UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10‑K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 20152017
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.
Yes¨ ☐ Nox ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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¨ ☒ Nox ☐
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).
Yesx ☒ No¨ ☐
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.
Yesx No¨
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.x10‑K. ☐
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).
Yes¨ ☐ Nox ☒
The aggregate market value of the voting common equity securities held by non-affiliates of the Registrant was $55,098,386$167,436,169 as of the last business day of the most recently completed second fiscal quarter, December 31, 2014,2016, based upon the closing price of the Registrant’s Common Stock on that date.
As of September 15, 2015,August 7, 2017, there were 35,854,65550,017,368 outstanding shares of Common Stock, no par value.
TABLE OF CONTENTS
USA TECHNOLOGIES, INC.
TABLE OF CONTENTS
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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 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, 2015,2017, the Company had approximately 333,000568,000 connections to its ePort Connect service, compared to approximately 266,000429,000 connections as of June 30, 2014,2016, representing a 25%32.4% increase. During the fiscal year ended June 30, 2015,2017, the Company processed approximately 217414.9 million cashless transactions totaling approximately $389$803.0 million in transaction dollars, representing a 28%31.4% increase in transaction volume and a 32%37.4% increase in dollars processed from the 169315.8 million cashless transactions totaling approximately $294$584.4 million during the previous fiscal year ended June 30, 2014.2016.
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.
years.
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 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).
The ePort® Interactive, which was unveiled in April 2016, is a cloud-based interactive media and content delivery management system and enables delivery of nutritional information, remote refunds, loyalty programs, and multimedia-marketing campaigns for the unattended and self-serve retail markets.
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 20162019, spending at merchants in the U.S., from the four card-based systemsystems 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. 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, titled “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 that are enabled to accept NFC payments and digital wallet applications, such as Google Wallet, Chase Wallet,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.
With over 70%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, 2015,2017, 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 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, 2016.2018. The VISA listing can be found online at http://www.visa.com/splisting/searchGrsp.do
searchGrsp.do.
OUR SERVICES
For the fiscal year ended June 30, 2015,2017, license and transaction fees generated by our ePort Connect service represented 75%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 asMORE, our loyalty program, two-tier pricing, special promotions such as our nationwide Apple Pay mobile payment |
· | 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 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 from the time of shipment.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 Online, enables customers to use USALive to securely process cards typically held on file for the purpose of online billing and recurring charges. ePort Online helps USAT’s customers reduce paper invoicing and collections. |
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 was going to be 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 was comprised of 30,000-35,000 laundromatsabout 35,000 coin laundries in the U.S. in 2015 that our partner, Setomatic Systems, estimated translates to roughly 2.5 million commercial washers and dryers. The Coin Laundry Association estimated gross annual revenue in the laundromat market at nearly $5 billion annually.
Mobile Merchant. New mobile-based payment acceptance technology has made a transformational impact on an entire base of merchants that previously had almost no access to electronic-based payments. Goldman Sachs (Equity Research Report, June 19, 2012) sees the arrival of mobile technology at the micro/small merchant level addressing an estimated 13 million U.S.-based micro merchants that are likely to benefit from the ability to accept electronic payment from mobile devices. The Company believes that its mobile-based acceptance product and existing turnkey service platform align well with the market’s need for integrated, mobile payment solutions.
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OUR COMPETITIVE STRENGTHS
We believe that we benefit from a number of advantages gained through our over twenty-yearnearly 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. Key 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 2,3001,650 new ePort Connect customers as well as increased penetration in markets such as amusement and arcade, and commercial laundry in fiscal year 2015.2017.
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 70%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, including 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,almost one in six US consumers (15%) had used a mobile wallet in the past six months, up from 9% in the same period in 2013, and an additional 22% are likely to adopt mobile wallet functionality in the coming six months (The Future of the Mobile Wallet -Chadwick Martin Bailey). As consumers continue to adopt these new methods of cashless payments, it is our belief that adoption will continue to accelerate at a rapid pace and result in more rapid adoption of cashless solutions like USA Technologies’the Company’s ePort in the markets that we serve.
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, USA Technologiesthe 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’sCompany’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 operators’operator’s business including micro-markets contract food industry, online payments and mobile payments and dining/retail POS.payments.
Leverage Intellectual Property. Through June 30, 2015,2017, we have been granted 8973 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, 2015,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 includingwww.usatech.com andwww.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 was three years, which was extended 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 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 three-year MasterCard Acceptance Agreement (“MasterCard Agreement”) with MasterCard International Incorporated ("MasterCard"), pursuant to which 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 result, the Company ceased accepting MasterCard debit card 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 conditionconditions under, or the transactions to, which the MasterCard custom pricing would be available, was amended. The reduced interchange rates became effective on April 20, 2015.
Chase Paymentech
The Company hasWe 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 debit 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 at least 250,000,000250 million transactions per year. The Agreement provides that Chase Paymentech may modify the pricing for its services upon 30-days’30‑days’ notice, and in connection with certain such increases, the Company has the right to terminate the Agreement upon 120-days’120‑days’ notice.
Compass/Foodbuy
As per its website, Compass is a $13 billion organization with locations worldwide, is the leader in vending, food service management and support services, is the largest national vending operating company, has over 500,000 associates, and is one of the leading owners and operators of vending machines in the United States. Compass is a division of UK-based Compass Group PLC.
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. 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, 2015,2017, Compass represented approximately 20%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 2015.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.
The agreement is subject to renewal for one-year periods after the initial three-year term, subject to notice of non-renewal by either party.
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 shift by our customers from acquiring our product via JumpStart, which accounted for 65%9% of our gross connections in fiscal year 2014,2016, and for 7% of our gross connections in fiscal year 2017, to QuickStart or a straight purchase, which wasaccounted for approximately 89%93% of gross connections forin fiscal 2015.year 2017. The shift to a straight purchase, along with our ability to increase cash collections under QuickStart sales by utilizing leasing companies, has improvedimproves cash provided by operating activities.
Due to the success of the QuickStart program as measured by customer utilization of the program and the positive impact on the Company’s cash flows from operating activities when a leasing company is utilized, the Company intends to expand this program by entering into additional vendor agreements with leasing companies and/or expanding its relationship with the two incumbent leasing companies.
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. In fiscal 2015,year 2017, the Company added approximately 11%7% of its gross connections through JumpStart.
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 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 and Cantaloupe Systems, Inc..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.
CUSTOMER CONCENTRATIONS
Customer concentrations for the years ended June 30, 2015, 2014 and 2013 are as follows:
2015 | 2014 | 2013 | ||||||||||
Trade accounts and finance receivables- one customer | 35 | % | 22 | % | 41 | % | ||||||
License and transaction processing revenues- two customers: | ||||||||||||
First customer | 21 | % | 26 | % | 26 | % | ||||||
Second customer | (1 | ) | (1 | ) | 11 | % | ||||||
Equipment sales revenue- one customer | 17 | % | (1 | ) | (1 | ) | ||||||
(1) Less than 10% |
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®, 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 USA Technologies.
MORE.
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, 2015, 892017, 96 patents have been granted to the Company, including 7681 United States patents and 1315 foreign patents, and 63 United States and 610 international patent applications are pending. Of the 8996 patents, 73 are still in force.
The Company filed for re-examination of U.S. Patent No. 7,131,575 (Reexamination Control No. 90/008,437) Our patents expire between 2017 and for reexamination of U.S. Patent No. 6,505,095 (Reexamination Control No. 90/008,448). On January 6, 2009, the U.S. Patent Office issued an Ex Parte Reexamination Certificate in connection with U.S. Patent No. 7,131,575 confirming patentability without any amendment to the claims. On August 11, 2009, the U.S. Patent Office issued an Ex Parte Reexamination Certificate in connection with U.S. Patent No. 6,505,095 which, among other things, approved amendments to certain of the prior claims and approved twelve new claims, for a total of 43 claims.
2035.
RESEARCH AND DEVELOPMENT
Research and development expenses, which are included in selling, general and administrative expense in the Consolidated Statements of Operations, were approximately $1,457,000, $1,018,000,$1.4 million, $1.4 million and $901,000$1.5 million for the years ended June 30, 2017, 2016 and 2015, 2014, and 2013, respectively.
EMPLOYEES
On August 31, 2015,As of June 30, 2017, the Company had 6491 full-time employees and 210 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 years ended June 30, 2013 and June 30, 2014. However, we experienced losses for the fiscal years 2015, fiscal year,2016, and 2017, and continued profitability is not assured. From our inception through June 30, 2015,2017, our cumulative losses from operations are approximately $172$183 million. 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, 20152017 and 2014,2016, we incurred a net loss of $1,089,482$1.9 million and earned a net income of $27,530,652 which includes a benefit for income taxes of $27,255,398,$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.
