UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

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

For the quarterly period ended December 31, ~~2017~~

2019

☐

☐	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)

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 February ~~2, 2018~~3, 2020 there were ~~53,623,143~~64,171,422 outstanding shares of Common Stock, no par ~~value, outstanding.~~

value.

USA TECHNOLOGIES, INC.

Part I. Financial Information

Item 1. Consolidated Financial Statements

USA Technologies, Inc.

Condensed Consolidated Balance Sheets

December 31,

June 30,
($ in thousands, except shares)

2017

2017

(unaudited)

(audited)
Assets

Current assets:

Cash and cash equivalents

$
15,386

$
12,745
Accounts receivable, less allowance of $3,740 and $3,149, respectively

15,472

7,193
Finance receivables, less allowance of $49 and $19, respectively

5,517

11,010
Inventory

11,215

4,586
Prepaid expenses and other current assets

1,971

968
Total current assets

49,561

36,502

Non-current assets:

Finance receivables, less current portion

11,215

8,607
Other assets

1,120

687
Property and equipment, net

12,622

12,111
Deferred income taxes

14,774

27,670
Intangibles, net

30,910

622
Goodwill

64,449

11,492
Total non-current assets

135,090

61,189

Total assets

$
184,651

$
97,691

Liabilities and shareholders’ equity

Current liabilities:

Accounts payable

$
23,775

$
16,054
Accrued expenses

6,798

4,130
Line of credit, net

—

7,036
Capital lease obligations and current obligations under long-term debt

5,121

3,230
Income taxes payable

6

10
Deferred revenue

595

—
Deferred gain from sale-leaseback transactions

198

239
Total current liabilities

36,493

30,699

Long-term liabilities:

Revolving credit facility

10,000

—
Capital lease obligations and long-term debt, less current portion

23,874

1,061
Accrued expenses, less current portion

65

53
Deferred gain from sale-leaseback transactions, less current portion

49

100
Total long-term liabilities

33,988

1,214

Total liabilities

$
70,481

$
31,913

Commitments and contingencies (Note 13)

Shareholders’ equity:

Preferred stock, no par value, 1,800,000 shares authorized, no shares issued

—

—
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $19,109 and $18,775 at December 31, 2017 and June 30, 2017, respectively

3,138

3,138
Common stock, no par value, 640,000,000 shares authorized, 53,619,898 and 40,331,645 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively

307,053

245,999
Accumulated deficit

(196,021)

(183,359)
Total shareholders’ equity

114,170

65,778
Total liabilities and shareholders’ equity

$
184,651

$
97,691
(Unaudited)



($ in thousands)	December 31, 2019			June 30, 2019

Assets
Current assets:
Cash and cash equivalents	$	37,505		$	27,464
Accounts receivable, less allowance of $6,261 and $4,866, respectively	18,904			21,906
Finance receivables, net	8,232			6,727
Inventory, net	11,324			11,273
Prepaid expenses and other current assets	1,789			1,558
Total current assets	77,754			68,928

Non-current assets:
Finance receivables due after one year, net	12,127			12,642
Other assets	2,050			2,099
Property and equipment, net	8,961			9,590
Operating lease right-of-use assets	6,281			—
Intangibles, net	24,602			26,171
Goodwill	63,945			63,945
Total non-current assets	117,966			114,447

Total assets	$	195,720		$	183,375

Liabilities, convertible preferred stock and shareholders’ equity
Current liabilities:
Accounts payable	$	33,142		$	27,584
Accrued expenses	24,496			23,351
Capital lease obligations and current obligations under long-term debt	587			12,497
Income taxes payable	258			254
Deferred revenue	1,629			1,681
Total current liabilities	60,112			65,367

Long-term liabilities:
Deferred income taxes	81			71
Capital lease obligations and long-term debt, less current portion	12,224			276
Operating lease liabilities, non-current	5,299			—
Accrued expenses, less current portion	1,520			100
Total long-term liabilities	19,124			447

Total liabilities	$	79,236		$	65,814
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 $20,444 and $20,111 at December 31, 2019 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, 64,171,422 and 60,008,481 shares issued and outstanding at December 31, 2019 and June 30, 2019, respectively	395,662			376,853
Accumulated deficit	(282,316		)	(262,430		)
Total shareholders’ equity	113,346			114,423
Total liabilities, convertible preferred stock and shareholders’ equity	$	195,720		$	183,375

See accompanying notes.

USA Technologies, Inc.

Condensed Consolidated Statements of Operations

Three months ended

Six months ended

December 31,

December 31,
($ in thousands, except shares and per share data)

2017

2016

2017

2016
Revenues:

License and transaction fees

$
22,853

$
16,639

$
42,797

$
33,004
Equipment sales

9,653

5,117

15,326

10,340
Total revenues

32,506

21,756

58,123

43,344

Costs of sales:

Cost of services

14,362

11,389

27,688

22,632
Cost of equipment

8,943

4,033

14,033

8,211
Total costs of sales

23,305

15,422

41,721

30,843

Gross profit

9,201

6,334

16,402

12,501

Operating expenses:

Selling, general and administrative

8,329

5,785

15,075

12,593
Integration and acquisition costs

3,335

8

4,097

109
Depreciation and amortization

737

307

982

515
Total operating expenses

12,401

6,100

20,154

13,217

Operating (loss) income

(3,200)

234

(3,752)

(716)

Other income (expense):

Interest income

251

200

331

273
Interest expense

(494)

(201)

(703)

(413)
Change in fair value of warrant liabilities

-

-

-

(1,490)
Total other expense, net

(243)

(1)

(372)

(1,630)

(Loss) income before income taxes

(3,443)

233

(4,124)

(2,346)
(Provision) benefit for income taxes

(9,073)

-

(8,605)

115

Net (loss) income

(12,516)

233

(12,729)

(2,231)
Preferred dividends

-

-

(334)

(334)
Net (loss) income applicable to common shares

$
(12,516)

$
233

$
(13,063)

$
(2,565)
Net (loss) income per common share

Basic

(0.24)

0.01

(0.26)

(0.07)
Diluted

(0.24)

0.01

(0.26)

(0.07)
Weighted average number of common shares outstanding

Basic

52,150,106

40,308,934

49,861,735

39,398,469
Diluted

52,150,106

40,730,712

49,861,735

39,398,469



	Three months ended December 31,						Six months ended December 31,
($ in thousands, except per share data)	2019			2018			2019			2018
Revenue:
License and transaction fees	$	35,754		$	29,733		$	70,363		$	58,404
Equipment sales	8,297			4,753			17,047			9,850
Total revenue	44,051			34,486			87,410			68,254

Costs of sales:
Cost of services	22,579			19,462			44,668			37,834
Cost of equipment	8,710			5,589			18,564			9,927
Total costs of sales	31,289			25,051			63,232			47,761

Gross profit	12,762			9,435			24,178			20,493

Operating expenses:
Selling, general and administrative	18,700			10,931			36,807			20,381
Investigation and restatement expenses	738			7,188			4,303			11,714
Integration and acquisition costs	—			181			—			1,103
Depreciation and amortization	1,080			1,143			2,102			2,276
Total operating expenses	20,518			19,443			43,212			35,474

Operating loss	(7,756		)	(10,008		)	(19,034		)	(14,981		)

Other income (expense):
Interest income	283			408			577			897
Interest expense	(833		)	(819		)	(1,298		)	(1,605		)
Total other income (expense), net	(550		)	(411		)	(721		)	(708		)

Loss before income taxes	(8,306		)	(10,419		)	(19,755		)	(15,689		)
Provision for income taxes	(72		)	(19		)	(131		)	(37		)

Net loss	(8,378		)	(10,438		)	(19,886		)	(15,726		)
Preferred dividends	—			—			(334		)	(334		)
Net loss applicable to common shares	$	(8,378	)	$	(10,438	)	$	(20,220	)	$	(16,060	)
Net loss per common share
Basic	$	(0.13	)	$	(0.17	)	$	(0.33	)	$	(0.27	)
Diluted	$	(0.13	)	$	(0.17	)	$	(0.33	)	$	(0.27	)
Weighted average number of common shares outstanding
Basic	63,664,256			60,059,936			61,891,197			60,056,924
Diluted	63,664,256			60,059,936			61,891,197			60,056,924

See accompanying notes.

USA Technologies, Inc.

Condensed Consolidated ~~Statement~~Statements of Shareholders’ Equity

~~(Unaudited)~~

Series A

Convertible

Preferred Stock

Common Stock

Accumulated

($ in thousands, except shares)

Shares

Amount

Shares

Amount

Deficit

Total
Balance, June 30, 2017

445,063

$
3,138

40,331,645

$
245,999

$
(183,359)

$
65,778
Issuance of common stock in relation to public offering, net of offering costs incurred of $3,237 (a)

—


—

9,583,332


39,888


—


39,888
Issuance of common stock as merger consideration(b)

—

—

3,423,367

19,810

—

19,810
Stock based compensation

—


—

281,554


1,356


—


1,356
Excess tax benefit from stock plans(c)

—


—

—


—


67


67
Net loss

—


—

—


—


(12,729)


(12,729)
Balance, December 31, 2017

445,063

$
3,138

53,619,898

$
307,053

$
(196,021)

$
114,170

^(a)

~~Refer to Note 12 regarding the public offering issued during July 2017.~~

^(b)

~~Refer to Note 3 regarding the business acquisition executed during November 2017.~~

(Unaudited)

^(c)

~~Refer to Note 2 regarding the adoption of ASU 2016-09.~~

Six Month Period Ended December 31, 2019



	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

Six Month Period Ended December 31, 2018



	Common Stock			Accumulated Deficit			Total
($ in thousands)	Shares	Amount		Accumulated Deficit			Total
Balance, June 30, 2018	59,998,811	$	375,436	$	(232,748	)	$	142,688
Cumulative effect adjustment for ASC 606 adoption	—	—		200			200
Stock based compensation	13,344	370		—			370
Net loss	—	—		(5,288		)	(5,288		)
Balance, September 30, 2018	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

See accompanying notes.

~~Table of Contents~~

USA Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six months ended

December 31,
($ in thousands)

2017

2016
OPERATING ACTIVITIES:

Net loss

$
(12,729)

$
(2,231)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Non-cash stock based compensation

1,356

445
Gain on disposal of property and equipment

(83)

(31)
Non-cash interest and amortization of debt discount

86

26
Bad debt expense

291

450
Depreciation and amortization

3,476

2,564
Change in fair value of warrant liabilities

-

1,490
Excess tax benefits

67

-
Deferred income taxes, net

8,537

(115)
Recognition of deferred gain from sale-leaseback transactions

(93)

(430)
Changes in operating assets and liabilities:

Accounts receivable

(5,290)

(2,347)
Finance receivables

7,958

2,119
Inventory

(5,822)

(2,689)
Prepaid expenses and other current assets

(606)

(542)
Accounts payable and accrued expenses

6,950

(3,840)
Income taxes payable

40

(12)
Net cash provided by (used in) operating activities

4,138

(5,143)

INVESTING ACTIVITIES:

Purchase of property and equipment, including rentals

(1,767)

(1,944)
Proceeds from sale of property and equipment, including rentals

157

61
Cash used for Cantaloupe acquisition

(65,181)

-
Net cash used in investing activities

(66,791)

(1,883)

FINANCING ACTIVITIES:

Cash used in retirement of common stock

-

(31)
Proceeds from exercise of common stock warrants

-

6,193
Payment of debt issuance costs

(445)

-
Proceeds from issuance of long-term debt

25,100

-
Proceeds from revolving credit facility

10,000

-
Issuance of common stock in public offering, net

39,888

-
Repayment of capital lease obligations and long-term debt

(9,249)

(374)
Net cash provided by financing activities

65,294

5,788

Net increase (decrease) in cash and cash equivalents

2,641

(1,238)
Cash and cash equivalents at beginning of year

12,745

19,272
Cash and cash equivalents at end of period

$
15,386

$
18,034

Supplemental disclosures of cash flow information:

Interest paid in cash

$
557

$
469
Income taxes paid in cash (refund), net

$
-

$
-
Supplemental disclosures of noncash financing and investing activities:

Equity issued in connection with Cantaloupe Acquisition

$
19,810

$
-
Equipment and software acquired under capital lease

$
227

$
272



	Six months ended December 31,
($ in thousands)	2019			2018
OPERATING ACTIVITIES:
Net loss	$	(19,886	)	$	(15,726	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Non-cash stock based compensation	2,032			972
Loss (gain) on disposal of property and equipment	41			(29		)
Non-cash interest and amortization of debt discount	732			45
Bad debt expense	862			1,308
Provision for inventory reserve	(514		)	1,211
Depreciation and amortization	3,493			3,972
Non-cash lease expense	1,021			—
Deferred income taxes	10			9
Changes in operating assets and liabilities:
Accounts receivable	2,133			4,332
Finance receivables, net	(990		)	(109		)
Inventory, net	465			284
Prepaid expenses and other assets	(411		)	(1,588		)
Accounts payable and accrued expenses	1,999			(11,095		)
Operating lease liabilities	(776		)	—
Deferred revenue	(52		)	(201		)
Income taxes payable	4			25
Net cash used in operating activities	(9,837		)	(16,590		)

INVESTING ACTIVITIES:
Purchase of property and equipment, including rentals	(1,361		)	(2,324		)
Proceeds from sale of property and equipment, including rentals	31			82
Net cash used in investing activities	(1,330		)	(2,242		)

FINANCING ACTIVITIES:
Proceeds from long-term debt and equity issuance by Antara	34,950			—
Repayment of revolving credit facility	(10,000		)	—
Repayment of capital lease obligations and long-term debt	(2,109		)	(1,928		)
Payment of debt and equity issuance costs	(1,633		)	(53		)
Proceeds from exercise of common stock options	—			42
Net cash provided by (used in) financing activities	21,208			(1,939		)

Net (decrease) increase in cash and cash equivalents	10,041			(20,771		)
Cash and cash equivalents at beginning of year	27,464			83,964
Cash and cash equivalents at end of period	$	37,505		$	63,193

Supplemental disclosures of cash flow information:
Debt and equity issuance costs incurred but not yet paid related to Antara issuance	$	(3,170	)	$	—
Interest paid in cash	$	565		$	1,503
Income taxes paid in cash	$	33		$	12

See accompanying notes.

