usat_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934

 

For the transition period from                           to                          

 

Commission file number 001-33365

 

USA Technologies, Inc.


(Exact name of registrant as specified in its charter)

 

Pennsylvania

    

23-2679963

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

100 Deerfield Lane, Suite 300, Malvern, Pennsylvania

    

19355

(Address of principal executive offices)

 

(Zip Code)

 

(610) 989-0340


(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ◻

 

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

 

Large accelerated filer ◻

Accelerated filer ☒

Non-accelerated filer ◻

 

Smaller reporting company ◻

 

 

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

 

As of February 1, 2017, there were 40,327,675 shares of Common Stock, no par value, outstanding.

 

 

 

 


 

Table of Contents

USA TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

Part I - Financial Information 

    

 

 

 

 

Item 1. 

Consolidated Financial Statements

 

 

 

 

 

 

Consolidated Balance Sheets (unaudited) – December 31, 2016 and June 30, 2016 (audited)

 

 

 

 

 

 

Consolidated Statements of Operations (unaudited) – Three and six months ended December 31, 2016 and 2015

 

 

 

 

 

 

Consolidated Statement of Shareholders’ Equity (unaudited) – Six months ended December 31, 2016

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) – Three and six months ended December 31, 2016 and 2015

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18 

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

37 

 

 

 

 

Item 4. 

Controls and Procedures

 

37 

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38 

 

 

 

 

Item 5. 

Other Information

 

38 

 

 

 

 

Item 6. 

Exhibits

 

38 

 

 

 

 

 

Signatures

 

39 

 

 

2


 

Table of Contents

Part I. Financial Information

Item 1. Consolidated Financial Statements

 

USA Technologies, Inc.

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

December 31,

 

June 30,

($ in thousands, except shares)

    

2016

    

2016

 

 

(unaudited)

 

(audited)

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

18,034

 

$

19,272

Accounts receivable, less allowance for doubtful accounts of $2,546 and $2,814, respectively

 

 

6,796

 

 

4,899

Finance receivables, less allowance for credit losses of $29 and $0, respectively

 

 

1,442

 

 

3,588

Inventory, net

 

 

4,786

 

 

2,031

Prepaid expenses and other current assets

 

 

1,764

 

 

987

Deferred income taxes

 

 

2,271

 

 

2,271

Total current assets

 

 

35,093

 

 

33,048

   

 

 

 

 

 

 

Finance receivables, less current portion

 

 

3,956

 

 

3,718

Other assets

 

 

145

 

 

348

Property and equipment, net

 

 

9,433

 

 

9,765

Deferred income taxes

 

 

25,568

 

 

25,453

Intangibles, net

 

 

711

 

 

798

Goodwill

 

 

11,492

 

 

11,703

Total assets

 

$

86,398

 

$

84,833

   

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

9,090

 

$

12,354

Accrued expenses

 

 

2,912

 

 

3,458

Line of credit, net

 

 

7,078

 

 

7,119

Current obligations under long-term debt

 

 

766

 

 

629

Income taxes payable

 

 

6

 

 

18

Warrant liabilities

 

 

 —

 

 

3,739

Deferred gain from sale-leaseback transactions

 

 

470

 

 

860

Total current liabilities

 

 

20,322

 

 

28,177

   

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Long-term debt, less current portion

 

 

1,394

 

 

1,576

Accrued expenses, less current portion

 

 

52

 

 

15

Deferred gain from sale-leaseback transactions, less current portion

 

 

 —

 

 

40

Total long-term liabilities

 

 

1,446

 

 

1,631

 

 

 

 

 

 

 

Total liabilities

 

 

21,768

 

 

29,808

   

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, no par value:

 

 

 

 

 

 

Authorized shares- 1,800,000 Series A convertible preferred- Authorized shares- 900,000  Issued and outstanding shares- 445,063 with liquidation preference of $18,442 and $18,108, respectively

 

 

3,138

 

 

3,138

Common stock, no par value: Authorized shares- 640,000,000 Issued and outstanding shares- 40,321,941 and 37,783,444, respectively

 

 

245,230

 

 

233,394

Accumulated deficit

 

 

(183,738)

 

 

(181,507)

 

 

 

 

 

 

 

Total shareholders’ equity

 

 

64,630

 

 

55,025

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

86,398

 

$

84,833

 

See accompanying notes.

 

3


 

Table of Contents

USA Technologies, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

December 31,

 

December 31,

 

($ in thousands, except shares and per share data)

    

2016

    

2015

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

License and transaction fees

 

$

16,639

 

$

13,674

 

$

33,004

 

$

26,599

 

Equipment sales

 

 

5,117

 

 

4,829

 

 

10,340

 

 

8,504

 

Total revenues

 

 

21,756

 

 

18,503

 

 

43,344

 

 

35,103

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of sales/revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

11,389

 

 

9,067

 

 

22,632

 

 

17,772

 

Cost of equipment

 

 

4,033

 

 

3,953

 

 

8,211

 

 

6,801

 

Total costs of sales/revenues

 

 

15,422

 

 

13,020

 

 

30,843

 

 

24,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

6,334

 

 

5,483

 

 

12,501

 

 

10,530

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,793

 

 

4,762

 

 

12,702

 

 

9,558

 

Depreciation and amortization

 

 

307

 

 

127

 

 

515

 

 

266

 

Total operating expenses

 

 

6,100

 

 

4,889

 

 

13,217

 

 

9,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

234

 

 

594

 

 

(716)

 

 

706

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

200

 

 

20

 

 

273

 

 

71

 

Interest expense

 

 

(201)

 

 

(104)

 

 

(413)

 

 

(223)

 

Change in fair value of warrant liabilities

 

 

 —

 

 

(1,230)

 

 

(1,490)

 

 

(887)

 

Total other income (expense), net

 

 

(1)

 

 

(1,314)

 

 

(1,630)

 

 

(1,039)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

233

 

 

(720)

 

 

(2,346)

 

 

(333)

 

Benefit (provision) for income taxes

 

 

 —

 

 

(154)

 

 

115

 

 

(181)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

233

 

 

(874)

 

 

(2,231)

 

 

(514)

 

Cumulative preferred dividends

 

 

 —

 

 

 —

 

 

(334)

 

 

(334)

 

Net income (loss) applicable to common shares

 

$

233

 

$

(874)

 

$

(2,565)

 

$

(848)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share - basic

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

 

Net earnings (loss) per common share - diluted

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding

 

 

40,308,934

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

 

Diluted weighted average number of common shares outstanding

 

 

40,730,712

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

 

 

See accompanying notes.

 

 

 

4


 

Table of Contents

USA Technologies, Inc.

Consolidated Statement of Shareholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Accumulated

 

 

 

($ in thousands, except shares)

    

Shares

    

Amount

    

Shares

    

Amount

    

Deficit

    

Total

Balance, June 30, 2016

 

445,063

 

$

3,138

 

37,783,444

 

$

233,394

 

$

(181,507)

 

$

55,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclass of fair value of warranty liability upon exercise of warrants

 

 

 

 

 

 

 —

 

 

5,229

 

 

 

 

 

5,229

Exercise of warrants

 

 

 

 

 

 

2,401,408

 

 

6,193

 

 

 

 

 

6,193

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 Stock Incentive Plan

 

 

 

 

 

 

143,622

 

 

194

 

 

 

 

 

194

2014 Stock Option Incentive Plan

 

 

 

 

 

 

 —

 

 

95

 

 

 

 

 

95

2015 Equity Incentive Plan

 

 

 

 

 

 

 —

 

 

156

 

 

 

 

 

156

Retirement of common stock

 

 

 

 

 

 

(6,533)

 

 

(31)

 

 

 

 

 

(31)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(2,231)

 

 

(2,231)

Balance, December 31, 2016

 

445,063

 

$

3,138

 

40,321,941

 

$

245,230

 

$

(183,738)

 

$

64,630

 

See accompanying notes.

 

 

 

5


 

Table of Contents

USA Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

December 31, 

 

December 31, 

 

($ in thousands)

    

2016

    

2015

    

2016

    

2015

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

233

 

$

(874)

 

$

(2,231)

 

$

(514)

 

Adjustments to reconcile net income (loss) to net cash provided/(used) by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges incurred in connection with the vesting and issuance of common stock and common stock options for employee and director compensation

 

 

233

 

 

237

 

 

445

 

 

509

 

Gain on disposal of property and equipment

 

 

(31)

 

 

(41)

 

 

(31)

 

 

(42)

 

Non-cash interest

 

 

(79)

 

 

 —

 

 

26

 

 

 —

 

Bad debt expense

 

 

352

 

 

238

 

 

450

 

 

474

 

Depreciation

 

 

1,220

 

 

1,323

 

 

2,477

 

 

2,673

 

Amortization of intangible assets

 

 

43

 

 

 —

 

 

87

 

 

 —

 

Change in fair value of warrant liabilities

 

 

 —

 

 

1,230

 

 

1,490

 

 

887

 

Deferred income taxes, net

 

 

 —

 

 

154

 

 

(115)

 

 

181

 

Recognition of deferred gain from sale-leaseback transactions

 

 

(215)

 

 

(215)

 

 

(430)

 

 

(430)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,309)

 

 

(448)

 

 

(2,347)

 

 

(409)

 

Finance receivables

 

 

2,125

 

 

214

 

 

2,119

 

 

(370)

 

Inventory

 

 

(467)

 

 

649

 

 

(2,689)

 

 

868

 

Prepaid expenses and other assets

 

 

(318)

 

 

(254)

 

 

(542)

 

 

(206)

 

Accounts payable

 

 

397

 

 

(1,623)

 

 

(3,266)

 

 

(2,667)

 

Accrued expenses

 

 

(1,061)

 

 

(13)

 

 

(574)

 

 

(15)

 

Income taxes payable

 

 

(1)

 

 

(70)

 

 

(12)

 

 

(70)

 

Net cash provided/(used) by operating activities

 

 

1,122

 

 

507

 

 

(5,143)

 

 

869

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase and additions of property and equipment

 

 

(441)

 

 

(118)

 

 

(609)

 

 

(167)

 

Purchase of property for rental program

 

 

(693)

 

 

 —

 

 

(1,335)

 

 

 —

 

Proceeds from sale of property and equipment

 

 

61

 

 

101

 

 

61

 

 

105

 

Net cash used by investing activities

 

 

(1,073)

 

 

(17)

 

 

(1,883)

 

 

(62)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used for the retirement of common stock

 

 

 —

 

 

(40)

 

 

(31)

 

 

(11)

 

Proceeds from exercise of common stock warrants

 

 

 —

 

 

 —

 

 

6,193

 

 

 —

 

Proceeds (payments) from line of credit, net

 

 

 —

 

 

3,000

 

 

 —

 

 

3,000

 

Repayment of long-term debt

 

 

(213)

 

 

(233)

 

 

(374)

 

 

(361)

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided/(used) by financing activities

 

 

(213)

 

 

2,727

 

 

5,788

 

 

2,628

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(164)

 

 

3,217

 

 

(1,238)

 

 

3,435

 

Cash at beginning of period

 

 

18,198

 

 

11,592

 

 

19,272

 

 

11,374

 

Cash at end of period

 

$

18,034

 

$

14,809

 

$

18,034

 

$

14,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid in cash

 

$

382

 

$

107

 

$

469

 

$

213

 

Depreciation expense allocated to cost of services

 

$

967

 

$

1,186

 

$

2,050

 

$

2,385

 

Reclass of rental program property to inventory, net

 

$

(55)

 

$

777

 

$

(66)

 

$

498

 

Prepaid items financed with debt

 

$

 —

 

$

 —

 

$

54

 

$

103

 

Equipment and property acquired under capital lease

 

$

18

 

$

 —

 

$

272

 

$

35

 

Disposal of property and equipment

 

$

570

 

$

238

 

$

570

 

$

337

 

 

See accompanying notes.