Our fiscal year 2016 business plan assumes that no material unusual or unanticipated non-operational expenses would be incurred by us. 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. Any such occurrence may cause our anticipated connections, revenues, gross profits, adjusted EBITDA, and other financial metrics for the 20162017 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, 2015,2017, we had net working capital of $6,293,137.$5.8 million. We had net cash (used in) provided by operating activities of $(1,697,742), $7,085,400,$(6.8) million, $6.5 million, and $6,038,952$(1.7) million for the fiscal years ended June 30, 2015, 2014,2017, 2016, and 2013,2015, respectively. Although we believe that we have adequate existing resources (used in) to provide for our funding requirements through at least July 1, 2016,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, 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 |
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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 changes. |
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. 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. Customer concentrations for the years ended June 30, 2017, 2016 and 2015 2014 and 2013 arewere as follows:
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| 2017 |
| 2016 |
| 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 | % |
2015 | 2014 | 2013 | ||||||||||
Trade accounts and finance receivables- one customer | 35% | 22% | 41% | |||||||||
License and transaction processing revenues- two customers: | ||||||||||||
First customer | 21% | 26% | 26% | |||||||||
Second customer | (1) | (1) | 11% | |||||||||
Equipment sales revenue- one customer | 17% | (1) | (1) | |||||||||
(1) Less than 10% |
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.
affected.
We are dependent on key management personnel, particularly the Chairman and Chief Executive Officer, Stephen P. Herbert and our Chief Services 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, 2016 and with Mr. DeMedio which expires on June 30, 2016, each of which contains confidentiality and non-compete agreements.
provisions. 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.
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, 2015,2017, we had 1213 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 8996 patents as of June 30, 2015.2017. There can be no assurance that:
· | any of the remaining patent applications will be granted to |
us;
· | 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 a 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 accumulate excess or obsolete inventory that could result in unanticipated price reductions and write downs and adversely affect our financial results.
Managing the proper inventory levels for components and finished products is challenging. In formulating our product offerings, we have focused our efforts on providing products with greater capability and functionality, which requires us to develop and incorporate the most current technologies in our products. This approach tends to increase the riskTable of obsolescence for products and components we hold in inventory and may compound the difficulties posed by other factors that affect our inventory levels, including the following:Contents
If we accumulate excess or obsolete inventory, price reductions and inventory write-downs may result, which could adversely affect our results of operation and financial condition.
We may not be able to adapt to changing technology and our customers’ technology needs.
We face rapidly changing technology and frequent new service offerings 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 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 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. Similarly, MasterCard International Incorporated ("MasterCard") has agreed to make available to us reduced interchange rates for small ticket debit card transactions pursuant to a three-year MasterCard Acceptance Agreement dated January 12, 2015, as amended by a First Amendment thereto dated April 27, 2015. If the foregoing agreements with Visa and 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 cards in addition to all major credit cards, including Visa, MasterCard, Discover and American Express at its current processing rates. If the Visa or 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.
In addition, ourOur 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, 2015,August 7, 2017, the unpaid and cumulative dividends on the series A convertible preferred stock are $13,257,454.$14.66 million. As of June 30, 2015,2017, 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, 2015,2017, 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, 2015,2017, the liquidation preference was $17,354,908.$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, 2015 is equal to $17,354,908.
The terms of the warrants that were issued in March 2011 to acquire up to 3,900,000 shares of common stock at $2.6058 per share which expire in September 2016 provide that upon a Fundamental Transaction (as defined in the warrant) the holder shall have the right to have the warrant purchased by the Company for cash at its Black Scholes Value (as defined in the warrant). The term Fundamental Transaction includes a merger, sale of substantially all of our assets, or if any person shall acquire 50% or more of the voting power of our shares. The Black Scholes Value (as defined in the warrant) payable for the 3,900,000 warrants as of June 30, 20152017 was approximately $5.3$18.8 million.
We may issue additional shares of our common stock, which could depress the market price of our common stock and dilute your ownership.
As of September 15, 2015, we had issued and outstanding warrants to purchase 4,298,000 shares of our common stock. The shares underlying 4,253,000 of these warrants have been registered and may be freely sold. Market sales of large amounts of our common stock, or the potential for those sales even if they do not actually occur, may have the effect of depressing the market price of our common stock. In addition, if our future financing needs require us to issue additional shares of common stock or securities convertible into common stock, the supply of common stock available for resale could be increased which could stimulate trading activity and cause the market price of our common stock to drop, even if our business is doing well. Furthermore, the issuance of any additional shares of our common stock including those pursuant to the exercise of warrants by the holders thereof, or securities convertible into our common stock could be substantially dilutive to holders of our common stock.
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 |
· | 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.
The substantial market overhang of our shares may tend to depress the market price of our shares.
As of September 15, 2015, the Company has 4,253,000 of our shares underlying warrants exercisable at $2.6058 per share at any time before September 18, 2016 which are required to be registered by us for resale under applicable securities laws. Sales in the public market of a substantial number of the shares underlying these warrants, or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, the sale of these shares could impair our ability to raise capital, should we wish to do so, through the sale of additional common stock. We are unable to estimate the number of shares that may be sold because this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors.
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 conducts its operations from various facilities under operating leases. 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, 2015, the Company’s rent payment for this facility is approximately $32,000 per month.
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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, 2015,2017, 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.
On January 26,As previously reported, on October 1, 2015, Universal Clearing Solutions, LLC (“Universal Clearing”), a former non-vending customer of the Company,purported class action was filed a complaint against the Company in the United States District Court for the Eastern District of Arizona. On April 10, 2015, Universal Clearing filed an amended complaint, and on June 19, 2015, Universal Clearing filed a second amended complaint, which alleged causes of actionPennsylvania against the Company for breachand its executive officers alleging violations under the Securities Exchange Act of contract, breach of fiduciary duty, and defamation.1934. The allegationscomplaint alleges, among other things, that the defendants failed to disclose that there were significant deficiencies in the complaint relate to an agreement entered into between the Companydesign and Universal Clearing pursuant to which Universal Clearing could board certain sub-merchants onoperating effectiveness of the Company’s service.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 monetary damages allegedly incurred by Universal Clearingcertification as a result of, amongclass action, unspecified compensatory damages plus interest, attorneys’ fees and other things,costs. On February 1, 2016, the Company’s refusal to board on its service certain sub-merchants of Universal Clearing. On July 24, 2015, the Company filed an answer to the defamation count of the complaint denying the allegations, and filed a motion to dismiss the remaining counts. The court has not yet ruled oncomplaint. On April 14, 2016, the Court issued an order granting the Company’s motion to dismiss.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 demanded 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 reporting 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 evaluate 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 the 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 24, 2015,15, 2016 the SLC issued its report (the “SLC Report”) which, among other things, concluded that none of the current or 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 a counterclaim against Universal Clearing seeking damages of approximately $680,000 which were incurred bywith the Company in connection with chargebacks relating to Universal Clearing’s sub-merchants which had been boarded on the Company’s service. The counterclaim alleges that Universal Clearing is responsible under the agreement for these chargebacks, and Universal Clearing misrepresented to the Company the business practices and other matters relating to these sub-merchants. On August 17, 2015, Universal Clearing filed an answer to the counterclaim denying that it was responsible for the chargebacks or had made any misrepresentations.
On August 7, 2015, the Company filed a third party complaint in the pending action against Steven Juliver, the manager of Universal Clearing, as well as against Universal Tranware, LLC, and Secureswype, LLC, entities affiliated with Universal Clearing. The third party complaint sets forth causes of action for fraud and breach of contract, and seeks to recover from these defendants the chargebacks relating to Universal Clearing’s sub-merchants described above. On September 14, 2015, the third party defendants filedCourt a motion to dismiss the third partyshareholder complaint. The courtOn 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 yet ruled on the motion to dismiss.
The Company does not believe that the claims set forth in the second amended complaint have merit and intends to vigorously defend this matter. The Company does not believe that this action would haverendered a material adverse effect on its financial statements, results of operations or cash flows. The Company also intends to pursue its claims for damages set forth in the counterclaim and third party complaint.decision.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
TheOur 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 |
Year ended June 30, 2015 | High | Low | ||||||
First Quarter (through September 30, 2014) | $ | 2.45 | $ | 1.71 | ||||
Second Quarter (through December 31, 2014) | $ | 1.87 | $ | 1.42 | ||||
Third Quarter (through March 31, 2015) | $ | 2.76 | $ | 1.55 | ||||
Fourth Quarter (through June 30, 2015) | $ | 3.36 | $ | 2.61 |
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 |
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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 |
On September 15, 2015,As of August 7, 2017, there were 614 recordapproximately 571 holders of therecord of our common stock and 306275 record holders of the preferred stock.
This number does not include stockholders for whom shares were held in a “nominee” or “street” name.
