Filed
Pursuant to Rule 424(b)(3)
File
No. 333-152042
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, 903,955 are shares underlying warrants
issuable as of the date of this prospectus. These warrants may be exercised at
$5.90 per share at any time before September 14, 2013.
Our
common stock is listed on The NASDAQ Global Market under the symbol “USAT.” On
March 6, 2009, the last reported sale price of our common stock was $1.49 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
3.
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 March 13, 2009.
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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
December 31, 2008, the Company had approximately 43,000 devices connected to its
USALive® network. During the quarter ended December 31, 2008, the Company
processed approximately 5.1 million transactions totaling over $10.6
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 $1,679,000, $1,355,000, and $974,000 for the years ended June 30,
2008, 2007 and 2006, respectively, and $1,551,000 (unaudited) and $779,000
(unaudited) for the six months ended December 31, 2008 and 2007,
respectively.
ABOUT
OUR OFFERING
Our
selling shareholder is, as of the date of this prospectus:
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the
holder of 1,950,426 shares covered by this prospectus;
and
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the
holder of unexercised warrants which, if exercised, would represent
903,955 shares, which are covered by this
prospectus.
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Based
upon the 15,275,527 shares of Common Stock outstanding as of December 31, 2008,
and assuming all of the warrants are exercised for 903,955 shares, we would have
16,179,482 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.
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,
“estimate,” “could,” “likely,” “may,” “plan,” “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:
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general
economic, market or business
conditions;
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the
ability of the Company to generate sufficient sales to generate operating
profits, or to sell products at a
profit;
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the
ability of the Company to raise funds in the future through sales of
securities;
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whether
the Company is able to enter into binding agreements with third parties to
assist in product or network
development;
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the
ability of the Company to commercialize its developmental products, or if
actually commercialized, to obtain commercial acceptance
thereof;
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the
ability of the Company to compete with its competitors to obtain market
share;
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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;
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the
ability of the Company to obtain approval of its pending patent
applications;
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the
ability of the Company to satisfy its trade obligations included in
accounts payable and accrued
liabilities;
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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;
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the
ability of the Company to retain key customers from whom a significant
portion of its revenues is derived;
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the
ability of a key customer to reduce or delay purchasing products from the
Company; and
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as
a result of the slowdown in the economy and/or the tightening of the
capital and credit markets, our customers may modify, delay or cancel
plans to purchase our products or services, and suppliers may increase
their prices, reduce their output or change their terms of
sale.
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Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements. We caution investors that actual results or business
conditions may differ materially from those projected or suggested in
forward-looking statements as a result of various factors including, but not
limited to, those described above and in the Risk Factors section of this
prospectus. We cannot assure you that we have identified all the
factors that create uncertainties. Moreover, new risks emerge from
time to time and it is not possible for our management to predict all risks, nor
can we assess the impact of all risks on our business or the extent to which any
risk, or combination of risks, may cause actual results to differ from those
contained in any forward-looking statements. Readers should not place
undue reliance on forward-looking statements.
Unless
required by law, we undertake no obligation to publicly revise any
forward-looking statement to reflect circumstances or events after the date of
this prospectus or to reflect the occurrence of unanticipated
events.
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
December 31, 2008, our cumulative losses from operations are approximately $172
million. For our fiscal years ended June 30, 2008, 2007 and 2006, we have
incurred net losses of $16,417,893, $17,782,458 and $14,847,076, respectively,
and a net loss of $7,673,222 during the six months ended December 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 July 1, 2010, 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. Subsequent to July 1, 2010, 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.
Current
conditions in the global financial markets and the distressed economy may
materially adversely affect our business, results of operations and ability to
raise capital.
Our
business and results of operations may be materially affected by conditions in
the financial markets and the economy generally. The stress being experienced by
global financial markets that began in late 2007 continued and substantially
increased during 2008 and into 2009. The volatility and disruption in the
financial markets have reached unprecedented levels. The availability and cost
of credit has been materially affected. These factors, combined with volatile
oil prices, depressed home prices and increasing foreclosures, falling equity
market values, declining business and consumer confidence and the risks of
increased inflation and unemployment, have precipitated an economic slowdown and
severe recession. These events and the continuing market upheavals may have an
adverse effect on us, our suppliers and our customers. The demand for our
products could be adversely affected in an economic
downturn and our revenues may decline under such circumstances. Furthermore, the
fixed-income markets are experiencing a period of both extreme volatility and
limited market liquidity, which has affected a broad range of asset classes and
sectors. Equity markets have also been experiencing heightened
volatility. We rely on the credit and equity markets for funding our
business by issuing debt and equity securities. We may find it
difficult, or we may not be able, to access the credit or equity markets, or we
may experience higher funding costs as a result of the current adverse market
conditions. Continued instability in these markets may limit our
ability to access the capital we require to fund and grow our
business.
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 68% and 41% of
the Company's accounts and finance receivables at June 30, 2008 and 2007,
respectively, were concentrated with two customers each year, and 42% as of
December 31, 2008 were concentrated with one customer. Approximately 59%, 40%
and 29% of the Company's revenues for the year ended June 30, 2008, 2007 and
2006 respectively, were concentrated with two (35% with one customer and 24%
with another customer), one, and two (19% with one customer and 10% with another
customer) customer(s), respectively. Approximately 17% and 75% of the Company’s
revenues for the six months ended December 31, 2008 and 2007, respectively, were
concentrated with one and two customers (43% with one customer and 32% with
another customer). 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,
2011. 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.
Through
December 31, 2008, we have 26 pending 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 December 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.
We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission adopted rules requiring public companies to include a report
of management on the company’s internal controls over financial reporting in
their annual reports, including Form 10-K. In addition, the independent
registered public accounting firm auditing a company’s financial statements must
also attest to and report on management’s assessment of the effectiveness of the
company’s internal controls over financial reporting as well as the operating
effectiveness of the company’s internal controls. Beginning in our fiscal year
starting July 1, 2009, our independent registered public accounting firm must
attest to, and report on, management’s assessment of internal controls. There
can be no positive assurance that we will receive a positive attestation from
our independent auditors.
In the
event we are unable to receive a positive attestation from our independent
auditors with respect to our internal controls, investors and others may lose
confidence in the reliability of our financial statements, and our ability to
obtain equity or debt financing could suffer.
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.
Our
products and services may be vulnerable to security breach.
Credit
card issuers have promulgated credit card security guidelines as part of their
ongoing efforts to battle identity theft and credit card fraud. We continue to
work with credit card issuers to assure that our products and services comply
with these rules. There can be no assurances, however, that our products and
services 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
March 1, 2009, the unpaid and cumulative dividends on the series A preferred
stock equal $10,348,607. 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, 2008
and 2007 and the six months ended December 31, 2008, certain holders of the
Preferred Stock converted 0, 1,150 and 0 (unaudited), respectively, into 0, 11
and 0 (unaudited) shares of Common Stock, respectively. Certain of these
shareholders also converted cumulative preferred dividends of $0, $15,000 and $0
(unaudited), respectively, into 0, 15 and 0 (unaudited) shares of Common Stock
during the years ended June 30, 2008 and 2007 and the six months ended December
31, 2008, respectively.
We
may issue additional shares of our common stock which could depress the market
price of our Common Stock.
As of
December 31, 2008, we had issued and outstanding options to purchase 160,750
shares of our common stock and warrants to purchase 3,030,863 shares. The shares
underlying none of these options, and 903,955 of these warrants have been
registered and may be freely sold. Market sales of large amounts of our common
stock, or the potential for those sales even if they do not actually occur, may
have the effect of depressing the market price of our common stock. In addition,
if our future financing needs require us to issue additional shares of common
stock or securities convertible into common stock, the supply of common stock
available for resale could be increased which could stimulate trading activity
and cause the market price of our common stock to drop, even if our business is
doing well. Furthermore, the issuance of any additional shares of our
Common Stock or securities convertible into our Common Stock could be
substantially dilutive to holders of our Common Stock if they do not invest in
future offerings.
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 December 31, 2008,
these shares consisted of the following:
|
|
o
|
15,275,527
shares of Common Stock
|
|
|
o
|
510,270
shares of the Series A Preferred Stock, convertible into 5,102 shares of
Common Stock
|
|
|
o
|
9,966
shares issuable upon conversion of the accrued and unpaid dividends on the
Series A Preferred Stock
|
|
|
o
|
903,955
shares underlying Common Stock warrants;
and
|
|
|
o
|
228,000
shares issuable under our 2008 Stock Incentive
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 63 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 $5,333,334.50 of proceeds from the
exercise of the warrants for 903,955 shares at the stated exercise price of
$5.90 per share. As of the date of this prospectus, 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, 2008 are
derived from the audited consolidated financial statements of USA Technologies,
Inc. The financial data for the six months ended December 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 six months ended December 31, 2008 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 2009. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information.
|
Year
ended June 30
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
OPERATIONS
DATA
|
||||||||||||||||||||
|
Revenues
|
$
|
16,103,546
|
$
|
9,158,012
|
$
|
6,414,803
|
$
|
4,677,989
|
$
|
5,632,815
|
||||||||||
|
Net
loss
|
(16,417,893
|
)
|
(17,782,458
|
)
|
(14,847,076
|
)
|
(15,499,190
|
)
|
(21,426,178
|
)
|
||||||||||
|
Cumulative
preferred dividends
|
(780,588
|
)
|
(781,451
|
)
|
(783,289
|
)
|
(784,113
|
)
|
(786,513
|
)
|
||||||||||
|
Loss
applicable to common shares
|
$
|
(17,198,481
|
)
|
(18,563,909
|
)
|
$
|
(15,630,365
|
)
|
$
|
(16,283,303
|
)
|
$
|
(22,212,691
|
)
|
||||||
|
Loss
per common share (basic and diluted)
|
$
|
(1.21
|
)
|
$
|
(2.13
|
)
|
$
|
(3.15
|
)
|
$
|
(4.18
|
)
|
$
|
(7.70
|
)
|
|||||
|
Cash
dividends per common share
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||||||
|
Total
assets
|
$
|
40,055,651
|
$
|
34,491,497
|
$
|
23,419,466
|
$
|
23,391,765
|
$
|
25,880,577
|
||||||||||
|
Convertible
Senior Notes and other long-term debt
|
$
|
967,518
|
$
|
1,029,745
|
$
|
7,780,853
|
$
|
9,337,300
|
$
|
7,273,056
|
||||||||||
|
Shareholders'
equity
|
$
|
32,576,549
|
$
|
28,084,206
|
$
|
11,177,064
|
$
|
9,309,185
|
$
|
14,108,662
|
||||||||||
|
Six
months ended
|
||||||||
|
December 31
|
||||||||
|
2008
|
2007
|
|||||||
|
OPERATIONS
DATA
|
(Unaudited)
|
(Unaudited)
|
||||||
|
Revenues
|
$
|
6,065,108
|
$
|
6,815,059
|
||||
|
Net
loss
|
(7,282,928
|
)
|
(8,902,655
|
)
|
||||
|
Cumulative
preferred dividends
|
(390,294
|
)
|
(390,294
|
)
|
||||
|
Loss
applicable to common shares
|
$
|
(7,673,222
|
)
|
$
|
(9,292,949
|
)
|
||
|
Loss
per common share (basic and diluted)
|
$
|
(0.51
|
)
|
$
|
(0.70
|
)
|
||
|
Cash
dividends per common share
|
$
|
--
|
$
|
--
|
||||
|
BALANCE
SHEET DATA
|
||||||||
|
Total
assets
|
$
|
31,134,023
|
$
|
48,109,907
|
||||
|
Long-term
debt
|
$
|
1,187,037
|
$
|
1,256,952
|
||||
|
Shareholders'
equity
|
$
|
25,995,103
|
$
|
39,004,722
|
||||
Unaudited
quarterly results of operations for the years ended June 30, 2008 and 2007 and
the six months ended December 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 2008 and 2007 and the six months ended December 31, 2008.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
||||||||||||||||
|
YEAR
ENDED JUNE 30, 2008
|
||||||||||||||||||||
|
Revenues
|
$ | 3,355,656 | $ | 3,459,403 | $ | 4,263,512 | $ | 5,024,975 | $ | 16,103,546 | ||||||||||
|
Gross
profit
|
$ | 519,176 | $ | 1,042,910 | $ | 895,722 | $ | 961,046 | $ | 3,418,854 | ||||||||||
|
Net
loss
|
$ | (5,262,989 | ) | $ | (3,639,666 | ) | $ | (3,760,546 | ) | $ | (3,754,692 | ) | $ | (16,417,893 | ) | |||||
|
Cumulative
preferred dividends
|
$ | (390,294 | ) | $ | - | $ | (390,294 | ) | $ | - | $ | (780,588 | ) | |||||||
|
Loss
applicable to common shares
|
$ | (5,653,283 | ) | $ | (3,639,666 | ) | $ | (4,150,840 | ) | $ | (3,754,692 | ) | $ | (17,198,481 | ) | |||||
|
Loss
per common share (basic and diluted)
|
$ | (0.47 | ) | $ | (0.25 | ) | $ | (0.28 | ) | $ | (0.25 | ) | $ | (1.21 | ) | |||||
|
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 | ) | |||||
|
SIX
MONTHS ENDED DECEMBER 31, 2008
|
||||||||||||||||||||
|
Revenues
|
$ | 6,065,108 | ||||||||||||||||||
|
Gross
profit
|
$ | 1,568,538 | ||||||||||||||||||
|
Net
loss
|
$ | (7,282,928 | ) | |||||||||||||||||
|
Cumulative
preferred dividends
|
$ | (390,294 | ) | |||||||||||||||||
|
Loss
applicable to common shares
|
$ | (7,673,222 | ) | |||||||||||||||||
|
Loss
per common share (basic and diluted)
|
$ | (0.51 | ) | |||||||||||||||||
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.
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.
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.
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.
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 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, 2008,
2007, and 2006, and $523,179 and $618,300 for the six months ended December
31,2008 and 2007 respectively.
INVESTMENTS
The
Company 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 shareholders' 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.).
As of
June 30, 2008, available-for-sales securities consisted of $6,875,000 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, the Company had $14,150,000 of ARS, of which $7,275,000 were redeemed
by the various issuers at par value through June 30, 2008 and as such, there
were no losses realized in connection with the redemption of our ARS
investments.
As of
June 30, 2008, we have classified $6,875,000 of our ARS as non-current assets.
We continue to believe that the par value represents the fair value of these
investments. As such, there was no unrealized loss recorded as of June 30, 2008
in connection with our ARS investments.
As of
June 30, 2007, available-for-sale securities consisted of $6,350,000 par value
of auction rate securities. There was no unrealized gain (loss) as of June 30,
2007. These securities were redeemed during the first quarter of fiscal year
2008.
RESULTS
OF OPERATIONS
SIX
MONTHS ENDED DECEMBER 31, 2008
Revenues
for the six months ended December 31, 2008 were $6,065,108 compared to
$6,815,059 for the corresponding six-month period in the previous fiscal year.
This $749,951 or 11% decrease was primarily due to a decrease in equipment sales
of $1,997,716, offset by an increase in license and transaction fees of
$1,247,765. The decrease in equipment sales was due to a decrease in sales of
approximately $1,703,000 of e-Port vending equipment and approximately $505,000
in energy conservation equipment, offset by an increase in other equipment sales
of approximately $210,000. The decrease in e-Port vending equipment sales was
primarily related to a decrease in capital spending by some of our customers due
to the current economic slowdown, as well as key customers awaiting release of
the e-Port G8 and e-Port Edge™ products, anticipated to occur during the third
quarter of fiscal 2009. 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 recurring revenues being generated by the e-Port units connected
to our network.
In
regards to transaction fees, during the six months ended December 31, 2008, the
Company processed approximately 9.8 million transactions totaling over $22.2
million as compared to approximately 4.2 million transactions totaling over
$15.0 million during the six months ended December 31, 2007, an increase of 133%
in transaction volume and 48% in dollars processed.
Cost of
sales for the period consisted of equipment costs of $2,330,586 and network and
transaction services related costs of $2,165,984. The decrease in total cost of
sales of $756,403 or 14% over the same period in the prior year was due to a
decrease in equipment costs of $1,697,906 and an increase in network and
transaction services related costs of $941,503.
Gross
profit for the six months ended December 31, 2008 was $1,568,538 compared to
gross profit of $1,562,086 for the corresponding six-month period in the
previous fiscal year. This slight increase is primarily due to an increase in
the profit margin of e-Port vending equipment sales as a result of an increase
in the average sales price and producing more of the product components at a
lower cost primarily due to offshore production.
