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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
September 30, 2018
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934 |
(Exact name of registrant as specified in its charter)
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| Pennsylvania | 23-2679963 | |||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
| 100 Deerfield Lane, Suite 300, Malvern, Pennsylvania | 19355 | |
(Address of principal executive offices) | (Zip Code) | |
(Registrant’s telephone number, including area code)
| Title of Each Class | Trading Symbol | Name Of Each Exchange On Which Registered |
Common Stock, no par value Series A Convertible Preferred Stock | USAT USATP | The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC |
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| Accelerated filer | ☒ | |
Non-accelerated filer (Do not check if a smaller reporting company) |
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Emerging growth company |
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Condensed Consolidated Balance Sheets (unaudited) | |||
Condensed Consolidated Statements of Operations (unaudited) | |||
Condensed Consolidated | |||
Condensed Consolidated Statements of Cash Flows (unaudited) | |||
Notes to Consolidated Financial Statements (unaudited) | |||
December 31, June 30, ($ in thousands, except shares) 2017 2017 (unaudited) (audited) Assets Current assets: Cash and cash equivalents $ 15,386 $ 12,745 Accounts receivable, less allowance of $3,740 and $3,149, respectively 15,472 7,193 Finance receivables, less allowance of $49 and $19, respectively 5,517 11,010 Inventory 11,215 4,586 Prepaid expenses and other current assets 1,971 968 Total current assets 49,561 36,502 Non-current assets: Finance receivables, less current portion 11,215 8,607 Other assets 1,120 687 Property and equipment, net 12,622 12,111 Deferred income taxes 14,774 27,670 Intangibles, net 30,910 622 Goodwill 64,449 11,492 Total non-current assets 135,090 61,189 Total assets $ 184,651 $ 97,691 Liabilities and shareholders’ equity Current liabilities: Accounts payable $ 23,775 $ 16,054 Accrued expenses 6,798 4,130 Line of credit, net — 7,036 Capital lease obligations and current obligations under long-term debt 5,121 3,230 Income taxes payable 6 10 Deferred revenue 595 — Deferred gain from sale-leaseback transactions 198 239 Total current liabilities 36,493 30,699 Long-term liabilities: Revolving credit facility 10,000 — Capital lease obligations and long-term debt, less current portion 23,874 1,061 Accrued expenses, less current portion 65 53 Deferred gain from sale-leaseback transactions, less current portion 49 100 Total long-term liabilities 33,988 1,214 Total liabilities $ 70,481 $ 31,913 Commitments and contingencies (Note 13) Shareholders’ equity: Preferred stock, no par value, 1,800,000 shares authorized, no shares issued — — Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $19,109 and $18,775 at December 31, 2017 and June 30, 2017, respectively 3,138 3,138 Common stock, no par value, 640,000,000 shares authorized, 53,619,898 and 40,331,645 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively 307,053 245,999 Accumulated deficit (196,021) (183,359) Total shareholders’ equity 114,170 65,778 Total liabilities and shareholders’ equity $ 184,651 $ 97,691 Three months ended Six months ended December 31, December 31, ($ in thousands, except shares and per share data) 2017 2016 2017 2016 Revenues: License and transaction fees $ 22,853 $ 16,639 $ 42,797 $ 33,004 Equipment sales 9,653 5,117 15,326 10,340 Total revenues 32,506 21,756 58,123 43,344 Costs of sales: Cost of services 14,362 11,389 27,688 22,632 Cost of equipment 8,943 4,033 14,033 8,211 Total costs of sales 23,305 15,422 41,721 30,843 Gross profit 9,201 6,334 16,402 12,501 Operating expenses: Selling, general and administrative 8,329 5,785 15,075 12,593 Integration and acquisition costs 3,335 8 4,097 109 Depreciation and amortization 737 307 982 515 Total operating expenses 12,401 6,100 20,154 13,217 Operating (loss) income (3,200) 234 (3,752) (716) Other income (expense): Interest income 251 200 331 273 Interest expense (494) (201) (703) (413) Change in fair value of warrant liabilities - - - (1,490) Total other expense, net (243) (1) (372) (1,630) (Loss) income before income taxes (3,443) 233 (4,124) (2,346) (Provision) benefit for income taxes (9,073) - (8,605) 115 Net (loss) income (12,516) 233 (12,729) (2,231) Preferred dividends - - (334) (334) Net (loss) income applicable to common shares $ (12,516) $ 233 $ (13,063) $ (2,565) Net (loss) income per common share Basic (0.24) 0.01 (0.26) (0.07) Diluted (0.24) 0.01 (0.26) (0.07) Weighted average number of common shares outstanding Basic 52,150,106 40,308,934 49,861,735 39,398,469 Diluted 52,150,106 40,730,712 49,861,735 39,398,469 USA Technologies, Inc. Series A Convertible Preferred Stock Common Stock Accumulated ($ in thousands, except shares) Shares Amount Shares Amount Deficit Total Balance, June 30, 2017 445,063 $ 3,138 40,331,645 $ 245,999 $ (183,359) $ 65,778 Issuance of common stock in relation to public offering, net of offering costs incurred of $3,237 (a) — — 9,583,332 39,888 — 39,888 Issuance of common stock as merger consideration(b) — — 3,423,367 19,810 — 19,810 Stock based compensation — — 281,554 1,356 — 1,356 Excess tax benefit from stock plans(c) — — — — 67 67 Net loss — — — — (12,729) (12,729) Balance, December 31, 2017 445,063 $ 3,138 53,619,898 $ 307,053 $ (196,021) $ 114,170 USA Technologies, Inc. Six months ended December 31, ($ in thousands) 2017 2016 OPERATING ACTIVITIES: Net loss $ (12,729) $ (2,231) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Non-cash stock based compensation 1,356 445 Gain on disposal of property and equipment (83) (31) Non-cash interest and amortization of debt discount 86 26 Bad debt expense 291 450 Depreciation and amortization 3,476 2,564 Change in fair value of warrant liabilities - 1,490 Excess tax benefits 67 - Deferred income taxes, net 8,537 (115) Recognition of deferred gain from sale-leaseback transactions (93) (430) Changes in operating assets and liabilities: Accounts receivable (5,290) (2,347) Finance receivables 7,958 2,119 Inventory (5,822) (2,689) Prepaid expenses and other current assets (606) (542) Accounts payable and accrued expenses 6,950 (3,840) Income taxes payable 40 (12) Net cash provided by (used in) operating activities 4,138 (5,143) INVESTING ACTIVITIES: Purchase of property and equipment, including rentals (1,767) (1,944) Proceeds from sale of property and equipment, including rentals 157 61 Cash used for Cantaloupe acquisition (65,181) - Net cash used in investing activities (66,791) (1,883) FINANCING ACTIVITIES: Cash used in retirement of common stock - (31) Proceeds from exercise of common stock warrants - 6,193 Payment of debt issuance costs (445) - Proceeds from issuance of long-term debt 25,100 - Proceeds from revolving credit facility 10,000 - Issuance of common stock in public offering, net 39,888 - Repayment of capital lease obligations and long-term debt (9,249) (374) Net cash provided by financing activities 65,294 5,788 Net increase (decrease) in cash and cash equivalents 2,641 (1,238) Cash and cash equivalents at beginning of year 12,745 19,272 Cash and cash equivalents at end of period $ 15,386 $ 18,034 Supplemental disclosures of cash flow information: Interest paid in cash $ 557 $ 469 Income taxes paid in cash (refund), net $ - $ - Supplemental disclosures of noncash financing and investing activities: Equity issued in connection with Cantaloupe Acquisition $ 19,810 $ - Equipment and software acquired under capital lease $ 227 $ 272 USA Technologies, Inc. The adoption of ASU No. 2016-09 did not impact our statement of cash flows for the three September 30, 2018 and 2017. adopted In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842) impact this guidance will have on its condensed consolidated financial statements. 2018.The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements. Company’s condensed consolidated financial statements. The following table summarizes the fair value of total consideration transferred to the holders of all of the outstanding equity interests of Cantaloupe at the acquisition date of November 9, 2017: Cantaloupe ($ in thousands) Systems, Inc. Accounts receivable $ 3,232 Finance receivables, current portion 1,640 Inventory 782 Prepaid expense and other current assets 682 Finance receivables, less current portion 3,483 Other assets 50 Property and equipment 1,573 Intangibles 30,800 Goodwill 52,957 Total assets acquired 95,199 Accounts payable (1,591) Accrued expenses (1,832) Deferred revenue (626) Capital lease obligations and current obligations under long-term debt (666) Capital lease obligations and long-term debt, less current portion (1,134) Deferred income tax liabilities (4,359) Total net assets acquired $ 84,991 Three months ended Six months ended ($ in thousands) December 31, 2017 December 31, 2017 Cost of equipment Acquired inventory fair market value step-up $ 23 $ 23 Operating expenses Integration and acquisition costs 3,335 4,097 Interest expense Write-off of deferred financing costs 55 55 Total integration and acquisition-related costs $ 3,413 $ 4,175 Supplemental disclosure of pro forma information Three months ended December 31, Six months ended December 31, (In thousands, except per share data) 2017 2016 2017 2016 Revenues $ 34,772 $ 27,521 $ 67,642 $ 54,704 Net loss attributable to USAT (10,632) (428) (10,552) (5,458) Net loss attributable to USAT common shares $ (10,632) $ (428) $ (10,886) $ (5,792) Net loss per share - basic and diluted (0.20) (0.01) (0.20) (0.11) Weighted average number of common shares outstanding - basic and diluted 53,619,921 53,315,633 53,584,368 52,369,824 costs. December 31, June 30, ($ in thousands) 2017 2017 Total finance receivables $ 16,732 $ 19,617 Less current portion 5,517 11,010 Non-current portion of finance receivables $ 11,215 $ 8,607 December 31, June 30, ($ in thousands) 2017 2017 Performing $ 16,325 $ 19,515 Nonperforming 407 102 Total $ 16,732 $ 19,617 30 and Under 31 – 60 61 – 90 Greater than Total Total Days Past Days Past Days Past 90 Days Past Non- Finance ($ in thousands) Due Due Due Due Performing Performing Receivables QuickStart Leases $ 40 $ 85 $ 162 $ 120 $ 407 $ 16,325 $ 16,732 30 and Under 31 – 60 61 – 90 Greater than Total Total Days Past Days Past Days Past 90 Days Past Non- Finance ($ in thousands) Due Due Due Due Performing Performing Receivables QuickStart Leases $ 29 $ 3 $ 35 $ 35 $ 102 $ 19,515 $ 19,617 Three months ended December 31, 2017 2016 Net Loss Shares Per-Share Net Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Net (loss) income from continuing operations $ (12,516) $ 233 Less: Preferred stock dividends - - Basic EPS Net (loss) income available to common shareholders (12,516) 52,150,106 $ (0.24) 233 40,308,934 $ 0.01 Effect of Dilutive Securities Incremental shares - - (a) - 421,778 Diluted EPS Net (loss) income available to common shareholders plus assumed conversions $ (12,516) 52,150,106 $ (0.24) $ 233 40,730,712 $ 0.01 Six months ended December 31, 2017 2016 Net Loss Shares Per-Share Net Loss Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Net loss from continuing operations $ (12,729) $ (2,231) Less: Preferred stock dividends (334) (334) Basic EPS Net loss available to common shareholders (13,063) 49,861,735 $ (0.26) (2,565) 39,398,469 $ (0.07) Effect of Dilutive Securities Incremental shares - - (a) - - (a) Diluted EPS Net loss available to common shareholders plus assumed conversions $ (13,063) 49,861,735 $ (0.26) $ (2,565) 39,398,469 $ (0.07) As of December 31, 2017 Accumulated Amortization ($ in thousands) Gross Amortization Net Period Intangible assets: Non-compete agreements 2 (2) — 2 years Brand and tradenames 1,695 (96) 1,599 3 - 7 years Developed technology 10,939 (499) 10,440 5 - 6 years Customer relationships 19,049 (178) 18,871 10 - 18 years Total intangible assets $ 31,685 $ (775) $ 30,910 Goodwill 64,449 — 64,449 Indefinite Total intangible assets & goodwill $ 96,134 (775) $ 95,359 As of June 30, 2017 Accumulated Amortization ($ in thousands) Gross Amortization Net Period Intangible assets: Non-compete agreements 2 (2) — 2 years Brand 95 (48) 47 3 years Developed technology 639 (191) 448 5 years