REGISTRATION
NO. 333-_________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
USA
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Pennsylvania
(State
or
other jurisdiction of incorporation or organization)
7359
(Primary
Standard Industrial Classification Code Number)
23-2679963
(I.R.S.
Employer Identification Number)
100
Deerfield Lane, Suite 140
Malvern,
Pennsylvania 19355
(610)
989-0340
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
George
R.
Jensen, Jr.
Chief
Executive Officer
USA
Technologies, Inc.
100
Deerfield Lane, Suite 140
Malvern,
Pennsylvania 19355
(610)
989-0340
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Douglas
M. Lurio, Esquire
Lurio
& Associates, P. C.
One
Commerce Square
2005
Market Street, Suite 2340
Philadelphia,
PA 19103-7015
(215)
665-9300
(Approximate
date of proposed sale to the public)
From
time
to time after this Registration Statement becomes effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check
the
following box: x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
CALCULATION
OF REGISTRATION FEE
|
Title
of each class
of Securities to be Registered
|
Amount
to be Registered
|
Proposed
Maximum Offering Price Per Unit (1)
|
Proposed
Maximum Aggregate Offering Price
|
Amount
of Registration
Fee
|
|||||||||
|
|
|||||||||||||
|
Common
Stock, no par value
|
800,000
shares
|
(2)
|
$
|
9.90
|
$
|
7,920,000.00
|
$
|
243.14
|
|||||
|
552,565 shares
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(3)
|
$
|
9.90
|
$
|
5,470,393.50
|
$
|
167.94
|
||||||
|
30,520
shares
|
(4)
|
$
|
9.90
|
$
|
302,148.00
|
$
|
9.28
|
||||||
|
30,520
shares
|
(5)
|
$
|
9.90
|
$
|
302,148.00
|
$
|
9.28
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||||||
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36,040
shares
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(6)
|
$
|
9.90
|
$
|
356,796.00
|
$
|
10.95
|
||||||
|
16,666
shares
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(7)
|
$
|
9.90
|
$
|
164,993.40
|
$
|
5.07
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||||||
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16,667
shares
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(8)
|
$
|
9.90
|
$
|
165,003.30
|
$
|
5.07
|
||||||
|
16,667
shares
|
(9)
|
$
|
9.90
|
$
|
165,003.30
|
$
|
5.07
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||||||
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78,334
shares
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(10)
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$
|
9.90
|
$
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775,506.60
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$
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23.81
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||||||
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TOTAL
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1,577,979
shares
|
$
|
15,621,992.10
|
|
$479.61
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(11)
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|||||||
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(1)
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Pursuant
to Rule 457c, the registration fee has been calculated at the average
of
the high and low prices reported in the consolidated reporting system
within 5 days prior to the date of the filing of the registration
statement.
|
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(2)
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Represents
shares issuable by us to Steve Illes under the 2006-B Common Stock
Purchase Agreement between Mr. Illes and us dated September 25, 2006
(“2006-B Common Stock Agreement”).
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2
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(3)
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This
registration statement amends our registration statement on Form
S-1,
Commission File No. 333-138116, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward 232,565 shares issuable by
us to Steve Illes under the 2006-B Common Stock Agreement as well
as
320,000 shares owned by him that were already purchased from us under
the
2006-B Common Stock Agreement.
|
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(4)
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Represents
30,520 shares issued to George R. Jensen, Jr., under his employment
agreement consisting of 25,000 issued to him as a bonus and 5,520
shares
issued to him in lieu of cash
salary.
|
|
(5)
|
This
registration statement amends our registration statement on Form
S-1,
Commission File No. 333-139883, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward 25,000 shares issued to
George R.
Jensen, Jr., as a bonus under his employment agreement and 5,520
shares
issued to him in lieu of cash salary under his employment
agreement.
|
|
(6)
|
This
registration statement amends our registration statement on Form
S-1,
Commission File No. 333-138116, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward 25,000 shares issued to
George R.
Jensen, Jr., as a bonus under his employment agreement and 11,040
shares
issued to him in lieu of cash salary under his employment
agreement.
|
|
(7)
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Represents
16,666 shares issued to Stephen Herbert as a bonus under his employment
agreement.
|
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(8)
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This
registration statement amends our registration statement on Form
S-1,
Commission File No. 333-139883, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward 16,667 shares issued to
Stephen
P. Herbert as a bonus under his employment
agreement.
|
|
(9)
|
This
registration statement amends our registration statement on Form
S-1,
Commission File No. 333-138116, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward 16,667 shares issued to
Stephen
P. Herbert as a bonus under his employment
agreement.
|
|
(10)
|
Represents
78,334 shares underlying vested options granted in April 2006 to
the
executive officers and directors of the
Company.
|
|
(11)
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$70.87
of the filing fee is being paid at the time of the filing of this
registration statement. $339.97 of the filing fee was previously
paid and
is offset against the currently due filing fee in connection with
the
Company’s registration statement no. 333-139116 on December 6, 2006
relating to the 552,565 shares described in footnote (3) to this
table; $23.51 of the filing fee was previously paid and is offset
against
the currently due filing fee in connection with the Company’s registration
statement no. 333-139883 on January 9, 2007 relating to the 30,520
shares
described in footnote (5) to this table; $22.17 of the filing fee
was
previously paid and is offset against the currently due filing fee
in
connection with the Company’s registration statement no. 333-138116 on
October 20, 2006 relating to the 36,040 shares described in footnote
(6)
to this table; $12.84 of the filing fee was previously paid and is
offset
against the currently due filing fee in connection with the Company’s
registration statement no. 333-139883 on January 9, 2007 relating
to the
16,667 shares described in footnote (8) to this table; $10.25 of
the
filing fee was previously paid and is offset against the currently
due
filing fee in connection with the Company’s registration statement no.
333-138116 on October 20, 2006 relating to the 16,667 shares described
in
footnote (9) to this table.
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3
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a),
may
determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission ("SEC") is effective. This prospectus is not an offer
to
sell these securities and it is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
4
PROSPECTUS
USA
TECHNOLOGIES, INC.
1,577,979
shares of Common Stock
THE
OFFERING
The
resale by our selling shareholders of up to 1,577,979 shares of common
stock on The NASDAQ Capital Market at the prevailing market price or in
negotiated transactions. This registration does not mean that the selling
shareholders will actually offer or sell any of these shares. We will receive
no
proceeds from the sale of the shares by the selling shareholders. We will
receive proceeds from the sale of shares to one of our selling shareholders
under the 2006-B Common Stock Purchase Agreement dated September 25, 2006 (the
“2006-B Common Stock Agreement”). Because each selling shareholder will offer
and sell the shares at various times, we have not included in this prospectus
information about the price to the public of the shares or the proceeds to
the
selling shareholders. We will also receive proceeds from the sale of shares
issuable by us upon the exercise of options by some of the selling shareholders.
Of the shares covered by this prospectus, an aggregate of 78,334 are shares
underlying vested options granted to the executive officers and directors of
the
Company. These options may be exercised at $7.50 per share at any time within
5
years of vesting.
Steve
Illes, one of our selling shareholders, is an “underwriter” within the meaning
of the Act in connection with the sale of shares purchased from us under the
2006-B Common Stock Agreement. Mr. Illes will receive a ten percent discount
from us in connection with his purchase of shares from us. See “Other
Events”.
Our
common stock is listed on The NASDAQ Capital Market under the symbol “USAT.” On
May 30, 2007, the last reported sale price of our common stock was $9.90 per
share.
THIS
INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF
YOU CAN AFFORD A COMPLETE LOSS. Please refer to Risk Factors beginning on Page
8.
Simultaneously
with this offering, and in addition to the shares offered by the prospectus,
certain other selling shareholders are concurrently offering for resale up
to
547,148 shares through an additional prospectus dated December 6, 2006,
2,242,965 shares through an additional prospectus dated February 12, 2007,
and
2,570,622 shares through an additional prospectus dated April 12, 2007.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of the securities or passed on the adequacy or accuracy
of this prospectus. Any representation to the contrary is a criminal offense.
The
date
of this prospectus is June 6, 2007.
5
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TABLE
OF CONTENTS
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Page
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7
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8
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19
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20
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21
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22
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22
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37
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40
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55
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65
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68
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69
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70
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73
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75
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78
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79
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79
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F-1
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PROSPECTUS
SUMMARY
OUR
COMPANY
USA
Technologies, Inc. (the “Company”, “We” and “Our”) was incorporated in the
Commonwealth of Pennsylvania in January 1992. The Company offers a suite of
networked devices and associated wireless non-cash payment, control/access
management, remote monitoring and data reporting services. As a result of the
acquisition of the assets of Bayview Technology Group, LLC ("Bayview") in July
2003, our Company also manufactures and sells energy management products which
reduce the power consumption of various equipment, such as refrigerated vending
machines and glass front coolers, thus reducing the energy costs associated
with
operating this equipment.
OUR
BUSINESS
Our
networked devices and associated services enable the owners and operators of
everyday, stand-alone, distributed assets, such as vending machines, personal
computers, copiers, faxes, kiosks and laundry equipment, the ability to remotely
monitor, control and report on the results of these distributed assets, as
well
as the ability to offer their customers alternative cashless payment options.
OUR
MARKET
Our
customers fall into the following categories; vending machine owners and/or
operators, business center operators which include hotels and audio visual
companies, commercial laundry operators servicing colleges and universities,
brand marketers wishing to provide their products or services via kiosks or
vending machines and equipment manufacturers such as consumer electronics,
appliances, building control systems, factory equipment and computer peripherals
that would like to incorporate the technological features of our networked
devices (i.e. remote monitoring, reporting and control as well as cashless
payments) into their products. Customers for our energy management products
also
include energy utility companies and operators of glass front coolers.
RESEARCH
AND DEVELOPMENT COSTS
Research
and development expenses, which are included in general and administrative
and
compensation expense in the Consolidated Statements of Operations, were
approximately $974,000, $1,364,000, and $688,000 for the years ended June 30,
2006, 2005 and 2004, respectively, and $992,000 and $577,000 for the nine months
ended March 31, 2006 and 2005, respectively.
ABOUT
OUR OFFERING
Our
selling shareholders are, as of the date of this prospectus, as
follows:
*
1,352,565 shares held by Steve Illes, 320,000 shares of which he has already
purchased from us under the 2006-B Common Stock Agreement and 1,032,565 shares
of which he has agreed to purchase from us under the 2006-B Common Stock
Agreement;
*
97,080
shares held by our Chairman and Chief Executive Officer, George R. Jensen,
Jr.;
*
50,000
shares held by our President and Chief Operating Officer, Stephen P. Herbert;
and
*
78,334
shares underlying vested options which were granted in April 2006 to executive
officers and directors of the Company (based upon the price of our shares of
$9.90 on May 30, 2007, all of these options are in the money).
Based
upon the 11,233,581 shares of Common Stock outstanding as of March 31, 2007,
if
Mr. Illes purchases all 1,032,565 shares pursuant to the 2006-B Common Stock
Agreement that are covered by this prospectus, and taking into account the
167,537 shares already purchased by Mr. Illes from us after March 31, 2007
under
the 2006-B Common Stock Agreement, the 30,520 shares issued to Mr. Jensen and
the 16,666 shares issued to Mr. Herbert subsequent to March 31, 2007, and
assuming all of the options are exercised, we would have 12,624,845 shares
outstanding.
The
shares covered by this prospectus would be offered by our selling shareholders
at the market price at the time of resale. Our selling shareholders may also
sell their shares to other investors in transactions not on the open market.
There is no requirement that our selling shareholders sell their shares pursuant
to this prospectus.
We
will
not receive any of the proceeds raised by the offering. We will receive proceeds
from the purchase by Mr. Illes from us of the shares referred to above under
the
2006-B Common Stock Agreement, and from the exercise by our executive officers
and directors of the options referred to above.
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
have
experienced losses since inception. We expect to continue to incur losses for
the foreseeable future as we expend substantial resources on sales, marketing,
and research and development of our products. From our inception through March
31, 2007, our cumulative losses are approximately $140 million. For our fiscal
years ended June 30, 2004, 2005 and 2006, we have incurred net losses of
$21,426,178, $15,499,190, and $14,847,076, respectively, and a net loss of
$12,176,860 during the nine months ended March 31, 2007. If we continue to
incur
losses, the price of our common stock can be expected to fall and our future
operating prospects harmed.
Our
existence is dependent on our ability to raise capital.
There
is
currently limited experience upon which to assume that our business will
generate sufficient revenues to cover our expenses. From inception, we have
generated funds primarily through the sale of securities. Although we believe
we
have adequate existing resources to provide for our funding requirements through
at least June 30, 2008, there can be no assurances we will be able to continue
to generate sufficient funds thereafter. We expect to raise funds in the future
through sales of our debt or equity securities until such time, if ever, as
we
are able to operate profitably. During the fiscal year ended June 30, 2006,
cash
used in operating activities was approximately $924,000 per month. Using the
prior fiscal year as a basis for estimating cash requirements for the year
ending June 30, 2007 (which assumes a static level of revenues), cash
requirements for the fiscal year 2007, including requirements for capital
expenditures and repayments of long-term debt, would be approximately
$11,600,000. Subsequent to June 30, 2008, our inability to obtain needed funding
can be expected to have a material adverse effect on our operations, future
prospects and our ability to achieve profitability. If we fail to generate
increased revenues or fail to sell additional securities, you may lose all
or a
substantial portion of your investment.
We
received an opinion from our auditor which raises substantial doubt about our
ability to continue as a going concern.
Our
auditors, Goldstein Golub Kessler LLP, have included an explanatory paragraph
in
their report on our June 30, 2006 consolidated financial statements indicating
that as of June 30, 2006, there is substantial doubt about our ability to
continue as a going concern. We will require additional funds in the future,
and
there can be no assurance that any independent auditors’ report on our future
financial statements will not include a similar explanatory paragraph if we
are
unable to raise sufficient funds or generate sufficient cash from operations
to
cover the cost of our operations. The existence of the explanatory paragraph
may
adversely affect our relationship with prospective customers, suppliers and
potential investors, and therefore could have a material adverse effect on
our
business, financial condition and results of operations.
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 our 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:
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§
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our
vulnerability to adverse economic conditions and competitive pressures
may
be heightened;
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§
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our
flexibility in planning for, or reacting to, changes in our business
and
industry may be limited;
|
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§
|
we
may be sensitive to fluctuations in interest rates if any of our
debt
obligations are subject to variable interest rates;
and
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§
|
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 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
additional financing will be available when required or, if available, will
be
on terms satisfactory to us.
The
loss of one or more of our key customers could significantly reduce our revenues
and profits.
We
have
derived, and believe we may continue to derive, a significant portion of our
revenues from a limited number of large customers. Approximately
39% and 36% of
the
Company's accounts and finance receivables at June 30, 2006 and 2005,
respectively, were concentrated with two and two customers, respectively and
62%
as of March 31, 2007 were concentrated with two customers. Approximately 29%,
11% and 13% of the Company's revenues for the year ended June 30, 2006, 2005
and
2004, respectively, were concentrated with two, one and one customer(s),
respectively. Approximately 50% and 34% of the Company’s revenues for the nine
months ended March 31, 2007 and 2006, respectively, were concentrated with
two
customers (43% with one customer and 7% with another customer) and two customers
(25% with one customer and 9% with another customer), respectively. 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 any of our large customers significantly reduce or delay purchases from
us or
if we are required to sell products to them at reduced prices or unfavorable
terms, our results of operations and revenue could be materially adversely
affected.
We
depend on our key personnel and if they leave, our business could be adversely
affected.
We
are
dependent on key management personnel, particularly the Chairman and Chief
Executive Officer, George R. Jensen, Jr. The loss of the services of Mr. Jensen
or other executive officers would dramatically affect our business prospects.
Certain of our employees are particularly valuable to us because they:
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have
specialized knowledge about our company and
operations;
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§
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have
specialized skills important to our operations;
or
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§
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would
be particularly difficult to replace.
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We
have
entered into an employment agreement with Mr. Jensen that expires on June 30,
2009. We have also entered into employment agreements with other executive
officers, each of which contain confidentiality and non-compete agreements.
We
have obtained a key man life insurance policy in the amount of $2,000,000 on
Mr.
Jensen and a key man life insurance policy in the amount of $1,000,000 on our
President, Stephen P. Herbert. We do not have and do not intend to obtain key
man life insurance coverage on any of our other executive officers. As a result,
we are exposed to the costs associated with the death of these key employees.
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 any perceived or actual inability
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
March 31, 2007, we have 29 pending patent applications, and intend to file
applications for additional patents covering our future products, although
there
can be no assurance we will do so. In addition, there can be no assurance we
will maintain or prosecute these applications. The United States Government
and
other countries have granted us 64 patents as of March 31, 2007. There can
be no
assurance that:
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any
of the remaining patent applications will be granted to us;
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we
will develop additional products that are patentable or do not infringe
the patents of others;
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§
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any
patents issued to us will provide us with any competitive advantages
or
adequate protection for our products;
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§
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any
patents issued to us will not be challenged, invalidated or circumvented
by others; or
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§
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any
of our products would not infringe the patents of
others.
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If
any of
our products are found to have infringed any patent, there can be no assurance
we will be able to obtain licenses to continue to manufacture and license such
product or that we will not have to pay damages as a result of such
infringement. Even if a patent application is granted for any of our products,
there can be no assurance 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, 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 rights in connection with any such litigation.
Competition
from others with greater resources could prevent USA from increasing revenue
and
achieving profitability.
Competition
from other companies that are well-established and have substantially greater
resources may reduce our ability to generate revenues and increase our expenses.
Many of our competitors have established reputations for success in the
development, sale and service of products similar to ours. We face competition
from the following groups:
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companies
offering automated, credit card activated control systems in connection
with facsimile machines, personal computers, debit card purchase/revalue
stations, and use of the Internet and e-mail, all of which directly
compete with our products;
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|
§
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companies
which have developed unattended, credit card activated control systems
currently used in connection with public telephones, prepaid telephone
cards, gasoline dispensing machines, or vending machines and are
capable
of developing control systems in direct competition with USA; and
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§
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businesses
which provide access to the Internet and personal computers to hotel
guests. Although these services are not credit card activated, such
services would compete with USA's Business Express(R).
|
Competition
may result in lower 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 or better pricing,
our
ability to compete could be adversely affected.
The
termination of any of our relationships with third parties upon whom we rely
for
supplies and services 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 Masterwork Electronics to assist us to develop
and manufacture our e-Port(R) products and with various sources to manufacture
our energy miser 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 IBM to host our network in a secure,
24/7
environment to ensure reliability of our network services. 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 qualifying a 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.
Our
reliance on our 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 network depends upon the capacity, reliability and security
of
services provided to us by our telecommunication services provider, Cingular.
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, our telecommunication services
provider may increase its prices at which it provides services, which would
increase our costs. If our telecommunication services provider were to cease
to
provide essential services or to significantly increase its 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 e-Port devices that are already
installed in the marketplace. This could significantly harm our reputation
and
cause us to lose customers and revenues.
We
have
contracted with IBM to host our network in a secure, 24/7 environment to ensure
reliability of our network services. 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.
Our
products may contain defects that may be difficult or even impossible to
correct, which could result in lost sales, additional costs and customer
erosion.
We
offer
technically complex products which, when first introduced or released in new
versions, may contain software or hardware defects that are difficult to detect
and correct. The existence of defects and delays in correcting them could result
in negative consequences, including the following:
|
§
|
delays
in shipping products;
|
|
§
|
cancellation
of orders;
|
|
§
|
additional
warranty expense;
|
|
§
|
delays
in the collection of receivables;
|
|
§
|
product
returns;
|
|
§
|
the
loss of market acceptance of our
products;
|
|
§
|
diversion
of research and development resources from new product
development; and
|
|
§
|
inventory
write-downs.
|
Even
though we test all of our products, defects may continue to be identified after
products are shipped. In past periods, we have experienced various issues in
connection with product launches, including the need to rework certain products
and stabilize product designs. Correcting defects can be a time-consuming and
difficult task. Software errors may take several months to correct, and hardware
errors may take even longer.
We
may accumulate excess or obsolete inventory that could result in unanticipated
price reductions and write downs and adversely affect our financial
results.
Managing
the proper inventory levels for components and finished products is challenging.
In formulating our product offerings, we have focused our efforts on providing
our customers products with greater capability and functionality, which requires
us to develop and incorporate the most current technologies in our products.
This approach tends to increase the risk of obsolescence for products and
components we hold in inventory and may compound the difficulties posed by
other
factors that affect our inventory levels, including the following:
|
§
|
the
need to maintain significant inventory of components that are in
limited
supply;
|
|
§
|
buying
components in bulk for the best
pricing;
|
|
§
|
responding
to the unpredictable demand for
products;
|
|
§
|
responding
to customer requests for short lead-time delivery
schedules;
|
|
§
|
failure
of customers to take delivery of ordered
products; and
|
|
§
|
product
returns.
|
If
we
accumulate excess or obsolete inventory, price reductions and inventory
write-downs may result, which could adversely affect our results of operation
and financial condition.
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 by competitors
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, continue to sell existing
products and prevent customers from returning existing products. Our inability
to respond effectively to any of these challenges may have a material adverse
effect on our business and financial success.
Our
products may fail to gain widespread market acceptance. As a result, we may
not
generate sufficient revenues or profit margins to become successful.
There
can
be no assurance that demand for our products will be sufficient to enable us
to
generate sufficient revenue or become profitable. Likewise, no assurance can
be
given that we will be able to install the e-Ports at enough locations or sell
equipment utilizing our network or our energy management products to enough
locations to achieve significant revenues or that our operations can be
conducted profitably. Alternatively, the locations which would utilize the
network may not be successful locations and our revenues would be adversely
affected. We may in the future lose locations utilizing our products to
competitors, or may not be able to install our products at competitors’
locations. In addition, there can be no assurance that our products could evolve
or be improved to meet the future needs of the market place.
Our
internal control over financial reporting may not be effective and our
independent registered public accounting firm may not be able to certify as
to
its effectiveness, which could have a significant and adverse effect on our
business and reputation.
We
are
evaluating our internal control over financial reporting in order to allow
management to report on, and our independent registered public accounting firm
to attest to, our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act of 2002 and rules and
regulations of the SEC thereunder, which we refer to as Section 404. We are
currently performing the system and process evaluation and testing required
(and
any necessary remediation) in an effort to comply with management certification
and auditor attestation requirements of Section 404. At the present time,
we anticipate the management certification and auditor attestation requirements
of Section 404 will initially apply to our Annual Report on Form 10-K
for our fiscal year ended June 30, 2008. However, as we are still in the
evaluation process, we may identify conditions that may result in significant
deficiencies or material weaknesses in the future. A material weakness is a
significant deficiency, as defined in Public Accounting Oversight Board Auditing
Standard No. 2 or a combination of significant deficiencies, that results in
more than a remote likelihood that a material misstatement of the Company’s
annual or interim financial statements would not be prevented or detected by
company personnel in the normal course of performing their assigned
functions.
We
cannot
be certain as to the timing of completion of our evaluation, testing and any
remediation actions or the impact of the same on our operations. If we are
not
able to implement the requirements of Section 404 in a timely manner or
with adequate compliance, our internal controls would be considered ineffective
for purposes of Section 404, our independent auditors may not be able to
certify as to the effectiveness of our internal control over financial reporting
and we may be subject to sanctions or investigation by regulatory authorities,
such as the SEC. As a result, there could be a negative reaction in the
financial markets due to a loss of confidence in the reliability of our
financial statements. In addition, we may be required to incur costs in
improving our internal control system and the hiring of additional personnel.
Any such action could negatively affect our results.
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. These can be no assurances, however, that
our
products and services 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.
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. Our
products may be vulnerable to breaches in security due to defects in the
security mechanisms, the operating system and applications or the hardware
platform. Security vulnerabilities could jeopardize the security of information
transmitted or stored using our products. In general, liability associated
with
security breaches of a certified electronic payment system belongs to the
institution that acquires the financial transaction. In addition, we have not
experienced any material security breaches affecting our business. However,
if
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.
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 or revocation 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. The payment processing industry
may become subject to regulation as a result of recent data security breaches
that have exposed consumer data to potential fraud. 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.
Our
failure to properly comply with these standards and regulations could result
in
lost product sales and significant costs associated with required remedial
measures or production stoppages, any of which could have a material adverse
effect on our business and financial performance.
RISKS
RELATING 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 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 the common stock
or
series A preferred stock and there can be no assurance that cash dividends
will
ever be paid on the common stock.
In
addition, our articles of incorporation prohibit the declaration of any
dividends on the Common Stock unless and until all unpaid and accumulated
dividends on the Series A preferred stock have been declared and paid. Through
May 31, 2007, the unpaid and cumulative dividends on the series A preferred
stock equal $8,992,712. The unpaid and cumulative dividends on the series A
preferred stock are convertible into shares of common stock at the rate of
$1000
per share at the option of the shareholder. Through May 31, 2007, $2,717,764
of
unpaid and cumulative dividends on the Series A Preferred Stock were converted
into 2,918 shares of common stock.
Sales
of shares eligible for future sale from exercise of warrants and options and
our
2006-B Common Stock Agreement could depress the market price of our Common
Stock.
As
of May
31, 2007, we had issued and outstanding options to purchase 177,808 shares
of
our common stock, warrants to purchase 1,704,175 shares, and 232,565 shares
eligible for sale under our 2006-B Common Stock Agreement with Steve Illes.
The
shares underlying 78,558 of these options, all of these warrants, and all of
the
shares underlying the 2006-B Common Stock Agreement have been registered and
may
be freely sold upon issuance. 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, or the increase of the number
of
shares eligible for sale to Mr. Illes under our agreements with him, 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.
The
limited prior public market and trading market may cause possible volatility
in
our stock price.
The
overall market for securities in recent years has experienced extreme price
and
volume fluctuations that have particularly affected the market prices of many
smaller companies. The trading price of our Common Stock is expected to be
subject to significant fluctuations including, but not limited to, the
following:
|
§
|
quarterly
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 or service offerings 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
being sold pursuant to Rule 144 or upon exercise of warrants;
and
|
|
§
|
general
economic or stock market conditions unrelated to our operating
performance.
|
These
fluctuations, as well as general economic and market conditions, may have a
material or adverse effect on the market price of our Common Stock.
The
substantial market overhang of our shares will tend to depress the market price
of our shares.
The
substantial number of our shares currently eligible for sale in the open market
will tend to depress the market price of our shares. As of March 31, 2007,
these
shares consisted of the following:
|
§
|
11,233,581
shares of Common Stock
|
|
§
|
5,203
shares issuable upon conversion of Preferred Stock
|
|
§
|
8,992
shares issuable upon conversion of the accrued and unpaid dividends
on the
Series A Preferred Stock
|
|
§
|
1,925,535
shares underlying Common Stock options and warrants
|
|
§
|
465,744
shares issuable under the 2006-B Common Stock Agreement with Steve
Illes;
and
|
|
§
|
87,987
shares issuable under our 2007-A Stock Compensation
Plan.
|
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.
USE
OF PROCEEDS
We
will
not receive any of the proceeds from the sales of our Common Stock by the
selling shareholders. The selling shareholders entitled to receive the net
proceeds from any sales of our common stock are listed on page 69 of this
prospectus. We will, however, receive proceeds from the purchase by Mr. Illes
of
shares under the 2006-B Common Stock Agreement and from the exercise of vested
options granted in April 2006 to our executive officers and
directors.
As
of the
date of this prospectus, we would receive $587,505 of proceeds from the exercise
of all of the options at the stated exercise price of $7.50 per share (all
of
which are in the money as of May 30, 2007). Also, as of the date of this
prospectus, the maximum amount of remaining purchases by Mr. Illes under the
2006-B Common Stock Agreement is $6,978,257. Based upon the price of our shares
as of May 30, 2007, we would receive $6,978,257 of proceeds from the purchase
by
Steve Illes of 783,194 shares issuable to him under his agreement with us at
$8.91 per share. If our share price would be in excess of $33.00 per share
when
purchases were made by Mr. Illes, we would receive $6,978,257 of proceeds from
the purchase by Mr. Illes of 232,609 shares issuable to him at $30.00 per
share.
SELECTED
FINANCIAL DATA
The
following selected financial data for the five years ended June 30, 2006 are
derived from the audited consolidated financial statements of USA Technologies,
Inc. The financial data for the nine months ended March 31, 2007 and 2006 are
derived from unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, which USA Technologies, Inc. considers necessary for a
fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended March 31, 2007 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 2007. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information.
|
Year
ended June 30
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
OPERATIONS
DATA
|
||||||||||||||||
|
Revenues
|
$
|
6,414,803
|
$
|
4,677,989
|
$
|
5,632,815
|
$
|
2,853,068
|
$
|
1,682,701
|
||||||
|
Net
loss
|
(14,847,076
|
)
|
(15,499,190
|
)
|
(21,426,178
|
)
|
(21,965,499
|
)
|
(17,314,807
|
)
|
||||||
|
Cumulative
preferred dividends
|
(783,289
|
)
|
(784,113
|
)
|
(786,513
|
)
|
(793,586
|
)
|
(822,561
|
)
|
||||||
|
Loss
applicable to common shares
|
$
|
(15,630
,365
|
)
|
$
|
(16,283,303
|
)
|
$
|
(22,212,691
|
)
|
$
|
(22,759,085
|
)
|
$
|
(18,137,368
|
)
|
|
|
Loss
per common share (basic and diluted)
|
$
|
(3.15
|
)
|
$
|
(4.18
|
)
|
$
|
(7.70
|
)
|
$
|
(20.36
|
)
|
$
|
(50.39
|
)
|
|
|
Cash
dividends per common share
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||
|
Total
assets
|
$
|
23,419,466
|
$
|
23,391,765
|
$
|
25,880,577
|
$
|
17,892,681
|
$
|
17,056,773
|
||||||
|
Convertible
Senior Notes and other long-term debt
|
$
|
7,780,853
|
$
|
9,337,300
|
$
|
7,273,056
|
$
|
9,213,699
|
$
|
7,968,097
|
||||||
|
Shareholders'
equity
|
$
|
11,177,064
|
$
|
9,309,185
|
$
|
14,108,662
|
$
|
3,692,083
|
$
|
3,395,892
|
||||||
|
Nine
months ended
|
||||||||||||||||
|
|
March
31
|
|||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
OPERATIONS
DATA
|
||||||||||||||||
|
Revenues
|
$
|
6,711,033
|
$
|
4,024,183
|
||||||||||||
|
Net
loss
|
(12,176,860
|
)
|
(9,374,830
|
)
|
||||||||||||
|
Cumulative
preferred dividends
|
(781,451
|
)
|
(783,289
|
)
|
||||||||||||
|
Loss
applicable to common shares
|
$
|
(12,958,311
|
)
|
$
|
(10,158,119
|
)
|
||||||||||
|
Loss
per common share (basic and diluted)
|
$
|
(1.65
|
)
|
$
|
(2.15
|
)
|
||||||||||
|
Cash
dividends per common share
|
$
|
-
|
$
|
-
|
||||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||
|
Total
assets
|
$
|
35,210,838
|
$
|
22,305,444
|
||||||||||||
|
Convertible
Senior Notes and other long-term debt
|
$
|
3,362,931
|
$
|
9,691,778
|
||||||||||||
|
Shareholders'
equity
|
$
|
27,807,757
|
$
|
8,460,327
|
||||||||||||
(a)
In
May 2002 the Company acquired Stitch Networks Corporation. In July 2003 the
Company acquired substantially all the assets of Bayview Technology Group,
LLC.
Both acquisitions have been accounted for using the purchase method and,
accordingly, are included in the Company's results of operations from their
respective dates of acquisition.
QUARTERLY
FINANCIAL DATA
Unaudited
quarterly results of operations for the years ended June 30, 2006 and 2005
and
the nine months ended March 31, 2007 follow and should be read in conjunction
with the consolidated financial statements, related notes and other financial
information and the Company's quarterly reports on Form 10-Q for the fiscal
years 2006 and 2005 and the nine months ended March 31, 2007.
|
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
|||||||||||
|
YEAR
ENDED JUNE 30, 2006
|
||||||||||||||||
|
Revenues
|
$
|
1,363,886
|
$
|
1,957,753
|
$
|
1,618,776
|
$
|
1,474,388
|
$
|
6,414,803
|
||||||
|
Gross
profit
|
$
|
314,927
|
$
|
787,882
|
$
|
687,749
|
$
|
219,788
|
$
|
2,010,346
|
||||||
|
Net
loss
|
$
|
(3,196,872
|
)
|
$
|
(2,864,091
|
)
|
$
|
(3,313,868
|
)
|
$
|
(5,472,245
|
)
|
$
|
(14,847,076
|
)
|
|
|
Cumulative
preferred dividends
|
$
|
(392,057
|
)
|
$
|
-
|
$
|
(391,232
|
)
|
$
|
-
|
$
|
(783,289
|
)
|
|||
|
Loss
applicable to common shares
|
$
|
(3,588,929
|
)
|
$
|
(2,864,091
|
)
|
$
|
(3,705,100
|
)
|
$
|
(5,472,245
|
)
|
$
|
(15,630,365
|
)
|
|
|
Loss
per common share (basic and diluted)
|
$
|
(0.89
|
)
|
$
|
(0.61
|
)
|
$
|
(0.74
|
)
|
$
|
(0.96
|
)
|
$
|
(3.15
|
)
|
|
|
YEAR
ENDED JUNE 30, 2005
|
||||||||||||||||
|
Revenues
|
$
|
1,032,578
|
$
|
1,135,449
|
$
|
1,122,330
|
$
|
1,387,632
|
$
|
4,677,989
|
||||||
|
Gross
profit
|
$
|
130,534
|
$
|
342,705
|
$
|
566,720
|
$
|
159,357
|
$
|
1,119,316
|
||||||
|
Net
loss
|
$
|
(3,640,637
|
)
|
$
|
(3,805,004
|
)
|
$
|
(3,702,049
|
)
|
$
|
(4,351,500
|
)
|
$
|
(15,499,190
|
)
|
|
|
Cumulative
preferred dividends
|
$
|
(392,057
|
)
|
$
|
-
|
$
|
(392,056
|
)
|
$
|
-
|
$
|
(784,113
|
)
|
|||
|
Loss
applicable to common shares
|
$
|
(4,032,694
|
)
|
$
|
(3,805,004
|
)
|
$
|
(4,094,105
|
)
|
$
|
(4,351,500
|
)
|
$
|
(16,283,303
|
)
|
|
|
Loss
per common share (basic and diluted)
|
$
|
(1.14
|
)
|
$
|
(1.01
|
)
|
$
|
(1.02
|
)
|
$
|
(1.12
|
)
|
$
|
(4.18
|
)
|
|
|
NINE
MONTHS ENDED MARCH 31, 2007
|
||||||||||||||||
|
Revenues
|
$
|
2,008,897
|
$
|
2,011,722
|
$
|
2,690,414
|
||||||||||
|
Gross
profit
|
$
|
615,536
|
$
|
284,189
|
$
|
317,940
|
||||||||||
|
Net
loss
|
$
|
(3,680,314
|
)
|
$
|
(4,377,088
|
)
|
$
|
(4,119,458
|
)
|
|||||||
|
Cumulative
preferred dividends
|
$
|
(391,157
|
)
|
$
|
-
|
$
|
(390,294
|
)
|
||||||||
|
Loss
applicable to common shares
|
$
|
(4,071,471
|
)
|
$
|
(4,377,088
|
)
|
$
|
(4,509,752
|
)
|
|||||||
|
Loss
per common share (basic and diluted)
|
$
|
(0.63
|
)
|
$
|
(0.60
|
)
|
$
|
(0.45
|
)
|
|||||||
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 and its investments
in
cash equivalents and other securities are not significant. Market risks related
to fluctuations of foreign currencies are not significant and the Company has
no
derivative instruments.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CRITICAL
ACCOUNTING POLICIES
GENERAL
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates. We believe the policies and estimates related to revenue recognition,
software development costs, impairment of long-lived assets, goodwill and
intangible assets, and investments represent our critical accounting policies
and estimates. Future results may differ from our estimates under different
assumptions or conditions.
REVENUE
RECOGNITION
Revenue
from the sale of equipment is recognized on the terms of freight-on-board
shipping point, or upon installation and acceptance of the equipment if
installation services are purchased for the related equipment. 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. Product revenues are
recognized for the sale of products from Company owned vending machines when
there is purchase and acceptance of product by the vending customer. 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.
SOFTWARE
DEVELOPMENT COSTS
The
Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior to
the
establishment of technological feasibility are expensed as incurred.
Amortization of software development costs commences when the product becomes
available for general release to customers. Amortization of software development
costs is calculated as the greater of the amount computed using (i) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
During
May 2000, the Company reached technological feasibility for the development
of
the multi-media e-Port(TM) product and related internal network and,
accordingly, the Company commenced capitalization of software development costs
related to this product and network. Costs capitalized through 2002 were $5.3
million, which included capitalized interest of approximately $493,000 pursuant
to SFAS No. 34, "Capitalization of Interest Costs".
During
the fourth quarter of fiscal year 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. During this quarter, management performed an evaluation
of
the commercial success and preliminary market acceptance of the multi-media
e-Port(TM) and enhanced network and as a result of this evaluation the Company
determined that the estimated future revenues less costs to complete and dispose
of the multi-media e-Port client product was zero. Therefore, the Company wrote
down $2,663,000 of software development costs related to the multi-media e-Port
client product. The unamortized balance of the software development costs after
the impairment charge was amortized over an estimated useful life of two years
and was fully amortized during the year ended June 30, 2004. Accumulated
amortization was $5,326,186 at March 31, 2007, and June 30, 2006, 2005, and
2004. Amortization expense was approximately $999,000 during the year ended
June
30, 2004. Such amortization is reflected in cost of sales in the accompanying
consolidated statements of operations.
IMPAIRMENT
OF LONG LIVED ASSETS
In
accordance with Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-lived Assets" ("FAS 144"), the Company
reviews its 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 FAS 144 are met, 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.
During
the fourth quarter of fiscal year 2003, the Company reviewed certain long-lived
assets (vending machines) and determined that such assets were impaired. These
vending machines were used and intended for use in connection with the Company's
program with Kodak to sell disposable cameras and film pursuant to the Kodak
Vending Placement Agreement. Management determined that it was more likely
than
not that these vending machines would be disposed of before the end of their
previously estimated useful lives. The estimated undiscounted cash flows for
this group of assets were less than the carrying value of the related assets.
As
a result, the Company recorded a charge of approximately $321,000 representing
the difference between the fair value as determined
from a quoted market price and the carrying value of the group of assets.
Effective December 31, 2003, the Kodak agreement was terminated. As a result,
the carrying value of the vending machines were further impaired and a charge
of
approximately $367,000 was recorded as a component of the gain on contract
settlement in the June 30, 2004 Consolidated Statement of Operations to reflect
these assets at their realizable value. The remaining value of these vending
machines was then recorded as assets held for sale in the Consolidated Balance
Sheets as of June 30, 2004. During the year ended June 30, 2005, the Company
wrote off the remaining value of the vending machines that had not been sold
during the year as a loss on contract settlement.
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 Statement
of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("FAS 142"). Under FAS 142, goodwill is not amortized to earnings, but instead
is subject to periodic testing for impairment. The Company tests goodwill 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 discounted cash flow 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. The Company has
concluded there has been no impairment of goodwill as a result of its testing
on
April 1, 2004, April 2005 and April 1, 2006. During the nine months ended March
31, 2007, no events or circumstances arose indicating that an impairment of
goodwill may have occurred.
Patents,
trademarks and the non-compete agreement are carried at cost less accumulated
amortization, which is calculated on a straight-line basis over their estimated
economic life. The Company reviews intangible for impairment whenever events
or
changes in circumstances indicate that they carrying amount may not be
recoverable. An asset is considered to be impaired when the sum of the
undiscounted future net cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. The amount of
the
impairment loss, if any, is measured as the difference between the net book
value of the asset and its estimated fair value.
Intangible
assets include patents, trademarks and non-compete arrangements purchased in
acquisitions. Amortization expense related to these intangible assets was
$1,236,600, $1,236,600, and $1,208,668 during the years ended June 30, 2006,
2005, and 2004, respectively and $927,450 and $927,450 for the nine months
ended
March 31, 2007 and 2006, respectively.
INVESTMENTS
The
Company's accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). Management determines the appropriate
classifications of securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Available for sale securities are
carried at fair value, with the unrealized gains and losses reported as a
separate component of stockholders' equity in other comprehensive income (loss).
A judgmental aspect of accounting for investments involves determining whether
an other-than-temporary decline in value of the investment has been sustained.
If it has been determined that an investment has sustained an
other-than-temporary decline in its value, the investment is written down to
its
fair value, by a charge to earnings. Such evaluation is dependent on the
specific facts and circumstances. Factors that are considered by the Company
each quarter in determining whether an other-than-temporary decline in value
has
occurred include: the market value of the security in relation to its cost
basis; the financial condition of the investee; and the intent and ability
to
retain the investment for a sufficient period of time to allow for recovery
in
the market value of the investment. In evaluating the factors above for
available-for-sale securities, management presumes a decline in value to be
other-than-temporary if the quoted market price of the security is below the
investment's cost basis for a period of six months or more. However, the
presumption of an other-than-temporary decline in these instances may be
overcome if there is persuasive evidence indicating that the decline is
temporary in nature (e.g., strong operating performance of investee, historical
volatility of investee, etc.).
During
the year ended June 30, 2003, the Company issued 150,000 shares of its Common
Stock ($2,850,000) for an investment in 1,870,091 shares in the Jubilee
Investment Trust, PLC ("Jubilee"), a United Kingdom Investment Trust whose
shares trade on the London Stock Exchange. The Company agreed not to sell the
Jubilee shares for a period of 90 days from January 24, 2003 and to sell a
maximum of 10% of the Jubilee shares during each month thereafter. Jubilee
agreed not to sell the Company's shares of Common Stock for a period of two
years from the date of issuance unless agreed to by the Company.
During
fiscal year 2004, the Company sold 1,669,091 of the Jubilee shares for net
proceeds of $1,471,140 and realized a gain of $603,480, with the cost of the
securities calculated by the specific identification method. An unrealized
gain
of $3,080 and $32,249 on the shares held by the Company was reflected in
shareholders' equity as accumulated other comprehensive income at June 30,
2005
and 2004, respectively. During fiscal year 2006, the Company sold the remaining
70,000 shares for net proceeds of $19,243 and realized a loss of $16,087, with
the cost of the securities calculated by the specific identification
method.
As
of
March 31, 2007, Available-for-sales securities consisted of auction market
securities. There was no unrealized gain (loss) as of March 31,
2007.
FORWARD
LOOKING STATEMENTS
This
Prospectus contains certain forward looking statements 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, "believes," "expects," "anticipates,"
or
similar expressions. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward looking
information is based on various factors and was derived using numerous
assumptions. Important factors that could cause the Company's actual results
to
differ materially from those projected, include, for example (i) the ability
of
the Company to generate sufficient sales to generate operating profits, or
to
sell products at a profit, (ii) the ability of the Company to raise funds in
the
future through sales of securities, (iii) whether the Company is able to enter
into binding agreements with third parties to assist in product or network
development, (iv) the ability of the Company to commercialize its developmental
products, or if actually commercialized, to obtain commercial acceptance
thereof, (v) the ability of the Company to compete with its competitors to
obtain market share, (vi) the ability of the Company to obtain sufficient funds
through operations or otherwise to repay its debt obligations or to fund
development and marketing of its products; (vii) the ability of the Company
to
obtain approval of its pending patent applications, (viii) the ability of the
Company to satisfy its trade obligations included in accounts payable and
accrued liabilities, (ix) the ability of the Company to predict or estimate
its
future quarterly or annual revenues given the developing and unpredictable
market for its products and the lack of established revenues; (x) the ability
of
the Company to retain key customers as a significant portion of its revenues
is
derived from a limited number of key customers; and (xi) the ability of a key
customer to reduce or delay purchasing products from the Company. Although
the
Company believes that the forward looking statements contained herein are
reasonable, it can give no assurance that the Company's expectations will be
met.
RESULTS
OF OPERATIONS
NINE
MONTHS ENDED MARCH 31, 2007
Revenues
for the nine months ended March 31, 2007 were $6,711,033 compared to $4,940,414
for the corresponding nine-month period in the previous fiscal year. This
$1,770,619 or 36% increase was primarily due to an increase in equipment sales
of $1,580,390 and license and transaction fees of $190,229. The increase in
equipment sales was due to an increase in sales of approximately $2,404,000
of
e-Port vending equipment sales, relating primarily to our initiative with
MasterCard Worldwide, and approximately $55,000 in other equipment sales, offset
by decreases of approximately $703,000 in energy conservation equipment,
approximately $114,000 in laundry equipment sales and approximately $62,000
in
business center sales.
Cost
of
sales for the period consisted of equipment costs of $4,610,096 and network
and
transaction related costs of $883,272. The increase in cost of sales of
$2,343,512 or 74% over the prior year period was due to an increase in equipment
costs of $2,120,891 and an increase of $222,621 of network and transaction
related costs. The increase in equipment costs is due to the increase in
equipment sales, specifically, the increase in equipment costs was due to the
change in sales mixture that consisted of an increase in our higher cost e-Port
equipment, as compared to the cost of our energy conservation equipment. The
increase in network and transaction costs relates to an increase in the number
of devices on our network and the number of transactions processed.
Gross
profit for the nine months ended March 31, 2007 was $1,217,665 compared to
gross
profit of $1,790,558 for the corresponding nine-month period in the previous
fiscal year. This 32% decrease is primarily due to the change in equipment
sales
mixture that consisted of an increase in sales of e-Ports at or near cost along
with a decrease in our higher margin energy Miser sales. The resulting e-Port
margins were driven by our market seeding program with Mastercard Worldwide.
Product pricing under this program does not reflect the Company’s current retail
pricing.
General
and administrative expense of $4,233,885, increased by $572,778 or 16% primarily
due to an increase in consulting expense of approximately $408,000, an increase
in legal fees of approximately $219,000, an increase in temporary labor expenses
of approximately $84,000 and an increase of approximately $119,000 in product
development costs, offset by a decrease in repairs and maintenance expense
of
approximately $121,000 and a decrease in royalty expense of approximately
$139,000.
Compensation
expense of $6,172,890 (approximately $1,213,000 of non-cash charges) increased
by $1,812,954 or 42%, primarily due to an increase in salaries and benefits
expense of approximately $663,000 related to the increase in the number of
employees and an increase in bonus expense of approximately $1,091,000 due
to
non-cash charges from common stock issued to employees and executive officers
and the vesting of common stock option grants to our executive
officers.
Interest
expense of $1,867,796 decreased by $77,994 or 4% primarily due to a reduction
in
the amount of interest expense relating to senior notes that were repaid early
in December 2006, offset by the recognition of the remaining unamortized debt
discount on the $1,645,841 of convertible Senior Notes that were repaid early
in
March 2007.
The
nine-month period ended March 31, 2007 resulted in a net loss of $12,176,860
(approximately $3.9 million of non-cash charges) compared to a net loss of
$9,374,830 (approximately $2.2 million of non-cash charges) for the nine-month
period ended March 31, 2006.
NINE
MONTHS ENDED MARCH 31, 2006
Revenues
for the nine months ended March 31, 2006 were $4,940,414 compared to $3,290,356
for the corresponding nine-month period in the previous fiscal year. This
$1,650,057 or 50% increase was primarily due to an increase in equipment sales
of approximately $1,575,000 and license and transaction fees of approximately
$75,000. The increase in equipment sales was due to an increase in sales of
approximately $876,000 of energy conservation equipment, approximately $544,000
in e-Port vending equipment sales, and approximately $175,000 in laundry
equipment, offset by a decrease of approximately $19,000 in business center
and
other equipment sales.
Cost
of
sales for the period consisted of equipment costs of approximately $2,491,000
and network and transaction related costs of $659,000. The increase in cost
of
sales of $899,458 or 40% over the prior year period was due to an increase
in
equipment costs of approximately $1,059,000, offset by a decrease of
approximately $159,000 of network and transaction related costs. The increase
in
equipment costs directly relates to the increase in equipment sales. The
decrease in network and transaction related costs is due to a decrease from
the
prior year period related to the one-time cost of switching our e-Port vending
customers to the Cingular wireless network and the processing of customer credit
card transactions in the prior period.
Gross
profit for the nine months ended March 31, 2006 was $1,790,558, compared to
gross profit of $1,039,958 for the corresponding nine-month period in the
previous fiscal year. This 72% increase is due to the 50% increase in revenues
with only a 40% increase in equipment and transaction costs as described
above.
General
and administrative expense of $3,661,107 decreased by $1,286,863 or 27%
primarily due to a reduction in consulting fees of approximately $1,022,000
and
a reduction in public relations fees of approximately $230,000.
Compensation
expense of $4,359,936 increased by $231,524 or 6% primarily due to an increase
in salaries and benefits expense of approximately $388,000 due to an increase
in
the number of employees, offset by a decrease in bonus expense of approximately
$97,000 and a decrease of $60,000 in commissions. The decrease in commissions
is
due to changes made to the commission program in the current fiscal
year.
Non-cash
interest expense and amortization of debt discount decreased by $352,885 or
29%
due to a decrease in non-cash charges for accelerated interest on the
unamortized debt discount and other issuance costs on the Senior Notes that
were
converted into Common Stock during the corresponding nine months of the prior
fiscal year. Conversions of Senior Notes totaled $468,452 during the nine-month
period ended March 31, 2005 whereas only $284,135 of Senior Notes were converted
during the corresponding period of the current fiscal year.
The
nine-month period ended March 31, 2006 resulted in a net loss of $9,374,830
(approximately $2.2 million of non-cash charges) compared to a net loss of
$11,147,691 (approximately $2.5 million of non-cash charges) for the nine-month
period ended March 31, 2005.
FISCAL
YEAR ENDED JUNE 30, 2006
Revenues
for the fiscal year ended June 30, 2006 were $6,414,803, an increase of
$1,736,814 or 37% from the fiscal year ended June 30, 2005. This increase was
primarily attributed to increased sales in our energy, vending and laundry
product lines. Revenues are discussed in more detail as follows:
Equipment
sales: Revenues from equipment sales increased to $5,198,360 from $3,535,064
in
the prior fiscal year, an increase of $1,663,296 or 47%. This increase was
primarily attributed to increased sales in our energy ($784,000), vending
($497,000) and laundry ($311,000) equipment sales.
