USA Technologies, Inc.
USA TECHNOLOGIES INC (Form: 10-K, Received: 09/13/2016 17:23:16)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended June 30, 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 000-50054

 

  USA Technologies, Inc.  
(Exact name of registrant as specified in its charter)

 

  Pennsylvania       23-2679963  
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

  100 Deerfield Lane, Suite 140, Malvern, Pennsylvania       19355  
(Address of principal executive offices)   (Zip Code)

 

  (610) 989-0340  
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

  Title of Each
Class
      Name Of Each Exchange On Which
Registered
 
Common Stock, no par value
Series A Convertible Preferred Stock
    The NASDAQ Stock Market LLC

 

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

 

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

 

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

 

Large accelerated filer ¨  Accelerated filer Non-accelerated filer ¨  Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

 

The aggregate market value of the voting common equity securities held by non-affiliates of the Registrant was $106,506,967 as of the last business day of the most recently completed second fiscal quarter, December 31, 2015, based upon the closing price of the Registrant’s Common Stock on that date.

 

As of August 25, 2016, there were 38,352,980 outstanding shares of Common Stock, no par value.

 

 

 

     

 

 

USA TECHNOLOGIES, INC.

 

TABLE OF CONTENTS  

 

        PAGE
         
PART I    
         
Item 1. Business.   4
         
  1A. Risk Factors.   14
         
  2. Properties.   23
         
  3. Legal Proceedings.   23
         
  4. Mine Safety Disclosures.   23
         
PART II    
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.   24
         
  6. Selected Financial Data.   25
         
  7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   28
         
  7A. Quantitative and Qualitative Disclosures About Market Risk.   37
         
  8. Financial Statements and Supplementary Data.   38
         
  9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 39
         
  9A. Controls and Procedures.   39
         
PART III    
     
Item 10. Directors, Executive Officers and Corporate Governance.   41
         
  11. Executive Compensation.   43
         
  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.   58
         
  13. Certain Relationships and Related Transactions, and Director Independence.   60
         
  14. Principal Accounting Fees and Services.   61
         
PART IV    
     
  15. Exhibits, Financial Statement Schedules.   62

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 10-K contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, the anticipated financial and operating results of the Company. For this purpose, forward-looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate,” “could,” “should,” “would,” “likely,” “may,” “will,” “plan,” “intend,” “believes,” “expects,” “anticipates,” “projected,” or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions.

 

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 in the “Risk Factors” section of this Form 10-K. We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.

 

Any forward-looking statement made by us in this Form 10-K speaks only as of the date of this Form 10-K. Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-K or to reflect the occurrence of unanticipated events.

 

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USA TECHNOLOGIES, INC.

 

PART I

 

Item 1. Business.

 

OVERVIEW

 

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 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.

 

We derive the majority of our revenues from license and transaction fees resulting from connections to, as well as services provided by, our ePort Connect service. 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. The majority of ePort Connect customers pay a monthly fee plus a blended transaction rate on the transaction dollar volume processed by the Company. Connections to the ePort Connect service, therefore, are the most significant driver of the Company’s revenues, particularly revenues from license and transaction fees.

 

As of June 30, 2016, the Company had approximately 429,000 connections to its ePort Connect service, compared to approximately 333,000 connections as of June 30, 2015, representing a 29% increase. During the fiscal year ended June 30, 2016, the Company processed approximately 316 million cashless transactions totaling approximately $584 million in transaction dollars, representing a 46% increase in transaction volume and a 50% increase in dollars processed from the 217 million cashless transactions totaling approximately $389 million during the previous fiscal year ended June 30, 2015.

 

 

The above charts show the increases over the last five fiscal years in the number of connections, revenues and the dollar value of transactions handled by us. The vertical bars depict total revenues, segmented by license and transaction fees and equipment revenues. The solid lines depict the number of connections to our ePort Connect service and the dollar value of transactions handled by us, as of the end of each of the last five fiscal years.

 

Our solutions and services have been designed to simplify the transition to cashless for traditionally cash-only based businesses. As such, they are turn-key and include our comprehensive ePort Connect service and POS electronic payment devices or certified payment software, which are able to process traditional magnetic stripe credit and debit cards, contactless credit and debit cards and mobile payments. Standard services through ePort Connect are maintained on our proprietary operating systems and include merchant account setup on behalf of the customer, automatic processing and settlement, sales reporting and 24x7 customer support. Other value-added services that customers can choose from include things such as cashless deployment planning, cashless performance review and loyalty products and services. Our solutions also provide flexibility to execute a variety of payment applications on a single system, transaction security, connectivity options, compliance with certification standards, and centralized, accurate, real-time sales and inventory data to manage distributed assets (wireless telemetry and M2M). The ePort® Interactive, which was unveiled in April 2016, is a cloud-based interactive media and content delivery management system and enables delivery of nutritional information, remote refunds, loyalty programs, and multimedia-marketing campaigns for the unattended and self-serve retail markets.

 

Our customers range from global food service organizations to small businesses that operate primarily in the self-serve, small ticket retail markets including beverage and food vending, amusement and arcade machines, smartphones via our ePort Online solution, commercial laundry, tolls, and various other self-serve kiosk applications as well as equipment developers or manufacturers who incorporate our ePort Connect service into their product offerings.

 

We believe that we have a history of being a market leader in cashless payments with a recognized brand name, a value-added proposition for our customers and a reputation of innovation in our product and services. We believe that these attributes position us to capitalize on industry trends.

 

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In January 2016, the Company acquired the cloud-based content delivery platform, device platform and products, customer base, and intellectual property of VendScreen, Inc. of Portland, Oregon. In addition to new technology and services, the acquisition has added a West Coast operational footprint for the Company, providing greater efficiencies in operational performance, expanded customer services, sales and technical support to the Company’s customer base. As a result of the acquisition, the Company has added to its product line an interactive media, content delivery system, including a vending application that provides enhanced vendor management system (VMS) integration and consumer product information, including nutritional data. The technology is NFC enabled and compatible with mobile wallets including Apple Pay and Android Pay, and supports instant refunds, couponing, advertising and real-time consumer feedback to the owner and operator.

  

THE INDUSTRY

 

We operate primarily in the small ticket electronic payments industry and, more specifically, the unattended POS market. We also have the ability to accept cashless payment “on the go” through mobile-based payment services, which are generally higher ticket transactions. Our solutions and services facilitate electronic payments in industries that have traditionally relied on cash transactions. We believe the following industry trends are driving growth in demand for electronic payment systems in general and more specifically within the markets we serve:

 

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

 

Increasing demand for electronic transaction functionality from both consumers and merchant/operators; and

 

Improving POS technology and NFC equipped mobile phone payment technology.

 

Shift toward electronic payment transactions and away from cash and checks

 

There has been an ongoing shift away from paper-based methods of payment, including cash and checks, towards electronic-based methods of payment. According to The Nilson Report, December 2015, paper-based methods of payment continued to decline in 2014, representing 28.07% of transaction dollars measured compared to 30.61% in 2013. The four card-based systems—credit, debit, prepaid, and electronic benefits transfer—generated $5.29 trillion in the United States in 2014, 57.34% of transaction dollars measured, compared to 42.3% in 2006. The Nilson Report projects that, by 2019, spending at merchants in the U.S. from the four card-based systems will grow to 67.03% of total transaction dollars measured.

 

Increase in Consumer and Merchant/Operator Demand for Electronic Payments

 

Increase in Consumer Demand . The unattended, vending and kiosk POS market has historically been dominated by cash purchases. However, oftentimes, cash purchases at unattended POS locations represent a cumbersome transaction for the consumer because they do not have the correct monetary value (paper or coin), or the consumer does not have the ability to convert their bills into coins. We believe electronic payment system providers such as USA Technologies that can meet consumers’ demand within the unattended market will be able to offer retailers, card associations, card issuers and payment processors and business owners an expanding value proposition at the POS.

 

Increase in Merchant/Operator Demand . We believe that, increasingly, merchants and operators of unattended payment locations (e.g., vending machines, laundry, tabletop games, etc.) are utilizing electronic payment alternatives as a means to improve business results. The Company works with its customers to help them drive increased revenue of their distributed assets through this expanded market opportunity. In addition, electronic payment systems can provide merchants and operators real-time sales and inventory data utilized for back-office reporting and forecasting, like USA Technologies’ solutions and services, helping them to manage their business more efficiently.

 

Increase in Demand for Networked Assets . M2M (machine-to-machine) technology includes capturing value from wireless modules and electronic devices to improve business productivity and customer service. The term M2M describes any kind of 2-way communication system between geographically distributed devices through a centrally managed software application without human intervention and as such, the Company’s integrated POS and ePort Connect remote data management capabilities fall into this category of solution. In addition, networked assets can provide valuable information regarding consumers’ purchasing patterns and payment preferences, allowing operators to more effectively tailor their offerings to consumers. Gartner, Inc. forecasts that 6.4 billion connected things will be in use worldwide in 2016, with 5.5 million new things getting connected every day, and will reach 20.8 billion by 2020. The Company believes that its expertise in integrating cashless payments, its scalable network data capacity, its proven ability to handle high transaction volume, and its high quality and reliable data management capabilities make it well suited for the growing opportunities in the M2M market.

 

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POS Technology and NFC Equipped Mobile Phone Payment Improvements

 

Consumer Interest in Mobile Payment.   NFC, or Near Field Communication, is a short range wireless connectivity technology that uses electromagnetic radio fields to enable communication between devices when there is a physical touch, or when they are within close proximity to one another. We believe that   POS contactless terminals that are enabled to accept NFC payments and digital wallet applications, such as Google Wallet, Chase Pay, Apple Pay, the recently introduced Android Pay, and others, stand to benefit from these evolving trends in mobile payment. Digital wallet is essentially a digital service, accessed via the web or a mobile phone application that serves as a substitute for the traditional credit or debit card. Providers can also market directly to targeted consumers with coupons and loyalty programs.

 

With over 70% of the Company’s connections contactless enabled to accept NFC payments (in addition to magnetic stripe cards) as of June 30, 2016, we believe that we are well-positioned to benefit from this emerging space.

 

OUR TECHNOLOGY-BASED SOLUTION

 

Our solutions have been designed to be turnkey and include the ePort Connect service, POS electronic payment devices, certified payment software able to process traditional magnetic stripe credit and debit cards, contactless credit and debit cards, and NFC equipped mobile phones that allow consumers to make payments with their cell phones. We believe that our ability to bundle our products and services, as well as the ability to tailor and customize them to individual customer needs, makes it easy and efficient for our customers to adopt and deploy our technology, and results in a service unmatched in the small-ticket, unattended retail market today.

 

The Product . The Company offers its customers several different devices or software to connect their distributed assets. These range from our QuickConnect™ Web service, more fully described below under the section “OUR PRODUCTS”, and encrypted magnetic stripe card readers to our ePort ® hardware that can be attached to the door of a stand-alone terminal.

 

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

 

The Connectivity Mediums. The client devices (described above) are interconnected for the transfer of our customers’ data through our ePort Connect network that provides multiple connectivity options such as phone line, ethernet, and wireless. Increased wireless connectivity options, coverage and reliability have allowed us to service a greater number of geographically dispersed customer locations. Additionally, we make it easy for our customers to deploy wireless solutions by acting as a single point of contact. We have contracted with Verizon Wireless in order to supply our customers with wireless network coverage.

 

Data Security. We are listed on the VISA Global Registry of Service Providers, meaning that VISA has reviewed and accepted the Report on Compliance (RoC) from our authorized Payment Card Industry (“PCI”) assessor as a PCI DSS Service Provider. Our entry on this registry is renewed annually, and our current entry is valid through January 31, 2017. The VISA listing can be found online at http://www.visa.com/splisting/searchGrsp.do.

 

OUR SERVICES

 

For the fiscal year ended June 30, 2016, license and transaction fees generated by our ePort Connect service represented 73% of the Company’s revenues. Our ePort Connect solution provides customers with all of the following services, under one cohesive service umbrella:

 

Diverse POS options. Ability to connect to a broad product line of cashless acceptance devices or software.

 

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

 

Wireless Connectivity. We manage wireless account activations, distributions, and relationships with wireless providers for our customers, if needed.

 

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Customer/Consumer Services. We support our installed base by providing 24-hour help desk support, repairs, and replacement of impaired system solutions. In addition, all inbound billing inquiries are handled through a 24-hour help desk, thereby eliminating the need for our customers to deal with consumer billing inquiries and potential chargebacks.

 

Online Sales Reporting. Via the USALive online reporting system, we provide customers with a host of sales and operational data, including information regarding their credit and cash transactions, user configuration, reporting by machine and region, by date range and transaction type, data reports for operations and finance, graphical reporting of sales, and condition monitoring for equipment service, as well as activation of new devices and redeployments.

 

M2M Telemetry and DEX data transfer. DEX, an acronym for digital exchange, is the Vending Industry’s standard way to communicate information such as sales, cash in bill validators, coins in coin boxes, sales of units by selection, pricing, door openings, and much more. USA Technologies is able to remotely transfer and push DEX data to customers’ route management systems through its DEX partner program. USA Technologies operates within the VDI (Vending Data Interchange) standards established by NAMA (National Automatic Merchandising Association) and sends DEX files compatible with most major remote management software systems.

 

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

 

Value-added Services. Access to additional services such as MORE , our loyalty program, two-tier pricing, special promotions such as our nationwide Apple Pay mobile payment for vending customers, as well as a menu of hardware purchasing options including JumpStart, our terminal-included service option and hardware leasing options through third parties.

 

Deployment Planning. Access to services to help operators successfully deploy cashless payment systems and integrated solutions that is based on our extensive market and customer experience data.

 

Premium Services. USAT offers Premium Services to support our customers that fully leverages the Company’s industry expertise and access to data. These services include planning, project management, installation support, marketing and performance evaluation.

 

We enter into an ePort Connect Services Agreement, our processing and licensing agreement, with our customers pursuant to which we act as a provider of cashless financial services for the customer’s distributed assets, and the customer agrees to pay us an activation fee, monthly service fees, and transaction processing fees. Our agreements are generally cancelable by the customer upon thirty to sixty days’ notice to us from the time of shipment. It typically takes thirty to sixty days for a new connection to begin contributing to the Company’s license and transaction fee revenues.

 

The Company counts its ePort connections upon shipment of an active terminal to a customer under contract, at which time activation on its network is performed by the Company, and the terminal is capable of conducting business via the Company’s network and related services. An ePort connection does not necessarily mean that the unit is actually installed by the customer on a machine, or that the unit has begun processing transactions, or that the Company has begun receiving monthly service fees in connection with the unit. Rather, at the time of shipment of the ePort, the customer becomes obligated to pay the one-time activation fee (if applicable), and is obligated to pay monthly service fees and lease payments (if applicable) in accordance with the terms of the customer’s contract with the Company.

 

OUR PRODUCTS

 

ePort is the Company’s core device, which is currently being utilized in self-service, unattended markets such as vending, amusement and arcade, and various other kiosk applications. Our ePort product facilitates cashless payments by capturing payment information and transmitting it to our network for authorization with the payment system (e.g., credit card processors). Additional capabilities of our ePort consist of control/access management by authorized users, collection of audit information (e.g., date and time of sale and sales amount), diagnostic information of the host equipment, and transmission of this data back to our network for web-based reporting, or to a compatible remote management system. Our ePort products are available in several distinctive modular configurations, and as hardware, software or as an API Web service, offering our customers flexibility to install a POS solution that best fits their needs and consumer demands.

 

ePort Edge™ is a one-piece design and is intended for those customers who require a magnetic swipe-only cashless system with basic features at a lower price point.

 

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ePort G-8 is a two-piece design that supports traditional magnetic stripe credit/debit cards and contactless cards. The ePort G8 telemeter is also available as a stand-alone DEX telemetry solution.
ePort G-9 has been designed to offer all the features of the G-8 plus additional new features that support expanded acceptance options, consumer engagement offerings and advanced diagnostics.
ePort Interactive is a cloud-based interactive media and content delivery management system, enabling delivery of nutritional information, remote refunds, loyalty programs, and multimedia-marketing for the unattended and self-serve retail markets.
QuickConnect is a Web service that allows a client application to securely interface with the Company’s ePort Connect service. QuickConnect essentially replaces ePort SDK (software development kit), which captured our ePort technology in software form for PC-based devices such as kiosks.

 

Other forms of our ePort technology include:

 

eSuds, our solution developed for the commercial laundry industry that enables laundry operators to provide customers cashless transactions via the use of their credit cards, debit cards and other payment mediums such as student IDs. Effective with the April 2013 mutually exclusive agreement with Setomatic Systems, we are no longer selling the entire eSuds solution to new customers, but we continue to provide processing services for laundry machines equipped with cashless hardware supplied by Setomatic Systems.
ePort Online, enables customers to use USALive to securely process cards typically held on on file for the purpose of online billing and recurring charges. ePort Online Online helps USAT’s customers reduce paper invoicing and collections.

 

SPECIFIC MARKETS WE SERVE

 

Our current customers are primarily in the self-serve, small ticket retail markets including beverage and food vending and kiosk, commercial laundry, car wash, tolls, amusement and gaming, and office coffee. While these industry sectors represent only a small fraction of our total market potential, as described below, these are the areas where we have gained the most traction to date. In addition to being our current primary markets, we believe these sectors serve as a proof-of-concept for other unattended POS industry applications.

 

Vending. According to Vending Times’ 2014 Census of the Industry, annual U.S. sales in the vending industry sector were estimated to be approximately $43 billion in 2013 transacted by approximately 4.5 million machines. The Company believes these machines represent a significant market opportunity for electronic payment conversion when compared to the Company’s existing ePort Connect service base and the overall low rate of industry adoption to date. For example, in another study conducted by Automatic Merchandiser (State of the Vending Industry, June 2015) that included a representative 5.1 million machines, cashless adoption was estimated at only 11% in 2014, up from 7% in 2012. With the continued shift to electronic payments and the advancement in mobile and POS technology, we believe that the traditional beverage and food vending industry will continue to look to cashless payments and telemetry systems to improve their business results.

 

Kiosk . According to IHL Consulting Group’s August 2012 North American Self-Service Kiosks Market Study, which defines, for purposes of their study, a kiosk as a self-standing, technology-based, unmanned device deployed across six retail and hospitality environments, approximately $926 billion was going to be transacted through self-service kiosks in 2013, with compound annual growth for the subsequent three years of seven percent (7%). We believe that kiosks are becoming increasingly popular as credit, debit or contactless payment options enable kiosks to sell an increased variety of items. In addition, the study points to the increasing trend toward self-sufficiency, where time is the most important commodity of the consumer. As merchants continue to seek new ways to reach their customers through kiosk applications, we believe the need for a reliable cashless payment provider experienced with machine integration, PCI compliance and cashless payment services designed specifically for the unattended market will be of increasing value in this market. Our existing kiosk customers integrate with our cashless payment services via our QuickConnect Web service using one of our encrypted readers or ePort POS technologies.

 

Laundry . Our primary targets in laundry consist of the coin-operated commercial laundry and multi-housing laundry markets. According to the Coin Laundry Association, the U.S. commercial laundry industry was comprised of about 35,000 coin laundries in the U.S. in 2015 that our partner, Setomatic Systems, estimated translates to roughly 2.5 million commercial washers and dryers. The Coin Laundry Association estimated gross annual revenue in the laundromat market at nearly $5 billion annually.

