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 3320
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: T
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
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Title of each class of Securities to be
Registered
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Amount to be Registered
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Proposed Maximum Offering Price Per Unit
(1)
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Proposed Maximum Aggregate Offering
Price
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Amount of Registration Fee
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Common
Stock, no par value
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2,570,622
shares
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(2) | $ | 5.83 | $ | 14,986,726.26 | $ | 588.98 | ||||||||
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Common
Stock, no par value
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283,759
shares
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(3) | $ | 5.83 | $ | 1,654,314.97 | $ | 65.01 | ||||||||
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TOTAL
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2,854,381
shares
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$ | 16,641,041.23 | $ | 653.99 | (4) | ||||||||||
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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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This
registration statement amends our registration statement on Form S-1,
Commission File No. 333-142063, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward all of the 2,570,622 shares
covered by such registration statement. These shares consist of: (i)
1,666,667 shares issued by us to S.A.C. Capital Associates, LLC, pursuant
to a Securities Purchase Agreement dated March 14, 2007, and (ii) up to
903,955 shares issuable by us upon the exercise of six-year warrants,
which were issued pursuant to the Securities Purchase Agreement, and which
are exercisable at any time after September 14, 2007 and before September
14, 2013.
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(3)
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This
registration statement amends our registration statement on Form S-1,
Commission File No. 333-147465, and pursuant to Rule 429 of the Securities
Act of 1933, as amended, carries forward 283,759 shares issued by us to
S.A.C. Capital Associates, LLC, pursuant to the Securities Purchase
Agreement dated October 17, 2007. None of the remaining 2,084,361 shares
covered by our registration statement on Form S-1, Commission File No.
333-147465 are being carried forward to this registration statement and
are hereby deregistered.
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2
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(4)
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$4.05
of the filing fee is being paid at the time of the filing of this
registration statement. $894.11 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. 333-142063 filed
on April 12, 2007 relating to the 2,570,622 shares described in footnote
(2) to this table. $60.96 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. 333-147465 filed on November 16, 2007
relating to the 283,759 shares described in footnote (3) to this
table.
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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.
3
USA
TECHNOLOGIES, INC.
2,854,381
shares of Common Stock
THE
OFFERING
The
resale by our selling shareholder of up to 2,854,381 shares of common stock on
The NASDAQ Global Market at the prevailing market price or in negotiated
transactions. We are registering these shares as required by the terms of the
registration rights agreements between the selling shareholder and us. Such
registration does not mean that the selling shareholder will actually offer or
sell any of these shares. We will receive no proceeds from the sale of the
shares by the selling shareholder. We will receive proceeds from the sale of
shares issuable by us upon the exercise of warrants by the selling shareholder.
Of the shares covered by this prospectus, 833,333 are shares underlying warrants
issuable as of the date of this prospectus together with an additional 70,622
shares that may be issuable under the warrants in the future in the event of the
issuance of securities by us at a price that is less than the exercise price of
the warrants. These warrants may be exercised at $6.40 per share at any time
before September 14, 2013.
Our
common stock is listed on The NASDAQ Global Market under the symbol “USAT.” On
June 23, 2008, the last reported sale price of our common stock was $5.83 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
7.
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 30, 2008.
4
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F-1
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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.
As of
March 31, 2008, the Company had approximately 31,000 devices connected to its
USALive® network. During the quarter ended March 31, 2008, the Company processed
approximately 3.2 million transactions totaling over $9.0 million.
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 $1,355,000, $974,000, and $1,364,000 for the years ended June 30,
2007, 2006 and 2005, respectively, and $405,000 (unaudited) and $992,000
(unaudited) for the nine months ended March 31, 2008 and 2007,
respectively.
ABOUT
OUR OFFERING
Our
selling shareholder is, as of the date of this prospectus:
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§
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the
holder of 1,950,426 shares covered by this prospectus;
and
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§
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the
holder of unexercised warrants which, if exercised, would represent
833,333 shares, which are covered by this
prospectus.
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Pursuant
to the registration rights agreement between the selling shareholder and us, we
agreed to include in this prospectus an additional 70,622 shares that may be
issuable under the warrants if we would issue securities in the future at a
price less than the exercise price of the warrants.
Based
upon the 15,138,470 shares of Common Stock outstanding as of March 31, 2008, and
assuming all of the warrants are exercised for 833,333 shares, we would have
15,971,803 shares outstanding.
The
shares covered by this prospectus would be offered by our selling shareholder at
the market price at the time of resale. Our selling shareholder may also sell
its shares to other investors in a transaction not on the open market. There is
no requirement that our selling shareholder sell its shares pursuant to this
prospectus.
We will
not receive any of the proceeds raised by the offering. We would receive
proceeds from the exercise of the warrants referred to above.
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, 2008, our cumulative losses from operations are approximately $158 million.
For our fiscal years ended June 30, 2007, 2006 and 2005, we have incurred net
losses of $17,782,458, $14,847,076 and $15,499,190, respectively, and a net loss
of $12,663,201 during the nine months ended March 31, 2008. If we continue to
incur losses, the price of our common stock can be expected to
fall.
Our
existence is dependent on our ability to raise capital that may not be
available.
There is
currently limited experience upon which to assume that our business will prove
financially profitable or generate sufficient revenues to cover our expenses.
From inception, we have generated funds primarily through the sale of
securities. Although we believe that we have adequate existing resources to
provide for our funding requirements through at least June 30, 2009, there can
be no assurances that 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 first nine months of the fiscal year ending June 30,
2008, cash used in operating activities, including requirements for capital
expenditures and replacement of long-term debt, was approximately $1,200,000 per
month. Assuming that the Company’s monthly cash requirement for each of the next
fifteen months was $1,200,000, or an aggregate of $18,000,000, and assuming
further that the cash cost reductions described in “Liquidity And Capital
Resources” on page 33 of $4,600,000 per annum ($5,750,000 for fifteen
months) are fully realized during the next fifteen months, the Company’s cash
requirements, including requirements for capital expenditures and repayments of
long-term debt during the next fifteen months, would be approximately
$12,250,000. Subsequent to July 1, 2009, our inability to obtain needed funding
can be expected to have a material adverse effect on our operations 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
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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our
vulnerability to adverse economic conditions and competitive pressures may
be heightened;
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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.
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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 41% and 39% of
the Company's accounts and finance receivables at June 30, 2007 and 2006,
respectively, were concentrated with two customers each year, and 58% as of
March 31, 2008 were concentrated with two customers. Approximately 40%, 29% and
11% of the Company's revenues for the year ended June 30, 2007, 2006 and 2005,
respectively, were concentrated with one, two and one customer(s), respectively.
Approximately 56% (40% with one customer and 16% with another customer) and 50%
(43% with one customer and 7% with another customer) of the Company’s revenues
for the nine months ended March 31, 2008 and 2007, respectively, were
concentrated with two customers. 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 would leave us, 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 services of Mr. Jensen or
other executive officers would dramatically affect our business prospects.
Certain of our employees are particularly valuable to us because:
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they
have specialized knowledge about our company and
operations;
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they
have specialized skills that are important to our operations;
or
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they
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 limited ability to protect our
intellectual property may adversely affect our ability to compete.
Challenge
to our ownership of our intellectual property could materially damage our
business prospects. Our technology may infringe upon the proprietary rights of
others. Our ability to execute our business plan is dependent, in part, on our
ability to obtain patent protection for our proprietary products, maintain trade
secret protection and operate without infringing the proprietary rights of
others.
As of May
31, 2008, we have 18 pending United States patent applications and 8 pending
foreign patent applications, and intend to file applications for additional
patents covering our future products, although there can be no assurance that we
will do so. In addition, there can be no assurance that we will maintain or
prosecute these applications. The United States Government and other countries
have granted us 69 patents as of May 31, 2008. 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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any
patents issued to us will provide us with any competitive advantages or
adequate protection for our
products;
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any
patents issued to us will not be challenged, invalidated or circumvented
by others; or
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any
of our products would not infringe the patents of
others.
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If any of
the products are found to have infringed any patent, there can be no assurance
that 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 that the patented technology will be a commercial
success or result in any profits to us.
If we are
unable to adequately protect our proprietary technology, 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 the Company from increasing
revenue and achieving profitability.
Competition
from other companies that are well established and have substantially greater
resources may reduce our profitability or reduce our business opportunities.
Many of our competitors have established reputations for success in the
development, sale and service of high quality products. 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 which directly compete with
our products;
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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 the Company;
and
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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 the Company's Business
Express®.
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In
addition, it is also possible that a company not currently engaged in any of the
businesses described above could develop services and products that compete with
our services and products. Competition may result in lower profit margins on our
products or may reduce potential profits or result in a loss of some or all of
our customer base. To the extent that our competitors are able to offer more
attractive technology, our ability to compete could be adversely
affected.
The
termination of any of our relationships with third parties upon whom we rely for
supplies and services that are critical to our products could adversely affect
our business and delay achievement of our business plan.
We depend
on arrangements with third parties for a variety of component parts used in our
products. We have contracted with various suppliers to assist us to develop and
manufacture our e-Port® products and with various suppliers 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 and DBSi to host our network in a
secure, 24/7 environment to ensure the reliability of our network services. We
also have contracted with multiple land-based telecommunications providers to
ensure the reliability of our land-based network. If these business
relationships are terminated, the implementation of our business plan may be
delayed until an alternative supplier or service provider can be retained. If we
are unable to find another source or one that is comparable, the content and
quality of our products could suffer and our business, operating results and
financial condition could be harmed.
A
disruption in the manufacturing capabilities of our third-party manufacturers,
suppliers or distributors would negatively impact our ability to meet customer
requirements.
We depend
upon third-party manufacturers, suppliers and distributors to deliver components
free from defects, competitive in functionality and cost, and in compliance with
our specifications and delivery schedules. Since we generally do not maintain
large inventories of our products or components, any termination of, or
significant disruption in, our manufacturing capability or our relationship with
our third-party manufacturers or suppliers may prevent us from filling customer
orders in a timely manner.
We have
occasionally experienced, and may in the future experience, delays in delivery
of products and delivery of products of inferior quality from third-party
manufacturers. Although alternate manufacturers and suppliers are generally
available to produce our products and product components, the number of
manufacturers or suppliers of some of our products and components is limited,
and a qualified replacement manufacturer or supplier could take several months.
In addition, our use of third-party manufacturers reduces our direct control
over product quality, manufacturing timing, yields and costs. Disruption of the
manufacture or supply of our products and components, or a third-party
manufacturer’s or supplier’s failure to remain competitive in functionality,
quality or price, could delay or interrupt our ability to manufacture or deliver
our products to customers on a timely basis, which would have a material adverse
effect on our business and financial performance.
Our
reliance on our wireless telecommunication service provider exposes us to a
number of risks over which we have no control, including risks with respect to
increased prices and termination of essential services.
The
operation of our wirelessly networked devices depends upon the capacity,
reliability and security of services provided to us by our wireless
telecommunication services provider, AT&T Mobility. 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 wireless telecommunication services provider may
increase its prices at which it provides services, which would increase our
costs. If our wireless 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
could cause us to lose customers and revenues.
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:
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delays
in shipping products;
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cancellation
of orders;
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additional
warranty expense;
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delays
in the collection of receivables;
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product
returns;
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the
loss of market acceptance of our
products;
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diversion
of research and development resources from new product development;
and
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inventory
write-downs.
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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:
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the
need to maintain significant inventory of components that are in limited
supply;
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buying
components in bulk for the best
pricing;
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responding
to the unpredictable demand for
products;
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responding
to customer requests for short lead-time delivery
schedules;
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failure
of customers to take delivery of ordered products;
and
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product
returns.
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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 assurances 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 requirement of Section 404 will initially apply to our
Annual Report on Form 10-K for our fiscal year ended June 30, 2008 and the
auditor attestation requirement for our fiscal year ended June 30, 2009. 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 currently defined by the Public
Accounting Oversight Board (“PCAOB”), 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. Auditing Standard No. 5 was approved by the Securities
and Exchange Commission on July 25, 2007 and is effective for audits of internal
control over financial reporting required by Section 404(b) of the
Sarbanes-Oxley Act of 2002 for fiscal years ending on or after November 15,
2007.
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.
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.
Credit
card issuers have promulgated credit card security guidelines as part of their
ongoing efforts to battle identity theft and credit card fraud.
We
continue to work with credit card issuers to assure that our products and
services comply with these rules. There can be no assurances, however, that our
products and services 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.
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 the Company and 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. These requirements could cause us to incur additional
costs, which could be significant, or to lose revenues to the extent we do not
comply with these requirements.
RISKS
RELATED TO OUR COMMON STOCK
We
do not expect to pay cash dividends in the foreseeable future and therefore
investors should not anticipate cash dividends on their investment.
The
holders of our common stock and series A 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, 2008, the unpaid and cumulative dividends on the series A preferred
stock equal $9,773,300. 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. During the years ended June 30, 2007
and 2006 and the nine months ended March 31, 2008, certain holders of the
Preferred Stock converted 1,150, 1,200 and 0 (unaudited), respectively, into 11,
12 and 0 (unaudited) shares of Common Stock, respectively. Certain of these
shareholders also converted cumulative preferred dividends of $15,000, $18,320
and $0 (unaudited), respectively, into 15, 18 and 0 (unaudited) shares of Common
Stock during the years ended June 30, 2007 and 2006 and the nine months ended
March 31, 2008, respectively. There were no conversions of preferred stock or
cumulative preferred dividends during the year ended June 30, 2005.
Sales
of shares eligible for future sale from exercise of warrants and options could
depress the market price of our Common Stock.
As of
March 31, 2008, we had issued and outstanding options to purchase 161,875 shares
of our common stock and warrants to purchase 1,591,735 shares. The shares
underlying none of these options, and 833,333 of these warrants have been
registered and may be freely sold. Market sales of large amounts of our common
stock, or the potential for those sales even if they do not actually occur, may
have the effect of depressing the market price of our common stock. In addition,
if our future financing needs require us to issue additional shares of common
stock or securities convertible into common stock, the supply of common stock
available for resale could be increased which could stimulate trading activity
and cause the market price of our common stock to drop, even if our business is
doing well.
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:
|
|
o
|
quarterly
variations in operating results and achievement of key business
metrics;
|
|
|
o
|
changes
in earnings estimates by securities analysts, if
any;
|
|
|
o
|
any
differences between reported results and securities analysts’ published or
unpublished expectations;
|
|
|
o
|
announcements
of new contracts or service offerings by us or our
competitors;
|
|
|
o
|
market
reaction to any acquisitions, joint ventures or strategic investments
announced by us or our competitors;
|
|
|
o
|
demand
for our services and products;
|
|
|
o
|
shares
being sold pursuant to Rule 144 or upon exercise of warrants;
and
|
|
|
o
|
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, 2008, these
shares consisted of the following:
|
|
o
|
15,138,470
shares of Common Stock
|
|
|
o
|
5,203
shares issuable upon conversion of the Series A Preferred
Stock
|
|
|
o
|
9,773
shares issuable upon conversion of the accrued and unpaid dividends on the
Series A Preferred Stock
|
|
|
o
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833,333
shares underlying vested Common Stock warrants;
and
|
|
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o
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73,287
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.
We will
not receive any of the proceeds from the sales of our Common Stock by the
selling shareholder. The selling shareholder entitled to receive the net
proceeds from any sales of our common stock is listed on page 72 of this
prospectus. We will, however, receive proceeds from the exercise of any warrants
by the selling shareholder.
As of the
date of this prospectus, we would receive $5,333,331.20 of proceeds from the
exercise of the warrants for 833,333 shares at the stated exercise price of
$6.40 per share. As of June 23, 2008, the exercise price of these warrants is
not in the money.
As
discussed in the “Other Events” section of this prospectus, the warrants may not
be exercised by the selling shareholder to the extent such exercise would cause
the selling shareholder to beneficially own more than 9.99% of our then issued
and outstanding shares. As of the date of this prospectus, our selling
shareholder is the beneficial owner of more than 9.99% of our shares and
therefore, the warrants are not presently exercisable by the selling
shareholder.
The
following selected financial data for the five years ended June 30, 2007 are
derived from the audited consolidated financial statements of USA Technologies,
Inc. The financial data for the nine months ended March 31, 2008 and 2007 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, 2008 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 2008. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information.
|
Year
ended June 30
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
OPERATIONS
DATA
|
||||||||||||||||||||
|
Revenues
|
$ | 9,158,012 | $ | 6,414,803 | $ | 4,677,989 | $ | 5,632,815 | $ | 2,853,068 | ||||||||||
|
Net
loss
|
(17,782,458 | ) | (14,847,076 | ) | (15,499,190 | ) | (21,426,178 | ) | (21,965,499 | ) | ||||||||||
|
Cumulative
preferred dividends
|
(781,451 | ) | (783,289 | ) | (784,113 | ) | (786,513 | ) | (793,586 | ) | ||||||||||
|
Loss
applicable to common shares
|
$ | (18,563,909 | ) | (15,630,365 | ) | $ | (16,283,303 | ) | $ | (22,212,691 | ) | $ | (22,759,085 | ) | ||||||
|
Loss
per common share (basic and diluted)
|
$ | (2.13 | ) | $ | (3.15 | ) | $ | (4.18 | ) | $ | (7.70 | ) | $ | (20.36 | ) | |||||
|
Cash
dividends per common share
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||||||
|
Total
assets
|
$ | 34,491,497 | $ | 23,419,466 | $ | 23,391,765 | $ | 25,880,577 | $ | 17,892,681 | ||||||||||
|
Convertible
Senior Notes and other long-term debt
|
$ | 1,029,745 | $ | 7,780,853 | $ | 9,337,300 | $ | 7,273,056 | $ | 9,213,699 | ||||||||||
|
Shareholders'
equity
|
$ | 28,084,206 | $ | 11,177,064 | $ | 9,309,185 | $ | 14,108,662 | $ | 3,692,083 | ||||||||||
|
Nine
months ended
|
||||||||
|
March 31
|
||||||||
|
2008
|
2007
|
|||||||
|
OPERATIONS
DATA
|
||||||||
|
Revenues
|
$ | 11,078,571 | $ | 6,711,033 | ||||
|
Net
loss
|
(12,663,201 | ) | (12,176,860 | ) | ||||
|
Cumulative
preferred dividends
|
(780,588 | ) | (781,451 | ) | ||||
|
Loss
applicable to common shares
|
$ | (13,443,789 | ) | $ | (12,958,311 | ) | ||
|
Loss
per common share (basic and diluted)
|
$ | (0.97 | ) | $ | (1.65 | ) | ||
|
Cash
dividends per common share
|
$ | -- | $ | -- | ||||
|
BALANCE
SHEET DATA
|
||||||||
|
Total
assets
|
$ | 42,974,500 | $ | 35,210,838 | ||||
|
Convertible
Senior Notes and other long-term debt
|
$ | 522,346 | $ | 2,930,612 | ||||
|
Shareholders'
equity
|
$ | 36,244,062 | $ | 27,807,757 | ||||
Unaudited
quarterly results of operations for the years ended June 30, 2007 and 2006 and
the nine months ended March 31, 2008 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 2007 and 2006 and the nine months ended March 31, 2008.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
||||||||||||||||
|
YEAR
ENDED JUNE 30, 2007
|
||||||||||||||||||||
|
Revenues
|
$ | 2,008,897 | $ | 2,011,722 | $ | 2,690,414 | $ | 2,446,979 | $ | 9,158,012 | ||||||||||
|
Gross
profit
|
$ | 615,536 | $ | 284,189 | $ | 317,940 | $ | 128,568 | $ | 1,346,233 | ||||||||||
|
Net
loss
|
$ | (3,680,314 | ) | $ | (4,377,088 | ) | $ | (4,119,458 | ) | $ | (5,605,598 | ) | $ | (17,782,458 | ) | |||||
|
Cumulative
preferred dividends
|
$ | (391,157 | ) | $ | - | $ | (390,294 | ) | $ | - | $ | (781,451 | ) | |||||||
|
Loss
applicable to common shares
|
$ | (4,071,471 | ) | $ | (4,377,088 | ) | $ | (4,509,752 | ) | $ | (5,605,598 | ) | $ | (18,563,909 | ) | |||||
|
Loss
per common share (basic and diluted)
|
$ | (0.63 | ) | $ | (0.60 | ) | $ | (0.45 | ) | $ | (0.49 | ) | $ | (2.13 | ) | |||||
|
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)
|
$ | (0.90 | ) | $ | (0.61 | ) | $ | (0.74 | ) | $ | (0.96 | ) | $ | (3.15 | ) | |||||
|
NINE
MONTHS ENDED MARCH 31, 2008
|
||||||||||||||||||||
|
Revenues
|
$ | 11,078,571 | ||||||||||||||||||
|
Gross
profit
|
$ | 2,457,808 | ||||||||||||||||||
|
Net
loss
|
$ | (12,663,201 | ) | |||||||||||||||||
|
Cumulative
preferred dividends
|
$ | (780,588 | ) | |||||||||||||||||
|
Loss
applicable to common shares
|
$ | (13,443,789 | ) | |||||||||||||||||
|
Loss
per common share (basic and diluted)
|
$ | (0.97 | ) | |||||||||||||||||
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, 2008, and June 30, 2007, 2006, and
2005. 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, 2006, April 1, 2007, and April 1, 2008. During the nine months ended
March 31, 2008, no events or circumstances arose indicating that an impairment
of goodwill may have occurred.
Patents,
trademarks and non-compete agreements are carried at cost less accumulated
amortization, which is calculated on a straight-line basis over their estimated
economic life. The Company reviews intangibles for impairment whenever events or
changes in circumstances indicate that their 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 $1,236,600 during the years ended June 30, 2007,
2006, and 2005, respectively, and $927,450 and $927,450 for the nine months
ended March 31, 2008 and 2007, 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, 2008, available-for-sales securities consisted of $14,150,000 par
value of auction rate securities (“ARS”) that were purchased during January
2008. The Company’s ARS are long-term variable rate securities whose dividend
rates are reset every seven days through a “dutch auction” conducted by
investment banks. We have the option to participate in the auction and sell our
ARS to prospective buyers at par value. Our ARS are all AAA or Aaa rated, and
represent preferred stock of closed-end investment funds. Our ARS have no fixed
maturity dates.