~~Table of Contents~~

USA Technologies, Inc.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

~~(Unaudited)~~

1. BUSINESS

USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”) was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutions and value-added services that facilitate electronic payment transactions 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 ~~Internet of Things (“IoT”)~~ and ~~machine-to-machine (“M2M”)~~IoT services, which include the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment. The connection to the ePort Connect ~~Platform~~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 ~~combination also marries~~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 ~~USA Technologies, Inc.~~the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and therefore should be read in conjunction with the Company’s June 30, 2019 Annual Report on Form ~~10-K for the year ended June 30, 2017.~~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 six months ended December 31, ~~2017~~2019 are not necessarily indicative of the results that may be expected for the year ending June 30, ~~2018.~~2020. The balance sheet at June 30, ~~2017~~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.

~~BASIS OF PRESENTATION~~

~~Certain reclassifications~~

In connection with the preparation of ~~prior year’s data have been~~the condensed consolidated financial statements for the three months ended December 31, 2019, the Company identified certain adjustments that are required to be made to ~~conform to current year’s presentation.~~its fiscal year 2019 interim and annual financial statements. As ~~disclosed in Note 3,~~a result, the Company ~~incurred integration~~has revised in this filing certain prior year interim and ~~acquisition expenses during~~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 ~~current period~~three months ended December 31, 2018 and ~~deemed it appropriate~~a $1.3 million decrease in net loss for the six months ended December 31, 2018. The Company does not believe these adjustments are material to ~~have such costs individually captioned within~~ the ~~statement~~previously issued financial statements.

LIQUIDITY

The Company has adopted Accounting Standards Codification, (“ASC”) 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the results of ~~operations. Accordingly,~~management’s assessment, plans and conclusion of the Company’s ability to continue as a going concern.

At June 30, 2019, the Company ~~retrospectively reclassified integration~~had $27.5 million in cash and ~~acquisition costs incurred~~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 credit facilities as current liabilities. Additionally, as of June 30, 2019, the Company identified sales tax liabilities and related interest in the ~~corresponding periods~~aggregate amount of $16.6 million. Also, the Company has reported aggregate net losses of $48.6 million for the three year period ended June 30, 2019.

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.

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 an aggregate purchase price 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 ~~previous fiscal year~~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 ~~conform~~which Antara committed to extend to the ~~current period’s presentation.~~

~~Table~~Company a $30.0 million senior secured term loan facility (“Term Facility”). Upon the execution of ~~Contents~~

~~2. ACCOUNTING POLICIES~~

~~RECENT ACCOUNTING PRONOUNCEMENTS~~

~~Accounting pronouncements adopted in fiscal year 2018~~

the Commitment Letter, the Company paid to Antara a non-refundable commitment fee of $1.2 million. In ~~January 2017,~~connection with the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2017-04 ("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 chargeCommitment Letter, Blair acted as exclusive placement agent for the ~~amount by which~~Company and received a cash placement fee of $750,000. On October 31, 2019, the ~~carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated~~Company entered into a Financing Agreement with Antara to ~~that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill~~draw $15.0 million on the ~~carrying~~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 ~~reporting unit when measuring~~draws under the ~~goodwill impairment loss, if applicable. ASU 2017-04 is effective~~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 ~~annual or any interim goodwill impairment tests~~working capital and general corporate purposes. The outstanding principal amount of the loan must be paid in ~~fiscal years beginning after December 15, 2019. We early adopted ASU 2017-04 for impairment tests~~full by no later than the maturity date of October 31, 2024. The Company will need to be ~~performed~~in 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 December 31, 2019, the Company was in compliance with its financial covenants.

As previously disclosed in our periodic reports and proxy statements, our independent Audit Committee chairperson, Robert Metzger is employed by Blair. Mr. Metzger receives discretionary compensation from Blair based on ~~testing dates after July 1, 2017, which did not impact our~~various activities including, among other things, training activities and business development.

The Company believes that its current financial resources, as of the date of the issuance of these consolidated financial statements, are sufficient to fund its current twelve month operating budget, alleviating any substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs for twelve months from the issuance of these consolidated financial statements.

2. ACCOUNTING POLICIES

RECENT ACCOUNTING PRONOUNCEMENTS

Accounting pronouncements adopted

In ~~March~~February 2016, the FASB issued ASU 2016-02, Leases, which requires, among other items, lessees to recognize a right of use asset and a related lease liability for most leases on the balance sheet. Lessees and lessors are required to disclose quantitative and qualitative information about leasing arrangements to 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 applying the guidance to leases existing as of the effective date. The Company has determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance 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. ~~2016-09, Compensation~~2016-02 resulted in an increase in the Company’s assets and liabilities of 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 elected the package of practical expedients included in this guidance, which allowed it to not reassess: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and, (iii) the initial direct 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 combined component is then accounted for under Topic 606 or Topic 842 depending on the predominant characteristic of the combined component.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718), Improvements to ~~Employee~~Nonemployee Share-Based Payment ~~Accounting, which modifies~~Accounting.” The standard simplifies the accounting for ~~certain aspects of~~ 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 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~~ASU on July 1, ~~2017.~~

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 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 ~~primary impact of adoption was the recognition of excess tax benefits in the Company's provision for income taxes which is applied prospectively starting~~Company adopted this ASU on July 1, 2017 in accordance with the guidance. Adoption of the new standard resulted in the recognition of $16 thousand of excess tax benefits in the Company's provision for income taxes for the six months ended December 31, 2017. 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 changed2019, and ~~the cumulative excess tax benefits as of June 30, 2017 amounting to $67 thousand were credited to accumulated deficit.~~

~~The~~its adoption ~~of ASU No. 2016-09~~ did not ~~impact our statement of cash flows for~~have a material effect on the ~~three and six months ended December 31, 2016.~~

Company’s condensed consolidated financial statements.

Accounting pronouncements to be ~~adopted.~~

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 May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) (“the New Standard”).” This ASU was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year. The new guidance provides a single model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The new standard also requires expanded qualitative and quantitative disclosures about the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU is now effective for fiscal years, and interim reporting periods within those years, beginning with the year ending June 30, 2019.

The Company’s project plan includes a three-phase approach to implementing this standard update. The Company is currently evaluating the impact of the potential changes identified by its initial phase one assessment work which included internal surveys of the business, holding revenue recognition workshops with sales and business unit finance leadership, and reviewing a representative sample of revenue arrangements across the business to initially identify a set of applicable qualitative revenue recognition changes related to the new standard update. During the quarter, the Company completed an acquisition of Cantaloupe and has commenced the phase one assessment of the recently acquired business.

~~Table of Contents~~

The objectives for the second phase of the project will be to establish and document key accounting policies and assess disclosures, business process and control impacts resulting from the New Standard. New policies and procedures identified during phase two will be applied to both historical Company revenue streams and those of the recently acquired business to ensure compliance with the New Standard. Lastly, the objectives of phase three will comprise effectively implementing the new standard update and embedding the new accounting treatment into the Company’s business processes and controls to support the financial reporting requirements. Phase three is expected to be completed in the fourth quarter of fiscal year 2018.

The Company is still evaluating the impact that the New Standard will have on the Company’s consolidated financial statements and will be unable to quantify its impact until the third phase of the project has been completed. The standard is expected to impact the Company’s revenue recognition processes, primarily in the areas of the allocation of contract revenues. An entity can elect to apply the guidance under one of the following two methods: (i) retrospectively to each prior reporting period presented – referred to as the full retrospective method; or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings – referred to as the modified retrospective method. The method of adoption has not yet been determined and is not expected to be finalized until the second phase of the project plan has been completed.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The company is the lessee under various agreements which are accounted for as operating leases. This amendment will be effective for the Company beginning with the year ending June 30, 2020, including interim periods within those fiscal years. Early application is permitted.

In June 2016, the FASB issued ASU No. 2016-13, “Financial ~~Instruments –~~ Instruments—Credit Losses (Topic 326).” The new guidance ~~introduces~~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.

In August ~~2016,~~2018, the FASB issued ASU No. ~~2016-15, “Statement of Cash Flows~~2018-15, “Intangibles—Goodwill and Other (Topic ~~230), Classification of Certain Cash Receipts and Cash Payments.~~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 ~~new guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This pronouncement~~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 Company beginning with the year ending June 30, 2019, and interim periods within that fiscal year. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected asfirst quarter of ~~the beginning of the~~our fiscal year beginning July 1, 2020. The Company expects that ~~includes that interim period. An entity that elects early~~the adoption ~~must adopt all~~ of this ASU will not have a material impact on the ~~amendments in the same period. The new guidance requires adoption on a retrospective basis unless it is~~ impracticable to apply, in which case the company would be required to apply the amendments prospectively as of the earliest date practicable. Upon adoption, the Company does not anticipate significant changes to the Company's existing accounting policies or presentation of the Statement of Cash Flows.

Company’s condensed consolidated financial statements.

In ~~January 2017,~~December 2019, the FASB issued ASU No. ~~2017-01, “Business Combinations~~2019-12, “Income Taxes (Topic ~~805), Clarifying~~740): Simplifying the ~~Definition of a Business.~~Accounting for Income Taxes.” ASU ~~2017-01 provides~~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 ~~in ascertaining whether a collection of assets and activities~~to improve consistent application. ASU 2019-12 is ~~considered a business. Adoption of the amendment will be applied prospectively~~ effective for ~~annual periods~~fiscal years beginning after December 15, ~~2017 with early adoption permissible for specific transactions. Adoption is not expected to have a material effect on the Company’s consolidated financial statements.~~

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting.” The standard provides guidance about which changes to the terms or conditions of a share-based payment award require modification accounting, which may result in a different fair value for the award. This ASU is effective for annual periods2020 and interim periods ~~beginning after~~within those fiscal years. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.

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 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 December ~~15, 2017,~~31, 2019, the Company has the following balances recorded in the balance sheet related to its lease arrangements:



($ in thousands)	Classification	As of December 31, 2019

Assets
Operating leases	Operating lease right-of-use assets	$	6,281
Finance leases	Property and equipment, net	98

Liabilities
Current:
Operating leases	Accrued expenses	1,134
Finance leases	Capital lease obligations and current obligations under long-term debt	75

Non-current:
Operating leases	Operating lease liabilities, non-current	5,299
Finance leases	Capital lease obligations and long-term debt, less current portion	$	29

Components of lease cost are as follows:



($ in thousands)	Three months ended December 31, 2019		Six months ended December 31, 2019

Finance lease costs:
Amortization of ROU assets	$	23	$	54
Interest on lease assets	3		6
Operating lease costs*	753		1,454
Total	$	779	$	1,514

* 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)	Six months ended December 31, 2019

Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities
Financing cash flows from finance leases	$	47
Operating cash flows from finance leases	6
Operating cash flows from operating leases	962

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:



	Six months ended December 31, 2019
Weighted-average remaining lease term
Finance leases	1.5
Operating leases	5.6

Weighted-average discount rate
Finance leases	9.8	%
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	$	818	$	55
2021	1,440		46
2022	1,461		16
2023	1,493		2
2024	1,030		1
Thereafter	1,520		—
Total lease payments	$	7,762	$	120
Less: Imputed interest	1,329		16
Present value of lease liabilities	$	6,433	$	104

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 ~~early~~the adoption ~~permissible.~~of ASC Topic 842. The ~~guidance~~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 ~~required~~generally insignificant and is reasonably certain to be ~~applied prospectively to awards modified on or after~~exercised by the ~~effective date. Historically, modifications to our share-based payment awards have been limited. As such, we~~lessee. Leases that do not ~~expect~~meet the ~~application of this standard~~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 ~~have a material effect on our results of operations or financial position.~~

~~Table of Contents~~

~~3. ACQUISITION OF CANTALOUPE SYSTEMS, INC.~~

~~On November 9, 2017,~~60 days' written notice. As discussed in Note 2, the Company ~~acquired all~~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 $85.0 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, net~~Equipment sales in the Consolidated Statements of ~~cash acquired. Cantaloupe is a premier provider of cloud~~Operations 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 preliminary fair value of the purchase price consideration consisted of the following:~~


~~($ in thousands)~~
~~Cash consideration, net of cash acquired~~ ~~(1)~~	$	~~(65,181)~~
~~USAT shares issued as stock consideration~~ ~~(2)~~		~~(19,810)~~
~~Total consideration~~	$	~~(84,991)~~

~~(1)~~

~~The Cash Consideration is subject to certain post-closing adjustments, including with respect to the Company’s net working capital, as set forth in the Merger Agreement.~~

~~(2)~~

Represents the stock consideration amount pursuant to the terms and conditions of the Merger Agreement equal to the 3,423,367 USAT Shares issued by the Company, multiplied by the fair market value per share of the USAT common stock, as determined by the Merger Agreement. Pursuant to an Escrow Agreement, 1,496,707 of the USAT Shares, with a value of $8.7 million as determined under the Merger Agreement, were not delivered to the former stockholders or warrant holders of Cantaloupe but are to be held in escrow for a minimum of fifteen months following the acquisition as partial security for certain indemnification obligations of the former stockholders and warrant holders of Cantaloupe under the Merger Agreement.