 

Mobile Merchant. New mobile-based payment acceptance technology has made a transformational impact on an entire base of merchants that previously had almost no access to electronic-based payments. Goldman Sachs (Equity Research Report, June 19, 2012) sees the arrival of mobile technology at the micro/small merchant level addressing an estimated 13 million U.S.-based micro merchants that are likely to benefit from the ability to accept electronic payment from mobile devices. The Company believes that its mobile-based acceptance product and existing turnkey service platform align well with the market’s need for integrated, mobile payment solutions.

 

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OUR COMPETITIVE STRENGTHS

 

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

 

1. One-Stop Shop, End-to-End Solution. We believe that our ability to offer our customers one point of contact through a bundled cashless payment solution makes it easy and efficient for our customers to adopt and deploy our electronic payment solutions and results in a service that is unmatched in the small ticket, self-service retail market today. To our knowledge, other cashless payment solutions available in the market today require the operator to set up their own accounts for cashless processing and manage multiple service providers (i.e., hardware terminal manufacturer, wireless network provider, and/or credit card processor). We interface directly with our card processor and wireless service provider, and, with our hardware solutions, are able to offer a bundled solution to our customers.

 

2. Trusted Brand Name. We believe that the ePort has a strong national reputation for quality, reliability, and innovation. We believe that card associations, payment processors, and merchants/operators trust our system solutions and services to handle financial transactions in a secure operating environment. Our trusted brand name is best exemplified by our high level of customer retention, numerous exclusive three-year agreements with customers for use of our ePort Connect service. We have agreements with partners like Visa, MasterCard, Chase Paymentech and Verizon Wireless as well as several one-way exclusive relationships which we have solidified with leading organizations within the unattended POS industry, including Setomatic Systems, AMI Entertainment Network, Inc., Innovative Foto, and Air-Serv.

 

3. Market Leadership. We believe we have the largest installed based of Unattended POS electronic payment systems in the unattended small ticket retail market for food and beverage and we are continuing to expand to other adjacent markets such as laundry, amusement, and gaming and kiosks. As of June 30, 2016, we had approximately 429,000 connections to our network. Our installed base supports our sales and marketing initiatives by enhancing our ability to establish or expand our market position. In addition, this data in combination with our industry experts and analysis enables us to offer Premium Services to our customers to help them deploy and better leverage our technology in their locations. We believe our installed base also provides multiple opportunities for referrals for new business, either from the merchant or operator of the deployed asset or through one of our several strategic partnerships.

 

4. Attractive Value Proposition for Our Customers . We believe that our solutions provide our customers an attractive value proposition. Our solutions and services make possible increased purchases by consumers who in the past were limited to the physical cash on hand while making a purchase at an unattended terminal, thereby increasing the universe of potential customers and the size of the purchases of those customers. In addition, value-added offerings and services such as Two-Tier Pricing, which allows the operator to charge different amounts for the same product depending upon whether the consumer chooses to pay by cash or credit/debit, and M2M telemetry provide operators with the ability to pursue additional opportunities to reduce costs and improve operating efficiencies. Lastly, new consumer engagement services further extend the potential for customers to build new revenue opportunities, customer loyalty and brand distinction. One of such services is provided through the ePort Interactive platform, our cloud-based interactive media and content delivery management system, which enables delivery of nutritional information, remote refunds, loyalty programs, and multimedia-marketing campaigns for the unattended and self-serve retail markets.

 

5. Increasing Scale and Financial Stability. Due to the continued growth in connections to the Company’s ePort Connect service, during the 2016 fiscal year, 73% of the Company’s revenues were from licensing and processing fees which are recurring in nature. We believe that this growing scale provides us improved financial stability and the footprint to market and distribute our products and services more effectively and in more markets than most of our competitors.

 

6. Customer-Focused Research and Development. Our research and development initiatives focus primarily on adding features and functionality to our electronic payment solutions based on customer input and emerging market trends. As of June 30, 2016, we had 78 patents (US and International) in force, and 4 United States and 7 international patent applications pending. We have generated considerable intellectual property and know-how associated with creating a seamless, end-to-end experience for our customers.

 

OUR GROWTH OPPORTUNITY

 

Our primary objective is to continue to enhance our position as a leading provider of technology that enables electronic payment transactions and value-added services primarily at small-ticket, self-service retail locations such as vending, kiosks, commercial laundry, and other similar markets. The Company believes its service-approach business model can create a high-margin stream of recurring revenues that could create a foundation for long-term value and continued growth. Key elements of our strategy are to:

 

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Drive Growth in Connections

 

Leverage Existing Customers/Partners. We have a solid base of key customers across multiple markets, particularly in vending, that have currently deployed our solutions and services to just a small portion of their deployed base. As a result, they are a key component of our plan to drive future sales. We have worked to build these relationships, drive future deployments, and develop customized network interfaces. Our customers have seen the benefits of our products and services first-hand and we believe they represent the largest opportunity to scale connections to our service.

 

Expand Distribution and Sales Reach. We are intently focused on driving profitable growth through efficient sales channels. Our sales resources and new distribution relationships have led to approximately 1,450 new ePort Connect customers as well as increased penetration in markets such as amusement and arcade, and commercial laundry in fiscal year 2016.

 

Further Penetrate Attractive Adjacent Markets. We plan to continue to introduce our turnkey solutions and services to various adjacent markets such as the broad-based kiosk market and other similar markets by leveraging our expertise in cashless payment integration combined with the capacity and uniqueness of our ePort Connect solution.

 

Capitalize on Opportunities in International Markets . We are currently focused on the U.S. and Canadian markets for our ePort devices and related ePort Connect service but may seek to establish a presence in electronic payment markets in Europe, Asia, and Latin America. In order to do so, however, we would have to invest in additional sales and marketing and research and development resources targeted towards these regions. At this time, the Company believes the most efficient route to these markets will be achieved by optimizing and coordinating opportunities with its global partners and customers. Our energy management devices have been shipped to customers located in North America, Europe, and Asia.

 

Expanding the Value of our Service

 

Capitalize on the emerging NFC and growing mobile payments trends. With approximately 78% of our connected base contactless enabled to accept NFC payments (including mobile wallets), the Company believes that continued increases in consumer preferences towards contactless payments, including mobile wallets like Apple Pay and Android Pay, represent a significant opportunity for the Company to further drive adoption. According to a market research study conducted in June 2015, almost one in six US consumers (15%) had used a mobile wallet in the past six months, up from 9% in the same period in 2013, and an additional 22% are likely to adopt mobile wallet functionality in the coming six months (The Future of the Mobile Wallet - Chadwick Martin Bailey ). As consumers continue to adopt these new methods of cashless payments, it is our belief that adoption will continue to accelerate at a rapid pace and result in more rapid adoption of cashless solutions like USA Technologies’ ePort in the markets that we serve.

 

Continuous Innovation. We are continuously enhancing our solutions and services in order to satisfy our customers and the end-consumers relying on our products at the POS locations. Our product innovation team is always working to enhance the design, size, and speed of data transmission, as well as security and compatibility with other electronic payment solution providers’ technologies. We believe our continued innovation will lead to further adoption of USAT’s solutions and services in the unattended POS payments market.

 

Comprehensive Service and Support. In addition to its industry-leading ePort cashless payments system, USA Technologies seeks to provide its customers with a comprehensive, value-added ePort Connect service that is designed to encourage optimal ROI through business planning and performance optimization; business metrics through the Company’s KnowledgeBase of data; a loyalty and rewards program for consumer engagement; marketing strategy and executional support; sales data and machine alerts; DEX data transmission; and the ability to extend cashless payments capabilities and the full suite of services across multiple aspects of an operator’s business including micro-markets contract food industry, online payments and mobile payments.

 

Leverage Intellectual Property . Through June 30, 2016, we have 78 U.S. and foreign patents in force that contain various claims, including claims relating to payment processing, networking and energy management devices. In addition, we own numerous trademarks, copyrights, and trade secrets. We will continue to explore ways to leverage this intellectual property in order to add value for our customers, attain an increased share of the market, and generate licensing revenues.

 

SALES AND MARKETING

 

The Company’s sales strategy includes both direct sales and channel development, depending on the particular dynamics of each of our markets. Our marketing strategy is diversified and includes media relations, direct mail, conferences, and client referrals. As of September 8, 2016, the Company was marketing and selling its products through its full and part-time sales staff consisting of 17 people.

 

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Direct Sales

 

Our direct sales efforts are currently primarily focused on the beverage and food vending industry, although we continue to further develop our presence in our ancillary market segments.

 

Indirect Sales/ Distribution

 

As part of our strategy to expand our sales reach while optimizing resources, we also have agreements with select resellers in the car wash, amusement and arcade, and vending markets. We also have a strategic marketing relationship in the commercial laundry market that makes the Company the exclusive service provider to Setomatic Systems’ POS offering, SpyderWash. We have also entered into agreements with resellers and distributors in connection with our energy management products.

 

Marketing

 

Our marketing strategy includes advertising and outreach initiatives designed to build brand awareness, make clear USAT’s competitive strengths, and prove the value of our services to our target markets-both for existing and prospective customers. Activities include creating company and product presence on the web including www.usatech.com and www.energymisers.com, digital advertising, SEO (Search Engine Optimization), and social media; the use of direct mail and email campaigns; educational and instructional online training sessions; advertising in vertically-oriented trade publications; participating in industry tradeshows and events; and working closely with customers and key strategic partners on co-marketing opportunities and new, innovative solutions that drive customer and consumer adoption of our services.

  

IMPORTANT RELATIONSHIPS

 

Verizon Wireless

 

In April 2011, we signed an agreement with Verizon for access to their digital wireless wide area network for the transport of data, including credit card transactions and inventory management data. The initial term of the agreement was three years, which was extended until April 2016. At the end of the term, the agreement automatically renews for successive one month periods unless terminated by either party upon thirty days’ notice.

 

On September 21, 2011, the Company and Verizon entered into a Joint Marketing Addendum (the “Verizon Agreement”) which amended the agreement described above. Pursuant to the Verizon Agreement, the Company and Verizon would work together to help identify business opportunities for the Company’s products and services. Verizon may introduce the Company to existing or potential Verizon customers that Verizon believes are potential purchasers of the Company’s products or services, and may attend sales calls with the Company made to these customers. The Company and Verizon would collaborate on marketing and communications materials that would be used by each of them to educate and inform customers regarding their joint marketing work. Verizon has the right to list the Company’s products and services in its Data Solutions Guide for use by its sales and marketing employees and in its external website. The Company has agreed to pay to Verizon a one-time referral fee for each customer introduced to the Company by Verizon that becomes a customer of the Company. The Verizon Marketing Agreement is terminable by either party upon 45 days’ notice.

 

VISA

 

As of November 14, 2014, we entered into a three-year agreement with Visa U.S.A. Inc. (“Visa”), pursuant to which Visa has agreed to continue to make available to the Company certain promotional interchange reimbursement fees for small ticket debit and credit card transactions. As previously reported, following implementation of the Durbin Amendment, Visa had significantly increased its interchange fees for small ticket regulated debit card transactions effective October 1, 2011. The promotional interchange reimbursement fees provided by the aforementioned agreement will continue until October 31, 2017.

 

MasterCard

 

On January 12, 2015, we entered into a three-year MasterCard Acceptance Agreement (“MasterCard Agreement”) with MasterCard International Incorporated ("MasterCard"), pursuant to which MasterCard has agreed to make available to us reduced interchange rates for small ticket debit card transactions in certain merchant category codes. As previously reported, MasterCard had significantly increased its interchange rates for small ticket regulated debit card transactions effective October 1, 2011, and as a result, the Company ceased accepting MasterCard debit card products in mid-November 2011. Pursuant to the MasterCard Agreement, however, the Company is currently accepting MasterCard debit card products for small ticket debit card transactions in the unattended beverage and food vending merchant category code. The Company and MasterCard entered into a first amendment on April 27, 2015, pursuant to which the conditions under, or the transactions to, which the MasterCard custom pricing would be available, was amended. The reduced interchange rates became effective on April 20, 2015.

 

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Chase Paymentech

 

The Company has entered into a five-year Third Party Payment Processor Agreement, dated April 24, 2015 with Paymentech, LLC, through its member, JPMorgan Chase Bank, N.A. (“Chase Paymentech”), pursuant to which Chase Paymentech will act as the provider of credit and debit card transaction processing services (including authorization, conveyance and settlement of transactions) to the Company and its customers. The Agreement provides that Chase Paymentech will act as the exclusive provider of transaction processing services to the Company and its customers for at least 250,000,000 transactions per year. The Agreement provides that Chase Paymentech may modify the pricing for its services upon 30-days’ notice, and in connection with certain such increases, the Company has the right to terminate the Agreement upon 120-days’ notice.

 

Compass/Foodbuy

 

As per its website, Compass Group PLC, a $23 billion organization with locations worldwide, is the leader in vending, food service management and support services, has over 500,000 employees, and is one of the leading owners and operators of vending machines in the United States. Compass is a division of UK-based Compass Group PLC.

 

On June 30, 2009, we entered into a Master Purchase Agreement (“MPA”) with Foodbuy, LLC (“Foodbuy”), the procurement company for Compass Group USA, Inc. (“Compass”) and other customers. The MPA provides, among other things that, for a period of thirty-six months, Foodbuy, on behalf of Compass, shall utilize USAT as the sole credit or debit card vending system hardware and related software and connect services provider for not less than seventy-five percent of the vending machines of Compass utilizing cashless payments solutions. The MPA also provides that, for a period of thirty-six months from the effective date of the agreement, USAT shall be a preferred supplier and provider to Foodbuy and its customers, including Compass, of USAT’s products and services. The MPA automatically renews for successive one-year periods unless terminated by either party upon sixty days’ notice prior to the end of any such one year renewal period. In addition, on July 1, 2009, USAT and Compass, in conjunction with the MPA described above, also entered into a three-year ePort Connect Services Agreement pursuant to which USAT will provide Compass with all card processing, data, network, communications and financial services, and DEX telemetry data services required in connection with all Compass vending machines utilizing ePorts. The agreement automatically renews for successive one-year periods unless terminated by either party upon sixty days’ notice prior to the end of any such one-year renewal period. During the fiscal year ended June 30, 2016, Compass represented approximately 20% of our total revenues.

 

AMI Entertainment

 

On August 22, 2011, we entered into an exclusive three-year agreement with AMI Entertainment (“AMI”) as their exclusive processor of credit and debit cards and other electronic payments in connection with equipment operated on AMI’s network in the U.S. and Canada. The agreement is subject to renewal for one-year periods thereafter, subject to notice of non-renewal by either party. The agreement renewed for one year in August 2016. AMI manufactures various types of amusement, entertainment and music equipment for sale to third party users.

 

Setomatic Systems

 

In April 2013, we entered into an three-year exclusive agreement with Setomatic Systems (“Setomatic”), a privately owned and operated developer and manufacturer of both open and closed loop card payment systems, drop coin meters and electronic timers for the commercial laundry industry. Under the terms of the agreement, the Company, through our ePort Connect® service, will act as the exclusive service provider for all credit/debit card processing for all new customers of Setomatic’s SpyderWash, a credit/debit card acceptance product. Similarly, the Company will market its ePort Connect service in the United States laundry market exclusively through Setomatic. The agreement is subject to renewal for one- year periods after the initial three-year term, subject to notice of non-renewal by either party.

 

QUICK START PROGRAM

 

In order to reduce customers’ upfront capital costs associated with the ePort hardware, the Company makes available to its customers the Quick Start 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.

 

From its introduction in September 2014 and through approximately mid-March 2015, the Company entered into these leases directly with its customers. In the third and fourth quarter of fiscal year 2015, however, the Company signed vendor agreements with two leasing companies, whereby our customers could enter into leases directly with the leasing companies.

 

There has been a shift by our customers from acquiring our product via JumpStart, which accounted for 11% of our gross connections in fiscal year 2015, and for 9% of our gross connections in fiscal year 2016, to QuickStart or a straight purchase, which accounted for approximately 91% of gross connections in fiscal year 2016. The shift to a straight purchase, along with our ability to increase cash collections under QuickStart sales by utilizing leasing companies, has improved cash provided by operating activities.

 

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Due to the success of the QuickStart program as measured by customer utilization of the program and the positive impact on the Company’s cash flows from operating activities when a leasing company is utilized, the Company intends to expand this program by entering into additional vendor agreements with leasing companies and/or expanding its relationship with the two incumbent leasing companies.

 

JUMP START PROGRAM

 

Pursuant to the JumpStart Program, customers acquire the ePort cashless device at no upfront cost by paying a higher monthly service fee, avoiding the need to make a major upfront capital investment. The Company would continue to own the ePort device utilized by its customer. At the time of the shipment of the ePort device, the customer is obligated to pay to the Company a one-time activation fee, and is later obligated to pay monthly ePort Connect service fees in accordance with the terms of the customer’s contract with the Company, in addition to transaction processing fees generated from the device. In fiscal year 2016, the Company added approximately 9% of its gross connections through JumpStart.

 

MANUFACTURING

 

The Company utilizes independent third party companies for the manufacturing of its products. Our internal manufacturing process mainly consists of quality assurance of materials and testing of finished goods received from our contract manufacturers. We have not entered into a long-term contract with our contract manufacturers, nor have we agreed to commit to purchase certain quantities of materials or finished goods from our manufacturers beyond those submitted under routine purchase orders, typically covering short-term forecasts.

 

COMPETITION

 

We are a leading provider of cashless payments systems for the small-ticket, unattended market and believe we have the largest installed base of unattended POS electronic payment systems in the beverage and food vending industry. Factors that we consider to be our competitive advantages are described above under “OUR COMPETITIVE STRENGTHS.” Our competitors are increasingly and actively marketing  products and services that compete with our products and services in the vending space including manufacturers who may include in their new vending machines their own (or another third party’s) cashless payment systems and services. These major competitors include Crane Payment Innovations and Cantaloupe Systems, Inc. While we believe our products and services are superior to our competitors’, many of our competitors are much larger enterprises and have substantially greater revenues. In addition to these competitors, there are also numerous credit card processors that offer card processing services to traditional retail establishments that could decide to offer similar services to the industries that we serve.

 

In the cashless laundry market, our joint solution with Setomatic Systems competes with hardware manufacturers, who provide joint solutions to their customers in partnership with payment processors, and with at least one competitor who provides an integrated hardware and payment processing solution.

 

TRADEMARKS, PROPRIETARY INFORMATION, AND PATENTS

 

The Company owns US federal registrations for the following trademarks and service marks: Blue Light Sequence®, Business Express®, CM2iQ®, Creating Value Through Innovation®, EnergyMiser®, ePort®, ePort Connect®, ePort Edge®, ePort GO®, ePort Mobile®, eSuds®, Intelligent Vending®, Public PC®, SnackMiser®, TransAct®, USA Technologies® USALive®, VendingMiser®, PC EXPRESS®, VENDSCREEN® and VM2iQ®. The Company owns pending applications for US federal registration of the following trademarks and service marks: Horizontal Blue Light Sequence™, and MORE.

 

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

 

Through June 30, 2016, 95 patents have been granted to the Company, including 80 United States patents and 15 foreign patents, and 4 United States and 7 international patent applications are pending. Of the 95 patents, 78 are still in force.

 

RESEARCH AND DEVELOPMENT

 

Research and development expenses, which are included in selling, general and administrative expense in the Consolidated Statements of Operations, were approximately $1.4 million, $1.5 million and $1.0 million for the years ended June 30, 2016, 2015 and 2014, respectively.

 

EMPLOYEES

 

On September 8, 2016, the Company had 71 full-time employees and 4 part-time employees.

 

Item 1A. Risk Factors.

