 2016-09 did not impact our statement of cash flows for the quarters ended September 30, 2017 and 2016. 

Accounting pronouncements to be adopted.

The Company is evaluating whether the effects of the following recent accounting pronouncements or any other recently issued, but not yet effective accounting standards, will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).”  This ASU was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year. The new guidance provides a single model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The new standard also requires expanded qualitative and quantitative disclosures about the nature, timing and uncertainty of revenue and cash flows rising from contracts with customers. The ASU is now effective for fiscal years, and interim reporting periods within those years, beginning with the year ending June 30, 2019.

 

The Company’s project plan includes a three-phase approach to implementing this standard update. The company has commenced phase one, which includes the following activities: conducting internal surveys of the business, holding revenue recognition workshops with sales and business unit finance leadership, and reviewing a representative sample of revenue arrangements across the business to initially identify a set of applicable qualitative revenue recognition changes related to the new standard update. The objectives for the second phase of the project will be to establish and document key accounting policies, assess disclosure, business process and control impacts. Lastly, the objectives of phase three will comprise effectively implementing the new standard update and embedding the new accounting treatment into the Company’s business processes and controls to support the financial reporting requirements. Phase three is expected to be completed in the fourth quarter of 2018.

 

The Company is still evaluating the impact that the new standard will have on the Company’s consolidated financial statements and will be unable to quantify its impact until the third phase of the project has been completed. The standard is expected to impact the Company’s revenue recognition processes, primarily in the areas of the allocation of contract revenues. An entity can elect to apply the guidance under one of the following two methods: (i) retrospectively to each prior reporting period presented – referred to as the full retrospective method or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earning – referred to as the modified retrospective method.  The method of adoption has not yet been determined and is not expected to be finalized until the second phase of the project plan has been completed.

 

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In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The company is the lessee under various agreements which are accounted for as operating leases. This amendment will be effective for the Company beginning with the year ending June 30, 2020, including interim periods within those fiscal years. Early application is permitted.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326).”  The new guidance introduces the accounting for estimated credit losses pertaining to certain types of financial instruments, including but not limited to, trade and lease receivables.  This pronouncement will be effective for fiscal years beginning after December 15, 2019.  Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments.” The new guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This pronouncement will be effective for the Company beginning with the year ending June 30, 2019, and interim periods within that fiscal year. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the company would be required to apply the amendments prospectively as of the earliest date practicable.  Upon adoption, the Company does not anticipate significant changes to the Company's existing accounting policies or presentation of the Statement of Cash Flows. 

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.”     ASU 2017-01 provides guidance in ascertaining whether a collection of assets and activities is considered a business.  Adoption of the amendment will be applied prospectively effective for annual periods beginning after December 15, 2017 with early adoption permissible for specific transactions. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.

 

 

3. FINANCE RECEIVABLES

 

Finance receivables consist of the following:

 

 

 

 

 

 

 

 

   

 

September 30, 

 

June 30, 

($ in thousands)

    

2017

    

2017

Total finance receivables

 

$

10,824

 

$

19,617

Less current portion

 

 

3,082

 

 

11,010

Non-current portion of finance receivables

 

$

7,742

 

$

8,607

 

The Company accounts for their finance receivables using delinquency and nonaccrual data as key performance indicators.  The Company classified $248 thousand and $102 thousand as outstanding and nonperforming as of September 30, 2017 and June 30, 2017, respectively.  The Company expects to collect on their outstanding finance receivables, less any portion currently reserved, without the contracting of third parties. At September 30, 2017 and June 30, 2017, credit quality indicators consisted of the following:

 

 

 

 

 

 

 

 

Credit risk profile based on payment activity:

 

September 30, 

 

June 30, 

($ in thousands)

    

2017

    

2017

Performing

 

$

10,576

 

$

19,515

Nonperforming

 

 

248

 

 

102

Total

 

$

10,824

 

$

19,617

 

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Age Analysis of Past Due Finance Receivables

As of September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 and under

 

31 – 60

 

61 – 90

 

Greater than

 

 

 

 

 

Total

 

 

Days   Past

 

Days Past

 

Days   Past

 

90 Days Past

 

Total

 

 

 