Customer relationships 149 (22) 127 10 years Total intangible assets $ 885 $ (263) $ 622 Goodwill 11,492 — 11,492 Indefinite Total intangible assets & goodwill $ 12,377 (263) $ 12,114 For the three The Company utilized approximately $7.0 million under the Heritage Line of Credit to satisfy the existing Avidbank Line of Credit and related Avidbank Term Loan. Loans under the five year credit agreement bear interest, at the Company's option, by reference to a base rate or a rate based on LIBOR, in either case, plus an applicable margin determined quarterly based on the Company's Total Leverage Ratio as of the last day of each fiscal quarter. The applicable interest rate on the loans for the three September 18, 2019, the Company obtained waivers of an event of default under the credit agreement. The event of default is the result of the Company having maintained deposits on account with a financial institution in excess of the amounts permitted by the credit agreement and not having transferred certain deposit accounts to the Lender. The waiver requires the Company to remedy the event of default by March 31, 2020 by which time the Company expects to be in compliance with the underlying covenant. As of June 30, 2019, the Company is not in compliance with the fixed charge coverage ratio and the total leverage ratio, which represents an event of default under the credit agreement. The Company has classified all amounts outstanding under the Revolving Credit Facility and Term Loan as current liabilities as of September 30, 2018 and June 30, 2018. The various provisions under the Act deemed most relevant to the Company have been considered in preparation of its condensed consolidated financial statements as of provision. Three months ended Six months ended December 31, December 31, 2017 2016 2017 2016 Beginning balance 23,978 68,978 23,978 2,445,653 Issued — — — — Exercised — (24,733) — (2,401,408) Expired — — — — Cancelled — (20,267) — (20,267) Ending balance 23,978 23,978 23,978 23,978 STOCK OPTIONS Six months ended December 31, 2017 2016 Expected volatility (percent) 50.21 - 50.89 Expected life (years) 4.0 - 4.5 4.0 Expected dividends — — Risk-free interest rate (percent) 1.64 - 1.72 Number of options granted 179,047 20,080 Weighted average exercise price $ 5.66 $ 4.98 Weighted average grant date fair value $ 2.42 $ 1.98 COMMON STOCK September 30, 2018 was $0.2 million. Three months ended Six months ended December 31, December 31, ($ in thousands, except per share data) 2017 2016 2017 2016 FY18 LTI Plan $ 273 $ — $ 489 $ — FY17 LTI Plan 64 85 128 155 FY16 LTI Plan 9 23 19 50 FY15 LTI Plan — 3 — 3 Total $ 346 $ 111 $ 636 $ 208 significant driver of the Company’s 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, The Company’s fiscal year ends June 30th. March 31, 2018. The Board also determined that related press releases, earnings releases, management’s report on the effectiveness of internal control over financial reporting as of June 30, 2017, and investor communications describing the Company’s financial statements for these periods should no longer be relied upon. TRENDING QUARTERLY FINANCIAL DATA As of and for the three months ended December 31, September 30, June 30, March 31, December 31, 2017 2017 2017 2017 2016 Connections: Gross new connections 317,000 28,000 70,000 40,000 25,000 % from existing customer base Net new connections (a) 311,000 26,000 64,000 35,000 21,000 Total connections 905,000 594,000 568,000 504,000 469,000 Customers: New customers added (a) 1,800 550 Total customers 15,050 13,250 12,700 12,400 11,900 Volumes: Total number of transactions (millions) 144.8 121.1 114.8 104.9 100.1 Total volume (millions) $ 272.7 $ 239.2 $ 225.6 $ 202.5 $ 191.5 Financing structure of connections: JumpStart QuickStart & all others (b) Total Includes credit sales with standard trade receivable terms. Three Months Ended September 30, 2017 For the three months ended December 31, Percent ($ in thousands) 2017 2016 Change Revenues: License and transaction fees $ 22,853 $ 16,639 Equipment sales 9,653 5,117 Total revenues 32,506 21,756 Costs of sales: Cost of services 14,362 11,389 Cost of equipment 8,943 4,033 Total costs of sales 23,305 15,422 Gross profit: License and transaction fees 8,491 5,250 Equipment sales 710 1,084 Total gross profit $ 9,201 $ 6,334 For the three months ended December 31, Percent Category ($ in thousands) 2017 2016 Change Selling, general and administrative expenses $ 8,329 $ 5,785 Integration and acquisition costs 3,335 8 Depreciation and amortization 737 307 Total operating expenses $ 12,401 $ 6,100 Depreciation and amortization. Depreciation and amortization expenses increased For the three months ended December 31, Percent ($ in thousands) 2017 2016 Change Other income (expense): Interest income $ 251 $ 200 Interest expense (494) (201) Total other expense, net $ (243) $ (1) For the three months ended December 31, Percent ($ in thousands) 2017 2016 Change Provision for income taxes $ (9,073) $ - income tax provision. For the three months ended December 31, ($ in thousands) 2017 2016 Net (loss) income $ (12,516) $ 233 Less interest income (251) (200) Plus interest expense 494 201 Plus income tax provision 9,073 — Plus depreciation expense 1,512 1,220 Plus amortization expense 472 43 EBITDA (1,216) 1,497 Plus stock-based compensation 780 233 Plus integration and acquisition costs and inventory step-up 3,358 8 Adjustments to EBITDA 4,138 241 Adjusted EBITDA $ 2,922 $ 1,738 As used herein, Adjusted EBITDA represents net Three months ended December 31, ($ in thousands) 2017 2016 Operating (loss) income $ $ Plus integration and acquisition costs and inventory step-up Plus amortization expense Adjusted operating income $ $ Three months ended December 31, ($ in thousands) 2017 2016 Net (loss) income $ (12,516) $ 233 Non-GAAP adjustments: Non-cash portion of income tax provision (benefit) 9,073 — Amortization expense 472 43 Stock-based compensation 780 233 Litigation related professional fees — — Integration and acquisition-related costs 3,413 8 Non-GAAP net income $ 1,222 $ 517 For the six months ended December 31, Percent ($ in thousands) 2017 2016 Change Revenues: License and transaction fees $ 42,797 $ 33,004 Equipment sales 15,326 10,340 Total revenues 58,123 43,344 Costs of sales: Cost of services 27,688 22,632 Cost of equipment 14,033 8,211 Total costs of sales 41,721 30,843 Gross profit: License and transaction fees 15,109 10,372 Equipment sales 1,293 2,129 Total gross profit $ 16,402 $ 12,501 For the six months ended December 31, Percent Category ($ in thousands) 2017 2016 Change Selling, general and administrative expenses $ 15,075 $ 12,593 Integration and acquisition costs 4,097 109 Depreciation and amortization 982 515 Total operating expenses $ 20,154 $ 13,217 For the six months ended December 31, Percent ($ in thousands) 2017 2016 Change Other income (expense): Interest income $ 331 $ 273 Interest expense (703) (413) Change in fair value of warrant liabilities - (1,490) Total other expense, net $ (372) $ (1,630) For the six months ended December 31, Percent ($ in thousands) 2017 2016 Change (Provision) benefit for income taxes $ (8,605) $ 115 (7,583)% For the six months ended December 31, ($ in thousands) 2017 2016 Net loss $ (12,729) $ (2,231) Less interest income (331) (273) Plus interest expense 703 413 Plus income tax provision (benefit) 8,605 (115) Plus depreciation expense 2,960 2,477 Plus amortization expense 516 87 EBITDA (276) 358 Plus loss on fair value of warrant liabilities — 1,490 Plus stock-based compensation 1,356 445 Plus litigation related professional fees — 33 Plus integration and acquisition costs and inventory step-up 4,120 109 Adjustments to EBITDA 5,476 2,077 Adjusted EBITDA $ 5,200 $ 2,435 Six months ended December 31, ($ in thousands) 2017 2016 Operating loss $ $ Plus integration and acquisition costs and inventory step-up Plus amortization expense Adjusted operating income (loss) $ $ Six months ended December 31, ($ in thousands) 2017 2016 Net loss $ (12,729) $ (2,231) Non-GAAP adjustments: Non-cash portion of income tax benefit 8,605 (115) Fair value of warrant adjustment — 1,490 Amortization expense 516 87 Stock-based compensation 1,356 445 Litigation related professional fees — 33 Integration and acquisition-related costs 4,175 109 Non-GAAP net income (loss) $ 1,923 $ (182) $5.6 million. fiscal year 2018 and substantially similar between both periods. period as a result of the material weaknesses in our internal control over financial reporting, which are described in Item 9A. of our 2019 Form 10-K. As discussed in Item 9A. of our 2019 Form 10-K, we have undertaken a broad range of remedial procedures to address the material weaknesses in our internal control over financial reporting. These remedial procedures entailed significant changes in our internal control over financial reporting throughout the course of the fiscal year ended June 30, 2019, and will continue through fiscal year 2020, with the goal to fully remediate all remaining material weaknesses by fiscal year end. 31.2 32.1 32.2 101 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. USA TECHNOLOGIES, INC. Date: /s/ Stephen P. Herbert Stephen P. Herbert, Chief Executive Officer Date: /s/ Interim Chief Financial Officer ($ in thousands) September 30,
2018 June 30,
2018 Assets Current assets: Cash and cash equivalents $ 68,262 $ 83,964 Accounts receivable, less allowance of $3,125 and $2,754, respectively 18,921 15,748 Finance receivables, net 5,141 4,603 Inventory, net �� 6,915 8,038 Prepaid expenses and other current assets 1,463 929 Total current assets 100,702 113,282 Non-current assets: Finance receivables due after one year 12,770 13,246 Other assets 1,900 720 Property and equipment, net 9,778 11,273 Intangibles, net 28,533 29,325 Goodwill 64,149 64,149 Total non-current assets 117,130 118,713 Total assets $ 217,832 $ 231,995 Liabilities, convertible preferred stock and shareholders’ equity Current liabilities: Accounts payable $ 19,335 $ 30,468 Accrued expenses 21,848 19,291 Capital lease obligations and current obligations under long-term debt 33,889 34,639 Income taxes payable 11 — Deferred revenue 1,428 511 Total current liabilities 76,511 84,909 Long-term liabilities: Deferred income taxes 71 67 Capital lease obligations and long-term debt, less current portion 932 1,127 Accrued expenses, less current portion 66 66 Total long-term liabilities 1,069 1,260 Total liabilities $ 77,580 $ 86,169 Commitments and contingencies (Note 14) Convertible preferred stock: Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $19,777 and $19,443 at September 30, 2018 and June 30, 2018, respectively 3,138 3,138 Shareholders’ equity: Preferred stock, no par value, 1,800,000 shares authorized, no shares issued — — Common stock, no par value, 640,000,000 shares authorized, 60,012,155 and 59,998,811 shares issued and outstanding at September 30, 2018 and June 30, 2018, respectively 375,806 375,436 Accumulated deficit (238,692 ) (232,748 ) Total shareholders’ equity 137,114 142,688 Total liabilities, convertible preferred stock and shareholders’ equity $ 217,832 $ 231,995 3 Three months ended
September 30,($ in thousands, except per share data) 2018 2017 Revenue: License and transaction fees $ 28,971 $ 19,397 Equipment sales 4,551 5,862 Total revenue 33,522 25,259 Costs of sales: Cost of services 18,544 13,247 Cost of equipment 4,868 5,831 Total costs of sales 23,412 19,078 Gross profit 10,110 6,181 Operating expenses: Selling, general and administrative 9,450 6,924 Investigation and restatement expenses 4,526 — Integration and acquisition costs 922 762 Depreciation and amortization 1,133 245 Total operating expenses 16,031 7,931 Operating loss (5,921 ) (1,750 ) Other income (expense): Interest income 405 80 Interest expense (786 ) (473 ) Total other expense, net (381 ) (393 ) Loss before income taxes (6,302 ) (2,143 ) Provision for income taxes (18 ) (28 ) Net loss (6,320 ) (2,171 ) Preferred dividends (334 ) (334 ) Net loss applicable to common shares $ (6,654 ) $ (2,505 ) Net loss per common share Basic $ (0.11 ) $ (0.05 ) Diluted $ (0.11 ) $ (0.05 ) Weighted average number of common shares outstanding Basic 60,053,912 47,573,364 Diluted 60,053,912 47,573,364 4StatementStatements of Shareholders’ Equity(Unaudited)(a)Refer to Note 12 regarding the public offering issued during July 2017.
