UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2014
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 000-50054001-33365
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 | 19355 | ||||
(Address of principal executive offices) | (Zip Code) |
(610) 989‑0340
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name Of Each Exchange On Which Registered | |||||
Common Stock, no par value Series A Convertible Preferred Stock | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K10‑K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company,” and “emerging growth company” in Rule 12b-212b‑2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |
Non-accelerated filer | Smaller reporting company | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Act).
The aggregate market value of the voting common equity securities held by non-affiliates of the Registrant was $61,214,929$167,436,169 as of the last business day of the most recently completed second fiscal quarter, December 31, 2013,2016, based upon the closing price of the Registrant’s Common Stock on that date.
As of September 15, 2014,August 7, 2017, there were 35,603,27150,017,368 outstanding shares of Common Stock, no par value.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K10‑K contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, the anticipated financial and operating results of the Company. For this purpose, forward-looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate,” “could,” “should,” “would,” “likely,” “may,” “will,” “plan,” “intend,” “believes,” “expects,” “anticipates,” “projected,” or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described in the “Risk Factors” section of this Form 10-K.10‑K. We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.
Any forward-looking statement made by us in this Form 10-K10‑K speaks only as of the date of this Form 10-K.10‑K. Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-K10‑K or to reflect the occurrence of unanticipated events.
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USA TECHNOLOGIES, INC.
OVERVIEW
USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”) was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutions and value-added services that facilitate electronic payment transactions primarily within the unattended Point of Sale (“POS”) market. We are a leading provider in the small ticket, beverage and food vending industry and are expanding our solutions and services to other unattended market segments, such as amusement, commercial laundry, kiosk taxi and others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as telemetry and machine-to-machine (“M2M”) services, which include the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment.
We derive the majority of our revenues from license and transaction fees resulting from connections to, as well as services provided by, our ePort Connect service. Connections to our service stem from the sale or lease of our POS electronic payment devices or certified payment software or the servicing of similar third-party installed POS terminals. The majority of ePort Connect customers pay a monthly fee plus a blended transaction rate on the transaction dollar volume processed by the Company. Connections to the ePort Connect service, therefore, are the most significant driver of the Company’s revenues, particularly revenues from license and transaction fees.
As of June 30, 2014,2017, the Company had approximately 266,000568,000 connections to its ePort Connect service, compared to approximately 214,000429,000 connections as of June 30, 2013,2016, representing a 24%32.4% increase. During the fiscal year ended June 30, 2014,2017, the Company processed approximately 169414.9 million cashless transactions totaling approximately $294$803.0 million in transaction dollars, representing a 31%31.4% increase in transaction volume and a 34%37.4% increase in dollars processed from the 129315.8 million cashless transactions totaling approximately $219$584.4 million during the previous fiscal year ended June 30, 2013.2016.
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The above chart showscharts show the increases over the last fourfive fiscal years in the number of connections, revenues and the dollar value of transactions handled by us. The vertical bars depict total revenues, segmented by license and transaction fees and equipment revenues. The solid line depictslines depict the number of connections to our ePort Connect service and the dollar value of transactions handled by us, as of the end of each of the last fourfive fiscal years, as indicated by the dot at the mid-point on the revenue bar for each year. Similarly, the dollar value of transactions handled by us during each of the last four fiscal years is indicated by the dotted line and the dot at the mid-point on the revenue bar for each year.
Our solutions and services have been designed to simplify the transition to cashless for traditionally cash-only based businesses. As such, they are turnkeyturn-key and include our comprehensive ePort Connect service and POS electronic payment devices or certified payment software, which are able to process traditional magnetic stripe credit and debit cards, contactless credit and debit cards and mobile payments. Standard services through ePort Connect are maintained on our proprietary operating systems and include merchant account setup on behalf of the customer, automatic processing and
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settlement, sales reporting and 24x7 customer support. Other value-added services that customers can choose from include things such as cashless deployment planning, cashless performance review and prepaid and loyalty products and services. Our solutions also provide flexibility to execute a variety of payment applications on a single system, transaction security, connectivity options, compliance with certification standards, and centralized, accurate, real-time sales and inventory data to manage distributed assets (wireless telemetry and M2M).
Our customers range from global food service organizations to small businesses that operate primarily in the self-serve, small ticket retail markets including beverage and food vending, amusement and arcade machines, smartphones via our ePort Mobile™Online solution, commercial laundry, tolls, and various other self-serve kiosk applications as well as equipment developers or manufacturers who incorporate our ePort Connect service into their product offerings.
We believe that we have a history of being a market leader in cashless payments with a recognized brand name, a value-added proposition for our customers and a reputation of innovation in our product and services. We believe that these attributes position us to capitalize on industry trends.
In January 2016, the Company acquired the cloud-based content delivery platform, device platform and products, customer base, and intellectual property of VendScreen, Inc. of Portland, Oregon. In addition to new technology and services, the acquisition has added a West Coast operational footprint for the Company, providing greater efficiencies in operational performance, expanded customer services, sales and technical support to the Company’s customer base. As a result of the acquisition, the Company has added to its product line an interactive media, content delivery system, including a vending application that provides enhanced vendor management system (VMS) integration and consumer product information, including nutritional data. The technology is NFC enabled and compatible with mobile wallets including Apple Pay and Android Pay, and supports instant refunds, couponing, advertising and real-time consumer feedback to the owner and operator.
THE INDUSTRY
We operate primarily in the small ticket electronic payments industry and, more specifically, the unattended POS market. We also have the ability to accept cashless payment “on the go” through mobile-based payment services, which are generally higher ticket transactions. Our solutions and services facilitate electronic payments in industries that have traditionally relied on cash transactions. We believe the following industry trends are driving growth in demand for electronic payment systems in general and more specifically within the markets we serve:
· | Ongoing shift toward electronic payment transactions and away from cash and checks; |
· | Increasing demand for electronic transaction functionality from both consumers and merchant/operators; and |
· | Improving POS technology and NFC equipped mobile phone payment technology. |
Shift toward electronic payment transactions and away from cash and checks
There has been an ongoing shift away from paper-based methods of payment, including cash and checks, towards electronic-based methods of payment. According to The Nilson Report, December 2012,2016, paper-based methods of payment continued to decline in 2010,2015, representing 38.97%26.14% of transaction dollars measured compared to 50.45%28.07% in 2005.2014. The four card-based systems—credit, debit, prepaid, and electronic benefits transfer—generated $4.22$5.665 trillion in the United States in 2011, 50.6%2015, 59.32% of transaction dollars measured, compared to 42.3% in 2006.measured. The Nilson Report projects that, by 2016 2019, spending at merchants in the U.S., from the four card-based system tosystems will grow to $6.5 trillion, or 62.8%67.03% of total transaction dollars measured.
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Increase in Consumer and Merchant/Operator Demand for Electronic Payments
Increase in Consumer Demand.The unattended, vending and kiosk POS market has historically been dominated by cash purchases. However, oftentimes, cash purchases at unattended POS locations represent a cumbersome transaction for the consumer because they do not have the correct monetary value (paper or coin), or the consumer does not have the ability to convert their bills into coins. We believe electronic payment system providers such as USA Technologiesthe Company that can meet consumers’ demand within the unattended market will be able to offer retailers, card associations, card issuers and payment processors and business owners an expanding value proposition at the POS. Based upon our survey of selected vending machines connected to our service over a recent twelve month period, we estimate that average annual cashless sales per machine increased by approximately 44% from those of a prior twelve month period, and cashless sales as a percentage of total machine sales (cashless and cash) increased by 15% from those of such prior twelve month period. In addition, average consumer purchases during the recent twelve month period in which the consumer utilized a credit or debit card were approximately 35% higher than purchases where the consumer utilized cash.
Increase in Merchant/Operator Demand.We believe that, increasingly, merchants and operators of unattended payment locations (e.g., vending machines, laundry,, tabletop games, etc.) are utilizing electronic payment alternatives as a means to improve business results. The Company works with its customers to help them drive increased revenue of their distributed assets through this expanded market opportunity. In addition, electronic payment systems can provide merchants and operators real-time sales and inventory data utilized for back-office reporting and forecasting, like USA Technologies’the Company’s solutions and services, helping them to manage their business more efficiently.
Increase in Demand for Networked Assets. M2M (machine-to-machine) technology includes capturing value from wireless modules and electronic devices to improve business productivity and customer service. The term M2M describes any kind of 2-way2‑way communication system between geographically distributed devices through a centrally managed software application without human intervention and as such, the Company’s integrated POS and ePort Connect remote data management capabilities fall into this category of solution. For example, the Company’s new ePortGO™ solution integrates cashless payment with software and hardware specific to the taxi and for-hire vehicle industry. In addition, networked assets can provide valuable information regarding consumers’ purchasing patterns and payment preferences, allowing operators to more effectively tailor their offerings to consumers. According to a Verizon Wireless 2011 whitepaper (When Machines Talk, Businesses Listen), within ten years, the number of machinesGartner, Inc. forecasted that can6.4 billion connected things would be in use worldwide in 2016, with 5.5 million new things getting connected should exceed sixtyevery day, and will reach 20.8 billion units.by 2020. The Company believes that its expertise in integrating cashless payments, its scalable network data capacity, its proven ability to handle high transaction volume,, and its high quality and reliable data management capabilities make it well suited for the growing opportunities in the M2M market.
POS Technology and NFC Equipped Mobile Phone Payment Improvements
Consumer Interest in Mobile Payment.NFC, or Near Field Communication, is a short range wireless connectivity technology that uses electromagnetic radio fields to enable communication between devices when there is a physical touch, or when they are within close proximity to one another. We believe thatPOS contactless terminals contactlessthat are enabled to accept NFC payments and digital wallet applications, such as Softcard, Google Wallet, Chase Pay, Apple Pay, the recently introduced Android Pay, and others, stand to benefit from these evolving trends in mobile payment. Digital wallet is essentially a digital service, accessed via the web or a mobile phone application that serves as a substitute for the traditional credit or debit card. Providers can also market directly to targeted consumers with coupons and loyalty programs.
As approximately 475,000 of the Company’s connections are contactless enabled to accept NFC payments (in addition to magnetic stripe cards) as of June 30, 2014,2017, we believe that we are well-positioned to benefit from this emerging space.
OUR TECHNOLOGY-BASED SOLUTION
Our solutions have been designed to be turnkeyturn-key and includesinclude the ePort Connect service, POS electronic payment devices, certified payment software able to process traditional magnetic stripe credit and debit cards, contactless credit and debit cards, and NFC equipped mobile phones that allow consumers to make payments with their cell phones. We believe that our ability to bundle our products and services, as well as the ability to tailor and customize them to individual customer needs, makes it easy and efficient for our customers to adopt and deploy our technology, and results in a service unmatched in the small-ticket, unattended retail market today.
The Product. The Company offers its customers several different devices or software to connect their distributed assets. These range from our QuickConnect™ Web service, more fully described below under the section “OUR PRODUCTS”,
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and encrypted magnetic stripe card readers to our ePort® hardware that can be attached to the door of a stand-alone terminal.
The Network. Our network is designed to transmit payment information from our customers’ terminals for processingand sales and diagnostic data for storage and reporting to our customers. Also, the network, through server-based software applications, provides remote management information, and enables control of the networked device’s functionality. Through our network we have the ability to upload software and update devices remotely enabling us to manage the devices easily and efficiently (e.g., change protocol functionality, provide software upgrades, and change terminal display messages).
The Connectivity Mediums. The client devices (described above) are interconnected for the transfer of our customers’ data through our ePort Connect network that provides multiple connectivity options such as phone line, ethernet, and wireless. Increased wireless connectivity options, coverage and reliability have allowed us to service a greater number of geographically dispersed customer locations. Additionally, we make it easy for our customers to deploy wireless solutions by acting as a single point of contact. We have contracted with Verizon Wireless and AT&T in the United States and Rogers Wireless in Canada in order to supply our customers with wireless network coverage.
Data Security. We are listed on the VISA Global Registry of Service Providers, meaning that VISA has reviewed and accepted ourthe Report on Compliance (RoC) from anour authorized Payment Card Industry (“PCI”) assessor as a PCI Level 1DSS Service Provider. Our entry on this registry is renewed annually, and our current entry is valid through January 31, 2015.2018. The VISA listing can be found online at http://www.visa.com/splisting/searchGrsp.dosearchGrsp.do.
OUR SERVICES
For the fiscal year ended June 30, 2014,2017, license and transaction fees generated by our ePort Connect service represented 84%66.4% of the Company’s revenues. Our ePort Connect solution provides customers with all of the following services, under one cohesive service umbrella:
· | Diverse POS options. Ability to connect to a broad product line of cashless acceptance devices or software. |
· | Card Processing Services. Through our existing relationships with card processors and card associations, we provide merchant account and terminal ID set up, pre-negotiated discounted fees on small ticket purchases, and direct electronic funds transfers (EFTs) to our customers’ bank accounts for all settled card transactions as well as ensure compliance with current processing |
· | Wireless Connectivity. We manage |
· | Customer/Consumer Services. We support our installed base by providing |
· | Online Sales Reporting. Via the USALive online reporting system, we provide customers with a host of sales and operational data, including information regarding their credit and cash transactions, user configuration, reporting by machine and region, by date range and transaction type, data reports for operations and finance, graphical reporting of sales, and condition monitoring for equipment service, as well as activation of new devices and redeployments. |
· | M2M Telemetry and DEX data transfer. DEX, an acronym for digital exchange, is the Vending Industry’s standard way to communicate information such as sales, cash in bill validators, coins in coin boxes, sales of units by selection, pricing, door openings, and much more. |
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· | Over-the-Air Update Capabilities. Automatic over-the-air updates to software, settings, and |
· | Value-added Services. Access to additional services such as MORE, our loyalty |
· | Deployment Planning. Access to services to help operators successfully deploy cashless payment systems and integrated solutions that is based on our extensive market and customer experience data. |
· | Premium Services. USAT offers Premium Services to support our customers that fully leverages the Company’s industry expertise and access to data. These services include planning, project management, installation support, marketing and performance evaluation. |
We enter into aan ePort Connect Services Agreement, our processing and licensing agreement, or ePort Connect Services Agreement, with our customers pursuant to which we act as a provider of cashless financial services for the customer’s distributed asset,assets, and the customer agrees to pay us an activation fee, monthly service fees, and transaction processing fees.fees either pursuant to this agreement or another related agreement, such as a purchase order. Our agreements are generally cancelable by the customer upon thirty to sixty days’ notice to us. It typically takes thirty to sixty days for a new connection to begin contributing to the Company’s license and transaction fee revenues.
The Company counts its ePort connections upon shipment of an active terminal to a customer under contract, at which time activation on its network is performed by the Company, and the terminal is capable of conducting business via the Company’s network and related services. An ePort connection does not necessarily mean that the unit is actually installed by the customer on a machine, or that the unit has begun processing transactions, or that the Company has begun receiving monthly service fees in connection with the unit. Rather, at the time of shipment of the ePort, the customer becomes obligated to pay the one-time activation fee (if applicable), and is obligated to pay monthly service fees and lease payments (if applicable) in accordance with the terms of the customer’s contract with the Company.
OUR PRODUCTS
ePort is the Company’s core device, which is currently being utilized in self-service, unattended markets such as vending, amusement and arcade, and various other kiosk applications. Our ePort product facilitates cashless payments by capturing payment information and transmitting it to our network for authorization with the payment system (e.g., credit card processors). Additional capabilities of our ePort consist of control/access management by authorized users, collection of audit information (e.g., date and time of sale and sales amount), diagnostic information of the host equipment, and transmission of this data back to our network for web-based reporting, or to a compatible remote management system. Our ePort products are available in several distinctive modular configurations, and as hardware, software or as an API Web service, offering our customers flexibility to install a POS solution that best fits their needs and customerconsumer demands.
· | ePort Edge™ is a one-piece design and is intended for those customers who require a magnetic swipe-only cashless system with basic features at a lower price point. |
· | ePort |
· | ePort |
· | ePort G10-S is a 4G LTE cashless payment device that enables faster processing and enhanced functionality for payment and consumer engagement applications that require higher speeds and large data loads. |
· | ePort Interactive is a cloud-based interactive media and content delivery management system, enabling delivery of nutritional information, remote refunds, loyalty programs, and multimedia-marketing for the unattended and self-serve retail markets. |
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· | QuickConnect is a Web service that allows a client application to securely interface with the Company’s ePort Connect service. QuickConnect essentially replaces ePort SDK (software development kit), which captured our ePort technology in software form for PC-based devices such as kiosks. |
Other forms of our ePort technology include:
· | eSuds, our solution developed for the commercial laundry industry that enables laundry operators to provide customers cashless transactions via the use of their credit cards, debit cards and other payment mediums such as student IDs. Effective with the April 2013 mutually exclusive agreement with Setomatic Systems, we are no longer selling the entire eSuds solution to new customers, but we continue to provide processing services for laundry machines equipped with cashless hardware supplied by |
· | ePort | ||
SPECIFIC MARKETS WE SERVE
Our current customers are primarily in the self-serve, small ticket retail markets including beverage and food vending and kiosk, commercial laundry, car wash, tolls, amusement and gaming, and office coffee. We estimate that there are approximately 13 million to 15 million potential connections in this self-serve, small ticket retail market. The 568,000 connections to our service as of June 30, 2017 constitute only 4% of these potential connections. While these industry sectors represent only a small fraction of our total market potential, as described below, these are the areas where we have gained the most traction to date. In addition to being our current primary markets, we believe these sectors serve as a proof-of-concept for other unattended POS industry applications.
Vending. According to Vending Times’ 20122014 Census of the Industry, annual U.S. sales in the vending industry sector were estimated to be approximately $43 billion in 20112013 transacted by over 6approximately 4.5 million machines. The Company believes these machines represent a significant market opportunity for electronic payment conversion when compared to the Company’s existing ePort Connect service base and the overall low rate of industry adoption to date. For example, in another study conducted by Automatic Merchandiser (State of the Vending Industry, June 2013)2015) that included a representative 5.45.1 million machines, cashless adoption was projectedestimated at only 11% in 2014, up from 7% in 2012, up from 4% in 2011. The increase was attributed to higher product price points, increased acceptance of debit and credit in retail for smaller purchases, Gen X and Y/millennials joining the workforce to become vending consumers and the growing research about how cashless payment systems can increase sales.2012. With the continued shift to electronic payments and the advancement in mobile and POS technology, we believe that the traditional beverage and food vending industry will continue to look to cashless payments and telemetry systems to improve their business results.
Kiosk. According to IHL Consulting Group’s August 2012 North AmericanSeptember 2013 Market Study on Self-Service Kiosks, Market Study, which defines, for purposes of their study, a kiosk as a self-standing, technology-based, unmanned device deployed across six retail and hospitality environments, approximately $926$822 billion will bewas transacted through self-service kiosks in 2013, with compound annual growth for the subsequent three years2012, which represents an increase of seven percent (7%).5.9% from 2011. We believe that kiosks are becoming increasingly popular as credit, debit or contactless payment options enable kiosks to sell an increased variety of items. In addition, the study points to the increasing trend toward self-sufficiency, where time is the most important commodity of the consumer. As merchants continue to seek new ways to reach their customers through kiosk applications, we believe the need for a reliable cashless payment provider experienced with machine integration, PCI compliance and cashless payment services designed specifically for the unattended market will be of increasing value in this market. Our existing kiosk customers integrate with our cashless payment services via our QuickConnect Web service using one of our encrypted readers or ePort POS technologies.
Laundry. Our primary targets in laundry consist of the coin-operated commercial laundry and multi-housing laundry markets. According to the Coin Laundry Association, the U.S. commercial laundry industry iswas comprised of 30,000-35,000 laundromatsabout 35,000 coin laundries in the U.S. in 2015 that our partner, Setomatic Systems, estimatesestimated translates to roughly 2.5 million commercial washers and dryers. Additionally, an industry participant indicates there are approximately 3.4 million machines in the multi-housing market. While no revenue figures are available for the multi-housing market, theThe Coin Laundry Association estimatesestimated gross annual revenue in the laundromat market at nearly $5 billion annually.
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OUR COMPETITIVE STRENGTHS
We believe that we benefit from a number of advantages gained through our over twentynearly twenty-five year history in our industry. They include:
1. | One-Stop Shop, End-to-End Solution.We believe that our ability to offer our customers one point of contact through a bundled cashless payment solution makes it easy and efficient for our customers to adopt and deploy our electronic payment solutions and results in a service that is unmatched in the small ticket, self-service retail market today. To our knowledge, other cashless payment solutions available in the market today require the operator to set up their own accounts for cashless processing and manage multiple service providers (i.e., hardware terminal manufacturer, wireless network provider, and/or credit card processor). We interface directly with our card processor and wireless service provider, and, with our hardware solutions, are able to offer a bundled solution to our customers. |
2. | Trusted Brand Name. We believe that the ePort |
3. | Market Leadership. We believe we have one of the largest installed |
4. | Attractive Value Proposition for Our Customers. We believe that our solutions provide our customers an attractive value proposition. Our solutions and services make possible increased purchases by consumers who in the past were limited to the physical cash on hand while making a purchase at an unattended terminal, thereby increasing the universe of potential customers and the |
5. | Increasing Scale and Financial Stability. Due to the continued growth in connections to the Company’s ePort Connect service, during the |
6. | Customer-Focused Research and Development. Our research and development initiatives focus primarily on adding features and functionality to our electronic payment solutions based on customer input and emerging market trends. |
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OUR GROWTH OPPORTUNITY
Our primary objective is to continue to enhance our position as a leading provider of technology that enables electronic payment transactions and value-added services primarily at small-ticket, self-service retail locations such as vending, kiosks, commercial laundry, and other similar markets. We plan to execute our growth strategy organically and through strategic acquisitions. The Company believes its service-approach business model can create a high-margin stream of recurring revenues that could create a foundation for long-term value and continued growth. KeyKey elements of our strategy are to:
Drive Growth in Connections
Leverage Existing Customers/Partners. We have a solid base of key customers across multiple markets, particularly in vending, that have currently deployed our solutions and services to just a small portion of their deployed base. Approximately 93% of our new connections during the fourth fiscal quarter ended June 30, 2017 were from existing customers. We estimate that our current customers represent approximately 2.0 million potential connections. Based on the 568,000 connections to our service as of June 30, 2017, there remain approximately 1.4 million potential connections from our current customers that could be connected to our service. As a result, they are a key component of our plan to drive future sales. We have worked to build these relationships, drive future deployments, and develop customized network interfaces. Our customers have seen the benefits of our products and services first-hand and we believe they represent the largest opportunity to scale connections to our service.
Expand Distribution and Sales Reach. We are intently focused on driving profitable growth through efficient sales channels. AddedOur sales resources and new distribution relationships have led to approximately 2,2501,650 new ePort Connect customers as well as increased penetration in markets such as amusement and arcade, and commercial laundry in fiscal year 2014.2017.
Further Penetrate Attractive Adjacent Markets. We plan to continue to introduce our turnkeyturn-key solutions and services to various adjacent markets such as the broad-based kiosk market and other similar markets by leveraging our expertise in cashless payment integration combined with the capacity and uniqueness of our ePort Connect solution.
Capitalize on Opportunities in International Markets. We are currently focused on the U.S. and Canadian markets for our ePort devices and related ePort Connect service but may seek to establish a presence in electronic payment markets in Europe, Asia, and Latin America. In order to do so, however, we would have to invest in additional sales and marketing and research and development resources targeted towards these regions. At this time, the Company believes the most efficient route to these markets will be achieved by optimizing and coordinating opportunities with its global partners and customers. Our energy management devices have been shipped to customers located in North America, Europe, and Asia.
Expanding the Value of our Service
Capitalize on the emerging NFC and growing mobile payments trends.With over 50%approximately 83% of our connected base contactless enabled to accept NFC payments (including mobile wallets), the Company believes that continued increases in consumer preferences towards contactless payments, representsincluding mobile wallets like Apple Pay and Android Pay, represent a significant opportunity for the Company to further drive adoption. According to a market research study conducted in June 2015,
Continuous Innovation. We are continuously enhancing our solutions and services in order to satisfy our customers and the end-consumers relying on our products at the POS locations. Our product innovation team is always working to enhance the design, size, and speed of data transmission, as well as security and compatibility with other electronic payment solution providers’ technologies. We believe our continued innovation will lead to further adoption of USAT’s solutions and services in the unattended POS payments market.
Comprehensive Service and Support. In addition to its industry-leading ePort cashless payments system, the Company seeks to provide its customers with a comprehensive, value-added ePort Connect service that is designed to encourage
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optimal ROI through business planning and performance optimization; business metrics through the Company’s KnowledgeBase of data; a loyalty and rewards program for consumer engagement; marketing strategy and executional support; sales data and machine alerts; DEX data transmission; and the ability to extend cashless payments capabilities and the full suite of services across multiple aspects of an operator’s business including micro-markets contract food industry, online payments and mobile payments.
Leverage Intellectual Property. Through June 30, 2014,2017, we have been granted 8773 U.S. and foreign patents whichin force that contain various claims, including claims relating to payment processing, networking and energy management devices. In addition, we own numerous trademarks, copyrights, and trade secrets. We will continue to explore ways to leverage this intellectual property in order to add value for our customers, attain an increased share of the market, and possibly generate licensing revenues.
SALES AND MARKETING
The Company’s sales strategy includes both direct sales and channel development, depending on the particular dynamics of each of our markets. Our marketing strategy is diversified and includes media relations, direct mail, conferences, and client referrals. As of August 31, 2014,June 30, 2017, the Company was marketing and selling its products through its full and part-time sales staff consisting of nineteen18 people.
Direct Sales
Our direct sales efforts are currently primarily focused on the beverage and food vending industry, although we continue to further develop our presence in our ancillary market segments.
Indirect Sales/ Distribution
As part of our strategy to expand our sales reach while optimizing resources, we also have agreements with select resellers in the car wash, amusement and arcade, and vending markets. We also have a strategic marketing relationship in the commercial laundry market that makes the Company the exclusive service provider to Setomatic Systems’ POS offering, SpyderWash. We have also entered into agreements with resellers and distributors in connection with our energy management products.
Marketing
Our marketing strategy includes advertising and outreach initiatives designed to build brand awareness, make clear USAT’s competitive strengths, and prove the value of our services to our target markets-both for existing and prospective customers. Activities include creating company and product presence on the web including www.usatech.com and www.energymisers.com, digital advertising, SEO (Search Engine Optimization), and social media; the use of direct mail and email campaigns; educational and instructional online training sessions; advertising in vertically-oriented trade publications; participating in industry tradeshows and events; and working closely with customers and key strategic partners on co-marketing opportunities and new, innovative solutions that drive customer and consumer adoption of our services.
IMPORTANT RELATIONSHIPS
Verizon Wireless
In April 2011, we signed an agreement with Verizon for access to their digital wireless wide area network for the transport of data, including credit card transactions and inventory management data. The initial term of the agreement iswas three years, expiring April 2014. In August 2013, we signed an amendment to this agreement which was extended the term until April 2016. At the end of the term, the agreement automatically renews for successive one month periods unless terminated by either party upon thirty days’ notice.
On September 21, 2011, the Company and Verizon entered into a Joint Marketing Addendum (the “Verizon Agreement”) which amended the agreement described above. Pursuant to the Verizon Agreement, the Company and Verizon would work together to help identify business opportunities for the Company’s products and services. Verizon may introduce the Company to existing or potential Verizon customers that Verizon believes are potential purchasers of the Company’s products or services, and may attend sales calls with the Company made to these customers. The Company and Verizon would collaborate on marketing and communications materials that would be used by each of them to educate and inform
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customers regarding their joint marketing work. Verizon has the right to list the Company’s products and services in its Data Solutions Guide for use by its sales and marketing employees and in its external website. The Company has agreed to pay to Verizon a one-time referral fee for each customer introduced to the Company by Verizon that becomes a customer of the Company. The Verizon Marketing Agreement is terminable by either party upon 45 days’ notice.
VISA
As of October 12, 2011,November 14, 2014, we entered into a three-year agreement with Visa U.S.A. Inc. (“Visa”), pursuant to which Visa has agreed to continue to make available to the Company certain promotional interchange reimbursement fees for small ticket debit and credit card transactions. As previously reported, following implementation of the Durbin Amendment, Visa had significantly increased its interchange fees for small ticket regulated debit card transactions effective October 1, 2011. The promotional interchange reimbursement fees provided by the aforementioned agreement will continue until October 31, 2017.
MasterCard
On January 12, 2015, we entered into a one-year agreementthree-year MasterCard Acceptance Agreement (“MasterCard Agreement”) with VISAMasterCard International Incorporated ("MasterCard"), pursuant to establishwhich MasterCard has agreed to make available to us reduced interchange rates for small ticket debit card transactions in certain merchant category codes. As previously reported, MasterCard had significantly increased its interchange rates for small ticket regulated debit card transactions effective October 1, 2011, and as a new, fixedresult, the Company ceased accepting MasterCard debit interchange rate. On October 8, 2012, wecard products in mid-November 2011. Pursuant to the MasterCard Agreement, however, the Company is currently accepting MasterCard debit card products for small ticket debit card transactions in the unattended beverage and food vending merchant category code. The Company and MasterCard entered into a first amendment on April 27, 2015, pursuant to which the original one-year termconditions under, or the transactions to, which the MasterCard custom pricing would be available, was extended until October 31, 2013,amended. The reduced interchange rates became effective on April 20, 2015.
Chase Paymentech
We entered into a five-year Third Party Payment Processor Agreement, dated April 24, 2015 with Paymentech, LLC, through its member, JPMorgan Chase Bank, N.A. (“Chase Paymentech”), pursuant to which Chase Paymentech will act as the provider of credit and further automatically reneweddebit card transaction processing services (including authorization, conveyance and settlement of transactions) to the Company and its customers. The Agreement provides that Chase Paymentech will act as the exclusive provider of transaction processing services to the Company and its customers for an additional year, or until October 31, 2014.
Compass/Foodbuy
On June 30, 2009, we entered into a Master Purchase Agreement (“MPA”) with Foodbuy, LLC (“Foodbuy”), the procurement company for Compass Group USA, Inc. (“Compass”) and other customers. The MPA provides, among other things that, for a period of thirty-six months, Foodbuy, on behalf of Compass, shall utilize USAT as the sole credit or debit card vending system hardware and related software and connect services provider for not less than seventy-five percent of the vending machines of Compass utilizing cashless payments solutions. The MPA also provides that, for a period of thirty-six months from the effective date of the agreement, USAT shall be a preferred supplier and provider to Foodbuy and its customers, including Compass, of USAT’s products and services. The MPA automatically renews for successive one-year periods unless terminated by either party upon sixty days’ notice prior to the end of any such one year renewal period. On July 1, 2009, USAT and Compass, in conjunction with the MPA described above, entered into a Quick Start Master Lease Agreement pursuant to which Compass could purchase ePort devices utilizing USAT’s Quick Start Program. The Quick Start Program enables Compass to acquire USAT’s ePort devices through a 36 month non-cancellable lease. Under the Quick Start Program, Compass will pay USAT a monthly amount, per terminal, that includes the lease of the ePort hardware and activation fee. Compass would be able to utilize the Quick Start Program to acquire ePorts during the three year term of the Master Purchase Agreement referred to above. In addition, on July 1, 2009, USAT and Compass, in conjunction with the MPA described above, also entered into a three yearthree-year ePort Connect Services Agreement pursuant to which USAT will provide Compass with all card processing, data, network, communications and financial services, and DEX telemetry data services required in connection with all Compass vending machines utilizing ePorts. The agreement automatically renews for successive one yearone-year periods unless terminated by either party upon sixty days’ notice prior to the end of any such one yearone-year renewal period. During the fiscal year ended June 30, 2014, Foodbuy and its customers, including2017, Compass represented 23%approximately 25% of our total revenues.
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AMI Entertainment
On August 22, 2011, we entered into an exclusive three-year agreement with AMI Entertainment (“AMI”) as their exclusive processor of credit and debit cards and other electronic payments in connection with equipment operated on AMI’s network in the U.S. and Canada. The agreement is subject to renewal for one yearone-year periods thereafter, subject to notice of non-renewal by either party; the agreement renewed for one year in August 2014.party. AMI manufactures various types of amusement, entertainment and music equipment for sale to third party users.
Setomatic Systems
In April 2013, we entered into ana three-year exclusive agreement with Setomatic Systems (“Setomatic”), a privately owned and operated developer and manufacturer of both open and closed loop card payment systems, drop coin meters and electronic timers for the commercial laundry industry. Under the terms of the agreement, the Company, through our ePort Connect® service, will act as the exclusive service provider for all credit/debit card processing for all new customers of Setomatic’s SpyderWash, a credit/debit card acceptance product. Similarly, the Company will market its ePort Connect service in the United States laundry market exclusively through Setomatic.
QUICK START PROGRAM
In order to reduce customers’ upfront capital costs associated with the ePort hardware, the Company makes available to its customers the Quick Start program, pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party leasing company for the devices. At the end of the lease period, the customer would have the option to purchase the device for a nominal fee.
From its introduction in September 2014 and through approximately mid-March 2015, the Company entered into these leases directly with its customers. In the third and fourth quarter of fiscal year 2015, however, the Company signed vendor agreements with two leasing companies, whereby our customers could enter into leases directly with the leasing companies.
There has been a strategic marketing agreementshift by our customers from acquiring our product via JumpStart, which accounted for 9% of our gross connections in fiscal year 2016, and for 7% of our gross connections in fiscal year 2017, to QuickStart or a straight purchase, which accounted for approximately 93% of gross connections in fiscal year 2017. The shift to a straight purchase, along with Softcard (formerly known as ISIS), a mobile commerce joint venture comprisedour ability to increase cash collections under QuickStart sales by utilizing leasing companies, improves cash provided by operating activities.
Due to the success of the three major telecommunication companies; Verizon Wireless, AT&T Mobility and T-Mobile USA. As partQuickStart program as measured by customer utilization of the agreement,program and the positive impact on the Company’s cash flows from operating activities when a leasing company is utilized, the Company was a participant inintends to expand this program by entering into additional vendor agreements with leasing companies and/or expanding its relationship with the Softcard Mobile Wallet in their two launch markets, Austin and Salt Lake City, during Fiscal 2013 for which it received financial and marketing support from Softcard. In addition, in April 2013, the Company announced, with Softcard, what we believe is the largest nationwide loyalty program in vending. The promotion is designed to allow any of our vending customers nationwide the ability to participate in Softcard Mobile Wallet payment and loyalty rewards program, provided that their locations are enabled for Softcard SmartTap technology for loyalty tracking. Consumers using the Softcard Mobile Wallet at one of these terminals would be eligible to receive their fifth vend free. Under the terms of the agreement covering the promotion, Softcard, through the Company, would essentially reimburse our vending customers for that free vend.
JUMP START PROGRAM
Pursuant to the JumpStart Program, customers acquire the ePort cashless device at no upfront cost by paying a higher monthly service fee, avoiding the need to make a major upfront capital investment. The Company would continue to own the ePort device utilized by its customer. At the time of the shipment of the ePort device, the customer is obligated to pay to the Company a one-time activation fee, and is later obligated to pay monthly ePort Connect service fees in accordance with the terms of the customer’s contract with the Company, in addition to transaction processing fees generated from the device.
MANUFACTURING
The Company utilizes independent third party companies for the manufacturing of its products. Our internal manufacturing process mainly consists of quality assurance of materials and testing of finished goods received from our contract manufacturers. We have not entered into a long-term contract with our contract manufacturers, nor have we agreed to
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commit to purchase certain quantities of materials or finished goods from our manufacturers beyond those submitted under routine purchase orders, typically covering short-term forecasts.
COMPETITION
We are a leading provider of cashless payments systems for the small-ticket, unattended market and believe we have the largest installed base of unattended POS electronic payment systems in the small ticket, beverage and food vending industry. Factors that we consider to be our competitive advantages are described above under “OUR COMPETITIVE STRENGTHS.” Our competitors are increasingly and actively marketing products and services that compete with our products and services in the vending space including manufacturers who may include in their new vending machines their own (or another third party’s) cashless payment systems and services. These major competitors include Crane Payment Innovations, Coin Acceptors Inc. (Coinco), and Cantaloupe Systems, Inc. and Coca-Cola Refreshments USA, Inc. While we believe our products and services are superior to our competitors’, many of our competitors are much larger enterprises and have substantially greater revenues. In addition to these competitors, there are also numerous credit card processors that offer card processing services to traditional retail establishments that could decide to offer similar services to the industries that we serve.
In the cashless laundry market, our joint solution with Setomatic Systems competes with hardware manufacturers, who provide joint solutions to their customers in partnership with payment processors, and with at least one competitor who provides an integrated hardware and payment processing solution.
TRADEMARKS, PROPRIETARY INFORMATION, AND PATENTS
The Company owns US federal registrations for the following trademarks and service marks: Blue Light Sequence®, Business Express®, CM2iQ®, Creating Value Through Innovation®, EnergyMiser®, ePort®, ePort Connect®, ePort Edge®, ePort GO®, ePort Mobile®, eSuds®, Intelligent Vending®, PC Express®, Public PC®, SnackMiser®, TransAct®, USA Technologies® USALive®, VendingMiser®, PC EXPRESS®, VENDSCREEN® and VM2iQ®. The Company owns pending applications for US federal registration of the following trademarks and service marks: Horizontal Blue Light Sequence™, and QuickConnect™.
Much of the technology developed or to be developed by the Company is subject to trade secret protection. To reduce the risk of loss of trade secret protection through disclosure, the Company has entered into confidentiality agreements with its key employees. There can be no assurance that the Company will be successful in maintaining such trade secret protection, that they will be recognized as trade secrets by a court of law, or that others will not capitalize on certain aspects of the Company’s technology.
Through June 30, 2014, 872017, 96 patents have been granted to the Company, including 7481 United States patents and 1315 foreign patents, and 73 United States and 3 foreign10 international patent applications are pending. Of the 8796 patents, 7973 are still in force.
RESEARCH AND DEVELOPMENT
Research and development expenses, which are included in selling, general and administrative expense in the Consolidated Statements of Operations, were approximately $1,018,000, $901,000,$1.4 million, $1.4 million and $1,038,000,$1.5 million for the years ended June 30, 2014, 2013,2017, 2016 and 2012,2015, respectively.
EMPLOYEES
As of June 30, 2017, the Company had fifty-six91 full-time employees and five10 part-time employees.
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Risks Relating to Our Business
We have a history of losses since inception and if we continue to incur losses, the price of our shares can be expected to fall.
We experienced losses from inception through June 30, 2012, with net income for the yearyears ended June 30, 2013 and June 30, 2014. However, we experienced losses for the fiscal years 2015, 2016, and 2017, and continued profitability is not assured. From our inception through June 30, 2014,2017, our cumulative losses from operations are approximately $171$183 million. For our fiscal year ended June 30, 2012, we incurred a net loss of $5,211,238, due primarily to the fact that our revenues had not been sufficient to sustain our operations. Until the Company’s products and services can generate sufficient annual revenues, the Company will be required to use its cash and cash equivalents on hand, its line of credit, and may raise capital to meet its cash flow requirements including the issuance of Common Stockcommon stock or debt financing. For the yearyears ended June 30, 20142017 and 2013,2016, we earnedincurred a net incomeloss of $27,530,652, which includes a benefit for income taxes of $27,255,398$1.9 million and $854,123,$6.8 million, respectively. If we continue to incur losses in the future, the price of our common stock can be expected to fall.
The occurrence of unusual ormaterial unanticipated non-operational expenses may require us to divert our cash resources from achieving our business plan, adversely affecting our financial performance and resulting in the decline of our stock price.
In the event we would incur any suchmaterial unanticipated expenses, we would anticipate divertingmay be required to divert our cash resources from our JumpStart programoperating activities in order to fund any such expenses. During the fiscal year ending June 30, 2015, we anticipate utilizing substantial cash resources in connection with the JumpStart program. Any such reductionoccurrence may cause our anticipated connections, revenues, gross profits, adjusted EBITDA, and other financial metrics for the 20152017 fiscal year and beyond to be materially adversely affected. In such event, the price of our common stock could be expected to fall.
The inability of our customers to utilize third party leasing companies under our QuickStart program would materially adversely affect our cash generated from operating activities and/or attaining our business plan.
The use of third party leasing companies by our customers under our QuickStart program positively affects our net cash provided by operating activities because we receive the purchase price from the leasing company at the time of the sale. There can be no assurance that we will be able to obtain such third party leasing companies. To the extent that third party leasing companies would not be available, we would lease the equipment directly to our customers. In such event, our net cash from operating activities would be adversely affected and we may be required to incur additional equity or debt financing to fund operations. In the alternative, we would not be able to attain our business plan, including anticipated connections and revenues.
We may require additional financing or find it necessary to raise capital to sustain our operations and without it we may not be able to achieve our business plan.
At June 30, 2014,2017, we had net working capital deficit of $611,010.$5.8 million. We had net cash (used in) provided by operating cash flowsactivities of $7,085,400, $6,038,952,$(6.8) million, $6.5 million, and $78,236,$(1.7) million for the fiscal years ended June 30, 2014, 2013,2017, 2016, and 2012, respectively. The foregoing does not reflect, and is not sufficient to pay for, our investments in the JumpStart Program of $10.9 million, $9 million and $5.8 million incurred during the fiscal years 2014, 2013 and 2012,2015, respectively. Although we believe that we have adequate existing resources to provide for our funding requirements through at least July 1, 2015,over the next 12 months, there can be no assurances that we will be able to continue to generate sufficient funds thereafter. Unless we maintain or grow our current level of operations, and maintain or reduce the number of JumpStart connections, we may need additional funds to continue these operations. We may also need additional capital to update our technology or respond to unusual or unanticipated non-operational events. Should the financing that we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could behave a material adverse effect on our business, operating results, financial condition and prospects.
Our future operating results may fluctuate.
Our future operating results will depend significantly on our ability to continue to drive revenues from license and transaction fees and our ability to develop and commercialize new products and services. Our operating results may fluctuate based upon many factors, including:
· | fluctuations in revenue generated by our | ||
· | fluctuations in operating expenses; |
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· | our ability to establish or maintain effective relationships with significant partners and suppliers on acceptable |
· | the amount of debit or credit card interchange rates that are charged by Visa and |
· | the fees that we charge our customers for processing |
· | the successful operation of our |
· | the commercial success of our customers, which could be affected by such factors as general economic |
· | the level of product and price |
· | the timing and cost of, and our ability to develop and successfully commercialize, new or enhanced products and |
· | activities of, and acquisitions or announcements by, |
· | the impact from any impairment of inventory, goodwill, fixed assets or |
· | the impact of any changes of valuation allowance on deferred tax assets; |
· | the ability to increase the number of customer connections to our |
· | marketing programs which delay realization by us of monthly service fees on our new |
· | the material breach of security of any of the Company’s systems or third party systems utilized by the |
· | the anticipation of and response to technological |
Our products may fail to gain substantial increased market acceptance. As a result, we may not generate sufficient revenues or profit margins to achieve our financial objectives or growth plans.