Finance

($ in thousands)

 

Due

 

Due

 

Due

 

Due

 

Non-Performing

 

Performing

 

Receivables

QuickStart Leases

 

$

103

 

$

 3

 

$

58

 

$

84

 

$

248

 

$

10,576

 

$

10,824

 

 

Age Analysis of Past Due Finance Receivables

As of June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 and under

 

31 – 60

 

61 – 90

 

Greater than

 

 

 

 

 

 

Total

 

 

Days   Past

 

Days Past

 

Days Past

 

90 Days Past

 

Total

 

 

 

Finance

($ in thousands)

 

Due

 

Due

 

Due

 

Due

 

Non-Performing

 

Performing

 

Receivables

QuickStart Leases

 

$

29

 

$

 3

 

$

35

 

$

35

 

$

102

 

$

19,515

 

$

19,617

 

 

4. INVENTORY

 

Inventory, net of reserves, was $8.2 million and $4.6 million as of September 30, 2017 and June 30, 2017, respectively.  Inventory consists of finished goods. The company's inventories are valued at the lower of cost or net realizable value.

 

The Company establishes allowances for obsolescence of inventory based upon quality considerations and assumptions about future demand and market conditions.

 

5. EARNINGS PER SHARE

 

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

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2017

 

 

Net Loss

 

Shares

 

Per-Share

 

 

(Numerator)

 

(Denominator)

 

Amount

Net loss from continuing operations

 

$

(213)

 

 

 

 

 

Less: Preferred stock dividends

 

 

(334)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

Net loss available to common shareholders

 

 

(547)

 

47,573,364

 

$

(0.01)

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

Incremental shares

 

 

 -

 

 -

(a)

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

Net loss available to common shareholders plus assumed conversions

 

$

(547)

 

47,573,364

 

$

(0.01)

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For the three months ended September 30, 2016

 

 

Net Loss

 

Shares

 

Per-Share

 

 

(Numerator)

 

(Denominator)

 

Amount

Net loss from continuing operations

 

$

(2,464)

 

 

 

 

 

Less: Preferred stock dividends

 

 

(334)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

Net loss available to common shareholders

 

 

(2,798)

 

38,488,005

 

$

(0.07)

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

Incremental shares

 

 

 -

 

 -

(a)

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

Net loss available to common shareholders plus assumed conversions

 

$

(2,798)

 

38,488,005

 

$

(0.07)

____________________

(a)

517,825 and 1,281,035 shares were excluded for the three months ended September 30, 2017 and 2016, respectively, as the effects would be anti-dilutive.

The change in the average number of shares that were anti-dilutive in the three months ended September 30, 2017 compared to the same period last year, was due to warrants exercised in connection with our common stock during September 2016.

6. GOODWILL AND INTANGIBLES

 

Intangible asset balances and goodwill consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017

 

 

 

 

 

 

Accumulated

 

 

 

Amortization

($ in thousands)

    

Gross

    

Amortization

    

Net

    

Period

Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

 

 2

 

 

(2)

 

 

 —

 

2 years

Brand

 

 

95

 

 

(55)

 

 

40

 

3 years

Developed technology

 

 

639

 

 

(224)

 

 

415

 

5 years

Customer relationships

 

 

149

 

 

(26)

 

 

123

 

10 years

Total Intangible Assets

 

$

885

 

$

(307)

 

$

578

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

11,492

 

 

 —

 

 

11,492

 

Indefinite

 

 

 

 

 

 

 

 

 

 

 

 

Total Intangible Assets & Goodwill

 

$

12,377

 

 

(307)

 

$

12,070

 

 

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As of June 30, 2017

 

 

 

 

 

 

Accumulated

 

 

 

Amortization

($ in thousands)

    

Gross

    

Amortization

    

Net

    

Period

Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

 

 2

 

 

(2)

 

 

 —

 

2 years

Brand

 

 

95

 

 

(48)

 

 

47

 

3 years

Developed technology

 

 

639

 

 

(191)

 

 

448

 

5 years

Customer relationships

 

 

149

 

 

(22)

 

 

127

 

10 years

Total Intangible Assets

 

$

885

 

$

(263)

 

$

622

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

11,492

 

 

 —

 

 

11,492

 

Indefinite

 

 

 

 

 

 

 

 

 

 

 

 

Total Intangible Assets & Goodwill

 

$

12,377

 

 

(263)

 

$

12,114

 

 

 

For both the three months ended September 30, 2017 and 2016, there was $44 thousand in amortization expense related to intangible assets.