Selling,
general and administrative expense of $8,215,833, decreased by $1,618,847 or 16%
primarily due to a decreases in compensation expense of approximately
$1,768,000, recruiting fees of approximately $252,000, bad debt expense of
approximately $153,000, and advertising expense of approximately $110,000,
offset by increases in professional and consulting services of approximately
$326,000, and product development costs of approximately $220,000. The overall
decrease was due to focused cost reduction measures taken by the Company during
the third and fourth quarters of fiscal year 2008. The increase in product
development costs and consulting services is directly attributable to the costs
related to the development of our new e-Port G-8 and e-Port Edge products which
are anticipated to be released during the third quarter of this fiscal
year.
Compensation
expense decreased by approximately $1,768,000 primarily due to a decrease of
approximately $1,515,000 in non-cash charges related to the Long-Term Equity
Incentive Program for fiscal year 2008 as compared to the program for fiscal
year 2007, specifically due to a decrease in the market value of the Company’s
stock, as well as a $229,000 decrease in salaries expense.
The
six-month period ended December 31, 2008 resulted in a net loss of $7,282,928
(approximately $1.4 million of non-cash charges) compared to a net loss of
$8,902,655 (approximately $2.5 million of non-cash charges) for the six-month
period ended December 31, 2007.
SIX
MONTHS ENDED DECEMBER 31, 2007
Revenues
for the six months ended December 31, 2007 were $6,815,059 compared to
$4,020,619 for the corresponding six-month period in the previous fiscal year.
This $2,794,440 or 70% increase was primarily due to an increase in equipment
sales of $1,956,204 and license and transaction fees of $838,236. The increase
in equipment sales was due to an increase in sales of approximately $1,849,000
of e-Port vending equipment sales and approximately $324,000 in energy
conservation equipment, offset by decreases of approximately $199,000 in
business center sales and approximately $18,000 in laundry equipment sales. The
increase in e-Port vending equipment sales was primarily related to the
CCE/MasterCard 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 CCE/MasterCard Agreement.
Cost of
sales for the period consisted of equipment costs of $4,028,492 and network and
transaction services related costs of $1,224,481. The increase in cost of sales
of $2,132,079 or 68% over the prior year period was due to an increase in
equipment costs of approximately $2,727,000 and an increase of approximately
$692,000 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.
Gross
profit for the six months ended December 31, 2007 was $1,562,086 compared to
gross profit of $899,725 for the corresponding six-month period in the previous
fiscal year. This 74% 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 $9,834,680, increased by $3,028,449 or 44%
primarily due to an increase in compensation expense of approximately
$2,243,000, an increase in recruiting fees of approximately $285,000, an
increase in consulting services of approximately $307,000, and an increase of
approximately $74,000 in bad debt expense.
Compensation
expense increased by approximately $2,243,000 due primarily to an increase in
salaries and benefits expense of approximately $861,000, an increase in bonus
expense of approximately $228,000, and due to non-cash charges of approximately
$1,247,000 related to the vesting of shares under the Long-Term Equity Incentive
Program for fiscal years 2007 and 2008.
Interest
expense of $73,939 decreased by $1,279,573 primarily due to retirement of the
outstanding convertible Senior Notes that were repaid in April 2007. Interest
income increased by $392,441 due to the investment in available-for-sale
securities with proceeds received from private placements.
The
six-month period ended December 31, 2007 resulted in a net loss of $8,902,655
(approximately $2.4 million of non-cash charges) compared to a net loss of
$8,057,402 (approximately $2.7 million of non-cash charges) for the six-month
period ended December 31, 2006.
FISCAL
YEAR ENDED JUNE 30, 2008
Revenues
for the fiscal year ended June 30, 2008 were $16,103,546, an increase of
$6,945,534 or 76% from the fiscal year ended June 30, 2007. This increase was
primarily attributed to increased sales in our vending product line. Revenues
are discussed in more detail as follows:
Equipment
sales: Revenues from equipment sales increased to $12,384,870 from $7,454,076 in
the prior fiscal year, an increase of $4,930,794 or 66%. This increase was
primarily attributed to increased sales of our vending ($4,643,000) and energy
($711,000) equipment, offset by decreases in business center ($189,000) and
laundry ($165,000) equipment sales. The increase in vending equipment sales was
primarily related to the CCE/MasterCard Agreement and the November 2007
MasterCard Agreement, as more fully described in Item 1 of this Annual Report,
as well as first time volume purchases following the MasterCard seeding
initiative.
License
and transaction fees: Revenues from license and transaction fees increased
$2,014,740 or 118% from $1,703,936 to $3,718,676 for the fiscal years ended June
30, 2007 and 2008, respectively. The increase in license and transaction fees
was due to the increase in the number of e-Port vending units on our USALive®
network, primarily as a result of the recurring revenues being generated by the
e-Ports deployed under the CCE/MasterCard Agreement and the November 2007
MasterCard Agreement, as well as sales of new e-Port vending units.
In
regards to license fees, as of June 30, 2008, the Company had approximately
38,000 devices connected to our USALive® network as compared to approximately
17,000 devices as of June 30, 2007.
In
regards to transaction fees, during the year ended June 30, 2008, the Company
processed approximately 11.3 million transactions totaling over $34.4 million as
compared to approximately 3.9 million transactions totaling over $21.3 million
during the year ended June 30, 2007, an increase of 190% in transaction volume
and 62% in dollars processed.
Cost of
equipment for the fiscal year ended June 30, 2008 was $9,703,474, compared to
$6,442,627 for the fiscal year ended June 30, 2007. The increase of $3,260,847
was primarily due to the increase in vending equipment sales.
Cost of
services for the fiscal year ended June 30, 2008 was $2,981,218, compared to
$1,369,152 for the fiscal year ended June 30, 2007. The increase of $1,612,066
was primarily due to the increase in the number of e-Ports connected to our
network.
Gross
profit for the fiscal year ended June 30, 2008 was $3,418,854, representing
21.2% of revenues, compared to $1,346,233, representing 14.7% of revenues, for
the fiscal year ended June 30, 2007. The increase of $2,072,621 was primarily
due to an increase in sales of our vending products coupled with the Company’s
continued efforts to decrease the per unit costs to manufacture the e-Port. In
the prior year, the units were sold at or near cost. Additionally, the Company
maintained the profit margins generated from sales of the energy saving Miser
product line.
Selling,
general and administrative expenses increased from $14,706,156 for the fiscal
year ended June 30, 2007 to $18,643,215 for the fiscal year ended June 30, 2008,
an increase of $3,937,059 or 27%. The increase is primarily due to an increase
in compensation expense of approximately $2,518,000, an increase in consulting
expenses of approximately $479,000, primarily related to Sarbanes-Oxley
implementation costs and network support services, recruiting expenses of
approximately $311,000, and facilities expenses of approximately $294,000. The
increase in compensation expense is due to non-cash stock bonuses awarded to
executive officers through the Long-Term Equity Incentive Program ($880,000) and
due to an increase in the number of full-time employees during the fiscal year
($1,638,000). In order to attempt to improve our operating results, the Company
took appropriate actions during the third and fourth fiscal quarters to reduce
our cash-based selling, general and administrative expenses, as further
discussed below under “Liquidity and Capital Resources”. As a result, our
cash-based selling, general and administrative expenses decreased from
approximately $4,753,000 during the second quarter of fiscal year 2008 to
approximately $4,445,000 during the third quarter of fiscal year 2008, and
further decreased to approximately $4,000,000 during the fourth quarter of
fiscal year 2008.
Interest
expense of $147,200 decreased by $2,837,751 primarily due to the retirement of
the outstanding convertible Senior Notes that were repaid in April 2007.
Interest income increased by $561,332 due to the investment in
available-for-sale securities with proceeds received from private
placements.
The
fiscal year ended June 30, 2008 resulted in a net loss of $16,417,893 (including
approximately $3.7 million of non-cash charges) compared to a net loss of
$17,782,458 (including approximately $5.8 million of non-cash charges) for the
prior fiscal year.
During
fiscal year 2009, 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 unit. If successful, we have committed to purchase at least
$3,600,000 of the new e-Port unit 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.
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.
LIQUIDITY
AND CAPITAL RESOURCES
For the
year ended June 30, 2008, net cash of $13,594,054 was used by operating
activities, primarily due to the net loss of $16,417,893 offset by non-cash
charges totaling $3,700,263 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 $876,424 primarily due
to an increase in accounts and finance receivables and prepaid expenses,
partially offset by an increase in accounts payable and accrued expenses and a
decrease in inventory.
For the
year ended June 30, 2008, net cash of $1,097,278 was used in investing
activities due to net purchases of property and equipment totaling $572,278 and
net purchases of available-for-sale securities totaling $525,000.
For the
six months ended December 31, 2008, net cash of $4,842,694 was used by operating
activities, primarily due to the net loss of $7,282,928 offset by non-cash
charges totaling $1,391,216 for transactions involving the vesting and issuance
of common stock for employee and officer compensation, 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 decreased
by $1,049,018 primarily due to decreases in prepaid expenses, and accounts and
finance receivables, offset by an increase in inventory and decreases in
accounts payable and accrued expenses.
The
Company used cash of $871,260 in financing activities for the six months ended
December 31, 2008 due to the repayment of $467,908 of long-term debt and cash
used to purchase and retire of $315,304 and $88,048 in Common Stock and
Preferred Stock, respectively.
The
Company has incurred losses since inception. Our accumulated deficit through
December 31, 2008 is composed of cumulative losses amounting to approximately
$169,000,000 and preferred dividends converted to common stock of approximately
$2,700,000. The Company has continued to raise capital through equity offerings
to fund operations.
As of
December 31, 2008 the Company had $6,111,637 of cash and cash equivalents on
hand and $4,850,000 of available-for-sale securities, which were classified as
current assets due to their purchase at par value, on January 2, 2009 by the
broker-dealer who sold the ARS to the Company. As a result of these purchases,
as of January 2, 2009, the Company had cash and cash equivalents of
approximately $10,962,000.
In order
to attempt to improve our operating results, we took appropriate actions during
the third and fourth quarters of fiscal year 2008 to reduce our cash-based
selling, general and administrative expenses. These actions consisted of staff
reductions and related costs and reductions in our controllable costs. As a
result, our cash-based selling, general and administrative expenses decreased
from approximately $4,753,000 during the second quarter of fiscal year 2008 to
approximately $4,445,000 during the third quarter of fiscal year 2008, to
approximately $4,000,000 during the fourth quarter of fiscal year 2008, to
approximately $3,758,000 during the first quarter of fiscal year 2009 and
further decreased to approximately $3,547,000 during the second quarter of
fiscal year 2009. As a result of these reductions, during the first six months
of the 2009 fiscal year, the Company’s average monthly cash used in operating
activities was $807,116 resulting in net cash used during the six month period
of $4,842,694.
On
January 5, 2009, the Company reduced the number of its employees by 22
individuals and implemented other cost savings measures. The Company also
intends to eliminate costs during the third quarter of this fiscal year related
to product development projects that are expected to be completed by the end of
the third fiscal quarter. These actions are anticipated to have the effect of
reducing the Company's monthly cash-based operating expenses to approximately
$800,000 commencing in the fourth quarter of fiscal year 2009. Assuming that the
Company's anticipated monthly cash-based operating expenses would be $800,000
and that its average monthly gross profit of $261,000 earned during the six
months ended December 31, 2008 would continue, the Company’s average monthly
cash requirements would be approximately $539,000.
Based on
the assumptions above, the Company believes its existing cash and cash
equivalents as of January 2, 2009, totaling approximately $10,962,000, would
provide sufficient funds to meet its cash requirements, including capital
expenditures and repayment of long-term debt, through at least July 1,
2010.
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. As described below, on October 1, 2008, and pursuant
to the terms of the warrant, the number of shares underlying the warrant was
automatically increased to 903,955 and the exercise price of the warrant was
automatically decreased to $5.90 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.
On
October 1, 2008, we issued to First Data Merchant Services Corporation
performance-based warrants to purchase up to 1,500,000 shares exercisable at
$5.25 per share for 500,000 shares, and at $6.00 per share for 1,000,000 shares.
Pursuant to the terms of the selling shareholder’s warrant, and effective
October 1, 2008, the number of shares issuable under the warrant was increased
to 903,955 shares and the exercise price was decreased to $5.90 per
share.
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
December 31, 2008, the Company had approximately 43,000 devices connected to its
USALive® network. During the six months ended December 31, 2008, the Company
processed approximately 9.8 million transactions totaling approximately $22.2
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 1, 2009, the Company was marketing and selling
its products through its full time staff consisting of four 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 and Canada. On the soft drink
bottler side, heavy effort is being put into securing additional distribution
agreements and servicing our existing customers’ growing demand for additional
cashless locations and the related network services.
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 in equipment revenues from
this agreement.
In May
2007, MasterCard International, the Company, and Coca-Cola Enterprises, Inc.
entered into an agreement to deploy 7,500 e-Port devices, all as more fully
described below. 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 signed
an agreement to deploy 4,051 e-Port devices that accept MasterCard’s
“PayPassTM”. From May 2007 through December 31, 2007, the Company had earned
approximately $1,600,000 in equipment revenues from this agreement.
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. As of June 30, 2008, we
act_as the transaction processor for all units sold under this
agreement.
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 and were to be utilized in CCE beverage vending machines
in multiple cities throughout the United States. For each e-Port successfully
installed by CCE, we received 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
68% and 41% of the Company's accounts and finance receivables at June 30, 2008
and 2007, respectively, were concentrated with two customers each year, and 42%
as of December 31, 2008 were concentrated with one customer. Approximately 59%,
40% and 29% of the Company's revenues for the years ended June 30, 2008, 2007
and 2006, respectively, were concentrated with two (35% with one customer and
24% with another customer), one, and two (19% with one customer and 10% with
another customer) customer(s), respectively. Approximately 17% and 75% of the
Company’s revenues for the six months ended December 31, 2008 and 2007,
respectively, were concentrated with one and two customers (43% with one
customer and 32% with another customer). 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
December 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:
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o
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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";
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o
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U.S.
Patent No. D423,474 entitled
"Dataport";
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o
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U.S.
Patent No. D415,742 entitled "Laptop Dataport
Enclosure";
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o
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U.S.
Patent No. D418,878 entitled "Sign
Holder";
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o
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U.S.
Patent No. 6,056,194 entitled "System and Method for Networking and
Controlling Vending Machines";
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o
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U.S.
Patent No. D428,047 entitled "Electronic Commerce Terminal
Enclosure";
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o
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U.S.
Patent No. D428,444 entitled "Electronic Commerce Terminal Enclosure for a
Vending Machine";
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o
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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";
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o
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U.S.
Patent No. 6,152,365 entitled "Credit and Bank Issued Debit Card Operated
System and Method for Controlling a Vending
Machine";
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o
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U.S.
Patent No. D437,890 entitled "Electronic Commerce Terminal Enclosure with
a Hooked Fastening Edge for a Vending
Machine";
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o
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U.S.
Patent No. D441,401 entitled "Electronic Commerce Terminal Enclosure with
Brackets";
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o
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U.S.
Patent No. 6,321,985 entitled "System and Method for Networking and
Controlling Vending Machines";
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o
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U.S.
Patent No. 6,505,095 entitled "System for Providing Remote Audit, Cashless
Payment, and Interactive Transaction Capabilities in a Vending Machine"
(Stitch);
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o
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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);
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o
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U.S.
Patent No. 6,021,626 entitled "Forming, Packaging, Storing, Displaying and
Selling Clothing Articles";
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o
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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
|
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
|
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 $1,679,000, $1,355,000, and $974,000 for the years ended June 30,
2008, 2007 and 2006, respectively, and $1,551,000 (unaudited)
and $779,000 (unaudited) for the six months ended December 31, 2008 and 2007,
respectively.
EMPLOYEES
On March
1, 2009, the Company had 36 full-time employees and no 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.
LEGAL
PROCEEDINGS
The
Company is not a party to any material legal proceedings.