 

 

 

6


 

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. BUSINESS

 

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

 

INTERIM FINANCIAL INFORMATION

The accompanying unaudited consolidated financial statements of USA Technologies, Inc. have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2016. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the three and six-month periods ended December 31, 2016 are not necessarily indicative of the results that may be expected for the year ending June 30, 2017. The balance sheet at June 30, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

 

2. ACCOUNTING POLICIES

 

CONSOLIDATION

 

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

 

USE OF ESTIMATES

 

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

 

CASH

 

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

 

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

 

Accounts receivable include amounts due to the Company for sales of equipment, other amounts due from customers, merchant service receivables, and unbilled amounts due from customers, net of the allowance for uncollectible accounts.

 

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, including from a shortfall in the customer transaction fund flow from which the Company would normally collect amounts due.

 

7


 

Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

The allowance is determined through an analysis of various factors including the aging of the accounts receivable, the strength of the relationship with the customer, the capacity of the customer transaction fund flow to satisfy the amount due from the customer, an assessment of collection costs and other factors. The allowance for doubtful accounts receivable is management’s best estimate as of the respective reporting date. The Company writes off accounts receivable against the allowance when management determines the balance is uncollectible and the Company ceases collection efforts. Management believes that the allowance recorded is adequate to provide for its estimated credit losses.

 

FINANCE RECEIVABLES

 

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

 

INVENTORY, Net

 

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

 

PROPERTY AND EQUIPMENT, Net

 

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

 

GOODWILL AND INTANGIBLE ASSETS

 

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

 

Goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. The Company accounts for goodwill in accordance with (“ASC”) 350, “Intangibles – Goodwill and Other”. Under (“ASC”) 350, goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (“Topic 820”): Improving Disclosures about Fair Value Measurements.” (“ASU”) 2010-06 amends certain disclosure requirements of Subtopic 820-10. This (“ASU”) provides additional disclosures for transfers in and out of Levels 1 and 2 and for activity in Level 3. This (“ASU”) also clarifies certain other existing disclosure requirements including level of desegregation and disclosures around inputs and valuation techniques.

 

The Company’s financial assets and liabilities are accounted for in accordance with (“ASC”) 820 “Fair Value Measurement.” Under (“ASC”) 820 the Company uses inputs from the three levels of the fair value hierarchy to measure its financial assets and liabilities. The three levels are as follows:

 

Level 1- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Level 2- Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

Level 3- Inputs are unobservable and reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.

 

The Company’s financial instruments, principally accounts receivable, short-term finance receivables, prepaid expenses and other assets, accounts payable and accrued expenses, are carried at cost which approximates fair value due to the short-term maturity of these instruments. The fair value of the Company’s obligations under its long-term debt agreements and the long-term portion of its finance receivables approximates their carrying value as such instruments are at market rates currently available to the Company.

 

REVENUE RECOGNITION

 

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

 

ePort hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party financing company for the devices. The Company utilizes its best estimate of selling price when calculating the revenue to be recorded under these leases. The leases qualify for sales type lease accounting. Accordingly, the Company recognizes a portion of lease payments as interest income for leases not placed with a third-party financing company. At the end of the lease period, the customer would have the option to purchase the device at its residual value.

 

PREFERRED STOCK

 

The Company adopted the provisions of (“ASU”) 2014-16 in determining whether the Company’s Series A Convertible Preferred Stock (“preferred stock”) is more equity-like or debt-like, and whether derivatives embedded in the preferred stock, if any, must be bifurcated and accounted for separately from its host contract. Based upon management’s review of the preferred stock features, management has determined that the preferred stock is more equity-like and that the embedded derivatives do not require bifurcation. As such, the adoption of this standard did not have a material impact on the company's financial statements.

 

ACCOUNTING FOR EQUITY AWARDS

 

In accordance with the (“ASC”) Topic 718, the cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award and allocated over the vesting period of the award.

 

INCOME TAXES

 

The Company follows the (“ASC”) Topic 740, “Accounting for Uncertainty in Income Taxes”, which provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the consolidated financial statements. Accordingly, tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of (“ASC”) Topic 740 and in subsequent periods.

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent that, based on available evidence, it is more likely than not such benefits will be realized. The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general and administrative expenses. No interest or penalties related to uncertain tax positions were accrued or incurred during the three and six months ended December 31, 2016 and 2015.

 

EARNINGS (LOSS) PER COMMON SHARE

 

Basic earnings (loss) per share are calculated by dividing income (loss) applicable to common shares by the weighted average common shares outstanding for the period. Diluted earnings per share are calculated by dividing income (loss) applicable to common shares by the weighted average common shares outstanding for the period plus the effect of potential common shares unless such effect is anti-dilutive.

 

SOFTWARE DEVELOPMENT COSTS

 

The Company follows the (“ASC”) Topic 350-40, “Accounting for the Cost of Computer Software Developed or obtained for Internal Use”, which provides for guidance for what costs can be capitalized for internal use.

 

Capitalized costs for internal-use software are included in fixed assets in the consolidated balance sheet and are amortized over three years. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

The Company is evaluating whether the effects of the following recent accounting will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

In October 2016, the (“FASB”) issued (“ASU”) 2016-19 – “Technical Corrections and Improvements”.

 

In January 2017, the (“FASB”) issued (“ASU”) 2017-04 – “Intangibles-Goodwill and Other (Topic 350): Simplifying the test for Goodwill Impairment.

 

10


 

Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

RECLASSIFICATION

 

Commencing with the June 30, 2016 financial statements, the Company changed the manner in which it presents certain unfunded finance receivables in its consolidated balance sheets and the related statements of cash flows. These finance receivables have yet to be and are expected to be funded by a third-party funding source. The previous accounting classification recorded these amounts as accounts receivable in the consolidated balance sheets and the related statements of cash flows. The impact of this change on the Statement of Cash Flows is as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

December 31, 2015

 

December 31, 2015

 

 

Accounts

 

Finance

 

Accounts

 

Finance

 

    

Receivable

    

Receivables

    

 

Receivable

 

    

Receivables

Per Original Statement of Cash Flows

 

$

(767)

 

$

533

 

$

(1,480)

 

$

701

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact from the reclassification

 

 

319

 

 

(319)

 

 

1,071

 

 

(1,071)

Adjusted Statement of Cash Flows

 

$

(448)

 

$

214

 

$

(409)

 

$

(370)

 

 

 

3. EARNINGS PER SHARE CALCULATION

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

December 31, 

 

December 31, 

($ in thousands, except per share data)

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic earnings per share - Net  income (loss) available to common shareholders

 

$

233

 

$

(874)

 

$

(2,565)

 

$

(848)

Gain recorded for reduction in fair value of warrants*

 

 

 —

 

 

 

 

 —

 

 

 —

Numerator for diluted earnings per share - Net income (loss) available to common shareholders

 

$

233

 

$

(874)

 

$

(2,565)

 

$

(848)

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share - Weighted average shares outstanding

 

 

40,308,934

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

Effect of dilutive potential common shares*

 

 

421,778

 

 

 —

 

 

 —

 

 

 —

Denominator for diluted earnings per share - Adjusted weighted average shares outstanding

 

 

40,730,712

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

Diluted earnings (loss) per share

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

* No adjustment necessary for the three months ended December 31, 2015 and the six months ended December 31, 2016 and 2015 as the effects would be anti-dilutive.

 

4. FINANCE RECEIVABLES

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Finance receivables consist of the following:

 

 

 

 

 

 

 

 

   

 

December 31, 

 

June 30, 

($ in thousands)

    

2016

    

2016

 

 

(unaudited)

 

 

 

Total finance receivables

 

$

5,398

 

$

7,306

Less current portion

 

 

1,442

 

 

3,588

Non-current portion of finance receivables

 

$

3,956

 

$

3,718

 

The Company collects monthly payments of its finance receivables from the customers’ transaction fund flow. Accordingly, as the fund flow from these customers’ transactions is generally sufficient to satisfy the amount due to the Company, the risk of loss is considered low and the Company has provided for an allowance for credit losses for finance receivables of $29 thousand and $0 as of December 31, 2016 and June 30, 2016, respectively.    The aggregate amount of unrealized losses on Finance Receivables was $33 thousand and $0 as of December 31, 2016 and June 30, 2016, respectively.  The number of Finance Receivables that are in a loss position is twelve and zero as of December 31, 2016 and June 30, 2016 respectively.

 

 

Credit Quality Indicators

 

 

 

 

 

 

 

 

Credit risk profile based on payment activity:

 

December 31, 

 

June 30, 

($ in thousands)

    

2016

    

2016

 

 

(unaudited)

 

 

 

Performing

 

$

5,309

 

$

7,174

Nonperforming

 

 

89

 

 

132

Total

 

$

5,398

 

$

7,306

 

Age Analysis of Past Due Finance Receivables

As of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 – 60

 

61 – 90

 

Greater than

 

 

 

 

 

 

Total

 

 

Days Past

 

Days Past

 

90 Days Past

 

Total Past

 

 

 

Finance

($ in thousands)

    

Due

    

Due

    

Due

    

Due

    

Current

    

Receivables

QuickStart Leases

 

$

5

 

$

5

 

$

46

 

$

56

 

$

5,342

 

$

5,398

 

 

Age Analysis of Past Due Finance Receivables

As of June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 – 60

 

61 – 90

 

Greater than

 

 

 

 

 

 

Total

 

 

Days Past

 

Days Past

 

90 Days Past

 

Total Past

 

 

 

Finance

($ in thousands)

    

Due

    

Due

    

Due

    

Due

    

Current

    

Receivables

QuickStart Leases

 

$

98

 

$

31

 

$

3

 

$

132

 

$

7,174

 

$

7,306

 

 

 

5. GOODWILL AND INTANGIBLES

 

On January 15, 2016, the Company executed an Asset Purchase Agreement with VendScreen, Inc (“VendScreen”) a Portland, Oregon based developer of vending industry cashless payment technology, by which it acquired substantially all of VendScreen’s assets and assumed specified liabilities, for a cash payment of $5.625 million and the corresponding goodwill recorded was $4.040 million. In December 2016, the company finalized the opening balance sheet of VendScreen

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

and recorded a reduction of goodwill for $211 thousand and increase finance receivables for the same amount. The final goodwill amount related to VendScreen opening balance sheet is $3.829 million.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration:

 

 

 

 

 

       Fair value of total consideration paid in cash

 

 

 

$

5,625

 

 

 

 

 

 

Acquisition related costs:

 

 

 

$

842

 

 

 

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

       Accounts Receivable

 

 

 

 

3

       Finance Receivables

 

 

 

 

839

       Other Current Assets

 

 

 

 

20

       Deferred Income Taxes

 

 

 

 

18

 

 

 

 

 

880

 

 

 

 

 

 

Property, Plant & Equipment

 

 

 

 

81

 

 

 

 

 

 

Identifiable Intangible Assets:

 

 

 

 

 

       Developed Technology

 

 

 

 

639

       Customer Relationships

 

 

 

 

149

       Brand

 

 

 

 

95

       Noncompete Agreement

 

 

 

 

2

       Fair Value of Intangible Assets

 

 

 

 

885

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

       Accrued Liabilities

 

 

 

$

(50)

 

 

 

 

 

 

Total identifiable net assets

 

 

 

$

1,796

 

 

 

 

 

 

       Goodwill

 

 

 

$

3,829

 

 

 

 

 

 

Total Fair Value

 

 

 

$

5,625

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

During the three and six months ended December 31, 2016, there was $43 thousand and $87 thousand, respectively, of amortization expense relating to acquired intangible assets. There was no amortization expense relating to acquired intangible assets during the three and six months ended December 31, 2015. Intangible asset balances consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

Additions/

 

 

 

 

Balance

 

Amortization

($ in thousands)

    

June 30, 2016

    

Adjustments

    

Amortization

    

December 31, 2016

    

Period

Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

$

1

 

$

 —

 

$

 —

 

$

1

 

2 years

Brand

 

 

79

 

 

 —

 

 

(16)

 

 

63

 

3 years

Developed technology

 

 

576

 

 

 —

 

 

(63)

 

 

513

 

5 years

Customer relationships

 

 

142

 

 

 —

 

 

(8)

 

 

134

 

10 years

Total Intangible Assets

 

$

798

 

$

 —

 

$

(87)

 

$

711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

11,703

 

$

(211)

 

$

 —

 

$

11,492

 

Indefinite

 

 

 

6. LINE OF CREDIT

 

During the fiscal year ended June 30, 2016, the Company entered into a Loan and Security Agreement and other ancillary documents (as amended, the “Heritage Loan Documents”) with Heritage Bank of Commerce (“Heritage Bank”), providing for a secured asset-based revolving line of credit in an amount of up to $12.0 million (the “Heritage Line of Credit”) at an interest rate calculated based on the Federal Reserves’ Prime, which was 3.75% at 12/31/2016, plus 2.25%. The Heritage Line of Credit and the Company’s obligations under the Heritage Loan Documents are secured by substantially all of the Company’s assets, including its intellectual property. The maturity date of the Heritage Line of Credit is March 29, 2017. At the time of maturity, all outstanding advances under the Heritage Line of Credit as well as any unpaid interest are due and payable. Prior to maturity of the Heritage Line of Credit, the Company may prepay amounts due under the Heritage Line of Credit without penalty, and subject to the terms of the Heritage Loan Documents, may re-borrow any such amounts.

