UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10-Q/A~~

~~(Amendment No. 1)~~10-Q



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

For the quarterly period ended ~~September 30, 2018~~March 31, 2020



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

For the transition period from _________ to _________

Commission file number 001-33365

USA Technologies, Inc.

(Exact name of registrant as specified in its charter)



Pennsylvania		23-2679963
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



100 Deerfield Lane,	Suite 300,	Malvern,	Pennsylvania	19355
(Address of principal executive offices)				(Zip Code)

~~(610)~~ (610) 989-0340

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol	Name Of Each Exchange On Which Registered
~~Common Stock, no par value~~ ~~Series A Convertible Preferred Stock~~ None	~~USAT~~ ~~USATP~~ None	~~The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC~~None

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

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

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



Large accelerated filer	☐	Accelerated filer	☒☑
Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of ~~September 19, 2019~~June 18, 2020 there were ~~60,008,481~~64,557,336 outstanding shares of Common Stock, no par value.

EXPLANATORY NOTE

On May 7, 2020, USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”) filed a Current Report on Form 8-K (the “Form 8-K”) with the U.S. Securities and Exchange Commission (the “Commission”) indicating its reliance on the 45-day extension provided by an order issued by the Commission under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) entitled Granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules Thereunder, dated March 4, 2020 (Release No. 34-88318), as modified and superseded by a new Commission order under Section 36 of the Exchange Act entitled Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, dated March 25, 2020 (Release No. 34-88465) (collectively, the “Order”). Specifically, the Company disclosed that it was unable to timely prepare and review the Quarterly Report due to circumstances related to COVID-19, including the remote working arrangements the Company has instituted for employees. These circumstances have impacted the Company’s ability to ensure information required to be disclosed in its reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure. Therefore, due to COVID-19’s interference in the Company’s operations, the Company was unable to file the Original Form 10-Q on or prior to the original due date for the report. Consistent with the Company’s statements made in the Form 8-K, this Quarterly Report for the three months ended March 31, 2020, has been filed on June 24, 2020 (which was within the permitted timeframe of the Order).

USA TECHNOLOGIES, INC.

TABLE OF CONTENTS



Part I - Financial Information

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets (unaudited)	4

	Condensed Consolidated Statements of Operations (unaudited)	5

	Condensed Consolidated Statements of ~~Operations~~Shareholders’ Equity (unaudited) ~~(unaudited)~~	6

	Condensed Consolidated Statements of ~~Shareholders’ Equity~~Cash Flows (unaudited) ~~(unaudited)~~	7

	~~Condensed~~ Notes to Consolidated Financial Statements ~~of Cash Flows~~(unaudited) ~~(unaudited)~~	8

	~~Notes to Consolidated Financial Statements~~Item 2. ~~(unaudited)~~	9Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

~~Part II - Other Information~~Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 6.4.	~~Exhibits~~Controls and Procedures	3042

Part II - Other Information

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	44

Item 3.	Defaults Upon Senior Securities	45

Item 6.	Exhibits	46

	Signatures	3149

~~EXPLANATORY NOTE~~

This Amendment No. 1 on Form 10-Q/A (“Amendment No. 1”) amends our Quarterly Report on Form 10-Q for the three months ended September 30, 2018, as filed with the U.S. Securities and Exchange Commission on October 9, 2019 (the “Original Filing” and the “Original Filing Date”).

This Amendment No. 1 is being filed to include additional discussion around the non-investigatory financial adjustments disclosed in Note 2, “Restatement of Consolidated Financial Statements” and to include the label “as restated” for the financial statements and tabular footnote disclosures impacted by the restatements discussed in the Original Filing. Pursuant to Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, we have included the entire text of Part I, Item 1 in this Amendment No. 1.

Part II, Item 6. has been included herein to reflect new certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, which are filed and furnished herewith, respectively. Because this Amendment No. 1 does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 4 and 5 of the certifications pursuant to Section 302 have been omitted. Except as indicated in this Explanatory Note, no other changes were made to the Original Filing. This Amendment No. 1 speaks as of the Original Filing Date, and does not reflect events that may have occurred subsequent to the Original Filing Date.

Part I. Financial Information

Item 1. Consolidated Financial Statements

USA Technologies, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)


($ in thousands)	September 30, 2018			June 30, 2018			March 31, 2020			June 30, 2019

Assets
Current assets:
Cash and cash equivalents	$	68,262		$	83,964		$	25,894		$	27,464
Accounts receivable, less allowance of $3,125 and $2,754, respectively	18,921			15,748
Accounts receivable, less allowance of $6,952 and $4,866, respectively							18,418			21,906
Finance receivables, net	5,141			4,603			7,941			6,727
Inventory, net	6,915			8,038			9,577			11,273
Prepaid expenses and other current assets	1,463			929			2,319			1,558
Total current assets	100,702			113,282			64,149			68,928

Non-current assets:
Finance receivables due after one year	12,770			13,246
Finance receivables due after one year, net							11,541			12,642
Other assets	1,900			720			2,075			2,099
Property and equipment, net	9,778			11,273			8,293			9,590
Operating lease right-of-use assets							5,903			—
Intangibles, net	28,533			29,325			23,818			26,171
Goodwill	64,149			64,149			63,945			63,945
Total non-current assets	117,130			118,713			115,575			114,447

Total assets	$	217,832		$	231,995		$	179,724		$	183,375

Liabilities, convertible preferred stock and shareholders’ equity
Current liabilities:
Accounts payable	$	19,335		$	30,468		$	24,592		$	27,584
Accrued expenses	21,848			19,291			27,533			23,351
Capital lease obligations and current obligations under long-term debt	33,889			34,639
Finance lease obligations and current obligations under long-term debt							381			12,497
Income taxes payable	11			—			168			254
Deferred revenue	1,428			511			1,621			1,681
Total current liabilities	76,511			84,909			54,295			65,367

Long-term liabilities:
Deferred income taxes	71			67			86			71
Capital lease obligations and long-term debt, less current portion	932			1,127
Finance lease obligations and long-term debt, less current portion							12,297			276
Operating lease liabilities, non-current							5,025			—
Accrued expenses, less current portion	66			66			450			100
Total long-term liabilities	1,069			1,260			17,858			447

Total liabilities	$	77,580		$	86,169		72,153			65,814
Commitments and contingencies (Note 14)
Commitments and contingencies (Note 13)
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
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $20,778 and $20,111 at March 31, 2020 and June 30, 2019, 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
Common stock, no par value, 640,000,000 shares authorized, 64,448,957 and 60,008,481 shares issued and outstanding at March 31, 2020 and June 30, 2019, respectively							396,044			376,853
Accumulated deficit	(238,692		)	(232,748		)	(291,611		)	(262,430		)
Total shareholders’ equity	137,114			142,688			104,433			114,423
Total liabilities, convertible preferred stock and shareholders’ equity	$	217,832		$	231,995		$	179,724		$	183,375

See accompanying notes.

USA Technologies, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three months ended September 30,						Three months ended March 31,						Nine months ended March 31,
($ in thousands, except per share data)	2018			2017 (as restated)			2020			2019			2020			2019
Revenue:
License and transaction fees	$	28,971		$	19,397		$	34,961		$	31,515		$	105,324		$	89,919
Equipment sales	4,551			5,862			8,137			6,189			25,184			16,039
Total revenue	33,522			25,259			43,098			37,704			130,508			105,958

Costs of sales:
Cost of services	18,544			13,247			22,244			20,307			66,912			58,141
Cost of equipment	4,868			5,831			9,856			7,444			28,420			17,371
Total costs of sales	23,412			19,078			32,100			27,751			95,332			75,512

Gross profit	10,110			6,181			10,998			9,953			35,176			30,446

Operating expenses:
Selling, general and administrative	9,450			6,924			20,069			11,156			56,876			31,537
Investigation and restatement expenses	4,526			—			—			1,408			4,303			13,122
Integration and acquisition costs	922			762			—			24			—			1,127
Depreciation and amortization	1,133			245			1,107			1,083			3,209			3,359
Total operating expenses	16,031			7,931			21,176			13,671			64,388			49,145

Operating loss	(5,921		)	(1,750		)	(10,178		)	(3,718		)	(29,212		)	(18,699		)

Other income (expense):
Interest income	405			80			411			348			988			1,245
Interest expense	(786		)	(473		)	(683		)	(913		)	(1,981		)	(2,518		)
Total other expense, net	(381		)	(393		)
Change in fair value of derivative							1,070			—			1,070			—
Total other income (expense), net							798			(565		)	77			(1,273		)

Loss before income taxes	(6,302		)	(2,143		)	(9,380		)	(4,283		)	(29,135		)	(19,972		)
Provision for income taxes	(18		)	(28		)
Benefit (provision) for income taxes							85			(23		)	(46		)	(60		)

Net loss	(6,320		)	(2,171		)	(9,295		)	(4,306		)	(29,181		)	(20,032		)
Preferred dividends	(334		)	(334		)	(334		)	(334		)	(668		)	(668		)
Net loss applicable to common shares	$	(6,654	)	$	(2,505	)	$	(9,629	)	$	(4,640	)	$	(29,849	)	$	(20,700	)
Net loss per common share
Basic	$	(0.11	)	$	(0.05	)	$	(0.15	)	$	(0.08	)	$	(0.48	)	$	(0.34	)
Diluted	$	(0.11	)	$	(0.05	)	$	(0.15	)	$	(0.08	)	$	(0.48	)	$	(0.34	)
Weighted average number of common shares outstanding
Basic	60,053,912			47,573,364			64,096,778			60,065,053			62,591,947			60,059,594
Diluted	60,053,912			47,573,364			64,096,778			60,065,053			62,591,947			60,059,594

See accompanying notes.

USA Technologies, Inc.

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

~~Three~~Nine Month Period Ended ~~September 30, 2017 (as restated)~~March 31, 2020

Common Stock
Accumulated
Deficit
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			Accumulated Deficit			Total
($ in thousands)	Shares	Amount		Accumulated Deficit			Total
Balance, June 30, 2019	60,008,481	$	376,853	$	(262,430	)	$	114,423
Stock based compensation	—	290		—			290
Net loss	—	—		(11,508		)	(11,508		)
Balance, September 30, 2019	60,008,481	377,143		(273,938		)	103,205
Issuance of common stock in relation to private placement, net of offering costs incurred of $1,102	3,800,000	16,777		—			16,777
Stock based compensation	362,941	1,742		—			1,742
Net loss	—	—		(8,378		)	(8,378		)
Balance, December 31, 2019	64,171,422	395,662		(282,316		)	113,346
Stock based compensation	277,535	382		—			382
Net loss	—	—		(9,295		)	(9,295		)
Balance, March 31, 2020	64,448,957	$	396,044	$	(291,611	)	$	104,433

~~Three~~Nine Month Period Ended ~~September 30, 2018~~March 31, 2019


	Common Stock			Accumulated Deficit				Total				Common Stock						Accumulated Deficit				Total
($ in thousands)	Shares	Amount						Total			Shares			Amount				Accumulated Deficit				Total
Balance, June 30, 2018	59,998,811	$	375,436	Accumulated Deficit	$	(232,748	)		$	142,688			59,998,811			$	375,436		$	(232,748	)		$	142,688
Cumulative effect adjustment for ASC 606 adoption	—	—		376				376				—			—			200				200
Stock based compensation	13,344	370		—				370				13,344			370			—				370
Net loss	—	—		(6,320		)		(6,320		)		—			—			(5,288		)		(5,288		)
Balance, September 30, 2018	60,012,155	$	375,806	$	(238,692	)		$	137,114			60,012,155			375,806			(237,836		)		137,970
Stock based compensation												1,563			557			—				557
Net loss												—			—			(10,438		)		(10,438		)
Balance, December 31, 2018												60,013,718			376,363			(248,274		)		128,089
Stock based compensation												5,720			337			—				337
Net loss												—			—			(4,306		)		(4,306		)
Balance, March 31, 2019												60,019,438			$	376,700		$	(252,580	)		$	124,120

See accompanying notes.

USA Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three months ended September 30,						Nine months ended March 31,
($ in thousands)	2018			2017 (as restated)			2020			2019
OPERATING ACTIVITIES:
Net loss	$	(6,320	)	$	(2,171	)	$	(29,181	)	$	(20,032	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Non-cash stock based compensation	415			409			2,453			1,393
Gain on disposal of property and equipment	7			(18		)
Loss (gain) on disposal of property and equipment							88			(39		)
Non-cash interest and amortization of debt discount	22			17			1,040			286
Bad debt expense	509			168			1,400			1,537
Provision for inventory reserve	212			221			(434		)	2,699
Depreciation and amortization	2,147			1,370			5,193			5,899
Excess tax benefits	—			67
Non-cash lease expense							1,398			—
Deferred income taxes	4			16			15			14
Change in fair value of derivative							(1,070		)	—
Changes in operating assets and liabilities:
Accounts receivable	(3,678		)	(3,149		)	2,088			(6,288		)
Finance receivables, net	(63		)	9,168
Inventory, net	1,707			(3,900		)
Finance receivables							(113		)	(182		)
Inventory							2,204			(5,349		)
Prepaid expenses and other assets	(220		)	(103		)	(1,045		)	(1,545		)
Accounts payable and accrued expenses	(8,665		)	(1,490		)	(414		)	(3,836		)
Operating lease liabilities							(1,102		)	—
Deferred revenue	(210		)	171			(60		)	(316		)
Income taxes payable	11			(55		)	(86		)	42
Net cash (used in) provided by operating activities	(14,122		)	721
Net cash used in operating activities							(17,626		)	(25,717		)

INVESTING ACTIVITIES:
Purchase of property and equipment, including rentals	(693		)	(720		)	(1,711		)	(3,156		)
Proceeds from sale of property and equipment, including rentals	30			45			33			103
Net cash used in investing activities	(663		)	(675		)	(1,678		)	(3,053		)

FINANCING ACTIVITIES:
Proceeds from long-term debt issuance by Antara							14,248			—
Proceeds from equity issuance by Antara							17,879			—
Repayment of revolving credit facility							(10,000		)	—
Repayment of finance lease obligations and long-term debt							(2,413		)	(22,313		)
Payment of debt and equity issuance costs							(1,980		)	(135		)
Proceeds from exercise of common stock options	42			—			—			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 cash provided by (used in) financing activities							17,734			(22,406		)

Net (decrease) increase in cash and cash equivalents	(15,702		)	39,125			(1,570		)	(51,176		)
Cash and cash equivalents at beginning of year	83,964			12,745			27,464			83,964
Cash and cash equivalents at end of period	$	68,262		$	51,870		$	25,894		$	32,788

Supplemental disclosures of cash flow information:
Interest paid in cash	$	740		$	431		$	940		$	2,321
Income taxes paid in cash	$	—		$	—		$	25		$	12
Supplemental disclosures of noncash financing and investing activities:
Equipment and software acquired under capital lease	$	—		$	227
Equipment and software acquired under finance lease							$	—		$	5

See accompanying notes.

USA Technologies, Inc.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1. BUSINESS

~~USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”)~~The Company was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutions and value-added services that facilitate electronic payment transactions and consumer engagement services primarily within the unattended Point of Sale (“POS”) market. We are a leading provider in the small ticket, beverage and food vending industry in the United States and are expanding our solutions and services to other unattended market segments, such as amusement, commercial laundry, kiosk and others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as telemetry and 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 platform also enables consumer loyalty programs, national rewards programs and digital content, including advertisements and product information to be delivered at the point of sale.

On November 9, 2017, the Company acquired all of the outstanding equity interests of Cantaloupe Systems, Inc. (“Cantaloupe”), pursuant to the Agreement and Plan of Merger (“Merger Agreement”). Cantaloupe is a premier provider of cloud and mobile solutions for vending, micro markets, and office coffee service. The acquisition 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 combined 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.

INTERIM FINANCIAL INFORMATION

The accompanying unaudited condensed consolidated financial statements of 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, 2019 Annual Report on Form ~~10-K, which was filed on October 9, 2019 (the “Form 10-K”), and amended by Amendment No. 1 thereto (the “Form 10-K/A”), which has been filed concurrently with this Form 10-Q/A.~~10-K. 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 nine months ended ~~September 30, 2018~~March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending June 30, ~~2019.~~2020. The balance sheet at June 30, ~~2018~~2019 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.

2~~. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS~~

~~Overview~~

~~Concurrently~~In connection with the ~~filing~~preparation of ~~this Form 10-Q/A,~~ the Company filed the Form 10-K/A containing our audited consolidated financial statements for the fiscal years ended June 30, 2019 and 2018 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 as 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 20, “Unaudited Quarterly Data” of the Notes to Consolidated Financial Statements.~~

We have not filed and do not intend to file amendments to any of our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatements of our consolidated financial statements. In addition, we have not filed and do not intend to file a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018. Concurrent with this filing, we are filing Amendment No. 1 on Form 10-Q/A to our Quarterly Reports on Form 10-Q for each of the fiscal quartersthree months ended December 31, ~~2018~~2019, the Company identified certain adjustments that are required to be made to its fiscal year 2019 interim and annual financial statements. As a result, the Company has revised in this filing certain prior year interim and annual amounts in its condensed consolidated balance sheets, statements of operations and statements of cash flows and related disclosures. Such adjustments resulted in a $0.2 million decrease in net loss for the three months ended March 31, 2019 ~~(together with the Original Filing, the “Fiscal Year 2019 Form 10-Qs”). We had not timely filed our Annual Report on Form 10-K~~and a $1.5 million decrease in net loss for the ~~fiscal year~~nine months ended ~~June 30, 2018~~March 31, 2019. The Company does not believe these adjustments are material to the previously issued financial statements.

A novel strain of coronavirus (COVID-19) was first identified in China in December 2019 and subsequently declared a global pandemic in March 2020 by the ~~Fiscal Year 2019 Form~~

~~10-Qs as a result~~World Health Organization. COVID-19 containment measures began in parts of the ~~internal investigation~~United States in March 2020 resulting in forced closure of ~~the Audit Committee~~non-essential businesses and social distancing protocols. The effects of ~~the Company’s Board of Directors (the “Audit Committee”) and the subsequent restatement of certain of our prior period financial statements as more fully described below.~~

~~Background~~

On September 11, 2018, the Company announced that the Audit Committee with the assistance of independent legal and forensic accounting advisors, was in the process of conducting an internal investigation of current and prior period matters relatingCOVID-19 are not significant 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.