There can be no assurances that demand for our products will be sufficient to enable us to generate sufficient revenue or become profitable on a sustainable basis. Likewise, no assurance can be given that we will be able to have a sufficient number of ePorts®ePorts® connected to our network or sell or lease equipment utilizing our network to enough locations to achieve significant revenues. Alternatively, the locations which utilize the network may not be successful locations and our revenues would be adversely affected. We may lose locations utilizing our products to competitors, or may not be able to install our products at competitors’ locations, or may not obtain future locations which would be obtained by our competitors. In addition, there can be no assurance that our products could evolve or be improved to meet the future needs of the marketplace. In any such event, we may not be able to achieve our growth plans, including anticipated connections and revenue growth.
We may be required to incur further debt to meet future capital requirements of our business, including funding our JumpStart program.business. Should we be required to incur additional debt, the restrictions imposed by the terms of such debt could adversely affect our financial condition and our ability to respond to changes in our business.
If we incur additional debt, we may be subject to the following risks:
· | our vulnerability to adverse economic conditions and competitive pressures may be |
· | our flexibility in planning for, or reacting to, changes in our business and industry may be |
· | our debt covenants may affect our flexibility in planning for, and reacting to, changes in the economy and in our |
· | a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and therefore, may be able to take advantage of opportunities that our indebtedness would prevent us from |
· | the covenants contained in the agreements governing our outstanding indebtedness may limit our ability to borrow additional funds, dispose of assets and make certain |
· | a significant portion of our cash flows could be used to service our |
· | we may be sensitive to fluctuations in interest rates if any of our debt obligations are subject to variable interest |
· | our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired. |
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We cannot assure you that our leverage and such restrictions will not materially and adversely affect our ability to finance our future operations or capital needs or to engage in other business activities. In addition, we cannot assure you that additional financing will be available when required or, if available, will be on terms satisfactory to us.
Our bank borrowing agreement contains restrictions which may limit our flexibility in operating and growing our business.
Our bank borrowing agreement contains covenants regarding our maintenance of a minimum quarterly adjusted EBITDA as defined in our loan agreement and certain numbers of connections. Our loan agreement also includes covenants that limit our ability to engage in specified types of transactions, including among other things:
· | incur additional indebtedness or issue equity; |
· | pay dividends on, repurchase or make distributions in respect of our common stock; |
· | make certain investments (including acquisitions) and distributions; |
· | sell certain assets; |
· | create liens; |
· | consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; |
· | enter into certain transactions with respect to our affiliates; |
· | ability to enter into business combinations; and |
· | certain other financial and non-financial covenants. |
We were in compliance with these covenants as of June 30, 2017. Failure to be in compliance with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all or a portion of our outstanding indebtedness, which would have a material adverse effect on our business, financial condition and results of operations.
The loss of one or more of our key customers could significantly reduce our revenues, results of operations, and net income.
We have derived, and believe we may continue to derive, a significant portion of our revenues from one large customer or a limited number of large customers. Approximately 22% and 41% of the Company’s trade accounts and finance receivables at June 30, 2014 and 2013, respectively, were concentrated with one customer. Approximately 26%, 37%, and 43% of the Company’s license and transaction processing revenuesCustomer concentrations for the years ended June 30, 2014, 2013,2017, 2016 and 2012, respectively,2015 were concentrated with one and two customer(s), respectively: 26%, 26%, and 25%, respectively for each year, with one; and 11%, and 18%, for the years ended June 30, 2013, and 2012, respectively, with another. There was no concentration of equipment sales revenue for the years ended June 30, 2014, 2013, and 2012.
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| 2015 |
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Trade account and finance receivables - one customer |
| 42 | % | 18 | % | 35 | % |
License and transaction processing revenues - one customer |
| 20 | % | 16 | % | 21 | % |
Equipment sales revenue - one customer |
| 37 | % | 28 | % | 17 | % |
Our customers may buy less of our products or services depending on their own technological developments, end-user demand for our products and internal budget cycles. A major customer in one year may not purchase any of our products or services in another year, which may negatively affect our financial performance. We have offered, and may in the future offer, discounts to our large customers to incentivize them to continue to utilize our products and services. If we are required to sell products to any of our large customers at reduced prices or unfavorable terms, our results of operations and revenue could be materially adversely affected. Further, there is no assurance that our customers will continue to utilize our transaction processing and related services as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice.
We depend on our key personnel and, if they would leave us, our business could be adversely affected
We are dependent on key management personnel, particularly the Chairman and Chief Executive Officer, Stephen P. Herbert and our Chief Financial Officer, David DeMedio.Herbert. The loss of services of Mr. Herbert or Mr. DeMedio or other officers could dramatically affect our business prospects. Our executive officers and certain of our officers and employees are particularly valuable to us because:
· | they have specialized knowledge about our company and |
· | they have specialized skills that are important to our |
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· | they would be particularly difficult to replace. |
We have entered into an employment agreement with Mr. Herbert, that expires on January 1, 2015 and with Mr. DeMedio which expires on June 30, 2015, each of which contains confidentiality and non-compete agreements.
We also may be unable to retain other existing senior management, sales personnel, and development and engineering personnel critical to our ability to execute our business plan, which could result in harm to key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs.
Our dependence on proprietary technology and limited ability to protect our intellectual property may adversely affect our ability to compete.
Challenge to our ownership of our intellectual property could materially damage our business prospects. Our technology may infringe upon the proprietary rights of others. Our ability to execute our business plan is dependent, in part, on our ability to obtain patent protection for our proprietary products, maintain trade secret protection and operate without infringing the proprietary rights of others.
Through June 30, 2014,2017, we had 1013 pending United States and foreign patent applications, and will consider filing applications for additional patents covering aspects of our future developments,, although there can be no assurance that we will do so. In addition, there can be no assurance that we will maintain or prosecute these applications. The United States Government and other countries have granted us 8796 patents as of June 30, 2014.2017. There can be no assurance that:
· | any of the remaining patent applications will be granted to |
· | we will develop additional products that are patentable or do not infringe the patents of |
· | any patents issued to us will provide us with any competitive advantages or adequate protection for our |
· | any patents issued to us will not be challenged, invalidated or circumvented by |
· | any of our products would not infringe the patents of others. |
If any of our products or services is found to have infringed any patent, there can be no assurance that we will be able to obtain licenses to continue to manufacture,, use, sell, and license such product or service or that we will not have to pay damages and/or be enjoined as a result of such infringement. Even if a patent application is granted for any of our products, there can be no assurance that the patented technology will be a commercial success or result in any profits to us.
If we are unable to adequately protect our proprietary technology or fail to enforce or prosecute our patents against others, third parties may be able to compete more effectively against us, which could result in the loss of customers and our business being adversely affected. Patent and proprietary rights litigation entails substantial legal and other costs, and diverts Company resources as well as the attention of our management. There can be no assurance we will have the necessary financial resources to appropriately defend or prosecute our intellectual property rights in connection with any such litigation.
Competition from others could prevent the Company from increasing revenue and achieving its growth plans.
While we are a leading provider and believe we have the largest installed base of unattended POS electronic payment systems in the small ticket, beverage and food vending industry, our competitors are increasingly and actively marketing products and services that compete with our products and services in this vending space. The competition includes manufacturers who may include in their new vending machines their own (or another third party’s) cashless payment systems and services other than our systems and services. While we believe our products and services are superior to our competitors, many of our competitors are much larger enterprises and have substantially greater revenues. In addition to these competitors, there are also numerous credit card processors that offer card processing services to traditional retail establishments that could decide to offer similar services to the industries that we serve. Competition from other companies, including those that are well established and have substantially greater resources, may reduce our profitability or reduce our business opportunities. Competition may result in lower profit margins on our products or may reduce potential profits or result in a loss of some or all of our customer base. To the extent that our competitors are able to offer more attractive technology, our ability to compete could be adversely affected.
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The termination of any of our relationships with third parties upon whom we rely for supplies and services that are critical to our products could adversely affect our business and delay achievement of our business plan.
We depend on arrangements with third parties for a variety of component parts used in our products. We have contracted with various suppliers to assist us to develop and manufacture our ePort® products. For other components, we do not have supply contracts with any of our third-party suppliers and we purchase components as needed from time to time. We have contracted with Xanda third-party data system recovery vendor to host our network in a secure, 24/7 environment to ensure the reliability of our network services. We also have contracted with multiple land-based telecommunications providers to ensure the reliability of our land-based network. If these business relationships are terminated, the implementation of our business plan may be delayed until an alternative supplier or service provider can be retained. If we are unable to find another source or one that is comparable, the content and quality of our products could suffer and our business, operating results and financial condition could be harmed.
A disruption in the manufacturing capabilities of our third-party manufacturers, suppliers or distributors would negatively impact our ability to meet customer requirements.
We depend upon third-party manufacturers, suppliers and distributors to deliver components free from defects, competitive in functionality and cost, and in compliance with our specifications and delivery schedules. Since we generally do not maintain large inventories of our products or components, any termination of, or significant disruption in, our manufacturing capability or our relationship with our third-party manufacturers or suppliers may prevent us from filling customer orders in a timely manner.
We have occasionally experienced, and may in the future experience, delays in delivery of products and delivery of products of inferior quality from third-party manufacturers. Although alternate manufacturers and suppliers are generally available to produce our products and product components, the number of manufacturers or suppliers of some of our products and components is limited, and a qualified replacement manufacturer or supplier could take several months. In addition, our use of third-party manufacturers reduces our direct control over product quality, manufacturing timing, yields and costs. Disruption of the manufacture or supply of our products and components, or a third-party manufacturer’s or supplier’s failure to remain competitive in functionality, quality or price, could delay or interrupt our ability to manufacture or deliver our products to customers on a timely basis, which would have a material adverse effect on our business and financial performance.
Substantially all of the network service contracts with our customers are terminable for any or no reason upon thirty to sixty days’ advance notice.
Substantially all of our customers may terminate their network service contracts with us for any or no reason upon providing us with thirty or sixty days’ advance notice. Accordingly, consistent demand for and satisfaction with our products by our customers is critical to our financial condition and future success. Problems, defects, or dissatisfaction with our products or services or competition in the marketplace could cause us to lose a substantial number of our customers with minimal notice. If a substantial number of our customers were to exercise their termination rights, it would result in a material adverse effect to our business, operating results, and financial condition.
Our reliance on our wireless telecommunication service provider exposes us to a number of risks over which we have no control, including risks with respect to increased prices and termination of essential services.
The operation of our wireless networked devices depends upon the capacity, reliability and security of services provided to us by our wireless telecommunication services providers, AT&T Mobility and Verizon Wireless. We have no control over the operation, quality or maintenance of these services or whether the vendor will improve or reduce its services or continue to provide services that are essential to our business. In addition, subject to our existing contracts with them, our wireless telecommunication services providers may increase their prices, which would increase our costs. If our wireless telecommunication services providers were to cease to provide essential services or to significantly increase prices, we could be required to find alternative vendors for these services. With a limited number of vendors, we could experience significant delays in obtaining new or replacement services, which could lead to slowdowns or failures of our network. In addition, we may have to replace our existing ePort®ePort® devices that are already installed in the marketplace and which are utilizing the existing vendor’s services. This could significantly harm our reputation and could cause us to lose customers and revenues.
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We may not be able to adapt to changing technology and our customers’ technology needs.
We face rapidly changing technology and frequent new service offerings that can render existing services obsolete or unmarketable. Our future depends, in part, on our ability to enhance existing services and to develop, introduce and market, on a timely and cost effective basis, new services that keep pace with technological developments and customer requirements. Developing new products and technologies is a complex, uncertain process requiring innovation and accurate anticipation of technological and market trends. When changes to the product line are announced, we will be challenged to manage possible shortened life cycles for existing products and continue to sell existing products. Our inability to respond effectively to any of these challenges may have a material adverse effect on our business and financial success.
Security is vital to our customers and therefore breaches in the security of transactions involving our products or services could adversely affect our reputation and results of operations.
Protection against fraud is of key importance to purchasers and end-users of our products. We incorporate security features, such as encryption software and secure hardware, into our products to protect against fraud in electronic payment transactions and to ensure the privacy and integrity of consumer data. We design and test our products to industry security standards and our products and methodologies are under periodic review and improvement. We also maintain the highest level PCI validation standard as mandated by the card industry and engage third party auditors not only to ensure that we meet the highest industry standards, but also to advise us on improving our security methods. Nevertheless, ourOur products and services and third party products and services that are utilized by us may be vulnerable to breaches in security due to defects in our security mechanisms, the operating system and applications in our hardware platform. Security vulnerabilities could jeopardize the security of information transmitted or stored using our products. TheIf the security of the information in our products is compromised, our reputation and marketplace acceptance of our products will be adversely affected, which would adversely affect our results of operations, and subject us to potential liability. If our security applications are breached and sensitive data is lost or stolen, we could incur significant costs to not only assess and repair any damage to our systems, but also to reimburse customers for losses that occur from the fraudulent use of the data. We may also be subject to fines and penalties from the credit card associations in the event of the loss of confidential card information.
Our products and services may be vulnerable to security breach.
Credit card issuers have promulgated credit card security guidelines as part of their ongoing efforts to battle identity theft and credit card fraud. We continue to work with credit card issuers to assure that our products and services comply with these rules. There can be no assurances, however, that our products and services or third party products and services utilized by us are invulnerable to unauthorized access or hacking. When there is unauthorized access to credit card data that results in financial loss, there is the potential that parties could seek damages from us,, and our business reputation mayand results of operations would be materially adversely affected.
If we fail to adhere to the standards of the Visa and MasterCard credit card associations, our registrations with these associations could be terminated and we could be required to stop providing payment processing services for Visa and MasterCard.
Substantially all of the transactions handled by our network involve Visa or MasterCard. If we fail to comply with the applicable requirements of the Visa and MasterCard credit card associations, Visa or MasterCard could suspend or terminate our registration with them. The termination of our registration with them or any changes in the Visa or MasterCard rules that would impair our registration with them could require us to stop providing payment processing services through our network. In such event, our business plan and/or competitive advantages in the market place couldwould be materially adversely affected.
We rely on other card payment processors;processors; if they fail or no longer agree to provide their services, our customer relationships could be adversely affected and we could lose business.
We rely on agreements with other large payment processing organizations, primarily Elavon, Inc. (“Elavon”),Chase Paymentech, to enable us to provide card authorization, data capture, settlement and merchant accounting services and access to various reporting tools for the customers we serve. The termination by our card processing providers of their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect our relationships with the customers whose accounts we serve and may cause those customers to terminate their processing agreements with us.
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We are subject to laws and regulations that affect the products, services and markets in which we operate. Failure by us to comply with these laws or regulations would have an adverse effect on our business, financial condition, or results of operations.
We are, among other things, subject to banking regulations and credit card association regulations. Failure to comply with these regulations may result in the suspension of our business, the limitation, suspension or termination of service, and/or the imposition of fines that could have an adverse effect on our financial condition. Additionally, changes to legal rules and regulations, or interpretation or enforcement thereof, could have a negative financial effect on us or our product offerings. To the extent this occurs, we could be subject to additional technical, contractual or other requirements as a condition of our continuing to conduct our payment processing business. These requirements could cause us to incur additional costs, which could be significant, or to lose revenues to the extent we do not comply with these requirements.
New legislation could be enacted regulating the basis upon which interchange rates are charged for debit or credit card transactions, which could increase the debit or credit card interchange fees charged by bankcard networks. An example of such legislation is the so-called “Durbin Amendment,” to the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. The Durbin Amendment regulates the basis upon which interchange rates for debit card transactions are made to ensure that interchange rates are “reasonable and proportionate to costs.” Pursuant to regulations that were promulgated by the Federal Reserve, Visa and MasterCard have significantly increased their interchange fees for small ticket debit card transactions.
As of November 14, 2014, we entered into a one-yearthree-year agreement (the “Visa Agreement”with Visa U.S.A. Inc. (“Visa”), pursuant to which Visa has agreed to continue to make available to the Company reduced interchange fees for debit card transactions. Thecertain promotional interchange reimbursement fees madefor small ticket debit and credit card transactions. Similarly, MasterCard International Incorporated ("MasterCard") has agreed to make available to the Company will allow the Companyus reduced interchange rates for small ticket debit card transactions pursuant to continue to accept Visa’s debit products without adversely impacting the Company’s historical gross profit from license and transaction fee revenues. On October 9, 2012, the Company and Visa entered intoa three-year MasterCard Acceptance Agreement dated January 12, 2015, as amended by a First Amendment to extend the terms of the original agreement to October 31, 2013, which automatically renewed for one year through October 31, 2014.thereto dated April 27, 2015. If the foregoing agreements with Visa Agreement isand MasterCard are not extended, our financial results would be materially adversely affected unless we are able to pass these significant additional charges to our customers.
Increases in card association and debit network interchange fees could increase our operating costs or otherwise adversely affect our operations. If we do not pass along to our customers any future increases in credit or debit card interchange fees, assessments and transaction fees, our gross profits would be reduced.
We are obligated to pay interchange fees and other network fees set by the bankcard networks to the card issuing bank and the bankcard networks for each transaction we process through our network. From time to time, card associations and debit networks increase the organization and/or processing fees, known as interchange fees that they charge. Under our processing agreements with our customers, we are permitted to pass along these fee increases to our customers through corresponding increases in our processing fees. Passing along such increases could result in some of our customers canceling their contracts with us. Consequently, it is possible that competitive pressures will result in our Company absorbing some or all of the increases in the future, which would increase our operating costs, reduce our gross profit and adversely affect our business.
During the term of the Visa Agreement, the Company does not anticipate accepting any debit cards with interchange fees that are higher than the rates provided under the Visa Agreement. The Company will continue to accept Visa- and MasterCard- branded debit and pre-paid cards in addition to all major credit cards, including Visa, MasterCard, Discover and American Express at its current processing rates. If the Visa Agreement isor MasterCard Agreements are not extended, our financial results would be materially adversely affected unless we are able to pass these significant additional charges to our customers.
The ability to recruit, retain and develop qualified personnel is critical to the Company’s success and growth.
For the Company to successfully compete and grow, it must retain, recruit and develop the necessary personnel who can provide the needed expertise required in its business. In addition, the Company must develop its personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive and the Company may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. The Company’s effort to retain and develop personnel may also result in significant additional expenses. The Company cannot assure that key personnel, including executive officers, will continue to be employed or that it will be able to attract and
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retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on the Company.
We incur chargeback liability when our customers refuse or cannot reimburse chargebacks resolved in favor of consumers. Any increase in chargebacks not paid by our customers may adversely affect our results of operations, financial condition and cash flows.
In the event a dispute between a cardholder and a customer is not resolved in favor of the customer, the transaction is normally charged back to the customer and the purchase price is credited or otherwise refunded to the cardholder. If we are unable to collect such amounts from the customer's account, or if the customer refuses or is unable, due to closure, bankruptcy or other reasons, to reimburse us for a chargeback, we bear the loss for the amount of the refund paid to the cardholder. We may experience significant losses from chargebacks in the future. Any increase in chargebacks not paid by our customers could have a material adverse effect on our business, financial condition, results of operations and cash flows. We have policies to manage customer-related credit risk and attempt to mitigate such risk by monitoring transaction activity. Notwithstanding our programs and policies for managing credit risk, it is possible that a default on such obligations by one or more of our customers could have a material adverse effect on our business.
Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could cause a loss of confidence in our financial reporting and adversely affect the trading price of our common stock.
Effective internal control over financial reporting is necessary for us to provide accurate financial information. Section 404 of the Sarbanes-Oxley Act requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K. Although our internal controls over financial reporting were effective as of June 30, 2017, we identified a material weakness in our internal controls over financial reporting as of June 30, 2016 and June 30, 2015. If we are unable to adequately maintain our internal control over financial reporting in the future, we may not be able to accurately report our financial results, which could cause investors to lose confidence in our reported financial information, negatively affecting the trading price of our common stock, or our ability to access the capital markets.
Risks RelatedRelating to Our Common Stock
We do not expect to pay cash dividends in the foreseeable future and therefore investors should not anticipate cash dividends on their investment.
The holders of our common stock and series A convertible preferred stock are entitled to receive dividends when, and if, declared by our board of directors. Our board of directors does not intend to pay cash dividends in the foreseeable future, but instead intends to retain any and all earnings to finance the growth of the business. To date, we have not paid any cash dividends on our common stock or our series A convertible preferred stock and there can be no assurance that cash dividends will ever be paid on our common stock.
Our articles of incorporation prohibit the declaration of any dividends on our common stock unless and until all unpaid and accumulated dividends on the series A convertible preferred stock have been declared and paid. In addition, our loan agreement with our bank prohibits us from paying dividends without the prior consent of our bank. Through September 15, 2014,August 7, 2017, the unpaid and cumulative dividends on the series A convertible preferred stock are $12,593,002.$14.66 million. As of June 30, 2014,2017, each share of series A convertible preferred stock was convertible into 0.1940 of a share of common stock at the option of the holder and is subject to further adjustment as provided in our Articlesarticles of Incorporation.incorporation. The unpaid and cumulative dividends on the series A convertible preferred stock are convertible into shares of our common stock at the rate of $1,000 per share at the option of the holder. During the year ended June 30, 2014,2017, none of our series A convertible preferred stock and no cumulative preferred dividends were converted into shares of common stock.
Our articles of incorporation also provide that the preferred stock has a liquidation preference over the common stock in the amount of $10 per share plus accrued and unpaid dividends. As of June 30, 2014,2017, the liquidation preference was $16,690,456.$18.78 million.
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Upon certain fundamental transactions involving the Company, such as a merger or sale of substantially all of our assets, we may be required to distribute the liquidation preference then due to the holders of our series A preferred stock as well as cash payments to certain of our warrant holders which would reduce the amount of the distributions otherwise to be made to the holders of our common stock in connection with such transactions.
Our articles of incorporation provide that upon a merger or sale of substantially all of our assets or upon the disposition of more than 50% of our voting power, the holders of at least 60% of the preferred stock may elect to have such transaction treated as a liquidation and be entitled to receive their liquidation preference. Upon our liquidation, the holders of our preferred stock are entitled to receive a liquidation preference prior to any distribution to the holders of common stock which, as of June 30, 2014 is equal to $16,690,456.
Our stock price may be volatile.
The trading price of our common stock is expected to be subject to significant fluctuations in response to various factors including, but not limited to, the following:
· | variations in operating results and achievement of key business |
· | changes in earnings estimates by securities analysts, if |
· | any differences between reported results and securities analysts’ published or unpublished |
· | announcements of new contracts, service offerings or technological innovations by us or our |
· | market reaction to any acquisitions, joint ventures or strategic investments announced by us or our |
· | demand for our services and |
· | shares of common stock being sold pursuant to Rule 144 or upon exercise of |
· | regulatory matters; |
· |
concerns about our financial position, operating results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary |
· | potential dilutive effects of future sales of shares of common stock by shareholders and by the |
· | the amount of average daily trading volume in our common |
· | our ability to obtain working capital |
· | general economic or stock market conditions unrelated to our operating performance. |
The securities market in recent years has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations, as well as general economic conditions, may also materially and adversely affect the market price of our common stock.
Director and officer liability is limited.
As permitted by Pennsylvania law, our by-laws limit the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our by-law provisions and Pennsylvania law, shareholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our by-laws and indemnification agreements entered into by the Company with each of the officers and directors provide that we shall indemnify our directors and officers to the fullest extent permitted by law.
Our publicly-filed reports are reviewed by the SEC from time to time and any significant changes required as a result of any such review may result in material liability to us, and have a material adverse impact on the trading price of our common stock.
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The reports of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying and to assess their compliance with applicable disclosure requirements and to enhance the overall effectiveness of companies’ public filings, and comprehensive reviews of such reports are now required at least every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports will comply in all material respects with the published SEC rules and regulations, we could be required to modify or reformulate information contained in prior filings as a result of an SEC review. Any modification or reformulation of information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of our common stock.
The Company leases 17,249approximately 23,138 square feet of space located in Malvern, Pennsylvania, for its principal executive office and for general administrative functions, sales activities, product development, and customer support. The Company’s monthly base rent for the premises is approximately $47 thousand, and will increase each year up to a maximum monthly base rent of approximately $53 thousand. The lease term expires on AprilNovember 30, 2016. As of June 30, 2014, the Company’s rent payment for this facility is approximately $31,000 per month.
The Company also leases 11,250 square feet of space in Malvern, Pennsylvania for its product warehousing and shipping under a lease agreement which expires on February 28, 2016.2019. As of June 30, 2014,2017, the Company’s rent payment is approximately $5,000$5 thousand per month.
The Company leases space in Portland, Oregon related to its VendScreen acquisition. The current lease commenced on October 17, 2016, and will terminate on December 31, 2019. The leased premises consists of approximately 5,362 square feet of rentable space. The lease includes monthly rental payments of approximately $11 thousand per month through December 31, 2019.
As previously reported, on October 1, 2015, a purported class action was filed in the United States District Court for the Eastern District of Pennsylvania against the Company is involved in various litigation proceedings arising duringand its executive officers alleging violations under the normal courseSecurities Exchange Act of business which,1934. The complaint alleges, among other things, that the defendants failed to disclose that there were significant deficiencies in the opiniondesign and operating effectiveness of the managementCompany’s internal control over financial reporting, which, when aggregated, represented a material weakness in internal control, and, as a result, the Company’s public statements were materially false and misleading. The complaint seeks certification as a class action, unspecified compensatory damages plus interest, attorneys’ fees and other costs. On February 1, 2016, the Company filed a motion to dismiss the complaint. On April 14, 2016, the Court issued an order granting the Company’s motion to dismiss the complaint. On May 13, 2016, the plaintiff appealed the Court’s order to the United States Court of Appeals for the Third Circuit. On August 16, 2016, the plaintiff filed a motion for relief from final judgment with the District Court seeking an order modifying the District Court’s previous order dismissing the complaint, and permitting the plaintiff to now file an amended complaint. On September 19, 2016, the District Court issued an order denying the plaintiff’s motion for relief from final judgment, and on October 4, 2016, the plaintiff filed an appeal of this order with the Court of Appeals. On October 6, 2016, the Court of Appeals consolidated the two appeals of plaintiff for all purposes. On March 28, 2017, oral argument was held before the Court of Appeals, and as of the date hereof, the Court of Appeals has not rendered a decision.
By letter dated December 7, 2015, a purported shareholder of the Company will not have a material effect ondemanded that the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s current and former officers and directors for breach of fiduciary duties in connection with the material weakness in its internal controls over financial positionreporting which were more fully described in the Company’s Form 10-K for the fiscal year ended June 30, 2015 (the “2015 Form 10-K”). In response to the demand letter, the Board of Directors formed a special litigation committee (the “SLC”) in order to investigate and resultsevaluate the demand letter. On June 1, 2016, and before the SLC had concluded its investigation, the purported shareholder filed a purported derivative action on behalf of operationsthe Company in the Chester County, Pennsylvania, Court of Common Pleas, against certain current and former officers and directors. The complaint alleges that the defendants breached their fiduciary duties relating to the material weakness in internal controls reported in the 2015 Form 10-K. The complaint seeks unspecified damages against the defendants and certain equitable relief. On July 15, 2016 the SLC issued its report (the “SLC Report”) which, among other things, concluded that none of the current or cash flows.former officers or directors had breached their fiduciary duties, that it was not in the best interests of the Company to pursue the pending shareholder derivative action, and that the Company request the Court to dismiss the action in its entirety. On August 1,
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2016, the Board of Directors of the Company adopted all of the conclusions and recommendations set forth in the SLC Report. On August 17, 2016, the Company filed with the Court a motion to dismiss the shareholder complaint. On March 8, 2017, the Court entered an order granting the Company’s motion to dismiss the complaint. On April 6, 2017, the plaintiff appealed the order to the Superior Court of Pennsylvania. As of the date hereof, the Superior Court has not rendered a decision.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock of the Company tradesis traded on The NASDAQ Global Market under the symbol USAT. “USAT.”
The high and low bidsales prices on The NASDAQ Global Market for the common stock were as follows:
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Year ended June 30, 2017 |
| High |
| Low | ||
First Quarter (through September 30, 2016) |
| $ | 5.81 |
| $ | 4.05 |
Second Quarter (through December 31, 2016) |
| $ | 5.77 |
| $ | 3.55 |
Third Quarter (through March 31, 2017) |
| $ | 4.85 |
| $ | 3.80 |
Fourth Quarter (through June 30, 2017) |
| $ | 5.60 |
| $ | 3.95 |
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Year ended June 30, 2016 |
| High |
| Low | ||
First Quarter (through September 30, 2015) |
| $ | 3.52 |
| $ | 1.70 |
Second Quarter (through December 31, 2015) |
| $ | 3.40 |
| $ | 2.18 |
Third Quarter (through March 31, 2016) |
| $ | 4.54 |
| $ | 2.69 |
Fourth Quarter (through June 30, 2016) |
| $ | 4.73 |
| $ | 3.50 |
| Year ended June 30, 2014 | High | Low | ||||||
| First Quarter (through September 30, 2013) | $ | 2.18 | $ | 1.60 | ||||
| Second Quarter (through December 31, 2013) | $ | 2.01 | $ | 1.40 | ||||
| Third Quarter (through March 31, 2014) | $ | 2.48 | $ | 1.80 | ||||
| Fourth Quarter (through June 30, 2014) | $ | 2.24 | $ | 1.73 | ||||
| Year ended June 30, 2013 | High | Low | ||||||
| First Quarter (through September 30, 2012) | $ | 1.75 | $ | 1.16 | ||||
| Second Quarter (through December 31, 2012) | $ | 1.97 | $ | 1.22 | ||||
| Third Quarter (through March 31, 2013) | $ | 2.75 | $ | 1.73 | ||||
| Fourth Quarter (through June 30, 2013) | $ | 2.65 | $ | 1.60 | ||||
As of August 7, 2017, there were 618approximately 571 holders of record of our common stock and 275 record holders of the Common Stock and 321 record holders of the Preferred Stock.
The holders of the Common Stockcommon stock are entitled to receive such dividends as the Board of Directors of the Company may from time to time declare out of funds legally available for payment of dividends. Through the date hereof, no cash dividends have been declared on the Company’s Common Stockcommon stock or Preferred Stock.preferred stock. No dividend may be paid on the Common Stockcommon stock until all accumulated and unpaid dividends on the Preferred Stockpreferred stock have been paid. As of September 15, 2014,August 7, 2017, such accumulated unpaid dividends amounted to $12,593,002.$14.7 million. The Preferred Stockpreferred stock is also entitled to a liquidation preference over the Common Stockcommon stock which, as of June 30, 20142017 equaled $16,690,456.
As of June 30, 2014,2017, equity securities authorized for issuance by the Company with respect to compensation plans were as follows:
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Plan category |
| Number of Securities |
| Weighted average |
| Number of securities |
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Equity compensation plans approved by security holders |
| 913,220 |
| $ | 2.82 |
| 1,062,451 | (1) |
Equity compensation plans not approved by security holders |
| — |
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| — |
| — |
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TOTAL |
| 913,220 |
| $ | 2.82 |
| 1,062,451 |
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(1) | Represents (i) 1,052,000 shares of common stock issuable under the 2015 Stock Incentive Plan, (ii) 1,447 shares of common stock underlying stock options issuable under the 2014 Stock Option Incentive Plan, and (iii) 9,004 shares of common stock issuable under the Company’s 2013 Stock Incentive Plan. |
| Plan category | Number of Securities to be issued upon exercise of outstanding options and warrants (a) | Weighted average exercise price of outstanding options and warrants (b) | Number of securities remaining available for future issuance (excluding securities reflected in column (a)) (c) | ||||||||||
| Equity compensation plans approved by security holders | 120,000 | $ | 2.05 | 1,218,991 | (1) | ||||||||
| Total | 120,000 | $ | 2.05 | 1,218,991 | |||||||||
As of August 7, 2017, shares of Common Stock issuable under the Company’s 2012 Stock Incentive Plan as approved by shareholders on June 28, 2012, and 500,000 shares of Common Stock issuable under the Company’s 2013 Stock Incentive Plan as approved by shareholders on June 21, 2013 for use in compensating employees, officers and directors, and 630,000 shares of Common Stock underlyingcommon stock options issuable under the Company’s 2014 Stock Option Incentive Plan as approved by shareholders on June 18, 2014 for use in compensating employees, officers and directors. The shares either have been, or will be registered with the Securities and Exchange Commission as employee benefit plans under Form S-8.
· | 23,978 shares issuable upon the exercise of common stock warrants at an exercise |
· | ||
101,001 shares issuable upon the conversion of outstanding |
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· | ||
9,004 shares issuable under the 2013 Stock Incentive Plan; |
· | 716,667 shares underlying stock options issued or to be issued under the 2014 Stock Option Incentive Plan; |
· | 1,052,000 shares issuable, and/or shares underlying stock options to be issued, under the 2015 Stock Incentive Plan; and |
· | 140,000 shares issuable to our former CEO upon the occurrence of a USA Transaction. |
PERFORMANCE GRAPH
The following graph shows a comparison of the 5-year5‑year cumulative total shareholder return for our common stock with The NASDAQ Composite Index and the S&P 500 Information Technology Index for small cap companies in the United States. The graph assumes a $100 investment on June 30, 20092012 in our common stock and in the NASDAQ Composite Index and the S&P 500 Information Technology Index, including reinvestment of dividends.
COMPARISON OF 5-YEAR5‑YEAR CUMULATIVE TOTAL RETURN
Among USA Technologies, Inc., The NASDAQ Composite Index and The S&P 500 Information Technology Index
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Total Return For: |
| Jun-12 |
| Jun-13 |
| Jun-14 |
| Jun-15 |
| Jun-16 |
| Jun-17 | ||||||
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USA Technologies, Inc. |
| $ | 100 |
| $ | 120 |
| $ | 146 |
| $ | 186 |
| $ | 294 |
| $ | 359 |
NASDAQ Composite |
| $ | 100 |
| $ | 116 |
| $ | 149 |
| $ | 168 |
| $ | 163 |
| $ | 207 |
S&P 500 Information Technology Index |
| $ | 100 |
| $ | 106 |
| $ | 137 |
| $ | 150 |
| $ | 154 |
| $ | 204 |
| Total Return For: | Jun-09 | Jun-10 | Jun-11 | Jun-12 | Jun-13 | Jun-14 | ||||||||||||||||||
| USA Technologies, Inc. | $ | 100 | $ | 16 | $ | 73 | $ | 48 | $ | 57 | $ | 69 | ||||||||||||
| NASDAQ Composite | $ | 100 | $ | 115 | $ | 151 | $ | 160 | $ | 185 | $ | 240 | ||||||||||||
| S&P 500 Information Technology Index | $ | 100 | $ | 115 | $ | 143 | $ | 161 | $ | 170 | $ | 220 | ||||||||||||
The information in the performance graph is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such a filing. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
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The following selected financial data for the five years ended June 30, 20142017 are derived from the audited consolidated financial statements of USA Technologies, Inc. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.