The Company and Heritage Bank entered into a Second Amendment as of September 30, 2016 to the Loan and Security Agreement.

The Heritage Loan Documents contain customary representations and warranties and affirmative and negative covenants applicable to the Company. The Heritage Loan Documents also require the Company to achieve a minimum Adjusted EBITDA, as defined in the Heritage Loan Documents, measured on a quarterly basis; that the number of the Company’s connections as of the end of each fiscal quarter shall not decrease below a specified number or by more than five percent as compared to the number of the Company’s connections as of the end of the immediately prior fiscal quarter; and that the Company shall maintain a minimum balance of unrestricted cash at the Bank.

The balance due on the Heritage line of credit was $7.1 million at December 31, 2016 and June 30, 2016. As of December 31, 2016, $4.9 million was available under our line of credit. Interest expense on the line of credit was approximately $200 thousand and $100 thousand for the three and six months ended December 31, 2016, respectively.

 

7. LONG-TERM DEBT

 

The Company periodically enters into capital lease obligations to finance certain office, network equipment and related support for use in its daily operations. During the six-month period ended December 31, 2016 the Company commenced capital lease obligations of $326 thousand. The obligations are due in two to five years in monthly or quarterly installments

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

of $1 thousand to $21 thousand. The value of the acquired equipment is included in property and equipment and amortized accordingly.

 

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

As of June 30, 2016, the fair values of the Company’s Level 3 financial instrument totaled $3.7 million for 2.2 million warrants. The Level 3 financial instrument consist of common stock warrants issued by the Company in March 2011, which include features requiring liability treatment of the warrants. The fair value of warrants issued in March 2011 to purchase shares of the Company’s common stock is based on valuations performed by an independent third-party valuation firm. The fair value was determined using proprietary valuation models using the quality of the underlying securities of the warrants, restrictions on the warrants and security underlying the warrants, time restrictions and precedent sale transactions completed in the secondary market or in other private transactions. During the six months ended December 31, 2016 all of the aforementioned warrants were exercised and the then-fair value warrant liability was reclassified as Common Stock.

 

The following table summarizes the changes in the Company’s Level 3 financial instruments for the three and six months ended December 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

December 31, 

 

December 31, 

($ in thousands)

    

2016

    

2015

    

2016

    

2015

Beginning balance

 

$

 —

 

$

(635)

 

$

(3,739)

 

$

(978)

Increase due to change in fair value of warrant liabilities

 

 

 —

 

 

(1,230)

 

 

(1,490)

 

 

(887)

Reclass of fair value of warranty liability to common stock upon exercise of warrants

 

 

 —

 

 

 —

 

 

5,229

 

 

 —

Ending balance

 

$

 —

 

$

(1,865)

 

$

 —

 

$

(1,865)

 

There were no transfers of assets or liabilities between level 1, level 2, or level 3 during the three and six months ended December 31, 2016 and December 31, 2015. As of December 31, 2016 and June 30, 2016, the Company held no Level 1 or Level 2 financial instruments.

 

9. INCOME TAXES

For the three and six months ended December 31, 2016, income tax benefits of $0 and $0.1 million, respectively, (substantially all deferred income taxes) were recorded. The benefits are based upon income (loss) before income taxes using an estimated annual effective income tax rate of 30% for the fiscal year ending June 30, 2017. However, such benefits actually calculated have been limited to $0.1 million pending the materialization of additional income before income taxes resulting in an increase of $0.03 million in valuation allowances for the calculated additional benefits. The benefits for the six months ended December 31, 2016 were reduced by a provision for the tax effect of the change in the fair value of warrant liabilities which was treated discretely. All of those warrants were exercised as of September 30, 2016.

For the three and six months ended December 31, 2015, income tax provisions of $0.2 million were recorded (substantially all deferred income taxes). The provisions consist of the tax effect of the change in the fair value of warrant liabilities which was treated discreetly offset by a tax benefit based upon loss before provision before income taxes using an estimated annual effective income tax rate of 41% for the fiscal year ending June 30, 2016.

 

10. EQUITY

 

WARRANTS

 

During the three months ended December 31, 2016, 24,733 warrants were exercised at $2.10 per share in a cashless exercise. There was no warrant activity during the three months ended December 31, 2015. During the six months ended December 31, 2016, 2,376,675 warrants were exercised at $2.6058 per share yielding proceeds of $6.2 million, and 24,733 

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

warrants were exercised at $2.10 per share in a cashless exercise. The following table summarizes warrant activity for the three and six months ended December 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

December 31, 

 

December 31, 

 

2016

    

2015

 

2016

    

2015

Beginning balance

68,978

 

4,298,000

 

2,445,653

 

4,309,000

Issued

 —

 

 —

 

 —

 

 —

Exercised

(24,733)

 

 —

 

(2,401,408)

 

(11,000)

Expired

 —

 

 —

 

 —

 

 —

Cancelled

(20,267)

 

 

 

(20,267)

 

 

Ending balance

23,978

 

4,298,000

 

23,978

 

4,298,000

 

STOCK OPTIONS

 

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

 

In August 2016 stock options were awarded to purchase up to 20,080 shares of common stock at an exercise price of $4.98 per share. The options vest on August 31, 2017, and expire if not exercised prior to August 31, 2023. The options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. The fair value of options granted during the three and six months ended December 31, 2016 and 2015 was estimated using the following weighted average assumptions:

 

 

 

 

 

 

 

 

 

Six months ended

 

 

December 31, 

 

 

2016

    

2015

 

Expected volatility

 

50

%  

 

63-66

%

Expected life

 

4 years

 

 

4-4.5 years

 

Expected dividends

 

 —

%  

 

 —

%

Risk-free interest rate

 

1.06

%  

 

1.34-1.49

%

Number of options granted

 

20,080

 

 

119,586

 

Weighted average exercise price

$

4.98

 

$

3.38

 

Weighted average grant date fair value

$

1.98

 

$

1.77

 

 

Stock based compensation related to stock options for the three months ended December 31, 2016 and December 31, 2015 was $47 thousand and $92 thousand, respectively and $95 thousand and $207 thousand, respectively for the six months ended December 31, 2016 and December 31, 2015.

 

COMMON STOCK

 

On July 1, 2016 $40 thousand of stock grants were awarded to each non-employee Director based on the prior 30-day average closing price of the Company’s Common Stock, for a total of 56,784 shares. The shares vest as follows: 18,960 on 07/01/2017, 18,960 on 07/01/2018 and 18,954 on 07/01/2019. The total expense recognized for these grants during the three and six months ended December 31, 2016 was $37 thousand and $73 thousand.

 

During the six months ended December 31, 2016, the Company awarded an aggregate of 78,711 shares to its Chief Executive Officer and Chief Services Officer under its fiscal year 2016 long term stock incentive plan and an aggregate of 6,254 shares to three non-employee Directors in satisfaction of board fees. During the six-month period, the Chief

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Executive Officer cancelled 6,533 shares of Common Stock awarded to him under the 2016 fiscal year long term stock incentive plan in satisfaction of $31 thousand of related payroll obligations.

 

During the six months ended December 31, 2016, the Company issued an aggregate of 2,401,408 shares upon the exercise of outstanding warrants.

 

LTI PLANS

 

The Board approved the Fiscal Year 2017 Long-Term Stock Incentive Plan (the “2017 LTI Stock Plan”) which provides that executive officers would be awarded shares of common stock of the Company in the event that certain metrics relating to the Company’s 2017 fiscal year would result in specified ranges of year-over-year percentage growth. The metrics are total number of connections as of June 30, 2017 as compared to total number of connections as of June 30, 2016 (50% weighting) and adjusted EBITDA earned during the 2017 fiscal year as compared to the adjusted EBITDA earned during the 2016 fiscal year (50% weighting).

 

If none of the minimum threshold year-over-year percentage target goals are achieved, the executive officers would not be awarded any shares. If all of the year-over-year percentage target goals are achieved, the executive officers would be awarded shares having the following value: Chief Executive Officer (“CEO”) - $675,000  (150% of base salary); and Chief Services Officer (“CSO”) - $250,000  (100% of base salary). If all of the maximum distinguished year-over-year percentage target goals are achieved, the executive officers would be awarded shares having the following value: CEO - $1,012,500  (225% of base salary); and CSO - $375,000  (150% of base salary). Assuming the minimum threshold year-over-year percentage target goal would be achieved for a particular metric, the number of shares to be awarded for that metric would be determined on a pro rata basis, provided that the award would not exceed the maximum distinguished award for that metric. The shares awarded under the 2017 LTI Stock Plan would vest as follows: one-third at the time of issuance; one-third on June 30, 2018; and one-third on June 30, 2019.

 

The Company had long-term stock incentive plans (“LTI”) in prior fiscal years for its then executive officers. Stock based compensation related to the LTI plans was as follows in the three and six months ended December 31, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

December 31, 

 

December 31, 

($ in thousands, except per share data)

    

2016

    

2015

    

2016

    

2015

FY17 LTI Plan

 

$

85

 

$

 —

 

$

155

 

$

 —

FY16 LTI Plan

 

 

23

 

 

25

 

 

50

 

 

110

FY15 LTI Plan

 

 

3

 

 

26

 

 

3

 

 

39

FY14 LTI Plan

 

 

 —

 

 

5

 

 

 —

 

 

8

Total

 

$

111

 

$

56

 

$

208

 

$

157

 

 

 

11. COMMITMENTS AND CONTINGENCIES

 

In the six months ended December 31, 2016 the Company entered into a lease agreement for its operations in Portland, Oregon, which commenced October 1, 2016. The new location consists of 5,362 square feet and will expire in December 2019. The lease includes monthly rental payments of $11 thousand. The straight-line rent expense for this lease is $11 thousand per month.

