USA Technologies, Inc.
USA TECHNOLOGIES INC (Form: 10-Q, Received: 05/13/2016 06:11:27)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 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 140, 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  x  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 x 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 x  

 

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

 

As of May 2, 2016, there were 36,734,629 shares of Common Stock, no par value, outstanding.

 

 

 

 

  

USA TECHNOLOGIES, INC.

 

TABLE OF CONTENTS

 

Part I - Financial Information    
       
Item 1. Consolidated Financial Statements (Unaudited)    
       
  Consolidated Balance Sheets – March 31, 2016 and June 30, 2015   3
       
  Consolidated Statements of Operations – Three and nine months ended March 31, 2016 and 2015   4
       
  Consolidated Statement of Shareholders’ Equity – Nine months ended March 31, 2016   5
       
  Consolidated Statements of Cash Flows – Three and nine months ended March 31, 2016 and 2015   6
       
  Notes to Consolidated Financial Statements   7
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   40
       
Item 4. Controls and Procedures   40
       
Part II - Other Information    
       
Item 1. Legal Proceedings   40
       
Item 3. Defaults upon Senior Securities   40
       
Item 6. Exhibits   41
       
  Signatures   42

 

  2  

 

  

USA Technologies, Inc.
Consolidated Balance Sheets
(Unaudited)

 

    March 31,     June 30,  
($ in thousands, except shares)   2016     2015  
             
Assets            
Current assets:            
Cash   $ 14,901     $ 11,374  
Accounts receivable, less allowance for doubtful accounts of $2,058 and $1,309, respectively     8,345       5,971  
Finance receivables     1,677       941  
Inventory     2,341       4,216  
Prepaid expenses and other current assets     1,060       574  
Deferred income taxes     1,276       1,258  
Total current assets     29,600       24,334  
                 
Finance receivables, less current portion     3,042       3,698  
Other assets     337       350  
Property and equipment, net     10,584       12,869  
Deferred income taxes     25,701       25,788  
Goodwill and intangibles     12,976       8,095  
Total assets   $ 82,240     $ 75,134  
                 
Liabilities and shareholders’ equity                
Current liabilities:                
Accounts payable   $ 12,029     $ 10,542  
Accrued expenses     3,339       2,108  
Line of credit     6,980       4,000  
Current obligations under long-term debt     625       478  
Income taxes payable     -       54  
Warrant liabilities     5,964       -  
Deferred gain from sale-leaseback transactions     860       860  
Total current liabilities     29,797       18,042  
                 
Long-term liabilities:                
Long-term debt, less current portion     1,742       1,854  
Accrued expenses, less current portion     19       49  
Warrant liabilities, less current portion     -       978  
Deferred gain from sale-leaseback transactions, less current portion     255       900  
Total long-term liabilities     2,016       3,781  
                 
Total liabilities     31,813       21,823  
                 
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 $18,108 and $17,440, respectively     3,138       3,138  
Common stock, no par value: Authorized shares- 640,000,000 Issued and outstanding shares- 36,578,715 and 35,763,663, respectively     227,924       224,874  
Accumulated deficit     (180,635 )     (174,701 )
                 
Total shareholders’ equity     50,427       53,311  
                 
Total liabilities and shareholders’ equity   $ 82,240     $ 75,134  

 

See accompanying notes.

 

  3  

 

  

USA Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)

 

    Three months ended     Nine months ended  
    March 31,     March 31,  
($ in thousands, except per share data)   2016     2015     2016     2015  
                         
Revenues:                        
License and transaction fees   $ 14,727     $ 11,059     $ 41,326     $ 31,695  
Equipment sales     5,634       4,298       14,138       8,736  
Total revenues     20,361       15,357       55,464       40,431  
                                 
Costs of sales/revenues:                                
Cost of services     9,703       7,157       27,475       21,566  
Cost of equipment     4,986       3,054       11,787       6,850  
Total costs of sales/revenues     14,689       10,211       39,262       28,416  
Gross profit     5,672       5,146       16,202       12,015  
                                 
Operating expenses:                                
Selling, general and administrative     6,094       4,281       15,652       11,444  
Depreciation     173       135       439       456  
Total operating expenses     6,267       4,416       16,091       11,900  
Operating income (loss)     (595 )     730       111       115  
                                 
Other income (expense):                                
Interest income     67       27       138       41  
Interest expense     (180 )     (85 )     (403 )     (209 )
Change in fair value of warrant liabilities     (4,805 )     (1,101 )     (5,692 )     (656 )
Total other income (expense), net     (4,918 )     (1,159 )     (5,957 )     (824 )
                                 
Loss before provision for income taxes     (5,513 )     (429 )     (5,846 )     (709 )
Benefit (provision) for income taxes     93       (138 )     (88 )     (180 )
                                 
Net loss     (5,420 )     (567 )     (5,934 )     (889 )
Cumulative preferred dividends     (334 )     (334 )     (668 )     (668 )
Net loss applicable to common shares   $ (5,754 )   $ (901 )   $ (6,602 )   $ (1,557 )
Net loss per common share - basic and diluted   $ (0.16 )   $ (0.03 )   $ (0.18 )   $ (0.04 )
Basic and diluted weighted average number of common shares outstanding     36,161,613       35,747,979       35,961,648       35,705,210  

 

See accompanying notes.

 

  4  

 

  

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, 2015, as previously reported     442,968     $ 3,138       35,747,242     $ 224,874     $ (174,701 )   $ 53,311  
Adjustments (See Note 18 of the Notes to Consolidated Financial Statements)     2,095       -       16,421       -       -       -  
Balance, June 30, 2015, as adjusted     445,063     $ 3,138       35,763,663     $ 224,874     $ (174,701 )   $ 53,311  
                                                 
Warrants issued in conjunction with Line of Credit Agreement     -       -       -       52       -       52  
Reclass of fair value of warrant liability upon exercise of warrants                     -       706               706  
Exercise of warrants     -       -       645,100       1,681       -       1,681  
Stock based compensation                                                
2013 Stock Incentive Plan     -       -       169,913       377       -       377  
2014 Stock Option Incentive Plan     -       -       12,785       274       -       274  
Retirement of common stock     -       -       (12,746 )     (40 )     -       (40 )
Net loss     -       -       -       -       (5,934 )     (5,934 )
                                                 
Balance, March 31, 2016     445,063     $ 3,138       36,578,715     $ 227,924     $ (180,635 )   $ 50,427  

 

See accompanying notes.

 

  5  

 

 

USA Technologies, Inc.
Consolidated Statements of Cash Flows

(Unaudited)

 



    Three months ended     Nine months ended  
($ in thousands)   March 31,     March 31,  
    2016     2015     2016     2015  
OPERATING ACTIVITIES:                        
Net loss   $ (5,420 )   $ (567 )   $ (5,934 )   $ (889 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                                
Charges incurred in connection with the vesting and issuance of common stock and common stock options for employee and director compensation     142       216       651       541  
Gain on disposal of property and equipment     (15 )     (6 )     (57 )     (13 )
Bad debt expense     506       302       980       602  
Depreciation     1,190       1,433       3,863       4,350  
Amortization of intangible assets     44       -       44       -  
Change in fair value of warrant liabilities     4,805       1,101       5,692       656  
Deferred income taxes, net     (93 )     121       88       184  
Recognition of deferred gain from sale-leaseback transactions     (215 )     (216 )     (645 )     (619 )
Changes in operating assets and liabilities, net of acquisition:                                
Accounts receivable     (1,872 )     (984 )     (3,352 )     (1,821 )
Finance receivables     (154 )     (2,248 )     547       (3,782 )
Inventory     250       651       1,118       (1,292 )
Prepaid expenses and other assets     (160 )     152       (366 )     (207 )
Accounts payable     4,154       (141 )     1,487       (2,046 )
Accrued expenses     1,166       234       1,151       (39 )
Income taxes payable     -       17       (70 )     (4 )
                                 
Net cash provided by (used in) operating activities     4,328       65       5,197       (4,379 )
                                 
INVESTING ACTIVITIES:                                
Purchase and additions of property and equipment     (164 )     (4 )     (331 )     (54 )
Purchase of property for rental program     -       -       -       (1,642 )
Proceeds from sale of rental equipment under sale-leaseback transactions     -       -       -       4,994  
Proceeds from sale of property and equipment     19       19       124       54  
Cash paid for assets acquired from VendScreen     (5,625 )     -       (5,625 )     -  
                                 
Net cash provided by (used in) investing activities     (5,770 )     15       (5,832 )     3,352  
                                 
FINANCING ACTIVITIES:                                
Cash used for the retirement of common stock     -       -       (40 )     (62 )
Proceeds from exercise of common stock warrants     1,652       -       1,681       -  
Proceeds (payments) from line of credit     33       -       3,033       (1,000 )
Proceeds from long-term debt     -       1,753       -       1,753  
Repayment of long-term debt     (151 )     (92 )     (512 )     (261 )
                                 
Net cash provided by financing activities     1,534       1,661       4,162       430  
                                 
Net increase (decrease) in cash     92       1,741       3,527       (597 )
Cash at beginning of period     14,809       6,734       11,374       9,072  
Cash at end of period   $ 14,901     $ 8,475     $ 14,901     $ 8,475  
                                 
Supplemental disclosures of cash flow information:                                
Interest paid in cash   $ 191     $ 67     $ 404     $ 202  
Depreciation expense allocated to cost of services   $ 1,051     $ 1,271     $ 3,436     $ 3,867  
Reclass of rental program property to inventory, net   $ 347     $ 1,374     $ 845     $ 1,393  
Prepaid items financed with debt   $ -     $ -     $ 103     $ 103  
Equipment and software acquired under capital lease   $ 409     $ -     $ 444     $ 108  
Disposal of property and equipment   $ 189     $ 343     $ 526     $ 395  
Disposal of property and equipment under sale-leaseback transactions   $ -     $ -     $ -     $ 3,873  
Fair value of common stock warrants at issuance recorded as a debt discount   $ 52     $ -     $ 52     $ -  
Debt financing costs financed with debt   $ 79     $ -     $ 79     $ -  

 

See accompanying notes.

 

  6  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

1. ACCOUNTING POLICIES

 

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, 2015. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the three and nine-month periods ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending June 30, 2016. The balance sheet at June 30, 2015 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.

 

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.

 

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 uncollectible accounts receivable is management’s best estimate as of the respective reporting date. If the factors described above were to deteriorate, additional amounts may need to be added to the allowance.

 

Changes in the estimated allowance are due to write-offs or collections of receivables. Other changes in the estimated allowance in the period are charged to bad debt expense and included in selling, general and administrative expenses on the statements of operations.

 

  7  

 

 

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

1. ACCOUNTING POLICIES (CONTINUED)

 

FINANCE RECEIVABLES

 

The Company offers extended payment terms to certain customers for equipment sales under its QuickStart Program. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification® (“ASC”) Topic 840, “Leases”, agreements under the QuickStart 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 or QuickStart 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

 

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

 

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.

 

INTANGIBLE ASSETS

 

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

 

The Company’s trademarks with an indefinite economic life are not being amortized. The trademarks, not subject to amortization, are related to the EnergyMiser asset group and consist of four trademarks. The Company tests indefinite-lived intangible assets for impairment using a two-step process. The first step screens for potential impairment, while the second step measures the amount of impairment. The Company uses a relief from royalty analysis to complete the first step in this process. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date for its indefinite-lived 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. 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.

 

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).

 

  8  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

1. ACCOUNTING POLICIES (CONTINUED)

 

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.

 

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 leasing company for the devices. At the end of the lease period, the customer would have the option to purchase the device at its residual value.

 

PREFERRED STOCK

 

Preferred stock is recorded on the balance sheet in the equity section at its par value.

 

ACCOUNTING FOR EQUITY AWARDS

 

In accordance with ASC 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 provisions of FASB ASC 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. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods.

 

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

 

  9  

 

   

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

1. ACCOUNTING POLICIES (CONTINUED)

 

RECLASSIFICATION

 

As reported in the Company’s Form 10-Q for the quarter ended September 30, 2015, commencing with the September 30, 2015 financial statements, the Company changed the manner in which it presents certain uncollected customer accounts receivable and the related allowance in its consolidated balance sheets and the related statements of cash flows. These accounts receivable represent a large number of small balance amounts due from customers for processing and service fees which had not been billed to customers, and as to which, there had been no customer transaction proceeds from which the Company could collect the amounts due in accordance with its normal procedures. The previous accounting classification recorded these amounts as a reduction of its accounts payable in the consolidated balance sheets and the related statements of cash flows. The new accounting classification moves these amounts to accounts receivable and allowance for bad debt.

 

Accordingly, the respective balances for all prior periods presented in these financial statements were reclassified in order to be consistent with and comparable to the accounting classification of these items in our March 31, 2016 financial statements. The new accounting classification as well as the reclassification for prior periods had no effect on the consolidated statements of operations or the consolidated statements of shareholders’ equity. The details of the reclassification of the respective consolidated balance sheets and the consolidated statements of cash flows amounts are presented in the table below: 

 

($ in thousands)   June 30, 2015 Balances  
Consolidated Balance Sheet Line Items   As previously
reported
    Reclassification     As reclassified  
Accounts Receivable, net of allowance for doubtful accounts:                  
Reclassification of balances included in accounts payable to accounts receivable           $ 2,114          
Reclassification of the allowance for doubtful accounts in accounts payable             (815 )        
    $ 4,672     $ 1,299     $ 5,971  
                         
Allowance for Doubtful Accounts:                        
Reclassification of the allowance for doubtful accounts in accounts payable   $ (494 )   $ (815 )   $ (1,309 )
                         
Accounts Payable:                        
Reclassification of balances included in accounts payable to accounts receivable           $ 2,114          
Reclassification of the allowance for doubtful accounts in accounts payable             (815 )        
    $ 9,243     $ 1,299     $ 10,542  

 

($ in thousands)   For the three months ended March 31, 2015  
Consolidated Statement of Cash Flow Line Items   As previously
reported
    Reclassification     As reclassified  
Accounts Receivable                  
Reclassification of cash provided by and included in accounts payable to accounts receivable   $ (974 )   $ (10 )   $ (984 )
                         
Accounts Payable:                        
Reclassification of cash used in and included in accounts payable to accounts receivable   $ (151 )   $ 10     $ (141 )

 

  10  

 

 

 

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

1. ACCOUNTING POLICIES (CONTINUED)

 

($ in thousands)   For the nine months ended March 31, 2015  
Consolidated Statement of Cash Flow Line Items   As previously
reported
    Reclassification     As reclassified  
Accounts Receivable                  
Reclassification of cash provided by and included in accounts payable to accounts receivable   $ (1,257 )   $ (564 )   $ (1,821 )
                         
Accounts Payable:                        
Reclassification of cash used in and included in accounts payable to accounts receivable   $ (2,610 )   $ 564     $ (2,046 )

 

SOFTWARE DEVELOPMENT COSTS

 

In the second quarter of fiscal 2016, the Company changed the manner in which it treats certain costs for software developed for internal use, which are accounted for through the capitalization of those costs incurred in connection with developing or obtaining internal-use software. These 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.

 

OTHER COMPREHENSIVE INCOME

 

ASC 220, “Comprehensive Income”, prescribes the reporting required for comprehensive income and items of other comprehensive income. Entities having no items of other comprehensive income are not required to report on comprehensive income. The Company has no items of other comprehensive income for the three and nine months ended March 31, 2016.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

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 September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments". ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. ASU 2015-16 will be effective for the Company beginning with the quarter ending September 30, 2016. Since this standard is prospective, the impact of ASU 2015-16 on the Company's financial condition, results of operations and cash flows will depend upon the nature of any measurement period adjustments identified in future periods.

 

In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"), which will require entities to present all deferred tax liabilities and assets as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The standard will be effective for the Company beginning with the quarter ending September 30, 2017. Early application is permitted. The standard can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.

 

In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842). This pronouncement will be effective for the Company beginning with the quarter ending September 30, 2019.

 

In March 2016, the FASB issued ASU 2016-09 “Compensation – Stock Compensation” (Topic 718). This pronouncement will be effective for the Company beginning with the quarter ending September 30, 2016.

 

  11  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

2. ACQUISITION

 

VENDSCREEN, INC.

 

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. The purchase price was funded using $2.625 million in cash, and the balance of $3.0 million from a term loan which was converted from a line of credit.

 

This acquisition expands the Company’s capability with interactive media (touchscreen) and content delivery through VendScreen’s cloud-based content delivery platform, device platform and products, customer base, vendor management system (VMS) integration, and consumer product information including nutritional data. In addition to new technology and services, the acquisition adds a West Coast operational footprint, with former VendScreen employees able to offer expanded customer services, sales and technical support.

 

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

 

($ in thousands)      
       
Consideration:      
Fair value of total consideration paid in cash   $ 5,625  
         
Acquisition / integration expenses:   $ 584  
         
Recognized amounts of identifiable assets acquired and liabilities assumed:
         
Financial Assets:        
Accounts receivable   $ 3  
Finance receivables     628  
Other current assets     20  
Deferred income taxes     18  
      669  
         
Property, and & equipment     81  
         
Identifiable intangible assets:        
Developed technology     639  
Customer relationships     149  
Brand     95  
Noncompete agreements     2  
Fair value of intangible assets     885  
         
Financial liabilities        
Accrued liabilities     (50 )
         
Total identifiable net assets   $ 1,585  
         
Goodwill     4,040  
         
Total Fair Value   $ 5,625  

 

Of the $885 thousand of acquired intangible assets, $639 thousand was assigned to developed technology that is subject to amortization over 5 years, $149 thousand was assigned to customer relationships which are subject to amortization over 10 years; $2 thousand was assigned to a non-compete agreement that is subject to amortization over 2 years, and $95 thousand was assigned to the brand that is subject to amortization over 3 years. All of the intangible assets are amortizable for income tax purposes.

 

  12  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

Substantially all of the goodwill is amortizable for income tax purposes.

 

VendScreen has been included in the accompanying consolidated financial statements of the Company since the date of acquisition. The $584 thousand of acquisition / integration expenses consists of non-recurring expenses incurred in connection with the acquisition and integration of the VendScreen business and were included in SG&A expenses during the nine months ended March 31, 2016.

 

3. EARNINGS PER SHARE CALCULATION

 

The calculation of basic and diluted earnings per share is presented below:

 

    Three months ended     Nine months ended  
    March 31,     March 31,  
($ in thousands, except per share data)   2016     2015     2016     2015  
                         
Numerator for basic earnings per share - Net loss available to common shareholders   $ (5,754 )   $ (901 )   $ (6,602 )   $ (1,557 )
Gain recorded for reduction in fair value of warrants*     -       -       -       -  
Numerator for diluted earnings per share - Net loss available to common shareholders   $ (5,754 )   $ (901 )   $ (6,602 )   $ (1,557 )
                                 
Denominator for basic earnings per share - Weighted average shares outstanding     36,161,613       35,747,979       35,961,648       35,705,210  
Effect of dilutive potential common shares*     -       -       -       -  
Denominator for diluted earnings per share - Adjusted weighted average shares outstanding     36,161,613       35,747,979       35,961,648       35,705,210  
                                 
Basic and diluted loss per share   $ (0.16 )   $ (0.03 )   $ (0.18 )   $ (0.04 )

 

* No adjustment necessary as the effects would be anti-dilutive.