| Year ended June 30, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| OPERATIONS DATA | ||||||||||||||||||||
| Revenues | $ | 42,344,964 | $ | 35,940,244 | $ | 29,017,243 | $ | 22,868,789 | $ | 15,771,106 | ||||||||||
| Operating income (loss) | $ | 436,332 | $ | 713,925 | $ | (7,000,392 | ) | $ | (5,688,217 | ) | $ | (11,595,697 | ) | |||||||
| Net Income (loss) | $ | 27,530,652 | $ | 854,123 | $ | (5,211,238 | ) | $ | (6,457,067 | ) | $ | (11,571,495 | ) | |||||||
| Cumulative preferred dividends | (664,452 | ) | (664,452 | ) | (664,452 | ) | (665,577 | ) | (735,139 | ) | ||||||||||
| Net income (loss) applicable to common shares | $ | 26,866,200 | $ | 189,671 | $ | (5,875,690 | ) | $ | (7,122,644 | ) | $ | (12,306,634 | ) | |||||||
| Net earnings (loss) per common share - basic | $ | 0.78 | $ | 0.01 | $ | (0.18 | ) | $ | (0.26 | ) | $ | (0.55 | ) | |||||||
| Net earnings (loss) per common share - diluted | $ | 0.78 | $ | 0.01 | $ | (0.18 | ) | $ | (0.26 | ) | $ | (0.55 | ) | |||||||
| Cash dividends per common share | - | - | - | - | - | |||||||||||||||
| BALANCE SHEET DATA | ||||||||||||||||||||
| Total assets | $ | 70,764,242 | $ | 36,576,196 | $ | 33,219,657 | $ | 36,004,005 | $ | 29,848,424 | ||||||||||
| Long-term debt | $ | 422,776 | $ | 369,906 | $ | 728,330 | $ | 253,061 | $ | 596,155 | ||||||||||
| Shareholders’ equity | $ | 53,736,667 | $ | 23,379,191 | $ | 21,655,022 | $ | 26,125,531 | $ | 22,812,172 | ||||||||||
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| As of and for the Year ended June 30, | |||||||||||||
($ in thousands, except per share data) |
| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 | |||||
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OPERATIONS DATA: |
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Revenues |
| $ | 104,093 |
| $ | 77,408 |
| $ | 58,077 |
| $ | 42,345 |
| $ | 35,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
| $ | 135 |
| $ | (1,467) |
| $ | (240) |
| $ | 437 |
| $ | 714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (1) |
| $ | (1,852) |
| $ | (6,806) |
| $ | (1,089) |
| $ | 27,531 |
| $ | 854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative preferred dividends |
|
| (668) |
|
| (668) |
|
| (668) |
|
| (668) |
|
| (668) |
Net (loss) income applicable to common shares |
| $ | (2,520) |
| $ | (7,474) |
| $ | (1,757) |
| $ | 26,863 |
| $ | 186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per common share - basic |
| $ | (0.06) |
| $ | (0.21) |
| $ | (0.05) |
| $ | 0.77 |
| $ | 0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per common share - diluted |
| $ | (0.06) |
| $ | (0.05) |
| $ | 0.78 |
| $ | 0.78 |
| $ | 0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 97,691 |
| $ | 84,833 |
| $ | 75,134 |
| $ | 70,764 |
| $ | 36,576 |
Capital lease obligations and long-term debt, including current portion |
| $ | 4,291 |
| $ | 2,205 |
| $ | 2,332 |
| $ | 423 |
| $ | 370 |
Shareholders’ equity |
| $ | 65,778 |
| $ | 55,025 |
| $ | 53,311 |
| $ | 53,737 |
| $ | 23,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
| $ | (6,771) |
| $ | 6,468 |
| $ | (1,698) |
| $ | 7,085 |
| $ | 6,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
| (3,693) |
|
| (5,772) |
|
| 3,354 |
|
| (7,917) |
|
| (9,181) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
| 3,937 |
|
| 7,202 |
|
| 646 |
|
| 3,923 |
|
| 2,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
| (6,527) |
|
| 7,898 |
|
| 2,302 |
|
| 3,091 |
|
| (446) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
| 19,272 |
|
| 11,374 |
|
| 9,072 |
|
| 5,981 |
|
| 6,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
| $ | 12,745 |
| $ | 19,272 |
| $ | 11,374 |
| $ | 9,072 |
| $ | 5,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONNECTIONS AND TRANSACTION DATA (UNAUDITED) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net New Connections |
|
| 139,000 |
|
| 96,000 |
|
| 67,000 |
|
| 52,000 |
|
| 50,000 |
Total Connections |
|
| 568,000 |
|
| 429,000 |
|
| 333,000 |
|
| 266,000 |
|
| 214,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Customers Added |
|
| 1,650 |
|
| 1,450 |
|
| 2,300 |
|
| 2,250 |
|
| 1,750 |
Total Customers |
|
| 12,700 |
|
| 11,050 |
|
| 9,600 |
|
| 7,300 |
|
| 5,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Transactions (millions) |
|
| 414.9 |
|
| 315.8 |
|
| 216.6 |
|
| 168.5 |
|
| 129.1 |
Transaction Volume ($ millions) |
| $ | 803.0 |
|
| 584.4 |
| $ | 388.9 |
| $ | 293.8 |
| $ | 219.0 |
(1) | Net income for the year ended June 30, 2014 includes an income tax benefit of $27.3 million for the reduction of tax valuation allowance. |
30
The following unaudited quarterly financial operations data for the years ended June 30, 20142017 and June 30, 20132016 is derived from the audited consolidated financial statements of USA Technologies, Inc. and its interim reports for the quarters therein. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| UNAUDITED | |||||||||||||
YEAR ENDED JUNE 30, 2017 |
| First Quarter |
| Second Quarter |
| Third Quarter |
| Fourth Quarter |
| Year | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 21,588 |
| $ | 21,756 |
| $ | 26,460 |
| $ | 34,289 |
| $ | 104,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
| $ | 6,167 |
| $ | 6,334 |
| $ | 6,625 |
| $ | 7,520 |
| $ | 26,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
| $ | (950) |
| $ | 234 |
| $ | 419 |
| $ | 432 |
| $ | 135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (2,464) |
| $ | 233 |
| $ | 136 |
| $ | 243 |
| $ | (1,852) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative preferred dividends |
| $ | (334) |
| $ | — |
| $ | (334) |
| $ | — |
| $ | (668) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common shares |
| $ | (2,798) |
| $ | 233 |
| $ | (198) |
| $ | 243 |
| $ | (2,520) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per common share - basic |
| $ | (0.07) |
| $ | 0.01 |
| $ | 0.00 |
| $ | 0.01 |
| $ | (0.06) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per common share - diluted |
| $ | (0.07) |
| $ | 0.01 |
| $ | 0.00 |
| $ | 0.01 |
| $ | (0.06) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic |
|
| 38,488,005 |
|
| 40,308,934 |
|
| 40,327,697 |
|
| 40,331,993 |
|
| 39,860,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - diluted |
|
| 38,488,005 |
|
| 40,730,712 |
|
| 40,327,697 |
|
| 40,772,482 |
|
| 39,860,335 |
31
| UNAUDITED |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
| YEAR ENDED JUNE 30, 2014 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | ||||||||||||||||||||||||||||||
|
| UNAUDITED | |||||||||||||||||||||||||||||||||
YEAR ENDED JUNE 30, 2016 |
| First Quarter |
| Second Quarter |
| Third Quarter |
| Fourth Quarter |
| Year | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Revenues | $ | 10,123,058 | $ | 10,570,514 | $ | 10,443,932 | $ | 11,207,460 | $ | 42,344,964 |
| $ | 16,600 |
| $ | 18,503 |
| $ | 20,361 |
| $ | 21,944 |
| $ | 77,408 | ||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Gross profit | $ | 3,582,771 | $ | 3,830,133 | $ | 3,997,788 | $ | 3,662,144 | $ | 15,072,836 |
| $ | 5,047 |
| $ | 5,483 |
| $ | 5,672 |
| $ | 5,783 |
| $ | 21,985 | ||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Operating income (loss) | $ | 128,918 | $ | 509,690 | $ | 365,535 | $ | (567,811 | ) | $ | 436,332 |
| $ | 112 |
| $ | 594 |
| $ | (595) |
| $ | (1,578) |
| $ | (1,467) | |||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Net income (loss) | $ | 293,654 | $ | 409,191 | $ | 26,866,526 | $ | (38,719 | ) | $ | 27,530,652 |
| $ | 360 |
| $ | (874) |
| $ | (5,420) |
| $ | (872) |
| $ | (6,806) | |||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Cumulative preferred dividends | $ | (332,226 | ) | $ | - | $ | (332,226 | ) | $ | - | $ | (664,452 | ) |
| $ | (334) |
| $ | — |
| $ | (334) |
| $ | — |
| $ | (668) | |||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Net income (loss) applicable to common shares | $ | (38,572 | ) | $ | 409,191 | $ | 26,534,300 | $ | (38,719 | ) | $ | 26,866,200 |
| $ | 26 |
| $ | (874) |
| $ | (5,754) |
| $ | (872) |
| $ | (7,474) | ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Net earnings (loss) per common share - basic | $ | - | $ | 0.01 | $ | 0.75 | $ | - | $ | 0.78 |
| $ | 0.00 |
| $ | (0.02) |
| $ | (0.16) |
| $ | (0.02) |
| $ | (0.21) | ||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Weighted average number of common shares outstanding | 33,324,295 | 34,136,884 | 35,504,911 | 35,517,099 | 34,613,497 | ||||||||||||||||||||||||||||||
| Net earnings (loss) per common share - diluted | $ | - | $ | 0.01 | $ | 0.75 | $ | - | $ | 0.78 |
| $ | 0.00 |
| $ | (0.02) |
| $ | (0.16) |
| $ | (0.02) |
| $ | (0.21) | ||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| Diluted weighted average number of common shares outstanding | 33,324,295 | 34,222,731 | 35,504,911 | 35,517,099 | 34,613,497 | ||||||||||||||||||||||||||||||
Weighted average number of common shares outstanding - basic |
| 35,848,395 |
| 35,909,933 |
| 36,161,626 |
| 37,325,681 |
| 36,309,047 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
| UNAUDITED | |||||||||||||||||||||||||||||||||||
| YEAR ENDED JUNE 30, 2013 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | ||||||||||||||||||||||||||||||
| Revenues | $ | 8,390,277 | $ | 8,884,321 | $ | 8,980,804 | $ | 9,684,842 | $ | 35,940,244 | |||||||||||||||||||||||||
| Gross profit | $ | 3,144,281 | $ | 3,600,181 | $ | 3,681,339 | $ | 3,670,812 | $ | 14,096,613 | |||||||||||||||||||||||||
| Operating income (loss) | $ | (414,232 | ) | $ | 567,650 | $ | 350,219 | $ | 210,288 | $ | 713,925 | ||||||||||||||||||||||||
| Net income (loss) | $ | 39,140 | $ | 153,758 | $ | (1,015,943 | ) | $ | 1,677,168 | $ | 854,123 | ||||||||||||||||||||||||
| Cumulative preferred dividends | $ | (332,226 | ) | $ | - | $ | (332,226 | ) | $ | - | $ | (664,452 | ) | ||||||||||||||||||||||
| Net income (loss) applicable to common shares | $ | (293,086 | ) | $ | 153,758 | $ | (1,348,169 | ) | $ | 1,677,168 | $ | 189,671 | |||||||||||||||||||||||
| Net earnings (loss) per common share - basic | $ | (0.01 | ) | $ | - | $ | (0.04 | ) | $ | 0.05 | $ | 0.01 | |||||||||||||||||||||||
| Weighted average number of common shares outstanding | 32,518,230 | 32,734,394 | 32,821,345 | 33,080,641 | 32,787,673 | ||||||||||||||||||||||||||||||
| Net earnings (loss) per common share - diluted | $ | (0.01 | ) | $ | - | $ | (0.04 | ) | $ | 0.05 | $ | 0.01 | |||||||||||||||||||||||
| Diluted weighted average number of common shares outstanding | 32,518,230 | 33,468,336 | 32,821,345 | 34,115,444 | 33,613,346 | ||||||||||||||||||||||||||||||
Weighted average number of common shares outstanding - diluted |
| 36,487,879 |
| 35,909,933 |
| 36,161,626 |
| 37,325,681 |
| 36,309,047 | |||||||||||||||||||||||||
32
| UNAUDITED | ||||||||||||||||||||
| YEAR ENDED JUNE 30, 2014 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | |||||||||||||||
| Net cash provided by operating activities | $ | 911,824 | $ | 1,743,352 | $ | 2,162,782 | $ | 2,267,442 | $ | 7,085,400 | ||||||||||
| Net cash used in investing activities | $ | (2,089,601 | ) | $ | (2,478,986 | ) | $ | (2,673,060 | ) | $ | (675,805 | ) | $ | (7,917,452 | ) | |||||
| Net cash provided by financing activities | $ | 1,008,677 | $ | 1,578,733 | $ | 432,396 | $ | 903,566 | $ | 3,923,372 | ||||||||||
| Net increase (decrease) in cash and cash equivalents | (169,100 | ) | 843,099 | (77,882 | ) | 2,495,203 | 3,091,320 | |||||||||||||
| �� | ||||||||||||||||||||
| Cash and cash equivalents at beginning of year | 5,981,000 | 5,811,900 | 6,654,999 | 6,577,117 | 5,981,000 | |||||||||||||||
| Cash and cash equivalents at end of year | $ | 5,811,900 | $ | 6,654,999 | $ | 6,577,117 | $ | 9,072,320 | $ | 9,072,320 | ||||||||||
| UNAUDITED | ||||||||||||||||||||
| YEAR ENDED JUNE 30, 2013 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | |||||||||||||||
| Net cash provided by (used in) operating activities | $ | 678,010 | $ | 1,922,175 | $ | (217,437 | ) | $ | 3,656,204 | $ | 6,038,952 | |||||||||
| Net cash used in investing activities | $ | (2,076,915 | ) | $ | (2,515,533 | ) | $ | (1,790,849 | ) | $ | (2,797,540 | ) | $ | (9,180,837 | ) | |||||
| Net cash provided by (used in) financing activities | $ | 1,175,963 | $ | (563,999 | ) | $ | 910,477 | $ | 1,173,799 | $ | 2,696,240 | |||||||||
| Net increase (decrease) in cash and cash equivalents | (222,942 | ) | (1,157,357 | ) | (1,097,809 | ) | 2,032,463 | (445,645 | ) | |||||||||||
| Cash and cash equivalents at beginning of year | 6,426,645 | 6,203,703 | 5,046,346 | 3,948,537 | 6,426,645 | |||||||||||||||
| Cash and cash equivalents at end of year | $ | 6,203,703 | $ | 5,046,346 | $ | 3,948,537 | $ | 5,981,000 | $ | 5,981,000 | ||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, the anticipated financial and operating results of the Company. For this purpose, forward-looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate,” “could,” “should,” “would,” “likely,” “may,” “will,” “plan,” “intend,” “believes,” “expects,” “anticipates,” “projected,” or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. 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 the Company to sell to third party lenders all or a portion of our finance receivables; |
· | the ability of a sufficient number of our customers to utilize third party financing companies under our QuickStart program in order to improve our 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 we experience 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; |
33
· | 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-K speaks only as of the date of this Form 10-K. Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-K or to reflect the occurrence of unanticipated events.
OVERVIEW OF THE COMPANY
USA Technologies, Inc. provides wireless networking, cashless transactions, asset monitoring, and other value-added services principally to the small ticket, unattended retail markets.Point of Sale (“POS”) market. Our ePort®ePort® technology can be installed and/or embedded into everyday devices such as vending machines, a variety of kiosks, amusement & arcade machinesgames, and smartphonescommercial laundry via either our ePort Mobile™hardware or our Quick Connect solution. Our associated service, ePort Connect®Connect®, is a PCI-compliant, comprehensive service that includes simplified credit/debit card processing and support, consumer engagement services as well as telemetry, Internet of Things (“IoT”), and machine-to-machine (“M2M”) services, including the ability to remotely monitor, control and report on the results of distributed assets containing our electronic payment solutions. In addition, the Company provides energy management products, such as its VendingMiser® and CoolerMiser™, which reduce energy consumption in vending machines and coolers.
The Company generates revenue in multiple ways. We derive the majorityDuring fiscal year 2017, we derived approximately 66.4% of our revenues from recurring license and transaction fees related to our ePort Connect service.service and approximately 33.6% of our revenue from equipment sales. Connections to our service stem from the sale or lease of our POS electronic payment devices, or certified payment software, or the servicing of similar third-party installed POS terminals. The majority of ePort Connect customers pay a monthly fee plus a blended transaction rate on the dollar volume processed by the Company. Customers with higher expected transaction rates might pay a lower or no ePort Connect monthly fee, but a higher blended transaction rate on dollar volume processed by the Company. Connections to the ePort Connect service therefore, 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, if available, 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 90 employees with its headquarters in Malvern, Pennsylvania; |
· | Over 12,700 customers and 568,000 connections to our service; |
· | Three direct sales teams at the national, regional, and local customer-level and a growing number of OEMs and national distribution partners; |
· | 73 United States and foreign patents are in force; |
· | The Company’s fiscal year ends June 30th; and |
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· | The Company has traded on the NASDAQ under the symbol “USAT” since 2007. |
The Company also generates equipment revenue throughhas deferred tax assets of approximately $27.7 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 direct salenext five or rental of ePort® technology as well as our stand-alone, non-networked energy management products.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements in conformity withare prepared applying certain critical accounting principles generally accepted in the United States requires management to makepolicies. 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 amounts reportedperiod or in the consolidatedfuture 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 the accompanying notes. Actual results could differ from those estimates.they conform to general practices in our industry. We believe the policies and estimates related to revenue recognition, software development costs, impairment of long-lived assets, goodwill and intangible assets, and investments represent ourapply critical accounting policies consistently from period to period and estimates. Future results may differ from our estimates under different assumptions or conditions.
REVENUE RECOGNITION
Revenue from the sale or QuickStart lease of equipment is recognized on the terms of freight-on-boardfree-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.
ePort hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party leasing company for the devices. The Company utilizes its best estimate of selling price when calculating the revenue to be recorded under these leases. The Quickstart contracts qualify for sales type lease accounting. Accordingly, the Company recognizes a portion of lease payments as interest income. At the end of the lease period, the customer would have the option to purchase the device at its residual value.
LONG LIVED ASSETS
In accordance with the Financial Accounting Standards Board Accounting Standards Codification® (“ASC”) TopicASC 360, “Impairment or Disposal of Long-livedLong-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. In September 2011, the FASB issued ASU No. 2011-08, which amends current guidance to allow the Company to first assess qualitative factors to determine if it is necessary to perform the two-step quantitative impairment test. If after this assessment the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step impairment test are unnecessary. If after this assessment the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, than the Company will perform the first step of the two-step impairment test. The first step screens for potential impairment, while the second step measures the amount of impairment. The Company uses a quantitative method, including a discounted cash flow analysis to complete the first step in this process. We also give consideration to our market capitalization. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date. The Company has concluded there has been no impairment of goodwill as a result of its testing on April 1, 2014, April 1, 2013, and April 1, 2012.
The Company tests indefinite-lived intangible assets for impairment using a two-step process. The first step screens for potential impairment, while the second step measures the amount of impairment. The Company uses a relief from royalty analysis to complete the first step in this process. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date for its indefinite-lived intangible assets. ThereThe Company concluded there was noan impairment of its
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indefinite-lived trademarks as a result of its annual impairment testing in its fiscal year 2016, and recorded a $432 thousand impairment expense recorded duringin the fourth quarter of the fiscal year ended June 30, 2014, 20132016. This impairment expense reduced the carrying value of the trademarks to zero at June 30, 2016. There were no indefinite-lived intangible assets remaining at June 30, 2017.
Patents, non-compete agreements, brand, developed technology and 2012.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the useinability 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.
VALUATION ALLOWANCE
Income taxes are computed using the asset and its eventual disposition is less than its carrying amount. The amountliability method of the impairment loss, if any, is measured as the difference between the net book value ofaccounting. Under the asset and itsliability method, a deferred tax asset or liability is recognized for estimated fair value. Forfuture tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence, it is more likely than not such benefits will be realized. The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general and administrative expenses. No interest or penalties related to uncertain tax positions were incurred during the years ended June 30, 2014, 2013,2017, 2016, and 2012, the Company has concluded there has been no impairment2015.
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RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 20142017 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2013
The following table sets forth our results of operations for the fiscal year ended June 30, 2014 continued to demonstrate growthperiods presented and improvementsas a percentage of our total revenues for those periods. The period-to-period comparison of our historical results is not necessarily indicative of the results that may be expected in the Company’s operations as compared to the fiscal year ended June 30, 2013. Highlights of year over year improvements include:future.
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| Year Ended June 30, |
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($ in thousands, except shares and per share data) |
| 2017 |
| % of Sales |
| 2016 |
| % of Sales |
| Change |
| % Change | |||
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Revenues: |
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License and transaction fees |
| $ | 69,142 |
| 66.4% |
| $ | 56,589 |
| 73.1% |
| $ | 12,553 |
| 22.1% |
Equipment sales |
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| 34,951 |
| 33.6% |
|
| 20,819 |
| 26.9% |
|
| 14,132 |
| 67.9% |
Total revenues |
|
| 104,093 |
| 100.0% |
|
| 77,408 |
| 100.0% |
|
| 26,685 |
| 34.5% |
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Cost of services |
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| 47,053 |
| 68.1% |
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| 38,089 |
| 67.3% |
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| 8,964 |
| 23.5% |
Cost of equipment |
|
| 30,394 |
| 87.0% |
|
| 17,334 |
| 83.3% |
|
| 13,060 |
| 75.3% |
Total cost of sales |
|
| 77,447 |
| 74.4% |
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| 55,423 |
| 71.6% |
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| 22,024 |
| 39.7% |
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Gross profit |
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| 26,646 |
| 25.6% |
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| 21,985 |
| 28.4% |
|
| 4,661 |
| 21.2% |
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Operating expenses: |
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Selling, general and administrative |
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| 25,493 |
| 24.5% |
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| 22,373 |
| 28.9% |
|
| 3,120 |
| 13.9% |
Depreciation and amortization |
|
| 1,018 |
| 1.0% |
|
| 647 |
| 0.8% |
|
| 371 |
| 57.3% |
Impairment of intangible asset |
|
| — |
| 0.0% |
|
| 432 |
| 0.6% |
|
| (432) |
| (100.0%) |
Total operating expenses |
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| 26,511 |
| 25.5% |
|
| 23,452 |
| 30.3% |
|
| 3,059 |
| 13.0% |
Operating income (loss) |
|
| 135 |
| 0.1% |
|
| (1,467) |
| (1.9%) |
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| 1,602 |
| (109.2%) |
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Other income (expense): |
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Interest income |
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| 482 |
| 0.5% |
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| 320 |
| 0.4% |
|
| 162 |
| 50.6% |
Interest expense |
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| (892) |
| (0.9%) |
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| (600) |
| (0.8%) |
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| (292) |
| 48.7% |
Change in fair value of warrant liabilities |
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| (1,490) |
| (1.4%) |
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| (5,674) |
| (7.3%) |
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| 4,184 |
| (73.7%) |
Total other expense, net |
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| (1,900) |
| (1.8%) |
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| (5,954) |
| (7.7%) |
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| 4,054 |
| 68.1% |
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Loss before (provision) benefit for income taxes |
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| (1,765) |
| (1.7%) |
|
| (7,421) |
| (9.6%) |
|
| 5,656 |
| 76.2% |
(Provision) benefit for income taxes |
|
| (87) |
| (0.1%) |
|
| 615 |
| 0.8% |
|
| (702) |
| (114.1%) |
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Net loss |
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| (1,852) |
| (1.8%) |
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| (6,806) |
| (8.8%) |
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| 4,954 |
| 72.8% |
Cumulative preferred dividends |
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| (668) |
| (0.6%) |
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| (668) |
| (0.9%) |
|
| — |
| 0.0% |
Net loss applicable to common shares |
| $ | (2,520) |
| (2.4%) |
| $ | (7,474) |
| (9.7%) |
| $ | 4,954 |
| 66.3% |
Net loss per common share - basic and diluted |
| $ | (0.06) |
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| $ | (0.21) |
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| $ | 0.15 |
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Weighted average number of common shares outstanding - basic and diluted |
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| 39,860,335 |
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| 36,309,047 |
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| 3,551,288 |
| (9.8%) |
Revenue | ||
37
Revenue from license and transaction fees, which represented 84%66.4% of total revenue for fiscal 2014,year 2017, is primarily attributable to monthly ePort Connect® service fees and transaction processing fees. Highlights for fiscal 2014year 2017 include:
· | ||
Adding |
· | As of June 30, |
· | Increases in the number of small-ticket credit/debit transactions and dollars handled for fiscal |
· | ePort Connect customer base grew |
The increase in license and transaction fees was due to the growth in ePort Connect service fees and transaction dollars that stems from the increased number of connections to our ePort Connect service. As of June 30, 2014, the Company had approximately 266,000 connections
Pursuant to theits agreements with customers, in addition to ePort Connect service fees, the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company which is reflected in license and transaction fees revenues. During the fiscal year ended June 30, 2017, the Company processed approximately 414.9 million transactions totaling approximately $803.0 million compared to approximately 214,000 connections315.8 million transactions totaling approximately $584.4 million during the fiscal year ended June 30, 2016, an increase of approximately 31.4% in the number of transactions and approximately 37.4% in the value of transactions processed.
New customers added to the ePortour ePort® Connect service during the fiscal year ended June 30, 2017 totaled 1,650, bringing the total number of customers to approximately 12,700 as of June 30, 2013. During2017. The Company added approximately 1,450 new customers in the year ended June 30, 2014,2016. The Company had approximately 11,050 customers as of June 30, 2016, representing a 14.9% increase during the Company added approximately 52,000 net connections to our network compared to approximately 50,000 net connections added during thefiscal year ended June 30, 2013.2017. The Company views the total installed base of machines managed by its customers that have yet to transition to cashless payment as a key strategic opportunity for future growth in connections. We count a customer as a new customer upon the signing of their ePort Connect service agreement. When a reseller sells our ePort, we count a customer as a new customer upon the signing of the applicable services agreement with the customer.
The $14.1 million increase in equipment sales was primarily attributable to the continued shift to the Quickstart program from the Jumpstart program, including the significant order from an existing customer referred to above.
Cost of sales Cost of sales consisted of cost of services for license and transaction fees of $47.1 million and $38.1 million and equipment costs of $30.4 million and $17.3 million for the fiscal years ended June 30, 2017 and 2016, respectively. The increase in total cost of sales of $22.0 million, or 39.7%, was partially due to an increase in cost of equipment sales of $13.1 million primarily due to selling more units during the period under the QuickStart program. There was also an increase in cost of services of $9.0 million that stemmed from the increase in transaction dollars processed by the greater number of connections to the Company’s ePort Connect service.
Gross Profit Gross profit for the fiscal year ended June 30, 2017 was $26.6 million as compared to gross profit of $22.0 million for the previous fiscal year, an increase of $4.6 million, or 21.2%, of which $3.5 million is attributable to license and transaction fees gross profit and $1.1 million of equipment sales gross profit.
Gross Margin Overall gross margins decreased from 28.4% in the 2016 fiscal year to 25.6% in the fiscal year ended June 30, 2017, composed of a decrease in license and transaction fees’ margin to 31.8% from 32.7% in the prior fiscal year, and a decrease in equipment sales margin from 16.8% in the prior fiscal year to 13.1% in the fiscal year ended June 30,
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2017. The decrease in overall gross margin is attributable to, among other things, reduced fees and/or pricing periodically extended to customers who offer strategic and/or large market opportunities.
Selling, general and administrative Selling, general and administrative (“SG&A”) expenses of $25.5 million for the fiscal year ended June 30, 2017, increased by $3.1 million or 13.9%, from the prior fiscal year. The increase was primarily attributable to a $3.0 million increase in professional services and other operating expenses and a $0.8 million increase in salaries and other compensation-related expenses driven by the general expansion of our business, partially offset by a $0.7 million decrease in Vendscreen acquisition costs.
Total Other Income (Expense) Total Other Income (Expense) for the fiscal year ended June 30, 2017, primarily consisted of a $1.5 million non-cash charge for the change in the fair value of the Company’s warrant liability.
Tax Provision The tax provision for the fiscal year ended June 30, 2017 was $87 thousand, consisting of $600 thousand in federal tax benefits offset by $(687) thousand in changes to permanent tax differences, primarily relating to the change in fair value of warrant liabilities.
Non-GAAP net loss was $166 thousand for the fiscal year ended June 30, 2017 compared to non-GAAP net loss of $713 thousand for fiscal year ended June 30, 2016.
A reconciliation of net loss to non-GAAP net income (loss) for the fiscal years ended June 30, 2017 and 2016 is as follows:
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| Year ended | ||||
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| June 30, |
| June 30, | ||
($ in thousands) |
| 2017 |
| 2016 | ||
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Net loss |
| $ | (1,852) |
| $ | (6,806) |
Non-GAAP adjustments: |
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Non-cash portion of income tax provision |
|
| 54 |
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| (579) |
Fair value of warrant adjustment |
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| 1,490 |
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| 5,674 |
VendScreen non-recurring charges |
|
| 109 |
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| 842 |
Litigation related professional fees |
|
| 33 |
|
| 156 |
Non-recurring costs |
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| — |
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| — |
Non-GAAP net income (loss) |
| $ | (166) |
| $ | (713) |
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Net loss |
| $ | (1,852) |
| $ | (6,806) |
Cumulative preferred dividends |
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| (668) |
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| (668) |
Net loss applicable to common shares |
| $ | (2,520) |
| $ | (7,474) |
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Non-GAAP net loss |
| $ | (166) |
| $ | (713) |
Cumulative preferred dividends |
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| (668) |
|
| (668) |
Non-GAAP net loss applicable to common shares |
| $ | (834) |
| $ | (1,381) |
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Net loss per common share - basic and diluted |
| $ | (0.06) |
| $ | (0.21) |
Non-GAAP net loss per common share - basic and diluted |
| $ | (0.02) |
| $ | (0.04) |
Weighted average number of common shares outstanding - basic and diluted |
|
| 39,860,335 |
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| 36,309,047 |
As used herein, non-GAAP net income (loss) represents GAAP (Generally Accepted Accounting Principles) net income (loss) excluding costs or benefits relating to any adjustment for fair value of warrant liabilities and non-cash portions of the Company’s income tax benefit (provision), non-recurring fees and charges that were incurred in connection with the acquisition and integration of the VendScreen business, and professional fees incurred in connection with the class action litigation and the SLC investigation. Non-GAAP net earnings (loss) per common share is calculated by dividing non-GAAP net income (loss) by the number of 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
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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.
For the fiscal year ended June 30, 2017, the Company had Adjusted EBITDA of $7.1 million compared to Adjusted EBITDA of $6.0 million for the fiscal year ended June 30, 2016. Reconciliation of net loss to Adjusted EBITDA for the fiscal years ended June 30, 2017 and 2016 is as follows:
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| Year ended | ||||
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| June 30, |
| June 30, | ||
($ in thousands) |
| 2017 |
| 2016 | ||
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Net loss |
| $ | (1,852) |
| $ | (6,806) |
Less interest income |
|
| (482) |
|
| (320) |
Plus interest expenses |
|
| 892 |
|
| 600 |
(Less) plus income tax provision |
|
| 87 |
|
| (615) |
Plus depreciation expense |
|
| 5,416 |
|
| 5,135 |
Plus amortization expense |
|
| 175 |
|
| 87 |
EBITDA |
|
| 4,236 |
|
| (1,919) |
Plus change in fair value of warrant liabilities |
|
| 1,490 |
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| 5,674 |
Plus stock-based compensation |
|
| 1,214 |
|
| 849 |
Plus intangible asset impairment |
|
| — |
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| 432 |
Plus VendScreen non-recurring charges |
|
| 109 |
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| 842 |
Plus Litigation related professional fees |
|
| 33 |
|
| 105 |
Adjustments to EBITDA |
|
| 2,846 |
|
| 7,902 |
Adjusted EBITDA |
| $ | 7,082 |
| $ | 5,983 |
As used herein, Adjusted EBITDA represents net loss before interest income, interest expense, income taxes, depreciation, amortization, non-recurring fees and charges that were incurred in connection with the acquisition and integration of the VendScreen business, professional fees incurred in connection with the class action litigation, impairment charges related to our EnergyMiser asset trademarks, and change in fair value of warrant liabilities and stock-based compensation expense. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash gain or charge that is not related to our operations. We have excluded the non-cash expense, stock-based compensation, as it does not reflect our cash-based operations. We have excluded the non-recurring costs and expenses incurred in connection with the VendScreen transaction in order to allow more accurate comparison of the financial results to historical operations. We have excluded the professional fees incurred in connection with the class action litigation as well as the trademark impairment charges because we believe that they represent a charge that is not related to our operations. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. 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 our net income or net loss 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 our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, we utilize Adjusted EBTIDA as a metric in our executive officer and management incentive compensation plans.
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FISCAL YEAR ENDED JUNE 30, 2016 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2015
The following table sets forth our results of operations for the periods presented and as a percentage of our total revenues for those periods. The period-to-period comparison of our historical results is not necessarily indicative of the results that may be expected in the future.
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| Year Ended June 30, |
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($ in thousands, except shares and per share data) |
| 2016 |
| % of Sales |
| 2015 |
| % of Sales |
| Change |
| % Change | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and transaction fees |
| $ | 56,589 |
| 73.1% |
| $ | 43,633 |
| 75.1% |
| $ | 12,956 |
| 29.7% |
Equipment sales |
|
| 20,819 |
| 26.9% |
|
| 14,444 |
| 24.9% |
|
| 6,375 |
| 44.1% |
Total revenues |
|
| 77,408 |
| 100.0% |
|
| 58,077 |
| 100.0% |
|
| 19,331 |
| 33.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
| 38,089 |
| 67.3% |
|
| 29,429 |
| 67.4% |
|
| 8,660 |
| 29.4% |
Cost of equipment |
|
| 17,334 |
| 83.3% |
|
| 11,825 |
| 81.9% |
|
| 5,509 |
| 46.6% |
Total cost of sales |
|
| 55,423 |
| 71.6% |
|
| 41,254 |
| 71.0% |
|
| 14,169 |
| 34.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 21,985 |
| 28.4% |
|
| 16,823 |
| 29.0% |
|
| 5,162 |
| 30.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 22,373 |
| 28.9% |
|
| 16,451 |
| 28.3% |
|
| 5,922 |
| 36.0% |
Depreciation and amortization |
|
| 647 |
| 0.8% |
|
| 612 |
| 1.1% |
|
| 35 |
| 5.7% |
Impairment of intangible asset |
|
| 432 |
| 0.6% |
|
| — |
| 0.0% |
|
| 432 |
| 0.0% |
Total operating expenses |
|
| 23,452 |
| 30.3% |
|
| 17,063 |
| 29.4% |
|
| 6,389 |
| 37.4% |
Operating income (loss) |
|
| (1,467) |
| (1.9%) |
|
| (240) |
| (0.4%) |
|
| (1,227) |
| 511.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 320 |
| 0.4% |
|
| 83 |
| 0.1% |
|
| 237 |
| 285.5% |
Other income |
|
| — |
| 0.0% |
|
| 52 |
| 0.1% |
|
| (52) |
| 0.0% |
Interest expense |
|
| (600) |
| (0.8%) |
|
| (302) |
| (0.5%) |
|
| (298) |
| 98.7% |
Change in fair value of warrant liabilities |
|
| (5,674) |
| (7.3%) |
|
| (393) |
| (0.7%) |
|
| (5,281) |
| 1343.8% |
Total other expense, net |
|
| (5,954) |
| (7.7%) |
|
| (560) |
| (1.0%) |
|
| (5,394) |
| (963.2%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before (provision) benefit for income taxes |
|
| (7,421) |
| (9.6%) |
|
| (800) |
| (1.4%) |
|
| (6,621) |
| (827.6%) |
(Provision) benefit for income taxes |
|
| 615 |
| 0.8% |
|
| (289) |
| (0.5%) |
|
| 904 |
| (312.8%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| (6,806) |
| (8.8%) |
|
| (1,089) |
| (1.9%) |
|
| (5,717) |
| (525.0%) |
Cumulative preferred dividends |
|
| (668) |
| (0.9%) |
|
| (668) |
| (1.2%) |
|
| — |
| 0.0% |
Net loss applicable to common shares |
| $ | (7,474) |
| (9.7%) |
| $ | (1,757) |
| (3.0%) |
| $ | (5,717) |
| (325.4%) |
Net loss per common share - basic and diluted |
| $ | (0.21) |
|
|
| $ | (0.05) |
|
|
| $ | (0.16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding |
|
| 36,309,047 |
|
|
|
| 35,719,211 |
|
|
|
| 589,836 |
| (1.7%) |
Revenues for the fiscal year ended June 30, 2016 were $77.4 million, consisting of $56.6 million of license and transactions fees and $20.8 million of equipment sales, compared to $58.0 million for the fiscal year ended June 30, 2015, consisting of $43.6 million of license and transaction fees and $14.4 million of equipment sales. The increase in total revenue from the prior year of $19.3 million, or 33%, was attributable to the 44% increase in equipment sales of $6.4 million and the 30% the increase in license and transaction fees of $13.0 million. Revenue from license and transaction fees, which represented 73% of total revenue for fiscal year 2016, is primarily attributable to monthly ePort Connect® service fees and transaction processing fees.
Highlights for fiscal year 2016 include:
41
· | Adding 96,000 net connections to our service, consisting of 110,000 new gross connections to our ePort Connect service in fiscal year 2016, offset by 11,000 deactivations from business churn and 3,000 attributable to a former customer against whom we have commenced litigation in order to seek to recover the amounts due to the Company from the former customer. The 96,000 net connections added compares to 67,000 net connections added in fiscal year 2015; |
· | As of June 30, 2016, the Company had approximately 429,000 connections to the ePort Connect service compared to approximately 333,000 connections to the ePort Connect service as of June 30, 2015, an increase of 96,000 net connections or 29%; |
· | Increases in the number of small-ticket, credit/debit transactions and dollars handled for fiscal year 2016 of 46% and 50%, respectively, compared to the same period a year ago; and |
· | ePort Connect customer base grew 15% from June 30, 2015. |
The increase in license and transaction fees was due to the growth in ePort Connect service fees and transaction dollars that stems from the increased number of connections to our ePort Connect service.
Pursuant to its agreements with customers, in addition to ePort Connect service fees, the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company. During the fiscal year ended June 30, 2014,2016, the Company processed approximately 169315.8 million transactions totaling approximately $294$584.4 million compared to approximately 129216.6 million transactions totaling approximately $219$388.9 million during the fiscal year ended June 30, 2013,2015, an increase of approximately 31%46% in the number of transactions and approximately 34%50% in the value of transactions processed.
New customers added to our ePort® Connect service during the fiscal year ended June 30, 20142016 totaled 2,250,1,450, bringing the total number of customers to approximately 7,30011,050 as of June 30, 2014.2016. The Company added approximately 1,7502,300 new customers in the year ended June 30, 2013. By comparison, the2015. The Company had approximately 5,0509,600 customers as of June 30, 2013,2015, representing a 45%15% increase during the past twelve months. The Company views the total installed base of machines managed by its customers that have yet to transition to cashless payment as a key strategic opportunity for future growth in connections. We count a customer as a new customer upon the signing of their ePort Connect service agreement. When a reseller sells our ePort, we count a customer as a new customer upon the signing of the applicable services agreement with the customer.
The $811,028$6.4 million increase in equipment sales was a result of an increase of approximately $1,058,000 related to ePort® products, offset by decreases of approximately $174,000 in Energy Miser products and approximately $73,000 in other products. The $1,058,000 increase in ePort products is directlyprimarily attributable to selling more units, and an increase in activation feesversus renting units via the JumpStart program, during the current fiscal year. The $174,000 decreaseyear due to the reintroduction of the QuickStart program in Energy Miser products is directly attributable to selling fewer units during the current fiscal year.
Cost of salesCost of sales consisted of cost of services for license and transaction fee related costsfees of $23,018,001$38.1 million and $18,219,945$29.4 million and equipment costs of $4,254,127$17.3 million and $3,623,686,$11.8 million for the fiscal years ended June 30, 20142016 and 2013,2015, respectively. The increase in total cost of sales of $5,428,497,$14.2 million, or 25%34%, was partially due to an increase in cost of equipment sales of $5.5 million primarily due to selling more units during the period under the QuickStart program. There was also an increase in cost of services of $4,798,056$8.7 million that stemmed from the increase in transaction dollars processed by the greater number of connections to the Company’s ePort Connect service and increases in transaction dollars processed by those connections. Also, there was an increase in cost of equipment sales of $630,441 due to selling more units during the period.
Gross ProfitGross profit (“GP”) for the fiscal year ended June 30, 20142016 was $15,072,836$22.0 million as compared to GPgross profit of $14,096,613$16.9 million for the previous fiscal year, an increase of $976,223,$5.1 million, or 7%30%, of which $12,620,120$4.3 million is attributable to license and transaction fees GPgross profit and $2,452,716$0.9 million of equipment sales GP.gross profit.
Gross Margin Overall gross profit margins decreaseddeclined from 39%29.0% in the 2015 fiscal year to 36% due to a decrease28.4% in the fiscal year ended June 30, 2016, composed of an increase in license and transaction fees marginsfees’ margin to 35%,32.7% from 39%32.6% in the prior fiscal year, and by a decrease in equipment sales margins to 37%,margin from 39%18.1% in the prior fiscal year. Lower license and transaction fee margins are largely attributableyear to approximately 24,000 deactivations that occurred during16.7% in the fiscal year primarily attributable to one customer as well as the impact of certain new JumpStart connections associated with grace periods under sales incentives. For the new connections associated with the grace periods, the Company incurred costs without receiving the associated monthly service fees.
Selling, general, and administrativeSelling, general and administrative (“SG&A”) expenses of $14,036,016$22.4 million for the fiscal year ended June 30, 2014,2016, increased by $1,967,450$5.9 million or 16%36%, from the prior fiscal year. The overall increase is comprisedSG&A expenses for the 2016 fiscal year reflects the following: $1.6 million of approximately a $1,207,000 increasecosts incurred in employeeconnection with the VendScreen acquisition and director compensation and benefit expenses; $329,000 in professional services, $224,000 increase in sales and marketing expenses; and, smaller, numerous, net increases in several other expenses totaling $207,000. The increase in employee and director compensation and benefits expenses predominantly related to expanding our base of employees, sales commissions and bonuses for record connections added in fiscal 2014integration as well as bonus accruals related to performance-based compensation arrangements.operating expenses of the VendScreen business; bad debt expense of $1.5 million; $0.7 million of professional
42
fees and expenses incurred in connection with management’s annual assessment of internal controls over financial reporting required under SOX 404; and $0.3 million of professional fees incurred in connection with the class action litigation and SLC investigation.
Other Income and ExpenseOther income and expense for the fiscal year ended June 30, 2014,2016, primarily consisted of a reduction of $26.7$5.7 million of the valuation allowance we had on our deferred tax assets as the Company believes that it is more likely than not it will be able to utilize net operating loss carryforwards to offset future taxable earnings. Also included is $65,429 of non-cash gaincharge for the change in the fair value of the Company’s warrant liabilities. The primary factor affecting the change in fair value is the decreaseincrease in the Black-Scholes value of the warrants from June 30, 20132015 to June 30, 2014,2016, which factored in the increase in the Company’s stock price as well as a decrease in its volatility used for this calculation during that period.
Tax Benefit The fiscal year ended June 30, 2014 resulted in net income of $27,530,652 compared to net income of $854,123tax benefit for the fiscal year ended June 30, 2013, an improvement2016 was $615 thousand, consisting of $26,676,529 between fiscal years. Included$2.5 million in federal tax benefits offset by $(1.9) million in changes to permanent tax differences, primarily relating to the change in fair value of warrant liabilities.
Non-GAAP net incomeloss was $713 thousand for the fiscal year ended June 30, 2014 is a benefit from reduction income tax valuation allowances2016 compared to non-GAAP net loss of $26,713,897. After preferred dividends of $664,452$470 thousand for each fiscal year, net income applicable to common shareholders was $26,866,200 and $189,671 for the fiscal years ended 2014 and 2013, respectively. For the fiscal year ended June 30, 2014, net earnings per common share (basic and diluted) were $0.78, compared to net earnings per common share (basic and diluted) of $0.01.