(Unaudited)(b)Refer to Note 3 regarding the business acquisition executed during November 2017.(c)Refer to Note 2 regarding the adoption of ASU 2016-09. Common Stock Total ($ in thousands) Shares Amount Balance, June 30, 2017 40,331,645 $ 245,999 $ (221,531 ) $ 24,468 Issuance of common stock in relation to public offering, net of offering costs incurred of $3,237 9,583,332 39,888 — 39,888 Stock based compensation 279,754 409 — 409 Excess tax benefit from stock plans — — 67 67 Net loss — — (2,171 ) (2,171 ) Balance, September 30, 2017 50,194,731 $ 286,296 $ (223,635 ) $ 62,661 Common Stock Total ($ in thousands) Shares Amount Balance, June 30, 2018 59,998,811 $ 375,436 $ (232,748 ) $ 142,688 Cumulative effect adjustment for ASC 606 adoption — — 376 376 Stock based compensation 13,344 370 — 370 Net loss — — (6,320 ) (6,320 ) Balance, September 30, 2018 60,012,155 $ 375,806 $ (238,692 ) $ 137,114 5 Three months ended
September 30,($ in thousands) 2018 2017 OPERATING ACTIVITIES: Net loss $ (6,320 ) $ (2,171 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Non-cash stock based compensation 415 409 Gain on disposal of property and equipment 7 (18 ) Non-cash interest and amortization of debt discount 22 17 Bad debt expense 509 168 Provision for inventory reserve 212 221 Depreciation and amortization 2,147 1,370 Excess tax benefits — 67 Deferred income taxes 4 16 Changes in operating assets and liabilities: Accounts receivable (3,678 ) (3,149 ) Finance receivables, net (63 ) 9,168 Inventory, net 1,707 (3,900 ) Prepaid expenses and other assets (220 ) (103 ) Accounts payable and accrued expenses (8,665 ) (1,490 ) Deferred revenue (210 ) 171 Income taxes payable 11 (55 ) Net cash (used in) provided by operating activities (14,122 ) 721 INVESTING ACTIVITIES: Purchase of property and equipment, including rentals (693 ) (720 ) Proceeds from sale of property and equipment, including rentals 30 45 Net cash used in investing activities (663 ) (675 ) FINANCING ACTIVITIES: Proceeds from exercise of common stock options 42 — Issuance of common stock in public offering, net — 39,888 Repayment of capital lease obligations and long-term debt (959 ) (809 ) Net cash (used in) provided by financing activities (917 ) 39,079 Net (decrease) increase in cash and cash equivalents (15,702 ) 39,125 Cash and cash equivalents at beginning of year 83,964 12,745 Cash and cash equivalents at end of period $ 68,262 $ 51,870 Interest paid in cash $ 740 $ 431 Income taxes paid in cash $ — $ — Supplemental disclosures of noncash financing and investing activities: Equipment and software acquired under capital lease $ — $ 227 6Internet of Things (“IoT”) and machine-to-machine (“M2M”)IoT services, which include the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment. The connection to the ePort Connect Platformplatform also enables consumer loyalty programs, national rewards programs and digital content, including advertisements and product information to be delivered at the point of sale.combination also marriescombined product offering provides the data-rich Seed system with USAT’s consumer benefits, providing operators with valuable consumer data that results in customized experiences. In addition to new technology and services, due to Cantaloupe’s existing customer base, the acquisition expands the Company’s footprint into new global markets.USA Technologies, Inc.the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and therefore should be read in conjunction with the Company’s June 30, 2018 Annual Report on Form 10-K, for the year ended June 30, 2017.which has been filed concurrently with this Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the three and six months ended December 31, 2017September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending June 30, 2018.2019. The balance sheet at June 30, 20172018 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.BASISPRESENTATIONCertain reclassificationsCONSOLIDATED FINANCIAL STATEMENTSprior year’sthis Form 10-Q, the Company filed its Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the "Form 10-K") containing our audited consolidated financial statements for the fiscal years ended June 30, 2019 and 2018, which have not previously been filed, as well as restatements of the following previously filed consolidated financial statements: (i) our audited consolidated financial statements for the fiscal year ended June 30, 2017; (ii) our selected financial data have been made to conform to current year’s presentation. As disclosedas of and for the fiscal years ended June 30, 2017, 2016 and 2015 contained in Item 6 of the Form 10-K; and (iii) our unaudited condensed consolidated financial statements for the fiscal quarters ended September 30, 2017 and 2016, December 31, 2017 and 2016, and March 31, 2018 and 2017 in Note 3,20, “Unaudited Quarterly Data” of the Notes to Consolidated Financial Statements.incurred integrationannounced that the Audit Committee with the assistance of independent legal and acquisition expensesforensic accounting advisors, was in the process of conducting an internal investigation of current and prior period matters relating to certain of the Company’s contractual arrangements, including the accounting treatment, financial reporting and internal controls related to such arrangements. The Audit Committee’s investigation focused principally on certain customer transactions entered into by the Company during fiscal years 2017 and 2018.current2017 and 2018 fiscal years of the Company. In most cases, revenues that had been recognized prematurely were, or were expected to be, recognized in subsequent quarters, including quarters subsequent to the quarters impacted by the investigative findings. The investigation further found that certain items that had been recorded as expenses, such as the payment of marketing or servicing fees, were more appropriately treated as contra-revenue items in earlier fiscal quarters.deemed it appropriateerrors related to have such costs individually captioned within the Company's acquisition and financial integration of Cantaloupe and (ii) out of period adjustments and errors identified during management's review of significant accounts and transactions.($ in thousands) Increase / (Decrease) Restatement Impact Three months ended September 30, 2017 Audit Committee Investigation-related Adjustments: Revenue $ (411 ) Costs of sales $ 165 Gross profit $ (576 ) Operating loss $ (576 ) Loss before income taxes $ (576 ) Significant Account and Transaction Review and Other: Revenue $ 53 Costs of sales $ 497 Gross profit $ (444 ) Operating loss $ (622 ) Loss before income taxes $ (886 ) ($ in thousands) Increase / (Decrease) Restatement Impact As of September 30, 2017 Audit Committee Investigation-related Adjustments: Accounts receivable $ (315 ) Finance receivables, net $ (1,640 ) Inventory, net $ 941 Prepaid expenses and other current assets $ 25 Other assets $ 82 Accounts payable $ 270 Accrued expenses $ 803 Significant Account and Transaction Review and Other: Accounts receivable $ 77 Inventory, net $ (305 ) Prepaid expenses and other current assets $ (136 ) Other assets $ (543 ) Property and equipment, net $ (1,149 ) Accounts payable $ 25 Accrued expenses $ 8,319 Capital lease obligations and current obligations under long-term debt $ (21 ) Deferred revenue $ (27 ) Deferred gain from sale-leaseback transactions $ (198 ) Deferred gain from sale-leaseback transactions, less current portion $ (99 ) Common stock $ (166 ) As of September 30, 2017 ($ in thousands) As Previously Reported Adjustments As Restated Assets Current assets: Cash and cash equivalents $ 51,870 $ — $ 51,870 Accounts receivable 10,288 (473 ) 9,815 Finance receivables, net 3,082 (1,641 ) 1,441 Inventory, net 8,240 636 8,876 Prepaid expenses and other current assets 1,122 (66 ) 1,056 Total current assets 74,602 (1,544 ) 73,058 Non-current assets: Finance receivables due after one year, net 7,742 — 7,742 Other assets 750 (461 ) 289 Property and equipment, net 11,850 (1,149 ) 10,701 Deferred income taxes 28,205 (28,205 ) — Intangibles, net 578 — 578 Goodwill 11,492 — 11,492 Total non-current assets 60,617 (29,815 ) 30,802 Total assets $ 135,219 $ (31,359 ) $ 103,860 Liabilities, convertible preferred stock and shareholders’ equity Current liabilities: Accounts payable $ 14,211 $ 295 $ 14,506 Accrued expenses 3,795 8,422 12,217 Line of credit, net 7,051 — 7,051 Capital lease obligations and current obligations under long-term debt 2,649 (21 ) 2,628 Income taxes payable 10 (10 ) — Deferred revenue — 439 439 Deferred gain from sale-leaseback transactions 197 (197 ) — Total current liabilities 27,913 8,928 36,841 Long-term liabilities: Deferred income taxes — 109 109 Capital lease obligations and long-term debt, less current portion 1,049 — 1,049 Accrued expenses, less current portion 62 — 62 Deferred gain from sale-leaseback transactions, less current portion 99 (99 ) — Total long-term liabilities 1,210 10 1,220 Total liabilities $ 29,123 $ 8,938 $ 38,061 Commitments and contingencies Convertible preferred stock: Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preference of $19,109 at September 30, 2017 — 3,138 3,138 Shareholders’ equity: Preferred stock, no par value, 1,800,000 shares authorized, no shares issued — — — Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preference of $19,109 at September 30, 2017 3,138 (3,138 ) — Common stock, no par value, 640,000,000 shares authorized, 50,194,731 shares issued and outstanding at September 30, 2017 286,463 (167 ) 286,296 Accumulated deficit (183,505 ) (40,130 ) (223,635 ) Total shareholders’ equity 106,096 (43,435 ) 62,661 Total liabilities, convertible preferred stock and shareholders’ equity $ 135,219 $ (31,359 ) $ 103,860 operations. Accordingly,operations for the Company retrospectively reclassified integration and acquisition costs incurred inthree months ended September 30, 2017 is as follows: Three months ended September 30, 2017 ($ in thousands, except per share data) As Previously Reported Adjustments As Restated Revenue: License and transaction fees $ 19,944 $ (547 ) $ 19,397 Equipment sales 5,673 189 5,862 Total revenue 25,617 (358 ) 25,259 Costs of sales: Cost of services 13,326 (79 ) 13,247 Cost of equipment 5,090 741 5,831 Total costs of sales 18,416 662 19,078 Gross profit 7,201 (1,020 ) 6,181 Operating expenses: Selling, general and administrative 6,746 178 6,924 Integration and acquisition costs 762 — 762 Depreciation and amortization 245 — 245 Total operating expenses 7,753 178 7,931 Operating loss (552 ) (1,198 ) (1,750 ) Other income (expense): Interest income 80 — 80 Interest expense (209 ) (264 ) (473 ) Total other expense, net (129 ) (264 ) (393 ) Loss before income taxes (681 ) (1,462 ) (2,143 ) Benefit (provision) for income taxes 468 (496 ) (28 ) Net loss (213 ) (1,958 ) (2,171 ) Preferred dividends (334 ) — (334 ) Net loss applicable to common shares $ (547 ) $ (1,958 ) $ (2,505 ) Net loss per common share Basic $ (0.01 ) $ (0.04 ) $ (0.05 ) Diluted $ (0.01 ) $ (0.04 ) $ (0.05 ) Weighted average number of common shares outstanding Basic 47,573,364 — 47,573,364 Diluted 47,573,364 — 47,573,364 corresponding periods fromrestatement on the previous fiscal year to conform topreviously filed condensed consolidated statement of cash flows for the current period’s presentation.three months ended September 31, 2017 is as follows:7 Three months ended September 30, 2017 ($ in thousands) As Previously Reported Adjustments As Restated OPERATING ACTIVITIES: Net loss $ (213 ) $ (1,958 ) $ (2,171 ) Adjustments to reconcile net loss to net cash provided by operating activities: Non-cash stock-based compensation 576 (167 ) 409 (Gain) loss on disposal of property and equipment (18 ) — (18 ) Non-cash interest and amortization of debt discount 15 2 17 Bad debt expense 118 50 168 Provision for inventory reserve — 221 221 Depreciation and amortization 1,492 (122 ) 1,370 Excess tax benefits 67 — 67 Deferred income taxes (535 ) 551 16 Recognition of deferred gain from sale-leaseback transactions (43 ) 43 — Changes in operating assets and liabilities: Accounts receivable (3,192 ) 43 (3,149 ) Finance receivables, net 8,771 397 9,168 Inventory, net (3,648 ) (252 ) (3,900 ) Prepaid expenses and other current assets (217 ) 114 (103 ) Accounts payable and accrued expenses (2,168 ) 678 (1,490 ) Deferred revenue — 171 171 Income taxes payable — (55 ) (55 ) Net cash provided by operating activities 1,005 (284 ) 721 INVESTING ACTIVITIES: Purchase of property and equipment, including rentals (992 ) 272 (720 ) Proceeds from sale of property and equipment, including rentals 45 — 45 Net cash used in investing activities (947 ) 272 (675 ) FINANCING ACTIVITIES: Issuance of common stock in public offering, net 39,888 — 39,888 Repayment of capital lease obligations and long-term debt (821 ) 12 (809 ) Net cash provided by financing activities 39,067 12 39,079 Net increase in cash and cash equivalents 39,125 — 39,125 Cash and cash equivalents at beginning of year 12,745 — 12,745 Cash and cash equivalents at end of period $ 51,870 $ — $ 51,870 2.3. ACCOUNTING POLICIES in fiscal year 2018$16$31 thousand of excess tax benefits in the Company's provision for income taxes for the six monthsyear ended December 31, 2017.June 30, 2018. Through June 30, 2017 excess tax benefits were reflected as a reduction of deferred tax assets via reducing actual operating