 

4. FINANCE RECEIVABLES

 

Finance receivables consist of the following:

 

    March 31,     June 30,  
($ in thousands)   2016     2015  
    (unaudited)        
             
Total finance receivables   $ 4,719     $ 4,639  
Less current portion     1,677       941  
Non-current portion of finance receivables   $ 3,042     $ 3,698  

 

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 sufficient to satisfy the amount due to the Company, the risk of loss is considered remote and the Company has not provided for an allowance for credit losses for finance receivables as of March 31, 2016 and June 30, 2015.

 

Credit Quality Indicators

As of March 31, 2016

(unaudited)

 

Credit risk profile based on payment activity:   March 31,     June 30,  
    2016     2015  
($ in thousands)   (unaudited)        
Performing   $ 4,671     $ 4,619  
Nonperforming     48       20  
Total   $ 4,719     $ 4,639  

 

  13  

 

 

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

Age Analysis of Past Due Finance Receivables

As of March 31, 2016

(unaudited)

 

    31 – 60     61 – 90     Greater than                 Total  
($ in thousands)   Days Past
Due
    Days Past
Due
    90 Days Past
Due
    Total Past
Due
    Current     Finance
Receivables
 
                                                 
QuickStart Leases   $ 30     $ 3     $ 15     $ 48     $ 4,671     $ 4,719  

 

Age Analysis of Past Due Finance Receivables

As of June 30, 2015

 

    31 – 60     61 – 90     Greater than                 Total  
($ in thousands)   Days Past
Due
    Days Past
Due
    90 Days Past
Due
    Total Past
Due
    Current     Finance
Receivables
 
                                                 
QuickStart Leases   $ -     $ 15     $ 5     $ 20     $ 4,619     $ 4,639  

 

5. PROPERTY AND EQUIPMENT

 

Property and equipment, at cost, consist of the following:

 

        March 31, 2016  
      (unaudited)  
($'s in thousands)   Useful
Lives
  Cost     Accumulated
Depreciation
    Net  
Computer equipment and software   3-7 years   $ 5,420     $ (4,287 )   $ 1,133  
Property and equipment used for rental program   5 years     26,789       (17,553 )     9,236  
Furniture and equipment   3-7 years     828       (626 )     202  
Leasehold improvements   Lesser of life or lease term     575       (562 )     13  
        $ 33,612     $ (23,028 )   $ 10,584  

 

      June 30, 2015  
($'s in thousands)  

Useful

Lives

  Cost     Accumulated
Depreciation
    Net  
Computer equipment and purchased software   3-7 years   $ 4,670     $ (4,017 )   $ 653  
Property and equipment used for rental program   5 years     26,469       (14,476 )     11,993  
Furniture and equipment   3-7 years     723       (572 )     151  
Leasehold improvements   Lesser of life or lease term     575       (503 )     72  
        $ 32,437     $ (19,568 )   $ 12,869  

 

  14  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

5. PROPERTY AND EQUIPMENT (CONTINUED)

 

Assets under capital lease totaled approximately $2.6 million and $2.1 million as of March 31, 2016 and June 30, 2015, respectively. Capital lease amortization of approximately $69 thousand and $130 thousand is included in depreciation expense for the three-month periods ended March 31, 2016 and 2015, respectively. Capital lease amortization of approximately $208 thousand and $271 thousand is included in depreciation expense for the nine-month periods ended March 31, 2016 and 2015, respectively.

 

6. GOODWILL AND INTANGIBLES

 

There was $44 thousand of amortization expense relating to acquired intangible assets during the three and nine months ended March 31, 2016. There was no amortization expense relating to acquired intangible assets during the three and nine months ended March 31, 2015. Intangible asset balances consisted of the following:

 

    Beginning     Nine months ended March 31, 2016     Ending      
    Balance     Additions/           Balance     Amortization
    July 1, 2015     Adjustments     Amortization     March 31, 2016     Period
Intangible assets:                            
                             
Goodwill   $ 7,663     $ 4,040     $ -     $ 11,703      Indefinite
Trademarks - Indefinite     432       -       -       432      Indefinite
Non-compete agreements     -       2       -       2      2 years
Brand     -       95       (8 )     87      3 years
Developed technology     -       639       (32 )     607      5 years
Customer relationships     -       149       (4 )     145      10 years
Total   $ 8,095     $ 4,925     $ (44 )   $ 12,976      

 

    Beginning     Year ended June 30, 2015     Ending      
    Balance     Additions/           Balance     Amortization
    July 1, 2014     Adjustments     Amortization     June 30, 2015     Period
Intangible assets:                            
                             
Goodwill   $ 7,663     $ -     $ -     $ 7,663      Indefinite
Trademarks - Indefinite     432       -       -       432      Indefinite
Total   $ 8,095     $ -     $ -     $ 8,095      

 

7. ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

    March 31,     June 30,  
($ in thousands)   2016     2015  
    (unaudited)        
Accrued compensation and related sales commissions   $ 1,135     $ 673  
Accrued professional fees     673       301  
Accrued taxes and filing fees     526       505  
Advanced customer billings     749       390  
Accrued rent     7       75  
Accrued other     268       213  
      3,358       2,157  
Less current portion     (3,339 )     (2,108 )
    $ 19     $ 49  

 

  15  

 

 

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

8. LINE OF CREDIT

 

On January 15, 2016, the Company and Avidbank Corporate Finance, a division of Avidbank (“Avidbank”) entered into a Fifteenth Amendment (the “Amendment”) to the Loan and Security Agreement (as amended, the “Avidbank Loan Agreement”) previously entered into between them. The Avidbank Loan Agreement provided for a secured asset-based revolving line of credit facility (the “Avidbank Line of Credit”) of up to $7.0 million. The outstanding balance of the amounts advanced under the Avidbank Line of Credit bear interest at 2% above the prime rate as published in The Wall Street Journal or five percent (5%), whichever is higher. Avidbank also made a three-year term loan to the Company in the principal amount of $3.0 million (the “Term Loan”). The Term Loan was used by the Company to repay to Avidbank an advance that had been made to the Company under the Avidbank Line of Credit in December 2015, and which had been used by the Company to pay for the VendScreen business. The Term Loan provides that interest only is payable monthly during year one, interest and principal is payable monthly during years two and three, and all outstanding principal and accrued interest is due and payable on the third anniversary of the Term Loan. The Term Loan bears interest at an annual rate equal to 1.75% above the prime rate as published from time to time by The Wall Street Journal , or five percent (5%), whichever is higher. The Amendment increased the amount available under the Avidbank Line of Credit to $7.5 million less the amount then outstanding under the Term Loan.

 

On March 29, 2016, the Company entered into a Loan and Security Agreement and other ancillary documents (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”).

 

The Company utilized approximately $7.0 million under the Heritage Line of Credit to satisfy the existing Avidbank Line of Credit and related Term Loan, and approximately $100 thousand under the Heritage Line of Credit to pay closing fees, recorded as a debt discount, of Heritage Bank. The amount of advances remaining available to the Company under the Heritage Line of Credit as of March 31, 2016 was approximately $4.8 million.

 

The Heritage Loan Documents provide that the aggregate amount of advances under the Heritage Line of Credit shall not exceed the lesser of (i) $12.0 million, or (ii) eighty-five percent (85%) of license and transaction fee revenue (as is reflected as such in the Company’s consolidated statement of operations) for the preceding three (3) calendar months.

 

The outstanding daily balance of the amounts advanced under the Heritage Line of Credit will bear interest at 2.25% above the prime rate as published from time to time in The Wall Street Journal . At March 31, 2016, this prime rate was 3.50%. Interest is payable by the Company to Heritage Bank on a monthly basis.

 

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.

 

The maturity date of the Heritage Line of Credit is March 29, 2017. 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 Heritage Loan Documents also require the Company to achieve a minimum Adjusted EBITDA, as defined in the Heritage Loan Documents, measured on a quarterly basis. The Heritage Loan Documents also require that the number of the Company’s connections as of the end of each fiscal quarter shall not decrease by more than five percent as compared to the number of the Company’s connections as of the end of the immediately prior fiscal quarter.

 

The Heritage Loan Documents also contain customary events of default, including, among other things, payment defaults, breaches of covenants, and bankruptcy and insolvency events, subject to grace periods in certain instances. Upon an event of default, Heritage Bank may declare all of the outstanding obligations of the Company under the Heritage Line of Credit and Heritage Loan Documents to be immediately due and payable, and exercise any other rights provided for under the Heritage Loan Documents, including foreclosing on the collateral securing the Heritage Loan Documents.

 

In connection with the Heritage Loan Documents, the Company issued to Heritage Bank warrants to purchase up to 23,978 shares of common stock of the Company at an exercise price of $5.00 per share. The warrants are exercisable at any time through March 29, 2021 subject to earlier termination in the event of a business combination (as defined in the Heritage Loan Documents).

 

  16  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

8. LINE OF CREDIT (CONTINUED)

 

The fair value of the warrants of $52 thousand was charged against the current obligation under the line of credit and will be amortized on a straight-line basis over 12 months. The Black-Sholes method was used to calculate fair value.

 

The balance due on the Heritage line of credit was $7.1 million and $4.0 million at March 31, 2016 and June 30, 2015, respectively. As of March 31, 2016 $4.9 million was available under our line of credit.

 

    As of or Nine Months Ended  
    March 31,  
($ in thousands)   2016     2015  
Principal balance at period-end   $ 7,111     $ 4,000  
Unamortized discount     (131 )     -  
Line of credit, net   $ 6,980     $ 4,000  
Maximum amount outstanding at any month end   $ 7,111     $ 5,000  
Average balance outstanding during the period   $ 4,230     $ 4,100  
Weighted-average interest rate:                
As of the period-end     5.8 %     5.3 %
Paid during the period     5.3 %     5.3 %

 

    As of or Three Months Ended  
    March 31,  
($ in thousands)   2016     2015  
Principal balance at period-end   $ 7,111     $ 4,000  
Unamortized discount     (131 )     -  
Line of credit, net   $ 6,980     $ 4,000  
Maximum amount outstanding at any month end   $ 7,111     $ 4,000  
Average balance outstanding during the period   $ 4,564     $ 4,000  
Weighted-average interest rate:                
As of the period-end     5.8 %     5.3 %
Paid during the period     5.5 %     5.3 %

 

Interest expense on the applicable line of credit was approximately $48 thousand and $55 thousand during each of the three months ended March 31, 2016 and 2015, respectively. Interest expense on the applicable line of credit was approximately $156 thousand and $158 thousand during the nine months ended March 31, 2016 and 2015, respectively.

 

9. LONG-TERM DEBT

 

CAPITAL LEASES

 

The Company periodically enters into capital lease obligations to finance certain office and network equipment for use in its daily operations. During the nine-month period ended March 31, 2016 the Company entered into capital lease obligations of $444 thousand. The interest rates on these obligations ranged from approximately 5.6% to 9.0%. The value of the acquired equipment is included in property and equipment and amortized accordingly.

 

OTHER LOAN AGREEMENTS

 

The Company periodically enters into other loan agreements to finance the purchase of various assets as needed, including computer equipment, insurance premiums, network equipment and software for use in its operations. During the nine-month period ended March 31, 2016, the Company entered into loan agreements for $103 thousand. The interest rates on these obligations were approximately 5.3%. The value of these financed insurance premiums acquired is included in prepaid expenses and other assets and expensed accordingly.

 

  17  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

9. LONG-TERM DEBT (CONTINUED)

 

ASSIGNMENT OF QUICKSTART LEASES

 

In February and May 2015, the Company assigned its interest in certain finance receivables (various sixty-month QuickStart leases) to third-party finance companies in exchange for cash and the assumption of financing obligations in the aggregate of $1.8 million and $304 thousand, respectively. These assignment transactions contain recourse provisions for the Company which requires the proceeds from the assignment to be treated as long-term debt. The financing obligations range in rate from 9.4% to 9.5%.

 

The balance of long-term debt as of March 31, 2016 and June 30, 2015 are shown in the table below.

 

    March 31,     June 30,  
($ in thousands)   2016     2015  
    (unaudited)        
Capital lease obligations   $ 667     $ 338  
Other loan agreements     12       -  
Lease financing obligations     1,688       1,994  
      2,367       2,332  
Less current portion     625       478  
    $ 1,742     $ 1,854  

 

The maturities of long-term debt for each of the fiscal years following March 31, 2016 are as follows:

 

2016 (remaining three months)   $ 157  
2017     631  
2018     628  
2019     588  
2020     358  
Thereafter     5  
    $ 2,367  

 

  18  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

In accordance with the fair value hierarchy described in Note 1, the following table shows the fair value of the Company’s financial instrument that is required to be measured at fair value as of March 31, 2016 and June 30, 2015:

 

($ in thousands)                        
March 31, 2016 (unaudited)   Level 1     Level 2     Level 3     Total  
                                 
Common stock warrant liability, 3.4 million warrants exercisable at $2.6058 from September 18, 2011 through September 18, 2016   $ -     $ -     $ 5,964     $ 5,964  

 

June 30, 2015   Level 1     Level 2     Level 3     Total  
                                 
Common stock warrant liability, 3.9 million warrants exercisable at $2.6058 from September 18, 2011 through September 18, 2016   $ -     $ -     $ 978     $ 978  

 

As of March 31, 2016 and June 30, 2015, the Company held no Level 1 or Level 2 financial instruments.

 

As of March 31, 2016 and June 30, 2015, the fair values of the Company’s Level 3 financial instrument totaled $5.964 million and $978 thousand for 3.4 million and 3.9 million warrants, respectively. The Level 3 financial instrument consists of common stock warrants issued by the Company in March 2011, which include features requiring liability treatment of the warrants. The fair value of warrants issued in March 2011 to purchase shares of the Company’s common stock is 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. There were no transfers of assets or liabilities between level 1, level 2, or level 3 during the three and nine months ended March 31, 2016 and 2015.

 

The following table summarizes the changes in fair value of the Company’s Level 3 financial instruments for the three and nine months ended March 31, 2016 and 2015.

 

    Three months ended  
($ in thousands)   March 31,  
    2016     2015  
             
Beginning balance   $ (1,865 )   $ (140 )
Increase due to change in fair value of warrant liabilities     (4,805 )     (1,101 )
Reduction due to warrant exercises     706       -  
Ending balance   $ (5,964 )   $ (1,241 )

 

    Nine months ended  
($ in thousands)   March 31,  
    2016     2015  
             
Beginning balance   $ (978 )   $ (585 )
Increase due to change in fair value of warrant liabilities     (5,692 )     (656 )
Reduction due to warrant exercises     706       -  
Ending balance   $ (5,964 )   $ (1,241 )

 

  19  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

 

During the third quarter of 2016, 500,000 warrants were exercised. In order to estimate the fair value effect, the fair values per warrant as determined by the independent third party as of December 31, 2015 and March 31, 2016 were used as reference points. The fair value on the day of exercise of each tranche of warrants is calculated between these two reference points based on the change in the closing USAT stock price from December 31, 2015 to the day of exercise.

 

11. WARRANTS

 

There were 634,100 exercises during the three months ended March 31, 2016, including the 500,000 warrants discussed in Note 10. During the nine months ended March 31, 2016, warrants were exercised at $2.6058 per share resulting in the issuance of 645,100 shares of common stock with proceeds of $1.681 million. The fair value of the 500,000 warrants was reclassed from liability to equity upon exercise. There were no exercises of warrants during the three or nine months ended March 31, 2015.

 

Warrant activity for the three and nine-month periods ended March 31, 2016 was as follows:

 

    Warrants  
Outstanding at June 30, 2015     4,309,000  
Issued     -  
Exercised     (11,000 )
Expired     -  
Outstanding at September 30, 2015     4,298,000  
Issued     -  
Exercised     -  
Expired     -  
Outstanding at December 31, 2015     4,298,000  
Issued     23,978  
Exercised     (634,100 )
Expired     -  
Outstanding at March 31, 2016     3,687,878  

 

12. INCOME TAXES

 

For the three and nine months ended March 31, 2016, income tax benefit/(provision) of $93 thousand and $(88) thousand, respectively, (substantially all deferred income taxes) were recorded. The benefit/(provision) consist of the tax effect of the change in the fair value of warrant liabilities which was treated discretely, offset by a tax benefit based upon loss before income taxes using an estimated annual effective income tax rate of 33% for the fiscal year ending June 30, 2016.

 

For the three and nine months ended March 31, 2015, income tax provisions of $(138) thousand and $(180) thousand, respectively, (substantially all deferred income taxes) were recorded; of the nine month amount, $(395) thousand was due to the decrease in the applicable tax rate utilized to tax affect the deferred tax assets that was caused by a state income tax law change. The remaining benefit of $215 thousand for the nine months ended March 31, 2015 and the tax provision for the three months ended March 31, 2015 were based upon income (loss) before provision for income taxes using an estimated annual effective income tax rate for the fiscal year ending June 30, 2015 of 64% and a provision for the tax effect of the change in the fair value of warrant liabilities which was treated discretely.

 

  20  

 

 

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

13. STOCK BASED COMPENSATION PLANS

 

STOCK OPTIONS

 

The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for options granted during:

 

    Nine months ended  
    March 31,  
    2016     2015  
Expected volatility     59-66%       79 %
Expected life     4 - 4.5 years       7 years  
Expected dividends     0.00 %     0.00 %
Risk-free interest rate     1.34-1.49%       2.04 %

 

Stock based compensation related to stock options for the nine months ended March 31, 2016 and 2015 was $274 thousand and $257 thousand, respectively. Unrecognized compensation related to stock option grants as of March 31, 2016 was $229 thousand.