A reconciliation of net income to Non-GAAP net income for the years ended June 30, 20142016 and 20132015 is as follows:
|
|
|
|
|
|
|
|
| Year ended | ||||
|
| June 30, |
| June 30, | ||
($ in thousands) |
| 2016 |
| 2015 | ||
|
|
|
|
|
|
|
Net loss |
| $ | (6,806) |
| $ | (1,089) |
Non-GAAP adjustments: |
|
|
|
|
|
|
Non-cash portion of income tax provision |
|
| (579) |
|
| 226 |
Fair value of warrant adjustment |
|
| 5,674 |
|
| 393 |
VendScreen non-recurring charges |
|
| 842 |
|
| — |
Litigation related professional fees |
|
| 156 |
|
| — |
Non-GAAP net income (loss) |
| $ | (713) |
| $ | (470) |
|
|
|
|
|
|
|
Net loss |
| $ | (6,806) |
| $ | (1,089) |
Cumulative preferred dividends |
|
| (668) |
|
| (668) |
Net loss applicable to common shares |
| $ | (7,474) |
| $ | (1,757) |
|
|
|
|
|
|
|
Non-GAAP net income (loss) |
| $ | (713) |
| $ | (470) |
Cumulative preferred dividends |
|
| (668) |
|
| (668) |
Non-GAAP net income (loss) applicable to common shares |
| $ | (1,381) |
| $ | (1,138) |
|
|
|
|
|
|
|
Net loss per common share - basic and diluted |
| $ | (0.21) |
| $ | (0.05) |
Non-GAAP net loss per common share - basic and diluted |
| $ | (0.04) |
| $ | (0.03) |
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares outstanding |
|
| 36,309,047 |
|
| 35,719,211 |
|
|
|
|
|
|
|
| Year ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Net income | $ | 27,530,652 | $ | 854,123 | ||||
| Non-GAAP adjustments: | ||||||||
| Operating expenses | ||||||||
| Selling, general and administrative: | ||||||||
| Proxy related costs | - | 328,000 | ||||||
| Fair value of warrant adjustment | (65,429 | ) | (267,928 | ) | ||||
| Benefit from reduction of valuation allowances | (26,713,897 | ) | - | |||||
| Non-GAAP net income | $ | 751,326 | $ | 914,195 | ||||
| Net income | $ | 27,530,652 | $ | 854,123 | ||||
| Non-GAAP net income | $ | 751,326 | $ | 914,195 | ||||
| Cumulative preferred dividends | (664,452 | ) | (664,452 | ) | ||||
| Net income applicable to common shares | $ | 26,866,200 | $ | 189,671 | ||||
| Non-GAAP net income applicable to common shares | $ | 86,874 | $ | 249,743 | ||||
| Net earnings per common share - basic | $ | 0.78 | $ | 0.01 | ||||
| Non-GAAP net earnings per common share - basic | $ | - | $ | 0.01 | ||||
| Weighted average number of common shares outstanding - basic | 34,613,497 | 32,787,673 | ||||||
| Net earnings per common share - diluted | $ | 0.78 | $ | 0.01 | ||||
| Non-GAAP net earnings per common share - diluted | $ | - | $ | 0.01 | ||||
| Diluted weighted average number of common shares outstanding | 34,613,497 | 33,613,346 | ||||||
As used herein, non-GAAP net income (loss) represents GAAP (Generally Accepted Accounting Principles) net income (loss) excluding costs or benefits relating to the proxy contest, any adjustment for fair value of warrant liabilities and changes innon-cash portions of the Company’s valuation allowances for taxes. As used herein, non-GAAPincome tax benefit (provision), non-recurring fees and charges that were incurred in connection with the acquisition and integration of the VendScreen business, and professional fees incurred in connection with the class action litigation and the SLC investigation. Non-GAAP net earnings (loss) per common share is calculated by dividing non-GAAP net income applicable to common shares(loss) by the number of weighted average number of shares outstanding, and where diluted shares are required, adds back the preferred dividend since the conversion of preferred shares are accounted for in the diluted share count.
| Year ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Net income | $ | 27,530,652 | $ | 854,123 | ||||
| Less interest income | (30,337 | ) | (57,121 | ) | ||||
| Plus interest expense | 256,844 | 157,205 | ||||||
| Plus income tax expense (benefit) | (27,255,398 | ) | 27,646 | |||||
| Plus depreciation expense | 5,463,985 | 3,837,174 | ||||||
| Plus amortization expense | 21,953 | 742,400 | ||||||
| Plus change in fair value of warrant liabilities | (65,429 | ) | (267,928 | ) | ||||
| Plus stock-based compensation | 529,041 | 502,907 | ||||||
| Adjusted EBITDA | $ | 6,451,311 | $ | 5,796,406 | ||||
43
measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles).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. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for changes in fair value of warrant liabilities and stock-based compensation expense.
| Year ended June 30, | ||||||||
| 2013 | 2012 | |||||||
| Net income (loss) | $ | 854,123 | $ | (5,211,238 | ) | |||
| Non-GAAP adjustments: | ||||||||
| Operating expenses | ||||||||
| Selling, general and administrative: | ||||||||
| Proxy related costs | 328,000 | 2,229,000 | ||||||
| CEO Separation | - | 975,000 | ||||||
| Fair value of warrant adjustment | (267,928 | ) | (1,813,687 | ) | ||||
| Non-GAAP net income (loss) | $ | 914,195 | $ | (3,820,925 | ) | |||
| Net income (loss) | $ | 854,123 | $ | (5,211,238 | ) | |||
| Non-GAAP net income (loss) | $ | 914,195 | $ | (3,820,925 | ) | |||
| Cumulative preferred dividends | (664,452 | ) | (664,452 | ) | ||||
| Net income (loss) applicable to common shares | $ | 189,671 | $ | (5,875,690 | ) | |||
| Non-GAAP net income (loss) applicable to common shares | $ | 249,743 | $ | (4,485,377 | ) | |||
| Net earnings (loss) per common share - basic | $ | 0.01 | $ | (0.18 | ) | |||
| Non-GAAP net earnings (loss) per common share - basic | $ | 0.01 | $ | (0.14 | ) | |||
| Weighted average number of common shares outstanding | 32,787,673 | 32,423,987 | ||||||
| Net earnings (loss) per common share - diluted | $ | 0.01 | $ | (0.18 | ) | |||
| Non-GAAP net earnings (loss) per common share - diluted | $ | 0.01 | $ | (0.14 | ) | |||
| Diluted weighted average number of common shares outstanding | 33,613,346 | 32,423,987 | ||||||
| Year ended June 30, | ||||||||
| 2013 | 2012 | |||||||
| Net income (loss) | $ | 854,123 | $ | (5,211,238 | ) | |||
| Less interest income | (57,121 | ) | (72,059 | ) | ||||
| Plus interest expense | 157,205 | 83,993 | ||||||
| Plus income tax expense | 27,646 | 12,599 | ||||||
| Plus depreciation expense | 3,837,174 | 2,443,054 | ||||||
| Plus amortization expense | 742,400 | 997,900 | ||||||
| Plus (gain)/loss for change in fair value of warrant liabilities | (267,928 | ) | (1,813,687 | ) | ||||
| Plus stock-based compensation | 502,907 | 782,100 | ||||||
| Adjusted EBITDA income (loss) | $ | 5,796,406 | $ | (2,777,338 | ) | |||
| Three months ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Net income (loss) | $ | (38,719 | ) | $ | 1,677,168 | |||
| Non-GAAP adjustments: | ||||||||
| Fair value of warrant adjustment | (53,125 | ) | (1,517,384 | ) | ||||
| Non-GAAP net income (loss) | $ | (91,844 | ) | $ | 159,784 | |||
| Net income (loss) | $ | (38,719 | ) | $ | 1,677,168 | |||
| Non-GAAP net income (loss) | $ | (91,844 | ) | $ | 159,784 | |||
| Cumulative preferred dividends | - | - | ||||||
| Net income (loss) applicable to common shares | $ | (38,719 | ) | $ | 1,677,168 | |||
| Non-GAAP net income (loss) applicable to common shares | $ | (91,844 | ) | $ | 159,784 | |||
| Net earnings (loss) per common share - basic | $ | - | $ | 0.05 | ||||
| Non-GAAP net earnings (loss) per common share - basic | $ | - | $ | - | ||||
| Weighted average number of common shares outstanding - basic | 35,517,099 | 33,080,641 | ||||||
| Net earnings (loss) per common share - diluted | $ | - | $ | 0.05 | ||||
| Non-GAAP net earnings (loss) per common share - diluted | $ | - | $ | - | ||||
| Diluted weighted average number of common shares outstanding | 35,517,099 | 34,115,444 | ||||||
For the quarterfiscal year ended June 30, 2014,2016, the Company had Adjusted EBITDA of $6.0 million as compared to an Adjusted EBITDA of $1,266,225.$6.3 million during the fiscal year ended June 30, 2015. Reconciliation of net income (loss) to Adjusted EBITDA for the quartersfiscal years ended June 30, 20142016 and 20132015 is as follows:
|
|
|
|
|
|
|
|
| For year ended | ||||
|
| June 30, |
| June 30, | ||
($ in thousands) |
| 2016 |
| 2015 | ||
|
|
|
|
|
|
|
Net loss |
| $ | (6,806) |
| $ | (1,089) |
|
|
|
|
|
|
|
Less interest income |
|
| (320) |
|
| (83) |
Plus interest expenses |
|
| 600 |
|
| 302 |
(Less) plus income tax provision |
|
| (615) |
|
| 289 |
Plus depreciation expense |
|
| 5,222 |
|
| 5,731 |
Plus amortization expense |
|
| — |
|
| — |
EBITDA |
|
| (1,919) |
|
| 5,150 |
Less change in fair value of warrant liabilities |
|
| 5,674 |
|
| 393 |
Plus stock-based compensation |
|
| 849 |
|
| 716 |
Plus intangible asset impairment |
|
| 432 |
|
| — |
Plus VendScreen non-recurring charges |
|
| 842 |
|
| — |
Plus Litigation related professional fees |
|
| 105 |
|
| — |
Adjustments to EBITDA |
|
| 7,902 |
|
| 1,109 |
Adjusted EBITDA |
| $ | 5,983 |
| $ | 6,259 |
| Three months ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Net income (loss) | $ | (38,719 | ) | $ | 1,677,168 | |||
| Less interest income | (8,995 | ) | (4,212 | ) | ||||
| Plus interest expense | 74,529 | 47,804 | ||||||
| Plus income tax expense (benefit) | (541,501 | ) | 6,911 | |||||
| Plus depreciation expense | 1,553,875 | 1,094,978 | ||||||
| Plus amortization expense | - | 185,600 | ||||||
| Plus change in fair value of warrant liabilities | (53,125 | ) | (1,517,384 | ) | ||||
| Plus stock-based compensation | 280,161 | 133,674 | ||||||
| Adjusted EBITDA | $ | 1,266,225 | $ | 1,624,539 | ||||
As used herein, Adjusted EBITDA represents net income (loss)loss before interest income, interest expense, income taxes, depreciation, amortization, non-recurring fees and charges that were incurred in connection with the acquisition and integration of the VendScreen business, professional fees incurred in connection with the class action litigation, impairment charges related to our EnergyMiser asset trademarks, and change in fair value of warrant liabilities and stock-based compensation expense. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash gain (charge)or charge that is not related to the Company’sour operations. We have excluded the non-cash expenses,expense, stock-based compensation, as it does not reflect our cash-based operations. We have excluded the cash-based operationsnon-recurring costs and expenses incurred in connection with the VendScreen transaction in order to allow more accurate comparison of the Company.financial results to historical operations. We have excluded the professional fees incurred in connection with the class action litigation as well as the trademark impairment charges because we believe that they represent a charge that is not related to our operations. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. 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 theour net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations
44
in that they do not reflect all of the items associated with the Company’sour net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’sour profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performanceperformance. Additionally, we utilize Adjusted EBITDA as a metric in our executive officer and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for changes in fair value of warrant liabilities and stock-basedmanagement incentive compensation expense.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations primarily through cash from operating activities, borrowings under our bank line of credit, along with equity issuances. Our principal source of liquidity is cash totaling $12.7 million and $19.3 million as of June 30, 2017 and June 30, 2016, respectively. On July 25, 2017, the Company closed its underwritten public offering resulting in gross proceeds, before deducting underwriting discounts and commissions and other offering expenses of approximately $43.1 million. The Company intends to use the net proceeds received from the offering for general corporate purposes and working capital to support anticipated growth. These purposes may include, among other things, future acquisitions of businesses, products and technologies, or establishing strategic alliances that the Company believes will complement its current or future business.
Operating Activities
For the year ended June 30, 2014,2017, net cash provided byused in operating activities was $7,085,400 as$6.8 million. The foregoing reflects a result of net income of $27,530,652, non-cash net benefit for non-cash operating activities of $21,220,722$8.5 million, and net cash providedused by the change in various operating assets and liabilities of $775,470.$13.4 million which includes an increase in finance receivables of $12.1 million attributable to QuickStart sales which as of June 30, 2017 were financed by the Company. Of the $21,220,722$8.5 million of non-cash activities, the most significant during fiscal year 2014 was the benefit for income taxes$5.6 million related to depreciation and amortization expense, of $27,301,266.which $4.5 million related to depreciation on JumpStart equipment allocated to cost of services. In addition to the benefit for income taxes, there was a small benefit relateddepreciation expense, other major non-cash charges included $1.2 million of stock compensation expense and $1.5 million expense due to the decreaseincrease in the fair value of warrant liabilities, offset by charges related to depreciation and amortization of assets, and the vesting and issuance of common stock for employee and director compensation. The cash used in the $775,470 change in the Company’s operating assets and liabilities was the result of decreases in inventory and finance receivables and increases in liabilities offset by increases in accounts receivable and prepaid expenses and other assets.
During the year ended June 30, 2014, the Company used $7,917,452 in investing activities of which $10,883,473 related to the purchase of equipment for the JumpStart Program, including approximately $869,000 for the change in JumpStart equipment on hand in the fiscal year ended June 30, 20142015, the Company reintroduced QuickStart, a program whereby our customers are able to purchase our ePort hardware via a five-year, non-cancellable lease. Under the QuickStart program, we sell the equipment to customers and $2,995,095 relatedcreate 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 leases directly with the finance companies as part of our QuickStart program. The Company invoices the finance company for the equipment leased by our customer, and records an accounts receivable for the balances due from the finance companies, and typically receives full payment within 30 days. Prior to the proceeds receivedreintroduction of QuickStart, the Company had previously financed its customer’s acquisition of ePort equipment primarily though 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. Customers who utilize third party finance companies with the QuickStart program improve our cash flow from operations, and our QuickStart program reduces cash flow needed for investing activities otherwise incurred by us for our JumpStart program.
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 under the sale-leaseback transactions. ApproximatelyJumpStart program which accounted for 60% of our gross new connections addedin fiscal year 2014, to QuickStart and sales under normal trade receivable items which accounted for 93% and 91% of our gross connections in fiscal year 2017 and 2016, respectively. JumpSart was 7% of gross connections during the 2017 fiscal year and 9% of our gross connections during the 2016 fiscal year.
We are seeking to expand our outside financing partners in order to accommodate expected growth.
Investing Activities
During the fiscal year ended June 30, 2014 were from our2017, $3.7 million of cash was used by investing activities of which $2.3 million was cash paid for JumpStart program.rental equipment and $1.7 million paid for the purchase of property and equipment.
Financing Activities
45
Net cash of $3,923,372 throughprovided by financing activities $2,000,000 of which arewas $3.9 million, generated predominantly by $6.2 million from the Line of Credit, cash proceeds of $2,361,956 from warrant exercises, and $24,847 from excess tax benefits from share-based compensation, offset by $374,411 related to repayment of debt and $89,020 related to cancellationexercise of common stock warrants partially offset by our executive officers to satisfy income tax liability due$2.0 million in connection with common stock awards.
Sources of Cash
During the year ended June 30, 20132017 and net income continuing through the year ended June 30, 2014. Based upon earnings performance that the Company has achieved currently and in the recent past along with its belief that such performance will continue into future2016 fiscal years, the Company, during the 2014 fiscal year, has determined that it is more likely than not that a substantial portion of its deferred tax assets will be realizedCompany’s net (decrease) increase in cash was $(6.5) million and has reduced $26,713,897 of its valuation allowances recorded in prior periods. Our accumulated deficit through June 30, 2014 is composed of cumulative losses amounting to approximately $170,770,000, preferred dividends converted to common stock of approximately $2,690,000, and charges incurred for the open-market purchases of preferred stock of approximately $150,000.
Therefore, the Company believes its existing cash and cash equivalents and available cash resources as of June 30, 2014,described above would provide sufficient funds through at least July 1, 2015 in order to meet its cash requirements, including payment of its accrued expenses and payables, any cashcapital resources to be utilized foroperate its anticipated business over the JumpStart program, other anticipated capital expenditures, and the repayment of long-term debt.
CONTRACTUAL OBLIGATIONS
As of June 30, 2014,2017, the Company had certain contractual obligations due over a period of time as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments Due by Fiscal Year | |||||||||||||
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Contractual Obligations |
| Total |
| 2018 |
| 2019-2020 |
| 2021-2022 |
| 2023 and Beyond | |||||
Long-Term Debt Obligations |
| $ | 1,226 |
| $ | 411 |
| $ | 815 |
| $ | — |
| $ | — |
Capital Lease Obligations |
|
| 3,263 |
|
| 2,996 |
|
| 238 |
|
| 29 |
|
| — |
Operating Lease Obligations |
|
| 3,396 |
|
| 628 |
|
| 1,144 |
|
| 939 |
|
| 685 |
Total Contractual Obligations |
| $ | 7,885 |
| $ | 4,035 |
| $ | 2,197 |
| $ | 968 |
| $ | 685 |
| Payments due by period | ||||||||||||||||||||
| Less Than | More than | |||||||||||||||||||
| Contractual Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
| Long-Term Debt Obligations | $ | 8,452 | $ | 8,452 | $ | - | $ | - | $ | - | ||||||||||
| Capital Lease Obligations | 486,271 | 198,416 | 264,493 | 23,362 | - | |||||||||||||||
| Operating Lease Obligations, other | 798,315 | 435,578 | 362,737 | - | - | |||||||||||||||
| Operating Lease Obligations under Sale Leaseback | 2,965,143 | 988,381 | 1,976,762 | - | - | |||||||||||||||
| Purchase Obligations | - | - | - | - | - | |||||||||||||||
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP | - | - | - | - | - | |||||||||||||||
| Total | $ | 4,258,181 | $ | 1,630,827 | $ | 2,603,992 | $ | 23,362 | $ | - | ||||||||||
The Company’s exposure to market risks for interest rate changes is not significant. Interest rates on its long-term debt are generally fixed and its investments in cash equivalents are not significant.fixed. The Company has no exposure to market risks related to Available-for-saleavailable-for-sale securities. Market risks related to fluctuations of foreign currencies are not significant and the Company has no derivative instruments.
46
Item 8.8. Financial Statements and Supplementary Data.
USA TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements: | |
F-1 | |
F-2 | |
F-4 | |
F-5 | |
F-6 | |
F-7 | |
F-8 |
47
To the Board of Directors and Shareholders
USA Technologies, Inc.
We have audited the accompanying consolidated balance sheets of USA Technologies, Inc. and subsidiaries as of June 30, 20142017 and 2013,2016, and the related consolidated statements of operations, shareholders’shareholders' equity and cash flows for each of the three years in the period ended June 30, 2014.2017. Our audits also included the financial statement schedule of USA Technologies, Inc. and subsidiaries listed in Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presentspresent fairly, in all material respects, the financial position of USA Technologies, Inc. and subsidiaries as of June 30, 20142017 and 2013,2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2014,2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presentspresent fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), USA Technologies, Inc. and subsidiaries’ internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 and our report dated August 22, 2017 expressed an unqualified opinion on the effectiveness of USA Technologies, Inc. and subsidiaries’ internal control over financial reporting.
/s/ RSM US LLP
Blue Bell, Pennsylvania
August 22, 2017
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
USA Technologies, Inc.
We have audited USA Technologies, Inc. and subsidiaries' internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. USA Technologies, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, USA Technologies, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
F-2
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of USA Technologies, Inc. and subsidiaries as of June 30, 2017 and 2016, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2017 and our report dated August 22, 2017 expressed an unqualified opinion.
/s/ RSM US LLP
Blue Bell, Pennsylvania
August 22, 2017
F-3
USA Technologies, Inc.
|
|
|
|
|
|
|
|
| June 30, |
| June 30, | ||
($ in thousands, except shares) |
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 12,745 |
| $ | 19,272 |
Accounts receivable, less allowance for doubtful accounts of $3,149 and $2,814, respectively |
|
| 7,193 |
|
| 4,899 |
Finance receivables, less allowance for doubtful accounts of $19 and $0, respectively |
|
| 11,010 |
|
| 3,588 |
Inventory |
|
| 4,586 |
|
| 2,031 |
Prepaid expenses and other current assets |
|
| 968 |
|
| 987 |
Total current assets |
|
| 36,502 |
|
| 30,777 |
|
|
|
|
|
|
|
Finance receivables, less current portion |
|
| 8,607 |
|
| 3,718 |
Other assets |
|
| 687 |
|
| 348 |
Property and equipment, net |
|
| 12,111 |
|
| 9,765 |
Deferred income taxes |
|
| 27,670 |
|
| 27,724 |
Intangibles, net |
|
| 622 |
|
| 798 |
Goodwill |
|
| 11,492 |
|
| 11,703 |
|
|
|
|
|
|
|
Total assets |
| $ | 97,691 |
| $ | 84,833 |
|
|
|
|
|
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
| $ | 16,054 |
| $ | 12,354 |
Accrued expenses |
|
| 4,130 |
|
| 3,458 |
Line of credit, net |
|
| 7,036 |
|
| 7,119 |
Capital lease obligations and current obligations under long-term debt |
|
| 3,230 |
|
| 629 |
Income taxes payable |
|
| 10 |
|
| 18 |
Warrant liabilities |
|
| — |
|
| 3,739 |
Deferred gain from sale-leaseback transactions |
|
| 239 |
|
| 860 |
Total current liabilities |
|
| 30,699 |
|
| 28,177 |
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
Capital lease obligations and long-term debt, less current portion |
|
| 1,061 |
|
| 1,576 |
Accrued expenses, less current portion |
|
| 53 |
|
| 15 |
Deferred gain from sale-leaseback transactions, less current portion |
|
| 100 |
|
| 40 |
Total long-term liabilities |
|
| 1,214 |
|
| 1,631 |
|
|
|
|
|
|
|
Total liabilities |
| $ | 31,913 |
| $ | 29,808 |
|
|
|
|
|
|
|
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
Preferred stock, no par value, 1,800,000 shares authorized, no shares issued |
|
| — |
|
| — |
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $18,775 and $18,108 at June 30, 2017 and 2016, respectively |
|
| 3,138 |
|
| 3,138 |
Common stock, no par value, 640,000,000 shares authorized, 40,331,645 and 37,783,444 shares issued and outstanding at June 30, 2017 and 2016, respectively |
|
| 245,999 |
|
| 233,394 |
Accumulated deficit |
|
| (183,359) |
|
| (181,507) |
Total shareholders’ equity |
|
| 65,778 |
|
| 55,025 |
Total liabilities and shareholders’ equity |
| $ | 97,691 |
| $ | 84,833 |
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 9,072,320 | $ | 5,981,000 | ||||
Accounts receivable, less allowance for uncollectible accounts of $63,000 and $18,000, respectively | 2,683,579 | 2,620,684 | ||||||
| Finance receivables | 119,793 | 116,444 | ||||||
| Inventory | 1,486,777 | 1,823,615 | ||||||
| Prepaid expenses and other current assets | 363,367 | 184,336 | ||||||
| Deferred income taxes | 907,691 | - | ||||||
| Total current assets | 14,633,527 | 10,726,079 | ||||||
| Finance receivables, less current portion | 352,794 | 408,674 | ||||||
| Other assets | 190,703 | 84,117 | ||||||
| Property and equipment, net | 21,138,580 | 17,240,065 | ||||||
| Deferred income taxes | 26,353,330 | - | ||||||
| Intangibles, net | 432,100 | 454,053 | ||||||
| Goodwill | 7,663,208 | 7,663,208 | ||||||
| Total assets | $ | 70,764,242 | $ | 36,576,196 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 7,753,911 | $ | 7,301,247 | ||||
| Accrued expenses | 1,915,799 | 1,468,184 | ||||||
| Line of credit | 5,000,000 | 3,000,000 | ||||||
| Current obligations under long-term debt | 172,911 | 247,152 | ||||||
| Income taxes payable | 21,021 | - | ||||||
| Deferred gain from sale-leaseback transactions | 380,895 | - | ||||||
| Total current liabilities | 15,244,537 | 12,016,583 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt, less current portion | 249,865 | 122,754 | ||||||
| Accrued expenses, less current portion | 186,174 | 366,785 | ||||||
| Deferred tax liabilities | - | 40,245 | ||||||
| Warrant liabilities | 585,209 | 650,638 | ||||||
| Deferred gain from sale-leaseback transactions, less current portion | 761,790 | - | ||||||
| Total long-term liabilities | 1,783,038 | 1,180,422 | ||||||
| Total liabilities | 17,027,575 | 13,197,005 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, no par value: | ||||||||
Authorized shares- 1,800,000 Series A convertible preferred- Authorized shares- 900,000 Issued and outstanding shares- 442,968 (liquidation preference of $16,690,456 and $16,026,004, respectively) | 3,138,056 | 3,138,056 | ||||||
Common stock, no par value: Authorized shares- 640,000,000 Issued and outstanding shares- 35,514,685 and 33,284,232, respectively | 224,210,197 | 221,383,373 | ||||||
| Accumulated deficit | (173,611,586 | ) | (201,142,238 | ) | ||||
| Total shareholders’ equity | 53,736,667 | 23,379,191 | ||||||
| Total liabilities and shareholders’ equity | $ | 70,764,242 | $ | 36,576,196 | ||||
See accompanying notes.
F-4
USA Technologies, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
| Year ended June 30, | |||||||
($ in thousands, except shares and per share data) |
| 2017 |
| 2016 |
| 2015 | |||
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
License and transaction fees |
| $ | 69,142 |
| $ | 56,589 |
| $ | 43,633 |
Equipment sales |
|
| 34,951 |
|
| 20,819 |
|
| 14,444 |
Total revenues |
|
| 104,093 |
|
| 77,408 |
|
| 58,077 |
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
| 47,053 |
|
| 38,089 |
|
| 29,429 |
Cost of equipment |
|
| 30,394 |
|
| 17,334 |
|
| 11,825 |
Total cost of sales |
|
| 77,447 |
|
| 55,423 |
|
| 41,254 |
Gross profit |
|
| 26,646 |
|
| 21,985 |
|
| 16,823 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 25,493 |
|
| 22,373 |
|
| 16,451 |
Depreciation and amortization |
|
| 1,018 |
|
| 647 |
|
| 612 |
Impairment of intangible asset |
|
| — |
|
| 432 |
|
| — |
Total operating expenses |
|
| 26,511 |
|
| 23,452 |
|
| 17,063 |
Operating income (loss) |
|
| 135 |
|
| (1,467) |
|
| (240) |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
Interest income |
|
| 482 |
|
| 320 |
|
| 83 |
Other income |
|
| — |
|
| — |
|
| 52 |
Interest expense |
|
| (892) |
|
| (600) |
|
| (302) |
Change in fair value of warrant liabilities |
|
| (1,490) |
|
| (5,674) |
|
| (393) |
Total other expense, net |
|
| (1,900) |
|
| (5,954) |
|
| (560) |
|
|
|
|
|
|
|
|
|
|
Loss before (provision) benefit for income taxes |
|
| (1,765) |
|
| (7,421) |
|
| (800) |
(Provision) benefit for income taxes |
|
| (87) |
|
| 615 |
|
| (289) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| (1,852) |
|
| (6,806) |
|
| (1,089) |
Cumulative preferred dividends |
|
| (668) |
|
| (668) |
|
| (668) |
Net loss applicable to common shares |
| $ | (2,520) |
| $ | (7,474) |
| $ | (1,757) |
Net loss per common share - basic and diluted |
|
| (0.06) |
|
| (0.21) |
|
| (0.05) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic and diluted |
|
| 39,860,335 |
|
| 36,309,047 |
|
| 35,719,211 |
| Year ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Revenues: | ||||||||||||
| License and transaction fees | $ | 35,638,121 | $ | 30,044,429 | $ | 23,370,754 | ||||||
| Equipment sales | 6,706,843 | 5,895,815 | 5,646,489 | |||||||||
| Total revenues | 42,344,964 | 35,940,244 | 29,017,243 | |||||||||
| Cost of services | 23,018,001 | 18,219,945 | 15,312,966 | |||||||||
| Cost of equipment | 4,254,127 | 3,623,686 | 3,743,226 | |||||||||
| Gross profit | 15,072,836 | 14,096,613 | 9,961,051 | |||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | 14,036,016 | 12,068,566 | 15,460,668 | |||||||||
| Depreciation and amortization | 600,488 | 1,314,122 | 1,500,775 | |||||||||
| Total operating expenses | 14,636,504 | 13,382,688 | 16,961,443 | |||||||||
| Operating income (loss) | 436,332 | 713,925 | (7,000,392 | ) | ||||||||
| Other income (expense): | ||||||||||||
| Interest income | 30,337 | 57,121 | 72,059 | |||||||||
| Interest expense | (256,844 | ) | (157,205 | ) | (83,993 | ) | ||||||
| Change in fair value of warrant liabilities | 65,429 | 267,928 | 1,813,687 | |||||||||
| Total other income (expense), net | (161,078 | ) | 167,844 | 1,801,753 | ||||||||
| Income (loss) before benefit (provision) for income taxes | 275,254 | 881,769 | (5,198,639 | ) | ||||||||
| Benefit (provision) for income taxes | 27,255,398 | (27,646 | ) | (12,599 | ) | |||||||
| Net income (loss) | 27,530,652 | 854,123 | (5,211,238 | ) | ||||||||
| Cumulative preferred dividends | (664,452 | ) | (664,452 | ) | (664,452 | ) | ||||||
| Net income (loss) applicable to common shares | $ | 26,866,200 | $ | 189,671 | $ | (5,875,690 | ) | |||||
| Net earnings (loss) per common share - basic | $ | 0.78 | $ | 0.01 | $ | (0.18 | ) | |||||
| Weighted average number of common shares outstanding | 34,613,497 | 32,787,673 | 32,423,987 | |||||||||
| Net earnings (loss) per common share - diluted | $ | 0.78 | $ | 0.01 | $ | (0.18 | ) | |||||
| Diluted weighted average number of common shares outstanding | 34,613,497 | 33,613,346 | 32,423,987 | |||||||||
See accompanying notes.
F-5
USA Technologies, Inc.
Consolidated Statements of Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Series A |
|
|
|
|
|
|
|
|
|
|
| |||
|
| Convertible |
|
|
|
|
|
|
|
|
|
|
| |||
|
| Preferred Stock |
| Common Stock |
| Accumulated |
|
|
| |||||||
($ in thousands, except shares) |
| Shares |
| Amount |
| Shares |
| Amount |
| Deficit |
| Total | ||||
Balance, June 30, 2014 |
| 445,063 |
| $ | 3,138 |
| 35,602,123 |
| $ | 224,210 |
| $ | (173,612) |
| $ | 53,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
| — |
|
| — |
| 193,439 |
|
| 716 |
|
| — |
|
| 716 |
Retirement of common stock |
| — |
|
| — |
| (31,899) |
|
| (62) |
|
| — |
|
| (62) |
Excess tax benefits from share-based compensation |
| — |
|
| — |
| — |
|
| 10 |
|
| — |
|
| 10 |
Net loss |
| — |
|
| — |
| — |
|
| — |
|
| (1,089) |
|
| (1,089) |
Balance, June 30, 2015 |
| 445,063 |
| $ | 3,138 |
| 35,763,663 |
| $ | 224,874 |
| $ | (174,701) |
| $ | 53,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in conjunction with Line of Credit Agreement |
| — |
|
| — |
| — |
|
| 52 |
|
| — |
|
| 52 |
Fair value of exercised warrant liability |
|
|
|
|
|
| — |
|
| 2,914 |
|
|
|
|
| 2,914 |
Exercise of warrants |
| — |
|
| — |
| 1,887,325 |
|
| 4,918 |
|
| — |
|
| 4,918 |
Stock based compensation |
| — |
|
| — |
| 184,992 |
|
| 849 |
|
| — |
|
| 849 |
Retirement of common stock |
| — |
|
| — |
| (52,536) |
|
| (213) |
|
| — |
|
| (213) |
Net loss |
| — |
|
| — |
| — |
|
| — |
|
| (6,806) |
|
| (6,806) |
Balance, June 30, 2016 |
| 445,063 |
| $ | 3,138 |
| 37,783,444 |
|
| 233,394 |
| $ | (181,507) |
|
| 55,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of exercised warrant liability |
| — |
|
| — |
| — |
|
| 5,229 |
|
| — |
|
| 5,229 |
Exercise of warrants |
| — |
|
| — |
| 2,401,408 |
|
| 6,193 |
|
| — |
|
| 6,193 |
Stock based compensation |
| — |
|
| — |
| 153,326 |
|
| 1,214 |
|
| — |
|
| 1,214 |
Retirement of common stock |
| — |
|
| — |
| (6,533) |
|
| (31) |
|
| — |
|
| (31) |
Net loss |
| — |
|
| — |
| — |
|
| — |
|
| (1,852) |
|
| (1,852) |
Balance, June 30, 2017 |
| 445,063 |
| $ | 3,138 |
| 40,331,645 |
| $ | 245,999 |
| $ | (183,359) |
| $ | 65,778 |
| Series A | ||||||||||||||||||||||||
| Convertible | ||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Deficit | Total | |||||||||||||||||||
| Balance, June 30, 2011 | 442,968 | $ | 3,138,056 | 32,281,140 | $ | 219,772,598 | (196,785,123 | ) | $ | 26,125,531 | ||||||||||||||
Exercise of 4,550 warrants at $2.20 resulting in issuance of common stock | - | - | 4,550 | 10,010 | - | 10,010 | ||||||||||||||||||
Cashless exercise of 2,767 warrants resulting in issuance of common stock | - | - | 990 | - | - | - | ||||||||||||||||||
Issuance of fully-vested shares of common stock to employees and directors and vesting of shares under the 2010 Stock Incentive Plan | - | - | 120,472 | 248,851 | - | 248,851 | ||||||||||||||||||
Issuance of fully-vested shares of common stock to employees and directors and vesting of shares under the 2011 Stock Incentive Plan | - | - | 141,666 | 335,636 | - | 335,636 | ||||||||||||||||||
Vesting of shares under the 2012 Stock Incentive Plan | - | - | - | 197,613 | - | 197,613 | ||||||||||||||||||
| Retirement of common stock | - | - | (38,749 | ) | (51,381 | ) | - | (51,381 | ) | |||||||||||||||
| Net loss | - | - | - | - | (5,211,238 | ) | (5,211,238 | ) | ||||||||||||||||
| Balance, June 30, 2012 | 442,968 | 3,138,056 | 32,510,069 | 220,513,327 | (201,996,361 | ) | 21,655,022 | |||||||||||||||||
Exercise of 382,503 warrants at $1.13 resulting in issuance of common stock | - | - | 382,503 | 432,229 | - | 432,229 | ||||||||||||||||||
Cashless exercise of 36,186 warrants resulting in issuance of common stock | - | - | 17,094 | - | - | - | ||||||||||||||||||
Warrants issued in conjunction with Line of Credit Amendment | - | - | - | 55,962 | - | 55,962 | ||||||||||||||||||
Issuance of fully-vested shares of common stock to employees and directors and vesting of shares under the 2010 Stock Incentive Plan | - | - | 62,942 | 68,723 | - | 68,723 | ||||||||||||||||||
Issuance of fully-vested shares of common stock to employees and directors and vesting of shares under the 2011 Stock Incentive Plan | - | - | 96,665 | 157,645 | - | 157,645 | ||||||||||||||||||
Issuance of fully-vested shares of common stock to employees and directors and vesting of shares under the 2012 Stock Incentive Plan | - | - | 279,806 | 276,539 | - | 276,539 | ||||||||||||||||||
| Retirement of common stock | - | - | (64,847 | ) | (121,052 | ) | - | (121,052 | ) | |||||||||||||||
| Net Income | - | - | - | - | 854,123 | 854,123 | ||||||||||||||||||
| Balance, June 30, 2013 | 442,968 | $ | 3,138,056 | 33,284,232 | $ | 221,383,373 | $ | (201,142,238 | ) | $ | 23,379,191 |
See accompanying notes.
F-6
| Series A | ||||||||||||||||||||||||
| Convertible | ||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Deficit | Total | |||||||||||||||||||
Exercise of 2,090,226 warrants at $1.13 resulting in issuance of common stock | - | - | 2,090,226 | 2,361,956 | - | 2,361,956 | ||||||||||||||||||
Issuance of fully-vested shares of common stock to employees and directors and vesting of shares under the 2010 Stock Incentive Plan | - | - | 6,668 | 6,024 | - | 6,024 | ||||||||||||||||||
Issuance of fully-vested shares of common stock to employees and directors and vesting of shares under the 2011 Stock Incentive Plan | - | - | 51,667 | 17,366 | - | 17,366 | ||||||||||||||||||
Issuance of fully-vested shares of common stock to employees and directors and vesting of shares under the 2012 Stock Incentive Plan | - | - | 131,203 | 505,651 | - | 505,651 | ||||||||||||||||||
| Retirement of common stock | - | - | (49,311 | ) | (89,020 | ) | - | (89,020 | ) | |||||||||||||||
Excess tax benefits from share-based compensation | - | - | - | 24,847 | - | 24,847 | ||||||||||||||||||
| Net Income | - | - | - | - | 27,530,652 | 27,530,652 | ||||||||||||||||||
| Balance, June 30, 2014 | 442,968 | $ | 3,138,056 | 35,514,685 | $ | 224,210,197 | $ | (173,611,586 | ) | $ | 53,736,667 | |||||||||||||
Consolidated Statements of Cash Flows
|
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|
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|
|
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|
|
($ in thousands) |
| Year ended June 30, | |||||||
|
| 2017 |
| 2016 |
| 2015 | |||
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (1,852) |
| $ | (6,806) |
| $ | (1,089) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation |
|
| 1,214 |
|
| 849 |
|
| 716 |
(Gain) loss on disposal of property and equipment |
|
| (177) |
|
| (167) |
|
| (17) |
Non-cash interest and amortization of debt discount |
|
| 113 |
|
| 13 |
|
| — |
Bad debt expense |
|
| 764 |
|
| 1,450 |
|
| 1,098 |
Depreciation and amortization |
|
| 5,591 |
|
| 5,222 |
|
| 5,731 |
Impairment of intangible asset |
|
| — |
|
| 432 |
|
| — |
Change in fair value of warrant liabilities |
|
| 1,490 |
|
| 5,674 |
|
| 393 |
Deferred income taxes, net |
|
| 54 |
|
| (660) |
|
| 215 |
Gain on sale of finance receivables |
|
| — |
|
| — |
|
| (52) |
Recognition of deferred gain from sale-leaseback transactions |
|
| (560) |
|
| (860) |
|
| (834) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (2,988) |
|
| (375) |
|
| (2,539) |
Finance receivables |
|
| (12,119) |
|
| (2,040) |
|
| (4,114) |
Inventory |
|
| (2,399) |
|
| 1,036 |
|
| (1,931) |
Prepaid expenses and other current assets |
|
| (304) |
|
| (763) |
|
| (304) |
Accounts payable and accrued expenses |
|
| 4,410 |
|
| 3,080 |
|
| 996 |
Income taxes payable |
|
| (8) |
|
| 383 |
|
| 33 |
Net cash (used in) provided by operating activities |
|
| (6,771) |
|
| 6,468 |
|
| (1,698) |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment, including rentals |
|
| (4,041) |
|
| (536) |
|
| (1,702) |
Proceeds from sale of rental equipment under sale-leaseback transactions |
|
| — |
|
| — |
|
| 4,994 |
Proceeds from sale of property and equipment |
|
| 348 |
|
| 389 |
|
| 62 |
Cash paid for assets acquired from VendScreen |
|
| — |
|
| (5,625) |
|
| — |
Net cash (used in) provided by investing activities |
|
| (3,693) |
|
| (5,772) |
|
| 3,354 |
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Cash used in retirement of common stock |
|
| (31) |
|
| (213) |
|
| (62) |
Proceeds from exercise of common stock warrants |
|
| 6,193 |
|
| 4,918 |
|
| — |
Deferred financing costs |
|
| (90) |
|
| — |
|
| — |
Proceeds from line of credit |
|
| — |
|
| 7,163 |
|
| (1,000) |
Repayment of line of credit |
|
| (106) |
|
| (3,992) |
|
|
|
Repayment of capital lease obligations and long-term debt |
|
| (2,029) |
|
| (674) |
|
| (359) |
Proceeds from long-term debt |
|
| — |
|
| — |
|
| 2,057 |
Excess tax benefits from share-based compensation |
|
| — |
|
| — |
|
| 10 |
Net cash provided by financing activities |
|
| 3,937 |
|
| 7,202 |
|
| 646 |
Net (decrease) increase in cash and cash equivalents |
|
| (6,527) |
|
| 7,898 |
|
| 2,302 |
Cash and cash equivalents at beginning of year |
|
| 19,272 |
|
| 11,374 |
|
| 9,072 |
Cash and cash equivalents at end of year |
| $ | 12,745 |
| $ | 19,272 |
| $ | 11,374 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
Interest paid in cash |
| $ | 735 |
| $ | 551 |
| $ | 306 |
Income taxes paid in cash (refund), net |
| $ | (335) |
| $ | 501 |
| $ | 31 |
Supplemental disclosures of noncash financing and investing activities: |
|
|
|
|
|
|
|
|
|
Reclass of rental program property to inventory, net |
| $ | 156 |
| $ | 1,150 |
| $ | 674 |
Prepaid items financed with debt |
| $ | 54 |
| $ | 103 |
| $ | 103 |
Equipment and software acquired under capital lease |
| $ | 4,065 |
| $ | 444 |
| $ | 108 |
Disposal of property and equipment under sale-leaseback transactions |
| $ | — |
| $ | — |
| $ | 3,873 |
| Year ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| OPERATING ACTIVITIES: | ||||||||||||
| Net income (loss) | $ | 27,530,652 | $ | 854,123 | $ | (5,211,238 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Charges incurred in connection with the vesting and issuance of common stock for employee and director compensation | 529,041 | 502,907 | 782,100 | |||||||||
| (Gain) Loss on disposal of property and equipment | 4,245 | (20,343 | ) | 134,350 | ||||||||
| Non-cash interest and amortization of debt discount | 2,095 | 53,867 | - | |||||||||
| Bad debt expense (recoveries), net | 134,176 | 68,615 | (48,270 | ) | ||||||||
| Depreciation | 5,463,985 | 3,837,174 | 2,443,054 | |||||||||
| Amortization | 21,953 | 742,400 | 997,900 | |||||||||
| Change in fair value of warrant liabilities | (65,429 | ) | (267,928 | ) | (1,813,687 | ) | ||||||
| Deferred income taxes, net | (27,301,266 | ) | 27,646 | 12,599 | ||||||||
| Recognition of deferred gain from sale-leaseback transactions | (9,522 | ) | - | - | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (157,071 | ) | (247,358 | ) | (758,952 | ) | ||||||
| Finance receivables | 52,531 | 17,729 | (61,460 | ) | ||||||||
| Inventory | 370,104 | 716,470 | 158,584 | |||||||||
| Prepaid expenses and other current assets | (190,783 | ) | 503,937 | 431,276 | ||||||||
| Accounts payable | 412,664 | 1,164,804 | 498,082 | |||||||||
| Accrued expenses | 267,004 | (1,915,091 | ) | 2,513,898 | ||||||||
| Income taxes payable | 21,021 | - | - | |||||||||
| Net cash provided by operating activities | 7,085,400 | 6,038,952 | 78,236 | |||||||||
| INVESTING ACTIVITIES: | ||||||||||||
| Purchase of property and equipment | (111,121 | ) | (107,351 | ) | (478,144 | ) | ||||||
| Purchase of property for rental program | (10,883,473 | ) | (9,092,394 | ) | (5,754,670 | ) | ||||||
| Proceeds from sale of rental equipment under sale-leaseback transactions | 2,995,095 | - | - | |||||||||
| Proceeds from sale of property and equipment | 82,047 | 18,908 | - | |||||||||
| Net cash used in investing activities | (7,917,452 | ) | (9,180,837 | ) | (6,232,814 | ) | ||||||
| FINANCING ACTIVITIES: | ||||||||||||
Net proceeds from the issuance (retirement) of common stock and exercise of common stock warrants | 2,272,936 | 311,177 | (41,371 | ) | ||||||||
| Excess tax benefits from share-based compensation | 24,847 | - | - | |||||||||
| Proceeds from line of credit | 2,000,000 | 3,000,000 | - | |||||||||
| Repayment of long-term debt | (374,411 | ) | (614,937 | ) | (368,917 | ) | ||||||
| Net cash provided by (used in) financing activities | 3,923,372 | 2,696,240 | (410,288 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | 3,091,320 | (445,645 | ) | (6,564,866 | ) | |||||||
| Cash and cash equivalents at beginning of year | 5,981,000 | 6,426,645 | 12,991,511 | |||||||||
| Cash and cash equivalents at end of year | $ | 9,072,320 | $ | 5,981,000 | $ | 6,426,645 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 259,820 | $ | 118,934 | $ | 38,891 | ||||||
| Depreciation expense allocated to cost of sales | $ | 4,880,529 | $ | 3,265,452 | $ | 1,940,179 | ||||||
| Reclass of rental program property to inventory, net | $ | 33,266 | $ | 28,337 | $ | - | ||||||
| Prepaid items financed with debt | $ | 101,850 | $ | 133,588 | $ | 95,263 | ||||||
| Prepaid interest from issuance of warrants for debt costs | $ | - | $ | 55,962 | $ | - | ||||||
| Equipment and software acquired under capital lease | $ | 325,431 | $ | 124,917 | $ | 495,955 | ||||||
| Equipment and software financed with long-term debt | $ | - | $ | - | $ | 252,968 | ||||||
| Disposal of property and equipment | $ | 709,638 | $ | 98,928 | $ | 652,093 | ||||||
| Disposal of property and equipment under sale-leaseback transactions | $ | 1,918,920 | $ | - | $ | - | ||||||
See accompanying notes.
F-7
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 taxi 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.
2. ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Stitch Networks Corporation (“Stitch”) and USAT Capital Corp LLC (“USAT Capital”).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 (“GAAP”) 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 AND CASH EQUIVALENTS
Cash equivalents represent all highly liquid investments with original maturities of three months or less.less from time of purchase. Cash equivalents are comprised of money market funds. The Company maintains its cash in bank deposit accounts, which may exceed federally insured limits at times.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable areinclude amounts for transactions processed with our card processers for which cash has not been received by the Company and included in accounts payable are amounts for transactions processed with our card processers and due to our customers, which are recorded net of fees due to the Company. Generally, contractual terms require us to remitCompany for sales of equipment, other amounts owed to ourdue from customers, on a weekly basis.
The Company maintains an allowance for doubtful accounts. 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 Company estimatesallowance 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, and an assessment of collection costs and other factors. The allowance for doubtful accounts for accounts receivable and finance receivables based on historical bad debts, factors related to specific customers’ ability to pay and current economic trends.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 accruedrecorded 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. Notes receivableFinance receivables or Quick Start leases are generally for a sixty month term. Finance receivables are carried at their contractual amount and charged off against the allowance for credit losses when management determines that recovery is
F-8
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
Inventory consists of finished goods and packaging materials. goods. The Company’s inventory is statedcompany's inventories are valued at the lower of cost (average cost basis) or market.
The Company establishes allowances for obsolescence of inventory based upon quality considerations and assumptions about future demand and market conditions.
PROPERTY AND EQUIPMENT,
Property and equipment are recorded at cost. Property and equipment are depreciated on the straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on the straight-line basis over the lesser of the estimated useful life of the asset or the respective lease term.