loss carryforwards because such benefits had not reduced income taxes payable. Under the new standard the treatment of excess tax benefits changed and the cumulative excess tax benefits as of June 30, 2017 amounting to $67 thousand were credited to accumulated deficit.and six months ended December 31, 2016. adopted.In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) (“the New Standard”).” This ASU was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year. The new guidance provides a single model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The new standard also requires expanded qualitative and quantitative disclosures about the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU is now effective for fiscal years, and interim reporting periods within those years, beginning with the year ending June 30, 2019.The Company’s project plan includes a three-phase approach to implementing this standard update. The Company is currently evaluating the impact of the potential changes identified by its initial phase one assessment work which included 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. During the quarter, the Company completed an acquisition of Cantaloupe and has commenced the phase one assessment of the recently acquired business.8The objectives for the second phase of the project will be to establish and document key accounting policies and assess disclosures, business process and control impacts resulting from the New Standard. New policies and procedures identified during phase two will be applied to both historical Company revenue streams and those of the recently acquired business to ensure compliance with the New Standard. Lastly, the objectives of phase three 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 fiscal year 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 standard is expected to impact the Company’s revenue recognition processes, primarily in the areas of the allocation of contract revenues. An entity can elect to apply the guidance under one of the following two methods: (i) retrospectively to each prior reporting period presented – referred to as the full retrospective method; or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings – referred to as the modified retrospective method. The method of adoption has not yet been determined and is not expected to be finalized until the second phase of the project plan has been completed..," ASU 2016-02 requires thatwhich will require, among other items, lessees to recognize a lessee recognizeright of use asset and a related lease liability for most leases on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. The Company adopted this new guidance on July 1, 2019, using the optional modified retrospective transition method. The Company expects the adoption to result in gross up on its consolidated balance sheets from the recognition of assets and liabilities that arise fromarising out of operating leases. A lessee shouldThe Company will recognize inassets for 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 assetleased property during the lease term and will recognize liabilities for the lease term. For leases with a term of 12 months or less, a lessee is permittedcorresponding financial obligation to make an accounting policy election by classlease payments to the lessor.underlying asset notpractical expedients permitted within the standard, which eliminates the requirements to recognizereassess prior conclusions about lease assetsidentification, lease classification, and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases atinitial direct costs. The Company is substantially complete with the beginningevaluation of the earliest period presented usingimpact on the condensed consolidated financial statements of adopting the new lease standard and does not anticipate a modified retrospective approach.material impact on the condensed consolidated statements of operations, shareholders’ equity, and cash flows or to retained earnings. Additionally, the Company does not anticipate the adoption of the standard will impact any debt covenants or result in significant changes to the internal processes, including the internal control over financial reporting. The companyCompany’s operating leases primarily comprise of office facilities, with the most significant leases relating to corporate headquarters in Malvern, Pennsylvania and an office in San Francisco, California. The Company is in the lessee under variousprocess of finalizing changes to its systems and processes in conjunction with its review of lease agreements which are accountedand will disclose the actual impact of adopting ASU 2016-02 in its interim report on Form 10-Q for as operating leases. This amendmentthe quarter ended September 30, 2019.forin annual periods beginning after December 15, 2018. The Company is currently evaluating and assessing the Company beginning with the year ending June 30, 2020, including interim periods within those fiscal years. Early application is permitted.–- Credit Losses (Topic 326).” The new guidance introduceschanges the accounting for estimated credit losses pertaining to certain types of financial instruments including, but not limited to, trade and lease receivables. This pronouncement will be effective for fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018.August 2016,June 2018, the FASB issued ASU No. 2016-15, “Statement of Cash Flows2018-07, “Compensation - Stock Compensation (Topic 230)718), Classification of Certain Cash Receipts and Cash Payments.Improvements to Nonemployee Share-Based Payment Accounting.” The newstandard simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance makes eight targeted changeson such payments to how cash receipts and cash payments are presented and classified in the statement of cash flows. This pronouncement willnonemployees would be effective for the Company beginningaligned with the year ending June 30, 2019, andrequirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal year. EarlyThe Company expects that the adoption is permitted, including adoption in an interim period. If an entity early adoptsof this ASU would not have a material impact on the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the company would be required to apply the amendments prospectively as of the earliest date practicable. Upon adoption, the Company does not anticipate significant changes to the Company's existing accounting policies or presentation of the Statement of Cash Flows. January 2017,August 2018, the FASB issued ASU No. 2017-01, “Business Combinations2018-15, “Intangibles—Goodwill and Other (Topic 805), Clarifying350): Internal-Use Software.” This standard aligns the Definition ofrequirements for capitalizing implementation costs incurred in a Business.” ASU 2017-01 provides guidance in ascertaining whethercloud computing arrangement that is a collection of assets and activitiesservice contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is considered a business. Adoption of the amendment will be applied prospectively effective for annual periodsfiscal years beginning after December 15, 2017 with early adoption permissible2019, including interim periods within those fiscal years, which means that it will be effective for specific transactions. Adoptionus in the first quarter of our fiscal year beginning July 1, 2020. The Company is not expected tocurrently evaluating and assessing the impact this guidance will have a material effect on the Company’sits condensed consolidated financial statements.In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting.” The standard provides guidance about which changes to the terms or conditions of a share-based payment award require modification accounting, which may result in a different fair value for the award. This ASU is effective for annual periods and interim periods beginning after December 15, 2017, with early adoption permissible. The guidance is required to be applied prospectively to awards modified on or after the effective date. Historically, modifications to our share-based payment awards have been limited. As such, we do not expect the application of this standard to have a material effect on our results of operations or financial position.3.4. ACQUISITION OF CANTALOUPE SYSTEMS, INC.$85.0$88.2 million in aggregate consideration, net of cash acquired.consideration. Cantaloupe is a premier provider of cloud and mobile solutions for vending, micro markets, and office coffee service. preliminary fair value of the purchase price consideration consisted of the following:($ in thousands)Cash consideration, net of cash acquired (1)$(65,181)USAT shares issued as stock consideration (2)(19,810)Total consideration$(84,991)(1)The Cash Consideration is subject to certain post-closing adjustments, including with respect to the Company’s net working capital, as set forth in the Merger Agreement.(2)Represents the stock consideration amount pursuant to the terms and conditions of the Merger Agreement equal to the 3,423,367 USAT Shares issued by the Company, multiplied by the fair market value per share of the USAT common stock, as determined by the Merger Agreement. Pursuant to an Escrow Agreement, 1,496,707 of the USAT Shares, with a value of $8.7 million as determined under the Merger Agreement, were not delivered to the former stockholders or warrant holders of Cantaloupe but are to be held in escrow for a minimum of fifteen months following the acquisition as partial security for certain indemnification obligations of the former stockholders and warrant holders of Cantaloupe under the Merger Agreement.($ in thousands) Cash consideration, net of cash acquired $ 65,181 USAT shares issued as stock consideration (As Restated) 23,279 Post-closing adjustment for working capital (253 ) Total consideration (As Restated) $ 88,207 910 for additional details.not finalized its valuation of certain assets and liabilities recorded in connection with this transaction. Thus, the estimated measurements recorded to date are subject to change and any changes will be recordedtransaction as adjustments to the fair value of those assets and liabilities and residual amounts will be allocated to goodwill. The final valuation adjustments may also require adjustment to the consolidated statements of operations and cash flows. The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date.June 30, 2018.10($ in thousands) Accounts receivable $ 2,921 Finance receivables 1,480 Inventory 282 Prepaid expense and other current assets 646 Finance receivables due after one year 3,603 Other assets 50 Property and equipment 2,234 Intangibles 30,800 Total assets acquired 42,016 Accounts payable (1,591 ) Accrued expenses (2,401 ) Deferred revenue (518 ) Capital lease obligations and current obligations under long-term debt (666 ) Capital lease obligations and long-term debt, less current portion (1,134 ) Deferred income tax liabilities (157 ) Total identifiable net assets 35,549 Goodwill 52,658 Total fair value $ 88,207 $53.0$52.7 million arising from the acquisition includes the expected synergies between Cantaloupe and the Company, the value of the employee workforce, and intangible assets that do not qualify for separate recognition at the time of acquisition. The goodwill, which is not deductible for income tax purposes, was assigned to the Company’s only reporting unit. The amount of Cantaloupe revenues included in the Company’s Consolidated Statements of Operations for both the three and six months ended December 31, 2017 is $4.7 million. The amount of Cantaloupe earnings included in the Company’s Consolidated Statements of Operations for both the three and six months ended December 31, 2017 is $1.8 million, which was primarily driven by an income tax benefit of $1.7 million.As a result of the acquisition of Cantaloupe, the Company incurred the following integration and acquisition costs and other one-time charges related to the acquisition in the three and six months ended December 31, 2017:11 Three months ended September 30, 2017 ($ in thousands, except per share data) Revenue $ 30,889 Net loss attributable to USAT (2,020 ) Net loss attributable to USAT common shares $ (2,354 ) Net loss per share: Basic $ (0.04 ) Diluted $ (0.04 ) Weighted average number of common shares outstanding: Basic 53,548,814 Diluted 53,548,814 and six months ended December 31,September 30, 2017 were adjusted to exclude $3.3 million and $4.1$0.8 million of integration and acquisition costs, respectively.supplemental unaudited pro forma earningseffect of adoption of this new guidance on the Condensed Consolidated Balance Sheet as of July 1, 2018 was to increase prepaid expenses and other current assets, other assets, and deferred revenue, with an offsetting decrease in the opening accumulated deficit, as follows: June 30, 2018 July 1, 2018 ($ in thousands) As Reported Adjustment Revised ASSETS Prepaid expenses and other current assets $ 929 $ 251 $ 1,180 Other assets 720 1,254 1,974 LIABILITIES Deferred revenue 511 1,127 1,638 SHAREHOLDERS' EQUITY Accumulated deficit (232,748 ) 376 (232,372 ) sixthree months ended December 31, 2016 were adjustedSeptember 30, 2018 is as follows: September 30, 2018 September 30, 2018 ($ in thousands) As Reported Adjustment Under Legacy Guidance BALANCE SHEET Prepaid expenses and other current assets $ 1,463 $ (253 ) $ 1,210 Other assets 1,900 (1,264 ) 636 Deferred revenue 1,428 (1,116 ) 312 Accumulated deficit (238,692 ) (400 ) (239,092 ) STATEMENT OF OPERATIONS License and transaction fees 28,971 (11 ) 28,960 Selling, general and administrative 9,450 12 9,462 Net loss (6,320 ) (23 ) (6,343 ) $4.1non-recurring charges. Further, we applied the practical expedient to not consider arrangements with an original expected duration of one year or less, which are primarily month to month rental agreements. The majority of contracts are considered to have a contractual term of between 36 and 60 months based on implied and explicit termination penalties. These amounts will be converted into revenue in future periods as work is performed, primarily based on the services provided or at delivery and acceptance of products, depending on the applicable accounting method.