 

Changes in outstanding stock options for the three months ended March 31, 2016 and 2015 consisted of the following:

 

    For the three months ended March 31,  
    2016     2015  
    Options     Weighted
Average
Exercise Price
    Weighted
Average Grant
Date Fair Value
    Options     Weighted
Average
Exercise Price
    Weighted
Average Grant
Date Fair Value
 
Options outstanding, beginning of period     658,474     $ 2.14     $ 1.41       448,888     $ 1.87     $ 1.33  
Granted     75,000     $ 2.94     $ 1.43       85,000     $ 1.70     $ 1.19  
Forfeited     (90,000 )   $ 3.38     $ 1.81       -     $ -     $ -  
Expired     -     $ -     $ -       -     $ -     $ -  
Exercised     (33,333 )   $ 1.80     $ 1.27       -     $ -     $ -  
Options outstanding, end of period     610,141     $ 2.07     $ 1.36       533,888     $ 1.84     $ 1.31  

 

Changes in outstanding stock options for the nine months ended March 31, 2016 and 2015 consisted of the following:

 

    For the nine months ended March 31,  
    2016     2015  
    Options     Weighted
Average
Exercise Price
    Weighted
Average Grant
Date Fair Value
    Options     Weighted
Average
Exercise Price
    Weighted
Average Grant
Date Fair Value
 
Options outstanding, beginning of period     538,888     $ 1.86     $ 1.33       120,000     $ 2.05     $ 1.49  
Granted     194,586     $ 3.21     $ 1.64       413,888     $ 1.78     $ 1.25  
Forfeited     (90,000 )   $ 3.38     $ 1.81       -     $ -     $ -  
Expired     -     $ -     $ -       -     $ -     $ -  
Exercised     (33,333 )   $ 1.80     $ 1.27       -     $ -     $ -  
Options outstanding, end of period     610,141     $ 2.07     $ 1.36       533,888     $ 1.84     $ 1.31  

 

  21  

 

  

USA Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 

13. STOCK BASED COMPENSATION PLANS (CONTINUED)

 

Changes in unvested stock options for the three months ended March 31, 2016 and 2015 consisted of the following:

 

    For the three months ended March 31,  
    2016     2015  
    Options     Weighted
Average Grant
Date Fair Value
    Options     Weighted
Average Grant
Date Fair Value
 
Unvested options, beginning of period     396,251     $ 1.49       448,888     $ 1.33  
Granted     75,000     $ 1.43       -     $ -  
Vested     (28,335 )   $ 1.27       -     $ -  
Forfeited     (90,000 )   $ 1.81       -     $ -  
Unvested options, end of period     352,916     $ 1.41       448,888     $ 1.33  

 

Changes in unvested stock options for the nine months ended March 31, 2016 and 2015 consisted of the following:

 

    For the nine months ended March 31,  
    2016     2015  
    Options     Weighted
Average Grant
Date Fair Value
    Options     Weighted
Average Grant
Date Fair Value
 
Unvested options, beginning of period     505,553     $ 1.32       120,000     $ 1.49  
Granted     194,586     $ 1.64       328,888     $ 1.27  
Vested     (257,223 )   $ 1.26       -     $ -  
Forfeited     (90,000 )   $ 1.81       -     $ -  
Unvested options, end of period     352,916     $ 1.41       448,888     $ 1.33  

 

Exercise prices of stock options outstanding as of March 31, 2016 and June 30, 2015 consisted of the following:

 

    March 31, 2016     June 30, 2015  
    (unaudited)              
Range of Exercise Prices   Options
Outstanding
    Options
Exercisable
    Options
Outstanding
    Options
Exercisable
 
$1.62 to $1.68     75,000       25,002       75,000       -  
$1.80     295,555       195,555       328,888       -  
$2.05     100,000       33,335       100,000       33,335  
$2.09     10,000       3,333       10,000       -  
$2.75     25,000       -       25,000       -  
$2.94     75,000       -                  
$3.38     29,586       -       -       -  
      610,141       257,225       538,888       33,335  

 

  22  

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

13. STOCK BASED COMPENSATION PLANS (CONTINUED)

 

    March 31, 2016     June 30, 2015  
    (unaudited)              
($ in thousands, except per share price
and number of options)
  Options
Outstanding
    Options
Exercisable
    Options
Outstanding
    Options
Exercisable
 
Number of stock options     610,141       257,225       538,888       33,335  
Weighted average exercise price   $ 2.07     $ 1.82     $ 1.86     $ 2.05  
Aggregate intrinsic value   $ 1,389     $ 653     $ 451     $ 22  
Weighted average contractual life     5.66       4.79       6.21       5.97  
Share price   $ 4.36     $ 4.36     $ 2.70     $ 2.70  

 

STOCK GRANTS

 

The Company’s nonvested common shares as of March 31, 2016, and changes during the period then ended consisted of the following:

 

          Weighted-Average  
          Grant-Date  
    Shares     Fair Value  
             
Nonvested at June 30, 2015     18,604     $ 1.88  
Granted     131,558       3.04  
Vested     (21,664 )     2.70  
Nonvested at September 30, 2015     128,498       2.97  
Granted     -       -  
Vested     (7,396 )     3.38  
Nonvested at December 31, 2015     121,102     $ 2.94  
Granted     -       -  
Vested     -       -  
Nonvested at March 31, 2016     121,102     $ 2.94  

 

14. PREFERRED STOCK

 

The authorized Preferred Stock may be issued from time to time in one or more series, each series with such rights, preferences or restrictions as determined by the Board of Directors. As of March 31, 2016 each share of Series A Preferred Stock is convertible into 0.194 of a share of Common Stock and each share of Series A Preferred Stock is entitled to 0.194 of a vote on all matters on which the holders of Common Stock are entitled to vote. Series A Preferred Stock provides for an annual cumulative dividend of $1.50 per share, payable when, as and if declared by the Board of Directors, to the shareholders of record in equal parts on February 1 and August 1 of each year. Any and all accumulated and unpaid cash dividends on the Series A Preferred Stock must be declared and paid prior to the declaration and payment of any dividends on the Common Stock.

 

The Series A Preferred Stock may be called for redemption at the option of the Board of Directors for a price of $11.00 per share plus payment of all accrued and unpaid dividends. No such redemption has occurred as of March 31, 2016. In the event of any liquidation as defined in the Company’s Articles of Incorporation, the holders of shares of Series A Preferred Stock issued shall be entitled to receive $10.00 for each outstanding share plus all cumulative unpaid dividends. If funds are insufficient for this distribution, the assets available will be distributed ratably among the preferred shareholders. The Series A Preferred Stock liquidation preference as of March 31, 2016 and June 30, 2015 is as follows:

 

  23  

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

14. PREFERRED STOCK (CONTINUED)

 

($ in thousands)   March 31,     June 30,  
    2016     2015  
    (unaudited)        
Shares outstanding at $10.00 per share   $ 4,451     $ 4,451  
Cumulative unpaid dividends     13,657       12,989  
    $ 18,108     $ 17,440  

 

Cumulative unpaid dividends are convertible into common shares at $1,000 per common share at the option of the shareholder. During the three and nine months ended March 31, 2016 and 2015, no shares of Preferred Stock nor cumulative preferred dividends were converted into shares of common stock.

 

15. RETIREMENT PLAN

 

The Company’s 401(k) Plan (the “Retirement Plan”) allows employees who have completed six months of service to make voluntary contributions up to a maximum of 100% of their annual compensation, as defined in the Retirement Plan and subject to IRS limitations. The Company may, in its discretion, make a matching contribution, a profit sharing contribution, a qualified non-elective contribution, and/or a safe harbor 401(k) contribution to the Retirement Plan. The Company must make an annual election at the beginning of the plan year as to whether it will make a safe harbor contribution to the plan. For the plan year ending June 30, 2016, the Company has elected to make safe harbor matching contributions of 100% of the participant’s first 3% and 50% of the next 2% of compensation deferred into the Retirement Plan. The Company’s safe harbor contributions for the three months ended March 31, 2016 and 2015 approximated $51 thousand and $61 thousand, respectively. The Company’s safe harbor contributions for the nine months ended March 31, 2016 and 2015 approximated $154 thousand and $149 thousand, respectively.

 

16. RELATED PARTY TRANSACTIONS

 

There were no related party transactions during the three or nine-month periods ended March 31, 2016 and 2015.

 

17. COMMITMENTS AND CONTINGENCIES

 

SALE AND LEASEBACK TRANSACTIONS

 

In June 2014 and through the three months ended September 30, 2014, the Company and a third party finance company, entered into Sale Leaseback Agreements (the “Sale Leaseback Agreements” or a “Sale Leaseback Agreement”) pursuant to which a third-party finance company purchased ePort equipment owned by the Company and used by the Company in its JumpStart Program.

 

Upon the completion of the sale under these agreements, the Company computed a gain on the sale of its ePort equipment, which is deferred and is amortized in proportion to the related gross rental charged to expense over the lease terms in accordance with the FASB topic ASC 840-40, “Sale Leaseback Transactions”. The computed gain on the sale is recognized ratably over the 36-month term and charged as a reduction to the Company’s JumpStart rent expense included in costs of services in the Company’s Consolidated Statement of Operations. The Company is accounting for the Sale Leaseback as an operating lease and is obligated to pay to the finance company a base monthly rental for this equipment during the 36-month lease term.

 

  24  

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

17. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

The following table summarizes the changes in deferred gain from the sale-leaseback transactions:

 

    Three months ended  
($ in thousands)   March 31,  
    2016     2015  
Beginning balance   $ 1,330     $ 2,191  
Gain on sale of rental equipment     -       -  
Recognition of deferred gain     (215 )     (216 )
Ending balance     1,115       1,975  
Less current portion     860       860  
Non-current portion of deferred gain   $ 255     $ 1,115  

 

    Nine months ended  
($ in thousands)   March 31,  
    2016     2015  
Beginning balance   $ 1,760     $ 1,143  
Gain on sale of rental equipment     -       1,452  
Recognition of deferred gain     (645 )     (619 )
Ending balance     1,115       1,976  
Less current portion     860       860  
Non-current portion of deferred gain   $ 255     $ 1,116  

 

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

 

On January 26, 2015, Universal Clearing Solutions, LLC (“Universal Clearing”), a former non-vending customer of the Company, filed a complaint against the Company in the United States District Court for the District of Arizona. On April 10, 2015, Universal Clearing filed an amended complaint, and on June 19, 2015, Universal Clearing filed a second amended complaint, which alleged causes of action against the Company for breach of contract, breach of fiduciary duty, and defamation. On July 24, 2015, the Company filed an answer to the defamation count of the complaint denying the allegations, and filed a motion to dismiss the remaining counts. On January 29, 2016, the Court granted the Company's motion, and dismissed the breach of contract and breach of fiduciary duty claims against the Company. The Company does not believe that the remaining defamation count of the complaint has merit or represents a material legal proceeding, and intends to vigorously defend against the claim.

 

On July 24, 2015, the Company filed a counterclaim against Universal Clearing seeking damages of approximately $680 thousand which were incurred by the Company in connection with chargebacks relating to Universal Clearing’s sub-merchants which had been boarded on the Company’s service. The counterclaim alleges that Universal Clearing is responsible under the agreement for these chargebacks, and Universal Clearing misrepresented to the Company the business practices and other matters relating to these sub-merchants. On August 17, 2015, Universal Clearing filed an answer to the counterclaim denying that it was responsible for the chargebacks or had made any misrepresentations.

 

On August 7, 2015, the Company filed a third party complaint in the pending action against Steven Juliver, the manager of Universal Clearing, as well as against Universal Tranware, LLC, and Secureswype, LLC, entities affiliated with Universal Clearing. The third-party complaint sets forth, among other things, causes of action for fraud and breach of contract, and seeks to recover from these defendants the chargebacks relating to Universal Clearing’s sub-merchants described above. On September 14, 2015, the third party defendants filed a motion to dismiss the third party complaint and on January 29, 2016, the court denied the motion to dismiss the fraud and breach of contract claims. The Company intends to vigorously pursue its claims for damages set forth in the counterclaim and third party complaint.

 

  25  

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

17. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

On October 1, 2015, a purported class action complaint was filed in the United States District Court for the Eastern District of Pennsylvania by Steven P. Messner, individually and on behalf of all others similarly situated, against the Company and its executive officers, alleging violations under the Securities Exchange Act of 1934. The lawsuit was filed on behalf of a purported class of investors who purchased or otherwise acquired securities of the Company between September 29, 2014 through September 29, 2015. The complaint alleges that the defendants made materially false and misleading statements, relating to, among other things, the failure to identify a large number of uncollectible small balance accounts. The complaint seeks certification as a class action and unspecified damages including attorneys’ fees and other costs. On December 15, 2015, the court appointed a lead plaintiff, and on January 18, 2016, the plaintiff filed an amended complaint that set forth the same causes of action and requested substantially the same relief as the original complaint. On February 1, 2016, the Company filed a motion to dismiss the amended complaint alleging, among other things, the amended complaint does not satisfy the applicable pleading standards under the Private Securities Litigation Reform Act. On April 11, 2016, the Court held oral argument on the Company’s motion, and on April 14, 2016, the Court entered an order granting the Company’s motion to dismiss the amended complaint without leave to amend. The plaintiff must appeal the Court’s order prior to May 17, 2016.

 

18. ADJUSTMENTS

 

The consolidated financial statements included in this Form 10-Q reflect additional shares of common stock and preferred stock that had been issued and outstanding in prior periods but were not reflected as such in previous consolidated financial statements. The additional shares primarily consisted of unvested shares of common stock awarded to officers and directors pursuant to the Company’s equity compensation plans. The Consolidated Statement of Shareholders’ Equity has been adjusted to reflect these additional common and preferred shares as of June 30, 2015. The June 30, 2015 Consolidated Balance Sheet has been adjusted to reflect these additional shares; and the liquidation preference of preferred stock as of such date has been increased by $85,371. The basic and diluted weighted average number of common shares outstanding for the three and nine month periods ended March 31, 2015 and March 31, 2016 in the Consolidated Statements of Operations has also been adjusted. The foregoing adjustments in basic and diluted weighted common shares outstanding did not affect the previously reported net loss per common share - basic or diluted for the three and nine month periods ended March 31, 2015.

 

19. SUBSEQUENT EVENTS

 

On April 29, 2016, the Company entered into a Third Amendment to Office Space Lease (the “Third Amendment”) with its landlord which amended certain terms of its existing lease (the “Lease”) for its Malvern, Pennsylvania executive offices consisting of approximately 17,249 square feet located on the first floor of the building (the “Current Premises”). The Third Amendment provides that the Company will relocate from the Current Premises to new offices located on the third floor of the building (the “New Offices”) consisting of approximately 17,689 square feet. Substantially all of the improvements to the New Offices will be constructed by the landlord at the landlord’s cost and expense. The landlord anticipates that the New Premises will be substantially completed on September 1, 2016, at which time the Company would relocate from the Current Premises to the New Premises (the “New Premises Commencement Date”). The Third Amendment provides that the term of the Lease is extended from the prior expiration date of April 30, 2016 until seven years following the New Premises Commencement Date. The Company’s monthly base rent for the Premises will increase from approximately $32,340 to approximately $36,115 on the New Office Commencement Date, and will increase each year thereafter up to a maximum monthly base rent of approximately $40,537. The Third Amendment also grants to the Company the option to extend the term of the Lease for an additional five year period with a minimum of one year advance notice prior to the expiration of the initial term, and provides certain rights of first offer on additional space located on the third floor of the building.

 

  26  

 

 

PART I

 

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;

 

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

 

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

 

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

 

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

 

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

 

the ability of a sufficient number of our customers to utilize third party leasing companies under our QuickStart program in order to continue to significantly reduce net cash used in 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 our products and services to avoid unauthorized hacking or credit card fraud;

 

whether our remediation of a significant deficiency that we identified in our internal controls over financial reporting, and which was reflected in our annual report on Form 10-K for the fiscal year ended June 30, 2015, would be effective;

 

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

 

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

 

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

 

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.

 

  27  

 

 

OVERVIEW OF THE BUSINESS

 

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

 

The Company generates revenue in multiple ways. During fiscal year 2015, we derived approximately 75% of our revenues from recurring license and transaction fees related to our ePort Connect service and approximately 25% of our revenue from equipment sales. Connections to our service stem from the sale or lease of our POS electronic payment devices or certified payment software or the servicing of similar third-party installed POS terminals. Connections to the ePort Connect service are the most significant driver of the Company’s revenues, particularly the recurring revenues from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:

 

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

 

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

 

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

 

OVERVIEW OF THE COMPANY

 

Incorporated in 1992, USA Technologies, Inc. has been helping customers in self-serve retail, traditionally cash-based industries, seamlessly make the transition to cashless payment. Highlights of the Company are below:

 

· Over 84 employees with its headquarters in Malvern, Pennsylvania as of March 31, 2016

 

· Over 10,800 customers and 401,000 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

 

· 78 United States and foreign patents are in force

 

· The Company’s fiscal year ends June 30 th

 

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

 

The Company has deferred tax assets of approximately $27 million resulting from a series of operating loss carry forwards that may be available to offset future taxable income from federal income taxes over the next five or more years.

 

In January 2016, the Company purchased substantially all of the assets of VendScreen, Inc. (See Note 2). On the date of the acquisition, VendScreen had approximately 150 customers with approximately 6,000 connections. Of those 150 customers approximately 50% are new customers of USAT.

 

THE MARKET WE SERVE

 

We believe our growing customer base is indicative of a broadening adoption and acceptance of cashless payments in the industries we serve. We estimate the self-serve retail market in the United States generates over $120 billion in annual cashless transaction revenues, representing 13 to 15 million potential connections. Included in the self-service retail market is the Company’s largest market segment, vending. This supports the Company’s position in the market and opportunities for growth.

 

Additionally, management estimates that the Company’s existing customer base controls over 2.0 million potential connections. The Company views the total installed base of machines managed by its customers that have yet to transition to cashless payment, as a key strategic opportunity for future growth in connections.

 

  28  

 

   

CRITICAL ACCOUNTING POLICIES

 

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

 

Revenue Recognition

 

Revenue from the sale or QuickStart lease of equipment is recognized on the terms of freight-on-board shipping point. Activation fee revenue is recognized when 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 leasing company for the devices. At the end of the lease period, the customer would have the option to purchase the device for a nominal fee.

 

Long Lived Assets

 

In accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”, 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. The Company has selected April 1 as its annual test date.

 

The Company trademarks with an indefinite economic life are not being amortized. The trademarks, not subject to amortization, are related to the EnergyMiser asset group and consist of four trademarks. The Company tests indefinite-lived intangible assets for impairment using a two-step process. The first step screens for potential impairment, while the second step measures the amount of impairment. The Company uses a relief from royalty analysis to complete the first step in this process. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date for its indefinite-lived intangible assets.

 

Patents, non-compete agreements, brand, developed technology, customer relationships and trademarks, with an estimated economic life, are carried at cost less accumulated amortization, which is calculated on a straight-line basis over their estimated economic life. The Company reviews intangibles, subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

 

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

 

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HIGHLIGHTS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2016 INCLUDE:

 

    As of and for the three months ended  
    March 31,              
($ in thousands)   2016     2015     $ Change     % Change  
                         
Total revenues   $ 20,361     $ 15,357     $ 5,004       32.6 %
License and transaction revenue   $ 14,727     $ 11,059     $ 3,668       33.2 %
License and transaction gross profit   $ 5,024     $ 3,902     $ 1,122       28.8 %
License and transaction margin     34.1 %     35.3 %     -1 %     -3.3 %
Connections     401,000       302,000       99,000       32.8 %
Customers     10,825       8,925       1,900       21.3 %
Adjusted EBITDA   $ 1,347     $ 2,379     $ (1,032 )     -43.4 %
Non-GAAP net income (loss)   $ (87 )   $ 655     $ (742 )     -113.3 %
Cash provided by operating activities   $ 4,328     $ 65     $ 4,263       6558.5 %

 

    For the nine months ended  
    March 31,              
($ in thousands)   2016     2015     $ Change     % Change  
                         
Total revenues   $ 55,464     $ 40,431     $ 15,033       37.2 %
License and transaction revenue   $ 41,326     $ 31,695     $ 9,631       30.4 %
License and transaction gross profit   $ 13,851     $ 10,129     $ 3,722       36.7 %
License and transaction margin     33.5 %     32.0 %     2 %     4.9 %
Adjusted EBITDA   $ 5,358     $ 5,007     $ 351       7.0 %
Non-GAAP net income (loss)   $ 660     $ (79 )   $ 739       935.4 %
Cash provided by (used in) operating activities   $ 5,197     $ (4,379 )   $ 9,576       218.7 %

 

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TRENDING QUARTERLY FINANCIAL DATA

 

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

 

Table 1: Five Quarters of Select Key Performance Indicators

 

    Three months ended  
(unaudited)   March 31,     December 31,     September 30,     June 30,     March 31,  
    2016     2015     2015     2015     2015  
Connections:                                        
Gross New Connections     38,000       24,000       20,000       34,000       24,000  
% from Existing Customer Base     91 %     89 %     86 %     89 %     82 %
Net New Connections     32,000       20,000       16,000       31,000       14,000  
Total Connections     401,000       369,000       349,000       333,000       302,000  
                                         
Customers:                                        
New Customers Added     200       350       675       675       475  
Total Customers     10,825       10,625       10,275       9,600       8,925  
                                         
Volumes:                                        
Total Number of Transactions (millions)     82.0       76.0       68.8       62.2       54.8  
Transaction Volume ($millions)   $ 151.0     $ 138.0     $ 126.4     $ 112.8     $ 97.7  
                                         
Financing Structure of Connections:                                        
JumpStart     7.4 %     10.1 %     10.2 %     6.0 %     11.3 %
QuickStart & All Others *     92.6 %     89.9 %     89.8 %     94.0 %     88.7 %
Total     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %

 

*Includes credit sales with standard trade receivable terms

 

Highlights of USAT’s connections for the quarter ended March 31, 2016 include:

 

32,000 net new connections to our ePort Connect service in the quarter, compared to 14,000 net connections added in the same quarter last year, an increase of 18,000, or 129%;

 

401,000 connections to the ePort Connect service compared to the same quarter last year of approximately 302,000 connections, an increase of 99,000 connections, or 33%;

 

USAT has shifted from providing financing for the customer’s equipment purchases through month-to-month agreements under the JumpStart rental program, to using outside leasing companies through the QuickStart program with sixty month terms. This shift to QuickStart provides for an upfront payment by the leasing companies for the equipment which significantly improves the Company’s cash flow from operations. The Company also may hold QuickStart leases as finance receivables for customers that are not able to obtain third party leasing arrangements. The Company is actively working to expand its outside leasing partners. The goal of the program would be to have enough leasing partners so that the Company would not need to provide financing to its customers.