 

Risks Relating to Our Business

 

We have a history of losses since inception and if we continue to incur losses, the price of our shares can be expected to fall.

 

We experienced losses from inception through June 30, 2012, with net income for the years ended June 30, 2013 and June 30, 2014. However, we experienced losses for the fiscal years 2015 and 2016, and continued profitability is not assured. From our inception through June 30, 2016, our cumulative losses from operations are approximately $181 million. Until the Company’s products and services can generate sufficient annual revenues, the Company will be required to use its cash and cash equivalents on hand, its line of credit, and may raise capital to meet its cash flow requirements including the issuance of Common Stock or debt financing. For the years ended June 30, 2016 and 2015, we incurred a net loss of $6.8 million and $1.1 million, respectively. If we continue to incur losses in the future, the price of our common stock can be expected to fall.

 

The occurrence of material unanticipated expenses may require us to divert our cash resources from achieving our business plan, adversely affecting our financial performance and resulting in the decline of our stock price.

 

In the event we would incur any material unanticipated expenses, we may be required to divert our cash resources from our operating activities in order to fund any such expenses. Any such occurrence may cause our anticipated connections, revenues, gross profits, and other financial metrics for the 2017 fiscal year and beyond to be materially adversely affected. In such event, the price of our common stock could be expected to fall.

 

The inability of our customers to utilize third party leasing companies under our QuickStart program would materially adversely affect our cash generated from operating activities and/or attaining our business plan.

 

The use of third party leasing companies by our customers under our QuickStart program positively affects our net cash provided by operating activities because we receive the purchase price from the leasing company at the time of the sale. There can be no assurance that we will be able to obtain such third party leasing companies. To the extent that third party leasing companies would not be available, we would lease the equipment directly to our customers. In such event, our net cash from operating activities would be adversely affected and we may be required to incur additional equity or debt financing to fund operations. In the alternative, we would not be able to attain our business plan, including anticipated connections and revenues.

 

We may require additional financing or find it necessary to raise capital to sustain our operations and without it we may not be able to achieve our business plan.

 

At June 30, 2016, we had net working capital of $4.9 million. We had net cash provided by operating activities of $6.5 million, $(1.7) million and $7.1 million for the fiscal years ended June 30, 2016, 2015 and 2014, respectively. Although we believe that we have adequate existing resources to provide for our funding requirements over the next 12 months, there can be no assurances that we will be able to continue to generate sufficient funds thereafter. Unless we maintain or grow our current level of operations, we may need additional funds to continue these operations. We may also need additional capital to update our technology or respond to unusual or unanticipated non-operational events. Should the financing that we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.

 

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Our future operating results may fluctuate.

 

Our future operating results will depend significantly on our ability to continue to drive revenues from license and transaction fees and our ability to develop and commercialize new products and services. Our operating results may fluctuate based upon many factors, including:

 

fluctuations in revenue generated by our business;

 

fluctuations in operating expenses;

 

our ability to establish or maintain effective relationships with significant partners and suppliers on acceptable terms;

 

the amount of debit or credit card interchange rates that are charged by Visa and MasterCard;

 

the fees that we charge our customers for processing services;

 

the successful operation of our network;

 

the commercial success of our customers, which could be affected by such factors as general economic conditions;

 

the level of product and price competition;

 

the timing and cost of, and our ability to develop and successfully commercialize, new or enhanced products and services;

 

activities of, and acquisitions or announcements by, competitors;

 

the impact from any impairment of inventory, goodwill, fixed assets or intangibles;

 

the impact of any changes of valuation allowance on deferred tax assets;

 

the ability to increase the number of customer connections to our network;

 

marketing programs which delay realization by us of monthly service fees on our new connections;

 

the material breach of security of any of the Company’s systems or third party systems utilized by the Company; and

 

the anticipation of and response to technological changes.

 

Our products may fail to gain substantial increased market acceptance. As a result, we may not generate sufficient revenues or profit margins to achieve our financial objectives or growth plans.

 

There can be no assurances that demand for our products will be sufficient to enable us to generate sufficient revenue or become profitable on a sustainable basis. Likewise, no assurance can be given that we will be able to have a sufficient number of ePorts ® connected to our network or sell or lease equipment utilizing our network to enough locations to achieve significant revenues. Alternatively, the locations which utilize the network may not be successful locations and our revenues would be adversely affected. We may lose locations utilizing our products to competitors, or may not be able to install our products at competitors’ locations, or may not obtain future locations which would be obtained by our competitors. In addition, there can be no assurance that our products could evolve or be improved to meet the future needs of the marketplace. In any such event, we may not be able to achieve our growth plans, including anticipated connections and revenue growth.

 

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We may be required to incur further debt to meet future capital requirements of our business. Should we be required to incur additional debt, the restrictions imposed by the terms of such debt could adversely affect our financial condition and our ability to respond to changes in our business.

 

If we incur additional debt, we may be subject to the following risks:

 

our vulnerability to adverse economic conditions and competitive pressures may be heightened;

 

our flexibility in planning for, or reacting to, changes in our business and industry may be limited;

 

our debt covenants may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;

 

a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and therefore, may be able to take advantage of opportunities that our indebtedness would prevent us from pursuing;

 

the covenants contained in the agreements governing our outstanding indebtedness may limit our ability to borrow additional funds, dispose of assets and make certain investments;

 

a significant portion of our cash flows could be used to service our indebtedness;

 

we may be sensitive to fluctuations in interest rates if any of our debt obligations are subject to variable interest rates; and

 

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

 

We cannot assure you that our leverage and such restrictions will not materially and adversely affect our ability to finance our future operations or capital needs or to engage in other business activities. In addition, we cannot assure you that additional financing will be available when required or, if available, will be on terms satisfactory to us.

 

Our bank borrowing agreement contains restrictions which may limit our flexibility in operating and growing our business.

 

Our bank borrowing agreement contains covenants regarding our maintenance of a minimum quarterly adjusted EBITDA as defined in our loan agreement and certain numbers of connections. Our loan agreement also includes covenants that limit our ability to engage in specified types of transactions, including among other things:

 

· incur additional indebtedness or issue equity;
· pay dividends on, repurchase or make distributions in respect of our common stock;
· make certain investments (including acquisitions) and distributions;
· sell certain assets;
· create liens;
· consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
· enter into certain transactions with respect to our affiliates,
· ability to enter into business combinations, and
· certain other financial and non-financial covenants.

 

We were in compliance with these covenants as of June 30, 2016 other than the minimum adjusted EBITDA covenant for the quarter ended June 30, 2016. We have received a waiver from our bank for the covenant default. Failure to be in compliance with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all or a portion of our outstanding indebtedness, which would have a material adverse effect on our business, financial condition and results of operations.

 

The loss of one or more of our key customers could significantly reduce our revenues, results of operations, and net income.

 

We have derived, and believe we may continue to derive, a significant portion of our revenues from one large customer or a limited number of large customers. Customer concentrations for the years ended June 30, 2016, 2015 and 2014 are as follows:

 

    2016     2015     2014  
Trade account and finance receivables - one customer     18 %     35 %     22 %
License and transaction processing revenues - one customer     16 %     21 %     26 %
Equipment sales revenue - one customer     28 %     17 %     < 10 %

 

Our customers may buy less of our products or services depending on their own technological developments, end-user demand for our products and internal budget cycles. A major customer in one year may not purchase any of our products or services in another year, which may negatively affect our financial performance. If we are required to sell products to any of our large customers at reduced prices or unfavorable terms, our results of operations and revenue could be materially adversely affected. Further, there is no assurance that our customers will continue to utilize our transaction processing and related services as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice.

 

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

 

We are dependent on key management personnel, particularly the Chairman and Chief Executive Officer, Stephen P. Herbert. The loss of services of Mr. Herbert or other officers could dramatically affect our business prospects. Our executive officers and certain of our officers and employees are particularly valuable to us because:

 

they have specialized knowledge about our company and operations;

 

they have specialized skills that are important to our operations; or

 

they would be particularly difficult to replace.

 

We have entered into an employment agreement with Mr. Herbert, which contains confidentiality and non-compete provisions. The agreement provided for an initial term continuing through January 1, 2013, which is automatically renewed for consecutive one year periods unless terminated by either Mr. Herbert or the Company upon at least 90 days’ notice prior to the end of the initial term or any one-year extension thereof.

 

We also may be unable to retain other existing senior management, sales personnel, and development and engineering personnel critical to our ability to execute our business plan, which could result in harm to key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs.

 

Our dependence on proprietary technology and limited ability to protect our intellectual property may adversely affect our ability to compete.

 

Challenge to our ownership of our intellectual property could materially damage our business prospects. Our technology may infringe upon the proprietary rights of others. Our ability to execute our business plan is dependent, in part, on our ability to obtain patent protection for our proprietary products, maintain trade secret protection and operate without infringing the proprietary rights of others.

 

Through June 30, 2016, we had 11 pending United States and foreign patent applications, and will consider filing applications for additional patents covering aspects of our future developments, although there can be no assurance that we will do so. In addition, there can be no assurance that we will maintain or prosecute these applications. The United States Government and other countries have granted us 95 patents as of June 30, 2016. There can be no assurance that:

 

any of the remaining patent applications will be granted to us;

 

we will develop additional products that are patentable or do not infringe the patents of others;

 

any patents issued to us will provide us with any competitive advantages or adequate protection for our products;

 

any patents issued to us will not be challenged, invalidated or circumvented by others; or

 

any of our products would not infringe the patents of others.

 

If any of our products or services is found to have infringed any patent, there can be no assurance that we will be able to obtain licenses to continue to manufacture, use, sell, and license such product or service or that we will not have to pay damages and/or be enjoined as a result of such infringement. Even if a patent application is granted for any of our products, there can be no assurance that the patented technology will be a commercial success or result in any profits to us.

 

If we are unable to adequately protect our proprietary technology or fail to enforce or prosecute our patents against others, third parties may be able to compete more effectively against us, which could result in the loss of customers and our business being adversely affected. Patent and proprietary rights litigation entails substantial legal and other costs, and diverts Company resources as well as the attention of our management. There can be no assurance we will have the necessary financial resources to appropriately defend or prosecute our intellectual property rights in connection with any such litigation.

 

Competition from others could prevent the Company from increasing revenue and achieving its growth plans.

 

While we are a leading provider and believe we have the largest installed base of unattended POS electronic payment systems in the small ticket, beverage and food vending industry, our competitors are increasingly and actively marketing products and services that compete with our products and services in this vending space. The competition includes manufacturers who may include in their new vending machines their own (or another third party’s) cashless payment systems and services other than our systems and services. While we believe our products and services are superior to our competitors, many of our competitors are much larger enterprises and have substantially greater revenues. In addition to these competitors, there are also numerous credit card processors that offer card processing services to traditional retail establishments that could decide to offer similar services to the industries that we serve. Competition from other companies, including those that are well established and have substantially greater resources, may reduce our profitability or reduce our business opportunities. Competition may result in lower profit margins on our products or may reduce potential profits or result in a loss of some or all of our customer base. To the extent that our competitors are able to offer more attractive technology, our ability to compete could be adversely affected.

 

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The termination of any of our relationships with third parties upon whom we rely for supplies and services that are critical to our products could adversely affect our business and delay achievement of our business plan.

 

We depend on arrangements with third parties for a variety of component parts used in our products. We have contracted with various suppliers to assist us to develop and manufacture our ePort® products. For other components, we do not have supply contracts with any of our third-party suppliers and we purchase components as needed from time to time. We have contracted with a third-party data system recovery vendor to host our network in a secure, 24/7 environment to ensure the reliability of our network services. We also have contracted with multiple land-based telecommunications providers to ensure the reliability of our land-based network. If these business relationships are terminated, the implementation of our business plan may be delayed until an alternative supplier or service provider can be retained. If we are unable to find another source or one that is comparable, the content and quality of our products could suffer and our business, operating results and financial condition could be harmed.

 

A disruption in the manufacturing capabilities of our third-party manufacturers, suppliers or distributors would negatively impact our ability to meet customer requirements.

 

We depend upon third-party manufacturers, suppliers and distributors to deliver components free from defects, competitive in functionality and cost, and in compliance with our specifications and delivery schedules. Since we generally do not maintain large inventories of our products or components, any termination of, or significant disruption in, our manufacturing capability or our relationship with our third-party manufacturers or suppliers may prevent us from filling customer orders in a timely manner.

 

We have occasionally experienced, and may in the future experience, delays in delivery of products and delivery of products of inferior quality from third-party manufacturers. Although alternate manufacturers and suppliers are generally available to produce our products and product components, the number of manufacturers or suppliers of some of our products and components is limited, and a qualified replacement manufacturer or supplier could take several months. In addition, our use of third-party manufacturers reduces our direct control over product quality, manufacturing timing, yields and costs. Disruption of the manufacture or supply of our products and components, or a third-party manufacturer’s or supplier’s failure to remain competitive in functionality, quality or price, could delay or interrupt our ability to manufacture or deliver our products to customers on a timely basis, which would have a material adverse effect on our business and financial performance.

 

Substantially all of the network service contracts with our customers are terminable for any or no reason upon thirty to sixty days’ advance notice.

 

Substantially all of our customers may terminate their network service contracts with us for any or no reason upon providing us with thirty or sixty days’ advance notice. Accordingly, consistent demand for and satisfaction with our products by our customers is critical to our financial condition and future success. Problems, defects, or dissatisfaction with our products or services or competition in the marketplace could cause us to lose a substantial number of our customers with minimal notice. If a substantial number of our customers were to exercise their termination rights, it would result in a material adverse effect to our business, operating results, and financial condition.

 

Our reliance on our wireless telecommunication service provider exposes us to a number of risks over which we have no control, including risks with respect to increased prices and termination of essential services.

 

The operation of our wireless networked devices depends upon the capacity, reliability and security of services provided to us by our wireless telecommunication services providers, AT&T Mobility and Verizon Wireless. We have no control over the operation, quality or maintenance of these services or whether the vendor will improve its services or continue to provide services that are essential to our business. In addition, subject to our existing contracts with them, our wireless telecommunication services providers may increase their prices, which would increase our costs. If our wireless telecommunication services providers were to cease to provide essential services or to significantly increase prices, we could be required to find alternative vendors for these services. With a limited number of vendors, we could experience significant delays in obtaining new or replacement services, which could lead to slowdowns or failures of our network. In addition, we may have to replace our existing ePort ® devices that are already installed in the marketplace and which are utilizing the existing vendor’s services. This could significantly harm our reputation and could cause us to lose customers and revenues.

 

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We may not be able to adapt to changing technology and our customers’ technology needs.

 

We face rapidly changing technology and frequent new service offerings that can render existing services obsolete or unmarketable. Our future depends, in part, on our ability to enhance existing services and to develop, introduce and market, on a timely and cost effective basis, new services that keep pace with technological developments and customer requirements. Developing new products and technologies is a complex, uncertain process requiring innovation and accurate anticipation of technological and market trends. When changes to the product line are announced, we will be challenged to manage possible shortened life cycles for existing products and continue to sell existing products. Our inability to respond effectively to any of these challenges may have a material adverse effect on our business and financial success.

 

Security is vital to our customers and therefore breaches in the security of transactions involving our products or services could adversely affect our reputation and results of operations.

 

Protection against fraud is of key importance to purchasers and end-users of our products. We incorporate security features, such as encryption software and secure hardware, into our products to protect against fraud in electronic payment transactions and to ensure the privacy and integrity of consumer data. We design and test our products to industry security standards and our products and methodologies are under periodic review and improvement. We also maintain the highest level PCI validation standard as mandated by the card industry and engage third party auditors not only to ensure that we meet the highest industry standards, but also to advise us on improving our security methods. Nevertheless, our products and services and third party products and services that are utilized by us may be vulnerable to breaches in security due to defects in our security mechanisms, the operating system and applications in our hardware platform. Security vulnerabilities could jeopardize the security of information transmitted or stored using our products. The security of the information in our products is compromised, our reputation and marketplace acceptance of our products will be adversely affected, which would adversely affect our results of operations, and subject us to potential liability. If our security applications are breached and sensitive data is lost or stolen, we could incur significant costs to not only assess and repair any damage to our systems, but also to reimburse customers for losses that occur from the fraudulent use of the data. We may also be subject to fines and penalties from the credit card associations in the event of the loss of confidential card information.

 

Our products and services may be vulnerable to security breach.

 

Credit card issuers have promulgated credit card security guidelines as part of their ongoing efforts to battle identity theft and credit card fraud. We continue to work with credit card issuers to assure that our products and services comply with these rules. There can be no assurances, however, that our products and services or third party products and services utilized by us are invulnerable to unauthorized access or hacking. When there is unauthorized access to credit card data that results in financial loss, there is the potential that parties could seek damages from us, and our business reputation may be materially adversely affected.

 

If we fail to adhere to the standards of the Visa and MasterCard credit card associations, our registrations with these associations could be terminated and we could be required to stop providing payment processing services for Visa and MasterCard.

 

Substantially all of the transactions handled by our network involve Visa or MasterCard. If we fail to comply with the applicable requirements of the Visa and MasterCard credit card associations, Visa or MasterCard could suspend or terminate our registration with them. The termination of our registration with them or any changes in the Visa or MasterCard rules that would impair our registration with them could require us to stop providing payment processing services through our network. In such event, our business plan and/or competitive advantages in the market place could be materially adversely affected.

 

We rely on other card payment processors; if they fail or no longer agree to provide their services, our customer relationships could be adversely affected and we could lose business.

 

We rely on agreements with other large payment processing organizations, primarily Chase Paymentech, to enable us to provide card authorization, data capture, settlement and merchant accounting services and access to various reporting tools for the customers we serve. The termination by our card processing providers of their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect our relationships with the customers whose accounts we serve and may cause those customers to terminate their processing agreements with us.

 

We are subject to laws and regulations that affect the products, services and markets in which we operate. Failure by us to comply with these laws or regulations would have an adverse effect on our business, financial condition, or results of operations.

 

We are, among other things, subject to banking regulations and credit card association regulations. Failure to comply with these regulations may result in the suspension of our business, the limitation, suspension or termination of service, and/or the imposition of fines that could have an adverse effect on our financial condition. Additionally, changes to legal rules and regulations, or interpretation or enforcement thereof, could have a negative financial effect on us or our product offerings. To the extent this occurs, we could be subject to additional technical, contractual or other requirements as a condition of our continuing to conduct our payment processing business. These requirements could cause us to incur additional costs, which could be significant, or to lose revenues to the extent we do not comply with these requirements.

 

  19  

 

 

New legislation could be enacted regulating the basis upon which interchange rates are charged for debit or credit card transactions, which could increase the debit or credit card interchange fees charged by bankcard networks. An example of such legislation is the so-called “Durbin Amendment,” to the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. The Durbin Amendment regulates the basis upon which interchange rates for debit card transactions are made to ensure that interchange rates are “reasonable and proportionate to costs.” Pursuant to regulations that were promulgated by the Federal Reserve, Visa and MasterCard have significantly increased their interchange fees for small ticket debit card transactions.

 

As of November 14, 2014, we entered into a three-year agreement with Visa U.S.A. Inc. (“Visa”), pursuant to which Visa has agreed to continue to make available to the Company certain promotional interchange reimbursement fees for small ticket debit and credit card transactions. Similarly, MasterCard International Incorporated ("MasterCard") has agreed to make available to us reduced interchange rates for small ticket debit card transactions pursuant to a three-year MasterCard Acceptance Agreement dated January 12, 2015, as amended by a First Amendment thereto dated April 27, 2015. If the foregoing agreements with Visa and MasterCard are not extended, our financial results would be materially adversely affected unless we are able to pass these significant additional charges to our customers.