($ in thousands) As of September 30, 2018 2020 7,551 2021 9,256 2022 7,443 2023 5,887 2024 and thereafter 3,629 Total $ 33,766 Three months ended September 30, ($ in thousands) 2018 Deferred revenue, beginning of the period $ 511 Plus: adjustment for adoption of ASC 606 1,127 Deferred revenue, beginning of the period, as adjusted 1,638 Deferred revenue, end of the period 1,428 Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period 156 integrationthe goods or services to which the asset relates. A straight-line or proportional amortization method is used depending upon which method best depicts the pattern of transfer of the goods or services to the customer. In addition, these contract costs are evaluated for impairment by comparing, on a pooled basis, the expected future net cash flows from underlying customer relationships to the carrying amount of the capitalized contract costs.costs. 4.costs” within the Condensed Consolidated Statements of Operations, with the remaining outstanding balance included within “Accrued expenses” on the Condensed Consolidated Balance Sheet. Liabilities for severance will generally be paid during the next twelve months.($ in thousands) Balance at July 1, 2018 $ 1,019 Plus: additions 137 Less: cash payments (301 ) Balance at September 30, 2018 $ 855 ($ in thousands) September 30,
2018 June 30,
2018Finance receivables, net $ 5,141 $ 4,603 Finance receivables due after one year 12,770 13,246 Total finance receivables, less allowance of $7 and $12, respectively $ 17,911 $ 17,849 accounts for theirroutinely evaluates outstanding finance receivables using delinquencyfor impairment based on past due balances or accounts otherwise determined to be at a higher risk of loss. A finance receivable is classified as nonperforming if it is considered probable the Company will be unable to collect all contractual interest and nonaccrual dataprincipal payments as key performance indicators. The Company classified $407 thousand and $102 thousand as outstanding and nonperforming as of December 31, 2017scheduled. 2017, respectively. The Company expects to collect on their outstanding finance receivables, less any portion currently reserved, without the contracting of third parties. At December 31, 2017 and June 30, 2017,2018, credit quality indicators consisted of the following:12($ in thousands) September 30,
2018 June 30,
2018Performing $ 17,911 $ 17,849 Nonperforming 7 12 Total $ 17,918 $ 17,861 Age Analysis of Past Due Finance ReceivablesAs of December 31, 2017Age Analysis of Past Due Finance Receivables As of September 30, 2018 ($ in thousands) Current QuickStart Leases $ 17,465 $ 126 $ 44 $ 102 $ 181 $ 17,918 Age Analysis of Past Due Finance ReceivablesAs of June 30, 2017Age Analysis of Past Due Finance Receivables Age Analysis of Past Due Finance Receivables As of June 30, 2018 As of June 30, 2018 Current $ 17,609 $ 56 $ 7 $ 56 $ 133 $ 17,861 5. INVENTORYInventory, net of reserves, was $11.2 million and $4.6 million as of December 31, 2017 and June 30, 2017, respectively. Inventory consists of finished goods. The Company's inventories are valued at the lower of cost or net realizable value.The Company establishes allowances for obsolescence of inventory based upon quality considerations and assumptions about future demand and market conditions.The fair value of Cantaloupe inventories acquired included a fair market value step-up of $23 thousand. In the three and six months ended December 31, 2017, the Company recognized the $23 thousand fair market value step-up as a component of cost of equipment, as the inventory acquired was sold to the Company’s customers. 6.13 Three months ended September 30, ($ in thousands, except per share data) 2018 2017 Numerator for basic and diluted loss per share Net loss $ (6,320 ) $ (2,171 ) Preferred dividends (334 ) (334 ) Net loss available to common shareholders $ (6,654 ) $ (2,505 ) 60,053,912 47,573,364 Effect of dilutive potential common shares — — 60,053,912 47,573,364 Basic loss per share $ (0.11 ) $ (0.05 ) Diluted loss per share $ (0.11 ) $ (0.05 ) a)645,417, 581,621, and 851,407 shares were excludeddiluted loss per share were 1,420,301 and 1,206,471 for the three and six months ended December 31, 2017 and six months ended December 31, 2016, respectively, as the effects would be anti-dilutive. The changes in the average number of shares that were anti-dilutive in the three and six months ended December 31, 2017 compared to the same period last year, were due to warrants exercised in connection with our common stock during September 2016.7.30, 2018 and September 30, 2017. As of September 30, 2018 ($ in thousands) Gross Net Intangible assets: Non-compete agreements $ 2 $ (2 ) $ — 2 years Brand and tradenames 1,695 (291 ) 1,404 3 - 7 years Developed technology 10,939 (1,882 ) 9,057 5 - 6 years Customer relationships 19,049 (977 ) 18,072 10 - 18 years Total intangible assets $ 31,685 $ (3,152 ) $ 28,533 Goodwill 64,149 — 64,149 Indefinite Total intangible assets & goodwill $ 95,834 $ (3,152 ) $ 92,682 14 As of June 30, 2018 ($ in thousands) Gross Net Intangible assets: Non-compete agreements $ 2 $ (2 ) $ — 2 years Brand 1,695 (226 ) 1,469 3 - 7 years Developed technology 10,939 (1,421 ) 9,518 5 - 6 years Customer relationships 19,049 (711 ) 18,338 10 - 18 years Total intangible assets $ 31,685 $ (2,360 ) $ 29,325 Goodwill 64,149 — 64,149 Indefinite Total intangible assets & goodwill $ 95,834 $ (2,360 ) $ 93,474 and six months ended December 31,September 30, 2018 and September 30, 2017 there was $472 thousand$0.8 million and $516$44 thousand in amortization expense related to intangible assets, respectively,respectively. comparedof June 30, 2018. As of September 30, As of June 30, ($ in thousands) 2018 2018 Revolving Credit Facility $ 10,000 $ 10,000 Term Loan 22,708 23,333 Other 2,355 2,689 Less: unamortized issuance costs (242 ) (256 ) Total 34,821 35,766 Less: debt and other financing arrangements, current (33,889 ) (34,639 ) Debt and other financing arrangements, noncurrent $ 932 $ 1,127 ($ in thousands) 2018 2017 Heritage Line of Credit $ — $ 133 Revolving Credit Facility 175 — Term Loan 350 — Other interest expense 261 340 Total interest expense $ 786 $ 473 six months ended December 31, 2016, for which there was $43 thousandall outstanding principal and $87 thousand in amortization expense relatedaccrued interest is due and payable on the third anniversary of the Avidbank Term Loan. The Avidbank Term Loan bears interest at an annual rate equal to intangible assets, respectively.8. LINE OF CREDITDuring1.75% above the fiscal year ended June 30,prime rate as published from time to time by The Wall Street Journal, or five percent (5%), whichever is higher. and other ancillary documents (as amended, the “Heritage Loan Documents”) with Heritage Bank of Commerce (“Heritage Bank”), providing for a secured asset-based revolving line of credit in an amount of up to $12.0 million (the “Heritage Line of Credit”) at an interest rate calculated based on the Federal Reserves’Reserve’s Prime plus 2.25%. The Heritage Line of Credit and the Company’s obligations under the Heritage Loan Documents were secured by substantially all of the Company’s assets, including its intellectual property.Heritage Line of Credit from March 29, 2017 to September 30, 2018.in respect of principal, interest, and fees, and satisfied all of its obligations underon the Loan and Security Agreement dated as of March 29, 2016, as amended, and ancillary agreements by and between the Company andwith Heritage Bank of Commerce. The Company recorded a charge of $55 thousand$0.1 million to write-off any remaining deferred financingdebt issuance costs related to the Heritage Line of Credit to interest expense forin the three and six months endedquarter ending December 31, 2017. Pursuant to such payment, all commitments of Heritage Bank of Commerce were terminated, and the Heritage Loan and Security Agreement was terminated. As such, there was no outstanding balance on the Heritage Line of Credit at December 31, 2017.9. DEBT15and six months ended December 31, 2017September 30, 2018 is LIBOR plus 4%. The Term Loan and Revolving Credit Facility contain customary representations and warranties and affirmative and negative covenants and require the Company to maintain a minimum quarterly Total Leverage Ratio and Fixed Charge Coverage Ratio.As The Revolving Credit Facility and Term Loan also require the Company to furnish various financial information on a quarterly and annual basis.Decemberthe delivery of the Company’s financial information required under the terms of the credit agreement. In connection with these agreements, the Company incurred extension fees due to the lender, totaling $0.2 million between September 28, 2018 and June 30, 2019. Additionally, during the quarter ended March 31, 2017,2019 the Company prepaid $20.0 million of the balance outstanding under the Term Loan, $0.6 million of which was applied to the installment payment due on March 31, 2019 and the remainder of which was applied to the last repayment installment obligations due under the Term Loan. On September 30, 2019, the Company prepaid the remaining principal balance of the Term Loan of $1.5 million and agreed to permanently reduce the amount available under the Revolving Credit Facility to $10 million which represented the outstanding balances for balance on the date thereof. The agreements also provide that the Company cannot incur additional borrowings on the Revolving Credit Facility without the Lender‘s prior consent. Further, the parties agreed that the applicable interest rate onthe Term Loan were $10.0 millionwill be LIBOR plus 4% until such time as the Company delivers certain financial information required under the credit agreement.$24.6 million, respectively.The Company periodically enters into capital lease obligations to finance network servers, computers, office furniture and equipment related support for use in its daily operations. During the six months ended December 31, 2017, the Company entered into capital lease obligations totaling $227 thousand, comprised of monthly installments of $7 thousand due within three years. The value of the acquired equipment is included in property and equipment and depreciated accordingly.million. At December 31, 2017,million with an outstanding balance of $1.3 million and $1.4 million as of September 30, 2018 and June 30, 2018 respectively. The balance for the debtperiod ended September 30, 2018 and June 30, 2018 is comprised of $550 thousandof: (i) $0.4 million and $0.4 million of promissory notes bearing an interest rate of a 5% and maturing on April 5, 2020 with principal and interest payments due monthly, $830 thousandmonthly; (ii) $0.6 million and $0.7 million of promissory notes bearing an interest rate of 10% and maturing on September 30,April 1, 2021 with principal and interest payments due quarterly,quarterly; and $356 thousand(iii) $0.2 million and $0.3 million of promissory notes bearing an interest rate of 12% and maturing on December 15, 2019 with principal and interest payments due quarterly.10.OF FINANCIAL INSTRUMENTSAs of December 31, 2017, the Company held no level 1, level 2, or level 3MEASUREMENTSinstruments.As of June 30, 2016, 2.2 million warrants with ainstruments, principally accounts receivable, cash equivalents, accounts payable, accrued expenses, and short-term finance receivables, are carried at cost which approximates fair value due to the short-term maturity of $3.7 million comprised the Company’s Level 3 financialthese instruments. The Level 3 financial instruments consisted of common stock warrants issued by the Company in March 2011 to purchase shares of the Company’s common stock. The Level 3 financial instruments included features requiring liability treatment of the warrants, with the fair value of the common stock based on valuations performed by an independent third-party valuation firm. The fairCompany’s obligations under its long-term debt agreements approximate their carrying value was determined using proprietary valuation models usingas such instruments are at market rates currently available to the quality of the underlying securities of the warrants, restrictions on the warrants and security underlying the warrants, time restrictions and precedent sale transactions completed in the secondary market or in other private transactions. During the three months ended September 30, 2016, all of the aforementioned warrants were exercised resulting in a $5.2 million reclassification to Common Stock and the net difference of $1.5 million was recorded as a loss on fair value associated with the warrant liability. 