 

7. LINE OF CREDIT

 

During the fiscal year ended June 30, 2016, the Company entered into a Loan and Security Agreement and other ancillary documents (as amended, the “Heritage Loan Documents”) with Heritage Bank of Commerce (“Heritage Bank”), providing for a secured asset-based revolving line of credit in an amount of up to $12.0 million (the “Heritage Line of Credit”) at an interest rate calculated based on the Federal Reserves’ Prime, which was 4.25% at September 30, 2017, plus 2.25%. The Heritage Line of Credit and the Company’s obligations under the Heritage Loan Documents are secured by substantially all of the Company’s assets, including its intellectual property.

 

During March 2017, the Company entered into the third amendment with Heritage Bank that extended the maturity date of the Heritage Line of Credit from March 29, 2017 to September 30, 2018.

At the time of maturity, all outstanding advances under the Heritage Line of Credit as well as any unpaid interest are due and payable. Prior to maturity of the Heritage Line of Credit, the Company may prepay amounts due under the Heritage Line of Credit without penalty, and subject to the terms of the Heritage Loan Documents, may re-borrow any such amounts. The Heritage Loan Documents contain customary representations and warranties and affirmative and negative covenants applicable to the Company.

The balance due on the Heritage Line of Credit was $7.1 million at September 30, 2017 and at June 30, 2017.  Included in the Heritage Line of Credit balance is $60 thousand and $75 thousand of unamortized debt issuance costs, which is reflected in our net liability of $7.1 million and $7.0 million as of September 30, 2017 and June 30, 2017, respectively.  As of September 30, 2017, $4.9 million was available under our line of credit. Interest expense on the line of credit was approximately $118 thousand and $107 thousand for the three months ended September 30, 2017 and 2016, respectively.

8. LONG-TERM DEBT

The Company periodically enters into capital lease obligations to finance network servers, computers, office furniture and equipment related support for use in its daily operations. During the three months ended September 30, 2017, the Company entered into capital lease obligations totaling $227 thousand, comprised of monthly installments of $7 thousand  due within three years.  The value of the acquired equipment is included in property and equipment and depreciated accordingly.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

As of September 30, 2017 the Company held no level 1, level 2, or level 3 financial instruments.

 

As of June 30, 2016, 2.2 million warrants with a fair value of $3.7 million comprised the Company’s Level 3 financial instruments. The Level 3 financial instruments consisted of common stock warrants issued by the Company in March 2011 to purchase shares of the Company’s common stock.  The Level 3 financial instruments included features requiring liability

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treatment of the warrants, with the fair value of the common stock based on valuations performed by an independent third-party valuation firm. The fair value was determined using proprietary valuation models using the quality of the underlying securities of the warrants, restrictions on the warrants and security underlying the warrants, time restrictions and precedent sale transactions completed in the secondary market or in other private transactions. During the three months ended September 30, 2016, all of the aforementioned warrants were exercised resulting in a $5.2 million reclassification to Common Stock and the net difference of $1.5 million was recorded as a loss on fair value associated with the warrant liability.    

 

10. INCOME TAXES

 

For the three months ended September 30, 2017, an income tax benefit of $468 thousand (substantially all deferred income taxes) was recorded based upon loss before benefit for income taxes using an estimated annual effective income tax rate of 59.2% for the fiscal year ending June 30, 2018 plus an income tax benefit for excess tax benefits recognized during the three months which were treated discretely.

For the three months ended September 30, 2016, an income tax benefit of $115 thousand (substantially all deferred income taxes) was recorded based upon loss before benefit for income taxes using an estimated annual effective income tax rate of 25.7% for the fiscal year ending June 30, 2017 net of a provision for the tax effect of the change in the fair value of warrant liabilities which was treated discretely.