~~The Company financed~~ a portion of the ~~purchase price~~lease payments as interest income. Revenue from operating leases is recognized ratably over the applicable service period with ~~proceeds from a $25.0 million term loan (“Term Loan”)~~service fee revenue related to the leases included in License 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. Refer to Note 9 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~~transaction fees in the Consolidated Statements of Operations.

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



($ in thousands)	December 31, 2019			June 30, 2019
Cost	$	32,507		36,190
Accumulated depreciation	(27,052		)	(30,473		)
Net	$	5,455		$	5,717

The Company’s net investment in sales-type leases (carrying value of lease receivables) and the future minimum amounts to be collected on these lease receivables as of December 31, 2019 are disclosed within Note 6 - Finance Receivables.

4. REVENUE

Disaggregated Revenue

Based on similar operational and economic characteristics, the Company’s revenue from contracts with customers is disaggregated by License and transaction ~~were recorded at~~fees and Equipment sales, as reported in the ~~date~~Company’s Condensed Consolidated Statements of ~~acquisition at their respective fair values using assumptions that are subject to change.~~Operations. The Company ~~has~~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 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 ~~finalized its valuation~~include non-recurring charges. Further, we applied the practical expedient to not consider arrangements with an original expected duration of ~~certain assets~~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 ~~liabilities recorded in connection with this transaction. Thus, the estimated measurements recorded to date are subject to change~~60 months based on implied and ~~any changes will be recorded as adjustments to the fair value of those assets and liabilities and residual~~explicit termination penalties. These amounts will be ~~allocated to goodwill. The final valuation adjustments may also require adjustment to~~converted into revenue in future periods as work is performed, primarily based on the ~~consolidated statements~~services provided or at delivery and acceptance of ~~operations and cash flows. The final determination of these fair values will be completed as soon as possible but no later than one year from~~products, depending on the ~~acquisition date.~~

applicable accounting method.

~~Table of Contents~~

The following table ~~summarizes~~reflects the ~~fair value of total consideration transferred~~estimated fees to be recognized in the ~~holders of all~~future related to performance obligations that are unsatisfied at the end of the ~~outstanding equity interests~~period:



($ in thousands)	As of December 31, 2019

2020	$	6,884
2021	12,169
2022	10,611
2023	7,977
2024 and thereafter	4,250
Total	$	41,891

Contract Liabilities

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



	Three months ended December 31,	Six months ended December 31,
($ in thousands)	2019	2019

Deferred revenue, beginning of the period	1,649	1,681
Deferred revenue, end of the period	1,629	1,629
Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period	209	360

The change in the contract liabilities period-over-period is primarily the result of ~~Cantaloupe at~~timing difference between the ~~acquisition date~~Company’s satisfaction of ~~November 9, 2017:~~

Cantaloupe
($ in thousands)

Systems, Inc.
Accounts receivable

$
3,232
Finance receivables, current portion

1,640
Inventory

782
Prepaid expense and other current assets

682
Finance receivables, less current portion

3,483
Other assets

50
Property and equipment

1,573
Intangibles

30,800
Goodwill

52,957
Total assets acquired

95,199
Accounts payable

(1,591)
Accrued expenses

(1,832)
Deferred revenue

(626)
Capital lease obligations and current obligations under long-term debt

(666)
Capital lease obligations and long-term debt, less current portion

(1,134)
Deferred income tax liabilities

(4,359)
Total net assets acquired

$
84,991

~~Amounts allocated to intangible assets included $18.9 million related to customer relationships, $10.3 million related to developed technology,~~a performance obligation 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 from 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 $53.0 million arising~~payment from the ~~acquisition includes the expected synergies between Cantaloupe and~~customer.

Contract Costs

At December 31, 2019, the Company ~~the value~~had net capitalized costs to obtain contracts of the employee workforce, and intangible assets that do not qualify for separate recognition at the time of acquisition. The goodwill, which is not deductible for income tax purposes, was assigned to the Company’s only reporting unit.

~~The amount of Cantaloupe revenues~~$0.3 million included in Prepaid expenses and other current assets and $1.7 million included in Other noncurrent assets on the ~~Company’s~~Condensed Consolidated ~~Statements~~Balance Sheet. None of ~~Operations for both~~these capitalized contract costs were impaired. During the three and six months ended December 31, ~~2017 is $4.7 million. The~~2019, amortization of capitalized contract costs was $0.1 million and $0.2 million, respectively.

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.

Subsequent to the Cantaloupe ~~earnings~~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 inthese severance charges under “Integration and acquisition costs” within the ~~Company’s~~Condensed Consolidated Statements of Operations, with the remaining outstanding balance included within “Accrued expenses” on the Condensed Consolidated Balance Sheet. Liabilities for ~~both~~severance will generally be paid during the ~~three and six months ended December 31, 2017 is $1.8 million, which was primarily driven by an income tax benefit of $1.7 million.~~

As a result of the acquisition of Cantaloupe, the Company incurred the following integration and acquisition costs and other one-time charges related to the acquisition in the three and six months ended December 31, 2017:

Three months ended

Six months ended
($ in thousands)

December 31, 2017

December 31, 2017
Cost of equipment

Acquired inventory fair market value step-up

$
23

$
23
Operating expenses

Integration and acquisition costs

3,335

4,097
Interest expense

Write-off of deferred financing costs

55

55
Total integration and acquisition-related costs

$
3,413

$
4,175

next twelve months.

~~Table of Contents~~

~~Supplemental disclosure of pro forma information~~

The following ~~supplemental unaudited pro forma information presents~~table summarizes 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 December 31,

Six months ended December 31,
(In thousands, except per share data)

2017

2016

2017

2016
Revenues

$
34,772

$
27,521

$
67,642

$
54,704
Net loss attributable to USAT

(10,632)

(428)

(10,552)

(5,458)
Net loss attributable to USAT common shares

$
(10,632)

$
(428)

$
(10,886)

$
(5,792)
Net loss per share - basic and diluted

(0.20)

(0.01)

(0.20)

(0.11)
Weighted average number of common shares outstanding - basic and diluted

53,619,921

53,315,633

53,584,368

52,369,824

~~The supplemental unaudited pro forma earnings~~Company’s severance activity for the three and six months ended December 31, ~~2017 were adjusted~~2019 related to ~~exclude $3.3 million~~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	$	—

6. FINANCE RECEIVABLES

The Company's finance receivables consist of financed devices under the Quickstart program and ~~$4.1 million~~Cantaloupe devices contractually associated with the Seed platform. Predominately all of ~~integration and acquisition costs, respectively.~~

~~The supplemental unaudited pro forma earnings for~~ the ~~six months ended~~Company's finance receivables agreements are classified as non-cancellable 60 month sales-type leases. As of December 31, ~~2016 were adjusted to include $4.1 million of integration~~2019 and ~~acquisition costs.~~

~~4. FINANCE RECEIVABLES~~

~~Finance~~June 30, 2019 finance receivables consist of the following:

December 31,

June 30,
($ in thousands)

2017

2017
Total finance receivables

$
16,732

$
19,617
Less current portion

5,517

11,010
Non-current portion of finance receivables

$
11,215

$
8,607



($ in thousands)	December 31, 2019		June 30, 2019
Finance receivables, net	$	8,232	6,727
Finance receivables due after one year, net	12,127		12,642
Total finance receivables, net of allowance of $602 and $606, respectively	$	20,359	$	19,369

The Company ~~accounts for their~~routinely evaluates outstanding finance receivables ~~using delinquency~~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 ~~nonaccrual data~~principal payments as ~~key performance indicators. The Company classified $407 thousand and $102 thousand as outstanding and nonperforming as of~~scheduled.

At December 31, ~~2017~~2019 and June 30, 2017, respectively. The Company expects to collect on their outstanding finance receivables, less any portion currently reserved, without the contracting of third parties. At December 31, 2017 and June 30, 2017,2019, credit quality indicators consisted of the following:

December 31,

June 30,
($ in thousands)

2017

2017
Performing

$
16,325

$
19,515
Nonperforming

407

102
Total

$
16,732

$
19,617



($ in thousands)	December 31, 2019		June 30, 2019
Performing	$	20,359	$	19,369
Nonperforming	602		606
Total	$	20,961	$	19,975

~~Table~~An aged analysis of ~~Contents~~

~~Age Analysis of Past Due Finance Receivables~~

~~As of December 31, 2017~~

30 and Under

31 – 60

61 – 90

Greater than

Total

Total

Days Past

Days Past

Days Past

90 Days Past

Non-

Finance
($ in thousands)

Due

Due

Due

Due

Performing

Performing

Receivables
QuickStart Leases

$
40

$
85

$
162

$
120

$
407

$
16,325

$
16,732

~~Age Analysis of Past Due Finance Receivables~~

~~As of June 30, 2017~~

~~5. INVENTORY~~

~~Inventory, net of reserves, was $11.~~2 ~~million and $4.6 million~~the Company's finance receivables as of December 31, ~~2017~~2019 and June 30, ~~2017, respectively. Inventory consists~~2019 is as follows:



($ in thousands)	December 31, 2019		June 30, 2019
Current	$	19,708	$	19,133
30 days and under past due	71		190
31 - 60 days past due	163		49
61 - 90 days past due	140		146
Greater than 90 days past due	879		457
Total finance receivables	$	20,961	$	19,975

Cash to be collected on our finance receivables due for each of ~~finished goods. The Company's inventories~~the fiscal years are ~~valued at the lower of cost or net realizable value.~~

~~The Company establishes allowances for obsolescence of inventory based upon quality considerations and assumptions about future demand and market conditions.~~

The fair value of Cantaloupe inventories acquired included a fair market value step-up of $23 thousand. In the three and six months ended December 31, 2017, the Company recognized the $23 thousand fair market value step-up as ~~a component of cost of equipment, as the inventory acquired was sold to the Company’s customers.~~

6.follows:



($ in thousands)
2020	$	6,846
2021	5,967
2022	5,303
2023	3,690
2024	1,876
Thereafter	313
Total amounts to be collected	23,995
Less: interest	3,034
Total finance receivables	$	20,961

7. EARNINGS (LOSS) PER SHARE

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

Three months ended December 31,

2017

2016

Net Loss

Shares

Per-Share

Net Income

Shares

Per-Share

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

Amount
Net (loss) income from continuing operations

$
(12,516)

$
233

Less: Preferred stock dividends

-

-

Basic EPS

Net (loss) income available to common shareholders

(12,516)

52,150,106

$
(0.24)

233

40,308,934

$
0.01

Effect of Dilutive Securities

Incremental shares

-

-
(a)

-

421,778

Diluted EPS

Net (loss) income available to common shareholders plus assumed conversions

$
(12,516)

52,150,106

$
(0.24)

$
233

40,730,712

$
0.01



	Three months ended December 31, 2019
($ in thousands, except per share data)	2019			2018

Numerator for basic and diluted loss per share
Net loss	$	(8,378	)	$	(10,438	)
Preferred dividends	—			—
Net loss applicable to common shareholders	$	(8,378	)	(10,438		)

Denominator for basic loss per share - Weighted average shares outstanding	63,664,256			60,059,936
Effect of dilutive potential common shares	—			—
Denominator for diluted loss per share - Adjusted weighted average shares outstanding	63,664,256			60,059,936

Basic loss per share	$	(0.13	)	$	(0.17	)
Diluted loss per share	$	(0.13	)	$	(0.17	)



	Six months ended December 31, 2019
($ in thousands, except per share data)	2019			2018

Numerator for basic and diluted loss per share
Net loss	$	(19,886	)	$	(15,726	)
Preferred dividends	(334		)	(334		)
Net loss applicable to common shareholders	$	(20,220	)	$	(16,060	)

Denominator for basic loss per share - Weighted average shares outstanding	61,891,197			60,056,924
Effect of dilutive potential common shares	—			—
Denominator for diluted loss per share - Adjusted weighted average shares outstanding	61,891,197			60,056,924

Basic loss per share	$	(0.33	)	$	(0.27	)
Diluted loss per share	$	(0.33	)	$	(0.27	)

Six months ended December 31,

2017

2016

Net Loss

Shares

Per-Share

Net Loss

Shares

Per-Share

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

Amount
Net loss from continuing operations

$
(12,729)

$
(2,231)

Less: Preferred stock dividends

(334)

(334)

Basic EPS

Net loss available to common shareholders

(13,063)

49,861,735

$
(0.26)

(2,565)

39,398,469

$
(0.07)

Effect of Dilutive Securities

Incremental shares

-

-
(a)

-

-
(a)

Diluted EPS

Net loss available to common shareholders plus assumed conversions

$
(13,063)

49,861,735

$
(0.26)

$
(2,565)

39,398,469

$
(0.07)

~~645,417, 581,621, and 851,407 shares were excluded~~diluted loss per share were 1,529,381 for ~~the three and six months ended December 31, 2017 and six months ended December 31, 2016, respectively, as the effects would be anti-dilutive.~~

~~The changes in the average number of shares that were anti-dilutive in~~ the three and six months ended December 31, ~~2017 compared to~~2019 and 1,400,968 for the ~~same period last year, were due to warrants exercised in connection with our common stock during September 2016.~~

7.three and six months ended December 31, 2018.