On January 14, 2019, the Company reported that the Audit Committee’s internal investigation was substantially completed, the principal findings of the internal investigation, and the remedial actions to be implemented by the Company as a result of the internal investigation. The Audit Committee found that, for certain of the customer transactions under review, the Company had prematurely recognized revenue. 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. 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.

On February 4, 2019, the Board of Directors of the Company, upon the recommendation of the Audit Committee, and based upon the adjustments to previously reported revenues proposed by the Audit Committee, determined that the following financial statements previously issued by the Company should no longer be relied upon: (1) the audited consolidated financial statements for the fiscal year ended June 30, 2017; and (2) the quarterly and year-to-date unaudited condensed consolidated financial statements for September 30, 2017, December 31, 2017, and March 31, 2018.

On October 7, 2019, the Board of Directors of the Company, upon the recommendation of the Audit Committee, and based upon the non-investigatory adjustments described below, determined that the following financial statements previously issued by the Company should no longer be relied upon: (1) the audited consolidated financial statements for the fiscal year ended June 30, 2015; (2) the audited consolidated financial statements for the fiscal year ended June 30, 2016; and (3) the quarterly and year-to-date unaudited condensed consolidated financial statements for September 30, 2016, December 31, 2016, and March 31, 2017.

During the course of the restatement process and related reaudit of prior period financial statements, management performed a review of certain historical significant accounting policies, significant transactions, and the methodologies and assumptions underlying significant reserves. As a result, in addition to the adjustments resulting from the Audit Committee investigation described above, the Company also corrected for out of period adjustments and errors identified during management's review of significant accounts and transactions.

~~The significant account and transaction review adjustments referred to above were reflected where appropriate in the restatement of our fiscal year 2017 financial statements, in the restatement of~~ our financial statements for the ~~fiscal quarters and year-to-date~~quarter ended ~~September 30, 2016 and 2017, December 31, 2016 and 2017, and~~ March 31, 2017 and 2018 appearing in Note 20 of the Form 10-K/A, and in the restated selected financial data for fiscal years 2015, 2016 and 2017 appearing in Item 6 of the Form 10-K, and primarily relate to the failure to maintain an effective control environment including ensuring that required accounting methodologies, policies and supporting documentation were in place and are primarily the result of:

•Since fiscal year 2014 the Company recognized a partial tax valuation allowance on its deferred tax assets. However, starting in fiscal year 2016 the Company should have recognized a full valuation allowance on its deferred tax assets.

•~~The Company historically inappropriately accounted for a fiscal year 2014 sale-leaseback transaction as an operating lease. The Company should have accounted for such transaction as a capital lease.~~

•The Company did not have effective processes and controls to recognize adequate reserves for sales-tax. In addition, the Company did not have effective processes to evaluate and estimate the Company’s reserves for bad debts, sales returns, and excess and obsolete inventory at the lower of cost or net realizable value. It was concluded that the previous processes were based on assumptions that were not sufficiently documented or supported.

•~~The Company previously capitalized certain sales commissions. The Company concluded that these costs did not meet the applicable criteria for capitalization and should have been expensed as incurred.~~

•~~The Company historically incorrectly classified its convertible preferred stock within shareholders’ equity on the Company’s consolidated balance sheets.~~

~~Effect of Restatement on Previously Filed September 30, 2017 Form 10-Q~~

~~A summary of~~2020. Further disclosure around the impact of COVID-19 as a subsequent event is discussed in Note 14.

LIQUIDITY

At June 30, 2019, the Company had $27.5 million in cash and a working capital surplus of $3.6 million. As of June 30, 2019, the Company was not in compliance with the fixed charge coverage ratio and the total leverage ratio of its Revolving Credit Facility

and Term Loan, which represented an event of default under the credit agreement. As a result, the Company classified all amounts outstanding ($11.5 million) under these ~~matters on income (loss) before taxes is presented below:~~credit facilities as current liabilities.

In response to its need to develop a cash management strategy, the Company developed a plan that included potentially seeking to extend the credit borrowings to beyond one year, securing a commitment for the sale of its long-term receivables, and obtaining outside financing.

($ 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 )

~~A summary~~Pursuant to a Stock Purchase Agreement dated October 9, 2019 (“SPA”) between the Company and Antara Capital Master Fund LP (“Antara”), the Company sold to Antara 3,800,000 shares of the ~~impact~~Company’s common stock at a price of ~~these matters~~$5.25 per share for gross proceeds of $19,950,000. Antara qualifies as an accredited investor under Rule 501 of the Securities Act of 1933, as amended (the "Act"), and the offer and sale of the shares was exempt from registration under Section 4(a)(2) of the Act. Antara agreed not to dispose of the shares for a period of 90 days from the closing date. In connection with the private placement, William Blair & Company, L.L.C. (“Blair”) acted as exclusive placement agent for the Company and received a cash placement fee of $1.2 million.

On October 9, 2019, the Company also entered into a commitment letter (“Commitment Letter”) with Antara, pursuant to which Antara committed to extend to the Company a $30.0 million senior secured term loan facility (“Term Facility”). Upon the execution of the Commitment Letter, the Company paid to Antara a non-refundable commitment fee of $1.2 million. In connection with the Commitment Letter, Blair acted as exclusive placement agent for the Company and received a cash placement fee of $750,000. On October 31, 2019, the Company entered into a Financing Agreement with Antara to draw $15.0 million on the ~~condensed consolidated~~Term Facility and agreed to draw an additional $15.0 million at any time between July 31, 2020 and April 30, 2021, subject to the terms of the Financing Agreement. The outstanding amount of the draws under the Term Facility bear interest at 9.75% per annum, payable monthly in arrears. The proceeds of the initial draw were used to repay the outstanding balance ~~sheet is presented below, excluding any tax effect from~~of the ~~restatement adjustments~~revolving line of credit loan due to JPMorgan Chase Bank, N.A. in the ~~aggregate:~~

($ 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 )

amount of $10.1 million, including accrued interest payable, and to pay transaction expenses, and the Company intends to utilize the balance for working capital and general corporate purposes. The ~~restatement adjustments were tax effected and any tax adjustments reflected in~~Commitment Letter provides that the ~~condensed consolidated financial statements in this note relate entirely to the tax effect on the restatement adjustments.~~

~~The tables below present the effect~~outstanding principal amount of the loan must be paid in full by no later than the maturity date of October 31, 2024; and that the Company is required to be in compliance with financial ~~statement adjustments~~covenants related to the ~~restatement discussed above~~minimum fixed charge coverage ratio beginning with the fiscal quarter ending June 30, 2020, maximum capital expenditures beginning with the fiscal quarter ending December 31, 2019, and minimum consolidated EBITDA beginning with the fiscal year ending June 30, 2020.

The Company is evaluating its options with respect to the Financing Agreement, including all rights and remedies that may be available to it. Based upon the current financial forecast for the fourth quarter of fiscal year 2020, without a refinancing or modification of existing terms within the Term Facility, the Company anticipates that as of June 30, 2020, it is highly likely the Company will not be in compliance with the minimum fixed charge coverage ratio and the minimum consolidated EBITDA of its Term Facility. Unless the Commitment Letter is rescinded, amended, or replaced, noncompliance would represent an event of default under the Term Facility, and, following the request of the Required Lenders (as such term is defined in the Term Facility), all unpaid principal of $15.0 million and accrued interest to Antara would immediately become due, in addition to a $0.8 million prepayment premium. In addition, all of the Company's ~~previously reported financial statements~~unamortized issuance costs and debt discount related to the Term Facility would be recognized upon repayment of the loan as interest expense in the period of repayment, which as of March 31, 2020 was $2.7 million.

As of June 30, 2019 the Company disclosed potential sales tax and ~~for~~related interest liabilities, which the Company estimated to be $18.2 million in the aggregate as of March 31, 2020. The Company has since engaged additional advisors to help evaluate such potential liabilities and the amount and timing of any such payments.

During the three months ended ~~September 30, 2017.~~March 31, 2020, the Company reached a settlement of a shareholder class action lawsuit pending in federal court. On May 29, 2020, the parties filed documents with the Court seeking preliminary approval of the settlement, and on June 9, 2020, the Court granted preliminary approval of the settlement and issued a scheduling order for further action on the settlement. The Company anticipates the payment of approximately $2.6 million toward that settlement in addition to amounts to be paid by the Company’s insurers. As discussed in Note 13, those amounts are contingent upon certain future events, but are expected to be paid during the next 12 months.

The Company is currently evaluating a variety of financing alternatives, including but not limited to negotiating modifications to the existing Term Facility. The Company has received a communication from an investor that it will provide sufficient financing in the event that the Company and Antara fail to agree to modifications to the existing Term Facility and other financing alternatives are not in place. The Company believes that its current financial resources, together with cash generated by operations and the financing available from the investor, if needed, will be sufficient to fund its current twelve-month operating budget from the date of issuance of these consolidated financial statements, alleviating any substantial doubt raised by the potential breach in our Term Facility with Antara.

~~The effect of the restatement on the previously filed condensed consolidated balance sheet as of September 30, 2017 is as follows:~~

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

~~The effect of the restatement on the previously filed condensed consolidated statement of operations for the three 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

~~The effect of the restatement on the previously filed condensed consolidated statement of cash flows for the three months ended September 31, 2017 is as follows:~~

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

3.2. ACCOUNTING POLICIES

RECENT ACCOUNTING PRONOUNCEMENTS

Accounting pronouncements adopted

In January 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which eliminates Step 2 from the goodwill impairment test. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We early adopted ASU 2017-04 for impairment tests to be performed on testing dates after July 1, 2017, which did not impact our condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which modifies the accounting for certain aspects of share-based payments to employees. The

new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits are to be separately classified as an operating activity apart from other income tax cash flows. The standard also allows the Company to repurchase more of an employee’s vested shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows. The Company adopted this standard as of July 1, 2017.

The primary impact of adoption was the recognition of excess tax benefits in the Company's provision for income taxes which is applied prospectively starting July 1, 2017 in accordance with the guidance. Adoption of the new standard resulted in the recognition of $31 thousand of excess tax benefits in the Company's provision for income taxes for the year ended 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. The adoption of ASU No. 2016-09 did not impact our statement of cash flows for the three months ended September 30, 2018 and 2017.

In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." The standard adds guidance to ASC 740, Income Taxes, that contain SEC guidance related to SAB 118. The standard is effective upon issuance. Refer to Note 12 for further information regarding the impact of the standard.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” ASU 2017-01 provides guidance in ascertaining whether a collection of assets and activities is considered a business. The Company adopted this standard as of July 1, 2018, and its adoption did not have a material effect on the Company’s 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. The Company adopted this standard as of July 1, 2018, and it will be applied prospectively to awards modified on or after the adoption date. Its adoption did not have a material effect on the Company's condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments.” The new guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this standard as of July 1, 2018 on a retrospective basis, and its adoption did not have a material effect on the Company’s condensed consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) (“the New Standard”). The New Standard provides a single model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The New Standard also requires expanded qualitative and quantitative disclosures about the nature, timing and uncertainty of revenue and cash flows rising from contracts with customers. The Company adopted the New Standard on July 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of July 1, 2018. Results for reporting periods beginning after July 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic revenue recognition methodology under ASC 605. Refer to Note 5 for further discussion.

~~Accounting pronouncements to be adopted~~

The Company is evaluating whether the effects of the following recent accounting pronouncements, or any other recently issued but not yet effective accounting standards, will have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02, ~~"Leases (Topic 842),"~~Leases, which ~~will require,~~requires, among other items, lessees to recognize a right of use asset and a related lease liability for most leases on the balance sheet. ~~Qualitative~~Lessees and lessors are required to disclose quantitative ~~disclosures will be enhanced~~and qualitative information about leasing arrangements to ~~better understand~~enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and requires a modified retrospective application, with early adoption permitted. The Company adopted this new guidance on July 1, 2019, using the optional modified retrospective transition ~~method.~~method applying the guidance to leases existing as of the effective date. The Company ~~expects~~has determined that there was no cumulative effect adjustment to beginning retained earnings on the ~~adoption to result in gross up on its~~ consolidated balance ~~sheets from~~sheet. We will continue to report periods prior to July 1, 2019 in our financial statements under prior guidance as outlined in Topic 840.

The Company’s adoption of ASU No. 2016-02 resulted in an increase in the ~~recognition of~~Company’s assets and liabilities ~~arising out~~ of ~~operating leases.~~approximately $3.9 million at July 1, 2019. The Company’s adoption of ASU No. 2016-02 did not have a material impact to the Company’s consolidated statements of operations or its consolidated statements of cash flows. Further, there was no impact on the Company’s covenant compliance under its current debt agreements as a result of the adoption of ASU No. 2016-02. The Company ~~will recognize assets for~~elected the ~~right to use the underlying leased property during the lease term and will recognize liabilities for the corresponding financial obligation to make lease payments to the lessor.~~

~~The Company plans to elect the transition~~ package of practical expedients ~~permitted within~~included in this guidance, which allowed it to not reassess: (i) whether any expired or existing contracts contain leases; (ii) the ~~standard, which eliminates the requirements to reassess prior conclusions about lease identification,~~ lease classification for any expired or existing leases; and, (iii) the initial direct ~~costs.~~costs for existing leases. From a lessee perspective, the Company elected the practical expedient related to treating lease and non-lease components as a single lease component for all leases as well as electing a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the Right-of-Use (“ROU”) assets and lease liabilities. From a lessor perspective, the Company also elected the practical expedient related to treating lease and non-lease components as a single component for those leases where the timing and pattern of transfer for the non-lease component and associated lease component are the same and the stand-alone lease component would be classified as an operating lease if accounted for separately. The ~~Company~~combined component is ~~substantially complete with~~then accounted for under Topic 606 or Topic 842 depending on the ~~evaluation~~predominant characteristic of the impact on the condensed consolidated financial statements of adopting the new lease standard and does not anticipate a 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 Company’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 process of finalizing changes to its systems and processes in conjunction with its review of lease agreements and will disclose the actual impact of adopting ASU 2016-02 in its interim report on Form 10-Q for the quarter ended September 30, 2019.

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements”. These amendments provide clarifications and corrections to certain ASC subtopics including “Compensation - Stock Compensation - Income Taxes” (Topic 718-740), “Business Combinations - Income Taxes” (Topic 805-740) and “Fair Value Measurement - Overall” (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The new guidance changes 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.The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.combined component.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.” The standard simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The Company adopted this ASU on July 1, 2019, and its adoption did not have a material effect on the Company’s condensed consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements”. These amendments provide clarifications and corrections to certain Accounting Standards Codification (“ASC”) subtopics including “Compensation - Stock Compensation - Income Taxes” (Topic 718-740), “Business Combinations - Income Taxes” (Topic 805-740) and “Fair Value Measurement - Overall” (Topic 820-10). The Company adopted this ASU on July 1, 2019, and its adoption did not have a material effect on the Company’s condensed consolidated financial statements.

Accounting pronouncements to be adopted

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326).” The new guidance changes ~~take effect~~the accounting for ~~public companies~~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 ~~starting~~beginning after December 15, ~~2018,~~2019, including interim periods within ~~that~~those fiscal ~~year.~~years. The Company ~~expects that~~is currently evaluating and assessing the ~~adoption of~~impact this ~~ASU would not~~guidance will have ~~a material impact~~ on ~~the Company’s~~its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other (Topic 350): Internal-Use Software.” This standard aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The

standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning July 1, 2020. The Company expects that the adoption of this ASU will not have a material impact on the Company’s condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.

~~4. ACQUISITION OF CANTALOUPE SYSTEMS, INC.~~

~~On November 9, 2017,~~3. LEASES

Lessee Accounting

The Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for office space, warehouses, automobiles and office equipment. USAT’s leases have lease terms of one year to eight years and some include options to extend and/or terminate the lease. The exercise of lease renewal options is at the Company’s sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term. The Company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or any material restrictive covenants.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is the collateralized rate of interest that we would pay to borrow over a similar term an amount equal to the lease payments, based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. USAT has lease agreements with lease and non-lease components, which are accounted for together as a single lease component. Lease expense for operating lease payments are recognized on a straight-line basis over the lease term.

Variable lease payments that are not based on an index or that result from changes to an index subsequent to the initial measurement of the corresponding lease liability are not included in the measurement of lease ROU assets or liabilities and instead are recognized in earnings in the period in which the obligation for those payments is incurred.

At March 31, 2020, the Company ~~acquired all~~has the following balances recorded in the balance sheet related to its lease arrangements:



($ in thousands)	Classification	As of March 31, 2020

Assets
Operating leases	Operating lease right-of-use assets	$	5,903
Finance leases	Property and equipment, net	73

Liabilities
Current:
Operating leases	Accrued expenses	1,082
Finance leases	Finance lease obligations and current obligations under long-term debt	55

Non-current:
Operating leases	Operating lease liabilities, non-current	5,025
Finance leases	Finance lease obligations and long-term debt, less current portion	$	24

Components of lease cost are as follows:



($ in thousands)	Three months ended March 31, 2020		Nine months ended March 31, 2020

Finance lease costs:
Amortization of ROU assets	$	25	$	79
Interest on lease assets	3		8
Operating lease costs*	515		1,970
Total	$	543	$	2,057

* Includes short-term lease and variable lease costs, which are not material.