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

 

 

17


 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

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

 

·

general economic, market or business conditions unrelated to our operating performance;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

the ability of a sufficient number of our customers to utilize third party financing companies under our QuickStart program resulting in improved net cash used by operating activities;

 

·

the incurrence by us of any unanticipated or unusual non-operating expenses which would require us to divert our cash resources from achieving our business plan;

 

·

the ability of the Company to predict or estimate its future quarterly or annual revenues and expenses given the developing and unpredictable market for its products;

 

·

the ability of the Company to retain key customers from whom a significant portion of its revenues are derived;

 

·

the ability of a key customer to reduce or delay purchasing products from the Company;

 

·

the ability of the Company to obtain widespread commercial acceptance of its products and service offerings such as ePort QuickConnect, mobile payment and loyalty programs;

 

·

whether any patents issued to the Company will provide the Company with any competitive advantages or adequate protection for its products, or would be challenged, invalidated or circumvented by others;

 

·

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

 

·

the ability of our products and services to avoid unauthorized hacking or credit card fraud;

 

·

whether our remediation of the control deficiencies that gave rise to the material weakness that we identified in our internal controls over financial reporting, and which was reflected in our annual report on Form 10-K for the fiscal year ended June 30, 2016, would be effective or successful;

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·

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

 

·

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

 

·

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

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above. We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.

 

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

 

OVERVIEW OF THE COMPANY

 

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

 

The Company generates revenue in multiple ways. During the quarters ended December 31, 2016 and 2015, we derived 76% and 74% of our revenues from recurring license and transaction fees related to our ePort Connect service and 24% and 26% of our revenue from equipment sales, respectively. Connections to our service stem from the sale or lease of our POS electronic payment devices or certified payment software or the servicing of similar third-party installed POS terminals. Connections to the ePort Connect service are the most significant driver of the Company’s revenues, particularly the recurring revenues from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:

 

·

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

 

·

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

 

·

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

 

Highlights of the Company are below:

 

·

Over 77 employees with its headquarters in Malvern, Pennsylvania;

 

·

Over 11,900 customers and 469,000 connections to our service;

 

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·

Three direct sales teams at the national, regional, and local customer-level and a growing number of OEMs and national distribution partners;

 

·

77 United States and foreign patents are in force;

 

·

The Company’s fiscal year ends June 30th; and

 

·

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

 

The Company has deferred tax assets of approximately $28 million resulting from a series of operating loss carry forwards that may be available to offset future taxable income from federal income taxes over the next five or more years.

 

CRITICAL ACCOUNTING POLICIES

 

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

 

Revenue Recognition

 

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

 

ePort hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party financing company for the devices. At the end of the lease period, the customer would have the option to purchase the device for a nominal fee.

 

Long Lived Assets

 

In accordance with (“ASC”) 360, “Impairment or Disposal of Long-Lived Assets”, the Company reviews its definite lived long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset will be written down to its fair value. In the period when the plan of sale criteria of (“ASC”) 360 are met, definite lived long-lived assets are reported as held for sale, depreciation and amortization cease, and the assets are reported at the lower of carrying value or fair value less costs to sell.

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. The Company accounts for goodwill in accordance with (“ASC”) 350, “Intangibles – Goodwill and Other”. Under (“ASC”) 350, goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date.

 

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

 

Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, including from a shortfall in the customer transaction fund flow from which the Company would normally collect amounts due.

 

The allowance is determined through an analysis of various factors including the aging of the accounts receivable, the strength of the relationship with the customer, the capacity of the customer transaction fund flow to satisfy the amount due from the customer, an assessment of collection costs and other factors. The allowance for doubtful accounts receivable is management’s best estimate as of the respective reporting date. The Company writes off accounts receivable against the allowance when management determines the balance is uncollectible and the Company ceases collection efforts. Management believes that the allowance recorded is adequate to provide for its estimated credit losses.

 

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HIGHLIGHTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 AND DECEMBER 31, 2015 INCLUDE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended

 

 

 

 

 

 

 

December 31, 

 

 

 

 

 

(Connections and $'s in thousands, transactions in millions, eps is not rounded)

    

2016

    

2015

    

$ Change

    

% Change

Revenues:

 

 

 

 

 

 

 

 

 

 

 

License and transaction fees

 

$

16,639

 

$

13,674

 

$

2,965

 

22%

Equipment Sales

 

 

5,117

 

 

4,829

 

 

288

 

6%

Total revenues

 

$

21,756

 

$

18,503

 

$

3,253

 

18%

 

 

 

 

 

 

 

 

 

 

 

 

License and transaction fee margin

 

 

31.6%

 

 

33.7%

 

 

-2.1%

 

-6%

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales gross margin

 

 

21.2%

 

 

18.1%

 

 

3.1%

 

17%

 

 

 

 

 

 

 

 

 

 

 

 

Overall Gross Margin

 

 

29.1%

 

 

29.6%

 

 

-0.5%

 

-2%

 

 

 

 

 

 

 

 

 

 

 

 

Operating income/(loss)

 

$

234

 

$

594

 

$

(360)

 

-61%

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

233

 

$

(874)

 

$

1,107

 

127%

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common shares - basic

 

$

0.01

 

$

(0.02)

 

$

0.03

 

150%

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common shares - diluted

 

$

0.01

 

$

(0.02)

 

$

0.03

 

150%

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

1,122

 

$

507

 

$

615

 

121%

 

 

 

 

 

 

 

 

 

 

 

 

Net New Connections

 

 

21

 

 

20

 

 

1

 

5%

 

 

 

 

 

 

 

 

 

 

 

 

Total Connections (at period end)

 

 

469

 

 

369

 

 

100

 

27%

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of Transactions (millions)

 

 

100

 

 

76

 

 

24

 

32%

 

 

 

 

 

 

 

 

 

 

 

 

Transaction Volume (millions)

 

$

192

 

$

138

 

$

54

 

39%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

1,738

 

$

2,260

 

$

(522)

 

-23%

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income

 

$

241

 

$

686

 

$

(445)

 

-65%

 

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HIGHLIGHTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2016 AND DECEMBER 31, 2015 INCLUDE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the six months ended

 

 

 

 

 

 

 

December 31, 

 

 

 

 

 

(Connections and $'s in thousands, transactions in millions, eps is not rounded)

    

2016

    

2015

    

$ Change

    

% Change

Revenues:

 

 

 

 

 

 

 

 

 

 

 

License and transaction fees

 

$

33,004

 

$

26,599

 

$

6,405

 

24%

Equipment Sales

 

 

10,340

 

 

8,504

 

 

1,836

 

22%

Total revenues

 

$

43,344

 

$

35,103

 

$

8,241

 

23%

 

 

 

 

 

 

 

 

 

 

 

 

License and transaction fee margin

 

 

31.4%

 

 

33.2%

 

 

-1.8%

 

-5%

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales gross margin

 

 

20.6%

 

 

20.0%

 

 

0.6%

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

Overall Gross Margin

 

 

28.8%

 

 

30.0%

 

 

-1.2%

 

-4%

 

 

 

 

 

 

 

 

 

 

 

 

Operating income/(loss)

 

$

(716)

 

$

706

 

$

(1,422)

 

-201%

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,231)

 

$

(514)

 

$

(1,717)

 

-334%

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common shares - basic

 

$

(0.07)

 

$

(0.02)

 

$

(0.05)

 

-250%

 

 

 

 

 

 

 

 

 

 

 

 

Net income loss per common shares - diluted

 

$

(0.07)

 

$

(0.02)

 

$

(0.05)

 

-250%

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(5,143)

 

$

869

 

$

(6,012)

 

-692%

 

 

 

 

 

 

 

 

 

 

 

 

Net New Connections

 

 

40

 

 

36

 

 

4

 

11%

 

 

 

 

 

 

 

 

 

 

 

 

Total Connections (at period end)

 

 

469

 

 

369

 

 

100

 

27%

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of Transactions (millions)

 

 

195

 

 

145

 

 

50

 

34%

 

 

 

 

 

 

 

 

 

 

 

 

Transaction Volume (millions)

 

$

375

 

$

264

 

$

111

 

42%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

2,435

 

$

4,011

 

$

(1,576)

 

-39%

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income (loss)

 

$

(714)

 

$

747

 

$

(1,461)

 

-196%

 

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TRENDING QUARTERLY FINANCIAL DATA

 

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

 

Table 1: Five Quarters of Select Key Performance Indicators

 

Five Quarter Connections & Other Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended

 

 

 

Dcember 31,

 

September 30,

 

June 30,

 

March 31,

 

December 31,

 

 

    

2016

    

2016

    

2016

    

2016

    

2015

 

Connections:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross New Connections

 

 

25,000

 

 

22,000

 

 

33,000

 

 

34,000

 

 

23,000

 

% from Existing Customer Base

 

 

80%

 

 

86%

 

 

83%

 

 

91%

 

 

89%

 

Net New Connections

 

 

21,000

 

 

19,000

 

 

28,000

 

 

32,000

 

 

20,000

 

Total Connections

 

 

469,000

 

 

448,000

 

 

429,000

 

 

401,000

 

 

369,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New Customers Added

 

 

500

 

 

350

 

 

300

 

 

125

 

 

350

 

Total Customers

 

 

11,900

 

 

11,400

 

 

11,050

 

 

10,750

 

 

10,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volumes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of Transactions (millions)

 

 

100

 

 

95

 

 

89

 

 

82

 

 

76

 

Transaction Volume (millions)

 

$

192

 

$

183

 

$

169

 

$

151

 

$

138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Structure of Connections:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JumpStart

 

 

6.8%

 

 

7.7%

 

 

6.5%

 

 

7.4%

 

 

10.1%

 

QuickStart & All Others *

 

 

93.2%

 

 

92.3%

 

 

93.5%

 

 

92.6%

 

 

89.9%

 

Total

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

100.0%

 


*   Includes credit sales with standard trade receivable terms

 

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

 

·

21,000 net new connections to our ePort Connect service in the quarter; and

·

469,000 connections to the ePort Connect service compared to the same quarter last year of approximately 369,000 connections, an increase of 100,000 connections, or 27%.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended December 31, 

 

 

 

 

 

($ in thousands, except shares and per share data)

    

2016

    

% of Sales

    

2015

    

% of Sales

    

Change

    

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License and transaction fees

 

$

16,639

 

76.5%

 

$

13,674

 

73.9%

 

$

2,965

 

21.7%

Equipment sales

 

 

5,117

 

23.5%

 

 

4,829

 

26.1%

 

 

288

 

6.0%

Total revenues

 

 

21,756

 

100.0%

 

 

18,503

 

100.0%

 

 

3,253

 

17.6%

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of sales/revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

11,389

 

68.4%

 

 

9,067

 

66.3%

 

 

2,322

 

25.6%

Cost of equipment

 

 

4,033

 

78.8%

 

 

3,953

 

81.9%

 

 

80

 

2.0%

Total costs of sales/revenues

 

 

15,422

 

70.9%

 

 

13,020

 

70.4%

 

 

2,402

 

18.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

6,334

 

29.1%

 

 

5,483

 

29.6%

 

 

851

 

15.5%

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,793

 

26.6%

 

 

4,762

 

25.7%

 

 

1,031

 

21.7%

Depreciation and amortization

 

 

307

 

1.4%

 

 

127

 

0.7%

 

 

180

 

141.7%

Total operating expenses

 

 

6,100

 

28.0%

 

 

4,889

 

26.4%

 

 

1,211

 

24.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

234

 

1.1%

 

 

594

 

3.2%

 

 

(360)

 

-60.6%

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

200

 

0.9%

 

 

20

 

0.1%

 

 

180

 

900.0%

Interest expense

 

 

(201)

 

-0.9%

 

 

(104)

 

-0.6%

 

 

(97)

 

-93.3%

Change in fair value of warrant liabilities

 

 

 —

 

0.0%

 

 

(1,230)

 

-6.6%

 

 

1,230

 

100.0%

Total other income (expense), net

 

 

(1)

 

0.0%

 

 

(1,314)

 

-7.1%

 

 

1,313

 

-99.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

233

 

1.1%

 

 

(720)

 

-3.9%

 

 

953

 

132.4%

Benefit (provision) for income taxes

 

 

 —

 

0.0%

 

 

(154)

 

-0.8%

 

 

154

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

233

 

1.1%

 

 

(874)

 

-4.7%

 

 

1,107

 

126.7%

Cumulative preferred dividends

 

 

 —

 

0.0%

 

 

 —

 

0.0%

 

 

 —

 

0.0%

Net income (loss) applicable to common shares

 

$

233

 

1.1%

 

$

(874)

 

-4.7%

 

$

1,107

 

126.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share - basic

 

$

0.01

 

 

 

$

(0.02)

 

 

 

$

0.03

 

150%

Net earnings (loss) per common share - diluted

 

$

0.01

 

 

 

$

(0.02)

 

 

 

$

0.03

 

150%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding

 

 

40,308,934

 

 

 

 

35,909,933

 

 

 

 

4,399,001

 

12.3%

Diluted weighted average number of common shares outstanding

 

 

40,730,712

 

 

 

 

35,909,933

 

 

 

 

4,820,779

 

13.4%

 

 

Revenue. The increase in net new connections of approximately 21,000 for the three months ended December 31, 2016 compared to approximately 20,000 in the same period last year represents an increase of 5%. The Company’s total connections have grown to 469,000 at December 31, 2016 compared to 369,000 at December 31, 2015, or a 27% increase year-over-year. The increase in total connections is driving the growth in license and transaction fees of 22% quarter-over-quarter. The increase in equipment revenue is due to more units sold during the three-month period ended December 31, 2016 compared to the same period last year.