11. EQUITY

 

On July 25, 2017, the Company closed its underwritten public offering of 9,583,332 shares of its common stock at a public offering price of $4.50 per share. The foregoing included the full exercise of the underwriters' option to purchase 1,249,999 additional shares from the Company. The gross proceeds to the Company from the offering, before deducting underwriting discounts and commissions and other offering expenses, was approximately $43.1 million.

 

WARRANTS

 

During the three months ended September 30, 2017, no warrants were exercised as compared to the three months ended September 30, 2016 where 2.4 million warrants were exercised at $2.6058 per share, yielding proceeds of $6.2 million. The following table summarizes warrant activity for the three months ended September 30, 2017 and 2016:

 

 

 

 

 

 

Three months ended

 

September 30, 

 

2017

    

2016

Beginning balance

23,978

 

2,445,653

Issued

 —

 

 —

Exercised

 —

 

(2,376,675)

Expired

 —

 

 —

Cancelled

 —

 

 —

Ending balance

23,978

 

68,978

 

STOCK OPTIONS

 

The Company estimates the grant date fair value of the stock options it grants using a Black-Scholes valuation model. The Company’s assumption for expected volatility is based on its historical volatility data related to market trading of its own common stock. The Company bases its assumptions for expected life of the new stock option grants on the life of the option granted, and if relevant, its analysis of the historical exercise patterns of its stock options. The dividend yield assumption is based on dividends expected to be paid over the expected life of the stock option. The risk-free interest rate assumption is determined by using the U.S. Treasury rates of the same period as the expected option term of each stock option.

 

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In July 2017, 135,000 stock options were granted for 11 employees vesting 1/3 on July 26, 2018, 1/3 on July 26, 2019 and 1/3 on July 26, 2020 expiring if not exercised prior to July 26, 2022. The options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended.

 

In August 2017, the Company awarded stock options to its Chief Executive Officer (CEO) and Chief Financial Officer (CFO) to purchase up to 19,047 and 25,000 shares respectively of common stock at an exercise price of $5.25 per share. The CEO options vest on August 16, 2018, expiring if not exercised prior to August 16, 2024.  The CFO options vest 1/3 on August 16, 2018, 1/3 on August 16, 2019 and 1/3 on August 16, 2020, expiring if not exercised prior to August 16, 2024. The CEO options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and the CFO options are non-qualified stock options. 

 

The fair value of options granted during the three months ended September 30, 2017 and 2016 was determined using the following weighted average assumptions:

 

 

 

 

 

 

 

 

 

 

Three months ended

 

September 30, 

 

2017

 

2016

Expected volatility

 

50.21 - 50.89

%  

 

 

50.37

%

Expected life (years)

 

4.0 - 4.5

 

 

 

4.0

 

Expected dividends

 

 —

%  

 

 

 —

%

Risk-free interest rate

 

1.64 - 1.72

%  

 

 

1.06

%

Number of options granted

 

179,047

 

 

 

20,080

 

Weighted average exercise price

$

5.66

 

 

$

4.98

 

Weighted average grant date fair value

$

2.42

 

 

$

1.98

 

 

Stock based compensation related to all stock options for the three months ended September 30, 2017 and 2016 was $149 thousand and $48 thousand, respectively. 

 

COMMON STOCK

 

On July 1, 2017, $90 thousand of stock grants were awarded to each non-employee Director based on the closing price of the Company’s Common Stock on June 8, 2017 (the date for which the stock grants were initially approved), for a total of 98,184 shares. The shares vest ratably on a monthly basis over the two year period following July 1, 2017.  The total expense recognized for these grants for the three months ending September 30, 2017 was $101 thousand.

 

During the three months ended September 30, 2017, the Company awarded an aggregate of 177,363 shares to its Chief Executive Officer, Chief Financial Officer and Chief Services Officer under its fiscal year 2017 long term stock incentive plan and an aggregate of 4,207 shares to two non-employee Directors in satisfaction of board fees.