8. GOODWILL AND INTANGIBLES

Intangible asset balances and goodwill consisted of the following:

As of December 31, 2017

Accumulated

Amortization
($ in thousands)

Gross

Amortization

Net

Period
Intangible assets:

Non-compete agreements

2

(2)

—

2 years
Brand and tradenames

1,695

(96)

1,599

3 - 7 years
Developed technology

10,939

(499)

10,440

5 - 6 years
Customer relationships

19,049

(178)

18,871

10 - 18 years
Total intangible assets

$
31,685

$
(775)

$
30,910

Goodwill

64,449

—

64,449

Indefinite

Total intangible assets & goodwill

$
96,134

(775)

$
95,359



	As of December 31, 2019
($ in thousands)	Gross		Accumulated Amortization			Net		Amortization Period
Intangible assets:
Non-compete agreements	$	2	$	(2	)	$	—	2 years
Brand and tradenames	1,695		(585		)	1,110		3 - 7 years
Developed technology	10,939		(4,188		)	6,751		5 - 6 years
Customer relationships	19,049		(2,308		)	16,741		10 - 18 years
Total intangible assets	$	31,685	$	(7,083	)	$	24,602

Goodwill	63,945		—			63,945		Indefinite

Total intangible assets & goodwill	$	95,630	$	(7,083	)	$	88,547



	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, 2017

Accumulated

Amortization
($ in thousands)

Gross

Amortization

Net

Period
Intangible assets:

Non-compete agreements

2

(2)

—

2 years
Brand

95

(48)

47

3 years
Developed technology

639

(191)

448

5 years
Customer relationships

149

(22)

127

10 years
Total intangible assets

$
885

$
(263)

$
622

Goodwill

11,492

—

11,492

Indefinite

Total intangible assets & goodwill

$
12,377

(263)

$
12,114

For the three and six months ended December 31, ~~2017,~~2019 there was ~~$472 thousand~~$0.8 million and ~~$516 thousand~~$1.6 million in amortization expense related to intangible assets, respectively, as compared to the three and six months ended December 31, ~~2016,~~2018, for which there was ~~$43 thousand~~$0.8 million and ~~$87 thousand~~$1.6 million in amortization expense related to intangible assets, respectively.

~~8. LINE OF CREDIT~~

~~During the fiscal year ended~~

9. DEBT AND OTHER FINANCING ARRANGEMENTS

The Company's debt and other financing arrangements as of December 31, 2019 and June 30, ~~2016,~~2019 consisted of the ~~Company entered into a Loan and Security Agreement and other ancillary documents (as amended, the “Heritage Loan Documents”) with Heritage Bank~~following:



	As of December 31,			As of June 30,
($ in thousands)	2019			2019

Term Facility	$	15,000		$	—
Revolving Credit Facility	—			10,000
Term Loan	—			1,458
Other, including capital lease obligations	705			1,323
Less: unamortized issuance costs and debt discount	(2,894		)	(8		)
Total	12,811			12,773
Less: debt and other financing arrangements, current	(587		)	(12,497		)
Debt and other financing arrangements, noncurrent	$	12,224		$	276

Details of ~~Commerce (“Heritage Bank”), providing for a secured asset-based revolving line of credit in an amount of up to $12.0 million (the “Heritage Line of Credit”) at an~~ interest ~~rate calculated based~~expense presented on the ~~Federal Reserves’ Prime plus 2.25%. The Heritage Line~~Condensed Consolidated Statements 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.~~

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

~~On November 9, 2017, the Company paid all amounts due in respect of principal, interest, and fees, and satisfied all of its obligations under the Loan and Security Agreement dated~~Operations are as of March 29, 2016, as amended, and ancillary agreements by and between the Company and Heritage Bank of Commerce. The Company recorded a charge of $55 thousand to write-off any remaining deferred financing costs related to the Heritage Line of Credit to interest expense for the three and six months ended December 31, 2017. Pursuant to such payment, all commitments of Heritage Bank of Commerce were terminated, and the Heritage Loan and Security Agreement was terminated. As such, there was no outstanding balance on the Heritage Line of Credit at December 31, 2017.

~~9. DEBT~~

follows:



	Three months ended December 31,				Six months ended December 31,
($ in thousands)	2019		2018		2019		2018
Term Facility	$	379	$	—	$	379	$	—
Revolving Credit Facility	226		181		303		356
Term Loan	—		352		160		702
Other interest expense	228		286		456		547
Total interest expense	$	833	$	819	$	1,298	$	1,605

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 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 and six months~~year to date ended ~~December~~October 31, ~~2017 is~~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 required the Company to furnish various financial information on a quarterly and annual basis. As of ~~December 31, 2017,~~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 credit agreement and the Company classified all amounts outstanding ~~balances for~~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 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, ~~were $10.0~~and on September 30, 2019, the Company prepaid the remaining principal balance of the Term Loan and agreed to permanently reduce the amount available under the Revolving Credit Facility to $10 million ~~and $24.6 million, respectively.~~

~~Other Long-Term Borrowings~~

~~The~~which represented the outstanding balance on the date thereof. On October 31, 2019, the Company ~~periodically enters into capital lease obligations~~repaid the outstanding balance on the Revolving Credit Facility.

Term Facility with Antara

On October 9, 2019, as a result of seeking additional financing sources to ~~finance network servers, computers, office furniture and equipment related~~ support ~~for use in its daily operations. During~~ the ~~six months ended December 31, 2017,~~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 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 ~~lease obligations totaling $227 thousand, comprised~~and general corporate purposes. The outstanding principal amount of ~~monthly installments~~the loan must be paid in full by no later than the maturity date of ~~$7 thousand due~~October 31, 2024. The Company will need to be in 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 December 31, 2019, the Company was in compliance with its financial covenants.

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 ~~three years.~~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 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 fair value recognized in the consolidated statement of operations and any changes in the assumptions used in measuring the fair value of the ~~acquired equipment is included~~derivative liability could result in ~~property~~a material increase or decrease in its carrying value. The allocation of the proceeds to the debt component and ~~equipment and depreciated accordingly.~~

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.

Other Long-Term Borrowings

In connection with the acquisition of Cantaloupe, the Company assumed debt of $1.8 ~~million. At~~million with an outstanding balance of $0.4 million and $0.8 million as of December 31, ~~2017, the debt is~~2019 and June 30, 2019, respectively, comprised ~~of $550 thousand~~of: (i) $0.1 million and $0.2 million of promissory notes bearing an interest rate of a 5% and maturing on April 5, 2020 with principal and interest payments due ~~monthly, $830 thousand~~monthly; (ii) $0.3 million and $0.4 million of promissory notes bearing an interest rate of 10% and maturing on ~~September 30,~~April 1, 2021 with principal and interest payments due ~~quarterly,~~quarterly; and ~~$356 thousand~~(iii) $0.1 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.~~

2019.

10. FAIR VALUE ~~OF FINANCIAL INSTRUMENTS~~

AsMEASUREMENTS

Financial assets and liabilities are recorded at fair value. The carrying amounts of ~~December 31, 2017, the Company held no level 1, level 2, or level 3 financial instruments.~~

As of June 30, 2016, 2.2 million warrants with a fair value of $3.7 million comprised the Company’s Level 3 financial instruments. The Level 3 financial instruments consisted of common stock warrants issued by the Company in March 2011 to purchase sharescertain of the Company’s ~~common stock. The Level 3~~ financial instruments, ~~included features requiring liability treatment~~including cash equivalents, accounts receivable, accounts payable and accrued expenses, are carried at cost which approximates fair value due to the short-term maturity of ~~the warrants, with~~these instruments and are Level 1 assets or liabilities of the fair value ~~of the common stock based on valuations performed by an independent third-party valuation firm.~~ hierarchy.

The accounting guidance for fair value ~~was determined using proprietary valuation models using~~provides a framework for measuring fair value, clarifies the ~~quality~~definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the ~~underlying securities of the warrants, restrictions on the warrants and security underlying the warrants, time restrictions and precedent sale transactions completed~~price that would be received in the ~~secondary~~sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market orparticipants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in ~~other private transactions. During~~ the ~~three months ended September 30, 2016, all of the aforementioned warrants were exercised resulting~~valuation methodologies in ~~a $5.2 million reclassification to Common Stock and the net difference of $1.5 million was recorded as a loss on~~measuring fair value ~~associated with the warrant liability.~~

~~11. INCOME TAXES~~

~~On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was signed into law. Substantially all of the provisions of the Act~~as follows:

Level 1 ‑ Inputs are ~~effective~~unadjusted quoted prices in active markets 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 impactingidentical assets or liabilities that the Company has the ~~most significant of which reduces~~ability to access at the ~~Federal corporate statutory tax rate from 34% to 21%.~~

~~The staff of~~measurement date.

Level 2 ‑ Inputs are other than quoted prices included within Level 1 that are observable for the ~~US Securities~~asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and ~~Exchange Commission (“SEC”) has recognized~~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 ~~complexity of reflecting the impacts of the Act, and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (“SAB 118”~~asset or liability

(i.e., interest rates, yield curves, etc.), ~~which clarifies accounting for income taxes under ASC 740 if information is not yet available~~and inputs that are derived principally from or ~~complete~~corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 ‑ Inputs are unobservable and ~~provides for up to a one year period~~reflect the Company’s assumptions that market participants would use in ~~which to complete~~pricing the required analyses and accounting (the measurement period). SAB 118 describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount,asset or ~~(3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740,~~liability. The Company develops these inputs based on the ~~provisions~~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 ~~tax laws that were in effect immediately prior~~fair value hierarchy due to the ~~Act being enacted.~~

significant unobservable inputs. The ~~various provisions under~~liability is included as a component of Accrued expenses, less current portion on the ~~Act deemed most relevant~~consolidated balance sheets and subject to remeasurement to fair value at the ~~Company have been considered in preparation~~end of its financial statements as of December 31, 2017. To the extent that clarifications or interpretations materialize in the future that would impact upon the effects of the Act incorporated into the December 31, 2017 financial statements, those effects will be reflected in the future as or if they materialize.

each reporting period. For the three and six months ended December 31, ~~2017,~~2019, the Company ~~recorded income tax provisions of $9,073 thousand and $8,605 thousand, respectively, (substantially all deferred income taxes) which include a charge of $6,592 thousand related to~~recognized the Act. These provisions are based upon income (loss) before income taxes using an estimated negative annual effective income tax rate of 49.20%, which is primarily driven by the impact of permanent differences. The tax rate reduction related to the Act was treatedchange as a ~~discrete item~~component of Other income (expense) in its consolidated statements of operations. The assumptions used in the ~~tax provisions~~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.

There were no transfers between Level 1, Level 2, and Level 3 during the periods presented. The following table provides a reconciliation for the ~~three~~opening and ~~six months ended~~closing balances of the embedded derivative liability from October 31, 2019 to December 31, ~~2017.~~

2019:



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

The ~~accounting for deferred income taxes~~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 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 of December 31, 2019 was approximately $17.7 million and considered a Level 3 liability of the fair value hierarchy because this instrument used significant unobservable inputs consistent with those used in determining 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 $13,271 thousand, the potential effect would be to record a valuation allowance in the opening balance sheet, as well as a tax benefit to reverse the provision recorded duringembedded derivative liability values.