 

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Table 2: Quarter Ended March 31, 2016 compared to Quarter Ended March 31, 2015

 

($ in thousands, except share and per share data)   For the three months ended March 31,              
(unaudited)   2016    

% of

Sales

    2015    

% of

Sales

    Change     % Change  
                                     
Revenues:                                                
License and transaction fees   $ 14,727       72.3 %   $ 11,059       72.0 %   $ 3,668       33.2 %
Equipment sales     5,634       27.7 %     4,298       28.0 %     1,336       31.1 %
Total revenues     20,361       100.0 %     15,357       100.0 %     5,004       32.6 %
                                                 
Costs of sales/revenues:                                                
Cost of services     9,703       65.9 %     7,157       64.7 %   $ 2,546       35.6 %
Cost of equipment     4,986       88.5 %     3,054       71.1 %     1,932       63.3 %
Total costs of sales/revenues     14,689       72.1 %     10,211       66.5 %     4,478       43.9 %
                                                 
Gross profit:                                                
License and transaction fees     5,024       34.1 %     3,902       35.3 %     1,122       28.8 %
Equipment sales     648       11.5 %     1,244       28.9 %     (596 )     -47.9 %
Total gross profit     5,672       27.9 %     5,146       33.5 %     526       10.2 %
                                                 
Operating expenses:                                                
Selling, general and administrative     6,094       29.9 %     4,281       27.9 %   $ 1,813       42.3 %
Depreciation     173       0.8 %     135       0.9 %     38       28.1 %
Total operating expenses     6,267       30.8 %     4,416       28.8 %     1,851       41.9 %
Operating income (loss)     (595 )     -2.9 %     730       4.8 %     (1,325 )     -181.5 %
                                                 
Other income (expense):                                                
Interest income     67       0.3 %     27       0.2 %     40       148.1 %
Interest expense     (180 )     -0.9 %     (85 )     -0.6 %     (95 )     111.8 %
Change in fair value of warrant liabilities     (4,805 )     -23.6 %     (1,101 )     -7.2 %     (3,704 )     336.4 %
Total other income (expense), net     (4,918 )     -24.2 %     (1,159 )     -7.5 %     (3,759 )     324.3 %
                                                 
Loss before provision for income taxes     (5,513 )     -27.1 %     (429 )     -2.8 %     (5,084 )     1185.1 %
Benefit (provision) for income taxes     93               (138 )             231       -167.4 %
                                                 
Net loss     (5,420 )     -26.6 %     (567 )     -3.7 %     (4,853 )     855.9 %
Cumulative preferred dividends     (334 )     -1.6 %     (334 )     -2.2 %     -       0.0 %
Net loss applicable to common shares   $ (5,754 )     -28.3 %   $ (901 )     -5.9 %   $ (4,853 )     538.6 %
Net loss per common share - basic and diluted   $ (0.16 )           $ (0.03 )           $ (0.13 )     535.1 %
Basic and diluted weighted average number of common shares outstanding     36,161,613               35,747,979               413,635       1.2 %
                                                 
Adjusted  EBITDA   $ 1,347       6.6 %   $ 2,379       15.5 %   $ (1,032 )     -43.4 %
                                                 
Non-GAAP net income (loss) applicable to common shares   $ (421 )     -2.1 %   $ 321       2.1 %   $ (742 )     -231.2 %
                                                 
Total connections at period-end     401,000               302,000                          
Net new connections in period     32,000               14,000                          

 

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Table 3: Nine Months Ended March 31, 2016 compared to the Nine Months Ended March 31, 2015

 

($ in thousands, except share and per share data)   For the nine months ended March 31,              
(unaudited)   2016    

% of

Sales

    2015    

% of

Sales

    Change     % Change  
                                     
Revenues:                                                
License and transaction fees   $ 41,326       74.5 %   $ 31,695       78.4 %   $ 9,631       30.4 %
Equipment sales     14,138       25.5 %     8,736       21.6 %     5,402       61.8 %
Total revenues     55,464       100.0 %     40,431       100.0 %     15,033       37.2 %
                                                 
Costs of sales/revenues:                                                
Cost of services     27,475       66.5 %     21,566       68.0 %   $ 5,909       27.4 %
Cost of equipment     11,787       83.4 %     6,850       78.4 %     4,937       72.1 %
Total costs of sales/revenues     39,262       70.8 %     28,416       70.3 %     10,846       38.2 %
                                                 
Gross profit:                                                
License and transaction fees     13,851       33.5 %     10,129       32.0 %     3,722       36.7 %
Equipment sales     2,351       16.6 %     1,886       21.6 %     465       24.7 %
Total gross profit     16,202       29.2 %     12,015       29.7 %     4,187       34.8 %
                                                 
Operating expenses:                                                
Selling, general and administrative     15,652       28.2 %     11,444       28.3 %   $ 4,208       36.8 %
Depreciation     439       0.8 %     456       1.1 %     (17 )     -3.7 %
Total operating expenses     16,091       29.0 %     11,900       29.4 %     4,191       35.2 %
Operating income (loss)     111       0.2 %     115       0.3 %     (4 )     -3.5 %
                                                 
Other income (expense):                                                
Interest income     138       0.2 %     41       0.1 %     97       236.6 %
Interest expense     (403 )     -0.7 %     (209 )     -0.5 %     (194 )     -92.8 %
Change in fair value of warrant liabilities     (5,692 )     -10.3 %     (656 )     -1.6 %     (5,036 )     -767.7 %
Total other income (expense), net     (5,957 )     -10.7 %     (824 )     -2.0 %     (5,133 )     -622.9 %
                                                 
Loss before provision for income taxes     (5,846 )     -10.5 %     (709 )     -1.8 %     (5,137 )     -724.5 %
Provision for income taxes     (88 )             (180 )             (92 )     -51.1 %
                                                 
Net loss     (5,934 )     -10.7 %     (889 )     -2.2 %     (5,045 )     -567.5 %
Cumulative preferred dividends     (668 )     -1.2 %     (668 )     -1.7 %     -       0.0 %
Net loss applicable to common shares   $ (6,602 )     -11.9 %   $ (1,557 )     -3.9 %   $ (5,045 )     -324.0 %
Net loss per common share - basic and diluted   $ (0.18 )           $ (0.04 )           $ (0.14 )     -323.5 %
Basic and diluted weighted average number of common shares outstanding     35,961,648               35,705,210               256,438       0.7 %
                                                 
Adjusted  EBITDA   $ 5,358       9.7 %   $ 5,007       12.4 %   $ 351       7.0 %
                                                 
Non-GAAP net loss applicable to common shares   $ (8 )     0.0 %   $ (747 )     -1.8 %   $ 739       98.9 %
                                                 
Total connections at period-end     401,000               302,000                          
Net new connections in period     68,000               36,000                          

 

  33  

 

 

Revenue. The increase in net new connections of approximately 32,000 for the three-month period ended March 31, 2016 compared to approximately 14,000 in the same period last year represents an increase of 128%. The increase in net new connections of 68,000 for the nine-month period ended March 31, 2016 compared to 36,000 for the same period last year represents an increase of 89%. The Company’s total connections have grown to 401,000 at March 31, 2016 compared to 302,000 at March 31, 2015, or a 32.8% increase year-over-year. The increase in total connections is driving the growth in license and transaction fees of 33.2% quarter-over-quarter and 30.4% over the prior comparable nine month period.

 

Gross Margin. License and transaction fees gross margin for the three-month period ended March 31, 2016 decreased from 35.3% to 34.1% compared to the three-month period ended March 31, 2015. The Company periodically offers reduced fees for customers who offer strategic and/or large market opportunities. During the nine month period, license and transaction fee gross margin increased from 32.0% to 33.5%. Management believes that this reflects the appropriate longer term margin for license and transaction fees. Equipment gross margin decreased from 28.9% for the three-month period ended March 31, 2015 to 11.5% for the three-month period ended March 31, 2016. The primary reason was that the prior year quarter included a $747 thousand recovery as well as strategic offers as noted above. Equipment gross margins decreased from 21.6% for the nine-month period ended March 31, 2015 to 16.6% for the nine-month period ended March 31, 2016. The decrease reflects the prior recovery noted above as well as strategic offers as noted above.

 

Operating Expenses. Operating expenses increased $1.8 million or 27.9% for the three-month period ended March 31, 2016 compared to the same period in 2015. The increases are primarily due to non-recurring charges of $461 thousand incurred in connection with the acquisition and integration of the VendScreen business, $105 thousand of professional fees incurred in connection with the class action litigation and other professional fees of $444 thousand. Lesser increases were in salaries and benefits, and bad debt provision. Operating expenses increased $4.2 million or 36.8% for the nine-month period ended March 31, 2016 compared to the same period in 2015. The increase are primarily due to salary and benefit increases of $1.4 million, professional fee increases of $1.1 million, and non-recurring charges of $584 thousand incurred in connection with the acquisition and integration of the VendScreen business, and $105 thousand of processional fees incurred during the March 31, 2016 quarter in connection with the class action litigation. Operating expenses as a percentage of sales increased for the three months ended March 31, 2016 to 30.8% compared to 28.8% for the three months ended March 31, 2015. Operating expenses as a percentage of sales decreased for the nine months ended March 31, 2016 to 29.0% compared to 29.4% for the nine months ended March 31, 2015. Going forward into the fourth quarter of fiscal 2016 and the first quarter of fiscal 2017, management expects decreased SG&A expenses as compared to those during the third quarter due to, among other things, realization of efficiencies and/or cost reductions.

 

Total Other Income (Expense). Includes interest expense, other income, and the change in the fair value of warrants. The primary driver for volatility in Other Income / (Expense) has been non-cash changes to the fair value of the warrant liabilities which are based on the Company’s stock price. Using the Black-Scholes model, the Company adjusts the warrant liability for fair value through the income statement quarterly. For the three-month period ended March 31, 2016 the Company recorded expense of $4.8 million for the change in the fair value of warrant liabilities compared to $1.0 million for the three months ended March 31, 2015. For the nine-month period ended March 31, 2016 the Company recorded expense of $5.7 million for the change in the fair value of warrant liabilities compared to $656 thousand for the nine months ended March 31, 2015. The change in both periods can be primarily attributed to the increase in market price of the Company’s common stock at the valuation dates which was $4.36 at March 31, 2016 and $2.75 at March 31, 2015.

 

Net Loss. Net loss is a function of the items described above. The increase in net loss is primarily attributed to the increase in the fair value of warrant liabilities, augmented by increased one-time charges related to the VendScreen acquisition.

 

Adjusted EBITDA. For the three months ended March 31, 2016 adjusted EBITDA decreased 43.4% from $2.379 million at March 31, 2015 to $1.347 million at March 31, 2016. The $1.0 million decrease was primarily due to decreases in equipment gross profit versus same quarter last year, as noted above, as well as increases in professional service fees and bad debt expense. For the nine months ended March 31, 2016 adjusted EBITDA increased 7.0% from $5.007 million at March 31, 2015 to $5.358 million at March 31, 2016. The $351 thousand increase is primarily due to an increase in gross margins on license and transaction fees in excess of the increases in operating expenses noted above.

 

Non-GAAP Net Income. For the three months ended March 31, 2016 non-GAAP net income applicable to common shares decreased 231.2% from $321 thousand during the three months ended March 31, 2015 to a loss of $421 thousand. The decrease was primarily due to decreases in gross margins during the current quarter as well as increases in professional service fees and bad debt expense. For the nine months ended March 31, 2016 non-GAAP net income applicable to common shares increased 98.9% from a loss of $747 thousand during the nine months ended March 31, 2015 to loss of $8 thousand. The increase is primarily due to the increased gross margin on license and transaction fees in excess of the increases in operating expenses noted above.

 

Weighted Average Shares Outstanding. The gradual increase in the basic weighted average number of common shares has been due to stock issued through the Company’s stock based compensation programs.

 

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Table 4: Reconciliation of Net Income (Loss) to Adjusted EBITDA:

 

    For the three months ended     For the nine months ended  
    March 31,     March 31,     March 31,     March 31,  
($ in thousands)   2016     2015     2016     2015  
Net loss   $ (5,420 )   $ (567 )   $ (5,934 )   $ (889 )
                                 
Less interest income     (67 )     (27 )     (138 )     (41 )
Plus interest expenses     180       85       403       210  
(Less) plus income tax provision     (93 )     138       88       180  
Plus depreciation expense     1,190       1,433       3,863       4,350  
Plus amortization expense     44       -       44       -  
Plus stock-based compensation     142       216       651       541  
EBITDA     (4,024 )     1,278       (1,023 )     4,351  
Less change in fair value of warrant liabilities     4,805       1,101       5,692       656  
Plus VendScreen non-recurring charges     461       -       584       -  
Plus class action professional fees     105       -       105       -  
Adjustments to EBITDA     5,371       1,101       6,381       656  
Adjusted  EBITDA   $ 1,347     $ 2,379     $ 5,358     $ 5,007  

 

As used herein, Adjusted EBITDA represents net income (loss) excluding interest income, interest expense, income taxes, depreciation, amortization, non-recurring professional service fees recorded in SG&A during the quarter ended December 31, 2015 that were incurred in connection with the VendScreen, Inc. (“VendScreen”) transaction, non-recurring costs and expenses recorded in SG&A during the quarter ended March 31, 2016 that were incurred in connection with the acquisition and integration of the VendScreen business, $105 thousand of professional fees incurred during the March 31, 2016 quarter in connection with the class action litigation, change in fair value of warrant liabilities, and stock-based compensation expense. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash gain or charge that is not related to the Company’s operations. We have excluded the non-cash expense, stock-based compensation, as it does not reflect the cash-based operations of the Company. We have excluded the non-recurring costs and expenses incurred in connection with the VendScreen transaction in order to allow more accurate comparisons of the financial results to historical operations. We have excluded the professional fees incurred in connection with the class action litigation because we believe they represent a charge that is not related to the Company’s operations. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, the Company utilizes Adjusted EBITDA as a metric in its management and executive officer incentive compensation plans.

 

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Table 5: Selling General & Administrative (SG&A) Expenses 

 

    Three months ended  
($ in thousands)   March 31,     % of     December 31,     % of     September 30,     % of     June 30,     % of     March 31,     % of  
(unaudited)   2016     SG&A     2015     SG&A     2015     SG&A     2015     SG&A     2015     SG&A  
                                                             
Salaries and benefit costs   $ 2,760       45.4 %   $ 2,786       58.6 %   $ 2,685       56.0 %   $ 2,295       45.8 %   $ 2,534       59.2 %
Marketing related expenses     362       5.9 %     335       7.0 %     333       6.9 %     580       11.6 %     184       4.3 %
Professional services     1,152       18.9 %     839       17.6 %     782       16.3 %     844       16.8 %     708       16.5 %
Bad debt expense     505       8.3 %     239       5.0 %     236       4.9 %     497       9.9 %     303       7.1 %
Premises, equipment and insurance costs     460       7.5 %     347       7.3 %     399       8.3 %     475       9.5 %     372       8.7 %
Research and development expenses     131       2.1 %     37       0.8 %     191       4.0 %     154       3.1 %     96       2.2 %
VendScreen non-recurring charges     461       7.6 %     106       2.2 %     17       0.4 %     -       0.0 %     -       0.0 %
Class action professional fees     105       1.7 %     -       0.0 %     -       0.0 %     -       0.0 %     -       0.0 %
Other expenses     158       2.6 %     73       1.5 %     153       3.2 %     164       3.3 %     84       2.0 %
Total SG&A expenses   $ 6,094       100 %   $ 4,762       100 %   $ 4,796       100 %   $ 5,009       100 %   $ 4,281       100 %

 

    Nine months ended  
($ in thousands)   March 31,     % of     March 31,     % of  
(unaudited)   2016     SG&A     2015     SG&A  
                         
Salaries and benefit costs   $ 8,231       52.5 %   $ 6,870       60.0 %
Marketing related expenses     1,030       6.6 %     646       5.6 %
Professional services     2,773       17.7 %     1,666       14.6 %
Bad debt expense     980       6.3 %     603       5.3 %
Premises, equipment and insurance costs     1,206       7.7 %     1,144       10.0 %
Research and development expenses     359       2.3 %     261       2.3 %
VendScreen non-recurring charges     584       3.7 %     -       0.0 %
Class action professional fees     105       0.7 %     -       0.0 %
Other expenses     384       2.5 %     254       2.2 %
Total SG&A expenses   $ 15,652       100 %   $ 11,444       100 %

 

Salaries and Benefit Costs . Includes employee compensation and benefits, directors’ fees, incentives, and stock-based compensation. The increase in cost from the nine months ended March 31, 2015 to the nine months ended March 31, 2016 related to employee compensation and headcount increases.

 

Marketing Related. Marketing related costs were higher for the three and nine-month periods ended March 31, 2016 due to trade show expenses and marketing initiatives for sales support and sales deployment.

 

Professional Services. Professional service expenses have increased due to additional information technology, legal, public relations, auditing, SOX 404 and other consulting work. Excludes $105 thousand of professional fees incurred during the March 31, 2016 quarter in connection with the class action litigation. The Company anticipates increased use of professional services to support its growing administrative, sales and service structure.

 

Bad Debt expense. Provision for bad debt reflects the most current assessment of reserves required.

 

Premises, Equipment and Insurance Costs. Includes facilities, supplies, printing and postage, sales & use taxes, and workers compensation. The increase for the three month period ended March 31, 2016 compared to the same period in 2015 was from liability insurance, and office supplies.