Until
February 2008, the auction process had allowed investors to obtain liquidity if
so desired by selling the securities at their par values on the weekly auction
date. However, beginning the week of February 11, 2008, the auctions for our ARS
failed as a result of negative overall market conditions, meaning there were not
enough buyers to purchase the amount of securities available for sale at
auction. The result of a failed auction, which does not signify a default by the
issuer, is that the ARS continue to pay dividends in accordance with their
terms, but we are not able to liquidate any of these securities until these
securities are redeemed by the issuer, or until there is a successful auction,
or until such time as other markets for these investments
develop.
As of
March 31, 2008, we have classified $7,575,000 of our ARS as current assets as we
have received a notice of redemption at par value from the issuer subsequent to
March 31, 2008, and classified the remaining $6,575,000 of our ARS as
non-current assets. Although we have uncertainty with regard to the short-term
liquidity of these securities, we continue to believe that the par value
represents the fair value of these investments. We currently anticipate that we
will be able to realize the par value of our ARS either through redemption by
the issuer, successful auction, or through a buyer outside of the auction
process and believe that we have the ability to hold these securities for a
sufficient period of time for us to realize the par value of these securities.
As such, there was no unrealized loss recorded as of March 31, 2008 in
connection with our ARS investments.
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 or the risk that its
technologies would infringe patents owned by others, (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; (xi) the ability
of a key customer to reduce or delay purchasing products from the Company; and
(xii) the risk that the Company may have to take an impairment charge relating
to its ARS investments in the future, or may have to sell its ARS investments
below par value in the future. 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, 2008
Revenues
for the nine months ended March 31, 2008 were $11,078,571 compared to $6,711,033
for the corresponding nine-month period in the previous fiscal year. This
$4,367,538 or 65% increase was primarily due to an increase in equipment sales
of $2,897,149 and license and transaction fees of $1,470,389. The increase in
equipment sales was due to an increase in sales of approximately $2,391,000 of
e-Port vending equipment sales and approximately $649,000 in energy conservation
equipment, offset by decreases of approximately $101,000 in business center
sales and approximately $41,000 in other equipment sales. The increase in e-Port
vending equipment sales was primarily related to the CCE/MasterCard Agreement
and the November 2007 MasterCard Worldwide agreement. The increase in license
and transaction fees was due to the increase in the number of e-Port units on
our USALive® network, primarily as a result of the November 2007 MasterCard
agreement and the recurring revenues being generated by the e-Ports deployed in
the prior two quarters under the CCE/MasterCard Agreement.
Cost of
sales for the period consisted of equipment costs of $6,592,088 and network and
transaction services related costs of $2,028,675. The increase in cost of sales
of $3,127,395 or 57% over the prior year period was due to an increase in
equipment costs of approximately $1,981,992 and an increase of approximately
$1,145,403 of network and transaction related costs.
Gross
profit for the nine months ended March 31, 2008 was $2,457,808 compared to gross
profit of $1,217,665 for the corresponding nine-month period in the previous
fiscal year. This 102% increase is primarily due to an increase in the profit
margins of both the energy equipment sales as well as the e-Port vending
equipment sales as a result of producing the products at a lower cost primarily
due to offshore production, as well as selling both of the products at higher
average sales prices.
Selling,
general and administrative expense of $14,226,973, increased by $3,820,198 or
37% primarily due to an increase in compensation expense of approximately
$2,348,000, an increase in professional and consulting services of approximately
$607,000, an increase in recruiting fees of approximately $388,000, and an
increase of approximately $189,000 in facilities expense, and an increase in bad
debt expense of approximately $92,000.
Compensation
expense increased by approximately $2,348,000 due primarily to an increase in
salaries and benefits expense of approximately $1,320,000 and an increase of
approximately $1,028,000 in non-cash charges related to the vesting of shares
under the Long-Term Equity Incentive Program for fiscal year 2008 as compared to
2007.
Interest
expense of $112,388 decreased by $1,755,408 primarily due to retirement of the
outstanding convertible Senior Notes that were repaid in April 2007. Interest
income increased by $581,303 due to the investment in available-for-sale
securities with proceeds received from private placements.
The
nine-month period ended March 31, 2008 resulted in a net loss of $12,663,201
(approximately $2.9 million of non-cash charges) compared to a net loss of
$12,176,860 (approximately $3.9 million of non-cash charges) for the nine-month
period ended March 31, 2007.
During
fiscal year 2008, the Company intends to continue to attempt to improve its
business model and financial results. In this regard, we will continue our
e-Port rental program. Management believes that this rental business
model will accelerate the adoption of its e-Port technology among operators that
do not want to initially purchase the e-Port technology outright. During the
first quarter of the 2008 fiscal year, the Company entered into a contract with
a manufacturer under which the manufacturer would attempt to produce for us a
lower cost e-Port device. If successful, we have committed to purchase at least
$3,600,000 of the new e-Port device from this manufacturer over an eighteen
month period. Finally, due to the fact that the Company, as a merchant, has
recently received competitive offers from various credit card processors, the
Company has discontinued considering the possibility of becoming a credit card
processor at this time.
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.
FISCAL
YEAR ENDED JUNE 30, 2007
Revenues
for the fiscal year ended June 30, 2007 were $9,158,012, an increase of
$2,743,609 or 43% from the fiscal year ended June 30, 2006. This increase was
primarily attributed to increased sales in our vending product lines. Revenues
are discussed in more detail as follows:
Equipment
sales: Revenues from equipment sales increased to $7,454,076 from $5,198,360 in
the prior fiscal year, an increase of $2,256,116 or 43%. This increase was
primarily attributed to increased sales in our vending equipment sales
($3,176,000) relating primarily to our seeding initiative with MasterCard
Worldwide and other sales offset by decreases in our energy
($625,000), business center ($230,000) and laundry equipment sales
($120,000).
License
and transaction fees: Revenues from license and transaction fees increased
$487,493 or 40% from $1,216,443 to $1,703,936 for the fiscal years ended June
30, 2006 and 2007, 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
equipment for the fiscal year ended June 30, 2007 was $6,442,627, compared to
$3,549,450 for the fiscal year ended June 30, 2006. The increase of $2,893,177
was primarily due to an increase in vending equipment sales relating primarily
to our seeding initiative with MasterCard Worldwide.
Cost of
services for the fiscal year ended June 30, 2007 was $1,369,152, compared to
$855,007 for the fiscal year ended June 30, 2006. The increase of $514,145 was
primarily due to the increase in the number of e-Ports connected to our network
relating primarily to our seeding initiative with MasterCard
Worldwide.
Gross
profit for the fiscal year ended June 30, 2007 was $1,346,233, compared to
$2,010,346 for the fiscal year ended June 30, 2006. The decrease of $664,113 was
due to an increase in sales of our vending products as part of a seeding
program. Specifically, we increased the sale of our e-Ports at or near cost
pursuant to our seeding program with MasterCard Worldwide which had the effect
of reducing our margins. Product pricing under this program does not reflect the
Company’s current retail pricing.
Total
operating expenses for the fiscal year ended June 30, 2007 was $16,454,809, an
increase of $2,662,664 or 19% 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:
Selling,
general and administrative expenses increased from $12,092,552 for the fiscal
year ended June 30, 2006 to $14,706,156 for the fiscal year ended June 30, 2007,
an increase of $2,613,604 or 22%. The increase is due to an increase in
compensation expense of approximately $1,956,000, an increase in consulting
expenses of approximately $516,000, primarily related to Sarbanes-Oxley
implementation costs and the setup of an equipment leasing program, and an
increase in legal fees of approximately $290,000 related to intellectual
property protection, offset by a reduction in royalty expenses of approximately
$150,000 due to the end of the energy management product royalty term agreement.
The increase in compensation expense is due to stock bonuses awarded to
executive officers through the Long-Term Equity Incentive Program, which
resulted in a charge of $599,311, and due to an increase in the number of
full-time and part-time employees during the fiscal year.
Total
interest expense increased to $2,984,950 for the fiscal year ended June 30, 2007
from $2,878,966 in the prior fiscal year, an increase of $105,984 or 4%. The
increase is a result of the repayment of all remaining outstanding Senior Notes,
which resulted in expensing all of the remaining unamortized beneficial
conversion features for the outstanding Senior Notes.
The
fiscal year ended June 30, 2007 resulted in a net loss of $17,782,458
(approximately $5.8 million of non-cash charges) compared to a net loss of
$14,847,076 (approximately $4.0 million of non-cash charges) for the prior
fiscal year.
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
equipment for the fiscal year ended June 30, 2006 was $3,549,450, compared to
$2,430,649 for the fiscal year ended June 30, 2005. The increase of
$1,118,801 was primarily due to an increase in equipment sales from our energy,
vending and laundry products.
Cost of
services for the fiscal year ended June 30, 2006 decreased to $193,017 from
$1,048,024 to $855,007 for the fiscal years ended June 30, 2005 and 2006,
respectively. This decrease was primarily due to a decrease in
software development costs.
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:
Selling,
general and administrative expenses increased from $11,989,403 for the fiscal
year ended June 30, 2005 to $12,092,552 for the fiscal year ended June 30, 2006,
an increase of $103,149 or 1%. The increase is primarily due to an increase in
compensation expense of approximately $1,332,000 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. This increase was offset by a reduction in
consulting services of approximately $918,000 and a reduction in public
relations expenses of approximately $204,000.
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
equipment for the fiscal year ended June 30, 2005 was $2,430,649, compared to
$2,502,743 for the fiscal year ended June 30, 2004. The decrease of
$72,094 was primarily due to a decrease in equipment sales as previously
discussed.
Cost of
services for the fiscal year ended June 30, 2005 was $1,048,024, compared to
$828,289 for the fiscal year ended June 30, 2004. The increase of
$219,735 was primarily due to an increase in the number of installed business
centers.
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:
Selling,
general and administrative expenses decreased from $16,819,178 for the fiscal
year ended June 30, 2004 to $11,989,403 for the fiscal year ended June 30, 2005,
a decrease of $4,829,775 or 29%. The decrease is due to a decrease in
compensation expense, bad debt expense and consulting fees, which was partially
offset by increases in public relations expenses. The decrease in compensation
expense of approximately $4,511,000 is primarily due to the one-time issuance of
105,000 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.
LIQUIDITY
AND CAPITAL RESOURCES
For the
year ended June 30, 2007, net cash of $13,678,043, was used by operating
activities, primarily due to the net loss of $17,782,458 offset by non-cash
charges totaling $5,831,362 for transactions involving the issuance of Common
Stock for services and legal settlements, stock option compensation charges,
depreciation and amortization of assets, amortization of debt discount, and a
gain on the repayment of Senior Notes. In addition to these non-cash charges,
the Company's net operating assets increased by $1,726,947, primarily due to an
increase in both accounts receivables and inventory, partially offset by an
increase in accounts payable.
For the
year ended June 30, 2007, net cash used in investing activities was $6,876,615,
comprised of purchases of property and equipment of $526,615, primarily
consisting of our implementation of Oracle’s e-Business Suite and software for
product development, and the purchase of available-for-sale securities of
$7,000,000 offset by the sale of available-for-sale securities of
$650,000.
Proceeds
from financing activities for the year ended June 30, 2007 provided $22,851,701
of funds, which were necessary to support cash used in operating activities. Net
proceeds of $30,989,109 were realized from the issuance of Common Stock and
$470,000 of proceeds from a loan agreement. These proceeds were reduced by
repayments of long-term debt ($305,732) and Senior Notes less discount
($8,301,676).
For the
nine months ended March 31, 2008, net cash of $9,774,372 was used by operating
activities, primarily due to the net loss of $12,663,201 offset by non-cash
charges totaling $2,858,540 for transactions involving the vesting and issuance
of common stock to employees, the vesting of stock options, bad debt expense and
the depreciation and amortization of assets. In addition to these non-cash
charges, the Company’s net operating assets increased by $185,689 primarily due
to an increase in inventories and decrease in accrued expenses, partially offset
by an increase in accounts payable and slight decreases in accounts and finance
receivables and prepaid expenses.
Proceeds
from financing activities for the nine months ended March 31, 2008 provided
$19,753,369 of funds, which were necessary to support cash used in operating
activities. Net proceeds of $20,028,422 were realized from the issuance of
Common Stock and exercise of Common Stock warrants, offset by the net repayment
of $275,053 of long-term debt.
The
Company has incurred losses since inception. Cumulative losses through March 31,
2008 amounted to approximately $158,000,000. The Company has continued to raise
capital through equity offerings to fund operations.
As of
March 31, 2008 the Company had $6,814,731 of cash and cash equivalents on hand
and $14,150,000 of available-for-sale securities, of which $7,575,000 and
$6,575,000 are classified as current and non-current, respectively (see Note 2
to the Consolidated Financial Statements). The ARS classified as non-current are
all rated AAA or Aaa. The auctions for these securities failed in mid-February
2008, and the funds represented by the ARS will not be accessible until the
issuer calls the security, a successful auction occurs, or a buyer is found
outside of the auction process. Based on our expected operating cash flows and
our other sources of cash, we do not believe that the uncertainty regarding the
liquidity of our ARS will have a material impact on our overall ability to meet
our liquidity needs for the next twelve months.
In order
to attempt to improve our operating results, we took appropriate actions during
the March 31, 2008 fiscal quarter to reduce our cash-based selling, general and
administrative expenses by approximately $4,600,000 on an annualized basis.
These actions consisted of staff reductions and related costs of approximately
$2.6 million and reductions in our controllable costs of approximately $2.0
million. The Company anticipates that the effect of these cost reductions will
begin to be reflected in the fourth quarter of the 2008 fiscal year with the
full benefit of the cost reductions reflected in the 2009 fiscal year. We also
believe that these cost reductions will not materially adversely affect our
planned revenue growth for the foreseeable future.
During
the first nine months of the 2008 fiscal year, the Company’s monthly cash
requirement, including requirements for capital expenditures and repayment of
long-term debt, was approximately $1,200,000 per month. Assuming that the
Company’s monthly cash requirement for each of the next fifteen months was
$1,200,000, or an aggregate of $18,000,000, and assuming further that the cash
cost reductions described above of $4,600,000 per annum ($5,750,000 for the next
fifteen months) are fully realized during the next fifteen months, the Company’s
cash requirements, including capital expenditures and repayment of long-term
debt, during the next fifteen months would be approximately
$12,250,000.
Funding
sources in place to meet the Company's cash requirements are primarily comprised
of approximately $6,800,000 of cash and cash equivalents on hand as of March 31,
2008 and $7,575,000 of current available-for-sale securities. Based upon the
assumptions described above, the Company believes these existing sources will
provide sufficient funds to meet its cash requirements, including capital
expenditures and repayment of long-term debt, through at least July 1,
2009.
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.
On March
14, 2007, the Company entered into a Securities Purchase Agreement with S.A.C.
Capital Associates, LLC, the selling shareholder under this prospectus. Pursuant
thereto, the Company sold to the selling shareholder 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 selling
shareholder to purchase up to 833,333 shares of Common Stock at an exercise
price of $6.40 per share. There were no commissions or placement agent fees paid
by the Company in connection with this offering. The warrants are exercisable at
any time prior to September 14, 2013. As of the date of this prospectus, the
selling shareholder has not exercised any 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 that would be issuable under the warrant
would be 903,955. The warrant provides that no adjustment shall be made in
connection with any securities issued pursuant to any employee benefit plan for
employees, officers, consultants, or directors, or to any shares issued upon the
exercise or conversion of any convertible securities outstanding as of the date
of the warrant.
Pursuant
to the March 14, 2007 registration rights agreement between us and the selling
shareholder, we agreed to register for resale in this prospectus that number of
shares equal to the 1,666,667 shares purchased by the selling shareholder and
the maximum of 903,955 shares issuable under the warrant issued to the selling
shareholder, or an aggregate of 2,570,622 shares. The Company has agreed to keep
the registration statement effective at all times until the earlier of (i) the
date as of which the selling shareholder may sell all of the securities covered
by such registration statement without restriction pursuant to Rule 144(k) (or
any successor thereto) promulgated under the 1933 Act, or (ii) the date on which
the selling shareholder shall have sold all of the securities covered by such
registration statement.
Under the
terms of the warrants, the selling shareholder may not exercise the warrants, to
the extent such exercise would cause the selling shareholder, together with its
affiliates, to beneficially own a number of shares of common stock which would
exceed 9.99% of our then outstanding shares of common stock following such
exercise, excluding for purposes of such determination shares of common stock
issuable upon exercise of the warrants which have not been exercised. As of the
date of this prospectus, our selling shareholder is the beneficial owner of more
than 9.99% of our shares and therefore, the warrants are not presently
exercisable by the selling shareholder.
For a
period of five years, the selling shareholder has been granted the pre-emptive
right to purchase that number of securities being offered for sale by the
Company in order to maintain selling shareholder’s pro-rata ownership of the
Common Stock of the Company following the issuance of any such securities by the
Company.
The
selling shareholder 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.
On
October 17, 2007, the Company sold an aggregate of 2,142,871 shares of Common
Stock for $7.00 per share for $15,000,097 to 37 investors pursuant to a
Securities Purchase Agreement entered into with each of the investors. Pursuant
to this offering, S.A.C. Capital Associates, LLC, the selling shareholder,
purchased 283,759 shares for $1,986,313. The offer and sale of the shares was
exempt from registration under Rule 506 promulgated under Section 4(2) of the
Act. All of these investors, including the selling shareholder, are accredited
investors. Pursuant to the October 17, 2007 Registration Rights Agreement
entered into between the Company and the selling shareholder, we have agreed to
register the shares purchased by the selling shareholder for resale under the
Act through October 17, 2009. The 283,759 shares purchased by the selling
shareholder are covered by this prospectus.
In
connection with the above October 17, 2007 private placement offering, William
Blair & Company, LLC, acted as exclusive placement agent. As compensation
for its services, Blair received cash compensation of $945,000 and warrants to
purchase up to 17,532 shares at $7.70 per share at any time through October 17,
2012. Blair also received an expense reimbursement from us of
$7,418.44.
OVERVIEW
USA
Technologies, Inc. (the “Company”, “We” or “Our”) was incorporated in the
Commonwealth of Pennsylvania in January 1992. The Company is a leading supplier
of cashless, remote management, reporting and energy management solutions
serving the unattended Point of Sale market. Our networked devices and
associated services enable the owners and operators of everyday, stand-alone,
distributed assets, such as vending machines, kiosks, personal computers,
photocopiers, 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 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 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.
As of
March 31, 2008, the Company had approximately 31,000 devices connected to its
USALive® network. During the quarter ended March 31, 2008, the Company processed
approximately 3.2 million transactions totaling approximately $9.0
million.
OUR
TECHNOLOGY-BASED SOLUTION
Our
Company offers the e-Port Connect™ end-to-end solution for turnkey cashless
payment processing, remote management, and on-line reporting for distributed
assets such as vending machines, kiosks, office equipment, and laundry machines.
The e-Port Connect™ solution consists of a device or software in the distributed
asset (the “Client”), a connectivity medium, and our proprietary USALive®
network, all coupled with first-class technology support and customer
service.
The
Client
As part
of the end-to-end solution, the Company offers its customers several different
Clients to connect their distributed assets. These range from software to
hardware devices consisting of control boards, magnetic strip card readers, and
RFID readers. The Client can be embedded inside the host equipment, such as
software residing in the central processing unit of a Kiosk or Business Center
computer; it can be integrated as part of the host equipment, such as our
e-Port® 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® terminal for
Copier Express®.
e-Port®
is the Company's core Client, which is currently being utilized in vending and
commercial laundry applications. Our e-Port® 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® 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®
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®, the TransAct® 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 Clients to the USALive® network is another component of the Company's
end-to-end e-Port Connect™ 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®
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®
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
identification cards. 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™ 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®
Developed
for the vending industry, Intelligent Vending® is our e-Port Connect™ solution
for the vending industry. This solution bundles the e-Port® Client, the USALive®
network, and our first class technology support and customer service. Our latest
improvement to Intelligent Vending® is the introduction of our e-Port® G-6. This
hardware includes a radio frequency identification (“RFID”) or “Tap & Go™”
tag reader for added convenience to consumers.
Vending
operators purchasing our Intelligent Vending® 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™
eSuds™ is
our e-Port Connect™ solution developed for the commercial laundry industry. The
eSuds™ solution bundles the e-Port® Client and the USALive® network, and our
first class technology support and customer service. eSuds™ offers an e-mail
alert system to notify users regarding machine availability, cycle completion,
and other events and supports a variety of value-added services such as custom
advertising or subscription-based payments.
Laundry
operators purchasing our eSuds™ 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, John Hopkins University, Temple University and others. We are working
with resellers, such as BlackBoard, and distributors, such as Caldwell &
Gregory, to install eSuds™ at other colleges and universities based on the
positive results of these installations.
Business
Express®
Business
Express® is our e-Port Connect™ solution comprised of our software Client, the
USALive® network and a suite of office equipment (i.e. PC, fax and copier), all
coupled with our first class technology support and customer service. Business
Express® enables hoteliers and others to offer unmanned business services
24/7/365. The Company also provides additional value-added service and revenue
generating opportunities with BEXPrint™, 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.
TransAct®,
our original payment technology system developed for self-service business
center devices, such as 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® device
can be sold as a stand-alone unit for customers wishing to integrate it with
their own office equipment.
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® provides a cost-effective solution.
Kiosk
We
provide an e-Port Connect™ solution that utilizes our e-Port® or software
Client, USALive®, and our first class technology support and customer service 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.