11.Company..The staff, as well as the elimination of the US Securitiescorporate alternative minimum tax ("AMT") and Exchange Commission (“SEC”) has recognizedchanging how existing AMT credits can be realized, the complexitycreation of reflectinga new limitation on deductible interest expense, and the impactschange in rules related to uses and limitations of the Act, and onnet operating loss carryforwards created in tax years beginning after December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (“SAB 118”), which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting (the measurement period). SAB 118 describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted.16December 31, 2017.September 30, 2018. To the extent that clarifications or interpretations materialize in the future that would impact upon the effects of the Act incorporated into the December 31, 2017September 30, 2018 financial statements, those effects will be reflected in the future as or if they materialize.and six months ended December 31, 2017,September 30, 2018, the Company recorded an income tax provisionsprovision of $9,073$18 thousand, which primarily relates to state income and $8,605 thousand, respectively, (substantially all deferred income taxes) which include a charge of $6,592 thousand related to the Act. These provisions arefranchise taxes. The provision is based upon income (loss)actual loss before income taxes usingfor the three months ended September 30, 2018, as the use of an estimated negative annual effective income tax rate does not provide a reliable estimate of 49.20%, which is primarily driven by the impact of permanent differences. Theincome tax rate reduction related to the Act was treated as a discrete item in the tax provisions for the three and six months ended December 31, 2017. $13,271 thousand,$16.3 million. The potential impact is immaterial to the potential effect would becondensed consolidated financial statements due to record athe existing valuation allowance inrecorded against the opening balance sheet, as well as aCompany’s deferred tax benefit to reverse the provision recorded duringassets.December 31,September 30, 2017, related to the rate reduction of the deferred tax assets acquired.For the three and six months ended December 31, 2016,an income tax benefitsprovision of $0 and $115$28 thousand respectively, (substantially all deferred income taxes) werewas recorded. The benefits areprovision is based upon income (loss)actual loss before income taxes usingfor the three months ended September 30, 2017, as the use of an estimated annual effective income tax rate of 30% for the fiscal year ended June 30, 2017. However, such benefits actually calculated have been limited to $115 thousand pending the materialization of additional income before income taxes resulting in an increase of $30 thousand in valuation allowances for the calculated additional benefits. The benefits for the six months ended December 31, 2016 were reduced bydoes not provide a provision for the tax effectreliable estimate of the change in the fair value of warrant liabilities which was treated discretely. All of those warrants were exercised as of September 30, 2016.12.income tax provision.$19.8$23.3 million. Refer to Footnote 3Note 4 for details on the Merger Agreement.17
The Company had 23,978 warrants outstanding as of September 30, 2018 and June 30, 2018, all of which were exercisable at $5.00 per share. The warrants have an expiration date of March 29, 2021.WARRANTSDuring the three and six months ended December 31, 2017, no warrants were exercised as compared to the three and six months ended December 31, 2016 where 2.4 million warrants were exercised at $2.6058 per share, yielding proceeds of $6.2 million. The following table summarizes warrant activity for the three and six months ended December 31, 2017 and 2016:(CEO) and Chief Financial Officer (CFO) to purchase up to 19,047 and 25,000 shares respectively of common stock at an exercise price of $5.25 per share. The CEOChief Executive Officer options vest on August 16, 2018, expiring if not exercised prior to August 16, 2024. The CFOChief Financial Officer options vest 1/3 on August 16, 2018, 1/3 on August 16, 2019 and 1/3 on August 16, 2020, expiring if not exercised prior to August 16, 2024. The CEOChief Executive Officer options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and the CFOChief Financial Officer options are non-qualified stock options. sixthree months ended December 31,September 30, 2018 and 2017 and 2016 was determined using the following weighted average assumptions:50.00 1.06 Three months ended
September 30, 2018 2017 Expected volatility (percent) 58.4 % 50.2 - 50.9% Expected life (years) 4.5 4.0 - 4.5 Expected dividends 0.0 % 0.0 % Risk-free interest rate (percent) 2.91 % 1.64 - 1.72% Number of options granted 400,000 179,047 Weighted average exercise price $ 8.75 $ 5.66 Weighted average grant date fair value $ 4.37 $ 2.42 sixthree months ended December 31, 2017September 30, 2018 was $0.1 million and 2016 was $276 thousand and $95 thousand, respectively. $0.1 million for the three months ended September 30, 2017.181, 2017, $90 thousand of stock grants2, 2018, 6,677 shares were awarded to each non-employee Director based on the closing price of the Company’s Common Stock on June 8, 2017 (the date for which the stock grants were initially approved),director for a total of 98,18440,062 shares. The shares vest ratably on a monthly basis over the two year period following July 1, 2017.2, 2018. The total expense recognized for these grants for the six months ending December 31, 2017 was $315 thousand.During the sixthree months ended December 31, 2017, the Company awarded an aggregate of 177,363 shares to its Chief Executive Officer, Chief Financial Officer and Chief Services Officer under its fiscal year 2017 long term stock incentive plan and an aggregate of 6,007 shares to two non-employee Directors in satisfaction of board fees.20172018 fiscal year (60% weighting). If none of the minimum threshold year-over-year percentage target goals are achieved, the executive officers would not be awarded any shares. If all of the year-over-year percentage target goals are achieved, the executive officers would be awarded shares having the following value: Chief Executive Officer - $840,000 (160% of base salary), Chief Financial Officer - $300,000 (100% of base salary), Chief Services Officer - $275,000 (100% of base salary), and Chief Product Officer - $280,000 (100% of base salary and subject to pro ration)be prorated to reflect the actual period of employment during the fiscal year). If all of the maximum distinguished year over year percentage target goals are achieved, the executive officers would be awarded shares having the following value: Chief Executive Officer - $1,260,000 (240% of base salary), Chief Financial Officer - $450,000 (150% of base salary), Chief Services Officer - $412,500 (150% of base salary), and Chief Product Officer - $420,000 (150% of base salary and subject to pro ration)be prorated to reflect the actual period of employment during the fiscal year). Assuming the minimum threshold year-over-year percentage target goal would be achieved for a particular metric, the number of shares to be awarded for that metric would be determined on a pro rata basis, provided that the award would not exceed the maximum distinguished award for that metric. The shares awarded under the 2018 LTI Stock Plan would vest as follows: one-third at the time of issuance; one-third on June 30, 2019; and one-third on June 30, 2020.and six months ended December 31, 2017September 30, 2018 and 2016:2017:13. Three months ended
September 30,($ in thousands) 2018 2017 FY18 LTI Plan $ 30 $ 50 FY17 LTI Plan 26 64 FY16 LTI Plan — 9 Total $ 56 $ 123 the current fiscal year 2018, the Company expanded the leased space for its headquarters in Malvern, Pennsylvania to a total of 23,138 square feet. The company’sCompany’s monthly base rent now is approximately $47$48 thousand with a lease expiration date of November 30, 2023.absorbedacquired a noncancelable operating lease pertaining to Cantaloupe’s headquarters based in San Francisco, California. The leased premise consists of approximately 8,400 square feet and calls for rental payments of approximately $46$45 thousand due each month up to a maximum monthly base rent of approximately $47 thousand through its January 31, 2020 expiration date.19From time to time, theThe Company is involved in various legal proceedings arising during the normal coursewhich are described in Item 1 of business. In the opinion of the Company’s management, these proceedings will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.14. SUBSEQUENT EVENTSThe Company has evaluated subsequent events that occurred through the date of the filingPart II of this Form 10-Q. Nooccurred subsequentplease refer to the balance sheet date and prior toCompany's Annual Report on Form 10-K for the filing date offiscal year ended June 30, 2019 which has been filed concurrently with this Form 10-Q that would have a material impact on the Consolidated Financial Statements.10-Q.·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;20
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;
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;·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 satisfy its trade obligations included in accounts payable and accrued expenses;·the ability of the Company to operate without infringing the intellectual property rights of others;
the ability of the Company to sell to third party lenders all or a portion of our finance receivables;·the ability of our products and services to avoid unauthorized hacking or credit card fraud;
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;·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;
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;·whether our suppliers would increase their prices, reduce their output or change their terms of sale; and
the ability of the Company to predict or estimate its future quarterly or annual revenue and expenses given the developing and unpredictable market for its products;·our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.above.above or those discussed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 which has been filed concurrently with this Form 10-Q. 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.was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutionsprovides wireless networking, cashless transactions, asset monitoring, and other value-added services that facilitate electronic payment transactions and consumer engagement services primarily withinprincipally to the small ticket, 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,Our ePort® technology can be installed and/or embedded into everyday devices such as vending machines, a variety of kiosks, amusement games, and commercial laundry kioskvia either our ePort hardware or our Quick Connect solution. Our associated service, ePort Connect®, is a PCI-compliant, comprehensive service that includes simplified credit/debit card processing and others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options,support, consumer engagement services as well as telemetry, Internet of Things (“IoT”), and machine-to-machine (“M2M”) services, which includeincluding the ability to remotely monitor, control and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment.The recent acquisition of Cantaloupe expanded the Company’s existing platform to become an end-to-end enterprise platform integrating Cantaloupe’s Seed Cloud which provides cloud and mobile solutions for dynamic route scheduling, automated pre-kitting, responsive merchandising, inventory management, warehouse and accounting management, as well as cashless vending. The combined companies complete the value chain for customers by providing both top-line revenue generating services as well as bottom line business efficiency services to help operators of unattended retail machines run their business better. The combination also marries the data-rich Seed system with USAT’s consumer benefits, providing operators with valuable consumer data that results in customized experiences. In addition to new technology and services, due to Cantaloupe’s existing customer base, the acquisition expands the Company’s footprint into new global markets.and six months ended December 31, 2017,September 30, 2018, we derived 70.3% and 73.6%approximately 86% of our revenuesrevenue from recurring license and transaction fees related to our ePort Connect service or Seed Cloud solution and 29.7% and 26.4%approximately 14% of our revenue from equipment sales, respectively.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. Connections to the ePort Connect service or Seed Cloud solution are the most21revenues,revenue, particularly the recurring revenuesrevenue from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:··· or Cantaloupe’s rental program, which are cancellable month-to-month operating leases.December 31, 2017,September 30, 2018, highlights of the Company include:are below:
Headquarters in Malvern, Pennsylvania;·Over 150 employees, primarily located in our corporate headquarters in Malvern, Pennsylvania and a newly acquired Cantaloupe office location in San Francisco, California.