 

Research and Development. Includes product development costs that cannot be capitalized, including materials and contractors.

 

Non-recurring Charges . Included here are VendScreen acquisition and integration expenses (professional, legal and severance fees).

 

Other expenses. Includes bank fees, recruiting expenses, non-inventory supplies, and subscriptions.

 

  36  

 

  

Table 6: Non-GAAP Earnings per Share

 

    Three months ended     Nine months ended  
    March 31,     March 31,     March 31,     March 31,  
($ in thousands)   2016     2015     2016     2015  
                         
Net loss   $ (5,420 )   $ (567 )   $ (5,934 )   $ (889 )
Non-GAAP adjustments:                                
Non-cash portion of income tax provision     (38 )     121       213       154  
Fair value of warrant adjustment     4,805       1,101       5,692       656  
VendScreen non-recurring charges     461       -       584       -  
Class action professional fees     105       -       105       -  
Non-GAAP net income (loss)   $ (87 )   $ 655     $ 660     $ (79 )
                                 
Net loss   $ (5,420 )   $ (567 )   $ (5,934 )   $ (889 )
Cumulative preferred dividends     (334 )     (334 )     (668 )     (668 )
Net loss applicable to common shares   $ (5,754 )   $ (901 )   $ (6,602 )   $ (1,557 )
                                 
Non-GAAP net income (loss)   $ (87 )   $ 655     $ 660     $ (79 )
Cumulative preferred dividends     (334 )     (334 )     (668 )     (668 )
Non-GAAP net income (loss) applicable to common shares   $ (421 )   $ 321     $ (8 )   $ (747 )
                                 
Net loss per common share - basic and diluted   $ (0.16 )   $ (0.03 )   $ (0.18 )   $ (0.04 )
Non-GAAP net earnings (loss) per common share - basic and diluted   $ (0.01 )   $ 0.01     $ -     $ (0.02 )
Basic and diluted weighted average number of common shares outstanding     36,161,613       35,747,979       35,961,648       35,705,210  

 

The gradual increase in the basic weighted average number of common shares has been due to stock issued through the Company’s stock based compensation programs.

 

As used herein, non-GAAP net income (loss) represents GAAP net income (loss) excluding costs or benefits relating to any adjustment for fair value of warrant liabilities and non-cash portions of the Company’s income tax benefit (provision), non-recurring professional service fees recorded in SG&A during the quarter ended December 31, 2015 that were incurred in connection with the VendScreen transaction, and non-recurring charges recorded in SG&A during the quarter ended March 2016 that were incurred primarily in connection with the acquisition and integration of the VendScreen business, and $105 thousand of professional fees incurred during the March 31, 2016 quarter in connection with the class action litigation. Non-GAAP net earnings (loss) per common share - diluted is calculated by dividing non-GAAP net income (loss) applicable to common shares by the number of diluted weighted average shares outstanding. Non-GAAP net income (loss) is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Management believes that non-GAAP net income (loss) and non-GAAP net earnings (loss) per common share - diluted are important measures of the Company's business. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. We believe that these non-GAAP financial measures serve as useful metrics for our management and investors because they enable a better understanding of the long-term performance of our core business and facilitate comparisons of our operating results over multiple periods, and when taken together with the corresponding GAAP financial measures and our reconciliations, enhance investors' overall understanding of our current and future financial performance. Additionally, the Company utilizes non-GAAP net income as a metric in its management and executive officer incentive compensation plans.

 

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Table 7: Balance Sheet as of March 31, 2016 Compared to June 30, 2015

 

($ in thousands)       March 31,     June 30,              
(unaudited)       2016     2015     $ Change     % Change  
                             
Assets                            
Current assets:                            
Cash       $ 14,901     $ 11,374     $ 3,527       31 %
Accounts receivable, less allowance   *     8,345       5,971       2,374       40 %
Finance receivables         1,677       941       736       78 %
Inventory         2,341       4,216       (1,875 )     -44 %
Deferred income taxes         1,276       1,258       18       1 %
Prepaid expenses and other current assets         1,060       574       486       85 %
Total current assets         29,600       24,334       5,266       22 %
                                     
Finance receivables, less current portion         3,042       3,698       (656 )     -18 %
Property and equipment, net         10,584       12,869       (2,285 )     -18 %
Goodwill and intangbiles         12,976       8,095       4,881       60 %
Deferred income taxes         25,701       25,788       (87 )     0 %
Other assets         337       350       (13 )     -4 %
Total assets       $ 82,240     $ 75,134     $ 7,106       9 %
                                     
Liabilities and shareholders' equity                                    
Current liabilities:                                    
Accounts payable   *   $ 12,029     $ 10,542     $ 1,487       14 %
Accrued expenses         3,339       2,108       1,231       58 %
Line of credit         6,980       4,000       2,980       75 %
Current obligations under long-term debt         625       478       147       31 %
Income taxes payable         -       54       (54 )     -100 %
Warrant liabilities         5,964       -       5,964       0 %
Deferred gain from sale-leaseback transactions         860       860       -       0 %
Total current liabilities         29,797       18,042       11,755       65 %
Long-term liabilities                                    
Long-term debt, less current portion         1,742       1,854       (112 )     -6 %
Accrued expenses, less current portion         19       49       (30 )     -61 %
Warrant liabilities, less current portion         -       978       (978 )     -100 %
Deferred gain from sale-leaseback transactions, less current portion         255       900       (645 )     -72 %
Total long-term liabilities         2,016       3,781       (1,765 )     -47 %
Total liabilities         31,813       21,823       9,990       46 %
                                     
Shareholders' equity:                                    
Preferred stock, no par value         3,138       3,138       -       0 %
Common stock, no par value         227,924       224,874       3,050       1 %
Accumulated deficit         (180,635 )     (174,701 )     (5,934 )     -3 %
Total shareholders' equity         50,427       53,311       (2,884 )     -5 %
Total liabilities and shareholders' equity       $ 82,240     $ 75,134     $ 7,106       9 %
                                     
Total current assets       $ 29,600     $ 24,334     $ 5,266       22 %
Total current liabilities         29,797       18,042       11,755       65 %
Net working capital       $ (197 )   $ 6,292     $ (6,489 )     -103 %
                                     
* Accounts receivable, net of allowance for doubtful accounts and accounts payable have increased by the following amounts due to reclassifications       $ -     $ 1,299                  

 

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Highlights from the Balance Sheet as of March 31, 2016 compared to June 30, 2015 include:

 

· Property and Equipment (“PP&E”) includes mostly JumpStart rental equipment and has declined $2.3 million primarily pursuant to the Company’s strategy of using third-party leasing programs through QuickStart. Net PP&E is expected to continue to decline over time.
· Of the $6.5 million decrease in net working capital from June 30, 2016, $6.0 million was due to the increase in the fair value of warrant liabilities. The increase in cash and accounts receivable of $5.9 million was approximately matched by an increase of $2.7 million in accounts payable and accrued liabilities and a $3.0 million increase in the line of credit.
· Accounts payable increased $1.5 million to $12.0 million as of March 31, 2016; nearly all of the increase was attributable to inventory and supply purchases during the quarter.
· Accounts receivable increased $2.4 million to $8.3 million as of March 31, 2016, primarily attributable to approximately $2.3 million due from third-party financing companies for the Company’s QuickStart Program sold during the quarter.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Highlights from the statement of cash flow include:

 

· The Company has experienced positive operating cash flow in the last five quarters and expects continued positive cash flow from operations.
· The net increase in cash over the nine months from June 30, 2015 to March 31, 2016 was $3.5 million compared to a net decrease in cash of ($0.6) million for the same period in the prior year. During the nine month period, the positive cash flow components were $5.2 million from operations (not primarily working capital changes), $3.1 million net increase in line of credit financing, and $1.7 million from exercise of warrants. These positive cash flows were partially offset by the $5.6 million outlay for the VendScreen acquisition.
· The net increase in cash over the three months from December 31, 2015 to March 31, 2016 is $92 thousand compared to a net increase of $1.7 million for the same period in prior year. This quarter, the primary driver of the $4.3 million of positive operating cash flow was the increase in accounts payable of $4.2 million which was primarily attributable to inventory and supplies purchases. Other cash flow factors were the exercise of warrants of $1.7 million, offset by the $5.6 million acquisition cost for VendScreen.

 

In September 2014, the Company reintroduced QuickStart, a program whereby our customers are able to purchase our ePort hardware via a five-year, non-cancellable lease. Under the QuickStart program, the Company provides the equipment to customers in a rent-to-own agreement and creates a long-term and current finance receivable for five-year leases. In the third and fourth quarters of fiscal 2015, the Company signed vendor agreements with two leasing companies, whereby our customers would enter into leases directly with the leasing companies. Under this scenario, the Company invoices the leasing company for the equipment leased by our customer, and records the full equipment sales amount to accounts receivable. Unlike finance receivables, where the cash from the equipment sale would be collected over a five-year period, the accounts receivable due from the leasing company is typically collected within 30 days. QuickStart through third-party leasing companies reduces cash flow needed for investing activities and improves the cash flow from operations. Company previously financed its customers’ acquisition of ePort equipment primarily through the JumpStart rental program. Under Jumpstart, the Company records an investing capital expenditure cash outflow for the equipment provided and fixed assets on the balance sheet, and then receives rental income from a month-to-month lease.

 

Since entering into vendor agreements with two third-party leasing companies, the majority of QuickStart sales consummated have been with customers entering into a lease directly with the leasing companies. Our customers have shifted from acquiring our products via JumpStart, which accounted for 60% of our gross connections in fiscal year 2014, to QuickStart and sales under normal trade receivable terms, which accounted for 88% of our gross connections in fiscal year 2015, and was approximately 90% of gross connections in the first nine months of fiscal year 2016. The Company is actively working to expand its outside leasing partners. The goal of the program would be to have enough leasing partners so that the Company would not need to provide financing to its customers. Accordingly, with continued success of the QuickStart third-party leasing program, the Company should continue to generate positive cash flow from operations during the remainder of the 2016 fiscal year.

 

Sources of Cash

 

The Company’s primary sources of cash include:

 

· Cash on hand of approximately $14.9 million as of March 31, 2016;
· The Company generated cash flow from operations of $5.2 million for the nine-month period ended March 31, 2016. The Company’s liquidity position is demonstrated by its net working capital, which is defined as current assets less current liabilities, and which was $(197) thousand, $5.9 million, $9.9 million, $7.5 million, and $6.3 million over the last five quarters beginning with the quarter ended March 31, 2016.

 

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· On March 29, 2016, a bank agreed to provide a $12 million line of credit to the Company. Approximately $7.1 million of this line was immediately used to pay off a term loan and line of credit from another bank. The line of credit bears interest at an annual rate equal to 2.25% above the prime rate as published from time to time by The Wall Street Journal, which prime rate is currently 3.5%. As of March 31, 2016, the balance outstanding under the line of credit was $7.1 million.

· Approximately $9.4 million from unexercised stock warrants exercisable at $2.6058 per share that expire on September 18, 2016; and

· The Company believes it could sell a portion of its finance receivables at a discount to a third-party lender.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no significant changes to our market risk since June 30, 2015. For a discussion of our exposure to market risk, refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the year ended June 30, 2015.

 

Item 4. Controls and Procedures.

 

(a) Evaluation of disclosure controls and procedures.

 

The principal executive officer and principal financial officer have evaluated the Company’s disclosure controls and procedures as of March 31, 2016. Based on this evaluation, they conclude that the disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in internal control over financial reporting.

 

There have been no changes during the quarter ended March 31, 2016 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

Part II - Other Information .

 

ITEM 1. Legal Proceedings

 

As previously reported, on October 1, 2015, a purported class action was filed in the United States District Court for the Eastern District of Pennsylvania against the Company and its executive officers alleging violations under the Securities Exchange Act of 1934. On December 15, 2015, the court appointed a lead plaintiff, and on January 18, 2016, the plaintiff filed an amended complaint that set forth the same causes of action and requested substantially the same relief as the original complaint. On February 1, 2016, the Company filed a motion to dismiss the amended complaint. On April 11, 2016, the Court held oral argument on the Company’s motion, and on April 14, 2016, the Court issued an order granting the Company’s motion to dismiss the amended complaint without leave to amend. The plaintiff must appeal the Court’s order prior to May 17, 2016.

 

Item 3. Defaults Upon Senior Securities

 

There were no defaults on any senior securities. On February 1, 2016, an additional $334 thousand of dividends were accrued on our cumulative Series A Convertible Preferred Stock. The total accrued and unpaid dividends on our Series A Convertible Preferred Stock as of March 31, 2016 are $13.7 million. The dividend accrual dates for our Preferred Stock are February 1 and August 1. The annual cumulative dividend on our Preferred Stock is $1.50 per share.

 

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Item 6. Exhibits

 

Exhibit    
Number   Description
     
2.1*   Asset Purchase Agreement dated January 15, 2016, by and between the Company and VendScreen, Inc.
     
10.1   Loan and Security Agreement dated as of March 29, 2016, by and between the Company and Heritage Bank of Commerce (Portions of this exhibit were redacted pursuant to a confidentiality treatment request)
     
10.2   Intellectual Property Security Agreement dated as of March 29, 2016, by and between the Company and Heritage Bank of Commerce
     
10.3   Fifteenth Amendment to Loan and Security Agreement dated January 15, 2016 by and between the Company and Avidbank Corporate Finance, a division of Avidbank (Portions of this exhibit were redacted pursuant to a confidentiality treatment request)
     
31.1   Certifications of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
31.2   Certifications of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
     
32.1   Certification of the Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of the Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Schedules and exhibits to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.

 

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    USA TECHNOLOGIES, INC.
     
Date: May 12, 2016   /s/ Stephen P. Herbert  
    Stephen P. Herbert,
    Chief Executive Officer
     
Date: May 12, 2016   /s/ Leland P. Maxwell  
    Leland P. Maxwell
    Interim Chief Financial Officer

 

  42  

 

 

Exhibit 2.1

 

ASSET PURCHASE AGREEMENT

 

THIS ASSET PURCHASE AGREEMENT (this “Agreement”) is dated January 15, 2016, by and among USA TECHNOLOGIES, INC., a Pennsylvania corporation (“Buyer”), and VENDSCREEN, INC., a Delaware corporation (“Seller”) (collectively, the “Parties”).

 

RECITALS

 

Seller desires to sell and Buyer desires to purchase all of Seller’s right, title and interest in and to substantially all of the assets of Seller, and Buyer proposes to assume certain of the liabilities and obligations of Seller, all on the terms and subject to the conditions set forth in this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the premises and mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties, intending to be legally bound, agree as follows:

 

1. DEFINITIONS

 

1.1      Definitions . For purposes of this Agreement, the following terms and variations thereof have the meanings specified or referred to in this Section 1.1:

 

“Accounts Receivable” means: (a) all trade accounts receivable, deferred receivables, and other rights to payment from customers of Seller and the full benefit of all security for such accounts or rights to payment, including all trade accounts receivable representing amounts receivable in respect of goods shipped or products sold or services rendered to customers of Seller; (b) all other accounts, loans, or notes receivable of Seller and the full benefit of all security for such accounts, loans, or notes; and (c) any claim, remedy or other right related to any of the foregoing.

 

  1  

 

 

“Affiliate” means with respect to any Person, any Person which directly or indirectly controls, is controlled by, or is under common control with such Person. A Person shall be deemed to control another Person if the controlling Person, directly or indirectly, possesses the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of voting securities, by contract, or otherwise.

 

“Assignment and Assumption of Lease” has the meaning set forth in Section 5.4.

 

“Benefit Plans” means all material “employee benefit plans,” as defined in Section 3(3) of ERISA (as defined at Section 3.10) and equity, employment and severance agreements and other similar arrangements maintained, contributed to, or required to be contributed to, by Seller or any ERISA Affiliate for the benefit of any employee of Seller or under which Seller has any material liability, including (a) any profit-sharing, deferred-compensation, bonus, stock-option, stock-purchase, pension, retainer, consulting, retirement, severance, welfare or incentive plan, agreement or arrangement, and (b) any employment agreement or executive compensation agreement.

 

“Cash” means cash and cash equivalents (including marketable securities, and short-term investments) of Seller as of the Closing Date.

 

“Closing Date” means 12:01 a.m., Eastern Time, on the date of this Agreement.

 

“Code” means the Internal Revenue Code of 1986, as amended.

 

“Confidential Information” means all information consisting of, relating to, or arising out of or in connection with (i) the Purchased Assets, including but not limited to, the Intellectual Property Assets, or (ii) the Assumed Liabilities, or (iii) any information disclosed by Buyer to Seller at any time prior to the date hereof under or pursuant to the Prior Confidentiality Agreements; and whether disclosed orally or disclosed or accessed in written, electronic or other form or media, and whether or not marked, designated or otherwise identified as “confidential”. Except as required by applicable federal, state or local law or regulation, the term “Confidential Information” as used in this Agreement shall not include information that: (a)at the time of disclosure is, or thereafter becomes, generally available to and known by the public other than as a result of, directly or indirectly, any violation of this Agreement by Seller; (b) at the time of disclosure is, or thereafter becomes, available to Seller on a non-confidential basis from a third-party source, provided that such third party is not and was not prohibited from disclosing such Confidential Information to Seller by a legal, fiduciary or contractual obligation to Seller or Buyer, or (c) consists of, relates to, or arises out of or in connection with any Excluded Assets or any Retained Liabilities .

 

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“Contemplated Transactions” means all of the transactions contemplated by this Agreement.

 

“Encumbrance” means any charge, claim, condition, equitable, contractual or other interest in favor of any third party (including any license in favor of any third party, except, in the case of any third party right or software under which Seller is a licensee, to the extent such right or software is also non-exclusively licensed to third parties), lien (including any Tax lien), option, pledge, hypothecation, security interest, encroachment, right of first option, right of first refusal or similar restriction, including any restriction on use, voting (in the case of any security or equity interest), transfer, receipt of income, or exercise of any other attribute of ownership or other encumbrance, in each case, whether arising by contract or operation of law, and any contract creating or to create any of the foregoing.

 

“Environmental Laws” means all Legal Requirements, Orders or other binding measures of any Governmental Body relating to the environment or governing the handling, management, treatment, storage or disposal of waste, management of Hazardous Substances or protection of human health or the environment.

 

“ERISA Affiliate” means any corporation or trade or business (whether or not incorporated) which is treated with Seller as a single employer within the meaning of Section 414 of the Code.

 

“Escrow Agent” has the meaning set forth in Section 2.4(b).

 

“Escrow Agreement” means the Escrow Agreement to be dated as of the Closing Date, substantially in the form of Exhibit “A” .

 

“Escrow Deposit” has the meaning set forth in Section 2.4(b).

 

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“Governmental Authorization” means any consent, license, registration, or permit issued, granted or given by any Governmental Body or pursuant to any Legal Requirement (including Environmental Permits).

 

“Governmental Body” means any federal, state, local, municipal, foreign, or other government (including any agency, branch, department, board, commission, court, tribunal, instrumentality or other entity exercising governmental or quasi-governmental powers).

 

“Hazardous Substances” means any hazardous, toxic or polluting substance, waste or material, including without limitation, asbestos, petroleum, petroleum products, or PCBs, all as defined under Environmental Laws.