Supplemental cash flow information and non-cash activity related to our leases are as follows:



($ in thousands)	Nine months ended March 31, 2020

Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities
Financing cash flows from finance leases	$	73
Operating cash flows from finance leases	9
Operating cash flows from operating leases	1,350

Non-cash activity
Right-of-use assets obtained in exchange for lease obligations:
Finance lease liabilities	12
Operating lease liabilities	$	3,384

Weighted-average remaining lease term and discount rate for our leases are as follows:



	Nine months ended March 31, 2020
Weighted-average remaining lease term (years)
Finance leases	1.4
Operating leases	5.4

Weighted-average discount rate
Finance leases	9.9	%
Operating leases	6.8	%

Maturities of lease liabilities by fiscal year for our leases are as follows:



($ in thousands)	Operating Leases			Finance Leases
Remainder of 2020	$	384		$	27
2021	1,440			46
2022	1,461			16
2023	1,493			2
2024	1,030			1
Thereafter	1,520			—
Total lease payments	$	7,328		$	92
Less: Imputed interest	(1,221		)	(13		)
Present value of lease liabilities	$	6,107		$	79

The Company's future minimum lease commitments as of June 30, 2019, under ASC Topic 840, the predecessor to Topic 842, are as follows:



($ in thousands)	Operating Leases		Capital Leases
2020	$	1,326	$	106
2021	1,151		34
2022	1,180		12
2023	1,208		1
2024	859		1
Thereafter	1,550		—
Total minimum lease payments	$	7,274	$	154
Less: interest			(14		)
Present value of minimum lease payments, net			140
Less: current obligations under capital leases			(106		)
Obligations under capital leases, noncurrent			$	34

Lessor Accounting

Lessor accounting remained substantially unchanged with the adoption of ASC Topic 842. The Company offers its customers financing for the lease of our POS electronic payment devices. We account for these transactions as sales-type leases. Our sales-type leases generally have a non-cancellable term of 60 months. Certain leases contain an end-of-term purchase option that is generally insignificant and is reasonably certain to be exercised by the lessee. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases, typically our JumpStart program leases. JumpStart terms are typically 36 months and are cancellable with 30 to 60 days' written notice. As discussed in Note 2, the Company has elected to combine lease and non-lease components for its operating leases and account for the combined components under ASC 606, which is the predominant characteristic of the ~~outstanding equity interests of Cantaloupe pursuant~~combined components. All QuickStart leases are sales-type and do not qualify for the election.

Lessor consideration is allocated between lease components and the non-lease components using the requirements under ASC 606. Revenue from sales-type leases is recognized upon shipment to the ~~Merger Agreement, for approximately $88.2 million~~customer and the interest portion is deferred and recognized as earned. The revenues related to the sales-type leases are included in ~~aggregate consideration. Cantaloupe is~~Equipment sales in the Consolidated Statements of Operations and a ~~premier provider of cloud and mobile solutions for vending, micro markets, and office coffee service.~~

The acquisition 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. 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.

~~The fair value~~portion of the ~~purchase price consideration~~lease payments as interest income. Revenue from operating leases is recognized ratably over the applicable service period with service fee revenue related to the leases included in License and transaction fees in the Consolidated Statements of Operations.

Property and equipment used for the operating lease rental program consisted of the following:



($ in thousands)	March 31, 2020			June 30, 2019
Cost	$	32,572		36,190
Accumulated depreciation	(27,664		)	(30,473		)
Net	$	4,908		$	5,717

($ 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

The ~~Company financed a portion~~Company’s net investment in sales-type leases (carrying value of lease receivables) and the purchase price with proceeds from a $25.0 million term loan (“Term Loan”) and $10.0 million of borrowings under a line of credit (“Revolving Credit Facility”), provided by JPMorgan Chase Bank, N.A., for an aggregate principal amount of $35.0 million. Referfuture minimum amounts to ~~Note 10 for additional details.~~

The acquisition of Cantaloupe was accounted for as a business combination using the acquisition method. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the transaction were recorded at the date of acquisition at their respective fair values using assumptions that are subject to change. The Company has finalized its valuation of certain assets and liabilities recorded in connection with this transactionbe collected on these lease receivables as of ~~June 30, 2018.~~

~~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:~~

($ in thousands)
November 9, 2017
(As Restated)
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

Amounts allocated to intangible assets included $18.9 million related to customer relationships, $10.3 million related to developed technology, and $1.6 million related to trade names. The fair value of the acquired customer relationships was determined using the excess earnings method. The fair value of both the acquired developed technology and the acquired trade names was determined using the relief from royalty method. The estimated useful life of the acquired intangible assets ranged fromMarch 31, 2020 are disclosed within Note 6 ~~to 18 years, with a weighted average estimated useful life of 13 years. The related amortization will be recorded on a straight-line basis.~~

Goodwill of $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.

~~Supplemental disclosure of pro forma information~~

The following supplemental unaudited pro forma information presents the combined results of USAT and Cantaloupe as if the acquisition of Cantaloupe occurred on July 1, 2016. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on July 1, 2016, nor are they indicative of any future results.

The pro forma results include adjustments for the preliminary purchase accounting impact of the Cantaloupe acquisition (including, but not limited to, amortization associated with the acquired intangible assets, and the interest expense and amortization of deferred financing fees associated with the Term Loan and Revolving Credit Facility that were used to finance a portion of the purchase price, along with the related tax impacts) and the alignment of accounting policies. Other material non-recurring adjustments are reflected in the pro forma and described below:

Three months ended September 30, 2017
(as restated)
($ 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

~~The supplemental unaudited pro forma earnings for the three months ended September 30, 2017 were adjusted to exclude $0.8 million of integration and acquisition costs.~~- Finance Receivables.

5.4. REVENUE

~~Adoption of ASC 606, Revenue from Contracts with Customers~~

In applying the new revenue guidance, the Company evaluated its population of open contracts with customers on July 1, 2018. The effect 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 )

The impact of the adoption of ASC 606 by financial statement line item within the Condensed Consolidated Balance Sheet as of September 30, 2018 and Condensed Consolidated Statement of Operations for the three months ended September 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 )

The adoption of ASC 606 had no effect on the cash flows from operating activities, investing activities or financing activities included in the Condensed Consolidated Statement of Cash Flows for the three months ended September 30, 2018.

~~Revenue Recognition Under ASC 606 (Periods commencing after July 1, 2018)~~

The Company provides an end-to-end payment solution which integrates hardware, software, and payment processing in the self-service retail market. The Company has contractual agreements with customers that set forth the general terms and conditions of the relationship, including pricing of goods and services, payment terms and contract duration. Revenue is recognized when the obligation under the terms of the Company’s contract with its customer is satisfied and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.

The foundation of the Company’s business model is to act as the Merchant of Record for its sellers. We provide cashless vending payment services in exchange for monthly service fees, in addition to collecting usage-based consideration for completed transactions. The contracts we enter into with third-party suppliers provide us with the right to access and direct their services when processing a transaction. The Company combines the services provided by third-party suppliers to enable customers to accept cashless payment transactions, indicating that it controls all inputs in directing their use to create the combined service. ~~Additionally, we sell cashless payment devices (e.g., e-Ports, Seed), which are either directly sold or leased through the Company’s QuickStart or JumpStart programs.~~

~~Cashless vending services represent a single performance obligation as the combination of the services provided gives the customer the ability to accept cashless payments.~~ Certain services are distinct, but are not accounted for separately as the rights are conterminous, they are transferred concurrently and the outcome is the same as accounting for the services as individual performance obligations. The single performance obligation is determined to be a stand-ready obligation to process payments whenever a consumer intends to make a purchase at a point-of-sale device. As the Company is unable to predict the timing and quantity of transactions to be processed, the assessment of the nature of the performance obligation is focused on each time increment rather than the underlying activity. Therefore, cashless vending services are viewed to comprise a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer. As a result, the promise to stand ready is accounted for as a single performance obligation.

Revenue related to cashless vending services is recognized over the period in which services are provided, with usage-based revenue recognized as transactions occur. Consideration for this service includes fixed fees for standing ready to process transactions, and generally also includes usage-based fees, priced as a percentage of transaction value and/or a specified fee per transaction processed. ~~The total transaction price of usage-based services is determined to be variable consideration as it is based on unknown quantities of services to be performed over the contract term.~~ ~~The underlying variability is satisfied each day the service is performed and provided to the customer.~~ ~~Clients are billed for cashless vending services on a monthly basis and for transaction processing as transactions occur.~~

Equipment sales represent a separate performance obligation, the majority of which is satisfied at a point in time through outright sales or sales-type leases (ASC 840) when the equipment is delivered to the customer. Revenues related to JumpStart equipment

~~are recognized over time as the customer obtains the right to use the equipment through an operating leases, however these are not significant to the Company’s total revenue.~~

USAT will occasionally offer volume discounts, rebates or credits on certain contracts, which is considered variable consideration. USAT uses either the most-likely or estimated value method to estimate the amount of the consideration, based on what the Company expects to better predict the amount of consideration to which it will be entitled to on a contract-by-contract basis. The Company will qualitatively assess if the variable consideration should be constrained to prevent possible significant reversal of revenue, as applicable.

The Company assesses the goods and/or services promised in each customer the contract and separately identifies a performance obligation for each promise to transfer to the customer a distinct good or service. The Company then allocates the transaction price to each performance obligation in the contract using relative standalone selling prices. The Company determines standalone selling prices based on the price at which a good or service is sold separately. If the standalone selling price is not observable through historic data, the Company estimates the standalone selling price by considering all reasonably available information, including market data, trends, as well as other company or customer-specific factors.

The Company recognizes fees charged to our customers primarily on a gross basis as transaction revenue when we are the principal in respect of completing a payment transaction. As a principal to the transaction, we control the service of completing payments for our customers through the payment ecosystem. The fees paid to payment processors and other financial institutions are recognized as transaction expense. For certain transactions in which we act in the capacity as an agent, those transactions are recorded on a net basis.

Disaggregated Revenue

Based on similar operational and economic characteristics, the Company’s revenue from contracts with customers is disaggregated by License and ~~Transaction Fees~~transaction fees and Equipment ~~Sales,~~sales, as reported in the Company’s Condensed Consolidated Statements of Operations. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are influenced by economic factors, and also ~~represents~~represent the level at which management makes operating decisions and assesses financial performance.

Transaction Price Allocated to Future Performance Obligations

In determining the transaction price allocated to unsatisfied performance obligations, we did not include non-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.

The following table reflects the estimated fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:



($ in thousands)	As of March 31, 2020

2020	$	3,536
2021	12,668
2022	11,120
2023	8,524
2024 and thereafter	5,000
Total	$	40,848

($ 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

~~Warranties and Returns~~

The Company offers standard warranties that provide the customer with assurance that its equipment will function in accordance with contract specifications. The Company’s standard warranties are not sold separately, but are included with each customer purchase. Warranties are not considered separate performance obligations, and therefore, are estimated and recorded at the time of sale. The Company estimates an allowance for equipment returns at the date of sale on a monthly basis.

~~Accounts Receivable, Contract Assets and Contract Liabilitie~~s

A contract with a customer creates legal rights and obligations. As the Company performs performance obligations under customer contracts, a right to unconditional consideration is recorded as an account receivable.

Contract liabilities represent consideration received from customers in excess of revenues recognized (i.e., deferred revenue). Contract liabilities are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.Liabilities

The Company’s contract liability (i.e., deferred revenue) balances are as follows:



	Three months ended March 31,	Nine months ended March 31,
($ in thousands)	2020	2020

Deferred revenue, beginning of the period	1,629	1,681
Deferred revenue, end of the period	1,621	1,621
Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period	120	467

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

The change in the contract liabilities period-over-period is primarily ~~attributable to~~ the result of timing difference between the Company’s satisfaction of a performance obligation and payment from the customer.

Contract Costs

The Company incurs costs to obtain contracts with customers, primarily in the form of commissions to sales employees. The Company recognizes as an asset the incremental costs of obtaining a contract with a customer if it expects to recover these costs. The Company currently does not incur material costs to fulfill its obligations under a contract once it is obtained but before transferring goods or services to the customer. At ~~September 30, 2018,~~March 31, 2020, the Company had net capitalized costs to obtain contracts of $0.3 million ~~and $1.3 million~~ included in ~~prepaid~~Prepaid expenses and other current assets and ~~other~~$1.7 million included in Other noncurrent assets on the ~~condensed consolidated balance sheet, respectively.~~

~~Contract costs are amortized on a systematic basis consistent with the transfer to the customer~~Condensed Consolidated Balance Sheet. None of the 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 capitalized 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.~~

In order to determine the appropriate amortization period for contract costs, the Company considers a number of factors, including expected early terminations, estimated terms of customer relationships, the useful lives of technology USAT uses to provide goods and services to its customers, whether future contract renewals are expected and if there is any incremental commission to be paid on a contract renewal. The Company amortizes these assets over the expected period of benefit. Costs to obtain a contract with an expected period of benefit of one year or less are expensed when incurred.were impaired. During the three and nine months ended ~~September 30, 2018,~~March 31, 2020, amortization of capitalized contract costs was $0.1 ~~million.~~million and $0.4 million, respectively.

6.5. RESTRUCTURING/INTEGRATION COSTS

On October 17, 2019, Stephen P. Herbert resigned as Chief Executive Officer (“CEO”) of the Company and as a member of the Company’s Board of Directors. Mr. Herbert received a severance payment in the amount of $400,000 in a lump sum, less applicable taxes, on October 25, 2019, along with certain other benefits as more fully described in the Company's Current Report on Form 8-K filed with the SEC on October 18, 2019.

Subsequent to the Cantaloupe acquisition, the Company initiated workforce reductions to integrate the Cantaloupe business for which costs totaled $2.1 million for the year ended June 30, 2018. The Company included these severance charges under “Integration and acquisition 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~~All amounts were paid ~~during the next twelve months.~~as of December 31, 2019.

No additional severance activity related to the integration of the Cantaloupe business was recorded for the three months ended March 31, 2020. The following table summarizes the Company’s severance activity for the three and six months ended ~~September 30, 2018:~~December 31, 2019 related to the workforce reductions to integrate the Cantaloupe business:



($ in thousands)	Workforce reduction
Balance at July 1, 2019	$	175
Plus: additions	26
Less: cash payments	—
Balance at September 30, 2019	$	201
Plus: additions	9
Less: cash payments	(210		)
Balance at December 31, 2019	$	—

($ in thousands)
Workforce
reduction
Balance at July 1, 2018 $ 1,019
Plus: additions 137
Less: cash payments (301 )
Balance at September 30, 2018 $ 855

7.6. FINANCE RECEIVABLES

~~Finance~~The Company's finance receivables consist of financed devices under the Quickstart program and Cantaloupe devices contractually associated with the Seed platform. Predominately all of the Company's finance receivables agreements are classified as non-cancellable 60 month sales-type leases. As of March 31, 2020 and June 30, 2019 finance receivables consist of the following:



($ in thousands)	March 31, 2020		June 30, 2019
Current finance receivables, net	$	7,941	6,727
Finance receivables due after one year, net	11,541		12,642
Total finance receivables, net of allowance of $702 and $606, respectively	$	19,482	$	19,369

($ in thousands) September 30,
2018 June 30,
2018
Finance 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

The Company routinely evaluates outstanding finance receivables for 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 principal payments as scheduled.

At ~~September 30, 2018~~March 31, 2020 and June 30, ~~2018,~~2019, credit quality indicators consisted of the following:



($ in thousands)	March 31, 2020		June 30, 2019
Performing	$	19,482	$	19,369
Nonperforming	702		606
Total	$	20,184	$	19,975

($ in thousands) September 30,
2018 June 30,
2018
Performing $ 17,911
$ 17,849
Nonperforming 7
12
Total $ 17,918
$ 17,861

Age Analysis of Past Due Finance Receivables
As of September 30, 2018
($ in thousands) Current
30 and Under
Days Past
Due

31 – 60
Days Past
Due

61 – 90
Days Past
Due

Greater than
90 Days Past
Due

Total
Finance
Receivables
QuickStart Leases $ 17,465
$ 126
$ 44
$ 102
$ 181
$ 17,918

Age Analysis of Past Due Finance Receivables
As of June 30, 2018
($ in thousands) Current
30 and Under
Days Past
Due

31 – 60
Days Past
Due

61 – 90
Days Past
Due

Greater than
90 Days Past
Due

Total
Finance
Receivables
QuickStart Leases $ 17,609
$ 56
$ 7
$ 56
$ 133
$ 17,861

8.As part of the financing under the Quickstart program and Cantaloupe devices contractually associated with the Seed platform, the Company has contractually granted deferred payment terms, where the entire sequence of up to 60 monthly payments are deferred by an agreed upon period. The “Deferred Payment Arrangements / Timing” column represents amounts subject to the agreed upon deferral period or amounts subject to adjustments related to situations where a third party is financing the receivable. The “Other Finance Receivables” column represents an aging schedule for finance receivables not subject to such deferral arrangements and other non-performing receivables.



	March 31, 2020						June 30, 2019
($ in thousands)	Deferred Payment Arrangements / Timing		Other Finance Receivables		Total		Total
Current	$	18,367	$	353	$	18,720	$	19,133
0-30 days	37		103		140		190
31-60 days	193		44		237		49
61-90 days	34		36		70		146
Greater than 91 days	513		504		1,017		457
Total finance receivables (gross)	$	19,144	$	1,040	$	20,184	$	19,975

Cash to be collected on our performing finance receivables due for each of the fiscal years are as follows:



($ in thousands)
2020	$	4,977
2021	6,159
2022	5,513
2023	3,908
2024	1,957
Thereafter	79
Total amounts to be collected	22,593
Less: interest	(2,409		)
Less: allowance for nonperforming receivables	(702		)
Total finance receivables	$	19,482

7. EARNINGS (LOSS) PER SHARE

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



	Three months ended March 31,
($ in thousands, except per share data)	2020			2019

Numerator for basic and diluted loss per share
Net loss	$	(9,295	)	$	(4,306	)
Preferred dividends	(334		)	(334		)
Net loss applicable to common shareholders	$	(9,629	)	(4,640		)

Denominator for basic loss per share - Weighted average shares outstanding	64,096,778			60,065,053
Effect of dilutive potential common shares	—			—
Denominator for diluted loss per share - Adjusted weighted average shares outstanding	64,096,778			60,065,053

Basic loss per share	$	(0.15	)	$	(0.08	)
Diluted loss per share	$	(0.15	)	$	(0.08	)


	Three months ended September 30,						Nine months ended March 31,
($ in thousands, except per share data)	2018			2017 (as restated)			2020			2019

Numerator for basic and diluted loss per share
Net loss	$	(6,320	)	$	(2,171	)	$	(29,181	)	$	(20,032	)
Preferred dividends	(334		)	(334		)	(668		)	(668		)
Net loss available to common shareholders	$	(6,654	)	$	(2,505	)
Net loss applicable to common shareholders							$	(29,849	)	$	(20,700	)

Denominator for basic loss per share - Weighted average shares outstanding	60,053,912			47,573,364			62,591,947			60,059,594
Effect of dilutive potential common shares	—			—			—			—
Denominator for diluted loss per share - Adjusted weighted average shares outstanding	60,053,912			47,573,364			62,591,947			60,059,594

Basic loss per share	$	(0.11	)	$	(0.05	)	$	(0.48	)	$	(0.34	)
Diluted loss per share	$	(0.11	)	$	(0.05	)	$	(0.48	)	$	(0.34	)

~~Antidilutive~~

Anti-dilutive shares excluded from the calculation of diluted loss per share were ~~1,420,301 and 1,206,471~~1,625,414 for the three and nine months ended ~~September 30, 2018~~March 31, 2020 and ~~September 30, 2017.~~1,240,302 for the three and nine months ended March 31, 2019.