Over 120 employees;·Over 15,000 customers and 900,000 connections to our services, including approximately 1,400 customers and 270,000 connections related to the acquisition of Cantaloupe;
Over 16,900 customers and approximately 1,047,000 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;
Three direct sales teams at the national, regional, and local customer-level and a growing number of OEMs and national distribution partners;·85 United States and foreign patents are in force;·The Company’s fiscal year ends June 30th; and·The Company has traded on the NASDAQ under the symbol “USAT” since 2007.has net deferred tax assetsannounced that the Audit Committee with the assistance of approximately $14.8 million predominantly resulting fromindependent legal and forensic accounting advisors, was in the process of conducting an internal investigation of current and prior period matters relating to certain of the Company’s contractual arrangements, including the accounting treatment, financial reporting and internal controls related to such arrangements. The Audit Committee’s investigation focused principally on certain customer transactions entered into by the Company during fiscal years 2017 and 2018.seriesresult of operating loss carry forwardsthe internal investigation. The Audit Committee proposed certain adjustments to previously reported revenues related to fiscal quarters occurring during the 2017 and 2018 fiscal years of the Company.mayreliance should not be availableplaced on: (i) the Report of Independent Public Accounting Firm dated August 22, 2017 relating to offset future taxable income.CRITICAL ACCOUNTING POLICIESOurthe Company’s internal control over financial reporting and 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 impactyear ended June 30, 2017; and (ii) the completed interim reviews for the periods ended March 31, 2018. The auditor also recalled its previously issued audit report on our futurethe Company’s internal control over financial conditionreporting and results of operations. Ourconsolidated financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate manner. Accounting policies currently deemed critical are listed below:Revenue RecognitionRevenue fromfor the sale or QuickStart leasefiscal year ended June 30, 2017.equipment is recognized on the termsDirectors of free-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 usagerecommendation of the Company’s cashless paymentAudit Committee, and control network. License fees for accessbased upon the adjustments to previously reported revenues proposed by 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,Audit Committee, determined that 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 eitherfollowing financial statements previously issued by the Company or a third-party financing companyshould no longer be relied upon: (1) the audited consolidated financial statements for the devices. The Company utilizes its best estimate of selling price when calculatingfiscal year ended June 30, 2017; and (2) the revenue to be recorded under these leases. The QuickStart22contracts qualify for sales type lease accounting. Accordingly, the Company recognizes a portion of lease payments as interest income. At the end of the lease period, the customer would have the option to purchase the device at its residual value.Long Lived AssetsIn 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, depreciationquarterly and amortization cease, and the assets are reported at the lower of carrying value or fair value less costs to sell.Goodwill and Intangible AssetsGoodwill 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.Company intangible assets include non-compete agreements, brand, developed technology, and customer relationships. They 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 AccountsThe 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 AllowanceThe Company follows the provisions of FASB ASC 740, Accounting for Uncertainty in Income Taxes, which provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in theyear-to-date unaudited condensed consolidated financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods.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 recognizedstatements for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent that, based on available evidence, it is more likely than not such benefits will be realized. The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general and administrative expenses. No interest or penalties related to uncertain tax positions were accrued or incurred during the three and six months endedSeptember 30, 2017, December 31, 2017, and 2016.23 to the interim Condensed Consolidated Financial Statements for a description of recent accounting pronouncements.44% 82% 93% 88% 80% 300 500 500 0.4% 4.1% 3.3% 8.6% 6.8% 99.6% 95.9% 96.7% 91.4% 93.2% 100.0% 100.0% 100.0% 100.0% 100.0% As of and for the three months ended September 30, 2018 June 30,
2018 Connections: Gross new connections 26,000 75,000 75,000 333,000 28,000 Net new connections 19,000 59,000 64,000 311,000 26,000 Total connections 1,047,000 1,028,000 969,000 905,000 594,000 Customers: New customers added 800 600 550 1,800 550 Total customers 17,000 16,200 15,600 15,050 13,250 Volumes: Total number of transactions (millions) 195.8 191.3 170.6 144.1 121.1 Total volume (millions) $ 381.5 $ 367.1 $ 318.0 $ 273.0 $ 239.4 Financing structure of connections: JumpStart 4.1 % 19.6 % 1.2 % 0.4 % 4.1 % 95.9 % 80.4 % 98.8 % 99.6 % 95.9 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % a) Activity for the three months ended December 31, 2017 includes net new connections and new customers related to the acquisition of Cantaloupe of approximately 270,000 and 1,400, respectively. b)December 31, 2017September 30, 2018 include:·270,000 net new connections related to the acquisition of Cantaloupe;·41,00019,000 additional net new connections during the quarter; and·905,000 total connections to our service compared to the same quarter last year of approximately 469,000 total connections to our service, an increase of 436,000 connections, or 93%1,047,000 total connections to our service compared to the same quarter last year of approximately 594,000 total connections to our service, an increase of 453,000 connections, or 76.3%.24December 31, 2017September 30, 2018 Compared to Three Months Ended December 31, 201637.3% 88.6% 49.4% 26.1% 121.7% 51.1% 61.7% (34.5%) 45.3% For the three months ended September 30, ($ in thousands) 2018 2017 Revenue: License and transaction fees $ 28,971 $ 19,397 49.4 % Equipment sales 4,551 5,862 (22.4 )% Total Revenue 33,522 25,259 32.7 % Costs of sales: Cost of services 18,544 13,247 40.0 % Cost of equipment 4,868 5,831 (16.5 )% Total costs of sales 23,412 19,078 22.7 % Gross profit: License and transaction fees 10,427 6,150 69.5 % Equipment sales (317 ) 31 NM Total gross profit $ 10,110 $ 6,181 63.6 % $10.7$8.3 million for the three months ended December 31, 2017September 30, 2018 compared to the same period in 2016.last year. The growth in total revenue resulted from a $6.2$9.6 million increase in license and transaction fee revenue for the quarter ended December 31, 2017 compared to the same period in 2016, and a $4.5 million increase in equipment revenue for three months ended December 31, 2017September 30, 2018 compared to the same period last year, bothpartially offset by a $1.3 million decrease in equipment revenue for the three months ended September 30, 2018 compared to the same period last year. This decrease was driven by anlower equipment shipments compared to the same period in 2018. The overall increase inis driven by increased connections to our network driving higher license and transaction fees, including the Cantaloupe acquisition.connections attributable to our acquisition of Cantaloupe. $7.9$4.3 million for the three months ended December 31, 2017September 30, 2018 compared to the same period last year. The increase was primarily driven by a $3.0 millionthe increase in cost ofthe fees associated with our higher license and transaction services and a $4.9 million increase inoffset by the lower cost of equipment sales, bothdriven by the decreased shipments compared to the prior period and the addition of Cantaloupe.connections and the Cantaloupe acquisition.Gross margin. The overall gross margin decreased 0.8% from 29.1% for the three months ended December 31, 2016 to 28.3% for the three months ended December 31, 2017. The decrease in the equipment margin, from 21.2% for the three months ended December 31, 2016 to 7.4% for the three months ended December 31, 2017, reflected our strategy of using equipment sales as an enabler for driving long-term, higher margin license and transaction fees. This decrease was partially offset by an increase inservices margin of 4.3% compared to the license fee and transaction marginsame period last year resulting from 31.6% for the three months ended December 31, 2016increased services connected to 37.2% for the three months ended December 31, 2017, which was driven by the impact of the Cantaloupe acquisition.our network. Operational44.0% 41,587.5% 140.1% 103.3% For the three months ended September 30, Category ($ in thousands) 2018 2017 Selling, general and administrative expenses $ 9,450 $ 6,924 36.5 % Investigation and restatement expenses 4,526 — NM Integration and acquisition costs 922 762 21.0 % Depreciation and amortization 1,133 245 362.4 % Total operating expenses $ 16,031 $ 7,931 102.1 % December 31, 2017,September 30, 2018, as compared to the same period in 2016.2017. This change was primarily driven by an increasehigher employee cost primarily driven by the acquisition of Cantaloupe.selling, general and administrative costs incurred related to Cantaloupe as well as an increase in sales and marketing related consulting expenses as we continue to increase our market share inconnection with the cashless-transaction vending industry.Audit Committee's investigation.$3.3$0.2 million for the three months ended December 31, 2017September 30, 2018 as compared to the same period in 2016,2017, due to the costs incurred in connection with the acquisition of Cantaloupe.25of Cantaloupe, partially offset by $8 thousand of acquisition costs incurred in the second quarter of fiscal year 2017 pertaining to the acquisition of VendScreen, Inc. (“VendScreen”). approximately $0.4$0.9 million for the three months ended December 31,September 30, 2018 compared to the same period in 2017, primarily due to the amortization of intangible assets recognized in connection with the Cantaloupe acquisition.netNet25.5% 145.8% 24200.0% For the three months ended September 30, ($ in thousands) 2018 2017 Other income (expense): Interest income $ 405 $ 80 406.3 % Interest expense (786 ) (473 ) 66.2 % Total other expense, net $ (381 ) $ (393 ) (3.1 )% increased $242 thousandwas substantially the same for the three months ended December 31, 2017September 30, 2018 compared to the same period in 2016. The increase was primarily driven by the interest incurred in connection with the Term Loan and Revolving Credit Facility utilized to fund a portion of the acquisition of Cantaloupe.2017. 100% For the three months ended September 30, ($ in thousands) 2018 2017 Provision for income taxes $ (18 ) $ (28 ) (35.7 )% December 31, 2017, an incomeSeptember 30, 2018, a tax provision of 9,073$18 thousand (substantially all deferred income taxes) was recorded which includes a charge of $6,592 thousand relatedprimarily relates to the recent enactment of the U.S. Tax Cutsstate income and Jobs Act.franchise taxes. The tax provision is based upon actual income (loss) before income taxes using an estimated negative annual effective income tax rate of 49.20%, which is primarily driven by the impact of permanent differences. The tax rate reduction related to tax reform was treated as a discrete item in the tax provision for the three months ended December 31, 2017.ForSeptember 30, 2018, as the three months ended December 31, 2016, no adjustment for the income tax benefit (provision) (substantially all deferred income taxes) was recorded based upon loss before benefit for income taxes usinguse of an estimated annual effective income tax rate does not provide a reliable estimate of 30.0%the income tax provision.fiscal yearthree months ended JuneSeptember 30, 2017, netas the use of an estimated annual effective income tax rate does not provide a provision for the tax effectreliable estimate of the change in the fair value of warrant liabilities which was treated discretely.(Loss) IncomeLoss to Adjusted EBITDA:26 For the three months ended September 30, ($ in thousands) 2018 2017 Net loss (6,320 ) $ (2,171 ) Less: interest income (405 ) (80 ) Plus: interest expense 786 473 Plus: income tax provision 18 28 Plus: depreciation expense 1,355 1,326 Plus: amortization expense 792 44 EBITDA (3,774 ) (380 ) Plus stock-based compensation 415 409 Plus: litigation related professional expenses 6 — Plus investigation and restatement expenses 4,526 — Plus integration and acquisition costs 922 762 Adjustments to EBITDA 5,869 1,171 Adjusted EBITDA $ 2,095 $ 791 (loss) incomeloss before interest income, interest expense, income tax provision (benefit),taxes, depreciation, amortization, stock-based compensation expense,non-recurring fees and non-recurring integration and acquisition costscharges that were incurred in connection with the acquisition and integration of Cantaloupe, including a charge for inventory fair value step-up,businesses, non-recurring fees and charges that were incurred in connection with the current fiscal yearAudit Committee investigation and the acquisition of the VendScreen business the previous fiscal year.financial statement restatement activities, class action litigation expenses, and stock-based compensation expense. We have excluded the non-cash expense, stock-based compensation, as it does not reflect theour cash-based operations of the Company.operations. We have excluded the integration non-recurring costs acquisition expenses incurred in connection with the Cantaloupe acquisition, including a charge for inventory fair value step-up, during the current fiscal year and the VendScreen transaction from the previous fiscal yearbusiness acquisitions in order to allow for a more accurate comparison of the financial results to historical operations,operations. We have excluded the professional fees incurred in connection with the class action litigation as well as the non-recurring costs and expenses related to the Audit Committee investigation and financial statement restatement activities because we believe that they pertain to period operational expensesrepresent charges that are not a core function ofrelated to our business.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 EBITDA as a metric in our executive officer and management incentive compensation plans. Three months ended September 30, ($ in thousands) 2018 2017 Net loss $ (6,320 ) $ (2,171 ) Non-GAAP adjustments: Non-cash portion of income tax provision 4 15 Amortization expense 792 44 Investigation and restatement expenses 4,526 — Litigation related professional fees 6 — Stock-based compensation 415 409 Integration and acquisition costs 922 762 Non-GAAP net income (loss) $ 345 $ (941 ) Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, the Company utilizes Adjusted EBTIDA as a metric in its executive officer and management incentive compensation plans.Reconciliation of Operating (Loss) Income to Adjusted Operating Income:(3,200) 234 3,358 8 472 43 630 285 As used herein, adjusted operating income represents operating (loss) income before the non-recurring integration and acquisition costs incurred in connection with the acquisition of Cantaloupe, including a charge for inventory fair value step-up, and VendScreen transaction and amortization expenses related to our acquisition-related intangibles. We have excluded these non-recurring costs and amortization expenses in order to allow for a more accurate comparison of the financial results to historical operations and we believe such a comparison is useful to investors as a measure of comparative operating performance. This is the first financial period for which we have adjusted for the amortization expenses related to our acquisition-related intangibles, and we intend to make such adjustments for future financial periods. Reconciliation of Net (Loss) Income to Non-GAAP Net Income:As used herein, non-GAAP net income represents GAAP net (loss) income excluding costs or benefits relating to any non-cash portions of the Company’s income tax benefit, adjustment for fair value of warrant liabilities, non-recurring costs and expenses that were incurred in connection with the acquisition and integration of Cantaloupe, including a charge for inventory fair value step-up and write-off of deferred financing costs, during the current fiscal year and VendScreen during the prior fiscal year, and non-cash expenses for equity awards under our equity incentive plans. This is the first financial period for which we have adjusted for the non-cash expenses attributable to equity awards, and we intend to make such27adjustments for future financial periods. Management believes that non-GAAP net income is an important measure of USAT’s business. Non-GAAP net income 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 provided by or (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 (loss) income as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Management uses the aforementioned non-GAAP measure 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 as a metric in its executive officer and management incentive compensation plans.Six Months Ended December 31, 2017 Compared to Six Months Ended December 31, 2016Revenue and Gross Profit29.7% 48.2% 34.1% 22.3% 70.9% 35.3% 45.7% (39.3%) 31.2% Revenue. Total revenue increased $14.8 million for the six months ended December 31, 2017 compared to the same period in 2016. The growth in total revenue resulted from a $9.8 million increase in license and transaction fee revenue for the six months ended December 31, 2017 compared to the same period in 2016, and a $5.0 million increase in equipment revenue for the six months ended December 31, 2017 compared to the same period last year; both driven by an increase in connections and the Cantaloupe acquisition. Cost of sales. Cost of sales increased $10.9 million for the six months ended December 31, 2017 compared to the same period last year. The increase was driven by a $5.1 million increase in cost of services and a $5.8 million increase in cost of equipment sales, both arising from an increase in connections and the Cantaloupe acquisition. Gross margin. The overall gross margin decreased 0.6% from 28.8% for the six months ended December 31, 2016 to 28.2% for the six months ended December 31, 2017. The decrease in the equipment margin, from 20.6% for the six months ended December 31, 2016 to 8.4% for the six months ended December 31, 2017 reflected our strategy of using equipment sales as an enabler for driving long-term, higher margin license and transaction fees. This decrease was partially offset by an increase in the license fee and transaction margin from 31.4% for the six months ended December 31, 2016 to 35.3% for the six months ended December 31, 2017 which was primarily driven by the impact of the Cantaloupe acquisition. 