DIRECTORS
AND EXECUTIVE OFFICERS
Our
Directors and executive officers, on the date of this prospectus, together with
their ages and business backgrounds were as follows:
|
Name
|
Age
|
Position(s)
Held
|
||
|
George
R. Jensen, Jr.
|
60
|
Chief
Executive Officer, Chairman Of the Board of Directors
|
||
|
Stephen
P. Herbert
|
46
|
Chief
Operating Officer and President, Director
|
||
|
David
M. DeMedio
|
37
|
Chief
Financial Officer
|
||
|
William
L. Van Alen, Jr. (1)(2)
|
76
|
Director
|
||
|
Steven
Katz (1)
|
61
|
Director
|
||
|
Douglas
M. Lurio
|
52
|
Director
|
||
|
Joel
Brooks (2)
|
50
|
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. and NaturalNano, Inc., each 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 years 2008 and 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. In October 2007,
the Board approved the recommendation of the Compensation Committee that Mr.
DeMedio’s annual base salary be increased to $195,000 effective October 1,
2007. 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. Lawlor 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 years 2008 and 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
fiscal year 2007, 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 2007, 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 Mr. Lawlor
during the 2008 fiscal year and to Mr. McLaughlin during fiscal year 2007. The
shares were awarded to them upon the recommendation of our President. In
addition, based upon performance, Messrs. Lawlor and McLaughlin earned cash
bonuses during fiscal year 2008. In December 2007, the Board approved the
recommendation of the Compensation Committee that Messrs. Jensen, Herbert, and
DeMedio receive cash bonuses based upon each of their performance during the
first six months of the fiscal year.
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
|
|||||||||
On
February 4, 2009, the Board of Directors approved the recommendation of the
Compensation Committee that the final twelve month measuring period under the
Plan be changed from the fiscal year ending June 30, 2009 to the fiscal year
ending June 30, 2010. The foregoing was approved by the Board as the Board did
not believe it would be appropriate to reward senior management with bonuses
during the current economic slow down.
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.
As a
result, during September 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 revenues, gross profit and EBITDA for the e-Port units
sold in the MasterCard PayPass seeding program. The Board of Directors has
approved the recommendation of the Compensation Committee.
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 issuance to the executive officers a total of
241,249 shares under the Plan for the 2007 fiscal year rather than a total of
101,578 shares prior to the normalization. The specific allocation of the shares
among the executive officers is as follows: Mr. Jensen-169,641 shares; Mr.
Herbert- 51,028 shares; and Mr. DeMedio- 20,580 shares.
Based
upon the financial results of the Company for the fiscal year ended June 30,
2008, a higher amount than the target revenue hurdle was met (125%) and the
minimum target hurdles relating to gross profit and EBITDA were not met,
resulting in the vesting of a total of 126,973 shares under the Plan as of June
30, 2008. The specific allocation of the shares among the executive officers is
as follows: Mr. Jensen-89,285 shares; Mr. Herbert- 26,857 shares; and Mr.
DeMedio- 10,831 shares.
As was
the case in fiscal year 2007, during the 2008 fiscal year a portion of the
e-Port units sold consisted of units pertaining to the MasterCard PayPass
seeding program with reduced selling prices resulting in reduced gross profit
and EBITDA. As a result, during September 2008, the Compensation Committee
recommended to the Board of Directors that the selling price of all the e-Ports
sold during the fiscal year ended June 30, 2008 as part of the seeding program
be “normalized” to the current retail price. This normalization resulted in
increased gross profit and EBITDA for the e-Port units sold in the MasterCard
PayPass seeding program. The Board of Directors has approved the recommendation
of the Compensation Committee.
As a
result of the normalization, a lower than target hurdle was met for gross profit
(85%), resulting in the issuance to the executive officers of a total of 191,729
shares under the Plan for the 2008 fiscal year rather than a total of 126,973
shares prior to the normalization. The specific allocation of the shares among
the executive officers is as follows: Mr. Jensen-134,820 shares; Mr. Herbert-
40,553 shares; and Mr. DeMedio- 16,356 shares.
On
February 4, 2009, the Board of Directors approved the recommendation of the
Compensation Committee that the final twelve month measuring period under the
Plan be changed from the fiscal year ending June 30, 2009 to the fiscal year
ending June 30, 2010. The foregoing was approved by the Board as the Board did
not believe it would be appropriate to reward senior management with bonuses
during the current economic slow down.
It is
difficult for management to fully predict our unit sales for e-Ports for the
2010 fiscal year. Based upon our current estimates, management believes that it
is likely that the Company would not meet the target (100%) goals established
under the Plan for the 2010 fiscal year relating to gross profit and EBITDA but
would meet the target (100%) goal established under the Plan for the 2010 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 of the selling prices of the e-Ports described above
in September 2007, certain target hurdles were met resulting in the vesting of a
total of 241,249 shares under the Plan for the 2007 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, during the first quarter
of fiscal year 2008, 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.
As a
result of the normalization of the selling price of the e-Ports described above
in September 2008, there is an additional charge of $287,517, as of September 3,
2008, required to be taken by our Company in connection with the additional
shares issued to our executives under the Plan. Of the total charge of
$1,043,006 to be taken by the Company on account of the shares awarded in
connection with the 2008 fiscal year, $755,489 is reflected in our financial
statements for the 2008 fiscal year and the balance of $287,517, as of September
3, 2008, is to be reflected in our financial statements in the first quarter of
the 2009 fiscal year. The Company will adjust the compensation expense related
to this award for changes in the fair value of this award until final settlement
occurs.
As a
result of the change of the last twelve month measuring period under the Plan
from the fiscal year ending June 20, 2009 to the fiscal year ending June 30,
2010, the short-term accrued share-based payment liability of $107,458 as of
December 31, 2008 will be reversed, with a corresponding reduction to
compensation expense during the three months ended March 31, 2009.
The Plan
permits the executives to satisfy any income tax withholding obligations by
electing to reduce the number of shares otherwise issuable to them under the
Plan. For the fiscal year 2007 award, the executives did not elect to reduce the
number of shares issued under the Plan related to the income tax withholding
obligations on the Plan shares, however, Mr. Jensen and Mr. Herbert did elect to
exchange 16,000 shares to settle tax withholding obligations paid by the Company
totaling $134,080 in connection with the restricted stock bonuses previously
awarded and issued to them under their employment agreements. For the fiscal
year 2008 award, the executives have not yet determined whether to satisfy any
income tax withholding obligations in connection with the shares awarded to them
under the Plan, and accordingly, the number of shares to be issued under the
Plan does not reflect any possible reduction.
SUMMARY
COMPENSATION TABLE
The
following table sets forth certain information with respect to compensation paid
or accrued by the Company during the fiscal years ended June 30, 2008, June 30,
2007 and June 30, 2006 to each of the executive officers and employees of the
Company named below:
|
Name
and Principal Position
(a)
|
Fiscal
Year
(b)
|
Salary
($)
(4)
(c)
|
Bonus
($)
(5)
(d)
|
Stock
Awards
($)
(6)
(e)
|
Option
Awards
($)
(7)
(f)
|
Non-Equity
Incentive Plan
Compensation
($)
(g)
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
(h)
|
All
Other Compensation
($)
(8)
((i)
|
Total
($)
(j)
|
|||||||||||||||||||||||||
|
George
R. Jensen, Jr.,
|
2008
|
325,000 | 171,000 | 1,039,994 | 68,851 | - | - | 26,875 | 1,631,720 | |||||||||||||||||||||||||
|
Chief
Executive Officer
|
2007
|
325,000 | - | 821,424 | 137,750 | - | - | 17,875 | 1,302,049 | |||||||||||||||||||||||||
|
&
Chairman of the Board
|
2006
|
270,288 | - | 200,000 | 137,750 | - | - | 18,563 | 626,601 | |||||||||||||||||||||||||
|
Stephen
P. Herbert,
|
2008
|
285,000 | 61,000 | 312,827 | 16,524 | - | - | 26,875 | 702,226 | |||||||||||||||||||||||||
|
Chief
Operating
|
2007
|
285,000 | - | 393,426 | 33,060 | - | - | 17,875 | 729,361 | |||||||||||||||||||||||||
|
Officer
& President
|
2006
|
246,673 | - | 133,336 | 33,060 | - | - | 18,563 | 431,632 | |||||||||||||||||||||||||
|
David
M. DeMedio,
|
2008
|
187,499 | 18,000 | 126,170 | 6,425 | - | - | 24,849 | 362,943 | |||||||||||||||||||||||||
|
Chief
Financial
|
2007
|
165,000 | - | 51,124 | 26,355 | - | - | 17,875 | 260,354 | |||||||||||||||||||||||||
|
Officer
|
2006
|
162,385 | - | - | 26,360 | - | - | 20,112 | 208,857 | |||||||||||||||||||||||||
|
Michael
Lawlor (1),
|
2008
|
129,673 | 122,980 | 16,640 | - | - | 13,637 | 282,930 | ||||||||||||||||||||||||||
|
Vice
President of
|
||||||||||||||||||||||||||||||||||
|
Sales
& Business Development
|
||||||||||||||||||||||||||||||||||
|
John
McLaughlin (2),
|
2008
|
132,028 | 125,668 | - | - | - | 13,731 | 271,427 | ||||||||||||||||||||||||||
|
Vice
President,
|
2007
|
132,028 | 46,629 | 18,821 | - | - | 8,450 | 205,928 | ||||||||||||||||||||||||||
|
Business
Development/ Strategic Partners
|
||||||||||||||||||||||||||||||||||
|
(1)
|
Employment
as Vice President of Sales & Business Development commenced on January
28, 2008.
|
|
(2)
|
Employment
as Vice President, Business Development/Strategic Partners commenced on
August 1, 2007. Prior to that date, Mr. McLaughlin was Vice
President of Sales.
|
|
(3)
|
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
|
|
(4)
|
Represents
cash bonuses paid during December 2007 based upon such person’s
performance during the first 6 months of the 2008 fiscal year. The cash
bonus awarded to Mr. McLaughlin during the 2007 fiscal year was in
recognition of his achievement of performance
goals.
|
|
(5)
|
Amounts
reported for fiscal year 2008 for Messrs. Jensen, Herbert and DeMedio
represent amounts earned under USA Technologies, Inc. Long-term Equity
Incentive Program as follows: 88,613 and 9,601 shares valued at $4.77 and
$8.38, respectively, earned by Mr. Jensen in September 2007 on account of
the 2007 fiscal year and 89,285 shares valued at $5.95 earned by Mr.
Jensen on June 30, 2008 on account of the 2008 fiscal year; 23,143 and
6,399 shares valued at $4.77 and $8.38, respectively, earned by Mr.
Herbert in September 2007 and 26,857 shares valued at $5.95 earned Mr.
Herbert on June 30, 2008 on account of the 2008 fiscal year; and 11,915
shares valued at $4.77 earned by Mr. DeMedio in September 2007 and 10,831
shares valued at $5.95 earned by Mr. DeMedio on June 30, 2008 on account
of the 2008 fiscal year. Fiscal year 2008 also includes 3,200 shares for
Mr. McLaughlin valued at $5.20 per
share.
|
|
|
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. 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.
|
|
(6)
|
Amounts
reported represent the dollar amount recognized for financial statement
reporting purposes in accordance with SFAS 123(R). The amounts
may include amounts from awards granted in prior years. The
amounts shown exclude the impact of estimated forfeitures related to
service based vesting conditions. See Note 12 of the Consolidated
Financial Statements for additional discussion on SFAS 123(R) valuation
methodology.
|
|
(7)
|
All
other compensation for fiscal year 2008 includes the following: amounts
for Messrs. Jensen and Herbert include car allowance payments of $17,875
and Company matching contributions under our 401(k) Plan of $9,000;
amounts for Mr. DeMedio include car allowance payments of $17,875 and
Company matching contributions under our 401(k) Plan of $6,974; and
amounts for Mr. Lawlor include car allowance payments of $8,450 and
Company matching contributions under our 401(k) Plan of $5,187; and
amounts for Mr. McLaughlin include car allowance payments of $8,450 and
Company matching contributions under our 401(k) Plan of
$5,281.
|
Amounts
reported for fiscal years 2006 and 2007, represents cash payments for car
allowances.
Grants
Of Plan-Based Awards Table
There
were no awards granted to our executive officers during fiscal year 2008. The
table below summarizes the amounts of awards granted to the employee named below
during the fiscal year ended June 30, 2008:
|
Estimated
Future Payouts Under Non-Equity Incentive Plan Awards
|
Estimated
Future Payouts Under Equity Incentive Plan Awards
|
All
Other
Stock
Awards
Number
of
Shares
of
Stock
or
|
All
Other Option Awards Number of
Securities
Underlying
|
Exercise
or Base Price of
Option
|
Grant
Date Fair Value of Stock and Option (1)
|
|||||||||||||||||||||||||||||||||||
|
Grant
|
Threshold
|
Target
|
Maximum
|
Threshold
|
Target
|
Maximum
|
Units
|
Options
|
Awards
|
Awards
|
||||||||||||||||||||||||||||||
|
Name
|
Date
|
($)
|
($)
|
($)
|
(#)
|
(#)
|
(#)
|
(#)
|
(#)
|
($)
|
($)
|
|||||||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
(k)
|
(l)
|
|||||||||||||||||||||||||||||
|
Michael
Lawlor
|
5/7/2008
|
-
|
-
|
-
|
-
|
-
|
-
|
3,200
|
-
|
$
|
5.20
|
$
|
16,640
|
|||||||||||||||||||||||||||
|
(1)
|
Amount
represents the grant date fair value determined in accordance with FAS
123(R).
|
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 and one
employee during fiscal 2008:
|
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. (2)
|
-
|
$
|
-
|
187,499
|
$
|
1,361,154
|
||||||||
|
Stephen
P. Herbert (3)
|
-
|
|
$
|
-
|
56,399
|
$
|
409,429
|
|||||||
|
David
M. DeMedio (4)
|
-
|
$
|
-
|
22,746
|
$
|
165,126
|
||||||||
|
Michael
Lawlor
|
-
|
$
|
-
|
3,200
|
$
|
16,640
|
||||||||
|
(1)
|
For
awards classified as equity, the value equals number of shares multiplied
by the market value on the vesting date. For awards classified as
liabilities, the value equals the number of shares multiplied by the
market value on the settlement
date.
|
|
(2)
|
Represents
89,285 shares valued at $5.95 that vested on June 30, 2008, and 98,214
shares valued at $8.45 that vested on September 21,
2007.
|
|
(3)
|
Represents
26,857 shares valued at $5.95 that vested on June 30, 2008, and 29,542
shares valued at $8.45 that vested on September 21,
2007.
|
|
(4)
|
Represents
10,831 shares valued at $5.95 that vested on June 30, 2008, and 11,915
shares valued at $8.45 that vested on September 21,
2007.
|
Outstanding
Equity Awards At Fiscal Year-End
The
following table shows information regarding unexercised stock options and
unvested equity awards granted to the executive officers as of the fiscal year
ended June 30, 2008:
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||||||||
|
Equity
|
||||||||||||||||||||||||||||||||||
|
Equity
|
Incentive
|
|||||||||||||||||||||||||||||||||
|
Incentive
|
Equity
|
Plan
|
||||||||||||||||||||||||||||||||
|
Plan
|
Incentive
|
Awards:
|
||||||||||||||||||||||||||||||||
|
Awards:
|
Plan
Awards:
|
Market
or
|
||||||||||||||||||||||||||||||||
|
Number
of
|
Number
of
|
Number
of
|
Number
of
|
Payout
Value
|
||||||||||||||||||||||||||||||
|
Securities
|
Securities
|
Securities
|
Number
|
Market
Value
|
Unearned
|
of
Unearned
|
||||||||||||||||||||||||||||
|
Underlying
|
Underlying
|
Underlying
|
Option
|
of
Shares or
|
of
Shares or
|
Shares,
Units or
|
Shares,
Units
|
|||||||||||||||||||||||||||
|
Unexercised
|
Unexercised
|
Unexercised
|
Exercise
|
Option
|
Units
of Stock
|
Units
of Stock
|
Other
Rights
|
or
Other Rights
|
||||||||||||||||||||||||||
|
Options
(#)
|
Options
(#)
|
Unearned
|
Price
|
Expiration
|
That
Have Not
|
That
Have Not
|
That
Have Not
|
That
Have Not
|
||||||||||||||||||||||||||
|
Name
|
Exercisable
|
Unexercisable
|
Options
(#)
|
($)
|
Date
|
Vested
(#)
|
Vested
($)
|
Vested
(#)
|
Vested
($)
|
|||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||||||||
|
George
R. Jensen, Jr.,
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|
318,570
|
$
|
1,895,492
|
|||||||||||||||||||||||
|
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,
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
53,713
|
$
|
319,592
|
||||||||||||||||||||||||
|
Chief
Operating Officer &
|
6,000
|
--
|
--
|
$
|
7.50
|
05/10/2011
|
--
|
--
|
--
|
--
|
||||||||||||||||||||||||
|
President
|
6,000
|
--
|
--
|
$
|
7.50
|
06/28/2012
|
--
|
--
|
--
|
--
|
||||||||||||||||||||||||
|
6,000
|
--
|
--
|
$
|
7.50
|
06/29/2013
|
--
|
--
|
--
|
--
|
|||||||||||||||||||||||||
|
David
M. DeMedio,
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
21,663
|
$
|
128,895
|
||||||||||||||||||||||||
|
Chief
Financial Officer
|
375
|
--
|
--
|
$
|
20
|
07/31/2008
|
--
|
--
|
--
|
--
|
||||||||||||||||||||||||
|
375
|
--
|
--
|
$
|
20
|
10/31/2008
|
--
|
--
|
--
|
--
|
|||||||||||||||||||||||||
|
375
|
--
|
--
|
$
|
20
|
01/31/2009
|
--
|
--
|
--
|
--
|
|||||||||||||||||||||||||
|
375
|
--
|
--
|
$
|
20
|
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
178,570 shares issuable to Mr. Jensen under the Long Term Equity Incentive
Program on account of fiscal year 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
53,713 shares issuable to Mr. Herbert and 21,663 shares issuable to Mr.