LONG TERM INCENTIVE PLANS

The Board approved the Fiscal Year 2018 Long-Term Stock Incentive Plan (the “2018 LTI Stock Plan”) which provides that executive officers would be awarded shares of common stock of the Company in the event that certain metrics relating to the Company’s 2018 fiscal year would result in specified ranges of year-over-year percentage growth.  The metrics are total number of connections as of June 30, 2018 as compared to total number of connections as of June 30, 2017 (40% weighting) and adjusted EBITDA earned during the 2018 fiscal year as compared to the adjusted EBITDA earned during the 2017 fiscal year (60% weighting).  If none of the minimum threshold year-over-year percentage target goals are achieved, the executive officers would not be awarded any shares.  If all of the year-over-year percentage target goals are achieved, the executive officers would be awarded shares having the following value: Chief Executive Officer (“CEO”) - $840,000  (160% of base salary), Chief Financial Officer (“CFO”) - $300,000  (100% of base salary), Chief Services Officer (“CSO”) - $275,000  (100% of base salary).  If all of the maximum distinguished year over year percentage target goals are achieved, the executive officers would be awarded shares having the following value: Chief Executive Officer (“CEO”) - $1,260,000  (240% of base salary), Chief Financial Officer (“CFO”) - $450,000  (150% of base salary), Chief Services Officer (“CSO”) - $412,500 (150% of base salary).  Assuming the minimum threshold year-over-year percentage target goal would be achieved for a particular metric, the number of shares to be awarded for that metric would be determined on a pro rata basis, provided that the award would not exceed the maximum distinguished award for that metric.  The  

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shares awarded under the 2018 LTI Stock Plan would vest as follows: one-third at the time of issuance; one-third on June 30, 2019; and one-third on June 30, 2020.

The Company had long-term stock incentive plans (“LTI”) in prior fiscal years for its then executive officers. Stock based compensation related to the LTI plans was as follows in the three months ended September 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

September 30, 

($ in thousands, except per share data)

    

2017

    

2016

FY18 LTI Plan

 

$

216

 

$

 —

FY17 LTI Plan

 

 

64

 

 

71

FY16 LTI Plan

 

 

 9

 

 

 3

FY15 LTI Plan

 

 

 —

 

 

 7

Total

 

$

289

 

$

81

 

 

12. COMMITMENTS AND CONTINGENCIES

 

During the quarter ended September 30, 2017, the Company expanded the leased space for its headquarters in Malvern, Pennsylvania to a total of 23,138 square feet. The company’s monthly base rent now is approximately $47 thousand with a lease expiration date of November 30, 2023.

From time to time, the Company is involved in various legal proceedings arising during the normal course of business.  In the opinion of the Company’s management,  these proceedings will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

13. SUBSEQUENT EVENTS

On November 7, 2017, the Company announced that it had signed a definitive agreement to acquire Cantaloupe Systems, Inc. (“Cantaloupe”) in a transaction valued at approximately $85 million.  Pursuant to the agreement, the Company will pay $65 million cash and issue $19.8 million in common stock of the Company for the acquisition.  The Company will also assume up to $1.8 million of Cantaloupe’s notes payable.  The purchase price is subject to a working capital adjustment and certain other adjustments to be settled following the closing.

Integration and acquisition costs related to the planned Cantaloupe acquisition were $762 thousand for the three months ended September 30, 2017.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This Form 10-Q 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 unrelated to our operating performance;

 

·

the ability of the Company to raise funds in the future through sales of securities or debt financing in order to sustain its operations if an unexpected or unusual event would occur;

 

·

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

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·

whether the Company’s current or future customers purchase, lease, rent or utilize ePort devices or our other products in the future at levels currently anticipated by our Company;

 

·

whether the Company’s customers continue to utilize the Company’s transaction processing and related services, as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice;

 

·

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

 

·

the ability of the Company to sell to third party lenders all or a portion of our finance receivables;

 

·

the ability of a sufficient number of our customers to utilize third party financing companies under our QuickStart program in order to improve our net cash used by operating activities;

 

·

the incurrence by us of any unanticipated or unusual non-operating expenses which would require us to divert our cash resources from achieving our business plan;

 

·

the ability of the Company to predict or estimate its future quarterly or annual revenues and expenses given the developing and unpredictable market for its products;

 

·

the ability of the Company to retain key customers from whom a significant portion of its revenues are derived;

 

·

the ability of a key customer to reduce or delay purchasing products from the Company;

 