License
and transaction fees: Revenues from license and transaction fees increased
$73,518 or 6% from $1,142,925 to $1,216,443 for the fiscal years ended June
30,
2005 and 2006, respectively. This increase was primarily due to an increase
in
license and transaction fees from our Intelligent Vending and eSuds products
due
to the increased number of devices connected to our USALive®
network.
Cost
of
sales consisted of equipment, product and labor costs of approximately
$3,547,000 and $2,431,000 for the fiscal years ended June 30, 2006 and 2005,
respectively, an increase of $1,116,000 and network and transaction related
costs of approximately $857,000 and $1,048,000 for the years ended June 30,
2006
and 2005, respectively, a decrease of $191,000. The total increase of $925,000
or 27% in cost of sales from $3,478,673 to $4,404,457 for the years ended June
30, 2005 and 2006, respectively, was principally attributable to the increase
in
equipment sales.
Gross
profit for the fiscal year ended June 30, 2006 was $2,010,346, compared to
$1,199,316 for the fiscal year ended June 30, 2005. The increase of $811,030
was
due to an increase in sales of our higher margin energy management
products.
Total
operating expenses for the fiscal year ended June 30, 2006 was $13,792,145,
an
increase of $202,622 or 2% over the prior fiscal year. The components of
operating expenses (General and administrative, Compensation, and Depreciation
and amortization) and the causes of this increase are explained in further
detail, below:
General
and administrative expenses decreased from $6,429,458 for the fiscal year ended
June 30, 2005 to $5,200,116 for the fiscal year ended June 30, 2006, a decrease
of $1,229,342 or 19%. The decrease is due to a reduction in consulting services
of approximately $918,000 and a reduction in public relations expenses of
approximately $204,000.
Compensation
expense increased from $5,559,945 to $6,892,436 for the fiscal year ended June
30, 2005 and 2006, respectively, a $1,332,491 or 24% increase over the prior
fiscal year. This increase is primarily due to stock bonuses and options awarded
to executives as well as stock options awarded to members of the board of
directors. In addition, the Company increased the number of full-time employees
during the fiscal year.
Depreciation
and amortization expense for the fiscal year ended June 30, 2006 was $1,699,593,
compared to $1,600,120 for the prior fiscal year, a $99,473 or 6% increase.
This
increase was attributable to an increased amount of depreciation expense
resulting from approximately $842,000 in property, plant and equipment purchases
during the fiscal year. The majority of the purchases relate to the purchase
and
implementation of Oracle’s e-Business Suite, an enterprise management
system.
Total
interest expense decreased from $3,127,751 to $2,878,966 for the fiscal year
ended June 30, 2005 and 2006, respectively, a decrease of $248,785 or 8%. The
decrease is a result of a reduction in the number of conversions of Senior
Notes
into shares of the Company's Common Stock by Senior Note Holders. In the prior
fiscal year, these conversions resulted in additional interest expense due
to
the accelerated amortization of debt discount charged to interest expense at
the
time of the conversion of the Senior Notes.
For
the
fiscal year ended June 30, 2006, the Company recorded a contingent loss accrual
related to a proposed settlement agreement with Swartz Private Equity, LLC,
as
more fully described above, resulting in a contingent loss of $270,000. There
were no such losses in the prior fiscal year.
The
fiscal year ended June 30, 2006 resulted in a net loss of $14,847,076
(approximately $4.0 million of non-cash charges) compared to a net loss of
$15,499,190 (approximately $3.6 million of non-cash charges) for the prior
fiscal year.
FISCAL
YEAR ENDED JUNE 30, 2005
Revenues
for the fiscal year ended June 30, 2005 were $4,677,989, a decrease of $954,826
or 17% from the fiscal year ended June 30, 2004. This decrease was primarily
attributed to a decrease in sales of our energy management products. Revenues
are discussed in more detail as follows:
Equipment
sales: Revenues from equipment sales decreased to $3,535,064 from $4,349,566
in
the prior fiscal year, a decrease of $814,502 or 19%. This decrease was
primarily attributed to a decrease in sales of our energy management products
of
approximately $1,000,000. This was a result of approximately $686,000 in sales
from three large customer orders in the current fiscal year as compared to
approximately $1,691,000 in sales from five large customer orders during fiscal
year 2004.
License
and transaction fees: Revenues from license and transaction fees increased
$165,274 or 17% from $977,651 to $1,142,925 for the fiscal years ended June
30,
2004 and 2005, respectively. This increase was primarily due to an increase
in
license and transaction fees from our Intelligent Vending products, which was
offset by the decrease in revenues from the termination of the Kodak Vending
Placement Agreement in the prior fiscal year.
Product
sales and other: Revenues from product sales and other decreased to $0 from
$305,598 in the prior fiscal year. This decrease was due to a decrease in camera
and film sales from Company owned vending machines of approximately $105,000
as
a result of the termination of the Kodak Vending Placement Agreement and a
decrease of $200,000 relating to a one-time payment in the prior fiscal year
related to the agreement with Unilever.
Cost
of
sales consisted of equipment, product and labor costs of approximately
$2,431,000 and $2,503,000 for the fiscal years ended June 31, 2005 and 2004,
respectively, a decrease of $72,000; software development amortization of
approximately $0 and $999,000 for the fiscal years ended June 30, 2005 and
2004,
respectively; and network and transaction related costs of $1,048,000 and
$828,000 for the years ended June 30, 2005 and 2004, respectively, an increase
of $220,000. The total decrease of $851,019 or 20% in cost of sales from
$4,329,692 to $3,478,673 for the years ended June 30, 2004 and 2005,
respectively, was principally attributable to the decrease in equipment sales
and the lack of software development costs.
Gross
profit for the fiscal year ended June 30, 2005 was $1,119,316, compared to
$1,303,123 for fiscal year ended June 30, 2004. The decrease of $183,807 was
due
to a reduction in sales of our higher margin energy management
products.
Total
operating expenses for the fiscal year ended June 30, 2005 was $13,589,523,
a
decrease of $5,180,899 or 28% over the prior fiscal year. The components of
operating expenses (General and administrative, Compensation, Depreciation
and
amortization and Loss on debt modification) and the causes of this decrease
are
explained in further detail, below:
General
and administrative expenses decreased from $6,747,824 for the fiscal year ended
June 30, 2004 to $6,429,458 for the fiscal year ended June 30, 2005, a decrease
of $318,366 or 5%. The decrease is due to decrease in bad debt expense and
consulting fees, which is partially offset by increases in public relations
expenses.
Compensation
expense decreased from $10,071,354 to $5,559,945 for the fiscal year ended
June
30, 2004 and 2005, respectively, a $4,511,409 or 45% decrease over the prior
fiscal year. This decrease is primarily due to the one-time issuance of
10,500,000 shares of Common Stock, valued at $4,620,000, to the Company's Chief
Executive Officer in connection with the amendment of his employment agreement
in the prior fiscal year. Additionally compensation expense increased by
approximately $108,000 related to an increase in medical insurance
costs.
Depreciation
and amortization expense for the fiscal year ended June 30, 2005 was $1,600,120,
compared to $1,632,330 for the prior fiscal year, a $32,210 or 2% decrease.
This
decrease was attributable to assets becoming fully depreciated during the fiscal
year ended June 30, 2005.
During
the prior fiscal year, the Company incurred a charge of $318,915 related to
the
modification of debt terms for certain 2003 and 2004 Senior Notes. This charge
represents the unamortized debt discount that remained on the Senior Notes
that
were scheduled to mature in December 2003 and 2004, and whose terms were
substantially modified when the note holders agreed to extend the maturity
date
of their notes in exchange for a reduction in the conversion rate on the note.
There was no such comparable charge in the fiscal year ended June 30, 2005.
During
the fiscal year ended June 30, 2004, the Company sold 1,669,091 shares of its
investment in the Jubilee Investment Trust for net proceeds of $1,471,140,
resulting in a gain of $603,480. There were no sales of such investments during
the year ended June 30, 2005.
During
the fiscal year ended June 30, 2004, a gain of $429,204 was recorded relating
to
the termination of the Kodak Vending Placement Agreement. This gain is comprised
of the payment from Kodak of approximately $675,000 plus the cancellation of
Stitch's obligation to the supplier of the vending machines of approximately
$124,000 less a write down of the carrying value of vending machines of
approximately $367,000 and a net write-off of amounts due to and from Kodak
of
$3,000. During the year ended June 30, 2005, the Company wrote off the remaining
value of the vending machines that had not been sold during the year as a loss
on contract settlement totaling $42,300.
Total
interest expense decreased from $5,032,351 to $3,127,751 for the fiscal year
ended June 30, 2004 and 2005, respectively, a decrease of $1,904,600 or 38%.
The
decrease is a result of a reduction in the number of conversions of the Senior
Notes into shares of the Company's Common Stock by Senior Note Holders. In
the
prior fiscal year, these conversions resulted in additional interest expense
due
to the accelerated amortization of debt discount charged to interest expense
at
the time of the conversion of the Senior Notes.
The
fiscal year ended June 30, 2005 resulted in a net loss of $15,499,190
(approximately $3.6 million of non-cash charges) compared to a net loss of
$21,426,178 (approximately $10.9 million of non-cash charges) for the prior
fiscal year.
FISCAL
YEAR ENDED JUNE 30, 2004
Revenues
for the fiscal year ended June 30, 2004 were $5,632,815, an increase of
$2,779,747 or 97% from the fiscal year ended June 30, 2003. This increase was
primarily attributed to sales of the Company's energy management equipment
during the fiscal year ended June 30, 2004. Such revenues did not exist in
fiscal year ended June 30, 2003 since the acquisition of Bayview occurred in
July 2003. The increase was also due to increases in the sale of our networked
devices and related services. Revenues are discussed in more detail as follows:
Equipment
sales: Revenues from equipment sales increased to $4,349,566 from $1,034,427
in
the prior fiscal year, an increase of $3,315,139 or 320%. This increase is
mainly due to sales of approximately $3,025,000 of the Company's energy
management equipment for the fiscal year ended June 30, 2004. As noted above,
such revenues did not exist in the prior fiscal year. In addition, sales of
the
Company's cashless technology equipment, which includes e-Port, e-Suds and
Kiosk
systems, increased to $736,000, approximately $349,000 or 90% over the prior
fiscal year. The increases in sales were offset by a decrease in Business Center
equipment sales of approximately $59,000.
License
and transaction fees: Revenues from license and transaction fees decreased
$395,922 or 29% from $1,373,573 to $977,651 for the fiscal years ended June
30,
2003 and 2004, respectively. This decrease was primarily due to a decrease
in
fees earned from the Kodak Vending Placement Agreement of approximately
$387,000, which resulted from the termination of the contract on December 31,
2003.
Product
sales and other: Revenues from product sales and other decreased to $305,598
from $445,068, a decrease of $139,470 or 31% from the prior fiscal year. This
decrease was due to a decrease in camera and film sales from Company owned
vending machines of approximately $340,000 as a result of the termination of
the
Kodak Vending Placement Agreement. This decrease was offset by $200,000 of
revenue relating to the Strategic Alliance Agreement executed in October 2003
between the Company and Conopco, Inc dba Unilever Home & Personal Care North
America.
Cost
of
sales consisted of equipment, product and labor costs of approximately
$2,503,000 and $1,085,000 for the fiscal years ended June 31, 2004 and 2003,
respectively, an increase of $1,418,000; software development amortization
of
approximately $999,000 and $1,331,000 for the fiscal years ended June 30, 2004
and 2003, respectively, a decrease of $332,000; and network and transaction
related costs of $828,000 and $555,000 for the years ended June 30, 2004 and
2003, respectively, an increase of $273,000. The total increase of $1,358,249
or
46% in cost of sales from $2,971,443 to $4,329,692 for the years ended June
30,
2003 and 2004, respectively, was principally attributable to the increase in
equipment sales.
Gross
profit for the fiscal year ended June 30, 2004 was $1,303,123, compared to
a
gross loss of $118,375 for fiscal year ended June 30, 2003. The increase of
$1,421,498 was due to increases in hardware sales, particularly the addition
of
energy management equipment sales, which yield a higher profit margin and were
not present in the prior fiscal year, as well as a decrease of approximately
$332,000 related to the amortization of software development costs, which were
fully amortized as of March 31, 2004.
Total
operating expenses for the fiscal year ended June 30, 2004 was $18,770,423,
an
increase of $3,829,159 or 26% over the prior fiscal year. The components of
operating expenses (General and administrative, Compensation, Depreciation
and
amortization and Loss on debt modification) and the causes of this increase
are
explained in further detail, below:
General
and administrative expenses decreased from $7,194,684 for the fiscal year ended
June 30, 2003 to $6,747,824 for the fiscal year ended June 30, 2004, a decrease
of $446,860 or 6%. The decrease is due to decreases of $1,717,000 of
professional fees, primarily related to business consulting, promotion and
public relations and decreases of $134,000 in IT consulting fees, offset by
increases in overall general and administrative expenses of approximately
$1,184,000 related to the acquired energy management operations, as such
expenses did not exist in the prior fiscal year, an increase of $118,000 in
expenses related to the recruitment of executive personnel, and an increase
of
$164,000 in bad debt expense related to an increase in the allowance for
uncollectible accounts as a result of the increase in sales and accounts
receivable.
Compensation
expense increased to $10,071,354 for the fiscal year ended June 30, 2004, a
$5,098,144 or 103% increase over the prior fiscal year. This increase is
primarily due to the one-time issuance of 10,500,000 shares of Common Stock,
valued at $4,620,000, to the Company's Chief Executive Officer in connection
with the amendment of his employment agreement. Additionally, approximately
$845,000 and $376,000 of this increase relates to additional compensation,
including salaries, employee benefits and sales commissions, from the Bayview
acquisition in July 2003 and existing operations, respectively. These increases
were offset by a $742,000 reduction in compensation expense due to a reduction
in bonuses awarded during the fiscal year ended June 30, 2004 as compared to
the
prior year.
Depreciation
and amortization expense for the fiscal year ended June 30, 2004 was $1,632,330,
compared to $1,251,716 for the prior fiscal year, a $380,614 or 30% increase.
This increase was attributable to amortization of intangible assets of $917,000
and depreciation of property and equipment of $122,000 acquired from Bayview
in
July 2003, offset by a decrease in depreciation of approximately $337,000
related to existing assets that have reached the end of their estimated useful
life. Additionally there was an impairment charge of $321,476 recorded on a
group of vending machines during fiscal year 2003.
The
Company incurred charges during the fiscal year ended June 30, 2004 and 2003
relating to the modification of debt terms for certain of the Senior Notes
in
the amount of $318,915 and $1,521,654, respectively. This charge reflects the
write-off of the unamortized debt discount remaining for Senior Notes scheduled
to mature in December 2003 and December 2004, for which the conversion and
maturity terms were modified. The Company offered these note modifications
to
manage short-term cash flows, which resulted in a non-cash charge.
During
the fiscal year ended June 30, 2004, the Company sold 1,669,091 shares of its
investment in the Jubilee Investment Trust for net proceeds of $1,471,140,
resulting in a gain of $603,480. During the fiscal year ended June 30, 2003,
the
Company determined that the decline in the market value of the investment in
the
Jubilee Investment Trust was "other than temporary." Accordingly, the Company
recorded a loss of $1,945,951 on the investment during fiscal year 2003.
During
the fiscal year ended June 30, 2004, a gain of $429,204 was recorded relating
to
the termination of the Kodak Vending Placement Agreement. This gain is comprised
of the payment from Kodak of approximately $675,000 plus the cancellation of
Stitch's obligation to the supplier of the vending machines of approximately
$124,000 less a write down of the carrying value of vending machines of
approximately $367,000 and a net write-off of amounts due to and from Kodak
of
$3,000.
Total
interest expense increased from $4,978,600 to $5,032,351 for the fiscal year
ended June 30, 2003 and 2004, respectively, an increase of $53,751 or 1%.
Although the average principal balances were lower on the Company's 12% Senior
Notes during fiscal year ended June 30, 2004 versus 2003, as the result of
conversions of the Senior Notes into shares of the Company's Common Stock by
Senior Note Holders, interest expense increased due to the accelerated
amortization of debt discount charged to interest expense at the time of the
conversion of the Senior Notes.
The
fiscal year ended June 30, 2004 resulted in a net loss of $21,426,178
(approximately $10.9 million of non-cash charges) compared to a net loss of
$21,965,499 (approximately $12.6 million of non-cash charges) for the prior
fiscal year.
LIQUIDITY
AND CAPITAL RESOURCES
For
the
year ended June 30, 2006, net cash of $11,082,407 was used by operating
activities, primarily due to the net loss of $14,847,076 offset by non-cash
charges totaling $3,966,080 for transactions involving the issuance of Common
Stock for services, stock option compensation charges, depreciation and
amortization of assets, amortization of debt discount, and a loss on the sale
of
an investment. In addition to these non-cash charges, the Company's net
operating assets increased by $419,925 (primarily a decrease in accounts payable
and an increase in both accounts and finance receivables).
For
the
year ended June 30, 2006, net cash used in investing activities was $823,227,
comprised of purchases of property and equipment (primarily consisting of our
purchase and implementation of Oracle’s e-Business Suite, an enterprise
management system), reduced slightly by the proceeds from the sale of an
investment.
Proceeds
from financing activities for the year ended June 30, 2006 provided $12,674,554
of funds, which were necessary to support cash used in operating activities.
Net
proceeds of $14,150,335 were realized from the issuance of Common Stock and
the
collection of Common Stock subscriptions receivable. Net proceeds of $1,314,944
were realized from the issuance of Senior Notes. These proceeds were reduced
by
payments of long-term debt and Senior Notes totaling $2,790,725, including
$927,405 of Senior Notes due December 31, 2005, and $1,683,500 of Senior Notes
due December 31, 2006.
For
the
nine months ended March 31, 2007, net cash of $10,897,110 was used by operating
activities, primarily due to the net loss of $12,176,860 offset by non-cash
charges totaling $3,882,001 for transactions involving the issuance of Common
Stock and Common Stock Options for compensation, the issuance of Common Stock
for legal settlements, the gain on repayment of Senior Notes, bad debt expense,
depreciation and amortization of assets, and amortization of debt discount.
In
addition to these non-cash charges, the Company’s net operating assets increased
by $2,602,251 primarily due to the increases in accounts receivables and
inventory along with decreases in accounts payable and accrued
expenses.
Proceeds
from financing activities for the nine months ended March 31, 2007 provided
$21,064,789 of funds, a portion of which was necessary to support cash used
in
operating and investing activities. Net proceeds of $26,967,182 were realized
from the issuance of Common Stock, $3,234 of proceeds from the collection of
subscriptions receivable and $470,000 of proceeds from a loan agreement, offset
by cash used to repay long-term debt ($177,151) and Senior Notes less discount
($6,198,476).
The
Company has incurred losses since inception. Cumulative losses through March
31,
2007 amounted to approximately $140,000,000. The Company has continued to raise
capital through equity offerings to fund operations.
During
the year ended June 30, 2006, cash used in operating activities was
approximately $925,000 per month. Using the prior fiscal year as a basis for
estimating cash requirements for the year ending June 30, 2007 (which assumes
a
static level of revenues), cash requirements for the fiscal year 2007, including
requirements for capital expenditures and repayments of long-term debt, would
be
approximately $11,600,000.
As
of
March 31, 2007 the Company had approximately $5,700,000 of cash and cash
equivalents on hand and $7,000,000 of short-term available-for-sale
securities.
Pursuant
to the 2006-B Common Stock Agreement, Mr. Illes agreed to purchase shares with
an aggregate purchase price not to exceed $15,000,000. From April 1, 2007
through May 4, 2007, the Company issued an additional 167,537 shares of Common
Stock to Mr. Illes under the 2006-B Common Stock Agreement for total gross
proceeds of $1,550,000. Of the $15,000,000, an aggregate of $7,403,743 in gross
proceeds have been received through May 4, 2007, leaving $7,596,257 of available
funds through the expiration date of the agreement on August 30,
2009.
On
April
30, 2007, the Company prepaid all of the remaining outstanding convertible
senior notes in the principal amount of $3,652,000. Each of the note holders
has
the right, for 30 days, to elect to convert the Senior Notes into shares of
Common Stock in lieu of accepting the repayment. As of May 14, 2007, the holders
of $798,800 of these Senior Notes elected to convert their Senior Notes at
the
rate of $10 per share into 79,880 shares of Common Stock in lieu of accepting
repayment.
From
April 1, 2007 through May 4, 2007, the holders of 32,098 warrants at $6.40
per
share exercised their warrants for total proceeds of $205,427.
Funding
sources in place to meet the Company's cash requirements for the year ending
June 30, 2007 are primarily comprised of approximately $6,000,000 in cash and
cash equivalents on hand and $4,000,000 of available-for-sale securities as
of
May 4, 2007, the proceeds that are available from Mr. Illes under the 2006-B
Common Stock Agreement totaling $7,596,257, as referred to above, future
exercises of options (78,334 of which are vested, currently exercisable and
in
the money as of May 30, 2007, and could generate proceeds of $587,505), and
future exercises of warrants (750,802 of which are currently exercisable and
in
the money as of May 30, 2007, and could generate proceeds of approximately
$4,850,000, and 833,333 of which will become exercisable on September 15, 2007
and are in the money as of the date hereof and could generate proceeds of
approximately $5,333,000), for total resources of approximately $28,366,505.
The
foregoing warrants that become exercisable on September 15, 2007 cannot be
exercised to the extent the exercise would result in the holder thereof being
the beneficial owner of more than 9.99% of our shares. The owner of these
warrants is currently the beneficial owner of approximately 15% of our shares,
and therefore these warrants could not be exercised by the holder unless and
until its ownership of our shares is reduced. The Company believes these
existing sources will provide sufficient funds to meet its cash requirements
through at least June 30, 2008.
COMMITMENTS
The
Company conducts its operations from various facilities under operating leases.
In March 2003, the Company entered into a lease for 12,864 square feet of space
located in Malvern, Pennsylvania for its principal executive office and used
for
general administrative functions, sales activities, and product development.
The
lease term extends through December 31, 2008 and provides for escalating rent
payments and a period of free rent prior to the commencement of the monthly
lease payment in January 2004 of approximately $25,000 per month. During April
2005, the Company entered into an amendment to the lease covering 4,385
additional square feet that is contiguous to its existing space. The lease
term
was extended to December 31, 2010, and the amendment provides for a period
of
free rent for the additional space with rent of approximately $31,000 per month
commencing in September 2005 with escalating rental payments
thereafter.
The
Company also leases 9,084 square feet of space, located in Malvern,
Pennsylvania, on a month-to-month basis for a monthly payment of approximately
$8,000. During January 2007, the Company entered into an amendment to the lease
covering 4,293 additional square feet that is contiguous to its existing space.
The lease term was extended to December 31, 2010, and the amendment provides
for
a rent of $13,377 per month with escalating rental payments through the
remainder of the lease. During prior years, the facility was solely used to
warehouse product. All product warehousing, shipping and customer support was
transferred to this location from the executive office location during the
first
quarter of fiscal year 2005.
In
December 2004, the Company entered into a lease for 2,837 square feet of space
located in Denver, Colorado to be used for administrative functions, sales
activities and product warehousing associated with our energy management
products. The lease term extends through May 31, 2009 and provides for five
months of free rent followed by rent payments of $1,200 per month and escalating
payments beginning on June 1, 2006. The lease provides for additional rent
for a
prorated share of operating costs for the entire facility.
During
the fourth quarter of fiscal year 2006, the Company committed to purchase
approximately $1,334,000 of inventory from a third party manufacturer through
December 31, 2007. The Company has purchased approximately $512,000 of this
inventory through March 31, 2007.
OTHER
EVENTS
Pursuant
to a Common Stock Purchase Agreement dated September 25, 2006 between Mr. Illes
and the Company (“2006-B Common Stock Agreement”), Mr. Illes agreed to purchase
shares of the Company's Common Stock with an aggregate purchase price not to
exceed $15,000,000. As of the date of this prospectus, Mr. Illes has purchased
1,267,435 shares under the 2006-B Common Stock Agreement for an aggregate of
$8,021,743, leaving $6,978,257 of proceeds available thereunder. The Company
issued 20,000 shares of Common Stock to Illes as a due diligence/commitment
fee
in connection with the 2006-B Common Stock Agreement. 1,032,565 shares
covered by this prospectus are available for sale to Mr. Illes under the 2006-B
Common Stock Agreement, provided that the purchase price of such shares does
not
exceed the remaining available proceeds thereunder of $6,978,257. This
prospectus also covers 320,000 shares currently held by Mr. Illes which were
already purchased from us under the 2006-B Common Stock Agreement.
Under
the
2006-B Common Stock Agreement, the Company has the right at any time to require
Mr. Illes to purchase Common Stock from the Company at the lower of: (i) $30.00
per share; or (ii) 90% of the closing bid price per share on the date prior
to
the date of the delivery by the Company to Mr. Illes of notice of his obligation
to purchase. The Company can require Mr. Illes to purchase shares only if the
shares have been registered by the Company for resale under the Act. During
any
calendar month, Mr. Illes cannot be required by the Company to purchase Common
Stock for an aggregate purchase price in excess of $800,000. The Company has
the
right in the future, if necessary, to register additional shares in order to
ensure that a sufficient number of shares are available for purchase by Mr.
Illes. The 2006-B Common Stock Agreement terminates August 30, 2009. The
securities were offered and sold to Mr. Illes under the exemption from
registration set forth under Rule 506 promulgated under the Act. Mr. Illes
is an
existing shareholder and an accredited investor, made appropriate investment
representations, was afforded access to all public filings and all other
information that the Company could reasonably obtain. There was no general
solicitation or advertising. We have agreed to register for resale the shares
issuable to Mr. Illes under the 2006-B Common Stock Agreement, and to keep
the
registration statement current and effective for two years from the date of
this
prospectus.
Prior
to
entering into the 2006-B Common Stock Agreement, Mr. Illes has been an investor
in our Company. During April 2003, we issued to Mr. Illes 10,000 shares at
$10
per share and a warrant to purchase up to 40,000 shares at $10 per share. Mr.
Illes exercised the warrant for 35,000 shares for an aggregate of $350,000
and
did not exercise the remaining warrants. During August 2004, we entered into
a
stock purchase agreement with Mr. Illes pursuant to which he purchased from
us
an aggregate of 349,504 shares for $3,560,620 from August 2004 through February
2005. During March 2005, Mr. Illes purchased $750,000 principal amount of our
2005-C convertible senior notes due December 31, 2010. In June 2005, Mr. Illes
converted $50,000 of this note into 5,000 shares of Common Stock at $10 per
share. In May 2007, Mr. Illes converted the remaining principal balance of
this
note into 70,000 shares. In April 2005, we entered into another stock purchase
agreement with Mr. Illes, which replaced the August 2004 agreement. Pursuant
to
this agreement, from April 2005 through May 2006, Mr. Illes purchased from
us an
aggregate of 559,999 shares for $4,863,066. In February 2006, we entered into
another stock purchase agreement, which replaced the April 2005 agreement.
Pursuant to this agreement, from February 2006 through November 30, 2006, Mr.
Illes has purchased from us an aggregate of 1,500,000 shares for $8,778,425.40,
and no shares remain available for purchase thereunder by Mr. Illes. The 2006-B
Common Stock Purchase Agreement entered into in September 2006 replaced the
February 2006 agreement, and provided that no additional shares were to be
registered under that agreement.
As
of the
date of this prospectus, Mr. Illes owns 390,000 shares of Common
Stock.
The
proceeds from the sales of our Common Stock to Mr. Illes under the 2006-B Common
Stock Agreement will not be used for the cancellation or offset of any current
or future debt instrument held by Mr. Illes.
Pursuant
to the Employment Agreement dated May 11, 2006 between Mr. Jensen and the
Company, the Company agreed to issue to Mr. Jensen an aggregate of 75,000 shares
of Common Stock. These shares vest as follows: 25,000 on June 1, 2006; 25,000
on
January 1, 2007; and 25,000 on June 1, 2007. All of these shares are included
in
this prospectus. Pursuant to his Employment Agreement, Mr. Jensen also elected
to have fifty percent of his base salary for the fiscal year ending June 30,
2007 paid through the issuance to him of 22,080 shares of Common Stock in lieu
of cash. These shares vested as follows: 5,520 shares on July 1, 2006; 5,520
shares on October 1, 2006; 5,520 shares on January 1, 2007; and 5,520 shares
on
April 1, 2007. All of these shares are included in this prospectus. Mr. Jensen
was also granted options to purchase up to 75,000 shares of Common Stock at
$7.50 per share. The options vest as follows: 25,000 on May 11, 2006; 25,000
on
June 30, 2007; and 25,000 on June 30, 2008. The options may be exercised at
any
time within 5 years of vesting. The shares underlying the options that vested
on
May 11, 2006 are included in this prospectus.The offer and sale of the shares
to
Mr. Jensen were exempt from registration under Section 4(2) of the Act.
Pursuant
to the Employment Agreement dated May 11, 2006 between Mr. Herbert and the
Company, the Company agreed to issue to Mr. Herbert an aggregate of 50,000
shares of Common Stock. These shares vested as follows: 16,667 on June 1, 2006;
16,667 on January 1, 2007; and 16,666 on June 1, 2007. The Company has agreed
to
include in this prospectus the 16,667 shares of Common Stock that vested on
June
1, 2007. All of these shares are included in this prospectus. Mr. Herbert was
also granted options to purchase up to 18,000 shares of Common Stock at $7.50
per share. The options vest as follows: 6,000 on May 11, 2006; 6,000 on June
30,
2007; and 6,000 on June 30, 2008. The options may be exercised at any time
within 5 years of vesting. The shares underlying the options that vested on
May
11, 2006 are included in this prospectus.The offer and sale of the shares to
Mr.
Herbert were exempt from registration under Section 4(2) of the
Act.
Pursuant
to the Employment Agreement dated May 11, 2006 between Mr. DeMedio and the
Company, the Company agreed to grant options to Mr. DeMedio to purchase up
to
7,000 shares of Common Stock at $7.50 per share. The options vest as follows:
2,334 on May 11, 2006; 2,333 on June 30, 2007; and 2,333 on June 30, 2008.
The
options may be exercised at any time within 5 years of vesting. The Company
has
agreed to include in this prospectus the 2,334 shares of Common Stock underlying
the options that vested on May 11, 2006.
On
April
21, 2006, the Company granted options to purchase up to 12,000 shares to each
of
the then non-employee directors, Messrs. Sellers, Van Alen, Katz, and Lurio,
and
options to purchase up to 6,000 shares to the other non-employee director,
Mr.
Passner. These options have an exercise price of $7.50 per share and are
exercisable at any time within five years following the date of vesting. The
options granted to Mr. Sellers and Mr. Van Alen were fully vested. Of the
options granted to Mr. Katz and Mr. Lurio, 6,000 vested immediately, 3,000
vest
on April 1, 2007, and 3,000 vest on April 1, 2008. Of the options granted to
Mr.
Passner, 3,000 vested on April 1, 2007, and 3,000 vest on April 1, 2008. The
Company has agreed to include in this prospectus 45,000 shares of Common Stock
underlying the options that vested on or prior to the date hereof.
BUSINESS
OVERVIEW
USA
Technologies, Inc. (the “Company”, “We” or “Our”) was incorporated in the
Commonwealth of Pennsylvania in January 1992. The Company offers a suite of
networked devices and associated wireless non-cash payment, control/access
management, remote monitoring and data reporting services, as well as energy
management products. Our networked devices and associated services enable the
owners and operators of everyday, stand-alone, distributed assets, such as
vending machines, personal computers, copiers, faxes, kiosks and laundry
equipment, the ability to remotely monitor, control and report on the results
of
these distributed assets, as well as the ability to offer their customers
alternative cashless payment options. As a result of the acquisition of the
assets of Bayview Technology Group, LLC (“Bayview”) in July 2003, our Company
also manufactures and sells energy management products which reduce the
electrical power consumption of various existing equipment, such as refrigerated
vending machines and glass front coolers, thus reducing the electrical energy
costs associated with operating this equipment.
Our
customers fall into the following categories: vending machine owners and
operators, business center operators which include hotels and audio visual
companies, commercial laundry operators servicing colleges and universities,
brand marketers wishing to provide their products or services via kiosks or
vending machines and equipment manufacturers that would like to incorporate
the
technological features of our networked devices (i.e. remote monitoring,
reporting and control as well as cashless payments) into their products.
Customers for our energy management products also include energy utility
companies, schools and operators of glass front coolers.
OUR
TECHNOLOGY
Our
Company offers an end-to-end solution for control/access management, remote
monitoring, turnkey cashless payment processing and data reporting for
distributed assets such as vending machines, office equipment, laundry machines
and kiosks. This solution consists of a device in the distributed asset (the
“client device”), a connectivity medium, and our proprietary
network.
The
Client Devices
As
part
of the end-to-end solution, the Company offers its customers several different
client devices to connect their distributed assets. These client devices range
from software, or dynamic link libraries ("DLLs"), to hardware devices
consisting of control boards, magnetic strip card readers, RFID readers, and/or
receipt printers. The client device can be embedded inside the host equipment,
such as software residing in the central processing unit of a Kiosk; it can
be
integrated as part of the host equipment, such as our e-Port(R) hardware that
can be attached to the door of a vending machine; or it can be a peripheral,
stand-alone terminal, such as our TransAct(TM) terminal for Business Express(R).
e-Port(R)
is the Company's core client device, which is currently being utilized in
vending and commercial laundry applications. Our e-Port(R) product facilitates
cashless payments by capturing the payment media and transmitting the
information to our network for authorization with the payment authority (e.g.
credit card processors). Additional capabilities of our e-Port(R) consist of
control/access management by authorized users, collection of audit information
(e.g. product or service sold, 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.
TransAct(R)
is the Company's original cashless, transaction-enabling device developed for
self-service business center equipment such as PC's, fax machines and copiers.
Similar to e-Port(R), the TransAct(R) capabilities include control/access
management, collection of sales data (e.g. date and time of sale, sales amount
and product or service purchased), and transmission back to our network for
reporting to customers.
The
Connectivity Mediums
Connectivity
of our client devices (e-Port(R) and TransAct(R)) to the USALive(R) network
is
another component of the Company's end-to-end solution. The reliable, cost
effective transfer of customer's business critical data is paramount to the
services we deliver. Due to the importance of connectivity, and realizing that
every customer's connectivity needs may be different (e.g. access, or lack
thereof, to phone lines, local area networks ("LANs”), wide area networks
("WANs”) and wireless data networks), the Company offers multiple connectivity
solutions - phone line, Ethernet and wireless.
Increasing
wireless connectivity options, coverage and reliability and decreasing costs,
over the past few years have allowed us to service a greater number of customer
locations, since many of our customer's host equipment, particularly within
the
vending industry, do not have access to any other communication medium.
Additionally, we make it easy for our customers to deploy wireless solutions
by
being a single point of contact. By aggregating different wireless networks,
we
ensure our customers have reliable, cost effective nationwide coverage without
the hassles of certification and administration of multiple wireless
suppliers.
The
Network
USALive(R)
is the network component of our end-to-end solution to which the Company's
devices transmit their cashless payment information for processing as well
as
the valuable 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.
USALive(R)
is the enabler of turnkey cashless payment processing for our customers. The
network is certified with several cashless payment authorities, such as credit
card processors and property management systems, facilitating the authorization
and settlement of credit cards, debit cards, hotel room keys and student ids.
The network can also act as its own payment processing authority for other
cashless payment media, such as on-line stored value or employee payroll
deduction. The network authorizes transactions, occurring at the host equipment,
with the appropriate payment authority and sends approval or decline responses
back to the networked device to allow or terminate the transaction for the
purchase of the product or service. The network consolidates successfully
approved transactions from multiple devices, batches, and then transmits these
batched transactions to the payment authority for settlement. By bundling and
batching transactions from multiple networked devices and connecting to the
appropriate payment authorities through one central dedicated processing medium,
it reduces the fees charged by the payment authority.
USALive
On-line(TM) is the web based reporting system that customers use to gain access
to the valuable business information collected from the networked devices.
The
website's functionality includes: management of the distributed assets deployed
in the field, such as new activations and location redeployments; user-defined
reporting for miscellaneous payment types (e.g. cash, credit, etc), date and
time product sold, and sales amount; and detailed bank account deposit
information, by device, for easier bank reconciliation. The Company offers
this
service through either a Company branded website or Customer specific branded
website.
OUR
PRODUCTS AND SERVICES
Intelligent
Vending(R)
Developed
for the vending industry, Intelligent Vending(R) is our end-to-end vending
solution. This system bundles e-Port(R), USALive(R), and its web-based remote
monitoring, management, reporting and turnkey payment processing. Our latest
improvement to Intelligent Vending(R) is the introduction of our e-Port(R)
G-6.
This device includes a radio frequency identification (“RFID”) or “Tap &
Go™” tag reader for added convenience to consumers.
Vending
operators purchasing our Intelligent Vending(R) products and services will
have
the capability to conduct cashless transactions via credit cards, debit cards
and other payment mediums such as employee/student ids and hotel room keys;
to
offer improved and expanded customer services by utilizing 'real-time',
web-based reporting to keep machine inventory at a desirable level and consumer
access to our 1-800 help-desk center for customer purchasing inquiries, both
providing the end-user a more consistent user experience; to reduce operational
costs through utilization of our remote monitoring technology, thereby
maximizing the scheduling of service visits and limiting 'out-of-stock'
machines; and to reduce theft and vandalism by providing 100% accountability
of
all sales transactions and reducing the cash reserves inside the machine.
e-Suds(TM)
eSuds(TM)
is our end-to-end solution developed for the commercial laundry industry. The
eSuds(TM) system bundles e-Port(R) and USALive(R) to offer a cash-free payment
option, web-based remote monitoring and management, an e-mail alert system
to
notify users regarding machine availability, cycle completion, and other events.
eSuds(TM) also supports a variety of value-added services such as custom
advertising or subscription-based payments.
Laundry
operators purchasing our eSuds(TM) system will have the capability to conduct
cashless transactions via credit cards, debit cards and other payment mediums
such as student ids; to reduce operational costs through utilization of our
remote monitoring technology, thereby maximizing the scheduling of service
visits and increasing machine up-time. The system can also increase customer
satisfaction through improved maintenance, higher machine availability,
specialized services (i.e. email alerts to indicate that laundry cycle is
finished) and the convenience of non-cash transactions. Installations have
been
completed at Carnegie Mellon University, Rutgers University, Case Western
Reserve University, John Hopkins University and others. We are working with
distributors to install eSuds(TM) at other colleges and universities based
on
the positive results of these installations.
Transact(R)
And Business Express(R)
TransAct(R),
our original payment technology system developed for self-service business
center devices, such as PCs, fax machines, and copiers, is a cashless
transaction-enabling terminal that permits customers to use office equipment
quickly and simply with the swipe of a major credit card. The TransAct(R) device
can be sold as a stand-alone unit for customers wishing to integrate it with
their own office equipment.
Business
Express(R) is a bundled solution comprised of the TransAct(R) payment terminal
and a suite of office equipment (i.e. PC, fax and copier). Business Express(R)
enables hoteliers and others to offer unmanned business services 24/7/365.
In
addition, the Company offers the Public PC(TM), the Public Fax(TM) and the
Public Copier(TM) to customers wishing to purchase a specific self-service
product versus a complete bundled Business Center(R). The Company also provides
additional value-added service and revenue generating opportunities with
BEXPrint(TM), our proprietary technology that allows users, without access
to a
printer, to send a document to a secure web-site for storage, and then password
retrieval of the document for printing at our Business Center locations, and
our
Kinko's relationship, which gives our Business Center users access to the
nearest, convenient Kinko's center for their more advanced business center
needs.
Although
larger hotels are expected to provide business centers to its guests, operation
of the center can be costly. In addition to the cost of operating a supervised
business center, operating hours usually are limited due to staff availability.
Business Express(R) provides a cost-effective solution.
Kiosk
We
provide an end-to-end solution that utilizes e-Port(R) and USALive(R) to offer
a
cash-free payment option and web-based remote monitoring and management for
all
kiosk types. Kiosks permit a host of new services to become available at the
point-of-demand, such as Sony's self-service, PictureStation kiosks, where
consumers can produce prints from their own digital media. Our solution also
enables Kiosks to sell a variety of more expensive items.
Sony's
PictureStation kiosks, which use our e-Port(R) software solution, have been
installed in approximately 60 locations across the United States.
Energy
Management Products
With
the
acquisition of Bayview in July 2003, our Company offers energy conservation
products ("Misers”) that reduce the electrical power consumption of various
types of existing equipment, such as vending machines, glass front coolers
and
other "always-on" appliances by allowing the equipment to selectively operate
in
a power saving mode when the full power mode is not necessary. Each of the
Company's Miser products utilizes occupancy sensing technology to determine
when
the surrounding area is vacant or occupied. The Miser then utilizes occupancy
data, room and product temperatures, and an energy saving algorithm to
selectively control certain high-energy components (e.g. compressor and fan)
to
realize electrical power savings over the long-term use of the equipment.
Customers of our VendingMiser(R) product benefit from reduced energy consumption
and costs of up to 46% per machine, depending on regional energy costs, machine
type, and utilization of the machine. Our Misers also reduce the overall stress
loads on the equipment, helping to reduce associated maintenance
costs.
The
Miser
family of energy-control devices, include:
VendingMiser(R)
- installs in a cold drink vending machine and can reduce the electrical power
consumption of the vending machine by an average of up to 46%.
CoolerMiser™
- reduces the electrical energy used by sliding glass or pull open glass-front
coolers that contain non-perishable goods.
VM2IQ™
and CM2IQ™ - The second generation of the VendingMiser™ and CoolerMiser™ devices
that is installed directly inside the machine and has the capability to control
the cooling system and the advertising lights separately.
SnackMiser™
- reduces the amount of electricity used by non-refrigerated snack vending
machines.
PlugMiser™
- reduces the amount of electricity used by all types of plug loads including
those found in personal or modular offices (printers, personal heaters, and
radios), video arcade games, and more.
THE
OPPORTUNITY
Everyday
devices from vending machines and logistics equipment to refrigerators, security
systems, and countless other devices can be better managed by embedding
thin-client computing technology with network connectivity into each unit.
Using
wired and/or wireless networks and centralized, server-based software
applications, managers can remotely monitor, control, and optimize a network
of
devices regardless of where they are located, resulting in a host of benefits
including lower maintenance costs, improved inventory and transaction
management, and increased operating efficiency.
This
market opportunity is known by several different names, including
Machine-to-Machine ("M2M") networking, Device Relationship Management ("DRM"),
the Pervasive Internet and Device Networking. This industry is the convergence
of computer-enabled devices and embedded systems, the Internet or other
networking mediums, and centralized enterprise data-management tools. By
connecting stand-alone devices into large-scale networks, new opportunities
emerge between brand marketers, service providers, and their customers.
Networked devices enable remote monitoring, cashless transactions, sales
analysis, and optimized machine maintenance - all yielding higher return on
investment for operators while increasing consumer satisfaction with improved
and expanded services.
Brand
marketers will be able to provide their products and services to customers
wherever and whenever the need arises. They will no longer be limited to
existing distribution channels and outlets. Just as beverage vending machines
bring bottlers' products beyond the supermarket to the location where and when
the customer wants them, a vast range of products and branding opportunities
can
be made available to customers at the point-of-need. In laundry, makers of
detergent and fabric softener can have their products injected directly into
a
consumer's laundry, again putting their products at the point-of-need.
The
market for networked device solutions is projected to be large and growing
rapidly and includes a wide variety of segments such as the security and alarm,
automated meter reading, fleet and asset management, and consumer telemetry
markets. Networked devices will include personal devices (e.g. cell phones,
PDAs), vehicles, containers, supply chain assets, medical devices, HVAC units,
industrial machinery, home appliances, energy, accelerometers, pressure gauges,
flow control indicators, biosensors, and countless other applications. According
to an article, "Pervasive Internet", in M2M Magazine (Fall 2003), a minimum
of
1.5 billion devices will be connected to the Internet worldwide by 2010. This
represents a $700 billion total opportunity including device enabling,
monitoring, and providing value-added services made available by the M2M
network, according to M2M Magazine.
We
believe that an opportunity exists to combine our technology with world-class
partners in order to deliver a best-in-class solution and emerge as a leader
in
the Device Networking industry. Our Company has begun addressing this
opportunity by working in several initial verticals, which include vending,
commercial laundry, self-service business centers and self-service kiosks.
These
services share several key attributes, specifically, they are all self-service,
cash-based businesses that are distributed across broad geographic areas. We
address the extremely broad range of Device Networking opportunities by
licensing our technologies to equipment makers throughout a variety of market
segments. Equipment makers will be able to merge our technology with their
in-depth market expertise.
THE
INDUSTRY
Our
current customers are primarily in the vending, commercial laundry, business
center and kiosk industry sectors. While these industry sectors represent only
a
small fraction of the total Device Networking market, these are the areas where
we have gained the most traction. In addition to being our primary markets,
these sectors serve as a proof-of-concept for other Device Networking industry
applications.
Vending
Annual
worldwide sales in the vending industry sector are estimated to be approximately
$143.5 billion, according to Vending Times Census of the Industry 2002.
According to this Census, there are an estimated 8 million vending locations
in
the United States, and 30 million locations worldwide. The market segment that
can be addressed by our end-to-end solution consists primarily of vended
products retailing for $1 or greater, which represents a Company estimated
vended volume of approximately $28 billion. Per census statistics, the overall
market growth is 5% to 6% annually, while the addressable market segment for
our
end-to-end solution is growing more rapidly at 9% annually. Our VendingMiser(R)
energy conservation product can serve the entire vending market.
Commercial
Laundry
The
domestic commercial laundry industry is estimated to be $5 billion in annual
sales and 3.5 million commercial laundry machines in operation, according to
Coin Laundry Association, October 2000 edition. The average annual growth rate
for the commercial laundry sector is estimated to be between 10% and 12%. The
Company believes the inline sale of additives (i.e. push-button selections
for
detergent and softener) may lead to a significant increase in this figure due
to
larger net margins over traditional industry standards. The addressable market
is primarily the seven largest laundry operators, as well as several other
small
operators. These operators own and manage the equipment that is installed in
multi-housing and college and university locations. The addressable market
excludes those who own single laundromats.
Business
Centers
There
are
currently 52,000 hotels in the United States and 300,000 worldwide, per American
Hotel & Lodging Association's website, www.ahma.com. There is demand for
business center availability in hotels, with ever-greater percentages of
travelers needing and expecting use of computers, printers, fax machines,
copiers, and other business services. We believe that there are 5,900 hotels
in
the primary addressable market - business oriented hotels with over 150 rooms
-
and 13,900 in the secondary market, hotels with 75 to 150 rooms. The growth
rate
for the overall market is 5% annually, with the addressable market gaining
8%
annually.
Kiosk
According
to a report by Frost and Sullivan Consulting, Kiosks represent a $500 million
market. Kiosks are becoming increasingly popular as self-service "specialty"
shops within larger retail environments. Value-added services, such as photo
enlargement and custom imaging are a prominent example, located within many
major retailers. Since pricing on these products is generally higher than $1
or
$2, cashless payment options are essential.
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 March 31, 2007, the Company was marketing and
selling its products through its full time staff consisting of thirteen people.
Direct
Sales
We
sell
directly to the major operators in each of our target markets. Each of our
target markets is dominated by a handful of large companies, and these companies
comprise our primary customer base. In the vending sector, approximately ten
large operators dominate the sector; in the commercial laundry sector, seven
operators currently control the majority of the market. We also work directly
with hoteliers for our TransAct(TM) and Business Express(R) products.
Within
the vending industry, our customers include soft drink bottlers and independent
vending operators throughout the United States. On the soft drink bottler side,
heavy effort is being put into securing initial distribution agreements. Three
of the premier national independent vending operators, the Compass Group
(Canteen, Flik, Eurest, Restaurant Associates and other affiliates), ARAMARK
and
Sodexho, have installed approximately 130 e-Port(R) devices.
Channel
Sales
We
currently engage in channel sales for our TransAct(TM) and Business Express(R)
products. We also work with audio-visual companies that service major hotels.
Marketing
Our
marketing strategy consists of building our brand by creating a company and
product presence at industry conferences and events, in order to raise
visibility within our industry, create opportunity to conduct product
demonstrations and consult with potential customers one-on-one; sponsoring
of
education workshops with trade associations such as National Automated
Merchandiser Association ("NAMA"), to educate the industry on the importance
and
benefits of our solution and establish our position as the industry leader;
develop several one-sheet case studies to illustrate the value of our products;
the use of direct mail campaigns; advertising in vertically-oriented trade
publications such as Vending Times, Automatic Merchandiser and Energy User
News;
and cultivate a network of State governments and utility companies to provide
incentives or underwriting for our energy management products.
STRATEGIC
RELATIONSHIPS
Mastercard
International
In
June
2006, Mastercard International and the Company signed an agreement to deploy
1,000 e-Port devices that accept Matercard “PayPass™” in Coca-Cola vending
machines owned and operated by the Philadelphia Coca-Cola Bottling Company.
From
July through March 31, 2007, the Company has earned approximately $400,000
from
this agreement.
In
November 2006, Mastercard International and the Company signed an agreement
to
deploy 5,000 e-Port devices that accept Matercard “PayPass™”. As of March 31,
2007, the Company had earned approximately $1,400,000 from this
agreement.
In
May
2007, MasterCard International, the Company, and Coca-Cola Enterprises, Inc.
entered into an agreement to deploy 7,500 e-Port devices, all as more fully
described below.
Mars
Electronics Inc. (MEI)
In
September 2004, MEI and the Company signed a technology licensing and sales
agreement to bring a turnkey cash and credit card payment system to the vending
market. Under the agreement, MEI licensed our intellectual property so operators
can connect to USALive(R), our network for services and credit card transaction
capability. As of March 31, 2007, the Company has not earned material revenues
from this agreement.