 

Gross Margin. License and transaction fees gross margin for the three-month period ended December 31, 2016 decreased from 33.7% to 31.6% compared to the three-month period ended December 31, 2015. The decrease in license and transaction gross margin is attributable to, among other things, reduced fees periodically extended to customers who offer strategic and/or large market opportunities and increased merchant fees associated with a change in card mix. License and transaction fees gross margins increased from 31.3% for the three month period ended September 30, 2016 to 31.6% for the three month period ended December 31, 2016.   

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Equipment gross margins increased from 18.1% for the three-month period ended December 31, 2015 to 21.2% for the three-month period ended December 31, 2016.  The increase in equipment gross margin is primarily attributable to cost reductions with respect to our products in the three-month period ended December 31, 2016 compared to December 31, 2015. Equipment gross margins increased from 20.0% for the three month period ended September 30, 2016 to 21.2% for the three month period ended December 31, 2016.   

Operating Expenses Operating expenses increased $1.2 million or 25% for the three-month period ended December 31, 2016 compared to the prior period in 2015, representing 28% and 26% of sales, respectively. The $0.4 million increase in professional services is attributable to operational compliance costs associated with collection efforts, Sarbanes-Oxley Act of 2002 (SOX 404) compliance, and internal audit. The $0.2 million increase in marketing related expenses is due to marketing and customer promotions. The $0.2 million increase in depreciation and amortization is primarily due to the assets acquired in the Vendscreen acquisition. The $0.2 million increase in premises, equipment and insurance costs is primarily due to increasing rent expense for leased properties and employer business insurance. As reflected in Table 5 below, our SG&A expense for the December 31, 2016 quarter was approximately $1.1 million less than our SG&A expense for the September 30, 2016 quarter, representing 26.6% and 32.0% of sales, respectively.

 

Total Other Income (Expense). Total Other Income (Expense) includes interest expense, other income, and the change in the fair value of warrants. The primary driver for volatility in Other Income / (Expense) has been non-cash changes to the fair value of the warrant liabilities which are based on the Company’s stock price. Using the Black-Scholes model, the Company adjusts the warrant liability for fair value through the income statement quarterly. For the three-month period ended December 31, 2016, the Company did not record any expense for the change in the fair value of warrant liabilities compared to recording an expense of $1.2 million for the three months ended December 31, 2015. As the warrants giving rise to the warrant liability were exercised in September 2016, there was no such liability recorded in the December 31, 2016 quarter.

 

Net Income (Loss). Net income (loss) is a function of the items described above. Net income for the second quarter was $0.2 million compared to net loss of $0.9 million for the comparable period a year ago. The primary reason for the difference in net income (loss) was the warrant liability charge taken during the December 31, 2015 quarter. The Company earned $.01 per share during the quarter as compared to a loss of ($0.02) per share during the prior corresponding quarter.

 

Adjusted EBITDA. For the three months ended December 31, 2016, adjusted EBITDA decreased to $1.7 million from $2.3 million for the quarter ended December 31, 2015. The decrease was primarily due to an increase in operating expenses which was partially offset by an increase in gross profit.

 

Non-GAAP Net Income (Loss). Non-GAAP net income decreased to $0.2 million for the three months ended December 31, 2016 compared to the quarter ended December 31, 2015 of $0.7 million. The decrease was primarily due to an increase in operating expenses which was partially offset by an increase in gross profit.

 

Weighted Average Shares Outstanding. The increase in the weighted average number of common shares was due to exercises of warrants and to stock issued through the Company’s stock based compensation programs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table 3: Six Months Ended December 31, 2016 compared to the Six Months Ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended December 31, 

 

 

 

 

 

($ in thousands, except shares and per share data)

    

2016

    

% of Sales

    

2015

    

% of Sales

    

Change

    

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License and transaction fees

 

$

33,004

 

76.1%

 

$

26,599

 

75.8%

 

$

6,405

 

24.1%

Equipment sales

 

 

10,340

 

23.9%

 

 

8,504

 

24.2%

 

 

1,836

 

21.6%

Total revenues

 

 

43,344

 

100.0%

 

 

35,103

 

100.0%

 

 

8,241

 

23.5%

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of sales/revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

22,632

 

68.6%

 

 

17,772

 

66.8%

 

 

4,860

 

27.3%

Cost of equipment

 

 

8,211

 

79.4%

 

 

6,801

 

80.0%

 

 

1,410

 

20.7%

Total costs of sales/revenues

 

 

30,843

 

71.2%

 

 

24,573

 

70.0%

 

 

6,270

 

25.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

12,501

 

28.8%

 

 

10,530

 

30.0%

 

 

1,971

 

18.7%

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

12,702

 

29.3%

 

 

9,558

 

27.2%

 

 

3,144

 

32.9%

Depreciation and amortization

 

 

515

 

1.2%

 

 

266

 

0.8%

 

 

249

 

93.6%

Total operating expenses

 

 

13,217

 

30.5%

 

 

9,824

 

28.0%

 

 

3,393

 

34.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

(716)

 

-1.7%

 

 

706

 

2.0%

 

 

(1,422)

 

-201.4%

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

273

 

0.6%

 

 

71

 

0.2%

 

 

202

 

284.5%

Interest expense

 

 

(413)

 

-1.0%

 

 

(223)

 

-0.6%

 

 

(190)

 

-85.2%

Change in fair value of warrant liabilities

 

 

(1,490)

 

-3.4%

 

 

(887)

 

-2.5%

 

 

(603)

 

-68.0%

Total other income (expense), net

 

 

(1,630)

 

-3.8%

 

 

(1,039)

 

-3.0%

 

 

(591)

 

-56.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

 

(2,346)

 

-5.4%

 

 

(333)

 

-0.9%

 

 

(2,013)

 

-604.5%

Benefit (provision) for income taxes

 

 

115

 

0.3%

 

 

(181)

 

-0.5%

 

 

296

 

163.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(2,231)

 

-5.1%

 

 

(514)

 

-1.5%

 

 

(1,717)

 

-334.0%

Cumulative preferred dividends

 

 

(334)

 

-0.8%

 

 

(334)

 

-1.0%

 

 

 —

 

0.0%

Net income (loss) applicable to common shares

 

$

(2,565)

 

-5.9%

 

$

(848)

 

-2.4%

 

$

(1,717)

 

-202.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share - basic

 

$

(0.07)

 

 

 

$

(0.02)

 

 

 

$

(0.05)

 

-250.0%

Net earnings (loss) per common share - diluted

 

$

(0.07)

 

 

 

$

(0.02)

 

 

 

$

(0.05)

 

-250.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding

 

 

39,398,469

 

 

 

 

35,879,164

 

 

 

 

3,519,305

 

9.8%

Diluted weighted average number of common shares outstanding

 

 

39,398,469

 

 

 

 

35,879,164

 

 

 

 

3,519,305

 

9.8%

 

Revenue. The Company’s total connections have grown to 469,000 at December 31, 2016 compared to 369,000 at December 31, 2015, or a 27% increase year-over-year. The increase in total connections is driving the growth in license and transaction fees of 24% year over year.

 

Gross Margin. License and transaction fees gross margin for the six-month period ended December 31, 2016 decreased from 33.2% to 31.4% compared to the six-month period ended December 31, 2015. The decrease in license and transaction gross margin is attributable to, among other things, reduced fees periodically extended to customers who offer strategic and/or large market opportunities and increased merchant fees associated with a change in card mix. 

 

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Equipment gross margin increased from 20.0% for the six-month period ended December 31, 2015 to 20.6% for the six-month period ended December 31, 2016.  The increase in gross margin on a year-to-date basis is primarily attributable to cost reductions of our products.

 

Operating Expenses Operating expenses increased $3.4 million or 35% for the six-month period ended December 31, 2016 compared to the prior period in fiscal year 2015. The $2.1 million increase of professional services is attributable to SOX 404 compliance, internal audit, and audit of our financial statements driven primarily by our status as a first time accelerated filer which required an audit of our annual SOX 404 assessment. The $0.5 million salaries and benefits increase is due to employee compensation, headcount and employee related medical benefits. The $0.3 million increase in premises, equipment and insurance costs is due to increasing rent expense for leased properties and employer business insurance. The $0.2 million increase in marketing related expenses is due to marketing and customer promotions. Total operating expenses as a percentage of sales increased slightly for the six-months ended December 31, 2016 to 31% compared to 28% for the six months ended December 31, 2015.

 

Total Other Income (Expense). Total Other (Income) Expense includes interest expense, other income, and the change in the fair value of warrants. The primary driver for volatility in Other Income / (Expense) has been non-cash changes to the fair value of the warrant liabilities which are based on the Company’s stock price. Using the Black-Scholes model, the Company adjusts the warrant liability for fair value through the income statement quarterly. For the six-month period ended December 31, 2016 the Company recorded $1.5 million for the change in the fair value of warrant liabilities (all attributable to the quarter ended September 30, 2016) compared to expense of $0.9 million for the six months ended December 31, 2015. As the warrants associated with the liability were exercised in September 2016, there will be no fair value liability recorded in subsequent periods.

 

Net Income (Loss). Net (loss) is a function of the items described above. Net loss for the six months ending December 31, 2016 was $2.2 million compared to a net loss of $0.5 million for the comparable period a year ago. The Company lost ($0.07) per share during the six month period as compared to a loss of ($0.02) per share during the prior corresponding six month period.

Adjusted EBITDA. For the six months ended December 31, 2016, adjusted EBITDA decreased to $2.4 million from $4.0 million for the six months ended December 31, 2015 or 39%. The decrease was primarily due to an increase in operating expenses which was partially offset by an increase in gross profit.

Non-GAAP Net Income (Loss). Non-GAAP net income decreased to ($0.7) million for the six months ended December 31, 2016 compared to non-GAAP net income for the six months December 31, 2015 of $0.7 million. The decrease was primarily due to an increase in operating expenses which was partially offset by an increase in gross profit.

Weighted Average Shares Outstanding. The increase in the weighted average number of common shares was due to exercises of warrants and to stock issued through the Company’s stock based compensation programs.