·

the ability of the Company to obtain widespread commercial acceptance of its products and service offerings such as ePort QuickConnect, mobile payment and loyalty programs;

 

·

whether any patents issued to the Company will provide the Company with any competitive advantages or adequate protection for its products, or would be challenged, invalidated or circumvented by others;

 

·

the ability of the Company to operate without infringing the intellectual property rights of others;

 

·

the ability of our products and services to avoid unauthorized hacking or credit card fraud;

 

·

whether we experience material weaknesses in our internal controls over financial reporting in the future, and are not able to accurately or timely report our financial condition or results of operations;

 

·

whether our suppliers would increase their prices, reduce their output or change their terms of sale; and

 

·

our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.

 

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

 

Any forward-looking statement made by us in this Form 10-Q speaks only as of the date of this Form 10-Q.  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-Q or to reflect the occurrence of unanticipated events.

 

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OVERVIEW OF THE COMPANY

 

USA Technologies, Inc. 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.

 

The Company generates revenue in multiple ways. During the quarters ended September 30, 2017 and 2016, we derived 77.9% and 75.8% of our revenues from recurring license and transaction fees related to our ePort Connect service and 22.1% and 24.2% of our revenue from equipment sales, respectively. Connections to our service stem from the sale or lease of our POS electronic payment devices or certified payment software or the servicing of similar third-party installed POS terminals. Connections to the ePort Connect service are the most significant driver of the Company’s revenues, particularly the recurr ing revenues from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:

 

·

Purchasing devices directly from the Company or one of its authorized resellers;

 

·

Financing devices under the Company’s QuickStart Program, which are non-cancellable sixty month sales-type leases, through an unrelated equipment financing company, if available, or directly from the Company; and

 

·

Renting devices under the Company’s JumpStart Program, which are cancellable month-to-month operating leases.

 

Highlights of the Company are below:

 

·

Over 104 employees with its headquarters in Malvern, Pennsylvania;

 

·

Over 13,250 customers and 594,000 connections to our service;

 

·

Three direct sales teams at the national, regional, and local customer-level and a growing number of OEMs and national distribution partners;

 

·

76 United States and foreign patents are in force;

 

·

The Company’s fiscal year ends June 30 th ; and

 

·

The Company has traded on the NASDAQ under the symbol “USAT” since 2007.

 

The Company has net deferred tax assets of approximately $28.2 million predominantly resulting from a series of operating loss carry forwards that may be available to offset future taxable income.

 

CRITICAL ACCOUNTING POLICIES

 

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

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critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. Accounting policies currently deemed critical are listed below:

 

Revenue Recognition

 

Revenue from the sale or QuickStart lease of equipment is recognized on the terms of free-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.

 

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 QuickStart contracts qualify for sales type lease accounting. Accordingly, the Company recognizes a portion of lease payments as interest income. At the end of the lease period, the customer would have the option to purchase the device at its residual value.  

 

Long Lived Assets

 

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

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. 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.

 

Company intangible assets include non-compete agreements, brand, developed technology, and customer relationships.  They 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.

 

Allowance for Doubtful 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.

 

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.

 

Valuation Allowance

 

18

 


 

Table of Contents

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, 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 incurred during the periods ended September 30, 2017 and 2016.

 

Recent Accounting Pronouncements

See Note 2 to the interim Consolidated Financial Statements for a description of recent accounting pronouncements. 

TRENDING QUARTERLY FINANCIAL DATA

 

The following tables show certain financial and non-financial data that management believes give readers insight into certain trends and relationships about the Company’s financial performance.

 

Five Quarter Select Key Performance Indicators including Connections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended

 

 

September 30, 

 

June 30, 

 

March 31, 

 

December 31, 

 

September 30, 

 

 

2017

    

2017

    

2017

    

2016

    

2016

Connections:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross New Connections

 

 

28,000

 

 

70,000

 

 

40,000

 

 

25,000

 

 

22,000

% from Existing Customer Base

 

 

82%

 

 

93%

 

 

88%

 

 

80%

 

 

86%

Net New Connections

 

 

26,000

 

 

64,000

 

 

35,000

 

 

21,000

 

 

19,000

Total Connections

 

 

594,000