9.8. GOODWILL AND INTANGIBLES

Intangible asset balances and goodwill consisted of the following:


	As of September 30, 2018								As of March 31, 2020
($ in thousands)	Gross		Accumulated Amortization			Net		Amortization Period	Gross		Accumulated Amortization			Net		Amortization Period
Intangible assets:
Non-compete agreements	$	2	$	(2	)	$	—	2 years	$	2	$	(2	)	$	—	2 years
Brand and tradenames	1,695		(291		)	1,404		3 - 7 years	1,695		(642		)	1,053		3 - 7 years
Developed technology	10,939		(1,882		)	9,057		5 - 6 years	10,939		(4,649		)	6,290		5 - 6 years
Customer relationships	19,049		(977		)	18,072		10 - 18 years	19,049		(2,574		)	16,475		10 - 18 years
Total intangible assets	$	31,685	$	(3,152	)	$	28,533		$	31,685	$	(7,867	)	$	23,818

Goodwill	64,149		—			64,149		Indefinite	63,945		—			63,945		Indefinite

Total intangible assets & goodwill	$	95,834	$	(3,152	)	$	92,682		$	95,630	$	(7,867	)	$	87,763



	As of June 30, 2019
($ in thousands)	Gross		Accumulated Amortization			Net		Amortization Period
Intangible assets:
Non-compete agreements	$	2	$	(2	)	$	—	2 years
Brand and tradenames	1,695		(470		)	1,225		3 - 7 years
Developed technology	10,939		(3,266		)	7,673		5 - 6 years
Customer relationships	19,049		(1,776		)	17,273		10 - 18 years
Total intangible assets	$	31,685	$	(5,514	)	$	26,171

Goodwill	63,945		—			63,945		Indefinite

Total intangible assets & goodwill	$	95,630	$	(5,514	)	$	90,116

As of June 30, 2018
($ in thousands) Gross
Accumulated
Amortization
Net
Amortization
Period
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

For the three and nine months ended ~~September 30, 2018 and September 30, 2017~~March 31, 2020 there was $0.8 million and ~~$44 thousand~~$2.4 million in amortization expense related to intangible assets, respectively, as compared to the three and nine months ended March 31, 2019, for which there was $0.8 million and $2.4 million in amortization expense related to intangible assets, respectively.

As set forth in the Merger Agreement, the Company finalized a post-working capital adjustment of $0.3 million during the quarter ended March 31, 2018. Accordingly, this post-working capital adjustment is reflected within goodwill as of June 30, 2018.

~~10.~~9. DEBT AND OTHER FINANCING ARRANGEMENTS

The Company's debt and other financing arrangements as of ~~September 30, 2018~~March 31, 2020 and June 30, ~~2018~~2019 consisted of the following:


	As of September 30,			As of June 30,			As of March 31,			As of June 30,
($ in thousands)	2018			2018			2020			2019

Term Facility							$	15,000		$	—
Revolving Credit Facility	$	10,000		$	10,000		—			10,000
Term Loan	22,708			23,333			—			1,458
Other	2,355			2,689
Less: unamortized issuance costs	(242		)	(256		)
Other, including finance lease obligations							423			1,323
Less: unamortized issuance costs and debt discount							(2,745		)	(8		)
Total	34,821			35,766			12,678			12,773
Less: debt and other financing arrangements, current	(33,889		)	(34,639		)	(381		)	(12,497		)
Debt and other financing arrangements, noncurrent	$	932		$	1,127		$	12,297		$	276

Details of interest expense presented on the Condensed Consolidated Statements of Operations are as follows:


	Three months ended September 30,				Three months ended March 31,				Nine months ended March 31,
($ in thousands)	2018		2017 (as restated)		2020		2019		2020		2019
Heritage Line of Credit	$	—	$	133
Term Facility					$	542	$	—	$	921	$	—
Revolving Credit Facility	175		—		—		170		303		526
Term Loan	350		—		—		456		160		1,158
Other interest expense	261		340		141		287		597		834
Total interest expense	$	786	$	473	$	683	$	913	$	1,981	$	2,518

~~Avidbank Line of Credit~~

On January 15, 2016, the Company and Avidbank Corporate Finance, a division of Avidbank (“Avidbank”) entered into a Fifteenth Amendment (the “Amendment”) to the Loan and Security Agreement (as amended, the “Avidbank Loan Agreement”) previously entered into between them. The Avidbank Loan Agreement provided for a secured revolving line of credit facility (the “Avidbank Line of Credit”) of up to $7.0 million and a three-year term loan to the Company in the principal amount of $3.0 million (the

“Avidbank Term Loan”). The Amendment increased the amount available under the Avidbank Line of Credit to $7.5 million less the amount then outstanding under the Avidbank Term Loan. The outstanding balance of the amounts advanced under the Avidbank Line of Credit bear interest at 2% above the prime rate as published in The Wall Street Journal or five percent (5%), whichever is higher. The Avidbank Term Loan was used by the Company to repay to Avidbank an advance that had been made to the Company under the Avidbank Line of Credit in December 2015, and which had been used by the Company to pay for the VendScreen business. The Avidbank Term Loan provides that interest only is payable monthly during year one, interest and principal is payable monthly during years two and three, and all outstanding principal and accrued 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 1.75% above the prime rate as published from time to time by The Wall Street Journal, or five percent (5%), whichever is higher.

~~Heritage Line of Credit~~

In March 2016, the Company entered into a Loan and Security Agreement with Heritage Bank of Commerce (“Heritage Bank”), providing for a secured 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 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. 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.

~~During March 2017, the Company entered into the third amendment with Heritage Bank that extended the maturity date of the Line of Credit from March 29, 2017 to September 30, 2018.~~

On November 9, 2017, the Company paid all amounts due on the Loan and Security Agreement with Heritage Bank of Commerce. The Company recorded a charge of $0.1 million to write-off any remaining debt issuance costs related to the Line of Credit to interest expense in the quarter 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.

Revolving Credit Facility and Term Loan with JPMorgan Chase

On November 9, 2017, in connection with the acquisition of Cantaloupe, the Company entered into a five year credit agreement among the Company, as the borrower, its subsidiaries, as guarantors, and JPMorgan Chase Bank, N.A., as the lender and administrative agent for the lender (the “Lender”), pursuant to which the Lender (i) made a $25 million Term Loan to the Company and (ii) provided the Company with the Revolving Credit Facility under which the Company may borrow revolving credit loans in an aggregate principal amount not to exceed $12.5 million at any time.

The proceeds of the Term Loan and borrowings under the Revolving Credit Facility, in an aggregate principal amount equal to $35.0 million, were used by the Company to finance a portion of the purchase price for the acquisition of Cantaloupe ($27.8 million) and repay existing indebtedness ~~to Heritage Bank of Commerce~~ ($7.2 million). Future borrowings under the Revolving Credit Facility may be used by the Company for working capital and general corporate purposes of the Company and its subsidiaries. The principal amount of the Term Loan is payable quarterly beginning on December 31, 2017 and the Term Loan, allAll advances under the Revolving Credit Facility and all other obligations ~~must~~were required to be paid in full at maturity on November 9, 2022.

Loans under the five year credit agreement ~~bear~~bore 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~~total leverage ratio as of the last day of each fiscal quarter. The applicable interest rate on the loans for the ~~three months~~year to date ended ~~September 30, 2018 is~~October 31, 2019 was LIBOR plus 4%. The Term Loan and Revolving Credit Facility ~~contain~~contained customary representations and warranties and affirmative and negative covenants and ~~require~~required the Company to maintain a minimum quarterly ~~Total Leverage Ratio~~total leverage ratio and ~~Fixed Charge Coverage Ratio.~~fixed charge coverage ratio. The Revolving Credit Facility and Term Loan also ~~require~~required the Company to furnish various financial information on a quarterly and annual basis.

As of June 30, 2019, the Company was not in compliance with the fixed charge coverage ratio and the total leverage ratio, which represented an event of default under the Term Facility and the Company classified all amounts outstanding under the Revolving Credit Facility and Term Loan as current liabilities as of June 30, 2019.

Due to the Company'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 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~~September 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~~and 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~~On October 31, 2019, the Company ~~cannot incur~~repaid the outstanding balance on the Revolving Credit Facility.

Term Facility with Antara

On October 9, 2019, as a result of seeking additional ~~borrowings~~financing sources to support the Company's operating activities, the Company entered into a commitment letter with Antara Capital Master Fund LP (“Antara”), pursuant to which Antara committed to extend to the Company a $30.0 million senior secured term loan facility (“Term Facility”). On October 31, 2019, the Company entered into a Financing Agreement with Antara to draw $15.0 million on

the Term Facility and agreed to draw an additional $15.0 million at any time between July 31, 2020 and April 30, 2021, subject to the terms of the Financing Agreement. If the Company fails to make the subsequent draw on the Term Facility by April 30, 2021, the Company shall pay Antara a commitment termination fee equal to 3% of the subsequent draw commitment. The outstanding amount of the draws under the Term Facility bear interest at 9.75% per annum, payable monthly in arrears. The proceeds of the initial draw were used to repay the outstanding balance of the Revolving Credit Facility ~~without~~due to JPMorgan Chase Bank, N.A. in the ~~Lender‘s prior consent. Further, the parties agreed that the applicable~~amount of $10.1 million, including accrued interest ~~rate on the Revolving Credit Facility~~payable, and ~~Term Loan will be LIBOR plus 4% until such time as~~to pay transaction expenses, and the Company ~~delivers certain~~intends to utilize the balance for working capital and general corporate purposes. The outstanding principal amount of the loan must be paid in full by no later than the maturity date of October 31, 2024. The Company is required to be in compliance with financial ~~information required under~~covenants related to the ~~credit agreement.~~

~~On March 29,~~minimum fixed charge coverage ratio beginning with the fiscal quarter ending June 30, 2020, maximum capital expenditures beginning with the fiscal quarter ending December 31, 2019, and ~~September 18, 2019,~~minimum consolidated EBITDA beginning with the fiscal year ending June 30, 2020. As of March 31, 2020, the Company ~~obtained waivers~~was in compliance with its capital expenditures financial covenant.

The Company is evaluating its options with respect to the Financing Agreement, including all rights and remedies that may be available to it. Based upon the current financial forecast for the fourth quarter of fiscal year 2020, without a refinancing or modification of existing terms within the Term Facility, the Company anticipates that as of June 30, 2020, it is highly likely the Company will not be in compliance with the minimum fixed charge coverage ratio and the minimum consolidated EBITDA of its Term Facility. Unless the Commitment Letter is rescinded, amended, or replaced, noncompliance would represent an event of default under the ~~credit agreement. The event of default is~~Term Facility, and, following the ~~result~~request of the ~~Company having maintained deposits on account with~~Required Lenders (as such term is defined in the Term Facility), all unpaid principal of $15.0 million and accrued interest to Antara would immediately become due, in addition to a ~~financial institution in excess~~$0.8 million prepayment premium. In addition, all of the ~~amounts permitted by the credit agreement~~Company's unamortized issuance costs and ~~not having transferred certain deposit accounts~~debt discount related to the ~~Lender. The waiver requires~~Term Facility would be recognized upon repayment of the ~~Company to remedy~~loan as interest expense in the ~~event~~period of ~~default by~~repayment, which as of March 31, 2020 ~~by which~~was $2.7 million.

The Company may prepay any principal amount outstanding on the Term Facility plus a prepayment premium of 5% (if prepaid on or prior to December 31, 2020), 3% (between January 1, 2021 and December 31, 2021), 1% (between January 1, 2022 and December 31, 2022) and 0% thereafter. Under the Term Facility, the Company is subject to mandatory prepayments as a result of certain asset sales, insurance proceeds, issuances of disqualified capital stock, and issuances of debt. These mandatory prepayments are subject to the prepayment premium that applies to voluntary prepayments. The Company is also subject to annual mandatory prepayments ranging from 0% to 75% of excess cash flow depending upon the consolidated total leverage ratio measured at the end of each fiscal year beginning with the fiscal year ending June 30, 2020. These mandatory prepayments are not subject to the aforementioned prepayment premium.

As discussed in Note 12, on October 9, 2019, the Company also sold shares of the Company’s common stock to Antara at a price below market value. Since the Term Facility and equity issuance were negotiated in contemplation of each other and executed within a short period of time, the Company ~~expects~~evaluated the debt and equity financing as a combined arrangement, and estimated the fair values of the debt and equity components to allocate the proceeds, net of the registration rights agreement liability (Note 12) on a relative fair value basis between the debt and equity components. The non-lender fees incurred to establish the debt and equity financing arrangement were allocated to the debt and equity components, which includes the delayed draw commitment, on a relative fair value basis and capitalized on the Company’s balance sheet. $0.9 million was allocated to debt issuance costs which is amortized on an effective interest method into interest expense over the term of the Term Facility and $0.1 million was allocated to debt commitment fees which is amortized on a straight-line basis through April 30, 2021.

The Term Facility was further evaluated for the existence of embedded features to be bifurcated from the amount allocated to the debt component. The Term Facility agreement contains a mandatory prepayment feature that was determined to be an embedded derivative, requiring bifurcation and fair value recognition for the derivative liability. The fair value of this derivative liability is remeasured at each reporting period, with changes in ~~compliance with~~fair value recognized in the ~~underlying covenant. As~~consolidated statement of operations and any changes in the assumptions used in measuring the fair value of the derivative liability could result in a material increase or decrease

in its carrying value. The allocation of the proceeds to the debt component and the bifurcation of the embedded derivative liability resulted in a $2.1 million debt discount that will be amortized as a credit to interest expense over the term of the Term Facility.

If the Company does not meet its financial covenants as of June 30, ~~2019, the Company is not in compliance with the fixed charge coverage ratio~~2020 and the ~~total leverage ratio, which represents an event~~debt and all accrued interest immediately becomes due as described above, all of ~~default under~~ the ~~credit agreement. The Company has classified all amounts outstanding under~~Company's unamortized issuance costs and debt discount would be recognized upon repayment of the ~~Revolving Credit Facility~~loan as interest expense in the period of repayment. At March 31, 2020, the unamortized balance of the $0.9 million debt issuance costs and ~~Term Loan as current liabilities as of September 30, 2018 and June 30, 2018.~~the $2.1 million debt discount was $2.7 million.

Other ~~Long-Term~~ Borrowings

In connection with the acquisition of Cantaloupe, the Company assumed debt of $1.8 million with an outstanding balance of ~~$1.3~~$0.3 million and ~~$1.4~~$0.8 million as of ~~September 30, 2018~~March 31, 2020 and June 30, ~~2018 respectively. The balance for the period ended September 30, 2018 and June 30, 2018 is~~2019, respectively, comprised of: (i) ~~$0.4~~$0.0 million and ~~$0.4~~$0.2 million of promissory notes bearing an interest rate of 5% and maturing on April 5, 2020 with principal and interest payments due monthly; (ii) ~~$0.6~~$0.3 million and ~~$0.7~~$0.4 million of promissory notes bearing an interest rate of 10% and maturing on April 1, 2021 with principal and interest payments due quarterly; and (iii) ~~$0.2~~$0.1 million ~~and $0.3 million~~as of June 30, 2019 of promissory notes bearing an interest rate of 12% ~~and maturing~~that matured on December 15, ~~2019 with principal and interest payments due quarterly.~~

The Company periodically enters into capital lease obligations to finance certain office and network equipment for use in its daily operations. At September 30, 2018 and June 30, 2018, such capital lease obligations were $0.3 million and $0.4 million , respectively. The interest rates on these obligations range from approximately 5.6% to 9.0% and the lease terms range from 2 to 5 years.2019.

~~11.~~10. FAIR VALUE MEASUREMENTS

Financial assets and liabilities are initially recorded at fair value. The carrying amounts of certain of the Company’s financial instruments, ~~principally accounts receivable,~~including cash equivalents, accounts receivable, accounts payable and accrued expenses, ~~and short-term finance receivables,~~ are carried at cost which approximates fair value due to the short-term maturity of these ~~instruments.~~instruments and are Level 1 assets or liabilities of the fair value hierarchy.

The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

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

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

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

The Company's embedded derivative liability is measured at fair value using a probability-weighted discounted cash flow model and is classified as a Level 3 liability of the fair value hierarchy due to the use of significant unobservable inputs. The liability is included as a component of Accrued expenses, less current portion on the consolidated balance sheets and subject to remeasurement to fair value at the end of each reporting period. For the three and nine months ended March 31, 2020, the Company recognized the change as a component of Other income (expense) in its consolidated statements of operations. The assumptions used in the discounted cash flow model of the embedded derivative liability include: (1) management's estimates of the probability and timing of future cash flows and related events; (2) the Company's risk-adjusted discount rate that includes a company-specific risk premium; and (3) the Company's cost of debt. The assumptions used in the discounted cash flow model were based on information known to the Company as of March 31, 2020. As described above, based on current forecasts, it is highly likely the Company will not be in compliance with certain covenants within the Term Facility as of June 30, 2020. The Company is currently pursuing a refinancing or modification of its Term Facility, or alternative financing arrangements. As a result, subsequent to March 31, 2020, the refinancing or modification may have a material impact on the assumptions used in the discounted cash flow model and related embedded derivative liability. If the Company is not in compliance with its covenants on June 30, 2020, this is likely to cause a material decrease in the carrying value of the embedded derivative liability.