For the three months ended December 31, ~~2017 related to~~2019, the ~~rate reduction~~Company recorded an income tax provision of ~~the deferred tax assets acquired.~~

$72 thousand. For the ~~three and~~ six months ended December 31, ~~2016,~~2019, the Company recorded an income tax ~~benefits~~provision of $0$131 thousand. As of December 31, 2019, the Company continued to record a full valuation against its deferred tax assets. The income tax provisions primarily relate to the Company's uncertain tax positions, as well as state income and ~~$115 thousand, respectively, (substantially all deferred~~franchise taxes. As of December 31, 2019, the Company had a total unrecognized income ~~taxes) were recorded.~~tax benefit of $0.3 million. The ~~benefits are~~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 ~~income (loss)~~actual loss before income taxes ~~using~~for the six months ended December 31, 2019, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of ~~30% for~~ the ~~fiscal year~~income tax provision.

For the three months ended ~~June 30, 2017. However, such benefits actually calculated have been limited~~December 31, 2018, an income tax provision of $19 thousand was recorded, which primarily relates to ~~$115~~state income and franchise taxes. For the six months ended December 31, 2018, an income tax provision of $37 thousand ~~pending the materialization of additional~~was recorded, which primarily relates to state income and franchise taxes. The provisions are based upon actual loss before income taxes ~~resulting in an increase of $30 thousand in valuation allowances for the calculated additional benefits. The benefits~~ for the six months ended December 31, ~~2016 were reduced by~~2018, as the use of an estimated annual effective income tax rate does not provide a ~~provision for the tax effect~~reliable estimate of the ~~change in the fair value of warrant liabilities which was treated discretely. All of those~~income tax provision.

The Company had 23,978 warrants ~~were exercised~~outstanding as of ~~September~~December 31, 2019 and June 30, ~~2016.~~

~~12. EQUITY~~

~~On July 25, 2017, the Company closed its underwritten public offering~~2019, all of ~~9,583,332 shares of its common stock~~which were exercisable at ~~a public offering price of $4.50~~$5.00 per share. The ~~foregoing included the full exercise~~warrants have an expiration date 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 $19.8 million. Refer to Footnote 3 for details on the Merger Agreement.

March 29, 2021.

~~WARRANTS~~

During the three and six months ended December 31, 2017, no warrants were exercised as compared to the three and six months ended December 31, 2016 where 2.4 million warrants were exercised at $2.6058 per share, yielding proceeds of $6.2 million. The following table summarizes warrant activity for the three and six months ended December 31, 2017 and 2016:

Three months ended

Six months ended

December 31,

December 31,


2017

2016

2017

2016
Beginning balance

23,978

68,978

23,978

2,445,653
Issued

—

—

—

—
Exercised

—

(24,733)

—

(2,401,408)
Expired

—

—

—

—
Cancelled

—

(20,267)

—

(20,267)
Ending balance

23,978

23,978

23,978

23,978

STOCK OPTIONS

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 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 ~~(CEO)~~ and Chief Financial Officer ~~(CFO)~~ to purchase up to 19,047 and 25,000 shares respectively of common stock at an exercise price of $5.25 per share. The ~~CEO~~Chief Executive Officer options vest on August 16, 2018, expiring if not exercised prior to August 16, 2024. The ~~CFO~~Chief Financial Officer options vest 1/3 on August 16, 2018, 1/3 on August 16, 2019 and 1/3 on August 16, 2020, expiring if not exercised prior to August 16, 2024. The ~~CEO~~Chief Executive Officer options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and the ~~CFO~~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.

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 which vest 1/3 each year.

In October 2019, the Company awarded stock options to its interim Chief Executive Officer to purchase up to 225,000 shares of common stock at an exercise price of $7.11 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 six months ended December 31, ~~2017~~2019 and ~~2016~~2018 was determined using the following ~~weighted average~~ assumptions:

Stock based compensation related to all stock options for the three and six months ended December 31, ~~2017~~2019 was $1.1 million and ~~2016 was $276 thousand~~$1.4 million, respectively, and ~~$95 thousand,~~$0.3 million and $0.4 million for the three and six months ended December 31, 2018, respectively.

On July ~~1, 2017, $90 thousand of stock grants~~2, 2018, 6,677 shares were awarded to each non-employee ~~Director based on the closing price of the Company’s Common Stock on June 8, 2017 (the date for which the stock grants were initially approved),~~director for a total of ~~98,184~~40,062 shares. The shares vest ~~ratably~~ on a monthly basis over the ~~two year~~two-year period following July ~~1, 2017.~~ 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 vesting on October 16, 2020. On November 8, 2019, Albin F. Moschner retired as a member of the Board of Directors, and his remaining shares immediately vested.

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

The total expense recognized for ~~these grants~~all common stock awards for the ~~six months ending December 31, 2017 was $315 thousand.~~

~~During the~~three and six months ended December 31, ~~2017,~~2019 was $0.5 million, and for the ~~Company awarded an aggregate of 177,363 shares to its Chief Executive Officer, Chief Financial Officer~~three and ~~Chief Services Officer under its fiscal year 2017 long term stock incentive plan~~six months ended December 31, 2018 was $0.1 million and ~~an aggregate of 6,007 shares to two non-employee Directors in satisfaction of board fees.~~

$0.3 million, respectively.

LONG TERM INCENTIVE PLANS

The Company did not award any long-term stock incentive compensation to its executive officers during the 2019 fiscal year.

In October 2019, the Company's Board of Directors approved the Fiscal Year ~~2018~~2020 Long-Term Stock Incentive Plan ~~(the “2018 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 ~~2017~~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 subject to pro ration). If all of the maximum distinguished year over year percentage target goals are achieved, the executive officers would be awarded shares having the following value: Chief Executive Officer - $1,260,000 (240% of base salary), Chief Financial Officer - $450,000 (150% of base salary), Chief Services Officer - $412,500 (150% of base salary), and Chief Product Officer - $420,000 (150% of base salary and subject to pro ration). 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 had long-term stock incentive plans (“LTI”) in prior fiscal years for its then executive officers. Stock based compensation related to the LTI plans was as follows in the three and six months ended December 31, ~~2017~~2019 and ~~2016:~~

2018:

SHAREHOLDER RIGHTS PLAN AND ~~CONTINGENCIES~~

~~During~~DIVIDEND DISTRIBUTION

On October 18, 2019, the ~~current fiscal year,~~Company’s Board of Directors adopted a shareholder rights plan and declared a dividend distribution of one right on each outstanding share of the Company’s common stock. The rights plan will be put to a vote of shareholders at the next annual meeting, and will automatically terminate if approval is not obtained. If shareholder approval is obtained at the meeting, the shareholder rights plan will expire on October 18, 2020.

The rights will be exercisable only if a person or group acquires 15% or more of the Company’s outstanding common stock. If a shareholder's beneficial ownership of common stock as of the time of this announcement is at or above the 15% threshold, that shareholder's existing ownership percentage would be grandfathered, but the rights would become exercisable if at any time after this announcement the shareholder acquires beneficial ownership of additional shares. Each right will entitle shareholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $30.

If a person or group acquires 15% of the Company’s outstanding common stock, each right will entitle its holder (other than such person or members of such group) to purchase for $30, a number of Company common shares having a market value of twice such price. In addition, at any time after a person or group acquires 15% of the Company’s outstanding common stock, the Company’s Board of Directors may exchange one share of the Company’s common stock for each outstanding right (other than rights owned by such person or group, which would have become void).

Prior to the acquisition by a person or group of beneficial ownership of 15% of the Company’s common stock, the rights are redeemable for one cent per right at the option of the Board of Directors.

The dividend distribution was made to holders of record as of October 28, 2019, and was not taxable to shareholders.

REGISTRATION RIGHTS AGREEMENT

In connection with the Stock Purchase Agreement on October 9, 2019 with Antara, the Company ~~expanded the leased space for its headquarters in Malvern, Pennsylvania~~also entered into a registration rights agreement (the "Registration Rights Agreement") with Antara, pursuant to ~~a total of 23,138 square feet. The company’s monthly base rent now is approximately $47 thousand with a lease expiration date of November 30, 2023.~~

~~Through the Cantaloupe acquisition,~~which the Company ~~absorbed~~agreed, at its expense, to file a ~~noncancelable operating lease pertaining~~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 ~~Cantaloupe’s headquarters based in San Francisco, California. The leased premise consists~~an Amendment to Registration Rights Agreement dated as of ~~approximately 8,400 square feet and calls for rental payments of approximately $46 thousand due each month through its~~ January 31, 2020 ~~expiration date.~~

~~From time to time,~~(the “Amendment”), Antara and the Company ~~is involved in various legal proceedings arising during~~agreed to terminate the ~~normal course of business. In the opinion~~obligation of the ~~Company’s management, these proceedings will not have~~Company to register the shares in exchange for a ~~material adverse effect on~~payment of approximately $1.2 million by the ~~Company’s financial position, results~~Company to Antara by no later than January 31, 2020. The Amendment provided that the payment would be in full satisfaction of ~~operations~~ 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 ~~cash flows.~~

~~14. SUBSEQUENT EVENTS~~

~~The~~to obtain and maintain the effectiveness thereof. This obligation was recorded by the Company ~~has evaluated subsequent events that occurred through~~as of December 31, 2019.

Under the ~~date of the filing of this Form 10-Q. No significant events occurred subsequent to the balance sheet date~~Registration Rights Agreement, and prior to the ~~filing date~~Amendment, the Company was required to file the registration statement by no later than November 8, 2019 (extended by agreement of ~~this~~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 ~~10-Q~~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 ~~have~~be unduly time consuming and expensive. The Company also sought to obtain a ~~material impact~~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 intend to participate in a private mediation on February 27, 2020.

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 ~~Financial Statements.~~

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. The Pennsylvania Superior Court has not yet decided the appealability of the Chester County Stay Order.

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

Forward-Looking Statements

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

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

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

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

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

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

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

~~the ability of the Company to sell to third party lenders all or a portion of our finance receivables;~~

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

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

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

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

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

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

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.

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

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

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

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

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

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

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described ~~above.~~above or those discussed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (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. ~~was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutions~~provides wireless networking, cashless transactions, asset monitoring, and other value-added services ~~that facilitate electronic payment transactions and consumer engagement services primarily within~~principally to the small ticket, unattended Point of Sale (“POS”) market. ~~We are a leading provider in the small ticket, beverage and food vending industry and are expanding our solutions and services to other unattended market segments,~~Our ePort® technology can be installed and/or embedded into everyday devices such as vending machines, a variety of kiosks, amusement games, and commercial laundry ~~kiosk~~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 ~~others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options,~~support, consumer engagement services as well as telemetry, Internet of Things (“IoT”), and machine-to-machine (“M2M”) services, ~~which include~~including the ability to remotely monitor, control and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment.

The recent acquisition of Cantaloupe expanded the Company’s existing platform to become an end-to-end enterprise platform integrating Cantaloupe’s Seed Cloud which provides cloud and mobile solutions for dynamic route scheduling, automated pre-kitting, responsive merchandising, inventory management, warehouse and accounting management, as well as cashless vending. The combined companies complete the value chain for customers by providing both top-line revenue generating services as well as bottom line business efficiency services to help operators of unattended retail machines run their business better. The combination also marries the data-rich Seed system with USAT’s consumer benefits, providing operators with valuable consumer data that results in customized experiences. In addition to new technology and services, due to Cantaloupe’s existing customer base, the acquisition expands the Company’s footprint into new global markets.

The Company generates revenue in multiple ways. During the three and six months ended December 31, ~~2017,~~2019, we derived ~~70.3%~~approximately 81% and ~~73.6%~~80% of our ~~revenues~~revenue from recurring license and transaction fees related to our ePort Connect service ~~or Seed Cloud solution~~ and ~~29.7%~~approximately 19% and ~~26.4%~~20% of our revenue from equipment ~~sales, respectively.~~sales. Connections to our service stem from the sale or lease of our POS electronic payment devices, or certified payment software, or the servicing of similar third-party installed POS terminals. Connections to the ePort Connect service ~~or Seed Cloud solution~~ are the most

significant driver of the Company’s ~~revenues,~~revenue, particularly the recurring ~~revenues~~revenue from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:

As of December 31, ~~2017,~~2019, highlights of the Company ~~include:~~

are below:

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

CRITICAL ACCOUNTING POLICIES

There have been no significant changes to ~~variations and may significantly affect our reported results and financial position for~~ the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply critical accounting policies ~~consistently from period to period~~disclosed in “Management’s Discussion and ~~intend that any change~~Analysis of Financial Condition and Results of Operations” in ~~methodology occur in an appropriate manner. Accounting policies currently deemed critical are listed below:~~

~~Revenue Recognition~~

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

ePort hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party financing company for the devices. The Company utilizes its best estimate of selling price when calculating the revenue to be recorded under these leases. The QuickStart

our 2019 Form 10-K.

contracts qualify for sales type lease accounting. Accordingly, the Company recognizes a portion of lease payments as interest income. At the end of the lease period, the customer would have the option to purchase the device at its residual value.