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® 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®
- - 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 to toll booths, 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")
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 and capitalize on loyalty rewards
programs. 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, 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 and services with
world-class partners in order to deliver a best-in-class solution and emerge as
a leader in the Device Networking industry. We are currently focused on becoming
a leader in the unattended Point of Sale market. Our Company has begun
addressing this opportunity by working in several initial verticals, which
include vending, commercial laundry, unattended business centers and unattended
kiosks. These services share several key attributes, specifically, they are all
unattended, cash-based businesses that are distributed across broad geographic
areas. We have the ability to 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 turnkey technology-based solutions 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®
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, 2008, the Company was marketing and
selling its products through its full time staff consisting of 12
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™ and Business Express® 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 1,120 e-Port® Client devices.
Channel
Sales
We
currently engage in channel sales for our TransAct™ and Business Express®
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 MasterCard “PayPass™” in Coca-Cola vending
machines owned and operated by the Philadelphia Coca-Cola Bottling Company. From
July 2006 through June 30, 2007, the Company has earned approximately $400,000
from this agreement, and all of the units were installed.
In
November 2006, MasterCard International and the Company signed an agreement to
deploy 5,000 e-Port devices that accept MasterCard “PayPass™”. As of June 30,
2007, the Company had earned approximately $1,975,000 from this agreement, and
all of the units were installed.
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. As of October 31, 2007, the Company had earned approximately
$3,248,000 from this agreement.
On
November 16, 2007, the Company and MasterCard International Incorporated entered
into an additional MasterCard PayPass Agreement as part of MasterCard’s PayPass
seeding initiative. The agreement provides that USA shall use its best efforts
to secure the installation of an additional 4,051 G-6 e-Ports that accept credit
cards utilizing MasterCard’s PayPass contactless technology. The e-Ports are
anticipated to be installed in beverage vending machines of USA customers
located in multiple cities throughout the United States. For each e-Port
successfully installed, the Company would receive $395 from Mastercard in full
payment for the e-Port. As of March 31, 2008, all of the units had been
installed.
AT&T
Mobility (formerly Cingular Wireless and AT&T 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 is a provider of advanced wireless voice and data
services for consumers and businesses, operating the largest digital wireless
network 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® and related e-Port Connect™ services 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 had agreed to use commercially reasonable efforts
to complete installation of up to 7,500 e-Ports by August 31, 2007. By amendment
executed by the parties to the Agreement, the installation completion date was
changed to October 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 will receive an aggregate of $433 from CCE and
MasterCard. As of October 31, 2007, a total of approximately 7,000 units have
been installed by CCE, and as of December 31, 2007, all of the units have been
installed by CCE.
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. With the exception of a manufacturer of our e-Port product, 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
41% and 39% of the Company's accounts and finance receivables at June 30, 2007
and 2006, respectively, were concentrated with two customers each year.
Approximately 40%, 29% and 11% of the Company's revenues for the year ended June
30, 2007, 2006 and 2005, respectively, were concentrated with one, two (19% with
one customer and 10% with another customer), and one customer(s), respectively.
Approximately 56% (40% with one customer and 16% with another customer) and 50%
(43% with one customer and 7% with another customer) of the Company’s revenues
for the nine months ended March 31, 2008 and 2007, respectively, were
concentrated with two customers. 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
May 31, 2008, 64 United States patents and 5 Foreign patents have been issued to
the Company, 18 United States patents and 8 Foreign patents are
pending.
The list
of issued patents is as follows:
|
o
|
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"; o 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";
|
|
o
|
U.S.
Patent No. D423,474 entitled
"Dataport";
|
|
o
|
U.S.
Patent No. D415,742 entitled "Laptop Dataport
Enclosure";
|
|
o
|
U.S.
Patent No. D418,878 entitled "Sign
Holder";
|
|
o
|
U.S.
Patent No. 6,056,194 entitled "System and Method for Networking and
Controlling Vending Machines";
|
|
o
|
U.S.
Patent No. D428,047 entitled "Electronic Commerce Terminal
Enclosure";
|
|
o
|
U.S.
Patent No. D428,444 entitled "Electronic Commerce Terminal Enclosure for a
Vending Machine";
|
|
o
|
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";
|
|
o
|
U.S.
Patent No. 6,152,365 entitled "Credit and Bank Issued Debit Card Operated
System and Method for Controlling a Vending
Machine";
|
|
o
|
U.S.
Patent No. D437,890 entitled "Electronic Commerce Terminal Enclosure with
a Hooked Fastening Edge for a Vending
Machine";
|
|
o
|
U.S.
Patent No. D441,401 entitled "Electronic Commerce Terminal Enclosure with
Brackets";
|
|
o
|
U.S.
Patent No. 6,321,985 entitled "System and Method for Networking and
Controlling Vending Machines";
|
|
o
|
U.S.
Patent No. 6,505,095 entitled "System for Providing Remote Audit, Cashless
Payment, and Interactive Transaction Capabilities in a Vending Machine"
(Stitch);
|
|
o
|
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);
|
|
o
|
U.S.
Patent No. 6,021,626 entitled "Forming, Packaging, Storing, Displaying and
Selling Clothing Articles";
|
|
o
|
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";
|
|
o
|
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";
|
|
o
|
U.S.
Patent No. 6,615,183 entitled "Method of warehousing user data entered at
an electronic commerce terminal";
|
|
o
|
U.S.
Patent No. 6,611,810 entitled "Store display window connected to an
electronic commerce terminal";
|
|
o
|
U.S.
Patent No. 6,609,103 entitled "Electronic commerce terminal for
facilitating incentive-based purchasing on transportation
vehicles";
|
|
o
|
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";
|
|
o
|
U.S.
Patent No. D478,577 entitled "Transceiver base
unit";
|
|
o
|
U.S.
Patent No. 6,606,605 entitled "Method to obtain customer specific data for
public access electronic commerce
services";
|
|
o
|
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";
|
|
o
|
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";
|
|
o
|
U.S.
Patent No. 6,604,086 entitled "Electronic commerce terminal connected to a
vending machine operable as a
telephone";
|
|
o
|
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";
|
|
o
|
U.S.
Patent No. 6,601,040 entitled "Electronic commerce terminal for wirelessly
communicating to a plurality of communication
devices";
|
|
o
|
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";
|
|
o
|
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";
|
|
o
|
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";
|
|
o
|
U.S.
Patent No. D477,030 entitled "Vending machine cashless payment
terminal";
|
|
o
|
U.S.
Patent No. D476,037 entitled "User interface bracket for a point of sale
terminal";
|
|
o
|
U.S.
Patent No. D476,036 entitled "Printer bracket for point of sale
terminal";
|
|
o
|
U.S.
Patent No. D475,751 entitled "User interface bracket for a point of sale
terminal";
|
|
o
|
U.S.
Patent No. D475,750 entitled "Paper guide for a point of sale
terminal";
|
|
o
|
U.S.
Patent No. D475,414 entitled "Printer bracket for point of sale
terminal";
|
|
o
|
U.S.
Patent No. 5,844,808 entitled "Apparatus and methods for monitoring and
communicating with a plurality of networked vending
machines";
|
|
o
|
U.S.
Patent No. 6,581,396 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation
mode";
|
|
o
|
U.S.
Patent No. 6,389,822 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation
mode";
|
|
o
|
U.S.
Patent No. 6,243,626 entitled "External power management device with
current monitoring precluding shutdown during high current";
and
|
|
o
|
U.S.
Patent No. 5,477,476 entitled "Power conservation system for computer
peripherals";
|
|
o
|
U.S.
Patent No. 6,629,080 entitled "Transaction processing method of fulfilling
an electronic commerce transaction by an electronic commerce terminal
system";
|
|
o
|
U.S.
Patent No. D480,948 entitled "Mounting bracket for mounting a cashless
payment terminal to a vending
machine";
|
|
o
|
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";
|
|
o
|
U.S.
Patent No. 6,684,197 entitled "Method of revaluing a private label card
using an electronic commerce terminal (as
amended)";
|
|
o
|
U.S.
Patent No. 6,754,641 entitled "Dynamic identification interchange method
for exchanging one form of identification for
another";
|
|
o
|
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";
|
|
o
|
U.S.
Patent No. 6,801,836 entitled "Power-conservation based on indoor/outdoor
and ambient-light determinations";
|
|
o
|
U.S.
Patent No. 6,807,532 entitled "Method of soliciting a user to input survey
data at an electronic commerce
terminal";
|
|
o
|
U.S.
Patent No. 6,853,894 entitled "Global network based vehicle safety and
security telematics";
|
|
o
|
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";
|
|
o
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U.S.
Patent No. 6,895,310 entitled "Vehicle related wireless scientific
instrumentation telematics";
|
|
o
|
U.S.
Patent No. 6,898,942 entitled "Method and apparatus for conserving power
consumed by a refrigerated
appliance";
|
|
o
|
U.S.
Patent No. 6,931,869 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation
mode";
|
|
o
|
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";
|
|
o
|
U.S.
Patent No. 7,003,289 entitled "Communication interface device for managing
wireless data transmission between a vehicle and the
internet";
|
|
o
|
U.S.
Patent No. 7,076,329 entitled "Cashless vending transaction management by
a Vend Assist mode of operation";
|
|
o
|
U.S.
Patent No. 7,089,209 entitled "Method for revaluing a phone
card";
|
|
o
|
U.S.
Patent No. 7,131,575 entitled "MDB transaction string effectuated cashless
vending";
|
|
o
|
U.S.
Patent No. 7,200,467 entitled “Method and Apparatus for Power Management
Control of a Compressor-Based Appliance that Reduces Electrical Power
Consumption of an Appliance”;
|
|
o
|
U.S.
Design Patent No. D543,588 entitled “Point of Sale Terminal Mountable on a
Vending Machine’;
|
|
o
|
U.S.
Patent No. 7,286,907 entitled “Method and Apparatus for Conserving Power
Consumed by a Refrigerated Appliance Utilizing Audio Signal
Detection”;
|
|
o
|
Canadian
Patent No. D199-1014 entitled "Sign
holder";
|
|
o
|
Canadian
Patent No. D199-1038 entitled "Laptop data port
enclosure";
|
|
o
|
Canadian
Patent No. 2,291,015 entitled "Universal interactive advertising and
payment system for public access electronic commerce and business related
products and services";
|
|
o
|
Australian
Patent No. 2001263356 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";
and
|
|
o
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Mexican
Patent No. 234363 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation
mode".
|
The
Company believes that one or more of its patents, including the U.S. patent No.
6,505,095 entitled "System for providing remote audit, cashless payment, and
interactive transaction capabilities in a vending machine", are important in
protecting its intellectual property used in its e-Port® control system targeted
to the vending industry. The aforesaid patent expires in July 2021. Reference is
hereby made to our risk factors relating to our intellectual
property.
The
Company has filed for the reexamination of U.S. Patent No. 7,131,575
(reexamination control no. 90/008,437) and for the reexamination of U.S. Patent
No. 6,505,095 (reexamination control no. 90/008,448).
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 $1,355,000, $974,000, and $1,364,000 for the years ended June 30,
2007, 2006 and 2005, respectively, and $405,000 (unaudited)
and $992,000 (unaudited) for the nine months ended March 31, 2008 and 2007,
respectively.
EMPLOYEES
On March
31, 2008, the Company had 69 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.
DIRECTORS
AND EXECUTIVE OFFICERS
Our
Directors and executive officers, on March 31, 2008, 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
|
44
|
Chief
Operating Officer and President, Director
|
||
|
David
M. DeMedio
|
36
|
Chief
Financial Officer
|
||
|
William
L. Van Alen, Jr. (1)(2)
|
74
|
Director
|
||
|
Steven
Katz (1)
|
59
|
Director
|
||
|
Douglas
M. Lurio
|
51
|
Director
|
||
|
Joel
Brooks (2)
|
49
|
Director
|
||
|
Stephen
W. McHugh (2)
|
51
|
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 joined the Board of Directors of USA on March 22, 2007. Mr.
Brooks was appointed by the Board to fill the vacancy on the Board caused by 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.
COMPENSATION
DISCUSSION AND ANALYSIS
Our
Compensation Committee is currently comprised of two non-employee directors. The
Compensation Committee is responsible for reviewing and recommending
compensation and compensation changes for the executive officers of the Company.
The compensation of the two other employees named in the Summary Compensation
Table is determined by the executive officers. The Chief Executive Officer
assists the Committee in determining the compensation of all other executive
officers and the other executive officers do not have a role in determining
their own compensation. Our Chief Executive Officer regularly provides
information to the Compensation Committee. The Compensation Committee considers
each component of executive compensation in light of total compensation. In
considering adjustments to the total compensation of the executive officers, the
Compensation Committee also considers the value of previous
compensation.
We have
developed a compensation policy that is designed to attract and retain key
executives responsible for our success and motivate management to enhance
long-term shareholder value. The Compensation Committee believes that
compensation of the Company’s executive officers should encourage creation of
shareholder value and achievement of strategic corporate objectives and the
Committee seeks to align the interests of the Company’s shareholders and
management by integrating compensation with the Company’s annual and long-term
corporate and financial objectives. We believe that providing our executive
officers who have responsibility for the Company’s management and growth with an
opportunity to increase their ownership of Company stock aligns the interests of
the executive officers with those of the shareholders. During the 2007 fiscal
year, we adopted the Long Term Equity Incentive Program for our executive
officers in order to provide them with the opportunity to further increase the
number of shares owned by them. In order to be competitive with compensation
offered by other technology companies and to motivate and retain executive
officers, the Company intends to offer a total compensation package competitive
with other technology companies as well as take into account individual
responsibilities and performance. The annual compensation package for our
executives primarily consists of:
|
|
·
|
a base
salary
|
|
|
·
|
stock
options
|
|
|
·
|
long-term stock incentive
awards
|
|
|
·
|
cash and stock
bonuses
|
|
|
·
|
restricted stock
awards
|
|
|
·
|
other
benefits
|
Base
Salary
Base
salary is the fixed component of our executive’s annual cash compensation and is
set with the goal of attracting talented executives and adequately compensating
and rewarding them for services rendered during the fiscal year. For fiscal
2007, our executive officers had employment agreements that specified the level
of salary to which the officer is entitled, subject to review of our Board or
Compensation Committee from time to time. These base salaries were established
in April 2006, and reflected the individual’s level of responsibility and
performance. In recommending base salaries to the Board, the Compensation
Committee also considers changes in duties and responsibilities, our business
and financial results, the relationship among base salaries paid to others
within our Company, and its knowledge of base salaries paid to executive
officers of other technology companies. As permitted under his employment
agreement, Mr. Jensen elected to receive fifty-percent (50%) of his base salary
in shares of Common Stock rather than cash payments during the 2007 fiscal year.
The base salaries for each of Messrs. Sagady and McLaughlin for the fiscal year
were established by our President after discussions with each
employee.
Stock
Options
Stock
options serve to ensure that executive management is properly focused on
shareholder value. Stock options align management incentives with shareholder’s
objectives because options have value only if the stock price increases over
time. A vesting schedule also keeps the executives focused on long term
performance and not short term gains. For fiscal 2007, various stock options
became vested that were granted to our executive officers at the time the
officers entered into their employment agreements in May 2006. During the fiscal
year, the Company granted to our executive officers piggy back registration
rights in connection with the shares underlying the options granted to them in
their employment agreements.
Restricted
Stock Awards
During
fiscal 2007, shares of restricted stock became vested that had been issued to
Messrs. Jensen and Herbert at the time they entered into their May 2006
employment agreements. During the fiscal year, the Company granted to our
executive officers piggy back registration rights in connection with the
restricted shares granted to them in their employment agreements.
Cash
and Stock Bonuses
In
addition to base salary, we may award variable cash bonus awards to our
executives as well as shares available under our stock compensation programs.
The shares awarded under our stock compensation plans are registered under the
Securities Act of 1933, as amended. Shares were awarded under our
stock plans to each of Messrs. Sagady and McLaughlin during the fiscal year. The
shares were awarded to them upon the recommendation of our President. In
addition, based upon performance, Messrs. Sagady and McLaughlin earned cash
bonuses.
Long-Term
Equity Incentive Program
During
February 2007, at the recommendation of the Compensation Committee, the Board of
Directors adopted the Long-Term Equity Incentive Program covering the Company’s
executive officers – Messrs. Jensen, Herbert and DeMedio. The purpose of the
Plan is to ensure continuity of the Company’s executives, encourage stock
ownership by the executives, align the interests of the executives with those of
the shareholders, and provide incentives and rewards to the executives who are
largely responsible for the management and growth of the Company.
Under the
Plan, each executive officer will be awarded common stock of the Company in the
event the Company achieves target goals relating to each of revenues, gross
profit and EBITDA during each of the fiscal years ending June 30, 2007, June 30,
2008, and June 30, 2009. EBITDA is defined as earnings before interest, taxes,
depreciation, and amortization, and excludes non-cash stock payments/awards and
stock options granted to officers and Board members. 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.
If the
target goals (100%) for revenues, gross profit, and EBITDA 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 actual
revenues, gross profit, or EBITDA for a particular fiscal year exceed the target
goals, each executive would be awarded additional eligible shares, up to an
amount no greater than 125% of the number of eligible shares. If the actual
revenues, gross profit, or EBITDA for a particular fiscal year are 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 revenues, gross profit,
or EBITDA for a particular fiscal year are not achieved, no eligible shares will
be awarded to each executive. Up to 952,298 shares of common stock are reserved
for issuance under the Plan.
Based
upon the financial results of the Company for the fiscal year ended June 30,
2007, the target goal (100%) relating to revenues was met and the minimum target
goals relating to gross profit and EBITDA were not met. Substantially all of the
e-Port units sold during the fiscal year consisted of units pertaining to the
MasterCard PayPass seeding program with substantially reduced selling prices
resulting in reduced gross profit and EBITDA.
Management’s
goal was to have the maximum number of units deployed in the field as quickly as
possible. The Compensation Committee agreed with management that given the
current stage of the Company’s business, it was more beneficial to the Company
to maximize the number of e-Ports in the field as soon as possible.
During
September 2007, the Board of Directors approved the recommendation of the
Compensation Committee that the selling price of all the e-Ports sold during the
fiscal year be “normalized” to the current retail price. This normalization
resulted in increased pro forma revenues, gross profit and EBITDA for the e-Port
units sold in the MasterCard PayPass seeding program. The Board of Directors
also approved the recommendation of the Compensation Committee that the
executive officers be given the option to elect to satisfy certain minimum tax
withholding obligations for the restricted stock bonuses previously awarded and
issued to the executives under their employment agreements by reducing the
number of shares otherwise issuable to them under the Plan.
As a
result of the normalization, a higher than target revenue hurdle was met (110%),
and lower than target hurdles for each of gross profit (85%) and EBITDA (85%)
were also met, resulting in the vesting of a total of
241,249 shares under the Plan for the fiscal year rather than a total
of 101,578 shares prior to the normalization. During September 2007, the Company
issued 225,249 of such shares to the executives, and at the executives’ request,
16,000 shares were exchanged by the executives and cancelled by the Company to
settle tax withholding obligations incurred in connection with the restricted
stock bonuses previously awarded and issued to the executives under their
employment agreements. The specific allocation of the 225,249 shares among the
executive officers is as follows: Mr. Jensen - 160,041 shares; Mr. Herbert -
44,628 shares; and Mr. DeMedio - 20,580 shares. In October 2007, the Company
granted to the executives, standard piggyback registration rights in connection
with these shares for a period of five years after vesting.
The Plan
also permits the executives to satisfy any income tax withholding obligations
attributable to the shares that become vested under the Plan by electing to
reduce the number of shares otherwise issuable to them under the Plan. The
payment of the withholding taxes attributable to the vested shares must be made
by the Company no later than December 30, 2007, and therefore, any such election
by the executives to cancel shares must be made by such date. The executives did
not elect to cancel any additional shares on or before December 31,
2007.
It is
difficult for management to fully predict our unit sales for e-Ports for the
2008 fiscal year. If the MasterCard seeding program would continue for the
majority of the 2008 fiscal year, management believes that it is likely that the
Company would not meet the target (100%) goals established under the Plan for
the 2008 fiscal year relating to gross profit and EBITDA but would meet the
target (100%) goal established under the Plan for the 2008 fiscal year relating
to revenue.
Other
Benefits
Our
health care, insurance and other employee benefits are substantially the same
for all our employees, including our executive officers. We do maintain an
automobile allowance program for each of our executive officers.
Impact
of Taxation and Accounting Considerations on Executive Compensation
The
Compensation Committee and the Board take into account tax and accounting
consequences of the compensation program and weigh these factors when setting
total compensation and determining the individual elements of any executive
officer’s compensation package.
As a
result of the normalization discussed above, certain target hurdles were met
resulting in the vesting of a total of 241,249 shares under the Plan for the
fiscal year rather than a total of 101,578 shares prior to the normalization.
Also, the value of the number of shares the executives may apply to tax
withholding was in excess of the minimum statutory obligation and, as a result,
the Plan is classified as a liability award rather than an equity award. As
such, the Company reclassified the $599,311 related to the 101,578 shares that
was previously recorded in Common Stock to a short-term share-based payment
liability. As the price of the Company’s shares was $8.45 on the date of the
approval of the normalization, a charge of $1,180,220 was also recorded to
compensation expense, related to the additional 139,671 additional shares, with
a corresponding amount to the short-term share-based payment liability for a
total share-based payment liability of $1,779,531 as of September 21, 2007. On
September 28, 2007, as the Company’s share price was $8.38, the total
share-based payment liability related to fiscal year 2007 was $1,769,754
($599,311 compensation expense in fiscal year 2007 and $1,170,443 in the three
months ended September 30, 2007). Of the 241,249 shares vested for fiscal year
2007, the Company issued 225,249 shares of Common Stock and the remaining 16,000
shares were exchanged by the executives and cancelled by the Company to settle
tax withholding obligations paid by the Company totaling $134,080 in connection
with the restricted stock bonuses previously awarded and issued to them under
their employment agreements. As a result of the fact that a portion of the
remaining 225,249 shares are subject to cancellation as discussed above, the
Company has recorded the entire fair value of these remaining shares as a
short-term share-based payment liability as of September 30, 2007 totaling
$1,635,674. The Company will continue to re-measure this share-based liability
until final settlement with changes in the fair value being charged to
compensation expense. Final settlement will occur upon the exercise or lapse of
the cancellation provision on December 30, 2007 and the fair value of the
remaining shares will be charged to Common Stock. The executives did not elect
to cancel any additional shares, and this provision lapsed on December 31,
2007.