AT&T
(formerly Cingular Wireless)
In
July
2004, we signed an agreement to use AT&T's digital wireless wide area
network for transport of data, including credit card transactions and inventory
management data. AT&T (formerly Cingular Wireless) is a provider of advanced
wireless voice and data services for consumers and businesses, operating one
of
the largest digital wireless networks in North America and the fastest
nationwide wireless data network in the United States.
Coca-Cola
Enterprises, Inc.
In
May
2007, we entered into a three year Supply And Licensing Agreement with Coca-Cola
Enterprises, Inc. (“CCE”), the world’s largest marketer, producer and
distributor of Coca-Cola products. The Agreement covers the purchase by CCE
from
us of our G6 e-Port for use in CCE’s beverage vending machines, including the
purchase of e-Ports by CCE under the MasterCard agreement referred to below.
The
price of each e-Port is $433. We would also receive 5% of the cashless revenues
from the CCE vending machine as a processing fee and a monthly payment of $9.95
per unit if we would act as the transaction processor for the CCE vending
machine.
The
Agreement also includes as an exhibit the MasterCard PayPass Participation
Agreement entered into between us, CCE, and MasterCard International
Incorporated under which CCE has agreed to use commercially reasonable efforts
to complete installation of up to 7,500 e-Ports by August 31, 2007. In addition
to accepting credit and debit cards, these e-Ports accept payment from credit
cards utilizing MasterCard’s PayPass contactless technology. The e-Ports would
be utilized in CCE beverage vending machines in multiple cities throughout
the
United States. For each e-Port successfully installed by CCE, we would receive
an aggregate of $433 from CCE and MasterCard. The agreement provides that if
all
7,500 e-Ports are not installed by August 31, 2007, we are required to refund
to
MasterCard a pro rata share of any payments received from MasterCard that relate
to any uninstalled units. If all of the 7,500 e-Ports are timely installed,
we
would receive $3,247,500 for the e-Ports.
MANUFACTURING
The
Company utilizes independent third party companies for the manufacturing of
its
products. The Company purchases other components of its business center
(computers, printers, fax and copy machines) through various manufacturers
and
resellers. Our 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 beyond those submitted under routine purchase
orders, typically covering short-term forecasts.
COMPETITION
The
cashless vending, remote business service and energy conservation industries
are
each highly competitive markets. While the Company offers unique products and
services within smaller niche markets of these industries, a number of
competitors in the broader market may offer products and services within our
niche market in the future. In the cashless vending market, we are aware of
one
direct competitor, Transaction Network Services, Inc. In the cashless laundry
market, we are aware of one direct competitor, Mac-Gray Corporation. In the
automated business center market, we are aware of three direct competitors.
In
the energy management market, we are not aware of any direct competitors for
our
Miser products.
The
businesses which have developed unattended, credit card activated control
systems currently in use in non-vending machine applications (e.g., gasoline
dispensing, public telephones, prepaid telephone cards and ticket dispensing
machines), might be capable of developing products or utilizing their existing
products in direct competition with our e-port control systems targeted to
the
vending industry. The Company is also aware of several businesses that make
available use of the Internet and use of personal computers to hotel guests
in
their hotel rooms. Such services might compete with the Company's Business
Express, and the locations may not order the Business Express, or if ordered,
the hotel guest may not use it. Finally, the production of highly efficient
vending machines and glass front coolers or alternative energy conservation
products may reduce or replace the need for our energy management
products.
The
Company’s key competitive factors include our unique products, our integrated
services, product performance and price. Our competitors are well established,
have substantially greater resources than the Company and have established
reputations for success in the development, sale and service of high quality
products. Any increase in competition in the future may result in reduced sales
and/or lower percentages of gross revenues being retained by the Company in
connection with its licensing arrangements, or otherwise may reduce potential
profits or result in a loss of some or all of its customer base.
CUSTOMER
CONCENTRATIONS
Approximately
39% and 36% of the Company's accounts and finance receivables at June 30, 2006
and 2005, respectively, were concentrated with two and two customers,
respectively, and 62% as of March 31, 2007 was concentrated with two customers.
Approximately 29%, 11% and 13% of the Company's revenues for the year ended
June
30, 2006, 2005 and 2004, respectively, were concentrated with two, one and
one
customer(s), respectively. Approximately 50% and 34% of the Company’s revenues
for the nine months ended March 31, 2007 and 2006, respectively, were
concentrated with two customers (43% with one customer and 7% with another
customer) and two customers (25% with one customer and 9% with another
customer), respectively. The Company's customers are principally located in
the
United States.
TRADEMARKS,
PROPRIETARY INFORMATION AND PATENTS
The
Company received federal registration approval of the following trademarks:
Business Express, Express Solutions, C3X, TransAct, Public PC, PC Express,
Copy
Express, Credit Card Copy Express, Credit Card Computer Express, Credit Card
Printer Express, Credit Card Microfiche Express, Credit Card Debit Express,
The
Office That Never Sleeps, Intelligent Vending, e-Port, Dial-A-Vend,
Dial-A-Snack, Dial-A-Vend.com, USALive and e-Port The Next Generation in
Vending. The Company has two trademarks pending registration, VM2IQ and CM2IQ.
Through its wholly owned subsidiary, Stitch Networks, the Company has secured
three registered trademarks, including eVend.net, eSuds.net, and Stitch
Networks, and one trademark, E-ppliance, which is pending registration. In
addition, due to the July 2003 acquisition of Bayview, the Company has secured
the VendingMiser trademark and the trademark SnackMiser is pending federal
registration.
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
March 31, 2007, 59 United States patents and 5 Foreign patents have been issued
to the Company, 21 United States patents and 8 Foreign patents are pending
and 2
patents have received notices of allowance.
The
list
of issued patents is as follows:
Ÿ
U.S.
Patent No. 5,619,024 entitled "Credit Card and Bank Issued Debit Card Operating
System and Method for Controlling and Monitoring Access of Computer and Copy
Equipment";
Ÿ
U.S.
Patent No. 5,637,845 entitled "Credit and Bank Issued Debit Card Operating
System and Method for Controlling a Prepaid Card Encoding/Dispensing Machine";
Ÿ
U.S.
Patent No. D423,474 entitled "Dataport";
Ÿ
U.S.
Patent No. D415,742 entitled "Laptop Dataport Enclosure";
Ÿ
U.S.
Patent No. D418,878 entitled "Sign Holder";
Ÿ
U.S.
Patent No. 6,056,194 entitled "System and Method for Networking and Controlling
Vending Machines";
Ÿ
U.S.
Patent No. D428,047 entitled "Electronic Commerce Terminal Enclosure";
Ÿ U.S.
Patent No. D428,444 entitled
"Electronic Commerce Terminal Enclosure for a Vending Machine";
Ÿ
U.S.
Patent No. 6,119,934 entitled "Credit Card, Smart Card and Bank Issued Debit
Card Operated System and Method for Processing Electronic Transactions";
Ÿ
U.S.
Patent No. 6,152,365 entitled "Credit and Bank Issued Debit Card Operated System
and Method for Controlling a Vending Machine";
Ÿ
U.S.
Patent No. D437,890 entitled "Electronic Commerce Terminal Enclosure with a
Hooked Fastening Edge for a Vending Machine";
Ÿ
U.S.
Patent No. D441,401 entitled "Electronic Commerce Terminal Enclosure with
Brackets";
Ÿ
U.S.
Patent No. 6,321,985 entitled "System and Method for Networking and Controlling
Vending Machines";
Ÿ
U.S.
Patent No. 6,505,095 entitled "System for Providing Remote Audit, Cashless
Payment, and Interactive Transaction Capabilities in a Vending Machine"
(Stitch);
Ÿ
U.S.
Patent No. 6,389,337 entitled "Transacting e-commerce and Conducting e-business
Related to Identifying and Procuring Automotive Service and Vehicle Replacement
Parts" (Stitch);
Ÿ
U.S.
Patent No. 6,021,626 entitled "Forming, Packaging, Storing, Displaying and
Selling Clothing Articles"; and
Ÿ
U.S
Patent No. 6,622,124 entitled "Method of transacting an electronic mail, an
electronic commerce, and an electronic business transaction by an electronic
commerce terminal operated on a transportation vehicle";
Ÿ
U.S.
Patent No. 6,615,186 entitled "Communicating interactive digital content between
vehicles and internet based data processing resources for the purpose of
transacting e-commerce or conducting e-business";
Ÿ
U.S.
Patent No. 6,615,183 entitled "Method of warehousing user data entered at an
electronic commerce terminal";
Ÿ
U.S.
Patent No. 6,611,810 entitled "Store display window connected to an electronic
commerce terminal";
Ÿ
U.S.
Patent No. 6,609,103 entitled "Electronic commerce terminal for facilitating
incentive-based purchasing on transportation vehicles";
Ÿ
U.S.
Patent No. 6,609,102 entitled "Universal interactive advertising and payment
system for public access electronic commerce and business related products
and
services";
Ÿ
U.S.
Patent No. D478,577 entitled "Transceiver base unit";
Ÿ
U.S.
Patent No. 6,606,605 entitled "Method to obtain customer specific data for
public access electronic commerce services";
Ÿ
U.S.
Patent No. 6,606,602 entitled "Vending machine control system having access
to
the internet for the purposes of transacting e-mail, e-commerce, and e-business,
and for conducting vending transactions";
Ÿ
U.S.
Patent No. 6,604,087 entitled "Vending access to the internet, business
application software, e-commerce, and e-business in a hotel room";
Ÿ
U.S.
Patent No. 6,604,086 entitled "Electronic commerce terminal connected to a
vending machine operable as a telephone";
Ÿ
U.S.
Patent No. 6,604,085 entitled "Universal interactive advertising and payment
system network for public access electronic commerce and business related
products and services";
Ÿ
U.S.
Patent No. 6,601,040 entitled "Electronic commerce terminal for wirelessly
communicating to a plurality of communication devices";
Ÿ
U.S.
Patent No. 6,601,039 entitled "Gas pump control system having access to the
Internet for the purposes of transacting e-mail, e-commerce, and e-business,
and
for conducting vending transactions";
Ÿ
U.S.
Patent No. 6,601,038 entitled "Delivery of goods and services resultant from
an
electronic commerce transaction by way of a pack and ship type company";
Ÿ
U.S.
Patent No. 6,601,037 entitled "System and method of processing credit card,
e-commerce, and e-business transactions without the merchant incurring
transaction processing fees or charges worldwide";
Ÿ
U.S.
Patent No. D477,030 entitled "Vending machine cashless payment terminal";
Ÿ
U.S.
Patent No. D476,037 entitled "User interface bracket for a point of sale
terminal";
Ÿ
U.S.
Patent No. D476,036 entitled "Printer bracket for point of sale terminal";
Ÿ
U.S.
Patent No. D475,751 entitled "User interface bracket for a point of sale
terminal";
Ÿ
U.S.
Patent No. D475,750 entitled "Paper guide for a point of sale terminal";
Ÿ
U.S.
Patent No. D475,414 entitled "Printer bracket for point of sale terminal";
Ÿ
U.S.
Patent No. 5,844,808 entitled "Apparatus and methods for monitoring and
communicating with a plurality of networked vending machines";
Ÿ
U.S.
Patent No. 6,581,396 entitled "Refrigerated vending machine exploiting expanded
temperature variance during power-conservation mode";
Ÿ
U.S.
Patent No. 6,389,822 entitled "Refrigerated vending machine exploiting expanded
temperature variance during power-conservation mode";
Ÿ
U.S.
Patent No. 6,243,626 entitled "External power management device with current
monitoring precluding shutdown during high current"; and
Ÿ
U.S.
Patent No. 5,477,476 entitled "Power conservation system for computer
peripherals";
Ÿ
U.S.
Patent No. 6,629,080 entitled "Transaction processing method of fulfilling
an
electronic commerce transaction by an electronic commerce terminal system";
Ÿ
U.S.
Patent No. D480,948 entitled "Mounting bracket for mounting a cashless payment
terminal to a vending machine";
Ÿ
U.S.
Patent No. 6,643,623 entitled "A method of transacting an electronic mail,
an
electronic commerce, and an electronic business transaction by an electronic
commerce terminal using a gas pump";
Ÿ
U.S.
Patent No. 6,684,197 entitled "Method of revaluing a private label card using
an
electronic commerce terminal (as amended)";
Ÿ
U.S.
Patent No. 6,754,641 entitled "Dynamic identification interchange method for
exchanging one form of identification for another";
Ÿ
U.S.
Patent No. 6,763,336 entitled "Method of transacting an e-mail, an e-commerce,
and an e-business transaction by an electronic commerce terminal using a
wirelessly networked plurality of portable devices";
Ÿ
U.S.
Patent No. 6,801,836 entitled "Power-conservation based on indoor/outdoor and
ambient-light determinations";
Ÿ
U.S.
Patent No. 6,807,532 entitled "Method of soliciting a user to input survey
data
at an electronic commerce terminal";
Ÿ
U.S.
Patent No. 6,853,894 entitled "Global network based vehicle safety and security
telematics";
Ÿ
U.S.
Patent No. 6,856,820 entitled "An in-vehicle device for wirelessly connecting
a
vehicle to the internet and for transacting e-commerce and e-business";
Ÿ
U.S.
Patent No. 6,895,310 entitled "Vehicle related wireless scientific
instrumentation telematics";
Ÿ
U.S.
Patent No. 6,898,942 entitled "Method and apparatus for conserving power
consumed by a refrigerated appliance";
Ÿ
U.S.
Patent No. 6,931,869 entitled "Refrigerated vending machine exploiting expanded
temperature variance during power-conservation mode";
Ÿ
U.S.
Patent No. 6,975,926 entitled "Method and apparatus for power management control
of a compressor-based appliance that reduces electrical power consumption on
an
appliance";
Ÿ
U.S.
Patent No. 7,003,289 entitled "Communication interface device for managing
wireless data transmission between a vehicle and the internet";
Ÿ
U.S.
Patent No. 7,076,329 entitled "Cashless vending transaction management by a
Vend
Assist mode of operation";
Ÿ
Canadian
Patent No. D199-1014 entitled "Sign holder";
Ÿ
Canadian
Patent No. D199-1038 entitled "Laptop data port enclosure";
Ÿ
Canadian
Patent No. 2,291,015 entitled "Universal interactive advertising and payment
system for public access electronic commerce and business related products
and
services";
Ÿ
Australian Patent No. 2001263356 entitled "Refrigerated vending machine
exploiting expanded temperature variance during power-conservation mode"; and
Ÿ
Mexican
Patent No. 234363 entitled "Refrigerated vending machine exploiting expanded
temperature variance during power-conservation mode".
The
Company believes that the U.S. patent No. 6,505,095 entitled "System for
providing remote audit, cashless payment, and interactive transaction
capabilities in a vending machine" is important in protecting its intellectual
property used in its e-Port(R) control system targeted to the vending industry.
The patent expires in July 2021.
RESEARCH
AND DEVELOPMENT
Research
and development expenses, which are included in general and administrative
and
compensation expense in the Consolidated Statements of Operations, were
approximately $974,000, $1,364,000, and $688,000 for the years ended June 30,
2006, 2005 and 2004, respectively, and $992,000 and $577,000 for the nine months
ended March 31, 2007 and 2006, respectively.
EMPLOYEES
On
March
31, 2007, the Company had 68 full-time employees and 2 part-time
employees.
PROPERTY
The
Company conducts its operations from various facilities under operating leases.
In March 2003, the Company entered into a lease for 12,864 square feet of space
located in Malvern, Pennsylvania for its principal executive office and used
for
general administrative functions, sales activities, and product development.
The
lease term extends through December 31, 2008 and provides for escalating rent
payments and a period of free rent prior to the commencement of the monthly
lease payment in January 2004 of approximately $25,000 per month. During April
2005, the Company entered into an amendment to the lease covering 4,385
additional square feet that is contiguous to its existing space. The lease
term
was extended to December 31, 2010, and the amendment provides for a period
of
free rent for the additional space with rent of approximately $31,000 per month
commencing in September 2005 with escalating rental payments
thereafter.
The
Company also leases 9,084 square feet of space, located in Malvern,
Pennsylvania, on a month-to-month basis for a monthly payment of approximately
$8,000. During January 2007, the Company entered into an amendment to the lease
covering 4,293 additional square feet that is contiguous to its existing space.
The lease term was extended to December 31, 2010, and the amendment provides
for
a rent of $13,377 per month with escalating rental payments through the
remainder of the lease. During prior years, the facility was solely used to
warehouse product. All product warehousing, shipping and customer support was
transferred to this location from the executive office location during the
first
quarter of fiscal year 2005.
In
December 2004, the Company entered into a lease for 2,837 square feet of space
located in Denver, Colorado, to be used for administrative functions, sales
activities and product warehousing associated with our energy management
products. The lease term extends through May 31, 2009 and provides for five
months of free rent followed by rent payments of $1,200 per month and escalating
payments beginning on June 1, 2006. The lease provides for additional rent
for a
prorated share of operating costs for the entire facility.
MANAGEMENT
DIRECTORS
AND EXECUTIVE OFFICERS
Our
Directors and executive officers, on March 31, 2007, together with their ages
and business backgrounds were as follows:
|
Name
|
Age
|
Position(s)
Held
|
||
|
George
R. Jensen, Jr.
|
58
|
Chief
Executive Officer, Chairman Of the Board of Directors
|
||
|
Stephen
P. Herbert
|
43
|
Chief
Operating Officer and President, Director
|
||
|
David
M. DeMedio
|
36
|
Chief
Financial Officer
|
||
|
William
L. Van Alen, Jr. (1)(2)
|
73
|
Director
|
||
|
Steven
Katz (1)
|
58
|
Director
|
||
|
Douglas
M. Lurio
|
50
|
Director
|
||
|
Joel
Brooks (2)
|
49
|
Director
|
||
|
Stephen
W. McHugh (2)
|
50
|
Director
|
(1)
Member of Compensation Committee
(2)
Member of Audit Committee
Each
Director holds office until the next Annual Meeting of shareholders and until
his successor has been elected and qualified.
George
R.
Jensen, Jr., has been our Chief Executive Officer and a Director since our
inception in January 1992. Mr. Jensen was Chairman, Director, and Chief
Executive Officer of American Film Technologies, Inc. ("AFT") from 1985 until
1992. AFT was in the business of creating color imaged versions of
black-and-white films. From 1979 to 1985, Mr. Jensen was Chief Executive Officer
and President of International Film Productions, Inc. Mr. Jensen was the
Executive Producer of the twelve hour miniseries, "A.D.", a $35 million dollar
production filmed in Tunisia. Procter and Gamble, Inc., the primary source
of
funds, co-produced and sponsored the epic, which aired in March 1985 for five
consecutive nights on the NBC network. Mr. Jensen was also the Executive
Producer for the 1983 special for public television, "A Tribute to Princess
Grace". From 1971 to 1978, Mr. Jensen was a securities broker, primarily for
the
firm of Smith Barney, Harris Upham. Mr. Jensen was chosen 1989 Entrepreneur
of
the Year in the high technology category for the Philadelphia, Pennsylvania
area
by Ernst & Young LLP and Inc. Magazine. Mr. Jensen received his Bachelor of
Science Degree from the University of Tennessee and is a graduate of the
Advanced Management Program at the Wharton School of the University of
Pennsylvania.
Stephen
P. Herbert was elected a Director in April 1996, and joined USA on a full-time
basis on May 6, 1996. Prior to joining us and since 1986, Mr. Herbert had been
employed by Pepsi-Cola, the beverage division of PepsiCo, Inc. From 1994 to
April 1996, Mr. Herbert was a Manager of Market Strategy. In such position
he
was responsible for directing development of market strategy for the vending
channel and subsequently the supermarket channel for Pepsi-Cola in North
America. Prior thereto, Mr. Herbert held various sales and management positions
with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science degree from
Louisiana State University.
David
M.
DeMedio joined USA Technologies on a full-time basis in March 1999 as
Controller. In the Summer of 2001, Mr. DeMedio was promoted to Director of
Financial Services where he was responsible for the sales and financial data
reporting to customers, the Company's turnkey banking services and maintaining
and developing relationships with credit card processors and card associations.
In July 2003, Mr. DeMedio served as interim Chief Financial Officer through
April, 2004. From April, 2004 until April 12, 2005, Mr. DeMedio served as Vice
President - Financial & Data Services. On April 12, 2005, he was appointed
as the Company's Chief Financial Officer. From 1996 to March 1999, prior to
joining the Company, Mr. DeMedio had been employed by Elko, Fischer, Cunnane
and
Associates, LLC as a supervisor in its' accounting and auditing and consulting
practice. Prior thereto, Mr. DeMedio held various accounting positions with
Intelligent Electronics, Inc., a multi-billion reseller of computer hardware
and
configuration services. Mr. DeMedio graduated with a Bachelor of Science in
Business Administration from Shippensburg University and is a Certified Public
Accountant.
William
L. Van Alen, Jr., joined the Board of Directors of USA in May 1993. Mr. Van
Alen
is President of Cornerstone Entertainment, Inc., an organization engaged in
the
production of feature films of which he was a founder in 1985. Since 1996 and
until March 2006, Mr. Van Alen had been President and a Director of The Noah
Fund, a publicly traded mutual fund. Prior to 1985, Mr. Van Alen practiced
law
in Pennsylvania for twenty-two years. Mr. Van Alen received his undergraduate
degree in Economics from the University of Pennsylvania and his law degree
from
Villanova Law School.
Steven
Katz joined the Board of Directors in May 1999. He is President of Steven Katz
& Associates, Inc., a management consulting firm specializing in strategic
planning and corporate development for technology and service-based companies
in
the health care, environmental, telecommunications and Internet markets. Mr.
Katz’s prior experience includes five years with PriceWaterhouse & Co. in
audit, tax and management advisory services; two years of corporate planning
with Revlon, Inc.; five years with National Patent Development Corporation
(NPDC) in strategic planning, merger and acquisition, technology in-licensing
and out-licensing, and corporate turnaround experience as President of three
NPDC subsidiaries; and two years as a Vice President and General Manager of
a
non-banking division of Citicorp, N.A. Mr. Katz is also a Director of Health
Systems Solutions Inc., NaturalNano, Inc. and Gammacan International, Inc.,
all
publicly traded companies.
Douglas
M. Lurio joined the Board of Directors of USA in June 1999. Mr. Lurio is
President of Lurio & Associates, P.C., attorneys-at-law, which he founded in
1991. He specializes in the practice of corporate and securities law. Prior
thereto, he was a partner with Dilworth, Paxson LLP. Mr. Lurio received a
Bachelor of Arts Degree in Government from Franklin & Marshall College, a
Juris Doctor Degree from Villanova Law School, and a Masters in Law (Taxation)
from Temple Law School.
Stephen
W. McHugh joined the Board of Directors of USA in June 2006. Mr. McHugh was
appointed by the Board to fill the vacancy on the Board caused by the death
of
William W. Sellers. Mr. McHugh is the President and co-founder of Santa Barbara
Infrared, Inc., a designer and manufacturer of military and commercial
Electro-Optical test equipment that was recently acquired by HEICO Corporation.
Mr. McHugh formerly was a mechanical engineer and technical sales expert at
Electro Optical Industries where he designed optical and mechanical instruments
for the test of infrared camera systems.
Joel
Brooks was appointed to the Board of Directors of the Company in March 2007,
to
fill the vacancy resulting from the resignation of Albert Passner. Since
December 2000, Mr. Brooks has served as the Chief Financial Officer and
Treasurer of Senesco Technologies, Inc., a biotechnology company whose shares
are traded on the American Stock Exchange. From September 1998 until November
2000, Mr. Brooks was the Chief Financial Officer of Blades Board and Skate,
LLC,
a retail establishment specializing in the action sports industry. Mr.
Brooks was Chief Financial Officer from 1997 until 1998 and Controller from
1994
until 1997 of Cable and Company Worldwide, Inc. He also held the position
of Controller at USA Detergents, Inc. from 1992 until 1994, and held various
positions at several public accounting firms from 1983 through 1992. Mr.
Brooks received his Bachelor of Science degree in Commerce with a major in
Accounting from Rider University in February 1983.
The
following table sets forth certain information with respect to compensation
paid
or accrued by the Company during the fiscal years ended June 30, 2004, June
30,
2005 and June 30, 2006 to each of the executive officers and employee of the
Company named below:
SUMMARY
COMPENSATION TABLE
|
Name
and Principal
Position
|
Fiscal
Year
|
Annual
Compensation
|
Long
Term
Compensation
|
||||||||||||||||
|
Salary
|
Bonus(1)
|
Other
Annual
Compensation
(2)
|
Restricted
Stock
Awards
($)
|
Securities
Underlying
Options
(#)
|
|||||||||||||||
|
George
R. Jensen, Jr.
|
2006
|
$
|
270,288
|
$
|
200,000
|
$
|
18,563
|
$
|
400,000
|
(6)
|
75,000
|
||||||||
|
Chief
Executive Officer
|
2005
|
$
|
250,000
|
—
|
$
|
17,875
|
—
|
—
|
|||||||||||
|
&
Chairman of the Board
|
2004
|
$
|
217,500
|
$
|
4,870,000(3
|
)
|
$
|
17,875
|
—
|
—
|
|||||||||
|
|
|||||||||||||||||||
|
Stephen
P. Herbert
|
2006
|
$
|
246,673
|
$
|
133,336
|
$
|
18,563
|
$
|
266,664
|
(6)
|
18,000
|
||||||||
|
Chief
Operating Officer
|
2005
|
$
|
231,923
|
—
|
$
|
17,875
|
—
|
—
|
|||||||||||
|
&
President
|
2004
|
$
|
192,692
|
$
|
225,000
|
$
|
17,875
|
—
|
—
|
||||||||||
|
|
|||||||||||||||||||
|
H.
Brock Kolls (5)
|
2006
|
$
|
171,346
|
$
|
30,000
|
$
|
12,375
|
—
|
—
|
||||||||||
|
Senior
Vice-President,
|
2005
|
$
|
165,000
|
$
|
110,000
|
$
|
11,917
|
—
|
—
|
||||||||||
|
Research
& Development
|
2004
|
$
|
156,923
|
$
|
60,000
|
$
|
63,205
|
—
|
—
|
||||||||||
|
David
M. DeMedio (4)
|
2006
|
$
|
162,385
|
—
|
$
|
20,112
|
—
|
7,000
|
|||||||||||
|
Chief
Financial Officer
|
2005
|
$
|
131,689
|
$
|
11,000
|
$
|
7,800
|
—
|
3,000
|
||||||||||
|
Wendy
Jenkins
|
2006
|
$
|
130,850
|
$
|
20,000
|
$
|
16,200
|
—
|
—
|
||||||||||
|
Vice-President
of
|
2005
|
$
|
103,653
|
$
|
26,000
|
$
|
14,850
|
—
|
—
|
||||||||||
|
Marketing
|
2004
|
$
|
65,384
|
—
|
$
|
10,500
|
—
|
—
|
|||||||||||
(1)
Fiscal year 2006 includes 25,000 shares that vested on June 1, 2006 valued
at
$8.00 per share for Mr. Jensen; 16,667 shares that vested on June 1, 2006 valued
at $8.00 per share for Mr. Herbert, a $30,000 cash bonus for Mr. Kolls, and
a
$20,000 cash bonus for Ms. Jenkins. Fiscal year 2005 includes a $110,000 cash
bonus for Mr. Kolls, cash bonuses totaling $11,000 for Mr. DeMedio, and a
$20,000 cash bonus and $6,000 stock bonus for Ms. Jenkins. Fiscal year 2004
includes 105,000 shares valued at $44 per share in connection with the amendment
of Mr. Jensen’s employment agreement, and a $250,000 cash bonus for Mr. Jensen;
a $225,000 cash bonus for Mr. Herbert; and a $60,000 cash bonus for Mr.
Kolls.
(2)
Represents cash payments authorized to reimburse certain executive officers
for
tax payments incurred from the award of a previous bonus as well as car
allowance payments.
(3)
Prior
to July 2003, Mr. Jensen's employment agreement provided that upon the
occurrence of a USA Transaction he would receive that number of shares equal
to
seven percent of all of the then issued and outstanding shares on a fully
converted basis. During July 2003, the Company and Mr. Jensen agreed to amend
Mr. Jensen's employment agreement so that upon the occurrence of a USA
Transaction he would receive only 140,000 shares. Under the new amended
agreement, the 140,000 shares became subject to dilution (i.e., did not increase
in order to reflect subsequent issuances by the Company of its shares). Under
the prior agreement, the number of shares to be issued to Mr. Jensen was not
subject to dilution (i.e., would be increased in order to reflect subsequent
issuances by the Company of its shares) and was based upon the actual total
number of shares outstanding at the time of a USA Transaction.
During
July 2003, the Company issued to Mr. Jensen an aggregate of 105,000 shares
of
restricted Common Stock, 25,000 shares of which were issued as compensation
to
Mr. Jensen, and 80,000 shares of which were issued to Mr. Jensen in connection
with the employment agreement amendment described above. In accordance with
generally accepted accounting principles, the Company was required to value
all
of these shares at $44 per share or an aggregate of $4,620,000.
(4)
Employment as Chief Financial Officer commenced on April 12, 2005.
(5)
During May 2006, Mr. Kolls notified the Company that he was resigning as an
employee effective as of June 30, 2006, and requested that his employment
agreement not be renewed.
(6)
Under
the terms of Mr. Jensen’s existing employment agreement with us, he received an
award of 75,000 shares of restricted stock upon his signing of the agreement
in
May 2006. These shares vest as follows: 25,000 on June 1, 2006; 25,000 on
January 1, 2007; and 25,000 on June 1, 2007. As of June 30, 2006, based upon
a
price per share of $7.80, the closing bid price for our common stock as of
such
date, the value of the restricted stock held by Mr. Jesnen was $390,000. This
stock will be treated like all other shares of our stock, including the right
to
receive any dividends declared on our common stock. The 25,000 shares that
vested on June 1, 2006 are reflected in the Bonus column of the above table.
Under
the
terms of Mr. Herbert’s existing employment agreement with us, he received an
award of 50,000 shares of restricted stock upon his signing of the agreement
in
May 2006. These shares vest as follows: 16,667 on June 1, 2006; 16,667 on
January 1, 2007; and 16,666 on June 1, 2007. As of June 30, 2006, based upon
a
price per share of $7.80, the closing bid price for our common stock as of
such
date, the value of the restricted stock held by Mr. Herbert was $259,997. This
stock will be treated like all other shares of our stock, including the right
to
receive any dividends declared on our common stock. The 16,667 shares that
vested on June 1, 2006 are reflected in the Bonus column of the above
table.
OPTION
GRANTS IN LAST FISCAL YEAR
(Individual
Grants)
|
Name
|
Number
of
securities
underlying
options
granted(1)
|
Percent
of
total
options
granted
to
employees
in
fiscal
year
|
Exercise
base
price
($/share)
|
Expiration
date
|
|||||||||
|
George
R. Jensen, Jr.
|
75,000
|
75
|
%
|
$
|
7.50
|
(2)
|
|
||||||
|
Stephen
P. Herbert
|
18,000
|
18
|
%
|
$
|
7.50
|
(2)
|
|
||||||
|
David
M. DeMedio
|
7,000
|
7
|
%
|
$
|
7.50
|
(2)
|
|
||||||
(1)
Conditioned upon continued employment, the options vest as follows:
one-third
on May 11, 2006, one-third on June 30, 2007, and one-third on June 30, 2008.
(2)
The
options expire five years from the date of vesting.
TOTAL
OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2006 AND YEAR END VALUES
The
following table gives information for options exercised by an executive officer
and an employee in fiscal year 2006, and the number of options held by the
executive officer and the employee at fiscal year end:
|
Name
|
Shares
Acquired
On
Exercise
(#)
|
Value
Realized
($)
|
Number
of
Securities
Underlying
Unexercised
Options
at FY-End
(#)Exercisable/
Unexercisable
|
Value
of Unexercised
In-the-Money
Options
at
FY-End
($)Exercisable/
Unexercisable
|
|||||||||
|
George
R. Jensen, Jr.
|
0
|
0
|
25,000/50,000
|
7,500/15,000
|
|||||||||
|
Stephen
P. Herbert
|
0
|
0
|
6,000/12,000
|
1,800/3,600
|
|||||||||
|
David
M. DeMedio
|
0
|
0
|
3,834/6,166
|
700/1,400
|
|||||||||
EXECUTIVE
EMPLOYMENT AGREEMENTS
On
May
11, 2006, the Company and Mr. Jensen entered into an Amended and Restated
Employment Agreement pursuant to which the term of Mr. Jensen’s employment with
the Company was extended to June 30, 2009. Effective May 11, 2006, Mr. Jensen’s
base salary was increased to $325,000 per annum. The Agreement requires Mr.
Jensen to devote his full time and attention to the business and affairs of
the
Company, and obligates him not to engage in any investments or activities which
would compete with the Company during the term of the Agreement and for a period
of one year thereafter. Mr. Jensen was granted the right (exercisable at any
time prior to the 60th day following the commencement of each fiscal year)
to
elect to have one-half of his base salary for each of the fiscal years ending
June 30, 2007, June 30, 2008, and June 30, 2009 paid in shares of Common Stock
rather than cash. Mr. Jensen has elected to receive shares in lieu of cash
for
one-half of his base salary for the fiscal year ending June 30, 2007. As a
result of such election, 22,080 shares will be issued to him which will vest
as
follows: 5,520 on July 1, 2006; 5,520 on October 1, 2006; 5,520 on January
1,
2007; and 5,520 on April 1, 2007. Mr. Jensen was also granted 75,000 shares
of
Common Stock and an additional amount of options to purchase up to 75,000 shares
of Common Stock at $7.50 per share. The 75,000 shares of Common Stock vest
as
follows: 25,000 on June 1, 2006; 25,000 on January 1, 2007; and 25,000 on June
1, 2007. The options vest as follows: 25,000 on May 11, 2006; 25,000 on June
30,
2007; and 25,000 on June 30, 2008. The options may be exercised at any time
within 5 years of vesting. In October 2006, the Company granted to Mr. Jensen
piggyback registration rights under the 1933 Act for the shares described above
for a period of five years following the vesting of any of such shares and
for
the shares underlying any of the options described above for a period of five
years following the vesting of any such options.
Upon
the
occurrence of a "USA Transaction" (as defined below), the Company will issue
to
Mr. Jensen 140,000 shares of Common Stock ("Jensen Shares"). Mr. Jensen is
not
required to pay any additional consideration for the Jensen Shares. At the
time
of any USA Transaction, all of the Jensen Shares are automatically deemed to
be
issued and outstanding immediately prior to any USA Transaction, and are
entitled to be treated as any other issued and outstanding shares of Common
Stock in connection with such USA Transaction.
The
term
USA Transaction is defined as (i) the acquisition of fifty-one percent or more
of the then outstanding voting securities entitled to vote generally in the
election of Directors of the Company by any person, entity or group, or (ii)
the
approval by the shareholders of the Company of a reorganization, merger,
consolidation, liquidation, or dissolution of the Company, or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of the Company. The Jensen Shares are irrevocable and fully vested, have no
expiration date, and will not be affected by the termination of Mr. Jensen’s
employment with the Company for any reason whatsoever.
Pursuant
to the Long-Term Equity Incentive Program adopted in February 2007, Mr. Jensen
is entitled to earn shares of Common Stock based upon the achievement by the
Company of certain target goals relating to revenues, gross profit, and EBITDA
(earnings before interest, taxes, depreciation, and amortization) of the Company
during each of the fiscal years ending June 30, 2007, June 30, 2008, and June
30, 2009. Under the plan, Mr. Jensen is eligible to earn up to 223,213 shares
each fiscal year if the maximum target goals are achieved. If a USA Transaction
would occur during any such fiscal year, and provided that Mr. Jensen is an
employee of the Company on the date of such USA Transaction, Mr. Jensen shall
be
awarded shares for each of the fiscal years that have not yet been completed
as
of the date of such USA Transaction. The number of shares shall be 178,570
for
each of the uncompleted fiscal years.
On
May
11, 2006, the Company and Mr. Herbert entered into an Amended and Restated
Employment Agreement pursuant to which the term of Mr. Herbert’s employment with
the Company was extended to June 30, 2009. Effective May 11, 2006, Mr. Herbert’s
base salary was increased to $285,000 per annum. The Agreement requires Mr.
Herbert to devote his full time and attention to the business and affairs of
the
Company and obligates him not to engage in any investments or activities which
would compete with the Company during the term of the agreement and for a period
of one year thereafter. In the event that a USA Transaction (as defined in
Mr.
Jensen's employment agreement) shall occur, then Mr. Herbert has the right
to
terminate his agreement upon 30 days notice to the Company. Mr. Herbert was
granted the right to elect to have one-half of his base salary for each of
the
fiscal years ending June 30, 2007, June 30, 2008, and June 30, 2009 paid in
shares of Common Stock rather than cash. Mr. Herbert was also granted 50,000
shares of Common Stock and an additional amount of options to purchase up to
18,000 shares of Common Stock at $7.50 per share. The 50,000 shares of Common
Stock vest as follows: 16,667 on June 1, 2006; 16,667 on January 1, 2007; and
16,666 on June 1, 2007. The options vest as follows: 6,000 on May 11, 2006;
6,000 on June 30, 2007; and 6,000 on June 30, 2008. The options may be exercised
at any time within 5 years of vesting. In October 2006, the Company granted
to
Mr. Herbert piggyback registration rights under the 1933 Act for the shares
described above for a period of five years following the vesting of any of
such
shares and for the shares underlying any of the options described above for
a
period of five years following the vesting of any such options.
Pursuant
to the Long-Term Equity Incentive Program adopted in February 2007, Mr. Herbert
is entitled to earn shares of Common Stock based upon the achievement by the
Company of certain target goals relating to revenues, gross profit, and EBITDA
(earnings before interest, taxes, depreciation, and amortization) of the Company
during each of the fiscal years ending June 30, 2007, June 30, 2008, and June
30, 2009. Under the plan, Mr. Herbert is eligible to earn up to 67,143 shares
each fiscal if the maximum target goals are achieved. If a USA Transaction
would
occur during any such fiscal year, and provided that Mr. Herbert is an employee
of the Company on the date of such USA Transaction, Mr. Herbert shall be awarded
shares for each of the fiscal years that have not yet been completed as of
the
date of such USA Transaction. The number of shares shall be 53,713 for each
of
the uncompleted fiscal years.
On
May
11, 2006, the Company and Mr. DeMedio entered into an amendment to his
Employment Agreement pursuant to which the term of Mr. DeMedio’s employment with
the Company was extended to June 30, 2008. Effective May 11, 2006, Mr. DeMedio’s
base salary was increased to $165,000 per annum. The Agreement requires Mr.
DeMedio to devote his full time and attention to the business and affairs of
the
Company and obligates him not to engage in any investments or activities which
would compete with the Company during the term of the agreement and for a period
of one year thereafter. Mr. DeMedio was granted the right to elect to have
one-half of his base salary for each of the fiscal years ending June 30, 2007,
and June 30, 2008 paid in shares of Common Stock rather than cash. Mr. DeMedio
was also granted options to purchase up to 7,000 shares of Common Stock at
$7.50
per share. The options vest as follows: 2,334 on May 11, 2006; 2,333 on June
30,
2007; and 2,333 on June 30, 2008. The options may be exercised at any time
within 5 years of vesting. In October 2006, the Company granted to Mr. DeMedio
piggyback registration rights under the Act for the shares underlying any of
the
options described above for a period of five years following the vesting of
any
such options. In the event that a USA Transaction (as defined in Mr. Jensen's
employment agreement) shall occur, then Mr. DeMedio has the right to terminate
his agreement upon 30 days notice to the Company.
Pursuant
to the Long-Term Equity Incentive Program adopted in February 2007, Mr. DeMedio
is entitled to earn shares of Common Stock based upon the achievement by the
Company of certain target goals relating to revenues, gross profit, and EBITDA
(earnings before interest, taxes, depreciation, and amortization) of the Company
during each of the fiscal years ending June 30, 2007, June 30, 2008, and June
30, 2009. Under the plan, Mr. DeMedio is eligible to earn up to 27,080 shares
each fiscal year if the maximum target goals are achieved. If a USA Transaction
would occur during any such fiscal year, and provided that Mr. DeMedio is an
employee of the Company on the date of such USA Transaction, Mr. Demedio shall
be awarded shares for each of the fiscal years that have not yet been completed
as of the date of such USA Transaction. The number of shares shall be 21,663
for
each of the uncompleted fiscal years.
Mr.
Kolls
entered into an employment agreement with the Company that required Mr. Kolls
or
the Company to deliver written notice of termination at least sixty days prior
to June 30, 2006, or the agreement would be automatically renewed until June
30,
2007. During May 2006, Mr. Kolls notified the Company that he was resigning
as
an employee effective as of June 30, 2006, and requested that his employment
agreement not be renewed for another year. The Company does not believe that
Mr.
Kolls’ resignation was timely. The agreement provided for an annual base salary
of $165,000 per year. Mr. Kolls was entitled to a payment of $5,000 upon each
of
the following: (i) filing of a new patent application by USA for which he is
listed as the inventor; (ii) granting of any such patent application; and (iii)
issuance of a patent for any patent application that had been filed prior to
April 20, 2004. Mr. Kolls was also entitled to receive such bonus or bonuses,
as
may have been awarded to him by the Board of Directors. The Agreement required
Mr. Kolls to devote his full time and attention to the business and affairs
of
the Company, and obligated him not to engage in any investments or activities
which would compete with the Company during the term of his agreement and for
a
period of one year thereafter. In the event that a USA Transaction (as defined
in Mr. Jensen's employment agreement) occured, then Mr. Kolls had the right
to
terminate his agreement upon 30 days notice to USA.
COMPENSATION
OF DIRECTORS
Members
of the Board of Directors receive cash and equity compensation for serving
on
the Board of Directors, as determined from time to time by the Compensation
Committee with subsequent approval thereof by the Board of
Directors.
During
fiscal year 2006, we paid each of Messrs. Sellers, Van Alen, Katz and Lurio
$20,000 each for serving as a Director during the fiscal year and $10,000 each
for serving on Board Committees.
On
April
21, 2006, we granted options to purchase up to 12,000 shares to each of Messrs.
Sellers, Van Alen, Katz, and Lurio, and options to purchase up to 6,000 shares
to Mr. Passner, a new director as of April 12, 2006. These options have an
exercise price of $7.50 per share and are exercisable at any time within five
years following the date of vesting. The options granted to Mr. Sellers and
Mr.
Van Alen were fully vested. Of the options granted to Mr. Katz and Mr. Lurio,
6,000 vested immediately, 3,000 vested on April 1, 2007, and 3,000 vest on
April
1, 2008. Of the options granted to Mr. Passner, 3,000 vested on April 1, 2007,
and 3,000 vest on April 1, 2008.
In
conjunction with the appointment of Stephen McHugh to the Board of Directors
on
June 20, 2006, the Company granted Mr. McHugh options to purchase up to 6,000
shares with an exercise price of $8.00 per share. The options vest as follows:
3,000 on June 20, 2007 and 3,000 on June 20, 2008. The options are exercisable
at any time within five years of vesting.
In
October 2006, the Company granted to each of the holders of the above options
piggyback registration rights under the Act for the shares underlying each
of
the options described above for a period of five years following the vesting
of
any such options.
Mr.
Sellers died in June 2006 and was replaced on the Board by Mr. McHugh. Mr.
Passner resigned from the Board in March 2007 and was replaced by Mr. Brooks.
PRINCIPAL
SHAREHOLDERS
COMMON
STOCK
The
following table sets forth, as of March 22, 2007, the beneficial ownership
of
the Common Stock of each of the Company's directors and executive officers,
the
other employees named in the summary compensation table set forth above, as
well
as by the Company's directors and executive officers as a group. Except as
set
forth below, the Company is not aware of any beneficial owner of more than
five
percent of the Common Stock. Except as otherwise indicated, the Company believes
that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power
with
respect to such shares, subject to community property laws where applicable:
|
Name
and Address of Beneficial Owner
|
Number
of Shares of Common Stock Beneficially Owned(1)
|
Percent
of Class(2)
|
|||||
|
George
R. Jensen, Jr.
|
184,290(3
|
)
|
1.67
|
%
|
|||
|
100
Deerfield Lane, Suite 140
|
|||||||
|
Malvern,
Pennsylvania 19355
|
|||||||
|
Stephen
P. Herbert
|
79,860(4
|
)
|
*
|
||||
|
100
Deerfield Lane, Suite 140
|
|||||||
|
Malvern,
Pennsylvania 19355
|
|||||||
|
David
M. DeMedio
|
7,345(5
|
)
|
*
|
||||
|
100
Deerfield Lane, Suite 140
|
|||||||
|
Malvern,
Pennsylvania 19355
|
|||||||
|
Douglas
M. Lurio
|
17,530(6
|
)
|
*
|
||||
|
2005
Market Street, Suite 2340
|
|||||||
|
Philadelphia,
Pennsylvania 19103
|
|||||||
|
Steven
Katz
|
15,350(7
|
)
|
*
|
||||
|
440
South Main Street
|
|||||||
|
Milltown,
New Jersey 08850
|
|||||||
|
William
L. Van Alen, Jr.
|
61,517(8
|
)
|
*
|
||||
|
P.O.
Box 727
|
|||||||
|
Edgemont,
Pennsylvania 19028
|
|||||||
|
Joel
Brooks
|
0
|
*
|
|||||
|
303
George Street, Suite 420
|
|||||||
|
New
Brunswick, New Jersey 08901
|
|||||||
|
Stephen
W. McHugh
|
0
|
*
|
|||||
|
100
Deerfield Lane, Suite 140
|
|||||||
|
Malvern,
Pennsylvania 19355
|
|||||||
|
Haven
Brock Kolls, Jr.
|
5,537(9
|
)
|
*
|
||||
|
100
Deerfield Lane, Suite 140
|
|||||||
|
Malvern,
Pennsylvania 19355
|
|||||||
|
Wendy
Jenkins
|
2,819(10
|
)
|
*
|
||||
|
100
Deerfield Lane, Suite 140
|
|||||||
|
Malvern,
Pennsylvania 19355
|
|||||||
|
SAC
Capital Advisors LLC
|
1,666,667(11
|
)
|
15.2
|
%
|
|||
|
72
Cummings Point Road
|
|||||||
|
Stamford,
CT 06902
|
|||||||
|
Cortina
Asset Management LLC
|
1,000,000(12
|
)
|
9.11
|
%
|
|||
|
330
East Kilbourn, Suite 850
|
|||||||
|
Milwaukee,
WI 53202
|
|||||||
|
Wellington
Management Company, LLP
|
942,500(13
|
)
|
8.58
|
%
|
|||
|
75
State Street
|
|||||||
|
Boston,
Massachusetts 02109
|
|||||||
|
All
Directors and Executive
|
365,892
|
3.26
|
%
|
||||
|
Officers
as a Group (8 persons)
|
*Less
than one percent (1%)
(1)
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to securities. In computing the number of shares of Common
Stock beneficially owned by a person, we deemed outstanding shares of Common
Stock issuable upon the conversion of Convertible Senior Notes, and the exercise
of warrants and options currently exercisable, or exercisable within 60 days
of
March 22, 2007. We did not deem these shares outstanding, however, for the
purpose of computing the percentage ownership of any other person.
(2)
The
percentage of Common Stock beneficially owned is based on 10,981,591 shares
outstanding as of March 22, 2007.
(3)
Includes 2,000 shares of Common Stock beneficially owned by his spouse. This
table does not include the right granted to Mr. Jensen under his employment
agreement to receive Common Stock upon the occurrence of a USA Transaction
(as
defined therein). Includes 60,000 shares owned by George R. Jensen, Jr. Grantor
Retained Unitrust dated July 14, 2003 over which Mr. Jensen retains beneficial
ownership. Includes 25,000 shares underlying vested stock options.
(4)
Includes 10 shares of Common Stock beneficially owned by his child and 4,000
shares of Common Stock beneficially owned by his spouse. Includes 6,000 shares
underlying vested stock options.
(5)
Includes 4,959 shares underlying vested stock options issuable to Mr. DeMedio
and 375 shares underlying options that vest within 60 days after March 22,
2007.
(6)
Includes 1,500 shares of Common Stock issuable to Mr. Lurio upon conversion
of
his Senior Note, 6,000 shares underlying vested stock options, and 3,000 shares
underlying stock options that vest within 60-days of March 22,
2007.
(7)
Includes 6,000 shares underlying vested stock options and 3,000 shares
underlying stock options that vest within 60-days of March 22,
2007.
(8)
Includes 10,167 shares of Common Stock issuable to Mr. Van Alen upon conversion
of his Senior Notes, 2,000 shares issuable upon the exercise of warrants and
100
shares of Common Stock beneficially owned by his spouse. Includes 12,000 shares
underlying vested stock options.
(9)
Includes 120 shares of Common Stock owned by Mr. Kolls' spouse and 1,500 shares
issuable to his spouse upon conversion of her Senior Note.
(10)
Includes 790 shares underlying vested stock options.
(11)
Based upon a Schedule 13G filed with the Securities and Exchange Commission
on
March 22, 2007, S.A.C. Capital Advisors, LLC, S.A.C. Capital Management, LLC,
S.A.C. Capital Associates, LLC, and Steven A. Cohen, each have shared voting
and
investment power with respect to such shares. The address of SAC Capital
Advisors and Mr. Cohen is as indicated in the table. The address of SAC Capital
Management is 540 Madison Avenue, New York, New York, 10023. The address of
SAC
Capital Associates is P.O. Box 58, Victoria House, The Valley, Anguilla, British
West Indies. Each of SAC Capital Advisors, SAC Capital Management and Mr. Cohen
disclaim beneficial ownership of these shares.
(12)
Based upon a Schedule 13G filed with the Securities and Exchange Commission
on
February 14, 2007, reflecting the beneficial ownership of our Common Stock
by
Cortina Asset Management LLC, which has sole voting authority over 510,147
shares and sole dispositive power over 1,000,000 shares. Does not include
500,000 shares underlying warrants that were not reflected in the Schedule
13G.