GOODWILL AND INTANGIBLE ASSETS
The Company’s intangible assets include goodwill, trademarks, 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. In September 2011, the FASB issued ASU No. 2011-08 Intangibles – Goodwill and Other: Testing Goodwill for Impairment, which amended guidance to allow the Company to first assess qualitative factors to determine if it is necessary to perform the two-step quantitative impairment test. If after this assessment the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If after this assessment the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, than the Company will perform the first step of the two-step impairment test. The first step screens for potential impairment, while the second step measures the amount of impairment. The Company uses a quantitative method, including a discounted cash flow analysis to complete the first step in this process. We also give consideration to our market capitalization. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date. The Company has concluded there has been no impairment of goodwill as a result of its testing on April 1, 2014, April 1, 2013, and April 1, 2012.
There were no indefinite-lived intangible assets 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 thatJune 30, 2017. During the carrying amount may not be recoverable. An asset is considered to be impaired when the sumfourth quarter of the undiscounted future net cash flows resulting fromfiscal year ended June 30, 2016, the use of the asset and its eventual disposition is less than its carrying amount. The amount of the impairment loss, if any, is measured as the difference between the net bookfair value of the asset and its estimated fair value. Astrademarks were determined to have inconsequential value based on the “relief from royalty” methodology. This assessment resulted in an impairment write-down of $432 thousand during the fourth fiscal quarter of the fiscal year ended June 30, 2014 and2016, which is included in “Impairment of intangible asset” in the Consolidated Statement of Operations for the fiscal year ended June 30, 2013, the Company has concluded there has been no impairment of its patents or trademarks that is subject to amortization.
LONG-LIVED ASSETS
In accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”, the Company reviews its definite lived long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset will be written down to its fair value. In the period when the plan of sale criteria of ASC 360 are met, definite lived long-lived assets are reported as held for sale, depreciation and amortization cease, and the assets are reported at the lower of carrying value or fair value less costs to sell. The Company has concluded that the carrying amount of definite lived long-lived assets is recoverable as of June 30, 20142017 and June 30, 2013.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial assets and liabilities are measured usingaccounted 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.hierarchy to measure its financial assets and liabilities. The three levels are as follows:
Level 1-1‑ Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2-2‑ 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
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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 3-3‑ 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 cash equivalents, 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 credit agreements approximatesthe long-term portion of its finance receivables approximate their carrying value as such instruments are at market rates currently available to the Company.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts and finance receivables. The Company maintains cash and cash equivalents with various financial institutions.institutions where accounts may exceed federally insured limits at times. Approximately 22%42%, 18% and 41%35% of the Company’s trade accounts and finance receivables at June 30, 20142017, 2016 and 2013,2015, respectively, were concentrated with one customer.
Concentration of revenues with customers subject the Company to operating risks. Approximately 26%20%, 37%,16% and 43%21% of the Company’s license and transaction processing revenues for the years ended June 30, 2014, 2013,2017, 2016 and 2012,2015, respectively, were concentrated with one customer. Approximately 37%, 28% and two customer(s), respectively: 26%, 26%, and 25%, respectively for each year,17% of the Company’s equipment sales revenue were concentrated with one; and 11%, and 18%,one customer for the years ended June 30, 2013,2017, 2016 and 2012, respectively, with another. There was no concentration of equipment sales revenue for the years ended June 30, 2014, 2013, and 2012.2015, respectively. The Company’s customers are principally located in the United States.
REVENUE RECOGNITION
Revenue from the sale or QuickStart lease of equipment is recognized on the terms of freight-on-boardfree-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.
ePort hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party leasing company for the devices. The Company utilizes its best estimate of selling price when calculating the revenue to be recorded under these leases. The Quickstart contracts qualify for sales type lease accounting. Accordingly, the Company recognizes a portion of lease payments as interest income. At the end of the lease period, the customer would have the option to purchase the device at its residual value.
EQUIPMENT RENTAL
The Company offers its customers a rental program for its ePort devices, the JumpStart Programprogram (“JumpStart”). The JumpStart terms are typically 36 months and are cancellable with thirty to sixty daysdays’ written notice. In accordance with ASC 840, “Leases”, the Company classifies the rental agreements as operating leases. For the years ended June 30, 2014, 2013, and 2012, there was approximately $1,032,000, $806,000, and $607,000, respectively, of activation fee revenue related to JumpStart equipment included in equipment sales in the Consolidated Statements of Operations. There was also approximately $13,337,000, $10,193,000, and $6,074,000 ofleases, with service fee revenue related to JumpStart equipmentthe leases included in license and transaction fees in the Consolidated Statements of Operations for the years ended June 30, 2014, 2013, and 2012, respectively. CostOperations. Costs for the JumpStart revenues, which consists of depreciation expense on the JumpStart equipment, approximated $4,804,900, $3,171,000, and $1,740,000 for the years ended June 30, 2014, 2013, and 2012, respectively, and wasis included in cost of services in the Consolidated Statements of Operations. At June 30, 2014 and 2013, approximately, $19,824,000 and $15,685,000, respectively, of ePort equipment utilized by the JumpStart Program wasprogram is included in property and equipment, net on the Consolidated Balance Sheet (see Note 4).Sheet.
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WARRANTY COSTS
The Company generally warrants its products for one to three years. Warranty costs are estimated and recorded at the time of sale based on historical warranty experience, if available. These costs are reviewed and adjusted, if necessary, periodically throughout the year.
SHIPPING AND HANDLING
Shipping and handling fees billed to our customers in connection with sales are recorded as revenue. The costs incurred for shipping and handling of our product are recorded as cost of sales.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $0.4 million, $0.3 million, and $0.2 million in the fiscal years ended June 30, 2017, 2016, and 2015, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed as incurred.incurred and primarily consist of contractors and product development costs. Research and development expenses, which are included in selling, general and administrative expenses in the Consolidated Statements of Operations, were approximately $1,018,000, $901,000,$1.4 million, $1.4 million and $1,038,000,$1.5 million, for the years ended June 30, 2014, 2013,2017, 2016, and 2012,2015, respectively. Our research and development initiatives focus on adding features and functionality to our system solutions through the development and utilization of our processing and reporting network and new technology.
SOFTWARE DEVELOPMENT COSTS
Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life.
ACCOUNTING FOR EQUITY AWARDS
In accordance with ASC 718 the cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award and allocated over the vestingrequisite service period of the award.
LITIGATION COSTS
From time to time, we are involved in Note 12,litigation, claims, contingencies and other legal matters. We record a charge equal to at least the Company recorded stock compensationminimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of the loss can be reasonably estimated. We expense of $450,078, $483,740, and $584,487 relatedlegal costs, including those legal costs expected to common stock grants and vesting of shares previously granted to employees and directors during the years ended June 30, 2014, 2013, and 2012, respectively. These expenses exclude the Performance Share Plans for the 2014 and 2013 fiscal years (“2014 Plan” and the “2013 Plan”) and the Long-Term Equity Incentive Program (“LTIP” or the “LTIP Program”) covering the Company’s executive officers.
INCOME TAXES
The Company follows the provisions of FASB ASC 740, Accounting for Uncertainty in Income Taxes,whichprovides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financialstatements. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods.recognized.
Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence, it is more likely than not such benefits will be realized. The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general
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and administrative expenses. No interest or penalties related to uncertain tax positions were accrued or incurred during the years ended June 30, 2014, 2013,2017, 2016, and 2012.
The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions. The tax years ended June 30, 20112014 through June 30, 20142017 remain open to examination by taxing jurisdictions to which the Company areis subject. While the statute of limitations has expired for years prior to the year ended June 30, 2014, changes in reported losses for those years could be made examination by tax authorities to the extent that operating loss carryforwards from those prior years impact upon taxable income in current years. As of June 30, 2014,2017, the Company did not have any income tax examinations in process.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share are calculated by dividing net income (loss) applicable to common shares by the weighted average common shares outstanding for the period. Diluted earnings (loss) per share isare calculated by dividing net income (loss) applicable to common shares by the weighted average common shares outstanding for the yearperiod plus the effectdilutive effects of potential common sharesstock equivalents unless the effects of such effect iscommon stock equivalents are anti-dilutive. For the fiscal yearyears ended June 30, 20142017, 2016 and 2015 no exerciseeffect for common stock equivalents was considered in the calculation of stock purchase warrants (4,309,000); ordiluted earnings (loss) per share because their effect was anti-dilutive.
OTHER COMPREHENSIVE INCOME
ASC 220, “Comprehensive Income”, prescribes the conversionreporting required for comprehensive income and items of preferred stock (85,936) or cumulative preferred dividends (12,261) was assumed during the fiscal yearother comprehensive income. Entities having no items of other comprehensive income are not required to report on comprehensive income. The Company has no items of other comprehensive income for its years ended June 30, 2014 because the result would be anti-dilutive. For the2017, 2016 or 2015.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting pronouncements adopted in fiscal year ended2017
In July 2015, the FASB issued ASU 2015-11, “Inventory”, which simplifies the measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company early adopted this guidance during fiscal year 2017. The adoption of this standard did not have a material effect on our consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement Period Adjustments”, which requires that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment is determined. We adopted this standard during the first quarter of fiscal 2017. The adoption of this standard did not have a material effect on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015‑17, "Balance Sheet Classification of Deferred Taxes", which will require entities to present all deferred tax liabilities and assets as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The standard will be effective for the Company beginning with the quarter ending September 30, 2017. Early application is permitted. The standard can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company early adopted this guidance during fiscal year 2017. As a result of the adoption, $2.3 million of deferred tax assets were reclassified from current to noncurrent assets as of June 30, 2013 exercise of 825,673 stock purchase warrants was assumed2016.
Accounting pronouncements to calculate the weighted average common shares outstanding for the year. Exercise of stock purchase warrants (5,212,955) or the conversion of preferred stock (85,847) or cumulative preferred dividends (11,596) was not assumed during the fiscal year ended June 30, 2013 because the result would be anti-dilutive. For the fiscal year ended June 30, 2012 no exercise of stock options (45,333); or stock purchase warrants (8,045,619); or the conversion of preferred stock (4,430) or cumulative preferred dividends (10,932) was assumed during the fiscal year ended June 30, 2012 because the result would be anti-dilutive.
The Company is evaluating whether the effects of the following recent accounting pronouncements or any other recently issued, but not yet effective accounting standards, will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
F-12
In May 2014, the Financial Accounting Standards BoardFASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year. The new guidance provides a single model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The new standard also requires expanded qualitative and quantitative disclosures about the nature, timing and uncertainty of revenue and cash flows rising from contracts with customers. The ASU is now effective for fiscal years, and interim reporting periods within those years, beginning with the year ending June 30, 2019.
The Company’s project plan includes a three-phase approach to implementing this standard update. Phase one, the assessment phase, is expected to be completed in the first quarter of 2018 and includes the following activities: conducting internal surveys of the business, holding revenue recognition workshops with sales and business unit finance leadership, and reviewing a representative sample of revenue arrangements across the business to initially identify a set of applicable qualitative revenue recognition changes related to the new standard update. The objectives for the second phase of the project will be to establish and document key accounting policies, assess disclosure, business process and control impacts. Phase two is expected to be completed in the second quarter of 2018. Lastly, phase three’s objectives will comprise effectively implementing the new standard update and embedding the new accounting treatment into the Company’s business processes and controls to support the financial reporting requirements. Phase three is expected to be completed in the fourth quarter of 2018.
The Company is still evaluating the impact that the new standard will have on the Company’s consolidated financial statements and will be unable to quantify its impact until the third phase of the project has been completed. The method of adoption has also not yet been determined and is not expected to be finalized until the second phase of the project plan has been completed.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The company is the lessee under various agreements which are accounted for as operating leases as discussed in Note 18. This amendment will be effective for the Company beginning with the fiscal year ending June 30, 2018.
In June 2014,March 2016, the Financial Accounting Standards BoardFASB issued ASU 2014-12No. 2016-09, Compensation –- Stock Compensation (Topic 718): Accounting for share-based payments when the terms, Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the award provide that a performance target could be achieved afterFASB Simplification Initiative and involves several aspects of accounting for shared-based payment transactions, including income tax consequences, forfeitures and classification on the requisite service period.statement of cash flows. This pronouncement will be effective for the Company beginning with the fiscal year ending June 30, 2018, and interim periods within that fiscal year. Accordingly, the company will adopt this standard on July 1, 2017. The primary effects of adoption for the company relate to changes in classification within the Consolidated Statements of Cash Flows and recognition of tax effects related to share-based payments. The new guidance requires all tax related cash flows resulting from share-based payments to be reported as cash provided by operating activities in the Consolidated Statements of Cash Flows. This is a change from the current requirement to present excess tax benefits as cash inflows from financing activities and tax deficiencies as cash outflows from operating activities. The updated guidance also requires all tax effects related to share-based payments to be recognized within the provision for income taxes in the Consolidated Income Statements. Previously excess tax benefits and tax deficiencies were required to be recognized in additional paid-in capital in the Consolidated Balance Sheets. The standard does not permit retrospective adoption of this update. As such, the company will adopt this update on a prospective basis.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The new guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This pronouncement will be effective for the Company beginning with the year ending June 30, 2019, and interim periods within that fiscal year. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new guidance requires adoption on a retrospective basis unless it is
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impracticable to apply, in which case the company would be required to apply the amendments prospectively as of the earliest date practicable.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, which outlines updates to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early application permitted.
3. ACQUISITION
VENDSCREEN, INC.
On January 15, 2016, the Company executed an Asset Purchase Agreement with VendScreen, Inc. (“VendScreen”), a Portland, Oregon based developer of vending industry cashless payment technology, by which it acquired substantially all of VendScreen’s assets and assumed specified liabilities, for a cash payment of $5.6 million. The purchase price was funded using $2.6 million in cash, and the balance of $3.0 million from a term loan which was converted from a line of credit.
The acquisition expanded the Company’s capability with interactive media (touchscreen) and content delivery through VendScreen’s cloud-based content delivery platform, device platform and products, customer base, vendor management system (VMS) integration, and consumer product information including nutritional data. In addition to new technology and services, the acquisition added a West Coast operational footprint, with former VendScreen employees able to offer expanded customer services, sales and technical support. On the date of the acquisition, VendScreen had approximately 150 customers with approximately 6,000 connections. Of those 150 customers approximately 50% were new customers of USAT.
In December 2016, the Company finalized the opening balance sheet of VendScreen relating to facts existing at the opening balance sheet date and recorded a reduction of goodwill for $211 thousand and increased finance receivables for the same amount within the measurement period. The final goodwill amount related to VendScreen opening balance sheet is $3.8 million.
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The following table summarizes the purchase price allocation to reflect the fair values of the assets acquired and liabilities assumed at the date of acquisition.
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|
|
|
($ in thousands) |
|
|
|
|
|
|
|
Consideration: |
|
|
|
Fair value of total consideration paid in cash |
| $ | 5,625 |
|
|
|
|
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 |
Fair value of financial assets |
|
| 880 |
Property & equipment |
|
| 81 |
Identifiable intangible assets: |
|
|
|
Developed technology |
|
| 639 |
Customer relationships |
|
| 149 |
Brand |
|
| 95 |
Noncompete agreements |
|
| 2 |
Fair value of intangible assets |
|
| 885 |
Financial liabilities |
|
|
|
Accrued liabilities |
|
| (50) |
Total identifiable net assets |
|
| 1,796 |
Goodwill |
|
| 3,829 |
Total Fair Value |
| $ | 5,625 |
Of the $885 thousand of acquired intangible assets, $639 thousand was assigned to Developed Technology that is subject to amortization over 5 years, $149 thousand was assigned to Customer Relationships which are subject to amortization over 10 years; $2 thousand was assigned to a non-compete agreement that is subject to amortization over 2 years, and $95 thousand was assigned to the Brand that is subject to amortization over 3 years. All of the intangible assets are amortizable for income tax purposes.
The Company incurred $109 thousand and $842 thousand of acquisition / non-recurring expenses consists in connection with the acquisition and integration of the VendScreen business for the fiscal years ended June 30, 2017 and 2016, respectively. These costs were included within Selling, general and administrative expenses on the Consolidated Statement of Operations.
The acquired business contributed net revenues of $1.2 million during the fiscal year ended June 30, 2016. ASC 805, Business Combinations, requires the disclosure of additional information including the amounts of earnings of the acquiree since the acquisition date included in the consolidated income statement, and the revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred at the beginning of the prior annual reporting period (supplemental pro forma information). The disclosure of such information was impractical and is not provided as (1) the acquiree had been integrated into the Company’s operation such that discreet financial information of the acquiree could not be determined, and (2) the financial records of the acquiree were not adequate to allow the preparation of supplemental pro forma information.
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4. EARNINGS PER SHARE CALCULATION
The calculation of basic loss per share and diluted loss per share is presented below:
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|
|
|
|
| Year ended June 30, | |||||||
($ in thousands, except per share data) |
| 2017 |
| 2016 |
| 2015 | |||
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|
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|
|
|
|
|
|
Numerator for basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (1,852) |
| $ | (6,806) |
| $ | (1,089) |
Preferred dividends |
|
| (668) |
|
| (668) |
|
| (668) |
Net loss available to common shareholders |
| $ | (2,520) |
| $ | (7,474) |
| $ | (1,757) |
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share - Weighted average shares outstanding |
|
| 39,860,335 |
|
| 36,309,047 |
|
| 35,719,211 |
Effect of dilutive potential common shares |
|
| — |
|
| — |
|
| — |
Denominator for diluted loss per share - Adjusted weighted average shares outstanding |
|
| 39,860,335 |
|
| 36,309,047 |
|
| 35,719,211 |
|
|
|
|
|
|
|
|
|
|
Basic loss per share |
| $ | (0.06) |
| $ | (0.21) |
| $ | (0.05) |
|
|
|
|
|
|
|
|
|
|
Diluted loss per share |
| $ | (0.06) |
| $ | (0.21) |
| $ | (0.05) |
Antidilutive shares excluded from the calculation of diluted loss per share were 634,231, 1,168,689, and 252,827 for the years ended June 30, 2017, 2016 and 2015, respectively.
5. FINANCE RECEIVABLES
Finance Receivablesreceivables consist of the following:
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|
|
|
|
| June 30, |
| June 30, | ||
($ in thousands) |
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Total finance receivables |
| $ | 19,617 |
| $ | 7,306 |
Less current portion |
|
| 11,010 |
|
| 3,588 |
Non-current portion of finance receivables |
| $ | 8,607 |
| $ | 3,718 |
The Company accounts for their finance receivables using delinquency and nonaccrual data as key performance indicators. At June 30, 2017, $102 thousand is outstanding and classified as nonperforming. The Company expects to collect on their outstanding finance receivables without the contracting of third parties. At June 30, 2017, credit quality indicators consist of the following:
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|
|
|
|
|
|
Credit risk profile based on payment activity: |
| June 30, |
| June 30, | ||
($ in thousands) |
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Performing |
| $ | 19,515 |
| $ | 7,174 |
Nonperforming |
|
| 102 |
|
| 132 |
Total |
| $ | 19,617 |
| $ | 7,306 |
| June 30, | June 30, | |||||||
| 2014 | 2013 | |||||||
| Total finance receivables | $ | 472,587 | $ | 525,118 | ||||
| Less current portion | 119,793 | 116,444 | ||||||
| Non-current portion of finance receivables | $ | 352,794 | $ | 408,674 | ||||
Age Analysis of Past Due Finance Receivables
As of June 30, 2014 and 2013, there was no allowance2017
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|
|
|
|
|
|
|
|
|
|
|
| 30 and under |
| 31 – 60 |
| 61 – 90 |
| Greater than |
|
|
|
|
| Total | |||||||
|
| Days Past |
| Days Past |
| Days Past |
| 90 Days Past |
| Total Past |
|
|
| Finance | |||||||
($ in thousands) |
| Due |
| Due |
| Due |
| Due |
| Due |
| Current |
| Receivables | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QuickStart Leases |
| $ | 29 |
| $ | 3 |
| $ | 35 |
| $ | 35 |
| $ | 102 |
| $ | 19,515 |
| $ | 19,617 |
F-16
Age Analysis of Past Due Finance Receivables
As of June 30, 2016
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 30 and under |
| 31 – 60 |
| 61 – 90 |
| Greater than |
|
|
|
|
| Total | |||||||
|
| Days Past |
| Days Past |
| Days Past |
| 90 Days Past |
| Total Past |
|
|
| Finance | |||||||
($ in thousands) |
| Due |
| Due |
| Due |
| Due |
| Due |
| Current |
| Receivables | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QuickStart Leases |
| $ | — |
| $ | 98 |
| $ | 31 |
| $ | 3 |
| $ | 132 |
| $ | 7,174 |
| $ | 7,306 |
Finance receivables due for credit losses of finance receivables. As the Company collects monthly paymentseach of the receivables from the customers’ transaction funds the risk of loss was determined to be remote.fiscal years following June 30, 2017 are as follows:
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
2018 |
| $ | 11,010 |
2019 |
|
| 2,417 |
2020 |
|
| 2,462 |
2021 |
|
| 2,006 |
2022 |
|
| 1,656 |
Thereafter |
|
| 66 |
|
|
| 19,617 |
| Credit Quality Indicators | ||||
| As of June 30, 2014 | ||||
| Credit risk profile based on payment activity: | ||||
| Leases | ||||
| Performing | $ | 472,587 | ||
| Nonperforming | - | |||
| Total | $ | 472,587 | ||
| Age Analysis of Past Due Finance Receivables | ||||||||||||||||||||||||
| As of June 30, 2014 | ||||||||||||||||||||||||
| 31 – 60 | 61 – 90 | Greater than | Total | |||||||||||||||||||||
| Days Past Due | Days Past Due | 90 Days Past Due | Total Past Due | Current | Finance Receivables | |||||||||||||||||||
| Leases | $ | - | $ | 909 | $ | 378 | $ | 1,287 | $ | 471,300 | $ | 472,587 | ||||||||||||
| Total | $ | - | $ | 909 | $ | 378 | $ | 1,287 | $ | 471,300 | $ | 472,587 | ||||||||||||
| Age Analysis of Past Due Finance Receivables | ||||||||||||||||||||||||
| As of June 30, 2013 | ||||||||||||||||||||||||
| 31 – 60 | 61 – 90 | Greater than | Total | |||||||||||||||||||||
| Days Past Due | Days Past Due | 90 Days Past Due | Total Past Due | Current | Finance Receivables | |||||||||||||||||||
| Leases | $ | - | $ | 814 | $ | - | $ | 814 | $ | 524,304 | $ | 525,118 | ||||||||||||
| Total | $ | - | $ | 814 | $ | - | $ | 814 | $ | 524,304 | $ | 525,118 | ||||||||||||
6. PROPERTY AND EQUIPMENT,
Property and equipment at cost, consist of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2017 | |||||||
|
| Useful |
|
|
|
| Accumulated |
|
|
| |
($ in thousands) |
| Lives |
| Cost |
| Depreciation |
| Net | |||
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software |
| 3-7 years |
| $ | 5,951 |
| $ | (4,800) |
| $ | 1,151 |
Internal-use software |
| 3-5 years |
|
| 1,089 |
|
| (112) |
|
| 977 |
Property and equipment used for rental program |
| 5 years |
|
| 31,406 |
|
| (21,948) |
|
| 9,458 |
Furniture and equipment |
| 3-7 years |
|
| 1,174 |
|
| (774) |
|
| 400 |
Leasehold improvements |
| (1) |
|
| 218 |
|
| (93) |
|
| 125 |
|
|
|
| $ | 39,838 |
| $ | (27,727) |
| $ | 12,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2016 | |||||||
|
| Useful |
|
|
|
| Accumulated |
|
|
| |
($ in thousands) |
| Lives |
| Cost |
| Depreciation |
| Net | |||
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and purchased software |
| 3-7 years |
| $ | 5,369 |
| $ | (4,365) |
| $ | 1,004 |
Internal-use software |
| 3-5 years |
|
| 137 |
|
| (9) |
|
| 128 |
Property and equipment used for rental program |
| 5 years |
|
| 26,648 |
|
| (18,246) |
|
| 8,402 |
Furniture and equipment |
| 3-7 years |
|
| 874 |
|
| (654) |
|
| 220 |
Leasehold improvements |
| (1) |
|
| 575 |
|
| (564) |
|
| 11 |
|
|
|
| $ | 33,603 |
| $ | (23,838) |
| $ | 9,765 |
| Useful | June 30, | |||||||||
| Lives | 2014 | 2013 | ||||||||
| Computer equipment and purchased software | 3-7 years | $ | 4,581,001 | $ | 4,688,104 | |||||
| Property and equipment used for Rental Program | 5 years | 30,348,918 | 21,574,225 | |||||||
| Furniture and equipment | 3-7 years | 681,717 | 693,554 | |||||||
| Leasehold improvements | Lesser of life or lease term | 575,343 | 539,629 | |||||||
| 36,186,979 | 27,495,512 | |||||||||
| Less accumulated depreciation | (15,048,399 | ) | (10,255,447 | ) | ||||||
| $ | 21,138,580 | $ | 17,240,065 | |||||||
(1) | Lesser of lease term or estimated useful life |
The total for gross assets under capital leaseleases was approximately $6.6 million and $2.6 million and accumulated amortization totaled approximately $2,031,000$3.1 million and $1,965,000$1.9 million as of June 30, 20142017 and 2013,2016, respectively. Capital lease amortization of approximately $305,000, $265,000,$1.2 million, $271 thousand and $189,000,$349 thousand, is included in depreciation expense for the years ended June 30, 2014, 2013,2017, 2016, and 2012,2015, respectively.
F-17
Depreciation expense allocated within our cost of sales for rental equipment utilized bywas $4.6 million, $4.6 million, and $5.1 million for the JumpStart Program is identified as Property and equipment used for Rental Program in the above table. Accumulated depreciation attributable to the Property and equipment used for Rental Program is approximately $10,525,000 and $5,889,000 as ofyears ended June 30, 20142017, 2016, and 2013, respectively and is included in accumulated depreciation for the respective years in the above table.
7. GOODWILL AND INTANGIBLE ASSETS
Amortization expense relating to all acquired intangible assets was approximately $22,000, $742,000,$176 thousand, $87 and $998,000$0 during each of the years ended June 30, 2014, 2013,2017, 2016 and 2012,2015, respectively. The intangibleIntangible asset balance and related accumulated amortizationbalances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Beginning |
| Year ended June 30, 2017 |
| Ending |
|
| ||||||
|
| Balance |
| Additions/ |
|
|
|
| Balance |
| Amortization | |||
($ in thousands) |
| July 1, 2016 |
| Adjustments |
| Amortization |
| June 30, 2017 |
| Period | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
| 1 |
|
| — |
|
| (1) |
|
| — |
| 2 years |
Brand |
|
| 79 |
|
| — |
|
| (32) |
|
| 47 |
| 3 years |
Developed technology |
|
| 576 |
|
| — |
|
| (128) |
|
| 448 |
| 5 years |
Customer relationships |
|
| 142 |
|
| — |
|
| (15) |
|
| 127 |
| 10 years |
Total Intangible Assets |
| $ | 798 |
| $ | — |
| $ | (176) |
| $ | 622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 11,703 |
|
| (211) |
|
| — |
|
| 11,492 |
| Indefinite |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets and Goodwill |
| $ | 12,501 |
| $ | (211) |
| $ | (176) |
| $ | 12,114 |
|
|
During fiscal 2017, the Company recorded adjustments which resulted in a measurement period adjustment of $211 thousand between goodwill and finance receivables.
| June 30, 2014 | ||||||||||||
| Gross | ||||||||||||
| Carrying | Accumulated | Net Carrying | ||||||||||
| Amount | Amortization | Value | ||||||||||
| Intangible assets: | ||||||||||||
| Trademarks | $ | 1,482,100 | $ | (1,050,000 | ) | $ | 432,100 | |||||
| Patents | 9,294,000 | (9,294,000 | ) | - | ||||||||
| Total | $ | 10,776,100 | $ | (10,344,000 | ) | $ | 432,100 | |||||
| June 30, 2013 | ||||||||||||
| Gross | ||||||||||||
| Carrying | Accumulated | Net Carrying | ||||||||||
| Amount | Amortization | Value | ||||||||||
| Intangible assets: | ||||||||||||
| Trademarks | $ | 1,482,100 | $ | (1,050,000 | ) | $ | 432,100 | |||||
| Patents | 9,294,000 | (9,272,047 | ) | 21,953 | ||||||||
| Total | $ | 10,776,100 | $ | (10,322,047 | ) | $ | 454,053 | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Beginning |
| Year ended June 30, 2016 |
| Ending |
|
| ||||||
|
| Balance |
| Additions/ |
|
|
|
| Balance |
| Amortization | |||
($ in thousands) |
| July 1, 2015 |
| Adjustments |
| Amortization |
| June 30, 2016 |
| Period | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks - Indefinite |
| $ | 432 |
| $ | (432) |
| $ | — |
| $ | — |
| Indefinite |
Non-compete agreements |
|
| — |
|
| 2 |
|
| (1) |
|
| 1 |
| 2 years |
Brand |
|
| — |
|
| 95 |
|
| (16) |
|
| 79 |
| 3 years |
Developed technology |
|
| — |
|
| 639 |
|
| (63) |
|
| 576 |
| 5 years |
Customer relationships |
|
| — |
|
| 149 |
|
| (7) |
|
| 142 |
| 10 years |
Total Intangible Assets |
| $ | 432 |
| $ | 453 |
| $ | (87) |
| $ | 798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 7,663 |
|
| 4,040 |
|
| — |
|
| 11,703 |
| Indefinite |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets and Goodwill |
| $ | 8,095 |
| $ | 4,493 |
| $ | (87) |
| $ | 12,501 |
|
|
In testing for impairment in fiscal year 2017, the Company concluded no impairment was needed for goodwill and there were no remaining indefinite-lived intangible assets subject to testing.
During the fourth quarter of itsthe fiscal year ended June 30, 2016, the fair value of the indefinite-lived trademarks includes the following trademarks:related to 1) VendingMiser, 2) CoolerMiser, 3) PlugMiser and 4) SnackMiser. As a resultSnackMiser were determined to have inconsequential value based on the “relief from royalty” methodology. Key assumptions in the valuation included the forecast sales volume, the royalty rate, the tax amortization benefit, and the estimated remaining economic useful life. This assessment resulted in an
F-18
impairment write-down during the fourth fiscal quarter of $432 thousand, which is included in “Impairment of intangible asset” in the Consolidated Statement of Operations for the fiscal yearsyear ended June 30, 2014, 2013 and 2012, the Company determined that no impairment had occurred. 2016.
At June 30, 2014, the definitive-lived2017, amortizable intangible asset balances were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |
($ in thousands) |
| Cost |
| Amortization |
| Net Book Value | |||
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
| $ | 2 |
| $ | (2) |
| $ | — |
Brand |
|
| 95 |
|
| (48) |
| $ | 47 |
Developed Technology |
|
| 639 |
|
| (191) |
| $ | 448 |
Customer Relationships |
|
| 149 |
|
| (22) |
| $ | 127 |
|
| $ | 885 |
| $ | (263) |
| $ | 622 |
Estimated annual amortization expense for amortizable intangible assets have been fully amortized. At June 30, 2014 and 2013, $432,100 of trademarks has an indefinite life and is included in the intangible assets tables above.as follows:
|
|
|
|
2018 |
| $ | 175 |
2019 |
|
| 159 |
2020 |
|
| 143 |
2021 |
|
| 79 |
2022 |
|
| 15 |
Thereafter |
|
| 51 |
|
| $ | 622 |
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
| June 30, |
| June 30, | ||
($ in thousands) |
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Accrued compensation and related sales commissions |
| $ | 1,495 |
| $ | 1,268 |
Accrued professional fees |
|
| 798 |
|
| 809 |
Accrued taxes and filing fees |
|
| 916 |
|
| 795 |
Advanced customer billings |
|
| 442 |
|
| 236 |
Accrued other |
|
| 532 |
|
| 365 |
|
|
| 4,183 |
|
| 3,473 |
Less current portion |
|
| (4,130) |
|
| (3,458) |
|
| $ | 53 |
| $ | 15 |
| June 30, | June 30, | |||||||
| 2014 | 2013 | |||||||
| Accrued compensation and related sales commissions | $ | 545,110 | $ | 583,710 | ||||
| Accrued professional fees | 214,615 | 165,444 | ||||||
| Accrued taxes and filing fees | 640,958 | 253,527 | ||||||
| Advanced customer billings | 370,040 | 346,868 | ||||||
| Accrued rent | 155,712 | 226,582 | ||||||
| Accrued other | 175,538 | 258,838 | ||||||
| $ | 2,101,973 | $ | 1,834,969 | |||||
9. LINE OF CREDIT
During the fiscal year ended June 30, 2016, the Company entered into a Loan and Security Agreement and other ancillary documents (the “Loan(as amended, the “Heritage Loan Documents”) with Avidbank Corporate Finance, a divisionHeritage Bank of Avidbank (the “Bank”Commerce (“Heritage Bank”), providing for a secured asset-based revolving line of credit in an amount of up to $3$12.0 million (the “Line“Heritage Line of Credit”) at an interest rate calculated based on the Federal Reserves’ Prime, which was 4.25% at June 30, 2017, plus 2.25%. The Company intends to use advances under the Line of Credit towards the financing of growth initiatives like its JumpStart Program and other working capital needs.
During March 2017, the Company entered into the third amendment with Heritage Bank that extended the maturity date of the Heritage Line of Credit is one year. from March 29, 2017 to September 30, 2018. The Company paid a total of $90 thousand in deferred financing costs.
At the time of maturity, all outstanding advances under the Heritage Line of Credit as well as any unpaid interest isare due and payable. Prior to maturity of the Heritage Line of Credit, the Company may prepay amounts due under the Heritage
F-19
Line of Credit without penalty, and subject to the terms of the Heritage Loan Documents, may re-borrow any such amounts.
The Second Amendment provided a change tobalance due on the definition of Adjusted EBITDA for covenant calculations for the fiscal quarters ended through March 31, 2014.
2017. As of June 30, 2014, the Company and the Bank entered into an Eighth Amendment (“Eighth Amendment”) to the Loan and Security Agreement to change the minimum Adjusted EBITDA covenant for the quarter ended June 30, 2014.
|
|
|
|
|
|
|
|
|
| For Year ended |
| ||||
|
| June 30, |
| ||||
($ in thousands) |
| 2017 |
| 2016 |
| ||
|
|
|
|
|
|
|
|
Principal balance at period-end |
| $ | 7,111 |
| $ | 7,217 |
|
Unamortized discount |
|
| (75) |
|
| (98) |
|
Line of credit, net |
| $ | 7,036 |
| $ | 7,119 |
|
Maximum amount outstanding at any month end |
| $ | 7,395 |
| $ | 7,217 |
|
Average balance outstanding during the period |
| $ | 7,177 |
| $ | 4,959 |
|
Weighted-average interest rate: |
|
|
|
|
|
|
|
As of the period-end |
|
| 6.5 | % |
| 5.8 | % |
Paid during the period |
|
| 6.0 | % |
| 5.5 | % |
Interest expense on the Line of Credit was $5,000,000approximately $434 thousand, $260 thousand and $3,000,000$211 thousand during each of the years ended June 30, 2017, 2016 and 2015 respectively.
10. SHORT-TERM AND LONG-TERM DEBT BORROWINGS
ASSIGNMENT OF QUICKSTART LEASES
In February and May 2015, the Company assigned its interest in certain finance receivables (various 60 month QuickStart leases) to third-party finance companies in exchange for cash and the assumption of financing obligations in the aggregate of $1.8 million and $304 thousand, respectively. These assignment transactions contain recourse provisions for the Company which requires the proceeds from the assignment to be treated as long-term debt. The financing obligations range in interest rate from 9.4% to 9.5%.
CAPITAL LEASE OBLIGATIONS
During the fiscal year ended June 30, 2017, the Company extended the termination date for each of its six Sales Leaseback Agreements (the “Sale Leaseback Agreements”) with a third party financing company for an additional year, and the extension will also result in the transfer of ownership of the leased assets to the Company at the end of the new term. As a result of the new provision for ownership transfer back to the Company, the Sale Leaseback Agreements previously considered to be operating leases are classified as capital leases at June 30, 20142017. The capital lease obligation related to the Sale Leaseback Agreements was $2.4 million at June 30, 2017. See Note 17 to the Consolidated Financial Statements for additional information relating to the Sale Leaseback Agreements.
The Company periodically enters into capital lease obligations to finance certain office and 2013, respectively.network equipment for use in its daily operations. At June 30, 2014, $2,000,000 was available under2017 and 2016, such capital lease obligations were $0.3 million and $0.4 million, respectively. The interest rates on these obligations range from approximately 5.6% to 9.0% and the Line of Credit.
The value of the following:equipment related to capital leases is included in property and equipment and depreciated over the applicable estimated useful lives accordingly.
F-20
| June 30, | June 30, | |||||||
| 2014 | 2013 | |||||||
| Capital lease obligations | $ | 414,525 | $ | 345,925 | ||||
| Loan agreements | 8,251 | 23,981 | ||||||
| 422,776 | 369,906 | |||||||
| Less current portion | 172,911 | 247,152 | ||||||
| $ | 249,865 | $ | 122,754 | |||||
The balance of long-term debt and capital lease obligations as of June 30, 2017 and June 30, 2016 are shown in the table below.
|
|
|
|
|
|
|
|
| June 30, |
| June 30, | ||
($ in thousands) |
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Assignment of QuickStart Leases |
| $ | 1,226 |
| $ | 1,600 |
Capital lease obligations |
|
| 3,065 |
|
| 605 |
|
| $ | 4,291 |
| $ | 2,205 |
Less current portion |
|
| 3,230 |
|
| 629 |
|
| $ | 1,061 |
| $ | 1,576 |
The maturities of long-term debt asand capital lease obligations for each of the fiscal years following June 30, 20142017 are as follows:
0g |
|
|
|
2018 |
| $ | 3,230 |
2019 |
|
| 654 |
2020 |
|
| 375 |
2021 |
|
| 22 |
2022 |
|
| 10 |
|
| $ | 4,291 |
| 2015 | $ | 172,911 | ||
| 2016 | 91,003 | |||
| 2017 | 80,251 | |||
| 2018 | 56,282 | |||
| Thereafter | 22,329 | |||
| $ | 422,776 |
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of June 30, 2017, the Company held no Level 1, Level 2 or Level 3 financial instruments. As of 2016, the Company held no Level 1 or Level 2 financial instruments. In accordance with the fair value hierarchy described in Note 2, the following table shows the fair value of the Company’s level 3 financial instruments that arewere required to be measured at fair value as of June 30, 2014 and 2013:
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016 |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrant liability, 2.2 million warrants exercisable at $2.6058 from September 17, 2011 through September 17, 2016 |
| $ | — |
| $ | — |
| $ | 3,739 |
| $ | 3,739 |
| June 30, 2014 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash equivalents | $ | - | $ | - | $ | - | $ | - | ||||||||
| Common stock warrant liability, warrants exercisable at $2.6058 from September 18, 2011 through September 18, 2016 | $ | - | $ | - | $ | 585,209 | $ | 585,209 | ||||||||
| June 30, 2013 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash equivalents | $ | 192,620 | $ | - | $ | - | $ | 192,620 | ||||||||
| Common stock warrant liability, warrants exercisable at $2.6058 from September 18, 2011 through September 18, 2016 | $ | - | $ | - | $ | 650,638 | $ | 650,638 | ||||||||
As of June 30, 2014 and 2013, the2016 fair values of the Company’s Level 1 financial instruments were $0 and $192,620, respectively. These financial instruments consist of cash equivalents, including money market accounts. As of June 30, 2014 and 2013, the Company held no Level 2 financial instruments.
There were no transferstransfer of assets or liabilities between level 1, level 2, or level 3 during the years ended June 30, 20142017 and 2013.2016.
|
|
|
|
|
|
|
|
| For Year Ended | ||||
|
| June 30, | ||||
($ in thousands) |
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Beginning balance |
| $ | (3,739) |
| $ | (978) |
Increase due to change in fair value of warrant liabilities |
|
| (1,490) |
|
| (5,674) |
Reduction due to warrant exercises |
|
| 5,229 |
|
| 2,913 |
Ending balance |
| $ | — |
| $ | (3,739) |
F-21
12. WARRANTS
All warrants outstanding as of June 30, 2017 were exercisable. The following table summarizesshows exercise prices and expiration dates for warrants outstanding as of June 30, 2017:
|
|
|
|
|
|
|
| Exercise |
|
| |
Warrants |
| Price |
| Expiration | |
Outstanding |
| Per Share |
| Date | |
| 23,978 |
| $ | 5.00 |
| March 29, 2021 |
| 23,978 |
|
|
|
|
|
The following table shows exercise prices and expiration dates for warrants outstanding as of June 30, 2016:
|
|
|
|
|
|
|
| Exercise |
|
| |
Warrants |
| Price |
| Expiration | |
Outstanding |
| Per Share |
| Date | |
| 2,376,675 |
| $ | 2.61 |
| September 18, 2016 |
| 45,000 |
| $ | 2.10 |
| December 31, 2017 |
| 23,978 |
| $ | 5.00 |
| March 29, 2021 |
| 2,445,653 |
|
|
|
|
|
Warrant activity for the changesyears ended June 30, 2017, 2016, and 2015 was as follows:
Warrants | ||
Outstanding at June 30, 2015 | 4,309,000 | |
Issued | 23,978 | |
Exercised | (1,887,325) | |
Expired | — | |
Outstanding at June 30, 2016 | 2,445,653 | |
Issued | — | |
Exercised | (2,401,408) | |
Cancelled | (20,267) | |
Expired | ��� | |
Outstanding at June 30, 2017 | 23,978 |
On March 17, 2011, in conjunction with a private placement offering the Company issued warrants to purchase up to 4.3 million shares of Common Stock, exercisable at $2.6058 per share. The 4.3 million warrants were exercisable from September 17, 2011 through September 17, 2016. During the year ended June 30, 2017 and June 30, 2016, approximately 2.4 million and 1.9 million warrants were exercised and the Company received cash proceeds of $6.2 million and $4.9 million, respectively. Due to a change in control provision, the Company has recorded a liability of $0.0 million and $3.7 million at June 30, 2017 and 2016, respectively, for the estimated fair value of the Company’s Level 3 financial instrumentswarrants in its Consolidated Balance Sheet (see Note 11‑Fair Value of Financial Instruments). Period to period changes in the fair value of these warrants were reflected through income. As of June 30, 2017 all of these warrants have been exercised.
In conjunction with the Loan and Security agreement (Note 9 – Line of Credit) and as a condition of the Avid bank (“the Bank”) entering into the First Amendment, the Company issued to the Bank warrants to purchase up to 45 thousand shares of Common Stock of the Company. The warrants were exercisable at any time prior to December 31, 2017 at an exercise price of $2.10 per share. Upon issuance, the fair value of the warrants was $55 thousand using a Black Scholes model, which was recorded as prepaid interest and included in other assets on the Consolidated Balance Sheet, and was amortized
F-22
as non-cash interest expense over the remaining term of the Line of Credit as amended in January 2013. During the year ended June 30, 2017, these options were converted into shares per the terms of the warrant agreement. As of June 30, 2017 all of these warrants have been exercised.