In
conjunction with the Plan award for fiscal year 2008, the Company recorded
compensation expense of $320,988 and a corresponding amount to the short-term
accrued shared-based payment liability for the three month period ended
September 30, 2007. This amount was based on management’s estimate of the
probability of meeting the target goals and the fair value of the Company’s
stock of $8.38 at the end of the reporting period, September 28, 2007.
Management will update this estimate and re-measure the short-term share-based
payment liability at the end of each reporting period until settlement. The
final measurement and charge to compensation expense will be determined on the
date of settlement.
The
charge for the additional 139,671 shares issued to our executives under the plan
as a result of the normalization is not reflected in the compensation tables
presented below and will be reflected in the compensation tables presented in
connection with the 2008 fiscal year.
SUMMARY
COMPENSATION TABLE
The
following table sets forth certain information with respect to compensation paid
or accrued by the Company during the fiscal years ended June 30, 2005, June 30,
2006 and June 30, 2007 to each of the executive officers and employees of the
Company named below:
|
Name
and Prinicpal Position
|
Fiscal
Year
|
Salary
($)
(4)
|
Bonus
($)
(5)
|
Stock
Awards
($)
(6)
|
Option
Awards
($)
(7)
|
Non-Equity
Incentive Plan Compensation
($)
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
|
All
Other Compensation
($)
(8)
|
Total
($)
|
|||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||||||||
|
George
R. Jensen, Jr.,
|
2007
|
$ | 325,000 | $ | - | $ | 821,424 | $ | 137,750 | $ | - | $ | - | $ | 17,875 | $ | 1,302,049 | |||||||||||||||||
|
Chief
Executive Officer &
|
2006
|
$ | 270,288 | $ | - | $ | 200,000 | $ | 137,750 | $ | - | $ | - | $ | 18,563 | $ | 626,601 | |||||||||||||||||
|
Chairman
of the Board
|
2005
|
$ | 250,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 17,875 | $ | 267,875 | |||||||||||||||||
|
Stephen
P. Herbert,
|
2007
|
$ | 285,000 | $ | - | $ | 393,426 | $ | 33,060 | $ | - | $ | - | $ | 17,875 | $ | 729,361 | |||||||||||||||||
|
Chief
Operating Officer &
|
2006
|
$ | 246,673 | $ | - | $ | 133,336 | $ | 33,060 | $ | - | $ | - | $ | 18,563 | $ | 431,632 | |||||||||||||||||
|
President
|
2005
|
$ | 231,923 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 17,875 | $ | 249,798 | |||||||||||||||||
|
David
M. DeMedio (1),
|
2007
|
$ | 165,000 | $ | - | $ | 51,124 | $ | 26,355 | $ | - | $ | - | $ | 17,875 | $ | 260,354 | |||||||||||||||||
|
Chief
Financial Officer
|
2006
|
$ | 162,385 | $ | - | $ | - | $ | 26,360 | $ | - | $ | - | $ | 20,112 | $ | 208,857 | |||||||||||||||||
|
2005
|
$ | 131,689 | $ | 11,000 | $ | - | $ | - | $ | - | $ | - | $ | 7,800 | $ | 150,489 | ||||||||||||||||||
|
John
McLaughlin (2),
|
2007
|
$ | 132,028 | $ | 46,629 | $ | 18,821 | $ | - | $ | - | $ | - | $ | 8,450 | $ | 205,928 | |||||||||||||||||
|
Vice
President of Sales
|
||||||||||||||||||||||||||||||||||
|
Cary
Sagady (3),
|
2007
|
$ | 125,400 | $ | 25,000 | $ | 27,675 | $ | - | $ | - | $ | - | $ | 7,800 | $ | 185,875 | |||||||||||||||||
|
Vice
President, Research &
|
||||||||||||||||||||||||||||||||||
|
Development
|
||||||||||||||||||||||||||||||||||
(1)
Employment as Chief Financial Officer commenced on April 12, 2005.
(2)
Employment as Vice President of Sales commenced on August 3, 2004.
(3)
Employment as Vice President of Research and Development commenced on January 1,
2006.
(4)
Includes Mr. Jensen’s election to receive one-half of his base salary in Common
Stock during the 2007 fiscal year. As a result, 22,080 restricted
shares were issued to Mr. Jensen on June 30, 2006 and recorded at $7.36 per
share of Common Stock for a total value of $162,500 during the fiscal
year. These shares vested 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
(5)
Consists of cash bonuses awarded upon achievement of performance
goals.
(6)
Fiscal year 2007 includes 50,000 shares (25,000 vested on January 1, 2007 and
25,000 vested on June 1, 2007) valued at $8.00 per share and 71,428 shares
valued at $5.90 per share relating to the Long-Term Equity Incentive Program for
Mr. Jensen; 33,333 shares (16,666 vested on January 1, 2007 and 16,666 vested on
June 1, 2007) valued at $8.00 and 21,485 shares valued at $5.90 per share
relating to the Long-Term Equity Incentive Program for Mr. Herbert; 8,665 shares
valued at $5.90 relating to the Long-Term Equity Incentive Program for Mr.
DeMedio; 3,150 shares valued at $5.975 per share for Mr. McLaughlin and 4,500
shares valued at $6.15 per share for Mr. Sagady. Fiscal year
2006 includes 25,000 shares that vested on June 1, 2006 valued at $8.00 per
share for Mr. Jensen; and 16,667 shares that vested on June 1, 2006 valued at
$8.00 per share for Mr. Herbert.
(7)
Fiscal year 2007 includes 25,000 options that vested on June 30, 2007 at the
fair market value of the grant date of $5.51 for Mr. Jensen; 6,000 options that
vested on June 30, 2007 at the fair market value of the grant date of $5.51 for
Mr. Herbert; 2,333 options that vested on June 30, 2007 at the fair market value
of the grant date of $5.51 and 1,500 options that vested on various dates during
the fiscal year at the fair market value of the grant of $9.00 for Mr.
DeMedio. Fiscal year 2006 includes 25,000 options that vested on June
30, 2006 at the fair market value of the grant date of $5.51 for Mr. Jensen;
6,000 options that vested on June 30, 2006 at the fair market value of the grant
date of $5.51 for Mr. Herbert; 2,334 options that vested on June 30, 2006 at the
fair market value of the grant date of $5.51 and 1,500 options that vested on
various dates during the fiscal year at the fair market value of the grant of
$9.00 for Mr. DeMedio.
(8)
Represents cash payments for car allowance payments.
GRANTS
OF PLAN-BASED AWARDS TABLE
The table
below summarizes the amounts of awards granted to the executive officers under
our Long-Term Equity Incentive Program and the shares awarded to the two
employees named below during the fiscal year ended June 30,
2007:
|
Estimated Future Payouts Under Non-Equity
Incentive Plan Awards
|
Estimated
Future Payouts Under Equity Incentive Plan Awards (1)
|
All
Other Stock Awards: Number of Shares of Stock
|
All
Other Option Awards: Number of Securities Underlying
|
Exercise
or Base Price of Option
|
Grant
Date Fair Value of Stock and Option
|
|||||||||||||||||||||||||||||||||||||
|
Grant
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
or
Units
|
Options
|
Awards
|
Awards
|
||||||||||||||||||||||||||||||||
|
Name
|
Date
|
($)
|
($)
|
($)
|
(#)
|
(#)
|
(#)
|
(#)
|
(#)
|
($)
|
($)
(2)
|
|||||||||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
(k)
|
(l)
|
|||||||||||||||||||||||||||||||
|
George
R. Jensen, Jr.
|
02/12/2007
|
- | - | - | 187,500 | 535,710 | 669,638 | - | - | - | $ | 3,950,864 | ||||||||||||||||||||||||||||||
|
Stephen
P. Herbert
|
02/12/2007
|
- | - | - | 56,400 | 161,139 | 201,424 | - | - | - | $ | 1,194,302 | ||||||||||||||||||||||||||||||
|
David
M. DeMedio
|
02/12/2007
|
- | - | - | 22,747 | 64,989 | 81,236 | - | - | - | $ | 479,292 | ||||||||||||||||||||||||||||||
|
John
McLaughlin
|
10/24/2006
|
- | - | - | - | - | - | 3,150 | - | $ | 5.975 | $ | 18,821 | |||||||||||||||||||||||||||||
|
Cary
Sagady
|
03/08/2007
|
- | - | - | - | - | - | 4,500 | - | $ | 6.150 | $ | 27,675 | |||||||||||||||||||||||||||||
(1) – The
amounts in columns (f), (g) and (h) represent the range of equity awards for
each named executive officer under the Long-Term Equity Incentive Program
issuable over the 2007, 2008 and 2009 fiscal years.
(2) –
Amounts represent the grant fair value determined in accordance with SFAS No.
123R.
TOTAL
OPTION EXERCISES AND STOCK VESTED
The
following table sets forth information regarding options exercised and shares of
common stock acquired upon vesting by our named executive officers during fiscal
2007:
|
Option Awards
|
Stock Awards
|
|||||||||||||||
|
Name
|
Number
of Shares Acquired on Exercise (#)
|
Value
Realized on Exercise ($)
|
Number
of Shares Acquired on Vesting (#)
|
Value
Realized on Vesting ($) (1)
|
||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
||||||||||||
|
George
R. Jensen, Jr.
|
- | $ | - | 121,428 | $ | 1,205,351 | ||||||||||
|
Stephen
P. Herbert
|
- | $ | - | 54,817 | $ | 522,619 | ||||||||||
|
David
M. DeMedio
|
- | $ | - | 8,665 | $ | 93,149 | ||||||||||
|
John
McLaughlin
|
- | $ | - | 3,150 | $ | 18,821 | ||||||||||
|
Cary
Sagady
|
- | $ | - | 4,500 | $ | 27,675 | ||||||||||
(1) Value
equals number of shares multiplied by the market value on vesting
date.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END
The
following table shows information regarding unexercised stock options and
unvested equity awards granted to the executive officers as of the fiscal year
ended June 30, 2007:
|
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercsied Options (#)
Exercisable
|
Number
of Securities Underlying Unexercsied Options (#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
Market
Value of Shares or Units of Stock That Have Not Vested ($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
That Have Not Vested (#)(1)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested ($)
|
|||||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||||||||||
|
George
R. Jensen, Jr.,
|
-- | -- | -- | -- |
--
|
-- | -- | 497,140 | $ | 5,344,255 | ||||||||||||||||||||||||||
|
Chief
Executive Officer &
|
25,000 | -- | -- | $ | 7.50 |
05/10/2011
|
-- | -- | -- | -- | ||||||||||||||||||||||||||
|
Chairman
of the Board
|
25,000 | -- | -- | $ | 7.50 |
06/28/2012
|
-- | -- | -- | -- | ||||||||||||||||||||||||||
| -- | 25,000 | -- | $ | 7.50 |
06/29/2013
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
|
Stephen
P. Herbert,
|
-- | -- | -- | -- |
--
|
-- | -- | 107,427 | $ | 1,154,840 | ||||||||||||||||||||||||||
|
Chief
Operating Officer &
|
6,000 | -- | -- | $ | 7.50 |
05/10/2011
|
-- | -- | -- | -- | ||||||||||||||||||||||||||
|
Presdient
|
6,000 | -- | -- | $ | 7.50 |
06/28/2012
|
-- | -- | -- | -- | ||||||||||||||||||||||||||
| -- | 6,000 | -- | $ | 7.50 |
06/29/2013
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
David
M. DeMedio,
|
-- | -- | -- | -- |
--
|
-- | -- | 43,327 | $ | 465,765 | ||||||||||||||||||||||||||
|
Chief
Financial Officer
|
375 | -- | -- | $ | 7.50 |
07/01/2007
|
-- | -- | -- | -- | ||||||||||||||||||||||||||
| 375 | -- | -- | $ | 7.50 |
10/31/2007
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
| 375 | -- | -- | $ | 7.50 |
01/31/2008
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
| 375 | -- | -- | $ | 7.50 |
04/30/2008
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
| 375 | -- | -- | $ | 7.50 |
07/31/2008
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
| 375 | -- | -- | $ | 7.50 |
10/31/2008
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
| 375 | -- | -- | $ | 7.50 |
01/31/2009
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
| 375 | -- | -- | $ | 7.50 |
04/30/2009
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
| 2,334 | -- | -- | $ | 7.50 |
05/10/2011
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
| 2,333 | --- | -- | $ | 7.50 |
06/28/2012
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
| -- | 2,333 | -- | $ | 7.50 |
06/29/2013
|
-- | -- | -- | -- | |||||||||||||||||||||||||||
|
(1)
|
Reflects
357,140 shares issuable to Mr. Jensen under the Long Term Equity Incentive
Program on account of fiscal years 2008 and 2009 assuming the target
performance goals are attained, and 140,000 shares issuable to Mr. Jensen
under his employment agreement upon the occurrence of a USA Transaction.
Reflects 107,427 shares issuable to Mr. Herbert and 43,327 shares issuable
to Mr. DeMedio on account of fiscal years 2008 and 2009 under the Long
Term Equity Incentive Program assuming the target performance goals are
attained.
|
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 such shares and 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"). 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, and excludes
non-cash payments/awards and stock options granted to officers and Board
members) 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 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. 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 such
shares and 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, and excludes
non-cash payments/awards and stock options granted to officers and Board
members) 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. During April 2008, the agreement was
automatically extended for an additional year, or until June 30, 2009. 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. In October 2006, the Company granted to Mr. DeMedio
piggyback registration rights under the 1933 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, and excludes
non-cash payments/awards and stock options granted to officers and Board
members) 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.
Potential
Payments Upon Termination Or Change Of Control
Each of
the executive officers’ employment agreements provides that upon the occurrence
of a USA Transaction, each such executive officer shall be awarded a specified
number of shares under the Long-Term Equity Incentive Program for each of the
fiscal years that has not been completed as of the date of such USA Transaction
provided that each such executive officer is an employee of the Company on the
date of the USA Transaction. The term USA Transaction has the same meaning as
set forth in Mr. Jensen’s employment agreement. In addition, each executive
officer’s employment agreement provides that upon the executive officer’s
termination of employment for any reason other than for cause, including death,
disability, or voluntary resignation, the executive officer will be eligible to
earn shares under the Plan for the fiscal year during which such termination
occurred, but will not be eligible to earn shares for any fiscal year following
the fiscal year during which the termination occurred.
The
following table describes the stock awards issuable by us to each of our
executive officers upon the occurrence of a USA Transaction assuming that such
USA Transaction occurred on June 30, 2007, when the closing price per share of
the Company’s Common Stock was $10.75:
|
Name
|
Upon
Occurrence
Of USA Transaction
|
|||
|
George
R. Jensen, Jr.
|
$ | 5,344,255.00 | (1) | |
|
Stephen
P. Herbert
|
$ | 1,154,840.25 | (2) | |
|
David
M. DeMedio
|
$ | 465,765.25 | (3) | |
|
(1)
|
Represents
(i) 178,570 shares issuable to Mr. Jensen for each of the fiscal years
ending June 30, 2008 and June 30 2009 pursuant to the Long-Term Equity
Incentive Program; and (ii) 140,000 shares issuable to Mr. Jensen upon the
occurrence of a USA Transaction pursuant to the Amended and Restated
Employment and Non-competition Agreement executed by the Company and Mr.
Jensen on May 11, 2006.
|
|
(2)
|
Represents
53,713 shares issuable to Mr. Herbert for the fiscal year 2008, and 53,714
shares issuable for the fiscal year ending June 30, 2009 pursuant to the
Company’s Long-Term Equity Incentive
Program.
|
|
(3)
|
Represents
21,663 shares issuable to Mr. DeMedio for the fiscal year 2008, and 21,664
shares issuable for the fiscal year ending June 30, 2009 pursuant to the
Company’s Long-Term Equity Incentive
Program.
|
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During
the fiscal year 2007, Steven Katz and William Van Alen, Jr., served as members
of the Compensation Committee of our Board of Directors. No member of the
Compensation Committee was an employee or former employee of our company or any
of our subsidiaries, or had any relationship with us requiring disclosure
herein.
During
the last fiscal year, none of our executive officers served as: (i) a member of
the compensation committee (or other committee of the board of directors
performing equivalent functions or, in the absence of any such committee, the
entire board of directors) of another entity, one of whose executive officers
served on our Compensation Committee; (ii) a director of another entity, one of
whose executive officers served on our Compensation Committee; or (iii) a member
of the compensation committee (or other committee of the board of directors
performing equivalent functions or, in the absence of any such committee, the
entire board of directors) of another entity, one of whose executive officers
served as a director on our Board of Directors.
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.
Director
Compensation Table
The table
below summarizes the compensation paid by the Company to non-employee Directors
during the fiscal year ended June 30, 2007.
|
Name
|
Fees Earned or Paid in Cash
($)
|
Stock Awards ($)
|
Option Awards ($)
|
Non-Equity Incentive Compensation Plan
($)
|
Change in Pension Value and Nonqualified Deferred
Compensation Earnings ($)
|
All Other Compensation ($)
|
Total ($)
|
|||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|||||||||||||||||||||
|
Joel
Brooks (1)
|
$ | 7,500 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 7,500 | ||||||||||||||
|
Steven
Katz
|
$ | 35,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 35,000 | ||||||||||||||
|
Douglas
M. Lurio
|
$ | 20,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 20,000 | ||||||||||||||
|
Stephen
W. McHugh
|
$ | 30,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 30,000 | ||||||||||||||
|
Albert
Passner (2)
|
$ | 15,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 15,000 | ||||||||||||||
|
William
L. Van Alen Jr.
|
$ | 37,500 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 37,500 | ||||||||||||||
(1)
Appointed a Director on March 22, 2007
(2)
Resigned as a Director on March 22, 2007
During
fiscal year 2007, we paid each of Messrs. Van Alen, Katz, McHugh and Lurio
$20,000 for serving as a Director during the fiscal year. The Company paid Mr.
Passner $15,000 for serving as a Director during the first three quarters of the
fiscal year. The Company paid Mr. Brooks $5,000 for serving as a Director and
$2,500 for serving on the Audit Committee during the fourth quarter of the
fiscal year. The Company paid Mr. McHugh $10,000 for serving on the
Audit Committee during the fiscal year, Mr. Katz $10,000 for serving on the
Compensation Committee and $5,000 for serving on the Audit Committee during the
fiscal year and Mr. Van Alen $10,000 for serving on the Compensation Committee
and $7,500 for serving on the Audit Committee.
On April
21, 2006, we granted 12,000 Common Stock Options to each of Messrs. Van Alen,
Katz, and Lurio 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. 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. 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. During the
2007 fiscal year, the Company granted to each Director piggy back registration
rights in connection with the shares underlying these options.
COMMON
STOCK
The
following table sets forth, as of January 2, 2008, 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(1)
|
Number of Shares of Common Stock Beneficially
Owned
|
Percent of Class(2)
|
||||||
|
George
R. Jensen, Jr.
|
275,331 | (3) | 1.65 | % | ||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
Stephen
P. Herbert
|
120,738 | (4) | * | |||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
David
M. DeMedio
|
29,508 | (5) | * | |||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
Douglas
M. Lurio
|
16,030 | (6) | * | |||||
|
2005
Market Street, Suite 3320
|
||||||||
|
Philadelphia,
Pennsylvania 19103
|
||||||||
|
Steven
Katz
|
15,350 | (7) | * | |||||
|
440
South Main Street
|
||||||||
|
Milltown,
New Jersey 08850
|
||||||||
|
William
L. Van Alen, Jr.
|
53,773 | (8) | * | |||||
|
P.O.
Box 727
|
||||||||
|
Edgemont,
Pennsylvania 19028
|
||||||||
|
Joel
Brooks
|
0 | * | ||||||
|
303
George Street, Suite 420
|
||||||||
|
New
Brunswick, New Jersey 08901
|
||||||||
|
Stephen
W. McHugh
|
3,000 | (9) | * | |||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
John
McLaughlin
|
500 | * | ||||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
Cary
Sagady
|
0 | * | ||||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
S.A.C.
Capital Advisors LLC
|
1,950,426 | (10) | 11.70 | % | ||||
|
72
Cummings Point Road
|
||||||||
|
Stamford,
CT 06902
|
||||||||
|
Wellington
Management Company, LLP
|
1,810,000 | (11) | 10.86 | % | ||||
|
75
State Street
|
||||||||
|
Boston,
Massachusetts 02109
|
||||||||
|
All
Directors and Executive
|
513,730 | 3.08 | % | |||||
|
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. Shares of Common Stock issuable upon
conversion of the Series A Preferred Stock, or shares of Common Stock issuable
upon exercise of warrants and options currently exercisable, or exercisable
within 60 days of January 2, 2008, are deemed to be beneficially owned for
purposes hereof.
(2) On
January 2, 2008 there were 14,915,557 shares of Common Stock and 520,392 shares
of Series A Preferred Stock issued and outstanding. For purposes of computing
the percentages under this table, it is assumed that all shares of issued and
outstanding Series A Preferred Stock have been converted into 5,203 shares of
Common Stock, and that all of the options to acquire Common Stock which have
been issued and are fully vested as of January 2, 2008 (or within 60-days of
January 2, 2008) have been converted into 177,808 shares of Common Stock. For
purposes of computing such percentages it has also been assumed that all of the
remaining Common Stock Warrants have been exercised for 1,591,735 shares of
Common Stock; and that all of the accrued and unpaid dividends on the Series A
Preferred Stock as of January 2, 2008 have been converted into 9,383 shares of
Common Stock. Therefore, 16,666,596 shares of Common Stock were treated as
issued and outstanding for purposes of computing the percentages under this
table. Does not reflect or include the 140,000 shares issuable to Mr. Jensen
upon a “USA Transaction”.