DeMedio on account of fiscal year 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.
During
September 2008, Mr. Jensen and the Company entered into an amendment to his
employment agreement pursuant to which the term of Mr. Jensen’s employment with
the Company was extended from June 30, 2009 until June 30, 2011, and his annual
base salary was increased to $365,000 effective October 1, 2008. In addition,
Mr. Jensen was also granted 110,000 shares of Common Stock under the 2008 Stock
Incentive Plan which vest as follows: 36,000 on September 15, 2008; 37,000 on
January 15, 2009; and 37,000 on June 30, 2009.
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.
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.
During
September 2008, Mr. Herbert and the Company entered into an amendment to his
employment agreement pursuant to which the term of Mr. Herbert’s employment with
the Company was extended from June 30, 2009 until June 30, 2011, and his annual
base salary was increased to $320,000 effective October 1, 2008. In addition,
Mr. Herbert was also granted 85,000 shares of Common Stock under the 2008 Stock
Incentive Plan which vest as follows: 28,000 on September 15, 2008; 28,000 on
January 15, 2009; and 29,000 on June 30, 2009.
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.
During
September 2008, Mr. DeMedio and the Company entered into an amendment to his
employment agreement pursuant to which he was granted 25,000 shares of Common
Stock under the 2008 Stock Incentive Plan which vest as follows: 8,000 on
September 15, 2008; 8,000 on January 15, 2009; and 9,000 on June 30,
2009.
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, 2008, when the closing price per share of
the Company’s Common Stock was $5.95:
|
Name
|
Upon
Occurrence
Of USA Transaction
|
|||
|
George
R. Jensen, Jr.
|
$ | 1,895,492 | (1) | |
|
Stephen
P. Herbert
|
$ | 319,598 | (2) | |
|
David
M. DeMedio
|
$ | 128,901 | (3) | |
|
(1)
|
Represents
(i) 178,570 shares issuable to Mr. Jensen for the fiscal year ending 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
53,714 shares issuable to Mr. Herbert for the fiscal year ending June 30,
2009 pursuant to the Company’s Long-Term Equity Incentive
Program.
|
|
(3)
|
Represents
21,664 shares issuable to Mr. DeMedio 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 2008, 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.
From
October 2007 through September 2008, our Chief Financial Officer, David M.
DeMedio, was a Director and a member of the Compensation Committee of the Board
of Directors of Gammacan International, Inc., a Delaware corporation whose
shares are traded on the OTC Bulletin Board. Steven Katz, a Director and a
member of our Compensation Committee, was also the Chairman of the Board and
President of Gammacan International, Inc. during such period of time. Except as
set forth in the prior sentence, 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, 2008.
|
Name
|
Fees
Earned or Paid in Cash
($)
|
Stock
Award
($)
|
Option
Award
($)
|
Non-Equity
Incentive Compensation Plan
($)
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
|
All
Other Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|||||||||||||||||||||
|
Joel
Brooks
|
$ | 30,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 30,000 | ||||||||||||||
|
Steven
Katz
|
$ | 30,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 30,000 | ||||||||||||||
|
Douglas
M. Lurio
|
$ | 20,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 20,000 | ||||||||||||||
|
Stephen
W. McHugh
|
$ | 30,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 30,000 | ||||||||||||||
|
William
L. Van Alen Jr.
|
$ | 40,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 40,000 | ||||||||||||||
During
fiscal year 2008, we paid each of Messrs. Brooks, Van Alen, Katz, McHugh and
Lurio $20,000 for serving as a Director during the fiscal year. The
Company paid Mr. McHugh, Mr. Brooks and Mr. Van Alen $10,000 for serving on the
Audit Committee during the fiscal year. The Company paid Mr. Katz and Mr. Van
Alen $10,000 for serving on the Compensation 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 June 30, 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.
|
198,001 | (3) | 1.17 | % | ||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
Stephen
P. Herbert
|
94,950 | (4) | * | |||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
David
M. DeMedio
|
33,951 | (5) | * | |||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
Douglas
M. Lurio
|
19,030 | (6) | * | |||||
|
2005
Market Street, Suite 3320
|
||||||||
|
Philadelphia,
Pennsylvania 19103
|
||||||||
|
Steven
Katz
|
18,350 | (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
|
6,000 | (9) | * | |||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
John
McLaughlin
|
500 | * | ||||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
Michael
Lawlor
|
3,200 | * | ||||||
|
100
Deerfield Lane, Suite 140
|
||||||||
|
Malvern,
Pennsylvania 19355
|
||||||||
|
S.A.C.
Capital Associates, LLC
|
1,950,426 | (10) | 11.53 | % | ||||
|
72
Cummings Point Road
|
||||||||
|
Stamford,
CT 06902
|
||||||||
|
Wellington
Management Company, LLP
|
2,051,000 | (11) | 12.13 | % | ||||
|
75
State Street
|
||||||||
|
Boston,
Massachusetts 02109
|
||||||||
|
All
Directors and Executive
|
423,695 | 2.51 | % | |||||
|
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 June 30, 2008, are deemed to be beneficially owned for
purposes hereof.
(2) On
June 30, 2008 there were 15,155,270 shares of Common Stock and 520,392 shares of
Preferred Stock issued and outstanding. For purposes of computing the
percentages under this table, it is assumed that all shares of issued and
outstanding 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 June 30, 2008 (or within 60 days of June 30,
2008) have been converted into 161,500 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 Preferred Stock as of
June 30, 2008 have been converted into 9,774 shares of Common Stock. Therefore,
16,909,882 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” nor
any shares issuable to the executive officers under the Long Term Equity
Incentive Program on account of the 2008 fiscal year.
(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 nor any shares
issuable to Mr. Jensen under the Long Term Equity Incentive Program on account
of the 2008 fiscal year. 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 75,000 shares
underlying vested stock options and 670 shares underlying Preferred
Stock.
(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 10,000 shares
underlying vested stock options. Does not include any shares issuable to Mr.
Herbert under the Long Term Equity Incentive Program on account of the 2008
fiscal year.
(5)
Includes 8,500 shares underlying vested stock options. Does not include any
shares issuable to Mr. DeMedio under the Long-Term Equity Incentive Program on
account of the 2008 fiscal year.
(6)
Includes 12,000 shares underlying vested stock options.
(7)
Includes 12,000 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.
(9)
Includes 6,000 shares underlying vested stock options.
(10)
Based upon a Schedule 13G/A filed with the Securities and Exchange Commission on
January 8, 2009, S.A.C. Capital Advisors, L.P., S.A.C. Capital Advisors, Inc.,
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, L.P., S.A.C. Capital Advisors, Inc. and Mr. Cohen is as indicated in
the table. The address of S.A.C. Capital Associates, LLC is P.O. Box 58,
Victoria House, The Valley, Anguilla, British West Indies. Each of S.A.C.
Capital Advisors, L.P., S.A.C. Capital Advisors, Inc. and Mr. Cohen disclaim
beneficial ownership of these shares.
(11)
Based upon a Schedule 13G/A filed with the Securities and Exchange Commission on
March 14, 2008, reflecting the beneficial ownership of our Common Stock by
Wellington Management Company, LLP, which has shared voting authority over
1,209,000 shares and shared dispositive power over 2,051,000
shares.
PREFERRED
STOCK
Other
than the 67,000 shares of Preferred Stock owned by Mr. Jensen, there were no
shares of Preferred Stock that were beneficially owned as of June 30, 2008 by
the Company's directors, executive officers, or the other employees named in the
Summary Compensation Table set forth above.
During
the years ended June 30, 2008, 2007, and 2006 and the six months ended December
31, 2008 and 2007, the Company incurred approximately $317,000, $356,000,
$258,000, $205,000 and $199,000 respectively, in connection with legal services
provided by Lurio & Associates, P.C., of which its president is a member of
the Company's Board of Directors. At June 30, 2008 and 2007, and December 31,
2008 and 2007 approximately $27,000, $33,000, $66,000 and $44,000 respectively,
of the Company's accounts payable and accrued expenses were due to this Board
member. During the years ended June 30, 2008, 2007 and 2006, certain Board
members and executives participated in various debt offerings of the Company for
total investments of approximately $0, $0, and $53,000,
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)
|
2,854,381 | (2) | 2,854,381 | (2) | 0 | |||||||
(1)
Pursuant to investment agreements, each of S.A.C. Capital Advisors, L.P., a
Delaware limited partnership, and S.A.C. Capital Advisors, Inc., a Delaware
corporation, 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, L.P. and S.A.C. Capital Advisors, Inc. Each of
S.A.C. Capital Advisors, L.P., S.A.C. Capital Advisors, Inc., and Mr. Cohen
disclaim beneficial ownership of these securities.
(2)
Represents 1,950,426 shares of Common Stock and 903,955 shares of Common Stock
issuable upon exercise of the warrants.
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,
2009
|
High
|
Low
|
||||||
|
First
Quarter (through September 30, 2008)
|
$ | 6.00 | $ | 2.92 | ||||
|
Second
Quarter (through December 31, 2008)
|
$ | 4.20 | $ | 0.90 | ||||
|
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)
|
$ | 8.50 | $ | 5.86 | ||||
|
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 March
6, 2009 there were 618 record holders of the Common Stock and 478 record holders
of the Preferred Stock.
The
holders of the Common Stock are entitled to receive such dividends as the Board
of Directors of the Company may from time to time declare out of funds legally
available for payment of dividends. Through the date hereof, no cash dividends
have been declared on the Company's Common Stock or Preferred Stock. No dividend
may be paid on the Common Stock until all accumulated and unpaid dividends on
the Preferred Stock have been paid. As of March 1, 2009, such accumulated unpaid
dividends amounted to $10,348,607.
As of
June 30, 2008, 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
(a)
|
Weighted
average
exercise
price of outstanding options and warrants
(b)
|
Number
of securities remaining available for future issuance (excluding
securities reflected in column (a))
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
300,000 | (3) | ||||||||||
|
Equity
compensation plans not approved by security holders
|
161,500 | (1) | $ | 7.56 | 513,920 | (2) | ||||||
|
Total
|
161,500 | $ | 7.56 | 813,920 | ||||||||
|
(1)
|
Represents
stock options outstanding as of June 30, 2008 for the purchase of shares
of Common Stock of the Company expiring at various times from July 2008
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.
Shareholder approval of these options was not required because the options
were granted prior to the Company's shares being listed on the NASDAQ
Stock Market LLC.
|
|
(2)
|
Represents
140,000 shares of Common Stock issuable to the Company's Chief Executive
Officer under the terms of his employment agreement upon the occurrence of
a USA Transaction, plus 56,487 shares of Common Stock issuable under the
Company's 2007-A Stock Compensation Plan, plus 317,433 shares of Common
Stock issuable under the Long-Term Equity Incentive Program adopted in
February 2007. Shareholder approval of the foregoing was not required
because each of the foregoing was adopted by the Company prior to the
Company's shares being listed on the NASDAQ Stock Market
LLC.
|
|
|
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
shares have been registered with the Securities and Exchange Commission as
an employee benefit plan under Form S-8. As of June 30, 2008 there were
56,487 shares available for future issuance under the
Plan.
|
|
(3)
|
Represents
shares of Common Stock issuable under the Company's 2008 Stock Incentive
Plan as approved by shareholders on February 28, 2008 for use in
compensating employees, directors and consultants through the issuance of
shares of Common Stock of the Company. The shares have been registered
with the Securities and Exchange Commission as an employee benefit plan
under Form S-8.
|
As of
December 31, 2008, shares of Common Stock reserved for future issuance were as
follows:
|
|
o
|
160,750
shares issuable upon the exercise of stock options at exercise prices
ranging from $7.50 to $20 per share
|
|
|
o
|
3,030,863
shares issuable upon the exercise of common stock warrants at exercise
prices ranging from $5.25 to $20 per
share
|
|
|
o
|
14,997 shares
issuable upon the conversion of outstanding Preferred Stock and cumulative
Preferred Stock dividends
|
|
o
|
7,097
shares under the 2007-A Stock Compensation Plan Adopted in January
2007
|
|
|
o
|
317,433
shares issuable under the Long-Term Equity Incentive Program adopted in
February 2007
|
|
|
o
|
228,000
shares issuable under the 2008 Stock Incentive Plan adopted in February
2008; 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 December 31, 2008, there were 15,275,527 shares of common
stock issued and outstanding and 510,270 shares of series A preferred stock
issued and outstanding which are convertible into 5,102 shares of common stock.
Through inception of the Company through December 31, 2008, a total of 591,758
shares of preferred stock have been converted into 2,187 shares of Common Stock
and $2,439,920 of accrued and unpaid dividends thereon have been converted into
1,219 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 1,
2009, such accumulated unpaid dividends amounted to
$10,348,607.
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 December 31, 2008, a total of 591,758 shares of
series A Preferred Stock have been converted into common stock and accrued and
unpaid dividends thereon have been converted into 1,219 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
December 31, 2008, there were 3,030,863 Common Stock warrants outstanding, all
of which were exercisable at exercise prices ranging from $5.25 to $7.70 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
15,275,527 shares of common stock issued and outstanding on December 31, 2008,
all are freely transferable without further registration under the Act (other
than shares held by “affiliates” of the Company). As of December 31, 2008, there
were 510,270 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 December 31, 2008, are
convertible into 5,102 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 152,755 shares as of December 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 and
for the year ended June 30, 2008, appearing in this prospectus and the related
registration statement have been audited by McGladrey & Pullen, 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
The
consolidated financial statements and schedule of USA Technologies, Inc. at June
30, 2007, and for each of the two years in the period ended June 30, 2007
appearing in this prospectus and the related 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.
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-3
|
|
Consolidated
Statements of Operations
|
F-4
|
|
Consolidated
Statements of Shareholders' Equity
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
F-9
|
|
Notes
to Consolidated Financial Statements
|
F-11
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
USA
Technologies, Inc.
We have
audited the accompanying consolidated balance sheet of USA Technologies, Inc. as
of June 30, 2008, and the related consolidated statement of operations,
shareholders' equity, and cash flows for the year then ended. Our audit also
included the June 30, 2008 balances in the financial statement schedule listed
in Item 16(b). These financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of USA Technologies, Inc. at
June 30, 2008, and the results of their operations and their cash flows for the
year then ended in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related June 30, 2008 balances in the
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/
McGladrey & Pullen, LLP
|
New York,
NY
September
23, 2008
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
Board of
Directors and Shareholders of
USA
Technologies, Inc.