 

“Intellectual Property” means the following: (a) all United States and foreign names, fictional business names, slogans, logos, trade names, trademarks, service marks, certification marks, domain names, design rights (including any word, symbol, product configuration, icon and logo) and trade dress (and applications and registrations for the same), whether registered or unregistered (collectively, “Marks”); (b) all United States and foreign patents and patent applications of any type or nature, whether utility, design or otherwise (including continuations, continuations-in-part, revisions, divisionals, extensions, provisionals, reexaminations, substitutions, reissue applications and renewals) or priority rights and applications therefor) (collectively, “Patents”), (c) invention disclosures and other rights to inventions (including firmware and hardware technology), Intellectual Property or designs; (d) all copyrights, in both published works and unpublished works, whether registered or unregistered, mask works and all other rights corresponding thereto (and registrations and applications for the same) (collectively, “Copyrights”); (e) all know-how, trade secrets, techniques, ideas, concepts, discoveries, reports, processes, procedures, specifications, engineering orders, proposals, databases, inventions (whether or not patentable and whether or not reduced to practice), invention disclosures, process technology, research records, plans, drawings, blue prints and any other proprietary information, including technical or user manuals, however recorded, stored or embodied in each case to the extent proprietary to Seller (collectively, “Trade Secrets”); (f) computer software and all subsequent versions thereof, including programs, applications, modules, routines and sub-routines, program and system logic, architecture and/or design, screen and report displays and layouts, templates, user interfaces, menus, buttons and icons, data definition specifications, source code, object code, comments, algorithms, application programming interfaces, databases and other software-related specifications and documentation, maintenance agreements, design notes, technical or user manuals, files and data, and all media on which the foregoing are stored or recorded (“Software”); (g) all internet protocol addresses and networks, including domain names, internet e-mail addresses, world wide web (www) and http addresses, network names, social media user names, identifiers, accounts and profiles, network addresses and services (such as mail or website) whether or not used or currently in service and any registrations relating thereto and any website materials, content and design, and any authorization codes, login details or credentials or passwords to use or access the same (“Domain Names”); and (h) all rights to sue or recover and retain damages and costs and attorneys’ fees for past, present and future infringement of any of the foregoing; in each case, including any registrations of, applications to register, and renewals and extensions of, any of the foregoing with or by any Governmental Body in any jurisdiction.

 

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“Inventories” means all inventories of Seller, wherever located, including all finished goods, unfinished goods and work-in-process, including any products or goods owned by Seller, and any raw materials, spare parts, components, and all other materials and supplies to be used or consumed by Seller in the production of finished goods.

 

“IRS” means the United States Internal Revenue Service.

 

“Knowledge” means, with respect to Seller, the actual knowledge, after reasonable internal inquiry, of David Grano.

 

“Lease” means that certain Office Lease dated July 1, 2013, between Historic U.S. National Bank Block, LLC, as landlord, and Seller, as tenant.

 

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“Legal Requirement” means any federal, state, local, municipal, foreign, international, multinational, or other constitution, law, ordinance, principle of common law, code, rule, regulation, statute, treaty or executive order, decree or similar measure, and any case law or judicial ruling interpreting any of the foregoing.

 

“Liability” means with respect to any Person, any liability, indebtedness, or other obligation of such Person of any kind, character or description, whether known or unknown, direct or indirect, absolute or contingent, accrued or unaccrued, disputed or undisputed, liquidated or unliquidated, choate or inchoate, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable, or otherwise, and whether or not the same is required to be accrued on the financial statements of such Person.

 

“Loss” means any loss, claim, demand, judgment, charge, Order, damage, penalty, fine, cost, expert witness fees and disbursements in connection with investigating, defending, or settling any action or threatened action, settlement payment, Liability, Tax, Encumbrance, expense, fee, court costs, and/or attorneys’ fees and expenses.

 

“Off-the-Shelf Software” means any third-party software that is generally commercially available and is licensed for use on desktop or laptop “PC-class” computers or related local area network servers.

 

“Open Source Software” means: (a) any software that contains, or is derived in any manner (in whole or in part) from, any software that is distributed as free software, open source software, or pursuant to similar licensing and distribution models; or (b) any software that requires as a condition of use, modification, and/or distribution of such software that such software or other code, routines or software incorporated into, derived from, or distributed with such software (i) be disclosed or distributed in source code form to any party, (ii) be licensed to any party (including for the purpose of making derivative works), or (iii) be redistributable at no or minimal charge.

 

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“Order” means any writ, order, injunction, judgment, decree, ruling, assessment, or arbitration award of any Governmental Body or arbitrator.

 

“Permitted Encumbrances” means (a) Encumbrances for taxes or other governmental charges, assessments or levies which are not yet due and payable, (b) statutory landlord’s, mechanic’s, carrier’s, workmen’s, repairmen’s or other similar Encumbrances arising or incurred in the ordinary course of business and not yet due and payable and (c) licenses granted under customer contracts.

 

“Person” means an individual, partnership, corporation, business trust, limited liability company, limited liability partnership, joint stock company, trust, unincorporated association, joint venture, or other entity or a Governmental Body.

 

“Prior Confidentiality Agreements” means the Mutual Non-Disclosure Agreement between Seller and Buyer dated May 29, 2014, and the Nondisclosure Agreement between Seller and Buyer dated November 14, 2011.

 

“Proceeding” means any action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, judicial or investigative, whether formal or informal, whether public or private) commenced, brought, conducted, or heard by or before any Governmental Body.

 

“Related Person” means, (a) with respect to a particular individual: (i) such individual’s spouse and any other person who is related to the individual or the individual’s spouse within the second degree (“Family”), and (ii) any Person that is directly or indirectly controlled by any one or more members of such individual’s Family; and (b) with respect to a specified Person other than an individual, any Person that directly or indirectly controls, is directly or indirectly controlled by, or is directly or indirectly under common control with, such specified Person and any related Person thereof. For purposes of this definition, “control” (including “controlling”, “controlled by”, and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

 

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“Representative” means with respect to a particular Person, any director, officer, manager, employee, agent, consultant, advisor, accountant, financial advisor, legal counsel, or other representative of that Person.

 

“Tax” or “Taxes” means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax of any kind whatsoever, whether computed on a separate or consolidated, unitary or combined basis or in any other manner, including any interest, penalty, or addition thereto, whether disputed or not.

 

“Tax Return” means any return, declaration, report, claim for refund, or information return or statement required to be filed with a Governmental Body in connection with Taxes, including any schedule or attachment thereto, and including any amendment thereof.

 

“Transaction Documents” shall mean this Agreement, the Escrow Agreement, the Intellectual Property Assignment Agreement, the Assignment of Patents, the Assignment and Assumption of Lease, the Assignment of Marks, the Bill of Sale, the Assumption Agreement, the Transition Services Agreement, and the Domain Name Assignment Agreement (in each case, as defined herein).

 

1.2      Interpretation . When a reference is made in this Agreement to an Exhibit, Schedule, or Section, such reference shall be to an Exhibit, Schedule, or Section of this Agreement unless otherwise indicated. The headings and the table of contents contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes,” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” Whenever the context requires, words used in the singular shall be construed to mean or include the plural and vice versa, and pronouns of any gender shall be deemed to include and designate the masculine, feminine or neuter gender. The word “extent” in the phrase “to the extent” shall mean the degree to which a subject or other thing extends or the scope of such subject or other thing, and such phrase shall not simply mean “if.”

 

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2. SALE AND TRANSFER OF ASSETS; CLOSING

 

2.1      Assets to be Sold . Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, Seller hereby sells, conveys, assigns, transfers, and delivers to Buyer, and Buyer hereby purchases and acquires from Seller, free and clear of any Encumbrances except Permitted Encumbrances and Assumed Liabilities, all of Seller’s right, title, and interest in and to all of the assets, properties, rights (contractual or otherwise) and business of every kind and description, wherever located, personal or mixed, tangible or intangible, owned, held or used by Seller as the same shall exist on the Closing Date, other than the Excluded Assets (the “Purchased Assets”). The Purchased Assets shall be free and clear of any Encumbrances except Permitted Encumbrances and Assumed Liabilities. The Purchased Assets include:

 

(a)     the machinery, equipment, tools, furniture, office equipment, computer hardware, supplies, materials, vehicles, and other items of tangible personal property (other than Inventories) owned or leased by Seller, together with any express or implied warranty by the manufacturers or sellers or lessors of any item or component part thereof and all maintenance records and other documents relating thereto as listed in Schedule 2.1(a)(i) (collectively, “Tangible Personal Property”);

 

(b)     all Inventories used or held by Seller, which are listed in Schedule 2.1(b) ;

 

(c)     all rights of Seller under existing agreements and contracts to which Seller is a party, including the Lease, all purchase orders and customer contracts described on Schedule 2.1(c) (collectively, the “Assumed Contracts”);

 

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(d)     all Intellectual Property that is owned by or leased, licensed or sublicensed to Seller, including the assets listed in Schedule 3.16(a) and Schedule 3.16(b) (collectively, the “Intellectual Property Assets”);

 

(e)     all Governmental Authorizations and all pending applications or renewals thereof, including but not limited to, those identified on Schedule 2.1(e) , to the extent transferable. Any Governmental Authorizations that are not transferable are so designated on such Schedule 2.1(e) ;

 

(f)     all information, files, correspondence, records, data, plans, reports, contracts and recorded knowledge, including customer, supplier, vendor, distributor, price and mailing lists, marketing, sales and promotional materials, purchase and sale records, quality control records, research and development files, technical manuals, files and data, company manuals and all accounting or other books and records of the Seller in whatever media retained or stored, including computer programs and disks;

 

(g)     all rights of Seller relating to deposits and prepaid expenses, claims for refunds and rights to offset in respect thereof (to the extent paid or arising solely pursuant to an Assumed Contract or Purchased Asset and arising after the Closing Date);

 

(h)     Accounts Receivable (other than those due from Evergreen Vending in the amount of approximately $340,000); and

 

(i)     all other tangible and intangible assets, properties and rights of Seller of any kind or description, wherever located (including all goodwill related to or associated with the Purchased Assets), that are (i) carried on the books of the Seller or (ii) owned or licensed by the Seller.

 

Notwithstanding the foregoing, the transfer of the Purchased Assets pursuant to this Agreement shall not include the assumption of any Liability related to any of the Purchased Assets unless Buyer expressly assumes that Liability pursuant to Section 2.3(a).

 

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2.2      Excluded Assets . Notwithstanding anything to the contrary contained in Section 2.1 or elsewhere in this Agreement, the following assets of Seller (collectively, the “Excluded Assets”) are not part of the sale and purchase contemplated hereunder, are excluded from the Purchased Assets and shall remain the property of Seller after the Closing:

 

(a)     all charter documents of Seller including minute books, stock ledger records and seals and other records having to do with the corporate organization of Seller;

 

(b)     all insurance policies and rights thereunder;

 

(c)     all Cash;

 

(d)     any contract or agreement to which Seller is a party other than the Assumed Contracts;

 

(e)     any books and records relating to Seller’s Tax matters and employees;

 

(f)     claims for and rights to receive refunds with respect to Taxes and Tax loss carryforwards, relating to the Seller’s business or the Purchased Assets with respect to taxable periods ending on or prior to the Closing Date;

 

(g)   the rights of Seller under or pursuant to this Agreement and the other agreements and documents executed and delivered in connection herewith; and

 

(h)   capital stock or other equity interests in Seller.

 

2.3      Liabilities .

 

(a)     Assumed Liabilities . Subject to the terms and conditions in this Agreement, on and effective as of the Closing Date, Buyer shall assume, perform and discharge, as and when due any Liability of Seller arising or required to be performed or discharged after the Closing Date under the Assumed Contracts (including any customer claims under Seller’s warranty terms for devices under assumed customer contracts and fees under the assumed contract for OTI 2016 Annual Software Maintenance Agreement dated November 17, 2015), the Lease, and the Assignment and Assumption of Lease (collectively the “Assumed Liabilities”), and such Assumed Liabilities shall be the sole Liability assumed by Buyer.

 

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(b)     Retained Liabilities . The Retained Liabilities shall remain the sole responsibility of and shall be retained, paid, performed and discharged solely by Seller. “Retained Liabilities” shall mean all Liabilities of Seller including but not limited to the following (to the extent not an Assumed Liability):

 

( i) any Liability under any Assumed Contract that arises on or after the Closing Date but that arises out of or relates to any breach, claim or other matter that occurred, vested or became effective on or prior to the Closing Date;

 

(ii) any Liability for the unpaid Taxes of the Seller (including unpaid Taxes relating to or arising out of the Excluded Assets or the operation of Seller), or Taxes or similar amounts that the Seller was required to withhold and deposit, including deferred income Taxes, with respect to any period or any Taxes arising out of or relating to events which shall have occurred, or services performed, or products sold, or the operation of the business of Seller on or prior to the Closing Date or any unpaid Transfer Taxes;

 

(iii) except for Buyer’s express obligations under the terms of the Assignment and Assumption of Lease, any Liability arising out of or relating to Seller’s Leased Real Property and any Liability to the landlord;

 

(iv) except as provided in Section 5.3, any Liability (including, for the avoidance of doubt, Taxes, if any) for or under the Benefit Plans or relating to payroll, salary, bonuses, employee equity incentives or options, vacation, sick leave, workers’ compensation, health care plans, or benefits or any other employee plans or benefits of any kind for, or other amounts or other obligations owed to, or otherwise relating to, Seller’s employees or former employees, current or former consultants or independent contractors in their capacities as current or former employees, independent contractors or consultants of Seller, as the case may be, or any grievance, complaint or claim by any current or former employee, consultant or independent contractor of Seller or obligation to indemnify, reimburse or advance amounts to any current or former employee, consultant or independent contractor or agent of Seller, in each case, arising before or on the Closing Date;

 

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(v) any Liability arising out of any Proceeding (i) to which Seller or any Affiliate of Seller is a party, (ii) relating to or arising in connection with any Excluded Asset or Retained Liability, or (iii) pending as of the Closing Date, or commenced after the Closing Date and arising out of or relating to any occurrence or event happening on or prior to the Closing Date;

 

(vi) any Liability of Seller under this Agreement or any other document executed in connection with the Contemplated Transactions;

 

(vii) except for any and all Liabilities related to product or service warranties, any Liability arising out of or relating to products, goods or services manufactured, sold, delivered, distributed, licensed, sublicensed or rendered (as the case may be) by Seller at any time prior to the Closing Date;

 

(viii) any Liability arising out of any of the Excluded Assets; and

 

(ix) any Liability arising out of or relating to failure to pay any accounts payable of Seller.

 

2.4      Purchase Price .

 

(a)     The purchase price for the Purchased Assets (the “Purchase Price”) shall be an amount equal to Five Million Six Hundred Twenty-Five Thousand Dollars ($5,625,000) which will be payable to Seller in immediately available funds at the Closing (the “Closing Payment”); provided, however, that Two Hundred Fifty Thousand Dollars ($250,000) shall be paid by Buyer to the Escrow Agent in accordance with subsection (b) below.

 

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(b)     At the Closing, Buyer will deposit with Lurio & Associates, P.C., as temporary escrow agent (together with its successors, the “Escrow Agent”) the sum of Two Hundred Fifty Thousand Dollars ($250,000) (the “Escrow Deposit”) pursuant to the terms of the Escrow Agreement. The Escrow Deposit (together with any interest earned thereon) shall be held for a period of twelve (12) months following the Closing Date for purposes of paying any indemnification claims made by any Buyer Indemnified Parties under Section 6.4 hereof on or prior to the expiration of such twelve (12) month period.

 

Seller and Buyer covenant and agree to use commercially reasonable efforts to transfer the Escrow Deposit within twenty (20) business days following the Closing Date to an escrow account at a national banking institution mutually selected by the Seller and Buyer in good faith to act as successor Escrow Agent pursuant to an escrow agreement to be entered into by and between Seller, Buyer and the successor Escrow Agent, in form reasonably satisfactory to Buyer and Seller. The Seller and Buyer shall equally split the fees and costs payable in connection with such escrow agreement and successor Escrow Agent.

 

2.5      Allocation . Within forty-five (45) days after the date hereof, and subject to the reasonable approval of Seller, Buyer shall prepare an allocation of the Purchase Price and Assumed Liabilities among the Purchased Assets. The allocation referred to in the preceding sentence shall be made in accordance with Section 1060 of the Code and the Treasury Regulations thereunder and the fair market values of the Purchased Assets . Buyer and Seller agree to cooperate with each other, and to furnish each other with such information as is reasonably requested by the other party, for purposes of such allocation. The Parties shall make consistent use of the allocation for all Tax purposes and in all filings, declarations and reports with the IRS in respect thereof, including the reports required to be filed under Section 1060 of the Code and the filing of IRS Form 8594. In any Proceeding related to the determination of any Tax, neither Buyer nor Seller shall contend or represent that such allocation is not a correct allocation.

 

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2.6      Transfer Taxes . All excise, sales, use, value added, registration, stamp, recording, documentary, conveyancing, franchise, property, transfer, gains and similar Taxes, levies, charges and fees (collectively, “Transfer Taxes”) incurred in connection with the Closing of the transactions contemplated by this Agreement shall be borne by the party upon whom they are imposed.

 

2.7      Closing . The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place simultaneously with the execution of this Agreement on the date of this Agreement (the “Closing Date”) at the offices of Lurio & Associates, P.C., Suite 3120, 2005 Market Street, Philadelphia, PA 19103. The consummation of the transactions contemplated by this Agreement shall be deemed to occur at 12:01 a.m. on the Closing Date.

 

2.8     Closing Obligations . In addition to any other documents to be delivered under other provisions of this Agreement, at the Closing:

 

(a)     Seller shall deliver to Buyer:

 

(i)     a bill of sale in a form attached hereto as Exhibit “F” (the “Bill of Sale”), executed by Seller;

 

(ii)    the Escrow Agreement, executed by Seller and Escrow Agent;

 

(iii)   the (1) Intellectual Property Assignment Agreement, (2) Assignment of Patents, and (3) Assignment of Marks (each as defined below), in each case, executed by Seller;

 

(iv)    the Assignment and Assumption of Lease executed by Seller;

 

(v)    an assignment of the Domain Names in a form attached hereto as Exhibit “I” (the “Domain Name Assignment Agreement”), executed by Seller;

 

(vi)    such other assignments, certificates of title, documents and other instruments of transfer and conveyance as may reasonably be requested by Buyer, each in form and substance satisfactory to Buyer and its legal counsel and executed by Seller;

 

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(vii) executed written consents or approvals of, or notice to, any third parties to or regarding the assignment of the Assumed Contracts or the execution, delivery and performance of the Transaction Documents as specified on Schedule 3.2(c) ;

 

(viii) the Transition Services Agreement in the form attached hereto as Exhibit “J” (the “Transition Services Agreement”) executed by Seller;

 

(ix)   a certificate of an authorized officer of Seller certifying, as complete and accurate as of the Closing Date, attached copies of the certificate of incorporation and bylaws of Seller, each as amended, including a certificate of existence issued by the Secretary of State of the State of Delaware, certifying and attaching all requisite resolutions of Seller’s board of directors and stockholders approving the execution and delivery of this Agreement and the consummation of the Contemplated Transactions, and certifying to the incumbency and signatures of the officers of Seller executing this Agreement and any other document relating to the Contemplated Transactions; and

 

(x)    such other documents as may be reasonably required by Buyer in connection with the consummation of the Contemplated Transactions.