The holders of the common stock are entitled to receive such dividends as the Board of Directors of the Company may from time to time declare out of funds legally available for payment of dividends. Through the date hereof, no cash dividends have been declared on the Company’s common stock or preferred stock. No dividend may be paid on the common stock until all accumulated and unpaid dividends on the preferred stock have been paid. As of September 15, 2015,August 7, 2017, such accumulated unpaid dividends amounted to $13,257,454.$14.7 million. The preferred stock is also entitled to a liquidation preference over the common stock which, as of June 30, 20152017 equaled $17,354,908.
$18.8 million.
As of June 30, 2015,2017, 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 |
| |
Equity compensation plans approved by security holders |
| 913,220 |
| $ | 2.82 |
| 1,062,451 | (1) |
Equity compensation plans not approved by security holders |
| — |
|
| — |
| — |
|
TOTAL |
| 913,220 |
| $ | 2.82 |
| 1,062,451 |
|
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 | 513,888 | $ | 1.88 | 1,491,119 | (1) | ||||||||
| (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. |
As of September 15, 2015,August 7, 2017, shares of common stock reserved for future issuance were as follows:
· | 23,978 shares issuable upon the exercise of common stock warrants at an exercise |
· | ||
101,001 shares issuable upon the conversion of outstanding preferred stock and cumulative preferred stock dividends; |
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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 |
· | ||
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, 20102012 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-10 | Jun-11 | Jun-12 | Jun-13 | Jun-14 | Jun-15 |
| Jun-12 |
| Jun-13 |
| Jun-14 |
| Jun-15 |
| Jun-16 |
| Jun-17 | ||||||||||||||||||||||||
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USA Technologies, Inc. | $ | 100 | $ | 444 | $ | 290 | $ | 348 | $ | 422 | $ | 540 |
| $ | 100 |
| $ | 120 |
| $ | 146 |
| $ | 186 |
| $ | 294 |
| $ | 359 | ||||||||||||
NASDAQ Composite | 100 | 131 | 139 | 161 | 209 | 236 |
| $ | 100 |
| $ | 116 |
| $ | 149 |
| $ | 168 |
| $ | 163 |
| $ | 207 | ||||||||||||||||||
S&P 500 Information Technology Index | 100 | 125 | 140 | 148 | 192 | 210 |
| $ | 100 |
| $ | 106 |
| $ | 137 |
| $ | 150 |
| $ | 154 |
| $ | 204 |
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.
28
Item 6. Selected Financial Data.
The following selected financial data for the five years ended June 30, 20152017 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.
29
Year ended June 30, | ||||||||||||||||||||
2015 | 2014 (1) | 2013 | 2012 | 2011 | ||||||||||||||||
OPERATIONS DATA: | ||||||||||||||||||||
Revenues | $ | 58,077,474 | $ | 42,344,964 | $ | 35,940,244 | $ | 29,017,243 | $ | 22,868,789 | ||||||||||
Operating income (loss) | $ | (240,303 | ) | $ | 436,332 | $ | 713,925 | $ | (7,000,392 | ) | $ | (5,688,217 | ) | |||||||
Net Income (loss) | $ | (1,089,482 | ) | $ | 27,530,652 | $ | 854,123 | $ | (5,211,238 | ) | $ | (6,457,067 | ) | |||||||
Cumulative preferred dividends | $ | (664,452 | ) | $ | (664,452 | ) | $ | (664,452 | ) | $ | (664,452 | ) | $ | (665,577 | ) | |||||
Net income (loss) applicable to common shares | $ | (1,753,934 | ) | $ | 26,866,200 | $ | 189,671 | $ | (5,875,690 | ) | $ | (7,122,644 | ) | |||||||
Net earnings (loss) per common share - basic and diluted | $ | (0.05 | ) | $ | 0.78 | $ | 0.01 | $ | (0.18 | ) | $ | (0.26 | ) | |||||||
Cash dividends per common share | - | - | - | - | - | |||||||||||||||
BALANCE SHEET DATA: | ||||||||||||||||||||
Total assets | $ | 73,835,195 | $ | 70,764,242 | $ | 36,576,196 | $ | 33,219,657 | $ | 36,004,005 | ||||||||||
Long-term debt | $ | 2,331,946 | $ | 422,776 | $ | 369,906 | $ | 728,330 | $ | 253,061 | ||||||||||
Shareholders’ equity | $ | 53,310,709 | $ | 53,736,667 | $ | 23,379,191 | $ | 21,655,022 | $ | 26,125,531 | ||||||||||
CASH FLOW DATA: | ||||||||||||||||||||
Net cash provided by (used in) operating activities | (1,697,742 | ) | 7,085,400 | 6,038,952 | 78,236 | (908,227 | ) | |||||||||||||
Net cash provided by (used in) investing activities | 3,353,491 | (7,917,452 | ) | (9,180,837 | ) | (6,232,814 | ) | (4,554,692 | ) | |||||||||||
Net cash provided by (used in) financing activities | 645,904 | 3,923,372 | 2,696,240 | (410,288 | ) | 10,850,106 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 2,301,653 | 3,091,320 | (445,645 | ) | (6,564,866 | ) | 5,387,187 | |||||||||||||
Cash and cash equivalents at beginning of period | 9,072,320 | 5,981,000 | 6,426,645 | 12,991,511 | 7,604,324 | |||||||||||||||
Cash and cash equivalents at end of period | $ | 11,373,973 | $ | 9,072,320 | $ | 5,981,000 | $ | 6,426,645 | $ | 12,991,511 | ||||||||||
CONNECTIONS AND TRANSACTION DATA (UNAUDITED) | ||||||||||||||||||||
Net New Connections | 67,000 | 52,000 | 50,000 | 45,000 | 37,000 | |||||||||||||||
Total Connections | 333,000 | 266,000 | 214,000 | 164,000 | 119,000 | |||||||||||||||
New Customers Added | 2,300 | 2,250 | 1,750 | 1,350 | 875 | |||||||||||||||
Total Customers | 9,600 | 7,300 | 5,050 | 3,300 | 1,950 | |||||||||||||||
Total Number of Transactions (millions) | 216.6 | 168.5 | 129.1 | 102.7 | 71.7 | |||||||||||||||
Transaction Volume ($millions) | $ | 388.9 | $ | 293.8 | $ | 219.0 | $ | 171.3 | $ | 119.6 |
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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 |
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Operating income (loss) |
| $ | 135 |
| $ | (1,467) |
| $ | (240) |
| $ | 437 |
| $ | 714 |
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Net (loss) income (1) |
| $ | (1,852) |
| $ | (6,806) |
| $ | (1,089) |
| $ | 27,531 |
| $ | 854 |
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Cumulative preferred dividends |
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| (668) |
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| (668) |
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| (668) |
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| (668) |
|
| (668) |
Net (loss) income applicable to common shares |
| $ | (2,520) |
| $ | (7,474) |
| $ | (1,757) |
| $ | 26,863 |
| $ | 186 |
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Net (loss) earnings per common share - basic |
| $ | (0.06) |
| $ | (0.21) |
| $ | (0.05) |
| $ | 0.77 |
| $ | 0.01 |
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Net (loss) earnings per common share - diluted |
| $ | (0.06) |
| $ | (0.05) |
| $ | 0.78 |
| $ | 0.78 |
| $ | 0.01 |
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Cash dividends per common share |
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| — |
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| — |
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| — |
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| — |
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| — |
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BALANCE SHEET DATA: |
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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 |
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CASH FLOW DATA: |
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Net cash (used in) provided by operating activities |
| $ | (6,771) |
| $ | 6,468 |
| $ | (1,698) |
| $ | 7,085 |
| $ | 6,039 |
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Net cash (used in) provided by investing activities |
|
| (3,693) |
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| (5,772) |
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| 3,354 |
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| (7,917) |
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| (9,181) |
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Net cash provided by (used in) financing activities |
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| 3,937 |
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| 7,202 |
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| 646 |
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| 3,923 |
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| 2,696 |
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Net (decrease) increase in cash and cash equivalents |
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| (6,527) |
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| 7,898 |
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| 2,302 |
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| 3,091 |
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| (446) |
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Cash and cash equivalents at beginning of period |
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| 19,272 |
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| 11,374 |
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| 9,072 |
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| 5,981 |
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| 6,427 |
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Cash and cash equivalents at end of period |
| $ | 12,745 |
| $ | 19,272 |
| $ | 11,374 |
| $ | 9,072 |
| $ | 5,981 |
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CONNECTIONS AND TRANSACTION DATA (UNAUDITED) |
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Net New Connections |
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| 139,000 |
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| 96,000 |
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| 67,000 |
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| 52,000 |
|
| 50,000 |
Total Connections |
|
| 568,000 |
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| 429,000 |
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| 333,000 |
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| 266,000 |
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| 214,000 |
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New Customers Added |
|
| 1,650 |
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| 1,450 |
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| 2,300 |
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| 2,250 |
|
| 1,750 |
Total Customers |
|
| 12,700 |
|
| 11,050 |
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| 9,600 |
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| 7,300 |
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| 5,050 |
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Total Number of Transactions (millions) |
|
| 414.9 |
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| 315.8 |
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| 216.6 |
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| 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 |
30
The following unaudited quarterly financial operations data for the years ended June 30, 20152017 and June 30, 20142016 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.