(13)
Based upon a Schedule 13G/A filed with the Securities and Exchange Commission
on
February 14, 2007, reflecting the beneficial ownership of our Common Stock
by
Wellington Management Company, LLP, which has shared voting authority over
484,750 shares and shared dispositive power over 942,500 shares. Does not
include 75,000 shares underlying warrants that were not reflected in the
Schedule 13G/A.
PREFERRED
STOCK
There
were no shares of Preferred Stock that were beneficially owned by the Company's
directors, executive officers, or the other employees named in the Summary
Compensation Table set forth above except for our Director, Mr. William L.
Van
Alen, Jr., who beneficially owns 4,000 shares of Series A Convertible Preferred
Stock.
CERTAIN
TRANSACTIONS
During
the fiscal year ended June 30, 2006, the Company incurred charges to Lurio
&
Associates, P.C., of which Mr. Lurio is President and a shareholder, for
professional fees of approximately $258,000 for legal services rendered to
the
Company by such law firm. Mr. Lurio is a Director of the Company.
During
fiscal year 2006, William Van Alen, Jr., a Director, invested $33,333 in the
2008-C Senior Note offering and received warrants to purchase 3,333 shares
of
Common Stock at $10 per share, pursuant to his investment in this offering.
Mr.
Van Alen also invested $20,000 in the 2010-B Senior Note offering and received
warrants to purchase 2,000 shares of Common Stock at $10 per share, pursuant
to
his investment in this offering.
SELLING
SHAREHOLDERS
Each
of
the selling shareholders listed below is, as of the date hereof, the holder
of
our common stock or has the right to acquire the number of shares of common
stock set forth opposite such selling shareholder's name. The issuance of the
common stock to the selling shareholders, as well as the issuance of the common
stock to the selling shareholders upon exercise of the options or upon purchase
under the 2006-B Common Stock Agreement, was or will be a transaction exempt
from the registration requirements of the Act and various state securities
laws.
For additional information regarding the issuances of common stock see "Other
Events" above. We are registering the shares of common stock in order to permit
each of the selling shareholders to offer the shares for resale from time to
time. Except as indicated below, the selling shareholders have not had any
material relationship with us within the past three years.
The
table
below lists the selling shareholders and other information regarding the
beneficial ownership of the shares of common stock by the selling shareholders.
The second column lists the number of shares of common stock beneficially owned
by each selling shareholder, based on his ownership of the shares of common
stock, as of the date of this prospectus.
The
third
column lists the shares of common stock being offered by this prospectus by
each
selling shareholder.
This
prospectus covers the resale of 1,323,621 shares. The fourth column assumes
the
sale of all of the shares offered by the selling shareholders pursuant to this
prospectus.
|
Beneficial
Ownership
|
||||||||||
|
Name
of Selling
Stockholder
|
Maximum
Number of Shares of Common Stock to be Sold Pursuant to this
Prospectus
|
Before
Offering
|
After
Offering
(10)
|
|||||||
|
Steve
Illes
|
1,352,565(1
|
)
|
1,422,565 | 70,000 | ||||||
|
George
R. Jensen, Jr.
|
122,080(2
|
)
|
154,290
|
32,210
|
||||||
|
Stephen
P. Herbert
|
56,000(3
|
)
|
69,860
|
13,860
|
||||||
|
David
M. DeMedio
|
2,334(4
|
)
|
7,345
|
5,011
|
||||||
|
Douglas
M. Lurio
|
9,000(5
|
)
|
16,030
|
7,030
|
||||||
|
Steven
Katz
|
9,000(6
|
)
|
15,350
|
6,350
|
||||||
|
William
L. Van Alen, Jr.
|
12,000(7
|
)
|
57,683
|
45,683
|
||||||
|
William
W. Sellers
|
12,000(8
|
)
|
33,607
|
21,607
|
||||||
|
Albert
Passner
|
3,000(9
|
)
|
3,000
|
0
|
||||||
|
TOTAL
|
1,577,979
|
|||||||||
|
(1)
|
Represents
320,000 shares currently owned by Mr. Illes previously purchased from
us under the 2006-B Common Stock Agreement and 1,032,565 shares issuable
to Mr. Illes under the 2006-B Common Stock Agreement. Mr. Illes is
and has
been an investor in our Company. See “Other Events.”
|
|
(2)
|
Represents
75,000
shares issued to George R. Jensen, Jr., under his employment agreement,
22,080 shares issued to him in lieu of cash salary, and
25,000 shares underlying vested stock options granted to him under
his
employment agreement. Mr. Jensen is our Chairman and Chief Executive
Officer.
|
|
(3)
|
Represents
50,000 shares issued to Stephen P. Herbert under his employment agreement
and 6,000 shares underlying vested options granted to him under his
employment agreement. Mr. Herbert is our President and Chief Operating
Officer.
|
|
(4)
|
Represents
shares underlying vested options granted to David M. DeMedio under
his
employment agreement. Mr. DeMedio is our Chief Financial
Officer.
|
|
(5)
|
Represents
shares underlying vested options granted to Douglas M. Lurio by the
Company. These
options may be exercised, at $7.50 per share, at any time within
5 years
of vesting. Mr.
Lurio is a Director. He is also the President and a shareholder of
the law
firm of Lurio & Associates, P.C., which has rendered legal services to
the Company.
|
|
(6)
|
Represents
shares underlying vested options granted to Steven Katz by the Company.
These
options may be exercised, at $7.50 per share, at any time within
5 years
of vesting. Mr. Katz is a Director. He is also President of Steven
Katz
& Associates, Inc., a management consulting firm that has provided
strategic planning and corporate development services to the
Company.
|
|
(7)
|
Represents
shares underlying vested options granted to William L. Van Alen,
Jr., by
the Company. These
options may be exercised, at $7.50 per share, at any time within
5 years
of vesting. Mr. Van Alen is a
Director.
|
|
(8)
|
Represents
shares underlying vested options granted to William W. Sellers by
the
Company. These
options may be exercised, at $7.50 per share, at any time within
5 years
of vesting. Mr. Sellers served as a Director until his death on June
3,
2006.
|
|
(9)
|
Represents
shares underlying vested options granted to Albert Passner by the
Company.
These
options may be exercised, at $7.50 per share, at any time within
5 years
of vesting. Mr. Passner was a Director until March
2007.
|
|
(10)
|
Following
the offering, each selling shareholder would own less than one
percent
(1%) of our outstanding shares.
|
MARKET
FOR COMMON STOCK
Commencing
March 19, 2007, the Common Stock of the Company has been trading on The NASDAQ
Capital Market under the symbol USAT. Prior thereto, the Common Stock of the
Company was traded on the OTC Electronic Bulletin Board under the symbol
USAT.OB.
The
high
and low bid prices on the OTC Electronic Bulletin Board or The NASDAQ Capital
Market, as the case may be, for the Common Stock were as follows. The quotations
on the OTC Electronic Bulletin Board reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions.
|
Year
ended June 30, 2007
|
High
|
Low
|
|||||
|
First
Quarter (through September 30, 2006)
|
$
|
6.30
|
$
|
6.00
|
|||
|
Second
Quarter (through December 31, 2006)
|
$
|
7.65
|
$
|
4.90
|
|||
|
Third
Quarter (through March 31, 2007)
|
$
|
9.01
|
$
|
5.50
|
|||
|
Year
ended June 30, 2006
|
|||||||
|
First
Quarter (through September 30, 2005)
|
$
|
16.80
|
$
|
12.00
|
|||
|
Second
Quarter (through December 31, 2005)
|
$
|
13.10
|
$
|
8.50
|
|||
|
Third
Quarter (through March 31, 2006)
|
$
|
14.00
|
$
|
10.10
|
|||
|
Fourth
Quarter (through June 30, 2006)
|
$
|
8.95
|
$
|
6.50
|
|||
|
|
|||||||
|
Year
ended June 30, 2005
|
|||||||
|
First
Quarter (through September 30, 2004)
|
$
|
18.10
|
$
|
11.70
|
|||
|
Second
Quarter (through December 31, 2004)
|
$
|
16.40
|
$
|
9.50
|
|||
|
Third
Quarter (through March 31, 2005)
|
$
|
28.00
|
$
|
10.80
|
|||
|
Fourth
Quarter (through June 30, 2005)
|
$
|
20.00
|
$
|
13.30
|
|||
On
March
15, 2007 there were 1,328 record holders of the Common Stock and 501 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 March 15, 2007, such accumulated
unpaid dividends amounted to $8,992,712.
As
of
June 30, 2006, 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
exercises
of
outstanding
options
and
warrants
|
Weighted
average
exercise
price
of
outstanding
options
and
warrants
|
Number
of
securities
remaining
available
for
future
issuance
|
|||
|
Equity
compensation
|
None
|
Not
applicable
|
None
|
|||
|
plans
approved by
|
||||||
|
security
holders
|
||||||
|
|
||||||
|
Equity
compensation
|
178,933
(a)
|
$8.68
|
156,587
(b)
|
|||
|
plans
not approved by
|
||||||
|
security
holders
|
a)
Represents stock options outstanding as of June 30, 2006 for the purchase of
shares of Common Stock of the Company expiring at various times from July 2006
through June 2013. Of such options, 164,275 were granted to employees and
directors of the Company and 14,658 to former option holders of Stitch Networks
Corporation. Exercise prices for all the options outstanding were at prices
that
were either equal to or greater than the market price of the Company's Common
Stock on the dates the options were granted.
b)
Represents 140,000 shares of Common Stock issuable to the Company's Chief
Executive Officer under the terms of his employment agreement plus 16,587 shares
of Common Stock issuable under the Company's 2006-A Stock Compensation
Plan.
In
July
2003 the Company and the Company's Chief Executive Officer (CEO) amended the
terms of his employment agreement. Under the terms of the previous Executive
Employment Agreement, the CEO would have been granted seven percent
(non-dilutive) of all the then issued and outstanding shares of the Company's
Common Stock in the event a "USA Transaction" (as defined) occurs, which among
other events includes a change in control of the Company. The amended terms
of
the Executive Employment Agreement, eliminated the seven percent (non-dilutive)
right to receive Common Stock upon a "USA Transaction", and granted the CEO
an
aggregate of 140,000 shares of Common Stock in the event a "USA Transaction"
occurs. In exchange for the amendment of these terms, the Company issued an
aggregate of 105,000 shares of its Common Stock to the CEO. In connection with
this amendment, the CEO also entered into a lock-up agreement pursuant to which
he shall not sell 25,000 of these shares for a one-year period and 80,000 of
these shares for a two-year period. The CEO will not be required to pay any
additional consideration for these shares of Common Stock. At the time of a
"USA
Transaction", all of the 140,000 shares to be issued to the CEO in connection
with this amendment are automatically deemed to be issued and outstanding,
and
will be entitled to be treated as any other issued and outstanding shares of
Common Stock. The right to receive the shares is irrevocable and fully vested,
and the rights have no expiration date and will not be affected by the
termination of the CEO’s employment with the Company for any reason whatsoever.
The shares issuable to Mr. Jensen are not reflected or included in the number
of
issued and outstanding shares of the Company on a fully diluted basis in this
prospectus.
The
Company's Board of Directors established and authorized the 2007-A Stock
Compensation Plan in February 2007 for use in compensating employees, directors
and consultants through the issuance of shares of Common Stock of the Company.
There were 100,000 shares authorized under the Plan. The underlying shares
for
the Plan have been registered with the Securities and Exchange Commission as
an
employee benefit plan under Form S-8. As of March 15, 2007, there were 87,987
shares available for future issuance under the Plan.
As
of
March 31, 2007, shares of Common Stock reserved for future issuance were as
follows:
|
§
|
177,808
shares issuable upon the exercise of stock options at exercise prices
ranging from $7.50 to $100 per share
|
|
§
|
1,747,727
shares issuable upon the exercise of common stock warrants at exercise
prices ranging from $6.40 to $20 per share
|
|
§
|
14,195
shares issuable upon the conversion of outstanding Preferred Stock
and
cumulative Preferred Stock dividends
|
|
§
|
289,200
shares issuable upon the conversion of Senior Notes having an aggregate
face value of $3,652,000
|
|
§
|
465,744
shares issuable to Steve Illes under the 2006-B Common Stock Agreement
|
|
§
|
87,987
shares issuable under the 2007-A Stock Compensation Plan; and
|
|
§
|
140,000
shares issuable to Mr. Jensen under his employment agreement upon
the
occurrence of a USA Transaction
|
PLAN
OF DISTRIBUTION
We
are
registering the shares of common stock issued or issuable to the selling
shareholders to permit the resale of these shares of common stock by the holders
of the common stock from time to time after the date of this prospectus. We
will
not receive any of the proceeds from the sale by the selling shareholders of
the
shares of common stock. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.
The
selling shareholders may sell all or a portion of the shares of common stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
common stock are sold through underwriters or broker-dealers, the selling
shareholders will be responsible for underwriting discounts or commissions
or
agent's commissions. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions:
|
·
|
which
may involve crosses or block transactions;
|
|
·
|
on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of
sale;
|
|
·
|
in
the over-the-counter market;
|
|
·
|
in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
|
|
·
|
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
short
sales;
|
|
·
|
sales
pursuant to Rule 144;
|
|
·
|
broker-dealers
may agree with the selling shareholder to sell a specified number
of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
If
the
selling shareholders effect such transactions by selling shares of common stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling shareholders or commissions from
purchasers of the shares of common stock for whom they may act as agent or
to
whom they may sell as principal (which discounts, concessions or commissions
as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales
of
the shares of common stock or otherwise, the selling shareholders may enter
into
hedging transactions with broker-dealers, who may in turn engage in short sales
of the shares of common stock in the course of hedging in positions they assume.
The selling shareholders may also sell shares of common stock short and deliver
shares of common stock covered by this prospectus to close out short positions
and to return borrowed shares in connection with such short sales. The selling
shareholders may also loan or pledge shares of common stock to broker-dealers
who in turn may sell such shares.
Each
selling shareholder may pledge or grant a security interest in some or all
of
the options or shares of common stock owned by him and, if he defaults in the
performance of his secured obligations, the pledgees or secured parties may
offer and sell the shares of common stock from time to time pursuant to this
prospectus or any amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933, as amended, amending, if
necessary, the list of selling shareholders to include the pledgee, transferee
or other successors in interest as selling shareholder under this prospectus.
Each selling shareholder may also transfer and donate the shares of common
stock
in other circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
Steve
Illes is an "underwriter" within the meaning of the Act in connection with
the
sale of shares purchased from us under his agreement with us. The ten-percent
discount received by him in connection with his purchase of shares from us
will
be an underwriting discount.
The
other
selling shareholders and any broker-dealer or agent participating in the
distribution of the shares of common stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commission paid, or any
discounts or concessions allowed to, any such broker-dealer may be deemed to
be
underwriting commissions or discounts under the Securities Act. At the time
a
particular offering of the shares of common stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of shares of common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
shareholder and any discounts, commissions or concessions allowed or re-allowed
or paid to broker-dealers.
Under
the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In addition,
in
some states the shares of common stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There
can
be no assurance that the selling shareholders will sell any or all of the shares
of common stock registered pursuant to the shelf registration statement, of
which this prospectus forms a part.
Each
selling shareholder and any other person participating in such distribution
will
be subject to applicable provisions of the Securities Exchange Act of 1934,
as
amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the shares of common stock by the selling
shareholder and any other participating person. Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of common
stock to engage in market-making activities with respect to the shares of common
stock. All of the foregoing may affect the marketability of the shares of common
stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.
We
will
pay all expenses of the registration of the shares of common stock, estimated
to
be $35,000 in total, including, without limitation, Securities and Exchange
Commission filing fees and expenses of compliance with state securities or
"blue
sky" laws; provided, however, that the selling shareholders will pay all
underwriting discounts and selling commissions, if any.
Once
sold
under the shelf registration statement, of which this prospectus forms a part,
the shares of common stock will be freely tradable in the hands of persons
other
than our affiliates.
DESCRIPTION
OF SECURITIES
GENERAL
We
are
authorized to issue up to 640,000,000 shares of common stock, no par value,
and
1,800,000 shares of undesignated preferred stock. As of the date hereof, 900,000
preferred shares have been designated as series A convertible preferred stock,
no par value. As of March 31, 2007, there were 11,233,581 shares of common
stock
issued and outstanding and 520,392 shares of series A preferred stock issued
and
outstanding which are convertible into 5,203 shares of common stock. Through
March 31, 2007, a total of 590,758 shares of preferred stock have been converted
into 6,671 shares of Common Stock and $2,718,764 of accrued and unpaid dividends
thereon have been converted into 2,919 shares of Common Stock.
COMMON
STOCK
The
holder of each share of common stock:
|
§
|
is
entitled to one vote on all matters submitted to a vote of the
shareholders of USA, including the election of directors. There is
no
cumulative voting for directors;
|
|
§
|
does
not have any preemptive rights to subscribe for or purchase shares,
obligations, warrants, or other securities of USA; and
|
|
§
|
is
entitled to receive such dividends as the Board of Directors may
from time
to time declare out of funds legally available for payment of dividends.
|
No
dividend may be paid on the common stock until all accumulated and unpaid
dividends on the series A preferred stock have been paid. Upon any liquidation,
dissolution or winding up of USA, holders of shares of common stock are entitled
to receive pro rata all of the assets of USA available for distribution, subject
to the liquidation preference of the series A preferred stock of $10 per share
and any unpaid and accumulated dividends on the series A preferred stock.
SERIES
A CONVERTIBLE PREFERRED STOCK
The
holders of shares of Series A preferred stock:
|
§
|
have
the number of votes per share equal to the number of shares of common
stock into which each such share is convertible (i.e., 100 shares
of
series A preferred stock equals 1 vote);
|
|
§
|
are
entitled to vote on all matters submitted to the vote of the shareholders
of USA, including the election of directors; and
|
|
§
|
are
entitled to an annual cumulative cash dividend of $1.50 per annum,
payable
when, as and if declared by the Board of Directors.
|
The
record dates for payment of dividends on the Series A Preferred Stock are
February 1 ($0.75) and August 1 ($0.75) 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.
Any unpaid and accumulated dividends will not bear interest. As of March 31,
2007, such accumulated unpaid dividends amounted to $8,992,712.
Each
share of Series A Preferred Stock is convertible at any time into
1/100th
of a
share of fully issued and non-assessable Common Stock. Accrued and unpaid
dividends earned on shares of Series A Preferred Stock being converted into
Common Stock are also convertible into Common Stock at the rate $1,000 per
share
of Common Stock at the time of conversion and whether or not such dividends
have
then been declared by USA. As of March 31, 2007, a total of 591,758 shares
of series A Preferred Stock have been converted into common stock and accrued
and unpaid dividends thereon have been converted into 3,406 shares of
Common Stock. The conversion rate of the Series A Preferred Stock (and any
accrued and unpaid dividends thereon) will be equitably adjusted for stock
splits, stock combinations, recapitalizations, and in connection with certain
other issuances of common stock by USA. Upon any liquidation, dissolution,
or
winding-up of USA, the holders of Series A Preferred Stock are entitled to
receive a distribution in preference to the Common Stock in the amount of $10
per share plus any accumulated and unpaid dividends.
We
have
the right, at any time, to redeem all or any part of the issued and outstanding
series A preferred stock for the sum of $11 per share plus any and all unpaid
and accumulated dividends thereon. Upon notice by USA of such call, the holders
of the series A preferred stock so called will have the opportunity to convert
their shares and any unpaid and accumulated dividends thereon into shares of
common stock. The $11 per share figure was the redemption price approved by
the
Directors and shareholders of USA at the time the series A preferred stock
was
created and first issued. We currently have no plans to redeem the preferred
stock.
COMMON
STOCK PURCHASE WARRANTS
As
of
March 31, 2007, there were 1,747,727 Common Stock warrants outstanding, all
of
which were exercisable at exercise prices ranging from $6.40 to $20 per share.
The
exercise price of the warrants and the number of shares of Common Stock issuable
upon exercise of the warrants are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a subdivision,
combination or recapitalization of the common stock. Upon the merger,
consolidation, sale of substantially all the assets of USA, or other similar
transaction, the warrant holders shall, at the option of USA, be required to
exercise the warrants immediately prior to the closing of the transaction,
or
such warrants shall automatically expire. Upon such exercise, the warrant
holders shall participate on the same basis as the holders of common stock
in
connection with the transaction.
The
warrants do not confer upon the holder any voting or any other rights of a
shareholder of USA. Upon notice to the warrant holders, USA has the right,
at
any time and from time to time, to reduce the exercise price or to extend the
warrant termination date.
SHARES
ELIGIBLE FOR FUTURE SALE
Of
the
11,233,581 shares of common stock issued and outstanding on March 31, 2007,
all
are freely transferable without further registration under the Act (other than
shares held by “affiliates” of the Company). As of March 31, 2007, there were
520,392 shares of preferred stock issued and outstanding, all of which are
freely transferable without further registration under the Act (other than
shares held by "affiliates" of USA).
The
shares of preferred stock issued and outstanding as of March 31, 2007, are
convertible into 5,203 shares of common stock all of which would be fully
transferable without further registration under the Act (other than shares
held
by "affiliates" of USA).
Shares
of
our common stock which are not freely tradeable under the Act are known as
"restricted securities" and cannot be resold without registration under the
Act
or pursuant to Rule 144 promulgated thereunder.
In
general, under Rule 144 as currently in effect, a person (or persons whose
shares are required to be aggregated), including any affiliate of USA, who
beneficially owns "restricted securities" for a period of at least one year
is
entitled to sell within any three-month period, shares equal in number to the
greater of (i) 1% of the then outstanding shares of the same class of shares,
or
(ii) the average weekly trading volume of the same class of shares during the
four calendar weeks preceding the filing of the required notice of sale with
the
SEC. The seller must also comply with the notice and manner of sale requirements
of Rule 144, and there must be current public information available about USA.
In addition, any person (or persons whose shares must be aggregated) who is
not,
at the time of sale, nor during the preceding three months, an affiliate of
the
USA, and who has beneficially owned restricted shares for at least two years,
can sell such shares under Rule 144 without regard to the notice, manner of
sale, public information or the volume limitations described above.
LIMITATION
OF LIABILITY; INDEMNIFICATION
As
permitted by the Pennsylvania Business Corporation Law of 1988 ("BCL"), our
By-laws provide that Directors will not be personally liable, as such, for
monetary damages for any action taken unless the Director has breached or failed
to perform the duties of a Director under the BCL and the breach or failure
to
perform constitutes self-dealing, willful misconduct or recklessness. This
limitation of personal liability does not apply to any responsibility or
liability pursuant to any criminal statute, or any liability for the payment
of
taxes pursuant to Federal, State or local law. The By-laws also include
provisions for indemnification of our Directors and officers to the fullest
extent permitted by the BCL. In addition, the Company has entered into separate
indemnification agreements with its Directors and executive officers which
require the Company to indemnify each of such executive officers and directors
to the fullest extent permitted by the law of the Commonwealth of Pennsylvania
against certain liabilities which may arise by reason of their status as
directors and officers. The indemnification agreements also provide that the
Company must
advance all expenses incurred by the indemnified person in connection with
any
proceeding, provided the indemnified person undertakes to repay the advanced
amounts if it is determined ultimately that the indemnified person is not
entitled to be indemnified. Insofar as indemnification for liabilities arising
under the Act may be permitted to Directors, officers and controlling persons
of
USA pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy
as
expressed in the Act and is, therefore, unenforceable.
TRANSFER
AGENT AND REGISTRAR
The
Transfer Agent and Registrar for our stock is American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005.
LEGAL
MATTERS
The
validity of the common stock has been passed upon for us by Lurio &
Associates, P.C., Philadelphia, Pennsylvania 19103.
EXPERTS
The
consolidated financial statements and schedule of USA Technologies, Inc. at
June
30, 2006 and 2005, and for each of the two years ended June 30, 2006 and 2005
appearing in this Prospectus and Registration Statement have been audited by
Goldstein Golub Kessler LLP, independent registered public accounting firm,
as
set forth in their report thereon (which contains an explanatory paragraph
describing conditions that raise substantial doubt about the Company's ability
to continue as a going concern as described in Note 2 to the consolidated
financial statements) appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
The
consolidated statement of operations, shareholders’ equity, and cash flows and
schedule of USA Technologies, Inc. at June 30, 2004 and for the year ended
June
30, 2004 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent registered public accounting firm,
as set forth in their report thereon (which contains an explanatory paragraph
describing conditions that raise substantial doubt about the Company's ability
to continue as a going concern as described in Note 2 to the consolidated
financial statements) appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
file
annual, quarterly and other reports, proxy statements and other information
with
the Securities and Exchange Commission. Anyone may inspect a copy of the
registration statement or any other reports we file, without charge at the
public reference facility maintained by the Securities and Exchange Commission
in Room 1024, 450 Fifth Street, NW, Washington, DC 20549. Copies of all or
any
part of the registration statement may be obtained from that facility upon
payment of the prescribed fees. The public may obtain information on the
operation of the public reference room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains
a
website at http://www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the Securities and Exchange Commission.
We
will
furnish record holders of our securities with annual reports containing
financial statements audited and reported upon by our independent auditors,
quarterly reports containing unaudited interim financial information, and such
other periodic reports as we may determine to be appropriate or as may be
required by law.
You
can
find additional information concerning us on our website http://wwwusatech.com.
Information on our website is not and should not be considered a part of this
prospectus.
FINANCIAL
STATEMENTS
USA
TECHNOLOGIES, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Financial
Statements:
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-1
|
|
Consolidated
Balance Sheets
|
F-3
|
|
Consolidated
Statements of Operations
|
F-4
|
|
Consolidated
Statements of Shareholders' Equity
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
F-9
|
|
Notes
to Consolidated Financial Statements
|
F-11
|
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRMS
Board
of
Directors and Shareholders of
USA
Technologies, Inc.
We
have
audited the accompanying consolidated balance sheets of USA Technologies,
Inc.
as of June 30, 2006 and 2005 and the related consolidated statement of
operations, shareholders' equity, and cash flows for the years then ended.
Our
audits also included the June 30, 2006 and 2005 balances in the financial
statement schedule listed in Item 16(b). These consolidated financial statements
and the schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
the
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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of USA Technologies,
Inc.
at June 30, 2006 and 2005 and the consolidated results of its operations
and its
cash flows for the years then ended, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related June 30, 2006 and
2005
balances in the consolidated financial statement schedule, when considered
in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from operations that
raise
substantial doubt about its ability to continue as a going concern. Management’s
plan in regard to these matters is also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
As
disclosed in note 1, the Company changed its method of accounting for
stock-based compensation effective July 1, 2005.
|
/s/
Goldstein Golub Kessler LLP
|
New
York,
NY
September
1, 2006, except for Note 16, last paragraph, which is dated September 20,
2006
Board
of
Directors and Shareholders of
USA
Technologies, Inc.
We
have
audited the accompanying consolidated statement of operations, shareholders'
equity, and cash flows for the year ended June 30, 2004. Our audit also included
the June 30, 2004 balances in the financial statement schedule listed in
Item
16(b). These consolidated financial statements and 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 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 the financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company’s internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a
basis
for designing audit procedures that are appropriate in the circumstances,
but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that
our
audit provides a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows
of USA
Technologies, Inc. for the year ended June 30, 2004, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the June
30,
2004 balances in the related consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a
whole, presents fairly in all material respects the information set forth
therein.
The
accompanying financial statements have been prepared assuming that USA
Technologies, Inc. will continue as a going concern. As more fully described
in
Note 2 to the financial statements, the Company has an accumulated deficit
and
has incurred recurring operating losses. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments to reflect the possible future
effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
|
/s/
Ernst & Young LLP
|
Philadelphia,
Pennsylvania
September
10, 2004
|
USA
Technologies, Inc.
|
||||||||||
|
Consolidated
Balance Sheets
|
||||||||||
|
June
30
|
March
31
|
|||||||||
|
2006
|
2005
|
2007
|
||||||||
|
(Unaudited)
|
||||||||||
|
Assets
|
||||||||||
|
Current
assets:
|
||||||||||
|
Cash
and cash equivalents
|
$
|
2,866,801
|
$
|
2,097,881
|
$
|
5,700,026
|
||||
|
Available-for-sale
securities
|
-
|
39,467
|
7,000,000
|
|||||||
|
Accounts
receivable, less allowance for uncollectible accounts of $229,000,
$196,000and $190,000, respectively
|
1,022,114
|
744,041
|
2,669,956
|
|||||||
|
Finance
receivables
|
418,184
|
255,595
|
361,623
|
|||||||
|
Inventory
|
1,410,812
|
1,697,236
|
1,948,916
|
|||||||
|
Prepaid
expenses and other current assets
|
209,108
|
240,324
|
163,938
|
|||||||
|
Subscriptions
receivable
|
-
|
35,723
|
340,000
|
|||||||
|
Total
current assets
|
5,927,019
|
5,110,267
|
18,184,459
|
|||||||
|
Finance
receivables, less current portion
|
289,389
|
269,722
|
337,464
|
|||||||
|
Property
and equipment, net
|
1,119,304
|
684,927
|
1,532,611
|
|||||||
|
Intangibles,
net
|
8,358,632
|
9,595,232
|
7,431,182
|
|||||||
|
Goodwill
|
7,663,208
|
7,663,208
|
7,663,208
|
|||||||
|
Other
assets
|
61,914
|
68,409
|
61,914
|
|||||||
|
Total
assets
|
$
|
23,419,466
|
$
|
23,391,765
|
$
|
35,210,838
|
||||
|
Liabilities
and shareholders' equity
|
||||||||||
|
Current
liabilities:
|
||||||||||
|
Accounts
payable
|
$
|
2,448,611
|
$
|
3,265,928
|
$
|
2,315,857
|
||||
|
Accrued
expenses
|
2,012,938
|
1,479,352
|
1,724,293
|
|||||||
|
Current
obligations under long-term debt
|
89,917
|
100,646
|
432,319
|
|||||||
|
Convertible
senior notes
|
851,486
|
1,252,161
|
-
|
|||||||
|
Total
current liabilities
|
5,402,952
|
6,098,087
|
4,472,469
|
|||||||
|
Convertible
senior notes, less current portion
|
6,805,403
|
7,897,314
|
2,509,945
|
|||||||
|
Long-term
debt, less current portion
|
34,047
|
87,179
|
420,667
|
|||||||
|
Total
liabilities
|
12,242,402
|
14,082,580
|
7,403,081
|
|||||||
|
Commitments
and contingencies (Note 16)
|
||||||||||
|
Shareholders'
equity:
|
||||||||||
|
Preferred
stock, no par value:
|
||||||||||
|
Authorized
shares- 1,800,000
|
||||||||||
|
Series
A convertible preferred-
|
||||||||||
|
Authorized
shares- 900,000
|
||||||||||
|
Issued
and outstanding shares- 521,542,522,742, and 520,392, respectively
(liquidation preference of $13,441,681, $12,688,713, and $14,196,632,
respectively)
|
3,694,360
|
3,702,856
|
3,686,218
|
|||||||
|
Common
stock, no par value:
|
||||||||||
|
Authorized
shares- 640,000,000, 560,000,000, and 640,000,000,
respectively
|
||||||||||
|
Issued
and outstanding shares- 6,327,175,4,335,679, and 11,233,581,
respectively
|
138,110,126
|
121,598,475
|
166,940,821
|
|||||||
|
Subscriptions
receivable
|
-
|
(233,850
|
)
|
-
|
||||||
|
Accumulated
other comprehensive income
|
-
|
3,080
|
-
|
|||||||
|
Accumulated
deficit
|
(130,627,422
|
)
|
(115,761,376
|
)
|
(142,819,282
|
)
|
||||
|
Total
shareholders' equity
|
11,177,064
|
9,309,185
|
27,807,757
|
|||||||
|
Total
liabilities and shareholders' equity
|
$
|
23,419,466
|
$
|
23,391,765
|
$
|
35,210,838
|
||||
See
accompanying notes.
|
USA
Technologies, Inc.
|
||||||||||||||||
|
Consolidated
Statements of Operations
|
||||||||||||||||
|
Nine
months ended
|
||||||||||||||||
|
Year
ended June 30
|
March
31
|
|||||||||||||||
|
2006
|
2005
|
2004
|
2007
|
2006
|
||||||||||||
|
Revenues:
|
(Unaudited)
|
|||||||||||||||
|
Equipment
sales
|
$
|
5,198,360
|
$
|
3,535,064
|
$
|
4,349,566
|
$
|
5,604,573
|
$
|
4,024,183
|
||||||
|
License
and transaction fees
|
1,216,443
|
1,142,925
|
977,651
|
1,106,460
|
916,231
|
|||||||||||
|
Product
sales and other
|
-
|
-
|
305,598
|
-
|
-
|
|||||||||||
|
Total
revenues
|
6,414,803
|
4,677,989
|
5,632,815
|
6,711,033
|
4,940,414
|
|||||||||||
|
Cost
of sales (including amortization of software development costs-
Note
2)
|
4,404,457
|
3,478,673
|
4,329,692
|
5,493,368
|
3,149,856
|
|||||||||||
|
Gross
profit
|
2,010,346
|
1,199,316
|
1,303,123
|
1,217,665
|
1,790,558
|
|||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
General
and administrative
|
5,200,116
|
6,429,458
|
6,747,824
|
4,233,885
|
3,661,107
|
|||||||||||
|
Compensation
|
6,892,436
|
5,559,945
|
10,071,354
|
6,172,890
|
4,359,936
|
|||||||||||
|
Depreciation
and amortization
|
1,699,593
|
1,600,120
|
1,632,330
|
1,284,771
|
1,269,416
|
|||||||||||
|
Loss
on debt modification
|
-
|
-
|
318,915
|
-
|
-
|
|||||||||||
|
Total
operating expenses
|
13,792,145
|
13,589,523
|
18,770,423
|
11,691,546
|
9,290,459
|
|||||||||||
|
Operating
loss
|
(11,781,799
|
)
|
(12,390,207
|
)
|
(17,467,300
|
)
|
(10,473,881
|
)
|
(7,499,901
|
)
|
||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
99,776
|
61,068
|
40,789
|
164,817
|
70,861
|
|||||||||||
|
Gain
(loss) on investment
|
(16,087
|
)
|
-
|
603,480
|
-
|
-
|
||||||||||
|
Gain
(loss) on contract
|
||||||||||||||||
|
settlement
|
-
|
(42,300
|
429,204
|
-
|
-
|
|||||||||||
|
Legal
loss contingency
|
(270,000
|
)
|
-
|
-
|
-
|
-
|
||||||||||
|
Interest
expense:
|
||||||||||||||||
|
Coupon
or stated rate
|
(1,365,860
|
)
|
(1,256,999
|
)
|
(1,179,322
|
)
|
(771,479
|
)
|
(1,061,330
|
)
|
||||||
|
Non-cash
interest and amortization of debt discount
|
(1,513,106
|
)
|
(1,870,752
|
)
|
(3,853,029
|
)
|
(1,096,317
|
)
|
(884,460
|
)
|
||||||
|
Total
interest expense
|
(2,878,966
|
)
|
(3,127,751
|
)
|
(5,032,351
|
)
|
(1,867,796
|
)
|
(1,945,790
|
)
|
||||||
|
Total
other income (expense)
|
(3,065,277
|
)
|
(3,108,983
|
)
|
(3,958,878
|
)
|
(1,702,979
|
)
|
(1,874,929
|
)
|
||||||
|
Net
loss
|
(14,847,076
|
)
|
(15,499,190
|
)
|
(21,426,178
|
)
|
(12,176,860
|
)
|
(9,374,830
|
)
|
||||||
|
Cumulative
preferred dividends
|
(783,289
|
)
|
(784,113
|
)
|
(786,513
|
)
|
(781,451
|
)
|
(783,289
|
|||||||
|
Loss
applicable to common shares
|
$
|
(15,630,365
|
)
|
$
|
(16,283,303
|
)
|
$
|
(22,212,691
|
)
|
$
|
(12,958,311
|
)
|
$
|
(10,158,119
|
)
|
|
|
Loss
per common share (basic and diluted)
|
$
|
(3.15
|
)
|
$
|
(4.18
|
)
|
$
|
(7.70
|
)
|
$
|
(1.65
|
)
|
$
|
(2.15
|
)
|
|
|
Weighted
average number of common shares outstanding (basic and
diluted)
|
4,965,501
|
3,894,204
|
2,884,761
|
7,770,543
|
4,714,494
|
|||||||||||
See
accompanying notes.
|
USA
Technologies, Inc.
|
||||||||||||||||
|
Consolidated
Statements of Shareholders' Equity
|
||||||||||||||||
|
|
Series
A
Convertible
Preferred
Stock
|
Common
Stock
|
Accumulated
Other
Comprehensive
Income
|
Accumulated
Deficit
|
Total
|
|||||||||||
|
Balance,
June 30, 2003
|
$
|
3,715,246
|
$
|
78,790,405
|
$
|
-
|
$
|
(78,813,568
|
)
|
$
|
3,692,083
|
|||||
|
Issuance
of 17 shares of common stock from the conversion of 1,750 shares
of
preferred stock
|
(12,390
|
)
|
12,390
|
-
|
-
|
-
|
||||||||||
|
Conversion
of cumulative preferred dividends into 22 shares of common stock
at $1000
per share
|
-
|
22,440
|
-
|
(22,440
|
)
|
-
|
||||||||||
|
Exercise
of 321,793 common stock warrants and options
|
-
|
2,800,472
|
-
|
-
|
2,800,472
|
|||||||||||
|
Issuance
of 142,048 shares of common stock from the conversion of 12%senior
notes
|
-
|
2,840,978
|
-
|
-
|
2,840,978
|
|||||||||||
|
Issuance
of 16,157 shares of common stock in exchange for salaries and professional
services
|
-
|
422,092
|
-
|
-
|
422,092
|
|||||||||||
|
Issuance
of 105,000 shares of common stock to executive in connection with
employment agreement
|
-
|
4,620,000
|
-
|
-
|
4,620,000
|
|||||||||||
|
Issuance
of 531,778 shares of common stock from various private placement
offerings
at varying prices per share, less issuance costs of
$253,071
|
-
|
9,389,263
|
-
|
-
|
9,389,263
|
|||||||||||
|
Issuance
of 10,612 shares of common stock and related common stock warrants
in lieu
of cash payment for interest on the 12% senior notes
|
-
|
478,496
|
-
|
-
|
478,496
|
|||||||||||
|
Debt
discount relating to beneficial conversion feature on 12% senior
notes
|
-
|
1,981,007
|
-
|
-
|
1,981,007
|
|||||||||||
|
Issuance
of 201,700 shares of common stock in connection with the Bayview
acquisition
|
-
|
9,278,200
|
-
|
-
|
9,278,200
|
|||||||||||
|
Comprehensive
loss:
|
||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
(21,426,178
|
)
|
(21,426,178
|
)
|
|||||||||
|
Unrealized
gain on investment
|
-
|
-
|
32,249
|
-
|
32,249
|
|||||||||||
|
Total
comprehensive loss
|
(21,393,929
|
)
|
||||||||||||||
|
Balance,
June 30, 2004
|
$
|
3,702,856
|
$
|
110,635,743
|
$
|
32,249
|
$
|
(100,262,186
|
)
|
$
|
14,108,662
|
|||||
See
accompanying notes
|
USA
Technologies, Inc.
|
|||||||||||||||||||
|
Consolidated
Statements of Shareholders' Equity (Continued)
|
|||||||||||||||||||
|
|
Series
A
Convertible
Preferred
Stock
|
Common
Stock
|
Subscriptions
Receivable
|
Accumulated
Other
Comprehensive
Income
|
Accumulated
Deficit
|
Total
|
|||||||||||||
|
Exercise
of 109,942 common stock warrants at $10 per share, net
|
$
|
-
|
$
|
1,094,658
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,094,658
|
|||||||
|
Issuance
of 90,351 shares of common stock from the conversion of 12%Senior
notes
|
-
|
931,208
|
-
|
-
|
-
|
931,208
|
|||||||||||||
|
Issuance
of 8,005 shares of common stock for employee compensation
|
-
|
107,670
|
-
|
-
|
-
|
107,670
|
|||||||||||||
|
Issuance
of 384,504 shares of common stock to an accredited investor at
varying
prices per share, less issuance costs of $291,166
|
-
|
3,779,454
|
-
|
-
|
-
|
3,779,454
|
|||||||||||||
|
Issuance
of 233,333 shares of common stock from a private placement at varying
prices per share, less issuance costs of $73,103
|
-
|
3,426,897
|
(233,850
|
)
|
-
|
-
|
3,193,047
|
||||||||||||
|
Cancellation
of 7,000 shares of common stock in connection with the Bayview
acquisition
|
-
|
(322,000
|
)
|
-
|
-
|
-
|
(322,000
|
)
|
|||||||||||
|
Debt
discount related to the beneficial conversion feature on various
senior
notes issued
|
-
|
1,944,845
|
-
|
-
|
-
|
1,944,845
|
|||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(15,499,190
|
)
|
(15,499,190
|
)
|
|||||||||||
|
Unrealized
loss on investment
|
-
|
-
|
-
|
(29,169
|
)
|
-
|
(29,169
|
)
|
|||||||||||
|
Total
comprehensive loss
|
(15,528,359
|
)
|
|||||||||||||||||
|
Balance,
June 30, 2005
|
$
|
3,702,856
|
$
|
121,598,475
|
$
|
(233,850
|
)
|
$
|
3,080
|
$
|
(115,761,376
|
)
|
$
|
9,309,185
|
|||||
See
accompanying notes.
|
USA
Technologies, Inc.
|
|||||||||||||||||||
|
Consolidated
Statements of Shareholders' Equity (Continued)
|
|||||||||||||||||||
|
|
Series
A
Convertible
Preferred
Stock
|
Common
Stock
|
Subscriptions
Receivable
|
Accumulated
Other
Comprehensive
Income
|
Accumulated
Deficit
|
Total
|
|||||||||||||
|
Issuance
of 1,754,428 shares of common stock to an accredited investors
at varying
prices per share
|
$
|
-
|
$
|
13,747,261
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
13,747,261
|
|||||||
|
Exercise
of 36,800 2005-D common stock warrants at $10 per share
|
-
|
368,000
|
-
|
-
|
-
|
368,000
|
|||||||||||||
|
Cancellation
of 15,590 shares of common stock issued as part of the 2005-D private
placement
|
-
|
(233,850
|
)
|
233,850
|
-
|
-
|
-
|
||||||||||||
|
Conversion
of 1,200 shares of preferred stock to 12 shares of common
stock
|
(8,496
|
)
|
8,496
|
-
|
-
|
-
|
-
|
||||||||||||
|
Conversion
of $18,320 of cumulative preferred dividends into 18 shares of
common
stock at $1000 per share
|
-
|
18,320
|
-
|
-
|
(18,970
|
)
|
(650
|
)
|
|||||||||||
|
Issuance
of 59,247 shares of common stock from the conversion of senior
notes
|
-
|
667,469
|
-
|
-
|
-
|
667,469
|
|||||||||||||
|
Debt
discount related to the beneficial conversion feature on senior
notes
|
-
|
552,263
|
-
|
-
|
-
|
552,263
|
|||||||||||||
|
Issuance
of special purchase rights in conjunction with the 2008-C and 2010-A
senior notes
|
-
|
428,941
|
-
|
-
|
-
|
428,941
|
|||||||||||||
|
Issuance
of 9,500 shares of common stock for employee compensation
|
-
|
79,195
|
-
|
-
|
-
|
79,195
|
|||||||||||||
|
Stock
option compensation charges
|
-
|
875,556
|
-
|
-
|
-
|
875,556
|
|||||||||||||
|
Repayment
of fractional shares from reverse stock split
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(14,847,076
|
)
|
(14,847,076
|
)
|
|||||||||||
|
Unrealized
loss on investment
|
-
|
-
|
-
|
(3,080
|
)
|
-
|
(3,080
|
)
|
|||||||||||
|
Total
comprehensive loss
|
(14,850,156
|
)
|
|||||||||||||||||
|
Balance,
June 30, 2006
|
$
|
3,694,360
|
$
|
138,110,126
|
$
|
-
|
$
|
-
|
$
|
(130,627,422
|
)
|
$
|
11,177,064
|
||||||
See
accompanying notes.
|
USA
Technologies, Inc.
|
|||||||||||||
|
Consolidated
Statement of Shareholders’ Equity
|
|||||||||||||
|
(Unaudited)
|
|||||||||||||
|
Series
A
Convertible
Preferred
Stock
|
Common
Stock
|
Accumulated
Deficit
|
Total
|
||||||||||
|
Balance,
June 30, 2006
|
$
|
3,694,360
|
$
|
138,110,126
|
$
|
(130,627,422
|
)
|
$
|
11,177,064
|
||||
|
Issuance
of 1,769,827 shares of common stock to an accredited investor at
varying
prices per share, less issuance costs of $75,261
|
-
|
9,573,133
|
-
|
9,573,133
|
|||||||||
|
Issuance
of 1,400,000 shares of common stock to an accredited investor at
$6.00 per
share and 700,017 warrants exercisable at $6.40 per share, less
issuance
costs of $542,801
|
-
|
7,857,199
|
-
|
7,857,199
|
|||||||||
|
Issuance
of 1,666,667 shares of common stock to an accredited investor at
$6.00 per
share and 833,333 warrants exercisable at $6.40 per share, less
issuance
costs of $100,150
|
-
|
9,899,850
|
-
|
9,899,850
|
|||||||||
|
Conversion
of 1,150 shares of preferred stock to 11 shares of common
stock
|
(8,142
|
)
|
8,142
|
-
|
-
|
||||||||
|
Conversion
of $15,000 of cumulative preferred dividends into 15 shares of
common
stock at $1,000 per share
|
-
|
15,000
|
(15,000
|
)
|
-
|
||||||||
|
Issuance
of 50 shares of common stock from the conversion of senior
notes
|
-
|
500
|
-
|
500
|
|||||||||
|
Issuance
of 42,536 shares of common stock to settle legal disputes
|
-
|
288,000
|
-
|
288,000
|
|||||||||
|
Retirement
of 1,300 shares of common stock
|
-
|
(23,000
|
)
|
-
|
(23,000
|
)
|
|||||||
|
Issuance
of 16,587 shares of common stock under the 2006-A stock compensation
plan
|
-
|
104,345
|
-
|
104,345
|
|||||||||
|
Issuance
of 12,013 shares of common stock under the 2007-A stock compensation
plan
|
-
|
74,135
|
-
|
74,135
|
|||||||||
|
Charges
incurred in connection with the issuance of common stock for employee
compensation
|
-
|
750,363
|
-
|
750,363
|
|||||||||
|
Charges
incurred in connection with stock options
|
-
|
283,028
|
-
|
283,028
|
|||||||||
|
Net
loss
|
-
|
-
|
(12,176,860
|
)
|
(12,176,860
|
)
|
|||||||
|
Balance,
March 31, 2007
|
$
|
3,686,218
|
$
|
166,940,821
|
$
|
(142,819,282
|
)
|
$
|
27,807,757
|
||||
See
accompanying notes.
|
USA
Technologies, Inc.
|
||||||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||||||
|
Nine
months ended
|
||||||||||||||||
|
Year
ended June 30
|
March
31
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2007
|
2006
|
|||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||||||
|
Net
loss
|
$
|
(14,847,076
|
)
|
$
|
(15,499,190
|
)
|
$
|
(21,426,178
|
)
|
$
|
(12,176,860
|
)
|
$
|
(9,374,830
|
||
|
Adjustment
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||||||
|
Charges
incurred in connection with the issuance of common stock for employee
compensation
|
79,195
|
107,670
|
5,042,092
|
928,843
|
12,640
|
|||||||||||
|
Charges
incurred in connection with stock option compensation
|
875,556
|
-
|
-
|
283,028
|
10,533
|
|||||||||||
|
Interest
expense on the senior notes paid through the issuance of common
stock
|
-
|
-
|
478,496
|
-
|
-
|
|||||||||||
|
Non-cash
interest and amortization of debt discount
|
1,513,106
|
1,870,752
|
3,374,533
|
1,096,317
|
884,460
|
|||||||||||
|
Charges
incurred in connection with the issuance of common stock for legal
settlements
|
-
|
-
|
-
|
288,000
|
-
|
|||||||||||
|
Depreciation
|
462,993
|
363,520
|
469,418
|
357,321
|
341,966
|
|||||||||||
|
Amortization
|
1,236,600
|
1,236,600
|
2,207,329
|
927,450
|
927,450
|
|||||||||||
|
Loss
(gain) on sale of investment
|
17,144
|
-
|
(603,478
|
)
|
-
|
-
|
||||||||||
|
Loss
(gain) on contract settlement
|
-
|
42,300
|
(429,204
|
)
|
-
|
-
|
||||||||||
|
Loss
on debt modification
|
-
|
-
|
318,915
|
-
|
-
|
|||||||||||
|
Gain
on repayment of senior notes
|
-
|
-
|
-
|
(44,285
|
)
|
-
|
||||||||||
|
Bad
debt expense
|
130,778
|
(23,215
|
)
|
194,166
|
45,327
|
43,284
|
||||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||||||
|
Accounts
receivable
|
(408,851
|
)
|
50,895
|
(906,014
|
)
|
(1,693,169
|
)
|
(601,087
|
)
|
|||||||
|
Finance
receivables
|
(182,256
|
)
|
(221,181
|
)
|
(73,353
|
)
|
8,486
|
(32,195
|
)
|
|||||||
|
Inventory
|
286,424
|
10,448
|
(1,249,784
|
)
|
(538,104
|
)
|
346,208
|
|||||||||
|
Prepaid
expenses and other assets
|
37,711
|
(85,541
|
)
|
(1,732
|
)
|
41,935
|
78,600
|
|||||||||
|
Accounts
payable
|
(817,317
|
)
|
336,437
|
843,680
|
(132,754
|
)
|
(745,314
|
)
|
||||||||
|
Accrued
expenses
|
533,586
|
(90,016
|
)
|
(796,342
|
)
|
(288,645
|
)
|
152,723
|
||||||||
|
Net
cash used in operating activities
|
(11,082,407
|
)
|
(11,900,521
|
)
|
(12,557,456
|
)
|
(10,897,110
|
)
|
(7,955,562
|
)
|
||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||||||
|
Purchase
of property and equipment, net
|
(842,470
|
)
|
(248,043
|
)
|
(358,033
|
)
|
(334,454
|
)
|
(650,110
|
)
|
||||||
|
Purchase
of available-for-sale securities
|
-
|
-
|
-
|
(7,000,000
|
)
|
-
|
||||||||||
|
Cash
paid in connection with
|
||||||||||||||||
|
Bayview
acquisition
|
-
|
-
|
(727,970
|
)
|
-
|
-
|
||||||||||
|
Cash
received from the sale of available-for-sale securities-
Jubilee
|
19,243
|
-
|
1,471,140
|
-
|
-
|
|||||||||||
|
Cash
received from contract settlement
|
-
|
-
|
674,649
|
-
|
-
|
|||||||||||
|
Cash
received from the sale of assets held for sale
|
-
|
23,700
|
41,400
|
-
|
-
|
|||||||||||
|
Net
cash provided by (used in)investing activities
|
(823,227
|
)
|
(224,343
|
)
|
1,101,186
|
(7,334,454
|
)
|
(650,110
|
)
|
|||||||
See
accompanying notes.
|
USA
Technologies, Inc.
|
||||||||||||||||
|
Consolidated
Statements of Cash Flows (Continued)
|
||||||||||||||||
|
Nine
months ended
|
||||||||||||||||
|
Year
ended June 30
|
March
31
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2007
|
2006
|
|||||||||||
|
FINANCING
ACTIVITIES:
|
(Unaudited)
|
(Unaudited)
|
||||||||||||||
|
Net
proceeds from the issuance of common stock and the exercise of
common
stock Warrants
|
$
|
14,114,612
|
$
|
8,004,436
|
$
|
11,889,735
|
$
|
26,967,182
|
$
|
7,683,607
|
||||||
|
Collection
of subscriptions receivable
|
35,723
|
300,000
|
1,013,400
|
3,234
|
35,723
|
|||||||||||
|
Net
proceeds from the issuance of senior notes
|
1,314,944
|
3,305,790
|
-
|
-
|
1,314,944
|
|||||||||||
|
Proceeds
from the issuance of long-term debt
|
-
|
-
|
-
|
470,000
|
-
|
|||||||||||
|
Repayment
of long-term debt and senior notes
|
(2,790,725
|
)
|
(406,695
|
)
|
(812,106
|
)
|
(6,375,627
|
)
|
(1,063,428
|
)
|
||||||
|
Net
cash provided by financing activities
|
12,674,554
|
11,203,531
|
12,091,029
|
21,064,789
|
7,970,846
|
|||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
768,920
|
(921,333
|
)
|
634,759
|
2,833,225
|
(634,826
|
)
|
|||||||||
|
Cash
and cash equivalents at beginning of period
|
2,097,881
|
3,019,214
|
2,384,455
|
2,866,801
|
2,097,881
|
|||||||||||
|
Cash
and cash equivalents at end of period
|
$
|
2,866,801
|
$
|
2,097,881
|
$
|
3,019,214
|
$
|
5,700,026
|
$
|
1,463,055
|
||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||||||
|
Cash
paid for interest
|
$
|
1,430,115
|
$
|
1,187,833
|
$
|
1,098,727
|
$
|
899,272
|
$
|
1,064,904
|
||||||
|
Equipment
and software under capital lease
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
436,173
|
$
|
-
|
||||||
|
Purchases
of equipment with long-term debt
|
$
|
54,900
|
$
|
197,450
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Conversion
of convertible preferred stock to common stock
|
$
|
8,496
|
$
|
-
|
$
|
12,390
|
$
|
8,142
|
$
|
8,496
|
||||||
|
Conversion
of cumulative preferred dividends to common stock
|
$
|
18,320
|
$
|
-
|
$
|
22,440
|
$
|
15,000
|
$
|
18,320
|
||||||
|
Subscriptions
receivable
|
$
|
-
|
$
|
35,723
|
$
|
300,000
|
$
|
340,000
|
$
|
-
|
||||||
|
Conversion
of senior notes to common stock
|
$
|
667,469
|
$
|
931,208
|
$
|
2,840,978
|
$
|
500
|
$
|
284,135
|
||||||
|
Issuance
(cancellation) of common stock in connection with Bayview
acquisition
|
$
|
-
|
$
|
(322,000
|
)
|
$
|
9,278,200
|
$
|
-
|
$
|
-
|
|||||
|
Common
stock issued to settle lawsuits
|
$
|
-
|
$
|
-
|
$
|
288,000
|
$
|
-
|
||||||||
|
Beneficial
conversion feature related to senior notes
|
$
|
552,263
|
$
|
1,944,845
|
$
|
1,981,007
|
$
|
-
|
$
|
123,322
|
||||||
|
Debt
discount related to issuance of purchase rights
|
$
|
428,941
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
See
accompanying notes.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
1.