28Operational Expenses19.7% 3,658.7% 90.7% 52.5% Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $2.5 million for the six months ended December 31, 2017, as compared to the same period in 2016. This change was primarily driven by an increase in selling, general and administrative costs related to Cantaloupe as well as an increase in sales and marketing related consulting expenses as we continue to increase our market share in the cashless-transaction vending industry.Integration and acquisition costs. Integration and acquisition costs increased $4.0 million for the six months ended December 31, 2017 as compared to the same period in 2016, due to the $4.1 million incurred in connection with the acquisition of Cantaloupe, partially offset by $0.1 million of acquisition costs incurred in the same period of fiscal year 2017 pertaining to the acquisition of VendScreen. Depreciation and amortization. Depreciation and amortization expenses increased approximately $0.5 million for the six months ended December 31, 2017 primarily due to the amortization of intangible assets recognized in connection with the Cantaloupe acquisition. Other Expense, net21.2% 70.2% (100.0%) (77.2%) Other expense, net. Other expense, net decreased $1.3 million for the six months ended December 31, 2017 compared to the same period in 2016. The decrease was primarily driven by the change in fair value associated with the exercised warrants recognized during September 2016.Income TaxesIncome taxes. For the six months ended December 31, 2017, an income tax provision of $8,605 thousand (substantially all deferred income taxes) was recorded which includes a charge of $6,592 thousand related to tax reform. The tax provision is based upon income (loss) before income taxes using an estimated negative annual effective income tax rate of 49.20%, which is primarily driven by the impact of permanent differences. The tax rate reduction related to tax reform was treated as a discrete item in the tax provision for the six months ended December 31, 2017.For the six months ended December 31, 2016, an income tax benefit of $115 thousand (substantially all deferred income taxes) was recorded based upon loss before benefit for income taxes using an estimated annual effective income tax rate of 30.0% for the fiscal year ending June 30, 2017 net of a provision for the tax effect of the change in the fair value of warrant liabilities which was treated discretely.29Reconciliation of Net Loss to Adjusted EBITDA:As used herein, Adjusted EBITDA represents net loss before interest income, interest expense, income tax provision (benefit), depreciation, amortization, change in fair value of warrant liabilities, stock-based compensation expense, and non-recurring integration and acquisition-related costs that were incurred in connection with the acquisition of Cantaloupe, including a charge for inventory fair value step-up, in the current fiscal year and the acquisition of the VendScreen business the previous fiscal year. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash gain or charge that is not related to the Company’s operations. We have excluded the non-cash expense, stock-based compensation, as it does not reflect the cash-based operations of the Company. We have excluded the integration and acquisition expenses incurred in connection with the Cantaloupe acquisition, including a charge for inventory fair value step-up, during the current fiscal year and the VendScreen transaction from the previous fiscal year in order to allow for a more accurate comparison of the financial results to historical operations, as they pertain to period operational expenses that are not a core function of our business. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, the Company utilizes Adjusted EBTIDA as a metric in its executive officer and management incentive compensation plans.Reconciliation of Operating Loss to Adjusted Operating Income (Loss):(3,752) (716) 4,120 109 516 87 884 (520) As used herein, adjusted operating loss represents operating loss before the non-recurring integration and acquisition costs and expenses incurred in connection with the acquisition of Cantaloupe, including a charge for inventory fair value step-up, and VendScreen transaction, and the amortization expenses related to our acquisition-related intangibles. We have excluded these non-recurring costs and expenses in order to allow for a more accurate comparison of the financial results to historical operations and we believe such a comparison is useful to investors as a measure of comparative operating performance. This is the first financial period for which we have adjusted for the amortization expenses related to our acquisition-related intangibles, and we intend to make such adjustments for future financial periods. 30Reconciliation of Net Loss to Non-GAAP Net Income (Loss):As used herein, non-GAAP net income (loss) represents GAAP net income (loss) excluding costs or benefits relating to any non-cash portions of the Company’s income tax benefit, adjustment for fair value of warrant liabilities, professional fees incurred in connection with the class action litigation and the special litigation committee investigation, and non-recurring costs and expenses that were incurred in connection with the acquisition and integration of Cantaloupe, including a charge for inventory fair value step-up and a write-off of deferred financing costs, during the current fiscal year and VendScreen during the prior fiscal year. This is the first financial period for which we have adjusted for the non-cash expenses attributable to equity awards under our equity incentive plans, and we intend to make such adjustments for future financial periods. Management believes that non-GAAP net income (loss) is anand non-GAAP net earnings (loss) per share are 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 provided by or (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 loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings.business. Management uses the aforementioned non-GAAP measure 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.provided byused in operating activities was $4.1$14.1 million for the sixthree months ended December 31, 2017September 30, 2018 compared to cash provided of $5.1$0.7 million used in the same period in 2016.fiscal year 2018. The $9.3 million increasechange reflects a change in cash provided bynet expense for non-cash operating activities wasof $1.1 million, and net cash used by the change in various operating assets and liabilities of $11.8 million. The change in operating assets and liabilities is primarily driven by a cash inflow of $5.8 million fromdecrease in the payment forchange in finance receivables related to a significant order received by us during the fourth quarter of the prior fiscal year as well as a cash inflow of $10.8$9.2 million related to the timing ofand an increase in accounts payable and accrued expenses partiallyof $7.2 million, offset by a $2.8 millionan increase in merchant receivables due to timing differences related to the remittanceinventory of credit card receipts, and a $3.1 million increase related to inventory due to purchases made to support the company’s anticipated future growth.$66.8$0.7 million for the sixthree months ended December 31, 2017September 30, 2018 compared to $1.9cash used of $0.7 million forin the same period in 2016. The $64.9 million increase is primarily related to net cash consideration paid for the acquisition of Cantaloupe.provided byused in financing activities was $65.3$0.9 million for the sixthree months ended December 31, 2017September 30, 2018 compared to $5.8cash provided of $39.1 million forin the same period in 2016.fiscal year 2018. The $59.5 million increasechange was primarily due to $39.9 million of cash proceeds from the issuance of common stock in a public offering which closed in July 2017 with net proceeds2018.$39.9 million as well as an increase of $35.0 million relatedCashTerm LoanCompany's delay in filing its periodic reports, between September 28, 2018, and September 30, 2019, the parties entered into various agreements to provide for the extension of the delivery of the Company’s financial information and related compliance certificates required under the terms of the credit agreement which are required to be delivered to the lender by no later than October 31, 2019. In connection with these agreements, the Company incurred extension fees due to the lender, totaling $0.2 million, between September 28, 2018 and June 30, 2019. Additionally, during the quarter ended March 31, 2019 the Company prepaid $20.0 million of the balance outstanding under the term loan, $0.6 million of which was applied to the installment payment due on March 31, 2019 and the remainder of which was applied to the last repayment installment obligations due under the term loan. On September 30, 2019, the Company prepaid the remaining principal balance of the term loan of $1.5 million and agreed to permanently reduce the amount available under the revolving credit facility to $10 million which represented the outstanding balance on the date thereof. The agreements also provide that the Company cannot incur additional borrowings on the Revolving Credit Facility partially offset by $6.2 million in proceeds received fromwithout the exerciseLender‘s prior consent. Further, the parties agreed that the applicable interest rate on the Revolving Credit Facility and Term Loan will be LIBOR plus 4% until such time as the Company delivers certain financial information required under the credit agreement.warrants duringCompany having maintained deposits on account with a financial institution in excess of the six months ended September 30, 2016amounts permitted by the credit agreement and an increase in repayments of debt duringnot having transferred certain deposit accounts to the six months ended December 31, 2017 of $8.9 million.31In September 2014,Lender. The waiver requires the Company reintroduced QuickStart, a program whereby our customers are able to purchase our ePort hardware via a five-year, non-cancellable finance agreement. Underremedy the QuickStart program,event of default by March 31, 2020 by which time the Company sells the equipmentexpects to customers and creates a long-term and current finance receivable for five-year agreements. In the third and fourth quarters of fiscal 2015, the Company signed vendor agreements with two finance companies, whereby our customers would enter into agreements directlybe in compliance with the finance companies as part of our QuickStart program. Under this scenario, the Company invoices the finance company for the equipment financed by our customer, and typically receives full payment within thirty days. Prior to the reintroduction of QuickStart, the Company had financed its customers’ acquisition of ePort equipment primarily through the JumpStart rental program. Under Jumpstart, the Company records an investing capital expenditure cash outflow for the equipment provided and fixed assets on the balance sheet, and then receives rental income from a month-to-month lease. Customers who utilize third party finance companies in connection with the QuickStart program improve our cash flow from operations, and our QuickStart program reduces cash flow needed for investing activities otherwise incurred by us for our JumpStart program.Since entering into vendor agreements with two third-party finance companies, the majority of QuickStart sales consummated have been with customers entering into agreements directly with the finance companies. Our customers have shifted from acquiring our products via JumpStart, which accounted for 65% of our gross connections in fiscal year 2014, to QuickStart and sales under normal trade receivable terms, which accounted for 89%, 91%, and 93% of our gross connections in fiscal years 2015, 2016, and 2017 respectively. JumpStart was approximately 1% of our gross new connections for the six months ended December 31, 2017.The Company is continually seeking to expand its outside financing partners in order to accommodate expected growth.Sources of CashThe Company’s net working capital, which is defined as current assets less current liabilities, increased $7.3 million from $5.8 millionunderlying covenant. Although as of June 30, 2017,2019 the Company was not in compliance with the fixed charge coverage ratio and the total leverage ratio financial covenants under the credit agreement, pursuant to $13.1the September 30, 2019 extension agreement, the lender agreed that any such failure would not constitute an event of default pending the delivery to the lender of our financial statements and related compliance certificates by no later than October 31, 2019. The Company has classified all amounts outstanding under the revolving credit facility and term loan as current liabilities as of September 30, 2018 and June 30, 2018.December 31, 2017. September 30, 2018; (2) the cash which may be provided by operating activities in the 2020 fiscal year; (3) potential sales to third party lenders of all or a portion of our finance receivables; and (4) gross cash proceeds of $19,950,000 from the issuance of our shares to Antara as referred to above; and (5) an aggregate amount of $30 million under the Term Facility as described above.December 31, 2017,$10.0 million, sales tax liability estimated to be no more than $16 million, and the Company’s primary sourcesadditional costs of preparing the 2019 Form 10-K and related activities which will be incurred primarily during the first fiscal quarter of fiscal year 2020. In addition, management has recently implemented efficiencies in working capital that are designed to increase our cash include:balances.·Cash on hand of approximately $15.4 million;·$2.5 million available underTherefore, the Revolving Credit Facility provided we continue to satisfy the various covenants set forth in the loan agreement, including the requirement to meet the minimum quarterly Total Leverage Ratio and Fixed Charge Coverage Ratio;·Sales to third party lenders of all or a portion of our $16.7 million of finance receivables which may occur in future quarters; and·Anticipated cash which may be provided by operating activities in future quarters.The Company believes its existing cash and cash equivalents and available cash resources described above would provide sufficient capital resources to operate its anticipated business over the next twelve12 months.There have been no significant changes to our market risk since June 30, 2017. a discussion of our exposure toquantitative and qualitative disclosures about market risk, refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on2019 Form 10-K for the year ended June 30, 2017.filed concurrently herewith.)). We maintain disclosure controls and procedures to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, and that such information is accumulated and communicated to our management, including our chief executive officer and interim chief financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our management, including our chief executive officer and interim chief financial officer, has concluded that our disclosure controls and procedures were not effective as of the end of such period.ThereDecember 31, 2017September 30, 2018 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.ExhibitNumberDescriptionDescription 10.131.1 10.210.331.1December 31, 2017,September 30, 2018, filed with the SEC on February 8, 2018,October 9, 2019, formatted in Extensible Business Reporting Language (XBRL): (1) the Consolidated Balance Sheets as of December 31, 2017September 30, 2018 and June 30, 2017,2018, (2) the Consolidated Statements of Operations for the three-month and six-month periods ended December 31,September 30, 2018 and 2017, and 2016, (3) the Consolidated Statements of Shareholders’ Equity for the six-monththree-month period ended December 31, 2017,September 30, 2018, (4) the Consolidated Statements of Cash Flows for the six-monththree-month period ended December 31,September 30, 2018 and 2017, and 2016, and (5) the Notes to Consolidated Financial Statements.33 FebruaryOctober 9, 2018 FebruaryOctober 9, 2018Priyanka SinghPriyanka Singh34