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| UNAUDITED | |||||||||||||
YEAR ENDED JUNE 30, 2017 |
| First Quarter |
| Second Quarter |
| Third Quarter |
| Fourth Quarter |
| Year | |||||
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Revenues |
| $ | 21,588 |
| $ | 21,756 |
| $ | 26,460 |
| $ | 34,289 |
| $ | 104,093 |
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Gross profit |
| $ | 6,167 |
| $ | 6,334 |
| $ | 6,625 |
| $ | 7,520 |
| $ | 26,646 |
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Operating (loss) income |
| $ | (950) |
| $ | 234 |
| $ | 419 |
| $ | 432 |
| $ | 135 |
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Net (loss) income |
| $ | (2,464) |
| $ | 233 |
| $ | 136 |
| $ | 243 |
| $ | (1,852) |
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Cumulative preferred dividends |
| $ | (334) |
| $ | — |
| $ | (334) |
| $ | — |
| $ | (668) |
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Net (loss) income applicable to common shares |
| $ | (2,798) |
| $ | 233 |
| $ | (198) |
| $ | 243 |
| $ | (2,520) |
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Net (loss) earnings per common share - basic |
| $ | (0.07) |
| $ | 0.01 |
| $ | 0.00 |
| $ | 0.01 |
| $ | (0.06) |
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Net (loss) earnings per common share - diluted |
| $ | (0.07) |
| $ | 0.01 |
| $ | 0.00 |
| $ | 0.01 |
| $ | (0.06) |
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Weighted average number of common shares outstanding - basic |
|
| 38,488,005 |
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| 40,308,934 |
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| 40,327,697 |
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| 40,331,993 |
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| 39,860,335 |
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Weighted average number of common shares outstanding - diluted |
|
| 38,488,005 |
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| 40,730,712 |
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| 40,327,697 |
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| 40,772,482 |
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| 39,860,335 |
31
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| UNAUDITED | |||||||||||||
YEAR ENDED JUNE 30, 2016 |
| First Quarter |
| Second Quarter |
| Third Quarter |
| Fourth Quarter |
| Year | |||||
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Revenues |
| $ | 16,600 |
| $ | 18,503 |
| $ | 20,361 |
| $ | 21,944 |
| $ | 77,408 |
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Gross profit |
| $ | 5,047 |
| $ | 5,483 |
| $ | 5,672 |
| $ | 5,783 |
| $ | 21,985 |
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Operating income (loss) |
| $ | 112 |
| $ | 594 |
| $ | (595) |
| $ | (1,578) |
| $ | (1,467) |
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Net income (loss) |
| $ | 360 |
| $ | (874) |
| $ | (5,420) |
| $ | (872) |
| $ | (6,806) |
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Cumulative preferred dividends |
| $ | (334) |
| $ | — |
| $ | (334) |
| $ | — |
| $ | (668) |
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Net income (loss) applicable to common shares |
| $ | 26 |
| $ | (874) |
| $ | (5,754) |
| $ | (872) |
| $ | (7,474) |
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|
Net earnings (loss) per common share - basic |
| $ | 0.00 |
| $ | (0.02) |
| $ | (0.16) |
| $ | (0.02) |
| $ | (0.21) |
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Net earnings (loss) per common share - diluted |
| $ | 0.00 |
| $ | (0.02) |
| $ | (0.16) |
| $ | (0.02) |
| $ | (0.21) |
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|
Weighted average number of common shares outstanding - basic |
|
| 35,848,395 |
|
| 35,909,933 |
|
| 36,161,626 |
|
| 37,325,681 |
|
| 36,309,047 |
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|
|
Weighted average number of common shares outstanding - diluted |
|
| 36,487,879 |
|
| 35,909,933 |
|
| 36,161,626 |
|
| 37,325,681 |
|
| 36,309,047 |
UNAUDITED | ||||||||||||||||||||
YEAR ENDED JUNE 30, 2015 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | |||||||||||||||
Revenues | $ | 12,252,602 | $ | 12,820,937 | $ | 15,357,740 | $ | 17,646,195 | $ | 58,077,474 | ||||||||||
Gross profit | $ | 3,135,238 | $ | 3,733,256 | $ | 5,146,139 | $ | 4,808,001 | $ | 16,822,634 | ||||||||||
Operating income (loss) | $ | (666,652 | ) | $ | 51,455 | $ | 731,406 | $ | (356,512 | ) | $ | (240,303 | ) | |||||||
Net loss | $ | (60,956 | ) | $ | (260,915 | ) | $ | (566,610 | ) | $ | (201,001 | ) | $ | (1,089,482 | ) | |||||
Cumulative preferred dividends | $ | (332,226 | ) | $ | - | $ | (332,226 | ) | $ | - | $ | (664,452 | ) | |||||||
Net loss applicable to common shares | $ | (393,182 | ) | $ | (260,915 | ) | $ | (898,836 | ) | $ | (201,001 | ) | $ | (1,753,934 | ) | |||||
Net loss per common share - basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.05 | ) | |||||
Weighted average number of common shares outstanding - basic and diluted | 35,586,455 | 35,657,519 | 35,687,650 | 35,716,603 | 35,663,386 |
UNAUDITED | ||||||||||||||||||||
YEAR ENDED JUNE 30, 2014 | 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 | ||||||||||
Gross profit | $ | 3,582,771 | $ | 3,830,133 | $ | 3,997,788 | $ | 3,662,144 | $ | 15,072,836 | ||||||||||
Operating income (loss) | $ | 128,918 | $ | 509,690 | $ | 365,535 | $ | (567,811 | ) | $ | 436,332 | |||||||||
Net income (loss) | $ | 293,654 | $ | 409,191 | $ | 26,866,526 | $ | (38,719 | ) | $ | 27,530,652 | |||||||||
Cumulative preferred dividends | $ | (332,226 | ) | $ | - | $ | (332,226 | ) | $ | - | $ | (664,452 | ) | |||||||
Net income (loss) applicable to common shares | $ | (38,572 | ) | $ | 409,191 | $ | 26,534,300 | $ | (38,719 | ) | $ | 26,866,200 | ||||||||
Net earnings (loss) per common share - basic | $ | - | $ | 0.01 | $ | 0.75 | $ | - | $ | 0.78 | ||||||||||
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 | ||||||||||
Diluted weighted average number of common shares outstanding | 33,324,295 | 34,222,731 | 35,504,911 | 35,517,099 | 34,613,497 |
32
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; |
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· | 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 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 games, and commercial laundry kiosk and smartphones 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 sale, lease,next five or rental of ePort® technology as well as our stand-alone, non-networked energy management products.more years.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared applying certain critical accounting policies. The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. Accounting policies currently deemed critical are listed below:
GENERAL
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 and license and transaction fee refunds on a monthly basis.
ePort hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party 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 for a nominal fee.
REVENUE RECOGNITION
Revenue from the sale or QuickStart lease of equipment is recognized on the terms of freight-on-board shipping point. Activation fee revenue is recognized when the Company’s cashless payment device is initially activated for use on the Company network. Transaction processing revenue is recognized upon the usage of the Company’s cashless payment and control network. License fees for access to the Company’s devices and network services are recognized on a monthly basis. In all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company estimates an allowance for product returns at the date of sale and license and transaction fee refunds on a monthly basis.
its residual value.
LONG LIVED ASSETS
In accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”, the Company reviews its definite lived long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset will be written down to its fair value. In the period when the plan of sale criteria of ASC 360 are met, definite lived long-lived assets are reported as held for sale, depreciation and amortization cease, and the assets are reported at the lower of carrying value or fair value less costs to sell.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. The Company accounts for goodwill in accordance with ASC 350, “Intangibles – Goodwill and Other”. Under ASC 350, goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date.
The Company trademarks with an indefinite economic life are not being amortized. The trademarks, not subject to amortization, are related to the EnergyMiser asset group and consist of four trademarks. 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. The Company concluded there was an impairment of its
35
indefinite-lived trademarks as a result of its annual impairment testing in its fiscal year 2016, and recorded a $432 thousand impairment expense in the fourth quarter of the fiscal year ended June 30, 2016. 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 trademarks,customer relationships, with an estimated economic life, are carried at cost less accumulated amortization, which is calculated on a straight-line basis over their estimated economic life. The Company reviews intangibles, subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, including from a shortfall in the customer transaction fund flow from which the Company would normally collect amounts due.
The allowance is determined through an analysis of various factors including the aging of the accounts receivable, the strength of the relationship with the customer, the capacity of the customer transaction fund flow to satisfy the amount due from the customer, an assessment of collection costs and other factors. The allowance for doubtful accounts receivable is management’s best estimate as of the respective reporting date. The Company writes off accounts receivable against the allowance when management determines the balance is uncollectible and the Company ceases collection efforts. Management believes that the allowance recorded is adequate to provide for its estimated credit losses.