(3) Includes
2,000 shares of Common Stock beneficially owned by his spouse. Does not include
the right granted to Mr. Jensen under his Employment Agreement to receive Common
Stock upon the occurrence of a USA Transaction. See "Executive Employment
Agreements". Includes 39,366 shares owned by George R. Jensen, Jr. Grantor
Retained Unitrust dated July 14, 2003 over which Mr. Jensen retains beneficial
ownership. Includes 50,000 shares underlying vested stock options.
(4)
Includes 10 shares of Common Stock beneficially owned by his child and 2,500
shares of Common Stock beneficially owned by his spouse. Includes 12,000 shares
underlying vested stock options.
(5)
Includes 6,917 shares underlying vested stock options.
(6)
Includes 9,000 shares underlying vested stock options.
(7)
Includes 9,000 shares underlying vested stock options.
(8)
Includes 5,333 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, and 40 shares issuable upon conversion of shares of Series
A Preferred Stock.
(9)
Includes 3,000 shares underlying vested stock options.
(10)
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 S.A.C. Capital
Advisors and Mr. Cohen is as indicated in the table. The address of S.A.C.
Capital Management is 540 Madison Avenue, New York, New York, 10023. The address
of S.A.C. Capital Associates is P.O. Box 58, Victoria House, The Valley,
Anguilla, British West Indies. Each of S.A.C. Capital Advisors, S.A.C. Capital
Management and Mr. Cohen disclaim beneficial ownership of these shares. Also
includes 283,759 shares purchased by S.A.C. Capital Associates, LLC from the
Company pursuant to the October 17, 2007 Securities Purchase
Agreement.
(11)
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. Also includes 867,500 shares purchased from the Company by
Wellington Management Company, LLP pursuant to the October 17, 2007 Securities
Purchase Agreement.
PREFERRED
STOCK
As of
January 2, 2008, 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.
During
the years ended June 30, 2007, 2006, and 2005, the Company incurred
approximately $356,000, $258,000 and $284,000, respectively, in connection with
legal services provided by a member of the Company's Board of Directors. At June
30, 2007 and 2006, approximately $33,000 and $28,000, 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. During the years ended June 30, 2007, 2006 and
2005, certain Board members and executives participated in various debt or
equity offerings of the Company for total investments of approximately $0,
$53,000, and $245,000, respectively.
The
shares of common stock being offered by the selling shareholder are those
previously issued to the selling shareholder under the March 14, 2007 Securities
Purchase Agreement, those issuable to the selling shareholder upon exercise of
the warrants issued to the selling shareholder under the March 14, 2007
Securities Purchase Agreement, and the shares previously issued to the selling
shareholder under the October 17, 2007 Securities Purchase Agreement. For
additional information regarding the issuances of common stock and the warrants,
see "Other Events" above. We are registering the shares of common
stock in order to permit the selling shareholder to offer the shares for resale
from time to time. Except for the ownership of the shares of common
stock and the warrants issued pursuant to the above-mentioned Securities
Purchase Agreements, the selling shareholder has not had any material
relationship with us within the past three years.
The table
below lists the selling shareholder and other information regarding the
beneficial ownership of the shares of common stock by the selling shareholder.
The second column lists the number of shares of common stock beneficially owned
by the selling shareholder, based on its ownership of the shares of common stock
and the warrants, as of the date of this prospectus assuming exercise of the
warrants held by the selling stockholders on that date, without regard to any
limitations on exercise.
The third
column lists the shares of common stock being offered by this prospectus by the
selling shareholder.
The
fourth column assumes the sale of all of the shares offered by the selling
shareholder pursuant to this prospectus.
Under the
terms of the warrants, the selling stockholder may not exercise the warrants, to
the extent such exercise would cause the selling shareholder, together with its
affiliates, to beneficially own a number of shares of common stock which would
exceed 9.99% of our then outstanding shares of common stock following such
exercise, excluding for purposes of such determination shares of common stock
issuable upon exercise of the warrants which have not been exercised. The number
of shares in the second column does not reflect this
limitation.
The
selling shareholder may sell all, some or none of their shares in this
offering. See "Plan of Distribution."
|
Name of Selling Stockholder
|
Number of Shares of Common Stock Owned Prior to
Offering
|
Maximum Number of Shares of Common Stock to be
Sold Pursuant to this Prospectus
|
Number of Shares of Common Stock Owned After
Offering
|
|||||||||
|
S.A.C. Capital Associates,
LLC (1)
|
2,783,759 | (2) | 2,854,381 | (2) | 0 | |||||||
(1)
Pursuant to investment agreements, each of S.A.C. Capital Advisors, LLC, a
Delaware limited liability company which we refer to in this prospectus as
S.A.C. Capital Advisors, and S.A.C. Capital Management, LLC, a Delaware limited
liability company which we refer to in this prospectus as S.A.C. Capital
Management, share all investment and voting power with respect to the securities
held by S.A.C. Capital Associates, LLC. Mr. Steven A. Cohen controls both S.A.C.
Capital Advisors and S.A.C. Capital Management. Each of S.A.C. Capital Advisors,
S.A.C. Capital Management and Mr. Cohen disclaim beneficial ownership of these
securities.
(2) As of the date of this
prospectus and as reflected in column two above, the selling shareholder owns
1,950,426 shares and warrants to purchase up to 833,333 shares. Pursuant to the
March 14, 2007 registration rights agreement between us and the selling
shareholder, and as reflected in column three above, we agreed to register an
additional 70,622 shares in order to provide for the maximum additional number
of shares that may be issuable under the warrant, or an aggregate of 903,955
shares.
The
Common Stock of the Company has been trading on The NASDAQ Global Market under
the symbol USAT since August 1, 2007. Prior thereto, and since March 19, 2007,
the Common Stock was traded on The NASDAQ Capital Market. Prior to March 19,
2007, the Common Stock was traded on the OTC Electronic Bulletin Board under the
symbol USAT.
The high
and low bid prices on the OTC Electronic Bulletin Board, and the high low sales
prices on The NASDAQ Global Market and 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,
2008
|
High
|
Low
|
||||||
|
First
Quarter (through September 30, 2007)
|
$ | 10.70 | $ | 7.65 | ||||
|
Second
Quarter (through December 31, 2007)
|
$ | 8.84 | $ | 4.53 | ||||
|
Third
Quarter (through March 31, 2008)
|
$ | 5.99 | $ | 2.90 | ||||
|
Year ended June 30,
2007
|
||||||||
|
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 | ||||
|
Fourth
Quarter (through June 30, 2007)
|
$ | 12.75 | $ | 7.71 | ||||
|
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 | ||||
On May
31, 2008 there were 628 record holders of the Common Stock and 488 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 May 31, 2008, such accumulated unpaid
dividends amounted to $9,773,300.
As of
June 30, 2007, 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 plans approved by security holders
|
None
|
Not
applicable
|
None
|
|
||||||||
|
Equity
compensation plans not approved by security holders
|
163,000 | (a) | $ | 7.75 | 1,078,707 | (b) | ||||||
a)
Represents stock options outstanding as of June 30, 2007 for the purchase of
shares of Common Stock of the Company expiring at various times from July 2007
through June 2013. All such options were granted to employees and directors of
the Company. 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 87,987 shares
of Common Stock issuable under the Company's 2007-A Stock Compensation Plan and
850,720 shares of Common Stock issuable under the Long-Term Equity Incentive
Program adopted in February 2007.
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
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 June 30, 2007 there were 87,987
shares available for future issuance under the Plan.
As of
March 31, 2008, shares of Common Stock reserved for future issuance were as
follows:
|
|
o
|
161,875
shares issuable upon the exercise of stock options at exercise prices
ranging from $7.50 to $20 per share
|
|
|
o
|
1,591,735
shares issuable upon the exercise of common stock warrants at exercise
prices ranging from $6.40 to $20 per
share
|
|
|
o
|
14,977
shares issuable upon the conversion of outstanding Preferred Stock and
cumulative Preferred Stock
dividends
|
|
|
o
|
672,958
shares issuable under the Long-Term Equity Incentive Program adopted in
February 2007
|
|
|
o
|
300,000
shares issuable under the 2008 Stock Incentive Plan adopted in February
2008
|
|
|
o
|
73,287
shares issuable under the 2007-A Stock Compensation Plan;
and
|
|
|
o
|
140,000
shares issuable to Mr. Jensen under his employment agreement upon the
occurrence of a USA Transaction.
|
We are
registering the shares of common stock previously issued and the shares of
common stock issuable upon exercise of the warrants to permit the resale of
these shares of common stock by the holders of the common stock and warrants
from time to time after the date of this prospectus. We will not
receive any of the proceeds from the sale by the selling shareholder 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 shareholder may sell all or a portion of the shares of common stock
beneficially owned by it 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 shareholder 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 security holders 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 shareholder effects 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 shareholder 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 shareholder may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of common stock in the course of hedging in positions they
assume. The selling shareholder 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 shareholder may also loan or pledge shares of
common stock to broker-dealers that in turn may sell such shares.
The
selling shareholder may pledge or grant a security interest in some or all of
the warrants or shares of common stock owned by it and, if it defaults in the
performance of its 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. The selling shareholder also may 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.
The
selling shareholder and any broker-dealer participating in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933, 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 of 1933. 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 reallowed
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 any selling shareholder 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.
The
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 pursuant to
the registration rights agreement, 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 shareholder will pay all underwriting discounts and selling
commissions, if any. We will indemnify the selling shareholder
against liabilities, including some liabilities under the Securities Act of
1933, in accordance with the registration rights agreements, or the selling
shareholder will be entitled to contribution. We may be indemnified
by the selling shareholder against civil liabilities, including liabilities
under the Securities Act of 1933, that may arise from any written information
furnished to us by the selling shareholder specifically for use in this
prospectus, in accordance with the related registration rights agreement, or we
may be entitled to contribution.
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.
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, 2008, there were 15,138,470 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, 2008, 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,
2008, such accumulated unpaid dividends amounted to $9,773,300.
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 September 30, 2007, a total of 590,758 shares
of series A Preferred Stock have been converted into common stock and accrued
and unpaid dividends thereon have been converted into 2,919 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, 2008, there were 1,591,735 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
15,138,470 shares of common stock issued and outstanding on March 31, 2008, all
are freely transferable without further registration under the Act (other than
shares held by “affiliates” of the Company). As of March 31, 2008, 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, 2008, 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 under the Securities Act of 1933, as in effect on the
date of this prospectus, a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned shares
of our common stock for at least six months, would be entitled to sell an
unlimited number of shares of our common stock provided current public
information about us is available and, after owning such shares for at least one
year, would be entitled to sell an unlimited number of shares of our common
stock without restriction. Our affiliates who have beneficially owned shares of
our common stock for at least six months are entitled to sell within any
three-month period a number of shares that does not exceed the greater
of:
• 1% of
the number of shares of our common stock then outstanding, which was equal to
approximately 151,385 shares as of March 31, 2008; or
• the
average weekly trading volume of our common stock on the Nasdaq Global Market
during the four calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale.
Sales
under Rule 144 by our affiliates are also subject to manner of sale provisions
and notice requirements and to the availability of current public information
about us.
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.
The
validity of the common stock has been passed upon for us by Lurio &
Associates, P.C., Philadelphia, Pennsylvania 19103.
The
consolidated financial statements and schedule of USA Technologies, Inc. at June
30, 2007, 2006 and 2005, and for each of the three years ended June 30, 2007,
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 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://www.usatech.com.
Information on our website is not and should not be considered a part of this
prospectus.
USA
TECHNOLOGIES, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Financial
Statements:
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-1
|
|
Consolidated
Balance Sheets
|
F-2
|
|
Consolidated
Statements of Operations
|
F-3
|
|
Consolidated
Statements of Shareholders' Equity
|
F-4
|
|
Consolidated
Statements of Cash Flows
|
F-8
|
|
Notes
to Consolidated Financial Statements
|
F-10
|
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, 2007 and 2006 and the related consolidated statement of
operations, shareholders' equity, and cash flows for the years ended June 30,
2007, 2006 and 2005. Our audits also included the June 30, 2007, 2006 and 2005
balances in the financial statement schedule. 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, 2007 and 2006 and the consolidated results of their operations and
their cash flows for the years ended June 30, 2007, 2006 and 2005, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the
related June 30, 2007, 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.
|
/s/
Goldstein Golub Kessler
LLP
|
New York,
NY
September
26, 2007
USA
Technologies, Inc.
Consolidated
Balance Sheets
|
June 30
|
March
31
|
|||||||||||
|
2007
|
2006
|
2008
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Assets
|
||||||||||||
|
Current
assets:
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 5,163,844 | $ | 2,866,801 | $ | 6,814,731 | ||||||
|
Available-for-sale
securities
|
6,350,000 | - | 7,575,000 | |||||||||
|
Accounts
receivable, less allowance for uncollectible
accounts of $142,000, $229,000 and $129,000,
respectively
|
2,269,193 | 1,022,114 | 2,250,227 | |||||||||
|
Finance
receivables
|
330,692 | 418,184 | 379,620 | |||||||||
|
Inventory,
net
|
3,033,792 | 1,410,812 | 2,258,046 | |||||||||
|
Prepaid
expenses and other current assets
|
206,508 | 209,108 | 489,792 | |||||||||
|
Total
current assets
|
17,354,029 | 5,927,019 | 19,767,416 | |||||||||
|
Available-for-sale
securities
|
- | - | 6,575,000 | |||||||||
|
Finance
receivables, less current portion
|
279,324 | 289,389 | 518,222 | |||||||||
|
Property
and equipment, net
|
1,876,754 | 1,119,304 | 2,054,877 | |||||||||
|
Intangibles,
net
|
7,122,032 | 8,358,632 | 6,194,582 | |||||||||
|
Goodwill
|
7,663,208 | 7,663,208 | 7,663,208 | |||||||||
|
Other
assets
|
196,150 | 61,914 | 201,195 | |||||||||
|
Total
assets
|
$ | 34,491,497 | $ | 23,419,466 | $ | 42,974,500 | ||||||
|
Liabilities
and shareholders’ equity
|
||||||||||||
|
Current
liabilities:
|
||||||||||||
|
Accounts
payable
|
$ | 3,945,894 | $ | 2,448,611 | $ | 3,285,408 | ||||||
|
Accrued
expenses
|
1,431,652 | 2,012,938 | 2,266,230 | |||||||||
|
Current
obligations under long-term debt
|
514,302 | 89,917 | 656,454 | |||||||||
|
Convertible
senior notes
|
- | 851,486 | - | |||||||||
|
Total
current liabilities
|
5,891,848 | 5,402,952 | 6,208,092 | |||||||||
|
Convertible
senior notes, less current portion
|
- | 6,805,403 | - | |||||||||
|
Long-term
debt, less current portion
|
515,443 | 34,047 | 522,346 | |||||||||
|
Total
liabilities
|
6,407,291 | 12,242,402 | 6,730,438 | |||||||||
|
Commitments
and contingencies (Note 14)
|
||||||||||||
|
Shareholders’
equity:
|
||||||||||||
|
Preferred
stock, no par value:
|
||||||||||||
|
Authorized
shares- 1,800,000
|
||||||||||||
|
Series A convertible
preferred-Authorized
shares- 900,000
|
||||||||||||
|
Issued and
outstanding shares- 520,392, 521,542,
and 520,392, respectively (liquidation
preference of $14,196,632, $13,441,681,
and $14,586,926, respectively)
|
3,686,218 | 3,694,360 | 3,686,218 | |||||||||
|
Common
stock, no par value:
|
||||||||||||
|
Authorized
shares- 640,000,000
|
||||||||||||
|
Issued
and outstanding shares- 11,810,849,
|
||||||||||||
|
6,372,175,
and 15,138,470, respectively
|
172,822,868 | 138,110,126 | 193,645,925 | |||||||||
|
Accumulated
deficit
|
(148,424,880 | ) | (130,627,422 | ) | (161,088,081 | ) | ||||||
|
Total
shareholders’ equity
|
28,084,206 | 11,177,064 | 36,244,062 | |||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 34,491,497 | $ | 23,419,466 | $ | 42,974,500 | ||||||
See
accompanying notes.
USA
Technologies, Inc.
Consolidated
Statements of Operations
|
Nine
months ended
|
||||||||||||||||||||
|
Year ended June 30
|
March 31
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
2008
|
2007
|
||||||||||||||||
|
Revenues:
|
(Unaudited)
|
|||||||||||||||||||
|
Equipment
sales
|
$ | 7,454,076 | $ | 5,198,360 | $ | 3,535,064 | $ | 8,501,722 | $ | 5,604,573 | ||||||||||
|
License
and transaction fees
|
1,703,936 | 1,216,443 | 1,142,925 | 2,576,849 | 1,106,460 | |||||||||||||||
|
Total
revenues
|
9,158,012 | 6,414,803 | 4,677,989 | 11,078,571 | 6,711,033 | |||||||||||||||
|
Cost
of equipment
|
6,442,627 | 3,549,450 | 2,430,649 | 6,592,088 | 4,610,096 | |||||||||||||||
|
Cost
of services
|
1,369,152 | 855,077 | 1,048,024 | 2,028,675 | 883,272 | |||||||||||||||
|
Gross
profit
|
1,346,233 | 2,010,346 | 1,199,316 | 2,457,808 | 1,217,665 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Selling,
general and administrative
|
14,706,156 | 12,092,552 | 11,989,403 | 14,226,973 | 10,406,775 | |||||||||||||||
|
Depreciation
and amortization
|
1,748,653 | 1,699,593 | 1,600,120 | 1,497,768 | 1,284,771 | |||||||||||||||
|
Total
operating expenses
|
16,454,809 | 13,792,145 | 13,589,523 | 15,724,741 | 11,691,546 | |||||||||||||||
|
Operating
loss
|
(15,108,576 | ) | (11,781,799 | ) | (12,390,207 | ) | (13,266,933 | ) | (10,473,881 | ) | ||||||||||
|
Other
income (expense):
|
||||||||||||||||||||
|
Interest
income
|
315,827 | 99,776 | 61,068 | 716,120 | 164,817 | |||||||||||||||
|
Other
loss
|
(4,759 | ) | (16,087 | ) | (42,300 | ) | - | - | ||||||||||||
|
Legal
loss contingency
|
(270,000 | ) | - | - | - | |||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||
|
Coupon
or stated rate
|
(746,578 | ) | (1,365,860 | ) | (1,256,999 | ) | (112,388 | ) | (771,479 | ) | ||||||||||
|
Non-cash
interest and amortization of debt discount
|
(2,238,372 | ) | (1,513,106 | ) | (1,870,752 | ) | - | (1,096,317 | ) | |||||||||||
|
Total
interest expense
|
(2,984,950 | ) | (2,878,966 | ) | (3,127,751 | ) | (112,388 | ) | (1,867,796 | ) | ||||||||||
|
Total
other income (expense)
|
(2,673,882 | ) | (3,065,277 | ) | (3,108,983 | ) | 603,732 | (1,702,979 | ) | |||||||||||
|
Net
loss
|
(17,782,458 | ) | (14,847,076 | ) | (15,499,190 | ) | (12,663,201 | ) | (12,176,860 | ) | ||||||||||
|
Cumulative
preferred dividends
|
(781,451 | ) | (783,289 | ) | (784,113 | ) | (780,588 | ) | (781,451 | ) | ||||||||||
|
Loss
applicable to common shares
|
$ | (18,563,909 | ) | $ | (15,630,365 | ) | $ | (16,283,303 | ) | $ | (13,443,789 | ) | $ | (12,958,311 | ) | |||||
|
Loss
per common share (basic and diluted)
|
$ | (2.13 | ) | $ | (3.15 | ) | $ | (4.18 | ) | $ | (0.97 | ) | $ | (1.65 | ) | |||||
|
Weighted
average number of common shares outstanding (basic and
diluted)
|
8,702,523 | 4,965,501 | 3,894,204 | 13,837,206 | 7,770,543 | |||||||||||||||
See
accompanying notes.
USA
Technologies, Inc.
Consolidated
Statements of Shareholders' Equity
|
Series
A Convertible Preferred Stock
|
Common
Stock
|
Subscriptions
Receivable
|
Accumulated
Other Comprehensive Income
|
Accumulated
Deficit
|
Total
|
|||||||||||||||||||
|
Balance,
June 30, 2004
|
$ | 3,702,856 | $ | 110,635,743 | $ | -- | $ | 32,249 | $ | (100,262,186 | ) | $ | 14,108,662 | |||||||||||
|
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 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 $1,000 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 | ||||||||||||||||||
|
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
Statements of Shareholders' Equity (Continued)
|
Series
A Convertible Preferred Stock
|
Common
Stock
|
Accumulated
Other Subscriptions Receivable
|
Comprehensive
Income
|
Accumulated
Deficit
|
Total
|
|||||||||||||||||||
|
Issuance
of 2,148,663 shares of common stock to an accredited investor at varying
prices per share, less issuance costs of $147,359
|
$ | -- | $ | 12,974,036 | $ | -- | $ | -- | $ | -- | $ | 12,974,036 | ||||||||||||
|
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 | ||||||||||||||||||
|
Exercise
of 32,098 and 11,454 warrants at $6.40 and $6.60 per share,
respectively
|
-- | 281,024 | -- | -- | -- | 281,024 | ||||||||||||||||||
|
Conversion
of 1,150 shares of preferred stock into 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 154,930 shares of common stock from the conversion of senior
notes
|
-- | 1,549,300 | -- | -- | -- | 1,549,300 | ||||||||||||||||||
|
Issuance
of 42,536 shares of common stock to settle legal matters
|
-- | 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 2006-A Stock Compensation
Plan
|
-- | 104,345 | -- | -- | -- | 104,345 | ||||||||||||||||||
|
Issuance
of 12,013 shares of common stock under 2007-A Stock Compensation
Plan
|
-- | 74,135 | -- | -- | -- | 74,135 | ||||||||||||||||||
|
Charges
incurred in connection with the issuance of common stock for employee
compensation
|
-- | 722,497 | -- | -- | -- | 722,497 | ||||||||||||||||||
|
Charges
incurred in connection with the Long-Term Equity Incentive Program
relating to the vesting of 101,578 shares to be issued
|
-- | 599,311 | -- | -- | -- | 599,311 | ||||||||||||||||||
|
Charges
incurred in connection with stock options
|
-- | 362,903 | -- | -- | -- | 362,903 | ||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
-- | -- | -- | -- | (17,782,458 | ) | (17,782,458 | ) | ||||||||||||||||
|
Balance,
June 30, 2007
|
$ | 3,686,218 | $ | 172,822,868 | $ | -- | $ | -- | $ | (148,424,880 | ) | $ | 28,084,206 | |||||||||||
See
accompanying notes.