 

Increases in card association and debit network interchange fees could increase our operating costs or otherwise adversely affect our operations. If we do not pass along to our customers any future increases in credit or debit card interchange fees, assessments and transaction fees, our gross profits would be reduced.

 

We are obligated to pay interchange fees and other network fees set by the bankcard networks to the card issuing bank and the bankcard networks for each transaction we process through our network. From time to time, card associations and debit networks increase the organization and/or processing fees, known as interchange fees that they charge. Under our processing agreements with our customers, we are permitted to pass along these fee increases to our customers through corresponding increases in our processing fees. Passing along such increases could result in some of our customers canceling their contracts with us. Consequently, it is possible that competitive pressures will result in our Company absorbing some or all of the increases in the future, which would increase our operating costs, reduce our gross profit and adversely affect our business.

 

During the term of the Visa Agreement, the Company does not anticipate accepting any debit cards with interchange fees that are higher than the rates provided under the Visa Agreement. The Company will continue to accept Visa- and MasterCard- branded debit cards in addition to all major credit cards, including Visa, MasterCard, Discover and American Express at its current processing rates. If the Visa or MasterCard Agreements are not extended, our financial results would be materially adversely affected unless we are able to pass these significant additional charges to our customers.

 

The ability to recruit, retain and develop qualified personnel is critical to the Company’s success and growth.

 

For the Company to successfully compete and grow, it must retain, recruit and develop the necessary personnel who can provide the needed expertise required in its business. In addition, the Company must develop its personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and the Company may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. The Company’s effort to retain and develop personnel may also result in significant additional expenses. The Company cannot assure that key personnel, including executive officers, will continue to be employed or that it will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on the Company.

 

We incur chargeback liability when our customers refuse or cannot reimburse chargebacks resolved in favor of consumers. Any increase in chargebacks not paid by our customers may adversely affect our results of operations, financial condition and cash flows.

 

In the event a dispute between a cardholder and a customer is not resolved in favor of the customer, the transaction is normally charged back to the customer and the purchase price is credited or otherwise refunded to the cardholder. If we are unable to collect such amounts from the customer's account, or if the customer refuses or is unable, due to closure, bankruptcy or other reasons, to reimburse us for a chargeback, we bear the loss for the amount of the refund paid to the cardholder. We may experience significant losses from chargebacks in the future. Any increase in chargebacks not paid by our customers could have a material adverse effect on our business, financial condition, results of operations and cash flows. We have policies to manage customer-related credit risk and attempt to mitigate such risk by monitoring transaction activity. Notwithstanding our programs and policies for managing credit risk, it is possible that a default on such obligations by one or more of our customers could have a material adverse effect on our business.

 

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Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could cause a loss of confidence in our financial reporting and adversely affect the trading price of our common stock.

 

Effective internal control over financial reporting is necessary for us to provide accurate financial information. Section 404 of the Sarbanes-Oxley Act requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K. If we fail to maintain the adequacy of our internal control, we may not be able to conclude and report that we have effective internal control over financial reporting. If we are unable to adequately maintain our internal control over financial reporting, we may not be able to accurately report our financial results, which could cause investors to lose confidence in our reported financial information, negatively affecting the trading price of our common stock, or our ability to access the capital markets. 

 

Risks Related to Our Common Stock

 

We do not expect to pay cash dividends in the foreseeable future and therefore investors should not anticipate cash dividends on their investment.

 

The holders of our common stock and series A convertible preferred stock are entitled to receive dividends when, and if, declared by our board of directors. Our board of directors does not intend to pay cash dividends in the foreseeable future, but instead intends to retain any and all earnings to finance the growth of the business. To date, we have not paid any cash dividends on our common stock or our series A convertible preferred stock and there can be no assurance that cash dividends will ever be paid on our common stock.

 

In addition, our articles of incorporation prohibit the declaration of any dividends on our common stock unless and until all unpaid and accumulated dividends on the series A convertible preferred stock have been declared and paid. Through August 25, 2016, the unpaid and cumulative dividends on the series A convertible preferred stock are $13.7 million. As of June 30, 2016, each share of series A convertible preferred stock was convertible into 0.1940 of a share of common stock at the option of the holder and is subject to further adjustment as provided in our Articles of Incorporation. The unpaid and cumulative dividends on the series A convertible preferred stock are convertible into shares of our common stock at the rate of $1,000 per share at the option of the holder. During the year ended June 30, 2016, none of our series A convertible preferred stock and no cumulative preferred dividends were converted into shares of common stock.

 

Our articles of incorporation also provide that the preferred stock has a liquidation preference over the common stock in the amount of $10 per share plus accrued and unpaid dividends. As of June 30, 2016, the liquidation preference was $18.1 million.

 

Upon certain fundamental transactions involving the Company, such as a merger or sale of substantially all of our assets, we may be required to distribute the liquidation preference then due to the holders of our series A preferred stock which would reduce the amount of the distributions otherwise to be made to the holders of our common stock in connection with such transactions.

 

Our articles of incorporation provide that upon a merger or sale of substantially all of our assets or upon the disposition of more than 50% of our voting power, the holders of at least 60% of the preferred stock may elect to have such transaction treated as a liquidation and be entitled to receive their liquidation preference. Upon our liquidation, the holders of our preferred stock are entitled to receive a liquidation preference prior to any distribution to the holders of common stock which as of June 30, 2016 is equal to $18.1 million.

 

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

 

As of August 25, 2016, we had issued and outstanding warrants to purchase 1,939,245 shares of our common stock. The shares underlying 1,870,267 of these warrants have been registered and may be freely sold. Market sales of large amounts of our common stock, or the potential for those sales even if they do not actually occur, may have the effect of depressing the market price of our common stock. In addition, if our future financing needs require us to issue additional shares of common stock or securities convertible into common stock, the supply of common stock available for resale could be increased which could stimulate trading activity and cause the market price of our common stock to drop, even if our business is doing well. Furthermore, the issuance of any additional shares of our common stock including those pursuant to the exercise of warrants by the holders thereof, or securities convertible into our common stock could be substantially dilutive to holders of our common stock.

 

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Our stock price may be volatile.

 

The trading price of our common stock is expected to be subject to significant fluctuations in response to various factors including, but not limited to, the following:

 

variations in operating results and achievement of key business metrics;

 

changes in earnings estimates by securities analysts, if any;

 

any differences between reported results and securities analysts’ published or unpublished expectations;

 

announcements of new contracts, service offerings or technological innovations by us or our competitors;

 

market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors;

 

demand for our services and products;

 

shares of common stock being sold pursuant to Rule 144 or upon exercise of warrants;

 

regulatory matters;

 

concerns about our financial position, operating results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights;

 

potential dilutive effects of future sales of shares of common stock by shareholders and by the Company;

 

the amount of average daily trading volume in our common stock;

 

our ability to obtain working capital financing; and

 

general economic or stock market conditions unrelated to our operating performance.

 

The securities market in recent years has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations, as well as general economic conditions, may also materially and adversely affect the market price of our common stock.

 

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

 

As of August 25, 2016, the Company has 1,870,267 of our shares underlying warrants exercisable at $2.6058 per share at any time before September 18, 2016 which are required to be registered by us for resale under applicable securities laws. Sales in the public market of a substantial number of the shares underlying these warrants, or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, the sale of these shares could impair our ability to raise capital, should we wish to do so, through the sale of additional common stock. We are unable to estimate the number of shares that may be sold because this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors.

 

Director and officer liability is limited.

 

As permitted by Pennsylvania law, our by-laws limit the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our by-law provisions and Pennsylvania law, shareholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our by-laws and indemnification agreements entered into by the Company with each of the officers and directors provide that we shall indemnify our directors and officers to the fullest extent permitted by law.

 

Our publicly-filed reports are reviewed by the SEC from time to time and any significant changes required as a result of any such review may result in material liability to us, and have a material adverse impact on the trading price of our common stock.

 

The reports of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements and to enhance the overall effectiveness of companies’ public filings, and comprehensive reviews of such reports are now required at least every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports will comply in all material respects with the published SEC rules and regulations, we could be required to modify or reformulate information contained in prior filings as a result of an SEC review. Any modification or reformulation of information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of our common stock.

 

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Item 2. Properties.

 

The Company leases 17,249 square feet of space located in Malvern, Pennsylvania for its principal executive office and for general administrative functions, sales activities, product development, and customer support. During April 2016, the Company entered into an amendment to the lease which provides that the Company will relocate from its present offices on the first floor of the building 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. When the New Offices are substantially completed, the Company would relocate from its current offices to the new offices (the “New Premises Commencement Date”). The Company’s monthly base rent for the Premises will increase from approximately $32 thousand to approximately $36 thousand on the New Office Commencement Date, and will increase each year thereafter up to a maximum monthly base rent of approximately $41 thousand. The amendment also provides that the term of the lease was extended from its then current expiration date of April 30, 2016 until seven years following the New Premises Commencement Date.

 

The Company also leases 11,250 square feet of space in Malvern, Pennsylvania for its product warehousing and shipping under a lease agreement which expires on February 28, 2019. As of June 30, 2016, the Company’s rent payment is approximately $5,000 per month.

 

As part of its acquisition of VendScreen, on January 15, 2016, the Company assumed the lease for approximately 9,319 square feet in Portland, Oregon which is being utilized for administrative functions and customer support. The lease expires on September 30, 2016, and as of June 30, 2016, the Company’s rent payment is approximately $19,900 per month.

 

Item 3. 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. On May 13, 2016, the plaintiff appealed the Court’s order to the United States Court of Appeals for the Third Circuit. On August 16, 2016, the plaintiff filed a Motion For Relief From Final Judgment with the District Court seeking an order modifying the District Court’s April 14, 2016, order dismissing the complaint, and permitting the plaintiff to now file an amended complaint due to alleged newly discovered evidence. By Order dated September 6, 2016, the District Court found that the Motion raised a substantial issue, and directed the plaintiff to notify the Court of Appeals thereof. On September 7, 2016, the plaintiff so notified the Court of Appeals. It is anticipated that the Court of Appeals will remand the case to the District Court pending the District Court’s ruling on the Motion. The Company’s response to the Motion is due by no later than September 15, 2016. The Company believes that the Motion has no merit and intends to vigorously oppose the Motion.

 

By letter dated December 7, 2015, a purported shareholder of the Company demanded that the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s current and former officers and directors for breach of fiduciary duties in connection with the material weakness in its internal controls over financial reporting which were more fully described in the Company’s Form 10-K for the fiscal year ended June 30, 2015 (the “2015 Form 10-K”). In response to the demand letter, the Board of Directors formed a special litigation committee (“the SLC”) consisting of Joel Brooks and William Reilly, Jr., in order to investigate and evaluate the demand letter. On June 1, 2016, and before the SLC had concluded its investigation, the purported shareholder filed a purported derivative action on behalf of the Company in the Chester County, Pennsylvania, Court of Common Pleas, against certain current and former officers and Directors. The complaint alleges that the defendants breached their fiduciary duties relating to the material weakness in internal controls reported in the 2015 Form 10-K. The complaint seeks unspecified damages against the defendants and certain equitable relief. On July 15, 2016 the SLC issued its report (the “SLC Report”) which, among other things, concluded that the none of the current or former officers or Directors had breached their fiduciary duties, that it was not in the best interests of the Company to pursue the pending shareholder derivative action, and that the Company request the Court to dismiss the action in its entirety. On August 1, 2016, the Board of Directors of the Company adopted all of the conclusions and recommendations set forth in the SLC Report. On August 16, 2016, the Company filed with the Court a motion to dismiss the shareholder derivative complaint. As of the date hereof, the court has not ruled on the motion to dismiss.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

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

 

The common stock of the Company trades on The NASDAQ Global Market under the symbol USAT. The high and low bid prices on The NASDAQ Global Market for the common stock were as follows:

 

Year ended June 30, 2016   High     Low  
First Quarter (through September 30, 2015)   $ 3.52     $ 1.70  
Second Quarter (through December 31, 2015)   $ 3.40     $ 2.18  
Third Quarter (through March 31, 2016)   $ 4.54     $ 2.69  
Fourth Quarter (through June 30, 2016)   $ 4.73     $ 3.50  

 

Year ended June 30, 2015     High       Low  
First Quarter (through September 30, 2014)   $ 2.45     $ 1.71  
Second Quarter (through December 31, 2014)   $ 1.87     $ 1.42  
Third Quarter (through March 31, 2015)   $ 2.76     $ 1.55  
Fourth Quarter (through June 30, 2015)   $ 3.36     $ 2.61  

 

On August 25, 2016, there were 589 record holders of the common stock and 290 record holders of the preferred stock.

 

The holders of the common stock are entitled to receive such dividends as the Board of Directors of the Company may from time to time declare out of funds legally available for payment of dividends. Through the date hereof, no cash dividends have been declared on the Company’s common stock or preferred stock. No dividend may be paid on the common stock until all accumulated and unpaid dividends on the preferred stock have been paid. As of August 25, 2016, such accumulated unpaid dividends amounted to $13.7 million. The preferred stock is also entitled to a liquidation preference over the common stock which as of June 30, 2016 equaled $18.1 million.

 

As of June 30, 2016, equity securities authorized for issuance by the Company with respect to compensation plans were as follows:

 

Plan category   Number of Securities
to be issued upon
exercise of outstanding
options and warrants
(a)
    Weighted average
exercise price of
outstanding options
and warrants
(b)
    Number of securities
remaining available for
future issuance
(excluding securities
reflected in column (a))
(c)
 
Equity compensation plans approved by security holders     610,140     $ 2.07       1,518,857 (1)
Equity compensation plans not approved by security holders     0       0       0  
TOTAL     610,140     $ 2.07       1,518,857  

 

(1) Represents (i) 1,250,000 shares of common stock issuable under the 2015 Equity Incentive Plan as approved by shareholders on June 18, 2015, (ii) 106,527 shares of common stock underlying stock options issuable under the 2014 Stock Option Incentive Plan as approved by shareholders on June 18, 2014, and (iii) 162,330 shares of common stock issuable under the Company’s 2013 Stock Incentive Plan as approved by shareholders on June 21, 2013 for use in compensating employees, officers and directors.

 

As of August 25, 2016, shares of common stock reserved for future issuance were as follows:

 

1,939,245 shares issuable upon the exercise of common stock warrants at exercise prices ranging from $2.10 to $5.00 per share
100,333 shares issuable upon the conversion of outstanding preferred stock and cumulative preferred stock dividends;
99,202 shares issuable under the 2013 Stock Incentive Plan;
716,667 shares underlying stock options issued or to be issued under the 2014 Stock Option Incentive Plan;
1,250,000 shares issuable under the 2015 Equity Incentive Plan;
140,000 shares issuable to our former CEO upon the occurrence of a USA Transaction.

 

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PERFORMANCE GRAPH

 

The following graph shows a comparison of the 5-year cumulative total shareholder return for our common stock with The NASDAQ Composite Index and the S&P 500 Information Technology Index in the United States. The graph assumes a $100 investment on June 30, 2011 in our common stock and in the NASDAQ Composite Index and the S&P 500 Information Technology Index, including reinvestment of dividends.

 

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN

 

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

 

 

Total Return For:   Jun-11     Jun-12     Jun-13     Jun-14     Jun-15     Jun-16  
                                     
USA Technologies, Inc.   $ 100     $ 65     $ 78     $ 95     $ 122     $ 192  
NASDAQ Composite   $ 100     $ 106     $ 123     $ 159     $ 180     $ 175  
S&P 500 Information Technology Index   $ 100     $ 112     $ 119     $ 154     $ 168     $ 174  

 

The information in the performance graph is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such a filing. The stock price performance included in this graph is not necessarily indicative of future stock price performance. 

 

Item 6. Selected Financial Data.

 

The following selected financial data for the five years ended June 30, 2016 are derived from the audited consolidated financial statements of USA Technologies, Inc. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.

 

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    As of and for the Year ended June 30  
($ in thousands, except per share data)   2016     2015     2014     2013     2012  
OPERATIONS DATA:                                        
                                         
Revenues   $ 77,408     $ 58,077     $ 42,345     $ 35,940     $ 29,017  
                                         
Operating income (loss)   $ (1,467 )   $ (240 )   $ 436     $ 714     $ (7,000 )
                                         
Net Income (loss) (1)   $ (6,806 )   $ (1,089 )   $ 27,531     $ 854     $ (5,211 )
                                         
Cumulative preferred dividends     (668 )     (668 )     (668 )     (668 )     (668 )
Net income (loss) applicable to common shares   $ (7,474 )   $ (1,757 )   $ 26,863     $ 186     $ (5,879 )
                                         
Net earnings (loss) per common share - basic and diluted   $ (0.21 )   $ (0.05 )   $ 0.77     $ 0.01     $ (0.18 )
                                         
Cash dividends per common share     -       -       -       -       -  
                                         
BALANCE SHEET DATA:                                        
                                         
Total assets   $ 84,833     $ 75,134     $ 70,717     $ 36,576     $ 33,220  
Long-term debt   $ 2,205     $ 2,332     $ 423     $ 370     $ 728  
Shareholders’ equity   $ 55,025     $ 53,311     $ 53,736     $ 23,378     $ 21,655  
                                         
CASH FLOW DATA:                                        
                                         
Net cash provided by (used in) operating activities   $ 6,468     $ (1,698 )   $ 7,085     $ 6,039     $ 78  
                                         
Net cash provided by (used in) investing activities     (5,772 )     3,354       (7,917 )     (9,181 )     (6,233 )
                                         
Net cash provided by (used in) financing activities     7,202       646       3,923       2,696       (410 )
                                         
Net increase (decrease) in cash and cash equivalents     7,898       2,302       3,091       (446 )     (6,565 )
                                         
Cash and cash equivalents at beginning of period     11,374       9,072       5,981       6,427       12,992  
                                         
Cash and cash equivalents at end of period   $ 19,272     $ 11,374     $ 9,072     $ 5,981     $ 6,427  
                                         
CONNECTIONS AND TRANSACTION DATA (UNAUDITED)                                        
                                         
Net New Connections #     96,000       67,000       52,000       50,000       45,000  
Total Connections #     429,000       333,000       266,000       214,000       164,000  
                                         
New Customers Added #     1,450       2,300       2,250       1,750       1,350  
Total Customers #     11,050       9,600       7,300       5,050       3,300  
                                         
Total Number of Transactions (millions)     315.8       216.6       168.5       129.1       102.7  
Transaction Volume ($millions) #   $ 584.4     $ 388.9     $ 293.8     $ 219.0     $ 171.3  

 

(1) Net income for the year ended June 30, 2014 includes an income tax benefit of $27.3 million for the reduction of tax valuation allowance.

 

  26  

 

 

The following unaudited quarterly financial operations data for the years ended June 30, 2016 and June 30, 2015 is derived from the audited consolidated financial statements of USA Technologies, Inc. and its interim reports for the quarters therein. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.