 

 

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Table of Contents

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

December 31, 

 

December 31, 

($ in thousands)

    

2016

    

2015

    

2016

    

2015

Net income (loss)

 

$

233

 

$

(874)

 

$

(2,231)

 

$

(514)

Less interest income

 

 

(200)

 

 

(20)

 

 

(273)

 

 

(71)

Plus interest expenses

 

 

201

 

 

104

 

 

413

 

 

223

Plus income tax provision / (Less income tax benefit)

 

 

 —

 

 

154

 

 

(115)

 

 

181

Plus depreciation expense

 

 

1,220

 

 

1,323

 

 

2,477

 

 

2,673

Plus amortization expense

 

 

43

 

 

 —

 

 

87

 

 

 —

EBITDA

 

 

1,497

 

 

687

 

 

358

 

 

2,492

 

 

 

 

 

 

 

 

 

 

 

 

 

Plus loss on fair value of warrant liabilities / (Less gain on fair value of warrant liabilities)

 

 

 —

 

 

1,230

 

 

1,490

 

 

887

Plus stock-based compensation

 

 

233

 

 

237

 

 

445

 

 

509

Plus VendScreen non-recurring charges

 

 

8

 

 

106

 

 

109

 

 

123

Plus Litigation related professional fees

 

 

 —

 

 

 —

 

 

33

 

 

 —

Adjustments to EBITDA

 

 

241

 

 

1,573

 

 

2,077

 

 

1,519

Adjusted  EBITDA

 

$

1,738

 

$

2,260

 

$

2,435

 

$

4,011

 

As used herein, Adjusted EBITDA represents net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, non-recurring fees and charges that were incurred in connection with the integration of the VendScreen business, change in fair value of warrant liabilities and stock-based compensation expense. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash gain or charge that is not related to the Company’s operations. We have excluded the non-cash expense, stock-based compensation, as it does not reflect the cash-based operations of the Company. We have excluded the non-recurring costs and expenses incurred in connection with the VendScreen transaction in order to allow more accurate comparison of the financial results to historical operations. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, the Company utilizes Adjusted EBTIDA as a metric in its executive officer and management incentive compensation plans.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

December 31,

 

% of

 

September 30,

 

% of

 

June 30,

 

% of

 

March 31,

 

% of

 

December 31,

 

% of

($ in thousands)

    

2016

 

SG&A

    

2016

    

SG&A

    

2016

    

SG&A

    

2016

    

SG&A

    

2015

    

SG&A

Salaries and benefit costs

 

$

2,849

 

49.2%

 

$

3,129

 

45.3%

 

$

3,050

 

45.4%

 

$

2,760

 

45.4%

 

$

2,786

 

58.6%

Marketing related expenses

 

 

578

 

10.0%

 

 

329

 

4.8%

 

 

635

 

9.4%

 

 

362

 

5.9%

 

 

335

 

7.0%

Professional services

 

 

1,213

 

20.9%

 

 

2,520

 

36.5%

 

 

1,533

 

22.8%

 

 

1,152

 

18.9%

 

 

839

 

17.6%

Bad debt expense

 

 

352

 

6.1%

 

 

97

 

1.4%

 

 

470

 

7.0%

 

 

505

 

8.3%

 

 

239

 

5.0%

Premises, equipment and insurance costs

 

 

498

 

8.6%

 

 

499

 

7.2%

 

 

555

 

8.3%

 

 

460

 

7.5%

 

 

347

 

7.3%

Research and development expenses

 

 

173

 

3.0%

 

 

124

 

1.8%

 

 

123

 

1.8%

 

 

131

 

2.1%

 

 

37

 

0.8%

VendScreen non-recurring charges

 

 

8

 

0.1%

 

 

101

 

1.5%

 

 

258

 

3.8%

 

 

461

 

7.6%

 

 

106

 

2.2%

Litigation related professional fees

 

 

 —

 

0.0%

 

 

33

 

0.5%

 

 

51

 

0.8%

 

 

105

 

1.7%

 

 

 —

 

0.0%

Other expenses

 

 

122

 

2.1%

 

 

77

 

1.1%

 

 

46

 

0.7%

 

 

158

 

2.6%

 

 

73

 

1.5%

Total SG&A expenses

 

$

5,793

 

100%

 

$

6,909

 

100%

 

$

6,721

 

100%

 

$

6,094

 

100%

 

$

4,762

 

100%

Total Revenue

 

$

21,756

 

 

 

$

21,588

 

 

 

$

21,944

 

 

 

$

20,361

 

 

 

$

18,503

 

 

SG&A expenses as a percentage of revenue

 

 

26.6%

 

 

 

 

32.0%

 

 

 

 

30.6%

 

 

 

 

29.9%

 

 

 

 

25.7%

 

 

 

 

Salaries and Benefit Costs. Includes employee compensation and benefits, directors’ fees, incentives, and stock-based compensation. The decrease in cost for the three-month period ended December 31, 2016 compared to three-month period

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ended September 30, 2016, related to the reversal of vacation benefits that were forfeited, and a reduction in the bonus amount recorded during the three-months ended December 31, 2016 as compared to the September 30, 2016 quarter.

 

Marketing Related. Marketing related costs increased for the three-month period ended December 31, 2016 compared to the three-month period ended September 30, 2016 due to marketing activities and customer promotions.

 

Professional Services. Includes information technology, legal, public relations, auditing, SOX 404 and other consulting work. Professional service expense during the December 31, 2016 quarter decreased by approximately $1.3 million from the professional service expense during the September 30, 2016 quarter, reflecting decreases in SOX 404 compliance, internal audit and financial statement audit costs.

 

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

 

Premises, equipment and insurance costs. Includes facilities, supplies, printing and postage, sales and use taxes, and workers’ compensation. The increase for the three month period ended December 31, 2016 compared to the same period in 2015 is primarily attributable to increases in rent expense reflecting the addition of the Portland, Oregon office in January 2016, the new lease agreement for the Malvern, Pennsylvania office, and liability insurance

 

Research and development. Includes product development costs that cannot be capitalized, including materials and contractors.  Research and development costs increased for the three-month period ended December 31, 2016 compared to the three-month period ended September 30, 2016 due to the increased use of outside contractors.

 

Non-recurring charges. Reflects professional fees incurred in connection with the VendScreen integration. 

 

Litigation related professional fees. Includes legal and other professional fees incurred in connection with the class action litigation as well as the investigation conducted by the Special Litigation Committee of the Board of Directors described in our Form 10-K for the 2016 fiscal year (the “SLC Investigation”).

 

Other expenses. Includes bank fees, recruiting expenses, non-inventory supplies, subscriptions, and the gain or loss on the disposal of assets.  Other expenses increased during the three-month period ended December 31, 2016 compared to the three-month period ended September 30, 2016 due to a lower gain on sale of assets recorded during the three-month period ended December 31, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

 

 

 

December 31,

 

% of

 

December 31,

 

% of

($ in thousands)

 

 

 

 

 

 

2016

 

SG&A

 

2015

 

SG&A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefit costs

 

 

 

 

 

 

$

5,978

 

47.1%

 

$

5,471

 

57.2%

Marketing related expenses

 

 

 

 

 

 

 

907

 

7.1%

 

 

668

 

7.0%

Professional services

 

 

 

 

 

 

 

3,733

 

29.4%

 

 

1,621

 

17.0%

Bad debt expense

 

 

 

 

 

 

 

449

 

3.5%

 

 

475

 

5.0%

Premises, equipment and insurance costs

 

 

 

 

 

 

 

997

 

7.8%

 

 

746

 

7.8%

Research and development expenses

 

 

 

 

 

 

 

297

 

2.3%

 

 

228

 

2.4%

VendScreen non-recurring charges

 

 

 

 

 

 

 

109

 

0.9%

 

 

123

 

1.3%

Class action professional fees

 

 

 

 

 

 

 

33

 

0.3%

 

 

 —

 

0.0%

Other expenses

 

 

 

 

 

 

 

199

 

1.6%

 

 

226

 

2.4%

Total SG&A expenses

 

 

 

 

 

 

$

12,702

 

100.0%

 

$

9,558

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

 

 

 

 

 

$

43,344

 

 

 

$

35,103

 

 

SG&A expenses as a percentage of revenue

 

 

 

 

 

 

 

29.3%

 

 

 

 

27.2%

 

 

 

Salaries and Benefit Costs. Includes employee compensation and benefits, directors’ fees, incentives, and stock-based compensation. The increase in cost for the six-month period ended December 31, 2016, related to increases in employee compensation, headcount (primarily due to the VendScreen acquisition), and employee health benefits. 

 

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Marketing Related. Marketing related costs increased due to marketing activities and customer promotions.

 

Professional Services. Includes information technology, legal, public relations, auditing, SOX 404 and other consulting work. The increase for the six-month period ended December 31, 2016 is related to SOX 404 compliance, internal audit, and audit of our financial statements driven primarily by our status as a first time accelerated filer which required an audit of our annual SOX 404 assessment.

 

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

 

Premises, equipment and insurance costs. Includes facilities, supplies, printing and postage, sales and use taxes, and workers’ compensation. The increase for the six-month period ended December 31, 2016 compared to the same period in 2015 is primarily attributable to increases in rent expense reflecting the addition of the Portland, Oregon office in January 2016, the new lease agreement for the Malvern, Pennsylvania office, and liability insurance.

 

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

 

Non-recurring charges. Includes VendScreen integration expenses for professional fees.

 

Litigation related professional fees. Includes legal and other professional fees incurred in connection with the class action litigation as well as the SLC Investigation.

 

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

 

Table 6: Non-GAAP Earnings (Loss) per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

December 31,

 

December 31,

($ in thousands)

    

2016

    

2015

    

2016

    

2015

Net income (loss)

 

$

233

 

$

(874)

 

$

(2,231)

 

$

(514)

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash portion of income tax provision

 

 

 —

 

 

224

 

 

(115)

 

 

251

Fair value of warrant adjustment

 

 

 —

 

 

1,230

 

 

1,490

 

 

887

VendScreen non-recurring charges

 

 

8

 

 

106

 

 

109

 

 

123

Litigation related professional fees

 

 

 —

 

 

 —

 

 

33

 

 

 —

Non-GAAP net income (loss)

 

$

241

 

$

686

 

$

(714)

 

$

747

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

233

 

$

(874)

 

$

(2,231)

 

$

(514)

Cumulative preferred dividends

 

 

 —

 

 

 —

 

 

(334)

 

 

(334)

Net income (loss) applicable to common shares

 

$

233

 

$

(874)

 

$

(2,565)

 

$

(848)

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income (loss)

 

$

241

 

$

686

 

$

(714)

 

$

747

Cumulative preferred dividends

 

 

 —

 

 

 —

 

 

(334)

 

 

(334)

Non-GAAP net income (loss) applicable to common shares

 

$

241

 

$

686

 

$

(1,048)

 

$

413

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share - basic

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

Net income (loss) per common share - diluted

 

$

0.01

 

$

(0.02)

 

$

(0.07)

 

$

(0.02)

Non-GAAP net income (loss) per common share - basic

 

$

0.01

 

$

0.02

 

$

(0.03)

 

$

0.01

Non-GAAP net income (loss) per common share - diluted

 

$

0.01

 

$

0.02

 

$

(0.03)

 

$

0.01

Basic weighted average number of common shares outstanding

 

 

40,308,934

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

Diluted weighted average number of common shares outstanding

 

 

40,730,712

 

 

35,909,933

 

 

39,398,469

 

 

35,879,164

 

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The increase in the weighted average number of common shares was due to exercises of warrants and to stock issued through the Company’s stock based compensation programs.