VALUATION ALLOWANCE
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 and administrative expenses. No interest or penalties related to uncertain tax positions were incurred during the years ended June 30, 2017, 2016, and 2015.
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RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 20152017 COMPARED TO FISCAL YEAR ENDED JUNE 30, 20142016
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.
Results for the fiscal year ended June 30, 2015 continued to demonstrate growth toward achieving our long-term goals. Highlights of year over year improvements include:
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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% |
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| 20,819 |
| 26.9% |
|
| 14,132 |
| 67.9% |
Total revenues |
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| 104,093 |
| 100.0% |
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| 77,408 |
| 100.0% |
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| 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 |
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| 30,394 |
| 87.0% |
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| 17,334 |
| 83.3% |
|
| 13,060 |
| 75.3% |
Total cost of sales |
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| 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% |
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| 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% |
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| 3,120 |
| 13.9% |
Depreciation and amortization |
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| 1,018 |
| 1.0% |
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| 647 |
| 0.8% |
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| 371 |
| 57.3% |
Impairment of intangible asset |
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| — |
| 0.0% |
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| 432 |
| 0.6% |
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| (432) |
| (100.0%) |
Total operating expenses |
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| 26,511 |
| 25.5% |
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| 23,452 |
| 30.3% |
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| 3,059 |
| 13.0% |
Operating income (loss) |
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| 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% |
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| 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%) |
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| (7,421) |
| (9.6%) |
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| 5,656 |
| 76.2% |
(Provision) benefit for income taxes |
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| (87) |
| (0.1%) |
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| 615 |
| 0.8% |
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| (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%) |
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| — |
| 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 Revenues for the fiscal year ended June 30, 20152017 were $58,077,474,$104.1 million, consisting of $43,633,462$69.1 million of license and transactions fees and $14,444,012$35.0 million of equipment sales, compared to $42,344,964$77.4 million for the fiscal year ended June 30, 2014,2016, consisting of $35,638,121$56.6 million of license and transaction fees and $6,706,843$20.8 million of equipment sales. The increase in total revenue from the prior year of $15,732,510,$26.7 million, or 37%34.5%, was equally attributable to the 67.9% increase in equipment sales of $7,737,169 or 115%$14.1 million and the 22.1% increase in license and transaction fees of $7,995,341, or 22%, from the prior year.$12.6 million.
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Revenue from license and transaction fees, which represented 75%66.4% of total revenue for fiscal 2015,year 2017, is primarily attributable to monthly ePort Connect® service fees and transaction processing fees. Highlights for fiscal 2015year 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.
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 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 315.8 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 our 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, 2017. The Company added approximately 1,450 new customers in the year ended June 30, 2016. The Company had approximately 11,050 customers as of June 30, 2016, representing a 14.9% increase during the fiscal year ended June 30, 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 |
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| 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 |
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| 109 |
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| 842 |
Litigation related professional fees |
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| 33 |
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| 156 |
Non-recurring costs |
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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 |
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| 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 $6.0 million for the fiscal year ended June 30, 2016. Reconciliation of net loss to Adjusted EBITDA for the fiscal years ended June 30, 2017 and 2016 is as follows:
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| Year ended | ||||
|
| June 30, |
| June 30, | ||
($ in thousands) |
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
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 |
|
| 5,674 |
Plus stock-based compensation |
|
| 1,214 |
|
| 849 |
Plus intangible asset impairment |
|
| — |
|
| 432 |
Plus VendScreen non-recurring charges |
|
| 109 |
|
| 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.
40
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended June 30, |
|
|
|
|
| ||||||||
($ 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, 2015,2016, the Company processed approximately 315.8 million transactions totaling approximately $584.4 million compared to approximately 216.6 million transactions totaling approximately $388.9 million compared to approximately 168.5 million transactions totaling approximately $293.8 million during the fiscal year ended June 30, 2014,2015, an increase of approximately 29%46% in the number of transactions and approximately 32%50% in the value of transactions processed.
New customers added to our ePort® Connect service during the fiscal year ended June 30, 20152016 totaled 2,300,1,450, bringing the total number of customers to approximately 9,60011,050 as of June 30, 2015.2016. The Company added approximately 2,2502,300 new customers in the year ended June 30, 2014. By comparison, the2015. The Company had approximately 7,3009,600 customers as of June 30, 2014,2015, representing a 32%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 $7,737,169$6.4 million increase in equipment sales was a result of an increase of approximately $8,159,507 related to ePort® products, offset by decreases of approximately $433,130 in Energy Miser products. The increase in ePort products is directlyprimarily attributable to selling more units, versus renting units via the JumpStart program, during the current fiscal year due to the reintroduction of the QuickStart program in September 2014. The decrease 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 fees of $29,429,385$38.1 million and $23,018,001$29.4 million and equipment costs of $11,825,455$17.3 million and $4,254,127,$11.8 million for the fiscal years ended June 30, 20152016 and 2014,2015, respectively. The increase in total cost of sales of $13,982,712,$14.2 million, or 51%34%, was partially due to an increase in cost of equipment sales of $7,571,328$5.5 million primarily due to selling more units during the period under the QuickStart program. In fiscal 2014, the JumpStart program accounted for a significant percentage of the Company’s net new connections. Under this program, the cost of the device is depreciated to cost of services for license and transaction fees over the expected rental period. There was also an increase in cost of services of $6,411,384$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.service.
Gross ProfitGross profit (“GP”) for the fiscal year ended June 30, 20152016 was $16,822,634$22.0 million as compared to GPgross profit of $15,072,836$16.9 million for the previous fiscal year, an increase of $1,749,798,$5.1 million, or 12%30%, of which $14,204,077$4.3 million is attributable to license and transaction fees GPgross profit and $2,618,557$0.9 million of equipment sales GP.gross profit.
Gross Margin Overall gross profit margins decreaseddeclined from 36%29.0% in the 2015 fiscal year to 29% 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 33%,32.7% from 35%32.6% in the prior fiscal year, and by a decrease in equipment sales margins to 18%,margin from 37%18.1% in the prior fiscal year.
License and transaction fees margins decreased dueyear to 16.7% in the impact of certain JumpStart connections added during the third and fourth quarters of 2014 fiscal year with fee grace periods extending into fiscal year 2015 under sales incentives, as well as approximately $1,716,000 of net rent expense during the year ended June 30, 2015 related to the Sale Leaseback transactions, which is approximately $535,000 higher than the depreciation the Company would have recorded on the ePorts during the same period had the Sale Leaseback transactions not occurred. Also contributing to the decrease of license and transaction fee margins was a charge of approximately $410,000 connection with a customer billing dispute.2016.
The decrease in equipment revenue margins is attributable to sales under the QuickStart program, which has generally lower margins than what is recognized under a rental, or JumpStart. In addition, there were approximately $878,000 less in activation fees recorded during fiscal 2015 versus fiscal 2014, which are a higher margin revenue source,Selling, general, and to date have not been part of the QuickStart program.
The $166,000 increase in equipment sales GP includes one-time recoveries of $747,000 and $152,000 in the years ended June 30, 2015 and 2014, respectively. The $747,000 relates to recoveries arising from a customer agreement; and, the $152,000 was a reversal of a prior charge for equipment rebates. Excluding these one-time items, equipment sales GP decreased $429,000 from the prior year, which was mostly attributable to having $878,000 less GP from ePort activation fees, which are a higher margin revenue source and which to date are not part of the QuickStart Program and $215,000 less GP related to fewer energy miser offset by a higher dollar volume of gross profit from the large increase in equipment revenue dollars as compared to a year ago.
administrativeSelling, general and administrative (“SG&A”) expenses of $16,451,255$22.4 million for the fiscal year ended June 30, 2015,2016, increased by $2,415,239$5.9 million or 17%36%, from the prior fiscal year. Approximately $1,130,000, or 47%SG&A expenses for the 2016 fiscal year reflects the following: $1.6 million of costs incurred in connection with the VendScreen acquisition and integration as well as operating expenses of the increase, were non-cash expenses. The overall increase in SG&A is attributable to increases of approximately $1,100,000 inVendScreen business; bad debt estimates, $588,000expense of $1.5 million; $0.7 million of professional
42
fees and expenses incurred in employeeconnection with management’s annual assessment of internal controls over financial reporting required under SOX 404; and director compensation$0.3 million of professional fees incurred in connection with the class action litigation and benefits expenses, $552,000 in consulting and professional services, and by a net increase of $175,000 for various other expenses.SLC investigation.