We have
audited the accompanying consolidated balance sheet of USA Technologies, Inc. as
of June 30, 2007 and the related consolidated statement of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended June 30, 2007. Our audits also included the June 30, 2007 and 2006
balances in the financial statement schedule listed in Item 16(b). These
consolidated financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 the consolidated results of their operations and their cash
flows for each of the two years in the period ended June 30, 2007, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the
related June 30, 2007 and 2006 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
|
December 31
|
|||||||||||
|
2008
|
2007
|
2008
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Assets
|
||||||||||||
|
Current
assets:
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 9,970,691 | $ | 5,163,844 | $ | 6,111,637 | ||||||
|
Available-for-sale
securities
|
- | 6,350,000 | 4,850,000 | |||||||||
|
Accounts
receivable, less allowance for uncollectible accounts of $215,000,
$142,000and $92,000, respectively
|
3,483,666 | 2,269,193 | 909,460 | |||||||||
|
Finance
receivables
|
399,427 | 330,692 | 324,257 | |||||||||
|
Inventory,
net
|
2,299,002 | 3,033,792 | 2,481,791 | |||||||||
|
Prepaid
expenses and other current assets
|
802,223 | 206,508 | 644,074 | |||||||||
|
Total
current assets
|
16,955,009 | 17,354,029 | 15,321,219 | |||||||||
|
Available-for-sale
securities
|
6,875,000 | - | - | |||||||||
|
Finance
receivables, less current portion
|
424,336 | 279,324 | 253,343 | |||||||||
|
Property
and equipment, net
|
2,024,842 | 1,876,754 | 2,293,635 | |||||||||
|
Intangibles,
net
|
5,885,432 | 7,122,032 | 5,362,253 | |||||||||
|
Goodwill
|
7,663,208 | 7,663,208 | 7,663,208 | |||||||||
|
Other
assets
|
227,824 | 196,150 | 240,365 | |||||||||
|
Total
assets
|
$ | 40,055,651 | $ | 34,491,497 | $ | 31,134,023 | ||||||
|
Liabilities
and shareholders' equity
|
||||||||||||
|
Current
liabilities:
|
||||||||||||
|
Accounts
payable
|
$ | 4,005,549 | $ | 3,893,307 | $ | 2,505,270 | ||||||
|
Accrued
expenses
|
2,506,035 | 1,484,239 | 1,446,613 | |||||||||
|
Current
obligations under long-term debt
|
526,348 | 514,302 | 690,665 | |||||||||
|
Total
current liabilities
|
7,037,932 | 5,891,848 | 4,642,548 | |||||||||
|
Long-term
debt, less current portion
|
441,170 | 515,443 | 496,372 | |||||||||
|
Total
liabilities
|
7,479,102 | 6,407,291 | 5,138,920 | |||||||||
|
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, 520,392, and 510,270,
respectively (liquidation preference of $14,977,220, $14,196,632, and
$15,098,161, respectively)
|
3,686,218 | 3,686,218 | 3,614,554 | |||||||||
|
Common
stock, no par value:
|
||||||||||||
|
Authorized
shares- 640,000,000 Issued and outstanding shares- 15,155,270, 11,810,849,
and 15,275,527, respectively
|
193,733,104 | 172,822,868 | 194,522,634 | |||||||||
|
Accumulated
deficit
|
(164,842,773 | ) | (148,424,880 | ) | (172,142,085 | ) | ||||||
|
Total
shareholders' equity
|
32,576,549 | 28,084,206 | 25,995,103 | |||||||||
|
Total
liabilities and shareholders' equity
|
$ | 40,055,651 | $ | 34,491,497 | $ | 31,134,023 | ||||||
|
See
accompanying notes.
|
||||||||||||
USA
Technologies, Inc.
Consolidated
Statements of Operations
|
Six
months ended
|
||||||||||||||||||||
|
Year
ended June 30
|
December 31
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
||||||||||||||||
|
Revenues:
|
(Unaudited)
|
(Unaudited)
|
||||||||||||||||||
|
Equipment
sales
|
$ | 12,384,870 | $ | 7,454,076 | $ | 5,198,360 | $ | 3,283,609 | $ | 5,281,325 | ||||||||||
|
License
and transaction fees
|
3,718,676 | 1,703,936 | 1,216,443 | 2,781,499 | 1,533,734 | |||||||||||||||
|
Total
revenues
|
16,103,546 | 9,158,012 | 6,414,803 | 6,065,108 | 6,815,059 | |||||||||||||||
|
Cost
of equipment
|
9,703,474 | 6,442,627 | 3,549,450 | 2,330,586 | 4,028,492 | |||||||||||||||
|
Cost
of services
|
2,981,218 | 1,369,152 | 855,007 | 2,165,984 | 1,224,481 | |||||||||||||||
|
Gross
profit
|
3,418,854 | 1,346,233 | 2,010,346 | 1,568,538 | 1,562,086 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Selling,
general and administrative
|
18,643,215 | 14,706,156 | 12,092,552 | 8,215,833 | 9,834,680 | |||||||||||||||
|
Depreciation
and amortization
|
1,923,491 | 1,748,653 | 1,699,593 | 807,032 | 1,007,675 | |||||||||||||||
|
Total
operating expenses
|
20,566,706 | 16,454,809 | 13,792,145 | 9,022,865 | 10,842,355 | |||||||||||||||
|
Operating
loss
|
(17,147,852 | ) | (15,108,576 | ) | (11,781,799 | ) | (7,454,327 | ) | (9,280,269 | ) | ||||||||||
|
Other
income (expense):
|
||||||||||||||||||||
|
Interest
income
|
877,159 | 315,827 | 99,776 | 224,537 | 451,553 | |||||||||||||||
|
Other
loss
|
- | (4,759 | ) | (16,087 | ) | - | - | |||||||||||||
|
Legal
loss contingency
|
- | - | (270,000 | - | - | |||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||
|
Coupon
or stated rate
|
(147,200 | ) | (746,578 | ) | (1,365,860 | ) | (53,138 | ) | (73,939 | ) | ||||||||||
|
Non-cash
interest and amortization of debt discount
|
- | (2,238,372 | (1,513,106 | - | - | |||||||||||||||
|
Total
interest expense
|
(147,200 | ) | (2,984,950 | ) | (2,878,966 | ) | (53,138 | ) | (73,939 | ) | ||||||||||
|
Total
other income (expense)
|
729,959 | (2,673,882 | (3,065,277 | 171,399 | 377,614 | |||||||||||||||
|
Net
loss
|
(16,417,893 | ) | (17,782,458 | ) | (14,847,076 | ) | (7,282,928 | ) | (8,902,655 | ) | ||||||||||
|
Cumulative
preferred dividends
|
(780,588 | ) | (781,451 | ) | (783,289 | ) | (390,294 | ) | (390,294 | ) | ||||||||||
|
Loss
applicable to common shares
|
$ | (17,198,481 | ) | $ | (18,563,909 | ) | $ | (15,630,365 | ) | $ | (7,673,222 | ) | $ | (9,292,949 | ) | |||||
|
Loss
per common share (basic and diluted)
|
$ | (1.21 | ) | $ | (2.13 | ) | $ | (3.15 | ) | $ | (0.51 | ) | $ | (0.70 | ) | |||||
|
Weighted
average number of common shares outstanding (basic and
diluted)
|
14,158,298 | 8,702,523 | 4,965,501 | 15,183,102 | 13,250,598 | |||||||||||||||
|
See
accompanying notes.
|
||||||||||||||||||||
USA
Technologies, Inc.
Consolidated
Statements of Shareholders' Equity
(Unaudited
with respect to the six months ended December 31, 2008)
|
Series
A
|
Accumulated
|
|||||||||||||||||||||||
|
Convertible
|
Other
|
|||||||||||||||||||||||
|
Preferred
|
Common
|
Subscriptions
|
Comprehensive
|
Accumulated
|
||||||||||||||||||||
|
Stock
|
Stock
|
Receivable
|
Income
|
Deficit
|
Total
|
|||||||||||||||||||
|
Balance,
June 30, 2005
|
$
|
3,702,856
|
$
|
121,598,475
|
$
|
(233,850
|
)
|
$
|
3,080
|
$
|
(115,761,376
|
)
|
$
|
9,309,185
|
||||||||||
|
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 $1000 per share
|
--
|
18,320
|
--
|
--
|
(18,970
|
)
|
(650
|
)
|
||||||||||||||||
|
Issuance
of 59,247 shares of Common Stock from the conversion of Senior
Notes
|
--
|
667,469
|
--
|
--
|
--
|
667,469
|
||||||||||||||||||
|
Debt
discount related to the beneficial conversion feature on Senior
Notes
|
--
|
552,263
|
--
|
--
|
--
|
552,263
|
||||||||||||||||||
|
Issuance
of special purchase rights in conjunction with the 2008-C and 2010-A
Senior Notes
|
--
|
428,941
|
--
|
--
|
--
|
428,941
|
||||||||||||||||||
|
Issuance
of 9,500 shares of Common Stock for employee compensation
|
--
|
79,195
|
--
|
--
|
--
|
79,195
|
||||||||||||||||||
|
Stock
option compensation charges
|
--
|
875,556
|
--
|
--
|
--
|
875,556
|
||||||||||||||||||
|
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)
(Unaudited
with respect to the six months ended December 31, 2008)
|
Series
A
|
||||||||||||||||
|
Convertible
|
||||||||||||||||
|
Preferred
|
Common
|
Accumulated
|
||||||||||||||
|
Stock
|
Stock
|
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)
(Unaudited
with respect to the six months ended December 31, 2008)
|
Series
A
|
||||||||||||||||
|
Convertible
|
||||||||||||||||
|
Preferred
|
Common
|
Accumulated
|
||||||||||||||
|
Stock
|
Stock
|
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 resulting in the issuance of 58,543
shares of Common Stock
|
--
|
374,675
|
--
|
374,675
|
||||||||||||
|
Retirement
of 650 shares of common stock
|
--
|
(7,138
|
)
|
--
|
(7,138
|
)
|
||||||||||
|
Issuance
of 31,500 fully-vested shares of common stock to employees and vesting of
restricted shares granted under the 2007-A Stock Compensation
Plan
|
221,953
|
--
|
221,953
|
|||||||||||||
|
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
|
--
|
71,488
|
--
|
71,488
|
||||||||||||
|
Net
loss
|
--
|
--
|
(16,417,893
|
)
|
(16,417,893
|
)
|
||||||||||
|
Balance,
June 30, 2008
|
$
|
3,686,218
|
$
|
193,733,104
|
$
|
(164,842,773
|
)
|
$
|
32,576,549
|
|||||||
See
accompanying notes.
USA
Technologies, Inc.
Consolidated
Statements of Shareholders' Equity (Continued)
(Unaudited
with respect to the six months ended December 31, 2008)
|
Series
A
|
||||||||||||||||
|
Convertible
|
||||||||||||||||
|
Preferred
|
Common
|
Accumulated
|
||||||||||||||
|
Stock
|
Stock
|
Deficit
|
Total
|
|||||||||||||
|
Retirement
of 135,744 shares of common stock
|
$
|
--
|
$
|
(315,304
|
)
|
$
|
--
|
$
|
(315,304
|
)
|
||||||
|
Retirement
of 10,122 shares of preferred stock
|
(71,664
|
)
|
--
|
(16,384
|
)
|
(88,048
|
)
|
|||||||||
|
Issuance
of 49,390 fully-vested shares of common stock to employees and vesting of
shares granted under the 2007-A Stock Compensation Plan
|
--
|
274,423
|
--
|
274,423
|
||||||||||||
|
Issuance
of 72,000 fully-vested shares of common stock to officers and vesting
of shares granted under the 2008 Stock Incentive
Plan
|
--
|
563,881
|
--
|
563,881
|
||||||||||||
|
Issuance
of 134,611 shares of common stock for settlement of the Long-Term Equity
Incentive Program liability for Fiscal Year 2008
|
266,530
|
--
|
266,530
|
|||||||||||||
|
Net
loss
|
--
|
--
|
(7,282,928
|
)
|
(7,282,928
|
)
|
||||||||||
|
Balance,
December 31, 2008 (unaudited)
|
$
|
3,614,554
|
$
|
194,522,634
|
$
|
(172,142,085
|
)
|
$
|
25,995,103
|
|||||||
See
accompanying notes.
USA
Technologies, Inc.
Consolidated
Statements of Cash Flows
|
|
Six months ended
|
|||||||||||||||||||
|
Year ended June 30
|
December 31
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
||||||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||||||||||
|
Net
loss
|
$ | (16,417,893 | ) | $ | (17,782,458 | ) | $ | (14,847,076 | ) | $ | (7,282,928 | ) | $ | (8,902,655 | ) | |||||
|
Adjustment
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||||||||||
|
Charges
incurred (reduced) in connection with the vesting and issuance of common
stock for employee and officer compensation
|
(377,358 | ) | 900,977 | 79,195 | 838,304 | 102,741 | ||||||||||||||
|
Charges
incurred (reduced) in connection with the Long-term Equity Incentive
Program
|
1,479,479 | 599,311 | - | (268,407 | ) | 1,247,089 | ||||||||||||||
|
Charges
incurred in connection with stock options
|
71,488 | 362,903 | 875,556 | - | 60,554 | |||||||||||||||
|
Charges
incurred in connection with the issuance of common stock for a legal
settlement
|
- | 18,000 | - | - | - | |||||||||||||||
|
Non-cash
interest and amortization of debt discount
|
- | 2,238,372 | 1,513,106 | - | - | |||||||||||||||
|
Depreciation,
$41,667 (unaudited) of which is allocated to cost of services for the six
months ended December 31, 2008
|
686,891 | 510,678 | 462,993 | 325,520 | 389,375 | |||||||||||||||
|
Amortization
|
1,236,600 | 1,236,600 | 1,236,600 | 523,179 | 618,300 | |||||||||||||||
|
Other
loss
|
- | - | 17,144 | - | - | |||||||||||||||
|
Gain
on repayment of senior notes
|
- | (44,285 | ) | - | - | - | ||||||||||||||
|
Bad
debt expense (recovery)
|
137,931 | 8,806 | 130,778 | (27,380 | ) | 125,711 | ||||||||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||||||||||
|
Accounts
receivable
|
(1,352,404 | ) | (1,255,885 | ) | (408,851 | ) | 2,601,586 | (1,483,812 | ) | |||||||||||
|
Finance
receivables
|
(213,747 | ) | 97,557 | (182,256 | ) | 246,163 | (155,140 | ) | ||||||||||||
|
Inventory
|
734,790 | (1,622,980 | ) | 286,424 | (182,789 | ) | 577,786 | |||||||||||||
|
Prepaid
expenses and other assets
|
(423,612 | ) | (131,636 | ) | 37,711 | 408,822 | (657,739 | ) | ||||||||||||
|
Accounts
payable
|
112,242 | 1,352,973 | (725,594 | ) | (1,500,279 | ) | 1,601,105 | |||||||||||||
|
Accrued
expenses
|
731,539 | (166,976 | ) | 441,863 | (524,485 | ) | 212,405 | |||||||||||||
|
Net
cash used in operating activities
|
(13,594,054 | ) | (13,678,043 | ) | (11,082,407 | ) | (4,842,694 | ) | (6,264,280 | ) | ||||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||||||||||
|
Purchase
of property and equipment, net
|
(572,278 | ) | (526,615 | ) | (842,470 | ) | (170,100 | ) | (403,939 | ) | ||||||||||
|
Net
proceeds (purchases) from redemption/sale of available-for-sale
securities
|
(525,000 | ) | (6,350,000 | ) | 19,243 | 2,025,000 | 6,350,000 | |||||||||||||
|
Net
cash provided by (used in) investing activities
|
(1,097,278 | ) | (6,876,615 | ) | (823,227 | ) | 1,854,900 | 5,946,061 | ||||||||||||
|
See
accompanying notes.
|
||||||||||||||||||||
USA
Technologies, Inc.