BUSINESS
USA
Technologies, Inc. (the "Company") was incorporated in the Commonwealth of
Pennsylvania in January 1992. The Company offers a suite of networked devices
and associated wireless non-cash payment, control/access management, remote
monitoring and data reporting services, as well as energy management products.
Our networked devices and associated services enable the owners and operators
of
everyday, stand-alone, distributed assets, such as vending machines, personal
computers, copiers, faxes, kiosks and laundry equipment, the ability to remotely
monitor, control and report on the results of these distributed assets, as
well
as the ability to offer their customers alternative cashless payment options.
As
a result of the acquisition of the assets of Bayview Technology Group, LLC
("Bayview") in July 2003 (Note 4), our Company also manufactures and sells
energy management products which reduce the electrical power consumption
of
various existing equipment, such as refrigerated vending machines and glass
front coolers, thus reducing the electrical energy costs associated with
operating this equipment.
2.
ACCOUNTING POLICIES
REVERSE
STOCK SPLIT
On
February 7, 2006, our shareholders approved a 1-for-100 reverse stock split
of
our Common Stock. The effective date of the reverse stock split was February
17,
2006. On the effective date of the reverse stock split, (i) each 100 shares
of
outstanding Common Stock was reduced to one share of Common Stock; (ii) the
number of shares of Common Stock into which each outstanding warrant, or
option
is exercisable was proportionately reduced on a 100-to-1 basis; (iii) the
exercise price of each outstanding warrant, or option was proportionately
increased on a 1-to-100 basis; (iv) the number of shares of Common Stock
into
which each share of Series A Preferred Stock is convertible was reduced from
1
share to one-hundredth of a share, and each share is entitled to one-hundredth
of a vote rather than one vote per share as previously provided; (v) the
conversion rate of the accrued and unpaid dividends on the Series A Preferred
Stock was increased from $10.00 to $1,000.00 per share of Common Stock; (vi)
and
the conversion price of each convertible senior note proportionately increased
on a 1-to-100 basis, and the number of shares into which each convertible
senior
note would be convertible was decreased on a 100-to-1 basis. The number of
our
authorized shares of Common Stock remains unchanged at 640,000,000. All of
the
share numbers, share prices, exercise prices, and conversion prices have
been
adjusted, on a retroactive basis, to reflect this 1-for-100 reverse stock
split.
BASIS
OF FINANCIAL STATEMENT PRESENTATION
The
financial statements of the Company have been prepared assuming the Company
will
continue as a going concern, which contemplates the realization of assets
and
the satisfaction of liabilities in the normal course of business. Accordingly,
the financial statements do not include any adjustments to recorded asset
values
that might be necessary should the Company be unable to continue in existence.
The Company has incurred recurring losses of $14.8 million, $15.5 million
and
$21.4 million during the fiscal years ended June 30, 2006, 2005 and 2004,
respectively and a loss of 12.2 million (unaudited) during the nine months
ended
March 31, 2007. Cumulative losses from its inception through June 30, 2006
amounted to approximately $127.9 million. Cumulative losses through March
31,
2007 amounted to approximately $140.0 million (unaudited). Losses have continued
through May 2007 and are expected to continue during fiscal year 2007. The
Company's ability to meet its future obligations is dependent upon the success
of its products and services in the marketplace. Until the Company's products
and services can generate sufficient operating revenues, the Company will
be
required to raise capital to meet its cash flow requirements. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management believes that actions presently being taken will allow
for
the Company to continue as a going concern. Such actions include the generation
of revenues from operations, the issuance of Common Stock (Notes 12 and 17)
and
the exercise of outstanding Common Stock warrants (Note 13).
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
2.
ACCOUNTING POLICIES (CONTINUED)
INTERIM
FINANCIAL INFORMATION
The
consolidated financial statements and disclosures included herein for the
nine
months ended March 31, 2007 and 2006 are unaudited. These financial statements
and disclosures have been prepared by the Company in accordance with U.S.
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended March 31, 2007
are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2007.
CONSOLIDATION
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Stitch Networks Corporation ("Stitch")
and USAT Capital Corp LLC (“USAT Capital”). All significant intercompany
accounts and transactions have been eliminated in consolidation.
USE
OF ESTIMATES
The
preparation of the 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 financial statements
and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATION
Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period presentation.
CASH
EQUIVALENTS
Cash
equivalents represent all highly liquid investments with original maturities
of
three months or less. Cash equivalents are comprised of certificates of deposit
and a money market fund. The Company maintains its cash in bank deposit
accounts, which may exceed federally insured limits at times.
ACCOUNTS
RECEIVABLE
Accounts
receivable are reported at their outstanding unpaid principal balances reduced
by an allowance for doubtful accounts. The Company estimates doubtful accounts
for accounts receivable and finance receivables based on historical bad debts,
factors related to specific customers’ ability to pay and current economic
trends. 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 accrued is adequate
to provide for normal credit losses.
FINANCE
RECEIVABLES
The
Company offers extended payment terms to certain customers for equipment
sales.
The Company does not require collateral or other security to support credit
sales, but provides an allowance for credit losses and discontinues the accrual
of interest, if necessary. 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 loan payments as interest income
based
on the effective interest rate method in the accompanying Consolidated Statement
of Operations.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
2.
ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory
consists of finished goods and packaging materials. Through November 30,
2005,
inventory was stated at the lower of cost (first-in, first-out basis) or
market.
Due to the implementation of a new accounting system on December 1, 2005,
the
Company's inventory is stated at the lower of cost (average cost basis) or
market. The Company determined that the change in accounting principle was
not
material and therefore has excluded the current and cumulative effect of
the
change and pro forma disclosures.
PROPERTY
AND EQUIPMENT
Property
and equipment are recorded at cost. Property and equipment are depreciated
on
the straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized on the straight-line basis over the
lesser
of the estimated useful life of the asset or the respective lease
term.
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 Statement
of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("FAS 142"). Under FAS 142, goodwill is not amortized to earnings, but instead
is subject to periodic testing for impairment. The Company tests goodwill
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 discounted cash flow 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. The Company has
concluded there has been no impairment of goodwill as a result of its testing
on
April 1, 2004, April 2005 and April 1, 2006. During the nine months ended
March
31, 2007, no events or circumstances arose indicating that an impairment
of
goodwill may have occurred.
Patents,
trademarks and the non-compete agreement are carried at cost less accumulated
amortization, which is calculated on a straight-line basis over their estimated
economic life. The Company reviews intangible for impairment whenever events
or
changes in circumstances indicate that they carrying amount may not be
recoverable. An asset is considered to be impaired when the sum of the
undiscounted future net cash flows expected to result from the use of the
asset
and its eventual disposition is less than its carrying amount. The amount
of the
impairment loss, if any, is measured as the difference between the net book
value of the asset and its estimated fair value.
SOFTWARE
DEVELOPMENT COSTS
The
Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior
to the
establishment of technological feasibility are expensed as incurred.
Amortization of software development costs commences when the product becomes
available for general release to customers. Amortization of software development
costs is calculated as the greater of the amount computed using (i) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The Company
reviews the unamortized software development costs at each balance sheet
date
and, if necessary, will write down the balance to net realizable value if
the
unamortized costs exceed the net realizable value of the asset.
During
May 2000, the Company reached technological feasibility for the development
of
the multi-media e-Port(TM) product and related internal network and,
accordingly, the Company commenced capitalization of software development
costs
related to this product and network. Costs capitalized through 2002 were
$5.3
million, which included capitalized interest of approximately $493,000 pursuant
to SFAS No. 34, "Capitalization of Interest Costs".
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
2.
ACCOUNTING POLICIES (CONTINUED)
SOFTWARE
DEVELOPMENT COSTS (CONTINUED)
During
the fourth quarter of fiscal year 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. During this quarter, management performed an evaluation
of
the commercial success and preliminary market acceptance of the multi-media
e-Port(TM) and enhanced network and as a result of this evaluation the Company
determined that the estimated future revenues less costs to complete and
dispose
of the multi-media e-Port client product was zero. Therefore, the Company
wrote
down $2,663,000 of software development costs related to the multi-media
e-Port
client product. The unamortized balance of the software development costs
after
the impairment charge was amortized over an estimated useful life of two
years
and was fully amortized during the year ended June 30, 2004. The gross amount
of
software development costs and the accumulated amortization was $5,326,186
at
June 30, 2006, 2005, and 2004 and at March 31, 2007 (unaudited). Amortization
expense was approximately $999,000 during the year ended June 30, 2004. Such
amortization is reflected in Cost of Sales in the accompanying Consolidated
Statements of Operations.
AVAILABLE-FOR-SALE
SECURITIES
The
Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and
Equity Securities". Management determines the appropriate classifications
of
securities at the time of purchase and reevaluates such designation as of
each
balance sheet date. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported as a separate component of
shareholders' equity in accumulated other comprehensive income (loss). If
the
investment sustains an other-than-temporary decline in fair value, the
investment is written down to its fair value by a charge to earnings.
IMPAIRMENT
OF LONG LIVED ASSETS
In
accordance with Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-lived Assets" ("FAS 144"), the Company
reviews its 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 FAS 144 are met, 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.
During
the fourth quarter of fiscal year 2003, the Company reviewed certain long-lived
assets (vending machines) and determined that such assets were impaired.
These
vending machines were used and intended for use in connection with the Company's
program with Kodak to sell disposable cameras and film pursuant to the Kodak
Vending Placement Agreement. Management determined that it was more likely
than
not that these vending machines would be disposed of before the end of their
previously estimated useful lives. The estimated undiscounted cash flows
for
this group of assets were less than the carrying value of the related assets.
As
a result, the Company recorded a charge of approximately $321,000 representing
the difference between the fair value as determined from a quoted market
price
and the carrying value of the group of assets. Effective December 31, 2003,
the
Kodak agreement was terminated (Note 14). As a result, the carrying value
of the
vending machines were further impaired and a charge of approximately $367,000
was recorded as a component of the gain on contract settlement in the June
30,
2004 Consolidated Statement of Operations to reflect these assets at their
realizable value. The remaining value of these vending machines was then
recorded as assets held for sale in the Consolidated Balance Sheets as of
June
30, 2004. During the year ended June 30, 2005, the Company wrote off the
remaining value of the vending machines that had not been sold during the
year
as a loss on contract settlement.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
2.
ACCOUNTING POLICIES (CONTINUED)
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
carrying value of cash and cash equivalents, accounts receivable, finance
receivables-current portion, other current assets, accounts payable and accrued
expenses reported in the consolidated balance sheets equal or approximate
fair
value due to their short maturities. The fair value of the Company's long-term
Finance Receivables and Long-Term Debt approximates book value as such
instruments are at market rates currently available to the Company. The fair
value of the Senior Notes approximates the principal amount as such instruments
are at market rates currently available to the Company.
CONCENTRATION
OF CREDIT RISK
Financial
instruments that subject the Company to a concentration of credit risk consist
principally of cash and cash equivalents and accounts and finance receivables.
The Company maintains cash and cash equivalents with various financial
institutions. Approximately 39% and 36% of the Company's accounts and finance
receivables at June 30, 2006 and 2005, respectively, were concentrated with
two
and two customers, respectively, and 62% (unaudited) as of March 31, 2007
were
concentrated with two customers. Approximately 29%, 11% and 13% of the Company's
revenues for the year ended June 30, 2006, 2005 and 2004, respectively, were
concentrated with two (19% with one customer and 10% with another customer),
one
and one customer, respectively. Approximately 50% (unaudited) and 34%
(unaudited) of the Company’s revenues for the nine months ended March 31, 2007
and 2006, respectively, were concentrated with two customers (43% with one
customer and 7% with another customer) and two customers (25% with one customer
and 9% with another customer), respectively. The Company's customers are
principally located in the United States.
REVENUE
RECOGNITION
Revenue
from the sale of equipment is recognized on the terms of freight-on-board
shipping point, or upon installation and acceptance of the equipment if
installation services are purchased for the related equipment. 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. Product revenues
are
recognized for the sale of products from Company owned vending machines when
there is purchase and acceptance of product by the vending customer. 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.
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.
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 sales.
RESEARCH
AND DEVELOPMENT EXPENSES
Research
and development expenses are expensed as incurred. Research and development
expenses, which are included in general and administrative and compensation
expense in the consolidated statements of operations, were approximately
$974,000, $1,364,000, and $688,000 for the years ended June 30, 2006, 2005
and
2004, respectively, and $992,000 (unaudited) and $577,000 (unaudited) for
the
nine months ended March 31, 2007 and 2006, respectively.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
2.
ACCOUNTING POLICIES (CONTINUED)
SHARE-BASED
PAYMENT
In
December 2004, the FASB issued Statement of Financial Accounting Standards
No.
123(R), “Share-Based Payment” (“FAS 123(R)”), which establishes standards for
transactions in which an entity exchanges its equity instruments for goods
or
services. This standard requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on
the
grant-date fair value of the award.
On
July
1, 2005, the Company adopted FAS123(R) using the Modified Prospective
Application method. For outstanding nonvested share-based awards as of July
1,
2006, compensation expense for the portion of the award for which the requisite
services have not been rendered will be recognized in the Statement of
Operations as the services are rendered. Compensation expense will be recognized
based on the grant-date fair value of the share-based award as previously
calculated under FAS 123 at the time of the grant, however, the Company is
required to adjust the compensation expense for expected forfeitures. Awards
granted subsequent to July 1, 2005 will be based on the guidance provided
by FAS
123(R).
Due
to
the adoption of FAS 123(R), the Company has recognized $14,044 of compensation
expense related to a single grant of 3,000 common stock options during the
prior
fiscal year for which were not fully vested as of the date of adoption. The
remainder of the common stock options that were outstanding at the date of
adoption were fully vested as of the date of adoption. There was no impact
on
cash flows or basic and diluted earnings per share.
The
pro-forma disclosures required by FAS 123 have not been included for the
years
ended June 30, 2005 and 2004 as the fair value of the options granted were
not
considered to be material.
There
were no common stock options granted during the quarter ended March 31, 2007.
The Company recorded stock compensation expense of $928,843 (unaudited) and
$ 12,640
(unaudited) related to Common Stock grants and vesting of shares previously
granted to employees and $283,028 (unaudited) and $10,533 (unaudited) related
to
the vesting of Common Stock options during the nine months ended March 31,
2007
and 2006, respectively.
LOSS
PER COMMON SHARE
Basic
earnings per share is calculated by dividing income (loss) applicable to
common
shares by the weighted average common shares outstanding for the period.
Diluted
earnings per share is calculated by dividing income (loss) applicable to
common
shares by the weighted average common shares outstanding for the period plus
the
dilutive effect (unless such effect is anti-dilutive) of potential common
shares
(approximately 1,081,000 and 1,250,000 shares as of June 30, 2006 and 2005,
respectively). No exercise of stock options, purchase rights, stock purchase
warrants, or the conversion of senior notes, debentures, preferred stock,
or
cumulative preferred dividends was assumed during the three fiscal years
ended
June 30, 2006 or the nine months ended March 31, 2007 and 2006 because the
assumed exercise of these securities would be anti-dilutive.
RECENT
ACCOUNTING PRONOUCEMENTS
In
June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB
Statement No. 109
(“FIN 48”), which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company has not completed its evaluation of the
impact of the adoption of FIN 48.
On
December 21, 2006, the Financial Accounting Standards Board (the “FASB”) issued
FASB Staff Position EITF 00-19-2 (“FSP EITF 00-19-2”). This FSP addresses an
issuer’s accounting for registration payment arrangements and specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with FASB Statement No. 5, Accounting
for
Contingencies. This FSP was effective on December 21, 2006 for new arrangements.
For registration payment arrangements entered into prior to the issuance
of this
FSP, this guidance is effective for financial statements issued for fiscal
years
beginning after December 15, 2006. The Company elected to adopt FSP EITF
00-19-2
early, on December 21, 2006.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
3.
AVAILABLE-FOR-SALE SECURITIES
JUBILEE
INVESTMENT TRUST, PLC
During
the year ended June 30, 2003, the Company issued 150,000 shares of its Common
Stock ($2,850,000) for an investment in 1,870,091 shares in the Jubilee
Investment Trust, PLC ("Jubilee"), a United Kingdom Investment Trust whose
shares trade on the London Stock Exchange. The Company agreed not to sell
the
Jubilee shares for a period of 90 days from January 24, 2003 and to sell
a
maximum of 10% of the Jubilee shares during each month thereafter. Jubilee
agreed not to sell the Company's shares of Common Stock for a period of two
years from the date of issuance unless agreed to by the Company.
During
fiscal year 2004, the Company sold 1,669,091 of the Jubilee shares for net
proceeds of $1,471,140 and realized a gain of $603,480, with the cost of
the
securities calculated by the specific identification method. An unrealized
gain
of $3,080 and $32,249 on the shares held by the Company was reflected in
shareholders' equity as accumulated other comprehensive income at June 30,
2005
and 2004, respectively. During fiscal year 2006, the Company sold the remaining
70,000 shares for net proceeds of $20,300 and realized a loss of $17,144,
with
the cost of the securities calculated by the specific identification
method.
OTHER
AVAILABLE-FOR-SALE SECURITIES
As
of
March 31, 2007, Available-for-sales securities consisted of auction market
securities. There was no unrealized gain (loss) as of March 31,
2007.
4.
ACQUISITIONS
BAYVIEW
TECHNOLOGY GROUP, LLC
On
July
11, 2003, the Company acquired substantially all of the assets of Bayview.
Under
the terms of the asset purchase agreement, the Company issued to Bayview
200,000
shares of its restricted Common Stock and cash of $631,247 to settle an
obligation of Bayview. The definitive agreement also provided for the Company
to
assume certain obligations under a royalty agreement expiring May 31, 2006.
Approximately $149,000, $112,000 and $169,000 of royalty expense was recorded
during the years ended June 30, 2006, 2005 and 2004, respectively, in connection
with this agreement. In connection with this transaction, the Company also
agreed to issue 1,700 shares of its restricted Common Stock to a consultant
who
provided certain services to the Company in connection with this acquisition.
The
acquisition allows the Company to offer energy conservation products that
reduce
the power consumption of various types of equipment, such as vending machines,
glass front coolers and other "always-on" appliances by allowing the equipment
to operate in power saving mode when the full power mode is not necessary.
The
acquisition cost of Bayview was $10,030,894, which principally was comprised
of
the issuance of 200,000 shares of restricted Common Stock valued at $9,200,000
and a cash payment of $631,247. The value of the 200,000 shares of Common
Stock
was determined based on the average market price of the Company's Common
Stock
over the two-day period before and after the definitive agreement date of
July
11, 2003. The purchase price also included acquisition related costs of
$199,647.
The
following table summarizes the final purchase price allocation to reflect
the
fair values of the assets acquired and liabilities assumed at the date of
acquisition.
|
Current
assets
|
$
|
7,628
|
||
|
Property
and equipment
|
244,704
|
|||
|
Intangible
assets
|
9,449,000
|
|||
|
Goodwill
|
329,562
|
|||
|
Total
assets acquired
|
$
|
10,030,894
|
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
4.
ACQUISITIONS (CONTINUED)
BAYVIEW
TECHNOLOGY GROUP, LLC (CONTINUED)
Of
the
$9,449,000 of Bayview acquired intangible assets, $7,424,000 was assigned
to
patents that are subject to amortization over a 10-year period, $1,011,000
was
assigned to a non-compete agreement that is subject to amortization over
a
5-year period and $1,014,000 was assigned to trademarks and trade names that
are
not subject to amortization.
Of
the
200,000 shares issued to Bayview, 7,000 shares were placed into an escrow
account to be issued to one owner of Bayview if certain Bayview stock options
were exercised. This agreement called for these shares to be returned to
the
Company if the Bayview stock options were not exercised. During the three
months
ended September 30, 2004, the Company determined that the Bayview stock options
would not be exercised and the shares previously issued into escrow would
be
cancelled. Therefore, the Company decreased the purchase price by $322,000
due
to the return and cancellation of the 7,000 shares held in escrow. The decrease
in the purchase price resulted in a reduction of goodwill and shareholders’
equity of $322,000 in the three months ended September 30, 2004.
The
acquisition was accounted for using the purchase method and, accordingly,
the
results of operations of Bayview have been included in the accompanying
consolidated statements of operations since the date of acquisition. Results
of
operations of the Company for year ended June 30, 2004 would not have been
significantly different than reported had the acquisition taken place July
1,
2003 as the acquisition occurred on July 11, 2003. Pro-forma combined results
for the year ended June 30, 2003 would have been as follows had the acquisition
taken place July 1, 2002 - revenues of $8,487,190; net loss of $22,478,740;
loss
applicable to common shares of $23,272,326; loss per common share (basic
and
diluted) of $17.66.
STITCH
NETWORKS CORPORATION
On
May
14, 2002, USA Acquisition Corp., a wholly owned subsidiary of the Company
acquired Stitch pursuant to an Agreement and Plan of Merger by and among
the
Company, USA Acquisition Corp., Stitch and the stockholders of Stitch.
Additionally, on May 14, 2002, the Company's shareholders voted to increase
the
number of authorized shares of Common Stock to 150,000,000. The Company acquired
Stitch to strengthen its position as a leading provider of wireless remote
monitoring and cashless and mobile commerce solutions and to increase the
Company's revenue base. These revenues would include product revenues and
monthly service and transaction fees. Additionally, the acquisition of the
Stitch technology enhanced the Company's existing technology and complemented
the revenue and transaction processing revenue of the Company's existing
products. Certain Stitch personnel were believed to possess some key strengths
in several disciplines that the Company believed to be of great value in
its
plans for growth.
The
acquisition was accounted for using the purchase method and, accordingly,
the
results of the operations of Stitch have been included in the accompanying
consolidated statements of operations since the acquisition date. The purchase
price consisted of the issuance of 227,623 shares of the Company's Common
Stock
in exchange for the outstanding shares of Stitch, and the issuance of warrants
to purchase up to 75,874 shares of the Company's Common Stock at $40 per
share
at any time through June 30, 2002. The purchase price also included the
assumption of outstanding Stitch stock options that were converted into options
to purchase an aggregate of 24,753 shares of the Company's Common Stock at
$16.50 per share at any time prior to May 14, 2007, warrants to purchase
up to
4,125 shares of the Company's Common Stock at $40 per share at any time through
June 30, 2002 and other acquisition related expenses. None of the warrants
issued in connection with the acquisition were exercised. A total of 48,000
shares of the Common Stock issued to the former stockholders of Stitch were
held
in escrow to secure the former stockholder's indemnification obligations
under
the Agreement and Plan of Merger. Such shares are subject to cancellation
if
there is a breach of the indemnification (as defined). The value of the
marketable equity securities issued in connection with this acquisition was
determined based on the average market price of the Company's Common Stock
over
a two-day period before and after April 10, 2002, the date the definitive
agreement to acquire Stitch was entered into. Such valuation was in accordance
with EITF 99-12: "Determination of the Measurement Date for the Market Price
of
Acquirer Securities Issued in a Purchase Business Combination".
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
4.
ACQUISITIONS (CONTINUED)
STITCH
NETWORKS CORPORATION (CONTINUED)
The
following table summarizes the final purchase price allocation of the fair
value
of the assets and liabilities assumed at the date of acquisition:
|
Current
assets
|
$
|
2,710,000
|
||
|
Property
and equipment
|
1,700,000
|
|||
|
Goodwill
|
7,946,000
|
|||
|
Intangibles
|
2,920,000
|
|||
|
Current
liabilities
|
(1,554,000
|
)
|
||
|
Long-term
debt
|
(3,976,000
|
)
|
||
|
$
|
9,746,000
|
In
connection with the acquisition, the Company determined that it would vacate
office space previously occupied by Stitch. Accordingly, in connection with
this
acquisition, the Company accrued the remaining lease exit costs relating
to the
lease in the amount of approximately $354,000 as part of the cost of purchasing
Stitch. In November 2003, Stitch and the lessor of the office space reached
an
agreement that required Stitch to pay the lessor $55,000 as consideration
to
release Stitch from any further obligations under the lease. In addition,
a
security deposit of approximately $9,000 was retained by the lessor.
Accordingly, the difference between estimated lease exit costs recorded in
conjunction with the acquisition and actual consideration paid was recorded
as a
reduction of goodwill in the amount of $290,000 during the year ended June
30,
2004.
INTANGIBLE
ASSETS
Amortization
expense relating to all acquired intangible assets was $1,236,600, $1,236,600
and $1,208,668 during the years ended June 30, 2006, 2005 and 2004,
respectively, and $927,450 (unaudited) and $927,450 (unaudited) for the nine
months ended March 31, 2007 and 2006, respectively. The intangible asset
balance
and related accumulated amortization consisted of the following:
|
March
31, 2007 (Unaudited)
|
||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Value
|
||||||||
|
Intangible
assets:
|
|
|
|
|||||||
|
Trademarks
|
$
|
2,064,000
|
$
|
(511,875
|
)
|
$
|
1,552,125
|
|||
|
Patents
|
9,294,000
|
(3,673,672
|
)
|
5,620,328
|
||||||
|
Non-Compete
agreement
|
1,011,000
|
(752,271
|
)
|
258,729
|
||||||
|
Total
|
$
|
12,369,000
|
$
|
(4,937,818
|
)
|
$
|
7,431,182
|
|||
|
|
||||||||||
|
June
30, 2006
|
||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Value
|
||||||||
|
Intangible
assets:
|
||||||||||
|
Trademarks
|
$
|
2,064,000
|
$
|
(433,125
|
)
|
$
|
1,630,875
|
|||
|
Patents
|
9,294,000
|
(2,976,622
|
)
|
6,317,378
|
||||||
|
Non-Compete
agreement
|
1,011,000
|
(600,621
|
)
|
410,379
|
||||||
|
Total
|
$
|
12,369,000
|
$
|
(4,010,368
|
)
|
$
|
8,358,632
|
|||
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
4.
ACQUISITIONS (CONTINUED)
|
June
30, 2005
|
||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Value
|
||||||||
|
Intangible
assets:
|
|
|
||||||||
|
Trademarks
|
$
|
2,064,000
|
$
|
(328,125
|
)
|
$
|
1,735,875
|
|||
|
Patents
|
9,294,000
|
(2,047,222
|
)
|
7,246,778
|
||||||
|
Non-Compete
agreement
|
1,011,000
|
(398,421
|
)
|
612,579
|
||||||
|
Total
|
$
|
12,369,000
|
$
|
(2,773,768
|
)
|
$
|
9,595,232
|
|||
At
March
31, 2007 and June 30, 2006, the expected amortization of the intangible assets
is as follows: $1,240,000 per year in fiscal year 2007 through fiscal year
2008,
$1,030,000 per year in fiscal year 2009 through fiscal year 2012, $740,000
in
fiscal year 2013 and $22,000 in fiscal year 2014. The weighted average useful
life of these intangible assets is 9.55 years at June 30, 2006.
5.
PROPERTY AND EQUIPMENT
Property
and equipment, at cost, consist of the following:
|
Useful
|
June
30
|
March
31
|
|||||||||||
|
Lives
|
2006
|
2005
|
2007
|
||||||||||
|
Computer
equipment and
|
|
(Unaudited)
|
|||||||||||
|
purchased
software
|
3
years
|
$
|
3,063,618
|
$
|
2,536,990
|
$
|
3,651,205
|
||||||
|
Vending
machines and
|
|||||||||||||
|
related
components
|
7
years
|
4,427
|
4,427
|
4,427
|
|||||||||
|
Control
systems
|
3
years
|
79,567
|
479,530
|
8,503
|
|||||||||
|
Furniture
and equipment
|
5-7
years
|
738,746
|
816,537
|
921,786
|
|||||||||
|
Leasehold
improvements
|
Lease
term
|
126,007
|
74,576
|
126,007
|
|||||||||
|
Vehicles
|
5
years
|
29,066
|
29,066
|
29,066
|
|||||||||
|
4,041,431
|
3,941,126
|
4,740,994
|
|||||||||||
|
Less
accumulated depreciation
|
(2,922,127
|
)
|
(3,256,199
|
)
|
(3,208,383
|
)
|
|||||||
|
|
$
|
1,119,304
|
$
|
684,927
|
$
|
1,532,611
|
|||||||
Assets
under capital lease totaled approximately $436,175 (unaudited), $0 and $6,000
as
of March 31, 2007 and June 30, 2006 and 2005, respectively. Capital lease
amortization of approximately $2,000, $2,000, $20,000, $6,560 (unaudited)
and
$2,000 (unaudited), is included in depreciation expense for the years ended
June
30, 2006, 2005 and 2004, and for the nine months ended March 31, 2007 and
2006,
respectively.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
6.
ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
June
30
|
March
31
|
|||||||||
|
|
2006
|
2005
|
2007
|
|||||||
|
Accrued
compensation and related sales commissions
|
$
|
384,256
|
$
|
404,485
|
(Unaudited)
$457,525
|
|||||
|
Accrued
interest
|
381,240
|
445,495
|
263,898
|
|||||||
|
Accrued
professional fees
|
162,051
|
151,220
|
174,994
|
|||||||
|
Accrued
taxes and filing fees
|
100,573
|
97,860
|
134,343
|
|||||||
|
Accrued
consulting fees
|
-
|
122,500
|
-
|
|||||||
|
Advanced
customer billings
|
109,007
|
65,385
|
106,383
|
|||||||
|
Accrued
loss contingency
|
270,000
|
-
|
-
|
|||||||
|
Accrued
other
|
605,811
|
192,407
|
587,150
|
|||||||
|
|
$
|
2,012,938
|
$
|
1,479,352
|
$
|
1,724,293
|
||||
7.
RELATED PARTY TRANSACTIONS
During
the years ended June 30, 2006, 2005, and 2004 and the nine months ended March
31, 2007 and 2006, the Company incurred approximately $258,000, $284,000,
$391,000, $266,000 (unaudited), and $187,000 (unaudited), respectively, in
connection with legal services provided by a member of the Company's Board
of
Directors. At June 30, 2006 and 2005 and March 31, 2007, approximately $28,000,
$25,000 and $43,000 (unaudited), respectively, of the Company's accounts
payable
and accrued expenses were due to this Board member. During the year ended
June
30, 2005, the Company incurred approximately $72,600 in connection with
consulting services provided by another member of the Company's Board of
Directors. At March 31, 2007 and June 30, 2006 and June 30, 2005, approximately
$0 (unaudited), $0 and $73,000, respectively, of the Company's accrued expenses
were due to this Board member. During the years ended June 30, 2006, 2005
and
2004, certain Board members and executives participated in various debt or
equity offerings of the Company for total investments of approximately $53,000,
$245,000, and $266,000, respectively. There was no participation by Board
members in debt or equity offerings during the nine months ended March 31,
2007
and 2006. As of March 31, 2007 (unaudited) and June 30, 2006 and June 30,
2005,
Mr. Illes, an accredited investor, held $750,000, $1,000,000 and $1,000,000
of
Senior Notes, respectively.
8.
LONG-TERM DEBT
Long-term
debt consists of the following:
|
June
30
|
March
31
|
|||||||||
|
|
2006
|
2005
|
2007
|
|||||||
|
|
|
|
(Unaudited)
|
|||||||
|
Software
licensing and other
|
$
|
123,964
|
$
|
186,768
|
$
|
416,813
|
||||
|
Capital
lease obligations
|
-
|
1,057
|
436,173
|
|||||||
|
|
123,964
|
187,825
|
852,986
|
|||||||
|
Less
current portion
|
89,917
|
100,646
|
432,319
|
|||||||
|
|
$
|
34,047
|
$
|
87,179
|
$
|
420,667
|
||||
During
fiscal year 2005, the Company entered into a loan agreement in connection
with
software licensing for approximately $170,000, due in eight equal quarterly
payments of $21,229 through March 2007 at an interest rate of
5.32%.
During
October 2006, the Company entered into a loan agreement with a financial
institution bearing interest at 18% and secured by $470,000 of the Finance
Receivables. The Company received $470,000 in proceeds and agreed to make
12
monthly payments of $25,000 followed by 18 monthly payments of $15,000 from
the
proceeds received from the finance receivables. As of March 31, 2007, $227,350
and $161,509 of the current and long-term Finance Receivables, respectively,
are
collateral for the outstanding balance of the loan, of which $201,139 and
$176,113 is current and long-term debt, respectively.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
8.
LONG-TERM DEBT (CONTINUED)
During
March 2007, the Company entered into a capital lease agreement in connection
with software licensing for approximately $290,000, due in sixteen equal
monthly
payments of $17,769 through July 2008 followed by two equal monthly payments
of
$19,787 through September 2008 at an interest rate of 14.27%.
During
March 2007, the Company entered into a capital lease agreement in connection
with office equipment for approximately $146,000, due in sixty equal monthly
payments of $2,965 through March 2012 at an interest rate of 7.83%.
9.
INCOME
TAXES
At
June
30, 2006 and 2005, the Company had net operating loss carryforwards of
approximately $111,024,000 and $98,428,000, respectively, to offset future
taxable income expiring through approximately 2026. In addition, the Company
had
a capital loss carryforward of approximately $1,360,000 and $1,264,000 as
of
June 30, 2006 and 2005, respectively, which expires in 2011. At June 30,
2006
and 2005, the Company recorded net deferred tax assets of approximately
$43,882,000 and $39,143,000, respectively, which was reduced by a valuation
allowance of the same amount as the realization of the deferred tax asset
is not
likely, principally due to the lack of earnings history.
The
timing and extent to which the Company can utilize future tax deductions
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). Stitch had net
operating loss carryforwards of approximately $11,800,000 at the acquisition
date. Such net operating loss carryforwards are limited under the same
provisions as to the amount available to offset future taxable income and
to the
extent used in any given year, will result in decreases to goodwill as opposed
to income tax expense.
The
deferred tax assets arose primarily from the use of different accounting
methods
for financial statement and income tax reporting purposes as follows:
|
June
30
|
|||||||
|
2006
|
2005
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss and capital loss carryforwards
|
$
|
41,833,000
|
$
|
37,508,000
|
|||
|
Deferred
research and development costs
|
234,000
|
373,000
|
|||||
|
Software
development costs
|
1,081,000
|
1,297,000
|
|||||
|
Other
|
1,430,000
|
780,000
|
|||||
|
44,578,000
|
39,958,000
|
||||||
|
Deferred
tax liabilities:
|
|||||||
|
Intangibles
|
(696,000
|
)
|
(815,000
|
)
|
|||
|
43,882,000
|
39,143,000
|
||||||
|
Valuation
allowance
|
(43,882,000
|
)
|
(39,143,000
|
)
|
|||
|
Deferred
tax assets, net
|
$
|
-
|
$
|
-
|
|||
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
10.
SENIOR NOTES
The
Company has issued six series of convertible Senior Notes each with an annual
interest rate of 12% These Senior Notes were scheduled to mature on December
31,
2004 ("2004 Senior Notes"), December 31, 2005 ("2005 Senior Notes"), December
31, 2006, December 31, 2007, December 31, 2008, and December 31, 2009. The
Company has also issued three series of convertible Senior Notes each with
an
annual interest rate of 10%. These Senior Notes were scheduled to mature
on June
30, 2007, December 31, 2008, and December 31, 2010.
The
2004
Senior Notes were issued pursuant to a private placement offering authorized
during the year ended June 30, 2002. The 2004 Senior Notes were convertible
into
shares of Common Stock at $40 per share at any time through December 31,
2004.
Certain shareholders of the Company who held warrants to purchase shares
of
Common Stock exercisable at $50 per share were offered the opportunity to
cancel
those warrants and receive an equivalent number of new warrants exercisable
at
$10 per share if they invested in the 2004 Senior Note offering. The fair
value
of the new warrants issued and the intrinsic value of the beneficial conversion
feature associated with the 2004 Senior Notes created debt discount that
was
allocated to equity and was amortized to interest expense through December
31,
2004. During January 2005, the Company repaid $131,152 of these Senior Notes
and
agreed with the holders of the remaining $320,000 of these notes to extend
the
maturity date to March 31, 2005. In exchange for extending the maturity date,
the Company authorized a reduction of the conversion price to $10 resulting
in
the recording of $32,000 as debt discount related to the intrinsic value
of this
beneficial conversion feature, which was amortized through March 31, 2005.
The
maturity date of these notes was further extended to June 30, 2009 in March
2006, with no other terms being modified.
The
2005
Senior Notes were issued pursuant to a private placement offering authorized
during the year ended June 30, 2002 that included the issuance of 200 shares
of
Common Stock for each $10,000 of face amount of notes issued. The 2005 Senior
Notes were convertible into shares of Common Stock at $20 per share at any
time
through December 31, 2005. The fair value of the Common Stock issued and
the
intrinsic value of beneficial conversion feature associated with the 2005
Senior
Notes created debt discount that was allocated to equity and was amortized
to
interest expense through December 31, 2005. During the years ended June 30,
2006, 2005 and 2004, $130,000, $21,000, and $514,359, respectively, of the
2005
Senior Notes were converted into 6,500, 1,050, and 25,717, shares of Common
Stock, respectively. On January 1, 2006, the Company repaid all of the
outstanding 2005 Senior Notes for a total repayment of $910,262.
In
March
2003, the Company granted to the holders of Senior Notes due December 31,
2003
(“2003 Senior Notes”) and the 2004 Senior Notes the right to extend the maturity
date of these Senior Notes to December 31, 2006 (“2006 Senior Notes”) and
December 31, 2007 (“2007 Senior Notes”), respectively, in exchange for reducing
the conversion rates from $125 to $20 per share for the 2003 Senior Notes
and
from $40 to $20 per share for the 2004 Senior Notes. This offer expired on
December 31, 2003. During the years ended June 30, 2004 and 2003, Senior
Note
holders agreed to exchange an aggregate of $2,303,953 and $6,911,397,
respectively, of 2003 Senior Notes and 2004 Senior Notes for new notes maturing
in 2006 and 2007. The exchange of the 2003 Senior Notes and 2004 Senior Notes
to
the 2006 Senior Notes and 2007 Senior Notes was deemed a significant
modification of the terms of the Senior Notes and, accordingly, the exchanged
2003 Senior Notes and 2004 Senior Notes have been extinguished. The unamortized
debt discount and other issuance costs remaining on the 2003 Senior Notes
and
2004 Senior Notes exchanged and extinguished were expensed ($318,915 for
the
year ended June 30, 2004) and have been reported as a loss on debt modification
in the Consolidated Statements of Operations. Included in the loss on debt
modification for the year ended June 30, 2004 is $277,279 that occurred during
the three months ended September 30, 2003. During fiscal year 2003 and 2004,
the
Company's share price was often greater than the conversion price at times
when
Senior Note holders exchanged their 2003 and 2004 Senior Notes for 2006 and
2007
Senior Notes. The intrinsic value of this beneficial conversion feature created
debt discount that was allocated to equity and is being amortized to interest
expense through December 31, 2006 and 2007, respectively.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
10.
SENIOR NOTES (CONTINUED)
During
the year ended June 30, 2006 and 2004, $10,000 and $1,478,000, respectively,
of
the 2006 Senior Notes were converted into 500 and 73,900 shares of Common
Stock,
respectively. During the years ended June 30, 2006, 2005 and 2004, $10,000,
$34,381, and $848,619, respectively, of the 2007 Senior Notes were converted
into 500, 1,719 and 42,430 shares of Common Stock, respectively. During May
2006, the Company repaid all of the 2006 Senior Notes for a total principal
repayment of $1,683,500.
On
November 3, 2004, the Company authorized the issuance of up to $2,500,000
of
Senior Notes convertible into shares of Common Stock at $10 per share and
maturing on June 30, 2007 (2007-B Senior Notes”). Interest is payable quarterly
at a rate of 10% per annum. Participation in the Senior Note offering was
offered to the holders of certain warrants issued in conjunction with the
payment of interest on Senior Notes (see “Additional Interest Warrants” in Note
13), holders of the warrants issued in conjunction with the 2004-A Private
Placement Offering, and to an accredited investor and current warrant holder.
Due to the limited number of authorized shares available for issuance, the
terms
of the offering provided that all of such warrant holder’s warrants would be
cancelled if they participated in the offering. Through the last day of the
offering, the Company received $1,550,789 in gross proceeds from sales of
the
2007-B Senior Notes and 56,370 shares underlying the warrants were cancelled.
As
the Company’s share price on the day of issuance of each of these Senior Notes
was greater than the conversion price of $10, the Company recorded the intrinsic
value of this beneficial conversion feature totaling $518,645 as additional
debt
discount, which is being amortized to interest expense through the maturity
date
of these Senior Notes. During the years ended June 30, 2006 and 2005 and
the
nine months ended March 31, 2007, $56,136, $460,827 and $500 (unaudited),
respectively, of the 2007-B Senior Notes were converted into 5,613, 46,082
and
50 (unaudited), respectively, shares of Common Stock. During December 2006,
the
Company repaid all of the outstanding 2007-B Senior Notes for a total principal
repayment of $983,327.
On
February 23, 2005, the Company authorized the issuance of up to $1,755,000
of
Senior Notes, due April 30, 2005 to accredited investors (the “2005-B Senior
Notes”) with interest payable at a rate of 10% per annum. In connection with
this offering, the Company paid a due diligence fee of $27,000 to an accredited
investor. The Company received $1,755,000 in gross proceeds from the 2005-B
Senior Note offering. On March 22, 2005, the Company authorized an offer
whereby
the holders of the 2005-B Senior Notes had the right through April 30, 2005
to
exchange their 2005-B Senior Notes for Senior Notes convertible into shares
of
Common Stock at $10 per share maturing on December 31, 2010 (“2010 Senior
Notes”). Interest on the 2010 Senior Notes is payable quarterly at 10% per
annum. During March 2005, all of the 2005-B Senior Notes were exchanged for
2010
Senior Notes. As the Company’s share price on the day of issuance of each of
these Senior Notes was greater than the conversion price of $10, the Company
recorded the intrinsic value of this beneficial conversion feature totaling
$1,394,200 as additional debt discount, which is being amortized to interest
expense through the maturity date of these Senior Notes. During the years
ended
June 30, 2006 and 2005, $98,000 and $415,000, respectively, of the 2010 Senior
Notes were converted into 9,800 and 41,500 shares, respectively, of Common
Stock. During the nine months ended March 31, 2007, the Company repaid the
face
amount of $200,000 (unaudited) of the 2010 Senior Notes with a payment of
$180,000 and recognized a discount on repayment of $20,000.
On
March
22, 2005, the Company authorized an offer to the holders of the Senior Notes
whereby those holders could elect to extend the maturity date of their Senior
Notes (the “Senior Note Extension Offer”). Holders of 2005 Senior Notes had the
right to extend their maturity to December 31, 2008 (“2008 Senior Notes”) and
holders of 2006 Senior Notes had the right to elect to extend their maturity
to
December 31, 2009 (“2009 Senior Notes”). Principal on the Senior Notes extended
was not be prepaid prior to April 1, 2006. During the year ended June 30,
2005,
these Senior Note holders agreed to exchange an aggregate of $1,920,651 and
$1,520,000, respectively, of 2005 Senior Notes and 2006 Senior Notes for
new
notes maturing in 2008 and 2009. The exchange of the 2005 Senior Notes and
2006
Senior Notes to the 2008 Senior Notes and 2009 Senior Notes was not deemed
a
significant modification of the terms of the Senior Notes and, accordingly,
the
unamortized debt discount and other issuance costs remaining on the 2005
Senior
Notes and 2006 Senior Notes exchanged will be amortized to interest expense
through the maturity date of the new notes. During the nine months ended
March
31, 2007 (unaudited), the Company repaid the face amount of $1,915,308 of
the
2008 Senior Notes with a payment of $1,895,536 and recognized a discount
on
repayment of $20,306.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
10.
SENIOR NOTES (CONTINUED)
During
October 2005, the Company approved a non-dilutive private placement offering
of
up to $2,333,333 of principal amount 10% Convertible Senior Notes due December
31, 2008 (the “2008-C Senior Notes”) to the holders of the 2005-D Common Stock
Warrants, which were received in connection with an offering that commenced
on
March 22, 2005 and ended on April 15, 2005 (“2005-D Private Placement Offering”)
in which accredited investors purchased Common Stock at $15 per share. The
2008-C Senior Note offering terminated on November 30, 2005. The holders
of the
2005-D Common Stock Warrants had the right to purchase the principal amount
of
the 2008-C Senior Notes equal to the number of 2005-D Common Stock Warrants
multiplied by $10. Upon the investment in the offering, the corresponding
2005-D
Common Stock Warrants were cancelled, resulting in a non-dilutive offering.
Interest on the 2008-C Senior Notes shall be paid on a quarterly basis in
arrears at the rate of 10% per annum with the outstanding principal amount
of
the 2008-C Senior Notes together with all accrued and unpaid interest thereon
to
be paid in full no later than December 31, 2008. The 2008-C Senior Notes
are
convertible at any time into Common Stock at the rate of $10 per share. As
the
Company’s share price on the day of issuance of each of these Senior Notes was
greater than the conversion price of $10, the Company recorded the intrinsic
value of this beneficial conversion feature totaling $230,864 as additional
debt
discount, which is being amortized to interest expense through the maturity
date
of these Senior Notes. For each $10,000 investment in the 2008-C Senior Notes,
the subscriber received a special purchase right to purchase up to 1,000
shares
of Common Stock at $20 per share at any time on or before December 31, 2008.
The
Company issued $544,944 of the 2008-C Senior Notes during the six months
ended
December 31, 2005 and issued special purchase rights to acquire up to 54,494
shares of Common Stock at $20 per share. During January 2006, the holder
of each
special purchase right agreed to exchange the purchase rights for warrants
to
purchase shares of Common Stock at $20 at anytime prior to December 31, 2008.