 

(b)     Buyer shall deliver to Seller:

 

(i)     the Closing Payment (less the amount described in Section 2.4(a)), to an account identified in writing by Seller prior to the Closing;

 

(ii)    the Escrow Agreement, executed by Buyer;

 

(iii)   the (1) Intellectual Property Assignment Agreement, (2) Assignment of Patents, and (3) Assignment of Marks (each as defined below) executed by Buyer;

 

(iv)   the Transition Services Agreement executed by Buyer;

 

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(v)    an Assumption Agreement in the form attached as Exhibit “H” , executed by Buyer; and

 

(vi)    the Assignment and Assumption of Lease executed by Buyer.

 

3. REPRESENTATIONS AND WARRANTIES OF SELLER

 

Seller represents and warrants to Buyer that the statements in this Section 3 are true and correct as of the date hereof, except as set forth in the schedules accompanying this Agreement (the “Disclosure Schedules”). The Disclosure Schedules have been arranged for purposes of convenience in separately titled sections corresponding to the sections of this Section 3. Any disclosure in one section of the Disclosure Schedules may apply to and qualify disclosures made in one or more other sections to the extent that it is reasonably apparent that such disclosures apply to or qualify other sections, notwithstanding the omission of an appropriate cross reference to such other section.

 

3.1     Organization and Good Standing . Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the state of Delaware, with full power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, and to perform all of its obligations under the Transaction Documents. Seller is duly qualified to do business as a foreign company and is in good standing under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification. Seller neither has any subsidiaries nor owns any equity interests or other securities of any other Person. The only names used by Seller for the conduct of the Business at any time since the date of Seller’s incorporation, including any trade or doing-business-as name, is VendScreen, Inc.

 

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3.2     Enforceability; Authority; No Conflict .

 

(a)     This Agreement constitutes the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and by equitable principles (whether applied in a proceeding at law or in equity). Upon the execution and delivery by Seller of each Transaction Document to be executed or delivered by Seller at the Closing, such Transaction Document shall constitute the legal, valid, and binding obligation of Seller, enforceable against Seller in accordance with its terms; provided, that the exceptions pertaining to enforceability set forth in the immediately preceding sentence shall apply equally to this sentence. This Agreement, each applicable Transaction Document and the Contemplated Transactions have been duly approved and authorized by all requisite corporate action, including, without limiting the generality of the foregoing, all stockholder and board of directors approvals required pursuant to the Seller’s certificate of incorporation, bylaws, as amended, and any Legal Requirements, and no other corporate or other proceedings or actions on the part of Seller, its board of directors or stockholders are necessary therefor.

 

(b)     Neither the execution, delivery and performance of this Agreement or any other Transaction Document nor the consummation or performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time): (i) breach or conflict with any provision of any of the certificate of incorporation or bylaws of Seller, as amended as of the Closing Date; (ii) give any Governmental Body or other Person (including any holder of any capital stock, other equity interest or debt of Seller) the right to challenge any of the Contemplated Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which Seller or any of the Purchased Assets, may be subject; (iii) contravene, conflict with or result in a violation or breach of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by Seller or that otherwise relates, directly or indirectly, to the Purchased Assets or to the business of Seller; or (iv) breach any provision of, or give any Person the right to declare a default or exercise any remedy or any right of first refusal or first offer under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, or otherwise result in or permit any change in the rights or obligations of any Person other than Seller under, any contract, lease, license or sublicense, franchise or other instrument or agreement to which Seller is a party or by which Seller or any of its assets are bound, including any Assumed Contract.

 

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(c)     Except as set forth on Schedule 3.2(c) , no notice to, or consent, approval or waiver from, any Person or filing or registration with any Governmental Body, is required in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions, including the sale, transfer and assignment of the Purchased Assets. There are no applicable bulk sales laws or similar Legal Requirements which would require that notice of the Contemplated Transactions be given to creditors of Seller or any Governmental Body, or any other notice be given or consent or approval be obtained or similar action be taken.

 

3.3     Sufficiency of Assets; Title .

 

(a)    The Purchased Assets constitute all of the assets, tangible and intangible, of any nature whatsoever, owned or licensed by Seller and necessary and sufficient to operate Seller’s business in the manner presently operated, except for the Excluded Assets.

 

(b)    Except as provided in Schedule 3.3(b)(i) , Seller owns good, valid and transferable title to, or valid, subsisting and transferable leasehold or license interests in Purchased Assets (which leased or licensed Purchased Assets are set forth on Schedule 3.3(b)(ii) ), free and clear of any Encumbrances except Permitted Encumbrances and, except as set forth in such Schedule 3.3(b)(i) , none of the Purchased Assets is owned by any Person other than Seller (including jointly with any other Person, including Affiliates of Seller); provided that the representations in this Section 3.3(b) do not apply to Intellectual Property, which is covered exclusively in Section 3.16.

 

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(c)     Except as set forth on Schedule 3.3(c) , each item of Tangible Personal Property is in good repair and good operating condition, ordinary wear and tear excepted, is fit for its intended use and suitable for immediate use in the business of Seller or otherwise in the ordinary course of business and is free from latent and patent defects in design, workmanship and materials. No item of Tangible Personal Property is in need of repair or replacement other than as part of routine maintenance in the ordinary course of business. Upon the sale, conveyance, transfer, assignment and delivery of the Tangible Personal Property in accordance with this Agreement, Buyer will acquire good and valid title to the Tangible Personal Property owned by Seller, free and clear of any Encumbrances except Permitted Encumbrances. Notwithstanding anything in Section 3.3(c), the representations in this Section 3.3(c) do not apply to Inventory, which is covered exclusively in Section 3.5.

 

3.4     Leased Real Property . Schedule 3.4 sets forth a list of all real property in which Seller has a leasehold interest (the “Leased Real Property”, with the leases or other Contracts evidencing such interests, and any amendments or modifications thereto or restatements thereof, being referred to as the “Real Property Leases”). Seller has provided Buyer with complete and accurate copies of all Real Property Leases. No party to any Real Property Lease has given Seller notice (whether written or oral) of, or made a claim with respect to, any breach or default thereunder. None of the Leased Real Property is subject to any assignment, sublease or grant to any Person of any license or right to the use, occupancy or enjoyment of the property or any portion thereof. Seller has paid on or prior to the date hereof (after giving effect to the Closing) to the applicable landlord all rentals and other amounts due and payable under the Real Property Leases as of the Closing. Seller has paid on or prior to the date hereof (after giving effect to the Closing) all required impositions under the Real Property Leases (e.g., Taxes, insurance, operating expense) up through and including the day of Closing to the extent the same were due and payable by or as of the Closing Date.

 

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3.5     Inventories . To Seller’s Knowledge, Schedule 2.1(b) sets forth a true, correct and complete list of all Inventories used in or held for the business of Seller. All items included in the Inventories consist of a quality and quantity usable and, with respect to finished goods, saleable, in the ordinary course of business of Seller, and free from latent and patent defects in design, workmanship and materials or otherwise and, with respect to finished goods, fit for their intended purpose and in material conformity with their applicable specifications and technical documentation, in each case subject to the reserve amount provided in the balance sheet of Seller as of September 30, 2015. The quantities of each item of Inventories (whether raw materials, work-in-process, component parts, or finished goods) are not excessive but are reasonable in the present circumstances of Seller.

 

3.6     Absence of Undisclosed Liabilities . Except as and to the extent reflected or reserved against on the balance sheet of Seller as of September 30, 2015 (such date, the “Balance Sheet Date”), Seller had no debts, liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature whatsoever, whether or not known or unknown, due or payable relating to the Purchased Assets, which are required to be set forth on the balance sheet of Seller or in the notes thereto in accordance with GAAP applied on a basis consistent with Seller’s past practices, except for debts, liabilities and obligations incurred since the Balance Sheet Date in the ordinary course of business or in connection with the Transaction Documents.

 

3.7     Taxes . Seller has filed or caused to be filed on a timely basis all Seller’s Tax Returns and all reports with respect to Seller’s Taxes that are or were required to be filed or provided by the Closing Date pursuant to applicable Legal Requirements. All Tax Returns and reports filed or provided by Seller are true, correct, and complete in all material respects. Seller has paid all Seller’s Taxes and assessments by Governmental Bodies that were due before the Closing Date. All Taxes that Seller is or was required by Legal Requirements to withhold, deduct or collect have been duly withheld, deducted and collected and, to the extent required, have been paid to the proper Governmental Body or other Person. Seller has not been notified by any jurisdiction in which it does not file Tax Returns that it may be obligated to file Tax Returns in the jurisdiction.

 

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3.8     No Material Adverse Change . Except as set forth on Schedule 3.8 , there has not been any material adverse change in the business, operations, prospects, assets, results of operations, or condition (financial or other) of Seller (including the Purchased Assets), and no event has occurred or circumstance exists that may result in such a material adverse change, nor has any Encumbrance (other than Permitted Encumbrances) attached or arisen over or with respect to any of the Purchased Assets, in each case, since the Balance Sheet Date. Without limiting the generality of the foregoing, except as set forth on Schedule 3.8, since the Balance Sheet Date, Seller has not taken or caused to be taken any of the following actions, nor has any of the following occurred (as the case may be), in each case outside the ordinary course of business:

 

(a)     sold, assigned or transferred any portion of the Purchased Assets, other than in the ordinary course of business;

 

(b)    (i)     amended or modified, (ii) entered into, agreed to or acquiesced to any waiver of or (iii) cancelled, terminated or received notice (whether written or oral) of future cancellation or termination of any Assumed Contract;

 

(c)     failed to make any payments on, under or relating to any Assumed Contracts, Taxes or Governmental Authorizations on a current basis as and when due;

 

(d)     suffered or incurred any material damage, destruction or Loss relating to the business of Seller or the Purchased Assets, whether or not covered by insurance, or received or incurred any material claims or Liabilities relating to the business of Seller or the Purchased Assets, whether or not covered by insurance;

 

(e)     incurred any indebtedness or non-current liability, or mortgaged, sold, assigned, transferred, hypothecated, pledged or otherwise placed or suffered or acquiesced in the imposition of an Encumbrance other than a Permitted Encumbrance on any Purchased Asset;

 

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(f)    transferred, granted, licensed, sublicensed, assigned, terminated or otherwise disposed of, modified, changed or cancelled, or entered into, agreed to or acquiesced to any waiver of, any material rights or obligations with respect to any of the Intellectual Property Assets;

 

(g)     no notice of resignation from or termination of employment with Seller of any employees; or

 

(h)     entered into any agreement or commitment to take any of the actions set forth in paragraphs (a) through (g) of this Section 3.8.

 

3.9     Labor and Employment Matters .

 

(a)     Schedule 3.9(a)(i) sets forth a true, correct, and complete list of each person employed by Seller including such employee’s Fair Labor Standards Act status as exempt or non-exempt, name, job title, work location, estimated current total compensation on a gross annualized basis and hourly pay rate (if applicable), total compensation paid to date in 2015 and total compensation paid in 2014. Schedule 3.9(a)(ii) sets forth any individuals who are (A) “leased employees” within the meaning of Section 414(n) of the Code or (B) “independent contractors” within the meaning of the Code and the rules and regulations promulgated thereunder (together with all employees of Seller, collectively, “Employees”) and with respect to each such Employee the following information: name, status as a leased employee or independent contractor, work location, compensation paid to date in 2015, and total compensation paid in 2014.

 

(b)     Neither the Seller nor any Affiliate of Seller is a party to, or bound by, any collective bargaining agreement or other agreement or understanding with any labor or trade union or similar labor organization. Neither the Seller nor any Affiliate of Seller has experienced, any union organizing efforts, strike, slowdown, work stoppage, lockout, material labor grievances, charges or complaints relating to unfair labor practices or other labor dispute.

 

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(c)     Without limiting the generality of Sections 3.11 and 3.12, there is no pending or current Proceeding, nor, to Seller’s Knowledge, is any Proceeding threatened, by any Governmental Body or any current or former employee, consultant or independent contractor of Seller or any Affiliate of Seller relating to or arising out of any violation or alleged violation of any Legal Requirement. Seller is and has at all times been in compliance with all Legal Requirements regarding employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to any current, former or retired employees, consultants or independent contractors of Seller.

 

3.10     Employee Benefits . Schedule 3.10 lists all Benefit Plans of Seller that are currently in effect. Seller has performed, in all material respects, all of its obligations under all Benefit Plans, including all obligations under the provisions of ERISA, the Code and other Laws applicable to the Benefit Plans. Neither Seller nor any ERISA Affiliate has ever contributed to, or been required to contribute to any “multiemployer plan” (within the meaning of Section 3(37) of Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) and neither Seller nor any ERISA Affiliate has any liability (contingent or otherwise) relating to the withdrawal or partial withdrawal from a multiemployer plan. None of the Benefit Plans is or at any time has been subject to Title IV of ERISA or Code Section 412. The Benefit Plans which are “employee pension benefit plans” within the meaning of Section 3(2) of ERISA and which are intended to meet the qualification requirements of Section 401(a) of the Code (each, a “Pension Plan”) have received favorable determination letters from the Internal Revenue Service with respect to their qualified status or are in the form of prototype or volume submitter plans that are the subject of favorable opinion or advisory letters from the Internal Revenue Service, and, to Seller’s Knowledge, nothing has occurred that would reasonably be expected to adversely affect the qualification of such Benefit Plan. To Seller’s Knowledge, no nonexempt “prohibited transaction” (within the meaning of Section 4975 of the Code or Sections 406 and 408 of ERISA) has occurred with respect to any of such Benefit Plans, which would reasonably be expected to result in a material liability to Seller. No Benefit Plan provides death or medical benefits beyond termination of service or retirement other than coverage mandated by law, benefits through the end of the month of termination of service or retirement and death benefits attributable to deaths occurring at or prior to termination of service or retirement.

 

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3.11     Compliance with Legal Requirements; Governmental Authorizations . Seller is, and at all times, has been, in material compliance with each Legal Requirement that is or was applicable to it or to the conduct or operation of its business or the ownership or use of any of the Purchased Assets. No event has occurred or circumstance exists that (with or without notice or lapse of time) (A) may constitute or result in a violation by Seller of, or a failure on the part of Seller to comply with, any Legal Requirement or any Governmental Authorization that is held by Seller or that otherwise relates, directly or indirectly, to the business of Seller or the Purchased Assets, or (B) may give rise to any obligation on the part of Seller to undertake, or to bear all or any portion of the cost of, any remedial action of any nature. Each Governmental Authorization that is held by Seller or that otherwise relates to the business of Seller or the Purchased Assets is valid and in full force and effect, and Seller has been in compliance with any such Governmental Authorization.

 

3.12     Legal Proceedings; Orders . There is no pending or threatened Proceeding (i) by or against Seller or that otherwise relates to or may affect the business of, or any of the Purchased Assets, or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the Contemplated Transactions. No event has occurred or circumstance exists that could reasonably be expected to give rise to or serve as a basis for the commencement of any such Proceeding. There is no Order to which Seller, its business or any of the Purchased Assets is a party or is subject.

 

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3.13     Environmental Matters .

 

(a)     Without limiting the generality of Sections 3.11 and 3.12, (i) Seller is not in violation of, and (ii) Seller currently conducts, and has at all times conducted, its business in compliance in all respects with, Environmental Laws. No permit, certificate, license, approval, registration or other Governmental Authorization is required under any Environmental Laws for the use, maintenance, ownership or storage of any of the Purchased Assets or for the operation of the business of Seller other than those Seller already has.

 

(b)     No notice, citation, summons, order or other correspondence has been received by Seller, no complaint has been filed against Seller, no penalty has been threatened or assessed against Seller and to Seller’s Knowledge, no investigation, corrective action, remediation or review is pending or threatened against Seller by any Governmental Body with respect to any Environmental Laws or any violation or alleged violation thereof.

 

(c)     Seller does not use, and has not used at any time, any Hazardous Substances. To Seller’s Knowledge, Seller has no Liability relating to, or arising as a result of, any Hazardous Materials that may have been discharged on, or released from, its premises.

 

3.14     Contracts; Customers and Suppliers; No Defaults .

 

(a)     Schedule 3.14(a) contains an accurate and complete list of (i) all of Seller’s customers and licensees and (ii) all of Seller’s suppliers, vendors, licensors, sublicensors, and other counterparties to whom Seller made payments (“Suppliers”) in excess of $10,000 during each of 2014 and 2015 and, together therewith, a description (including date and title) of each outstanding contract, agreement or purchase or supply order or commitment with such party.

 

(b)     (i)     Each Assumed Contract is in full force and effect and is valid and enforceable in accordance with its terms; and (ii) each Assumed Contract is assignable by Seller to Buyer without the consent or approval of, waiver by, or notice to any other Person.

 

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(c)     Seller has not received any written notice that any party to an Assumed Contract has any intention or plan (whether present or future) to terminate any Assumed Contract. None of the Suppliers has given Seller written notice of the termination or any material change in the terms of its business relationship with the Seller.

 

(d)     (i)     Seller is, and at all times has been, in compliance with all applicable terms and requirements of each Assumed Contract; (ii) each other Person that has or had any obligation or liability under any Assumed Contract is, and at all times has been, in compliance with all applicable terms and requirements of such Assumed Contract; and (iii) no event has occurred or circumstance now exists or will exist in connection with the delegation and assignment to Buyer of the Assumed Contracts as contemplated hereby that (with or without notice or lapse of time) may contravene, conflict with or result in a breach of, or give Seller or other Person the right to declare a default or exercise any remedy or any right of first refusal or first offer under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, or otherwise result in or permit any change in the rights or obligations of any Person under, any Assumed Contract; and (iv) no event has occurred or circumstance exists under or by virtue of any contract that (with or without notice or lapse of time) would cause, and the delegation and assignment to Buyer of, the Assumed Contracts as contemplated hereby will not result in, the creation of any Encumbrance affecting any of the Purchased Assets.

 

3.15     Insurance . All policies of insurance to which Seller is a party or that provide coverage to Seller (i) are valid, outstanding and enforceable; and (ii) taken together, provide adequate insurance coverage for the Purchased Assets and the operations of Seller for all risks normally insured against by a Person carrying on the same business or businesses as Seller in the same location.

 

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3.16     Intellectual Property Assets .

 

(a)     Schedule 3.16(a) sets forth a true and complete list of the Intellectual Property Assets owned by Seller that are registered or are material Software, and Seller owns all rights, title, and interest in and to such Intellectual Property Assets. For each listed Intellectual Property Asset, Schedule 3.16(a) also includes, where applicable, the registration or application number, the date granted or applied for, the expiration date, the jurisdiction, and the current status thereof. All of the Intellectual Property Assets listed in Schedule 3.16(a) , to the extent registered, have been issued by the authority referred to therein, and are held of record in the name of Seller and all pending applications identified in Schedule 3.16(a) have been validly filed with the authority referred to therein in the name of Seller. Except as provided in Schedule 3.16(a) , none of the Intellectual Property Assets owned by Seller are licensed to any third party and no third party is authorized to use, copy, distribute, modify, decompile, or prepare derivatives of any of such Intellectual Property Assets, including any Software owned by Seller. All of Seller’s right, title and interest to the Intellectual Property Assets, excluding the Patents and Marks, are assigned by Seller to Buyer pursuant to the Intellectual Property Assignment Agreement in the form set forth as Exhibit “B” .