 

    UNAUDITED  
YEAR ENDED JUNE 30, 2016   First Quarter     Second Quarter     Third Quarter     Fourth Quarter     Year  
                               
Revenues   $ 16,600     $ 18,503     $ 20,361     $ 21,944     $ 77,408  
                                         
Gross profit   $ 5,047     $ 5,483     $ 5,672     $ 5,783     $ 21,985  
                                         
Operating income (loss)   $ 112     $ 594     $ (595 )   $ (1,578 )   $ (1,467 )
                                         
Net income (loss)   $ 360     $ (874 )   $ (5,420 )   $ (872 )   $ (6,806 )
                                         
Cumulative preferred dividends   $ (334 )   $ -     $ (334 )   $ -     $ (668 )
                                         
Net income (loss) applicable to common shares   $ 26     $ (874 )   $ (5,754 )   $ (872 )   $ (7,474 )
                                         
Net earnings (loss) per common share:                                        
Basic   $ 0.00     $ (0.02 )   $ (0.16 )   $ (0.02 )   $ (0.21 )
                                         
Diluted   $ 0.00     $ (0.02 )   $ (0.16 )   $ (0.02 )   $ (0.21 )
                                         
Weighted average number of common shares outstanding:                                        
Basic     35,848,395       35,909,933       36,161,626       37,325,681       36,309,047  
                                         
Diluted     36,487,879       35,909,933       36,161,626       37,325,681       36,309,047  

 

    UNAUDITED  
YEAR ENDED JUNE 30, 2015   First Quarter     Second Quarter     Third Quarter     Fourth Quarter     Year  
                               
Revenues   $ 12,253     $ 12,821     $ 15,358     $ 17,645     $ 58,077  
                                         
Gross profit   $ 3,135     $ 3,733     $ 5,146     $ 4,809     $ 16,823  
                                         
Operating income (loss)   $ (667 )   $ 51     $ 731     $ (355 )   $ (240 )
                                         
Net income (loss)   $ (61 )   $ (261 )   $ (567 )   $ (200 )   $ (1,089 )
                                         
Cumulative preferred dividends   $ (334 )   $ -     $ (334 )   $ -     $ (668 )
                                         
Net income (loss) applicable to common shares   $ (395 )   $ (261 )   $ (901 )   $ (200 )   $ (1,757 )
                                         
Net earnings (loss) per common share          
Basic   $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.01 )   $ (0.05 )
                                         
Diluted   $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.01 )   $ (0.05 )
                                         
Weighted average number of common shares outstanding:                              
Basic     35,651,732       35,716,848       35,747,979       35,761,370       35,719,211  
                                         
Diluted     35,651,732       35,716,848       35,747,979       36,206,934       35,719,211  

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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 games, and commercial laundry via either our ePort hardware or our Quick Connect 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 2016, we derived approximately 73% of our revenues from recurring license and transaction fees related to our ePort Connect service and approximately 27% 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.

 

CRITICAL ACCOUNTING POLICIES

 

Our 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 estimates 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. The Company concluded there was an impairment of its indefinite-lived trademarks as a result of its testing in its fiscal year 2016, and has recorded a $432 thousand impairment expense in the fourth quarter of the fiscal year ended June 30, 2016. This impairment expense reduced the carrying value of the trademarks to zero at June 30, 2016. There was no impairment expense recorded during the fiscal years ended June 30, 2015 and 2014.

 

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Patents, non-compete agreements, brand, developed technology and customer relationships, 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.

 

RESULTS OF OPERATIONS

 

FISCAL YEAR ENDED JUNE 30, 2016 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2015

 

Highlights of year over year improvements include:

 

· Record net new connections of 96,000;
· Total revenue up 33% to $77.4 million;
· Recurring license and transaction fee revenue up 30% to $56.6 million; and
· Improvements in cash flows from operating activities as a result of QuickStart reintroduced in the latter half of the prior fiscal year. The Company 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.

 

Revenues for the fiscal year ended June 30, 2016 were $77.4 million, consisting of $56.6 million of license and transactions fees and $20.8 million of equipment sales, compared to $58.0 million for the fiscal year ended June 30, 2015, consisting of $43.6 million of license and transaction fees and $14.4 million of equipment sales. The increase in total revenue from the prior year of $19.3 million, or 33%, was attributable to the 44% increase in equipment sales of $6.4 million and the 30% the increase in license and transaction fees of $13.0 million.

 

Revenue from license and transaction fees, which represented 73% of total revenue for fiscal year 2016, is primarily attributable to monthly ePort Connect® service fees and transaction processing fees. Highlights for fiscal year 2016 include:

 

Adding 96,000 net connections to our service, consisting of 110,000 new gross connections to our ePort Connect service in fiscal year 2016, offset by 11,000 deactivations from business churn and 3,000 attributable to a former customer against whom we have commenced litigation in order to seek to recover the amounts due to the Company from the former customer. The 96,000 net connections added compares to 67,000 net connections added in fiscal year 2015;
As of June 30, 2016, the Company had approximately 429,000 connections to the ePort Connect service compared to approximately 333,000 connections to the ePort Connect service as of June 30, 2015, an increase of 96,000 net connections or 29%;
Increases in the number of small-ticket, credit/debit transactions and dollars handled for fiscal year 2016 of 46% and 50%, respectively, compared to the same period a year ago; and
ePort Connect customer base grew 15% from June 30, 2015.

 

The increase in license and transaction fees was due to the growth in ePort Connect service fees and transaction dollars that stems from the increased number of connections to our ePort Connect service.

 

Pursuant to its agreements with customers, in addition to ePort Connect service fees, the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company. During the fiscal year ended June 30, 2016, the Company processed approximately 315.8 million transactions totaling approximately $584.4 million compared to approximately 216.6 million transactions totaling approximately $388.9 million during the fiscal year ended June 30, 2015, an increase of approximately 46% in the number of transactions and approximately 50% in the value of transactions processed.

 

New customers added to our ePort® Connect service during the fiscal year ended June 30, 2016 totaled 1,450, bringing the total number of customers to approximately 11,050 as of June 30, 2016. The Company added approximately 2,300 new customers in the year ended June 30, 2015. The Company had approximately 9,600 customers as of June 30, 2015, representing a 15% increase during the past twelve months. 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. We count a customer as a new customer upon the signing of their ePort Connect service agreement. When a reseller sells our ePort, we count a customer as a new customer upon the signing of the applicable services agreement with the customer.

 

The $6.4 million increase in equipment sales was primarily attributable to selling more units, versus renting units via the JumpStart program, during the current fiscal year due to the reintroduction of the QuickStart program in September 2014.

 

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Cost of sales consisted of cost of services for license and transaction fees of $38.1 million and $29.4 million and equipment costs of $17.3 million and $11.8 million for the fiscal years ended June 30, 2016 and 2015, respectively. The increase in total cost of sales of $14.2 million, or 34%, was partially due to an increase in cost of equipment sales of $5.5 million primarily due to selling more units during the period under the QuickStart program. There was also an increase in cost of services of $8.7 million that stemmed from the increase in transaction dollars processed by the greater number of connections to the Company’s ePort Connect service.

 

Gross profit (“GP”) for the fiscal year ended June 30, 2016 was $22.0 million compared to GP of $16.9 million for the previous fiscal year, an increase of $5.1 million, or 30%, of which $4.3 million is attributable to license and transaction fees GP and $0.9 million of equipment sales GP.

 

Overall gross margins declined from 29.0% in the 2015 fiscal year to 28.4% in the fiscal year ended June 30, 2016, composed of an increase in license and transaction fees’ margin to 32.7% from 32.6% in the prior fiscal year, and a decrease in equipment sales margin from 18.1% in the prior fiscal year to 16.7% in the fiscal year ended June 30, 2016.

 

Selling, general and administrative (“SG&A”) expenses of $22.4 million for the fiscal year ended June 30, 2016, increased by $5.9 million or 36%, from the prior fiscal year. SG&A expenses for the 2016 fiscal year reflects the following: $1.6 million of costs incurred in connection with the VendScreen acquisition and integration as well as operating expenses of the VendScreen business; bad debt expense of $1.5 million; $0.7 million of professional fees and expenses incurred in connection with management’s annual assessment of internal controls over financial reporting required under SOX 404; and $0.3 million of professional fees incurred in connection with the class action litigation and SLC investigation.

 

Other income and expense for the fiscal year ended June 30, 2016, primarily consisted of a $5.7 million non-cash charge for the change in the fair value of the Company’s warrant liabilities. The primary factor affecting the change in fair value is the increase in the Black-Scholes value of the warrants from June 30, 2015 to June 30, 2016, which factored in the increase in the Company’s stock price as well as a decrease in its volatility used for this calculation during that period.

 

The fiscal year ended June 30, 2016 resulted in net loss of $6.8 million compared to a net loss of $1.1 million for the fiscal year ended June 30, 2015. The net loss for the fiscal year reflected the $5.7 million non-cash charge for the change in the fair value of warrant liability described in the prior paragraph after preferred dividends of $0.7 million for each fiscal year, net loss applicable to common shareholders was $7.5 million and $1.8 million for the fiscal years ended 2016 and 2015, respectively. For the fiscal year ended June 30, 2016, net loss per common share (basic and diluted) was $0.21, compared to net loss per common share (basic and diluted) of $0.05 for the fiscal year ended June 30, 2015.

 

Non-GAAP net loss was $0.7 million for the fiscal year ended June 30, 2016 compared to non-GAAP net loss of $.5 million for fiscal year ended June 30, 2015.

 

  30  

 

 

A reconciliation of net loss to Non-GAAP net loss for the fiscal years ended June 30, 2016 and 2015 is as follows:

 

    Year ended  
    June 30,     June 30,  
($ in thousands)   2016     2015  
             
Net loss   $ (6,806 )   $ (1,089 )
Non-GAAP adjustments:                
Non-cash portion of income tax provision     (579 )     226  
Fair value of warrant adjustment     5,674       393  
VendScreen non-recurring charges     842       -  
Litigation related professional fees     156       -  
Non-GAAP net loss   $ (713 )   $ (470 )
                 
Net loss   $ (6,806 )   $ (1,089 )
Cumulative preferred dividends     (668 )     (668 )
Net loss applicable to common shares   $ (7,474 )   $ (1,757 )
                 
Non-GAAP net loss   $ (713 )   $ (470 )
Cumulative preferred dividends     (668 )     (668 )
Non-GAAP net loss applicable to common shares   $ (1,381 )   $ (1,138 )
                 
Net loss per common share - basic and diluted   $ (0.21 )   $ (0.05 )
Non-GAAP net loss per common share - basic and diluted   $ (0.04 )   $ (0.03 )
Basic and diluted weighted average number of common shares outstanding     36,309,047       35,719,211  

 

 

As used herein, non-GAAP net income (loss) represents GAAP (Generally Accepted Accounting Principles) 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 fees and charges that were incurred in connection with the acquisition and integration of the VendScreen business, and professional fees incurred in connection with the class action litigation and the SLC investigation. 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. Management believes that non-GAAP net income (loss) is an important measure of USAT’s business. Non-GAAP net income (loss) is a non-GAAP financial measure which is not required by or defined under GAAP. 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 share 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 this non-GAAP financial measure serves as a useful metric 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 (loss) as a metric in its executive officer and management incentive compensation plans.

 

  31  

 

 

For the fiscal year ended June 30, 2016, the Company had Adjusted EBITDA of $6.0 million. Reconciliation of net income (loss) to Adjusted EBITDA for the fiscal years ended June 30, 2016 and 2015 is as follows:

 

    Year ended  
    June 30,     June 30,  
($ in thousands)   2016     2015  
Net loss   $ (6,806 )   $ (1,089 )
                 
Less interest income     (320 )     (83 )
Plus interest expenses     600       302  
(Less) plus income tax provision     (615 )     289  
Plus depreciation expense     5,135       5,731  
Plus amortization expense     87       -  
EBITDA     (1,919 )     5,150  
Plus change in fair value of warrant liabilities     5,674       393  
Plus stock-based compensation     849       716  
Plus intangible asset impairment     432       -  
Plus VendScreen non-recurring charges     842       -  
Plus Litigation related professional fees     105       -  
Adjustments to EBITDA     7,901       1,109  
Adjusted  EBITDA   $ 5,983     $ 6,259  

 

As used herein, Adjusted EBITDA represents net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, non-recurring fees and charges that were incurred in connection with the acquisition and integration of the VendScreen business, professional fees incurred in connection with the class action litigation incurred during the third quarter of the fiscal year, impairment charges related to our EnergyMiser asset trademarks, and 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 comparison of the financial results to historical operations. We have excluded the professional fees incurred in connection with the class action litigation as well as the trademark impairment charges because we believe that 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 or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, the Company utilizes Adjusted EBTIDA as a metric in its executive officer and management incentive compensation plans.

 

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FISCAL YEAR ENDED JUNE 30, 2015 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2014

 

Results for the fiscal year ended June 30, 2015 continued to demonstrate growth toward achieving our long-term goals. Highlights of year over year improvements include:

 

· Record net new connections of 67,000;
· Total revenue up 37% to $58.1 million;
· Recurring license and transaction fee revenue up 22% to $43.6 million; and
· Improvements in cash flows from operating activities in third and fourth quarters, as a result of QuickStart reintroduced during the fiscal year.

 

Revenues for the fiscal year ended June 30, 2015 were $58.1 million, consisting of $43.6 million of license and transactions fees and $14.4 million of equipment sales, compared to $42.3 million for the fiscal year ended June 30, 2014, consisting of $35.6 million of license and transaction fees and $6.7 million of equipment sales. The increase in total revenue of $15.7 million, or 37%, was equally attributable to the increase in equipment sales of $7.7 million or 115% and the increase in license and transaction fees of $8.0 million, or 22%, from the prior year.

 

Revenue from license and transaction fees, which represented 75% of total revenue for fiscal 2015, is primarily attributable to monthly ePort Connect® service fees and transaction processing fees. Highlights for fiscal 2015 include:

 

Adding 67,000 net connections to our service, consisting of 82,000 new connections to our ePort Connect service in fiscal 2015, offset by 15,000 deactivations, compared to 52,000 net connections added in fiscal 2014;
As of June 30, 2015, the Company had approximately 333,000 connections to the ePort Connect service compared to approximately 266,000 connections to the ePort Connect service as of June 30, 2014, an increase of 67,000 net connections or 25%;
Increases in the number of small-ticket, credit/debit transactions and dollars handled for fiscal 2015 of 29% and 32%, respectively, compared to the same period a year ago; and
ePort Connect customer base grew 32% from June 30, 2014.

 

The increase in license and transaction fees was due to the growth in ePort Connect service fees and transaction dollars that stems from the increased number of connections to our ePort Connect service.

 

Pursuant to its agreements with customers, in addition to ePort Connect service fees, the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company. During the year ended June 30, 2015, the Company processed approximately 216.6 million transactions totaling approximately $388.9 million compared to approximately 168.5 million transactions totaling approximately $293.8 million during the year ended June 30, 2014, an increase of approximately 29% in the number of transactions and approximately 32% in the value of transactions processed.

 

New customers added to our ePort® Connect service during the fiscal year ended June 30, 2015 totaled 2,300, bringing the total number of customers to approximately 9,600 as of June 30, 2015. The Company added approximately 2,250 new customers in the year ended June 30, 2014. By comparison, the Company had approximately 7,300 customers as of June 30, 2014, representing a 32% increase during the past twelve months. 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. We count a customer as a new customer upon the signing of their ePort Connect service agreement. When a reseller sells our ePort, we count a customer as a new customer upon the signing of the applicable services agreement with the customer.

 

The $7.7 million increase in equipment sales was a result of an increase of approximately $8.1 million related to ePort® products, offset by decreases of approximately $0.4 million in Energy Miser products. The increase in ePort products is directly attributable to selling more units, versus renting units via the JumpStart program, during the current fiscal year due to the reintroduction of the QuickStart program in September 2014. The decrease in Energy Miser products is directly attributable to selling fewer units during the current fiscal year.

 

Cost of sales consisted of cost of services for license and transaction fees of $29.4 million and $23.0 million and equipment costs of $11.8 million and $4.3 million, for the years ended June 30, 2015 and 2014, respectively. The increase in total cost of sales of $14.0 million, or 51%, was due to an increase in cost of equipment sales of $7.6 million due to selling more units during the period under the QuickStart program. In fiscal 2014, the JumpStart program accounted for a significant percentage of the Company’s net new connections. Under this program, the cost of the device is depreciated to cost of services for license and transaction fees over the expected rental period. There was also an increase in cost of services of $6.4 million that stemmed from the greater number of connections to the Company’s ePort Connect service and increases in transaction dollars processed by those connections.

 

Gross profit (“GP”) for the year ended June 30, 2015 was $16.8 million compared to GP of $15.1 million for the previous fiscal year, an increase of $1.7 million, or 12%, of which $14.2 million is attributable to license and transaction fees GP and $2.6 million of equipment sales GP. Overall gross profit margins decreased from 36% to 29% due to a decrease in license and transaction fees margins to 33%, from 35% in the prior fiscal year and by a decrease in equipment sales margins to 18%, from 37% in the prior fiscal year.

 

License and transaction fees margins decreased due to the impact of certain JumpStart connections added during the third and fourth quarters of 2014 fiscal year with fee grace periods extending into fiscal year 2015 under sales incentives, as well as approximately $1.7 million of net rent expense during the year ended June 30, 2015 related to the Sale Leaseback transactions, which is approximately $0.5 million higher than the depreciation the Company would have recorded on the ePorts during the same period had the Sale Leaseback transactions not occurred. Also contributing to the decrease of license and transaction fee margins was a charge of approximately $0.4 million in connection with a customer billing dispute.

 

  33  

 

 

The decrease in equipment revenue margins is attributable to sales under the QuickStart program, which has generally lower margins than what is recognized under a rental, or JumpStart. In addition, there were approximately $0.9 million less in activation fees recorded during fiscal 2015 versus fiscal 2014, which are a higher margin revenue source, and to date have not been part of the QuickStart program.

 

The $0.2 million increase in equipment sales GP includes one-time recoveries of $0.7 million and $0.2 million in the years ended June 30, 2015 and 2014, respectively. The $0.7 million relates to recoveries arising from a customer agreement; and, the $0.2 million was a reversal of a prior charge for equipment rebates. Excluding these one-time items, equipment sales GP decreased $0.4 million from the prior year, which was mostly attributable to having $0.9 million less GP from ePort activation fees, which are a higher margin revenue source and which to date are not part of the QuickStart Program and $0.2 million less GP related to fewer energy miser offset by a higher dollar volume of gross profit from the large increase in equipment revenue dollars as compared to a year ago.

 

Selling, general and administrative (“SG&A”) expenses of $16.5 million for the fiscal year ended June 30, 2015, increased by $2.4 million or 17%, from the prior fiscal year. Approximately $1.1 million, or 47% of the increase, were non-cash expenses. The overall increase in SG&A is attributable to increases of approximately $1.1 million in bad debt estimates, $0.6 million in employee and director compensation and benefits expenses, $0.6 million in consulting and professional services, and by a net increase of $0.2 million for various other expenses.

 

Other income and expense for the year ended June 30, 2015, primarily consisted of a $0.4 million non-cash charge for the change in the fair value of the Company’s warrant liabilities. The primary factor affecting the change in fair value is the increase in the Black-Scholes value of the warrants from June 30, 2014 to June 30, 2015, which factored in the increase in the Company’s stock price as well as a decrease in its volatility used for this calculation during that period.

 

The fiscal year ended June 30, 2015 resulted in net loss of $1.1 million compared to net income of $27.5 million for the fiscal year ended June 30, 2014. Included in net income for the fiscal year ended June 30, 2014 is a benefit from a reduction in income tax valuation allowances of $26.7 million. After preferred dividends of $0.7 million for each fiscal year, net (loss)/income applicable to common shareholders was ($1.8 million) and $26.9 million for the fiscal years ended 2015 and 2014, respectively. For the fiscal year ended June 30, 2015, net loss per common share (basic and diluted) was $0.05, compared to net earnings per common share (basic and diluted) of $0.78.