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

June 30,

 

 

 

 

 

($ in thousands)

    

2016

    

2016

    

Change

    

% Change

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

18,034

 

$

19,272

 

$

(1,238)

 

-6%

Accounts receivable, less allowance for doubtful accounts of $2,546 and $2,814, respectively

 

 

6,796

 

 

4,899

 

 

1,897

 

39%

Finance receivables, less allowance for credit losses of $29 and $0, respectively

 

 

1,442

 

 

3,588

 

 

(2,146)

 

-60%

Inventory, net

 

 

4,786

 

 

2,031

 

 

2,755

 

136%

Prepaid expenses and other current assets

 

 

1,764

 

 

987

 

 

777

 

79%

Deferred income taxes

 

 

2,271

 

 

2,271

 

 

 —

 

0%

Total current assets

 

 

35,093

 

 

33,048

 

 

2,045

 

6%

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables, less current portion

 

 

3,956

 

 

3,718

 

 

238

 

6%

Other assets

 

 

145

 

 

348

 

 

(203)

 

-58%

Property and equipment, net

 

 

9,433

 

 

9,765

 

 

(332)

 

-3%

Deferred income taxes

 

 

25,568

 

 

25,453

 

 

115

 

0%

Intangibles, net

 

 

711

 

 

798

 

 

(87)

 

-11%

Goodwill

 

 

11,492

 

 

11,703

 

 

(211)

 

-2%

Total assets

 

$

86,398

 

$

84,833

 

$

1,565

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,090

 

$

12,354

 

$

(3,264)

 

-26%

Accrued expenses

 

 

2,912

 

 

3,458

 

 

(546)

 

-16%

Line of credit, net

 

 

7,078

 

 

7,119

 

 

(41)

 

-1%

Current obligations under long-term debt

 

 

766

 

 

629

 

 

137

 

22%

Income taxes payable

 

 

6

 

 

18

 

 

(12)

 

-67%

Warrant liabilities

 

 

 —

 

 

3,739

 

 

(3,739)

 

100%

Deferred gain from sale-leaseback transactions

 

 

470

 

 

860

 

 

(390)

 

-45%

Total current liabilities

 

 

20,322

 

 

28,177

 

 

(7,855)

 

-28%

Long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

 

1,394

 

 

1,576

 

 

(182)

 

-12%

Accrued expenses, less current portion

 

 

52

 

 

15

 

 

37

 

247%

Deferred gain from sale-leaseback transactions, less current portion

 

 

 —

 

 

40

 

 

(40)

 

100%

Total long-term liabilities

 

 

1,446

 

 

1,631

 

 

(185)

 

-11%

Total liabilities

 

 

21,768

 

 

29,808

 

 

(8,040)

 

-27%

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, no par value

 

 

3,138

 

 

3,138

 

 

 —

 

0%

Common stock, no par value

 

 

245,230

 

 

233,394

 

 

11,836

 

5%

Accumulated deficit

 

 

(183,738)

 

 

(181,507)

 

 

(2,231)

 

1%

Total shareholders' equity

 

 

64,630

 

 

55,025

 

 

9,605

 

17%

Total liabilities and shareholders' equity

 

$

86,398

 

$

84,833

 

$

1,565

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

Net working capital

 

$

14,771

 

$

4,871

 

$

9,900

 

203%

 

Key points from the Balance Sheet as of December 31, 2016 compared to June 30, 2016 include:

 

·

$9.6 million increase to shareholders’ equity primarily due to $11.8 million increase in common stock offset by our $2.2 million net loss. The increase in common stock included $6.2 million of cash proceeds and $5.2 million

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of the reclassification of fair value of warrant liability, both attributable to warrants exercised during the September 30, 2016 quarter for 2.4 million shares of common stock;

 

·

$9.9 million increase in net working capital primarily attributable to a $1.9 million increase in accounts receivable, a $2.8 million increase in inventory, a $3.3 million decrease in accounts payable and elimination of any warrant liabilities as of December 31, 2016. The increase of $1.9 million in accounts receivable was largely the result of the quarter ending on a Saturday, a day on which we do not receive funds due to us from our processor. The increase in inventory was to provide stock for anticipated sales in subsequent quarters. The decrease in accounts payable was attributable primarily to the last business day of the month occurring on a Friday; which is the highest level of routine customer payments of all weekdays.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Table 8: Quarterly Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

December 31,

($ in thousands)

    

2016

    

2016

    

2016

    

2016

    

2015

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

233

 

$

(2,464)

 

$

(872)

 

$

(5,420)

 

$

(874)

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges incurred in connection with the vesting and issuance of common stock for employee and director compensation

 

 

233

 

 

211

 

 

198

 

 

142

 

 

237

Gain on disposal of property and equipment

 

 

(31)

 

 

 —

 

 

(110)

 

 

(15)

 

 

(41)

Non-cash interest and amortization of debt discount

 

 

(79)

 

 

33

 

 

13

 

 

 —

 

 

 —

Bad debt expense

 

 

352

 

 

97

 

 

470

 

 

506

 

 

238

Depreciation

 

 

1,220

 

 

1,257

 

 

1,272

 

 

1,190

 

 

1,323

Amortization of intangible assets

 

 

43

 

 

44

 

 

43

 

 

44

 

 

 —

Impairment of intangible asset

 

 

 

 

 

 —

 

 

432

 

 

 —

 

 

 —

Change in fair value of warrant liabilities

 

 

 —

 

 

1,490

 

 

(18)

 

 

4,805

 

 

1,230

Deferred income taxes, net

 

 

 —

 

 

(115)

 

 

(748)

 

 

(93)

 

 

154

Recognition of deferred gain from sale-leaseback transactions

 

 

(215)

 

 

(215)

 

 

(215)

 

 

(215)

 

 

(215)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,309)

 

 

(1,038)

 

 

2,977

 

 

(1,872)

 

 

(448)

Finance receivables

 

 

2,125

 

 

(5)

 

 

(2,587)

 

 

(154)

 

 

214

Inventory

 

 

(467)

 

 

(2,223)

 

 

(82)

 

 

250

 

 

649

Prepaid expenses and other assets

 

 

(318)

 

 

(224)

 

 

(397)

 

 

(160)

 

 

(254)

Accounts payable

 

 

397

 

 

(3,661)

 

 

329

 

 

4,154

 

 

(1,623)

Accrued expenses

 

 

(1,061)

 

 

486

 

 

115

 

 

1,166

 

 

(13)

Income taxes payable

 

 

(1)

 

 

(10)

 

 

453

 

 

 —

 

 

(70)

Net change in operating assets and liabilities

 

 

(634)

 

 

(6,675)

 

 

808

 

 

3,384

 

 

(1,545)

Net cash provided (used) by operating activities

 

 

1,122

 

 

(6,337)

 

 

1,273

 

 

4,328

 

 

507

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase and additions of property and equipment

 

 

(1,777)

 

 

(168)

 

 

(207)

 

 

(164)

 

 

(118)

Purchase of property for rental program

 

 

(693)

 

 

(642)

 

 

 —

 

 

 —

 

 

 —

Proceeds from sale of property and equipment

 

 

61

 

 

 —

 

 

265

 

 

19

 

 

101

Cash paid for assets acquired from VendScreen

 

 

 —

 

 

 —

 

 

 —

 

 

(5,625)

 

 

 —

Net cash provided by (used in) investing activities

 

 

(2,409)

 

 

(810)

 

 

58

 

 

(5,770)

 

 

(17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used for the retirement of common stock

 

 

 —

 

 

(31)

 

 

(173)

 

 

 —

 

 

(40)

Proceeds from exercise of common stock warrants

   

 

 —

 

 

6,193

 

 

3,237

 

 

1,652

 

 

 —

Proceeds (payments) from line of credit, net

 

 

 —

 

 

72

 

 

138

 

 

33

 

 

3,000

Repayment of long-term debt

 

 

(213)

 

 

(161)

 

 

(162)

 

 

(151)

 

 

(233)

Net cash provided by (used in) financing activities

 

 

(213)

 

 

6,073

 

 

3,040

 

 

1,534

 

 

2,727

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(1,500)

 

 

(1,074)

 

 

4,371

 

 

92

 

 

3,217

Cash at beginning of period

 

 

18,198

 

 

19,272

 

 

14,901

 

 

14,809

 

 

11,592

Cash at end of period

 

$

16,698

 

$

18,198

 

$

19,272

 

$

14,901

 

$

14,809

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid in cash

 

$

382

 

$

87

 

$

147

 

$

191

 

$

107

Income taxes paid by cash

 

$

 —

 

$

 —

 

$

501

 

$

 —

 

$

 —

Depreciation expense allocated to cost of services

 

$

967

 

$

1,083

 

$

1,139

 

$

1,051

 

$

1,186

Reclass of rental program property to inventory, net

 

$

(55)

 

$

(11)

 

$

415

 

$

347

 

$

777

Prepaid items financed with debt

 

$

 —

 

$

54

 

$

 —

 

$

 —

 

$

 —

Warrant issuance for debt discount

 

$

 —

 

$

 —

 

$

 —

 

$

52

 

$

 —

Debt financing cost financed with debt

 

$

 —

 

$

 —

 

$

 —

 

$

79

 

$

 —

Equipment and property acquired under capital lease

 

$

18

 

$

254

 

$

 —

 

$

409

 

$

 —

Disposal of property and equipment

 

$

570

 

$

 —

 

$

555

 

$

189

 

$

238

 

Operating cash flow for the quarter ended December 31, 2016 improved by $0.6 million from the quarter ended December 31, 2015. The improvement is primarily due to:

 

·

$1.0 million less cash used by operating assets and liabilities:

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Table of Contents

 

·

Offset by a $0.4 million decrease in net income as adjusted for non-cash operating items, as follows:

 

·

$0.2 million net income and $1.4 million of non-cash operating items for the quarter ended December 31, 2016, as compared to

 

·

$0.9 million of net loss offset by $2.9 million of non-cash operating items for the quarter ended December 31, 2015.

 

Net cash used by investing activities increased by $1.1 million from the prior corresponding quarter, reflecting $0.4 for equipment and furniture purchased in connection with the relocation of the Malvern office, $0.2 for internally developed software, and $0.7 million for ePort units purchased for use in the JumpStart rental program.

 

In September 2014, the Company reintroduced QuickStart, a program whereby our customers are able to purchase our ePort hardware via a five-year, non-cancellable finance agreement. Under the QuickStart program, the Company sells the equipment to customers and creates a long-term and current finance receivable for five-year agreements. In the third and fourth quarters of fiscal 2015, the Company signed vendor agreements with two finance companies, whereby our customers would enter into agreements directly with the finance companies as part of our QuickStart program. Under this scenario, the Company invoices the finance company for the equipment financed by our customer, and typically receives full payment within thirty days. Prior to the reintroduction of QuickStart, the Company had financed its customers’ acquisition of ePort equipment primarily through the JumpStart rental program. Under Jumpstart, the Company records an investing capital expenditure cash outflow for the equipment provided and fixed assets on the balance sheet, and then receives rental income from a month-to-month lease. QuickStart through third-party finance companies reduces cash flow needed for investing activities and improves the cash flow from operations.

 

Since entering into vendor agreements with two third-party finance companies, the majority of QuickStart sales consummated have been with customers entering into agreements directly with the finance companies. Our customers have shifted from acquiring our products via JumpStart, which accounted for 65% of our gross connections in fiscal year 2014, to QuickStart and sales under normal trade receivable terms, which accounted for 89% and 91% of our gross connections in fiscal year 2015 and 2016, respectively. JumpStart was approximately 7% of gross connections in the three months ending December 31, 2016.

 

The Company is seeking to expand its outside financing partners. The goal of the program would be to have enough finance partners so that the Company would not need to provide financing to its customers.

 

Sources of Cash

 

The Company’s net working capital, which is defined as current assets less current liabilities, was $14.8 million, $14.0 million, $4.9 million, ($0.2) million, and $9.9 million over the last five quarter-end reporting dates beginning December 31, 2016 and working backwards. As of December 31, 2016, the Company’s primary sources of cash include:

 

·

Cash on hand of approximately $18.0 million;

 

·

$4.9 million available under the line of credit provided we continue to satisfy the various covenants set forth in the loan agreement, including the requirement to meet minimum quarterly adjusted EBITDA, as defined in the loan agreement. Although the line expires on March 29, 2017, we anticipate renewing the line with Heritage Bank or obtaining a new line of credit from another financial institution;

 

·

Sales to third party lenders of all or a portion of our finance receivables; and

 

·

Anticipated cash which may be provided by operating activities in future quarters.