USA
Technologies, Inc.
Consolidated
Statements of Shareholders' Equity (Continued)
|
Series
A Convertible Preferred Stock
|
Common
Stock
|
Accumulated
Other Subscriptions Receivable
|
Comprehensive
Income
|
Accumulated
Deficit
|
Total
|
|||||||||||||||||||
|
Issuance
of 886,908 shares of common stock to an accredited investor at varying
prices per share, less issuance costs of $1,410
|
$ | -- | $ | 5,671,847 | $ | -- | $ | -- | $ | -- | $ | 5,671,847 | ||||||||||||
|
Issuance
of 2,142,871 shares of common stock to an accredited investor at $7.00 per
share, less issuance costs of $1,012,597
|
13,987,500 | 13,987,500 | ||||||||||||||||||||||
|
Exercise
of 58,543 warrants at $6.40 per share
|
-- | 374,675 | -- | -- | -- | 374,675 | ||||||||||||||||||
|
Retirement
of 650 shares of common stock
|
-- | (5,600 | ) | -- | -- | -- | (5,600 | ) | ||||||||||||||||
|
Issuance
of 14,700 shares of common stock to employees under the 2007-A Stock
Compensation Plan
|
-- | 138,704 | -- | -- | -- | 138,704 | ||||||||||||||||||
|
Reclassification
of charges from Long-Term Equity Incentive Program for Fiscal Year 2007 to
a share-based liability until settlement
|
-- | (599,311 | -- | -- | -- | (599,311 | ) | |||||||||||||||||
|
Issuance
of 225,249 shares of common stock for settlement of the Long-Term Equity
Incentive Program liability for Fiscal Year 2007
|
-- | 1,189,222 | -- | -- | 1,189,222 | |||||||||||||||||||
|
Charges
incurred in connection with stock options
|
-- | 66,020 | -- | -- | -- | 66,020 | ||||||||||||||||||
|
Net
loss
|
-- | -- | -- | -- | (12,663,201 | ) | (12,663,201 | ) | ||||||||||||||||
|
Balance,
March 31, 2008 (unaudited)
|
$ | 3,686,218 | $ | 193,645,925 | $ | -- | $ | -- | $ | (161,088,081 | ) | $ | 36,244,062 | |||||||||||
See
accompanying notes.
USA
Technologies, Inc.
Consolidated
Statements of Cash Flows
|
Nine
months ended
|
||||||||||||||||||||
|
Year ended June 30
|
March 31
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
2008
|
2007
|
||||||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||||||||||
|
Net
loss
|
$ | (17,782,458 | ) | $ | (14,847,076 | ) | $ | (15,499,190 | ) | $ | (12,663,201 | ) | $ | (12,176,860 | ) | |||||
|
Adjustment
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||||||||||
|
Charges
incurred in connection with the vesting and issuance of common stock for
employee compensation
|
1,500,288 | 79,195 | 107,670 | 1,157,540 | 928,843 | |||||||||||||||
|
Charges
incurred in connection with stock option compensation
|
362,903 | 875,556 | - | 66,020 | 283,028 | |||||||||||||||
|
Non-cash
interest and amortization of debt discount
|
2,238,372 | 1,513,106 | 1,870,752 | - | 1,096,317 | |||||||||||||||
|
Charges
incurred in connection with the issuance of common stock for legal
settlements
|
18,000 | - | - | - | 288,000 | |||||||||||||||
|
Depreciation
|
510,678 | 462,993 | 363,520 | 570,318 | 357,321 | |||||||||||||||
|
Amortization
|
1,236,600 | 1,236,600 | 1,236,600 | 927,450 | 927,450 | |||||||||||||||
|
Other
loss
|
- | 17,144 | 42,300 | - | - | |||||||||||||||
|
Gain
on repayment of senior notes
|
(44,285 | ) | - | - | - | (44,285 | ) | |||||||||||||
|
Bad
debt expense (recovery)
|
8,806 | 130,778 | (23,215 | ) | 137,212 | 45,327 | ||||||||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||||||||||
|
Accounts
receivable
|
(1,255,885 | ) | (408,851 | ) | 50,895 | (118,246 | ) | (1,693,169 | ) | |||||||||||
|
Finance
receivables
|
97,557 | (182,256 | ) | (221,181 | ) | (287,826 | ) | 8,486 | ||||||||||||
|
Inventory
|
(1,622,980 | ) | 286,424 | 10,448 | 775,746 | (538,104 | ) | |||||||||||||
|
Prepaid
expenses and other assets
|
(131,636 | ) | 37,711 | (85,541 | ) | (84,552 | ) | 41,935 | ||||||||||||
|
Accounts
payable
|
1,497,283 | (817,317 | ) | 336,437 | (660,486 | ) | (132,754 | ) | ||||||||||||
|
Accrued
expenses
|
(311,286 | ) | 533,586 | (90,016 | ) | 405,653 | (288,645 | ) | ||||||||||||
|
Net
cash used in operating activities
|
(13,678,043 | ) | (11,082,407 | ) | (11,900,521 | ) | (9,774,372 | ) | (10,897,110 | ) | ||||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||||||||||
|
Purchase
of property and equipment, net
|
(526,615 | ) | (842,470 | ) | (248,043 | ) | (528,110 | ) | (334,454 | ) | ||||||||||
|
Purchase
of available-for-sale securities
|
(7,000,000 | ) | - | - | (39,675,000 | ) | (7,000,000 | ) | ||||||||||||
|
Cash
received from the sale of available-for-sale securities
|
650,000 | 19,243 | - | 31,875,000 | - | |||||||||||||||
|
Cash
received from the sale of assets held for sale
|
- | - | 23,700 | - | - | |||||||||||||||
|
Net
cash used in investing activities
|
(6,876,615 | ) | (823,227 | ) | (224,343 | ) | (8,328,110 | ) | (7,334,454 | ) | ||||||||||
See
accompanying notes.
USA
Technologies, Inc.
Consolidated
Statements of Cash Flows (Continued)
|
Nine
months ended
|
||||||||||||||||||||
|
Year ended June 30
|
March 31
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
2008
|
2007
|
||||||||||||||||
|
FINANCING
ACTIVITIES:
|
(Unaudited)
|
(Unaudited)
|
||||||||||||||||||
|
Net
proceeds from the issuance of common stock and the exercise of common
stock warrants
|
$ | 30,989,108 | $ | 14,114,612 | $ | 8,004,436 | $ | 20,028,422 | $ | 26,967,182 | ||||||||||
|
Collection
of subscriptions receivable
|
- | 35,723 | 300,000 | - | 3,234 | |||||||||||||||
|
Net
proceeds from the issuance of senior notes
|
- | 1,314,944 | 3,305,790 | - | - | |||||||||||||||
|
Proceeds
from the issuance of long-term debt
|
470,000 | - | - | 332,740 | 470,000 | |||||||||||||||
|
Repayment
of senior notes
|
(8,301,676 | ) | (2,654,821 | ) | (143,887 | ) | - | (6,198,476 | ) | |||||||||||
|
Repayment
of long-term debt
|
(305,731 | ) | (135,904 | ) | (262,808 | ) | (607,793 | ) | (177,151 | ) | ||||||||||
|
Net
cash provided by financing activities
|
22,851,701 | 12,674,554 | 11,203,531 | 19,753,369 | 21,064,789 | |||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
2,297,043 | 768,920 | (921,333 | ) | 1,650,887 | 2,833,225 | ||||||||||||||
|
Cash
and cash equivalents at beginning of period
|
2,866,801 | 2,097,881 | 3,019,214 | 5,163,844 | 2,866,801 | |||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 5,163,844 | $ | 2,866,801 | $ | 2,097,881 | $ | 6,814,731 | $ | 5,700,026 | ||||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||||||||||
|
Cash
paid for interest
|
$ | 1,013,339 | $ | 1,430,115 | $ | 1,187,833 | $ | 126,962 | $ | 899,272 | ||||||||||
|
Equipment
and software under capital lease
|
$ | 741,513 | $ | - | $ | - | $ | 220,331 | $ | 436,173 | ||||||||||
|
Prepaid
insurance financed with long-term debt
|
$ | - | $ | - | $ | - | $ | 203,777 | $ | - | ||||||||||
|
Purchases
of equipment with long-term debt
|
$ | - | $ | 54,900 | $ | 197,450 | $ | - | $ | - | ||||||||||
|
Conversion
of convertible preferred stock to common stock
|
$ | 8,142 | $ | 8,496 | $ | - | $ | - | $ | 8,142 | ||||||||||
|
Conversion
of cumulative preferred dividends to common stock
|
$ | 15,000 | $ | 18,320 | $ | - | $ | - | $ | 15,000 | ||||||||||
|
Subscriptions
receivable
|
$ | - | $ | - | $ | 35,723 | $ | - | $ | 340,000 | ||||||||||
|
Conversion
of senior notes to common stock
|
$ | 1,549,300 | $ | 667,469 | $ | 931,208 | $ | - | $ | 500 | ||||||||||
|
Cancellation
of common stock in connection with Bayview acquisition
|
$ | - | $ | - | $ | (322,000 | ) | $ | - | $ | - | |||||||||
|
Common
stock issued to settle lawsuit
|
$ | 270,000 | $ | - | $ | - | $ | - | $ | 288,000 | ||||||||||
|
Beneficial
conversion feature related to senior notes
|
$ | - | $ | 552,263 | $ | 1,944,845 | $ | - | $ | - | ||||||||||
|
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 is a leading supplier of cashless,
remote management, reporting and energy management solutions serving the
unattended Point of Sale market. Our networked devices and associated services
enable the owners and operators of everyday, stand-alone, distributed assets,
such as vending machines, kiosks, personal computers, photocopiers, 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
cashless payment options. As part of out Intelligent Vending® solution, 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. The Company's customers are
principally located in the United States.
The
Company has incurred losses from its inception through June 30, 2007 and losses
have continued through March 2008 and are expected to continue during fiscal
year 2008. The Company's ability to meet its future obligations is dependent
upon the success of its products and services in the marketplace and the
available capital resources. Until the Company's products and services can
generate sufficient operating revenues, the Company will be required to use its
cash and cash equivalents on hand and available-for-sale securities (Note 2) as
well as raise capital to meet its cash flow requirements including the issuance
of Common Stock (Note 11) and the exercise of outstanding Common Stock warrants
(Note 12).
2.
ACCOUNTING POLICIES
INTERIM
FINANCIAL INFORMATION
The
consolidated financial statements and disclosures included herein for the nine
months ended March 31, 2008 and 2007 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 March 31, 2008 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2008.
CONSOLIDATION
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
2.
ACCOUNTING POLICIES (CONTINUED)
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.
As of
March 31, 2008, available-for-sale securities consisted of $14,150,000 par value
of auction rate securities (“ARS”) that were purchased during January 2008. The
Company’s ARS are long-term variable rate securities whose dividend rates are
reset every seven days through a “dutch auction” conducted by investment banks.
We have the option to participate in the auction and sell our ARS to prospective
buyers at par value. Our ARS are all AAA or Aaa rated, and represent preferred
stock of closed-end investment firms. Our ARS have no fixed maturity
dates.
Until
February 2008, the auction process had allowed investors to obtain liquidity if
so desired by selling the securities at their par values on the weekly auction
date. However, beginning the week of February 11, 2008, the auctions for our ARS
failed as a result of negative overall market conditions, meaning there were not
enough buyers to purchase the amount of securities available for sale at
auction. The result of a failed auction, which does not signify a default by the
issuer, is that the ARS continue to pay dividends in accordance with their
terms, but we are not able to liquidate any of these securities until these
securities are redeemed by the issuer, or until there is a successful auction,
or until such time as other markets for these investments
develop.
As of
March 31, 2008, we have classified $7,575,000 of our ARS as current assets as we
have received a notice of redemption at par value from the issuer subsequent to
March 31, 2008, and classified the remaining $6,575,000 of our ARS as
non-current assets. Although we have uncertainty with regard to the short-term
liquidity of these securities, we continue to believe that the par value
represents the fair value of these investments. We currently anticipate that we
will be able to realize the par value of our ARS either through redemption by
the issuer, successful auction, or through a buyer outside of the auction
process and believe that we have the ability to hold these securities for a
sufficient period of time for us to realize the par value of these securities.
As such, there was no unrealized loss recorded as of March 31, 2008 in
connection with our ARS investments.
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 provides an allowance for credit losses as discussed above 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.
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, 2005, April 1, 2006 and April 1, 2007. During the nine
months ended March 31, 2008 (unaudited), 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 intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. An asset is considered to be impaired when the sum of the
undiscounted future net cash flows resulting 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.
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.
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
2.
ACCOUNTING POLICIES (CONTINUED)
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 41% and 39% of the Company's accounts and finance
receivables at June 30, 2007 and 2006, respectively, were concentrated with two
customers each year and 58% (unaudited) as of March 31, 2008 were concentrated
with two customers. Approximately 40%, 29% and 11% of the Company's revenues for
the year ended June 30, 2007, 2006 and 2005, respectively, were concentrated
with one, two (19% with one customer and 10% with another customer), and one
customer, respectively. Approximately 56% (40% with one customer and 16% with
another customer) (unaudited) and 50% (43% with one customer and 7% with another
customer) (unaudited) of the Company’s revenues for the nine months ended March
31, 2008 and 2007, respectively, were concentrated with two customers. 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
$1,355,000, $974,000, and $1,364,000 for the years ended June 30, 2007, 2006 and
2005, respectively and $405,000 (unaudited) and $992,000 (unaudited) for the
nine months ended March 31, 2008 and 2007, respectively.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
2.
ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING
FOR STOCK OPTIONS
In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R, “Share-Based Payment” (“FAS 123R”), 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 FAS123R using the Modified Prospective Application
method. For outstanding nonvested share-based awards as of July 1, 2005,
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
123R.
Due to
the adoption of FAS 123R, the Company has recognized $14,044 of compensation
expense during the year ended June 30, 2006 related to a single grant of 3,000
common stock options during the year ended June 30, 2005 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 year
ended June 30, 2005 as the fair value of the options granted were not considered
to be material.
There
were no common stock options granted during the year ended June 30, 2007 or the
quarter ended March 31, 2008. The Company recorded stock compensation expense of
$1,500,288, $79,195 and $107,670 related to common stock grants and vesting of
shares previously granted to employees and $362,903, $875,556 and $0 related to
the vesting of common stock options during the year ended June 30, 2007, 2006
and 2005, respectively. The Company recorded stock compensation expense of
$138,704 (unaudited) and $803,895 (unaudited) related to common stock grants and
vesting of shares previously granted to employees under the 2007-A Stock
Compensation Plan and $66,020 (unaudited) and $283,028 (unaudited) related to
the vesting of common stock options during the nine months ended March 31, 2008
and 2007, respectively. The Company recorded stock compensation expense of
$428,925 (unaudited) and $124,948 (unaudited) related to the vesting of shares
under the Long-term Equity Incentive Program during the nine months ended March
31, 2008 and 2007, respectively.
INCOME
TAXES
In July
2006, the Financial Accounting Standards Board issued FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB
Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an entity’s financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a
recognition threshold and measurement attribute for financial statement
disclosure of tax positions taken or expected to be taken on a tax return.
Additionally, FIN 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Company adopted FIN 48 effective July 1, 2007 and there was no
material affect on our results of operations or financial
position.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
2.
ACCOUNTING POLICIES (CONTINUED)
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 2,618,000, 1,081,000 and 1,250,000 shares as of June 30, 2007,
2006 and 2005, respectively). No exercise of stock options (163,000) or stock
purchase warrants (1,704,175); or the conversion of preferred stock (5,203) or
cumulative preferred dividends (8,992); or the issuance of shares granted under
the Long-Term Equity Incentive Program (736,444) was assumed during the fiscal
year ended June 30, 2007 because the result would be anti-dilutive. No exercise
of stock options or stock purchase warrants, or the conversion of senior notes,
preferred stock or cumulative preferred dividends was assumed during the fiscal
years ended June 30, 2006 and 2005 or the nine months ended March 31, 2008
(unaudited) and 2007 (unaudited) because the result would be
anti-dilutive.
RECENT
ACCOUNTING PRONOUCEMENTS
In
September 2006, the Financial Accounting Standards Board issued SFAS No. 157,
“Fair Value Measurements” (“SFAS No.157”). This statement clarifies the
definition of fair value, establishes a framework for measuring fair value, and
expands the disclosures on fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. We do not expect the
adoption of this statement to have a material affect on our results of
operations or financial position.
3.
ACQUISITIONS AND INTANGIBLES
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 $0, $149,000, and $112,000 of royalty expense was recorded during
the years ended June 30, 2007, 2006 and 2005, 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
3.
ACQUISITIONS AND INTANGIBLES (CONTINUED)
BAYVIEW
TECHNOLOGY GROUP, LLC (CONTINUED)
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.
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 |
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
3.
ACQUISITIONS AND INTANGIBLES (CONTINUED)
INTANGIBLE
ASSETS
Amortization
expense relating to all acquired intangible assets was $1,236,600, $1,236,600
and $1,236,600 during the years ended June 30, 2007, 2006 and 2005,
respectively, and $927,450 (unaudited) and $927,450 (unaudited) for the nine
months ended March 31, 2008 and 2007, respectively. The intangible asset balance
and related accumulated amortization consisted of the following:
|
March 31, 2008
(Unaudited)
|
|||||||||
|
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
|||||||
|
Amount
|
Amortization
|
Value
|
|||||||
|
Intangible
assets:
|
|||||||||
|
Trademarks
|
$ | 2,064,000 | $ | (616,875 | ) | $ | 1,447,125 | ||
|
Patents
|
9,294,000 | (4,603,072 | ) | 4,690,928 | |||||
|
Non-Compete
agreement
|
1,011,000 | (954,471 | ) | 56,529 | |||||
|
Total
|
$ | 12,369,000 | $ | (6,174,418 | ) | $ | 6,194,582 | ||
|
June 30, 2007
|
|||||||||
|
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
|||||||
|
Amount
|
Amortization
|
Value
|
|||||||
|
Intangible
assets:
|
|||||||||
|
Trademarks
|
$ | 2,064,000 | $ | (538,125 | ) | $ | 1,525,875 | ||
|
Patents
|
9,294,000 | (3,906,022 | ) | 5,387,978 | |||||
|
Non-Compete
agreement
|
1,011,000 | (802,821 | ) | 208,179 | |||||
|
Total
|
$ | 12,369,000 | $ | (5,246,968 | ) | $ | 7,122,032 | ||
|
June 30, 2006
|
|||||||||
|
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
|||||||
|
Amount
|
Amortization
|
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 | ||
At March
31, 2008 and June 30, 2007, the expected amortization of the intangible assets
is as follows: $1,240,000 in 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, 2007.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
4.
PROPERTY AND EQUIPMENT
Property
and equipment, at cost, consist of the following:
|
Useful
|
June 30
|
March 31
2008
|
|||||||||||
|
Lives
|
2007
|
2006
|
(Unaudited)
|
||||||||||
|
Computer
equipment and purchased software
|
3
years
|
$ | 4,089,137 | $ | 3,063,618 | $ | 4,625,048 | ||||||
|
Vending
machines and related components
|
7
years
|
4,427 | 4,427 | 4,427 | |||||||||
|
Control
systems
|
3
years
|
8,503 | 79,567 | 8,503 | |||||||||
|
Furniture
and equipment
|
5-7
years
|
940,386 | 738,746 | 1,033,032 | |||||||||
|
Leasehold
improvements
|
Lesser
of life or lease term
|
118,475 | 126,007 | 265,296 | |||||||||
|
Vehicles
|
5
years
|
29,066 | 29,066 | 29,066 | |||||||||
| 5,189,994 | 4,041,431 | 5,965,372 | |||||||||||
|
Less
accumulated depreciation
|
(3,313,240 | ) | (2,922,127 | (3,910,495 | |||||||||
| $ | 1,876,754 | $ | 1,119,304 | $ | 2,054,877 | ||||||||
Assets
under capital lease totaled approximately $977,000 (unaudited), $741,513 and $0
as of March 31, 2008, June 30, 2007 and 2006, respectively. Capital lease
amortization of approximately $39,310, $2,000, $2,000, $181,545 (unaudited) and
$0 (unaudited), is included in depreciation expense for the years ended June 30,
2007, 2006 and 2005, and for the nine months ended March 31, 2008 and 2007,
respectively.
5.
ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
June 30
|
March 31
2008
|
|||||||||||
|
2007
|
2006
|
(Unaudited)
|
||||||||||
|
Accrued
compensation and related sales commissions
|
$ | 502,431 | $ | 384,256 | $ | 619,834 | ||||||
|
Accrued
interest
|
14,574 | 381,240 | -- | |||||||||
|
Accrued
professional fees
|
213,086 | 162,051 | 235,926 | |||||||||
|
Accrued
taxes and filing fees
|
202,428 | 100,573 | 377,494 | |||||||||
|
Advanced
customer billings
|
96,264 | 109,007 | 433,447 | |||||||||
|
Accrued
loss contingency
|
-- | 270,000 | -- | |||||||||
|
Accrued
share-based payment liability
|
-- | -- | 428,925 | |||||||||
|
Accrued
other
|
402,869 | 605,811 | 170,604 | |||||||||
| $ | 1,431,652 | $ | 2,012,938 | $ | 2,266,230 | |||||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
6.