Other Income and ExpenseOther income and expense for the fiscal year ended June 30, 2015,2016, primarily consisted of a $393,144$5.7 million non-cash charge for the change in the fair value of the Company’s warrant liabilities. The primary factor affecting the change in fair value is the increase in the Black-Scholes value of the warrants from June 30, 20142015 to June 30, 2015,2016, 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, 2015 resulted in net loss of $1,089,482 compared to net income of $27,530,652tax benefit for the fiscal year ended June 30, 2014. Included2016 was $615 thousand, consisting of $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 a reduction in 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 (loss)/income applicable to common shareholders was $(1,753,934) and $26,866,200 for the fiscal years ended 2015 and 2014, respectively. For the fiscal year ended June 30, 2015, net loss per common share (basic and diluted) were $0.05, compared to net earnings per common share (basic and diluted) of $0.78.
Non-GAAP net loss was $470,262 for the year ended June 30, 2015, compared to non-GAAP net income of $188,804 for the year ended June 30, 2014. Management believes that non-GAAP net income is an important measure of USAT’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 non-GAAP financial measures serve as useful metrics 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 (United States’ Generally Accepted Accounting Principles) financial measures and our reconciliations, enhance investors’ overall understanding of our current and future financial performance.2015.
A reconciliation of net income to Non-GAAP net income for the years ended June 30, 20152016 and 20142015 is as follows:
Year ended June 30, | ||||||||
2015 | 2014 (1) | |||||||
Net income (loss) | $ | (1,089,482 | ) | $ | 27,530,652 | |||
Non-GAAP adjustments: | ||||||||
Non-cash portion of income tax provision (benefit) | 226,076 | (27,276,419 | ) | |||||
Fair value of warrant adjustment | 393,144 | (65,429 | ) | |||||
Non-GAAP net income (loss) | $ | (470,262 | ) | $ | 188,804 | |||
Net income (loss) | $ | (1,089,482 | ) | $ | 27,530,652 | |||
Cumulative preferred dividends | (664,452 | ) | (664,452 | ) | ||||
Net income (loss) applicable to common shares | $ | (1,753,934 | ) | $ | 26,866,200 | |||
Non-GAAP net income (loss) | $ | (470,262 | ) | $ | 188,804 | |||
Cumulative preferred dividends | (664,452 | ) | (664,452 | ) | ||||
Non-GAAP net loss applicable to common shares | $ | (1,134,714 | ) | $ | (475,648 | ) | ||
Net earnings (loss) per common share - basic and diluted | $ | (0.05 | ) | $ | 0.78 | |||
Non-GAAP net loss per common share - basic and diluted | $ | (0.03 | ) | $ | (0.01 | ) | ||
Weighted average number of common shares outstanding - basic and diluted | 35,663,386 | 34,613,497 |
|
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
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 - diluted is calculated by dividing non-GAAP net income (loss) applicable to common shares by the number of diluted weighted average shares outstanding.
For the fiscal year ended June 30, 2015, the Company had Adjusted EBITDA of $6,258,993. Reconciliation of Management believes that non-GAAP net income (loss) to Adjusted EBITDA for the years ended June 30, 2015 and 2014 is as follows:
Year ended June 30, | ||||||||
2015 | 2014 | |||||||
Net income (loss) | $ | (1,089,482 | ) | $ | 27,530,652 | |||
Less interest income | (82,695 | ) | (30,337 | ) | ||||
Plus interest expense | 301,767 | 256,844 | ||||||
Plus income tax expense (benefit) | 289,141 | (27,255,398 | ) | |||||
Plus depreciation expense | 5,731,356 | 5,463,985 | ||||||
Plus amortization expense | - | 21,953 | ||||||
Plus change in fair value of warrant liabilities | 393,144 | (65,429 | ) | |||||
Plus stock-based compensation | 715,762 | 529,041 | ||||||
Adjusted EBITDA | $ | 6,258,993 | $ | 6,451,311 |
As used herein, Adjusted EBITDA representsan important measure of USAT’s business. Non-GAAP net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, change in fair value of warrant liabilities and stock-based compensation expense. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash gain or charge that is not related to the Company’s operations. We have excluded the non-cash expense, stock-based compensation, as it does not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial
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.
FISCAL YEAR ENDED JUNE 30, 2014 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2013
Results for the fiscal year ended June 30, 2014 continued to demonstrate growth and improvements in the Company’s operations as compared to the fiscal year ended June 30, 2013. Highlights of year over year improvements include:
Revenues for the fiscal year ended June 30, 2014 were $42,344,964, consisting of $35,638,121 of license and transactions fees and $6,706,843 of equipment sales, compared to $35,940,244 for the fiscal year ended June 30, 2013, consisting of $30,044,429 of license and transaction fees and $5,895,815 of equipment sales. The increase in total revenue of $6,404,720, or 18%, was primarily due to an increase in license and transaction fees of $5,593,692, or 19%, from the prior year, and an increase in equipment sales of $811,028 or 14%, from the prior year.
Revenue from license and transaction fees, which represented 84% of total revenue for fiscal 2014, is primarily attributable to monthly ePort Connect® service fees and transaction processing fees. Highlights for fiscal 2014 include:
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 to the ePort Connect service compared to approximately 214,000 connections to the ePort Connect service as of June 30, 2013. During the year ended June 30, 2014, the Company added approximately 52,000 net connections to our network compared to approximately 50,000 net connections added during the year ended June 30, 2013.
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 year ended June 30, 2014, the Company processed approximately 169 million transactions totaling approximately $294 million compared to approximately 129 million transactions totaling approximately $219 million during the year ended June 30, 2013, an increase of approximately 31% in the number of transactions and approximately 34% in the value of transactions processed.
New customers added to our ePort® Connect service during the fiscal year ended June 30, 2014 totaled 2,250, bringing the total number of customers to approximately 7,300 as of June 30, 2014. The Company added approximately 1,750 new customers in the year ended June 30, 2013. By comparison, the Company had approximately 5,050 customers as of June 30, 2013, representing a 45% 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 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 directly attributable to selling more units and an increase in activation fees during the current fiscal year. The $174,000 decrease in Energy Miser products is directly attributable to selling fewer units during the current fiscal year.
Cost of sales consisted of cost of services for license and transaction fee related costs of $23,018,001 and $18,219,945 and equipment costs of $4,254,127 and $3,623,686, for the years ended June 30, 2014 and 2013, respectively. The increase in total cost of sales of $5,428,497, or 25%, was due to an increase in cost of services of $4,798,056 that stemmed from 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 profit (“GP”) for the year ended June 30, 2014 was $15,072,836 compared to GP of $14,096,613 for the previous fiscal year, an increase of $976,223, or 7%, of which $12,620,120 is attributable to license and transaction fees GP and $2,452,716 of equipment sales GP. Overall gross profit margins decreased from 39% to 36% due to a decrease in license and transaction fees margins to 35%, from 39% in the prior fiscal year and by a decrease in equipment sales margins to 37%, from 39% in the prior fiscal year. Lower license and transaction fee margins are largely attributable to approximately 24,000 deactivations that occurred during 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 administrative (“SG&A”) expenses of $14,036,016 for the fiscal year ended June 30, 2014, increased by $1,967,450 or 16%, from the prior fiscal year. The overall increase is comprised of approximately a $1,207,000 increase in employee 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 2014 as well as bonus accruals related to performance-based compensation arrangements.
Other income and expense for the year ended June 30, 2014, primarily consisted of a reduction of $26.7 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 gain for the change in the fair value of the Company’s warrant liabilities. The primary factor affecting the change in fair value is the decrease in the Black-Scholes value of the warrants from June 30, 2013 to June 30, 2014, which factored in the increase in the Company’s stock price as well as a decrease in its volatility during that period.
The fiscal year ended June 30, 2014 resulted in net income of $27,530,652 compared to net income of $854,123 for the fiscal year ended June 30, 2013, an improvement of $26,676,529 between fiscal years. Included in net income for the fiscal year ended June 30, 2014 is a benefit from reduction income tax valuation allowances of $26,713,897. After preferred dividends of $664,452 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.
Non-GAAP net income was $751,326 for the year ended June 30, 2014, compared to non-GAAP net income of $914,195 for the year ended June 30, 2013. Management believes that non-GAAP net income (loss) and non-GAAP net income is anearnings (loss) per share are important measuremeasures of USAT’sthe 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 measures servemeasure serves as a useful metricsmetric 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 (United States’ Generally Accepted Accounting Principles) financial measures and our reconciliations, enhance investors’ overall understanding of our current and future financial performance.