There were no transfers between Level 1, Level 2, and Level 3 during the periods presented. The following table provides a reconciliation for the opening and closing balances of the embedded derivative liability from October 31, 2019 to March 31, 2020:



($ in millions)
Balance at October 31, 2019	$	1.5
Net change in fair value	—
Balance at December 31, 2019	1.5
Net change in fair value	(1.1		)
Balance at March 31, 2020	$	0.4

The Company’s obligations under its long-term debt agreements are carried at amortized cost, which approximates their fair value as of June 30, 2019. The fair value of the Company’s obligations under its long-term debt agreements ~~approximate their carrying~~with JPMorgan Chase were considered Level 2 liabilities of the fair value hierarchy because these instruments have interest rates that reset frequently. The fair value of the Company's obligations under its long-term debt agreements with Antara as ~~such instruments are at market rates currently available to~~of March 31, 2020 was approximately $16.1 million and considered a Level 3 liability of the ~~Company.~~fair value hierarchy because this instrument used significant unobservable inputs consistent with those used in determining the embedded derivative liability values.

~~12.~~11. INCOME TAXES

On ~~December 22, 2017,~~March 27, 2020, in response to COVID-19 and its detrimental impact to the ~~“Tax Cuts~~global economy, President Trump signed the Coronavirus Aid, Relief, and ~~Jobs~~Economic Security Act (“CARES Act” ~~(the “Act”~~) ~~was signed~~ into law, which provides a stimulus to the U.S. economy in the form of various individual and business assistance programs as well as temporary changes to existing tax law. ~~Substantially all~~Among the changes to the provision in business tax laws include a five-year net operating loss carryback for the 2018, 2019 and 2020 tax

years, a deferral of the employer’s portion of the social security tax, an increase in the interest expense limitation under Section 163(j) from 30% to 50% for the 2019 and 2020 tax years, and others. ASC 740 requires the tax effects of changes in tax laws or rates to be recorded in the period of enactment. None of the income tax provisions of the CARES Act are effective for taxable years beginning after December 31, 2017. The Act includes significant changes to the Internal Revenue Code of 1986 (as amended, the “Code”), including amendments which significantly change the taxation of individuals and business entities. The Act contains numerous provisions impactinghave a material impact on the Company, ~~the most significant of which reduces the Federal corporate statutory tax rate from 34% to 21%, as well as the elimination of the corporate alternative minimum tax ("AMT")~~ and changing how existing AMT credits can be realized, the creation of a new limitation on deductible interest expense, and the change in rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

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 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 September 30, 2018 financial statements, those effects will be reflected in the future as or if they materialize.therefore no adjustment was recorded.

For the three months ended ~~September 30, 2018,~~March 31, 2020, the Company recorded an income tax benefit of $85 thousand. For the nine months ended March 31, 2020, the Company recorded an income tax provision of ~~$18 thousand, which~~$46 thousand. As of March 31, 2020, the Company reviewed the existing deferred tax assets in light of COVID-19 and continues to record a full valuation against its deferred tax assets. The income tax provisions primarily ~~relates~~relate to the Company's uncertain tax positions, as well as state income and franchise taxes. As of March 31, 2020, the Company had a total unrecognized income tax benefit of $0.2 million. The Company is actively working with the tax authorities related to the majority of this uncertain tax position and it is reasonably possible that a majority of the uncertain tax position will be settled within the next 12 months. The provision is based upon actual loss before income taxes for the ~~three~~nine months ended ~~September 30, 2018,~~March 31, 2020, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision. The Company will continue to monitor the status of the COVID-19 pandemic and its impact on our results of operations.

The accounting for deferred income taxes in the acquisition of Cantaloupe did not consider the potential effects of IRS Code Section 382 relating to the limitation on use of operating loss carryforwards created by Cantaloupe for its changes in ownership because the analysis required for such determination has not yet been completed. If upon completion of such analysis there are limitations on the use of operating loss carryforwards created by Cantaloupe totaling approximately $16.3 million. The potential impact is immaterial to the condensed consolidated financial statements due to the existing valuation allowance recorded against the Company’s deferred tax assets.

For the three months ended ~~September 30, 2017,~~March 31, 2019, an income tax provision of ~~$28~~$23 thousand was ~~recorded.~~recorded, which primarily relates to state income and franchise taxes. For the nine months ended March 31, 2019, an income tax provision of $60 thousand was recorded, which primarily relates to state income and franchise taxes. The ~~provision is~~provisions are based upon actual loss before income taxes for the ~~three~~nine months ended ~~September 30, 2017,~~March 31, 2019, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.

~~13.~~12. EQUITY

On July 25, 2017, the Company closed its underwritten public offering of 9,583,332 shares of its common stock at a public offering price of $4.50 per share. The foregoing included the full exercise of the underwriters' option to purchase 1,249,999 additional shares from the Company. The gross proceeds to the Company from the offering, before deducting underwriting discounts and commissions and other offering expenses, was approximately $43.1 million.

On November 6, 2017, the Company entered into a Merger Agreement with Cantaloupe for cash and 3,423,367 shares of the company’s stock valued at $23.3 million. Refer to Note 4 for details on the Merger Agreement.

WARRANTS

The Company had 23,978 warrants outstanding as of ~~September 30, 2018~~March 31, 2020 and June 30, ~~2018,~~2019, all of which were exercisable at $5.00 per share. The warrants have an expiration date of March 29, 2021.

STOCK OPTIONS

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

In July 2017, 135,000 stock options were granted ~~for~~to 11 employees vesting 1/3 on July 26, 2018, 1/3 on July 26, 2019 and 1/3 on July 26, 2020 expiring if not exercised prior to July 26, 2022. The options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended.

In August 2017, the Company awarded stock options to its former Chief Executive Officer and Chief Financial Officer to purchase up to 19,047 and 25,000 shares respectively of common stock at an exercise price of $5.25 per share. The Chief Executive Officer options ~~vest~~vested on August 16, 2018, expiring if not exercised prior to August 16, 2024. The Chief Financial Officer options were scheduled to 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 Chief Executive Officer options ~~are~~were intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and the Chief Financial Officer options are non-qualified stock options. The Company's former Chief Executive Officer exercised all of his 274,267 outstanding options during the three months ended December 31, 2019. The Company's former Chief Financial Officer forfeited the remaining unvested options upon her resignation effective January 7, 2019.

In September 2018, the Company awarded stock options to 102 employees to purchase up to 400,000 shares of common stock at an exercise price of ~~$8.75.~~$8.75 which vest 1/3 each year.

In October 2019, the Company awarded stock options to its then-interim Chief Executive Officer to purchase up to 225,000 shares of common stock at an exercise price of $7.18 per share which vested immediately and are non-qualified stock options.

In November 2019, the Company awarded stock options to 11 employees to purchase up to 110,000 shares of common stock at an exercise price of $6.28 which vest 1/3 each year. The options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended.

The fair value of options granted during the ~~three~~nine months ended ~~September 30, 2018~~March 31, 2020 and ~~2017~~2019 was determined using the following assumptions:



	Nine months ended March 31,
	2020			2019
Expected volatility (percent)	74.6% - 90.1%			58.4% - 70.9%
Expected life (years)	3.5 - 4.5			4.5
Expected dividends	0.0		%	0.0		%
Risk-free interest rate (percent)	1.4% - 1.6%			2.23% - 2.91%
Number of options granted	340,760			420,000
Weighted average exercise price	$	6.85		$	8.52
Weighted average grant date fair value	$	6.84		$	4.27

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

Stock based compensation related to all stock options for the three and nine months ended ~~September 30, 2018~~March 31, 2020 was $0.1 million and ~~$0.1~~$1.5 million, respectively, and $0.2 million and $0.6 million for the three and nine months ended ~~September 30, 2017.~~

March 31, 2019, respectively.

COMMON STOCK

On July 2, 2018, 6,677 shares were awarded to each non-employee director for a total of 40,062 shares. The shares were scheduled to vest on a monthly basis over the ~~two year~~two-year period following July 2, 2018.

On October 9, 2019, the Company sold to Antara 3,800,000 shares of the Company’s common stock at a below market value price of $5.25 per share for gross cash proceeds of $19,950,000. Since the Term Facility and equity issuance were negotiated in contemplation of each other and executed within a short period of time, the Company evaluated the debt and equity financing as a combined arrangement, and estimated the fair values of the debt and equity components to allocate the total proceeds on a relative fair value basis between the debt and equity components, resulting in a $17.9 million allocation to equity, less $1.1 million in issuance fees allocated to the equity component on a relative fair value basis.

On October 16, 2019, 13,216 shares were awarded to each non-employee director and its interim Chief Executive Officer for a total of 118,944 shares. 1/3 of the shares vested immediately at the award date, with the remaining shares scheduled to vest on October 16, 2020.

On November 22, 2019, 104,500 total shares were awarded to 11 employees. The shares vest 1/3 each year.

On February 28, 2020, the Company awarded 186,916 total shares to its Chief Executive Officer. The shares were scheduled to vest 1/4 on February 28, 2021, with the remaining shares scheduled to vest on a quarterly basis thereafter through February 28, 2024. The Company also awarded 10,778 shares each for a total of 21,556 shares which were scheduled to vest on February 28, 2021 to new non-employee directors Kelly Kay and Sunil Sabharwal. The Company also awarded 16,767 total shares to its Chief Financial Officer and 8,982 total shares to its Chief Accounting Officer which vest 1/3 each year.

On November 8, 2019, Albin F. Moschner retired as a member of the Board of Directors, and his remaining unvested shares immediately vested. On February 28, 2020, Steven D. Barnhart, Joel Brooks, and William J. Reilly, Jr. resigned as members of the Board of Directors, and their remaining unvested shares were forfeited immediately. Due to the resignation of the Chief Executive Officer and members of the Board of Directors in the fourth quarter of fiscal year 2020, certain unvested common stock awards were forfeited upon their resignations. See Note 14.

The total expense recognized for ~~these grants~~all common stock awards for the three and nine months ended ~~September 30, 2018~~March 31, 2020 was ~~$0.2 million.~~$0.4 million and $0.9 million, and for the three and nine months ended March 31, 2019 was $0.1 million and $0.4 million, respectively.

LONG TERM INCENTIVE PLANS

~~The~~In October 2019, the Company's Board of Directors approved the Fiscal Year ~~2018~~2020 Long-Term Stock Incentive Plan ~~(the “2018~~(“FY20 LTI ~~Stock~~ Plan”) which provides that each executive ~~officers~~officer would be awarded shares of common stock of the Company in the event that certain metrics relating to the Company’s ~~2018~~2020 fiscal year would result in specified ranges of year-over-year percentage growth. The metrics are total number of connections as of June 30, ~~2018~~2020 as compared to total number of connections as of June 30, ~~2017~~2019 (40% weighting) and adjusted EBITDA earned during the ~~2018~~2020 fiscal year as compared to the adjusted EBITDA earned during the ~~2018~~2019 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 to 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 to 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~~metric (which in any event cannot exceed 150% of the executive officer’s target bonus award). Any shares awarded under the ~~2018 LTI Stock Plan~~plan would vest as follows: one-third at the time of issuance; one-third on June 30, ~~2019;~~2021; and one-third on June 30, ~~2020.~~

2022. The Company ~~did not award any long-term stock incentive compensation to its executive officers during~~is evaluating the ~~2019 fiscal year.~~impact of COVID-19 on the FY20 LTI Plan.

The Company had long-term stock incentive plans ~~(“LTI”)~~ in prior fiscal years for its then executive officers. Stock based compensation related to the LTI plans was as follows in the three and nine months ended ~~September 30, 2018~~March 31, 2020 and ~~2017:~~2019:



	Three months ended March 31,					Nine months ended March 31,
($ in thousands)	2020			2019		2020		2019
FY20 LTI Plan	$	(83	)	$	—	$	36	$	—
FY18 LTI Plan	2			30		21		91
FY17 LTI Plan	—			17		—		68
Total	$	(81	)	$	47	$	57	$	159

Three months ended
September 30,
($ in thousands) 2018 2017
(as restated)
FY18 LTI Plan $ 30
$ 50
FY17 LTI Plan 26
64
FY16 LTI Plan —
9
Total $ 56
$ 123
SHAREHOLDER RIGHTS PLAN

Effective April 27, 2020, the Company's Board of Directors terminated the shareholder rights plan, implemented on October 18, 2019. The Company determined it was in the best interests of the Company and its shareholders to redeem the shareholder rights plan and as a result, the rights plan, which was previously scheduled to automatically expire at the time of the Company's 2020 annual meeting of shareholders, was terminated.

REGISTRATION RIGHTS AGREEMENT

In connection with the Stock Purchase Agreement on October 9, 2019 with Antara, the Company also entered into a registration rights agreement (the "Registration Rights Agreement") with Antara, pursuant to which the Company agreed, at its expense, to file a registration statement under the Act with the Securities and Exchange Commission (the "SEC") covering the resale of the shares by Antara (the "Registration Statement").

Pursuant to an Amendment to Registration Rights Agreement dated as of January 31, 2020 (the “Amendment”), Antara and the Company agreed to terminate the obligation of the Company to register the shares in exchange for a payment of approximately $1.2 million by the Company to Antara. The Amendment provided that the payment would be in full satisfaction of any and all liquidated damages which may be due by the Company to Antara under the Registration Rights Agreement for the failure to timely file the Form S-1 registration statement and/or to obtain and maintain the effectiveness thereof.

Under the Registration Rights Agreement, and prior to the Amendment, the Company was required to file the registration statement by no later than November 8, 2019 (extended by agreement of the parties until November 26, 2019). The Company informed Antara that it would not be able to file the Registration Statement without unreasonable effort and expense because the applicable rules of the SEC require the Company to include certain pre-acquisition financial statements of Cantaloupe in the Registration Statement.

These pre-acquisition financial statements had been filed by the Company as exhibit 99.1 to the Form 8-K/A filed on January 24, 2018. As part of the audit process and subsequent to June 30, 2019, the Company performed an extensive analysis relating to certain of the accounts of Cantaloupe for periods subsequent to the acquisition and made certain adjustments to previously issued financial statements, all of which were described in the Company’s annual report on Form 10-K for the year ended June 30, 2019 and the Amendment No. 1 thereto. The Company determined that to perform such an analysis in connection with the pre-acquisition financial statements required to be included in the registration statement would be unduly time consuming and expensive. The Company also sought to obtain a waiver from the staff of the SEC from the regulations which require the inclusion of these pre-acquisition financial statements in the registration statement. By letter dated December 30, 2019, the SEC staff indicated that it was unable to provide such a waiver.

13. COMMITMENTS AND CONTINGENCIES

Eastern District of Pennsylvania Consolidated Shareholder Class Actions

As previously reported, various putative shareholder class action complaints had been filed in the United States District Court for the District of New Jersey against the Company, its chief executive officer and chief financial officer at the relevant time, its directors at the relevant time, and the investment banks who served as underwriters in the May 2018 follow-on public offering of the Company (the “Underwriters”). These complaints alleged violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These various actions were consolidated by the Court into one action (the “Consolidated Action”), and the Court granted the Motion to Transfer filed by the Company and its former chief executive officer, and transferred the Consolidated Action to the United States District Court for the Eastern District of Pennsylvania, Docket No. 19-cv-04565. On November 20, 2019, Plaintiff filed an amended complaint, and defendants filed motions to dismiss on February 3, 2020. The Court has not yet ruled on the motions to dismiss. The parties participated in a private mediation on February 27, 2020 which resulted in a settlement. On May 29, 2020, the plaintiffs filed documents with the Court seeking preliminary approval of the settlement, with the defendants supporting approval of the settlement. On June 9, 2020, the Court granted preliminary approval of the settlement and issued a scheduling order for further action on the settlement. The settlement provides for a payment of $15.3 million which includes all administrative costs and plaintiff’s attorneys’ fees and expenses. The Company’s insurance carriers are anticipated to pay approximately $12.7 million towards the settlement and the Company is anticipated to pay approximately $2.6 million towards the settlement, which has been recorded as a liability in the accompanying condensed consolidated financial statements. Payments will not be distributed pursuant to the settlement until and unless an opt-out process is completed successfully and the Court grants final approval of the settlement. The Company expects but cannot assure that those events will occur later in the calendar year. Should the settlement not be approved the parties will resume litigation of the claims.

Chester County, Pennsylvania Class Action

to the Pennsylvania Superior Court from the Order granting defendants’ Petition for Stay, Docket No. 3100 EDA 2019. On December 6, 2019, the Pennsylvania Superior Court issued an Order stating that the Stay Order does not appear to be final or otherwise appealable and directed plaintiff to show cause as to the basis of the Pennsylvania Superior Court’s jurisdiction. The plaintiff filed a Response to the Order to Show Cause on December 16, 2019, and the defendants filed an Application to Quash Appeal on December 26, 2019. On February 20, 2020 the Pennsylvania Superior Court quashed the appeal.

Subpoena

During the three months ended March 31, 2020, the Company responded to a subpoena received from the U.S. Department of Justice that sought records regarding Company activities that occurred during prior financial reporting periods, including restatements. The Company is cooperating fully with the agency’s queries.

HEC Master Fund LP Lawsuit

On November 15, 2019, HEC Master Fund LP (together with related entities, including Hudson Executive Capital LP, “HEC”) filed a lawsuit against the Company and its directors at the relevant time in the Court of Common Pleas of Chester County, Pennsylvania, Docket No. 2019-11640-MJ. The lawsuit alleged that the directors’ adoption of an amendment to the Company’s bylaws that prohibited shareholders from calling a special meeting of shareholders until the Company’s next annual meeting of shareholders, along with other efforts by the directors to prevent HEC from soliciting consents to call a special meeting of shareholders, constituted impermissible entrenchment and interference with the shareholder franchise in violation of Pennsylvania law. On November 22, 2019, the Court, with the consent of HEC and the Company, ordered the Company to call and hold its annual meeting of shareholders on or before April 30, 2020. The Court also ordered that the directors stand for election at the annual meeting in accordance with the bylaws and prohibited the board of directors from making further amendments of any kind to the bylaws prior to the annual meeting. Following the entry of that order, HEC voluntarily discontinued the lawsuit. On March 27, 2020, HEC moved to strike the discontinuance and hold the Company in contempt of the Court’s November 22, 2019 order. On April 26, 2020, the parties entered into a Letter Agreement pursuant to which HEC’s action was dismissed with prejudice.