Consolidated
Statements of Cash Flows (Continued)
|
Six
months ended
|
||||||||||||||||||||
|
Year ended June 30
|
December 31
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
||||||||||||||||
|
FINANCING
ACTIVITIES:
|
(Unaudited)
|
(Unaudited)
|
||||||||||||||||||
|
Net
proceeds from the issuance (payments for retirement) of common stock and
and exercise of common stock warrants
|
$ | 20,026,884 | $ | 30,989,108 | $ | 14,114,612 | $ | (315,304 | ) | $ | 19,069,965 | |||||||||
|
Payments
for retirement of preferred stock
|
- | - | - | (88,048 | ) | - | ||||||||||||||
|
Collection
of subscriptions receivable
|
- | - | 35,723 | - | - | |||||||||||||||
|
Net
proceeds from the issuance of senior notes
|
- | - | 1,314,944 | - | - | |||||||||||||||
|
Proceeds
from the issuance of long-term debt
|
332,740 | 470,000 | - | - | 332,740 | |||||||||||||||
|
Repayment
of senior notes
|
- | (8,301,676 | ) | (2,654,821 | ) | - | - | |||||||||||||
|
Repayment
of long-term debt
|
(861,445 | ) | (305,731 | ) | (135,904 | ) | (467,908 | ) | (373,235 | ) | ||||||||||
|
Net
cash provided by (used in) financing activities
|
19,498,179 | 22,851,701 | 12,674,554 | (871,260 | ) | 19,029,470 | ||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
4,806,847 | 2,297,043 | 768,920 | (3,859,054 | ) | 18,711,251 | ||||||||||||||
|
Cash
and cash equivalents at beginning of period
|
5,163,844 | 2,866,801 | 2,097,881 | 9,970,691 | 5,163,844 | |||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 9,970,691 | $ | 5,163,844 | $ | 2,866,801 | $ | 6,111,637 | $ | 23,875,095 | ||||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||||||||||
|
Cash
paid for interest
|
$ | 168,332 | $ | 1,013,339 | $ | 1,430,115 | $ | 54,351 | $ | 73,097 | ||||||||||
|
Equipment
and software acquired under capital lease
|
$ | 262,701 | $ | 741,513 | $ | - | $ | 424,213 | $ | 63,925 | ||||||||||
|
Prepaid
insurance financed with long-term debt
|
$ | 203,777 | $ | - | $ | - | $ | 225,785 | $ | 203,777 | ||||||||||
|
Prepaid
maintenance contracts financed with long-term debt
|
$ | - | $ | - | $ | - | $ | 37,429 | $ | - | ||||||||||
|
Purchases
of equipment with long-term debt
|
$ | - | $ | - | $ | 54,900 | $ | - | $ | - | ||||||||||
|
Conversion
of convertible preferred stock to common stock
|
$ | - | $ | 8,142 | $ | 8,496 | $ | - | $ | - | ||||||||||
|
Conversion
of cumulative preferred dividends to common stock
|
$ | - | $ | 15,000 | $ | 18,320 | $ | - | $ | - | ||||||||||
|
Conversion
of senior notes to common stock
|
$ | - | $ | 1,549,300 | $ | 667,469 | $ | - | $ | - | ||||||||||
|
Common
stock issued to settle a legal liability
|
$ | - | $ | 270,000 | $ | - | $ | - | $ | - | ||||||||||
|
Beneficial
conversion feature related to senior notes
|
$ | - | $ | - | $ | 552,263 | $ | - | $ | - | ||||||||||
|
Debt
discount related to issuance of purchase rights
|
$ | - | $ | - | $ | 428,941 | $ | - | $ | - | ||||||||||
|
See
accompanying notes.
|
||||||||||||||||||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
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, 2008 and losses
have continued through December 2008 and are expected to continue during fiscal
year 2009. 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 as discussed below, as well as raise capital
to meet its cash flow requirements including the issuance of Common Stock and
the exercise of outstanding Common Stock warrants.
2.
ACCOUNTING POLICIES
INTERIM
FINANCIAL INFORMATION
The
consolidated financial statements and disclosures included herein for the six
months ended December 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 six-month period ending December 31, 2008
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2009.
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
2.
ACCOUNTING POLICIES (CONTINUED)
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.
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
December 31, 2008, June 30, 2008 and June 30, 2007, available-for-sale
securities consisted of $4,850,000, $6,875,000 and $6,350,000, par value of
auction rate securities (“ARS”), respectively. 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. Due to the weekly liquidity afforded by these securities, the Company
classified its ARS as current assets at June 30, 2007. 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 a result of
these failures, the Company changed the classification of its ARS from a current
asset to a long term asset in its June 30, 2008 Consolidated Balance
Sheet.
At
December 31, 2008, the Company changed the classification of $4,850,000 of the
ARS to current assets due to the purchase of the securities, at par, on January
2, 2009, by the broker-dealer who sold the ARS to the Company.
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
2.
ACCOUNTING POLICIES (CONTINUED)
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.
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, 2007 and April 1, 2008. During the six months ended December
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
2.
ACCOUNTING POLICIES (CONTINUED)
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.
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 68% and 41% of the Company's accounts and finance
receivables at June 30, 2008 and 2007, respectively, were concentrated with two
customers each year and 42% (unaudited) as of December 31, 2008 were
concentrated with one customer. Approximately 59%, 40% and 29% of the Company's
revenues for the years ended June 30, 2008, 2007 and 2006, respectively, were
concentrated with two (35% with one customer and 24% with another customer),
one, and two (19% with one customer and 10% with another customer) customer(s),
respectively. Approximately 17% (unaudited) and 75% (unaudited) of the Company’s
revenues for the six months ended December 31, 2008 and 2007, respectively, were
concentrated with one and two (43% with one customer and 32% with another
customer) customer(s), respectively. The Company's customers are principally
located in the United States.
REVENUE
RECOGNITION
Revenue
from the sale of equipment is recognized on the terms of freight-on-board
shipping point, or upon installation and acceptance of the equipment if
installation services are purchased for the related equipment. Transaction
processing revenue is recognized upon the usage of the Company's cashless
payment and control network. License fees for access to the Company's devices
and network services are recognized on a monthly basis. Product revenues are
recognized for the sale of products from Company owned vending machines when
there is purchase and acceptance of product by the vending customer. In all
cases, revenue is only recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable, and collection of the resulting receivable is reasonably
assured. The Company estimates an allowance for product returns at the date of
sale.
WARRANTY
COSTS
The
Company generally warrants its products for one to three years. Warranty costs
are estimated and recorded at the time of sale based on historical warranty
experience, if available.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
2.
ACCOUNTING POLICIES (CONTINUED)
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
$1,679,000, $1,355,000, and $974,000 for the years ended June 30, 2008, 2007 and
2006, respectively and $1,551,000 (unaudited) and $779,000 (unaudited) for the
six months ended December 31, 2008 and 2007, respectively.
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 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 was fully vested as of the date of
adoption. There was no impact on cash flows or basic and diluted earnings per
share.
There
were no common stock options granted during the year ended June 30, 2007, June
30, 2008 or the six months ended December 31, 2008. The Company recorded stock
compensation expense of $221,953, $900,977, and $79,195 related to common stock
grants and vesting of shares previously granted to employees, excluding the
Long-term Equity Incentive Program, and $71,488, $362,903, and $875,556 related
to the vesting of common stock options during the year ended June 30, 2008, 2007
and 2006, respectively. The Company recorded stock compensation expense of
$838,304 (unaudited) and $102,741 (unaudited) related to common stock grants and
vesting of shares previously granted to employees under the 2007-A Stock
Compensation Plan and $0 (unaudited) and $60,554 (unaudited) related to the
vesting of common stock options during the six months ended December 31, 2008
and 2007, respectively. The Company recorded stock compensation expense of
$1,479,479 and $599,311 related to the vesting of shares under the Long-term
Equity Incentive Program during the years ended June 30, 2008 and 2007,
respectively. The Company recorded a reduction to stock compensation expense of
$268,407 (unaudited) and expense of $1,247,089 (unaudited) related to the
vesting of shares under the Long-term Equity Incentive Program during the six
months ended December 31, 2008 and 2007, respectively.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
2.
ACCOUNTING POLICIES (CONTINUED)
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.
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 2,213,000 and 2,618,000 shares as of June 30, 2008 and 2007,
respectively). No exercise of stock options (161,500) or stock purchase warrants
(1,591,735); or the conversion of preferred stock (5,203) or cumulative
preferred dividends (9,774); or the issuance of shares granted under the
Long-Term Equity Incentive Program (444,405) was assumed during the fiscal year
ended June 30, 2008 because the result would be anti-dilutive. 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, stock purchase
warrants, preferred stock or cumulative preferred dividends was assumed during
the six months ended December 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 and interim periods within
those fiscal years. In February 2008, the Financial Accounting Standards Board
deferred the effective date for one year for certain nonfinancial assets and
nonfinancial liabilities and removed certain leasing transactions from its
scope. We do not expect the adoption of this statement to have a material affect
on our results of operations or financial position.
In
February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS
No. 159”). SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions of
SFAS No. 159 apply only to entities that elect the fair value option. SFAS No.
159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We do not
expect the adoption of this statement to have a material affect on our results
of operations or financial position.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
2.
ACCOUNTING POLICIES (CONTINUED)
In March
2008, the Financial Accounting Standards Board issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161
requires enhanced disclosures about derivative instruments and hedging
activities. The Statement is effective for financial statements
issued for a reporting period that begins after November 15, 2008, regardless of
whether that reporting period is the first interim period in the entity’s fiscal
year. We do not expect the adoption of this statement to have a material affect
on our results of operations or financial position.
In April
2008, the Financial Accounting Standards Board issued FSP No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets”. The FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. We do not
expect the adoption of this statement to have a material affect on our results
of operations or financial position.
In May
2008, the Financial Accounting Standards Board Emerging Issues Task Force issued
EITF Issue No. 08-4, “Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjusted Conversion Ratios” (“EITF 08-04”).
EITF 08-04 provides transition guidance for conforming changes made to EITF
Issue No. 98-5, “Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjusted Conversion Ratios”, that resulted
from EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments” and SFAS No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liability and Equity”. The conforming
changes are effective for financial statements issued for fiscal years ending
after December 15, 2008, with earlier application permitted. We do not expect
the adoption of this statement to have a material affect on our results of
operations or financial position.
In June
2008, the Financial Accounting Standards Board issued FSP No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-06-1”). FSP EITF 03-06-1 clarifies that
instruments granted in share-based payment transactions can be participating
securities prior to the requisite service having been rendered. The FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. We do not expect the
adoption of this statement to have a material affect on our results of
operations or financial position.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
3.
PROPERTY AND EQUIPMENT
Property
and equipment, at cost, consist of the following:
|
Useful
|
June 30
|
December 31
2008
|
|||||||||||
|
Lives
|
2008
|
2007
|
(Unaudited)
|
||||||||||
|
Computer
equipment and purchased software
|
3
years
|
$ | 3,573,898 | $ | 4,089,137 | $ | 4,167,336 | ||||||
|
Vending
machines and related components
|
7
years
|
4,427 | 4,427 | 4,427 | |||||||||
|
Control
systems
|
3
years
|
8,503 | 8,503 | 8,503 | |||||||||
|
Furniture
and equipment
|
5-7
years
|
1,033,691 | 940,386 | 1,034,330 | |||||||||
|
Leasehold
improvements
|
Lesser
of life or lease term
|
265,749 | 118,475 | 265,749 | |||||||||
|
Vehicles
|
5
years
|
29,066 | 29,066 | 29,066 | |||||||||
| 4,915,334 | 5,189,994 | 5,509,411 | |||||||||||
|
Less
accumulated depreciation
|
(2,890,492 | ) | (3,313,240 | ) | (3,215,776 | ) | |||||||
| $ | 2,024,842 | $ | 1,876,754 | $ | 2,293,635 | ||||||||
Assets
under capital lease totaled approximately $1,441,000 (unaudited), $1,017,000 and
$742,000 as of December 31, 2008, June 30, 2008 and 2007, respectively. Capital
lease amortization of approximately $228,000, $39,000, $2,000, $95,000
(unaudited) and $0 (unaudited), is included in depreciation expense for the
years ended June 30, 2008, 2007 and 2006, and for the six months ended December
31, 2008 and 2007, respectively.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
4.
INTANGIBLE ASSETS
Amortization
expense relating to all acquired intangible assets was $1,236,600 during each of
the years ended June 30, 2008, 2007 and 2006, respectively, and $523,179
(unaudited) and $618,300 (unaudited) for the six months ended December 31, 2008
and 2007, respectively. The intangible asset balance and related accumulated
amortization consisted of the following:
|
December 31,
2008 (Unaudited)
|
||||||||||||
|
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
||||||||||
|
Amount
|
Amortization
|
Value
|
||||||||||
|
Intangible
assets:
|
||||||||||||
|
Trademarks
|
$ | 2,064,000 | $ | (695,625 | ) | $ | 1,368,375 | |||||
|
Patents
|
9,294,000 | (5,300,122 | ) | 3,993,878 | ||||||||
|
Non-Compete
agreement
|
1,011,000 | (1,011,000 | ) | - | ||||||||
|
Total
|
$ | 12,369,000 | $ | (7,006,747 | ) | $ | 5,362,253 | |||||
|
June 30,
2008
|
||||||||||||
|
Gross
Carrying
|
Accumulated
|
Net
Carrying
|
||||||||||
|
Amount
|
Amortization
|
Value
|
||||||||||
|
Intangible
assets:
|
||||||||||||
|
Trademarks
|
$
|
2,064,000
|
$
|
(643,125
|
)
|
$
|
1,420,875
|
|||||
|
Patents
|
9,294,000
|
(4,835,422
|
)
|
4,458,578
|
||||||||
|
Non-Compete
agreement
|
1,011,000
|
(1,005,021
|
)
|
5,979
|
||||||||
|
Total
|
$
|
12,369,000
|
$
|
(6,483,568
|
)
|
$
|
5,885,432
|
|||||
|
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
|
|||||
At
December 31, 2008 and June 30, 2008, the expected amortization of the intangible
assets is as follows: $1,040,000 in fiscal year 2009, $1,034,000 per year in
fiscal year 2010 through fiscal year 2012, $742,000 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, 2008.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
5.
ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
June 30
|
December 31
2008
|
|||||||||||
|
2008
|
2007
|
(Unaudited)
|
||||||||||
|
Accrued
compensation and related sales commissions
|
$ | 640,726 | $ | 502,431 | $ | 248,325 | ||||||
|
Accrued
professional fees
|
265,557 | 213,086 | 474,410 | |||||||||
|
Accrued
taxes and filing fees
|
417,848 | 202,428 | 203,850 | |||||||||
|
Advanced
customer billings
|
199,988 | 96,264 | 86,766 | |||||||||
|
Accrued
share-based payment liability
|
755,489 | -- | 107,458 | |||||||||
|
Accrued
other
|
226,427 | 470,030 | 325,804 | |||||||||
| $ | 2,506,035 | $ | 1,484,239 | $ | 1,446,613 | |||||||
6.
RELATED PARTY TRANSACTIONS
During
the years ended June 30, 2008, 2007, and 2006 and the six months ended December
31, 2008 and 2007, the Company incurred approximately $317,000, $356,000,
$258,000, $205,000 (unaudited) and $199,000 (unaudited) respectively, in
connection with legal services provided by a member of the Company's Board of
Directors. At June 30, 2008 and 2007 and December 31, 2008, approximately
$27,000, $33,000 and $66,000 (unaudited), respectively, of the Company's
accounts payable and accrued expenses were due to this Board member. During the
year ended June 30, 2008, the Company incurred approximately $20,000 in
connection with consulting services provided by another member of the Company's
Board of Directors. At December 31, 2008 and June 30, 2008, 2007 and 2006,
approximately $0 (unaudited), and $0, respectively of the Company's accrued
expenses were due to this Board member. During the year ended June 30 2006,
certain Board members and executives participated in various debt offerings of
the Company for total investments of approximately $53,000. There was no
participation by Board members in debt or equity offerings during the years
ended June 30, 2007 and 2008 and the six months ended December 31, 2008 and
2007. As of June 30, 2008, 2007 and 2006, Mr. Illes (see Note 11), held $0, $0,
and $1,000,000 of Senior Notes, respectively.
7.
LONG-TERM DEBT
Long-term debt consists of the
following:
|
June 30
|
December 31,
2008
|
|||||||||||
|
2008
|
2007
|
(Unaudited)
|
||||||||||
|
Capital
lease obligations
|
$ | 561,287 | $ | 677,475 | $ | 756,081 | ||||||
|
Loan
agreement
|
406,232 | 352,270 | 430,956 | |||||||||
| 967,518 | 1,029,745 | 1,187,037 | ||||||||||
|
Less
current portion
|
526,348 | 514,302 | 690,665 | |||||||||
| $ | 441,170 | $ | 515,443 | $ | 496,372 | |||||||
The
maturities of long-term debt as of June 30, 2008 are as follows:
|
2009
|
$
|
526,348
|
||
|
2010
|
275,670
|
|||
|
2011
|
87,895
|
|||
|
2012
|
39,678
|
|||
|
2013
|
15,031
|
|||
|
Thereafter
|
22,896
|
|||
|
$
|
967,518
|
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
7.
LONG-TERM DEBT (CONTINUED)
During
November 2008, the Company entered into various capital leases for network
equipment and maintenance contracts on the equipment totaling $461,642, due in
24 to 36 monthly installments at interest rates from 3.75% to
12.35%.