RELATED PARTY TRANSACTIONS
During
the years ended June 30, 2007, 2006, and 2005 and the nine months ended March
31, 2008 and 2007, the Company incurred approximately $355,000, $258,000,
$284,000, $270,000 (unaudited) and $266,000 (unaudited) respectively, in
connection with legal services provided by a member of the Company's Board of
Directors. At June 30, 2007 and 2006 and March 31, 2008, approximately $33,000,
$28,000 and $24,000 (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, 2008 and June 30, 2007, 2006 and 2005, approximately $0
(unaudited), $0, $0 and $73,000, respectively, of the Company's accrued expenses
were due to this Board member. During the years ended June 30, 2007, 2006 and
2005, certain Board members and executives participated in various debt or
equity offerings of the Company for total investments of approximately $0,
$53,000, and $245,000, respectively. There was no participation by
Board members in debt or equity offerings during the nine months March 31, 2008
and 2007. As of June 30, 2007, 2006 and 2005, Mr. Illes (see Note 11), held $0,
$1,000,000 and $1,000,000 of Senior Notes, respectively.
7.
LONG-TERM DEBT
Long-term
debt consists of the following:
|
June 30
|
March 31
|
|||||||||||
|
2007
|
2006
|
2008 (Unaudited)
|
||||||||||
|
Capital
lease obligations
|
$ | 677,475 | $ | -- | $ | 624,758 | ||||||
|
Loan
agreement
|
318,224 | -- | 447,491 | |||||||||
|
Software
licensing and other
|
34,046 | 123,964 | 106,551 | |||||||||
| 1,029,745 | 123,964 | 1,178,800 | ||||||||||
|
Less
current portion
|
514,302 | 89,917 | 656,454 | |||||||||
| $ | 515,443 | $ | 34,047 | $ | 522,346 | |||||||
The
maturities of long-term debt as of June 30, 2007 are as follows:
|
2008
|
$ | 514,302 | ||
|
2009
|
331,683 | |||
|
2010
|
125,751 | |||
|
2011
|
32,175 | |||
|
2012
|
25,834 | |||
| $ | 1,029,745 |
During
July 2007, the Company entered into a loan agreement for $150,355 with a
financial institution bearing interest at 12% that was collaterized by $169,420
of the Finance Receivables. The Company agreed to make 32 monthly payments of
$5,826, which include interest and principal, from the proceeds received from
the Finance Receivables. During July 2007, the Company also entered into a loan
agreement for $89,385 with the same financial institution bearing interest at
12% that was collaterized by $105,074 of the Finance Receivables. The Company
agreed to make 32 monthly payments of $3,278, which include interest and
principal, from the proceeds received from the Finance
Receivables.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
7. LONG-TERM
DEBT (CONTINUED)
During
October 2006, the Company entered into a loan agreement with a financial
institution bearing interest at 18% and collaterized 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, which
include interest and principal, from the proceeds received from the Finance
Receivables. As of June 30, 2007, $206,223 and $121,428 of the current and
long-term Finance Receivables, respectively, are collateral for the outstanding
balance of the loan, of which $179,804 and $138,420 is current and long-term
debt, respectively. Including the loan agreements added in July 2007, as listed
above, as of March 31, 2008 $241,053 (unaudited) and $225,505 (unaudited) of the
current and long-term Finance Receivables, respectively, are collateral for the
outstanding balance of the loan, of which $256,188 (unaudited) and $101,646
(unaudited) is current and long-term debt, respectively.
During
August and December 2007, the Company financed the premiums for various
insurance policies totaling $203,777, due in 10 monthly installments at an
interest rate of 8%.
During
November 2007, the Company entered into a long-term debt agreement for $93,000
with a financial institution bearing interest at 8.25% that was collaterized by
the assets of the Company. The Company agreed to make 84 monthly payments of
$1,467, including interest and principal.
During
May 2007, the Company entered into a capital lease agreement in connection with
office equipment for approximately $305,000, due in thirty-six equal monthly
payments of $9,456 through April 2010 at an interest rate of 7.13%.
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%.
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%. This loan
agreement was satisfied in March 2007.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
8. INCOME
TAXES
At June
30, 2007 and 2006, the Company had net operating loss carryforwards of
approximately $125,443,000 and $111,024,000, respectively, to offset future
taxable income expiring through approximately 2027. In addition, the Company had
a capital loss carryforward of approximately $1,364,000 and $1,360,000 as of
June 30, 2007 and 2006, respectively. At June 30, 2007 and 2006, the Company
recorded net deferred tax assets of approximately $49,521,000 and $43,882,000,
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 net
deferred tax assets arose primarily from the use of different accounting methods
for financial statement and income tax reporting purposes as
follows:
|
JUNE 30
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss and capital loss carryforwards
|
$ | 47,018,000 | $ | 41,833,000 | ||||
|
Deferred
research and development costs
|
155,000 | 234,000 | ||||||
|
Software
development costs
|
865,000 | 1,081,000 | ||||||
|
Intangibles
|
500,000 | 372,000 | ||||||
|
Stock
based compensation
|
909,000 | 355,000 | ||||||
|
Other
|
653,000 | 703,000 | ||||||
| 50,100,000 | 44,578,000 | |||||||
|
Deferred
tax liabilities:
|
||||||||
|
Intangibles
|
(579,000 | ) | (696,000 | ) | ||||
| 49,521,000 | 43,882,000 | |||||||
|
Valuation
allowance
|
(49,521,000 | ) | (43,882,000 | ) | ||||
|
Deferred
tax assets, net
|
$ | -- | $ | -- | ||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
9. SENIOR
NOTES
The
Company had issued six series of Senior Notes each with an annual interest rate
of 12% that were convertible into shares of the Company's Common Stock for which
there were outstanding obligations as of June 30, 2006 or 2005. 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 had also issued three
series of Senior Notes each with an annual interest rate of 10% that were
convertible into shares of the Company's Common Stock for which there were
outstanding obligations as of June 30, 2006 or June 30, 2005. These Senior Notes
were scheduled to mature on June 30, 2007, December 31, 2008, and December 31,
2010. There were no Senior Notes outstanding as of June 30, 2007 due to the
repayment of all of the Senior Notes during the year ended June 30, 2007. During
the year ended June 30, 2007, repayments of Senior Notes totaled $8,325,961
(less discounts of $24,285) and $1,549,300 of Senior Notes were converted into
154,930 shares of Common Stock.
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. In
March 2006, the maturity date of these notes was further extended to June 30,
2009 with no other terms being modified. In April 2007, all of these notes were
converted into 32,000 shares of Common Stock.
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
9. SENIOR
NOTES (CONTINUED)
The
intrinsic value of this beneficial conversion feature created debt discount that
was allocated to equity and was being amortized to interest expense through
December 31, 2006 and 2007, respectively. 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
12), 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, 2007, 2006 and 2005,
$500, $56,136 and $460,827, respectively, of the 2007-B Senior Notes were
converted into 50, 5,613 and 46,082, respectively, shares of Common
Stock. During December 2006, the Company repaid all of the 2007-B
Senior Notes for a total principal repayment of $983,326.
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, 2007, 2006 and 2005, $778,800, $98,000 and
$415,000, respectively, of the 2010 Senior Notes were converted into 77,880,
9,800 and 41,500 shares, respectively, of Common Stock. During the
year ended June 30, 2007, the Company repaid all of the 2010 Senior Notes for a
total principal repayment of $463,200 less a discount 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 year ended June 30, 2007, the Company repaid all of the 2008 Senior Notes
and 2009 Senior Notes for total principal repayments of $1,915,308 (less
discounts of $19,772) and $1,520,000 respectively.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
9. 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 year ended June 30, 2007,
the Company repaid all of the 2008-C Senior Notes for a total principal
repayment of $181,611 less a discount 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. During the year ended June 30, 2007, $450,000 of the 2010-B
Senior Notes were converted into 45,000 shares of Common
Stock. During April 2007, the Company repaid all of the 2010-B Senior
Notes for a total principal repayment of $320,000.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
9. SENIOR
NOTES (CONTINUED)
A summary
of the activity for the Senior Notes for the years ended June 30, 2007 and 2006
follows:
|
Senior Notes Maturing
December 31,
|
||||||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
|||||||||||||||||||
|
(2005 Senior Notes)
|
(2006 Senior Notes)
|
(2007 Senior Notes)
|
(2008 & 2008-C Notes)
|
(2009 Senior Notes)
|
(2010 & 2010-B Senior
Notes)
|
|||||||||||||||||||
|
Face
amount of Senior Notes
|
||||||||||||||||||||||||
|
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 | ) | (1,520,000 | ) | (763,200 | ) | ||||||||||||||
|
Discount
on Repayment
|
-- | -- | -- | (24,285 | ) | -- | (20,000 | ) | ||||||||||||||||
|
Conversions
to Common Stock
|
-- | -- | -- | -- | -- | (1,228,800 | ) | |||||||||||||||||
|
Balance,
June 30, 2007
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||||
|
Senior
Notes Maturing
|
||||||||
|
June 30,
|
||||||||
|
2009
|
2007
|
|||||||
|
(2007-B Senior Notes)
|
||||||||
|
Face
amount of Senior Notes
|
||||||||
|
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
|
(320,000 | ) | (500 | ) | ||||
|
Balance,
June 30, 2007
|
$ | -- | $ | -- | ||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
9. SENIOR
NOTES (CONTINUED)
|
Senior Notes Maturing
December 31,
|
||||||||||||||||||||||||
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
|||||||||||||||||||
|
(2005 Senior Notes)
|
(2006 Senior Notes)
|
(2007 Senior Notes)
|
(2008 & 2008-C Notes)
|
(2009 Senior Notes)
|
(2010 & 2010-B Notes)
|
|||||||||||||||||||
|
Debt
discount and other issuance costs
|
||||||||||||||||||||||||
|
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
and write off of unamortized costs upon conversions to Common
Stock
|
-- | -- | 250,326 | 348,026 | 226,986 | 1,280,694 | ||||||||||||||||||
|
Unamortized
costs at June 30, 2007
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||||
|
Senior
Notes reflected in the Consolidated Balance Sheet:
|
||||||||||||||||||||||||
|
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 | |||||||||||||
|
June
30, 2007
|
||||||||||||||||||||||||
|
Face
amount
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||||
|
Unamortized
costs
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
| $ | -- | $ | -- | $ | -- | -- | $ | -- | $ | -- | ||||||||||||||
|
Senior Notes Maturing
June 30,
|
||||||||
|
2009
|
2007
|
|||||||
|
(2007-B Senior Notes)
|
||||||||
|
Debt
discount and other issuance costs
|
||||||||
|
Unamortized
costs at June 30, 2005
|
$ | -- | $ | (293,230 | ) | |||
|
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 June 30, 2007
|
$ | -- | $ | -- | ||||
|
Senior
Notes reflected in the Consolidated Balance Sheet:
|
||||||||
|
June
30, 2006
|
||||||||
|
Face
amount
|
$ | 320,000 | $ | 983,286 | ||||
|
Unamortized
costs
|
-- | $ | (132,340 | ) | ||||
| $ | 320,000 | $ | 851,486 | |||||
|
June
30, 2007
|
||||||||
|
Face
amount
|
$ | -- | $ | -- | ||||
|
Unamortized
costs
|
-- | $ | -- | |||||
| $ | -- | $ | -- | |||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
10.
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, 2007 and 2006 and March 31, 2008 amounted to
$8,992,712, $8,226,261, and $9,773,300 (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, 2007 and 2006
and the nine months ended March 31, 2008, certain holders of the Preferred Stock
converted 1,150, 1,200 and 0 (unaudited), respectively, into 11, 12 and 0
(unaudited) shares of Common Stock, respectively. Certain of these shareholders
also converted cumulative preferred dividends of $15,000, $18,320 and $0
(unaudited), respectively, into 15, 18 and 0 (unaudited) shares of Common Stock
during the years ended June 30, 2007 and 2006 and the nine months ended March
31, 2008, 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, 2007, 2006, 2005 or March 31, 2008. 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.
11.
COMMON STOCK
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
11.
COMMON STOCK (CONTINUED)
The
Company's Board of Directors has authorized various Common Stock private
placement offerings. Activity for these offerings during the years ended June
30, 2007, 2006 and 2005 and the nine months ended March 31, 2008.
-On
October 17, 2007, the Company entered into a securities purchase agreement
(collectively, the “Securities Purchase Agreement”) with 37 accredited investors
(“Buyers”). Pursuant to the Securities Purchase Agreement, the Company sold to
the Buyers a total of 2,142,871 shares of the Company’s Common Stock (“Shares”)
at a price of $7.00 per Share, for gross proceeds of $15,000,097. William Blair
& Co., LLC (“Blair”), a broker-dealer registered under the 1934 Act, acted
as the exclusive placement agent for the private placement. As compensation for
its services, the Company paid Blair a fee equal to approximately eight percent
of the total consideration received by the Company as a result of the offering.
The fee was comprised of cash of $945,000 and warrants to purchase up to 17,532
shares of the Company’s Common Stock at $7.70 per share at any time through
October 17, 2012. Pursuant to the Registration Rights Agreement entered into
between the Company and each Buyer, the Company registered the Buyers shares
with the Securities and Exchange Commission (“SEC”) covering the resale of the
Shares effective December 20, 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, as described
below. 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
11.
COMMON STOCK (CONTINUED)
- 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.
- 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
11.
COMMON STOCK (CONTINUED)
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. During the year ended June 30, 2007 and 2006, the Company issued
715,571 and 784,429 shares, respectively, of Common Stock under the 2006 Common
Stock Agreement for total gross proceeds of $3,794,651 and $4,983,774,
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 Company registered 1,500,000 and 800,000 shares effective December 21,
2006 and July 9, 2007, respectively. 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 issued to Mr. Illes
20,000 shares of Common Stock as a due diligence fee in connection with this
transaction and registered these shares for resale by Mr. Illes under the 1933
Act. During the year ended June 30, 2007 and the nine months ended March 31,
2008, the Company issued 1,433,092 shares, including the 20,000 shares as a due
diligence fee, and 886,908 (unaudited) shares of Common Stock, respectively,
under the 2006-B Common Stock Agreement for total gross proceeds of $9,326,743
and $5,671,847 (unaudited), respectively. The Company incurred issuance costs of
$147,509 and $1,410 (unaudited) during the year ended June 30, 2007 and the nine
months ended March 31, 2008, respectively, in connection with this
agreement.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
11.
COMMON STOCK (CONTINUED)
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, 2007 and 2006 and the nine months ended March 30, 2008,
warrants were exercised to purchase 43,552, 36,800 and 58,543 (unaudited) shares
of Common Stock at share prices of $6.40, $10 and $6.40 generating proceeds of
$281,024, $368,000 and $374,675 (unaudited). 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.
There
were 28,600, 9,500, 8,005 and 14,700 (unaudited) shares of Common Stock issued
to certain employees and officers for services and for professional services
during the years ended June 30, 2007, 2006, and 2005 and the nine months ended
March 31, 2008, 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 $178,480, $79,195, $107,670 and $138,704 (unaudited) for the years ended
June 30, 2007, 2006, and 2005 and the nine months ended March 31, 2008,
respectively.
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, there
were 5,000 shares 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. During the year ended June 30, 2007 and 2006, the Company issued 16,587
and 8,413 shares under the 2007-A Stock Compensation plan totaling $104,345 and
$65,874 based on the grant date fair value of the shares. On January 8, 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 June 30, 2007,
there were 12,013 shares issued under the Plan totaling $74,135 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 (the “Target Goals”) of the Company during
each of the fiscal years ending June 30, 2007, June 30, 2008 and June 30, 2009.
EBITDA is defined as earnings before interest, taxes, depreciation, and
amortization, and excludes non-cash stock payments/awards and stock options
granted to officers and Board members. The maximum number of shares that can be
awarded under the Program is 952,298. The Program allows for the executive
officers to reduce the number of shares to be issued in order to satisfy the
minimum statutory tax withholding requirements.
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
11.
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 (see Note 14) 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 2008 and 2009 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. Based upon the audited financial results of the
Company for the fiscal year ended June 30, 2007, the target goal (100%) relating
to revenues was met and the minimum Target Goals relating to gross profit and
EBITDA were not met. Therefore the Company recorded compensation expense of
$599,311 and a corresponding amount to Common Stock for the year ended June 30,
2007 related to the vesting of 101,578 shares for Fiscal Year 2007 Target Goals
based on the grant date fair value of the Company’s stock of $5.90. There is no
effect on the number of issued and outstanding shares of Common Stock until
shares are issued and thus none of the shares vested as of June 30, 2007 are
included in issued and outstanding Common Stock as of June 30,
2007.
During
fiscal year 2007, substantially all of the e-Port units sold consisted of units
pertaining to the MasterCard PayPass seeding program with substantially reduced
selling prices which resulted in reduced gross profit and EBITDA. Management’s
goal was to have the maximum number of units deployed in the field as quickly as
possible. The Compensation Committee agreed with management that given the
current stage of the Company’s business, it was more beneficial to the Company
to maximize the number of e-Ports in the field as soon as possible. As a result,
on September 21, 2007, the Compensation Committee recommended to the Board of
Directors that the selling price of all the e-Ports sold during the fiscal year
be “normalized” to the current retail price. This normalization resulted in
increased proforma revenues, gross profit and EBITDA for the e-Port units sold
in the MasterCard PayPass seeding program. The Compensation Committee also
recommended that the executive officers be given the option to elect to satisfy
certain minimum statutory tax withholding obligations for the restricted stock
bonuses previously awarded and issued to the executives under their employment
agreements by reducing the number of Common Shares otherwise issuable to them
under the Plan. The Board of Directors approved the recommendations of the
Compensation Committee.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
11.
COMMON STOCK (CONTINUED)
As a
result of the normalization, certain target hurdles were met resulting in the
vesting of a total of 241,249 shares under the Plan for the fiscal year rather
than a total of 101,578 shares prior to the normalization. The value of the
number of the shares the executives may apply to tax withholding was in excess
of the minimum statutory obligation and, as a result the Plan is classified as a
liability award rather than an equity award. As such, the Company reclassified
the $599,311 related to the 101,578 shares that was previously recorded in
Common Stock to a short-term share-based payment liability. As the price of the
Company’s shares was $8.45 on the date of the approval of the normalization, a
charge of $1,180,220 was also recorded to compensation expense, related to the
additional 139,671 additional shares, with a corresponding amount to the
short-term share-based payment liability for a total share-based payment
liability of $1,779,531 as of September 21, 2007. On September 28, 2007, as the
Company’s share price was $8.38, the total share-based payment liability related
to fiscal year 2007 was $1,769,754 ($599,311 compensation expense in fiscal year
2007 and $1,170,443 in the three months ended September 30, 2007). Of the
241,249 shares vested for fiscal year 2007, the Company issued 225,249 shares of
Common Stock and the remaining 16,000 shares were exchanged by the executives
and redeemed by the Company to settle tax withholding obligations paid by the
Company totaling $134,080 in connection with the restricted stock bonuses
previously awarded and issued to them under their employment agreements. As a
result of the fact that a portion of the remaining 225,249 shares were subject
to redemption at September 30, 2007, the Company had recorded the entire fair
value of those remaining shares as a short-term share-based payment liability as
of September 30, 2007 totaling $1,635,674. On December 30, 2007 the redemption
provision lapsed, no further shares were redeemed and the final settlement
resulted in a reduction of the short-term share-based payment liability of
$1,635,674, a reduction of compensation expense of $446,452 and a credit to
Common Stock of $1,189,222 (123,671 shares at $4.77 and 101,578 shares at
$5.90), as the share price on the date of settlement was
$4.77.
In
conjunction with the Plan award for fiscal year 2008, the Company recorded a
reduction to compensation expense of $94,174 and recorded compensation expense
of $428,925 and a corresponding amount to the short-term accrued shared-based
payment liability during the three and nine months ended March 31, 2008. This
amount was based on management’s estimate of the probability of meeting the
target goals and fair value of the Company’s stock of $4.50 at the end of the
reporting period, March 31, 2008. Management will update this estimate and
remeasure the short-term share-based payment liability at the end of each
reporting period until settlement. The final measurement and charge to
compensation expense will be determined on the date of settlement.
As of
March 31, 2008, the Company had reserved shares of Common Stock for future
issuance for the following (unaudited):
|
Exercise
of Common Stock Options
|
161,875 | |||
|
Exercise
of Common Stock Warrants
|
1,591,735 | |||
|
Conversions
of Preferred Stock and cumulative Preferred Stock
dividends
|
14,977 | |||
|
Issuance
under 2007-A Stock Compensation Plan
|
73,287 | |||
|
Issuance
under Long-Term Equity Incentive Program- Fiscal Years 2008 and 2009 (not
vested)
|
634,866 | |||
|
Issuance
under Chief Executive Officer’s employment agreement upon the occurrence
of a USA Transaction
|
140,000 | |||
|
Total
shares reserved for future issuance
|
2,616,740 |
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
11.
COMMON STOCK (CONTINUED)
As of
June 30, 2007, the Company had reserved shares of Common Stock for future
issuance for the following:
|
Exercise
of Common Stock Options
|
163,000 | |||
|
Exercise
of Common Stock Warrants
|
1,704,175 | |||
|
Conversions
of Preferred Stock and cumulative Preferred Stock
dividends
|
14,195 | |||
|
Issuance
under 2006-B Common Stock Agreement
|
86,908 | |||
|
Issuance
under 2007-A Stock Compensation Plan
|
87,987 | |||
|
Issuance
under Long-Term Equity Incentive Program- Fiscal Year 2007 (vested, but
not issued)
|
101,578 | |||
|
Issuance
under Long-Term Equity Incentive Program- Fiscal Years 2008 and 2009 (not
vested)
|
634,866 | |||
|
Issuance
under Chief Executive Officer’s employment agreement upon the occurrence
of a USA Transaction
|
140,000 | |||
|
Total
shares reserved for future issuance
|
2,932,709 |
A summary
of the status of the Company’s nonvested common shares as of March 31, 2008
(unaudited) and June 30, 2007 and 2006, and changes during the years ended June
30, 2007 and 2006 and the nine months ended March 31, 2008 (unaudited), is
presented below:
|
Weighted-Average
|
||||||||
|
Grant-Date
|
||||||||
|
Nonvested
Shares
|
Shares
|
Fair Value
|
||||||
|
Nonvested
at July 1, 2005
|
- | $ | - | |||||
|
Granted
|
125,000 | 8.00 | ||||||
|
Vested
|
(41,667 | ) | 8.00 | |||||
|
Nonvested
at June 30, 2006
|
83,333 | $ | 8.00 | |||||
|
Granted
(LTIP)
|
952,298 | 5.90 | ||||||
|
Vested
(Bonus)
|
(83,333 | ) | 8.00 | |||||
|
Vested
(LTIP)
|
(101,578 | ) | 5.90 | |||||
|
Forfeited
(LTIP)
|
(215,854 | ) | 5.90 | |||||
|
Nonvested
at June 30, 2007
|
634,866 | $ | 5.90 | |||||
|
Reversal
of forfeited shares due to normalization (LTIP)
|
139,671 | 5.90 | ||||||
|
Vested
(LTIP)
|
(139,671 | ) | 5.90 | |||||
|
Nonvested
at March 31, 2008 (unaudited)
|
634,866 | $ | 5.90 | |||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
12.