The fair value of the purchase rights issued in conjunction with the 2008-C
Senior Notes created debt discount totaled $184,542, which is being amortized
to
interest expense through the maturity date of these Senior Notes. The fair
value
was estimated using the Black-Scholes model with the following assumptions:
dividend yield of 0%, expected stock price volatility of 0.868, risk-free
interest rate of 4.0%, and an expected life of three years. During the year
ended June 30, 2006, $363,333 of the 2008-C Senior Notes were converted into
36,333 shares of Common Stock. During the nine months ended March 31, 2007
(unaudited), the Company repaid the face amount of $181,611 of the 2008-C
Senior
Notes with a payment of $177,098 and recognized a discount on repayment of
$4,513.
During
October 2005, the Company approved a non-dilutive private placement offering
of
up to $1,000,000 of Notes (“Bridge Notes”) due January 6, 2006 with interest
payable on the due date at a rate of 10% per annum. The offering terminated
on
November 30, 2005. The Company issued $770,000 of the Bridge Notes. As all
of
the aforementioned 2008-C Senior Notes were not subscribed on the due date
of
the Bridge Notes, the Bridge Notes were automatically exchanged on January
6,
2006, in accordance with the original terms of Bridge Notes, for a like
principal amount of new Convertible Senior Notes due December 31, 2010 (“2010-B
Senior Notes”). Interest on the 2010-B Senior Notes is payable quarterly at 10%
per annum and is convertible into Common Shares at $10 per share. As the
Company’s share price on the day of issuance of each of these Senior Notes was
greater than the conversion price of $10, the Company recorded the intrinsic
value of this beneficial conversion feature totaling $321,399 as additional
debt
discount, which is being amortized to interest expense through the maturity
date
of these Senior Notes. In addition, for each $10,000 of 2010-B Senior Notes
issued in exchange for the Bridge Notes, the Company also issued special
purchase rights that enable the holder to purchase up to 1,000 shares of
Common
Stock at $20 per share through December 31, 2008. The Company issued $770,000
of
the 2010-B Senior Notes and issued special purchase rights to acquire up
to
77,000 shares of Common Stock at $20 per share. During January 2006, the
holder
of each special purchase right agreed to exchange the purchase rights for
warrants to purchase shares of Common Stock at $20 at anytime prior to December
31, 2008. The fair value of the purchase rights issued in conjunction with
the
2010-B Senior Notes created debt discount totaled $244,399, which is being
amortized to interest expense through the maturity date of these Senior Notes.
The fair value was estimated using the Black-Scholes model with the following
assumptions: dividend yield of 0%, expected stock price volatility of 0.844,
risk-free interest rate of 4.0%, and an expected life of three
years.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
10.
SENIOR NOTES (CONTINUED)
Through
December 31, 2003, the holders of the Senior Notes had the right to purchase
shares of the Company's Common Stock at $20 per share using quarterly interest
payments that were due in lieu of a cash payment of the interest. Additionally,
for each share purchased, the note holder was entitled to receive a warrant
to
purchase one share of the Company's Common Stock at $20 per share exercisable
at
any time through June 30, 2004 (extended to August 30, 2004). For the year
ended
June 30, 2004, 10,612 shares of Common Stock were issued for payment of interest
due of $212,238. The fair value of the warrants issued and the beneficial
conversion feature related to the $20 per share rate used to convert the
interest to shares of Common Stock totaled $266,258 for the year ended June
30,
2004 and have been recorded as additional interest expense. There were no
shares
of Common Stock issued for payment of interest on the Senior Notes during
the
years ended June 30, 2005 and 2006.
A
summary
of the activity for the Senior Notes for the years ended June 30, 2006 and
2005
and the nine months ended
March
31,
2007 (unaudited) follows:
|
Senior
Notes Maturing December 31,
|
|||||||||||||||||||||||||
|
|
2003
(2003
Senior Notes)
|
2004
(2004
Senior Notes)
|
2005
(2005
Senior Notes)
|
2006
(2006
Senior Notes)
|
2007
(2007
Senior Notes)
|
2008
(2008
& 2008-C Senior Notes)
|
2009
(2009
Senior Notes)
|
2010
(2010
& 2010-B Senior Notes)
|
|||||||||||||||||
|
Face
amount of Senior Notes
|
|||||||||||||||||||||||||
|
Balance,
June 30, 2004
|
$
|
-
|
$
|
451,152
|
$
|
3,011,791
|
$
|
3,213,500
|
$
|
3,019,397
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||
|
Issued
for cash
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Repayment
|
-
|
(131,152
|
)
|
(12,735
|
)
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
2004
Senior Notes exchanged for June 30, 2006 Senior Notes
|
-
|
(320,000
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
2005
and 2006 Senior Notes exchanged for 2008 and 2009Senior
Notes
|
-
|
-
|
(1,920,651
|
)
|
(1,520,000
|
)
|
-
|
1,920,651
|
1,520,000
|
-
|
|||||||||||||||
|
2005-B
Senior Notes issued for cash and subsequently exchanged for 2010
Senior
|
|||||||||||||||||||||||||
|
Notes
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,755,000
|
|||||||||||||||||
|
Conversions
to Common Stock
|
-
|
-
|
(21,000
|
)
|
-
|
(34,381
|
)
|
-
|
-
|
(415,000
|
)
|
||||||||||||||
|
Balance,
June 30, 2005
|
$
|
-
|
$
|
-
|
$
|
1,057,405
|
$
|
1,693,500
|
$
|
2,985,016
|
$
|
1,920,651
|
$
|
1,520,000
|
$
|
1,340,000
|
|||||||||
|
2008-C
Issued for cash
|
-
|
-
|
-
|
-
|
-
|
544,944
|
-
|
-
|
|||||||||||||||||
|
Bridge
Notes converted into 2010-B Senior Notes
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
770,000
|
|||||||||||||||||
|
Repayment
|
-
|
-
|
(927,405
|
)
|
(1,683,500
|
)
|
(12,500
|
)
|
(5,343
|
)
|
-
|
-
|
|||||||||||||
|
Conversions
to Common Stock
|
-
|
-
|
(130,000
|
)
|
(10,000
|
)
|
(10,000
|
)
|
(363,333
|
)
|
-
|
(98,000
|
)
|
||||||||||||
|
Balance,
June 30, 2006
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,962,516
|
$
|
2,096,919
|
$
|
1,520,000
|
$
|
2,012,000
|
|||||||||
|
Repayment
|
-
|
-
|
-
|
-
|
(2,962,516
|
)
|
(2,072,634
|
)
|
-
|
(180,000
|
)
|
||||||||||||||
|
Discount
on note repayment
|
-
|
-
|
-
|
-
|
-
|
(24,285
|
)
|
-
|
(20,000
|
)
|
|||||||||||||||
|
Balance,
March 31, 2007
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
-
|
$
|
1,520,000
|
$
|
1,812,000
|
||||||||||
|
|
|
||||||||||||||||||||||||
|
|
Senior
Notes Maturing
June
30
|
||||||||||||||||||||||||
|
2009
|
2007
(2007-B
Senior Notes)
|
|
|||||||||||||||||||||||
|
Face
amount of Senior Notes
|
|||||||||||||||||||||||||
|
Balance,
June 30, 2004
|
$
|
-
|
$
|
-
|
|||||||||||||||||||||
|
Issued
for cash
|
-
|
1,550,790
|
|||||||||||||||||||||||
|
2004
Senior Notes exchanged for June 30, 2006 Senior Notes
|
320,000
|
-
|
|||||||||||||||||||||||
|
Conversions
to Common Stock
|
-
|
(460,827
|
)
|
||||||||||||||||||||||
|
Balance,
June 30, 2005
|
$
|
320,000
|
$
|
1,089,962
|
|||||||||||||||||||||
|
Repayment
|
-
|
(50,000
|
)
|
||||||||||||||||||||||
|
Conversions
to Common Stock
|
-
|
(56,136
|
)
|
||||||||||||||||||||||
|
Balance,
June 30, 2006
|
$
|
320,000
|
$
|
983,826
|
|||||||||||||||||||||
|
Repayment
|
(983,326
|
)
|
|||||||||||||||||||||||
|
Conversions
to Common Stock
|
-
|
(500
|
)
|
||||||||||||||||||||||
|
Balance,
March 31, 2007
|
$
|
320,000
|
$
|
-
|
|||||||||||||||||||||
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
10.
SENIOR NOTES (CONTINUED)
|
Senior
Notes Maturing December 31,
|
|||||||||||||||||||||||||
|
2003
(2003
Senior Notes)
|
2004
(2004
Senior Notes)
|
2005
(2005
Senior Notes)
|
2006
(2006
Senior Notes)
|
2007
(2007
Senior Notes)
|
2008
(2008
& 2008-C Senior Notes)
|
2009
(2009
Senior Notes)
|
2010
(2010
&2010-B Senior Notes)
|
||||||||||||||||||
|
Debt
discount and other issuance costs
|
|||||||||||||||||||||||||
|
Unamortized
costs at June 30, 2003
|
$
|
(80,233
|
)
|
$
|
(453,930
|
)
|
$
|
(2,153,223
|
)
|
$
|
(1,104,169
|
)
|
$
|
(596,852
|
)
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Debt
discount from issuances
|
-
|
-
|
-
|
(1,155,475
|
)
|
(825,532
|
)
|
-
|
-
|
-
|
|||||||||||||||
|
Amortization
and write-off of unamortized costs upon conversions to Common
Stock
|
32,803
|
133,180
|
1,052,231
|
1,329,255
|
827,064
|
-
|
-
|
-
|
|||||||||||||||||
|
Loss
on modification for exchanges of 2003 and 2004
|
|||||||||||||||||||||||||
|
Senior
Notes for 2006 and 2007 Senior Notes
|
47,430
|
271,485
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Unamortized
costs at June 30, 2004
|
-
|
(49,265
|
)
|
(1,100,992
|
)
|
(930,389
|
)
|
(595,320
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Debt
discount from issuance
|
-
|
-
|
358,659
|
308,052
|
-
|
(358,659
|
)
|
(308,052
|
)
|
(1,394,200
|
)
|
||||||||||||||
|
Amortization
and write off of unamortized costs upon conversions to
Common
|
|||||||||||||||||||||||||
|
Stock
|
-
|
49,265
|
617,089
|
328,148
|
174,933
|
23,911
|
16,213
|
376,778
|
|||||||||||||||||
|
Unamortized
costs at June 30, 2005
|
$
|
-
|
$
|
-
|
$
|
(125,244
|
)
|
$
|
(294,189
|
)
|
$
|
(420,387
|
)
|
$
|
(334,748
|
)
|
$
|
(291,839
|
)
|
$
|
(1,017,422
|
)
|
|||
|
Debt
discount from issuance
|
-
|
-
|
-
|
-
|
-
|
(415,406
|
)
|
-
|
(565,798
|
)
|
|||||||||||||||
|
Amortization
and write off of unamortized costs upon conversions to Common
Stock
|
-
|
-
|
125,244
|
294,189
|
170,061
|
402,128
|
64,853
|
302,526
|
|||||||||||||||||
|
Unamortized
costs at
|
|||||||||||||||||||||||||
|
June
30, 2006
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(250,326
|
)
|
$
|
(348,026
|
)
|
$
|
(226,986
|
)
|
$
|
(1,280,694
|
)
|
|||||
|
Amortization
|
-
|
-
|
-
|
-
|
250,326
|
348,026
|
48,640
|
316,985
|
|||||||||||||||||
|
Unamortized
costs at March 31, 2007 (Unaudited)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(178,346
|
)
|
$
|
(963,709
|
)
|
|||||||
|
Senior
Notes reflected in the
|
|||||||||||||||||||||||||
|
Consolidated
Balance Sheet:
|
|||||||||||||||||||||||||
|
June
30, 2005
|
|||||||||||||||||||||||||
|
Face
amount
|
$
|
-
|
$
|
-
|
$
|
1,057,405
|
$
|
1,693,500
|
$
|
2,985,016
|
$
|
1,920,651
|
$
|
1,520,000
|
$
|
1,340,000
|
|||||||||
|
Unamortized
costs
|
-
|
-
|
(125,244
|
)
|
(294,189
|
)
|
(420,387
|
)
|
(334,748
|
)
|
(291,839
|
)
|
(1,017,422
|
)
|
|||||||||||
|
|
$ |
-
|
$
|
-
|
$
|
932,161
|
$
|
1,399,311
|
$
|
2,564,629
|
$
|
1,585,903
|
$
|
1,228,161
|
$
|
322,578
|
|||||||||
|
June
30, 2006
|
|||||||||||||||||||||||||
|
Face
amount
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,962,516
|
$
|
2,096,919
|
$
|
1,520,000
|
$
|
2,012,000
|
|||||||||
|
Unamortized
costs
|
-
|
-
|
-
|
-
|
(250,326
|
)
|
(348,026
|
)
|
(226,986
|
)
|
(1,280,694
|
)
|
|||||||||||||
|
|
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,712,190
|
$
|
1,748,893
|
$
|
1,293,014
|
$
|
731,306
|
||||||||
|
March
31, 2007 (Unaudited)
|
|||||||||||||||||||||||||
|
Face
amount
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,520,000
|
$
|
1,812,000
|
|||||||||
|
Unamortized
costs
|
-
|
-
|
-
|
-
|
-
|
-
|
(178,346
|
)
|
(963,709
|
)
|
|||||||||||||||
|
|
$ | - |
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,341,654
|
$
|
848,291
|
|||||||||
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
10.
SENIOR NOTES (CONTINUED)
|
Senior
Notes Maturing
June
30,
|
|||||||
|
|
2009
|
2007
(2007-B
Senior Notes)
|
|||||
|
Debt
discount and other issuance costs
|
|||||||
|
Unamortized
costs at June 30, 2004
|
$
|
-
|
$
|
-
|
|||
|
Debt
discount from issuance
|
-
|
(518,645
|
)
|
||||
|
Amortization
and write off of unamortized costs upon conversions to Common
Stock
|
-
|
225,415
|
|||||
|
Unamortized
costs at June 30, 2005
|
$
|
-
|
$
|
(293,230
|
)
|
||
|
Debt
discount from issuance
|
-
|
-
|
|||||
|
Amortization
and write off of unamortized costs upon conversions to Common
Stock
|
-
|
160,890
|
|||||
|
Unamortized
costs at June 30, 2006
|
$
|
-
|
$
|
(132,340
|
)
|
||
|
Amortization
and write off of unamortized costs upon conversions to Common
Stock
|
-
|
132,340
|
|||||
|
Unamortized
costs at March 31, 2007 (Unaudited)
|
$
|
-
|
$
|
-
|
|||
|
Senior
Notes reflected in the Consolidated Balance Sheet:
|
|||||||
|
June
30, 2005
|
|||||||
|
Face
amount
|
$
|
320,000
|
$
|
1,089,962
|
|||
|
Unamortized
costs
|
-
|
$
|
(293,230
|
)
|
|||
|
$
|
320,000
|
$
|
796,732
|
||||
|
June
30, 2006
|
|||||||
|
Face
amount
|
$
|
320,000
|
$
|
983,826
|
|||
|
Unamortized
costs
|
-
|
$
|
(132,340
|
)
|
|||
|
$
|
320,000
|
$
|
851,486
|
||||
|
March
31, 2007 (Unaudited)
|
|||||||
|
Face
amount
|
$
|
320,000
|
$
|
-
|
|||
|
Unamortized
costs
|
-
|
$
|
-
|
||||
|
$
|
320,000
|
$
|
-
|
||||
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
10.
SENIOR NOTES (CONTINUED)
Aggregate
maturities of Senior Notes as of March 31, 2007 are as follows
(unaudited):
|
2009
|
1,840,000
|
|||
|
2010
|
1,912,000
|
|||
|
|
$
|
3,652,000
|
||
|
Less
discount
|
1,142,055
|
|||
|
|
$
|
2,509,945
|
Aggregate
maturities of Senior Notes as of June 30, 2006 are as follows:
|
2007
|
$
|
3,946,342
|
||
|
2008
|
2,096,919
|
|||
|
2009
|
1,840,000
|
|||
|
2010
|
2,012,000
|
|||
|
|
$
|
9,895,261
|
||
|
Less
discount
|
2,238,372
|
|||
|
|
$
|
7,656,889
|
11.
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. Each share of Series A Preferred Stock shall have
the
right to one-hundredth of a vote and is convertible at any time into
one-hundredth of a share of Common Stock. Each share of Common Stock entitles
the holder to one voting right. Series A Preferred Stock provides for an
annual
cumulative dividend of $1.50 per share, payable when, as and if declared
by the
Board of Directors, to the shareholders of record in equal parts on February
1
and August 1 of each year. Any and all accumulated and unpaid cash dividends
on
the Series A Preferred Stock must be declared and paid prior to the declaration
and payment of any dividends on the Common Stock.
Cumulative
unpaid dividends at June 30, 2006 and 2005 and March 31, 2007 amounted to
$8,226,261, 7,461,293 and $8,992,712 (unaudited), respectively. 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, 2006 and
2004
and the nine months ended March 31, 2007, certain holders of the Preferred
Stock
converted 1,200, 1,750 and 1,150 (unaudited), respectively, into 12, 17 and
11
(unaudited) shares of Common Stock, respectively. Certain of these shareholders
also converted cumulative preferred dividends of $18,320, $22,440 and $15,000
(unaudited), respectively, into 18, 22 and 15 (unaudited) shares of Common
Stock
during the year ended June 30, 2006 and 2004 and the nine month period ended
March 31, 2007, respectively. There were no conversions of preferred stock
or
cumulative preferred dividends during the year ended June 30, 2005. The Series
A
Preferred Stock may be called for redemption at the option of the Board of
Directors at any time on and after January 1, 1998 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, 2004, 2005, 2006 or March 31, 2007. In the event
of any
liquidation, 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.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
12.
COMMON STOCK
On
February 7, 2006, our shareholders approved a 1-for-100 reverse stock split
of
our Common Stock (see Note 1).
The
Company's Board of Directors has authorized various Common Stock private
placement offerings. Activity for these offerings during the years ended
June
30, 2006, 2005 and 2004 and the nine months ended March 31, 2007:
-
On
March 14, 2007, the Company entered into a Securities Purchase Agreement
with
S.A.C. Capital Associates, LLC (“SAC”). Pursuant thereto, the Company sold to
SAC 1,666,667 shares of the Company’s Common Stock at a price of $6.00 per share
for an aggregate purchase price of $10,000,000. The Company also issued warrants
to SAC to purchase up to 833,333 shares of Common Stock at an exercise price
of
$6.40 per share. The warrants are exercisable at any time within six years
following the six-month anniversary of the issuance of the warrants. The
fair
value of these warrants was estimated to be $2,897,204 using the Black-Scholes
model with the following assumptions: dividend yield of 0%, expected stock
price
volatility of 0.545, risk free interest rate of 5.14%, and an expected life
of
six years. Upon vesting, the warrants are exercisable to the extent that
such
exercise would not result in the beneficial ownership by SAC and its affiliates
of more than 9.99% of the number of shares outstanding immediately after
giving
effect to the issuance of shares upon exercise of the warrants. The warrant
also
provides that if the Company would issue securities in the future at a purchase
price that is less than the exercise price of the warrant, then the exercise
price of the warrant would be reduced to such lower purchase price, provided,
however, that such exercise price can never be lower than $5.90 which was
the
closing bid price of our shares on the day prior to the sale of our securities
to SAC. The warrant also provides that in the event we issue securities at
a
purchase price less than the exercise price of the warrant, the number of
shares
issuable under the warrant shall be increased by that number of shares
determined by multiplying the exercise price in effect immediately prior
to such
adjustment by the number of shares issuable under the warrant immediately
prior
to such adjustment and dividing the product thereof by the new exercise price
of
the warrant (which can never be less than $5.90). Under this formula, the
maximum number shares would be issuable under the warrant would be 903,955.
The
warrant provides that no adjustments shall be made for any shares sold to
Mr.
Illes by the Company under the 2006-B Common Stock Agreement. There were
no
commissions or placement agent fees paid by the Company in connection with
this
offering. The proceeds received by the Company were reduced by a $100,000
expense allowance. The Company registered the shares under this agreement
effective May 11, 2007.
For
a
period of five years, SAC has been granted the pre-emptive right to purchase
that number of securities being offered for sale by the Company in order
to
maintain SAC’s pro-rata ownership of the Common Stock of the Company following
the issuance of any such securities by the Company. SAC has also been granted
the right to have one observer attend all of the Company’s Board of Director
meetings for a period of one year.
-
On
December 15, 2006, the Company entered into stock purchase agreements (the
“Blair Agreements”) with certain investors (“Buyers”). Pursuant to the
Agreements, the Company agreed to sell to the Buyers 1,400,000 shares of
the
Company’s Common Stock at a price of $6.00 per share, for gross proceeds of
$8,400,000. The Company also agreed to issue to the Buyers warrants to purchase
up to 700,017 common shares at an exercise price of $6.40 per share exercisable
at any time through December 31, 2011. The fair value of these warrants was
estimated to be $2,778,300 using the Black-Scholes model with the following
assumptions: dividend yield of 0%, expected stock price volatility of 0.695,
risk free interest rate of 4.76%, and an expected life of five years. The
closing under the Blair Agreements occurred on December 20, 2006. William
Blair
& Co., LLC (“Blair”) acted as the exclusive placement agent for the private
placement. As compensation for its services, the Company paid Blair cash
compensation of $542,801 and issued warrants to purchase up to 11,454 Common
Shares at $6.60 per share at any time through December 31, 2011. Pursuant
to the
Blair Agreements, the Company agreed to file a registration statement with
the
SEC covering the resale of these shares and of the shares underlying the
warrants within thirty days from the date of the Agreements. The Company
registered the 1,400,000 shares and 711,454 warrants effective February 13,
2007.
-
On
January 9, 2006, the Company entered into a Stock Purchase Agreement with
Rationalwave Onshore Equity Fund, LP (“Rationalwave”). Under this agreement, the
Company sold to Rationalwave 40,000 shares of Common Stock for $10 per share
for
an aggregate of $400,000.
-
On
December 13, 2005, the Company entered into a Stock Purchase Agreement with
Wellington Management Company, LLP, a large Boston-based institutional investor,
on behalf of certain of its clients (“Wellington”). Under this agreement, the
Company sold to Wellington 400,000 shares of Common Stock for $10 per share
for
an aggregate of $4,000,000.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
12.
COMMON STOCK (CONTINUED)
-
On
March 22, 2005, the Company authorized the issuance of up to 233,333 shares
of
Common Stock at $15 per share to accredited investors through April 15, 2005
(the “2005-D Private Placement Offering”). For shares purchased under the
offering, the investors also received warrants to purchase an equal number
of
shares of Common Stock exercisable at $15 per share at any time prior to
December 31, 2005. The Company issued 233,333 shares of Common Stock and
233,333
Common Stock warrants under the 2005-D Private Placement Offering, for total
gross proceeds of $3,500,000. Included in this amount are subscriptions
receivable of $35,723 and $233,850 at June 30, 2005, of which $35,723 was
received in July 2005. The Company incurred $73,103 of stock issuance costs
in
connection with the 2005-D Private Placement Offering.
-
A
Common Stock purchase agreement with an accredited investor, Steve Illes,
was
initially executed in June 2004 and then replaced in August 2004 with a new
agreement (the "Common Stock Agreement"). Pursuant to the Common Stock
Agreement, the investor agreed to purchase shares of the Company's Common
Stock,
provided that the aggregate purchase price did not exceed $7,500,000. Under
the
Common Stock Agreement, the Company had the right at any time to require
Mr.
Illes to purchase Common Stock from the Company at the lower of: (i) $30
per
share; or (ii) 90% of the closing bid price per share on the date prior to
the
date of the delivery by the Company to the investor of notice of his obligation
to purchase. The Company could require Mr. Illes to purchase shares under
the
Common Stock Agreement only if the shares had been registered by the Company
for
resale under the Act. Additionally, the shares were only available for purchase
for a period of one year from the date the shares were registered under the
Act.
During any calendar month, Mr. Illes could not be required by the Company
to
purchase Common Stock for an aggregate purchase price in excess of $700,000.
The
Company registered 350,000 shares that were effective August 13, 2004. The
Company agreed to pay Mr. Illes a due diligence fee of $45,000 in connection
with this transaction. During the year ended June 30, 2005, the Company issued
349,504 shares of Common Stock under the Common Stock Agreement for total
gross
proceeds of $3,560,620. In addition to the due diligence fee, the Company
incurred $152,624 of other stock issuance costs in connection with the Common
Stock Agreement during the year ended June 30, 2005.
On
April
4, 2005, the Company and Mr. Illes entered into a new Common Stock Purchase
Agreement (“2005 Common Stock Agreement”). Pursuant to the 2005 Common Stock
Agreement, Mr. Illes agreed to purchase shares of the Company’s Common Stock,
provided that the aggregate purchase price did not exceed $10,000,000. Under
the
2005 Common Stock Agreement, the Company had the right at any time to require
Mr. Illes to purchase Common Stock from the Company at the lower of: (i)
$30 per
share; or (ii) 90% of the closing bid price per share on the date prior to
the
date of the delivery by the Company to the investor of notice of his obligation
to purchase. During any calendar month, Mr. Illes could not be required by
the
Company to purchase Common Stock for an aggregate purchase price in excess
of
$800,000. The Company could require the investor to purchase shares under
the
Common Stock Agreement only if the shares had been registered by the Company
for
resale under the Act. The Company filed a registration statement related
to this
agreement that included 205,000 shares of Common Stock and was effective
May 13,
2005 and a registration statement that included 360,000 shares of Common
Stock
and was effective February 14, 2006. The Company issued 5,000 shares of Common
Stock ($90,000) to the investor as a due diligence/commitment fee in connection
with this agreement. In addition to the due diligence fee, the Company incurred
$48,542 of other stock issuance costs in connection with the 2005 Common
Stock
Agreement during the year ended June 30, 2005. During the year ended June
30,
2006 and 2005, the Company issued 529,999 and 30,000 shares, respectively,
of
Common Stock under the 2005 Common Stock Agreement for total gross proceeds
of
$4,443,066 and $420,000, respectively.
On
February 17, 2006, the Company entered into a Common Stock Purchase Agreement
(the “2006 Common Stock Agreement”) with Mr. Illes, an accredited investor. Mr.
Illes agreed to purchase shares of the Company's Common Stock with an aggregate
purchase price not to exceed $15,000,000. Under the 2006 Common Stock Agreement,
the Company has the right at any time to require Mr. Illes to purchase Common
Stock from the Company at the lower of: (i) $30.00 per share; or (ii) 90%
of the
closing bid price per share on the date prior to the date of the delivery
by the
Company to Mr. Illes of notice of his obligation to purchase. The Company
can
require Mr. Illes to purchase shares only if the shares have been registered
by
the Company for resale under the Act. The agreement also states that no
additional shares shall be registered under the 2005 Common Stock Agreement.
During any calendar month, Mr. Illes cannot be required by the Company to
purchase Common Stock for an aggregate purchase price in excess of $800,000.
The
Company has the right in the future, if necessary, to register additional
shares
in order to ensure that a sufficient number of shares are available for purchase
by Mr. Illes. The 2006 Common Stock Agreement terminates June 30, 2009. The
Company filed a registration statement related to the 2006 Common Stock
Agreement that included 1,500,000 shares of Common Stock and was effective
April
7, 2006.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
12.
COMMON STOCK (CONTINUED)
During
the year ended June 30, 2006 and the nine months ended March 31, 2007, the
Company issued 784,429 and 715,571 (unaudited) shares, respectively, of Common
Stock under the 2006 Common Stock Agreement for total gross proceeds of
$4,983,774 and $3,794,651 (unaudited), respectively.
On
September 25, 2006, the Company entered into a Common Stock Purchase Agreement
(the “2006-B Common Stock Agreement”) with Steve Illes. Mr. Illes agreed to
purchase shares of the Company's Common Stock with an aggregate purchase
price
not to exceed $15,000,000. Under the 2006-B Common Stock Agreement, the Company
has the right at any time to require Mr. Illes to purchase Common Stock from
the
Company at the lower of: (i) $30.00 per share; or (ii) 90% of the closing
bid
price per share on the date prior to the date of the delivery by the Company
to
Mr. Illes of notice of his obligation to purchase. The Company can require
Mr.
Illes to purchase shares only if the shares have been registered by the Company
for resale by Mr. Illes under the Securities Act of 1933, as amended. The
agreement also states that no additional shares shall be registered under
the
2006 Common Stock Agreement. During any calendar month, Mr. Illes cannot
be
required by the Company to purchase Common Stock for an aggregate purchase
price
in excess of $800,000. The 2006-B Common Stock Agreement terminates August
30,
2009. The initial number of shares of Common Stock subject to this agreement
is
1,500,000. The Company registered 1,500,000 shares effective December 21,
2006.
The Company has the right in the future, if necessary, to register additional
shares for resale by Mr. Illes in order to ensure that a sufficient number
of
shares are available for purchase by Mr. Illes under the 2006-B Common Stock
Agreement. The Company agreed to issue to Mr. Illes 20,000 shares of Common
Stock as a due diligence fee in connection with this transaction, and to
register these shares for resale by Mr. Illes under the 1933 Act. During
the
nine months ended March 31, 2007, the Company issued 1,054,256 (unaudited)
shares of Common Stock, including the 20,000 shares as a due diligence fee,
under the 2006-B Common Stock Agreement for total gross proceeds of $5,853,743
(unaudited). The Company incurred issuance costs of $75,261 during the nine
months ended March 31, 2007 in connection with this agreement.
-
The
2004-A Private Placement Offering was authorized during fiscal year 2004
for the
issuance of common stock at $15 per share. During the year ended June 30,
2004,
there were 282,908 shares issued generating net proceeds of $4,207,080. Included
in this amount are subscriptions receivable of $300,000 at June 30, 2004,
which
were collected by the Company during July 2004. Participants in the offering
were granted one warrant to purchase shares of Common Stock for every two
shares
of Common Stock purchased and were exercisable at $20 per share through December
31, 2004.
-
The
2003-A Private Placement Offering was authorized during fiscal year 2003
for the
issuance of common stock at $10 per share. During the year ended June 30,
2004,
there were 43,770 shares issued generating net proceeds of $432,754. The
Company
also issued 6,950 shares under this offering during the years ended June
30,
2004 for services rendered by consultants amounting to $185,000.
-
During
the year ended June 30, 2004, 200,100 shares of Common Stock were issued
to
accredited investors at $25 per share in four private placement offerings
generating net proceeds of $5,002,500.
On
March
17, 2005, the Company’s shareholders approved an increase in the number of
authorized shares of Common Stock from 475,000,000 to 560,000,000. On December
13, 2005, the Company’s shareholders approved an increase in the number of
authorized shares of Common Stock from 560,000,000 to 640,000,000.
During
the year ended June 30, 2006, warrants were exercised to purchase 36,800
shares
of Common Stock at a share price of $10, generating proceeds of $368,000.
During
the year ended June 30, 2005, warrants were exercised to purchase 109,942
shares
of Common Stock at a share price of $10, generating net proceeds of $1,094,658.
During the year ended June 30, 2004, warrants and stock options were exercised
to purchase 321,793 shares of Common Stock at share prices ranging from $7
to
$20, generating proceeds of $2,800,472.
In
July
2003, the Company and the Company's Chief Executive Officer ("CEO") amended
the
terms of his Executive Employment Agreement (expiring June 2005). Under the
terms of the previous Executive Employment Agreement, the CEO would have
been
granted seven percent (non-dilutive) of all the then issued and outstanding
shares of the Company's Common Stock in the event a "USA Transaction" (as
defined) occurs, which among other events includes a change in control of
the
Company. The amended terms of the Executive Employment Agreement, eliminates
the
seven percent (non-dilutive) right to receive Common Stock upon a "USA
Transaction" and granted the CEO an aggregate of 140,000 shares of Common
Stock
(subject to adjustment for stock splits or combinations) in the event a "USA
Transaction" occurs. In exchange for the
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
12.
COMMON STOCK (CONTINUED)
amendment
of these terms, the Company issued the CEO 105,000 shares of its Common Stock
valued at $4,620,000 or $44 per share representing the quoted market price
of
the Company's Common Stock on the date the amendment was entered into and
the
shares were granted. In connection with this amendment, the CEO also entered
into a lock-up agreement pursuant to which he cannot sell 25,000 of these
shares
for a one-year period and 80,000 of these shares for a two-year period. The
CEO
is not required to pay any additional consideration for these shares of Common
Stock. At the time of a "USA Transaction", all of the 140,000 shares are
automatically deemed to be issued and outstanding, and will be entitled to
be
treated as any other issued and outstanding shares of Common Stock. These
shares
are irrevocable and fully vested, have no expiration date, and are not affected
by the termination of the CEO for any reason whatsoever.
In
addition to the shares issued to the CEO, there were 9,500, 8,005, 9,207
and
28,600 (unaudited) shares of Common Stock issued to certain employees and
officers for services and for professional services during the years ended
June
30, 2006, 2005, and 2004 and the nine months ended March 31, 2007, respectively.
The value of these shares was based upon the fair value of the Company's
Common
Stock on the dates the shares were granted and totaled $79,195, $107,670,
$237,040 and $178,480 (unaudited) for the years ended June 30, 2006, 2005,
and
2004 and the nine months ended March 31, 2007, respectively.
During
the year ended June 30, 2004, 5,000 shares of Common Stock were issued to
an
accredited investor as settlement resulting from a non-registration event
as
defined under the subscription agreement dated November 4, 2002.
In
April
2004, the Company's Board of Directors established and authorized the 2004-A
Stock Compensation Plan for use in compensating employees, directors and
consultants through the issuance of shares of Common Stock of the Company.
There
were 5,000 shares authorized under the 2004-A Plan. As of June 30, 2005 and
2004, there were 5,000 and 5,000 shares, respectively, issued under the 2004-A
Plan. On October 29, 2004, the Board of Directors approved the 2004-B Stock
Compensation Plan to allow up to 5,000 shares of Common Stock to be available
for issuance to future or current employees, directors or consultants of
the
Company. As of June 30, 2006 and 2005, there were 5,000 and 3,913 shares,
respectively, issued under the 2004-B Plan. On June 13, 2006, the Board of
Directors approved the 2006-A Stock Compensation Plan to allow up to 25,000
shares of Common Stock to be available for issuance to future or current
employees, directors or consultants of the Company. As of March 31, 2007
and
June 30, 2006, there were 25,000 (unaudited) and 8,413 shares, respectively,
issued under the 2006-A Plan. In January 2007, the Board of Directors approved
the 2007-A Stock Compensation Plan to allow up to 100,000 shares of Common
Stock
to be available for issuance to future or current employees, directors or
consultants of the Company. As of March 31, 2007, there were 12,013 shares
issued under the Plan totaling $74,135 based on the grant date fair value
of the
shares. During the nine months ended March 31, 2007, the Company issued 16,587
shares under the 2007-A Stock Compensation plan totaling $104,345 based on
the
grant date fair value of the shares.
On
February 12, 2007, upon recommendation of the Compensation Committee of the
Board of Directors of the Company, the Board adopted the Long-Term Equity
Incentive Program (the “Program”) for each of George R. Jensen, Jr., Stephen P.
Herbert, and David M. DeMedio. The Program is intended to ensure continuity
of
the Company’s executive management, to encourage stock ownership by such
persons, and to align the interests of executive management with those of
the
shareholders.
Pursuant
to and as defined in the Program, each executive would be awarded shares
of the
Company’s Common Stock if the Company achieves certain target goals relating to
revenues, gross profit, and EBITDA (earnings before interest, taxes,
depreciation, and amortization) (the “Target Goals”) of the Company during each
of the fiscal years ending June 30, 2007, June 30, 2008 and June 30, 2009.
The
maximum number of shares that can be awarded under the Program is 952,298.
During
each such fiscal year, the number of eligible shares to be awarded to the
executive is based upon the following weightings: 40% of eligible shares
are
determined by revenues; 30% of eligible shares are determined by gross profit;
and 30% of eligible shares are determined by EBITDA.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
12.
COMMON STOCK (CONTINUED)
If
the
Target Goals are achieved by the Company during the applicable fiscal year,
the
executive officers would be awarded the following number of shares:
|
Fiscal
Year Ended
June
30,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
George
R. Jensen, Jr.
|
178,570
|
178,570
|
178,570
|
|||||||||
|
Stephen
P. Herbert
|
53,713
|
53,713
|
53,714
|
|||||||||
|
David
M. DeMedio
|
21,663
|
21,663
|
21,664
|
|||||||||
If
the
actual results for a particular fiscal year exceeds the Target Goals, each
executive would be awarded an additional pro rata portion of the eligible
shares, up to an amount no greater than 125% of the number of eligible shares.
If the actual results for a particular fiscal year is less than the Target
Goals, each executive would be awarded a lesser pro rata portion of the number
of eligible shares. If minimum Target Goals for a particular fiscal year
are not
achieved, no eligible shares would be awarded to each executive.
If
a USA
Transaction (as defined in Mr. Jensen’s Employment Agreement) would occur during
any such fiscal year, and provided that the executive is an employee of the
Company on the date of such USA Transaction, the executive would be awarded
shares for each of the fiscal years that have not yet been completed as of
the
date of such USA Transaction. The number of shares to be awarded to each
executive for each of the uncompleted fiscal years is as follows: Mr.
Jensen-178,570 shares; Mr. Herbert-53,713 shares; and Mr. DeMedio-21,663
shares.
In
conjunction with the Program, during March 2007, each of Mr. Jensen, Mr.
Herbert, and Mr. DeMedio signed amendments to their Employment and
Non-Competition Agreements. In conjunction with the Program and the signing
of
the amendments to these agreements, the Company recorded compensation expense
of
$124,948 and a corresponding amount to Common Stock for the period ended
March
31, 2007. This amount was based on management’s estimate of the probability of
meeting the Target Goals and on the grant date fair value of the Company’s stock
of $5.90. Management will update this estimate and adjust the amount of
compensation expense recorded at each quarterly reporting date. There is
no
effect on the number of issued and outstanding shares of Common Stock until
shares are awarded.
As
of
March 31, 2007, the Company had reserved shares of Common Stock for future
issuance for the following (unaudited):
|
Exercise
of Common Stock Options
|
177,808
|
|||
|
Exercise
of Common Stock Warrants
|
1,747,727
|
|||
|
Conversions
of Preferred Stock and cumulative
|
||||
|
Preferred
Stock dividends
|
14,195
|
|||
|
Conversions
of Senior Notes
|
289,200
|
|||
|
Issuance
under 2006-B Common Stock Agreement
|
465,744
|
|||
|
Issuance
under 2007-A Stock Compensation Plan
|
87,987
|
|||
|
Issuance
under Chief Executive Officer’s employment
agreement
upon the occurrence of a USA Transaction
|
140,000
|
|||
|
Total
shares reserved for future issuance
|
2,922,661
|
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
12.
COMMON STOCK (CONTINUED)
As
of
June 30, 2006, the Company had reserved shares of Common Stock for future
issuance for the following:
|
Exercise
of Common Stock Options
|
178,933
|
|||
|
Exercise
of Common Stock Warrants
|
219,481
|
|||
|
Conversions
of Preferred Stock and cumulative
|
||||
|
Preferred
Stock dividends
|
13,441
|
|||
|
Conversions
of Senior Notes
|
669,635
|
|||
|
Issuance
under 2006 Common Stock Agreement
|
715,571
|
|||
|
Issuance
under 2006-A Stock Compensation Plan
|
16,587
|
|||
|
Issuance
under Chief Executive Officer’s employment agreement upon the occurrence
of a USA Transaction
|
140,000
|
|||
|
Total
shares reserved for future issuance
|
1,953,648
|
A
summary
of the status of the Company’s nonvested common shares as of March 31, 2007
(unaudited) and June 30, 2006, and changes during the year ended June 30,
2006
and nine months ended March 31, 2007 (unaudited), is presented
below:
|
Shares
|
Weighted-Average
Grant-Date
Fair
Value
|
||||||
|
Nonvested
at July 1, 2006
|
-
|
$
|
-
|
||||
|
Granted
|
125,000
|
8.00
|
|||||
|
Vested
|
41,667
|
8.00
|
|||||
|
Forfeited
|
-
|
-
|
|||||
|
Nonvested
at June 30, 2006
|
83,333
|
8.00
|
|||||
|
Vested
|
41,667
|
8.00
|
|||||
|
Nonvested
at March 31, 2007
|
41,666
|
$
|
8.00
|
||||
13.
COMMON STOCK WARRANTS AND OPTIONS
Common
Stock Warrant activity for the years ended June 30, 2006, 2005 and 2004 and
the
nine months ended March 31, 2007 (unaudited) was as follows:
|
|
Warrants
|
|||
|
Outstanding
at June 30, 2003
|
621,277
|
|||
|
Issued
|
188,739
|
|||
|
Exercised
|
(320,604
|
)
|
||
|
Cancelled
|
(154,840
|
)
|
||
|
Outstanding
at June 30, 2004
|
334,571
|
|||
|
Issued
|
233,333
|
|||
|
Exercised
|
(109,942
|
)
|
||
|
Cancelled
|
(136,642
|
)
|
||
|
Outstanding
at June 30, 2005
|
321,320
|
|||
|
Issued
|
131,494
|
|||
|
Exercised
|
(36,800
|
)
|
||
|
Cancelled
|
(196,533
|
)
|
||
|
Outstanding
at June 30, 2006
|
219,481
|
|||
|
Issued
|
1,544,804
|
|||
|
Cancelled
|
(16,558
|
)
|
||
|
Outstanding
at March 31, 2007
|
1,747,727
|
|||
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
13.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
All
Common Stock warrants outstanding as of March 31, 2007 and June 30, 2006
and
2005 were exercisable, except for the 833,333 warrants issued to SAC in March
2007. The following table shows exercise prices and expiration dates for
warrants outstanding as of March 31, 2007 (unaudited):
|
Warrants
Outstanding
|
Exercise
Price
Per
Share
|
Expiration
Date
|
|||||
|
71,429
|
$ |
7.00
|
October
26, 2007
|
||||
|
131,494
|
$ |
20.00
|
December
31, 2008
|
||||
|
700,017
|
$ |
6.40
|
December
31, 2011
|
||||
|
11,454
|
$ |
6.60
|
December
31, 2011
|
||||
|
833,333
|
$ |
6.40
|
March
15, 2013
|
||||
|
1,747,727
|
|
||||||
The
following table shows exercise prices and expiration dates for warrants
outstanding as of June 30, 2006:
|
Warrants
Outstanding
|
Exercise
Price
Per
Share
|
Expiration
Date
|
|||||
|
750
|
$ |
12.50
|
June
30, 2006
|
||||
|
71,429
|
$ |
7
|
October
26, 2007
|
||||
|
131,494
|
$ |
20
|
December
31, 2008
|
||||
|
12,000
|
$ |
91
|
August
29, 2010
|
||||
|
3,779
|
$ |
100
|
April
24, 2011
|
||||
|
29
|
$ |
103
|
April
30, 2011
|
||||
|
219,481
|
|||||||
The
following table shows exercise prices and expiration dates for warrants
outstanding as of June 30, 2005:
|
Warrants
Outstanding
|
Exercise
Price
Per
Share
|
Expiration
Date
|
|||||
|
233,333
|
$ |
15
|
December
31, 2005
|
||||
|
750
|
$ |
12.50
|
June
30, 2006
|
||||
|
71,429
|
$ |
7
|
October
26, 2007
|
||||
|
12,000
|
$ |
91
|
August
29, 2010
|
||||
|
3,779
|
$ |
100
|
April
24, 2011
|
||||
|
29
|
$ |
103
|
April
30, 2011
|
||||
|
321,320
|
|
||||||
In
conjunction with the SAC agreement (Note 10), the Company issued warrants
to
purchase 833,333 shares of Common Stock and are exercisable at $6.40 per
share.
The warrants are exercisable at any time within six years following the
six-month anniversary of the issuance of the warrants. Upon vesting, the
warrants are exercisable to the extent that such exercise would not result
in
the beneficial ownership by SAC and its affiliates of more than 9.99% of
the
number of shares outstanding immediately after giving effect to the issuance
of
shares upon exercise of the warrants. The warrant also provides that if the
Company would issue securities in the future at a purchase price that is
less
than the exercise price of the warrant, then the exercise price of the warrant
would be reduced to such lower purchase price, provided, however, that such
exercise price can never be lower than $5.90 which was the closing bid price
of
our shares on the day prior to the sale of our securities to SAC. The warrant
also provides that in the event we issue securities at a purchase price less
than the exercise price of the warrant, the number of shares issuable under
the
warrant shall be increased by that number of shares determined by multiplying
the exercise price in effect immediately prior to such adjustment by the
number
of shares issuable under the warrant immediately prior to such adjustment
and
dividing the product thereof by the new exercise price of the warrant (which
can
never be less than $5.90). Under this formula, the maximum number shares
would
be issuable under the warrant would be 903,955. The warrant provides that
no
adjustments shall be made for any shares sold to Mr. Illes by the Company
under
the 2006-B Common Stock Agreement. at any time prior to December 31,
2011.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
13.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
In
conjunction with the Blair Agreements (Note 10), the Company issued warrants
to
purchase 700,017 shares of Common Stock and are exercisable at $6.40 per
share
at any time prior to December 31, 2011. Additionally, the Company issued
Blair,
the placement agent, warrants to purchase 11,454 shares of Common Stock and
are
exercisable at $6.60 per share at any time prior to December 31,
2011.
In
conjunction with the 2008-C Senior Note offering (Note 10), the Company issued
warrants to purchase 54,494 shares of Common Stock and are exercisable at
$20
per share at any time prior to December 31, 2008.
In
conjunction with the 2010-B Senior Note offering (Note 10), the Company issued
warrants to purchase 77,000 shares of Common Stock and are exercisable at
$20
per share at any time prior to December 31, 2008.
In
conjunction with the 2005-D Private Placement Offering (Note 12), the Company
issued warrants to purchase 233,333 shares of Common Stock and are exercisable
at $15 per share at any time prior to December 31, 2005. During October 2005,
the Company approved a temporary reduction in the exercise price of the 2005-D
Common Stock Warrants from $15 to $10 per share through November 30, 2005.
The
Company received $368,000 and issued 36,800 shares of Common Stock as a result
of the exercise of the 2005-D Common Stock Warrants at $10 per
share.
Prior
to
June 30, 2004, the Company issued warrants to purchase approximately 37,000
shares of Common Stock to holders of the Senior Notes who elected to receive
quarterly interest on their Notes in shares of Common Stock, in lieu of a
cash
payment of interest ("Original Interest Warrants"). These warrants were
exercisable at $20 per share through August 30, 2004. In June 2004, the Company
issued additional warrants to the Senior Note holders who elected to receive
interest in shares of Common Stock ("Additional Interest Warrants"). One
additional warrant was issued for each warrant previously issued with an
exercise price of $20 per share through December 31, 2004.
The
Company reduced the exercise price of the Original Interest Warrants to $15
per
share and extended their expiration through October 29, 2004. In addition,
for
each Original Interest Warrant exercised through October 4, 2004, the expiration
date of one Additional Interest Warrant was extended to June 30, 2005 from
December 31, 2004, and the exercise price was reduced to $15 per share through
June 30, 2005. The Company also reduced the exercise price of the Additional
Interest Warrants to $15 per share through November 30, 2004 and then
retroactively to $10 per share through December 31, 2004. Investors who had
previously exercised Original Interest Warrants and Additional Interest Warrants
at $15 per share were refunded the equivalent of $5 per share in recognition
of
the reduction of the exercise price to $10 per share that occurred after
the
warrants were exercised. Such refunds amounted to $40,971. During the year
ended
June 30, 2005, Original Interest Warrants and Additional Interest Warrants
were
exercised to purchase 8,074 shares of Common Stock. Such exercises generated
net
proceeds of approximately $75,000, after considering the above-mentioned
refund.
As
of
October 25, 2004, the Company reduced the exercise price of the Common Stock
warrants issued as part of the 2004-A Private Placement Offering to $10 per
share, from $20 per share, through November 30, 2004. On December 13, 2004,
the
exercise price of $10 per share was retroactively extended to December 31,
2004.
During the year ended June 30, 2005, the Company received $765,833 upon the
exercise of 76,583 of these warrants at an exercise price of $10 per
share.