A reconciliation of net income to Non-GAAP net income for Additionally, the years ended June 30, 2014 and 2013 is as follows:
Year ended June 30, | ||||||||
2014 (1) | 2013 | |||||||
Net income | $ | 27,530,652 | $ | 854,123 | ||||
Non-GAAP adjustments: | ||||||||
Proxy related costs (SG&A) | - | 328,000 | ||||||
Non-cash portion of income tax provision/benefit | (27,276,419 | ) | 27,646 | |||||
Fair value of warrant adjustment | (65,429 | ) | (267,928 | ) | ||||
Non-GAAP net income | $ | 188,804 | $ | 941,841 | ||||
Net income | $ | 27,530,652 | $ | 854,123 | ||||
Cumulative preferred dividends | (664,452 | ) | (664,452 | ) | ||||
Net income applicable to common shares | $ | 26,866,200 | $ | 189,671 | ||||
Non-GAAP net income | $ | 188,804 | $ | 941,841 | ||||
Cumulative preferred dividends | (664,452 | ) | (664,452 | ) | ||||
Non-GAAP net income (loss) applicable to common shares | $ | (475,648 | ) | $ | 277,389 | |||
Net earnings per common share - basic | $ | 0.78 | $ | 0.01 | ||||
Non-GAAP net earnings (loss) per common share - basic | $ | - | $ | 0.01 | ||||
Basic weighted average number of common shares outstanding | 34,613,497 | 32,787,673 | ||||||
Net earnings per common share - diluted | $ | 0.78 | $ | 0.01 | ||||
Non-GAAP net earnings (loss) per common share - diluted | $ | - | $ | 0.01 | ||||
Diluted weighted average number of common shares outstanding | 34,613,497 | 33,613,346 |
As used herein,Company utilizes non-GAAP net income represents GAAP net income excluding costs relating to the proxy contest, any adjustment for fair value of warrant liabilities(loss) as a metric in its executive officer and changes in the Company’s valuation allowances for taxes. As used herein, non-GAAP net earnings per common share is calculated by dividing non-GAAP net income applicable to common shares by the 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.
management incentive compensation plans.
For the fiscal year ended June 30, 2014,2016, the Company had Adjusted EBITDA of $6,451,311.$6.0 million as compared to an Adjusted EBITDA of $6.3 million during the fiscal year ended June 30, 2015. Reconciliation of net income (loss) to Adjusted EBITDA for the fiscal years ended June 30, 20142016 and 20132015 is as follows:
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 |
|
|
|
|
|
|
|
|
| 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 |
As used herein, Adjusted EBITDA represents net incomeloss 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 chargegain or gai ncharge that is not related to the Company’sour operations. We have excluded the non-cash 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.
plans.
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, 2015,2017, net cash used byin operating activities was $1,697,742 as a result of$6.8 million. The foregoing reflects a net loss of $1,089,482, offset bybenefit for non-cash operating activities net benefit of $7,251,674,$8.5 million, and net cash used by the change in various operating assets and liabilities of $7,859,934.$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 $7,251,674$8.5 million of non-cash activities, the most significant during fiscal year 2015 was $5,731,356$5.6 million related to depreciation and amortization expense, of which $5,119,674$4.5 million related to depreciation on JumpStart equipment allocated to cost of services. In addition to depreciation expense, other major non-cash charges included $715,762 related to the vesting$1.2 million of equity-basedstock compensation for employeesexpense and directors, $1,099,528 of bad debt expense, $393,144$1.5 million expense due to the changeincrease in the fair value of warrant liabilities and $395,038 of deferred income taxes. These non-cash charges were offset by an $833,619 non-cash gain from sale-leaseback transactions. The $7,859,934 cash used in the change in the Company’s operating assets and liabilities was the result of increases in finance receivables of $4,113,898 related to the QuickStart program, accounts receivable of $2,517,493, predominately related to sales of hardware sold with credit terms, $1,930,857 in inventory; these uses of cash were partially offset by an increase of $918,761 in accounts payable.
liabilities.
During the fiscal year ended June 30, 2015, the Company reintroduced QuickStart, a program whereby our customers are able to purchase our ePort hardware via a five-year, non-cancellable lease. From its introduction in September 2014Under the QuickStart program, we sell the equipment to customers and through approximately mid-March 2015, the Company was entering into these leases directly with its customers. Under this scenario, the Company recordedcreate a long-term and short-termcurrent finance receivable for the five-year leases. The $4,113,898 increase in finance receivables is directly due to leases the Company entered into directly with its customers.agreements. In the third and fourth quarters of fiscal 2015, the Company signed vendor agreements with two leasingfinance companies, whereby our customers would enter into leases directly with the leasing companies. Under this scenario,finance companies as part of our QuickStart program. The Company invoices the Company invoiced the leasingfinance company for the equipment leased by our customer, and recorded asrecords an accounts receivable. Unlike its finance receivables, whichreceivable for the cash would be collected over a five-year period, the accounts receivablebalances due from the leasing company isfinance companies, and typically collectedreceives full payment within 30 days. Prior to the reintroduction 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 the vendor agreements and through June 30, 2015,with two third-party finance companies, the majority of QuickStart sales consummated werehave been with the customercustomers entering into the leaseagreements directly with the leasing company, which contributed to the $2,517,493 increase in accounts receivable, whereby amounts due from the leasing companies had not yet been collected by June 30, 2015.
There has been a shift by ourfinance companies. Our customers have shifted from acquiring our product viaproducts under the JumpStart program which accounted for 60% of our gross connections in fiscal year 2014, and was just 4% in our 2015 fourth quarter, to QuickStart or a straight purchase,and sales under normal trade receivable items which accounted for 89%93% and 91% of our gross connections in fiscal year 20152017 and 2016, respectively. JumpSart was approximately 54%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, 2017, $3.7 million of cash was used by investing activities of which $2.3 million was cash paid for our fiscal 2015 fourth quarter. This is further illustrated in our cash flow statement whereby the cash usedJumpStart rental equipment and $1.7 million paid for the purchase of property for rental program reduced from $10,883,473 in fiscal 2014 to just $1,641,993 in fiscal 2015. This shift, as well as our ability to increase the cash collection under QuickStart sales, by utilizing leasing companies (as described above) if available, significantly improves cash flows from operating activities. We believe we will continue to be able to utilize third party leasing companies in our QuickStart program, and therefore do not expect finance receivables to increase in the future. The exception being, for any customer unable to secure third party leasing for which the Company may decide to enter in a lease directly with the customer or if we are unable to procure satisfactory and/or sufficient third party leasing arrangements.equipment.
Financing Activities
During the year ended June 30, 2015, $3,353,491 of cash was provided by investing activities of which $4,993,879 was received from the sale of rental equipment under sale-leaseback transactions, which were offset by cash used of $1,641,993 related to the purchase of equipment for the JumpStart program.
45
Net cash provided by financing activities was $645,904 predominately from $2,056,724 of proceeds received$3.9 million, generated predominantly by selling finance receivables with recourse and/or the rights to the cash flows$6.2 million from the finance receivables to a third party leasing company,exercise of common stock warrants partially offset by the repayment$2.0 million in repayments of $1,000,000 on the Linelong-term debt.
Sources of Credit and $358,582 of debt.Cash
Adjusted EBITDA forDuring the year ended June 30, 2015 was $6,258,993 compared to $6,451,311 for the prior2017 and 2016 fiscal year. The Company reports Adjusted EBITDA to reflect the liquidity of operations and a measure of operational cash flow. Adjusted EBITDA excludes significant non-cash charges such as depreciation, fair value warrant liability changes, stock-based compensation from net income and changes toyears, the Company’s valuation allowances for taxes. We believe that, provided there are no unusual or unanticipated material non-operational expenses, achieving positive Adjusted EBITDA is sustainable, and will continue tonet (decrease) increase as our connection base increases.
As a result of the continued growth in connections to our ePort Connect service that has resulted in strong growth in recurring revenue from license and transaction fees and the improvement in GP dollars, as well as the significant reduction in cash used for JumpStart,was $(6.5) million and the utilization of third party leasing companies in our QuickStart program, the Company generated positive free cash flow (defined as net cash provided by operating activities less cash used for the purchase of rental equipment/JumpStart) for its third and fourth quarters in fiscal year 2015. Free cash flow for the fourth quarter was $2,681,155, and the Company believes it will continue to generate positive free cash flow for the 2016 fiscal year, assuming QuickStart remains a significant component of connections, and third party leasing companies continue to enter into leases directly with our customers.
$7.9 million, respectively. The Company has threethe following primary sources of cash available to fund and grow the business as of June 30, 2015:capital available: (1) cash and cash equivalents on hand of approximately $11 million;$12.7 million as of June 30, 2017; (2) the anticipated cash which may be provided by operating activities from our QuickStart program; andin the future; (3) $3$4.9 million available as of June 30, 2017 under the line of credit with a commercial bank, provided we continue to satisfy the various covenants set forth in the loan agreement. The lineagreement, including the requirement to meet minimum quarterly adjusted EBITDA, as defined in the loan agreement; (4) gross proceeds of credit matures$43.1 million from the public offering which closed on August 17, 2017. In addition, the Company believes the capital markets, debtJuly 25, 2017; and equity, would be available(5) sales to provide additional sourcesthird party lenders of cash, if required.
all or a portion of our finance receivables.
Therefore, the Company believes its existing cash and cash equivalents and available cash resources as of June 30, 2015,described above would provide sufficient funds through at least July 1, 2016 in order to meet its cash requirements, including payment of its accrued expenses and payables, any cashcapital resources to be utilized foroperate its anticipated business over the JumpStart program, other anticipated capital expenditures, and the repayment of long-term debt.
next 12 months.