On March 29, 2016, the Company entered into a Loan and Security Agreement with a secondary bank (Note 9 – Line of Credit), providing a secured asset-based revolving line of credit in an amount of up to $12 million. In conjunction with the Loan and Security Agreement the company issued to the bank warrants to purchase up to 24 thousand shares of Common Stock of the Company. The warrants are exercisable at any time prior to March 29, 2021 at an exercise price of $5.00 per share. At the time of issuance the fair value of the warrants was estimated at $52 thousand using a Black Scholes model. This was recorded as a contra-debt item and is included in the line of credit on the Consolidated Balance Sheet, and is being amortized as a non-cash interest expense over the remaining term of the Line of Credit. Non-cash interest expense of $39 thousand and $13 thousand has been recognized for the years ended:
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Beginning balance | $ | (650,638 | ) | $ | (918,566 | ) | ||
| Gain due to change in fair value of warrant liabilities, net | 65,429 | 267,928 | ||||||
| Ending balance | $ | (585,209 | ) | $ | (650,638 | ) | ||
13. INCOME TAXES
The Company has significant deferred tax assets, a substantial amount of which result from operating loss carryforwards. The Company routinely evaluates its ability to realize the benefits of these assets to determine whether it is more likelikely than not that such benefit will be realized. In periods prior to the year ended June 30, 2014, the Company’s evaluation of its ability to realize the benefit from its deferred tax assets resulted in a full valuation allowance against such assets. Based upon earnings performance that the Company hashad achieved currently and in the recent past along with the belief that such performance will continue into future years, the Company has determined during the year ended June 30, 2014 that it iswas more likely than not that a substantial portion of its deferred tax assets willwould be realized and has reducedwith approximately $64 million of its operating loss carryforwards being utilized to offset corresponding future years’ taxable income resulting in a reduction in its valuation allowances recorded in prior years by $27,255,398, which includes $40,245 of deferred tax liabilities recorded as of June 30, 2013 (as described hereinafter) reversing in the current year .
In addition to considering recent periods’ performance, the evaluation of the amount of deferred tax assets expected to be realized involves forecasting the amount of taxable income that will be generated in future years. The number of connections added in a service year is a key metric which, in the Company’s recurring revenue service model, becomes an important ingredient in driving future growth and earnings. The Company has forecasted future results using estimates that management believes to be conservative. The number of connections added in a service year are a key metric, which in the Company’s recurring revenue service model become an important ingredient in driving future growth and earnings. The forecasts the Company used assumed that significantly fewer net connections would be added to its service year than what it has historically achieved during each of its previous five fiscal years.achievable. With respect to its forecasts, the Company also tookhas taken into account several industry analysts who have projected that demand for technology and services similar to the Company’s will continue to grow in the markets the Company serves. Using these forecasts, the Company estimated that it was more likely than not that approximately $64 million of its operating loss carryforwards would be utilized to offset corresponding future taxable income.
If in future periods the Company demonstrates its ability to grow future taxable income in excess of the forecasts described above,it has used, it will re-evaluate the need to keep some, or all, of the remaining valuation allowances of $22,833,685approximately $23 million on its deferred tax assets.
The reduction(provision) benefit for income taxes for the years ended June 30, 2017, 2016 and 2015 is comprised of the $27,255,398 in valuation allowances is reflected as an income tax benefit in thefollowing:
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2017 |
| 2016 |
| 2015 | |||
Current: |
|
|
|
|
|
|
|
|
|
Federal |
| $ | (2) |
| $ | (7) |
| $ | (58) |
State |
|
| (31) |
|
| (38) |
|
| (6) |
Total current |
|
| (33) |
|
| (45) |
|
| (64) |
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
| (14) |
|
| 407 |
|
| 365 |
State |
|
| (40) |
|
| 253 |
|
| (590) |
Total deferred |
|
| (54) |
|
| 660 |
|
| (225) |
Total income tax (provision) benefit |
| $ | (87) |
| $ | 615 |
| $ | (289) |
The provision for income taxes for the year ended June 30, 20142015 includes $396 thousand for the state and is net of amounts that otherwise would have been recorded for current federal income taxestax effects of $21,021,a decrease in the applicable state tax rate used to tax effect deferred federal income taxes of $52,533, deferredtax assets resulting from a state income taxestax law change.
F-23
A reconciliation of the (provision) benefit for income taxes for the years ended June 30, 20132017, 2016 and 2012 were $27,646 and $12,599, respectively, comprised of deferred federal2015 to the indicated (provision) benefit based on income taxes of $20,842 and $9,498, respectively, and deferred state income taxes of $6,804 and $3,101, respectively. These deferred income taxes were recorded for the future potential income tax effects for basis differences between financial reporting and income tax purposes for indefinite life intangible assets and goodwill that are being amortized(loss) before (provision) benefit for income tax purposes but not for financial reporting. Because there was a full valuation allowance reflected against deferred tax assets as of June 30, 2013 and June 30, 2012, the potential future income tax effects associated with such indefinite life assets were not subject to offset deferred tax assets with finite lives.
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
| 2017 |
| 2016 |
| 2015 | |||
Indicated (provision) benefit at federal statutory rate of 34% |
| $ | 600 |
| $ | 2,523 |
| $ | 272 |
Effects of permanent differences |
|
|
|
|
|
|
|
|
|
Warrants |
|
| (507) |
|
| (1,929) |
|
| (133) |
Other |
|
| (137) |
|
| (111) |
|
| (82) |
State income taxes, net of federal benefit |
|
| (59) |
|
| 199 |
|
| (410) |
Income tax credits |
|
| 60 |
|
| 70 |
|
| 40 |
Changes related to prior years |
|
| 8 |
|
| — |
|
| 187 |
Changes in valuation allowances |
|
| (52) |
|
| (137) |
|
| (163) |
|
| $ | (87) |
| $ | 615 |
| $ | (289) |
At June 30, 20142017 the Company had federal and state operating loss carryforwards of $165,566,973approximately $162 million and $72 million, respectively, to offset future taxable income expiring through approximately 2034.2037. The timing and extent to which the Company can utilize operating loss carryforwards in any year may be limited bybecause of provisions of the Internal Revenue Code regarding changes in ownership of corporations (i.e. IRS Code Section 382). The changes in ownership limitations under IRS Code Section 382 have had the effect of limiting the maximum amount of federal operating loss carryforwards as of June 30, 20142017 available for use to offset future years’ taxable income to $127,362,276. Thoseapproximately $124 million. Federal and state operating loss carryforwards start to expire June 30, 2022.
The net deferred tax assets arose primarily from net operating loss carryforwards, as well as the use of different accounting methods for financial statement and income tax reporting purposes as follows:
|
|
|
|
|
|
|
|
| June 30, | ||||
($ in thousands) |
| 2017 |
| 2016 | ||
Deferred tax assets: |
|
|
|
|
|
|
Net operating loss carryforwards |
| $ | 46,604 |
| $ | 46,691 |
Asset reserves |
|
| 2,063 |
|
| 1,713 |
Deferred research and development |
|
| 1,634 |
|
| 1,356 |
Intangibles |
|
| 244 |
|
| 539 |
Deferred gain on assets under sale-leaseback transaction |
|
| 125 |
|
| 331 |
Stock-based compensation |
|
| 607 |
|
| 377 |
Other |
|
| 285 |
|
| 379 |
|
|
| 51,562 |
|
| 51,386 |
Deferred tax liabilities: |
|
|
|
|
|
|
Fixed assets |
|
| (706) |
|
| (528) |
Deferred tax assets, net |
|
| 50,856 |
|
| 50,858 |
Valuation allowance |
|
| (23,186) |
|
| (23,134) |
Deferred tax assets, net of allowance |
| $ | 27,670 |
| $ | 27,724 |
14. STOCK BASED COMPENSATION PLANS
The Company has three active stock based compensation plans at June 30, 2017 as shown in the table below:
Authorized | ||||||
Date Approved | Name of Plan | Type of Plan | Shares | |||
June 2013 | 2013 Stock Incentive Plan | Stock | 500,000 | |||
June 2014 | 2014 Stock Option Incentive Plan | Stock Options | 750,000 | |||
June 2015 | 2015 Stock Incentive Plan | Stock & Stock Options | 1,250,000 | |||
2,500,000 |
F-24
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 47,776,042 | $ | 49,534,732 | ||||
| Deferred research and development costs | 710,640 | 135,189 | ||||||
| Intangibles | 907,274 | 1,132,471 | ||||||
| Stock-based compensation | 250,426 | 230,452 | ||||||
| Deferred gain on assets under sale-leaseback transaction | 460,902 | - | ||||||
| Other | 740,040 | 671,947 | ||||||
| 50,845,324 | 51,704,791 | |||||||
| Deferred tax liabilities: | ||||||||
| Intangibles and goodwill | (67,459 | ) | (40,245 | ) | ||||
| Fixed Assets | (683,159 | ) | (585,889 | ) | ||||
| Deferred tax assets, net | 50,094,706 | 51,078,657 | ||||||
| Valuation allowance | (22,833,685 | ) | (51,118,902 | ) | ||||
| Deferred tax assets (liabilties), net of allowance | 27,261,021 | (40,245 | ) | |||||
| Less current portion | 907,691 | - | ||||||
| Deferred tax assets (liabilties), non-current | $ | 26,353,330 | $ | (40,245 | ) | |||
As of June 30, 2014 each share of Series A Preferred Stock is convertible into 0.194 of a share of Common Stock and each share of Series A Preferred Stock is entitled to 0.194 of a vote on all matters on which the holders of Common Stock are entitled to vote. Series A Preferred Stock provides for an annual cumulative dividend of $1.50 per share, payable when, as and if declared by the Board of Directors, to the shareholders of record in equal parts on February 1 and August 1 of each year. Any and all accumulated and unpaid cash dividends on the Series A Preferred Stock must be declared and paid prior to the declaration and payment of any dividends on the Common Stock.
Exercise of Common Stock Warrants | 23,978 | |||
Conversions of Preferred Stock and cumulative Preferred Stock dividends | 100,667 | |||
Issuance under 2013 Stock Incentive Plan | 9,004 | |||
Issuance under 2014 Stock Option Incentive Plan | 1,447 | |||
Issuance under 2015 Stock Incentive Plan | 1,052,000 | |||
Issuance to former Chief Executive Officer upon the occurrence of a USA Transaction | 140,000 | |||
Total shares reserved for future issuance |
| Weighted-Average | ||||||||
| Grant-Date | ||||||||
| Shares | Fair Value | |||||||
Nonvested Shares | ||||||||
| Nonvested at June 30, 2011 | 187,335 | $ | 2.32 | |||||
| Granted | 473,285 | 1.58 | ||||||
| Vested | (380,282 | ) | 1.73 | |||||
| Forfeited due to Separation Agreement | (91,667 | ) | 2.00 | |||||
| Forfeited, Director changes | (16,668 | ) | 1.71 | |||||
| Nonvested at June 30, 2012 | 172,003 | $ | 1.82 | |||||
| Granted | 156,429 | 1.45 | ||||||
| Vested | (204,587 | ) | 1.72 | |||||
| Forfeited, Employee shares not earned | (26,699 | ) | 1.52 | |||||
| Nonvested at June 30, 2013 | 97,146 | $ | 1.52 | |||||
| Granted | 10,000 | 2.17 | ||||||
| Vested | (55,001 | ) | 1.62 | |||||
| Forfeited, Director changes | (3,334 | ) | 0.94 | |||||
| Forfeited, Employee shares not earned | (5,000 | ) | 1.52 | |||||
| Nonvested at June 30, 2014 | 43,811 | $ | 1.59 | |||||
| Exercise | ||||||
| Warrants | Price | Expiration | ||||
| Outstanding | Per Share | Date | ||||
| 4,264,000 | $ | 2.6058 | September 18, 2016 | |||
| 45,000 | $ | 2.10 | December 31, 2017 | |||
| 4,309,000 | ||||||
1,327,096 |
STOCK OPTIONS
The Company estimates the grant date fair value of the stock options it grants using a Black-Scholes valuation model. The Company’s assumption for expected volatility is based on its historical volatility data related to market trading of its own common stock. The Company bases its assumptions for expected life of the new stock option grants on the life of the option granted, and if relevant, its analysis of the historical exercise patterns of its stock options. The dividend yield assumption is based on dividends expected to be paid over the expected life of the stock option. The risk-free interest rate assumption is determined by using the U.S. Treasury rates of the same period as the expected option term of each stock option.
|
|
|
|
|
|
|
|
| Year ended |
| Year ended |
| Year ended |
|
| June 30, 2017 |
| June 30, 2016 |
| June 30, 2015 |
|
|
|
|
|
|
|
Expected volatility |
| 48-50% |
| 59-66% |
| 78-79% |
Expected life |
| 4 years |
| 4.5 years |
| 7 years |
Expected dividends |
| 0.00% |
| 0.00% |
| 0.00% |
Risk-free interest rate |
| 1.06-1.90% |
| 1.46-1.49% |
| 1.59-2.04% |
Stock based compensation related to stock options granted duringfor the fiscal yearyears ended June 30, 20142017, 2016 and 2015 was $1.49. There were no$264 thousand, $338 thousand, and $370 thousand respectively. Unrecognized compensation related to stock option grants as of June 30, 2017, 2016, and 2015 was $450 thousand, $167 thousand, and $297 thousand respectively.
The following tables provide information about outstanding options granted duringfor the fiscal years ended June 30, 20132017, 2016, and 2012. 2015:
|
|
|
|
|
|
|
|
|
|
| For the Twelve Months Ended June 30, | ||||||
|
| 2017 | ||||||
|
|
|
| Weighted |
|
| ||
|
|
|
| Average Grant |
| Weighted Average | ||
|
| Shares |
| Date Fair Value |
| Exercise Price | ||
|
|
|
|
|
|
|
|
|
Outstanding options, beginning of period |
| 610,141 |
| $ | 1.35 |
| $ | 2.07 |
Granted |
| 303,079 |
| $ | 1.80 |
| $ | 4.30 |
Forfeited |
| — |
| $ | — |
| $ | — |
Exercised |
| — |
| $ | — |
| $ | — |
Expired |
| — |
| $ | — |
| $ | — |
Outstanding options, end of period |
| 913,220 |
| $ | 1.51 |
| $ | 2.82 |
F-25
|
|
|
|
|
|
|
|
|
|
| For the Twelve Months Ended June 30, | ||||||
|
| 2016 | ||||||
|
|
|
| Weighted |
|
| ||
|
|
|
| Average Grant |
| Weighted Average | ||
|
| Shares |
| Date Fair Value |
| Exercise Price | ||
|
|
|
|
|
|
|
|
|
Outstanding options, beginning of period |
| 538,888 |
| $ | 1.33 |
| $ | 1.86 |
Granted |
| 199,586 |
| $ | 1.63 |
| $ | 3.21 |
Forfeited |
| (95,000) |
| $ | 1.80 |
| $ | 3.38 |
Exercised |
| — |
| $ | — |
| $ | — |
Expired |
| (33,333) |
| $ | 1.27 |
| $ | 1.80 |
Outstanding options, end of period |
| 610,141 |
| $ | 1.35 |
| $ | 2.07 |
|
|
|
|
|
|
|
|
|
|
| For the Twelve Months Ended June 30, | ||||||
|
| 2015 | ||||||
|
|
|
| Weighted |
|
| ||
|
|
|
| Average Grant |
| Weighted Average | ||
|
| Shares |
| Date Fair Value |
| Exercise Price | ||
|
|
|
|
|
|
|
|
|
Outstanding options, beginning of period |
| 120,000 |
| $ | 1.49 |
| $ | 2.05 |
Granted |
| 438,888 |
| $ | 1.30 |
| $ | 1.82 |
Forfeited |
| (20,000) |
| $ | 1.49 |
| $ | 2.05 |
Exercised |
| — |
| $ | — |
| $ | — |
Expired |
| — |
| $ | — |
| $ | — |
Outstanding options, end of period |
| 538,888 |
| $ | 1.33 |
| $ | 1.86 |
The fair valuefollowing table provides information related to options as of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
| Options Exercisable | |||||||
|
|
|
| Remaining Contractual |
| Shares |
| Remaining Contractual |
| Weighted Average | |
Range of Exercise Prices |
| Options Outstanding |
| Life |
| Exercisable |
| Life |
| Exercise Price | |
|
|
|
|
|
|
|
|
|
|
|
|
$1.62 to $1.68 |
| 75,000 |
| 4.51 |
| 50,001 |
| 4.51 |
| $ | 1.65 |
$1.80 to $2.00 |
| 295,555 |
| 4.16 |
| 245,555 |
| 4.16 |
| $ | 1.80 |
$2.05 |
| 100,000 |
| 3.97 |
| 100,000 |
| 3.97 |
| $ | 2.05 |
$2.09 |
| 10,000 |
| 4.58 |
| 6,666 |
| 4.58 |
| $ | 2.09 |
$2.75 |
| 25,000 |
| 4.77 |
| 16,666 |
| 4.77 |
| $ | 2.75 |
$2.94 |
| 75,000 |
| 5.53 |
| 25,000 |
| 5.53 |
| $ | 2.94 |
$3.38 |
| 29,585 |
| 5.06 |
| 29,586 |
| 5.06 |
| $ | 3.38 |
$4.00 |
| 75,000 |
| 6.69 |
| — |
| — |
| $ | — |
$4.05 |
| 30,000 |
| 6.61 |
| 10,000 |
| 6.61 |
| $ | 4.05 |
$4.40 |
| 178,000 |
| 6.78 |
| — |
| — |
| $ | — |
$4.98 |
| 20,080 |
| 6.17 |
| — |
| — |
| $ | — |
|
| 913,220 |
| 5.18 |
| 483,474 |
| 4.36 |
| $ | 2.08 |
The following table provides information about unvested options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Twelve Months Ended June 30, | |||||||||||||||
|
|
| 2017 |
|
| 2016 |
|
| 2015 | |||||||||
|
|
|
|
| Weighted |
|
|
|
| Weighted |
|
|
|
| Weighted | |||
|
|
|
|
| Average Grant |
|
|
|
| Average Grant |
|
|
|
| Average Grant | |||
|
|
| Shares |
| Date Fair Value |
|
| Shares |
| Date Fair Value |
|
| Shares |
| Date Fair Value | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested options, beginning of period |
|
| 311,248 |
| $ | 1.39 |
|
| 505,553 |
| $ | 1.32 |
|
| 120,000 |
| $ | 1.49 |
Granted |
|
| 303,079 |
| $ | 1.80 |
|
| 199,586 |
| $ | 1.63 |
|
| 438,888 |
| $ | 1.30 |
Vested |
|
| (184,581) |
| $ | 1.42 |
|
| (298,891) |
| $ | 1.31 |
|
| (33,335) |
| $ | 1.49 |
Forfeited |
|
| — |
| $ | — |
|
| (95,000) |
| $ | 1.80 |
|
| (20,000) |
| $ | 1.49 |
Unvested options, end of period |
|
| 429,746 |
| $ | 1.67 |
|
| 311,248 |
| $ | 1.39 |
|
| 505,553 |
| $ | 1.32 |
The following table provides information about options grantedoutstanding and exercisable options:
F-26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2015 | ||||||||||||
|
| Options |
| Exercisable |
| Options |
| Exercisable |
| Options |
| Exercisable | ||||||
|
| Outstanding |
| Options |
| Outstanding |
| Options |
| Outstanding |
| Options | ||||||
Number |
|
| 913,220 |
|
| 483,474 |
|
| 610,141 |
|
| 298,893 |
|
| 538,888 |
|
| 33,335 |
Weighted average exercise price |
| $ | 2.82 |
| $ | 2.08 |
| $ | 2.07 |
| $ | 1.87 |
| $ | 1.86 |
|
| 2.05 |
Aggregate intrinsic value |
| $ | 2,173,464 |
| $ | 1,508,439 |
| $ | 1,341,828 |
| $ | 717,343 |
| $ | 452,666 |
|
| 21,668 |
Weighted average contractual term |
| $ | 5.18 |
|
| 4.36 |
|
| 5.42 |
|
| 5.17 |
|
| 6.21 |
|
| 5.97 |
Share price as of June 30 |
| $ | 5.20 |
| $ | 5.20 |
| $ | 4.27 |
| $ | 4.27 |
| $ | 2.70 |
| $ | 2.70 |
STOCK GRANTS
A summary of the status of the Company’s nonvested common shares as of June 30, 2017, 2016, and 2015, and changes during the fiscal yearyears then ended is presented below:
|
|
|
|
|
|
|
|
|
| Weighted-Average | |
|
|
|
| Grant-Date | |
|
| Shares |
| Fair Value | |
|
|
|
|
|
|
Nonvested at June 30, 2014 |
| 43,811 |
| $ | 1.59 |
Granted |
| 155,927 |
|
| 2.00 |
Vested |
| (181,134) |
|
| 1.89 |
Nonvested at June 30, 2015 |
| 18,604 |
| $ | 1.88 |
Granted |
| 131,558 |
|
| 3.04 |
Vested |
| (21,664) |
|
| 2.70 |
Nonvested at June 30, 2016 |
| 128,498 |
| $ | 2.97 |
Granted |
| 135,585 |
|
| 4.25 |
Vested |
| (141,527) |
|
| 3.33 |
Nonvested at June 30, 2017 |
| 122,556 |
| $ | 3.96 |
15. PREFERRED STOCK
The authorized Preferred Stock may be issued from time to time in one or more series, each series with such rights, preferences or restrictions as determined by the Board of Directors. As of June 30, 2014 was estimated2017 each share of Series A Preferred Stock is convertible into 0.194 of a share of Common Stock and each share of Series A Preferred Stock is entitled to 0.194 of a vote on all matters on which the holders of Common Stock are entitled to vote. Series A Preferred Stock provides for an annual cumulative dividend of $1.50 per share, payable when, and if declared by the Board of Directors, to the shareholders of record in equal parts on February 1 and August 1 of each year. Any and all accumulated and unpaid cash dividends on the Series A Preferred Stock must be declared and paid prior to the declaration and payment of any dividends on the Common Stock.
The Series A Preferred Stock may be called for redemption at the grant date usingoption of the following weighted average assumptions:
|
|
|
|
|
|
|
|
| June 30, |
| June 30, | ||
($ in thousands) |
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
For Shares outstanding at $10.00 per share |
| $ | 4,451 |
| $ | 4,451 |
Cumulative unpaid dividends |
|
| 14,324 |
|
| 13,657 |
|
| $ | 18,775 |
| $ | 18,108 |
Cumulative unpaid dividends are convertible into common shares at $1,000 per common share at the option of the shareholder. During the years ended June 30, 2014, 2013, and 2012 was as follows:
| Weighted- | ||||||||||||
| Exercise | Average | |||||||||||
| Options | Price | Exercise | ||||||||||
| Outstanding | Per Share | Price | ||||||||||
| Outstanding and exercisable at June 30, 2011 | 90,666 | $ | 7.50-8 | $ | 7.53 | |||||||
| Granted | - | - | - | |||||||||
| Expired | (45,333 | ) | $ | 7.50-8 | $ | 7.53 | ||||||
| Outstanding and exercisable at June 30, 2012 | 45,333 | $ | 7.50-8 | $ | 7.53 | |||||||
| Granted | - | - | - | |||||||||
| Expired | (45,333 | ) | $ | 7.50-8 | $ | 7.53 | ||||||
| Outstanding and exercisable at June 30, 2013 | - | $ | - | $ | - | |||||||
| Granted | 120,000 | $ | 2.05 | $ | 2.05 | |||||||
| Exercised/vested | - | $ | - | $ | - | |||||||
| Expired | - | $ | - | $ | - | |||||||
| Outstanding at June 30, 2014 | 120,000 | $ | 2.05 | $ | 2.05 | |||||||
F-27
| Weighted Average | |||||||||||||||||||||||||
| Options | Options | Exercise Price Per | Remaining Life | Remaining Life | Intrinsic Value- | ||||||||||||||||||||
| Outstanding | Exercisable | Share | Outstanding | Exercisable | Outstanding | Exercisable | |||||||||||||||||||
| 120,000 | - | $ | 2.05 | 6.97 | - | - | - | ||||||||||||||||||
| 120,000 | - | 6.97 | - | - | - | ||||||||||||||||||||
16. RETIREMENT PLAN
The Company’s 401(k) Plan (the “Retirement Plan”) allows employees who have completed six months of service to make voluntary contributions up to a maximum of 100% of their annual compensation, as defined in the Retirement Plan. The Company may, in its discretion, make a matching contribution, a profit sharing contribution, a qualified non-elective contribution, and/or a safe harbor 401(k) contribution to the Retirement Plan. The Company must make an annual election, at the beginning of the plan year, as to whether it will make a safe harbor contribution to the plan. In fiscal years 2014, 20132017, 2016 and 2012,2015, the Company elected and made a safe harbor matching contributions of 100% of the participant’s first 3% and 50% of the next 2% of compensation deferred into the Retirement Plan. The Company’s safe harbor contributions for the years ended June 30, 2014, 20132017, 2016 and 20122015 approximated $168,000, $176,000$214 thousand, $189 thousand and $140,000,$192 thousand, respectively.
17. COMMITMENTS AND CONTINGENCIES
SALE AND LEASEBACK TRANSACTIONS
During the yearsfiscal year ended June 30, 2014, and 2013. During the year ended June 30, 2012, the Company incurred approximately $744,000 in connection with legal services provided by the law firm of a member of the Company’s Board of Directors. As of July 2012 this person was no longer a Director.
Rent expense under the Sale Leaseback Agreements as described above were completed subsequent towas approximately $1.5 million, $2.6 million, and $2.5 million during the years ended June 30, 2014 (see Note 17).
Upon the completion of the sale under the first two agreements in June 2014,sales, the Company computed a total gain on the sale of its ePort equipment in the amount of $1,152,207 as follows:
|
|
|
|
|
| Year ended June 30, | |
($ in thousands) |
| 2015 | |
|
|
|
|
Rental equipment sold, cost |
| $ | 3,873 |
Rental equipment sold, accumulated depreciation upon sale |
|
| (331) |
Rental equipment sold, net book value |
|
| 3,542 |
Proceeds from sale |
|
| 4,994 |
Gain on sale of rental equipment |
| $ | 1,452 |
| Rental equipment sold, cost | $ | 1,918,920 | ||
| Rental equipment sold, accumulated depreciation upon sale | (76,032 | ) | ||
| Rental equipment sold, net book value | 1,842,888 | |||
| Proceeds from Sale | 2,995,095 | |||
| Gain on sale of rental equipment | $ | 1,152,207 |
In accordance with the FASB topic ASC 840-40,840‑40, “Sale Leaseback Transactions”, any gain shall be deferred and shall be amortized in proportion to the related gross rental charged to expense over the lease term. TheAs such, the computed gain on the sale will bewas being recognized ratably over the 36 month lease term and charged as a reduction to the Company’s JumpStart rent expense included in costs of services in the Company’s consolidated statementConsolidated Statement of operations. ForOperations.
During the fiscal year ended June 30, 20142017, the Company recognized $9,522extended the termination date for each of the six Sales Leaseback Agreements with the third party financing company for an additional year and the extension will also result in the transfer of ownership of the leased assets to the Company at the end of the new term. As a result of the new provision for ownership transfer at the end of the lease, the Sale Leaseback Agreements previously considered to be operating leases are classified as capital leases at June 30, 2017 and the remaining deferred gain at the time of the extension will be amortized ratably over the remaining estimated useful lives of the related property and equipment, through the fourth quarter of 2019.
At June 30, 2017 and 2016 the deferred gain amounted to $1,142,685was as follows:
F-28
|
|
|
|
|
|
|
|
| Year ended June 30, | ||||
($ in thousands) |
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Beginning balance |
| $ | 900 |
| $ | 1,760 |
Recognition of deferred gain |
|
| (561) |
|
| (860) |
Ending balance |
|
| 339 |
|
| 900 |
Less current portion |
|
| 239 |
|
| 860 |
Non-current portion of deferred gain |
| $ | 100 |
| $ | 40 |
OTHER LEASES
Other lease commitments include leases for its operations from various facilities. The Company leases 17,249 square feet of space located in Malvern, Pennsylvania for its principal executive office and used for general administrative functions, sales activities, product development, and customer support. In November 2010,On December 1, 2016, pursuant to a Third Amendment to Office Space Lease entered into in April 2016, the Company entered into an amended leaserelocated from the approximately 17,249 square feet of its principal executive officepremises that it previously leased on the first floor of the building in Malvern, Pennsylvania, which extendedto 17,689 square feet of space on the leasethird floor of such building. The Third Amendment provided that the term fromof the Lease would expire seven years following December 31, 20101, 2016, and granted to April 2016.the Company the option to extend the term of the Lease for an additional five-year period, and provided certain rights of first offer on additional space located on the third floor of the building. The amendment includes rental payments of approximately $29,000 to $32,000 as well as a four month period of no rent payments and leasehold improvements of approximately $195,000. The straight-linedstraight-line rent expense for this office was approximately $38 thousand per month. Commencing in June 2016, and pursuant to a Fourth Amendment to Office Space Lease, the Company has been temporarily leasing an additional 1,097 square feet of space in the building on month-to-month basis at a monthly rent of $1,120. Pursuant to the rights of first offer set forth in the lease, commencing on August 7, 2017, and as provided in the Fifth Amendment to Office Space Lease, the Company expanded its leased space to a total of 23,138 square feet. The Company’s monthly base rent is now approximately $25,000 per month for$47 thousand, and will increase each year up to a maximum monthly base rent of approximately $53 thousand during the durationremaining term of the lease.
The Company leases space in Malvern, Pennsylvania for its product warehousing and shipping support. In October 2011,March 2016, the Company amended theextended its lease of its operations site in Malvern, Pennsylvania, to extend the lease term from December 31, 2011 to December 31, 2012. The amendment includes monthly rental payments of approximately $15,100 to $16,200. Beginning in January 2012 the straight-lined rent expense for this office is approximately $15,600 per month for the duration of the amended lease period. In November 2012, the Company amended and extended this lease to January 31, 2013 with monthly rent of $16,721 for January 2013.
The Company leases space in Portland, Oregon related to its VendScreen acquisition. The current lease commenced on October 17, 2016, and will terminate on December 31, 2019. The leased premises consists of approximately 5,362 square feet of rentable space. The lease includes monthly rental payments of approximately $11 thousand through December 31, 2019. The Company classifies this lease as an operating lease.
Rent expense under other operating leases was approximately $372,000, $432,000,$729 thousand, $479 thousand and $502,000$354 thousand during the years ended June 30, 2014, 2013,2017, 2016, and 2012,2015, respectively.
F-29
SUMMARY OF LEASE OBLIGATIONS
Future minimum lease payments for fiscal years subsequent to June 30, 20142017 under non-cancellable operating leases and capital leases are as follows:
|
|
|
|
|
|
|
|
| Operating |
| Capital | ||
($ in thousands) |
| Leases |
| Leases | ||
|
|
|
|
|
|
|
2018 |
| $ | 628 |
| $ | 2,996 |
2019 |
|
| 621 |
|
| 217 |
2020 |
|
| 523 |
|
| 21 |
2021 |
|
| 465 |
|
| 19 |
2022 |
|
| 474 |
|
| 10 |
Thereafter |
|
| 685 |
|
| — |
Total minimum lease payments |
| $ | 3,396 |
| $ | 3,263 |
Less Amount Representing interest |
|
|
|
|
| 198 |
Present Value of net minimum lease payments |
|
|
|
|
| 3,065 |
Less Current obligations under capital leases |
|
|
|
|
| 2,819 |
Obligations under capital leases, less current portion |
|
|
|
| $ | 246 |
| Operating Leases | Other Operating | Total Operating | Capital | |||||||||||||
| from Sale Leaseback | Leases | Leases | Leases | |||||||||||||
| 2015 | $ | 988,381 | $ | 435,578 | $ | 1,423,959 | $ | 198,416 | ||||||||
| 2016 | 988,381 | 361,927 | 1,350,308 | 111,647 | ||||||||||||
| 2017 | 988,381 | 810 | 989,191 | 92,261 | ||||||||||||
| 2018 | - | - | - | 60,585 | ||||||||||||
| 2019 | - | - | - | 23,362 | ||||||||||||
| Thereafter | - | - | - | - | ||||||||||||
| Total minimum lease payments | $ | 2,965,143 | $ | 798,315 | $ | 3,763,458 | $ | 486,271 | ||||||||
| Less amount representing interest | 71,745 | |||||||||||||||
| Present value of net minimum lease payments | 414,526 | |||||||||||||||
| Less current obligations under capital leases | 164,660 | |||||||||||||||
| Obligations under capital leases, less current portion | $ | 249,866 | ||||||||||||||
LITIGATION
As previously reported, on October 1, 2013, which is automatically renewed for consecutive one year periods unless terminated by either Mr. Herbert or the Company upon at least ninety days’ notice prior to the end of the initial term or any one year extension thereof.
On August 16, 2016, the plaintiff filed a Motion For Relief From Final Judgment with the District Court seeking an order modifying the District Court’s April 14, 2012;2016 order dismissing the complaint, and 8,334 on April 14, 2013.
By letter dated December 7, 2015, a purported shareholder of the Company will not have a material effect ondemanded that the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s current and former officers and directors for breach of fiduciary duties in connection with the material weakness in its internal controls over financial position and results of operations or cash flows.
F-30
The ultimate outcome of these matters cannot be determined at this time. The Company believes that it has meritorious defenses to such claims and is defending them vigorously, and has not recorded a provision for the ultimate outcome of these matters in its financial statements.
18. UNAUDITED QUARTERLY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| UNAUDITED | |||||||||||||
YEAR ENDED JUNE 30, 2017 |
| First Quarter |
| Second Quarter |
| Third Quarter |
| Fourth Quarter |
| Year | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 21,588 |
| $ | 21,756 |
| $ | 26,460 |
| $ | 34,289 |
| $ | 104,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
| $ | 6,167 |
| $ | 6,334 |
| $ | 6,625 |
| $ | 7,520 |
| $ | 26,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
| $ | (950) |
| $ | 234 |
| $ | 419 |
| $ | 432 |
| $ | 135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (2,464) |
| $ | 233 |
| $ | 136 |
| $ | 243 |
| $ | (1,852) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative preferred dividends |
| $ | (334) |
| $ | — |
| $ | (334) |
| $ | — |
| $ | (668) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common shares |
| $ | (2,798) |
| $ | 233 |
| $ | (198) |
| $ | 243 |
| $ | (2,520) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per common share - basic |
| $ | (0.07) |
| $ | 0.01 |
| $ | 0.00 |
| $ | 0.01 |
| $ | (0.06) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per common share - diluted |
| $ | (0.07) |
| $ | 0.01 |
| $ | 0.00 |
| $ | 0.01 |
| $ | (0.06) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic |
|
| 38,488,005 |
|
| 40,308,934 |
|
| 40,327,697 |
|
| 40,331,993 |
|
| 39,860,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - diluted |
|
| 38,488,005 |
|
| 40,730,712 |
|
| 40,327,697 |
|
| 40,772,482 |
|
| 39,860,335 |
F-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| UNAUDITED | |||||||||||||
YEAR ENDED JUNE 30, 2016 |
| First Quarter |
| Second Quarter |
| Third Quarter |
| Fourth Quarter |
| Year | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 16,600 |
| $ | 18,503 |
| $ | 20,361 |
| $ | 21,944 |
| $ | 77,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
| $ | 5,047 |
| $ | 5,483 |
| $ | 5,672 |
| $ | 5,783 |
| $ | 21,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
| $ | 112 |
| $ | 594 |
| $ | (595) |
| $ | (1,578) |
| $ | (1,467) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 360 |
| $ | (874) |
| $ | (5,420) |
| $ | (872) |
| $ | (6,806) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative preferred dividends |
| $ | (334) |
| $ | — |
| $ | (334) |
| $ | — |
| $ | (668) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares |
| $ | 26 |
| $ | (874) |
| $ | (5,754) |
| $ | (872) |
| $ | (7,474) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share - basic |
| $ | 0.00 |
| $ | (0.02) |
| $ | (0.16) |
| $ | (0.02) |
| $ | (0.21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share - diluted |
| $ | 0.00 |
| $ | (0.02) |
| $ | (0.16) |
| $ | (0.02) |
| $ | (0.21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic |
|
| 35,848,395 |
|
| 35,909,933 |
|
| 36,161,626 |
|
| 37,325,681 |
|
| 36,309,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - diluted |
|
| 36,487,879 |
|
| 35,909,933 |
|
| 36,161,626 |
|
| 37,325,681 |
|
| 36,309,047 |
21. SUBSE
19. SUBSEQUENT EVENTS
On July 25, 2017, the Company closed its underwritten public offering of 9,583,332 shares of its common stock at a public offering price of $4.50 per share. The foregoing included the full exercise of the underwriters' option to purchase common stock under1,249,999 additional shares from USAT. The gross proceeds to USAT from the Company’s 2014 Stock Option Incentive Planoffering, before deducting underwriting discounts and commissions and other offering expenses, was approximately $43.1 million. The Company intends to eachuse the net proceeds received from the offering for general corporate purposes and working capital to support anticipated growth. These purposes may include, among other things, future acquisitions of Messrs. Herbertbusinesses, products and DeMedio.
2
F-32
Item 9. ChangesChanges in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
temItem 9A. Controls and Procedures.Procedures
(a) | Evaluation of disclosure controls and procedures. |
The principal executive officer and principal financial officer have evaluated the Company’s disclosure controls and procedures as of June 30, 2014.2017. Based on this evaluation, they conclude that thethese disclosure controls and procedures were effectiveare effective. Disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) | Management’s annual report on internal control over financial reporting. |
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f)Rule 13a‑15(f). The Company’s internal control over financial reporting is a process affected by the Company’s management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S.United States generally accepted accounting principles.
In designing and evaluating our disclosureinternal controls and procedures, our management recognized that disclosureinternal controls and procedures, no matter how well conceived and operated, can provide only a reasonable, not absolute, assurance that the objectives of the disclosureinternal controls and procedures are met.
The Company’s management assessed the effectiveness of its internal control over financial reporting as of June 30, 2014.2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission inCommission’s 2013 Internal Control—Integrated Framework. Based on its assessment, management believesconcluded that as of June 30, 2014, the Company’s internal control over financial reporting is effective.
RSM US LLP, the Company’s independent registered public accounting firm regardingthat audited our financial statements included in this Annual Report on Form 10‑K, has issued an attestation report on our internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to an exemption for smaller reporting, companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(c) | Changes in internal control over financial reporting. |
We identified in our Form 10-K for the fiscal year ended June 30, 2016 (the “2016 Form 10-K”), significant deficiencies that, when aggregated, resulted in a material weakness in our internal controls over financial reporting.
In response to these weaknesses, we have designed and implemented a series of internal controls related to a number of business process areas, including:
· | Identification, analysis and accrual of merchant receivables at period-end |
· | Detailed review of the accounts receivable aging, and |
· | Search for and analysis of unrecorded liabilities prior to period close. |
We have successfully completed the testing and remediation necessary to conclude that the material weakness identified in our 2016 Form 10-K has been remediated.
48
Except as noted above, there have been no changes during the quarter ended June 30, 20142017 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, internal controlcontrols over financial reporting.
DIRECTORS AND EXECUTIVE OFFICERS
Our Directors and executive officers, on August 31, 2014,7, 2017, together with their ages and business backgrounds were as follows:
Name | Age | Position(s) Held | ||
Steven D. Barnhart (1)(2) | 55 | Director | ||
Joel Brooks | 58 | Director | ||
Stephen P. Herbert | 54 | Chief Executive Officer, Chairman of the Board of Directors | ||
Michael K. Lawlor | 56 | Chief Services Officer | ||
Priyanka Singh | 37 | Chief Financial Officer | ||
Robert L. Metzger (1) | 49 | Director | ||
Albin F. | 64 | Director | ||
William J. Reilly, Jr. | 68 | Director | ||
William J. Schoch (1)(4) | 52 | Director |
(1) | Member of Audit Committee |
(2) | Lead independent director |
(3) | Member of Compensation Committee |
(4) | Member of Nominating and Corporate Governance Committee |
Each member of the Board of Directors will hold office until the 20152018 annual shareholders’ meeting and until his or her successor has been elected and qualified.
Steven D. Barnhart was appointed to the Board of Directors in October 2009. Mr. Barnhart is the Company’s lead independent director, has been a member of our Audit Committee since December 2016, and isserved as a member of our Compensation Committee.Committee until December 2016. Since September 2014, Mr. Barnhart has served as the Senior Vice President and Chief Financial Officer for Bankrate, Inc. From August 2012 to June 2014, Mr. Barnhart served as the Senior Vice President and Chief Financial Officer of Sears Hometown and Outlet Stores, Inc. From January 2010 to June 2012, Mr. Barnhart served as the Senior Vice President and Chief Financial Officer of Bally Total Fitness. Mr. Barnhart was Chief Executive Officer and President of Orbitz Worldwide from 2007 to January 2009, after holding other executive positions since 2003, when he joined the company. Prior to Orbitz Worldwide, he worked for PepsiCo and the Pepsi Bottling Group from 1990 to 2003, where he was Finance Director for the Southeast Business Unit of the Pepsi Bottling Group, and held various finance and strategy roles at PepsiCo. Mr. Barnhart received a Bachelor of Arts degree in Economics in 1984 from the College of the University of Chicago and a Masters in Business Administration in 1988 from the University of Chicago-Booth School of Business. Mr. Barnhart served on the Board of Directors of Orbitz Worldwide from 2007 to January 2009. We believe Mr. Barnhart’s extensive executive experience and leadership skills, and prior public board experience provide the requisite qualifications, skills, perspectives, and experiences to serve on our Board of Directors.
Joel Brooks joined the Board of Directors of the Company duringin March 2007. Mr. Brooks is the Chair ofserved on our Audit Committee.Committee from March 2007 until December 2016, and served as Chair since October 2009. Since May 2015, Mr. Brooks has served as the Vice President, Finance, for MeiraGTx Limited. From December 2000 until May 2015, Mr. Brooks has served as the Chief Financial Officer, Treasurer and Secretary of Sevion Therapeutics, Inc. (formerly Senesco Technologies, Inc.), a biotechnology company whose shares are traded on the OTCQB. From September 1998 until November 2000, Mr. Brooks
49
was the Chief Financial Officer of Blades Board and Skate, LLC, a retail establishment specializing in the action sports industry. Mr. Brooks was Chief Financial Officer from 1997 until 1998 and Controller from 1994 until 1997 of Cable and Company Worldwide, Inc. He also held the position of Controller at USA Detergents, Inc. from 1992 until 1994, and held various positions at several public accounting firms from 1983 through 1992. Mr. Brooks received his Bachelor of Science degree in Commerce with a major in Accounting from Rider University in February 1983. We believe Mr. Brooks’ extensive accounting and finance background, and his executive experience at Senesco TechnologiesSevion Therapeutics, Inc. provide the requisite qualifications, skills, perspectives, and experiences to serve on our Board of Directors.