 

Non-GAAP net loss was $0.5 million for the year ended June 30, 2015, compared to non-GAAP net income of $0.2 million for the year ended June 30, 2014. Management believes that non-GAAP net income is an important measure of USAT’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 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 (United States’ Generally Accepted Accounting Principles) financial measures and our reconciliations, enhance investors’ overall understanding of our current and future financial performance.

 

  34  

 

 

A reconciliation of net income to Non-GAAP net income for the years ended June 30, 2015 and 2014 is as follows:

 

Reconciliation of Net Income (Loss) to Non-GAAP Net Income (Loss) and Net Earnings (Loss) Per Common

 

Share - Basic and Diluted to Non-GAAP Net Earnings (Loss) Per Common Share - Basic and Diluted

 

    Year ended  
    June 30,     June 30,  
($ in thousands)   2015     2014  
             
Net income (loss)   $ (1,089 )   $ 27,531  
Non-GAAP adjustments:                
Non-cash portion of income tax provision     226       (27,277 )
Fair value of warrant adjustment     393       (66 )
Non-GAAP net income (loss)   $ (470 )   $ 188  
                 
Net income (loss)   $ (1,089 )   $ 27,531  
Cumulative preferred dividends     (668 )     (668 )
Net loss applicable to common shares   $ (1,757 )   $ 26,863  
                 
Non-GAAP net income (loss)   $ (470 )   $ 188  
Cumulative preferred dividends     (668 )     (668 )
Non-GAAP net income (loss) applicable to common shares   $ (1,138 )   $ (480 )
                 
Net earnings (loss) per common share - basic   $ (0.05 )   $ 0.77  
                 
Net earnings (loss) per common share - diluted   $ (0.05 )   $ 0.77  
                 
Non-GAAP net earnings (loss) per common share - basic   $ (0.03 )   $ (0.01 )
                 
Non-GAAP net earnings (loss) per common share - diluted   $ (0.03 )   $ (0.01 )
                 
Basic weighted average number of common shares outstanding     35,719,211       34,667,769  
                 
Diluted weighted average number of common shares outstanding     35,719,211       35,009,559  

 

(1) Net income for the year ended June 30, 2014 includes an income tax benefit of $27.3 million for the reduction on tax valuation allowances.

 

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-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.

 

For the fiscal year ended June 30, 2015, the Company had Adjusted EBITDA of $6.3 million. Reconciliation of net income (loss) to Adjusted EBITDA for the years ended June 30, 2015 and 2014 is as follows:

 

    For year ended  
    June 30,     June 30,  
($ in thousands)   2015     2014  
Net loss   $ (1,089 )   $ 27,531  
                 
Less interest income     (83 )     (30 )
Plus interest expenses     302       257  
(Less) plus income tax provision     289       (27,255 )
Plus depreciation expense     5,731       5,464  
Plus amortization expense     -       22  
EBITDA     5,150       5,989  
Less change in fair value of warrant liabilities     393       (66 )
Plus stock-based compensation     716       529  
Adjustments to EBITDA     1,109       463  
Adjusted  EBITDA   $ 6,259     $ 6,452  

 

  35  

 

 

As used herein, Adjusted EBITDA represents net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, 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. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for changes in fair value of warrant liabilities and stock-based compensation expense.

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the year ended June 30, 2016, net cash provided by operating activities was $6.5 million. The foregoing reflects a net benefit for non-cash operating activities of $12.0 million, and net cash provided by the change in various operating assets and liabilities of $1.3 million. Of the $12.0 million of non-cash activities, $5.1 million related to depreciation expense, of which, $4.5 million related to depreciation on JumpStart equipment allocated to cost of services. In addition to depreciation expense, other major non-cash charges included $1.5 million of bad debt expense and $5.7 million expense due to the increase in the fair value of warrant liabilities.

 

During the fiscal year ended June 30, 2015, the Company reintroduced QuickStart, a program whereby our customers are able to purchase our ePort hardware via a five-year, non-cancellable lease. From its introduction in September 2014 and through approximately mid-March 2015, the Company was entering into these leases directly with its customers. Under this scenario, the Company recorded a long-term and short-term receivable for the 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 an accounts receivable for the balances due from the leasing companies. Unlike its finance receivables, where the cash 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 increases cash flow needed for investing activities and improves cash flows from operations. The Company previously financed its customer's acquisition of ePort equipment primarily though the JumpStart 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. During the fiscal year ended June 30, 2016, the majority of QuickStart sales consummated were with the customer entering into the lease directly with a third party leasing company. During the 2016 fiscal year, 91% of our gross connections consisted of QuickStart and sales under normal receivable terms and 9% of our gross connections consisted of JumpStart units.

 

By contrast, during the 2014 fiscal year, JumpStart units accounted for 60% of our gross connections. The increased use by our customers of the QuickStart program, with third party leasing, significantly improves cash flows from operating activities. We believe we will continue to be able to utilize third party leasing companies in our QuickStart program, which will increase our cash flow. However, some customers may be unable to secure third party leasing, and in those cases the Company would enter into a lease directly with the customer which would result in an increase in finance receivables. Accordingly, with the continued success of the QuickStart third-party leasing program, the Company should continue to generate positive cash flow from operations.

 

During the fiscal year ended June 30, 2016, $5.8 million of cash was used by investing activities of which $5.6 million was the cash paid for the assets acquired from VendScreen during the third quarter.

 

Net cash provided by financing activities was $7.2 million, generated predominantly by $4.9 million from the exercise of common stock warrants and $2.5 million net borrowings under the line of credit. During the fiscal year, the Company increased the aggregate amount available to it under its working capital line of credit from $7.5 million to $12 million.

 

During the 2016 and 2015 fiscal years, the Company's net increase in cash was $7.9 million and $2.3 million, respectively. The Company has the following primary sources of capital available: (1) cash and cash equivalents on hand of $19.3 million as of June 30, 2016; (2) the anticipated cash to be provided by operating activities including our QuickStart program; (3) $4.8 million available as of June 30, 2016 under the line of credit provided we continue to satisfy the various covenants set forth in the loan agreement, including the requirement to meet minimum quarterly adjusted EBITDA, as defined in the loan agreement; (4) proceeds of $6.2 million from the potential exercise of warrants outstanding as of June 30, 2016 which expire on September 18, 2016; and (5) sales to a third party lender of all or a portion of our finance receivables.

 

Therefore, the Company believes its existing cash and cash equivalents and available cash resources described above, would provide sufficient capital resources to operate its anticipated business, including payment of its accrued expenses and payables, any cash resources to be utilized for the JumpStart program, other anticipated capital expenditures, and the repayment of long-term debt over the next 12 months. Although the existing working capital line of credit matures in March 2017, the Company anticipates that the line of credit would be renewed or could be refinanced with another lending institution. 

 

  36  

 

 

CONTRACTUAL OBLIGATIONS

 

As of June 30, 2016, the Company had certain contractual obligations due over a period of time as summarized in the following table:

 

    Payments due by period  
          Less Than                 More than  
Contractual Obligations   Total     1 year     1-3 years     3-5 years     5 years  
Long-Term Debt Obligations   $ 1,906     $ 509     $ 1,392     $ 5     $ -  
Capital Lease Obligations     677       299       378       -       -  
Operating Lease Obligations, other     3,443       552       1,460       1,431       -  
Operating Lease Obligations under Sale Leaseback     2,779       2,641       138       -       -  
Total   $ 8,805     $ 4,001     $ 3,368     $ 1,436     $ -  

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

  37  

 

 

Item 8. Financial Statements and Supplementary Data.

 

USA TECHNOLOGIES, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Financial Statements:    
     
Report of Independent Registered Public Accounting Firm   F-1
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting   F-1
Consolidated Balance Sheets   F-2
Consolidated Statements of Operations   F-3
Consolidated Statements of Shareholders’ Equity   F-4
Consolidated Statements of Cash Flows   F-5
Notes to Consolidated Financial Statements   F-6

 

  38  

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders

USA Technologies, Inc.

 

 

We have audited the accompanying consolidated balance sheets of USA Technologies, Inc. and subsidiaries as of June 30, 2016 and 2015, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2016. Our audits also included the financial statement schedule of USA Technologies, Inc. and subsidiaries listed in Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USA Technologies, Inc. and subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), USA Technologies, Inc. and subsidiaries’ internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated September 13, 2016, expressed an opinion that USA Technologies, Inc. and subsidiaries had not maintained effective internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

  

/s/ RSM US LLP

New York, NY

September 13, 2016

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders

USA Technologies, Inc.

 

 

We have audited USA Technologies, Inc. and subsidiaries' internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. USA Technologies, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment. Management identified control deficiencias, including significant deficiencies, in the design or operating effectiveness of the Company’s internal control over financial reporting, which when aggregated, represent a material weakness in internal control. The significant deficiencies included that the operation of an existing control did not result in timely resolution of account receivable aging issues; the design of certain internal controls allowed for errors or omissions in the accrual process; and one operational control that did not identify certain merchant receivables as one of the critical accounts to be audited on a monthly basis. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 financial statements, and this report does not affect our report dated September 13, 2016 on those financial statements.

 

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, USA Technologies, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of USA Technologies, Inc. and subsidiaries as of June 30, 2016 and 2015, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2016 and our report dated September 13, 2016 expressed an unqualified opinion.

 

/s/ RSM US LLP

 

New York, NY

September 13, 2016

 

F- 1

 

 

USA Technologies, Inc.

Consolidated Balance Sheets

 

    June 30,     June 30,  
($ in thousands, except shares)   2016     2015  
             
             
Assets                
Current assets:                
Cash   $ 19,272     $ 11,374  
Accounts receivable, less allowance for doubtful accounts of $2,814 and $1,309, respectively     4,899       5,971  
Finance receivables     3,588       941  
Inventory, net     2,031       4,216  
Prepaid expenses and other current assets     987       574  
Deferred income taxes     2,271       1,258  
Total current assets     33,048       24,334  
                 
Finance receivables, less current portion     3,718       3,698  
Other assets     348       350  
Property and equipment, net     9,765       12,869  
Deferred income taxes     25,453       25,788  
Intangibles, net     798       432  
Goodwill     11,703       7,663  
                 
Total assets   $ 84,833     $ 75,134  
                 
Liabilities and shareholders’ equity                
Current liabilities:                
Accounts payable   $ 12,354     $ 10,542  
Accrued expenses     3,458       2,108  
Line of credit, net     7,119       4,000  
Current obligations under long-term debt     629       478  
Income taxes payable     18       54  
Warrant liabilities     3,739       -  
Deferred gain from sale-leaseback transactions     860       860  
Total current liabilities     28,177       18,042  
                 
Long-term liabilities:                
Long-term debt, less current portion     1,576       1,854  
Accrued expenses, less current portion     15       49  
Warrant liabilities, less current portion     -       978  
Deferred gain from sale-leaseback transactions, less current portion     40       900  
Total long-term liabilities     1,631       3,781  
                 
Total liabilities     29,808       21,823  
                 
Commitments and contingencies (Note 18)                
                 
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- 37,783,444 and 35,763,663, respectively     233,394       224,874  
Accumulated deficit     (181,507 )     (174,701 )
                 
Total shareholders’ equity     55,025       53,311  
                 
Total liabilities and shareholders’ equity   $ 84,833     $ 75,134  

 

See accompanying notes.

 

F- 2

 

 

USA Technologies, Inc.

Consolidated Statements of Operations

 

    Year ended June 30,  
($ in thousands, except shares and per share data)   2016     2015     2014  
                   
Revenues:                        
License and transaction fees   $ 56,589     $ 43,633     $ 35,638  
Equipment sales     20,819       14,444       6,707  
Total revenues     77,408       58,077       42,345  
                         
Cost of services     38,089       29,429       23,018  
Cost of equipment     17,334       11,825       4,254  
Total cost of sales     55,423       41,254       27,272  
Gross profit     21,985       16,823       15,073  
                         
Operating expenses:                        
Selling, general and administrative     22,373       16,451       14,036  
Depreciation and amortization     647       612       600  
Impairment of intangible asset     432       -       -  
Total operating expenses     23,452       17,063       14,636  
Operating income (loss)     (1,467 )     (240 )     437  
                         
Other income (expense):                        
Interest income     320       83       30  
Other income     -       52       -  
Interest expense     (600 )     (302 )     (257 )
Change in fair value of warrant liabilities     (5,674 )     (393 )     66  
Total other income (expense), net     (5,954 )     (560 )     (161 )
                         
Income (loss) before benefit (provision) for income taxes     (7,421 )     (800 )     276  
Benefit (provision) for income taxes     615       (289 )     27,255  
                         
Net income (loss)     (6,806 )     (1,089 )     27,531  
Cumulative preferred dividends     (668 )     (668 )     (668 )
Net income (loss) applicable to common shares   $ (7,474 )   $ (1,757 )   $ 26,863  
Net earnings (loss) per common share - basic   $ (0.21 )   $ (0.05 )   $ 0.77  
Net earnings (loss) per common share - diluted   $ (0.21 )   $ (0.05 )   $ 0.77  
                         
Basic weighted average number of common shares outstanding     36,309,047       35,719,211       34,667,769  
Diluted weighted average number of common shares outstanding     36,309,047       35,719,211       35,009,559  

 

See accompanying notes.

 

F- 3

 

 

USA Technologies, Inc.

Consolidated Statements of Shareholders’ Equity

 

    Series A                          
    Convertible                          
    Preferred Stock     Common Stock     Accumulated        
($ in thousands, except shares)   Shares     Amount     Shares     Amount     Deficit     Total  
                                     
Balance, June 30, 2013 As Reported     442,968     $ 3,138       33,284,232     $ 221,383     $ (201,143 )   $ 23,378  
                                                 
Cumulative impact of prior period revisions (See Note 19 of the Notes to Consolidated Financial Statements)       2,095       -       62,661       -       -       -  
Balance, June 30, 2013     445,063     $ 3,138       33,346,893     $ 221,383     $ (201,143 )   $ 23,378  
                                                 
Exercise of warrants     -       -       2,090,226       2,362       -       2,362  
Stock based compensation                                                
2010 Stock Incentive Plan     -       -       3,334       6       -       6  
2011 Stock Incentive Plan     -       -       -       17       -       17  
2012 Stock Incentive Plan     -       -       158,505       279       -       279  
2013 Stock Incentive Plan     -       -       55,810       227       -       227  
Retirement of common stock     -       -       (52,645 )     (89 )     -       (89 )
Excess tax benefits from share-based compensation     -       -       -       25       -       25  
Net income     -       -       -       -       27,531       27,531  
                                                 
Balance, June 30, 2014     445,063     3,138       35,602,123     224,210     (173,612 )   53,736  
                                                 
Stock based compensation                                                
2011 Stock Incentive Plan     -       -       -       1       -       1  
2012 Stock Incentive Plan     -       -       33,698       52       -       52  
2013 Stock Incentive Plan     -       -       159,741       293       -       293  
2014 Stock Option Incentive Plan     -       -       -       370       -       370  
Retirement of common stock     -       -       (31,899 )     (62 )     -       (62 )
Excess tax benefits from share-based compensation     -       -       -       10       -       10  
Net loss     -       -       -       -       (1,089 )     (1,089 )
                                                 
Balance, June 30, 2015     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 warranty liability upon exercise of warrants                     -       2,914               2,914  
Exercise of warrants     -       -       1,887,325       4,918       -       4,918  
Stock based compensation                                                
2013 Stock Incentive Plan     -       -       172,207       513       -       513  
2014 Stock Option Incentive Plan     -       -       12,785       336       -       336  
Retirement of common stock     -       -       (52,536 )     (213 )     -       (213 )
Net loss     -       -       -       -       (6,806 )     (6,806 )
                                      -          
Balance, June 30, 2016     445,063     $ 3,138       37,783,444     $ 233,394     $ (181,507 )   $ 55,025  

 

See accompanying notes.

 

F- 4

 

 

USA Technologies, Inc. 

Consolidated Statements of Cash Flows

 

($ in thousands, except shares)   Year ended June 30,  
    2016     2015     2014  
OPERATING ACTIVITIES:                        
Net income (loss)   $ (6,806 )   $ (1,089 )   $ 27,531  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                        
Charges incurred in connection with the vesting and issuance of common stock for employee and director compensation     849       716       529  
(Gain) loss on disposal of property and equipment     (167 )     (17 )     4  
Non-cash interest and amortization of debt discount     13       -       2  
Bad debt expense     1,450       1,098       134  
Depreciation     5,135       5,731       5,464  
Amortization     87       -       22  
Impairment of intangible asset     432       -       -  
Change in fair value of warrant liabilities     5,674       393       (66 )
Deferred income taxes, net     (660 )     215       (27,301 )
Gain on sale of finance receivables     -       (52 )     -  
Recognition of deferred gain from sale-leaseback transactions     (860 )     (834 )     (10 )
Changes in operating assets and liabilities:                        
Accounts receivable     (375 )     (2,539 )     (204 )
Finance receivables     (2,040 )     (4,114 )     53  
Inventory     1,036       (1,931 )     370  
Prepaid expenses and other current assets     (763 )     (304 )     (191 )
Accounts payable     1,814       941       460  
Accrued expenses     1,266       55       267  
Income taxes payable     383       33       21  
                         
Net cash provided by (used in) operating activities     6,468       (1,698 )     7,085  
                         
INVESTING ACTIVITIES:                        
Purchase and additions of property and equipment     (536 )     (60 )     (111 )
Purchase of property for rental program     -       (1,642 )     (10,883 )
Proceeds from sale of rental equipment under sale-leaseback transactions     -       4,994       2,995  
Proceeds from sale of property and equipment     389       62       82  
Cash paid for assets acquired from VendScreen     (5,625 )     -       -  
                         
Net cash provided by (used in) investing activities     (5,772 )     3,354       (7,917 )
                         
FINANCING ACTIVITIES:                        
Cash used in retirement of common stock     (213 )     (62 )     (89 )
Proceeds from exercise of common stock warrants     4,918       -       2,362  
Proceeds from line of credit     7,163       -       2,000  
Repayment of line of credit     (3,992 )     (1,000 )     -  
Repayment of long-term debt     (674 )     (359 )     (375 )
Proceeds from long-term debt     -       2,057       -  
Excess tax benefits from share-based compensation     -       10       25  
                         
Net cash provided by financing activities     7,202       646       3,923  
                         
Net increase in cash     7,898       2,302       3,091  
Cash and cash equivalents at beginning of year     11,374       9,072       5,981  
Cash at end of year   $ 19,272     $ 11,374     $ 9,072  
                         
Supplemental disclosures of cash flow information:                        
Interest paid in cash   $ 551     $ 306     $ 260  
Income taxes paid in cash   $ 501     $ 31     $ -  
Depreciation expense allocated to cost of services   $ 4,575     $ 5,120     $ 4,881  
Reclass of rental program property to inventory, net   $ 1,150     $ 674     $ 33  
Prepaid items financed with debt   $ 103     $ 103     $ 102  
Warrant issuance for debt discount   $ 52     $ -     $ -  
Debt financing costs financed with debt   $ 79     $ -     $ -  
Equipment and software acquired under capital lease   $ 444     $ 108     $ 325  
Disposal of property and equipment   $ 1,081     $ 842     $ 710  
Disposal of property and equipment under sale-leaseback transactions   $ -     $ 3,873     $ 1,919  

 

See accompanying notes.

 

F- 5

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

1. BUSINESS

 

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

 

2. ACCOUNTING POLICIES

 

CONSOLIDATION

 

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

 

USE OF ESTIMATES

 

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

 

CASH

 

The Company maintains its cash in bank deposit accounts, which may exceed federally insured limits at times.