During
August and November 2008, the Company financed a portion of the premiums for
various insurance policies totaling $90,798 and $134,987, due in 11 and 10
monthly installments, at an interest rate of 5.95% and 6.25%,
respectively.
During
February, March, and April 2008, the Company entered into various capital leases
for network equipment totaling approximately $199,000, due in 36 monthly
installments at interest rates from 3.78% to 12.35%.
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
July 2007, the Company entered into loan agreements for $239,740 with a
financial institution bearing interest at 12% that was collaterized by $274,494
of the Finance Receivables. The Company agreed to make 32 monthly payments of
$9,104, which include interest and principal, from the proceeds received from
the Finance Receivables. 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, 2008, $236,216
and $151,320 of the current and long-term Finance Receivables, respectively, are
collateral for the outstanding balance of these loans, of which $235,751 and
$61,585 is current and long-term debt, respectively. 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 $470,000 loan,
of which $179,804 and $138,420 is current and long-term debt, respectively. As
of December 31, 2008, $163,126 (unaudited) and $68,789 (unaudited) of the
current and long-term Finance Receivables, respectively, are collateral for the
outstanding balances of loans, of which $160,311 (unaudited) and $9,026
(unaudited) is classified as current and long-term debt,
respectively.
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
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
8. INCOME
TAXES
At June
30, 2008 and 2007, the Company had net operating loss carryforwards of
approximately $141,446,000 and $125,443,000, respectively, to offset future
taxable income expiring through approximately 2028. In addition, the Company had
a capital loss carryforward of approximately $1,364,000 and $1,364,000 as of
June 30, 2008 and 2007, respectively. At June 30, 2008 and 2007, the Company
recorded net deferred tax assets of approximately $55,034,000 and $49,521,000,
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). The Company has not
yet determined the extent of these limitations, if any. 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
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss and capital loss carryforwards
|
$
|
52,773,000
|
$
|
47,018,000
|
||||
|
Deferred
research and development costs
|
164,000
|
155,000
|
||||||
|
Software
development costs
|
648,000
|
865,000
|
||||||
|
Intangibles
|
628,000
|
500,000
|
||||||
|
Stock-based
compensation
|
667,000
|
909,000
|
||||||
|
Other
|
614,000
|
653,000
|
||||||
|
55,494,000
|
50,100,000
|
|||||||
|
Deferred
tax liabilities:
|
||||||||
|
Intangibles
|
(460,000
|
)
|
(579,000
|
)
|
||||
|
55,034,000
|
49,521,000
|
|||||||
|
Valuation
allowance
|
(55,034,000
|
)
|
(49,521,000
|
)
|
||||
|
Deferred
tax assets, net
|
$
|
--
|
$
|
--
|
||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
9. SENIOR
NOTES
The
Company had issued three 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. These Senior Notes
were scheduled to mature on December 31, 2007, December 31, 2008, and December
31, 2009. The Company had also issued four 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.
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.
In April
2007, all of the Senior Notes due June 30, 2009 were converted into 32,000
shares of Common Stock.
During
fiscal year 2003, the Company granted to the holders of Senior Notes due
December 31, 2004 the right to extend the maturity date of these Senior Notes to
December 31, 2007 (“2007 Senior Notes”), in exchange for reducing the conversion
rates from $40 to $20 per share. 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 notes. 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, 2007. During the year
ended June 30, 2007, the Company repaid all of the outstanding 2007 Senior Notes
for a total principal repayment of $2,962,516.
During
fiscal year 2005, the Company issued $1,550,789 of Senior Notes convertible into
shares of Common Stock at $10 per share and maturing on June 30, 2007 (“2007-B
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
$518,645 as additional debt discount, which was being amortized to interest
expense through the maturity date of these Senior Notes. During the year ended
June 30, 2007, $500 of the 2007-B Senior Notes were converted into 50 shares of
Common Stock. During December 2006, the Company repaid all of the outstanding
2007-B Senior Notes for a total principal repayment of $983,326.
During
fiscal year 2005, the Company issued $1,755,000 of Senior Notes due April 30,
2005 to accredited investors. During fiscal year 2005, the Company authorized an
offer whereby all of the holders of these notes exchanged these Senior Notes for
new Senior Notes convertible into shares of Common Stock at $10 per share
maturing on December 31, 2010 (“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 was being amortized to interest expense through the maturity date of these
Senior Notes. During the year ended June 30, 2007, $778,800 of the 2010 Senior
Notes were converted into 77,880 shares of Common Stock. During the year ended
June 30, 2007, the Company repaid all of the outstanding 2010 Senior Notes for a
total principal repayment of $463,200 less a discount of $20,000.
During
fiscal year 2005, holders of an aggregate of $1,920,651 in Senior Notes due
December 31, 2005 extended their maturity to December 31, 2008 (“2008 Senior
Notes”) and holders of an aggregate of $1,520,000 in Senior Notes due December
31, 2006 extended their maturity to December 31, 2009 (“2009 Senior Notes”). The
exchange of these 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 these Senior Notes was 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 outstanding 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
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
9. SENIOR
NOTES (CONTINUED)
During
fiscal year 2006, the Company issued $544,944 of convertible Senior Notes due
December 31, 2008 (the “2008-C Senior Notes”). The 2008-C Senior Notes were
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 was 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 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 was 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 issued $770,000 of Notes (“Bridge Notes”) due January
6, 2006 with interest payable on the due date at a rate of 10% per annum. 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”) and were
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 was 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 was 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 outstanding 2010-B Senior Notes for a total principal repayment of
$320,000.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
9. SENIOR
NOTES (CONTINUED)
A summary of the activity for the
Senior Notes for the years ended June 30, 2008 and 2007
follows:
|
Senior
Notes Maturing December 31,
|
||||||||||||||||
|
2007
|
2008
|
2009
|
2010
|
|||||||||||||
|
(2007
Senior Notes)
|
(2008
& 2008-C Notes)
|
(2009
Senior Notes)
|
(2010
& 2010-B Senior Notes)
|
|||||||||||||
|
Face
amount of Senior Notes
|
||||||||||||||||
|
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, 2006
|
$
|
320,000
|
$
|
983,826
|
||||
|
Repayment
|
--
|
(983,326
|
)
|
|||||
|
Conversions
to Common Stock
|
(320,000
|
)
|
(500
|
)
|
||||
|
Balance,
June 30, 2007
|
$
|
--
|
$
|
--
|
||||
|
Senior
Notes Maturing December 31,
|
||||||||||||||||
|
2007
|
2008
|
2009
|
2010
|
|||||||||||||
|
(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, 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, 2007
|
||||||||||||||||
|
Face
amount
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
||||||||
|
Unamortized
costs
|
--
|
--
|
--
|
--
|
||||||||||||
|
$
|
--
|
--
|
$
|
--
|
$
|
--
|
||||||||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
9. SENIOR
NOTES (CONTINUED)
|
Senior
Notes Maturing
June 30,
|
||||||||
|
2009
|
2007
|
|||||||
|
(2007-B
Senior Notes)
|
||||||||
|
Debt
discount and other issuance costs
|
||||||||
|
Unamortized
costs at June 30, 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, 2007
|
||||||||
|
Face
amount
|
$
|
--
|
$
|
--
|
||||
|
Unamortized
costs
|
--
|
$
|
--
|
|||||
|
$
|
--
|
$
|
--
|
|||||
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, 2008 and 2007 and December 31, 2008 amounted to
$9,773,300, $8,992,712, and $9,965,905 (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, 2008 and 2007
and the six months ended December 31, 2008, certain holders of the Preferred
Stock converted 0, 1,150 and 0 (unaudited), respectively, into 0, 11 and 0
(unaudited) shares of Common Stock, respectively. Certain of these shareholders
also converted cumulative preferred dividends of $0 and $15,000 and $0
(unaudited), respectively, into 0, 15 and 0 (unaudited) shares of Common Stock
during the years ended June 30, 2008 and 2007 and the six months ended December
31, 2008, respectively. The Series A Preferred Stock may be called for
redemption at the option of the Board of Directors for a price of $11.00 per
share plus payment of all accrued and unpaid dividends. No such redemption has
occurred as of December 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
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.
The
Company's Board of Directors has authorized various Common Stock private
placement offerings. Activity for these offerings during the years ended June
30, 2008, 2007 and 2006 and the six months ended December 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
11.
COMMON STOCK (CONTINUED)
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. In
October 2008, the Company entered into an agreement which caused the number of
warrants to be automatically increased to 903,955 and the exercise price reduced
to $5.90 (See Note 12). 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 was 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. The one year observer period had lapsed as of
June 30, 2008.
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
11.
COMMON STOCK (CONTINUED)
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
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.
On April
4, 2005, the Company entered into a Common Stock purchase agreement with an
accredited investor, Steve Illes (“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.
During the year ended June 30, 2006 the Company issued 529,999 shares of Common
Stock under the 2005 Common Stock Agreement for total gross proceeds of
$4,443,066.
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 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 only if the shares have been registered by
the Company for resale under the Act. The agreement also stated that no
additional shares shall be registered under the 2005 Common Stock Agreement.
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 had the right in the future, if necessary, to register additional shares
in order to ensure that a sufficient number of shares were 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
11.
COMMON STOCK (CONTINUED)
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
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 only if the shares had been registered by the Company
for resale by Mr. Illes under the Securities Act of 1933, as amended. The
agreement also stated that no additional shares would be registered under the
2006 Common Stock Agreement. 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 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 had 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 were 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, 2008 and 2007, the Company issued 886,908
and 1,433,092 shares, including the 20,000 shares as a due diligence fee, of
Common Stock, respectively, under the 2006-B Common Stock Agreement for total
gross proceeds of $5,671,847 and $9,326,743, respectively. The Company incurred
issuance costs of $1,410 and $147,509 during the year ended June 30, 2008 and
2007, respectively, in connection with this agreement. No shares were issued
under this agreement during the six months ended December 31, 2008.
During
the years ended June 30, 2008, 2007 and 2006 warrants were exercised to purchase
58,543, 43,552, and 36,800 shares of Common Stock at share prices of $6.40, $10,
and $6.40, generating proceeds of $374,675, $281,024, and
$368,000. During the six months ended December 31, 2008 no
(unaudited) warrants were exercised to purchase shares of Common
Stock.
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 there were 5,000 shares issued under the 2004-B Plan, of which 1,087
shares were issued during the year then ended.
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 2006-A Stock Compensation Plan totaling $104,345 and $65,874, respectively,
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. During
the years ended June 30, 2008 and 2007 and the six months ended December 31,
2008 and 2007 the Company issued 31,500, 12,013, 49,390 (unaudited) and 8,700
(unaudited) shares under the 2007-A Stock Compensation plan totaling $221,953,
$74,135, $274,423 (unaudited) and $86,591 (unaudited), respectively based on the
grant date fair value of the shares.
On
February 28, 2008, the Company’s shareholders approved the 2008 Stock Incentive
Plan to allow up to 300,000 shares of Common Stock to be available for issuance
to future or current employees, directors and consultants of the
Company. As of December 31, 2008, 72,000 (unaudited) shares have been
issued under the plan totaling $563,881 (unaudited) based on the grant date fair
value of the shares.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
11.
COMMON STOCK (CONTINUED)
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.
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 the uncompleted fiscal year
2009 is as follows: Mr. Jensen-178,570 shares; Mr. Herbert-53,714 shares; and
Mr. DeMedio-21,664 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
11.
COMMON STOCK (CONTINUED)
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.
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.
During
the 2008 fiscal year a portion of the e-Port units sold consisted of units
pertaining to the MasterCard PayPass seeding program with 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 beneficial to the Company to maximize the number
of e-Ports in the field as soon as possible. In September 2008, the Compensation
Committee recommended to the Board of Directors that the selling price of the
e-Ports sold during fiscal year 2008 as part of the seeding program be
“normalized” to the current retail price for the Long-Term Equity Incentive
Program (the “Program”). The normalization resulted in increased gross profit
and EBITDA for the e-Port units sold in the MasterCard PayPass seeding program.
The Board of Directors approved the recommendation of the Compensation Committee
on September 3, 2008.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
11.
COMMON STOCK (CONTINUED)
As a
result of the normalization, a lower than target hurdle was met for gross profit
(85%), resulting in the issuance to the executive officers of a total of 191,729
shares under the Plan for the 2008 fiscal year versus a total of 126,973 shares
prior to the normalization. The specific allocation of the shares among the
executive officers was as follows: Mr. Jensen-134,820 shares; Mr. Herbert-
40,553 shares; and Mr. DeMedio- 16,356 shares. As a result, the vesting of the
additional 64,756 shares resulted in compensation expense of $287,517 and a
corresponding amount recorded to the accrued share-based liability on September
3, 2008, when the market value of the Company’s Common Stock was $4.44 per
share. On September 30, 2008, the Company’s share price was $4.14, and the total
share-based payment liability related to the fiscal year 2008 award was
$794,333. During the three months ended September 30, 2008, the Company recorded
stock compensation expense of $38,844 related to the Program for fiscal year
2008, $268,284 of which relates to the additional 64,756 shares awarded, offset
by a reduction of $229,440 related to the change in the fair value of the
original award. On December 30, 2008, the executive officers exercised their
right to cancel shares for payroll tax obligations. As a result, 57,118 of the
191,729 vested shares were cancelled to satisfy $113,093 of related payroll tax
obligations. The final settlement of the award for the fiscal year 2008 Program
resulted in a reduction of the short-term share-based payment liability of
$794,333, a reduction of a tax receivable for $113,093, a reduction of
compensation expense of $414,710 and a credit to Common Stock of $266,530
(134,611 shares at $1.98), as the share price on the date of settlement was
$1.98. The total compensation expense recognized for the fiscal year 2008
Program was $379,623, of which $755,489 was recorded in the fiscal year ended
June 30, 2008, and was offset by reductions in compensation expense of $375,866
during the first six months of fiscal year 2009. Compensation expense recognized
for the fiscal year 2008 Program was $523,099 (unaudited) as of December 31,
2007.
During
September 2008, the Company entered into amendments to the employment agreements
with Mr. Jensen, Mr. Herbert and Mr. DeMedio. As part of the amendments, Mr.
Jensen was granted 110,000 shares of Common Stock under the 2008 Stock Incentive
Plan valued at $4.44 per share which vest as follows: 36,000 on September 15,
2008; 37,000 on January 15, 2009; and 37,000 on June 30, 2009; Mr. Herbert was
granted 85,000 shares of Common Stock under the 2008 Stock Incentive Plan valued
at $4.44 per share which vest as follows: 28,000 on September 15, 2008; 28,000
on January 15, 2009; and 29,000 on June 30, 2009; and Mr. DeMedio was granted
25,000 shares of Common Stock under the 2008 Stock Incentive Plan valued at
$4.44 per share which vest as follows: 8,000 on September 15, 2008; 8,000 on
January 15, 2009; and 9,000 on June 30, 2009.
In
conjunction with the Plan award for fiscal year 2009, the Company recorded
compensation expense of $107,458 (unaudited) and a corresponding amount to the
short-term accrued shared-based payment liability during the six months ended
December 31, 2008. Of which, $158,578 (unaudited) of compensation expense was
recorded during the three months ended September 30, 2008, offset by a reduction
of compensation expense of $51,120 (unaudited) during the three months ended
December 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
$2.11 at the end of the reporting period, December 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.
On
February 4, 2009, the Board of Directors approved the recommendation of the
Compensation Committee that the final twelve month measuring period under the
Program (see note 4) be changed from the fiscal year ending June 30, 2009 to the
fiscal year ending June 30, 2010. The foregoing was approved by the Board as the
Board did not believe it would be appropriate to reward senior management with
bonuses during the current economic slow down. As a result, the short-term
accrued share-based payment liability of $107,458 (unaudited) as of December 31,
2008 will be reversed, with a corresponding reduction to compensation expense
during the three months ended March 31, 2009.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
11.