HEC Master Fund LP Shareholder Demand

By letter dated February 12, 2020, HEC demanded that the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s current and former officers and directors and other responsible parties for breach of fiduciary duties. The matters alleged to constitute breaches of duty related to the matters raised by HEC during the contest for the election of directors at the 2020 annual meeting. On April 26, 2020, the parties entered into a Letter Agreement pursuant to which HEC withdrew its shareholder demand for board action.

14. ~~COMMITMENTS AND CONTINGENCIES~~SUBSEQUENT EVENTS

~~During~~

Agreement with Hudson Executive Capital LP

On April 26, 2020, the Company entered into a Letter Agreement with Hudson Executive Capital LP (“Hudson”), the largest shareholder of the Company, to appoint Lisa P. Baird, Douglas G. Bergeron, Douglas L. Braunstein, Jacob Lamm, Michael K. Passilla, Ellen Richey, Anne M. Smalling and Shannon S. Warren to the Board of Directors. The Company accepted the resignations of Kelly Ann Kay, Robert L. Metzger, Sunil Sabharwal, William J. Schoch and Ingrid S. Stafford from the Board of Directors. All of the unvested common stock awards of the former members of the Board of Directors were forfeited upon their resignation. Pursuant to its proxy disclosure, Hudson has requested that the Company reimburse the expenses it incurred in connection with its proxy solicitation and has informed the Company that it is prepared to accept non-cash consideration for such reimbursement; the Board is considering Hudson’s request. No determination regarding the reimbursement or the possible amount of such reimbursement has been made at this time.

Chief Executive Officer Resignation

On May 10, 2020, Donald W. Layden, Jr., former Chief Executive Officer, agreed to resign his employment with the Company, effective as of May 8, 2020. Mr. Layden further agreed to resign from his position as a director on the Board of Directors of the Company (the “Board”), also effective as of May 8, 2020. The resignation was not the result of any disagreement Mr. Layden had with the Company on any matter relating to the Company’s operations, policies, and practices.

Pursuant to a Separation Agreement and Release (the “Release”) entered into by and between Mr. Layden and the Company on May 10, 2020, Mr. Layden received no severance pay or other separation benefits in connection with his resignation. The Release provides that Mr. Layden will retain certain vested equity awards in accordance with the terms of the Release, and additionally

provides releases of claims by Mr. Layden and, on a limited basis, by the Company. The Release also contains customary restrictive covenants, including perpetual confidentiality and non-disparagement covenants, and a one-year post-employment non-solicit of customers and employees. All of Mr. Layden's unvested common stock awards were forfeited upon his resignation.

Appointment of New Chief Executive Officer

On and effective as of May 8, 2020, the Board appointed Sean Feeney as its Chief Executive Officer. In connection with Mr. Feeney’s appointment as Chief Executive Officer, the Company entered into an employment agreement with Mr. Feeney, also dated and effective as of May 8, 2020 (the “Feeney Agreement”). On May 21, 2020, the Board appointed Mr. Feeney as a director of the Company.

Pursuant to the Feeney Agreement, Mr. Feeney shall serve as Chief Executive Officer of the Company, reporting to the Board. The Feeney Agreement provides Mr. Feeney a base salary of $450,000 per year, and, commencing with the Company’s fiscal 2021 year, an annual cash bonus target opportunity each fiscal year ~~2018, the Company expanded the leased space for its headquarters in Malvern, Pennsylvania~~equal to 100% of his base salary (up to a ~~total~~maximum of ~~23,138 square feet.~~150% of base salary), with any cash bonus earned based on the terms of the Company’s then-current annual incentive program (with a minimum bonus for fiscal 2021, only, equal to 50% of Mr. Feeney’s base salary).

In addition, Mr. Feeney was awarded an initial inducement equity grant of 1,000,000 stock options, with an exercise price equal to the Company's closing price on May 8, 2020, subject to the terms of a Non-Qualified Stock Option Agreement, also dated as of May 8, 2020 (the “Option Agreement”). The ~~Company’s monthly base rent~~stock options are eligible to vest as follows: (i) 50% of the options are eligible to vest in 4 equal annual installments on the first four anniversaries of the grant date, (ii) 12.5% of the options are eligible to vest on June 30, 2021, and (iii) an additional 12.5% of the options are eligible to vest on each of June 30, 2022, June 30, 2023, and June 30, 2024, subject to the achievement of performance goals for the fiscal year ending on each such date to be established by the Board, following consultation with Mr. Feeney, as soon as reasonably practicable following the commencement of the applicable fiscal year, and in each case subject to Mr. Feeney’s continued employment through the applicable vesting date. If at least 80% of the performance goals for an applicable fiscal year are achieved, the Compensation Committee may determine that the portion of the option eligible to vest in respect of such fiscal year will vest on a prorated basis. In addition, any of the stock options then-outstanding and unvested will immediately vest upon a “change of control,” as defined in the Feeney Agreement, subject to Mr. Feeney’s continued employment as of immediately prior to the “change of control.”

Under the Feeney Agreement, if Mr. Feeney is ~~approximately $48 thousand~~terminated without “cause” or resigns for “good reason” (as each term is defined under the Feeney Agreement), then, subject to Mr. Feeney’s execution of a release of claims and continued compliance with the Feeney Agreement, Mr. Feeney will be provided with a ~~lease expiration date~~severance package consisting of ~~November 30, 2023.~~

Through the Cantaloupe acquisition during fiscal year 2018, the Company acquired a noncancelable operating lease pertaining to Cantaloupe’s headquarters based in San Francisco, California. The leased premise consists(i) 12 months of ~~approximately 8,400 square feet~~continued base salary, (ii) senior executive-level outplacement support for 12 months, and ~~calls for rental payments of approximately $45 thousand due each month~~(iii) up to a ~~maximum monthly~~12-month COBRA subsidy. However, if such termination occurs within 24 months following a “change of control,” as defined in the Feeney Agreement, then Mr. Feeney will instead be provided a lump sum payment equal to the sum of his base salary and last annual bonus paid in the fiscal year completed prior to such termination.

The Feeney Agreement contains customary restrictive covenants, including perpetual confidentiality, non-disparagement, and intellectual property covenants, as well as a non-compete, non-solicit of customers and suppliers, and non-solicit of employees (including a no-hire) that each apply during employment and for two years following any termination.

COVID-19

A novel strain of coronavirus (COVID-19) was first identified in China in December 2019 and subsequently declared a global pandemic in March 2020 by the World Health Organization. COVID-19 containment measures began in parts of the United States in March 2020 resulting in forced closure of non-essential businesses and social distancing protocols. As a result, COVID-19 has impacted our business, significantly reducing foot traffic to distributed assets containing our electronic payment solutions and reducing discretionary spending by consumers. The Company did not observe meaningful reductions in processing volume until mid-March, when average daily processing volume decreased approximately 40%. By mid-April, processing volumes began to recover and have shown a steady improvement by approximately 30% over the mid-March levels. At this time we are unable to reasonably estimate the length of time that containment measures will be needed in the United States. Furthermore, even after containment measures are lifted there can be no assurance as to the time required to regain operations and sales at levels prior to the pandemic.

In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of our employees by implementing work-from-home measures while continuing to diligently serve our customers. Additionally, we have created an internal task force to lead measures to protect the business in light of the volatility and uncertainty caused by the COVID-19 pandemic, including ensuring the safety of our employees and our community by implementing work from home policies,

conserving liquidity, evaluating cost saving actions, partnering with customers to position USAT for renewed growth post crisis, and pausing on international expansion. The liquidity conservation and cost savings initiatives include but are not limited to: a 20% salary reduction for the senior leadership team until December 2020; deferral of all cash-based director fees until calendar year 2021; a temporary furlough of about 10% of our employee base; negotiations with and concessions from vendors in regard to cost reductions and/or payment deferrals; an increased collection effort to reduce outstanding accounts receivables; and various supply chain/inventory improvements. Our supply chain network has not been significantly disrupted and we are continuously monitoring for the impact of COVID-19.

Subsequent to March 31, 2020, in response to the outbreak, we have agreed to concessions regarding modifications to price and/or payment terms with certain customers who have been negatively impacted by COVID-19, and may negotiate additional concessions or other contract amendments regarding modifications to price and/or payment terms.

We continue to monitor the rapidly evolving situation and guidance from federal, state and local public health authorities. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. The effects of COVID-19 are not significant to our financial statements for the quarter ended March 31, 2020. However, based on current trends and if the pandemic is not substantially contained in the near future, COVID-19 may have a material adverse impact on our revenue growth as well as our overall profitability for the quarter ended June 30, 2020 and beyond, and may lead to higher sales-related, inventory-related, and operating reserves. Further, a sustained downturn may also result in a decrease in the fair value of our goodwill or other intangible assets, causing them to exceed their carrying value. This may require us to recognize an impairment to those assets.

Paycheck Protection Program Loan

The Company has applied for, and has received, funds under the Paycheck Protection Program after the period end in the amount of $3.1 million. The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

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

Forward-Looking Statements

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

general economic, market or business conditions unrelated to our operating performance, including the impact of the coronavirus disease 2019 (COVID-19) pandemic on the Company's business;

the uncertainties associated with COVID-19, including its effects on the Company’s operations, financial condition, and the demand for the Company’s products and services;

failure to comply with the financial covenants of our Term Facility;

failure to negotiate amendments to the existing Term Facility or otherwise raise additional capital from other lenders or investors;

uncertainties resulting from, among other things, quarantines of employees, customers, consumers, and suppliers, travel restrictions, reduced consumer spending, and closures of customer locations, manufacturing facilities, warehouses and logistics supply chains, associated with COVID-19;

the Company’s ability to efficiently and flexibly manage its business and financial resources amid uncertainties related to COVID-19;

uncertainty around the duration of the COVID-19 virus’ impact;

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 revenue 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 revenue are derived;

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

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

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

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

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

whether we continue to 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;

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

the ability of the Company to sell to third party lenders all or a portion of our finance receivables, or to do so in a timely manner;

whether the listing application for the Company’s securities which has been filed by the Company with The Nasdaq Stock Market LLC (“Nasdaq”) will be granted in a timely manner;

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

the risks associated with the currently pending litigation or possible regulatory action arising from the internal investigation and its findings, from the failure to timely file our periodic reports with the SEC, from the restatement of the affected financial statements, from allegations related to the registration statement for the follow-on public offering, or from potential litigation or other claims arising from the shareholder demands for derivative action.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above, or those discussed under Item 1A. “Risk Factors” in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the "2019 Form 10-K"). We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.

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

OVERVIEW OF THE COMPANY

USA Technologies, Inc. provides wireless networking, cashless transactions, asset monitoring, and other value-added services principally to the small ticket, unattended Point of Sale (“POS”) market. Our ePort® technology can be installed and/or embedded into everyday devices such as vending machines, a variety of kiosks, amusement games, and commercial laundry via 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 support, consumer engagement services as well as telemetry, Internet of Things (“IoT”), and machine-to-machine (“M2M”) services, including the ability to remotely monitor, control and report on the results of distributed assets containing our electronic payment solutions.

The Company generates revenue in multiple ways. During the three and nine months ended March 31, 2020, we derived approximately 81% of our revenue from recurring license and transaction fees related to our ePort Connect service and approximately 19% of our revenue from equipment sales. Connections to our service stem from the sale or lease of our POS electronic payment devices, certified payment software, or the servicing of similar third-party installed POS terminals. Connections to the ePort Connect service are the most significant driver of the Company’s revenue, particularly the recurring revenue from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:

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

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

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

As of March 31, 2020, highlights of the Company are below:

Headquarters in Malvern, Pennsylvania;

Over 150 employees;

Over 22,000 customers and approximately 1,289,000 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;

The Company’s fiscal year ends June 30th.

As indicated in our 2019 Form 10-K, as a result of our failure to comply with our periodic reporting obligations, on September 26, 2019, our securities were suspended from trading on The Nasdaq Stock Market LLC (“Nasdaq”) and are currently quoted on the OTC Markets. On October 8, 2019, and pursuant to applicable Nasdaq rules, we filed an appeal to the Nasdaq Listing and Hearing Review Council (the “Listing Council”) from the Nasdaq Hearing Panel’s determination to delist the Company’s securities from trading. On November 22, 2019, the Company received a notification that the Listing Council had affirmed the decision of the Hearing Panel to suspend trading of the Company’s securities on Nasdaq and to delist the Company’s securities. On January 29, 2020, the Company received written notification from Nasdaq that the Nasdaq Board of Directors declined to call for review of the decision of the Listing Council, and that the decision of the Listing Council represented the final action of Nasdaq relating to the decision of the Listing Council. Pursuant to applicable Nasdaq listing rules and the rules promulgated under the Securities Exchange Act of 1934, as amended, on February 4, 2020, Nasdaq issued a press release stating that it will delist the Company’s securities and will file a Form 25 with the Securities and Exchange Commission to complete the delisting. The delisting of the Company’s securities from Nasdaq became effective on February 18, 2020. Independent of and in addition to the appeal process described above, the Company has applied to relist its common stock and preferred stock on Nasdaq, and the application is currently under review by the staff of the Nasdaq Listing Qualifications Department. There can be no assurance that the listing application will be granted by Nasdaq or granted in a timely manner.

Agreement with Hudson Executive Capital LP

On April 26, 2020, the Company entered into a Letter Agreement with Hudson Executive Capital LP (“Hudson”), the largest shareholder of the Company, to appoint Lisa P. Baird, Douglas G. Bergeron, Douglas L. Braunstein, Jacob Lamm, Michael K. Passilla, Ellen Richey, Anne M. Smalling and Shannon S. Warren to the Board of Directors. The Company accepted the resignations of Kelly Ann Kay, Robert L. Metzger, Sunil Sabharwal, William J. Schoch and Ingrid S. Stafford from the Board of Directors. Pursuant to its proxy disclosure, Hudson has requested that the Company reimburse the expenses it incurred in connection with its proxy solicitation and has informed the Company that it is prepared to accept non-cash consideration for such reimbursement; the Board is considering Hudson’s request. No determination regarding the reimbursement or the possible amount of such reimbursement has been made at this time.

COVID-19 Update

an internal task force to lead measures to protect the business in light of the volatility and uncertainty caused by the COVID-19 pandemic, including ensuring the safety of our employees and our community by implementing work from home policies, conserving liquidity, evaluating cost saving actions, partnering with customers to position USAT for renewed growth post crisis, and pausing on international expansion. The liquidity conservation and cost savings initiatives include but are not limited to: a 20% salary reduction for the senior leadership team until December 2020; deferral of all cash-based director fees until calendar year 2021; a temporary furlough of about 10% of our employee base; negotiations with and concessions from vendors in regard to cost reductions and/or payment deferrals; an increased collection effort to reduce outstanding accounts receivables; and various supply chain/inventory improvements. Our supply chain network has not been significantly disrupted and we are continuously monitoring for the impact of COVID-19.

Paycheck Protection Program Loan

CRITICAL ACCOUNTING POLICIES

There have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Form 10-K.

Recent Accounting Pronouncements

See Note 2 to the interim Condensed Consolidated Financial Statements for a description of recent accounting pronouncements.

TRENDING QUARTERLY FINANCIAL DATA

The following table shows certain financial and non-financial data that management believes give readers insight into certain trends and relationships about the Company’s financial performance. We believe the first three measurements are useful in allowing management and readers to evaluate our strategy of driving growth in connections and transactions and the fourth measurement is useful in allowing management and readers to evaluate the growth of our QuickStart program and direct sales compared to the JumpStart program.

Gross new connections, net new connections, and total connections.

Connections to the Company’s service include those resulting from the sale or lease of our point of sale (“POS”) electronic payment devices, telemetry devices or certified payment software or the servicing of similar third-party installed POS terminals or telemetry devices. The Company records a connection upon shipment of an activated device or the activation of a non-device location on our platform to a customer under contract. A self-service retail location that utilizes an ePort cashless payment device as well as Seed management services constitutes only one connection. We will no longer count an existing connection as a connection following the receipt of instructions from the customer to deactivate the device or non-device location, as the case may be, upon the expiration of the applicable notice period, provided that the notice is in accordance with the terms of the customer contract. A previously installed telemeter or cashless payment system that is no longer being utilized by our customer is considered and reported as an existing connection unless and until the customer provides the appropriate notice under the contract and the applicable notice period has expired.

Net new connections during the quarter are defined as gross new connections during the quarter less deactivated connections during the quarter. We derive the majority of our revenues from license and transaction fees resulting from connections to, as well as services provided by, our ePort Connect service, and management tracks new connection growth and total connections to evaluate the effectiveness of our revenue strategy.

New customers added and total customers.

New customers are defined as new entities that have not previously purchased our hardware or services. Management uses new customer growth and total customer base to evaluate the effectiveness of our distribution and sales reach and ability to further penetrate attractive adjacent markets.

Total number of transactions and total dollar volume of transactions.

Transactions are defined as electronic payment transactions that are processed by our technology-enabled solutions. Management uses total number and dollar volume of transactions to evaluate the effectiveness of our new customer strategy and ability to leverage existing customers and partners.

Financing structure of connections.

The financing structure of connections is determined by identifying the gross new connections during the quarter and determining which connections were due to devices financed by the JumpStart program compared to connections due to devices financed by the QuickStart program or purchased outright. We monitor this metric as we are able to increase cash collections from direct sales to customers or under QuickStart sales by utilizing lease companies which improves cash provided by operating activities.