 

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL 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 doubtful accounts receivable is management’s best estimate as of the respective reporting date. The Company writes off accounts receivable against the allowance when management determines the balance is uncollectible and the Company ceases collection efforts. Management believes that the allowance recorded is adequate to provide for its estimated credit losses.

 

F- 6

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

2. ACCOUNTING POLICIES (CONTINUED)

 

FINANCE RECEIVABLES

 

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

 

INVENTORY, Net

 

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

 

PROPERTY AND EQUIPMENT, Net

 

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

 

GOODWILL AND INTANGIBLE ASSETS

 

The Company’s intangible assets include goodwill, 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-life 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. The Company concluded there was no impairment of trademarks during the fiscal years ended June 30, 2015 and 2014, respectively. During the fourth quarter of the fiscal year ended June 30, 2016, the fair value of the trademarks were determined to have inconsequential value based on the “relief from royalty” methodology. This assessment resulted in an impairment write-down during the fourth fiscal quarter of $432 thousand, which is included in “Impairment of intangible asset” in the Consolidated Statement of Operations for the fiscal year ended June 30, 2016. (See Note 7 Goodwill and Intangible Assets for details.)

 

F- 7

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

2. ACCOUNTING POLICIES (CONTINUED)

 

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 has concluded there has been no impairment of goodwill during the fiscal years ended June 30, 2016, 2015 and 2014, respectively.

 

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. The Company has concluded that the carrying amount of definite lived long-lived assets is recoverable as of June 30, 2016 and 2015.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Financial Accounting Standards Board (“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).

 

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 approximate their carrying value as such instruments are at market rates currently available to the Company.

 

CONCENTRATION OF RISK

 

Financial instruments that subject the Company to a concentration of credit risk consist principally of cash and accounts and finance receivables. The Company maintains cash with various financial institutions where accounts may exceed federally insured limits at times. Approximately 18%, 35% and 22% of the Company’s trade accounts and finance receivables at June 30, 2016, 2015 and 2014, respectively, were concentrated with one customer.

 

F- 8

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

2. ACCOUNTING POLICIES (CONTINUED)

 

Concentration of revenues with customers subject the Company to operating risks. Approximately 16%, 21% and 26% of the Company’s license and transaction processing revenues for the years ended June 30, 2016, 2015 and 2014, respectively, were concentrated with one customer. Approximately 28% and 17% of the Company’s equipment sales revenue were concentrated with one customer for the years ended June 30, 2016 and 2015, respectively, with no concentrations for the year ended June 30, 2014. The Company’s customers are principally located in the United States. 

 

REVENUE RECOGNITION

 

Revenue from the sale or QuickStart lease of equipment is recognized on the terms of free-on-board shipping point. Activation fee revenue, if applicable, is recognized when the Company’s cashless payment device is initially activated for use on the Company network. Transaction processing revenue is recognized upon the usage of the Company’s cashless payment and control network. License fees for access to the Company’s devices and network services are recognized on a monthly basis. In all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company estimates an allowance for product returns at the date of sale and license and transaction fee refunds on a monthly basis.

 

ePort hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party leasing company for the devices. The Company qualifies for sales type lease accounting. Accordingly, the company recognizes a portion of lease payments as interest income. At the end of the lease period, the customer would have the option to purchase the device at its residual value.

 

EQUIPMENT RENTAL  

 

The Company offers its customers a rental program for its ePort devices, the JumpStart program (“JumpStart”). JumpStart terms are typically 36 months and are cancellable with thirty to sixty days’ written notice. In accordance with ASC 840, “Leases”, the Company classifies the rental agreements as operating leases, with service fee revenue related to the leases included in license and transaction fees in the Consolidated Statements of Operations. Cost for the JumpStart revenues, which consists of depreciation expense on the JumpStart equipment, is included in cost of services in the Consolidated Statements of Operations. ePort equipment utilized by the JumpStart program is included in property and equipment, net on the Consolidated Balance Sheet.

 

WARRANTY COSTS

 

The Company generally warrants its products for one to three years. Warranty costs are estimated and recorded at the time of sale based on historical warranty experience, if available. These costs are reviewed and adjusted, if necessary, periodically throughout the year.

 

SHIPPING AND HANDLING

 

Shipping and handling fees billed to our customers in connection with sales are recorded as revenue. The costs incurred for shipping and handling of our product are recorded as cost of equipment.

 

ADVERTISING

 

Advertising costs are expensed as incurred. Advertising expense was $0.3 million, $0.2 million, and $0.2 million in the fiscal years ended June 30, 2016, 2015, and 2014, respectively.

 

RESEARCH AND DEVELOPMENT EXPENSES

 

Research and development expenses are expensed as incurred. Research and development expenses, which are included in selling, general and administrative expenses in the Consolidated Statements of Operations, were approximately $1.4 million, $1.5 million and $1.0 million, for the years ended June 30, 2016, 2015, and 2014, respectively. Our research and development initiatives focus on adding features and functionality to our system solutions through the development and utilization of our processing and reporting network and new technology.

 

F- 9

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

2. ACCOUNTING POLICIES (CONTINUED)

 

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 requisite service period of the award.

 

Litigation Costs

 

From time to time, we are involved in litigation, claims, contingencies and other legal matters. We record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statement and (ii) the range of the loss can be reasonably estimated. We expense legal costs, including those legal costs expected to be incurred in connection with a loss contingency, as incurred.

 

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 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, 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 years ended June 30, 2016, 2015, and 2014.

 

The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions. The tax years ended June 30, 2013 through June 30, 2016 remain open to examination by taxing jurisdictions to which the Company is subject. As of June 30, 2016, the Company did not have any income tax examinations in process.

 

EARNINGS (LOSS) PER COMMON SHARE

 

Basic earnings (loss) per share are calculated by dividing net income (loss) applicable to common shares by the weighted average common shares outstanding for the period. Diluted earnings (loss) per share are calculated by dividing net income (loss) applicable to common shares by the weighted average common shares outstanding for the period plus the dilutive effects of common stock equivalents unless the effects of such common stock equivalents are anti-dilutive. For the years ended June 30, 2016, 2015 and 2014 no effect for common stock equivalents was considered in the calculation of diluted earnings (loss) per share because their effect was anti-dilutive.

 

The consolidated financial statements included in this Form 10-K 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 as explained in Note 19. The basic and diluted weighted average number of common shares outstanding for the years ended June 30, 2015 and 2014 have been adjusted to reflect the additional number of shares pertaining to each of those years. 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 year ended June 30, 2015. The previously reported net income per common share-basic and diluted for the year ended June 30, 2014 was decreased from $.78 to $.77 as a result of the foregoing adjustments.

 

SOFTWARE DEVELOPMENT COSTS

 

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.  At June 30, 2016, the Company had $137 thousand in capitalized software development which is being amortized over a period of three years.

 

F- 10

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

2. ACCOUNTING POLICIES (CONTINUED)

 

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 its years ended June 30, 2016, 2015 or 2014.

 

RECENT ACCOUNTING PRONOUCEMENTS

 

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

 

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

 

In June 2014, the Financial Accounting Standards Board issued ASU 2014-12 Compensation - Stock Compensation (Topic 718); Accounting for share-based payments when the terms of the award provide that a performance target could be achieved after the requisite service period. Under the new guidance an entity will not record compensation expense related to an award until it becomes probable that the performance target will be met. This pronouncement will be effective for the Company beginning with the year ending June 30, 2017.

 

In April 2015, the Financial Accounting Standards Board issued ASU 2015-03 Interest - Imputation of Interest (Subtopic 835-30): Simplifying the presentation of debt issuance costs. This standard is part of FASB’s simplification initiative which has as its objective to identify, evaluate, and improve areas where cost and complexity can be reduced while maintaining or improving the usefulness of the information for users. The Company adopted this pronouncement for the year ended June 30, 2016.

 

In July 2015, the Financial Accounting Standards Board issued ASU 2015-11 Inventory (Topic 330): Simplifying the measurement of inventory. This standard is part of FASB’s simplification initiative which has as its objective to identify, evaluate, and improve areas where cost and complexity can be reduced while maintaining or improving the usefulness of the information for users. This pronouncement will be effective for the Company beginning with the year ending June 30, 2018.

 

In September 2015, the Financial Accounting Standards Board 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 Financial Accounting Standards Board 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 Financial Accounting Standards Board issued ASU 2016-02 “Leases” (Topic 842). Under the new guidance, those leases classified as operating leases under previous GAAP, will be recognized on our consolidated balance sheet as liabilities with corresponding right-of-use assets. This pronouncement will be effective for the Company beginning with the year ending June 30, 2018.

 

F- 11

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

2. ACCOUNTING POLICIES (CONTINUED)

 

In March 2016, the Financial Accounting Standards Board issued ASU 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new guidance simplifies several aspects of accounting and presentation for share-bases compensation. This pronouncement will be effective for the Company beginning with the year ending June 30, 2018.

 

In August 2016, the Financial Accounting Standards Board issued ASU 2016-15 Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments (Topic 230). This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This pronouncement will be effective for the Company beginning with the year ending June 30, 2018.

 

There are three amendments to ASU 2014-09 issued in 2016. They are ASU 2016-08, issued in March 2016 Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations which clarifies those relationships with the customer, ASU 2016-10, issued in April 2016 Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, what is the entity’s obligations to its customer and what is the customer’s entitlement in the license agreements and ASU 2016-12, issued in April 2016 Revenue from Contracts with Customers (Topic 606), Narrow Scope Improvements and Practical Expedients, guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contract modifications at transition. These amendments to ASU 2014-09 are now effective for fiscal years, and interim reporting periods within those years, beginning with the year ending June 30, 2019.

 

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.

 

F- 12

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

2. ACCOUNTING POLICIES (CONTINUED)

 

($ 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  

 

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 June 30, 2015 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 consolidated balance sheets were disclosed in the Company’s Form 10-Q for the quarter ended September 30, 2015. The consolidated statements of cash flows amounts are presented in the table below:

 

($ in thousands)   For the fiscal year ended June 30, 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   $ (2,517 )   $ (22 )   $ (2,539 )
                         
                         
Accounts Payable:                        
·Reclassification of cash used in and included in accounts payable to accounts receivable   $ 919     $ 22     $ 941  

 

F- 13

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

2. ACCOUNTING POLICIES (CONTINUED)

 

($ in thousands)   For the fiscal year ended June 30, 2014  
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   $ (157 )   $ (47 )   $ (204 )
                         
                         
Accounts Payable:                        
·Reclassification of cash used in and included in accounts payable to accounts receivable   $ 413     $ 47     $ 460  

 

F- 14

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

3. 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. 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 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.

 

F- 15

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

3. ACQUISITION (CONTINUED)

 

($ in thousands)      
       
Consideration:        
Fair value of total consideration paid in cash   $ 5,625  
         
Acquisition / non-recurring acquisition expenses:   $ 842  
         
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, plant & 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.

 

VendScreen has been included in the accompanying consolidated financial statements of the Company since the date of acquisition. The $842 thousand of acquisition / non-recurring 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 1 year ended June 30, 2016.

 

The acquired business contributed net revenues of $1.2 million during the fiscal year ended June 30, 2016. ASC No. 2010-29 requires the disclosure of additional information including the amounts of earnings of the acquiree since the acquisition date included in the consolidated income statement, and the revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred at the beginning of the prior annual reporting period (supplemental pro forma information). The disclosure of such information was impractical and is not provided as (1) the acquiree had been integrated into the Company’s operation such that discreet financial information of the acquiree could not be determined, and (2) the financial records of the acquiree were not adequate to allow the preparation of supplemental pro forma information.

 

4. EARNINGS PER SHARE CALCULATION

 

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

 

    Year Ended June 30  
($ in thousands, except per share data)   2016     2015     2014  
                   
Numerator for basic and diluted earnings per share                        
Net income (loss)   $ (6,806 )   $ (1,089 )   $ 27,531  
Preferred dividends     (668 )     (668 )     (668 )
Net income (loss) available to common shareholders   $ (7,474 )   $ (1,757 )   $ 26,863  
                         
Denominator for basic earnings per share - Weighted average shares outstanding     36,309,047       35,719,211       34,667,769  
Effect of dilutive potential common shares     -       -       341,790  
Denominator for diluted earnings per share - Adjusted weighted average shares outstanding     36,309,047       35,719,211 #     35,009,559  
                         
Basic earnings (loss) per share   $ (0.21 )   $ (0.05 )   $ 0.77  
                         
Diluted earnings (loss) per share   $ (0.21 )   $ (0.05 )   $ 0.77  

 

Antidilutive shares excluded from the calculation of diluted earnings per share were 1,168,689, 252,827 and 98,497 for the years ended June 30, 2016, 2015 and 2014, respectively.

 

F- 16

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

5. FINANCE RECEIVABLES

 

Finance receivables consist of the following:

 

    June 30,     June 30,  
($ in thousands)   2016     2015  
             
Total finance receivables   $ 7,306     $ 4,639  
Less current portion     3,588       941  
Non-current portion of finance receivables   $ 3,718     $ 3,698  

 

Credit quality indicators consist of the following:

 

Credit Quality Indicators

 

Credit risk profile based on payment activity:   June 30,     June 30,  
    2016     2015  
($ in thousands)                
Performing   $ 7,174     $ 4,619  
Nonperforming     132       20  
Total   $ 7,306     $ 4,639  

 

F- 17

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

5. FINANCE RECEIVABLES (CONTINUED)

 

Age Analysis of Past Due Finance Receivables

As of June 30, 2016

 

    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   $ 98     $ 31     $ 3     $ 132     $ 7,174     $ 7,306  

 

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   $ -     $ 16     $ 5     $ 21     $ 4,618     $ 4,639  

 

Finance receivables due for each of the fiscal years following June 30, 2016 are as follows:

 

($ in thousands)      
       
2017   $ 3,588  
2018     1,246  
2019     1,246  
2020     944  
2021 and beyond     282  
    $ 7,306  

 

6. PROPERTY AND EQUIPMENT, net

 

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

 

    Useful   June 30, 2016  
($ in thousands)   Lives   Cost     Accumulated
Depreciation
    Net  
Computer equipment and software   3-7 years   $ 5,506     $ (4,374 )   $ 1,132  
Property and equipment used for rental program   5 years     26,648       (18,246 )     8,402  
Furniture and equipment   3-7 years     874       (654 )     220  
Leasehold improvements   Lesser of life or lease term     575       (564 )     11  
        $ 33,603     $ (23,838 )   $ 9,765  

 

    Useful   June 30, 2015  
($ in thousands)   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  

 

F- 18

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

6. PROPERTY AND EQUIPMENT, net (CONTINUED)

 

Assets under capital leases totaled approximately $2.6 million and $2.1 million as of June 30, 2016 and 2015, respectively. Capital lease amortization of approximately $271 thousand, $349 thousand and $305 thousand, is included in depreciation expense for the years ended June 30, 2016, 2015, and 2014, respectively.

 

7. GOODWILL AND INTANGIBLE ASSETS

 

Amortization expense relating to all acquired intangible assets was approximately $87 thousand, $0 and $22 thousand during each of the years ended June 30, 2016, 2015 and 2014, respectively. Intangible asset balances consisted of the following:

 

    Beginning     Year ended June 30, 2016     Ending      
($ in thousands)   Balance     Additions/           Balance     Amortization
    July 1, 2015     Adjustments     Amortization     June 30, 2016     Period
Intangible Assets:                                    
Trademarks - Indefinite   $ 432     $ (432 )(1)   $ -     $ -      Indefinite
Non-compete agreements     -       2       (1 )     1      2 years
Brand     -       95       (16 )     79      3 years
Developed technology     -       639       (63 )     576      5 years
Customer relationships     -       149       (7 )     142      10 years
Total Intangible Assets   $ 432     $ 453     $ (87 )   $ 798      
                                     
Goodwill     7,663       4,040       -       11,703      Indefinite
                                     
Total Intangible Assets & Goodwill   $ 8,095     $ 4,493     $ (87 )   $ 12,501      

 

 

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

 

(1) The Company’s test for impairment of its indefinite-lived trademarks consists of the trademarks: 1) VendingMiser, 2) CoolerMiser, 3) PlugMiser and 4) SnackMiser. As a result of its testing in fiscal years ended June 30, 2015 and 2014 the Company determined that no impairment had occurred. In the testing in fiscal year 2016, the Company determined that the sum of the expected discounted cash flows attributable to the trademarks was less than its carrying value of $432 thousand, and that an impairment write-down was required. The fair value of the trademarks was determined by a method known as “relief from royalty”, in which the fair value is determined by reference to the amount of royalty income the intangible would generate if it were licensed in an arm’s-length transaction. The essential assumptions in a valuation via an income approach are as follows:

 

F- 19

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

7. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)

  

· The related dollar sales volume;
· The percentage royalty on sales;
· The adjustment for taxes;
· The remaining useful economic life;
· The percentage return on investment; and,
· The tax amortization benefit.

 

During the fourth quarter of the fiscal year ended June 30, 2016, the fair value of the trademarks was determined to have inconsequential value based on the “relief from royalty” methodology. This assessment resulted in an impairment write-down during the fourth fiscal quarter of $432 thousand, which is included in “Impairment of intangible asset” in the Consolidated Statement of Operations for the fiscal year ended June 30, 2016.

 

At June 30, 2016, amortizable intangible asset balances were:
                   
($ in thousands)   Cost     Accumulated
Amortization
    Net Book Value  
                   
Non-compete agreements   $ 2     $ (1 )   $ 1  
Brand     95       (16 )   $ 79  
Developed Technology     639       (63 )   $ 576  
Customer Relationships     149       (7 )   $ 142  
    $ 885     $ (87 )   $ 798  

 

There were no amortizable intangible assets at June 30, 2015.

 

Estimated annual amortization expense for amortizable intangible assets is as follows:

 

2017   $ 175  
2018     175  
2019     159  
2020     143  
2021     79  
Thereafter     67  
    $ 798  

 

F- 20

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

8. ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

    June 30,     June 30,  
($ in thousands)   2016     2015  
             
Accrued compensation and related sales commissions   $ 1,268     $ 673  
Accrued professional fees     809       301  
Accrued taxes and filing fees     795       505  
Advanced customer billings     236       390  
Accrued rent     2       75  
Accrued other     363       213  
      3,473       2,157  
Less current portion     (3,458 )     (2,108 )
    $ 15     $ 49  

 

9. 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 $80 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 June 30, 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.

 

F- 21

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

9. LINE OF CREDIT (CONTINUED)

 

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 June 30, 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. As of June 30, 2016, the Company was not in compliance with the minimum Adjusted EBITDA provision of the debt covenant. The Company received a waiver from its bank for the covenant default. 

 

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).

 

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

 

The balance due on the Heritage line of credit was $7.2 million at June 30, 2016 and the balance due on the Avidbank line of credit was $4.0 million at June 30, 2015. As of June 30, 2016, $4.8 million was available under our line of credit.

 

    For year ended  
($ in thousands)   June 30,  
    2016     2015  
Principal balance at period-end   $ 7,217     $ 4,000  
Unamortized discount     (98 )     -  
Line of credit, net   $ 7,119     $ 4,000  
Maximum amount outstanding at any month end   $ 7,217     $ 5,000  
Average balance outstanding during the period   $ 4,959     $ 4,100  
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 Line of Credit was approximately $260 thousand, $211 thousand and $221 thousand during each of the years ended June 30, 2016, 2015 and 2014 respectively.