 

The Company believes its existing cash and available cash resources described above, would provide sufficient capital resources to operate its anticipated business over the next twelve months.

36


 

Table of Contents

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no significant changes to our market risk since June 30, 2016. For a discussion of our exposure to market risk, refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the year ended June 30, 2016.

 

Item 4. Controls and Procedures.

(a) Disclosure Controls and Procedures

Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness as of the end of the period covered by this Form 10-Q of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). We maintain disclosure controls and procedures to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were not effective as of the end of such period because of the material weakness in our internal control over financial reporting identified in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (the "2016 Form 10-K"), as described below. Notwithstanding the material weakness identified in the 2016 Form 10-K, our management, including our chief executive officer and chief financial officer, has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

(b) Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during our fiscal quarter ended December 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

In our Form 2016 10-K, we stated that management had identified control deficiencies, including three significant deficiencies, in the design or operating effectiveness of the Company's internal control over financial reporting, which when aggregated, represent a material weakness in internal control. The significant deficiencies included that the operation of an existing control did not result in timely resolution of account receivable aging issues; the design of certain of our internal controls allowed for errors or omissions in the accrual process; and one operational control did not identify certain merchant receivables as one of the critical accounts to be audited on a monthly basis. In order to address the significant deficiencies identified in our 2016 Form 10-K, the Company implemented changes in its internal controls over financial reporting during the quarter ended September 30, 2016, and remains committed to remediating the control deficiencies that gave rise to the material weakness.

 

37


 

Table of Contents

 

Part II - Other Information.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

On November 18, 2016, the Company issued to AvidBank Holdings, Inc. (“AvidBank”), 24,733 shares of common stock in connection with the exercise, on a cashless basis, of warrants to purchase 24,733 shares at an exercise price of $2.10 per share. The warrants were previously issued to AvidBank as of January 1, 2013, pursuant to a First Amendment dated as of January 1, 2013 to the Loan and Security Agreement by and between the Company and AvidBank Corporate Finance. The shares were issued by the Company in reliance on the exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, in a transaction not involving a public offering.

 

 

Item 5. Other Information

On November 9, 2016, the Company and Heritage Bank of Commerce (the “Bank”), entered into a Second Amendment (the "Second Amendment”) to the Loan and Security Agreement dated as of March 29, 2016, as amended (collectively, the “Loan Agreement”).

The Loan Agreement provides for a secured asset-based revolving line of credit facility of up to $12.0 million. The Second Amendment, among other things, (i) specifies the minimum Adjusted EBITDA (as defined in the Loan Agreement) that the Company must achieve during each quarter of the Company’s fiscal year ending June 30, 2017, (ii) provides that the number of the Company’s connections as of the end of each fiscal quarter shall not decrease below a specified number or by more than five percent as compared to the number of the Company’s connections as of the end of the immediately prior fiscal quarter, and (iii) provides that the Company shall maintain a minimum balance of unrestricted cash at the Bank.

The foregoing summary of the Second Amendment does not purport to be complete and is qualified in its entirety by reference to the Second Amendment, which is filed hereto as Exhibit 10.1 and is incorporated herein by reference.

 

 

 

 

Item 6. Exhibits

 

Exhibit

 

 

Number

    

Description

 

 

 

 

 

 

10.1

 

Second Amendment to Loan and Security Agreement dated as of September 30, 2016 by and between the Company and Heritage Bank of Commerce (Portions of this exhibit were redacted pursuant to a confidentiality treatment request)

31.1

 

Certifications of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

 

 

 

31.2

 

Certifications of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

 

 

 

32.1

 

Certification of the Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of the Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

38


 

Table of Contents

 

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

 

 

 

 

 

    

USA TECHNOLOGIES, INC.

 

 

 

Date: February 9, 2017

 

/s/ Stephen P. Herbert

 

 

Stephen P. Herbert,

 

 

Chief Executive Officer

 

 

 

Date: February 9, 2017

 

/s/ Leland P. Maxwell

 

 

Leland P. Maxwell

 

 

Interim Chief Financial Officer

 

 

 

39


usat_Ex10_1

Exhibit 10.1

PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS, WHICH ARE MARKED BY ASTERISKS (“***”).

 SECOND AMENDMENT AND WAIVER TO

LOAN AND SECURITY AGREEMENT

This Second Amendment and Waiver to Loan and Security Agreement (the “Amendment”) is entered into effective as of September 30, 2016 by and between HERITAGE BANK OF COMMERCE (“Bank”) and USA TECHNOLOGIES, INC.  (“Borrower”).

RECITALS

A. Borrower and Bank are parties to that certain Loan and Security Agreement dated as of March 29, 2016 (as the same may from time to time be amended, modified, supplemented or restated, the “Agreement”).   

B. An Event of Default has occurred under the Agreement by virtue of Borrower’s failure to comply with Section 6.9(b) of the Agreement for the quarterly period ending September 30, 2016 (the “Covenant Default”).

C. Borrower has asked Bank to waive its rights and remedies arising out of the Covenant Default and to amend certain provisions of the Agreement.    Bank is willing to do so, on the terms and conditions and in reliance upon the representations and warranties set forth in this Amendment.

AGREEMENT

NOW, THEREFORE, the parties agree as follows:

1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Agreement.

2. Waiver of Covenant Default.  Bank waives the Covenant Default and any right to enforce any rights and remedies it may have against Borrower with respect to the Covenant Default.  This waiver applies only to the Covenant Default for the quarterly period ending September 30, 2016.  Borrower shall comply with the Agreement after the date hereof.  Bank’s agreement to waive the Covenant Default shall not limit or impair the Bank’s right to demand strict performance of such financial covenant as of all other dates.

3. Amendments to Agreement. Bank and Borrower agree to amend the terms of the Agreement as follows:

(a) Section 6.9(b) of the Agreement is amended to read as follows:

6.9Financial Covenants.

(a) Maximum Churn Rate.  Borrower’s number of connections as at the end of each fiscal quarter shall not decrease (i) by more than five percent (5%) as compared to Borrower’s number of connections as at the end of the immediately preceding fiscal quarter, or (ii) below *** connections.

 (b)Minimum Adjusted EBITDA.  Borrower shall maintain quarterly Adjusted EBITDA, as set forth below, tested quarterly:

Quarterly Period ending

Minimum Adjusted EBITDA

December 31, 2016

$572,000

1


 

March 31, 2017 (applicable only if the Revolving Maturity Date is extended)

$780,000

June 30, 2017 (applicable only if the Revolving Maturity Date is extended)

$982,000

 

 (c)Minimum Cash.  Borrower shall maintain a minimum balance of unrestricted cash at Bank of $*** at all times.

(b) Exhibit D to the Agreement (Compliance Certificate) is amended and restated in its entirety to read as attached Exhibit D.

4. Bank agrees that notwithstanding Section 2.4(d) and in lieu of the requirements set forth therein, Borrower may set up a lockbox with JPMorgan Chase with proceeds thereof directed to a deposit account maintained with JPMorgan Chase, provided that a control agreement satisfactory to Bank shall remain in place with respect to such deposit account.

5. Borrower has presented the terms of a proposed transaction with *** (“***”), pursuant to which *** would purchase USAT’s cashless devices and customer financings and lease the same to Borrower’s customers (the “*** Financing”).  Borrower has requested, and Bank confirms that it consents to the *** Financing, and that Bank releases its security interest in such devices and customer financings that are purchased by *** concurrent with the purchase thereof pursuant to the terms of the *** Financing as presented to Bank as of the date of this Amendment.

6. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects.  Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof.  Borrower ratifies and reaffirms the continuing effectiveness of all agreements entered into in connection with the Agreement. 

7. Borrower represents and warrants that the representations and warranties contained in the Agreement are true and correct in all material respects as of the date of this Amendment, and that no Event of Default has occurred and is continuing. 

8. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

9. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following: 

(a) this Amendment, duly executed by Borrower;

(b) the Affirmation of Guaranty, duly executed by the party thereto;

(c) payment of a waiver fee of $25,000 and all Bank Expenses incurred through the date of this Amendment; and

(d) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

2


 

 

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date first above written.

 

 

 

 

 

 

“Borrower”

 

USA TECHNOLOGIES, INC.

 

By: /s/ Leland P. Maxwell

Name:  Leland P. Maxwell

Title: Interim CFO

 

 

 

“Bank”

 

HERITAGE BANK OF COMMERCE

 

By: /s/ Karla Schrader

Name:  Karla Schrader

Title: VP

 

 

 

 


 

 

Exhibit D
Compliance Certificate

TO:HERITAGE BANK OF COMMERCE

FROM:USA TECHNOLOGIES, INC.

The undersigned authorized officer of USA TECHNOLOGIES, INC. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the “Agreement”), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof; provided that those representations and warranties expressly referring to another date shall be true, correct, and complete in all material respects as of such date.  Attached herewith are the required documents supporting the above certification.  The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant

Required

Complies

 

 

 

 

Borrowing Base Certificate

Monthly within 25 days of month end

Yes

No

Quarterly financial statements  with churn report and Compliance Certificate

Quarterly within 50 days of quarter end

Yes

No

Annual financial statements (CPA Audited)

FYE within 120 days

Yes

No

10K and 10Q

Within 5 days of filing

Yes

No

A/R Audit

Semi-annually

Yes

No

IP Notices

As required under Section 6.10

Yes

No

 

 

 

 

Financial Covenant

Required

Actual

Complies

 

 

 

 

 

Maximum Churn

5% / *** min. connections

__________

Yes

No

Minimum Adjusted EBITDA

See Section 6.9(b)

__________

Yes

No

 

Minimum Cash at Bank

 

$***

 

__________

 

Yes

 

No

 

 

 

Comments Regarding Exceptions:  See Attached.

BANK USE ONLY

 

 

 

Received by:

Sincerely,

AUTHORIZED SIGNER

 

 

 

Date:

 

 

Verified:

SIGNATURE

AUTHORIZED SIGNER

 

 

 

 

Date:

TITLE

 

 

Compliance Status

Yes

No

 

DATE

 

 

 

 


usat_Ex31_1

Exhibit 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

I, Stephen P. Herbert, certify that:

1.

I have reviewed this quarterly report on Form 10‑Q of USA Technologies, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

5.

The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

 

 

Date: February 9, 2017

/s/ Stephen P. Herbert

 

Stephen P. Herbert

 

Chief Executive Officer

 

 


usat_Ex31_2

Exhibit 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

I, Leland P. Maxwell, certify that:

1.

I have reviewed this quarterly report on Form 10‑Q of USA Technologies, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

5.

The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

a.all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

b.any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

 

 

Date: February 9, 2017

/s/ Leland P. Maxwell

 

Leland P. Maxwell

 

Interim Chief Financial Officer

 

 


usat_Ex32_1

Exhibit 32.1

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

In connection with the accompanying Quarterly Report of USA Technologies, Inc., (the “Company”) on Form 10‑Q for the period ended December 31, 2016 (the “Report”), I, Stephen P. Herbert., Chief Executive Officer of the Company, hereby certify that to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: February 9, 2017

/s/ Stephen P. Herbert

 

Stephen P. Herbert

 

Chief Executive Officer

 

 


usat_Ex32_2

Exhibit 32.2

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

In connection with the accompanying Quarterly Report of USA Technologies, Inc., (the “Company”) on Form 10‑Q for the period ended December 31, 2016 (the “Report”), I, Leland P. Maxwell, Interim Chief Financial Officer of the Company, hereby certify that to my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: February 9, 2017

/s/ Leland P. Maxwell

 

Leland P. Maxwell

 

Interim Chief Financial Officer