The
Company's Board of Directors has granted options to employees and Board members
to purchase shares of Common Stock at prices that were at or above fair market
value on the dates the options were granted. The option term and vesting
schedule were established by the contracts under which the options were granted.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
13.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
Common
Stock Option activity during the years ended June 30, 2006, 2005 and 2004
and
the nine months ended March 31, 2007 (unaudited) was as follows:
|
Options
Outstanding
|
Exercise
Price
Per
Share
|
Weighted-Average
Exercise
Price
|
||||||||
|
Outstanding
at June 30, 2003
|
29,075
|
$
|
16.50-$250
|
$
|
35.32
|
|||||
|
Granted
|
3,000
|
$
|
30
|
$
|
30.00
|
|||||
|
Exercised
|
(2,239
|
)
|
$
|
16.50
|
$
|
16.50
|
||||
|
Expired
|
(10,861
|
)
|
$
|
16.50-$250
|
$
|
56.15
|
||||
|
Outstanding
at June 30, 2004
|
18,975
|
$
|
16.50-$200
|
$
|
23.80
|
|||||
|
Granted
|
3,000
|
$
|
20
|
$
|
20.00
|
|||||
|
Cancelled
|
(1,876
|
)
|
$
|
30
|
$
|
30.00
|
||||
|
Outstanding
at June 30, 2005
|
20,099
|
$
|
16.50-$200
|
$
|
23.58
|
|||||
|
Granted
|
160,000
|
$
|
7.50-$8
|
$
|
7.52
|
|||||
|
Expired
|
(1,166
|
)
|
$
|
100-$200
|
$
|
105.66
|
||||
|
Outstanding
at June 30, 2006
|
178,933
|
$
|
7.50-$100
|
$
|
8.68
|
|||||
|
Expired
|
(750
|
)
|
$
|
30
|
$
|
30.00
|
||||
|
Outstanding
at March 31, 2007
|
177,808
|
$
|
7.50-$100
|
$
|
8.55
|
|||||
|
Exercisable
at June 30, 2006
|
86,767
|
$
|
7.50-$100
|
$
|
9.69
|
|||||
|
Exercisable
at March 31, 2007
|
86,767
|
$
|
7.50-$100
|
$
|
9.56
|
|||||
The
following table shows exercisable options, exercise prices, the weighted
average
remaining contractual life and the aggregate intrinsic value for options
outstanding as of March 31, 2007 (unaudited).
|
|
|
Weighted
Average
|
|||||||||||||||||
|
|
|
Exercise
|
Remaining
Contractual
|
Intrinsic
|
|||||||||||||||
|
Options
|
Options
|
Price
|
Life
(Years)-
|
Value-
|
|||||||||||||||
|
Outstanding
|
Exercisable
|
Per
Share
|
Outstanding
|
Exercisable
|
Outstanding
|
Exercisable
|
|||||||||||||
|
154,000
|
69,334
|
$
|
7.50
|
4.97
|
4.08
|
$
|
120,120
|
$
|
54,081
|
||||||||||
|
6,000
|
-
|
$
|
8
|
5.72
|
0.00
|
$
|
1,680
|
$
|
-
|
||||||||||
|
14,658
|
14,658
|
$
|
16.50
|
0.12
|
0.12
|
$
|
-
|
$
|
-
|
||||||||||
|
3,000
|
2,250
|
$
|
20
|
1.20
|
1.08
|
$
|
-
|
$
|
-
|
||||||||||
|
150
|
150
|
$
|
100
|
0.21
|
0.21
|
$
|
-
|
$
|
-
|
||||||||||
|
177,808
|
86,767
|
4.53
|
3.32
|
$
|
121,800
|
$
|
54,081
|
||||||||||||
The
following table shows exercisable options, exercise prices, the weighted
average
remaining contractual life and the aggregate intrinsic value for options
outstanding as of June 30, 2006.
|
Weighted
Average
|
|||||||||||||||||||
|
Exercise
|
Remaining
Contractual
|
Intrinsic
|
|||||||||||||||||
|
Options
|
Options
|
Price
|
Life
(Years)-
|
Value-
|
|||||||||||||||
|
Outstanding
|
Exercisable
|
Per
Share
|
Outstanding
|
Exercisable
|
Outstanding
|
Exercisable
|
|||||||||||||
|
154,000
|
69,334
|
$
|
7.50
|
5.72
|
4.83
|
$
|
30,800
|
$
|
13,867
|
||||||||||
|
6,000
|
-
|
$
|
8
|
6.47
|
0.00
|
-
|
-
|
||||||||||||
|
14,658
|
14,658
|
$
|
16.50
|
0.87
|
0.87
|
-
|
-
|
||||||||||||
|
3,000
|
1,500
|
$
|
20
|
1.95
|
0.40
|
-
|
-
|
||||||||||||
|
1,125
|
1,125
|
$
|
30
|
0.31
|
0.31
|
-
|
-
|
||||||||||||
|
150
|
150
|
$
|
100
|
0.96
|
0.96
|
-
|
-
|
||||||||||||
|
178,933
|
86,767
|
5.25
|
4.02
|
$
|
30,800
|
$
|
13,867
|
||||||||||||
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
13.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
Total
expected compensation expense related to the vesting of options outstanding
as
of June 30, 2006 is $477,946 and is expected to be recognized over
weighted-average period of 1.43 years. The intrinsic value of the non-vested
options as of March 31, 2007 and June 30, 2006 was $67,719 (unaudited) and
$16,933, respectively.
On
April
21, 2006, the Board of Directors approved the grant of 12,000 Common Stock
Options to each of the outside directors serving as of February 27, 2006
and
6,000 Common Stock Options to Mr. Passner, a new director as of April 12,
2006,
all with an exercise price of $7.50 per share and all exercisable at any
time
within five years following the date of vesting. The options granted to Mr.
Sellers and Mr. Van Allen are fully vested. Of the options granted to Mr.
Katz
and Mr. Lurio, 6,000 vest immediately, 3,000 vest on April 1, 2007, and 3,000
vest on April 1, 2008. Of the options granted to Mr. Passner, 3,000 vest
on
April 1, 2007, and 3,000 vest on April 1, 2008.
In
conjunction with the signing of employment agreements on May 11, 2006, the
Company granted Mr. Jensen, Mr. Herbert, and Mr. DeMedio, 75,000, 18,000
and
7,000 Common Stock Options, all with an exercise price of $7.50 per share
and
all exercisable at any time within five years following the date of vesting.
The
options vest as follows: one-third on May 11, 2006; one-third on June 30,
2007;
and one-third on June 30, 2008.
In
conjunction with the appointment of Stephen McHugh to the Board of Directors
on
June 20, 2006, the Company granted Mr. McHugh 6,000 Common Stock Options
with an
exercise price of $8.00 per share. The options vest as follows: 3,000 on
June
20, 2007 and 3,000 on June 20, 2008. The options are exercisable at any time
within five years of vesting.
The
fair
value of the stock options granted on April 21 and May 11, 2006 was $4.83
and
$5.51, respectively, and was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions.
|
Dividend
yield
|
0
|
%
|
||
|
Expected
stock price volatility
|
0.823
|
|||
|
Risk-free
interest rate
|
4.0
|
%
|
||
|
Expected
life, in years
|
5
|
The
fair
value of the stock options granted on June 20, 2006 was $5.06 and was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions.
|
Dividend
yield
|
0
|
%
|
||
|
Expected
stock price volatility
|
0.796
|
|||
|
Risk-free
interest rate
|
4.0
|
%
|
||
|
Expected
life, in years
|
5
|
During
the year ended June 30, 2005, stock options were granted to one individual
to
purchase 3,000 shares of Common Stock of the Company at $20 per share and
vest
through April 30, 2007. The fair value of the stock options granted, $9.36,
was
estimated on the date of the grant using the Black-Scholes option-pricing
model
with the following assumptions.
|
Dividend
yield
|
0
|
%
|
||
|
Expected
stock price volatility
|
0.922
|
|||
|
Risk-free
interest rate
|
4.0
|
%
|
||
|
Expected
life, in years
|
2
|
During
the year ended June 30, 2004, stock options were granted to one individual
to
purchase 3,000 shares of Common Stock of the Company at $30 per share. The
fair
value of the stock options granted, $16.00, was estimated on the date of
the
grant using the Black-Scholes option-pricing model with the following
assumptions.
|
Dividend
yield
|
0
|
%
|
||
|
Expected
stock price volatility
|
0.971
|
|||
|
Risk-free
interest rate
|
4.0
|
%
|
||
|
Expected
life, in years
|
3
|
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
13.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
The
weighted-average grant-date fair value of stock options granted was $5.26,
$9.36
and $16.00 during the years ended June 30, 2006, 2005 and 2004, respectively.
The total fair value of options vested during the years ended June 30, 2006,
2005 and 2004 and the nine months ended March 31, 2007 and 2006 was $371,050,
$18,000, $0, $10,125
(unaudited)
and
$10,125 (unaudited), respectively.
14.
TERMINATION OF KODAK VENDING PLACEMENT AGREEMENT
The
Company's wholly owned subsidiary, Stitch, entered into a vending placement
agreement whereby Stitch agreed to purchase film and cameras directly from
Eastman Kodak Company and vending machines from a supplier. Stitch placed
the
vending machines at numerous locations throughout the United States under
agreements negotiated with the location owners and derived revenues amounting
to
$0, $0 and $358,484 for the years ended June 30, 2006, 2005 and 2004,
respectively.
During
2003, Stitch alleged that the supplier and another party to the vending
agreement breached the vending agreement and the supplier and the other party
to
the vending agreement alleged that Stitch had breached the vending agreement.
Effective December 31, 2003, the parties finalized a settlement of this matter
which resulted in the termination of the vending agreement. Under the settlement
agreement, the Company received a payment from Kodak of approximately $675,000.
The agreement also provides for the Company to receive payments of $300 per
vending machine from the supplier of the vending machines, as the machines
are
pulled from service at the supplier's sole cost and expense. Upon receipt
of the
$300 per machine, title to the vending machine transfers from Stitch to the
supplier. Through December 30, 2004, the Company had received $65,100 for
these
machines. The agreement also provided that the supplier cancel a $124,000
obligation of Stitch for the purchase of vending machines.
This
termination agreement resulted in a gain of $429,204 during the year ended
June
30, 2004 and is reflected as Other income in the June 30, 2004 Consolidated
Statement of Operations. This gain is comprised of the payment from Kodak
of
approximately $675,000 plus the cancellation of Stitch's obligation to the
supplier of the vending machines of approximately $124,000 less a write-down
of
the carrying value of vending machines of approximately $367,000 and a net
write-off of amounts due to and from Kodak of $3,000. The remaining vending
machines are reported as assets held for sale in the June 30, 2004, as it
was
determined that the plan of sale criteria in FAS 144 was met in the termination
agreement, at which time depreciation of these assets ceased. During the
year
ended June 30, 2005, the Company wrote off the remaining value of the vending
machines that had not been sold during the year as a loss on contract settlement
totaling $42,300.
15.
RETIREMENT PLAN
The
Company's Savings and Retirement Plan (the "Plan") allows employees who have
attained the age of 21 and have completed six months of service to make
voluntary contributions up to a maximum of 15% of their annual compensation,
as
defined in the Plan. Through June 30, 2000, the Plan did not provide for
any
matching contribution by the Company, however, starting at the beginning
of
fiscal year 2001, the Company amended the Plan to include a Company matching
contribution up to 10% of an employee's compensation. Effective January 1,
2003,
the matching contribution changed to a dollar-for-dollar matching contribution
on salary deferrals up to 3% of the employee's compensation then a fifty-cents
on the dollar matching contribution on salary deferrals from 3% to 5%. The
Company's contribution for the years ended June 30, 2006, 2005 and 2004 and
nine
months ended March 31, 2007 and 2006 was approximately $114,000, $96,000,
$78,000, $104,000 (unaudited) and $115,000 (unaudited),
respectively.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
16.
COMMITMENTS AND CONTINGENCIES
The
Company conducts its operations from various facilities under operating leases.
In March 2003, the Company entered into a lease for 12,864 square feet of
space
located in Malvern, Pennsylvania for its principal executive office and used
for
general administrative functions, sales activities, and product development.
The
lease term extends through December 31, 2008 and provides for escalating
rent
payments and a period of free rent prior to the commencement of the monthly
lease payment in January 2004 of approximately $25,000 per month. During
April
2005, the Company entered into an amendment to the lease covering 4,385
additional square feet that is contiguous to its existing space. The lease
term
was extended to December 31, 2010, and the amendment provides for a period
of
free rent for the additional space with rent of approximately $31,000 per
month
commencing in September 2005 with escalating rental payments
thereafter.
In
February 2004, the Company also leased 9,084 square feet of space, located
in
Malvern, Pennsylvania, on a month-to-month basis for a monthly payment of
approximately $8,000. During prior years, the facility was solely used to
warehouse product. All product warehousing, shipping and customer support
was
transferred to this location from the executive office location during the
first
quarter of fiscal year 2005. During December 2006, the Company entered into
an
amendment to the lease covering 4,293 additional square feet that is contiguous
to its existing space. The lease term was set to December 31, 2010 with rent
of
approximately $13,000 per month commencing in April 2007 with escalating
rental
payments thereafter.
In
connection with the acquisition of the energy conservation product line in
July
2003 from Bayview Technology Group, LLC, the Company assumed leases for 6,384
square feet of space located in Denver, Colorado used for administrative
functions, sales activities and product warehousing associated with our energy
management products. The lease terms extended through June 30, 2005 and provided
for escalating rent payments ending at $8,200 per month. The lease provided
for
additional rent for a prorated share of operating costs for the entire
facility.
In
December 2004, the Company entered into a lease for 2,837 square feet of
space
located in Denver, Colorado to replace the above-mentioned lease used for
administrative functions, sales activities and product warehousing associated
with our energy management products. The lease terms extend through May 31,
2009
and provide for five months of free rent followed by rent payments of $1,200
per
month and escalating payments beginning on June 1, 2006. The lease provides
for
additional rent for a prorated share of operating costs for the entire facility.
Rent
expense under operating leases was approximately $489,000, $447,000, $450,000,
$395,000 (unaudited) and $375,000 (unaudited) during the years ended June
30,
2006, 2005 and 2004 and the nine months ended March 31, 2007 and 2006,
respectively. Future minimum lease payments subsequent to June 30, 2006 under
noncancellable operating leases are as follows:
|
|
Operating
Leases
|
|||
|
2007
|
$
|
438,000
|
||
|
2008
|
447,000
|
|||
|
2009
|
452,000
|
|||
|
2010
|
220,000
|
|||
|
Total
minimum lease payments
|
$
|
1,989,000
|
||
During
the fourth quarter of fiscal year 2006, the Company committed to purchase
approximately $1,334,000 of inventory from a third party manufacturer through
December 31, 2007. The Company expects to begin taking delivery of the inventory
during the third quarter of fiscal year 2007 upon completion of
manufacturing.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
16.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
In
conjunction with the Program (Note 12), during March 2007, each of Mr. Jensen,
Mr. Herbert, and Mr. DeMedio signed amendments to their Employment and
Non-Competition Agreements.
On
May
11, 2006, the Company and Mr. Jensen entered into an Amended and Restated
Employment Agreement pursuant to which the term of Mr. Jensen’s employment with
the Company was extended to June 30, 2009. Effective May 11, 2006, Mr. Jensen’s
base salary was increased to $325,000 per annum. Mr. Jensen’s base salary had
not been increased since January 1, 2004. The Agreement requires Mr. Jensen
to
devote his full time and attention to the business and affairs of the Company,
and obligates him not to engage in any investments or activities which would
compete with the Company during the term of the Agreement and for a period
of
one year thereafter. Mr. Jensen was granted the right (exercisable at any
time
prior to the 60th day following the commencement of each fiscal year) to
elect
to have one-half of his base salary for each of the fiscal years ending June
30,
2007, June 30, 2008, and June 30, 2009 paid in shares of Common Stock rather
than cash. Mr. Jensen has elected to receive shares in lieu of cash for one-half
of his base salary for the fiscal year ending June 30, 2007. As a result
of such
election, 22,080 shares will be issued to him which will vest as follows:
5,520
on July 1, 2006; 5,520 on October 1, 2006; 5,520 on January 1, 2007; and
5,520
on April 1, 2007. Mr. Jensen was also granted 75,000 shares of Common Stock
and
an additional amount of options to purchase up to 75,000 shares of Common
Stock
at $7.50 per share. The 75,000 shares of Common Stock vest as follows: 25,000
on
June 1, 2006; 25,000 on January 1, 2007; and 25,000 on June 1, 2007. The
options
vest as follows: 25,000 on May 11, 2006; 25,000 on June 30, 2007; and 25,000
on
June 30, 2008. The options may be exercised at any time within 5 years of
vesting. The Company recorded a non-cash compensation charge of $264,000
and
$172,127 related to the grant of restricted Common Stock and Common Stock
Options, respectively, during the fiscal year ended June 30, 2006. See note
13
for additional option disclosures. All of the shares granted to or to be
issued
to Mr. Jensen under his employment agreement, and the shares underlying the
options granted to Mr. Jensen, are not and will not be registered under the
Securities Act of 1933, as amended, and constitute restricted securities
as such
term is defined in Rule 144 promulgated under the 1933 Act. In October 2006,
the
Company granted to Mr. Jensen piggyback registration rights under the Act
for
the shares described above for a period of five years following the vesting
of
any of such shares and for the shares underlying any of the options described
above for a period of five years following the vesting of any such
options.
As
previously provided in his employment agreement, upon the occurrence of a
"USA
Transaction" (as defined below), the Company will issue to Mr. Jensen 140,000
shares of Common Stock subject to adjustment for stock splits or combinations
("Jensen Shares"). The Jensen Shares have not been reserved for issuance
by the
Company and are not reflected or included in the number of issued and
outstanding shares of the Company on a fully diluted basis in this Form 10-K.
Mr. Jensen is not required to pay any additional consideration for the Jensen
Shares. At the time of any USA Transaction, all of the Jensen Shares are
automatically deemed to be issued and outstanding immediately prior to any
USA
Transaction, and are entitled to be treated as any other issued and outstanding
shares of Common Stock in connection with such USA Transaction.
The
term
USA Transaction is defined as (i) the acquisition of fifty-one percent or
more
of the then outstanding voting securities entitled to vote generally in the
election of Directors of the Company by any person, entity or group, or (ii)
the
approval by the shareholders of the Company of a reorganization, merger,
consolidation, liquidation, or dissolution of the Company, or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of the Company. The Jensen Shares are irrevocable and fully vested, have
no
expiration date, and will not be affected by the termination of Mr. Jensen’s
employment with the Company for any reason whatsoever. If a USA Transaction
shall occur at a time when there are not a sufficient number of authorized
but
unissued shares of Common Stock, then the Company shall as a condition of
such
USA Transaction promptly take any and all appropriate action to make available
a
sufficient number of shares of Common Stock. In the alternative, the Company
may
structure the USA Transaction so that Mr. Jensen would receive the same amount
and type of consideration in connection with the USA Transaction as any other
holder of Common Stock.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
16.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
On
May
11, 2006, the Company and Mr. Herbert entered into an Amended and Restated
Employment Agreement pursuant to which the term of Mr. Herbert’s employment with
the Company was extended to June 30, 2009. Effective May 11, 2006, Mr. Herbert’s
base salary was increased to $285,000 per annum. Mr. Herbert’s base salary had
not been increased since January 1, 2004. The Agreement requires Mr. Herbert
to
devote his full time and attention to the business and affairs of the Company
and obligates him not to engage in any investments or activities which would
compete with the Company during the term of the agreement and for a period
of
one year thereafter. In the event that a USA Transaction (as defined in Mr.
Jensen's employment agreement) shall occur, then Mr. Herbert has the right
to
terminate his agreement upon 30 days notice to USA. Mr. Herbert was granted
the
right to elect to have one-half of his base salary for each of the fiscal
years
ending June 30, 2007, June 30, 2008, and June 30, 2009 paid in shares of
Common
Stock rather than cash. Mr. Herbert was also granted 50,000 shares of Common
Stock and an additional amount of options to purchase up to 18,000 shares
of
Common Stock at $7.50 per share.
The
50,000 shares of Common Stock vest as follows: 16,667 on June 1, 2006; 16,667
on
January 1, 2007; and 16,666 on June 1, 2007. The
options vest as follows: 6,000 on May 11, 2006; 6,000 on June 30, 2007; and
6,000 on June 30, 2008. The options may be exercised at any time within 5
years
of vesting. The Company recorded a non-cash compensation charge of $176,003
and
$41,310 related to the grant of restricted Common Stock and Common Stock
Options, respectively, during the fiscal year ended June 30, 2006. See note
13
for additional option disclosures. All of the shares granted to or to be
issued
to Mr. Herbert under his employment agreement, and the shares underlying
the
options granted to Mr. Herbert, are not and will not be registered under
the
Securities Act of 1933, as amended, and constitute restricted securities
as such
term is defined in Rule 144 promulgated under the 1933 Act. In October 2006,
the
Company granted to Mr. Herbert piggyback registration rights under the Act
for
the shares described above for a period of five years following the vesting
of
any of such shares and for the shares underlying any of the options described
above for a period of five years following the vesting of any such
options.
On
May
11, 2006, the Company and Mr. DeMedio entered into an amendment to his
Employment Agreement pursuant to which the term of Mr. DeMedio’s employment with
the Company was extended to June 30, 2008. Effective May 11, 2006, Mr. DeMedio’s
base salary was increased to $165,000 per annum. Mr. DeMedio was granted
the
right to elect to have one-half of his base salary for each of the fiscal
years
ending June 30, 2007, and June 30, 2008 paid in shares of Common Stock rather
than cash. Mr. DeMedio was also granted options to purchase up to 7,000 shares
of Common Stock at $7.50 per share. The options vest as follows: 2,334 on
May
11, 2006; 2,333 on June 30, 2007; and 2,333 on June 30, 2008. The options
may be
exercised at any time within 5 years of vesting. The Company recorded a non-cash
compensation charge of $16,068 related to the grant of restricted Common
Stock
Options during the fiscal year ended June 30, 2006. See note 13 for additional
option disclosures. All of the shares underlying the options granted to Mr.
DeMedio under his employment agreement are not and will not be registered
under
the Securities Act of 1933, as amended, and constitute restricted securities
as
such term is defined in Rule 144 promulgated under the 1933 Act. In October
2006, the Company granted to Mr. DeMedio piggyback registration rights under
the
Act for the shares underlying any of the options described above for a period
of
five years following the vesting of any such options.
Various
legal actions and claims occurring in the normal course of business are pending
or may be instituted or asserted in the future against the Company. The Company
does not believe that the resolution of these matters will have a material
effect on the financial position or results of operations of the Company.
In
February 2005, a Complaint was filed against the Company by Swartz Private
Equity, LLC (“Swartz”) alleging that the Company breached various agreements
entered into with Swartz in August and September 2000 in connection with
the
so-called equity line of credit provided by Swartz to the Company. The Complaint
requested money damages of $4,350,381 representing the alleged value of the
warrants held by or claimed to be due to Swartz, money damages of $196,953
representing a termination fee allegedly due in connection with the termination
of the agreements, and unspecified money damages relating to the alleged
breach
of the rights of first refusal.
USA
Technologies, Inc.
Notes
to
Consolidated Financial Statements
16.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
The
Company’s response to the Complaint denied any liability to Swartz and asserted
various counterclaims against Swartz that seek money damages and other
affirmative relief against Swartz. The Company’s response, among other things,
stated that the entire transaction was void and unenforceable because Swartz
had
failed to register as a broker-dealer under applicable Federal and state
securities laws as required in order for Swartz to be engaged in the business
of
providing equity line products.
On
September 20, 2006, the parties agreed to fully settle this litigation. In
this
regard, the Company agreed to issue to Swartz 33,184 shares of our Common
Stock.
We also agreed to honor the cashless exercise of warrants by Swartz in 2003
for
6,816 shares of Common Stock. We had previously disputed that Swartz had
validly
exercised those warrants. We have granted to Swartz certain registration
rights
in connection with the 33,184 shares. The settlement agreement and release
implementing the settlement was signed by the parties on October 12, 2006.
The
Company had recorded a liability of $270,000 as of June 30 to accrue for
the
value of the 40,000 shares of Common Stock that were issued in October 2006
under the settlement agreement.
The
Company also issued 2,536 shares of Common Stock to a former employee totaling
$18,000 relating to the settlement of litigation.
17.
SUBSEQUENT EVENTS (UNAUDITED)
From
April 1, 2007 through May 4, 2007, the Company issued an additional 167,537
shares of Common Stock to Mr. Illes under the 2006-B Common Stock Agreement
for
total gross proceeds of $1,550,000. On April 6, 2007, the Company received
the
amounts due related to the $340,000 Subscription Receivable.
In
April
2007, and as permitted under the terms thereof, the Company repaid all of
the
remaining outstanding Convertible Senior Notes in the principal amount of
$3,652,000 of Convertible Senior Notes. These Convertible Senior Notes consisted
of all the $320,000 principal amount of outstanding 12% Convertible Senior
Notes
due June 30, 2009, all of the $1,520,000 principal amount of outstanding 12%
Convertible Notes due December 31, 2009 and all of the $1,812,000 principal
amount of outstanding 10% Convertible Notes due December 31, 2010. Each of
the
note holders has the right, for 30 days, to elect to convert the Senior Notes
into shares of Common Stock in lieu of accepting the repayment. As of May
14,
2007, the holders of $798,800 of these Senior Notes elected to convert their
Senior Notes at the rate of $10 per share into 79,880 shares of Common Stock
in
lieu of accepting repayment.
From
April 1, 2007 through May 4, 2007, the Company sold $3,000,000 of the
available-for-sale securities. The Company used the proceeds from the sale
to
repay the outstanding Convertible Senior Notes as previously
mentioned.
From
April 1, 2007 through May 4, 2007, the holders of 32,098 warrants at $6.40
per
share exercised their warrants for total proceeds of $205,427.
On
May
14, 2007, the holder of 11,454 warrants at $6.60 per share exercised their
warrants for total proceeds of $75,596.
PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following is an itemized statement of the estimated amounts of all expenses
payable by the Registrant in connection with the registration of the common
stock, other than underwriting discounts and commissions.
|
Securities
and Exchange Commission - Registration Fee
|
$
|
70.87
|
||
|
Printing
and Engraving Expenses
|
$
|
4,929.13
|
||
|
Accounting
Fees and Expenses
|
$
|
15,000.00
|
||
|
Legal
Fees and Expenses
|
$
|
15,000.00
|
||
|
Total
|
$
|
35,000.00
|
ITEM
14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section
1746 of the Pennsylvania Business Corporation Law of 1988, as amended ("BCL"),
authorizes a Pennsylvania corporation to indemnify its officers, directors,
employees and agents under certain circumstances against expenses and
liabilities incurred in legal proceedings involving such persons because of
their holding or having held such positions with the corporation and to purchase
and maintain insurance of such indemnification. Our By-laws substantively
provide that we will indemnify our officers, directors, employees and agents
to
the fullest extent provided by Section 1746 of the BCL.
Section
1713 of the BCL permits a Pennsylvania corporation, by so providing in its
By-laws, to eliminate the personal liability of a director for monetary damages
for any action taken unless the director has breached or failed to perform
the
duties of his office and the breach or failure constitutes self-dealing, willful
misconduct or recklessness. In addition, no such limitation of liability is
available with respect to the responsibility or liability of a director pursuant
to any criminal statute or for the payment of taxes pursuant to Federal, state
or local law. Our By-laws eliminate the personal liability of the directors
to
the fullest extent permitted by Section 1713 of the BCL.
In
addition, the Company has entered into separate indemnification agreements
with
its Directors and officers which require the Company to indemnify each of such
officers and directors to the fullest extent permitted by the law of the
Commonwealth of Pennsylvania against certain liabilities which may arise by
reason of their status as directors and officers. The indemnification agreements
also provide that the Company must
advance all expenses incurred by the indemnified person in connection with
any
proceeding, provided the indemnified person undertakes to repay the advanced
amounts if it is determined ultimately that the indemnified person is not
entitled to be indemnified.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES.
During
the three years immediately preceding the date of the filing of this
registration statement, the following securities were issued by USA without
registration under the Securities Act of 1933, as amended ("Act"):
PRIVATE
PLACEMENTS
From
February through June 2004, the Company sold 282,908 shares of Common Stock
to
34 accredited investors at $15 per share for an aggregate of $4,243,625. During
June 2004, the Company granted to each investor in the offering a warrant to
purchase one-half of a share for each share subscribed for by such investor
in
the offering. The Company issued warrants to purchase a total of 141,454 shares.
The warrants were originally exercisable at $20 per share at any time through
December 31, 2004. The exercise price was subsequently reduced to $10 per share.
We have agreed to register the shares and the shares underlying the warrants
under the Act for resale for a period of two years. The offer and sales of
the
shares was exempt from registration under Rule 506 promulgated under Section
4(2) of the Act. All of the investors were either pre-existing security holders
or business associates. The offer and sale thereof did not involve any general
advertising or solicitation and the securities contained appropriate restrictive
legends under the Act.
In
June
2004, we issued warrants to purchase up to 37,164 shares of Common Stock to
the
holders of our senior notes who elected to receive warrants in lieu of the
cash
interest payment due for the quarters ended June 30, 2002, September 30, 2002,
December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003 and
December 31, 2003. The warrants are exercisable at $20 per share at any time
through December 31, 2004 and were later reduced in price to $10 per share.
We
have agreed to register the shares underlying the warrants under the Act for
resale for a period of 2 years. The securities were offered and sold under
the
exemption from registration set forth in Rule 506 promulgated under the Act.
All
of the noteholders are accredited investors and existing security holders of
USA, and there was no general solicitation or advertising.
On
June
18, 2004, we entered into a Common Stock Purchase Agreement with Steve Illes.
During the one year period following the effectiveness of a registration
statement covering the shares, Mr. Illes has agreed to purchase from USA shares
of Common Stock, provided that the aggregate purchase price can not exceed
$7,500,000. Under the Agreement, Mr. Illes is permitted to purchase Common
Stock
from USA at any time at the price per share of $30. In addition, USA has the
right at any time to require Mr. Illes to purchase Common Stock from USA at
the
lower of: (i) $30; or (ii) 90% of the closing bid price per share on the date
prior to the date of the delivery by USA to Mr. Illes of notice of his
obligation to purchase. USA can require Mr. Illes to purchase shares under
the
Agreement only if the shares have been registered by the Company for resale
by
Mr. Illes under the Act. During any calendar month, Mr. Illes is not permitted
to purchase and can not be required by USA to purchase Common Stock for an
aggregate purchase price in excess of $700,000. We have agreed to register
for
resale the shares purchased by Mr. Illes under the Agreement for a period of
one
year from the date of the effectiveness of the initial registration statement
covering the shares to be purchased by Mr. Illes. We have agreed to pay to
Mr.
Illes a due diligence fee of $45,000. The securities were offered and sold
to
Mr. Illes under the exemption from registration set forth under Rule 506
promulgated under the Act. Mr. Illes is an existing shareholder and an
accredited investor, and there was no general solicitation or advertising.
In
July
2004, the Staff of the Securities and Exchange Commission indicated that because
of the discretion given to Mr. Illes under the Agreement to purchase the shares
at any time for $30 per share, it was not appropriate to register the shares
unless this discretion was eliminated. On August 6, 2004 the Company and Mr.
Illes entered into a subsequent agreement which superceded the prior agreement
and gave the Company the right to require Mr. Illes to purchase the shares
but
did not give Mr. Illes any discretion to purchase shares. During the one year
period following the date of effectiveness of a registration statement covering
the shares, Mr. Illes has agreed to purchase from USA shares of Common Stock,
provided that the aggregate purchase price can not exceed $7,500,000. Under
the
Agreement, USA has the right at any time to require Mr. Illes to purchase Common
Stock from USA at the lower of: (i) $30; or (ii) 90% of the closing bid price
per share on the date prior to the date of the delivery by USA to Mr. Illes
of
notice of his obligation to purchase. USA can require Mr. Illes to purchase
shares under the Agreement only if the shares have been registered by the
Company for resale by Mr. Illes under the Act. During any calendar month, Mr.
Illes is not permitted to purchase and can not be required by USA to purchase
Common Stock for an aggregate purchase price in excess of $700,000.
From
November 3, 2004 through February 14, 2005, the Company sold $1,550,789 of
senior notes convertible into Common Shares at $10 per share and maturing on
June 30, 2007. Interest is payable quarterly at a rate of 10% per annum. The
securities were offered and sold under the exemption from registration set
forth
in Rule 506 promulgated under Section 4(2) of the Act. All of the purchasers
of
the notes were accredited investors, were either pre-existing security holders
or business associates and there was no general solicitation or advertising.
We
have agreed to use our best efforts to have the shares underlying the senior
notes registered for resale under the Act through June 30, 2007.
In
March
2005, the Company exchanged $1,755,000 of principal amount 2005-B 10% Senior
Notes for a like principal amount of 2005-C 10% Convertible Senior Notes (“2010
Senior Notes”). The 2010 Senior Notes are convertible into Common Shares at $10
per share and due December 31, 2010. There are an aggregate of 175,500 shares
underlying these senior notes. Interest is payable quarterly at a rate of 10%
per annum. We have agreed to register the shares underlying the 2010 Senior
Notes under the Act for resale through April 30, 2006. The exchange of the
shares was exempt from registration under Section 3(a)(9) of the Act. All of
the
investors receiving 2010 Senior Notes are existing security holders. No
commission or remuneration was paid or given directly or indirectly for
soliciting the exchange.
During
March and April 2005, the Company sold 233,333 shares of Common Stock at $15
per
share for an aggregate of $3,500,000 (“2005-D Private Placement Offering”). For
each share purchased, the Company granted a warrant to purchase one share of
Common Stock exercisable at $15 per share at anytime prior to December 31,
2005.
The Company issued warrants to purchase a total of 233,333 shares. To date,
none
of the warrants have been exercised. We have agreed to register the shares
and
the shares underlying the warrants under the Act for resale through December
31,
2006. The offer and sales of the shares was exempt from registration under
Rule
506 promulgated under Section 4(2) of the Act. All of the investors were
accredited investors and either pre-existing security holders or business
associates. The offer and sale thereof did not involve any general advertising
or solicitation and the securities contained appropriate restrictive legends
under the Act.
On
April
4, 2005, the Company and Steve Illes entered into a new Common Stock Purchase
Agreement (“2005 Commmon Stock Ageement”). Pursuant to the 2005 Common Stock
Agreement, Mr. Illes agreed to purchase shares of the Company’s Common Stock,
provided that the aggregate purchase price does not exceed $10,000,000. Under
the 2005 Common Stock Agreement, the Company has the right at any time to
require Mr. Illes to purchase Common Stock from the Company at the lower of:
(i)
$30 per share; or (ii) 90% of the closing bid price per share on the date prior
to the date of the delivery by the Company to Mr. Illes of notice of his
obligation to purchase. The Company can require Mr. Illes to purchase shares
under the Common Stock Agreement only if the shares have been registered by
the
Company for resale under the Act. During any calendar month, Mr. Illes cannot
be
required by the Company to purchase Common Stock for an aggregate purchase
price
in excess of $800,000. The Company issued 5,000 shares of Common Stock to Mr.
Illes as a due diligence/commitment fee in connection with the 2005 Common
Stock
Agreement. The 2005 Common Stock Agreement terminates August 11, 2007. We have
agreed to register for resale the shares purchased by Mr. Illes under the
agreement until May 13, 2007. The securities offered and to be sold to Mr.
Illes
are exempt from registration as set forth under Rule 506 promulgated under
the
Act. Mr. Illes is an existing shareholder and an accredited investor, and there
was no general solicitation or advertising.
During
October and November 2005, the Company sold $544,945 principal amount of 2005-G
Convertible Senior Notes due December 31, 2008 to six investors. These notes
earn interest at 10% per annum, payable quarterly, and are convertible into
Common Shares at $10 per share at any time prior to maturity. The offering
was
made to the holders of the 2005-D Common Stock Warrants. The 2005-D Warrants
were exercisable at $10 per share through November 30, 2005, and at $15 through
December 31, 2005. Each holder of the 2005-D Common Stock Warrants was entitled
to purchase the principal amount of the 2005-G Senior Notes equal to the number
of 2005-D Warrants held multiplied by $10. Upon any investment in the offering,
the corresponding number of 2005-D Warrants were cancelled. There are 54,494
shares underlying these 2005-G senior notes. For each $10,000 of senior notes
purchased, the investor also received a purchase right to purchase up to 1,000
shares at $20 per share at anytime prior to December 31, 2008. The purchase
rights could only be exercised if the shares issuable upon the exercise of
the
purchase rights are made available through the prepayment by the Company of
outstanding convertible senior notes that are convertible at $20 per share.
The
Company issued purchase rights to acquire 54,494 shares. During January 2006,
the holder of each purchase right agreed to exchange the purchase rights for
warrants to purchase shares at $20 at anytime prior to December 31, 2008.
Pursuant thereto, warrants were issued for an aggregate of 54,494 shares. We
have agreed to register the shares underlying the 2005-G Senior Notes and the
shares underlying the warrants under the Act for resale, and to keep the
registration statement current and effective through November 30, 2006. The
offer and sale of the 2005-G Senior Notes and purchase rights was exempt from
registration under Rule 506 promulgated under Section 4(2) of the Act. All
of
the investors were accredited investors. The offer and sale thereof did not
involve any general advertising or solicitation and the securities contained
appropriate restrictive legends under the Act. The issuance by us of the
warrants was exempt from registration under Section 3(a)(9) of the Act. All
of
the investors were existing holders of the purchase rights. No commission or
remuneration was paid or given directly or indirectly for soliciting the
exchange.
On
December 13, 2005, the Company entered into a Stock Purchase Agreement with
Wellington Management Company, LLP, a large Boston-based institutional investor,
on behalf of certain of its clients (“Wellington”). Pursuant thereto, the
Company sold to Wellington 400,000 shares of Common Stock for $10 per share
for
an aggregate of $4,000,000. The offer and sale of the shares was exempt from
registration under Rule 506 promulgated under Section 4(2) of the Act. As
investment manager, Wellington has shared dispositive and shared voting power
over the shares. All of these clients are accredited investors. We have agreed
to register the shares for resale under the Act for a period of one year. The
Stock Purchase Agreement provides that if the registration statement is not
declared effective by the SEC within 60 days from the date of the Stock Purchase
Agreement, then the Company will pay to Wellington as liquidated damages two
percent of the purchase price for the shares for each month beyond 60 days
that
the registration statement is not effective. As a condition of its investment,
Wellington required the Company to approve and call a special meeting of its
shareholders to consider approval of a 1-to-100 reverse stock split of its
Common Stock.
In
October and November, 2005, the Company offered for sale up to $1,000,000 of
principal amount of 10% Bridge Notes due January 6, 2006. Interest accrued
on
the Bridge Notes at the rate of 10% per annum from and after the date of
issuance with all accrued and unpaid interest paid on January 6, 2006. The
Company sold $770,000 Bridge Notes to 8 investors. On January 6, 2006, the
Bridge Notes were automatically exchanged for a like principal amount of new
2006-A Convertible Senior Notes due December 31, 2010. The 2006-A Notes bear
interest at 10% and are convertible at any time prior to maturity at $10 per
share. For each $10,000 of 2006-A Convertible Senior Notes received in exchange
for the Bridge Notes, the Company also issued purchase rights enabling the
holder to purchase up to 1,000 shares of Common Stock at $20 per share at
anytime prior to December 31, 2008. The purchase rights could only be exercised
if the shares issuable upon the exercise of the purchase rights are made
available through the prepayment by the Company of outstanding convertible
senior notes that are convertible at $20 per share. The Company issued purchase
rights to acquire 77,000 shares. During January 2006, the holder of each
purchase right agreed to exchange the purchase right for a warrant to purchase
one share at $20 at anytime prior to December 31, 2008. Pursuant thereto,
warrants were issued for an aggregate of 77,700 shares. The offer and sale
of
the Bridge Notes was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were accredited investors. The
offer and sale thereof did not involve any general advertising or solicitation
and the securities contained appropriate restrictive legends under the Act.
The
issuance by us of the 2006-A Senor Notes and purchase rights in exchange for
the
Bridge Notes, and the warrants in exchange for the purchase rights was exempt
from registration under Section 3(a)(9) of the Act. All investors were existing
security holders of the Company. No commission or remuneration was paid or
given
directly or indirectly for soliciting the exchange. We have agreed to register
the shares underlying the 2006-A Senior Notes and the shares underlying the
warrants under the Act for resale, and to keep the registration statement
current and effective through November 30, 2006.
On
January 9, 2006, the Company entered into a Stock Purchase Agreement with
Rationalwave On Shore Equity Fund, L.P. (“Rationalwave”), an accredited
investor. Pursuant thereto, the Company sold to Rationalwave 40,000 shares
of
Common Stock for $10 per share for an aggregate of $400,000. The offer and
sale
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. We have agreed to register the shares for resale under
the Act through January 9, 2007.
On
February 17, 2006, the Company and Steve Illes entered into a Common Stock
Purchase Agreement ("2006 Commmon Stock Ageement"). Pursuant to the 2006 Common
Stock Agreement, Mr. Illes agreed to purchase shares of the Company's Common
Stock, provided that the aggregate purchase price does not exceed $20,000,000.
Under the 2006 Common Stock Agreement, the Company has the right at any time
to
require Mr. Illes to purchase Common Stock from the Company at the lower of:
(i)
$30.00 per share; or (ii) 90% of the closing bid price per share on the date
prior to the date of the delivery by the Company to Mr. Illes of notice of
his
obligation to purchase. The Company can require Mr. Illes to purchase shares
under the Common Stock Agreement only if the shares have been registered by
the
Company for resale under the Act. During any calendar month, Mr. Illes cannot
be
required by the Company to purchase Common Stock for an aggregate purchase
price
in excess of $800,000. The 2006 Common Stock Agreement terminates June 30,
2009.
We have agreed to register for resale the shares purchased by Mr. Illes under
the agreement for a two year period. The securities offered and to be sold
to
Mr. Illes are exempt from registration as set forth under Rule 506 promulgated
under the Act. Mr. Illes is an existing shareholder and an accredited investor,
and there was no general solicitation or advertising. The 2006 Common Stock
Agreement replaces the April 2005 stock purchase agreement between Mr. Illes
and
the Company, and provides that no further shares may be registered under that
agreement.
Pursuant
to the Employment Agreement dated May 11, 2006 between Mr. Jensen and the
Company, the Company agreed to issue to Mr. Jensen an aggregate of 75,000 shares
of Common Stock. These shares vest as follows: 25,000 on June 1, 2006; 25,000
on
January 1, 2007; and 25,000 on June 1, 2007. Pursuant to his Employment
Agreement, Mr. Jensen also elected to have fifty percent of his base salary
for
the fiscal year ending June 30, 2007 paid through the issuance to him of 22,080
shares of Common Stock in lieu of cash. These shares vest as follows: 5,520
shares on July 1, 2006; 5,520 shares on October 1, 2006; 5,520 shares on January
1, 2007; and 5,520 shares on April 1, 2007. The offer and sale of the shares
to
Mr. Jensen were exempt from registration under Section 4(2) of the Act.
Pursuant
to the Employment Agreement dated May 11, 2006 between Mr. Herbert and the
Company, the Company agreed to issue to Mr. Herbert an aggregate of 50,000
shares of Common Stock. These shares vest as follows: 16,667 on June 1, 2006;
16,667 on January 1, 2007; and 16,666 on June 1, 2007. The offer and sale of
the
shares to Mr. Herbert were exempt from registration under Section 4(2) of the
Act.
On
September 25, 2006, the Company and Steve Illes entered into the 2006-B Common
Stock Purchase Agreement. Pursuant to the 2006-B Common Stock Agreement, Mr.
Illes agreed to purchase shares of the Company's Common Stock, provided that
the
aggregate purchase price does not exceed $15,000,000. Under the 2006-B Common
Stock Agreement, the Company has the right at any time to require Mr. Illes
to
purchase Common Stock from the Company at the lower of:
(i)
$30.00 per share; or (ii) 90% of the closing bid price per share on the date
prior to the date of the delivery by the Company to Mr. Illes of notice of
his
obligation to purchase. The Company can require Mr. Illes to purchase shares
under the 2006-B Common Stock Agreement only if the shares have been registered
by the Company for resale under the Act. During any calendar month, Mr. Illes
cannot be required by the Company to purchase Common Stock for an aggregate
purchase price in excess of $800,000. The 2006-B Common Stock Agreement
terminates August 30, 2009. We have agreed to register for resale the shares
purchased by Mr. Illes under the agreement for a two year period. The securities
offered and to be sold to Mr. Illes are exempt from registration as set forth
under Rule 506 promulgated under the Act. Mr. Illes is an existing shareholder
and an accredited investor, and there was no general solicitation or
advertising. The 2006-B Common Stock Purchase Agreement replaces the February
2006 stock purchase agreement between Mr. Illes and the Company, and provides
that no further shares may be registered under that agreement.
In
September 2006, the Company agreed to settle a legal action brought against
the
Company by Erica Bender, a former employee. As part of the settlement, the
Company issued to her 2,536 shares valued at $7.10 per share. The offer and
sale
of the shares to Bender were exempt from registration under Section 4(2) of
the
Act.
In
September 2006, the Company settled its pending litigation with Swartz Private
Equity, LLC. In full settlement of the litigation, the Company issued to Swartz
an aggregate of 40,000 shares of Common Stock. Of these shares, 6,816 shares
were attributable to the cashless exercise by Swartz in May and June 2003 of
warrants, and the balance of 33,184 shares are newly issued shares. Under the
settlement agreement, the Company has agreed to register for resale the 33,184
shares through October 12, 2007. The issuance of the shares to Swartz by the
Company was exempt from registration under Rule 506 promulgated under Section
4(2) of the Act.
During
December 2006, the Company sold 1,400,000 shares of Common Stock for $6.00
per
share for an aggregate of $8,400,000 to 78 investors. For each share purchased
in the offering, the investor received a warrant to purchase one-half of a
share. Pursuant to the offering, warrants to purchase an aggregate of 700,017
shares were issued. The warrants are exercisable at any time through December
31, 2011 at $6.40 per share. The offer and sale of the shares and the warrants
was exempt from registration under Rule 506 promulgated under Section 4(2)
of
the Act. All of these investors are accredited investors. We have agreed to
register the shares and the shares underlying the warrants for resale under
the
Act through December 14, 2007. The Stock Purchase Agreements entered into with
the investors provide that if the registration statement is not declared
effective by the SEC within 90 days from the date of the Stock Purchase
Agreements, or by March 14, 2007, then the Company will pay to the investors
as
liquidated damages one percent of the purchase price for the shares for each
month beyond 90 days that the registration statement is not effective with
the
maximum damages not to exceed 12% of the purchase price for the shares.
In
connection with the above private placement offering, William Blair &
Company, LLC, acted as exclusive placement agent. As compensation for its
services, Blair received cash compensation of $529,200 and warrants to purchase
up to 11,454 shares at $6.60 per share at any time through December 31, 2011.
Blair also received expense reimbursement from us of $12,576.08. We have agreed
to register the shares underlying the warrants for resale under the Act through
December 14, 2007. The offer and sale of the warrants was exempt from
registration under Section 4(2) of the Act. The investor is an accredited
investor. The offer and sale thereof did not involve any general advertising
or
solicitation and the securities contained appropriate restrictive legends under
the Act.
On
March
14, 2007, the Company entered into a Securities Purchase Agreement with S.A.C.
Capital Associates, LLC (the “Buyer”). Pursuant thereto, the Company sold to the
Buyer 1,666,667 shares of the Company’s Common Stock at a price of $6.00 per
share for an aggregate purchase price of $10,000,002. The Company also issued
warrants to the Buyer to purchase up to 833,333 shares of Common Stock at an
exercise price of $6.40 per share. The warrants are exercisable at any time
within six years following the six-month anniversary of the issuance of the
warrants. The warrant provides that if we would issue securities in the future
at a purchase price that is less than the exercise price of the warrant, then
the exercise price of the warrant would be reduced to such lower purchase price,
provided, however, that such exercise price can never be lower than $5.90 which
was the closing bid price of our shares on the day prior to the sale of our
securities to the selling shareholder. The warrant also provides that in the
event we issue securities at a purchase price less than the exercise price
of
the warrant, the number of shares issuable under the warrant shall be increased
by that number of shares determined by multiplying the exercise price in effect
immediately prior to such adjustment by the number of shares issuable under
the
warrant immediately prior to such adjustment and dividing the product thereof
by
the new exercise price of the warrant (which can never be less than $5.90).
Under this formula, the maximum number shares would be issuable under the
warrant would be 903,955.There were no commissions or placement agent fees
paid
by the Company in connection with this offering. The Buyer is an accredited
investor and the offer and sale of the shares and the warrants was exempt from
registration under Rule 506 promulgated under Section 4(2) of the Act. The
Company has agreed to register the shares and the shares underlying the warrant
for resale under the Act until the earlier of (i) the date as of which the
Buyer
may sell all of the securities covered by such Registration Statement without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act, or (ii)
the
date on which the Buyer shall have sold all of the securities covered by such
Registration Statement. In the event that the registration statement is not
declared effective within (i) ninety calendar days after March 14, 2007, in
the
event that the registration statement is not subject to a full review by the
SEC, or (ii) one-hundred and twenty calendar days after March 14, 2007, in
the
event that the registration statement is subject to a full review by the SEC,
then the Company has agreed to pay to the Buyer a cash payment equal to one
percent (1%) of the aggregate subscription price for each thirty day period
beyond such date that the registration statement has not been declared
effective. The maximum aggregate amount payable to the Buyer is twelve percent
(12%) of the aggregate subscription price.
STOCK
OPTIONS
On
April
12, 2005 the Company issued to David DeMedio options to purchase 3,000 shares
of
Common Stock for $20 per share which vest ratably over a two-year period.
On
April
21, 2006, the Board of Directors approved the grant of 12,000 Common Stock
Options to each of the outside directors serving as of February 27, 2006 and
6,000 Common Stock Options to Mr. Passner, a new director as of April 12, 2006,
all with an exercise price of $7.50 per share and all exercisable at any time
within five years following the date of vesting. The options granted to Mr.
Sellers and Mr. Van Allen are fully vested. Of the options granted to Mr. Katz
and Mr. Lurio, 6,000 vest immediately, 3,000 vest on April 1, 2007, and 3,000
vest on April 1, 2008. Of the options granted to Mr. Passner, 3,000 vest on
April 1, 2007, and 3,000 vest on April 1, 2008.
In
conjunction with the signing of employment agreements on May 11, 2006, the
Company granted Mr. Jensen, Mr. Herbert, and Mr. DeMedio, 75,000, 18,000 and
7,000 Common Stock Options, all with an exercise price of $7.50 per share and
all exercisable at any time within five years following the date of vesting.
The
options vest as follows: one-third on May 11, 2006; one-third on June 30, 2007;
and one-third on June 30, 2008.
In
conjunction with the appointment of Stephen McHugh to the Board of Directors
on
June 20, 2006, the Company granted Mr. McHugh 6,000 Common Stock Options with
an
exercise price of $8.00 per share. The options vest as follows: 3,000 on June
20, 2007 and 3,000 on June 20, 2008. The options are exercisable at any time
within five years of vesting.