 

F- 22

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

10. LONG-TERM DEBT

 

ASSIGNMENT OF QUICKSTART LEASES

 

In February and May 2015, the Company assigned its interest in certain finance receivables (various 60 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%.

 

CAPITAL LEASE OBLIGATIONS

 

The Company periodically enters into capital lease obligations to finance certain office and network equipment for use in its daily operations. During the year periods ended June 30, 2016, 2015 and 2014, the Company entered into capital lease obligations of $444 thousand, $108 thousand and $325 thousand, respectively. The interest rates on these obligations ranged from approximately 5.6% to 9.0%. The lease terms range from 2 to 5 years. The value of the acquired equipment is included in property and equipment and depreciated over the applicable estimated useful lives accordingly.

 

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

 

    June 30,     June 30,  
($ in thousands)   2016     2015  
             
Assignment of QuickStart Leases   $ 1,600     $ 1,994  
Capital lease obligations     605       338  
    $ 2,205     $ 2,332  
Less current portion     629       478  
    $ 1,576     $ 1,854  

 

 The maturities of long-term debt for each of the fiscal years following June 30, 2016 are as follows:

 

($ in thousands)      
       
2017   $ 629  
2018     625  
2019     588  
2020     358  
2021     5  
    $ 2,205  

 

F- 23

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

In accordance with the fair value hierarchy described in Note 2, the following table shows the fair value of the Company’s financial instruments that are required to be measured at fair value as of June 30, 2016 and 2015:

 

($ in thousands)                        
June 30, 2016   Level 1     Level 2     Level 3     Total  
                         
Common stock warrant liability, 2.2 million warrants exercisable at $2.6058 from September 17, 2011 through September 17, 2016   $ -     $ -     $ 3,739     $ 3,739  
                                 

 

June 30, 2015     Level 1       Level 2       Level 3       Total  
                                 
Common stock warrant liability, 3.9 million warrants exercisable at $2.6058 from September 17, 2011 through September 17, 2016   $ -     $ -     $ 978     $ 978  

 

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

 

As of June 30, 2016 and 2015 fair values of the Company’s Level 3 financial instrument totaled $3,739 million and $978 thousand for 2.2 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 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 on the secondary market or in other private transactions. There were no transfer of assets or liabilities between level 1, level 2, or level 3 during the years ended June 30, 2016 and 2015.

 

    For Year Ended  
($ in thousands)   June 30,  
    2016     2015  
             
Beginning balance   $ (978 )   $ (585 )
Increase due to change in fair value of warrant liabilities     (5,674 )     (393 )
Reduction due to warrant exercises     2,913       -  
Ending balance   $ (3,739 )   $ (978 )

 

12. WARRANTS

 

All warrants outstanding as of June 30, 2016 were exercisable. The following table shows exercise prices and expiration dates for warrants outstanding as of June 30, 2016:

 

    Exercise      
Warrants   Price     Expiration
Outstanding   Per Share     Date
2,376,675   $ 2.61     September 18, 2016
45,000   $ 2.10     December 31, 2017
23,978   $ 5.00     March 29, 2021
2,445,653            

 

F- 24

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

12. WARRANTS (CONTINUED)

 

Warrant activity for the years ended June 30, 2016, 2015, and 2014 was as follows:

 

    Warrants  
Outstanding at June 30, 2013     7,361,708  
Issued     -  
Exercised     (2,090,226 )
Expired     (962,482 )
Outstanding at June 30, 2014     4,309,000  
Issued     -  
Exercised     -  
Expired     -  
Outstanding at June 30, 2015     4,309,000  
Issued     23,978  
Exercised     (1,887,325 )
Expired     -  
Outstanding at June 30, 2016     2,445,653  

 

On May 12, 2010, in conjunction with a public offering, the Company issued warrants to purchase 2.8 million shares of Common Stock, exercisable at $1.13 per share at any time prior to December 31, 2013. During the year ended June 30, 2014, 2.1 million of these warrants were exercised at $1.13 per share for cash proceeds of $2.4 million. Warrants to purchase 59 thousand shares of Common Stock expired unexercised on December 31, 2013. 

 

In conjunction with this public offering, the Company also issued to the placement agent warrants to purchase 165,207 and 15,717 shares of Common Stock, exercisable at $1.13 per share at any time prior to May 12, and July 7, 2013, respectively. During the year ended June 30, 2013 the placement agent elected cashless exercises of 36,186 warrants resulting in the issuance of 17,094 shares of Common Stock and exercised warrants to purchase 13,216 shares of Common Stock at $1.13 per share for cash proceeds of $14,934. Warrants to purchase 1,258 shares of Common Stock expired unexercised in May 2013.

 

On March 17, 2011, in conjunction with a private placement offering the Company issued warrants to purchase up to 4.3 million shares of Common Stock, exercisable at $2.6058 per share. The 4.3 million warrants are exercisable from September 18, 2011 through September 17, 2016. During the year ended June 30, 2016, approximately 1.9 million warrants were exercised under this offering for cash proceeds of approximately $4.92 million. The balance of exercisable warrants as of June 30, 2016 is 2.4 million.

 

3.9 million of the warrants issued under this private placement offering contain a provision that if a Fundamental Transaction occurs, notably a change in control, the warrant holder may require the Company to pay the Black-Scholes calculated value of the then unexercised warrant to the warrant holder in cash. As such the Company has recorded a liability of $3.7 million and $978 thousand at June 30, 2016 and 2015, respectively, for the estimated fair value of the warrants in its Consolidated Balance Sheet (see Note 11-Fair Value of Financial Instruments). Period to period changes in the fair value of these warrants are reflected through income.

 

In conjunction with the Loan and Security agreement (Note 9 – Line of Credit) and as a condition of the Bank entering into the First Amendment, the Company issued to the Bank warrants to purchase up to 45 thousand shares of Common Stock of the Company. The warrants are exercisable at any time prior to December 31, 2017 at an exercise price of $2.10 per share. Upon issuance, the fair value of the warrants was $55 thousand using a Black Scholes model, which was recorded as prepaid interest and included in other assets on the Consolidated Balance Sheet, and was amortized as non-cash interest expense over the remaining term of the Line of Credit as amended in January 2013. Non-cash interest of $2 thousand was recognized for the year ended June 30, 2014 relating to these warrants. As of June 30, 2016 none of these warrants have been exercised.

 

On March 29, 2016, the Company entered into a Loan and Security Agreement with a secondary bank (Note 9 – Line of Credit), providing a secured asset-based revolving line of credit in an amount of up to $12 million. In conjunction with the Loan and Security Agreement the company issued to the bank warrants to purchase up to 24 thousand shares of Common Stock of the Company. The warrants are exercisable at any time prior to March 29, 2021 at an exercise price of $5.00 per share. At the time of issuance the fair value of the warrants was estimated at $52 thousand using a Black Scholes model. This was recorded as a contra -debt item and is included in the line of credit on the Consolidated Balance Sheet, and is being amortized as a non-cash interest expense over the remaining term of the Line of Credit. Non-cash interest expense of $13 thousand has been recognized for the year ending June 30, 2016 related to this warrant.

 

13. INCOME TAXES

 

The Company has significant deferred tax assets, a substantial amount of which result from operating loss carryforwards. The Company routinely evaluates its ability to realize the benefits of these assets to determine whether it is more likely than not that such benefit will be realized. In periods prior to the year ended June 30, 2014, the Company’s evaluation of its ability to realize the benefit from its deferred tax assets resulted in a full valuation allowance against such assets. Based upon earnings performance that the Company had achieved along with the belief that such performance will continue into future years, the Company determined during the year ended June 30, 2014 that it was more likely than not that a substantial portion of its deferred tax assets would be realized with approximately $64 million of its operating loss carryforwards being utilized to offset corresponding future years’ taxable income resulting in a reduction in its valuation allowances recorded in prior years.

 

F- 25

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

13. INCOME TAXES (CONTINUED)

 

In addition to considering recent periods’ performance, the evaluation of the amount of deferred tax assets expected to be realized involves forecasting the amount of taxable income that will be generated in future years. The number of connections added in a service year is a key metric which, in the Company’s recurring revenue service model, becomes an important ingredient in driving future growth and earnings. The Company has forecasted future results using estimates that management believes to be achievable. With respect to its forecasts, the Company also has taken into account several industry analysts who have projected that demand for technology and services similar to the Company’s will continue to grow in the markets the Company serves.

 

If in future periods the Company demonstrates its ability to grow taxable income in excess of the forecasts it has used, it will re-evaluate the need to keep some, or all, of the remaining valuation allowances of approximately $23 million on its deferred tax assets.

 

The benefit (provision) for income taxes for the years ended June 30, 2016, 2015 and 2014 is comprised of the following:

 

($ in thousands)   2016     2015     2014  
Current:                        
Federal   $ (7 )   $ (58 )   $ (21 )
State     (38 )     (6 )     -  
      (45 )     (64 )     (21 )
                         
Deferred:                        
Federal     407       365       20,970  
State     253       (590 )     6,306  
      660       (225 )     27,276  
                         
    $ 615     $ (289 )   $ 27,255  

 

The provision for income taxes for the year ended June 30, 2015 includes $396 thousand for the state and federal income tax effects of a decrease in the applicable state tax rate used to tax effect deferred tax assets caused by a state income tax law change.

 

A reconciliation of the benefit (provision) for income taxes for the years ended June 30, 2016, 2015 and 2014 to the indicated benefit (provision) based on income (loss) before benefit (provision) for income taxes at the federal statutory rate of 34% is as follows:

 

($ in thousands)   2016     2015     2014  
                   
Indicated benefit (provision) at federal statutory rate of 34%   $ 2,523     $ 272     $ (94 )
Effects of permanent differences     (2,040 )(A)     (215 )     (8 )
State income taxes, net of federal benefit     199       (410 )     (18 )
Income tax credits     70       40       -  
Changes related to prior years     -       187       -  
Changes in valuation allowances     (137 )     (163 )     27,375  
    $ 615     $ (289 )   $ 27,255  

 

(A) Increase in the effects of permanent differences due to the tax effect of the change in fair value of warrant liabilities in 2016

 

F- 26

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

13. INCOME TAXES (CONTINUED)

 

At June 30, 2016 the Company had federal operating loss carryforwards of approximately $162 million to offset future taxable income expiring through approximately 2036. The timing and extent to which the Company can utilize operating loss carryforwards in any year may be limited by provisions of the Internal Revenue Code regarding changes in ownership of corporations (i.e. IRS Code Section 382). The changes in ownership limitations under IRS Code Section 382 have had the effect of limiting the maximum amount of operating loss carryforwards as of June 30, 2016 available for use to offset future years’ taxable income to approximately $124 million. Those operating loss carryforwards start to expire June 30, 2022.

 

The net deferred tax assets arose primarily from net operating loss carryforwards, as well as the use of different accounting methods for financial statement and income tax reporting purposes as follows:

 

    June 30,  
($ in thousands)   2016     2015  
Deferred tax assets:                
Net operating loss carryforwards   $ 46,691     $ 46,919  
Asset reserves     1,713       792  
Deferred research and development costs     1,356       1,009  
Intangibles     539       606  
Deferred gain on assets under sale-leaseback transaction     331       632  
Stock-based compensation     377       224  
Other     379       437  
      51,386       50,619  
Deferred tax liabilities:                
Fixed assets     (528 )     (492 )
Intangibles and goodwill     -       (84 )
Deferred tax assets, net     50,858       50,043  
Valuation allowance     (23,134 )     (22,997 )
Deferred tax assets (liabilties), net of allowance     27,724       27,046  
                 
Less current portion     2,271       1,258  
Deferred tax assets (liabilties), non-current   $ 25,453     $ 25,788  

 

14. STOCK BASED COMPENSATION PLANS

 

The Company has three active stock based compensation plans at June 30, 2016 as shown in the table below:

 

Date Approved   Name of Plan   Type of Plan   Authorized
Shares
 
June 2013   2013 Stock Incentive Plan   Stock     500,000  
June 2014   2014 Stock Option Incentive Plan   Stock Options     750,000  
June 2015   2015 Equity Incentive Plan   Stock & Stock Options     1,250,000  
              2,500,000  

 

F- 27

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

14. STOCK BASED COMPENSATION PLANS (CONTINUED)

 

As of June 30, 2016, the Company had reserved shares of Common Stock for future issuance for the following:

 

Exercise of Common Stock Warrants     2,445,653  
Conversions of Preferred Stock and cumulative Preferred Stock dividends     99,999  
Issuance under 2013 Stock Incentive Plan     162,330  
Issuance under 2014 Stock Option Incentive Plan     737,215  
Issuance under 2015 Stock Incentive Plan     1,250,000  
Issuance to former Chief Executive Officer upon the occurrence of a USA Transaction     140,000  
Total shares reserved for future issuance     4,835,197  

 

STOCK OPTIONS

 

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

 

    Year Ended     Year ended     Year ended  
    June 30, 2016     June 30, 2015     June 30, 2014  
Expected volatility     59-66%       78-79%       79%
Expected life     4.5 years        7 years        7 years  
Expected dividends     0.00%     0.00%     0.00%
Risk-free interest rate     1.46-1.49%       1.59-2.04%       2.22%

 

The 2014 Stock Option Incentive Plan was approved in June 2014 therefore there was no stock based compensation expense related to stock options for the years ended June 30, 2014. Stock based compensation related to stock options for the years ended June 30, 2016 and June 30, 2015 was $338 and $370 thousand respectively. Unrecognized compensation related to stock option grants as of June 30, 2016 and June 30, 2015 was $167 thousand and $297 thousand respectively.

 

The following table provides information about outstanding options:

 

    For the Twelve Months Ended June 30,  
    2016     2015     2014  
    Shares     Weighted
Average Grant
Date Fair Value
    Shares     Weighted
Average Grant
Date Fair Value
    Shares     Weighted
Average Grant
Date Fair Value
 
Outstanding options, beginning of period     538,888     $ 1.32       120,000     $ 1.49       -       -  
Granted     199,586     $ 1.63       438,888     $ 1.30       120,000     $ 1.49  
Forfeited     (95,000 )   $ 1.80       (20,000 )   $ 1.49       -       -  
Excercised     (33,333 )   $ 1.27                                  
Outstanding options, end of period     610,141     $ 1.35       538,888     $ 1.33       120,000     $ 1.49  

 

The following table provides information related to options as of June 30, 2016:

 

    Options Outstanding   Options Exercisable  
Range of Exercise Prices   Options Outstanding   Remaining Contractual Life   Shares Exercisable   Remaining Contractual Life   Weighted Average Exercise Price  
$1.62 to $1.68   75,000   5.51   25,002   5.51   1.65  
$1.80   295,555   5.16   195,555   5.16   1.8  
$2.05   100,000   4.97   66,670   4.97   2.05  
$2.09   10,000   5.58   3,333   5.58   2.09  
$2.75   25,000   5.77   8,333   5.77   2.75  
$2.94   75,000   6.53   -     -     -    
$3.38   29,586   6.06   -     -     -    
    610,141   5.42   298,893   5.17   1.87  

 

The following table provides information about unvested options:

 

    For the Twelve Months Ended June 30,  
    2016     2015     2014  
    Shares     Weighted
Average Grant
Date Fair Value
    Shares     Weighted
Average Grant
Date Fair Value
    Shares     Weighted
Average Grant
Date Fair Value
 
Unvested options, beginning of period     505,553     $ 1.32       120,000     $ 1.49       -       -  
Granted     199,586     $ 1.63       438,888     $ 1.30       120,000     $ 1.49  
Vested     (298,891 )   $ 1.31       (33,335 )   $ 1.49       -       -  
Forfeited     (95,000 )   $ 1.80       (20,000 )   $ 1.49       -       -  
Unvested options, end of period     311,248     $ 1.39       505,553     $ 1.32       120,000     $ 1.49  

 

 

 

F- 28

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

14. STOCK BASED COMPENSATION PLANS (CONTINUED)

 

The following table provides information about options outstanding and exercisable options:

 

    As of June 30,  
    2016     2015     2014  
    Options
Outstanding
    Exercisable
Options
    Options
Outstanding
    Exercisable
Options
    Options
Outstanding
    Exercisable
Options
 
Number     610,141       298,893       538,888       33,335       120,000       -  
Weighted average exercise price   $ 2.07     $ 1.87     $ 1.86     $ 2.05     $ 2.05       -  
Aggregate intrinsic value   $ 1,341,828     $ 717,343     $ 451,177     $ 21,668     $ 7,200       -  
Weighted average contractual term   $ 5.42       5.17       6.21       5.97       6.97       -  
Share price as of June 30   $ 4.27     $ 4.27     $ 2.70     $ 2.70     $ 2.11     $ 2.11  

 

STOCK GRANTS

 

A summary of the status of the Company’s nonvested common shares as of June 30, 2016, 2015, and 2014, and changes during the years then ended is presented below:

 

          Weighted-Average  
          Grant-Date  
    Shares     Fair Value  
             
Nonvested at June 30, 2013     97,146     $ 1.52  
Granted     10,000       2.17  
Vested     (55,001 )     1.62  
Forfeited, Director changes     (3,334 )     0.94  
Forfeited, Employee shares not earned     (5,000 )     1.52  
Nonvested at June 30, 2014     43,811     $ 1.59  
Granted     155,927       2.00  
Vested     (181,134 )     1.89  
Nonvested at June 30, 2015     18,604     $ 1.88  
Granted     131,558       3.04  
Vested     (21,664 )     2.70  
Nonvested at June 30, 2016     128,498     $ 2.97  

 

F- 29

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

15. 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 June 30, 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, 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 June 30, 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 June 30, 2016 and 2015 is as follows:

 

($ in thousands)   June 30,     June 30,  
    2016     2015  
             
For 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 years ended June 30, 2016, 2015 and 2014, no shares of Preferred Stock nor cumulative preferred dividends were converted into shares of common stock.

 

16. 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. 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. In fiscal years 2016, 2015 and 2014, the Company elected and made a 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 years ended June 30, 2016, 2015 and 2014 approximated $189 thousand, $192 thousand and $168 thousand, respectively.  

 

17. RELATED PARTY TRANSACTIONS

 

There were no related party transactions during the years ended June 30, 2016, 2015 and 2014. 

 

18. COMMITMENTS AND CONTINGENCIES

 

SALE AND LEASEBACK TRANSACTIONS

 

In June 2014, the Company and a third party finance company, entered into six 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. As of June 30, 2014, a third-party finance company completed the purchase from the Company, the ePort equipment under the first two of the Sale Leaseback Agreements.  

F- 30

 

 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

 

18. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

In the quarter ended September 2014, a third-party finance company completed the purchase from the Company of the ePort equipment described in the last four of the Sale Leaseback Agreements. 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 will be 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 will be 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 Varilease a base monthly rental for this equipment during the 36-month lease term. The future lease payment obligations under these agreements are included in the table at the bottom of this note.

 

Upon the completion of the sales, the Company computed gains on the sale of its ePort equipment as follows:

 

($ in thousands)   Year ended June 30,  
    2015  
Rental equipment sold, cost   $ 3,873  
Rental equipment sold, accumulated depreciation upon sale     (331 )
Rental equipment sold, net book value     3,542  
Proceeds from sale     4,994  
Gain on sale of rental equipment   $ 1,452  

 

In accordance with the FASB topic ASC 840-40, “Sale Leaseback Transactions”, any gain shall be deferred and shall be amortized in proportion to the related gross rental charged to expense over the lease term. The computed gain on the sale will be recognized ratably over the 36 month term and charged as a reduction to the Company’s JumpStart rent expense included in co