CONTRACTUAL OBLIGATIONS
As of June 30, 2015,2017, the Company had certain contractual obligations due over a period of time as summarized in the following table:
Payments due by period |
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|
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|
| ||||||||||||||||||||
Less Than | More than |
| Payments Due by Fiscal Year | ||||||||||||||||||||||||||||||||
($ in thousands) |
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Contractual Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years |
| Total |
| 2018 |
| 2019-2020 |
| 2021-2022 |
| 2023 and Beyond | ||||||||||||||||||||
Long-Term Debt Obligations | $ | 2,483,072 | $ | 519,472 | $ | 1,572,269 | $ | 391,330 | $ | - |
| $ | 1,226 |
| $ | 411 |
| $ | 815 |
| $ | — |
| $ | — | ||||||||||
Capital Lease Obligations | 382,666 | 157,304 | 225,362 | - | - |
|
| 3,263 |
|
| 2,996 |
|
| 238 |
|
| 29 |
|
| — | |||||||||||||||
Operating Lease Obligations, other | 362,737 | 361,927 | 810 | - | - | ||||||||||||||||||||||||||||||
Operating Lease Obligations under Sale Leaseback | 5,420,041 | 2,641,155 | 2,778,886 | - | - | ||||||||||||||||||||||||||||||
Total | $ | 8,648,516 | $ | 3,679,859 | $ | 4,577,328 | $ | 391,330 | $ | - | |||||||||||||||||||||||||
Operating Lease Obligations |
|
| 3,396 |
|
| 628 |
|
| 1,144 |
|
| 939 |
|
| 685 | ||||||||||||||||||||
Total Contractual Obligations |
| $ | 7,885 |
| $ | 4,035 |
| $ | 2,197 |
| $ | 968 |
| $ | 685 |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company’s exposure to market risks for interest rate changes is not significant. Interest rates on its long-term debt are generally fixed. 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. Financial Statements and Supplementary Data.
USA TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
47 Report of Independent Registered Public Accounting Firm
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,
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.
In our opinion, the consolidated financial statements referred to above
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.
See accompanying notes. F-4
Consolidated Statements of Operations
See accompanying notes. F-5
Consolidated Statements of Shareholders’ Equity
See accompanying notes.
F-6
Notes to Consolidated Financial Statements USA Technologies, Inc. Consolidated Statements of Cash Flows
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 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. All of our customers are located in North America. 2. ACCOUNTING POLICIES CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“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 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 The Company maintains an allowance for doubtful The FINANCE RECEIVABLES The Company offers extended payment terms to certain customers for equipment sales under its Quick Start Program. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification® (“ASC”) Topic 840, “Leases”, agreements under the Quick Start Program qualify for sales-type lease accounting. Accordingly, the future minimum lease payments are classified as finance receivables in the Company’s consolidated balance sheets. Finance receivables 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 The Company establishes allowances for obsolescence of inventory based upon quality considerations and assumptions about future demand and market conditions.
PROPERTY AND EQUIPMENT, Net Property and equipment are recorded at cost. Property and equipment are depreciated on the straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on the straight-line basis over the lesser of the estimated useful life of the asset or the respective lease GOODWILL AND INTANGIBLE ASSETS The customer relationships. Goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. The Company accounts for goodwill in accordance with ASC 350, “Intangibles – Goodwill and Other”. Under ASC 350, goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date. The Company has concluded there has been no impairment of goodwill during the fiscal years ended June 30,
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, FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial assets and liabilities are accounted for in accordance with ASC 820 “Fair Value Measurement.” Under ASC 820 the Company uses inputs from the three levels of the fair value hierarchy to measure its financial assets and liabilities. The three levels are as follows: Level Level F-9 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 The Company’s financial instruments, principally accounts receivable, short-term finance receivables, prepaid expenses and other assets, accounts payable and accrued expenses, are carried at cost which approximates fair value due to the short-term maturity of these instruments. The fair value of the Company’s obligations under its long-term debt CONCENTRATION OF RISKS Financial instruments that subject the Company to a concentration of credit risk consist principally of cash and accounts and finance receivables. The Company maintains cash with various financial institutions where accounts may exceed federally insured limits at times. Approximately Concentration of revenues with customers subject the Company to operating risks. Approximately REVENUE RECOGNITION Revenue from the sale or QuickStart lease of equipment is recognized on the terms of 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 EQUIPMENT RENTAL The Company offers its customers a rental program for its ePort devices, the JumpStart program (“JumpStart”). JumpStart terms are typically 36 months and are cancellable with thirty to sixty days’ written notice. In accordance with ASC 840, “Leases”, the Company classifies the rental agreements as operating leases, with service fee revenue related to the leases included in license and transaction fees in the Consolidated Statements of Operations.
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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 equipment. 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 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 requisite service period of the award. LITIGATION COSTS From time to time, we are involved in litigation, claims, contingencies and other legal matters. We record a charge equal to at least the minimum 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 legal costs, including those legal costs expected to be incurred in connection with a loss contingency, as incurred. 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 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 F-11 and administrative expenses. No interest or penalties related to uncertain tax positions were 2015. The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions. The tax years ended June 30, 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 are calculated by dividing net income (loss) applicable to common shares by the weighted average common shares outstanding for the period plus the dilutive effects of common stock equivalents unless the effects of such common stock equivalents OTHER COMPREHENSIVE INCOME ASC 220, “Comprehensive Income”, prescribes the reporting required for comprehensive income and items of other 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, 2017, 2016 or 2015. RECENT ACCOUNTING PRONOUNCEMENTS Accounting pronouncements adopted in fiscal year 2017 In July 2015,
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, 2016. Accounting pronouncements to be adopted. 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 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 year ending June 30, 2020, including interim periods within those fiscal years. Early application is permitted. In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB Simplification Initiative and involves several aspects of accounting for shared-based payment transactions, including income tax consequences, forfeitures and classification on the statement of cash flows. This pronouncement will be effective for the Company beginning with the year ending June 30,
In F-13
impracticable to apply, in which case the company would be required to apply the amendments prospectively as of the earliest date practicable. In
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. F-14 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.
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. F-15 4. EARNINGS PER SHARE CALCULATION The calculation of basic loss per share and diluted loss per share is presented below:
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 receivables consist of the following:
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:
Age Analysis of Past Due Finance Receivables As of June 30, 2017
F-16 Age Analysis of Past Due Finance Receivables As of June 30, 2016
Finance
6. PROPERTY AND EQUIPMENT, net Property and equipment consist of the following:
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Amortization expense relating to all acquired intangible assets was approximately
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 the fiscal year ended June 30, 2016, the fair value of the indefinite-lived trademarks related to 1) VendingMiser, 2) CoolerMiser, 3) PlugMiser and 4) SnackMiser 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 year ended June 30, 2016. At June 30, 2017, amortizable intangible asset balances were:
Estimated annual amortization expense for amortizable intangible assets is as follows:
8. ACCRUED EXPENSES Accrued expenses consist of the following:
During March 2017, the Company entered into the third amendment with Heritage Bank that extended the maturity date of the At the time of maturity, all outstanding advances under the
F-19 Line of Credit without penalty, and subject to the terms of the Heritage Loan Documents, may re-borrow any such amounts. The Heritage Loan Documents contain customary representations and warranties and affirmative and negative covenants applicable to the Company. The balance due on the Heritage Line of Credit was $7.1 million at June 30, 2017 and $7.2 million at June 30, 2016. Included in the Heritage Line of Credit balance is $75 thousand of unamortized debt issuance costs, which is reflected in our net liability of $7.0 million for
Interest expense on the
ASSIGNMENT OF QUICKSTART LEASES In February
CAPITAL LEASE OBLIGATIONS
The Company periodically enters into capital lease obligations to finance certain office and network equipment for use in its daily operations. At June 30, 2017 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 lease terms range from 2 to 5 years. The value of the equipment related to capital leases is included in property and equipment and depreciated over the applicable estimated useful lives accordingly. F-20
The balance of
The maturities of long-term debt and capital lease obligations for each of the fiscal years following June 30,
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
There were no
F-21 12. WARRANTS All warrants outstanding as of June 30, 2017 were exercisable. The following table shows exercise prices and expiration dates for warrants outstanding as of June 30, 2017:
The following table
Warrant activity for the
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 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
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 likely 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 had achieved along with the belief that such performance will continue into future years, the Company determined during the year ended June 30, 2014 that it was more likely than not that a substantial portion of its deferred tax assets would be realized years. 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 If in future periods the Company demonstrates its ability to grow taxable income in excess of the forecasts The (provision) benefit
The provision for income taxes for the year ended June 30, 2015 includes F-23 A reconciliation of the (provision) benefit for income taxes for the years ended June 30,
At June 30,
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:
The Company has three active stock based compensation plans at June 30,
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