COMMON STOCK (CONTINUED)
As of
December 31, 2008, the Company had reserved shares of Common Stock for future
issuance for the following (unaudited):
|
Exercise
of Common Stock Options
|
160,750
|
|||
|
Exercise
of Common Stock Warrants
|
3,030,863
|
|||
|
Conversions
of Preferred Stock and cumulative Preferred Stock
dividends
|
15,098
|
|||
|
Issuance
under 2007-A Stock Compensation Plan
|
7,097
|
|||
|
Issuance
under 2008 Stock Incentive Plan
|
228,000
|
|||
|
Issuance
under Long-Term Equity Incentive Program- Fiscal Year 2009 (not
vested)
|
317,433
|
|||
|
Issuance
under Chief Executive Officer’s employment agreement upon the occurrence
of a USA Transaction
|
140,000
|
|||
|
Total
shares reserved for future issuance
|
3,899,241
|
As of
June 30, 2008, the Company had reserved shares of Common Stock for future
issuance for the following:
|
Exercise
of Common Stock Options
|
161,500
|
|||
|
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
|
56,487
|
|||
|
Issuance
under 2008 Stock Incentive Plan
|
300,000
|
|||
|
Issuance
under Long-Term Equity Incentive Program- Fiscal Year 2008 (vested, but
not issued)
|
126,973
|
|||
|
Issuance
under Long-Term Equity Incentive Program- Fiscal Year 2009 (not
vested)
|
317,433
|
|||
|
Issuance
under Chief Executive Officer’s employment agreement upon the occurrence
of a USA Transaction
|
140,000
|
|||
|
Total
shares reserved for future issuance
|
2,709,105
|
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
11.
COMMON STOCK (CONTINUED)
A summary
of the status of the Company’s nonvested common shares as of December 31, 2008
(unaudited) and June 30, 2008, 2007 and 2006, and changes during the years ended
June 30, 2008, 2007 and 2006 and the six months ended December 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- FY 2007 (LTIP)
|
139,671
|
5.90
|
||||||
|
Vested-
FY 2007 (LTIP)
|
(139,671
|
)
|
5.90
|
|||||
|
Vested-
FY 2008 (LTIP)
|
(126,973
|
)
|
5.90
|
|||||
|
Forfeited-
FY 2008 (LTIP)
|
(190,460
|
)
|
5.90
|
|||||
|
Nonvested
at June 30, 2008
|
317,433
|
$
|
5.90
|
|||||
|
Granted
|
220,000
|
$
|
4.44
|
|||||
|
Vested
|
(72,000
|
)
|
$
|
4.44
|
||||
|
Reversal
of forfeited shares due to normalization- FY 2008 (LTIP)
|
64,756
|
5.90
|
||||||
|
Vested-
FY 2008 (LTIP)
|
(64,756
|
)
|
5.90
|
|||||
|
Nonvested
at December 31, 2008 (unaudited)
|
465,433
|
$
|
5.44
|
|||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
12.
COMMON STOCK WARRANTS AND OPTIONS
Common
Stock Warrant activity for the years ended June 30, 2008, 2007 and 2006 and the
six months ended December 31, 2008 (unaudited) was as follows:
|
Warrants
|
||||
|
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 June 30, 2008
|
1,591,735
|
|||
|
Issued
|
1,570,622
|
|||
|
Exercised
|
-
|
|||
|
Expired
|
(131,494
|
)
|
||
|
Outstanding
at December 31, 2008 (unaudited)
|
3,030,863
|
|||
All
Common Stock warrants outstanding as of December 31, 2008 (unaudited) were
exercisable except for the 500,000 and 1,000,000 warrants expiring on October 1,
2010 and October 1, 2011, respectively, which are not exercisable until minimum
performance hurdles in the First Data Joint Marketing Agreement are achieved.
The following table shows exercise prices and expiration dates for warrants
outstanding as of December 31, 2008 (unaudited):
|
Warrants
|
Exercise
Price
|
||||||
|
Outstanding
|
Per
Share
|
Expiration
Date
|
|||||
| 500,000 | $ | 5.25 |
October
1, 2010
|
||||
| 1,000,000 | $ | 6.00 |
October
1, 2011
|
||||
| 609,376 | $ | 6.40 |
December
31, 2011
|
||||
| 17,532 | $ | 7.70 |
October
17, 2012
|
||||
| 903,955 | $ | 5.90 |
March
15, 2013
|
||||
| 3,030,863 | |||||||
All
Common Stock warrants outstanding as of June 30, 2008 were exercisable. The
following table shows exercise prices and expiration dates for warrants
outstanding as of June 30, 2008:
|
Warrants
|
Exercise
Price
|
||||||
|
Outstanding
|
Per
Share
|
Expiration
Date
|
|||||
| 131,494 | $ | 20 |
December
31, 2008
|
||||
| 609,376 | $ | 6.40 |
December
31, 2011
|
||||
| 17,532 | $ | 7.70 |
October
17, 2012
|
||||
| 833,333 | $ | 6.40 |
March
15, 2013
|
||||
| 1,591,735 | |||||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
12.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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 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 | |||||||
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 | |||||||
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
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
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, 58,543 and 32,098
were exercised during the year ended June 30, 2008 and 2007, respectively.
Additionally, the Company issued Blair, the placement agent, warrants to
purchase 11,454 shares of Common Stock that were 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.
On
October 1, 2008, the Company and First Data Merchant Services Corporation, a
wholly-owned subsidiary of First Data Corporation ("First Data"), entered into a
three year Joint Marketing Agreement. Pursuant to the Joint Marketing Agreement,
the Company and First Data agreed to jointly market and sell to vending
operators and soft drink bottlers in the United States a prepaid vending
solution which utilizes the Company’s e-Port device and First Data’s GO-Tag
contactless payment presentation device. The Joint Marketing Agreement
contemplates the sale to customers of up to 100,000 e-Ports and up to 25 million
GO-Tags over the three year term of the agreement. The Company would sell the
e-Ports to the customers at retail pricing. The e-Ports would accept credit
cards, debit cards, and contactless cards as well as First Data’s
GO-Tag.
At the
time of entering into the Joint Marketing Agreement, the Company issued First
Data performance-based warrants to purchase up to 1,500,000 shares of Common
Stock. First Data would have the right to purchase 500,000 of such shares within
two years of issuance at $5.25 per share (the "A Warrants"), and 1,000,000 of
such shares within three years of issuance at $6.00 per share (the "B
Warrants"). The A Warrants are only exercisable by First Data if a minimum of
20,000 e-Ports are sold to a customer pursuant to the Joint Marketing Agreement
prior to the expiration of the A Warrants. The B Warrants are only exercisable
by First Data if the A Warrants become exercisable and if a minimum of 15,000
additional e-Ports are sold to a customer pursuant to the Joint Marketing
Agreement following the date on which the A Warrants become exercisable and
prior to the expiration of the B Warrants. In accordance with EITF 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services", the Company will
determine the fair market value of the warrants on their respective measurement
dates for determining the amount of expense, if any, to record to Selling,
General and Administrative expense.
The Joint
Marketing Agreement provides that First Data has the pre-emptive right for a
period of three years to purchase that number of securities being offered for
sale by the Company during such three year period in order to maintain its
pro-rata portion of the Common Stock of the Company following the issuance of
any securities to be sold by the Company in any such subsequent securities
offering.
As a
result of the issuance of warrants to First Data, the exercise price of the
warrants held by S.A.C. Capital Associates, LLC (“S.A.C.”) has been
automatically reduced to $5.90 per share from $6.40 per share, and the number of
shares underlying these warrants has been automatically increased to 903,955
from 833,333, as required by the terms of the Securities Purchase Agreement with
S.A.C. dated March 14, 2007.
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
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
12.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
Common
Stock Option activity during the years ended June 30, 2008, 2007 and 2006 and
the six months ended December 31, 2008 (unaudited) was as follows:
|
Weighted-
|
||||||||||||
|
Exercise
|
Average
|
|||||||||||
|
Options
|
Price
|
Exercise
|
||||||||||
|
Outstanding
|
Per
Share
|
Price
|
||||||||||
|
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
|
(1,500
|
)
|
$
|
20
|
$
|
20
|
||||||
|
Outstanding
and exercisable at June 30, 2008
|
161,500
|
$
|
7.50-20
|
$
|
7.63
|
|||||||
|
Expired
|
(750
|
)
|
$
|
20
|
$
|
20
|
||||||
|
Outstanding
and exercisable at December 31, 2008
|
160,750
|
$
|
7.50-20
|
$
|
7.58
|
|||||||
The
following table shows exercisable options, exercise prices, the weighted average
remaining contractual life and the aggregate intrinsic value for options
outstanding as of December 31, 2008 (unaudited).
|
Weighted
Average
|
||||||||||||||||||||||||||
|
Exercise
|
Remaining
|
Contractual
|
Intrinsic
|
|||||||||||||||||||||||
|
Options
|
Options
|
Price
Per
|
Life
|
(Years)-
|
Value-
|
|||||||||||||||||||||
|
Outstanding
|
Exercisable
|
Share
|
Outstanding
|
Exercisable
|
Outstanding
|
Exercisable
|
||||||||||||||||||||
|
154,000
|
154,000
|
$
|
7.50
|
3.22
|
1.77
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
6,000
|
6,000
|
$
|
8
|
3.97
|
1.7
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
750
|
750
|
$
|
20
|
0.21
|
0.21
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
160,750
|
160,750
|
3.22
|
1.76
|
$
|
-
|
$
|
-
|
|||||||||||||||||||
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, 2008.
|
Weighted
Average
|
||||||||||||||||||||||||||
|
Exercise
|
Remaining
|
Contractual
|
Intrinsic
|
|||||||||||||||||||||||
|
Options
|
Options
|
Price
Per
|
Life
|
(Years)-
|
Value-
|
|||||||||||||||||||||
|
Outstanding
|
Exercisable
|
Share
|
Outstanding
|
Exercisable
|
Outstanding
|
Exercisable
|
||||||||||||||||||||
|
154,000
|
154,000
|
$
|
7.50
|
3.72
|
2.09
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
6,000
|
6,000
|
$
|
8
|
4.47
|
1.92
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
1,500
|
1,500
|
$
|
20
|
0.46
|
0.46
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
161,500
|
161,500
|
3.72
|
2.07
|
$
|
-
|
$
|
-
|
|||||||||||||||||||
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
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, 2007.
|
Weighted
Average
|
||||||||||||||||||||||||||
|
Exercise
|
Remaining
|
Contractual
|
Intrinsic
|
|||||||||||||||||||||||
|
Options
|
Options
|
Price
Per
|
Life
|
(Years)-
|
Value-
|
|||||||||||||||||||||
|
Outstanding
|
Exercisable
|
Share
|
Outstanding
|
Exercisable
|
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
|
|||||||||||||||||||
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
|
Exercisable
|
Outstanding
|
Exercisable
|
||||||||||||||||||||
|
154,000
|
69,334
|
$
|
7.50
|
5.72
|
4.83
|
$
|
30,800
|
$
|
13,867
|
|||||||||||||||||
|
6,000
|
-
|
$
|
8
|
6.47
|
0.00
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
14,658
|
14,658
|
$
|
16.50
|
0.87
|
0.87
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
3,000
|
1,500
|
$
|
20
|
1.95
|
0.40
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
1,125
|
1,125
|
$
|
30
|
0.31
|
0.31
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
150
|
150
|
$
|
100
|
0.96
|
0.96
|
$
|
-
|
$
|
-
|
|||||||||||||||||
|
178,933
|
86,767
|
5.25
|
4.02
|
$
|
30,800
|
$
|
13,867
|
|||||||||||||||||||
There is
no expected compensation expense related to the vesting of options outstanding
as of December 31, 2008 (unaudited) as all options were vested as of December
31, 2008 (unaudited).
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 vested 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 vested 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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
12.
COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
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 |
The
weighted-average grant-date fair value of stock options granted was $5.26 during
the year ended June 30, 2006. The total fair value of options vested during the
years ended June 30, 2008, 2007, and 2006 was $242,315, $255,815, and
$371,050.
13.
RETIREMENT PLAN
The
Company’s 401(k) Plan (the "Plan") allows employees who have completed six
months of service to make voluntary contributions up to a maximum of 100% of
their annual compensation, as defined in the 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 Company may, in its discretion, make a matching
contribution, a profit sharing contribution, and/or a safe harbor 401(k)
contribution to the Plan. Effective July 1, 2006, the Plan was restated to
conform to provisions of the Economic Growth and Tax Relief Reconciliation Act
of 2001 (“EGTRRA”) and other applicable laws and regulations. In fiscal years
2008, 2007 and 2006 and the six months ended December 31, 2008 the Company made
safe harbor matching contributions of 100% of the participant’s first 3% and 50%
of the next 2% of compensation deferred into the Plan. The Company's
contribution for the years ended June 30, 2008, 2007 and 2006 and the six months
ended December 31, 2008 approximated $197,000, $143,000, $114,000, and $93,000
(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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
14.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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 $598,000, $492,000, $489,000,
$307,000 (unaudited) and $300,000 (unaudited) during the years ended June 30,
2008, 2007 and 2006 and the six months ended December 31, 2008 and 2007,
respectively. Future minimum lease payments subsequent to June 30, 2008 under
capital leases and noncancellable operating leases are as follows:
|
Capital
|
Operating
|
|||||||
|
Leases
|
Leases
|
|||||||
|
2009
|
$
|
299,251
|
$
|
621,081
|
||||
|
2010
|
216,524
|
619,099
|
||||||
|
2011
|
80,713
|
91,064
|
||||||
|
2012
|
26,684
|
1,400
|
||||||
|
Total
minimum lease payments
|
$
|
623,172
|
$
|
1,332,644
|
||||
|
Less
amount representing interest
|
61,885
|
|||||||
|
Present
value of net minimum lease payments
|
561,287
|
|||||||
|
Less
current obligations under capital leases
|
262,028
|
|||||||
|
Obligations
under capital leases, less current portion
|
$
|
299,259
|
||||||
In
September 2007 and 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. As of December 31, 2008, the Company had not yet
purchased any inventory under this commitment. The commitment to purchase
inventory is to begin upon the approval, by the Company, of the pre-production
unit. The Company provided such approval to the manufacturer in
February 2009. The Company expects to start receiving shipments from this third
party contract manufacturer during the third quarter of the 2009 fiscal
year.
In
conjunction with the Long-Term Equity Incentive Program (Note 11), during March
2007, each of Mr. Jensen, Mr. Herbert, and Mr. DeMedio signed amendments to
their Employment and Non-Competition Agreements.
During
September 2008, Mr. Jensen and the Company entered into an amendment to his
employment agreement pursuant to which the term of Mr. Jensen’s employment with
the Company was extended from June 30, 2009 until June 30, 2011, and his annual
base salary was increased to $365,000 effective October 1, 2008. In addition,
Mr. Jensen was granted 110,000 shares of Common Stock under the 2008 Stock
Incentive Plan valued at $4.44 per share which vest as follows: 36,000 on
September 15, 2008; 37,000 on January 15, 2009; and 37,000 on June 30,
2009.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
14.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. As previously provided
in his employment agreement, 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 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 that 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. 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 vested 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.
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.
During
September 2008, Mr. Herbert and the Company entered into an amendment to his
employment agreement pursuant to which the term of Mr. Herbert’s employment with
the Company was extended from June 30, 2009 until June 30, 2011, and his annual
base salary was increased to $320,000 effective October 1, 2008. In addition,
Mr. Herbert was granted 85,000 shares of Common Stock under the 2008 Stock
Incentive Plan valued at $4.44 per share which vest as follows: 28,000 on
September 15, 2008; 28,000 on January 15, 2009; and 29,000 on June 30,
2009.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
14.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
As
previously provided in his employment agreement, Mr. Herbert is required 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 vested 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.
During
September 2008, Mr. DeMedio and the Company entered into an amendment to his
employment agreement, expiring June 30, 2009, pursuant to which he was granted
25,000 shares of Common Stock under the 2008 Stock Incentive Plan valued at
$4.44 per share which vest as follows: 8,000 on September 15, 2008; 8,000 on
January 15, 2009; and 9,000 on June 30, 2009.
As
previously provided in his employment agreement, 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 vested 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. Effective October 1, 2007,
Mr. DeMedio’s base salary was increased to $195,000 per annum.
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.
USA
Technologies, Inc.
Notes to
Consolidated Financial Statements
(Unaudited
with respect to December 31, 2008 and 2007 and the six month periods then
ended)
14.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
The
Company also issued 2,536 shares of Common Stock to a former employee totaling
$18,000 relating to the settlement of litigation.
In
September 2007 and 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. As of December 31, 2008, the Company had not yet
purchased any inventory under this commitment. The commitment to purchase
inventory is to begin upon the approval, by the Company, of the pre-production
unit. The Company provided such approval to the manufacturer in
February 2009. The Company expects to start receiving shipments from this third
party contract manufacturer during the third quarter of the 2009 fiscal
year.
F-45