~~Long Lived Assets~~

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

~~Goodwill and Intangible Assets~~

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

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

~~Allowance for Doubtful Accounts~~

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

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

~~Valuation Allowance~~

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

Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent that, based on available evidence, it is more likely than not such benefits will be realized. The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general and administrative expenses. No interest or penalties related to uncertain tax positions were accrued or incurred during the three and six months ended December 31, 2017 and 2016.

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 tables show certain financial and non-financial data that management believes give readers insight into certain trends and relationships about the Company’s financial performance.

Five Quarter Select Key Performance Indicators including Connections

As of and for the three months ended

December 31,

September 30,

June 30,

March 31,

December 31,

2017

2017

2017

2017

2016
Connections:

Gross new connections

317,000

28,000

70,000

40,000

25,000
% from existing customer base

44%

82%

93%

88%

80%
Net new connections (a)

311,000

26,000

64,000

35,000

21,000
Total connections

905,000

594,000

568,000

504,000

469,000

Customers:

New customers added (a)

1,800

550

300

500

500
Total customers

15,050

13,250

12,700

12,400

11,900

Volumes:

Total number of transactions (millions)

144.8

121.1

114.8

104.9

100.1
Total volume (millions)

$
272.7

$
239.2

$
225.6

$
202.5

$
191.5

Financing structure of connections:

JumpStart

0.4%

4.1%

3.3%

8.6%

6.8%
QuickStart & all others (b)

99.6%

95.9%

96.7%

91.4%

93.2%
Total

100.0%

100.0%

100.0%

100.0%

100.0%



	As of and for the three months ended
	December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018
Connections:
Gross new connections	45,000			49,000			47,000			51,000			36,000
Net new connections	40,000			46,000			43,000			46,000			33,000
Total connections	1,255,000			1,215,000			1,169,000			1,126,000			1,080,000
Customers:
New customers added	900			900			825			925			650
Total customers	21,200			20,300			19,400			18,575			17,650
Volumes:
Total number of transactions (millions)	277.6			232.7			229.6			217.2			204.6
Total volume (millions)	$	529.9		$	461.2		$	453.0		$	420.3		$	392.2
Financing structure of connections:
JumpStart	4.3		%	3.4		%	10.1		%	1.8		%	7.8		%
QuickStart & all others ^(a)	95.7		%	96.6		%	89.9		%	98.2		%	92.2		%
Total	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

Includes credit sales with standard trade receivable terms.

Highlights of USAT’s connections for the quarter ended December 31, ~~2017~~2019 include:

~~270,000 net new connections related to the acquisition of Cantaloupe;~~

~~41,000~~40,000 additional net new connections during the quarter; and

~~905,000 total connections to our service compared to the same quarter last year of approximately 469,000 total connections to our service, an increase of 436,000 connections, or 93%~~1,255,000 total connections to our service compared to the same quarter last year of approximately 1,080,000 total connections to our service, an increase of 175,000 connections, or 16%.

~~Table of Contents~~

RESULTS OF OPERATIONS

Three Months Ended December 31, ~~2017~~2019 Compared to Three Months Ended December 31, ~~2016~~

2018

Revenue and Gross Profit

Revenue. Total revenue increased ~~$10.7~~$9.6 million for the three months ended December 31, ~~2017~~2019 compared to the same period in ~~2016.~~2018. The ~~growth~~change in total revenue resulted from a ~~$6.2~~$6.0 million increase in license and transaction fee revenue for the ~~quarter~~three months ended December 31, ~~2017~~2019 compared to the same period in ~~2016,~~2018, driven primarily by the increase in connection count which caused an increase in license fee and processing fees, and a ~~$4.5~~$3.5 million increase in equipment revenue for the three months ended December 31, ~~2017~~2019 compared to the same period ~~last year, both~~in 2018 driven primarily by anthe 40,000 new net connections delivered for the three months ended December 31, 2019 compared to 33,000 new net connections delivered in the same period in 2018. This 7,000 increase in new net connections ~~and the Cantaloupe acquisition.~~ represents a 21 percent increase year over year.

Cost of sales. Cost of sales increased ~~by $7.9~~$6.2 million for the three months ended December 31, ~~2017~~2019 compared to the same period in 2018. The increase was driven by a $3.1 million increase in cost of services driven primarily by an increase in transaction processing costs following the increase in transaction processing fees for the quarter and a $3.1 million increase in cost of equipment sales, resulting from higher shipments compared to the same period last year. ~~The increase was driven by a $3.0 million increase in~~However, the cost of services ~~and a $4.9 million increase in cost of equipment sales, both driven by an increase in connections and the Cantaloupe acquisition.~~

~~Gross margin. The overall gross margin decreased 0.8% from 29.1%~~compared to services fees was 2.3% lower for the three months ended December 31, ~~2016~~2019 compared to ~~28.3%~~the same period in 2018 due primarily to a higher average ticket price in transactions processed during the current quarter.

Gross margin. Total gross margin increased 1.6%, from 27.4% for the three months ended December 31, ~~2017. The decrease in the equipment margin, from 21.2%~~2018 to 29.0% for the three months ended December 31, ~~2016 to 7.4% for the three months ended December 31, 2017, reflected~~2019. The change in our ~~strategy of using equipment sales as an enabler for driving long-term, higher~~gross margin ~~license and transaction fees. This decrease~~ was ~~partially offset~~driven primarily by ana 2.3% increase in the ~~license fee and~~ transaction processing margin ~~from 31.6% for the three months ended December 31, 2016 to 37.2% for the three months ended December 31, 2017, which was~~ driven by a higher ticket price realized in the ~~impact of the Cantaloupe acquisition.~~ current quarter.

~~Operational~~

For the three months ended December 31,

Percent
Category ($ in thousands)

2017

2016

Change
Selling, general and administrative expenses

$
8,329

$
5,785

44.0%
Integration and acquisition costs

3,335

8

41,587.5%
Depreciation and amortization

737

307

140.1%
Total operating expenses

$
12,401

$
6,100

103.3%



	Three months ended December 31,				Percent Change
Category ($ in thousands)	2019		2018		Percent Change
Selling, general and administrative expenses	$	18,700	$	10,931	71.1	%
Investigation and restatement expenses	738		7,188		NM
Integration and acquisition costs	—		181		NM
Depreciation and amortization	1,080		1,143		(5.5	)%
Total operating expenses	$	20,518	$	19,443	5.5	%

NM — not meaningful

Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately ~~$2.5~~$7.8 million for the three months ended December 31, ~~2017,~~2019, as compared to the same period in ~~2016.~~2018. This change was primarily driven by ana $3.4 million increase in ~~selling, general and administrative~~professional services costs ~~incurred~~primarily related to ~~Cantaloupe as well as an~~the Company's restatement project and related audit activities that were not included in one-time costs, a $3.2 million increase in ~~sales~~employment related costs and ~~marketing related consulting~~$0.4 million of severance costs.

Investigation and restatement expenses ~~as we continue to increase our market share~~. Investigation and restatement expenses were incurred beginning in the ~~cashless-transaction vending industry.~~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. Integration and acquisition costs ~~increased $3.3~~were $0.2 million for the three months ended December 31, ~~2017 as compared to the same period in 2016,~~2018 due to the ~~costs incurred in connection with~~completion of the ~~acquisition~~Cantaloupe acquisition.

~~of Cantaloupe, partially offset by $8 thousand of acquisition costs incurred in the second quarter of fiscal year 2017 pertaining to the acquisition of VendScreen, Inc. (“VendScreen”).~~

Depreciation and amortization. Depreciation and amortization ~~expenses increased approximately $0.4 million for the three months ended December 31, 2017 primarily due to the amortization of intangible assets recognized in connection~~expense was consistent with the ~~Cantaloupe acquisition.~~ same period in 2018.

Other Expense, ~~net~~

Net

Other expense, net. Other expense, net ~~increased $242~~was consistent with the same period in 2018.

Income taxes. For the three months ended December 31, 2019, a tax provision of $72 thousand was recorded which primarily relates to the Company's uncertain tax positions, as well as state income and franchise taxes. As of December 31, 2019, the Company had a total unrecognized income tax benefit of $0.3 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 December 31, ~~2017 compared to~~2019, as the ~~same period in 2016. The increase was primarily driven by the interest incurred in connection with the Term Loan and Revolving Credit Facility utilized to fund~~use of an estimated annual effective income tax rate does not provide a ~~portion~~reliable estimate of the ~~acquisition of Cantaloupe.~~income tax provision.

~~Income Taxes~~

For the three months ended December 31,

Percent
($ in thousands)

2017

2016

Change
Provision for income taxes

$
(9,073)

$
-

100%

Reconciliation of Net ~~(Loss) Income~~Loss to Adjusted ~~EBITDA:~~

For the three months ended December 31,
($ in thousands)

2017

2016
Net (loss) income

$
(12,516)

$
233
Less interest income

(251)

(200)
Plus interest expense

494

201
Plus income tax provision

9,073

—
Plus depreciation expense

1,512

1,220
Plus amortization expense

472

43
EBITDA

(1,216)

1,497

Plus stock-based compensation

780

233
Plus integration and acquisition costs and inventory step-up

3,358

8
Adjustments to EBITDA

4,138

241
Adjusted EBITDA

$
2,922

$
1,738

EBITDA



	Three months ended December 31,
($ in thousands)	2019			2018
Net loss	$	(8,378	)	$	(10,438	)
Less: interest income	(283		)	(408		)
Plus: interest expense	833			819
Plus: income tax provision	72			19
Plus: depreciation expense	1,053			1,204
Plus: amortization expense	784			793
EBITDA	(5,919		)	(8,011		)
Plus: stock-based compensation	1,742			557
Plus: litigation related professional expenses	1,115			97
Plus: investigation and restatement expenses	738			7,188
Plus: integration and acquisition costs	—			181
Adjustments to EBITDA	3,595			8,023
Adjusted EBITDA	$	(2,324	)	$	12

As used herein, Adjusted EBITDA represents net income (loss) ~~income~~ before interest income, interest expense, income ~~tax provision (benefit),~~taxes, depreciation, amortization, ~~stock-based compensation expense,~~non-recurring fees and ~~non-recurring integration and acquisition costs~~charges that were incurred in connection with the acquisition and integration of ~~Cantaloupe, including a charge for inventory fair value step-up,~~businesses, non-recurring fees and charges that were incurred in connection with the ~~current fiscal year~~Audit Committee investigation and ~~the acquisition of the VendScreen business the previous fiscal year.~~financial statement restatement activities, class action litigation or activist related expenses, and stock-based compensation expense. We have excluded the non-cash expense, stock-based compensation, as it does not reflect ~~the~~our cash-based ~~operations of the Company.~~operations. We have excluded the ~~integration~~non-recurring costs and ~~acquisition~~ expenses incurred in connection with ~~the Cantaloupe acquisition, including a charge for inventory fair value step-up, during the current fiscal year and the VendScreen transaction from the previous fiscal year~~business acquisitions in order to allow ~~for a~~ more accurate comparison of the financial results to historical ~~operations,~~operations. We have excluded the professional fees incurred in connection with the class action litigation or 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 ~~pertain to period operational expenses~~represent charges that are not ~~a core function of~~related to our ~~business.~~operations. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, we utilize Adjusted EBITDA as a metric in our executive officer and management incentive compensation plans.

Reconciliation of Net Loss to Non-GAAP Net Income (Loss)



	Three months ended December 31,
($ in thousands)	2019			2018
Net loss	$	(8,378	)	$	(10,438	)
Non-GAAP adjustments:
Non-cash portion of income tax provision	5			5
Amortization expense	784			793
Stock-based compensation	1,742			557
Litigation related professional fees	1,115			97
Investigation and restatement expenses	738			7,188
Integration and acquisition costs	—			181
Non-GAAP net (loss) income	$	(3,994	)	$	(1,617	)

As used herein, non-GAAP net income (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, and stock-based compensation expense. Management believes that non-GAAP net income (loss) is an important measure of USAT’s business. Non-GAAP net income (loss) is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, the Company utilizes Adjusted EBTIDA as a metric in its executive officer and management incentive compensation plans.

~~Reconciliation of Operating (Loss) Income to Adjusted Operating Income:~~

Three months ended December 31,
($ in thousands)

2017

2016
Operating (loss) income

$
(3,200)

$
234
Plus integration and acquisition costs and inventory step-up

3,358

8
Plus amortization expense

472

43
Adjusted operating income

$
630

$
285

As used herein, adjusted operating income represents operating (loss) income before the non-recurring integration and acquisition costs incurred in connection with the acquisition of Cantaloupe, including a charge for inventory fair value step-up, and VendScreen transaction and amortization expenses related to our acquisition-related intangibles. We have excluded these non-recurring costs and amortization expenses in order to allow for a more accurate comparison of the financial results to historical operations and we believe such a comparison is useful to investors as a measure of comparative operating performance. This is the first financial period for which we have adjusted for the amortization expenses related to our acquisition-related intangibles, and we intend to make such adjustments for future financial periods.