Stephen P. Herbert has been our Chief Executive Officer and Chairman since November 30, 2011. He was elected a director in April 1996, and joined the Company on a full-time basis on May 6, 1996 as Executive Vice President. During August 1999, Mr. Herbert was appointed President and Chief Operating Officer of the Company. On October 5, 2011, Mr. Herbert was appointed as interim Chief Executive Officer and Chairman, and on November 30, 2011, he was appointed as the Chairman of the Board of Directors and Chief Executive Officer of the Company. Prior to joining us and since 1986, Mr. Herbert had been employed by Pepsi-Cola, the beverage division of PepsiCo, Inc. From 1994 to April 1996, Mr. Herbert was a Manager of Market Strategy. In such position he was responsible for directing development of market strategy for the vending channel and subsequently the supermarket channel for Pepsi-Cola in North America. Prior thereto, Mr. Herbert held various sales and management positions with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science degree from Louisiana State University. We believe Mr. Herbert’s position as the President and Chief Operating Officer of our Company until October 5, 2011 and as Chairman and Chief Executive Officer of the Company thereafter, his intimate knowledge and experience with all aspects of our Company, and his extensive vending experience at PepsiCo before joining our Company provide the requisite qualifications, skills, perspectives, and experiences to serve on our Board of Directors.
Michael K. Lawlor has been our Chief Services Officer since March 8, 2016, in which role he oversees the Company’s ePort Connect Service, including delivery to customers of the ePort Connect suite of cashless payment, consumer engagement, loyalty and telemetry services, customer service and support, premium support services, Knowledge Base, and strategic partner development. Prior to his role as CSO, Mr. Lawlor was senior vice president of sales and business development at the Company. Since joining the Company in 1996, Mr. Lawlor has provided senior leadership driving innovative sales programs, national strategic partnerships and the development of an expanded suite of electronic payment services. Prior to joining the Company, he worked for Pepsi-Cola Co., a division of PepsiCo, managing the retail, restaurant and vending business sectors with regional and national positions that spanned several functions including sales, operations, and sales management in the Dallas and Houston, Texas, markets. He was also a national accounts sales manager on the Pepsi-Cola national food service team, responsible for corporate and franchise relationships, with multiple national restaurant chains. Mr. Lawlor graduated with a Bachelor of Business Administration degree from the University of Texas, Arlington, in 1986.
Priyanka Singh has been our Chief Financial Officer since March 31, 2017. Prior to that, Ms. Singh served as the Vice President of Product Strategy and Innovation, and as Division CFO for Heartland Commerce at Global Payments, Inc. since April 2016. Prior to the acquisition of Heartland Payment Systems by Global Payments in April 2016, she had served in various capacities since December 2011 with that company, including as Divisional CFO of the Heartland Commerce units, as Vice President, Finance, and as Director, Financial Planning and Analysis. Prior thereto and since 2005, she had been employed by General Electric in various roles at both GE Capital and GE Healthcare, focusing on financial planning and analysis, accounting, controllership, internal auditing and SOX compliance. Ms. Singh is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. She received a Bachelor of Commerce (Honors) degree in Finance and Accounting from University of Rajasthan, India.
Robert L. Metzger joined the Board of Directors of the Company in March 2016. Mr. Metzger has been the Chair of our Audit Committee since December 2016, and a member of the Audit Committee since June 2016. He has served as the Director of the Investment Banking Academy at the University of Illinois at Urbana-Champaign College of Business since August 2015, and as a lecturer in the Department of Finance since August 2015. He has served as a member of the Audit Committee and the Board of Directors of WageWorks, Inc. since February 2016. Mr. Metzger was a Partner at William Blair & Company, L.L.C. from January 2005 to December 2015 after joining the firm in 1999, and since January 2016, he has been employed as a Senior Director at the firm. He served as the head of the Technology group between January 2011 and January 2015 and of the Financial Services Investment Banking Group between April 2007 and December 2015. He also acted as Chairman of the firm’s Audit Committee from January 2013 to December 2015. Prior to joining William Blair & Company, L.L.C., he worked in the Investment Banking Division of ABN AMRO Incorporated from 1997 to 1999, in the Financial Institutions Group at A.T. Kearney, Inc. from 1995 to 1997, and in Audit and Audit Advisory
50
Services at Price Waterhouse from 1990 to 1994. Mr. Metzger graduated with a Masters in Business Administration with concentrations in finance and strategy in 1995 from Northwestern University’s Kellogg School of Management and a Bachelor of Science degree in Accountancy in 1989 from the University of Illinois at Urbana-Champaign. We believe that Mr. Metzger’s finance and accounting background, his experience with public companies and capital markets, and experience in the financial technology and payments space provide the requisite qualifications, skills, perspectives, and experiences to serve on our Board of Directors.
Albin F. Moschner joined the Board of Directors of the Company in April 2012. He is the Chair of our Compensation Committee, and was a member of our Audit Committee.Committee from June 2014 until June 2016. Mr. Moschner has been serving on the Board of The Nuveen Funds since July 2016. He also served on the Board of Wintrust Financial Corporation from 1994 until June 2016. Previously, he served at Leap Wireless International, Inc. as the Chief Operating Officer from July 2008 to February 2011 and as Chief Marketing Officer from August 2004 to June 2008. Prior to joining Leap Wireless, Mr. Moschner served as President of the Verizon Card Services division of Verizon Communications, Inc. From January 1999 to December 2000, Mr. Moschner was President of One Point Services at One Point Communications. Mr. Moschner served at Zenith Electronics Corporation as President and Chief Executive Officer from 1995 to 1996 and as President, Chief Operating Officer and Director from 1994 to 1995. Mr. Moschner has also served in various managerial capacities at Tricord Systems, Inc. and International Business Machines Corp. Mr. Moschner has also been serving on the Board of Wintrust Financial Corporation since 1994. Mr. Moschner holds a Bachelor of Engineering in Electrical Engineering from The City College of New York, awarded in 1974, and a masters degree in Electrical Engineering awarded by Syracuse University in 1979. We believe that Mr. Moschner’s marketing, manufacturing and wireless industry experience and long standing prior public board experience provide the requisite qualifications, skills, perspectives, and experiences to serve on our Board of Directors.
William J. Reilly, Jr., joined the Board of Directors of the Company in July 2012. He is a member of our Audit and Nominating and Corporate Governance Committees.Committee, has been a member of our Compensation Committee since December 2016, and was a member of our Audit Committee from July 2012 until December 2016. He has been an independent consultant since January 2011. From September 2004 to November 2010, Mr. Reilly was President and Chief Executive Officer of Realtime Media, Inc., an interactive promotional marketing firm serving the pharmaceutical and consumer packaged goods markets. Following the sale of Realtime Media, Inc. in November 2010, Mr. Reilly was retained as a consultant until January 2011. From September 2002 to September 2004, Mr. Reilly was a principal at Chesterbrook Growth Partners, independent consultants to the private equity community. Between 1989 and 2002, Mr. Reilly served at various positions at Checkpoint Systems Inc., a multinational manufacturer and marketer of products and services for automatic identification, retail security, pricing and brand promotion, including as Chief Operating Officer, Executive Vice President, Senior Vice President of the Americas and Pacific Rim and Vice President of Sales. Prior to that, Mr. Reilly held national and sales management positions at companies in the medical electronics and telecommunications industries, including Minolta Corporation, Megatech Pty. Ltd. and Multitone Electronics PLC. He has also served on the Board of Veramark Technologies, Inc., a telecommunications software firm, from June 1997 to May 2008. Mr. Reilly graduated from Mount St. Mary’s University with a bachelorsBachelor of scienceScience degree in Psychology in 1970. We believe that Mr. Reilly’s executive, business development and international experience provide the requisite qualifications, skills, perspectives and experiences to serve on our Board of Directors.
William J. Schoch joined the Board of Directors of the Company in July 2012. He is a memberthe Chair of our Nominating and Corporate Governance Committee.Committee and has been a member of our Audit Committee since December 2016. Mr. Schoch is the President and Chief Executive Officer of Western Payments Alliance, a non-profit payments association and has served in that capacity since March 2008. He serves on the Boards of Western Payments Alliance and WesPay Advisors, a payments consultancy and subsidiary of Western Payments Alliance. He is a past director of NACHA an industry trade association– The Electronic Payments Association and the administrator of the Automated Clearing House (ACH) Network, and iscontinues to serve on the steeringSteering committee of NACHA’s Council for Electronic Billing and Payment.NACHA's Payments Innovation Alliance. From 1997 to 2008, Mr. Schoch worked at Visa International where, as the Vice President of Emerging Market Initiatives, he was responsible for the global development of the Visa Money Transfer Platform. Prior to that, Mr. Schoch served as a Vice President at Citibank, N.A. from 1989 to 1997 and as an Associate Director at NACHA from 1986 to 1989. Mr. Schoch obtained a Bachelor of Arts degree in 1986 from Indiana University of Pennsylvania with a major in Public Policy and a minor in Economics. We believe that Mr. Schoch’s experience and familiarity with the electronic payments industry and his leadership experience provide the requisite qualifications, skills, perspectives and experiences to serve on our Board of Directors.
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AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has a standing Audit Committee presently consisting of each of Mr. Brooks (Chairman)Metzger (Chair), and Messrs. ReillyBarnhart and Moschner.Schoch. The Company’s Board of Directors has determined that Joel BrooksMr. Barnhart is an “audit committee financial expert” under Securities and Exchange Commission rules, and has met the additional independence criteria required for Audit Committee membership under applicable NASDAQ listing standards.
CODE OF BUSINESS CONDUCT AND ETHICS
Our Board has adopted a Code of Ethics, which applies to all executive officers, directors and employees of the Company, including our Chief Executive Officer, Chief Financial Officer, Chief Services Officer and Controller. A copy of our Code of Business Conduct and Ethics is accessible on the Company’s website, www.usatech.com.
The following reportpublic may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Audit Committee does not constitute soliciting materialPublic Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and shall notother information regarding issuers that file electronically. Such information can be deemed filed or incorporated by reference into any other Company filing underaccessed through the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates this report by reference.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than 10% of the Company’s Common Stock, to file with the Securities and Exchange Commission reports of ownership and changes in ownership of Common Stock. Officers, directors and greater than 10% beneficial owners are required by Securities and Exchange Commission regulations to furnish the Company with copies of all Section 16(a) forms they file.
William J. Schoch filed one late Form 4 during the 20142017 fiscal year.
COMPENSATION DISCUSSION AND ANALYSIS
During the 2017 fiscal year, our named executive officers during the 2014 fiscal year (collectively, the “named executive officers”): were as follows: Stephen P. Herbert-Herbert - Chairman and Chief Executive Officer; David M. DeMedio-Priyanka Singh – Chief Financial Officer; Michael Lawlor-Vice President of Sales and Business Development; and Cary Sagady-Leland P. Maxwell – former interim Chief Financial Officer, who became our Senior Vice President of Product Management & Network Solutions.
Our 2017 Compensation Goals and Objectives
The Compensation Committee is responsible for annually reviewing and recommending to the Board for approval the corporate goals and objectives relevant to the compensation of the executive officers of the Company, evaluating the executive officers’ performance in light of those goals and objectives, and recommending for approval to the Board the executive officers’ compensation levels based on this evaluation. The compensation of Messrs. Lawlor and Sagady is determined by our Chief Executive Officer in consultation withassisted the Compensation Committee. The Chief Executive Officer assists the Committee in establishing the compensation of our other executive officer, David DeMedio.officers, Priyanka Singh, Leland Maxwell, and Michael Lawlor. The compensation of Mr. Harrum and Ms. Duska was determined by our Chief Executive Officer. Our Chief Executive Officer regularly provides information to the Compensation Committee. The Chief Executive Officer is not present during voting or deliberations on his compensation. The Compensation Committee has, from time to time, retained an independent compensation consultant, Buck Consultants, LLC, as deemed necessary to assist the Committee in making appropriate recommendations regarding our executive officers’ compensation.
We have developed a compensation policy that is designed to attract and retain key executives responsible for our success and motivate management to enhance long-term shareholder value. The Compensation Committee believes that compensation of the Company’s executive officers should encourage creation of shareholder value and achievement of strategic corporate objectives, and the Committee seeks to align the interests of the Company’s shareholders and management by integrating compensation with the Company’s annual and long-term corporate and financial objectives.
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The Compensation Committee also ties a significant portion of each executive officer’s compensation to key operational and financial goals and performance.
We have also designed and implemented our compensation package in order to be competitive with other companies in our peer group, as compiled by our compensation consultant, and to motivate and retain our executive officers. Our compensation package also takes into account individual responsibilities and performance.
Certain elements of our compensation reflect different compensation objectives. For example, as base salaries are generally fixed in advance of the year in which the compensation will be earned, the Committee believes that it is appropriate to determine base salaries with a focus on similarly situated officers at comparable peer group companies while also having them reflect the officer’s performance. On the other hand, annual bonuses and long-term incentives are better able to reflect the Company’s performance as measured by financial measures such as total number of connections, total revenues, operating expenses, operating earnings,non-GAAP net income, adjusted EBIDTA, and cash generated from operations. In addition, annual bonuses and long-term incentive awards, including the performance goals they are based on, help us achieve our goal of retaining executives, and motivating executive officers to increase shareholder value. The other elements of compensation reflect the Committee’s and Board’s philosophy that personal benefits, including retirement and health benefits, should be available to all employees on a non-discriminatory basis.
Our Executive Compensation Practices
Our compensation program for our executive officers features many commonly used “best practices” including:
· | Pay-for-performance. A substantial part of our executive officer’s pay is, in our view, performance based. For the 2017 fiscal year, our Chief Executive Officer had approximately 64.7% of his total target compensation tied to performance, while our current Chief Financial Officer and Chief Services Officer had approximately 68.2% and 52.3%, respectively, of their total target current compensation tied to performance. |
· | Stretch performance goals. Our performance target goals under our Fiscal Year 2017 Short-Term Incentive Plan (the “2017 STI Plan”) and Fiscal Year 2017 Long-Term Incentive Performance Share Plan (the “2017 LTI Stock Plan”) are designed to stretch individual and organizational performance in order to receive target payouts. |
· | Capped payouts under incentive plans. Both our long-term and short-term bonus programs have maximum payout amounts in order to discourage excessive risk taking. |
· | Stock ownership guidelines. We have significant ownership guidelines. Our Chief Executive Officer is required to hold Common Stock with a value equal to a multiple of three times his base salary and our Chief Financial |
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Officer and other executive officers are required to hold Common Stock with a value equal to one time his or her base salary. |
· | No Tax Gross-Up Provisions. Our compensation program does not include any excise tax gross-up provisions with respect to payments contingent upon a change of control. |
· | Limited perquisites for our executives. Perquisites are not a significant portion of our executive officers’ compensation, representing 1% of Mr. Herbert’s, 13.2% of Ms. Singh’s (consists of signing bonus), and 2.5% of Mr. Lawlor’s total target compensation. |
· | Independent compensation consultant. The Committee has from time to time retained an independent compensation consultant, Buck Consultants, LLC, to review the executive compensation programs and practices. |
· | No payment on change of control without a “double trigger”. Payments under our employment agreements require two events for vesting – both the change of control and a “good reason” for termination of employment. |
· | No repricing of underwater options. Our stock option incentive plan does not permit repricing or the exchange of underwater stock options without shareholder approval. |
Pay-for-Performance Review
Pay-for-performance is an important component of our compensation philosophy and is evident in the structure of our compensation program. Our compensation approach is designed to motivate our executive officers to substantially contribute to the Company’s long-term sustainable growth. Our pay-for-performance approach provides that our executive officers should have a large portion of variableour executive officers’ total compensation should be in the form of short-term and long-term incentive awards with performance hurdles designed to stretch individual and organizational performance.
Reinforcing pay-for-performance is a significant underpinning of our compensation program. During the 20142017 fiscal year, a total of 53%64.7% of Mr. Herbert’s, 68.2% of Ms. Singh’s and 47%52.3% of Mr. DeMedio’sLawlor’s total target total compensation was in the form of performance-based variable compensation designed to motivate them to deliver strong business performance and create shareholder value. These compensation elements were dependent upon the Company’s achievement of pre-established financial and other business goals recommended by the Committee as well as individual goals established by the Committee.Committee or consisted of stock option awards which are inherently performance based as they only deliver value if the stock price increases. All stock options awarded by the Committee are exercisable at the closing share price on the date of the grant. Based on actual results, the annual variable compensation amount and the ultimate value of the equity compensation awards could have been zerosignificantly reduced if the Company or management did not perform.
For fiscal year 2017, the targeted aggregate compensation of our current named executive officers consisted of the following components expressed as a percentage of total compensation:
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| Long-Term |
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| Base |
| Award |
| Incentive |
| Perquisites & |
| Total |
Named Executive Officer |
| Salary |
| Bonus |
| Compensation |
| Other Benefits |
| Compensation |
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Stephen P. Herbert |
| 34% |
| 10% |
| 55% |
| 1% |
| 100% |
Priyanka Singh |
| 19% |
| 9% |
| 60% |
| 13% |
| 100% |
Michael Lawlor |
| 45% |
| 7% |
| 45% |
| 3% |
| 100% |
Maeve Duska |
| 75% |
| 25% |
| 0% |
| 0% |
| 100% |
George Harrum |
| 83% |
| 17% |
| 0% |
| 0% |
| 100% |
Leland P. Maxwell |
| 39% |
| 40% |
| 21% |
| 0% |
| 100% |
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The long-term incentive compensation in the above table and in the table set forth below each reflect the awards to Mr. Herbert of incentive stock options to purchase up to 20,080 shares, to Ms. Singh of non-qualified stock options to purchase up to 75,000 shares, and to Mr. Maxwell of non-qualified stock options to purchase up to 20,000 shares.
For fiscal year 2017, the aggregate compensation actually paid or awarded to our named executive officers consisted of the following components expressed as a percentage of total compensation:
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| Long- |
| Other |
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| Term |
| Perquisites & |
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| Base |
| Award |
| Incentive |
| Other |
| Total |
Named Executive Officer |
| Salary |
| Bonus |
| Compensation |
| Benefits |
| Compensation |
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Stephen P. Herbert |
| 36% |
| 11% |
| 52% |
| 1% |
| 100% |
Priyanka Singh |
| 19% |
| 9% |
| 58% |
| 14% |
| 100% |
Michael Lawlor |
| 47% |
| 7% |
| 43% |
| 3% |
| 100% |
Maeve Duska |
| 75% |
| 25% |
| 0% |
| 0% |
| 100% |
George Harrum |
| 83% |
| 17% |
| 0% |
| 0% |
| 100% |
Leland P. Maxwell |
| 39% |
| 40% |
| 21% |
| 0% |
| 100% |
Peer Group Analysis
In May 2011,August 2016, the Company obtained an updated analysis from Buck Consultants, LLC which contained a new peer group and updated the compensation analysis that had been previously performed. Buck Consultants, LLC assembled a peer group of 1215 companies that it deemed comparable to the Company on the basis of size, market capitalization, industry, andor financial performance. The peer group included companies that offered networking, software or other technology solutions to businesses with revenues within the same range as the Company. The peer group consisted of:
☐ Radysis Corporation | ☐ SciQuest, inc. | ☐ Infrustrure, Inc. |
☐ Callidus Software, Inc. | ☐ PDF Solutions, Inc. | ☐ Upland Software, Inc. |
☐ Limelight Networks, Inc. | ☐ Numerex Corp. | ☐ Amber Road, Inc. |
☐ Exav Corporation | ☐ CVI Global, Inc. | ☐ Exa Corporation |
☐ Agilysys, Inc. | ☐ NAPCO Security Technologies, Inc. | ☐ Zix Corporation |
When making compensation decisions, the Committee reviews the aggregate target compensation paid to an executive officer relative to the compensation paid to similarly situated executives, to the extent available, at our peer companies. For fiscal year 2014,2017, the Committee recommended a compensation program for our executive officers consisting of target level compensation approximately equal to the 50th percentile for similarly situated officers at the peer group companies compiled by Buck Consultants, in May 2011.
Elements of Compensation
This section describes the various elements of our compensation program for our named executive officers during the 20142017 fiscal year. The components of compensation reflected in our named executive officers’ compensation program are set forth in the following table:
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Why We Pay | How We Determine | |||||
Element | Key Characteristics | this Element | the Amount | |||
Base Salary | Fixed compensation component payable in cash. Reviewed annually and adjusted when appropriate. | Provide a base level of competitive cash compensation for executive talent. | Experience, job scope, peer group, and individual performance. | |||
Annual Bonus | Variable compensation component payable in cash or stock based on performance as compared to annually-established company | Motivate and reward executives for performance on key operational, financial and personal measures during the year. | Organizational and individual performance, with actual payouts based on the extent to which performance goals are satisfied. | |||
Long Term Incentives | Variable compensation component payable in restricted | Alignment of long term interests of management and shareholders. Retention of executive talent. | Organizational and individual performance, with actual | |||
Perquisites and Other Personal Benefits | Fixed compensation component to provide basic competitive benefits. | Provide a base level of competitive compensation for executive talent. | Periodic review of benefits provided generally to all employees. |
Named Executive Officer | Base Salary | Annual Bonus | Long-Term Incentive Compensation | Perquisites & Other Benefits | Total Compensation | ||||
| Stephen P. Herbert | 46% | 7% | 46% | 1% | 100% | ||||
| David M. DeMedio | 53% | 7% | 40% | 0% | 100% | ||||
| Michael Lawlor | 49% | 49% | 0% | 2% | 100% | ||||
| Cary Sagady | 61% | 37% | 0% | 2% | 100% |
| Named Executive Officer | Base Salary | Annual Bonus | Long-Term Incentive Compensation | Perquisites & Other Benefits | Total Compensation | ||||
| Stephen P. Herbert | 76% | 7% | 15% | 2% | 100% | ||||
| David M. DeMedio | 82% | 6% | 12% | 0% | 100% | ||||
| Michael Lawlor | 88% | 8% | 0% | 4% | 100% | ||||
| Cary Sagady | 93% | 3% | 0% | 4% | 100% |
Base Salary
Base salary is the fixed component of our named executive officers’ annual cash compensation and is set with the goal of attracting talented executives and adequately compensating and rewarding them for services rendered during the fiscal year. The Compensation Committee reviews our executive officers’ base salary on an annual basis.
The base salaries of each of our executive officers reflect the individual’s level of responsibility and performance. In recommending base salaries of our executive officers to the Board of Directors, the Compensation Committee also considers changes in duties and responsibilities, our business and financial results, and its knowledge of base salaries paid to executive officers of our peer group. The base salaries of each of Messrs. SagadyMs. Duska and LawlorMr. Harrum were established by our Chief Executive Officer after discussions with each employee.
Effective August 31, 2016, we increased Mr. Herbert’s base salaries weresalary by 25% to $450,000, and we increased during the 2014 fiscal year.
Annual Bonus
Performance-based annual bonuses are based on each named executive officer’s overall performance and the achievement of performance goals. Annual bonuses are intended to provide officers with an opportunity to receive additional cash and equity compensation based on their individual performance and Company results, including the achievement of pre-determined Company andand/or individual performance goals. Performance-based bonuses are included in the compensation package because they incentivize our named executive officers, in any particular year, to pursue particular objectives that are consistent with the overall goals and strategic direction that the Board has set for the Company for that year.
The Committee believes that the annual performance-based bonus reinforces the pay-for-performance nature of our compensation program.
Fiscal Year 20142017 Short-Term Incentive Plan
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At the recommendation of the Compensation Committee, the Board of Directors adopted the Fiscal Year 2014 Short-Term Incentive2017 STI Plan (the “2014 STI Plan”) covering Messrs. Herbert and DeMedio.our executive officers. Pursuant to the 20142017 STI Plan, each executive officer would earn a cash bonus in the event that the Company achieved during the 20142017 fiscal year certain annual financial goals (80% weighting) and certain annual specific performance goals relating to the executive officer which were established by the Compensation Committee (20% weighting). The annual financial goals are total revenues (30%(28% weighting), cash generated from operations (30%(28% weighting), and non-GAAP net income (40%(24% weighting). Assuming the minimum threshold target goal would be achieved for a particular metric, the amount of the cash bonus to be earned would be determined on a pro rata basis, provided that the bonus would not exceed the maximum distinguished award for that metric.
The individual performance goals established by the Compensation Committee for Mr. Herbert included clearly communicating the Company's strategy, goals and objectives to the investment community, developing senior management leadership necessary to support the future growth of the Company, and leading the effort to identify strategic alternatives for the Company.
The Compensation Committee sets the cash bonus opportunity for each current executive officer as a percentage of his respective annual base salary as set forth in the following table:
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| Threshold |
| Target |
| Distinguished |
Named Executive Officer |
| Performance |
| Performance |
| Performance |
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Stephen P. Herbert |
| — |
| 50% |
| 75% |
Michael Lawlor |
| — |
| 30% |
| 45% |
Priyanka Singh |
| — |
| 15% |
| 23% |
Below were the threshold, target and distinguished cash bonus award target opportunities for our current executive officers:
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| Threshold |
| Target |
| Distinguished | |||
Named Executive Officer |
| Performance |
| Performance |
| Performance | |||
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Stephen P. Herbert |
| $ | — |
| $ | 225,000 |
| $ | 337,500 |
Michael Lawlor |
| $ | — |
| $ | 75,000 |
| $ | 112,500 |
Priyanka Singh |
| $ | — |
| $ | 41,250 |
| $ | 61,875 |
| Threshold Performance | Target Performance | Distinguished Performance | ||||||||||
| Stephen P. Herbert | $ | - | $ | 51,184 | $ | 102,368 | ||||||
| David M. DeMedio | $ | - | $ | 29,283 | $ | 58,566 | ||||||
Mr. Herbert earned a cash bonus of $29,673 and Mr. DeMedio$131,299, representing 29.2% of his base salary, Ms. Singh earned a cash bonus of $17,238$33,334 representing 12.1% of her base salary, and Mr. Lawlor earned a cash bonus of $38,891 representing 15.6% of his base salary, under the 20142017 STI Plan. Each executiveThe Compensation Committee determined that Mr. Herbert had achieved all120% of thehis individual performance target goals, established by the Committee.Ms. Singh had achieved 150% of her individual performance target goals, and Mr. Lawlor had achieved 125% of his individual performance target goals. Based on the actual performance of the Company during the 20142017 fiscal year, the minimum threshold performance targets established under the 2014 STI Plan weretarget was not met for non-GAAP net income. Revenuesincome and cash generated from operations, and revenues for the fiscal year were in excess of the minimum threshold target goal but less than the distinguished target goal. In determining the award under the 2017 STI Plan, the Compensation Committee further increased non-GAAP net income by certain unusual expenses incurred by the Company during the fiscal year related to SOX 404 compliance. Following the adjustment, non-GAAP net income exceeded the minimum threshold target but was less than the target goal and cash from operations was in excess ofunder the maximum distinguished performance target goal.
Other Named Executive Officers’ Cash Bonus
For the fiscal year ended June 30, 2014,2017, the cash bonuses earned by Messrs. LawlorMr. Maxwell, Mr. Harrum and SagadyMs. Duska under the fiscal year 2017 management incentive plan were based upon the attainment of financial target goals by the Company relating to connections (50% weighting for Mr. Sagady and 75% weighting for Mr. Lawlor)(25% weighting), revenues (25% weighting for Mr. Sagady and 15% weighting for Mr. Lawlor)(15% weighting), andnon-GAAP net income (20% weighting), adjusted EBITDA (25% weighting for Mr. Sagadyweighting), and 10% weighting for Mr. Lawlor)cash generated from operations (15% weighting). Based on the actual performance of the Company during the 20142017 fiscal year, the minimum threshold performance targets were not met for revenuesnon-GAAP net income, adjusted EBITDA, and adjusted EBITDA. Connections for the fiscal yearcash generated from operations, connections were in excess of the minimum thresholddistinguished target goal, and revenues were in excess of the threshold but less than the target goal.
Long-Term Incentive Compensation
57
As described above, the Compensation Committee believes that a substantial portion of each executive officer’s compensation should be in the form of long-term incentive compensation in order to further align the interests of our executive officers and shareholders.
Fiscal Year 20142017 Long-Term Incentive Performance Share Plan
At the recommendation of the Compensation Committee, the Board of Directors adopted the Fiscal Year 2014 Long-Term Incentive Performance Share Plan (the “20142017 LTI Stock Plan”)Plan covering Messrs. Herbert and DeMedio.our executive officers. Under the 20142017 LTI Stock Plan, each executive officer would be awarded shares of common stockCommon Stock in the event that certain metrics relating to the Company’s 20142017 fiscal year would result in specified ranges of year-over-year percentage growth. The metrics are total number of connections as of June 30, 20142017 as compared to total number of connections as of June 30, 20132016 (50% weighting), total license and transaction fee revenues earned during the 2014 fiscal year as compared to those earned during the 2013 fiscal year (25% weighting), and adjusted EBITDA earned during the 20142017 fiscal year as compared to adjusted EBITDA earned during the 20132016 fiscal year (25%(50% weighting). The shares awarded under the 20142017 LTI Stock Plan would vest as follows: one-third on the date of issuance; one-third on the first anniversary of the date of issuance;June 30, 2018; and one-third on the second anniversary of the date of issuance.
At the time of the establishment of the 20142017 LTI Stock Plan, the Compensation Committee believed that the attainment of the target goals under the 20142017 LTI Stock Plan would represent a significant achievement for management, and were designed to stretch the Company’s and management’s performance during the fiscal year.
The Compensation Committee established target long-term award levels for each current executive officer as a percentage of his respective annual base salary as indicated in the table set forth below.
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| Threshold |
| Target |
| Distinguished |
Named Executive Officer |
| Performance |
| Performance |
| Performance |
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Stephen P. Herbert |
| — |
| 150% |
| 225% |
Michael Lawlor |
| — |
| 100% |
| 150% |
Priyanka Singh |
| — |
| 38% |
| 56% |
The table set forth below lists the value of the shares that would have been awarded to the executive officers under the 20142017 LTI Stock Plan if all of the minimum threshold performance goals had been achieved, if all of the target performance goals had been achieved, and if all of the distinguished performance goals had been achieved. Assuming the minimum threshold target goal was achieved for a particular metric, the number of shares to be awarded for that metric was required to be determined on a pro-rata basis, provided that the award could not exceed the maximum distinguished award for that metric.
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| Threshold |
| Target |
| Target | |||
Named Executive Officer |
| Performance |
| Performance |
| Performance | |||
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Stephen P. Herbert |
| $ | — |
| $ | 675,000 |
| $ | 1,012,500 |
Michael Lawlor |
| $ | — |
| $ | 250,000 |
| $ | 375,000 |
Priyanka Singh |
| $ | — |
| $ | 103,125 |
| $ | 154,688 |
Threshold Performance | Target Performance | Distinguished Performance | ||||||||||
| Stephen P. Herbert | $ | - | $ | 341,277 | $ | 682,554 | ||||||
| David M. DeMedio | $ | - | $ | 175,699 | $ | 351,396 | ||||||
Based on the actual performance of the Company during the 20142017 fiscal year, the minimum threshold performance targetstarget established under the 20142017 LTI Stock Plan werewas not met for revenues or adjusted EBITDA. Connections (50% weighting) for the fiscal year were in excess of the maximum distinguished target goal. In determining the award under the 2017 LTI Stock Plan, the Compensation Committee further increased Adjusted EBITDA by certain unusual expenses incurred by the Company during the fiscal year related to SOX 404 compliance. Following the adjustment, Adjusted EBITDA exceeded the minimum threshold target but was less than the target goal.goal under the plan. Consequently, the stock award to each executive officer under the 20142017 LTI Stock Plan was as follows:
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| Number of |
| Value of Shares as of | |
Names Executive Officer |
| shares |
| June 30, 2017 | |
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Stephen P. Herbert |
| 116,445 |
| $ | 605,515 |
Michael Lawlor |
| 43,128 |
| $ | 224,265 |
Priyanka Singh |
| 17,790 |
| $ | 92,509 |
58
| Number of Shares | Value of Shares as of June 30, 2014 | |||||||
| Stephen P. Herbert | 36,649 | $ | 76,776 | |||||
| David M. DeMedio | 19,161 | $ | 39,532 | |||||
The shares awarded to Mr. Herbert had a value equal to 135% of his annual base salary, the shares awarded to Ms. Singh had a value equal to 33.6% of her annual base salary, and the shares awarded to Mr. Lawlor had a value equal to 89.7% of his annual base salary.
Stock Option Awards
During September 2016, Mr. Herbert was awarded incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), to purchase up to 20,080 shares 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.
During March 2017, Ms. Singh was awarded non-qualified stock options to purchase up to 75,000 shares at an exercise price of $4.00 per share. The options vest on March 31, 2018 and expire if not exercised prior to March 31, 2024.
During March 2017, Mr. Maxwell was awarded incentive stock options intended to qualify under Section 422 of the Code to purchase up to 20,000 shares at an exercise price of $4.05 per share. The options vest on March 31, 2018 and expire if not exercised prior to March 31, 2024.
Perquisites and Other Benefits
Our named executive officers were entitled to the health care coverage, group insurance and other employee benefits provided to all of our other employees. In this regard, we recommended to the Board, and the Board approved, the discontinuance of all fringe benefits previously provided to our named executive officers which were in excess of those generally available to the Company’s employees. The base salaries of the named executive officers were increased by an amount equal to the annual payments attributable to these discontinued fringe benefits.
Post-Termination Compensation
As set forth in his employment agreement, upon the termination of Mr. Herbert’s employment under certain circumstances, including termination by the Company without cause or by a notice of non-renewal of the employment agreement, or under certain circumstances following a change of control of the Company, the Company has agreed to pay Mr. Herbert a lump sum amount equal to two times his annual base salary and all restricted stock awards or stock options would become vested as of the date of termination.
We believe that these provisions are an important component of each executive’sMr. Herbert's employment arrangement and will help to secure thehis continued employment and dedication, of our executive officers, notwithstanding any concern that theyhe might have at such time regarding theirhis own continued employment, prior to or following a change inof control.
The Committee notes that there would be no payments to our executive officers upon a change of control without a “double trigger”. Payments under our employment agreements require two events for vesting – both the change inof control and a “good reason” for termination of employment.
Additional information regarding what would have been received by our executive officersMr. Herbert had termination occurred on June 30, 20142017 is found under the heading “Potential Payments upon Termination or Change of Control” on page 46 ofwithin this Form 10-K.
Stock Ownership Policy
We believe that providing our executive officers who have responsibility for the Company’s management and growth with an opportunity to increase their ownership of Company stockshares aligns the interests of the executive officers with those of the shareholders. In furtherance thereof, in April 2011, the Board approvedOur Stock Ownership Guidelines that were recommended by the Compensation Committee. These guidelines provide that the Chief Executive Officer should own shares with a value of at least three times his annual base salary, and the Chief Financial Officer and other executive officers should own shares with a value of at least one times his or her annual base salary. Each executive officer has until April 2016five years to complyobtain such ownership from the commencement of serving as an executive officer. As of the date hereof, each executive officer is in compliance with the policy. In November 2013, the Compensation Committee recommended and the Board approved an amendment to our guidelines to
Our Stock Ownership Guidelines provide that non-vested restricted stock awards would count towards the stock ownership requirements thereunder for executive officers and non-employee directors.
59
For purposes of these guidelines, “shares” include shares owned by the executive officer or director or by such person’s immediate family members residing in the same household and include non-vested restricted stock awards held by the executive officer or non-employee director was required to own sharesdirector.
Effect of common stock with a value of at least $40,000.
At the 2014 annual meeting2017 Annual Meeting of shareholders,Shareholders, over 77%90% of the votes cast on the advisory vote on the compensation of our named executive officers were in favor of the Company’s executive compensation disclosed in the proxy statement. The Compensation Committee considered the vote, and even though the results convey strong shareholder support for the Company’s executive compensation programs and the Compensation Committee’s decisions, the Committee determined that it was in the best interest of the Company and its shareholders to continue to evaluate our executive compensation programs and, if appropriate, to strengthen certain aspects of these programs.
Impact of Taxation and Accounting Considerations on Executive Compensation
The Compensation Committee and the Board of Directors take into account tax and accounting consequences of the compensation program and weigh these factors when setting total compensation and determining the individual elements of any named executive officer’s compensation package.
The stock and option awards to our named executive officers under our stockequity incentive plans as well as any option awards under our 2014 Stock Option Incentive Plan provide that the executiveofficer is responsible for any withholding or payroll tax obligations incurred by the Company in connection with the award, and that the executiveofficer may satisfy any such obligations by, among other things, either the delivery to the Company of a cash payment equal to the obligations, or the assignment or transfer to the Company of shares having a value equal to the obligations, or such other method that shall be satisfactory to the Company.