The
issuance of all of the foregoing options was made in reliance upon the exemption
provided by Section 4(2) of the Act as all of the options were issued to
officers, directors, employees or consultants of USA, each of such issuances
were separate transactions not part of any plan, and none of the issuances
involved any general solicitation or advertising.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS
|
Ex
No
|
Description
|
|
|
2.1
|
Asset
Purchase Agreement dated July 11, 2003 by and between USA and Bayview
Technology Group LLC (Incorporated by reference to Exhibit 2.1 to
Form 8-K
filed July 14, 2003)
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation of USA filed January 26, 2004
(Incorporated by reference to Exhibit 3.1.19 to Form 10-QSB filed
on
February 12, 2004).
|
|
|
3.1.1
|
First
Amendment to Amended and Restated Articles of Incorporation of USA
filed
on March 17, 2005 (Incorporated by reference to Exhibit 3.1.1 to
Form S-1
Registration Statement No. 333-124078).
|
|
|
3.1.2
|
Second
Amendment to Amended and Restated Articles of Incorporation of USA
filed
on December 13, 2005 (Incorporated by reference to Exhibit 3.1.2
to Form
S-1 Registration Statement No. 333-130992).
|
|
|
3.2
|
By-Laws
of USA (Incorporated by reference to Exhibit 3.2 to Form SB-2 Registration
Statement No. 33-70992).
|
|
4.1
|
Form
of 2004 Senior Note (Incorporated by reference to Exhibit 4.24 to
Form
SB-2 Registration Statement No. 333-101032).
|
|
|
|
||
|
4.2
|
Form
of 2005 Senior Note (Incorporated by reference to Exhibit 4.25 to
Form
SB-2 Registration Statement No. 333-101032).
|
|
|
|
||
|
4.3
|
Addendum
to 2006 Senior Note. (Incorporated by reference to Exhibit 4.30 to
Form
10-KSB filed on September 28, 2004).
|
|
|
|
||
|
4.4
|
Addendum
to 2007 Senior Note. (Incorporated by reference to Exhibit 4.30 to
Form
10-KSB filed on September 28, 2003).
|
|
|
|
||
|
4.5
|
Common
Stock Purchase Agreement between the Company and Steve Illes dated
April
4, 2005 (Incorporated by reference to Exhibit 4.13.1 to Form S-1
Registration Statement No. 333-124078).
|
|
|
|
||
|
4.6
|
Form
of 2004-B Note (Incorporated by reference to Exhibit 4.28 to Form
S-1
Registration Statement No. 333-119951).
|
|
|
|
||
|
4.7
|
Form
of 2005-C Note (Incorporated by reference to Exhibit 4.15 to Form
S-1
Registration Statement No. 333-124078).
|
|
|
|
||
|
4.8
|
Stock
Purchase Agreement dated December 13, 2005 by and between the Company
and
certain clients of Wellington Management Company, LLC (Incorporated
by
reference to Exhibit 4.1 to Form 8-K filed December 19,
2005).
|
|
|
|
||
|
4.9
|
Stock
Purchase Agreement dated January 9, 2006, by and between the Company
and
Rationalwave On Shore Equity Fund, L.P. (Incorporated by reference
to
Exhibit 4.19 to Form S-1 Registration Statement No.
333-130992).
|
|
|
|
||
|
4.10
|
Form
of 2006-A 10% Convertible Senior Note due December 31, 2010 (Incorporated
by reference to Exhibit 4.20 to Form S-1 Registration Statement No.
333-130992).
|
|
|
|
||
|
4.11
|
Form
of 2006-A Warrant(Incorporated by reference to Exhibit 4.21 to Form
S-1
Registration Statement No. 333-130992).
|
|
|
|
||
|
4.12
|
Form
of 2005-G Warrant (Incorporated by reference to Exhibit 4.22 to Form
S-1
Registration Statement No. 333-130992).
|
|
|
|
||
|
4.13
|
Common
Stock Purchase Agreement between the Company and Steve Illes dated
February 17, 2006 (Incorporated by reference to Exhibit 4.23 to Form
S-1
Statement No. 333-132019).
|
|
|
|
||
|
4.14
|
2006-B
Common Stock Purchase Agreement between the Company and Steve Illes
dated
September 25, 2006 (Incorporated by reference to Exhibit 4.14 to
Form 10-K
filed September 28, 2006).
|
|
|
|
||
|
4.15
|
Settlement
Agreement And Mutual Release between Erika Bender and USA Technologies,
Inc. dated September 22, 2006 (Incorporated by reference to Exhibit
4.15
to Form S-1 Registration Statement No. 333-138116).
|
|
|
|
||
|
4.16
|
Settlement
Agreement dated October 12, 2006 between Swartz Private Equity, LLC
and
USA Technologies, Inc (Incorporated by reference to Exhibit 4.16
to Form
S-1 Registration Statement No.
333-138116).
|
|
4.17
|
Common
Stock Purchase Agreement between the Company and Cortina Asset Management
LLC dated December 15, 2006 (Incorporated by reference to Exhibit
4.17 to
Form S-1 filed on January 9, 2007).
|
|
|
|
||
|
4.18
|
Common
Stock Purchase Agreement between the Company and Wellington Management
Company, LLP, acting on behalf of Public Sector Pension Investment
Board,
dated December 15, 2006 (Incorporated by reference to Exhibit 4.18
to Form
S-1 filed on January 9, 2007).
|
|
|
|
||
|
4.19
|
Common
Stock Purchase Agreement between the Company and Wellington Management
Company, LLP, acting on behalf of New York Nurses Association Pension
Plan, dated December 15, 2006 (Incorporated by reference to Exhibit
4.19
to Form S-1 filed on January 9, 2007).
|
|
|
4.20
|
Common
Stock Purchase Agreement between the Company and Wellington Management
Company, LLP, acting on behalf of The Government of Singapore Investment
Corporation Pte Ltd, dated December 15, 2006 (Incorporated by reference
to
Exhibit 4.20 to Form S-1 filed on January 9, 2007).
|
|
|
|
||
|
4.21
|
Common
Stock Purchase Agreement between the Company and SF Capital Partners
Ltd.
dated December 15, 2006 (Incorporated by reference to Exhibit 4.21
to Form
S-1 filed on January 9, 2007).
|
|
|
|
||
|
4.22
|
Common
Stock Purchase Agreement between the Company and United Capital
Management, Inc. dated December 15, 2006 (Incorporated by reference
to
Exhibit 4.22 to Form S-1 filed on January 9, 2007).
|
|
|
|
||
|
4.23
|
Common
Stock Purchase Agreement between the Company and Harbour Holdings
Ltd.
dated December 15, 2006 (Incorporated by reference to Exhibit 4.23
to Form
S-1 filed on January 9, 2007).
|
|
|
|
||
|
4.24
|
Common
Stock Purchase Agreement between the Company and Skylands Special
Investment LLC dated December 15, 2006 (Incorporated by reference
to
Exhibit 4.24 to Form S-1 filed on January 9, 2007).
|
|
|
|
||
|
4.25
|
Common
Stock Purchase Agreement between the Company and Skylands Quest LLC
dated
December 15, 2006 (Incorporated by reference to Exhibit 4.25 to Form
S-1
filed on January 9, 2007).
|
|
|
|
||
|
4.26
|
Common
Stock Purchase Agreement between the Company and Skylands Special
Investment II LLC dated December 15, 2006 (Incorporated by reference
to
Exhibit 4.26 to Form S-1 filed on January 9, 2007).
|
|
|
|
||
|
4.27
|
Form
of 2006-BP Common Stock Purchase Warrant (Incorporated by reference
to
Exhibit 4.27 to Form S-1 filed on January 9, 2007).
|
|
|
|
||
|
4.28
|
Common
Stock Purchase Warrant issued to William Blair & Co., LLC, dated
January 4, 2007 (Incorporated by reference to Exhibit 4.28 to Form
S-1
filed on January 9, 2007).
|
|
|
|
||
|
4.29
|
Securities
Purchase Agreement between the Company and S.A.C. Capital Associates,
LLC
dated March 14, 2007 (Incorporated by reference to Exhibit 4.1 to
Form 8-K
filed on March 15, 2007).
|
|
|
4.30
|
Form
of Warrant No. SAC-001 issued to S.A.C. Capital Associates, LLC
(Incorporated by reference to Exhibit 4.2 to Form 8-K filed on March
15,
2007).
|
|
4.31
|
Registration
Rights Agreement between the Company and S.A.C. Capital Associates,
LLC
dated March 14, 2007 (Incorporated by reference to Exhibit 4.3 to
Form 8-K
filed on March 15, 2007).
|
|
|
|
||
|
**
5.1
|
Opinion
of Lurio & Associates, P.C.
|
|
|
10.1
|
Amended
And Restated Employment and Non-Competition Agreement between USA
and
Stephen P. Herbert dated May 11, 2006 (Incorporated by reference
to
Exhibit 10.2 to Form 10-Q filed on May 15, 2006).
|
|
|
|
||
|
10.2
|
Amended
And Restated Employment and Non-competition Agreement between USA
and
George R. Jensen, Jr. dated May 11, 2006 (Incorporated by reference
to
Exhibit 10.1 to Form 10-Q filed on May 15, 2006).
|
|
|
10.3
|
Agreement
and Plan of Merger dated April 10, 2002, by and among the Company,
USA
Acquisition, Inc., Stitch Networks Corporation, David H. Goodman,
Pennsylvania Early Stage Partners, L.P., and Maytag Holdings, Inc.
(Incorporated by reference to Exhibit 2.1 to Form 10-QSB for the
quarter
ended March 31, 2002).
|
|
|
10.4
|
Strategic
Alliance Agreement between USA and ZiLOG Corporation dated October
15,
2002 (Incorporated by reference to Exhibit 10.39 to Form SB-2 Registration
Statement No. 333-101032).
|
|
|
10.5
|
Vending
Placement, Supply and Distribution Agreement between Stitch Networks
Corporation, Eastman Kodak Company, Maytag Corporation and Dixie-Narco,
Inc. dated D-ecember 2000 (Incorporated by reference to Exhibit 10.40
to
Form SB-2 Registration Statement No. 333-101032).
|
|
|
10.6
|
Design
and Manufacturing Agreement between USA and RadiSys dated June 27,
2000
(Incorporated by reference to Exhibit 10.41 to Form SB-2 Registration
Statement No. 333-101032).
|
|
|
10.7
|
Termination
Agreement dated December 31, 2003 by and between Eastman Kodak Company,
Maytag Corporation, Dixie-Narco, Inc. and Stitch Networks Corporation.
(Incorporated by reference to Exhibit 10.6 to Form 10-QSB filed on
February 12, 2004).
|
|
|
10.8
|
Option
Certificate (No. 198) dated April 28, 2004 in favor of Mary West
Young.
(Incorporated by reference to Exhibit 10.45 to Form SB-2 Registration
Statement No. 333-116977).
|
|
|
10.9
|
Agreement
of Lease between Pennswood Spring Mill Associates, as landlord, and
the
Company, as tenant, dated September 2002, and the Rider thereto
(Incorporated by reference to Exhibit 10.21 to Form 10-KSB filed
on
September 28, 2004).
|
|
|
10.10
|
Agreement
of Lease between Deerfield Corporate Center 1 Associates LP, as landlord,
and the Company, as tenant, dated March 2003 (Incorporated by reference
to
Exhibit 10.22 to Form 10-KSB filed on September 28,
2004).
|
|
|
10.11
|
Amendment
to Office Space Lease dated as of April 1, 2005 by and between the
Company
and Deerfield Corporate Center Associates, LP. (Incorporated by reference
to Exhibit 10.19.1 to Form S-1 Registration Statement No.
333-124078).
|
|
10.12
|
Co-Marketing
Agreement between Honeywell D.M.C. Services, LLC and the Company
dated
July 13, 2004 (Incorporated by reference to Exhibit 99.1 to Form
8-K filed
on September 29, 2004).
|
|
|
10.13
|
Employment
and Non-Competition Agreement between USA and David M. DeMedio dated
April
12, 2005 (Incorporated by reference to Exhibit 10.22 to Form S-1
Registration Statement No. 333-124078).
|
|
|
10.14
|
First
Amendment to Employment and Non-Competition Agreement between USA
and
David M. DeMedio dated May 11,2006 (Incorporated by reference to
Exhibit
10.3 to Form 10-Q filed on May 15, 2006).
|
|
|
10.15
|
Option
Certificate (No. 200) dated April 12, 2005 in favor of David M. DeMedio
(Incorporated by reference to Exhibit 10.23 to Form S-1 Registration
Statement No. 333-124078).
|
|
|
10.16
|
Agreement
dated December 28, 2004 between USA Technologies and PepsiCo, Inc.
(Incorporated by reference to Exhibit 10.01 of Form 8-K filed July
27,
2005).
|
|
|
10.17
|
Option
Certificate (No. 201) dated May 11, 2006 in favor of George R. Jensen,
Jr.
(Incorporated by reference to Exhibit 10.21 to Form 10-K filed on
September 28, 2006)
|
|
|
10.18
|
Option
Certificate (No. 202) dated May 11, 2006 in favor of Stephen P. Herbert
(Incorporated by reference to Exhibit 10.22 to Form 10-K filed on
September 28, 2006)
|
|
|
10.19
|
Option
Certificate (No. 203) dated May 11, 2006 in favor of David M. Demedio
(Incorporated by reference to Exhibit 10.23 to Form 10-K filed on
September 28, 2006)
|
|
|
10.20
|
Option
Certificate (No. 204) dated April 21, 2006 in favor of William W.
Sellers
(Incorporated by reference to Exhibit 10.24 to Form 10-K filed on
September 28, 2006)
|
|
|
10.21
|
Option
Certificate (No. 205) dated April 21, 2006 in favor of William L.
Van
Alen, Jr. (Incorporated by reference to Exhibit 10.25 to Form 10-K
filed
on September 28, 2006)
|
|
|
10.22
|
Option
Certificate (No. 206) dated April 21, 2006 in favor of Steven Katz
(Incorporated by reference to Exhibit 10.26 to Form 10-K filed on
September 28, 2006)
|
|
|
10.23
|
Option
Certificate (No. 207) dated April 21, 2006 in favor of Douglas M.
Lurio
(Incorporated by reference to Exhibit 10.27 to Form 10-K filed on
September 28, 2006)
|
|
|
10.24
|
Option
Certificate (No. 208) dated April 21, 2006 in favor of Albert Passner
(Incorporated by reference to Exhibit 10.28 to Form 10-K filed on
September 28, 2006)
|
|
|
10.25
|
Option
Certificate (No. 209) dated July 20, 2006 in favor of Stephen W.
McHugh
(Incorporated by reference to Exhibit 10.29 to Form 10-K filed on
September 28, 2006)
|
|
|
10.26
|
USA
Technologies, Inc. 2006-A Stock Compensation Plan (Incorporated by
reference to Exhibit 10.1 to Form S-8 filed June 19,
2006).
|
|
10.27
|
Restricted
Stock Issuance Agreement In Lieu of Cash Base Salary between George
R.
Jensen, Jr. and USA Technologies, Inc. dated June 28, 2006 (Incorporated
by reference to Exhibit 10.31 to Form S-1 filed October 20,
2006).
|
|
|
10.28
|
Restricted
Bonus Stock Issuance Agreement between George R. Jensen, Jr., and
USA
Technologies, Inc. dated June 28, 2006 (Incorporated by reference
to
Exhibit 10.32 to Form S-1 filed October 20, 2006).
|
|
|
10.29
|
Restricted
Bonus Stock Issuance Agreement between Stephen P. Herbert and USA
Technologies, Inc. dated June 28, 2006 (Incorporated by reference
to
Exhibit 10.33 to Form S-1 filed October 20, 2006).
|
|
|
10.30
|
MasterCard
PayPass Agreement dated as of November 9, 2006 between the Company
and
MasterCard International Incorporated (Incorporated by reference
to
Exhibit 10.34 to Form S-1/A filed December 7, 2006).
|
|
|
10.31
|
Amendment
to Agreement of Lease between BMR-Spring Mill Drive, L.P., as landlord,
and the Company, as tenant, dated January 15, 2007 (Incorporated
by
reference to Exhibit 10.1 to Form 10-Q filed on February 13,
2007).
|
|
|
10.32
|
First
Amendment to Employment and Non-Competition Agreement dated March
13,
2007, between the Company and George R. Jensen, Jr. (Incorporated
by
reference to Exhibit 10.32 to Form S-1 filed April 12,
2007).
|
|
|
|
||
|
10.33
|
First
Amendment to Employment and Non-Competition Agreement dated March
13,
2007, between the Company and Stephen P. Herbert (Incorporated by
reference to Exhibit 10.33 to Form S-1 filed April 12,
2007).
|
|
|
10.34
|
Second
Amendment to Employment and Non-Competition Agreement dated March
13,
2007, between the Company and David M. DeMedio (Incorporated by reference
to Exhibit 10.34 to Form S-1 filed April 12, 2007).
|
|
|
10.35
|
Form
of Indemnification Agreement between the Company and each of its
officers
and Directors (Incorporated by reference to Exhibit 10.1 to Form
10-Q
filed May 14, 2007).
|
|
|
**
10.36
|
Supply
and Licensing Agreement dated as of February 19, 2007 between Coca-Cola
Enterprises, Inc. and the Company.
|
|
|
14.1
|
Code
of Business Conduct and Ethics (Incorporated by reference to Exhibit
14.1
to Form 8-K filed on April 17, 2006).
|
|
|
**
23.1
|
Consent
of Ernst & Young LLP, Independent Registered Public Accounting
Firm.
|
|
|
**
23.2
|
Consent
of Goldstein Golub Kessler LLP, Independent Registered Public Accounting
Firm.
|
**
Filed
herewith
ITEM
16(b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE
II
USA
TECHNOLOGIES, INC.
VALUATION
AND QUALIFYING ACCOUNTS
YEARS
ENDED JUNE 30, 2006, 2005 AND 2004
|
ACCOUNTS
RECEIVABLE
|
|
||||||||||||
|
Balance
at
beginning
of
period
|
Addtitions
(reductions)
charged
to
earnings
|
Deductions
uncollectable
receivables
written
off, net
of
recoveries
|
Balance
at
end
of
period
|
||||||||||
|
June
30, 2006
|
$
|
196,000
|
131,000
|
98,000
|
$
|
229,000
|
|||||||
|
|
|||||||||||||
|
June
30, 2005
|
$
|
240,000
|
(23,000
|
20,000
|
$
|
196,000
|
|||||||
|
|
|||||||||||||
|
June
30, 2004
|
$
|
65,000
|
194,000
|
19,000
|
$
|
240,000
|
|||||||
|
INVENTORY
|
|
|
|
|
|||||||||
|
Balance
at
beginning
of
period
|
Additions
charged
to
earnings
|
Deductions
shrinkage
and
obsolescence
|
Balance
at
end
of
period
|
||||||||||
|
June
30, 2006
|
$
|
321,000
|
484,000
|
546,000
|
$
|
259,000
|
|||||||
|
|
|||||||||||||
|
June
30, 2005
|
$
|
229,000
|
286,000
|
194,000
|
$
|
321,000
|
|||||||
|
|
|||||||||||||
|
June
30, 2004
|
$
|
63,000
|
190,000
|
24,000
|
$
|
229,000
|
|||||||
ITEM
17. UNDERTAKINGS.
The
undersigned registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
To
include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
(ii)
To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the
effective registration statement.
(iii)
To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2)
That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
That,
for purposes of determining liability under the Securities Act of 1933 to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration
statements
relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A,
shall be deemed to be part of and included in the registration statement as
of
the date it is first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated
or deemed incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
(5)
That,
for purposes of determining liability of the undersigned registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary offering
of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities
to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be
a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned registrant relating
to
the offering required to be filed pursuant to Rule 424;
(ii)
Any
free writing prospectus relating to the offering prepared by or on behalf of
the
undersigned registrant or used or referred to by the undersigned registrant;
(iii)
The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv)
Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this Form S-1 and has duly caused this Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in Malvern, Pennsylvania, on June 6, 2007.
|
USA
TECHNOLOGIES, INC.
|
|||
|
By:
|
/s/
George R. Jensen, Jr.
|
||
|
George
R. Jensen, Jr., Chairman
|
|||
|
and
Chief Executive Officer
|
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints George R. Jensen, Jr. and Stephen P. Herbert, and
each
of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her
name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the SEC, granting unto such attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite
or
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them or
their or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been duly signed below by the following persons in the capacities
and dates indicated.
|
SIGNATURES
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
|
|
/s/
George R. Jensen, Jr.
|
|
Chairman
of the Board of Directors
|
|
June
6,2007
|
|
George
R. Jensen, Jr.
|
|
and
Chief Executive Officer
|
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
David M. DeMedio
|
|
Chief
Financial Officer (Principal
|
|
June
6, 2007
|
|
David
M. DeMedio
|
|
Accounting
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Stephen P. Herbert
|
|
Chief
Operating Officer, President
|
|
June
6, 2007
|
|
Stephen
P. Herbert
|
|
and
Director
|
|
|
|
|
|
|
|
|
|
/s/
William L. Van Alen,
Jr.
|
|
Director
|
|
June
6, 2007
|
|
William
L. Van Alen, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Douglas M. Lurio
|
|
Director
|
|
June
6, 2007
|
|
Douglas
M. Lurio
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Steven Katz
|
|
Director
|
|
June
6, 2007
|
|
Steven
Katz
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Joel Brooks
|
|
Director
|
|
June
6, 2007
|
|
Joel
Brooks
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Stephen W. McHugh
|
|
Director
|
|
June
6, 2007
|
|
Stephen
W. McHugh
|
|
|
|
|
Exhibit
Index
|
Exhibit
Number
|
Description
|
|
|
5.1
|
Opinion
of Lurio & Associates, P.C.
|
|
|
10.36
|
Supply
and Licensing Agreement dated as of February 19, 2007 between Coca-Cola
Enterprises, Inc. and the Company.
|
|
|
23.1
|
Consent
of Ernst & Young LLP
|
|
|
23.2
|
Consent
of Goldstein Golub Kessler LLP
|
99
Exhibit
5.1
June
6,
2007
USA
Technologies, Inc.
100
Deerfield Lane, Suite 140
Malvern,
PA 19355
Attn:
Mr.
George R. Jensen, Jr., Chief Executive Officer
Re:
USA
Technologies, Inc. - Registration Statement on Form S-1
Dear
Mr.
Jensen:
We
have
acted as counsel to USA Technologies, Inc., a Pennsylvania corporation (the
"Company"), in connection with a Registration Statement on Form S-1, filed
with
the Securities and Exchange Commission on the date hereof (the "Registration
Statement"). The Registration Statement covers an aggregate of 1,577,979
shares of Common Stock ("Common Stock"), 467,080 of which are currently
outstanding, 78,334 of which are issuable upon the exercise of common stock
options, and 1,032,565 of which are issuable to Steve Illes under the
2006-B Common Stock Purchase Agreement.
In
rendering this opinion, we have examined (i) the Articles of Incorporation,
as
amended, and By-Laws of the Company; (ii) the resolutions of the Board of
Directors evidencing the corporate proceedings taken by the Company to authorize
the issuance of the Common Stock pursuant to the Registration Statement; (iii)
the Registration Statement (including all exhibits thereto); and (iv) such
other
documents as we have deemed appropriate or necessary as a basis for the opinion
hereinafter expressed.
In
rendering the opinion expressed below, we assumed the authenticity of all
documents and records examined, the conformity with the original documents
of
all documents submitted to us as copies, and the genuineness of all signatures.
Based
upon and subject to the foregoing, and such legal considerations as we deem
relevant, we are of the opinion that (i) the 467,080 shares of Common Stock
that are currently issued and outstanding are legally issued, fully paid and
nonassessable; and (ii) the 78,334 shares of common stock issuable upon exercise
of common stock options, and the 1,032,565 shares of Common Stock issuable
to
Steve Illes under the 2006-B Common Stock Purchase Agreement, when issued,
will
be legally issued, fully paid and nonassessable.
We
hereby
consent to the filing of this opinion as an Exhibit to the Registration
Statement and to references made to this firm under the heading "Legal Matters"
in the Prospectus contained in the Registration Statement and all amendments
thereto.
|
Sincerely,
|
|
|
/s/
LURIO & ASSOCIATES, P.C.
|
|
|
LURIO
& ASSOCIATES, P.C.
|
SUPPLY AND LICENSING AGREEMENT
This Supply And Licensing Agreement (the “Agreement”) is entered into as of February 19, 2007 (the “Effective Date”), by and between Coca Cola Enterprises Inc., a Delaware corporation, having a principal place of business at 2500 Windy Ridge Parkway, Atlanta, GA 30339 and its U.S. subsidiaries (collectively “CCE”), and USA Technologies, Inc., a Pennsylvania corporation, with a principal place of business at 100 Deerfield Lane, Malvern, PA 19355 (“USAT”).
RECITALS
WHEREAS, CCE is in the business of owning and operating beverage vending machines, and USAT is in the business of facilitating intelligent vending solutions through the research, development, design, manufacture, marketing and sale of hardware, software and firmware and the research, development, design, manufacture, marketing and hosting of vending solution application software; and
WHEREAS, CCE and USAT have entered into a USALive Services Agreement on June 8, 2006 that relates to services to be provided to CCE by USAT where the intelligent vending hardware offered by USAT has not been utilized by CCE in a beverage vending machine; and
WHEREAS, CCE now wishes to purchase intelligent vending hardware from USAT for use in its beverage vending machines, and engage USAT to provide certain modifications to its firmware and software to facilitate interoperability with other service providers and USAT is willing to provide such hardware and modifications;
NOW THEREFORE, in consideration of the above, the mutual promises and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
1. Purchase of G6e-Port
A-1
1.1 During the term of this Agreement, USAT will provide CCE with USAT’s G6e-Port hardware including SIM cards and embedded software (“Products”) all in accordance with the terms and conditions contained in this Agreement. All such purchases shall be evidenced by a purchase order or other statement of work to be signed by each of CCE and USAT. A description of the Product is set forth in Exhibit A hereto.
1.2 CCE will purchase its requirements of the Products from USAT in accordance with the terms of the Agreement so long as USAT timely meets CCE’s delivery schedule requirements and the Products comply with all applicable warranties set forth in this Agreement.
2. Software/Firmware License
2.1 Solely in connection with the purchase of the Products pursuant to Section 6.1 and the MasterCard PayPass Participation Agreement attached hereto as Exhibit E, which calls for the purchase of up to 7500 units, USAT grants for such units to CCE a license to use the embedded software (“Product Firmware”) in the Products. Additionally, from time to time, and at a price to be agreed upon, USAT agrees to modify, adapt and translate the Product Firmware at the request of CCE for the use of the Products in CCE’s vending business.
3. SIM Cards
3.1 Each of the Products will be supplied with a Subscriber Identity Module (“SIM”) Card required to establish wireless communications with a wireless service provider. Each SIM Card shall be the property of USAT and USAT shall be responsible for payment to the wireless carrier of all wireless service and other charges associated with such SIM Cards.
3.2 Upon CCE’s request, USAT will cooperate with the wireless service provider to transfer ownership and the attendant responsibility for payment from USAT to CCE. All costs imposed by the wireless carrier for services and expenses related to and arising from such a transfer are to be paid by and are the sole responsibility of CCE.
A-2
4. Communication Protocol Modifications
4.1 As configured on the Effective Date, the Products shall be capable of communicating vending machine events and transactions to USAT’s USALive Network gateway, utilizing USAT’s data communication protocols.
4.2 USAT will provide CCE the capability to redirect the 7500 units funded in part by MasterCard in order to allow the Products to communicate vending machine event data and transaction data to a gateway operated by CCE or a third party provider of data services that is capable of receiving such communicated data. Such redirection capability must be capable of implementation by instructions provided to the Products over the wireless service provider’s network and will not require physical access or proximity to the Products.
4.3 Upon CCE’s request, USAT will modify the data communication protocols utilized for communication between the Products and the USALive Network to conform to at least one alternative protocol of CCE’s choosing so long as such protocol is compatible with the Products and at a price and terms agreed to by the parties in writing prior to USAT undertaking such modification. Any such alternative protocol shall be provided by CCE and described on a subsequently prepared Exhibit B in sufficient detail’ approved by USAT, and attached to this Agreement.
4.4 All right, title and interest to intellectual property, including, but not limited to inventions (whether or not patentable or subject to a patent application or patent), works of authorship (whether or not copyrightable or subject to a copyright registration application or copyright registration) trade secrets or trademarks/service marks (collectively “Intellectual Property”), related to the Products, including adaptations, modifications and/or designs to the Products for the purpose of operating under the alternative protocols identified in Section 4 shall be the sole property of USAT. As a result of modifying data communication protocols and implementing CCE’s alternative protocol(s), USAT will acquire no rights that interfere with, restrict or impede CCE’s rights, or the rights of any constituent of The Coca-Cola Bottling System, to use such alternative protocols for communicatio ns with vending machines.
A-3
5. Settlement Development
5.1 During the term of this Agreement, USAT will use reasonable efforts in attempting to meet a specific request by CCE for software development services to provide an interface for inventory data and CCE’s settlement system. Such software development services shall be at no expense to CCE and specifications will be agreed to by the parties in writing prior to USAT undertaking software development services. The scope of this software to be developed is generally described in Exhibit C attached hereto and entitled Statement of Settlement Engine Development Services.
5.2 USAT shall own all right, title and interest in Intellectual Property software that USAT develops relating to the Settlement Engine pursuant to this Section 5. USAT shall grant CCE a paid up, royalty free license to use any software that USAT develops relating to the Settlement Engine, so long as CCE is current on payments due USAT under this Agreement. Notwithstanding the above, CCE also has the rights to meet the business requirements of creating an interface for inventory data and the CCE settlement system in other manners if so desired. Therefore CCE is permitted to develop, or have a 3rd party develop, and use an alternative interface for inventory data and the Settlement Engine without encumbrance or interference from USAT’s rights.
6. Prices, Payment, and Taxes
6.1 The price which CCE will pay for each Product is $433.00 plus applicable taxes. USAT hereby warrants and represents that it has the capacity to calculate, collect and remit all appropriate taxes and that it will be responsible for calculating, collecting and remitting such taxes from CCE for each Product purchased. USAT shall have the right to increase the price for each Product by reasonable prior notice to CCE. Notwithstanding the foregoing, the per Product price for the up to 7,500 units of Product being purchased by CCE from USAT in connection with the MasterCard initiative described in Section 6.7 shall be $100, subject to CCE’s full performance under that certain MasterCard PayPass Participation Agreement attached hereto in
A-4
Exhibit E and made part hereof. USAT shall invoice CCE for $433.00 plus applicable taxes and, upon payment of that invoice by CCE to USAT, USAT shall, at the same time, issue an instant rebate to CCE for seventy-seven percent (77%) of the total applicable sales tax owed for the Product (“Instant Rebate”). For example, in a state where the applicable sales tax rate is seven percent (7%), CCE’s total invoice would be $433.00 plus $30.31 = $463.31. The Instant Rebate issued by USAT would be $356.31 ($333.00 plus 7% sales tax). Thus CCE’s total cost would be $107.00 ($100 plus 7% sales tax).
6.2 USAT hereby undertakes to use reasonable efforts to deliver the Product to such destinations as may be designated by CCE and agreed to by USAT, all at the cost of CCE. The goods sold pursuant to this Agreement are sold F.O.B. and C.I.F. the place of manufacture or Malvern, Pennsylvania as designated by USAT. The risk of loss, damage, or destruction of the goods for any reason shall be borne by USAT until the Product has been duly delivered to CCE provided such loss, damage, or destruction is not attributable solely to CCE’s own negligence. The delivery dates specified in the purchase orders or statement of work signed by USAT and CCE are intended as firm delivery dates that must be met.
6.3 CCE shall have thirty (30) business days following the day on which it receives a shipment of Product to reject any portion of the shipment which fails to conform to the specifications by giving written notice to USAT specifying in reasonable detail the alleged nonconformity with the specifications or other defect in the Product. Upon receipt of such notification of nonconformance or defect and appropriate samples of alleged nonconforming Product, USAT will have up to fifteen (15) business days from receipt to inspect the affected Product and perform any additional testing it considers appropriate. In all cases in which the Parties agree that there is a nonconformance or defect that was caused by USAT, USAT, at no additional cost to CCE, shall promptly replace any nonconforming Product, to be shipped to CCE at no additional cost to CCE.
6.4 Taxes.
A-5
6.4.1 CCE shall be responsible for all transfer, sales, use, value-added taxes, duties, levies, tariffs or similar charges of any kind imposed by any federal, state, local, or other governmental authority associated with the per Product price for goods or services purchased by CCE by USAT under this Agreement (“Taxes”) to be billed and collected by USAT as set forth in Section 6.1 above.
6.4.2 In connection with any goods or services provided to CCE by USAT under this Agreement, USAT shall be responsible for (1) remittance of the Taxes for which CCE shall be responsible where required by operation of law [i.e., where CCE is not allowed by the taxing jurisdiction to self-assess and directly remit such taxes], and the filing of any related tax returns; and (2) all other taxes, assessments, charges, duties, fees, levies or other governmental charges, including federal, state, city, county, parish, foreign or other income, franchise, capital stock, real property, personal property, escheatment or unclaimed property, intangible, withholding, FICA (or similar), unemployment compensation, disability, environmental (including taxes under section 59A of the Internal Revenue Code of 1986, as amended), fuel, excise, gross receipts, alternative or add-on-minimum, estimated and all other taxes of any ki nd for which USAT may have any liability imposed by any governmental authority (including interest, penalties or additions associated therewith) whether disputed or not, and including any transferee or secondary liability in respect of any tax (whether imposed by law, contractual agreement or otherwise) and any liability in respect of any tax as a result of being a member of any affiliated, consolidated, combined, unitary or similar group; provided, however, that the foregoing shall not relieve or discharge CCE for any primary liability for any of the foregoing items, and CCE shall pay and, or discharge any such primary liability
6.4.3 Each of the parties will use its reasonable, good faith efforts legally to minimize any taxes associated with the transactions contemplated in this Agreement. The party requesting that such efforts be made by the other party shall be responsible for all reasonable costs associated with such request.
A-6
6.5 USAT shall be entitled to invoice CCE for Products upon delivery to CCE. All amounts due under this Agreement will be payable within forty-five (45) days of the invoice. Ownership of the Products shall vest in CCE upon payment of the applicable invoice.
6.6 In connection with the CCE beverage vending machines utilizing the Product, USAT and CCE shall enter into a USALive Services Agreement in the form of Exhibit D hereto.
7. Term and Termination
7.1 The initial term of this Agreement shall commence upon the Effective Date and shall end at 12:00 midnight on the third annual anniversary of the Effective Date. This Agreement will automatically be renewed for successive one-year periods thereafter unless either USAT or CCE shall have delivered to the other written notice of its intention not to renew this Agreement. A notice of non-renewal must be given at least six months prior to the date on which the term hereof otherwise would be renewed. If in the event of termination CCE requests transfer of ownership of SIM cards pursuant to Section 3.2, or redirection of the Products to another gateway pursuant to Section 4.2, USAT must continue providing services under this Agreement until it fulfills any such request and redirection.
7.2 Either party may terminate this Agreement for the other’s material breach by providing a sixty day written notice that describes the breach. The termination will not be effective if the breach is cured within the notice period. If so terminated by USAT for CCE’s breach, CCE will remain obligated to pay USAT all amounts for services rendered and Products delivered under this Agreement. Recovery of these amounts shall constitute USAT’s sole remedy for CCE’s breach of this Agreement. If so terminated by CCE for USAT’s breach, CCE will not be obligated to pay any amounts specified under this agreement which are due after the date of the notice of breach. CCE shall be responsible for returning all Products for which CCE has not paid.
A-7
7.3. This Agreement will automatically terminate upon the bankruptcy or liquidation of either party.
8. Warranties of USAT
8.1 Power and Authority: USAT warrants to CCE that it has sufficient right and authority to enter into this Agreement, and to grant the rights and assume the rights and obligations set forth herein.
8.2 Competence: USAT warrants that all professional services provided under this Agreement shall be provided in a competent and professional manner by persons who are trained and qualified with the intelligent vending.
8.3 Industry Standards: USAT warrants that all professional services provided under this Agreement shall be performed in a workmanlike manner consistent with current industry standards.
8.4 Third Party Rights: USAT warrants that no service, equipment, Products or reports furnished hereunder will in any way infringe upon or violate any rights of any third person, including, without limitation, rights of patent, trade secret, trademark or copyright.
8.5 Laws and Regulations: USAT warrants that no service, equipment, Products or reports furnished hereunder will be in violation of applicable laws and regulations.
8.6 Products: USAT shall for a period of three (3) years following the installation of the Product, repair and maintain the Product at no cost to CCE on an exchange basis, other than shipping. In connection with such limited warranty, USAT's entire liability and CCE's entire and exclusive remedy shall be limited to repairing and/or replacing the Product. USAT's limited warranty shall not apply if the Product has been damaged by improper or unreasonable use, negligence, accident or any other causes unrelated to defective materials and workmanship.
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THE FOREGOING LIMITED WARRANTY OF USAT IS IN LIEU OF ALL OTHER WARRANTIES OF USAT, EXPRESSED OR IMPLIED, ORAL OR WRITTEN, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WHICH ARE EXPRESSLY DISCLAIMED. NO WARRANTIES, EXPRESS OR IMPLIED, WILL APPLY AFTER THE THREE-YEAR PERIOD REFERRED TO ABOVE.
EXCEPT AS PROVIDED IN THE FOREGOING LIMITED WARRANTY OR AS MAY BE OCCASIONED BY USAT’S INTENTIONAL CONDUCT, IN NO EVENT SHALL USAT BE LIABLE TO ANY PERSON OR ENTITY WHATSOEVER FOR INDIRECT DAMAGES OR LOSSES (IN CONTRACT OR TORT) IN CONNECTION WITH THE PRODUCT, INCLUDING BUT NOT LIMITED TO, DAMAGES FOR LOST PROFITS, LOST SAVINGS, OR INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES, EVEN IF CAUSED BY USAT’S NEGLIGENCE AND EVEN IF USAT HAS KNOWLEDGE OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE.
9. Warranties of CCE
9.1 CCE warrants to USAT that it has sufficient right and authority to enter into this Agreement and to grant the rights and assume the rights and obligations set forth herein.
9.2 CCE acknowledges and agrees that the computer programs, computer software, specifications, data, images, designs, codes, configurations, and sounds (“Software”) contained in or utilized by the Product are proprietary and confidential to USAT and protected under United States copyright law. USAT shall retain all right, title and interest in and to the Software and the Product. CCE shall not copy, modify, adopt, translate, merge, reverse engineer, decompile, or disassemble, the Software or the Product, or create any derivative works based on the Software or the Product.
EXCEPT AS MAY BE OCCASIONED BY CCE’S INTENTIONAL CONDUCT, IN NO EVENT SHALL CCE BE LIABLE TO ANY PERSON OR ENTITY WHATSOEVER FOR
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INDIRECT DAMAGES OR LOSSES (IN CONTRACT OR TORT) IN CONNECTION WITH THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO, DAMAGES FOR LOST PROFITS, LOST SAVINGS, OR INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES, EVEN IF CAUSED BY CCE’S NEGLIGENCE AND EVEN IF CCE HAS KNOWLEDGE OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE.
10. Remedies
Except as may be caused by a party’s intentional breach or other wrongful conduct, in no event will either party be liable (a) for any special, incidental, consequential or exemplary damages of any kind, including but not limited to any lost profits and lost savings, however caused, whether for breach or repudiation of contract, tort, breach of warranty, negligence, or otherwise, whether or not the other party was advised of the possibility of such loss or damages; (b) for the cost of procurement of substitute goods; or (c) for third-party claims against the other party for losses or damage.
In the event of any default or breach of this Agreement by either CCE or USAT, the parties shall have all rights and remedies available under the applicable state or federal law, including all remedies available under the Uniform Commercial Code as adopted in Georgia.
11. General
11.1 The parties to this Agreement are at all times independent contractors, and nothing in this Agreement will be construed as creating a partnership, employment, agency or other joint venture relationship.
11.2 USAT acknowledges that all non-public information about CCE’s operations, operational data, sales data, business results, test plans and long-term plans is confidential information of CCE. CCE acknowledges that all non-public information about the USAT Products, USALive network and USAT’s business and plans is confidential information of USAT. In addition, the parties acknowledge and reaffirm the Reciprocal Non-Disclosure Agreement dated October 31, 2005, a copy of which is attached hereto as Exhibit F.
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11.3 Without CCE's prior written approval, and except as required by applicable securities laws, USAT shall not publish or use any advertising, sales promotion or publicity matter relating to services, equipment, materials, products and reports furnished by USAT wherein the names of CCE, its subsidiaries and/or authorized bottlers are mentioned or their identity implied. Notwithstanding that the parties intend to publish a press release shortly after the signing of the agreement relating to the MasterCard initiative, CCE’s prior written consent is required before the publication of such release.
11.4 This Agreement will be exclusively governed by and construed according to the laws of the State of Georgia of the United States of America, without regard to that body of law controlling conflict of laws. The parties also agree that regardless of any statute or law to the contrary, any claim or cause of action arising out of or related to this Agreement must be brought within one (1) year after such claim or cause of action arose or be forever barred. If either party employs attorneys to enforce any rights arising out of or related to this Agreement, the prevailing party will be entitled to recover its reasonable attorneys’ fees and costs from the other party.
11.5 Neither party is liable to the other for any alleged loss or damages resulting from failure to perform (except for payments of money) due to acts of God, natural disasters, acts of civil or military authority, terrorism, government priorities, fire, floods, epidemics, quarantine, energy crises, war or riots. Each party will promptly notify the other party of such event.
11.6 No waiver will be implied from conduct or failure to enforce rights. The exercise of any right or remedy provided in this Agreement will be without prejudice to the right to exercise any other right or remedy provided by law or equity, except as expressly limited by this Agreement.
11.7 In the event any provision of this Agreement, or part thereof, is found to be invalid, illegal or unenforceable, that provision or part thereof will be enforced to the maximum extent permitted by law and the remainder of this Agreement will remain in full force.
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11.8 Either party may assign its rights or delegate its duties under this Agreement in connection with any merger, acquisition or other change of control of such party, including but not limited to the purchase of all or substantially all of its assets, provided that such assignee agrees to be bound by the terms and conditions of this Agreement in advance in writing. Except as set forth above, neither party may assign any rights or delegate any duties under this Agreement in whole or in part without the other party’s prior written consent, and any such attempted assignment is void and of no effect.
11.9 All notices and communications hereunder are required to be sent to the address stated below (or such other address or facsimile number as subsequently notified in writing to the other party). Any notices sent to CCE hereunder should be sent to: Coca-Cola Enterprises Inc., 2500 Windy Ridge Parkway, Atlanta, GA 30339, Attention: Bob Relf. Any notices sent to USAT hereunder should be sent to: USA Technologies, Inc., 100 Deerfield Lane, Malvern, PA 19355, Attention: Stephen P. Herbert.
11.10 This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.
11.11 Each of USAT and CCE shall at the request of the other party, execute and deliver to such other party all such further instruments, assignments, assurances and other documents as such other party may reasonably request in connection with the carrying out of this Agreement and the transactions contemplated herein.
11.12 This Agreement, including the Exhibits and the June 8, 2006 USALive Services Agreement, represents the complete and exclusive statement of the terms of the agreement between the parties regarding the subject matter hereof and supersede any and all other prior agreements, representations, discussions or understandings, whether written or oral, between them relating to the subject matter hereof. This Agreement may not be modified or supplemented except in writing executed by both parties.
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11.13 Except as provided otherwise herein, any joint development work shall be agreed upon in advance between USAT and CCE. Ownership and licensing arrangements regarding such joint development work shall be agreed upon between the parties on an ongoing basis in advance. Except as otherwise specifically provided in this Agreement or any Exhibit thereto, each of USAT and CCE shall retain full and complete rights to its own technologies and intellectual property.
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IN WITNESS WHEREOF, the parties hereto agreeing to be legally bound have executed this Agreement by their duly authorized representatives the signatures of which are set forth below.
| Coca-Cola Enterprises Inc. | USA Technologies, Inc. |
| By: /s/ Terry Marks___________________ | By: /s/ Stephen P. Herbert______________ |
| Printed Name: Terry Marks_____________ | Printed Name: Stephen P. Herbert________ |
| Title: President / NABV________________ | Title: President/COO__________________ |
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Exhibit D
USALive® SERVICES AGREEMENT
Customer Name: Coca-Cola Enterprises Inc.
1. Parties - USA Technologies, Inc. located at 100 Deerfield Lane, Malvern, PA 19355,("USA") hereby agrees to provide to Coca-Cola Enterprises Inc., 3200 Windy Hill Road, Atlanta GA 30339 (“Customer”), network and financial services utilizing USA’s USALive® network, a patented, credit/debit card activated, financial services and communications network solely in connection with the Customer’s vending equipment that is equipped with a credit/debit card system enabled to connect to USA’s USALive® network (collectively referred to as “Equipment”).
2. Credit Card Transaction Processing & Associated Fees - USA shall act as and is hereby appointed the agent on behalf of Customer in connection with the processing of all credit and debit card transactions in connection with the Customer’s equipment. USA shall retain 5 % or $0.05, whichever is greater, of the gross cashless revenues from the Equipment as a Transaction processing fee. The net revenues from the use of the Equipment (gross revenues less refunds, 5% fee or $0.05, whichever is greater, any chargebacks from the credit card processor and/or fraudulent transactions or any fee due to USA hereunder) shall be remitted to Customer by USA. After- eighteen months from the date of this agreement, and each yearly anniversary thereafter, the transaction-processing fee may be increased by no more than the lesser of the current CPI-U index or five percent (5%) with prior written notice by USA to Customer.
3. USALive® Network Services & Associated Fees -The Customer shall pay to USA $9.95 per month, per Equipment unit, for network and financial/accounting services related to vendor transactions and billing & customer support services. After eighteen months from that the date of this agreement, and each yearly anniversary thereafter, such network service fees may be increased by no more than the lesser of the current CPI-U index or five percent (5%), with prior written notice by USA to Customer. The customer agrees these fees wi ll be deducted monthly, in arrears, from the Customer’s credit card transaction remittances.
4. Term –The term of this Agreement shall be for a period of three (3) years, starting from the date of this agreement. The Customer may at its sole option renew the agreement for up to three (3) additional one (1) year terms.
5. Card reader Activation Form – Upon the installation of a credit/debit card reader into Customers Equipment, Customer is required to complete a card reader Activation Form (attached hereto as attachment “A” to this USALive® SERVICES AGREEMENT) and remit to USA via e-mail, fax or on-line. Customer bears the risk of any losses resulting from an Activation Form not submitted to USA in a timely manner, defined as 48 hours after installation by Customer.
6. SIM card activation and Fees – USA will charge the customer a one time fee to activate a SIM card required to establish wireless communications, this fee will be $30. The SIM card remains the property of USA and must be returned to USA upon termination of this services agreement for any reason. Should the SIM card not be returned within 30 days of the termination date then the customer will be liable for the replacement of the sim. If CCE requests Cingular to have the ownership of the SIM card transferred from USA to CCE they may elect to do so with no charges to CCE from USA. At the time of this transfer CCE becomes liable for all activity of the SIM card and will have billing for the SIM Card go directly to CCE. At the time of ownership transfer, the monthly fee to CCE from USA will be reduced accordingly from $9.95 per month (described in section 3) to $6.95. The above transfer of SIM is contingent upon CCE attaining approval and necessary assistance of Cingular (at no cost to USA) to affect such transfer.
7 - Availability of Service - Customer acknowledges that USA relies on third party providers in the delivery of its services, including, but not limited to, wireless data network providers. Cellular radio service provided by third parties is available only when within the operating range of cellular systems, and cellular service is subject to transmissions limitations and dropped or interrupted transmissions. Cellular service may be temporarily refused, limited, interrupted, or curtailed due to government regulations or orders, atmospheric and/or topographical conditions and cellular system modifications, repairs and upgrades. Customer agrees that USA shall not be liable for, and to hold USA harmless for any losses, damages, or business interruptions sustained as a result of interruptions caused by its wireless data network providers,.
8. No Consequential Damages — In no event shall USA be liable for any punitive, incidental, or consequential damages or any damages for loss of profits, business interruption, loss of information, or pecuniary loss, even if such party has been advised of the possibility of such damages
9. Indemnification — Customer shall indemnify and hold harmless USA, its officers, directors, agents, and employees from and against any and all claims, demands, causes of action, obligations, liabilities, expenses (including reasonable attorney’s fees), damages, or suits whatsoever, in connection with, arising out of, or relating to, in whole or in part, any act or omission of Customer, including, but not limited to, the operation and management of the Equipment.
10. Termination — Customer may choose to terminate its USA credit card processing and network services on any of Customer’s Equipment at any time by discontinuing the use of the card reader with specified Equipment(s) and providing thirty- (30) days written notice to USA, at which time USA will discontinue providing processing and network services for the specified Equipment(s). USA shall also have the right to terminate this Agreement if, after thirty (30) days notice, Customer fails to cure any breach by the customer of this agreement.
11. Arbitration — Every claim or dispute arising out of or relating to the negotiation, performance or non-performance of this Agreement shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“AAA”). The place of arbitration shall be Atlanta Georgia.
12. Validity — Should any part of this Agreement, for any reason, be declared invalid, then such portion shall be invalid only to the extent of the prohibition without invalidating or affecting the remaining provisions of the Agreement. This agreement shall be constructed in accordance with the laws of the State of Georgia exclusive of any conflicts of law principles.
| Customer: Coca-Cola Enterprises | Service Provider: USA Technologies, Inc. |
| Signature: /s/ Bob Means | Signature:/s/ Stephen P. Herbert |
|
Address: 2500 Windy Ridge Pkwy City, State & Zip:Atlanta, GA 30339 Phone: 770-989-3000 |
Title: President/COO Date: 6/2/06 100 Deerfield Lane, Suite 140, Malvern, PA 19355 Phone 800-633-0340 |
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the reference to our firm under the caption "Experts" and to the
use
of our report dated September 10, 2004, in the Registration Statement (Form
S-1
No. 333-000000) and related Prospectus of USA Technologies, Inc. for the
registration of 1,577,979 shares of its Common Stock.
|
/s/
Ernst & Young LLP
|
Philadelphia,
Pennsylvania
June
6,
2007
Exhibit
23.2
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the reference to our firm under the caption "Experts" and to the
use
of our report dated September 1, 2006, except for Note 16, last paragraph,
which
is dated September 20, 2006, in the Registration Statement (Form S-1 No.
333-000000) and related Prospectus of USA Technologies, Inc. dated June 6,
2007.
|
/s/
Goldstein Golub Kessler LLP
|
New
York,
New York
June
6,
2007