Five Quarter Select Key Performance Indicators Including Connections



	As of and for the three months ended
	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
Connections:
Gross new connections	37,000			45,000			49,000			47,000			51,000
Net new connections	34,000			40,000			46,000			43,000			46,000
Total connections	1,289,000			1,255,000			1,215,000			1,169,000			1,126,000
Customers:
New customers added	1,100			900			900			825			925
Total customers	22,300			21,200			20,300			19,400			18,575
Volumes:
Total number of transactions (millions)	237.3			243.4			232.7			229.6			217.2
Total volume (millions)	$	462.7		$	476.4		$	461.2		$	453.0		$	420.3
Financing structure of connections:
JumpStart	1.4		%	4.3		%	3.4		%	10.1		%	1.8		%
QuickStart & all others ^(a)	98.6		%	95.7		%	96.6		%	89.9		%	98.2		%
Total	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%


a)	Includes credit sales with standard trade receivable terms.

Highlights of USAT’s connections for the quarter ended March 31, 2020 include:

34,000 additional net new connections during the quarter; and

1,289,000 total connections to our service compared to the same quarter last year of approximately ~~$47 thousand through its January~~1,126,000 total connections to our service, an increase of 163,000 connections, or 14%.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2020 ~~expiration~~Compared to Three Months Ended March 31, 2019

Revenue and Gross Profit



	Three months ended March 31,						Percent Change
($ in thousands)	2020			2019			Percent Change
Revenue:
License and transaction fees	$	34,961		$	31,515		10.9	%
Equipment sales	8,137			6,189			31.5	%
Total Revenue	43,098			37,704			14.3	%

Costs of sales:
Cost of services	22,244			20,307			9.5	%
Cost of equipment	9,856			7,444			32.4	%
Total costs of sales	32,100			27,751			15.7	%

Gross profit:
License and transaction fees	12,717			11,208			13.5	%
Equipment sales	(1,719		)	(1,255		)	(37.0	)%
Total gross profit	$	10,998		$	9,953		10.5	%

Revenue. Total revenue increased $5.4 million for the three months ended March 31, 2020 compared to the same period in 2019. The change in total revenue resulted from a $3.4 million increase in license and transaction fee revenue for the three months ended March 31, 2020 compared to the same period in 2019, driven primarily by the increase in connection count which caused an increase in license fee and processing fees, and a $1.9 million increase in equipment revenue for the three months ended March 31, 2020 compared to the same period in 2019 driven primarily by higher shipments compared to the same period last year.

Cost of sales. Cost of sales increased $4.3 million for the three months ended March 31, 2020 compared to the same period in 2019. The increase was driven by a $1.9 million increase in cost of services driven primarily by an increase in transaction processing costs following the increase in transactions processed during the quarter and a $2.4 million increase in cost of equipment sales, resulting from an increase in equipment revenue due to higher shipments compared to the same period last year.

Gross margin. Total gross margin decreased 0.9%, from 26.4% for the three months ended March 31, 2019 to 25.5% for the three months ended March 31, 2020. The change in our gross margin was driven primarily by a decrease in equipment margin from a loss of 20.3% for the three months ended March 31, 2019 to a loss of 29.0% for the three months ended March 31, 2020. The increase in the loss on our equipment margin was due to the low margin the company recognized on a large shipment in the third quarter compared to the same period in 2019. License and transaction margin increased to 36.4% for the three months ended March 31, 2020 compared to 35.6% for the same period in 2019.

Operating Expenses



	Three months ended March 31,				Percent Change
Category ($ in thousands)	2020		2019		Percent Change
Selling, general and administrative expenses	$	20,069	$	11,156	79.9	%
Investigation and restatement expenses	—		1,408		NM
Integration and acquisition costs	—		24		NM
Depreciation and amortization	1,107		1,083		2.2	%
Total operating expenses	$	21,176	$	13,671	54.9	%

____________

NM — not meaningful

Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $8.9 million for the three months ended March 31, 2020, as compared to the same period in 2019. This change was primarily driven by a $4.5 million increase in professional services costs primarily related to the Company's restatement project and related audit and legal activities that were not included in one-time costs, a $2.0 million increase in employment related costs, a $2.6 million legal contingency accrual related to ongoing litigation, and a $0.3 million reduction in other selling, general and administrative expenses.

Investigation and restatement expenses. Investigation and restatement expenses were incurred beginning in the first quarter of fiscal year 2019 through the second quarter of fiscal year 2020 in connection with the Audit Committee's investigation, the restatements of previously filed financial statements, bank consents, and the ongoing remediation of deficiencies in our internal control over financial reporting.

Integration and acquisition costs. The Company did not incur integration and acquisition costs for the three months ended March 31, 2020. Integration and acquisition costs were $24 thousand for the three months ended March 31, 2019 due to the completion of the Cantaloupe acquisition.

Depreciation and amortization. Depreciation and amortization expense was consistent with the same period in 2019.

Other Income (Expense), Net



	Three months ended March 31,						Percent Change
($ in thousands)	2020			2019			Percent Change
Other income (expense):
Interest income	$	411		$	348		18.1	%
Interest expense	(683		)	(913		)	(25.2	)%
Change in fair value of derivative	1,070			—			NM
Total other income (expense), net	$	798		$	(565	)	(241.2	)%

____________

NM — not meaningful

Other income (expense), net. Other income (expense), net increased approximately $1.4 million for the three months ended March 31, 2020 as compared to the same period in 2019. This change was primarily driven by the change in fair value of the Company's derivative related to the Antara debt.

Income Taxes



	Three months ended March 31,					Percent Change
($ in thousands)	2020		2019			Percent Change
Benefit (provision) for income taxes	$	85	$	(23	)	(469.6	)%

Income taxes. For the three months ended March 31, 2020, a tax benefit of $85 thousand was recorded which primarily relates to the Company's uncertain tax positions, as well as state income and franchise taxes. As of March 31, 2020, the Company had a total unrecognized income tax benefit of $0.2 million. The Company is actively working with the tax authorities related to the majority of this uncertain tax position and it is reasonably possible that a majority of the uncertain tax position will be settled within the next 12 months. The provision is based upon actual loss before income taxes for the three months ended March 31, 2020, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.

For the three months ended March 31, 2019, a tax provision of $23 thousand was recorded which primarily relates to state income and franchise taxes. The provision is based upon actual loss before income taxes for the three months ended March 31, 2019, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.

Reconciliation of Net Loss to Adjusted EBITDA



	Three months ended March 31,
($ in thousands)	2020			2019
Net loss	$	(9,295	)	$	(4,306	)
Less: interest income	(411		)	(348		)
Plus: interest expense	683			913
Plus (less): income tax provision (benefit)	(85		)	23
Plus: depreciation expense	916			1,143
Plus: amortization expense	784			784
EBITDA	(7,408		)	(1,791		)
Plus: stock-based compensation	421			421
Less: change in fair value of derivative	(1,070		)	—
Plus: litigation related professional expenses	2,138			186
Plus: investigation and restatement expenses	—			1,408
Plus: integration and acquisition costs	—			24
Adjustments to EBITDA	1,489			2,039
Adjusted EBITDA	$	(5,919	)	$	248

As used herein, Adjusted EBITDA represents net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, non-recurring fees and charges that were incurred in connection with the acquisition and integration of businesses, non-recurring fees and charges that were incurred in connection with the Audit Committee investigation and financial statement restatement activities, class action litigation and activist related expenses, changes in the fair value of our derivative, and stock-based compensation expense.

We have excluded the non-cash expense, stock-based compensation, as it does not reflect our cash-based operations. Consistent with the exclusion of debt interest expense from EBITDA, the debt-related derivative gain recorded for the third quarter was also excluded from adjusted EBITDA. We have excluded the non-recurring costs and expenses incurred in connection with business acquisitions in order to allow more accurate comparison of the financial results to historical operations. We have excluded the professional fees incurred in connection with the class action litigation and the activist related matters 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 represent charges that are not related to our operations.

Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, we utilize Adjusted EBITDA as a metric in our executive officer and management incentive compensation plans.

Reconciliation of Net Loss to Non-GAAP Net Loss



	Three months ended March 31,
($ in thousands)	2020			2019
Net loss	$	(9,295	)	$	(4,306	)
Non-GAAP adjustments:
Non-cash portion of income tax provision	5			5
Amortization expense	784			784
Stock-based compensation	421			421
Change in fair value of derivative	(1,070		)	—
Litigation related professional fees	2,138			186
Investigation and restatement expenses	—			1,408
Integration and acquisition costs	—			24
Non-GAAP net loss	$	(7,017	)	$	(1,478	)

As used herein, non-GAAP net loss represents GAAP net loss excluding costs or benefits relating to any non-cash portions of the Company’s income tax provision, amortization expense related to our acquisition-related intangibles, non-recurring fees and charges that were incurred in connection with the acquisition and integration of businesses, non-recurring fees and charges that were incurred in connection with the Audit Committee investigation and financial statement restatement activities, class-action litigation or activist related expenses, changes in the fair value of our derivative, and stock-based compensation expense.

Non-GAAP net loss is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Management believes that non-GAAP net loss is an important measure of the Company’s 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 loss as a metric in its executive officer and management incentive compensation plans.

Nine Months Ended March 31, 2020 Compared to Nine Months Ended March 31, 2019

Revenue and Gross Profit



	Nine months ended March 31,						Percent Change
($ in thousands)	2020			2019			Percent Change
Revenue:
License and transaction fees	$	105,324		$	89,919		17.1	%
Equipment sales	25,184			16,039			57.0	%
Total Revenue	130,508			105,958			23.2	%

Costs of sales:
Cost of services	66,912			58,141			15.1	%
Cost of equipment	28,420			17,371			63.6	%
Total costs of sales	95,332			75,512			26.2	%

Gross profit:
License and transaction fees	38,412			31,778			20.9	%
Equipment sales	(3,236		)	(1,332		)	(142.9	)%
Total gross profit	$	35,176		$	30,446		15.5	%

Revenue. Total revenue increased $24.6 million for the nine months ended March 31, 2020 compared to the same period in 2019. The growth in total revenue resulted from a $15.4 million increase in license and transaction fee revenue for the nine months ended March 31, 2020 compared to the same period in 2019, mostly driven by the increase in connection count which generated an increase in license fee and processing fees, and a $9.1 million increase in equipment revenue for the nine months ended March 31, 2020 compared to the same period in 2019 driven primarily by the 120,000 new net connections delivered for the nine months ended March 31, 2020 compared to 98,000 new net connections delivered in the same period in 2019. This 22,000 increase in new net connections represents a 22 percent increase year over year.

Cost of sales. Cost of sales increased $19.8 million for the nine months ended March 31, 2020 compared to the same period in 2019. The increase was driven by a $8.8 million increase in cost of services driven by an increase in transaction processing costs following the increase in transactions processed for the period and a $11.0 million increase in cost of equipment sales, resulting from higher shipments compared to the same period last year.

Gross margin. Total gross margin decreased 1.8%, from 28.7% for the nine months ended March 31, 2019 to 27.0% for the nine months ended March 31, 2020. The decrease was driven primarily by a lower equipment margin resulting from a large equipment sale made to a strategic customer during the first three quarters of fiscal year 2020, reflecting our strategy of using equipment sales as an enabler for driving longer-term, higher margin license and transaction fees. License and transaction margin increased to 36.5% for the nine months ended March 31, 2020 compared to 35.3% for the same period in 2019.

Operating Expenses



	Nine months ended March 31,				Percent Change
Category ($ in thousands)	2020		2019		Percent Change
Selling, general and administrative expenses	$	56,876	$	31,537	80.3	%
Investigation and restatement expenses	4,303		13,122		(67.2	)%
Integration and acquisition costs	—		1,127		NM
Depreciation and amortization	3,209		3,359		(4.5	)%
Total operating expenses	$	64,388	$	49,145	31.0	%

____________

NM — not meaningful

Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $25.3 million for the nine months ended March 31, 2020, as compared to the same period in 2019. This change was primarily driven by a $15.3

million increase in professional services costs primarily related to the Company's restatement project and related audit and legal activities that were not included in one-time costs, a $6.3 million increase in employment related costs, and a $2.6 million legal contingency accrual related to ongoing litigation.

Integration and acquisition costs. The Company did not incur integration and acquisition costs for the nine months ended March 31, 2020. Integration and acquisition costs were $1.1 million for the nine months ended March 31, 2019 due to the completion of the Cantaloupe acquisition.

Depreciation and amortization. Depreciation and amortization expense was consistent with the same period in 2019.

Other Income (Expense), Net



	Nine months ended March 31,						Percent Change
($ in thousands)	2020			2019			Percent Change
Other income (expense):
Interest income	$	988		$	1,245		(20.6	)%
Interest expense	(1,981		)	(2,518		)	(21.3	)%
Change in fair value of derivative	1,070			—			NM
Total other income (expense), net	$	77		$	(1,273	)	(106.0	)%

____________

NM — not meaningful

Other income (expense), net. Other income (expense), net increased approximately $1.4 million for the nine months ended March 31, 2020 as compared to the same period in 2019. This change was primarily driven by the change in fair value of the Company's derivative related to the Antara debt.

Income Taxes



	Nine months ended March 31,						Percent Change
($ in thousands)	2020			2019			Percent Change
Provision for income taxes	$	(46	)	$	(60	)	(23.3	)%

Income taxes. For the nine months ended March 31, 2020, a tax provision of $46 thousand was recorded which primarily relates to the Company's uncertain tax positions, as well as state income and franchise taxes. As of March 31, 2020, the Company had a total unrecognized income tax benefit of $0.2 million. The Company is actively working with the tax authorities related to the majority of this uncertain tax position and it is reasonably possible that a majority of the uncertain tax position will be settled within the next 12 months. The provision is based upon actual loss before income taxes for the nine months ended March 31, 2020, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.

For the nine months ended March 31, 2019, a tax provision of $60 thousand was recorded which primarily relates to state income and franchise taxes. The provision is based upon actual loss before income taxes for the nine months ended March 31, 2019, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.

Reconciliation of Net Loss to Adjusted EBITDA



	Nine months ended March 31,
($ in thousands)	2020			2019
Net loss	$	(29,181	)	$	(20,032	)
Less: interest income	(988		)	(1,245		)
Plus: interest expense	1,981			2,518
Plus: income tax provision	46			60
Plus: depreciation expense	2,840			3,530
Plus: amortization expense	2,353			2,369
EBITDA	(22,949		)	(12,800		)
Plus: stock-based compensation	2,453			1,393
Less: change in fair value of derivative	(1,070		)	—
Plus: litigation related professional expenses	3,367			289
Plus: investigation and restatement expenses	4,303			13,122
Plus: integration and acquisition costs	—			1,127
Adjustments to EBITDA	9,053			15,931
Adjusted EBITDA	$	(13,896	)	$	3,131

Reconciliation of Net Loss to Non-GAAP Net Loss



	Nine months ended March 31,
($ in thousands)	2020			2019
Net loss	$	(29,181	)	$	(20,032	)
Non-GAAP adjustments:
Non-cash portion of income tax provision	15			14
Amortization expense	2,353			2,369
Stock-based compensation	2,453			1,393
Change in fair value of derivative	(1,070		)	—
Litigation related professional fees	3,367			289
Investigation and restatement expenses	4,303			13,122
Integration and acquisition costs	—			1,127
Non-GAAP net loss	$	(17,760	)	$	(1,718	)

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operating activities was $17.6 million for the nine months ended March 31, 2020 compared to cash used of $25.7 million in the same period in fiscal year 2019. The change reflects a change in net expense for non-cash operating activities of $1.7 million, and net cash provided by the change in various operating assets and liabilities of $18.9 million. The change in operating assets and liabilities is primarily driven by the change of accounts receivable of $8.4 million and change of inventory of $7.6 million.

Cash used in investing activities was $1.7 million for the nine months ended March 31, 2020 compared to cash used of $3.1 million in the same period in fiscal year 2019, primarily driven by a decrease in equipment purchases for rental equipment compared to the same period last year.

Cash provided by financing activities was $17.7 million for the nine months ended March 31, 2020 compared to cash used of $22.4 million in the same period in fiscal year 2019. The change was primarily due to proceeds received from the Term Facility and equity financing provided by Antara, offset by payments of issuance fees for the Term Facility and the repayment of the Term Loan and Revolving Credit Facility.

Sources and Uses of Cash

Due to the Company's delay in filing its periodic reports, between September 28, 2018, and September 30, 2019, the Company entered into various agreements with JPMorgan Chase Bank, N.A. (“Lender”), 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 were 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 September 30, 2019. Additionally, during the quarter ended March 31, 2019 the Company prepaid $20.0 million of the balance outstanding 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. On October 31, 2019, the Company repaid the outstanding balance on the Revolving Credit Facility.

Pursuant to a Stock Purchase Agreement dated October 9, 2019 between the Company and Antara Capital Master Fund LP (“Antara”), the Company sold to Antara 3,800,000 shares of the Company’s common stock at a price of $5.25 per share for gross proceeds of $19,950,000. Antara qualifies as an accredited investor under Rule 501 of the Securities Act of 1933, as amended (the "Act"), and the offer and sale of the shares was exempt from registration under Section 4(a)(2) of the Act. Antara agreed not to dispose of the shares for a period of 90 days from the closing date. In connection with the private placement, William Blair & Company, L.L.C. (“Blair”) acted as exclusive placement agent for the Company and received a cash placement fee of $1.2 million. In connection with the Stock Purchase Agreement, the Company also entered into a registration rights agreement with Antara, pursuant to which the Company agreed, at its expense, to file a registration statement under the Act with the Securities and Exchange Commission covering the resale of the shares by Antara. Subsequently, Antara and the Company agreed to terminate the obligation of the Company to register the shares in exchange for a payment of approximately $1.2 million by the Company to Antara which was made during the three months ended March 31, 2020.

On October 9, 2019, the Company also entered into a commitment letter (“Commitment Letter”) with Antara, pursuant to which Antara committed to extend to the Company a $30.0 million senior secured term loan facility (“Term Facility”). Upon the execution of the Commitment Letter, the Company paid to Antara a non-refundable commitment fee of $1.2 million. In connection with the Commitment Letter, Blair acted as exclusive placement agent for the Company and received a cash placement fee of $750,000. On October 31, 2019, the Company entered into a Financing Agreement with Antara to draw $15.0 million on the Term Facility and agreed to draw an additional $15.0 million at any time between July 31, 2020 and April 30, 2021, subject to the terms of the Financing Agreement. The outstanding amount of the draws under the Term Facility bear interest at 9.75% per annum, payable monthly in arrears. The proceeds of the initial draw were used to repay the outstanding balance of the revolving line of credit loan due to JPMorgan Chase Bank, N.A. in the amount of $10.1 million, including accrued interest payable, and to pay transaction expenses, and the Company intends to utilize the balance for working capital and general corporate purposes. The outstanding principal amount of the loan must be paid in full by no later than the maturity date of October 31, 2024.