~~Reconciliation of Net (Loss) Income to Non-GAAP Net Income:~~

Three months ended December 31,
($ in thousands)

2017

2016
Net (loss) income

$
(12,516)

$
233
Non-GAAP adjustments:

Non-cash portion of income tax provision (benefit)

9,073

—
Amortization expense

472

43
Stock-based compensation

780

233
Litigation related professional fees

—

—
Integration and acquisition-related costs

3,413

8
Non-GAAP net income

$
1,222

$
517

As used herein, non-GAAP net income represents GAAP net (loss) income excluding costs or benefits relating to any non-cash portions of the Company’s income tax benefit, adjustment for fair value of warrant liabilities, non-recurring costs and expenses that were incurred in connection with the acquisition and integration of Cantaloupe, including a charge for inventory fair value step-up and write-off of deferred financing costs, during the current fiscal year and VendScreen during the prior fiscal year, and non-cash expenses for equity awards under our equity incentive plans. This is the first financial period for which we have adjusted for the non-cash expenses attributable to equity awards, and we intend to make such

~~adjustments for future financial periods.~~ Management believes that non-GAAP net ~~income~~loss is an important measure of USAT’s business. Non-GAAP net income is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash provided by or (used in) operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net (loss) income as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Management uses the aforementioned non-GAAP measure to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. We believe that this non-GAAP financial measure serves as a useful metric for our management and investors because they enable a better understanding of the long-term performance of our core business and facilitate comparisons of our operating results over multiple periods, and when taken together with the corresponding GAAP financial measures and our reconciliations, enhance investors’ overall understanding of our current and future financial performance. Additionally, the Company utilizes non-GAAP net income as a metric in its executive officer and management incentive compensation plans.

~~Six Months Ended December 31, 2017 Compared to Six Months Ended December 31, 2016~~

~~Revenue and Gross Profit~~

For the six months ended December 31,

Percent
($ in thousands)

2017

2016

Change
Revenues:

License and transaction fees

$
42,797

$
33,004

29.7%
Equipment sales

15,326

10,340

48.2%
Total revenues

58,123

43,344

34.1%

Costs of sales:

Cost of services

27,688

22,632

22.3%
Cost of equipment

14,033

8,211

70.9%
Total costs of sales

41,721

30,843

35.3%

Gross profit:

License and transaction fees

15,109

10,372

45.7%
Equipment sales

1,293

2,129

(39.3%)
Total gross profit

$
16,402

$
12,501

31.2%

~~Revenue.~~ Total revenue increased $14.8 million for the six months ended December 31, 2017 compared to the same period in 2016. The growth in total revenue resulted from a $9.8 million increase in license and transaction fee revenue for the six months ended December 31, 2017 compared to the same period in 2016, and a $5.0 million increase in equipment revenue for the six months ended December 31, 2017 compared to the same period last year; both driven by an increase in connections and the Cantaloupe acquisition.

~~Cost of sales.~~ Cost of sales increased $10.9 million for the six months ended December 31, 2017 compared to the same period last year. The increase was driven by a $5.1 million increase in cost of services and a $5.8 million increase in cost of equipment sales, both arising from an increase in connections and the Cantaloupe acquisition.

~~Gross margin~~. The overall gross margin decreased 0.6% from 28.8% for the six months ended December 31, 2016 to 28.2% for the six months ended December 31, 2017. The decrease in the equipment margin, from 20.6% for the six months ended December 31, 2016 to 8.4% for the six months ended December 31, 2017 reflected our strategy of using equipment sales as an enabler for driving long-term, higher margin license and transaction fees. This decrease was partially offset by an increase in the license fee and transaction margin from 31.4% for the six months ended December 31, 2016 to 35.3% for the six months ended December 31, 2017 which was primarily driven by the impact of the Cantaloupe acquisition.

~~Operational Expenses~~

For the six months ended December 31,

Percent
Category ($ in thousands)

2017

2016

Change
Selling, general and administrative expenses

$
15,075

$
12,593

19.7%
Integration and acquisition costs

4,097

109

3,658.7%
Depreciation and amortization

982

515

90.7%
Total operating expenses

$
20,154

$
13,217

52.5%

~~Selling, general and administrative expenses.~~ ~~Selling~~, general and administrative expenses increased approximately $2.5 million for the six months ended December 31, 2017, as compared to the same period in 2016. This change was primarily driven by an increase in selling, general and administrative costs related to Cantaloupe as well as an increase in sales and marketing related consulting expenses as we continue to increase our market share in the cashless-transaction vending industry.

~~Integration and acquisition costs~~. Integration and acquisition costs increased $4.0 million for the six months ended December 31, 2017 as compared to the same period in 2016, due to the $4.1 million incurred in connection with the acquisition of Cantaloupe, partially offset by $0.1 million of acquisition costs incurred in the same period of fiscal year 2017 pertaining to the acquisition of VendScreen.

~~Depreciation and amortization.~~ Depreciation and amortization expenses increased approximately $0.5 million for the six months ended December 31, 2017 primarily due to the amortization of intangible assets recognized in connection with the Cantaloupe acquisition.

~~Other Expense, net~~

For the six months ended December 31,

Percent
($ in thousands)

2017

2016

Change
Other income (expense):

Interest income

$
331

$
273

21.2%
Interest expense

(703)

(413)

70.2%
Change in fair value of warrant liabilities

-

(1,490)

(100.0%)
Total other expense, net

$
(372)

$
(1,630)

(77.2%)

~~Other expense, net~~. Other expense, net decreased $1.3 million for the six months ended December 31, 2017 compared to the same period in 2016. The decrease was primarily driven by the change in fair value associated with the exercised warrants recognized during September 2016.

~~Income Taxes~~

For the six months ended December 31,

Percent
($ in thousands)

2017

2016

Change
(Provision) benefit for income taxes

$
(8,605)

$
115

(7,583)%

~~Income taxes~~. For the six months ended December 31, 2017, an income tax provision of $8,605 thousand (substantially all deferred income taxes) was recorded which includes a charge of $6,592 thousand related to tax reform. The tax provision is based upon income (loss) before income taxes using an estimated negative annual effective income tax rate of 49.20%, which is primarily driven by the impact of permanent differences. The tax rate reduction related to tax reform was treated as a discrete item in the tax provision for the six months ended December 31, 2017.

For the six months ended December 31, 2016, an income tax benefit of $115 thousand (substantially all deferred income taxes) was recorded based upon loss before benefit for income taxes using an estimated annual effective income tax rate of 30.0% for the fiscal year ending June 30, 2017 net of a provision for the tax effect of the change in the fair value of warrant liabilities which was treated discretely.

~~Reconciliation of Net Loss to Adjusted EBITDA:~~

For the six months ended December 31,
($ in thousands)

2017

2016
Net loss

$
(12,729)

$
(2,231)
Less interest income

(331)

(273)
Plus interest expense

703

413
Plus income tax provision (benefit)

8,605

(115)
Plus depreciation expense

2,960

2,477
Plus amortization expense

516

87
EBITDA

(276)

358

Plus loss on fair value of warrant liabilities

—

1,490
Plus stock-based compensation

1,356

445
Plus litigation related professional fees

—

33
Plus integration and acquisition costs and inventory step-up

4,120

109
Adjustments to EBITDA

5,476

2,077
Adjusted EBITDA

$
5,200

$
2,435

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

~~Reconciliation of Operating Loss to Adjusted Operating Income (Loss):~~

Six months ended December 31,
($ in thousands)

2017

2016
Operating loss

$
(3,752)

$
(716)
Plus integration and acquisition costs and inventory step-up

4,120

109
Plus amortization expense

516

87
Adjusted operating income (loss)

$
884

$
(520)

As used herein, adjusted operating loss represents operating loss before the non-recurring integration and acquisition costs and expenses incurred in connection with the acquisition of Cantaloupe, including a charge for inventory fair value step-up, and VendScreen transaction, and the amortization expenses related to our acquisition-related intangibles. We have excluded these non-recurring costs and expenses in order to allow for a more accurate comparison of the financial results to historical operations and we believe such a comparison is useful to investors as a measure of comparative operating performance. This is the first financial period for which we have adjusted for the amortization expenses related to our acquisition-related intangibles, and we intend to make such adjustments for future financial periods.

~~Reconciliation of Net Loss to Non-GAAP Net Income (Loss):~~

Six months ended December 31,
($ in thousands)

2017

2016
Net loss

$
(12,729)

$
(2,231)
Non-GAAP adjustments:

Non-cash portion of income tax benefit

8,605

(115)
Fair value of warrant adjustment

—

1,490
Amortization expense

516

87
Stock-based compensation

1,356

445
Litigation related professional fees

—

33
Integration and acquisition-related costs

4,175

109
Non-GAAP net income (loss)

$
1,923

$
(182)

As used herein, non-GAAP net income (loss) represents GAAP net income (loss) excluding costs or benefits relating to any non-cash portions of the Company’s income tax benefit, adjustment for fair value of warrant liabilities, professional fees incurred in connection with the class action litigation and the special litigation committee investigation, and non-recurring costs and expenses that were incurred in connection with the acquisition and integration of Cantaloupe, including a charge for inventory fair value step-up and a write-off of deferred financing costs, during the current fiscal year and VendScreen during the prior fiscal year. This is the first financial period for which we have adjusted for the non-cash expenses attributable to equity awards under our equity incentive plans, and we intend to make such adjustments for future financial periods. Management believes that non-GAAP net income (loss) is an important measure of USAT’s business. Non-GAAP net income (loss) is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash provided by or (used in) operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Management uses the aforementioned non-GAAP measure to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. We believe that this non-GAAP financial measure serves as a useful metric for our management and investors because they enable a better understanding of the long-term performance of our core business and facilitate comparisons of our operating results over multiple periods, and when taken together with the corresponding GAAP financial measures and our reconciliations, enhance investors’ overall understanding of our current and future financial performance. Additionally, the Company utilizes non-GAAP net income (loss) as a metric in its executive officer and management incentive compensation plans.

~~LIQUIDITY AND CAPITAL RESOURCES~~

~~Cash provided by operating activities was $4.1~~

Six Months Ended December 31, 2019 Compared to Six Months Ended December 31, 2018

Revenue and Gross Profit



	Six months ended December 31,						Percent Change
($ in thousands)	2019			2018			Percent Change
Revenue:
License and transaction fees	$	70,363		$	58,404		20.5	%
Equipment sales	17,047			9,850			73.1	%
Total Revenue	87,410			68,254			28.1	%

Costs of sales:
Cost of services	44,668			37,834			18.1	%
Cost of equipment	18,564			9,927			87.0	%
Total costs of sales	63,232			47,761			32.4	%

Gross profit:
License and transaction fees	25,695			20,570			24.9	%
Equipment sales	(1,517		)	(77		)	(1,870.1	)%
Total gross profit	$	24,178		$	20,493		18.0	%

Revenue. Total revenue increased $19.2 million for the six months ended December 31, ~~2017~~2019 compared to ~~cash of $5.1~~the same period in 2018. The growth in total revenue resulted from a $12.0 million ~~used~~increase in license and transaction fee revenue for the six months ended December 31, 2019 compared to the same period in 2018, mostly driven by the increase in connection count which generated an increase in license fee and processing fees, and a $7.2 million increase in equipment revenue for the six months ended December 31, 2019 compared to the same period in 2018 driven primarily by the 86,000 new net connections delivered for the six months ended December 31, 2019 compared to 52,000 new net connections delivered in the same period in ~~2016. The $9.3 million~~2018. This 34,000 increase in ~~cash provided by operating activities was primarily driven by~~new net connections represents a ~~cash inflow~~65 percent increase year over year.

Cost of ~~$5.8 million from the payment for finance receivables related to a significant order received by us during the fourth quarter~~sales. Cost of the prior fiscal year as well as a cash inflow of $10.8 million related to the timing of accounts payable and accrued expenses, partially offset by a $2.8 million increase in merchant receivables due to timing differences related to the remittance of credit card receipts, and a $3.1 million increase related to inventory due to purchases made to support the company’s anticipated future growth.

~~Cash used in investing activities was $66.8~~sales increased $15.5 million for the six months ended December 31, ~~2017~~2019 compared to ~~$1.9 million for~~ the same period in ~~2016.~~2018. The ~~$64.9~~increase was driven by a $6.8 million increase ~~is primarily related to net cash consideration paid~~in cost of services driven by an increase in transaction processing costs commensurate with the increase in transaction processing fees for the ~~acquisition~~period and a $8.6 million increase in cost of ~~Cantaloupe.~~

~~Cash provided~~equipment sales, resulting from higher shipments compared to the same period last year.