Summary Compensation Table
The following table sets forth certain information with respect to compensation paid or accrued by the Company during the fiscal years ended June 30, 2014, 2013,2017, 2016, and 20122015 to each of the executive officers and employees of the Company named below (“our named executive officers”):officers:
60
| Fiscal | Stock | All Other | ||||||||||||||||||||
| Name and Principal Position | Year | Salary | Bonus (2) | Awards (3) | Compensation (4) | Total | ||||||||||||||||
| Stephen P. Herbert | 2014 | $ | 341,227 | $ | 29,673 | $ | 341,227 | $ | 10,000 | $ | 695,127 | |||||||||||
| Chief Executive Officer, President | 2013 | $ | 341,227 | $ | 51,250 | $ | 111,399 | $ | 10,000 | $ | 513,876 | |||||||||||
| & Chairman of the Board (1) | 2012 | $ | 332,246 | $ | 40,000 | $ | 391,300 | $ | 18,748 | $ | 782,294 | |||||||||||
| David M. DeMedio | 2014 | $ | 237,875 | $ | 17,238 | $ | 213,709 | $ | - | $ | 468,822 | |||||||||||
| Chief Financial Officer | 2013 | $ | 234,265 | $ | - | $ | 4,024 | $ | 4,813 | $ | 243,102 | |||||||||||
| 2012 | $ | 219,615 | $ | - | $ | 134,542 | $ | 18,190 | $ | 372,347 | ||||||||||||
| Cary Sagady | 2014 | $ | 200,300 | $ | 7,109 | $ | - | $ | 7,721 | $ | 215,130 | |||||||||||
| Sr. VP Product Management & | 2013 | $ | 198,200 | $ | 42,063 | $ | - | $ | 12,100 | $ | 252,363 | |||||||||||
| Network Solutions | 2012 | $ | 193,066 | $ | 64,680 | $ | - | $ | 16,016 | $ | 273,762 | |||||||||||
| Michael Lawlor | 2014 | $ | 179,800 | $ | 15,953 | $ | - | $ | 8,670 | $ | 204,423 | |||||||||||
| VP of Sales & Business | 2013 | $ | 179,800 | $ | 62,930 | $ | - | $ | 10,000 | $ | 252,730 | |||||||||||
| Development | 2012 | $ | 173,745 | $ | 96,320 | $ | 36,200 | $ | 15,197 | $ | 321,462 | |||||||||||
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| Stock |
| Option |
| All Other |
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| |||
Name and Principal Position |
| Year |
| Salary |
| Bonus (1) |
| Awards (2) |
| Awards (3) |
| Compensation (4) |
| Total | ||||||
Stephen P. Herbert |
| 2017 |
| $ | 446,538 |
| $ | 131,299 |
| $ | 675,000 |
| $ | 39,758 |
| $ | 13,091 |
| $ | 1,305,686 |
Chief Executive Officer, President |
| 2016 |
| $ | 358,194 |
| $ | 134,227 |
| $ | 360,000 |
| $ | 48,225 |
| $ | 10,600 |
| $ | 911,246 |
& Chairman of the Board |
| 2015 |
| $ | 341,227 |
| $ | 101,732 |
| $ | 341,227 |
| $ | 261,055 |
| $ | 10,400 |
| $ | 1,055,641 |
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Priyanka Singh (5) |
| 2017 |
| $ | 70,865 |
| $ | 33,334 |
| $ | 103,125 |
| $ | 123,000 |
| $ | 50,000 |
| $ | 380,324 |
Chief Financial Officer |
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Michael Lawlor |
| 2017 |
| $ | 249,231 |
| $ | 38,891 |
| $ | 250,000 |
| $ | — |
| $ | 13,706 |
| $ | 551,828 |
Chief Services Officer |
| 2016 |
| $ | 203,246 |
| $ | 68,977 |
| $ | 88,125 |
| $ | 107,250 |
| $ | 9,990 |
| $ | 477,588 |
|
| 2015 |
| $ | 179,800 |
| $ | 44,186 |
| $ | — |
| $ | 50,283 |
| $ | 7,830 |
| $ | 282,099 |
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Leland P. Maxwell |
| 2017 |
| $ | 59,654 |
| $ | 60,163 |
| $ | — |
| $ | 32,400 |
| $ | — |
| $ | 152,217 |
Former Interim Chief Financial Officer |
| 2016 |
| $ | 92,000 |
| $ | 42,331 |
| $ | — |
| $ | — |
| $ | — |
| $ | 134,331 |
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Maeve Duska |
| 2017 |
| $ | 212,885 |
| $ | 71,048 |
| $ | — |
| $ | — |
| $ | — |
| $ | 283,933 |
Sr. VP of Sales and Marketing |
| 2016 |
| $ | 181,738 |
| $ | 88,137 |
| $ | — |
| $ | — |
| $ | — |
| $ | 269,875 |
|
| 2015 |
| $ | 179,800 |
| $ | 36,512 |
| $ | 50,000 |
| $ | 28,773 |
| $ | — |
| $ | 295,085 |
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George Harrum |
| 2017 |
| $ | 196,269 |
| $ | 40,939 |
| $ | — |
| $ | — |
| $ | — |
| $ | 237,208 |
Sr. VP of Operations |
| 2016 |
| $ | 180,508 |
| $ | 50,786 |
| $ | — |
| $ | — |
| $ | 7,899 |
| $ | 239,193 |
|
| 2015 |
| $ | 179,800 |
| $ | 17,674 |
| $ | — |
| $ | 28,555 |
| $ | 7,362 |
| $ | 233,391 |
(1) | Represents cash bonuses earned upon such person’s performance during the fiscal year or upon the attainment by the Company of certain target goals. For fiscal year 2017, represents (i) awards under the 2017 STI Plan to each of Mr. Herbert, Mr. Lawlor, and Ms. Singh, and (ii) awards under the fiscal year 2017 management incentive plan (the “2017 MIP”) to each of Mr. Maxwell, Ms. Duska, and Mr. Harrum. |
(2) | In accordance with FASB ASC Topic 718, the price of our common stock on the grant date equals the grant date fair value of these stock awards. For fiscal year |
(3) | In accordance with FASB ASC Topic 718, the Black-Scholes value on the grant date equals the grant date fair value of these option awards. For fiscal year 2017, represents (i) 20,080 incentive stock options awarded to Mr. Herbert on August 31, 2016, which will vest on August 31, 2017, (ii) 75,000 non-qualified stock options awarded to Ms. Singh on March 10, 2017, which vest on March 31, 2018, and (iii) 20,000 incentive stock options awarded to Mr. Maxwell on March 27, 2017, which vest on March 31, 2018. |
(4) | During the |
(5) | Ms. Singh joined the Company as Chief Financial Officer on March 31, 2017. |
61
Grants Of Plan-Based Awards Table
The table below summarizes the amounts of awards granted to our named executive officers and employees during the fiscal year ended June 30, 2014:2017:
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| All Other Option |
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| Awards: Number |
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| Grant Date Fair | |
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| of Securities |
| Exercise or Base |
| Value of Stock | ||
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| Price of Option |
| and Option |
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| Underlying |
| Price of Option |
| and Option | ||
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| Awards |
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| Awards |
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Name |
| Grant Date |
|
| Target ($) |
| Maximum ($) |
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| Target (#) |
| Maximum (#) |
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| Units (#) |
| $/Sh |
| Awards ($) | ||||
Stephen P. Herbert |
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| $ | 225,000 |
| $ | 337,500 |
|
| — |
| — |
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| — |
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| — |
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| — |
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| 8/31/2016 |
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| — |
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| — |
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| 135,542 |
| 203,313 |
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| — |
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| — |
| $ | 675,000 |
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| 8/31/2016 |
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| — |
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| — |
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| — |
| — |
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| 20,080 |
| $ | 4.98 |
| $ | 39,758 |
Priyanka Singh |
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| $ | 41,250 |
| $ | 61,875 |
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| — |
| — |
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| — |
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| — |
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| — |
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| 8/31/2016 |
|
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| — |
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| — |
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| 20,208 |
| 31,062 |
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| — |
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| — |
| $ | 103,125 |
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| 3/10/2017 |
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| — |
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| — |
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| — |
| — |
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| 75,000 |
| $ | 4.00 |
| $ | 123,000 |
Michael Lawlor |
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| $ | 75,000 |
| $ | 112,500 |
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| — |
| — |
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| — |
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| — |
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| — |
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| 8/31/2016 |
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| — |
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| — |
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| 50,201 |
| 75,301 |
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| — |
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| — |
| $ | 250,000 |
Leland P. Maxwell |
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| $ | 117,500 |
| $ | 146,875 |
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| — |
| — |
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| — |
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| — |
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| — |
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| 3/27/2017 |
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| — |
| $ | — |
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| — |
| — |
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| 20,000 |
| $ | 4.05 |
| $ | 32,400 |
Maeve Duska |
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| $ | 164,000 |
| $ | 205,000 |
|
| — |
| — |
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| — |
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| — |
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| — |
George Harrum |
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| $ | 94,500 |
| $ | 118,125 |
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| — |
| — |
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| — |
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| — |
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| — |
| Estimated Future Payouts Under Non-Equity Incentive Plan Awards (1) | Estimated Future Payouts Under Equity Incentive Plan Awards (2) | All Other Stock Awards: Number of Shares of Stock or Units (3) | Grant Date Fair Value of Stock Awards (4) | |||||||||||||||||||||||||||||||
| Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | Units (#) | Awards ($) | |||||||||||||||||||||||||
| Stephen P. Herbert | - | 51,184 | 102,368 | - | - | - | - | $ | - | |||||||||||||||||||||||||
| 11/7/2013 | - | - | - | - | 188,523 | 377,102 | $ | 341,227 | ||||||||||||||||||||||||||
| David M. DeMedio | - | 29,283 | 58,566 | - | - | - | - | $ | - | |||||||||||||||||||||||||
| 11/7/2013 | - | - | - | - | 97,071 | 194,141 | - | $ | 175,699 | |||||||||||||||||||||||||
| 11/7/2013 | - | - | - | - | - | - | 21,000 | $ | 38,010 | |||||||||||||||||||||||||
| Cary Sagady | - | 120,000 | - | - | - | - | - | $ | - | |||||||||||||||||||||||||
| Michael Lawlor | - | 179,800 | - | - | - | - | - | $ | - | |||||||||||||||||||||||||
(1) | Represents target and maximum awards | ||
(2) | Represents number of shares under the target and maximum awards for Mr. Herbert, Ms. Singh, and Mr. Lawlor under the 2017 LTI Stock Plan. |
(3) | Represents awards granted to Messrs. Herbert and Lawlor and Ms. Singh as follows: Mr. Herbert – 20,080 incentive stock options; Ms. Singh - 75,000 non-qualified stock options, and Mr. Maxwell- 20,000 incentive stock options. The incentive stock options awarded to Mr. Herbert vest on August 31, 2017. The non-qualified stock options awarded to Ms. Singh and the incentive stock options awarded to Mr. Maxwell vest on March 31, 2018. |
(4) |
Represents the grant date fair value of the target award under the 2017 LTI Stock Plan or the option award, as the case may be, as determined in accordance with FASB ASC Topic 718. |
Outstanding Equity Awards At Fiscal Year-End
The following table shows information regarding unexercised stock options and unvested equity awards granted to the named executive officers as of the fiscal year ended June 30, 2014:2017:
62
| Option Awards | Stock Awards | ||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options(#) Exercisable | Option Exercise Price($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested($) | ||||||||||||
| Stephen P. Herbert | - | $ | - | 48,241 | (1) | $ | 101,789 | ||||||||||
| David M. DeMedio | - | $ | - | 12,774 | (1) | $ | 26,953 | ||||||||||
| Cary Sagady | - | $ | - | - | $ | - | |||||||||||
| Michael Lawlor | - | $ | - | - | $ | - | |||||||||||
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| Option Awards |
| Stock Awards | ||||||||||
Executive Officer |
| Number of |
| Number of Securities Underlying Unexercised Options(#) Unexercisable (1) |
| Option |
| Option |
| Number of |
|
| Market | |
Stephen P. Herbert |
| 155,555 |
| 50,000 |
| $ | 1.80 |
| 9/1/2021 |
| 21,077 | (2) | $ | 109,600 |
|
| 29,585 |
| — |
|
| 3.38 |
| 8/1/2022 |
| — |
|
| — |
|
| — |
| 20,080 |
| $ | 4.98 |
| 8/31/2023 |
| — |
|
| — |
Priyanka Singh |
| — |
| 75,000 |
| $ | 4.00 |
| 45,382 |
| — |
|
| — |
Michael Lawlor |
| 16,667 |
| 8,333 |
| $ | 2.75 |
| 4/8/2022 |
| 5,159 | (2) | $ | 26,827 |
|
| 25,000 |
| 50,000 |
| $ | 2.94 |
| 1/12/2023 |
| — |
|
| — |
Leland P. Maxwell |
| — |
| 20,000 |
| $ | 4.05 |
| 3/31/2024 |
| — |
|
| — |
Maeve Duska |
| 16,667 |
| 8,333 |
| $ | 1.62 |
| 1/2/2022 |
| — |
|
| — |
George Harrum |
| 16,667 |
| 8,333 |
| $ | 1.68 |
| 1/2/2022 |
| — |
|
| — |
(1) | Options vest as follows: Mr. Herbert – 50,000 of the $1.80 stock options on September 1, 2017, and 20,080 of the $4.98 stock options on August 31, 2017; Ms. Singh - 75,000 on March 31, 2018; Mr. Lawlor – 25,000 on January 12, 2018, 8,333 on April 8, 2018, and 25,000 on January 12, 2019; Mr. Maxwell - 20,000 on March 31, 2018; Ms. Duska – 8,333 on January 2, 2018; and Mr. Harrum – 8,333 on January 2, 2018. |
(2) | Reflects |
Option Exercises And Stock Vested
The following table sets forth information regarding options exercised and shares of common stock acquired upon vesting by our named executive officers during the fiscal year ended June 30, 2014:2017:
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|
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|
|
|
|
| Option Awards |
| Stock Awards | ||||||
|
| Number of |
|
|
|
| Number of |
|
|
|
|
| Shares |
| Value |
| Shares |
| Value | ||
|
| Acquired on |
| Realized on |
| Acquired on |
| Realized on | ||
Name |
| Exercise (#) |
| Exercise ($) |
| Vesting (#) |
| Vesting ($) | ||
Stephen P. Herbert |
| — |
| $ | — |
| 56,381 |
| $ | 293,181 |
Priyanka Singh |
| — |
| $ | — |
| — |
| $ | — |
Michael Lawlor |
| — |
| $ | — |
| 10,320 |
| $ | 53,664 |
Leland P. Maxwell |
| — |
| $ | — |
| — |
| $ | — |
Maeve Duska |
| — |
| $ | — |
| — |
| $ | — |
George Harrum |
| — |
| $ | — |
| — |
| $ | — |
| Option Awards | Stock Awards | |||||||||||||||
| Number of | Number of | |||||||||||||||
| Shares | Value | Shares | Value | |||||||||||||
| Acquired on | Realized on | Acquired on | Realized on | |||||||||||||
| Name | Exercise (#) | Exercise ($) | Vesting (#) | Vesting ($) | ||||||||||||
| Stephen P. Herbert (1) | - | $ | - | 33,334 | $ | 59,001 | ||||||||||
| David M. DeMedio (2) | - | $ | - | 29,334 | $ | 52,761 | ||||||||||
| Cary Sagady | - | $ | - | - | $ | - | ||||||||||
| Michael Lawlor | - | $ | - | - | $ | - | ||||||||||
Executive Employment Agreements
Additional information regarding each named executive officer’s employment agreement with the Company is set forth below.
Stephen P. Herbert
Mr. Herbert’s employment agreement provides that he has been appointed Chairman and is employed as the Chief Executive Officer. The agreement provided for an initial term continuing through January 1, 2013, which is automatically renewed for consecutive one year periods unless terminated by either Mr. Herbert or the Company upon at least 90 days’ notice prior to the end of the initial term or any one year extension thereof.
Priyanka Singh
Ms. Singh’s employment agreement provides that heshe is employed as the Chief Financial Officer ofeffective March 31, 2017. Ms. Singh’s employment agreement with the Company. The agreement providedCompany provides for an initial term from June 30, 2011 until June 30, 2014,through March 31, 2018, and will
63
automatically continue from year to year thereafterfor consecutive one-year periods unless terminated asby either party upon notice of at least 90 days prior to the end of the original term or any such one year renewal period byperiod.
During the Company or Mr. DeMedio by at least 90-days’ notice. During November 2013, the Company and Mr. DeMedio entered into an amendment to his employment agreement which contained certain provisions which are described below in this Form 10-K under the section titled “Potential Payments Upon Termination Or Change of Control”.
Ms. Singh is also entitled to the expiration.
Michael Lawlor
Mr. Lawlor’s employment agreement provides that he is employed as Chief Services Officer effective March 8, 2016, and as Senior Vice President of Sales and Business Development prior thereto. Mr. Lawlor’s employment agreement with the Company provides for an initial term through June 30, 2013. Mr. Lawlor’s employment with the Company shall2017, and will automatically continue for consecutive one-year periods unless terminated by either party upon notice of at least 60 days prior to the end of each one-year extension.
Mr. Lawlor is also entitled to be covered by all standard fringe and employee benefits made available to other employees of the Company, including medical and dental insurance, paid vacation and holidays, a 401(k) plan and a long-term disability plan.
Maeve Duska
Ms. Duska is employed as Senior Vice President of Sales and Marketing. Ms. Duska is covered by all standard fringe and employee benefits made available to other employees of the Company, including medical and dental insurance, paid vacation and holidays, a 401(k) plan and a long-term disability plan.
George Harrum
Mr. Harrum’s employment agreement provides that he is employed as Senior Vice President of Operations. Mr. Harrum’s employment agreement with the Company provides for a term through June 30, 2017, and will automatically continue for consecutive one-year periods unless terminated by either party upon notice of at least 60 days prior to the end of the original term or any one year renewal period. The employment agreement provides that Mr. Harrum is eligible to earn an annual discretionary bonus under the management incentive plan in the maximum amount of 50% of his annual base salary based upon the Company’s and/or his performance. Mr. Harrum is also entitled to be covered by all standard fringe and employee benefits made available to other employees of the Company, including medical and dental insurance, paid vacation and holidays, a 401(k) plan and a long-term disability plan.
Leland P. Maxwell
Pursuant to a letter agreement between the Company and Mr. Maxwell dated January 27, 2016, and an extension effective as of October 1, 2016, Mr. Maxwell served as the Company’s interim Chief Financial Officer from January 28, 2016 through March 31, 2017. As interim Chief Financial Officer, he was eligible to participate in the 2016 MIP, and to receive a cash bonus equal to 50% of the compensation received by him from the Company during the fiscal year if the Company achieved certain annual financial goals during and for the entire 2017 fiscal year. Effective March 31, 2017, Mr. Maxwell became the Senior Vice President of Finance pursuant to which he receives a base salary of $235,000 and is entitled to participate in the management incentive plan.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The employment agreementsagreement of our executive officers includeMr. Herbert includes provisions for the Company to make a payment and certain benefits to the executiveshim upon termination of employment under certain conditions or if a successor to the Company’s business or assets does not agree to assume and perform his employment agreement as a condition to the consummation of a USA Transaction.
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Mr. Herbert’s employment agreement provides that if Mr. Herbert would terminate his employment with the Company for good reason, or if the Company would terminate his employment without cause, or if the Company would provide Mr. Herbert with a notice of non-renewal of his employment agreement, then the Company would pay to him a lump sum equal to two times his base salary on or before the termination of his employment and all restricted stock awards and stock options would become vested as of the date of termination.
The term “good reason,” as defined in the agreement, includes: (A) a material breach of the terms of the agreement by the Company; (B) the assignment by the Company to Mr. Herbert of duties in any way materially inconsistent with his authorities, duties, or responsibilities, or a material reduction or alteration in the nature or status of his authority, duties, or responsibilities as the Chief Executive Officer of the Company; (C) the Company reduces Mr. Herbert’s annual base salary; or (D) a material reduction by the Company in the kind or level of employee benefits to which Mr. Herbert is entitled immediately prior to such reduction with the result that his overall benefit package is significantly reduced unless such failure to continue a plan, policy, practice or arrangement pertains to all plan participants generally. As a condition to Mr. Herbert receiving any payments or benefits upon the termination of his employment for good reason, Mr. Herbert shall have executed and delivered (and not revoked) a release of any and all claims, suits, or causes of action against the Company and its affiliates in form reasonably acceptable to the Company.
The agreement also provides that, as a condition of the consummation of a USA Transaction, the successor to the Company’s business or assets would agree to assume and perform Mr. Herbert’s employment agreement. If any such successor would not do so, Mr. Herbert’s employment would terminate on the date of consummation of the USA Transaction, and the Company would pay to Mr. Herbert a lump sum equal to two times his base salary on or before the termination of his employment and all restricted stock awards and stock options would become vested as of the date of termination.
The term “USA Transaction” means: (i) the acquisition of fifty-one percent or more of the then outstanding voting securities entitled to vote generally in the election of directors of the Company by any person, entity or group, or (ii) the approval by the shareholders of the Company of a liquidation or dissolution, or certain reorganizations, mergers, or consolidations of the Company, or certain sales, transfers, leases or other dispositions of all or substantially all of the assets of the Company, or (iii) a change in the composition of the Board of Directors of the Company over a period of twelve (12) months or less such that the continuing directors fail to constitute a majority of the Board.
If Mr. Herbert’s employment had been terminated as of June 30, 20142017 (when the closing price per share was $2.11)$5.20) (i) by him for good reason, or (ii) by the Company without cause, or (iii) if a successor to the Company’s business or assets had not agreed to assume and perform his employment agreement as a condition to the consummation of a USA Transaction, then Mr. Herbert would have been entitled to receive: (a) an aggregate cash payment of twice his annual base salary or $682,454;$900,000; (b) an aggregate of 24,43221,077 shares granted to him under the 20142016 LTI Stock Plan, which would become automatically vested as of the date of termination, with a value of $51,552; and$109,600; (c) an aggregate of 23,809options exercisable for 50,000 shares previously granted to him during September 2012, whichat $1.80 per share would automatically become vested as of the date of termination with a value of $50,237.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year 2014,2017, Albin F. Moschner, Frank A. Petito, III, and Steven D. Barnhart, and William J. Reilly, Jr. served at various times as members of the Compensation Committee of our Board of Directors. No member of the Compensation Committee was, during fiscal year 2014,2017, an officer or employee of the Company or any of our subsidiaries, or was formerly an officer of the Company or any of our subsidiaries, or had any relationships requiring disclosure by us under Item 404 of Regulation S-K of the General Rules and Regulations of the Securities and Exchange Commission.
During the last fiscal year, none of our executive officers served as: (i) a member of the compensation committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our Compensation Committee; (ii) a director of another entity, one of whose executive officers served on our Compensation Committee; or (iii) a member of the compensation committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a director on our board of directors.
65
Compensation Committee Report
Members of the Board of Directors who are not employees of the Company receive cash and equity compensation for serving on the Board of Directors, as determined from time to time by the Compensation Committee with subsequent approval thereof by the Board of Directors. Each member of the Board has the option, in his or her discretion, to receive cash or stock, or some combination thereof, in payment of the compensationfees due for his or her service on the Board.
Director Compensation Table
The table below summarizes the compensation earned or paid in cash byof the Company to non-employee Directors duringdirectors for the fiscal year ended June 30, 2014.2017.
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|
|
|
|
|
|
|
|
|
|
|
| Fees Earned |
|
|
|
|
|
|
|
|
| |
|
| or Paid in |
| Stock |
| Option |
|
|
| |||
Name |
| Cash ($) (1) |
| Awards ($) |
| Awards ($) |
| Total ($) | ||||
Steven D. Barnhart |
| $ | 72,500 |
| $ | 40,000 |
| $ | — |
| $ | 112,500 |
Joel Brooks |
| $ | 41,713 |
| $ | 40,000 |
| $ | — |
| $ | 81,713 |
Robert L. Metzger |
| $ | 36,643 |
| $ | 40,000 |
| $ | — |
| $ | 76,643 |
Albin F. Moschner |
| $ | 40,000 |
| $ | 40,000 |
| $ | — |
| $ | 80,000 |
William J. Reilly, Jr. |
| $ | 50,000 |
| $ | 40,000 |
| $ | — |
| $ | 90,000 |
William J. Schoch |
| $ | 44,144 |
| $ | 40,000 |
| $ | — |
| $ | 84,144 |
| Name | Fees Earned or Paid in Cash($)(2) | Stock Awards ($) | Option Awards ($)(3) | Total($) | ||||||||||||
| Deborah G. Arnold | $ | 30,000 | $ | - | $ | 29,800 | $ | 59,800 | ||||||||
| Steven D. Barnhart | $ | 70,000 | $ | - | $ | 29,800 | $ | 99,800 | ||||||||
| Joel Brooks | $ | 30,000 | $ | - | $ | 29,800 | $ | 59,800 | ||||||||
| Albin F. Moschner | $ | 30,000 | $ | - | $ | 29,800 | $ | 59,800 | ||||||||
| Frank A. Petito, III (1) | $ | 20,000 | $ | - | $ | - | $ | 20,000 | ||||||||
| Jack E. Price | $ | 30,000 | $ | - | $ | - | $ | 30,000 | ||||||||
| William J. Reilly, Jr. | $ | 40,000 | $ | - | $ | 29,800 | $ | 69,800 | ||||||||
| William J. Schoch | $ | 30,000 | $ | - | $ | 29,800 | $ | 59,800 | ||||||||
(1) | During fiscal year ended June 30, |
· | Director: each director received $25,000 for serving on the Board. |
· |
Lead Independent Director: Mr. Barnhart received $40,000. |
· | Standing Committees: the Chairman of each Standing Committee received an annual fee of $15,000, and all other members received an annual fee of $7,500. |
· | Special Litigation Committee: each of Messrs. Brooks |
During the fiscal year ended June 30, 2014,2017, the following directors elected to receive their fees, or a portion thereof, in the Company’s Common Stockcommon stock in lieu of cash:
· | Mr. Metzger elected to receive |
(2) | Amounts represent the grant date fair value of |
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in this Form 10‑K with the Company’s management. Based upon such review and the related discussions, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Form 10‑K.
Compensation Committee
Albin F. Moschner
William J. Reilly, Jr.
66
ItemItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
Common Stock
The following table sets forth, as of September 5, 2014,August 7, 2017, the beneficial ownership of the common stock of each of the Company’s directors, andby the named executive officers the other employees namedincluded in the Summary Compensation Table set forth above, as well as by the Company’s current directors and executive officers as a group. The Company is not aware of anygroup, and by the beneficial owner of more than five percent5% of the common stock. Except as otherwise indicated below, the Company believes that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable:
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|
|
|
|
| Number of Shares of |
|
|
|
| Common Stock |
| Percent of |
Name of Beneficial Owner(1) |
| Beneficially Owned(2) |
| Class |
Steven D. Barnhart |
| 345,669 | (3) | * |
Joel Brooks |
| 92,677 | (4) | * |
Stephen P. Herbert |
| 656,058 | (5) | 1.31% |
Michael Lawlor |
| 92,698 | (6) | * |
Robert L. Metzger |
| 29,580 | (7) | * |
Leland P. Maxwell |
| 0 | (8) | * |
Albin F. Moschner |
| 462,484 | (9) | * |
William J. Reilly, Jr. |
| 125,007 | (10) | * |
William J. Schoch |
| 137,592 | (11) | * |
Priyanka Singh |
| 0 |
| * |
Maeve Duska |
| 16,867 | (12) | * |
George Harrum |
| 21,667 | (13) | * |
Forest Manor NV |
| 2,993,172 | (14) | 5.98% |
All Current Directors and Executive Officers As a Group (9 Persons) |
| 1,941,765 |
| 3.85% |
*Less than one percent (1%)
| Name and Address of Beneficial Owner(1) | Number of Shares of Common Stock Beneficially Owned(2) | Percent of Class | ||||||
Deborah G. Arnold 9704 Clos du Lac Circle Loomis, California 95630 | 43,416 | * | ||||||
Steven D. Barnhart 1 W. Onwentsia Road Lake Forest, Illinois 60045 | 240,197 | * | ||||||
Joel Brooks 303 George Street, Suite 140 New Brunswick, New Jersey 08901 | 35,000 | * | ||||||
David M. DeMedio 100 Deerfield Lane, Suite 140 Malvern, Pennsylvania 19355 | 130,675 | * | ||||||
Stephen P. Herbert 100 Deerfield Lane, Suite 140 Malvern, Pennsylvania 19355 | 346,656 | (3) | * | |||||
Michael Lawlor 100 Deerfield Lane, Suite 140 Malvern, Pennsylvania 19355 | 35,552 | * | ||||||
Albin F. Moschner 1022 Aynsley Avenue Lake Forest, Illinois 60045 | 483,172 | (4) | 1.36 | % | ||||
William J. Reilly, Jr. 1280 South Concord Road West Chester, Pennsylvania 19382 | 42,080 | (5) | * | |||||
Cary Sagady 100 Deerfield Lane, Suite 140 Malvern, Pennsylvania 19355 | 5,050 | * | ||||||
William J. Schoch 300 Montgomery Street, #400 San Francisco, California 94104 | 41,958 | * | ||||||
All Directors and Executive Officers As a Group (8 persons) | 1,363,154 | 3.83 | % | |||||
(1) | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and derives from either voting or dispositive power with respect to securities. Shares of Common Stock issuable upon conversion of the series A preferred stock, or shares of Common Stock issuable upon exercise of options currently exercisable, or exercisable within 60 days of August 7, 2017, are deemed to be beneficially owned for purposes hereof. |
(2) | The percentage of common stock beneficially owned is based on 50,017,368 shares outstanding as of August 7, 2017. |
(3) | Includes 20,000 shares of common stock issuable upon exercise of stock options granted to Mr. Barnhart that are exercisable as of August 7, 2017, and 25,945 shares which have not yet vested and over which Mr. Barnhart has sole voting power but no dispositive power. |
(4) | Includes 20,000 shares of common stock issuable upon exercise of stock options granted to Mr. Brooks that are exercisable as of August 7, 2017, and 25,945 shares which have not yet vested and over which Mr. Brooks has sole voting power but no dispositive power. |
(5) | Includes 72,010 shares of Common Stock beneficially owned by Mr. Herbert’s child and 27,440 shares of Common Stock beneficially owned by his spouse. Includes 255,220 shares of common stock issuable upon exercise of stock options granted to Mr. Herbert that are exercisable as of, or within 60 days of, August 7, 2017, and 21,077 shares which have not yet vested, and over which Mr. Herbert has sole voting power but no dispositive power. |
(6) | Includes 41,667 shares of common stock issuable upon exercise of stock options granted to Mr. Lawlor that are exercisable as of August 7, 2017, and 5,159 shares which have not yet vested, and over which Mr. Lawlor has sole voting power but no dispositive power. |
67
(7) | Includes 25,945 shares which have not yet vested and over which Mr. Metzger has sole voting power but no dispositive power. |
(8) | Mr. Maxwell served as the Company’s interim Chief Financial Officer from January 28, 2016 until March 31, 2017, when he became the Senior Vice President of Finance. |
(9) | Includes 1,358 shares of common stock issuable upon conversion of 7,000 shares of series A preferred stock. Also includes 20,000 shares of common stock issuable upon exercise of stock options granted to Mr. Moschner that are exercisable as of August 7, 2017, and which are owned by Moschner Family LLC, a Delaware limited liability company, of which Mr. Moschner is the manager, and 25,945 shares which have not yet vested, and over which Mr. Moschner has sole voting power but no dispositive power. |
(10) | Includes 100 shares of Common Stock beneficially owned by Mr. Reilly’s child. Also includes 97 shares of common stock issuable upon conversion of 500 shares of series A preferred stock and 20,000 shares of common stock issuable upon exercise of stock options granted to Mr. Reilly that are exercisable as of August 7, 2017, and 25,945 shares which have not yet vested, and over which Mr. Reilly has sole voting power but no dispositive power. |
(11) | Includes 20,000 shares of common stock issuable upon exercise of stock options granted to Mr. Schoch that are exercisable as of August 7, 2017, and 25,945 shares which have not yet vested, and over which Mr. Schoch has sole voting power but no dispositive power. |
(12) | Includes 16,667 shares of common stock issuable upon exercise of stock options granted to Ms. Duska that are exercisable as of August 7, 2017. |
(13) | Includes 16,667 shares of common stock issuable upon exercise of stock options granted to Mr. Harrum that are exercisable as of August 7, 2017. |
(14) | Based upon an amended Schedule 13G filed with the Securities and Exchange Commission on August 7, 2017 by Forest Manor NV, whose business address is Albert Hahnplantsoen 23, 1077 BM, Amsterdam, the Netherlands. |
Preferred Stock
The following table sets forth, as of August 7, 2017, the beneficial ownership of the series A preferred stock by the Company’s directors, by the named executive officers included in the Summary Compensation Table set forth above, by the Company’s current directors and executive officers as a group, and by the beneficial owner of more than 5% of the series A preferred stock. Other than the shares of series A preferred stock beneficially owned by Messrs. Moschner and Reilly, there were no shares of series A preferred stock beneficially owned as of August 7, 2017 by the Company’s directors, by the named executive officers included in the Summary Compensation Table set forth above, or by the current directors and executive officers as a group. Except as indicated below, the Company believes that the beneficial owners of the series A preferred stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
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|
| Number of Shares of |
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|
|
| Series A |
| Percent of |
Name of Beneficial Owner |
| Preferred Stock (1) |
| Class |
Albin F. Moschner |
| 7,000 |
| 1.57% |
William J. Reilly, Jr. |
| 500 |
| * |
Legion Partners Asset Management, LLC |
| 44,250 | (2) | 9.94% |
All Current Directors and Executive Officers As a Group (9 Persons) |
| 7,500 |
| 1.69% |
*Less than one percent (1%)
1. | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and derives from either voting or investment power with respect to securities. |
| The percentage of |
68
2. | Based upon a Schedule 13D/A filed on November 4, 2016 with the Securities and Exchange Commission, each of the following persons has shared voting and dispositive power over 44,250 shares of |
REVIEW APPROVAL OR RATIFICATIONAPPROVAL OF TRANSACTIONS WITH RELATED PERSONS
We have adopted a formal written policy which is set forth in our Audit Committee Charter, that allour executive officers, directors, holders of more than 5% of any class of our voting securities, and any member of the immediate family of and any entity affiliated with any of the foregoing persons, are not permitted to enter into a related party transactions,person transaction with us without the prior consent of our Audit Committee. Any request for us to enter into a transaction with an executive officer, director, principal shareholder, or any of their immediate family members or affiliates, in which are requiredthe amount involved exceeds $120,000 must first be presented to be disclosed under Item 404 of Regulation S-K promulgated underour Audit Committee for review, consideration and approval. In approving or rejecting any such proposal, our Audit Committee is to consider the Securities Act of 1933, as amended, arerelevant facts and circumstances available and deemed relevant to be reviewed and approved by the Audit Committee, for any possible conflictsincluding, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of interest. This policy is evidencedthe related person’s interest in the Chartertransaction.
In addition, under our Code of Business Conduct and Ethics, our executive officers and directors have a responsibility to disclose any transaction or relationship that reasonably could be expected to interfere with their exercise of independent judgment or materially impair the Audit Committeeperformance of thetheir responsibilities to our Board of Directors, of the Company.
DIRECTOR INDEPENDENCE
The Board of Directors has determined that Deborah G. Arnold, Steven D. Barnhart, Joel Brooks, Robert L. Metzger, Albin F. Moschner, William J. Reilly, Jr., and William J. Schoch, which members constitute all of the currently serving Board of Directors other than Mr. Herbert, are independent in accordance with the applicable listing standards of The NASDAQ Stock Market LLC.
The Board of Directors has a standing Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee.
The Audit Committee of the Board of Directors presently consists of Mr. Brooks (Chairman)Metzger (Chair), Mr. MoschnerBarnhart and Mr. Reilly.Schoch. The Board of Directors has determined that each of the current members of the Audit Committee is independent in accordance with the applicable listing standards of The Nasdaq Stock Market LLC. The Audit Committee recommends the engagement of the Company’s independent accountants and is primarily responsible for approving the services performed by the Company’s independent accountants, for reviewing and evaluatingdiscussing the Company’s accounting principles,audited financial statements with management, compliance with the Public Company Accounting Oversight Board (“PCAOB”) auditing standard No. 16 – Communication with Audit Committee, including reviewing the independence of independent auditors, recommending to the board of directors that the audited financial statements be included in the Company’s annual Form 10-K for the previous fiscal year, and reviewingfor discussing with management and the independent auditor any major issues as to the adequacy and effectiveness of the Company’s internal controls.controls and any special steps adopted in light of material control deficiencies. The Audit Committee operates pursuant to a charter that was last amended and restated by the Board of Directors on April 11, 2006, a copy of which is accessible on the Company’s website, www.usatech.com.
The Compensation Committee of the Board of Directors presently consists of Mr. Moschner (Chairman)(Chair) and Mr. Barnhart.Reilly. The Board of Directors has determined that each of the current members of the Compensation Committee is independent in
69
accordance with the applicable listing standards of The Nasdaq Stock Market LLC. The Committee reviews and recommends compensation and compensation changes for the executive officers of the Company and administers the Company’s stock option and restricted stock grant plans. The Compensation Committee operates pursuant to a charter that was adopted by the Board of Directors in September 2007 and amended in May 2013, a copy of which is accessible on the Company’s website, www.usatech.com.
The Nominating and Corporate Governance Committee of the Board of Directors presently consists of Ms. Arnold (Chairman), Mr. ReillySchoch (Chair) and Mr. Schoch.Reilly. The Board of Directors has determined that each of the current members of the Nominating and Corporate Governance Committee is independent in accordance with the applicable listing standards of The Nasdaq Stock Market LLC. The Committee recommends to the entire Board of Directors for selection any nominees for director. The Nominating and Corporate Committee operates pursuant to a charter that was adopted by the Board of Directors on October 26, 2012, a copy of which is accessible on the Company’s website, www.usatech.com.
AUDIT AND NON-AUDIT FEES
During the fiscal year ended June 30, 20142017 and 2013,2016, fees in connection with services rendered by McGladreyRSM US LLP were as set forth below:
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|
|
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|
|
| Fiscal |
| Fiscal | ||
($ in thousands) |
| 2017 |
| 2016 | ||
Audit Fees |
| $ | 693 |
| $ | 982 |
Audit-Related Fees |
|
| 7 |
|
| 9 |
Tax Fees |
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| — |
|
| 13 |
All Other Fees |
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| — |
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| — |
Total |
| $ | 700 |
| $ | 1,004 |
| Fiscal | Fiscal | |||||||
| 2014 | 2013 | |||||||
| Audit Fees | $ | 225,530 | $ | 211,186 | ||||
| Audit-Related Fees | 5,800 | 10,905 | ||||||
| Tax Fees | 9,500 | - | ||||||
| All Other Fees | - | - | ||||||
| Total | $ | 240,830 | $ | 222,091 | ||||
Audit fees consisted of fees for the audit of our annual financial statements, and review of quarterly financial statements and the audit of internal control over financial reporting, as well as services normally provided in connection with statutory and regulatory filings or engagements, consents and assistance with and reviews of Company documents filed with the Securities and Exchange Commission.
Audit related fees were primarily incurred in connection with our equity offerings, and fees in connection with research and attending the annual shareholders meeting.
AUDIT COMMITTEE PRE-APPROVAL POLICY
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm on a case-by-case basis.
ItemItem 15. Exhibits, Financial Statement Schedules.
Exhibit | Description | |
3.1 | Amended and Restated Articles of Incorporation of the Company filed January 26, 2004 (Incorporated by reference to Exhibit 3.1.20 to Form | |
3.1.1 | First Amendment to Amended and Restated Articles of Incorporation of the Company filed on March 17, 2005 (Incorporated by reference to Exhibit 3.1.1 to Form | |
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3.1.2 | Second Amendment to Amended and Restated Articles of Incorporation of the Company filed on December 13, 2005 (Incorporated by reference to Exhibit 3.1.2 to Form | |
3.1.3 | Third Amendment to Amended and Restated Articles of Incorporation of the Company filed on February 7, 2006 (Incorporated by reference to Exhibit 3.1.3 to Form | |
3.1.4 | Fourth Amendment to Amended and Restated Articles of Incorporation of the Company filed on July 25, 2007. (Incorporated by reference to Exhibit 3.1.3 to Form | |
3.1.5 | Fifth Amendment to Amended and Restated Articles of Incorporation of the Company filed on March 6, 2008. (Incorporated by reference to Exhibit 3.1.4 to Form | |
3.2 | Amended and Restated By-Laws of the Company dated as of April 24, 2014 (Incorporated by reference to Exhibit 3(i) to | |
4.1 | Warrant dated |
10.1 | ||
Form of Indemnification Agreement between the Company and each of its officers and Directors (Incorporated by reference to Exhibit 10.1 to Form | ||
10.2 | USA Technologies, Inc. 2013 Stock Incentive Plan (Incorporated by reference to Exhibit | |
10.3 | USA Technologies, Inc. | |
10.4 | USA Technologies, Inc. | |
10.5 | ||
Amended and Restated Employment and Non-Competition Agreement between the Company and Stephen P. Herbert dated November 30, 2011. (Incorporated by reference to Exhibit 10.1 to Form |
10.6 | ||
Employment and Non-Competition Agreement dated June 7, 2010 between the Company and Michael Lawlor (Incorporated by reference to Exhibit 10.22 to Form | ||
10.6.1 | First Amendment to Employment and Non-competition Agreement dated April 27, 2012 between the Company and Michael Lawlor (Incorporated by reference to Exhibit 10.23 to Form |
10.6.2 | Second Amendment | |
10.7 | Letter agreement dated January 27, 2016, by and between the Company and Leland P. Maxwell (Incorporated by reference to Exhibit 10.2 to Form | |
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10.7.1 | Letter agreement dated September 28, 2016, by and | |
10.8 | Employment Offer Letter dated as of March 10, 2017, by and between the Company and Priyanka Singh (Incorporated by reference to Exhibit 10.1 to Form 8-K filed March 28, 2017). | |
10.9 | Visa Incentive Agreement between the Company and Visa U.S.A. Inc., dated as of November 14, 2014 (Portions of this exhibit were redacted pursuant to a confidential treatment request) (Incorporated by reference to Exhibit 10.1 to Form 10‑Q filed February 17, 2015). | |
10.10 | Mastercard Acceptance Agreement by and between the Company and Mastercard International Incorporated (Incorporated by reference to Exhibit 10.2 to Form 10‑Q filed May 15, 2015) (Portions of this exhibit were redacted pursuant to a confidential treatment request). | |
10.10.1 | First Amendment to Mastercard Acceptance Agreement by and between the Company and Mastercard International Incorporated dated April 27, 2015 (Incorporated by reference to Exhibit 10.45 to Form 10‑K filed September 30, 2015) (Portions of this exhibit were redacted pursuant to a confidential treatment request). | |
10.11 | Third Party Payment Processor Agreement dated April 24, 2015 by and among the Company, JPMorgan Chase Bank, N.A. and Paymentech, LLC (Incorporated by reference to Exhibit 10.46 to Form 10‑K filed September 30, 2015) (Portions of this exhibit were redacted pursuant to a confidential treatment request). | |
10.12 | Loan and Security Agreement dated March 29, 2016 by and between the Company and Heritage Bank of Commerce (Portions of this exhibit were redacted pursuant to a confidential treatment request) (Incorporated by reference to Exhibit 10.1 to Form 10‑Q filed May 12, 2016). | |
10.13 | Intellectual Property Security Agreement dated March 29, 2016 by and between the Company and Heritage Bank of Commerce (Portions of this exhibit were redacted pursuant to a confidential treatment request) (Incorporated by reference to Exhibit 10.2 to Form 10‑Q filed May 12, 2016). | |
10.13.1 | Second Amendment to Loan and Security Agreement dated as of | |
10.13.2 | Third Amendment to Loan and Security Agreement dated as of | |
10.14 | Asset Purchase Agreement dated | |
21 | ||
List of significant subsidiaries of the Company (Incorporated by reference to Exhibit 21 to Form | ||
23.1* | Consent of | |
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31.1* | Certifications of Chief Executive Officer pursuant to Rule | |
31.2* | Certifications of Chief Financial Officer pursuant to Rule | |
32.1* | Certification by the Chief Executive Officer | |
32.2* | Certification by the Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
*Filed herewith.
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SCHEDULE II
USA TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2014, 2013,2017, 2016, AND 20122015
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| Balance at |
| Additions |
| receivables |
| Balance | ||||
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| beginning |
| charged to |
| written off, net |
| at end | ||||
ACCOUNTS RECEIVABLE |
| of period |
| earnings |
| of recoveries |
| of period | ||||
June 30, 2017 |
| $ | 2,814 |
| $ | 856 |
| $ | 521 |
| $ | 3,149 |
June 30, 2016 |
| $ | 1,309 |
| $ | 1,576 |
| $ | 71 |
| $ | 2,814 |
June 30, 2015 |
| $ | 63 |
| $ | 1,409 |
| $ | 163 |
| $ | 1,309 |
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| Balance at |
| Additions |
| Deductions, |
| Balance | ||||
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| beginning |
| charged to |
| Shrinkage and |
| at end | ||||
INVENTORY |
| of period |
| earnings |
| obsolescence |
| of period | ||||
June 30, 2017 |
| $ | 1,297 |
| $ | 799 |
| $ | 139 |
| $ | 1,957 |
June 30, 2016 |
| $ | 944 |
| $ | 943 |
| $ | 590 |
| $ | 1,297 |
June 30, 2015 |
| $ | 765 |
| $ | 551 |
| $ | 372 |
| $ | 944 |
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| Deductions | ||||||||||||||||
| uncollectible | ||||||||||||||||
| Balance at | Additions | receivables | Balance | |||||||||||||
| beginning | charged to | written off, net | at end | |||||||||||||
| ACCOUNTS RECEIVABLE | of period | earnings | of recoveries | of period | ||||||||||||
| June 30, 2014 | $ | 18,000 | $ | 94,000 | $ | 49,000 | $ | 63,000 | ||||||||
| June 30, 2013 | $ | 25,000 | $ | 69,000 | $ | 76,000 | $ | 18,000 | ||||||||
| June 30, 2012 | $ | 113,000 | $ | (46,000 | ) | $ | 42,000 | $ | 25,000 | |||||||
| Balance at | Additions | Deductions, | Balance | |||||||||||||
| beginning | charged to | Shrinkage and | at end | |||||||||||||
| INVENTORY | of period | earnings | obsolescence | of period | ||||||||||||
| June 30, 2014 | $ | 727,000 | $ | 164,000 | $ | 126,000 | $ | 765,000 | ||||||||
| June 30, 2013 | $ | 712,000 | $ | 135,000 | $ | 120,000 | $ | 727,000 | ||||||||
| June 30, 2012 | $ | 628,000 | $ | 136,000 | $ | 52,000 | $ | 712,000 | ||||||||
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
USA TECHNOLOGIES, INC | ||
By: /s/ Stephen P. Herbert | ||
Stephen P. Herbert, Chairman | ||
And Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES | TITLE | DATE | ||
/s/ Stephen P. Herbert | Chairman of the Board of Directors | August 22, 2017 | ||
Stephen P. Herbert | and Chief Executive Officer | |||
(Principal Executive Officer) | ||||
/s/ | Chief Financial Officer | August 22, 2017 | ||
Priyanka Singh, CPA | (Principal Financial and Accounting Officer) | |||
/s/ Steven D. Barnhart | Director | August 22, 2017 | ||
Steven D. Barnhart | ||||
/s/ Joel Brooks | Director | August 22, 2017 | ||
Joel Brooks | ||||
/s/ Robert L. Metzger | Director | August 22, 2017 | ||
Robert L. Metzger | ||||
/s/ Albin F. Moschner | Director | August 22, 2017 | ||
Albin F. Moschner | ||||
/s/ William J. Reilly, Jr. | Director | August 22, 2017 | ||
William J. Reilly, Jr. | ||||
/s/ William J. Schoch | Director | August 22, 2017 | ||
William J. Schoch |
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