We may prepay any principal amount outstanding on the Term Facility plus a prepayment premium of 5% (if prepaid on or prior to December 31, 2020), 3% (between January 1, 2021 - December 31, 2021), 1% (between January 1, 2022 - December 31, 2022) and 0% thereafter. Under the Term Facility we are subject to mandatory prepayments as a result of certain asset sales, insurance proceeds, issuances of disqualified capital stock, and issuances of debt. These mandatory prepayments are subject to the prepayment premium that applies to voluntary prepayments. We are also subject to annual mandatory prepayments ranging from 0% of excess cash flow to 75% of excess cash flow depending upon the consolidated total leverage ratio measured at the end of each fiscal year beginning with the fiscal year ending June 30, 2020. These mandatory prepayments are not subject to the aforementioned prepayment premium.

The Company is ~~involved~~required to be in ~~various legal proceedings~~compliance with financial covenants related to the minimum fixed charge coverage ratio beginning with the fiscal quarter ending June 30, 2020, maximum capital expenditures beginning with the fiscal quarter ending December 31, 2019, and minimum consolidated EBITDA beginning with the fiscal year ending June 30, 2020. As of March 31, 2020, the Company was in compliance with its capital expenditures financial covenant.

The Company is evaluating its options with respect to the Financing Agreement, including all rights and remedies that may be available to it. Based upon the current financial forecast for the fourth quarter of fiscal year 2020, without a refinancing or modification of existing terms within the Term Facility, the Company anticipates that as of June 30, 2020, it is highly likely the Company will not be in compliance with the minimum fixed charge coverage ratio and the minimum consolidated EBITDA of its Term Facility. Unless the Commitment Letter is rescinded, amended, or replaced, noncompliance would represent an event of default under the Term Facility, and, following the request of the Required Lenders (as such term is defined in the Term Facility), all unpaid principal of $15.0 million and accrued interest to Antara would immediately become due, in addition to a $0.8 million prepayment premium. In addition, all of the Company's unamortized issuance costs and debt discount related to the Term Facility would be recognized upon repayment of the loan as interest expense in the period of repayment, which as of March 31, 2020 was $2.7 million.

As of June 30, 2019 the Company disclosed potential sales tax and related interest liabilities, which the Company estimated to be $18.2 million in the aggregate as of March 31, 2020. The Company has since engaged additional advisors to help evaluate such potential liabilities and the amount and timing of any such payments.

During the three months ended March 31, 2020, the Company reached a settlement of a shareholder class action lawsuit pending in federal court, and anticipates the payment of approximately $2.6 million toward that settlement in addition to amounts to be paid by the Company’s insurers. As discussed in Note 13, those amounts are contingent upon certain future events, but are expected to be paid during the next 12 months.

The Company has the following primary sources of capital available: (1) cash and cash equivalents on hand of $25.9 million as of March 31, 2020; (2) the cash which may be provided by operating activities; and (3) an aggregate amount of $15 million under the Term Facility to be drawn between July 31, 2020 and April 30, 2021 as described above, if the Term Facility were to be modified with similar draw terms. In addition, management has recently implemented efficiencies in working capital that are designed to increase our cash balances.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risk related to changes in interest rates on our cash investments, which earn a floating rate of interest. The uncertainty that exists with respect to the economic impact of the global coronavirus (COVID-19) pandemic has introduced significant volatility in the financial markets. We invest our excess cash in money market funds that we believe are highly liquid and marketable in the short term. These investments are not held for trading or other speculative purposes. Consequently, our exposure to market risks for interest rate changes related to our money market funds is not material.

In addition, as described above under Item 1A - “Risk Factors”, there may be implications on our business with regard to the COVID-19.

Market risks related to fluctuations of foreign currencies are not material.

Item 4. Controls and Procedures.

(a) Disclosure Controls and Procedures

Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness as of the end of the period covered by this Form 10-Q of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"). We maintain disclosure controls and procedures to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our management, including our chief executive officer and chief financial officer, has concluded that our disclosure controls and procedures were not effective as of the end of such period as a result of the material weaknesses in our internal control over financial reporting, which are described in Item 19A. of ~~Part II of this~~our 2019 Form ~~10-Q/A.~~10-K.

(b) Changes in Internal Control over Financial Reporting

~~15. SUBSEQUENT EVENTS~~

~~For a discussion~~Other than the remediation actions disclosed in Item 9A. of the ~~Company's~~2019 Form 10-K, there were no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. As discussed in Item 9A. of our 2019 Form 10-K, we have implemented a broad range of remedial procedures to address the material weaknesses in our internal control over financial reporting. These remedial procedures entailed significant ~~subsequent events, please refer~~changes in our internal control over financial reporting throughout the course of the fiscal year ended June 30, 2019 and were not complete as of March 31, 2020, and will continue through fiscal year 2020, with the goal to ~~the Form 10-K/A which has been filed concurrently with this Form 10-Q/A.~~fully remediate all remaining material weaknesses by fiscal year end.

Part II - Other Information

Item 1. Legal Proceedings.

Eastern District of Pennsylvania Consolidated Shareholder Class Actions

Chester County, Pennsylvania Class Action

As previously reported, a putative shareholder class action complaint was filed against the Company, its chief executive officer and chief financial officer at the relevant time, its directors at the relevant time, and the Underwriters, in the Court of Common Pleas, Chester County, Pennsylvania, Docket No. 2019-04821-MJ. The complaint alleged violations of the Securities Act of 1933, as amended. As also previously reported, on September 20, 2019 the Court granted the defendants’ Petition for Stay and stayed the Chester County action until the Consolidated Action reaches a final disposition. On October 18, 2019, plaintiff filed an appeal to the Pennsylvania Superior Court from the Order granting defendants’ Petition for Stay, Docket No. 3100 EDA 2019. On December 6, 2019, the Pennsylvania Superior Court issued an Order stating that the Stay Order does not appear to be final or otherwise appealable and directed plaintiff to show cause as to the basis of the Pennsylvania Superior Court’s jurisdiction. The plaintiff filed a Response to the Order to Show Cause on December 16, 2019, and the defendants filed an Application to Quash Appeal on December 26, 2019. On February 20, 2020, the Pennsylvania Superior Court quashed the appeal.

Subpoena

HEC Master Fund LP Lawsuit

On November 15, 2019, HEC filed a lawsuit against the Company and its directors at the relevant time in the Court of Common Pleas of Chester County, Pennsylvania, Docket No. 2019-11640-MJ. The lawsuit alleged that the directors’ adoption of an amendment to the Company’s bylaws that prohibited shareholders from calling a special meeting of shareholders until the Company’s next annual meeting of shareholders, along with other efforts by the directors to prevent HEC from soliciting consents to call a special meeting of shareholders, constituted impermissible entrenchment and interference with the shareholder franchise in violation of Pennsylvania law. On November 22, 2019, the Court, with the consent of HEC and the Company, ordered the Company to call and hold its annual meeting of shareholders on or before April 30, 2020. The Court also ordered that the directors stand for election at the annual meeting in accordance with the bylaws and prohibited the board of directors from making further amendments of any kind to the bylaws prior to the annual meeting. Following the entry of that order, HEC voluntarily discontinued the lawsuit. On March 27, 2020, HEC moved to strike the discontinuance and hold the Company in contempt of the Court’s November 22, 2019 order. On April 26, 2020, the parties entered into a Letter Agreement pursuant to which HEC’s action was dismissed with prejudice.

HEC Master Fund LP Shareholder Demand

Item 1A. Risk Factors.

Our results of operations may be adversely impacted by the COVID-19 pandemic depending on when the pandemic is contained.

The global spread of the COVID-19 pandemic has created significant volatility, uncertainty and economic disruption on our business. Electronic payment transaction volume within unattended markets has decreased significantly since the pandemic accelerated in the United States in March 2020, as government authorities have imposed forced closure of non-essential businesses and social distancing protocols, significantly reducing foot traffic to distributed assets containing our electronic payment solutions and reducing discretionary spending by consumers.

The extent to which the COVID-19 pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we are not able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; and the impact of the pandemic on economic activity and actions taken in response. Furthermore, even after containment measures are lifted there can be no assurance as to the time required to regain operations and sales at levels prior to the pandemic. There may also be increased marketplace consolidation as companies are challenged to respond to the COVID-19 impact.

A sustained downturn may also result in a decrease in the fair value of our goodwill or other intangible assets, causing them to exceed their carrying value. This may require us to recognize an impairment to those assets. The effects of the pandemic, including remote working arrangements for employees, may also impact our financial reporting systems and internal control over financial reporting, including our ability to ensure information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Further, the COVID-19 pandemic could decrease consumer spending, adversely affect demand for our technology and services, cause one or more of our customers and partners to file for bankruptcy protection or go out of business, cause one or more of our customers to fail to renew, terminate, or renegotiate their contracts, affect the ability of our sales team to travel to potential customers, impact expected spending from new customers and negatively impact collections of accounts receivable, all of which could adversely affect our business, results of operations and financial condition. Subsequent to March 31, 2020, in response to the outbreak, we have agreed to concessions regarding modifications to price and/or payment terms with certain customers who have been negatively impacted by COVID-19, and may negotiate additional concessions or other contract amendments regarding modifications to price and/or payment terms.

It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business, results of operations or financial condition at this time.

Failure to comply with any of the covenants could result in an event of default which may accelerate our outstanding indebtedness or other obligations and have a material adverse impact on our business, liquidity position and financial position.

The Term Facility contains financial covenants requiring compliance with financial covenants related to the minimum fixed charge coverage ratio beginning with the fiscal quarter ending June 30, 2020, maximum capital expenditures beginning with the fiscal quarter ending December 31, 2019, and minimum consolidated EBITDA beginning with the fiscal year ending June 30, 2020. Based upon the current financial forecast for the fourth quarter of fiscal year 2020, without a refinancing, rescission of the Commitment Letter, or modification of existing terms within the Term Facility, the Company anticipates that as of June 30, 2020, it is highly likely the Company will not be in compliance with the minimum fixed charge coverage ratio and the minimum consolidated EBITDA of its Term Facility.

Without a refinancing or modification of existing terms within the Term Facility, noncompliance with the Commitment Letter’s covenants could have materially adverse impacts on the Company's financial condition and would represent an event of default under the Term Facility, and, following the request of the Required Lenders (as such term is defined in the Term Facility), all unpaid principal and accrued interest would immediately become due. We are currently evaluating our options with respect to the Financing Agreement, including all rights and remedies that may be available to us. There is no guarantee that we will be able to reach any agreement with our lenders under the Term Facility in relation to a potential breach of our minimum fixed charge coverage ratio and the minimum consolidated EBITDA, or otherwise maintain compliance with all applicable covenants under our financial arrangements.

A failure to comply with our covenants, including our minimum fixed charge coverage ratio and the minimum consolidated EBITDA under the Term Facility, if they are not modified, may result in an event of default and have a material adverse impact on our business, liquidity position and financial position. If we are subject to and unable to comply with such covenants, we may have to enter into another credit agreement or debt financing arrangements which may contain restrictive covenants or limitations on our ability to efficiently manage our balance sheet. If we decide to raise additional capital through an equity offering, such an offering would dilute existing holders of our common stock who do not participate in the offering.

We may not be entitled to forgiveness of our recently received Paycheck Protection Program Loan, and our application for the Paycheck Protection Program Loan could in the future be determined to have been impermissible.

In the fourth quarter of fiscal year 2020, we received loan proceeds of approximately $3.1 million (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). We intend to use the PPP Loan in accordance with the provisions of the CARES Act. The PPP Loan, if not forgiven, bears interest at a rate of 1.00% per annum, and is subject to the standard terms and conditions applicable to loans administered by the SBA under the CARES Act.

Under the CARES Act, as amended in June 2020, loan forgiveness is generally available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the Covered Period, which is 8 weeks or 24 weeks (at the election of the Company) beginning on the date of the first disbursement of the PPP Loan. The amount of the PPP Loan eligible to be forgiven may be reduced in certain circumstances, including as a result of certain headcount or salary reductions. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will apply for forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA.

In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, the maintenance of our workforce, our need for additional funding to continue operations, and our ability to access alternative forms of capital in the current market environment to offset the effects of the COVID -19 pandemic. Following this analysis, we believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad objectives of the CARES Act. The certification described above is subject to interpretation.

On April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that given our circumstances we satisfied all eligible requirements for the PPP Loan, we are later determined to have not been in compliance with these requirements or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. Should we be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the PPP Loan or otherwise, such audit or review could result in the diversion of management’s time and attention and the incurrence of additional costs. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

In addition to the other information set forth in this report, you should carefully consider the risks set forth in the risk factors described in Part I, Item 1A of the Company's June 30, 2019 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our June 30, 2019 Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

Item 3. Defaults Upon Senior Securities.

There were no defaults on any senior securities. On February 1, 2020, an additional $334 thousand of dividends were accrued on our cumulative Series A Convertible Preferred Stock. The total accrued and unpaid dividends on our Series A Convertible Preferred Stock as of March 31, 2020 was $20.8 million. The dividend accrual dates for our Preferred Stock are February 1 and August 1. The annual cumulative dividend on our Preferred Stock is $1.50 per share.

Item 6. Exhibits.



Exhibit Number		Description

3.1		Amended and Restated Articles of Incorporation, as amended through May 29, 2020 (Redline version).

3.2		Amended and Restated Bylaws, as amended through May 4, 2020 (Redline version).

4.1		Amendment No. 1 to Rights Agreement, dated April 28, 2020, by and between USA Technologies and American Stock Transfer & Trust Company, LLC, as rights agent (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on April 28, 2020) (File No. 001-33365).

10.1**		Payment Solutions Agreement between the Company, First Data Merchant Services LLC and Wells Fargo Bank, N.A., dated March 20, 2020 (portions of this exhibit were redacted pursuant to a confidential treatment request).

10.2*		Employment Agreement between the Company and Michael Wasserfuhr dated February 28, 2020.

10.3*		Employment Agreement between the Company and Glen E. Goold dated March 2, 2020.

10.4*		Employment Agreement between the Company and William T. Haines dated January 7, 2020.

10.5*		Employment Agreement dated February 28, 2020, by and between the Company and Donald W. Layden, Jr.(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March 2, 2020) (File No. 001-33365).

10.6*		First Amendment to Employment Agreement, dated April 26, 2020, by and between USA Technologies, Inc. and Donald W. Layden, Jr (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on April 27, 2020) (File No. 001-33365).

10.7*		Separation Agreement and Release, dated May 10, 2020, between USA Technologies, Inc. and Donald W. Layden, Jr. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 13, 2020) (File No. 001-33365).

10.8*		Employment Agreement, dated May 8, 2020, between USA Technologies, Inc. and Sean Feeney (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on May 13, 2020) (File No. 001-33365).

10.9*		Non-Qualified Stock Option Agreement, dated May 8, 2020, between USA Technologies, Inc. and Sean Feeney (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on May 13, 2020) (File No. 001-33365).

10.10*		First Amendment to the USA Technologies, Inc. 2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 26, 2020) (File No. 001-33365).

10.11*		Restricted Stock Unit Award Agreement, dated May 29, 2020, between USA Technologies, Inc. and Anant Agrawal (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 3, 2020) (File No. 001-33365).

10.12		Amendment to Registration Rights Agreement by and between the Company and Antara Capital Master Fund LP dated January 31, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 6, 2020) (File No. 001-33365).



10.13		Letter Agreement, dated April 26, 2020, by and between USA Technologies, Inc. and Hudson Executive Capital LP (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on April 27, 2020) (File No.001-33365).

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

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

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

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

101		The following financial information from our Quarterly Report on Form ~~10-Q/A~~10-Q for the quarter ended ~~September 30, 2018,~~March 31, 2020, filed with the SEC on ~~November 14, 2019,~~June 24, 2020, formatted in Extensible Business Reporting Language (XBRL): (1) the Consolidated Balance Sheets as of ~~September 30, 2018~~March 31, 2020 and June 30, ~~2018,~~2019, (2) the Consolidated Statements of Operations for the three-month and nine-month periods ended ~~September 30, 2018~~March 31, 2020 and ~~2017,~~2019, (3) the Consolidated Statements of Shareholders’ Equity for the ~~three-month period~~nine-month periods ended ~~September 30, 2018,~~March 31, 2020 and 2019, (4) the Consolidated Statements of Cash Flows for the ~~three-month period~~nine-month periods ended ~~September 30, 2018~~March 31, 2020 and ~~2017,~~2019, and (5) the Notes to Consolidated Financial Statements.
*		Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 6 of this report.

**		Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).

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: ~~November 14, 2019~~June 24, 2020	/s/ ~~Donald W. Layden, Jr.~~Sean Feeney
	~~Donald W. Layden, Jr.,~~Sean Feeney
	~~Interim~~ Chief Executive Officer

Date: ~~November 14, 2019~~June 24, 2020	/s/ ~~Glen E. Goold~~Michael Wasserfuhr
	~~Glen E. Goold~~Michael Wasserfuhr
	~~Interim~~ Chief Financial Officer

3149



($ 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



($ 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



($ in thousands)	November 9, 2017 (As Restated)
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



	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		)



	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		)



($ in thousands)	Workforce reduction
Balance at July 1, 2018	$	1,019
Plus: additions	137
Less: cash payments	(301		)
Balance at September 30, 2018	$	855



Age Analysis of Past Due Finance Receivables
As of June 30, 2018
($ in thousands)	Current		30 and Under Days Past Due		31 – 60 Days Past Due		61 – 90 Days Past Due		Greater than 90 Days Past Due		Total Finance Receivables
QuickStart Leases	$	17,609	$	56	$	7	$	56	$	133	$	17,861



	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