 

(b)     Schedule 3.16(b) sets forth a complete and accurate list of all Patents and Marks issued or registered to or owned by Seller, and Seller owns all rights, title, and interest in such Patents and Marks, and all of Seller’s right title and interest to such Patents and Marks are assigned by Seller to Buyer in the form of the Assignment of Patents set forth in Exhibit “C” or the Assignment of Marks set forth in Exhibit “E” .

 

(c)     Schedule 3.16(c) sets forth any and all Intellectual Property used by Seller that is licensed, leased, or otherwise owned by any third party, excluding licenses for Off-the-Shelf Software.

 

(d)     Schedule 3.16(d) sets forth any and all Software that is licensed, leased, or otherwise provided by any third party to Seller, pursuant to any license, purchase, or other agreement, excluding licenses for Off-the-Shelf Software.

 

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(e)     The Intellectual Property Assets set forth in Schedule 3.16(e) require timely payments of governmental maintenance fees, and all other registered Marks, Patents, and Domain Names are currently in material compliance with formal legal requirements (including payment of filing, examination, registration, and maintenance fees where applicable and proofs of working or use), and are not subject to any maintenance fees falling due within ninety (90) days after the Closing Date.

 

(f)     To Seller’s Knowledge, there is no pending or threatened objection or claim being asserted against Seller in any administrative or judicial proceeding or by any Person with respect to the ownership, validity, registrability, enforceability or use of any of the Intellectual Property Assets, including any Software, or challenging or questioning the validity or effectiveness of any such ownership or license and there is no basis for any such objection or claim. No notice of rejection, opposition, interference, petition for cancellation, or refusal to register has been received by Seller from a Governmental Body or an adverse party by Seller in connection with any of Seller’s applications for Patents, Copyrights, Software, or Domain Name registration.

 

(g)     Seller has not infringed, violated, or misappropriated any Intellectual Property rights of any other Person, and there is no violation, infringement, or misappropriation or alleged violation, infringement, or misappropriation of any currently existing Intellectual Property rights of any Person which will occur as a result of the continued operation of the business of Seller as now conducted. The Intellectual Property Assets and the manufacture, sale, use, offer for sale, and licensing of the Intellectual Property Assets do not violate, infringe, or misappropriate any of the Intellectual Property rights of any Person. There is no present violation, infringement or misappropriation of any of the Intellectual Property Assets by any Person, no one has asserted or threatened any claim or objection against any Person for any such violation, infringement or misappropriation and there is no basis for any such objection or claim. Seller has not agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other violation with respect to any Intellectual Property Asset.

 

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(h)     Seller has taken commercially reasonable steps (including measures to protect secrecy and confidentiality) to protect Seller's right, title and interest in and to all Intellectual Property Assets, including the Software, and to cause its employees who have access to confidential or proprietary information of Seller to have a contractual or legal obligation of confidentiality to Seller with respect to such information, and have an obligation to transfer rights for no additional consideration in inventions, and authored works, whether or not patented, patentable, copyrighted or otherwise protectable under the Law, made during the course of their employment prior to the Closing Date using resources of Seller.

 

(i)     Except as provided in Schedule 3.16(i) , Seller has not transferred ownership of or granted any license, option, or other rights with respect to, any Intellectual Property Asset, to any third party, or knowingly permitted the rights of Seller in such Intellectual Property Assets to lapse or enter the public domain. No claim is pending or threatened, and no notice or invitation to license has been received, which questions Seller's title to, claims any ownership of, or any rights to, any Intellectual Property Assets.

 

(j)     No Employee is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with his or her duties to Seller or that would conflict with the Employee's best efforts to promote the interest of Seller and the business of Seller as presently conducted and as proposed to be conducted. Each Employee and former Employee and current and former consultant or independent contractor of Seller and any other person who participated in developing the Intellectual Property Assets owned by Seller has, pursuant to a contractual obligation with Seller, validly and properly assigned to Seller the rights of such Employee or former Employee or current or former consultant or independent contractor in and to all inventions, pending patent applications, patents issued and other Intellectual Property Assets used in the business or operations of Seller. No Employee or former Employee or current or former consultant or independent contractor of Seller is in violation of any such contractual obligation. Except as set forth in Schedule 3.16(j) , no Employee or former Employee of Seller has excluded works or inventions made prior to his or her employment with Seller from his or her contractual obligation with Seller. It is not or will not be necessary to use any inventions of any Employee or former Employee made prior to their employment by Seller that is not otherwise licensed to Seller.

 

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(k)     Schedule 3.16(k) contains a true, correct and complete list of all (i) Open Source Software incorporated or used in, linked to or with, or used to perform, execute, run, develop, compile or derive, any Software (or any component thereof) owned or developed by Seller, and (ii) all licenses and agreements governing such Open Source Software. None of the Intellectual Property Assets (or any components thereof) owned by Seller incorporate or use or are linked to or with any Off-the-Shelf or Open Source Software, or require or rely on Off-the-Shelf or Open Source Software to be performed, executed, run, developed, compiled or derived, in a manner that (A) violates the terms of any license or agreement governing any such Off-the-Shelf or Open Source Software or (B) requires any such Intellectual Property Assets (or any components thereof) to be disclosed or distributed in source code form to any party, be licensed to any party (including for the purpose of making derivative works) or be redistributable at no or minimal charge to any party. Seller will provide to Buyer all material documentation, agreements, or licenses relating to or arising out of Seller’s use of any Off-the-Shelf or Open Source Software or Software that is used, maintained or developed by Seller at or before the Closing.

 

(l)     Without limiting the generality of Sections 3.11 and 3.12, Seller is, and at all times, has been, in compliance with all Legal Requirements regarding consumer and data privacy and related matters concerning the disclosure of personally identifiable information.

 

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(m)     With respect to each Trade Secret owned or used by to Seller, the documentation in Seller’s possession relating to such Trade Secret, if any, is current, accurate and sufficient in detail and content in all material respects to identify and explain it and to allow its full and proper use without reliance on the knowledge or memory of any individual. Seller has taken all commercially reasonable precautions to protect the secrecy, confidentiality, and value of all such Trade Secrets. To Seller’s Knowledge, such Trade Secrets are not part of the public knowledge or literature. Such Trade Secrets have not been used, divulged or appropriated either for the benefit of any Person (other than Seller) or to the detriment of Seller. No such Trade Secret is subject to any adverse claim, and no such Trade Secret has been challenged or threatened in any way or infringes any Intellectual Property right of any other Person.

 

3.17     Relationships With Related Persons . Except as provided in Schedule 3.17 , no Related Person of Seller has or has had, any interest in (a) any Purchased Assets or other property (whether real, personal or mixed and whether tangible or intangible) used in or pertaining to Seller’s business, or (b) any Person that has had business dealings or a material financial interest in any transaction with Seller or engaged in competition with Seller. No Related Person of Seller is a party to any contract, understanding or arrangement with, or has any claim (whether contractual or otherwise), cause of action or right or entitlement against, Seller, whether contingent or absolute, direct or indirect, or express or implied (including any claim for any payment or entitlement to any service or property and any loan or indebtedness, whether in favor of Seller or such Related Person), except as set forth on Schedule 3.17 . Notwithstanding anything in Section 3.17, the representations in this Section 3.17 do not apply to Intellectual Property, which is covered exclusively in Section 3.16.

 

3.18     Brokers or Finders . Neither Seller nor any of its Representatives have incurred any obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or other similar payments in connection with the sale of the Purchased Assets or the Contemplated Transactions.

 

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3.19     Financial Statements . Attached as Schedule 3.19 is a true, correct and complete copy of the statements of income, cash flows and balance sheets of Seller as of and for its fiscal years ended December 31, 2012, December 31, 2013, and December 31, 2014 (the “Annual Financial Statements”), and Seller's income statements, cash flows, and balance sheets as of the Balance Sheet Date (collectively, the “Interim Financial Statements”). The Annual Financial Statements and Interim Financial Statements have been prepared from the underlying books and records of Seller and (i) fairly present in all material respects the financial condition of Seller, the results of operations and cash flows of Seller for the periods therein referred to, and the assets and liabilities of Seller as of the dates thereof, in each case, without any material departure from GAAP as applied by Seller for the periods indicated, except, with respect to the documents as of the Balance Sheet Date, normal year-end adjustments in accordance with past practice of Seller and the absence of footnotes; (iii) include all the material expenses or obligations incurred by Seller and/or any Affiliates thereof related to Seller or the business of Seller required to be disclosed in accordance with GAAP applied on a basis consistent with Seller’s past practices, except for expenses or obligations incurred since the Balance Sheet Date in the ordinary course of business or in connection with the Transaction Documents; and (iv) include on a consistent basis all of the assets, liabilities, reserves, allowances and accruals related to Seller and/or the business of Seller required to be included in accordance with GAAP applied on a basis consistent with Seller’s past practices, except for assets, liabilities, reserves, allowances and accruals accrued or incurred since the Balance Sheet Date in the ordinary course of business or in connection with the Transaction Documents.

 

3.20     Product Warranty and Product Liability .

 

(a)     Schedule 3.20 contains a summary of Seller’s good faith estimate of claims for, any (i) product returns, or (ii) warranty obligations relating to any products, goods or services sold, delivered, distributed, licensed, sublicensed or rendered by Seller.

 

(b)    The goods, products and services sold, delivered, distributed, licensed, sublicensed or rendered by the Seller relating to the business of Seller conform in all material respects to the specifications, documentation, samples and/or sales demonstrations furnished to the customers or purchasers of such products, goods or services (as the case may be).

 

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3.21     Receivables . Seller does not warrant the collectability of any of its receivables. Seller’s balance sheet as of the Balance Sheet Date includes receivables that are over 90 days past due and may not be collectible.

 

3.22     Disclosure . No representation or warranty or other statement made by Seller in this Agreement or the Disclosure Schedules contains any untrue statement of a material fact or omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not materially misleading. To Seller’s Knowledge, there is no fact that has specific application to Seller (other than general economic or industry conditions) and that may materially adversely affect the assets, business, prospects, financial condition or results of operations of Seller that has not been set forth in this Agreement or the Disclosure Schedules.

 

4. REPRESENTATIONS AND WARRANTIES OF BUYER

 

Buyer represents and warrants to Seller that the statements in this Section 4 are true and correct as of the date hereof.

 

4.1      Organization and Good Standing . Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania, with full corporate power and authority to conduct its business as it is now conducted.

 

4.2      Authority; No Conflict .

 

(a)    This Agreement constitutes the legal, valid and binding obligation of Buyer, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and by equitable principles (whether applied in a proceeding at law or in equity). Upon the execution and delivery by Buyer of the Transaction Documents to be executed or delivered by Buyer at the Closing, such Transaction Documents will constitute the legal, valid and binding obligation of Buyer, enforceable against it in accordance with their respective terms; provided, that the exceptions pertaining to enforceability set forth in the immediately preceding sentence shall apply equally to this sentence. Buyer has the right, power and authority to execute and deliver this Agreement and each of the Transaction Documents to be executed or delivered by Buyer at the Closing and to perform its obligations under this Agreement and each of such Transaction Documents, and such action has been duly authorized by all necessary company action.

 

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(b)     Neither the execution and delivery of this Agreement nor the consummation or performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time): (i) breach any provision of any of the articles of incorporation or bylaws of Buyer, as amended; (ii) breach or give any Governmental Body or other Person the right to challenge any of the Contemplated Transactions or to exercise any remedy or obtain any relief under any Legal Requirement or any Order to which Buyer may be subject; or (iii) breach any provision of any contract or agreement to which Buyer is bound.

 

4.3      Certain Proceedings . There is no pending or, to Buyer’s knowledge, threatened Proceeding that has been commenced against Buyer and that challenges, or may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the Contemplated Transactions.

 

4.4      Brokers or Finders . Neither Buyer nor any of its Representatives have incurred any obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or other similar payment in connection with the Contemplated Transactions.

 

4.5      Disclosure . No representation or warranty or other statement made by Buyer in this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not materially misleading.

 

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5. COVENANTS

 

5.1      Employee Matters and Employee Benefits . Except as expressly provided in this Agreement, nothing in this Agreement (including Sections 5.2 and 5.3) shall be deemed to impose on Buyer any Liabilities or responsibilities (including, for the avoidance of doubt, Taxes, if any) for periods prior to the Closing Date to or relating to Seller’s employees, consultants or independent contractors (or those of any Affiliate of Seller) in their capacity as such, including without limitation, Liabilities or responsibilities for (a) pension, retirement, profit-sharing, savings, medical, dental, disability income, life insurance or accidental death benefits, whether insured or self-insured, whether funded or unfunded, (b) workers’ compensation (both long term and short term) benefits, whether insured or self-insured, whether or not accruing or based upon exposure to conditions prior to the date of this Agreement or for claims incurred or for disabilities commencing prior to the Closing Date, or (c) severance benefits.

 

5.2      Former Employees . Notwithstanding Section 5.1, Buyer anticipates that all of the employees of Seller would be employed by Buyer following the Closing Date and through a minimum ninety (90) to one hundred and eighty (180) day transition period to ensure seamless customer integration and appropriate knowledge transfer. Thereafter, employees would be retained by Buyer based upon their role, responsibility and performance consistent with all other employees of Buyer. As employees of Buyer, former employees of Seller would be covered by and entitled to all fringe benefits that are generally available to employees of Buyer, including health insurance, dental insurance, group life and disability insurance, and matching 401(k) plan, subject to the eligibility and participation requirements of such benefits and plans. At the Closing, Buyer and each employee of Seller would execute and deliver either an employment or a non-solicitation agreement, as the case may be, in the form attached hereto as Exhibit “G” .

 

5.3      COBRA . Buyer and the buying group (as defined in Treasury Regulation Section 54.4980B-9, Q&A-3(b)) of which it is a part, and not Seller or the selling group (as defined in Treasury Regulation Section 54.4980B-9, Q&A-3(a)) of which it is a part, shall be solely responsible for providing continuation coverage under Sections 601-608 of ERISA, Section 4980B of the Code and similar state laws to those individuals who are M&A qualified beneficiaries (as defined in Treasury Regulation Section 54.4980B-9, Q&A-4(a)) with respect to the transactions contemplated in or by this Agreement.

 

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5.4      Assignment and Assumption of Lease . At the Closing, Seller and Buyer shall enter into an assignment in the form attached hereto as Exhibit “D” of the Leased Real Property as more particularly set forth therein (the “Assignment and Assumption of Lease”).

 

5.5      Assignment of Intellectual Property Assets; Payment of Maintenance Fees . At the Closing, Seller and Buyer shall enter into and execute an assignment of the Intellectual Property Assets in the form attached hereto as Exhibit “B” (the “Intellectual Property Assignment Agreement”), and an assignment of the Seller’s Patents, in the form attached hereto as Exhibit “C” (the “Assignment of Patents”) and an assignment of the Marks, in the form attached hereto as Exhibit “E” (the “Assignment of Marks”). Seller agrees to pay all maintenance expenses related to the Patents or Marks through the Closing Date, and Buyer agrees to pay all maintenance expenses related to the Patents or the Marks on and after the Closing Date, as it chooses to do at its sole discretion.

 

5.6      Seller Covenants . Seller shall perform the following covenants:

 

(a)     Pay in a timely manner all Taxes resulting from or payable in connection with the sale of the Assets pursuant to this Agreement that are imposed on Seller.

 

(b)    Pay, or make adequate provision for the payment, in full, of all of the Retained Liabilities, including but not limited to (i) an amount equal to the vending cash payable to operators (account no. 2300) of Seller as of the Closing Date shall be paid to the appropriate operators, and (ii) an amount equal to any customer deposits (account no. 2410) of Seller as of the Closing Date shall be paid to the applicable customer.

 

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(c)     Cooperate with Buyer and its counsel in the contest or defense of, and make available its personnel and provide any testimony and access to its books and records in connection with, any Proceeding involving or relating to (i) any Contemplated Transaction or (ii) any action, activity, circumstance, condition, conduct, event, fact, failure to act, incident, occurrence, plan, practice, situation, status or transaction on or before the Closing Date involving Seller or its business.

 

(d)     On the Closing Date, Seller shall (i) file with the Secretary of State of the State of Delaware an amendment to the certificate of incorporation of Seller changing the legal name of Seller to a name that does not include the words “VendScreen” or any variation thereof or any word that is similar in sound or appearance to such words or otherwise confusingly similar thereto, (ii) file all corresponding documents, filings or certificates necessary to effect the same name change with the applicable Governmental Body in any other jurisdiction in which Seller has qualified to do business as a foreign entity or otherwise registered (the filings required by Section 5.6(d)(i) and (ii), collectively, the “Amendments”), and (iii) provide that its board of directors and/or stockholders of Seller, as applicable, adopt an amendment to the bylaws of Seller reflecting the name change required under Section 5.6(d)(i). From and after the Closing Date, Seller (x) shall discontinue any use of the name “VendScreen” and any service marks, trademarks, trade names, trade dress, identifying symbols, logos, emblems, signs, insignia and other marks related thereto or containing or comprising the foregoing, including any name or mark confusingly similar thereto, (y) shall not hold itself out as having any affiliation with Buyer or its Affiliates, and (z) shall cause each of its subsidiaries and Affiliates to comply with each of the restrictions set forth in clauses (x) and (y) of this sentence.

 

5.7      Buyer Covenants . Buyer shall assume, perform and discharge, as and when due all Assumed Liabilities.

 

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5.8      Further Assurances .

 

(a)     From time to time, as and when requested by any Party hereto, the other Party hereto shall, to the extent reasonably practicable, execute and deliver, or cause to be executed and delivered, all such documents, assignments, and instruments and shall take, or cause to be taken, all such further or other actions reasonably necessary to evidence and effectuate the transactions contemplated by this Agreement. The reasonable out-of-pocket expenses of the other Party shall be paid by the requesting Party.

 

(b)     Following the Closing Date, in order for Buyer to prepare all historical financial statements of Seller, including audited, unaudited, and pro forma financial statements, as may be required to be filed on a current report on Form 8-K with the Securities and Exchange Commission (the “SEC”) in connection with the Contemplated Transactions, Seller agrees to make commercially reasonable efforts to(i) furnish to Buyer or its Representatives any additional documents or information relating to Seller (as to periods on or prior to the Closing Date), the Purchased Assets, or the business of Seller in the possession or control of Seller, its directors, officers, agents, or advisors (including corporate, financial, and accounting books and records, work papers, sales records, invoices, and other documents necessary for the completion of a financial audit or other such financial statements), and (ii) provide all such other assistance as may be necessary or desirable for the preparation of audited or other financial statements required to be filed by Buyer with the SEC, including providing any certifications, representations (including the signing of management representation letters), or consents requested by Buyer, providing cooperation with all auditors, accountants, and Representatives of Buyer, and providing access to personnel of Seller, in each case (i) and (ii), after reasonable request by Buyer and to the extent practical in light of Seller’s personnel and resources following the Closing Date. All of the costs and expenses incurred by Buyer or Seller in conne