COMMON STOCK WARRANTS AND OPTIONS
Common
Stock Warrant activity for the years ended June 30, 2007, 2006 and 2005 and the
nine months ended March 31, 2008 (unaudited) was as follows:
|
WARRANTS
|
||||
|
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 | |||
|
Exercised
|
(43,552 | ) | ||
|
Cancelled
|
(16,558 | ) | ||
|
Outstanding
at June 30, 2007
|
1,704,175 | |||
|
Issued
|
17,532 | |||
|
Exercised
|
(58,543 | ) | ||
|
Cancelled
|
(71,429 | ) | ||
|
Outstanding
at March 31, 2008
|
1,591,735 | |||
All
Common Stock warrants outstanding as of March 31, 2008, June 30, 2007, June 30,
2006 and June 30, 2005 were exercisable and all Common Stock warrants
outstanding as of June 30, 2007 were exercisable except for the 833,333 warrants
expiring March 15, 2013 which were exercisable as of September 15, 2007. The
following table shows exercise prices and expiration dates for warrants
outstanding as of March 31, 2008 (unaudited):
|
WARRANTS
|
EXERCISE
PRICE
|
||||||
|
OUTSTANDING
|
PER SHARE
|
EXPIRATION DATE
|
|||||
| 131,494 | $ | 20 |
December
31, 2008
|
||||
| 641,930 | $ | 6.40 |
December
31, 2011
|
||||
| 833,333 | $ | 6.40 |
March
15, 2013
|
||||
| 17,532 | $ | 7.70 |
October
17, 2012
|
||||
| 1,591,735 | |||||||
The
following table shows exercise prices and expiration dates for warrants
outstanding as of June 30, 2007:
|
WARRANTS
|
EXERCISE
PRICE
|
||||||
|
OUTSTANDING
|
PER SHARE
|
EXPIRATION DATE
|
|||||
| 71,429 | $ | 7 |
October
26, 2007
|
||||
| 131,494 | $ | 20 |
December
31, 2008
|
||||
| 667,919 | $ | 6.40 |
December
31, 2011
|
||||
| 833,333 | $ | 6.40 |
March
15, 2013
|
||||
| 1,704,175 | |||||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
12.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
All
Common Stock warrants outstanding as of June 30, 2006 were exercisable. The
following table shows exercise prices and expiration dates for warrants
outstanding as of June 30, 2006:
|
WARRANTS
|
EXERCISE
PRICE
|
||||||
|
OUTSTANDING
|
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
|
EXERCISE
PRICE
|
||||||
|
OUTSTANDING
|
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 October 17, 2007 Securities Purchase Agreement (Note 11),
the Company issued warrants to purchase up to 17,532 shares of the Company’s
Common Stock at $7.70 per share at any time through October 17,
2012.
In
conjunction with the SAC agreement (Note 11), 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
|
12.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
In
conjunction with the Blair Agreements (Note 11), 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. Of these warrants, 90,641 (unaudited)
and 32,098 were exercised during the nine months ended March 31, 2008 and the
year ended June 30, 2007, respectively. 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. All of
these warrants were exercised during the year ended June 30, 2007.
In
conjunction with the 2008-C Senior Note offering (Note 9), 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 9), 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 11), 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
12.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
Common
Stock Option activity during the years ended June 30, 2007, 2006 and 2005 and
the nine months ended March 31, 2008 (unaudited) was as follows:
|
OPTIONS
OUTSTANDING
|
EXERCISE
PRICE
PER SHARE
|
WEIGHTED-AVERAGE
EXERCISE PRICE
|
||||||||||
|
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 | |||||||
|
Granted
|
-- | -- | -- | |||||||||
|
Expired
|
(15,933 | ) | $ | 16.50-$100 | $ | 18.24 | ||||||
|
Outstanding
at June 30, 2007
|
163,000 | $ | 7.50-$20 | $ | 7.75 | |||||||
|
Expired
|
(1,125 | ) | $ | 20 | $ | 20.00 | ||||||
|
Outstanding
at March 31, 2008 (unaudited)
|
161,875 | $ | 7.50-$20 | $ | 7.61 | |||||||
|
Exercisable
at June 30, 2007
|
117,667 | $ | 7.50-$20 | $ | 7.83 | |||||||
|
Exercisable
at March 31, 2008 (unaudited)
|
116,542 | $ | 7.50-$20 | $ | 7.64 | |||||||
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, 2008 (unaudited).
|
WEIGHTED
AVERAGE
|
||||||||||||||||||||||||||
|
EXERCISE
|
REMAINING
|
CONTRACTUAL
|
INTRINSIC
|
|||||||||||||||||||||||
|
OPTIONS
|
OPTIONS
|
PRICE
PER
|
LIFE
|
(YEARS)-
|
VALUE-
|
|||||||||||||||||||||
|
OUTSTANDING
|
EXERCISABLE
|
SHARE
|
OUTSTANDING
|
EXERCISEABLE
|
OUTSTANDING
|
EXERCISABLE
|
||||||||||||||||||||
| 154,000 | 111,667 | $ | 7.50 | 4.18 | 2.56 | $ | - | $ | - | |||||||||||||||||
| 6,000 | 3,000 | $ | 8 | 4.97 | 1.44 | $ | - | $ | - | |||||||||||||||||
| 1,875 | 1,875 | $ | 20 | 0.83 | 0.83 | $ | - | $ | - | |||||||||||||||||
| 161,875 | 116,542 | 4.43 | 2.71 | $ | - | $ | - | |||||||||||||||||||
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, 2007.
|
WEIGHTED
AVERAGE
|
||||||||||||||||||||||||||
|
EXERCISE
|
REMAINING
|
CONTRACTUAL
|
INTRINSIC
|
|||||||||||||||||||||||
|
OPTIONS
|
OPTIONS
|
PRICE
PER
|
LIFE
|
(YEARS)-
|
VALUE-
|
|||||||||||||||||||||
|
OUTSTANDING
|
EXERCISABLE
|
SHARE
|
OUTSTANDING
|
EXERCISEABLE
|
OUTSTANDING
|
EXERCISABLE
|
||||||||||||||||||||
| 154,000 | 111,667 | $ | 7.50 | 4.72 | 2.99 | $ | 500,500 | $ | 362,918 | |||||||||||||||||
| 6,000 | 3,000 | $ | 8 | 5.47 | 1.60 | $ | - | $ | - | |||||||||||||||||
| 3,000 | 3,000 | $ | 20 | 0.95 | 0.95 | $ | - | $ | - | |||||||||||||||||
| 163,000 | 117,667 | 4.68 | 2.90 | $ | 500,500 | $ | 362,918 | |||||||||||||||||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
12.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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
PER
|
LIFE
|
(YEARS)-
|
VALUE-
|
|||||||||||||||||||||
|
OUTSTANDING
|
EXERCISABLE
|
SHARE
|
OUTSTANDING
|
EXERCISEABLE
|
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 | |||||||||||||||||||
Total
expected compensation expense related to the vesting of options outstanding as
of June 30, 2007 is $115,046 and is expected to be recognized over
weighted-average period of 0.95 years. The intrinsic value of the non-vested
options as March 31, 2008 and June 30, 2007 was $0 (unaudited) and $145,832
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 all
with an exercise price of $7.50 per share and all exercisable at any time within
five years following the date of vesting.
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 |
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
12.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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 |
The
weighted-average grant-date fair value of stock options granted was $5.26 and
$9.36 during the years ended June 30, 2006 and 2005, respectively. The total
fair value of options vested during the years ended June 30, 2007, 2006, and
2005 and the nine months ended March 31, 2008 was $255,815, $371,050, $18,000
and $0 (unaudited), respectively.
13.
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, 2007, 2006 and 2005 and the
nine months ended March 31, 2008 and 2007 was approximately $143,000, $114,000,
$96,000, $119,000 (unaudited) and $104,000 (unaudited),
respectively.
14.
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.
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
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
14.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $492,000, $489,000, $447,000,
$454,000 (unaudited) and $395,000 (unaudited) during the years ended June 30,
2007, 2006 and 2005 and the nine months ended March 31, 2008 and 2007,
respectively. Future minimum lease payments subsequent to June 30, 2007 under
capital leases and noncancellable operating leases are as follows:
|
CAPITAL
|
OPERATING
|
|||||||
|
LEASES
|
LEASES
|
|||||||
|
2008
|
$ | 362,280 | $ | 448,000 | ||||
|
2009
|
206,398 | 455,000 | ||||||
|
2010
|
130,577 | 223,000 | ||||||
|
2011
|
35,578 | 3,000 | ||||||
|
2012
|
26,684 | -- | ||||||
|
Total
minimum lease payments
|
$ | 761,517 | $ | 1,129,000 | ||||
|
Less
amount representing interest
|
84,042 | |||||||
|
Present
value of net minimum lease payments
|
677,475 | |||||||
|
Less
current obligations under capital leases
|
311,420 | |||||||
|
Obligations
under capital leases, less current portion
|
$ | 366,055 | ||||||
In
September 2007 (unaudited), provided that the manufacturer can produce a lower
cost e-Port for the Company, the Company had committed to purchase approximately
$3,600,000 of inventory from a third party contract manufacturer over an
eighteen month period.
In
conjunction with the Program (Note 11), 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 were 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 vested 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. 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
14.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
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"). 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.
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 vested 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.
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.
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. 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
14.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
requests money damages of $4,350,381 representing the alleged value of the
warrants currently 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. 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, states that the entire
transaction is 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, 2006 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.
15.
SUBSEQUENT EVENTS (UNAUDITED)
From
March 31 through June 25, 2008, $7,275,000 of our available-for-sale ARS
investments were redeemed by the issuers at par value for cash.
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
|
$ | 510.71 | ||
|
Printing
and Engraving Expenses
|
$ | 4,489.29 | ||
|
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
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
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 agreed to
register the shares for resale under the Act for a period of one year. The Stock
Purchase Agreement provided that if the registration statement was not declared
effective by the SEC within 60 days from the date of the Stock Purchase
Agreement, then the Company would 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 was 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 were 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 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 Common Stock Agreement"). 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 had 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 could require Mr. Illes to purchase shares under the 2006-B Common
Stock Agreement only if the shares had been registered by the Company for resale
under the Act. During any calendar month, Mr. Illes could 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 was to terminate on August 30, 2009.
However, as of March 31, 2008, the Company issued $15,000,000 in Common Stock
and there are no remaining funds under this agreement. We had agreed to register
for resale the shares purchased by Mr. Illes under the agreement for a two year
period. The securities offered and sold to Mr. Illes were 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 replaced
the February 2006 stock purchase agreement between Mr. Illes and the Company,
and provided 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.
On
October 17, 2007, the Company sold 2,142,871 shares of Common Stock for $7.00
per share for an aggregate of $15,000,097 to 37 investors pursuant to a
Securities Purchase Agreement entered into with the investors. The offer and
sale of the shares 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 for resale under the Act through October 17,
2009. The Registration Rights Agreement entered into with the investors provided
that if the registration statement was not declared effective by the SEC within
90 days from the date of the Stock Purchase Agreements, or by January 15, 2008,
then the Company would pay to the investors as liquidated damages 1% of the
purchase price for the shares for each month beyond 90 days that the
registration statement was 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 $945,000.00 and warrants to
purchase up to 17,532 shares at $7.70 per share at any time through October 17,
2012. As of the date of this prospectus, none of the warrants have been
exercised. Blair also received an expense reimbursement from us of $7,418.44. We
have agreed to register the shares underlying the warrants for resale under the
Act through October 17, 2009. 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.
During
February 2007, the Company adopted the Long-Term Equity Incentive Program
covering the Company’s executive officers – Messrs. Jensen, Herbert and DeMedio.
Under the Plan, each executive officer will be awarded common stock of the
Company in the event the Company achieves target goals relating to each of
revenues, gross profit and EBITDA during each of the fiscal years ending June
30, 2007, June 30, 2008, and June 30, 2009. For the 2007 fiscal year, a higher
than target revenue hurdle was met (110%), and lower than target hurdles for
each of gross profit (85%) and EBITDA (85%) were also met, resulting in the
issuance to the executive officers a total of 225,249 shares under the Plan for
the fiscal year. The specific allocation of the shares among the executive
officers is as follows: Mr. Jensen - 160,041 shares; Mr. Herbert - 44,628
shares; and Mr. DeMedio - 20,580 shares. The offer and sale of these shares was
exempt from registration under Section 4(2) of the
Act. In October 2007, the Company granted to the
executives standard piggyback registration rights in connection with these
shares for a period of five years after vesting.
During
September 2007, the Company granted to Bruce Shirey in connection with the
commencement of his employment with the Company as Vice President- e-Port
Connect Services, 6,000 shares which vest as follows: 2,000 on March 1, 2008;
2,000 on September 1, 2008; and 2,000 on September 1, 2009. The offer and sale
of the shares was exempt from registration under Section 4(2) of the
Act.
During
September 2007, the Company granted to Len Crosson in connection with the
commencement of his employment with the Company as Vice President- Global Sales
& Business Development, 6,000 shares which vest as follows: 2,000 on April
1, 2008; 2,000 on August 1, 2008; and 2,000 on August 1, 2009. The offer and
sale of the shares was exempt from registration under Section 4(2) of the
Act.
STOCK
OPTIONS
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
|
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).
|
|
|
4.2
|
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).
|
|
|
4.3
|
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).
|
|
|
4.4
|
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).
|
|
|
4.5
|
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).
|
|
|
4.6
|
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).
|
|
4.7
|
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).
|
|
|
4.8
|
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).
|
|
|
4.9
|
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).
|
|
|
4.10
|
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).
|
|
|
4.11
|
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).
|
|
|
4.12
|
Form
of 2006-BP Common Stock Purchase Warrant (Incorporated by reference to
Exhibit 4.27 to Form S-1 filed on January 9, 2007).
|
|
|
4.13
|
Common
Stock Purchase Warrant issued to William Blair & Co., LLC, dated
January 4, 2007 (Incorporated by reference to Exhibit 4.27 to Form S-1
filed on January 9, 2007).
|
|
|
4.14
|
Securities
Purchase Agreement between the Company and S.A.C. Capital Associates, LLC
dated March 14, 2007.
|
|
|
4.15
|
Form
of Warrant No. SAC-001 issued to S.A.C. Capital Associates,
LLC.
|
|
|
4.16
|
Registration
Rights Agreement between the Company and S.A.C. Capital Associates, LLC
dated March 14, 2007.
|
|
|
4.17
|
Form
of Securities Purchase Agreement dated October 17, 2007 between the
Company and each of the Buyers (Incorporated by reference to Exhibit 4.1
of Form 8-K filed October 17, 2007).
|
|
|
4.18
|
Form
of Registration Rights Agreement dated October 17, 2007 between the
Company and each of the Buyers (Incorporated by reference to Exhibit 4.2
of Form 8-K filed October 17, 2007).
|
|
|
4.19
|
Common
Stock Purchase Warrant issued to William Blair & Co., LLC, dated
October 17, 2007 (Incorporated by reference to Exhibit 4.34 of Form S-1
filed November 16, 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
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).
|
|
10.4
|
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).
|
|
|
10.5
|
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).
|
|
|
10.6
|
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).
|
|
|
10.7
|
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).
|
|
|
10.8
|
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).
|
|
|
10.9
|
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)
|
|
|
10.10
|
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)
|
|
|
10.11
|
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)
|
|
|
10.12
|
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)
|
|
|
10.13
|
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)
|
|
|
10.14
|
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)
|
|
|
10.15
|
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)
|
|
|
10.16
|
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)
|
|
|
10.17
|
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)
|
|
10.18
|
USA
Technologies, Inc. 2006-A Stock Compensation Plan (Incorporated by
reference to Exhibit 10.1 to Form S-8 filed June 19,
2006).
|
|
|
10.19
|
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).
|
|
|
10.20
|
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).
|
|
|
10.21
|
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).
|
|
|
10.22
|
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).
|
|
|
10.23
|
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).
|
|
|
10.24
|
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).
|
|
|
10.25
|
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).
|
|
|
10.26
|
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).
|
|
|
10.27
|
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).
|
|
|
10.28
|
Supply
and Licensing Agreement dated as of February 19, 2007 between Coca-Cola
Enterprises, Inc. and the Company (Incorporated by reference to Exhibit
10.34 to Form S-1 filed June 6, 2007).
|
|
|
10.29
|
Stock
Issuance And Withholding Agreement between the Company and George R.
Jensen, Jr., dated September 28, 2007 (Incorporated by reference to
Exhibit 10.1 to Form 10-Q filed November 13, 2007).
|
|
|
10.30
|
Stock
Issuance And Withholding Agreement between the Company and Stephen P.
Herbert dated September 28, 2007 (Incorporated by reference to Exhibit
10.2 to Form 10-Q filed November 13,
2007).
|
|
10.31
|
Stock
Issuance Agreement between the Company and David M. DeMedio dated
September 28, 2007 (Incorporated by reference to Exhibit 10.3 to Form 10-Q
filed November 13, 2007).
|
|
|
10.32
|
First
Amendment to MasterCard PayPass Participation Agreement dated August 17,
2007 between the Company, MasterCard International Incorporated and
Coca-Cola Enterprises (Incorporated by reference to Exhibit 10.26 to Form
10-K for the fiscal year ended June 30, 2007).
|
|
|
10.33
|
MasterCard
PayPass Agreement between the Company and MasterCard International
Incorporated dated November 16, 2007 (Incorporated by reference to Exhibit
10.33 to Form S-1 filed November 28, 2007).
|
|
|
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 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, 2007, 2006 AND 2005
|
ACCOUNTS
RECEIVABLE
|
Balance
at beginning of period
|
Additions(reductions)charged
to earnings
|
Deductions
uncollectible receivables written off, net of recoveries
|
Balance
at end of period
|
||||||||||||
|
June 30, 2007
|
$ | 229,000 | 9,000 | 96,000 | $ | 142,000 | ||||||||||
|
June 30, 2006
|
$ | 196,000 | 131,000 | 98,000 | $ | 229,000 | ||||||||||
|
June
30, 2005
|
$ | 240,000 | (23,000 | ) | 20,000 | $ | 197,000 | |||||||||
|
INVENTORY
|
Balance
at beginning of period
|
Additions
charged to earnings
|
Deductions
shrinkage and obsolescence
|
Balance
at end of period
|
||||||||||||
|
June 30, 2007
|
$ | 259,000 | 141,000 | 83,000 | $ | 317,000 | ||||||||||
|
June 30, 2006
|
$ | 321,000 | 484,000 | 546,000 | $ | 259,000 | ||||||||||
|
June 30, 2005
|
$ | 229,000 | 286,000 | 194,000 | $ | 321,000 | ||||||||||
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 30, 2008.
|
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 re-substitution, 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
30, 2008
|
||
|
GEORGE
R. JENSEN, JR.
|
and
Chief Executive Officer
|
|||
|
(Principal
Executive Officer)
|
||||
|
/s/ David M. DeMedio
|
Chief
Financial Officer (Principal
|
June
30, 2008
|
||
|
DAVID
M. DEMEDIO
|
Accounting
Officer)
|
|||
|
/s/ Stephen P. Herbert
|
Chief
Operating Officer, President
|
June
30, 2008
|
||
|
STEPHEN
P. HERBERT
|
and
Director
|
|||
|
/s/ William L. Van Alen,
Jr.
|
Director
|
June
30, 2008
|
||
|
WILLIAM
L. VAN ALEN, JR.
|
||||
|
/s/ Douglas M. Lurio
|
Director
|
June
30, 2008
|
||
|
DOUGLAS
M. LURIO
|
||||
|
/s/ Steven Katz
|
Director
|
June
30, 2008
|
||
|
STEVEN
KATZ
|
||||
|
/s/ Joel Brooks
|
Director
|
June
30, 2008
|
||
|
JOEL
BROOKS
|
||||
|
/s/ Stephen W. McHugh
|
Director
|
June
30, 2008
|
||
|
STEPHEN
W. MCHUGH
|
Exhibit
Index
|
Exhibit
Number
|
Description
|
|
|
Opinion
of Lurio & Associates, P.C.
|
||
|
Consent
of Goldstein Golub Kessler LLP
|
98
Exhibit
5.1
June 30,
2008
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 June 30, 2008 (the "Registration
Statement"). The Registration Statement covers an aggregate of 2,854,381 shares
of Common Stock ("Common Stock"), 1,950,426 of which are currently outstanding,
and the balance (up to 903,955 shares) of which are issuable upon the exercise
of common stock purchase warrants.
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 1,950,426 shares of Common Stock
that are currently issued and outstanding are legally issued, fully paid and
nonassessable; and (ii) the 903,955 shares issuable upon exercise of common
stock purchase warrants, 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.
|
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 26, 2007 in the Registration Statement (Form S-1
No. 333-000000) and related Prospectus of USA Technologies, Inc. dated June 30,
2008.
|
/s/ Goldstein Golub
Kessler LLP
|
|
|
GOLDSTEIN
GOLUB KESSLER LLP
|
New York,
New York
June 30,
2008