Gross margin. Total gross margin decreased 2.4%, from 30.0% for the six months ended December 31, 2018 to 27.7% for the six months ended December 31, 2019. The decrease was driven primarily by ~~financing activities was $65.3~~a lower equipment margin resulting from a large equipment sale made to a strategic customer during the prior quarter, reflecting our strategy of using equipment sales as an enabler for driving longer-term, higher margin license and transaction fees. License and transaction processing margin remained consistent compared to the same period last year.



	Six months ended December 31,				Percent Change
Category ($ in thousands)	2019		2018		Percent Change
Selling, general and administrative expenses	$	36,807	$	20,381	80.6	%
Investigation and restatement expenses	4,303		11,714		NM
Integration and acquisition costs	—		1,103		NM
Depreciation and amortization	2,102		2,276		(7.6	)%
Total operating expenses	$	43,212	$	35,474	21.8	%

NM — not meaningful

Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $16.4 million for the six months ended December 31, ~~2017~~2019, as compared to ~~$5.8 million for~~ the same period in ~~2016. The $59.5~~2018. This change was primarily driven by a

$10.8 million increase ~~was~~in professional services costs primarily ~~due to the public offering which closed in July 2017 with net proceeds of $39.9 million as well as an increase of $35.0 million~~ related to the ~~Term Loan~~Company's restatement project and ~~Revolving Credit Facility, partially offset by $6.2~~related audit activities that were not included in one-time costs, $4.4 million ~~in proceeds received from the exercise of the warrants during the six months ended September 30, 2016 and an~~ increase in ~~repayments~~employment related costs, and $0.4 million of ~~debt during~~severance costs.

Investigation and restatement expenses. Investigation and restatement expenses were incurred beginning in the ~~six months ended December 31, 2017 of $8.9 million.~~

In September 2014, the Company reintroduced QuickStart, a program whereby our customers are able to purchase our ePort hardware via a five-year, non-cancellable finance agreement. Under the QuickStart program, the Company sells the equipment to customers and creates a long-term and current finance receivable for five-year agreements. In the third and fourth quartersfirst quarter of fiscal 2015, the Company signed vendor agreements with two finance companies, whereby our customers would enter into agreements directly with the finance companies as part of our QuickStart program. Under this scenario, the Company invoices the finance company for the equipment financed by our customer, and typically receives full payment within thirty days. Prior to the reintroduction of QuickStart, the Company had financed its customers’ acquisition of ePort equipment primarilyyear 2019 through the JumpStart rental program. Under Jumpstart, the Company records an investing capital expenditure cash outflow for the equipment provided and fixed assets on the balance sheet, and then receives rental income from a month-to-month lease. Customers who utilize third party finance companiessecond quarter of fiscal year 2020 in connection with the ~~QuickStart program improve~~Audit Committee's investigation, the restatements of previously filed financial statements, bank consents, and the ongoing remediation of deficiencies in our ~~cash flow from operations,~~internal control over financial reporting.

Integration and ~~our QuickStart program reduces cash flow needed for investing activities otherwise incurred by us for our JumpStart program.~~

Since entering into vendor agreements with two third-party finance companies, the majority of QuickStart sales consummated have been with customers entering into agreements directly with the finance companies. Our customers have shifted from acquiring our products via JumpStart, which accounted for 65% of our gross connections in fiscal year 2014, to QuickStartacquisition costs. Integration and sales under normal trade receivable terms, which accounted for 89%, 91%, and 93% of our gross connections in fiscal years 2015, 2016, and 2017 respectively. JumpStart was approximately 1% of our gross new connectionsacquisition costs were $1.1 million for the six months ended December 31, ~~2017.~~

2018 due to the completion of the Cantaloupe acquisition.

Depreciation and amortization. Depreciation and amortization expense was consistent with the same period in 2018.



	Six months ended December 31,						Percent Change
($ in thousands)	2019			2018			Percent Change
Other income (expense):
Interest income	$	577		$	897		(35.7	)%
Interest expense	(1,298		)	(1,605		)	(19.1	)%
Total other expense, net	$	(721	)	$	(708	)	1.8	%

Other expense, net. Other expense, net was consistent with the same period in 2018.



	Six months ended December 31,						Percent Change
($ in thousands)	2019			2018			Percent Change
Provision for income taxes	$	(131	)	$	(37	)	254.1	%

Income taxes. For the six months ended December 31, 2019, a tax provision of $131 thousand was recorded which primarily relates to the Company's uncertain tax positions, as well as state income and franchise taxes. As of December 31, 2019, the Company had a total unrecognized income tax benefit of $0.3 million. The Company is ~~continually seeking~~actively working with the tax authorities related to ~~expand its outside financing partners~~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 six months ended December 31, 2019, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.

For the six months ended December 31, 2018, a tax provision of $37 thousand was recorded which primarily relates to state income and franchise taxes. The provision is based upon actual loss before income taxes for the six months ended December 31, 2018, 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



	Six months ended December 31,
($ in thousands)	2019			2018
Net loss	$	(19,886	)	$	(15,726	)
Less: interest income	(577		)	(897		)
Plus: interest expense	1,298			1,605
Plus: income tax provision	131			37
Plus: depreciation expense	1,924			2,387
Plus: amortization expense	1,569			1,585
EBITDA	(15,541		)	(11,009		)
Plus: stock-based compensation	2,032			972
Plus: litigation related professional expenses	1,229			103
Plus: investigation and restatement expenses	4,303			11,714
Plus: integration and acquisition costs	—			1,103
Adjustments to EBITDA	7,564			13,892
Adjusted EBITDA	$	(7,977	)	$	2,883

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 or activist related expenses, and stock-based compensation expense. We have excluded the non-cash expense, stock-based compensation, as it does not reflect our cash-based operations. We have excluded the non-recurring costs and expenses incurred in connection with business acquisitions in order to ~~accommodate expected growth.~~

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 or 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 Income (Loss)



	Six months ended December 31,
($ in thousands)	2019			2018
Net loss	$	(19,886	)	$	(15,726	)
Non-GAAP adjustments:
Non-cash portion of income tax provision	10			9
Amortization expense	1,569			1,585
Stock-based compensation	2,032			972
Litigation related professional fees	1,229			103
Investigation and restatement expenses	4,303			11,714
Integration and acquisition costs	—			1,103
Non-GAAP net (loss) income	$	(10,743	)	$	(240	)

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

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operating activities was $9.8 million for the six months ended December 31, 2019 compared to cash used of $16.6 million in the same period in fiscal year 2018. The change reflects a change in net expense for non-cash operating activities of $0.2 million, and net cash provided by the change in various operating assets and liabilities of $10.7 million. The change in operating assets and liabilities is primarily driven by the change of accounts receivable of $2.2 million offset by the change of accounts payable and accrued expenses of $13.1 million.

Cash used in investing activities was $1.3 million for the six months ended December 31, 2019 compared to cash used of $2.2 million in the same period in fiscal year 2018, primarily driven by a decrease in equipment purchases for rental equipment compared to the same period last year.

Cash provided by financing activities was $21.2 million for the six months ended December 31, 2019 compared to cash used of $1.9 million in the same period in fiscal year 2018. The change was primarily due to proceeds received from the Term Facility, 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.

~~Pennsylvania~~		~~23-2679963~~

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)



Title of Each Class	Trading Symbol	Name Of Each Exchange On Which Registered
Common Stock, no par value Series A Convertible Preferred Stock	USAT USATP	The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC



Part I - Financial Information

Item 1.	Condensed Consolidated Financial Statements ~~(unaudited)~~

	Condensed Consolidated Balance Sheets (unaudited)	3 3

	Condensed Consolidated Statements of Operations (unaudited)	4 4

	Condensed Consolidated ~~Statement~~Statements of Shareholders’ Equity (unaudited)	5 5

	Condensed Consolidated Statements of Cash Flows (unaudited)	6 6

	Notes to Consolidated Financial Statements (unaudited)	7 7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23 20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35 32

Item 4.	Controls and Procedures	35 33

Part II - Other Information

Item 1.	Legal Proceedings	37

Item 6.	Exhibits	37 33

	Signatures	39 34


	Six months ended
	December 31,
	2017		2016
Expected volatility (percent)		50.21 - 50.89		50.00
Expected life (years)		4.0 - 4.5		4.0
Expected dividends		—		—
Risk-free interest rate (percent)		1.64 - 1.72		1.06
Number of options granted		179,047		20,080
Weighted average exercise price	$	5.66	$	4.98
Weighted average grant date fair value	$	2.42	$	1.98



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


	December 31,		June 30,
($ in thousands, except shares)	2017		2017
	(unaudited)		(audited)
Assets
Current assets:
Cash and cash equivalents	$	15,386	$	12,745
Accounts receivable, less allowance of $3,740 and $3,149, respectively		15,472		7,193
Finance receivables, less allowance of $49 and $19, respectively		5,517		11,010
Inventory		11,215		4,586
Prepaid expenses and other current assets		1,971		968
Total current assets		49,561		36,502

Non-current assets:
Finance receivables, less current portion		11,215		8,607
Other assets		1,120		687
Property and equipment, net		12,622		12,111
Deferred income taxes		14,774		27,670
Intangibles, net		30,910		622
Goodwill		64,449		11,492
Total non-current assets		135,090		61,189

Total assets	$	184,651	$	97,691

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	23,775	$	16,054
Accrued expenses		6,798		4,130
Line of credit, net		—		7,036
Capital lease obligations and current obligations under long-term debt		5,121		3,230
Income taxes payable		6		10
Deferred revenue		595		—
Deferred gain from sale-leaseback transactions		198		239
Total current liabilities		36,493		30,699

Long-term liabilities:
Revolving credit facility		10,000		—
Capital lease obligations and long-term debt, less current portion		23,874		1,061
Accrued expenses, less current portion		65		53
Deferred gain from sale-leaseback transactions, less current portion		49		100
Total long-term liabilities		33,988		1,214

Total liabilities	$	70,481	$	31,913

Commitments and contingencies (Note 13)
Shareholders’ equity:
Preferred stock, no par value, 1,800,000 shares authorized, no shares issued		—		—
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $19,109 and $18,775 at December 31, 2017 and June 30, 2017, respectively		3,138		3,138
Common stock, no par value, 640,000,000 shares authorized, 53,619,898 and 40,331,645 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively		307,053		245,999
Accumulated deficit		(196,021)		(183,359)
Total shareholders’ equity		114,170		65,778
Total liabilities and shareholders’ equity	$	184,651	$	97,691


	Three months ended				Six months ended
	December 31,				December 31,
($ in thousands, except shares and per share data)	2017		2016		2017		2016
Revenues:
License and transaction fees	$	22,853	$	16,639	$	42,797	$	33,004
Equipment sales		9,653		5,117		15,326		10,340
Total revenues		32,506		21,756		58,123		43,344

Costs of sales:
Cost of services		14,362		11,389		27,688		22,632
Cost of equipment		8,943		4,033		14,033		8,211
Total costs of sales		23,305		15,422		41,721		30,843

Gross profit		9,201		6,334		16,402		12,501

Operating expenses:
Selling, general and administrative		8,329		5,785		15,075		12,593
Integration and acquisition costs		3,335		8		4,097		109
Depreciation and amortization		737		307		982		515
Total operating expenses		12,401		6,100		20,154		13,217

Operating (loss) income		(3,200)		234		(3,752)		(716)

Other income (expense):
Interest income		251		200		331		273
Interest expense		(494)		(201)		(703)		(413)
Change in fair value of warrant liabilities		-		-		-		(1,490)
Total other expense, net		(243)		(1)		(372)		(1,630)

(Loss) income before income taxes		(3,443)		233		(4,124)		(2,346)
(Provision) benefit for income taxes		(9,073)		-		(8,605)		115

Net (loss) income		(12,516)		233		(12,729)		(2,231)
Preferred dividends		-		-		(334)		(334)
Net (loss) income applicable to common shares	$	(12,516)	$	233	$	(13,063)	$	(2,565)
Net (loss) income per common share
Basic		(0.24)		0.01		(0.26)		(0.07)
Diluted		(0.24)		0.01		(0.26)		(0.07)
Weighted average number of common shares outstanding
Basic		52,150,106		40,308,934		49,861,735		39,398,469
Diluted		52,150,106		40,730,712		49,861,735		39,398,469


	Series A
	Convertible
	Preferred Stock			Common Stock			Accumulated
($ in thousands, except shares)	Shares	Amount		Shares	Amount		Deficit		Total
Balance, June 30, 2017	445,063	$	3,138	40,331,645	$	245,999	$	(183,359)	$	65,778
Issuance of common stock in relation to public offering, net of offering costs incurred of $3,237 (a)	—		—	9,583,332		39,888		—		39,888
Issuance of common stock as merger consideration(b)	—		—	3,423,367		19,810		—		19,810
Stock based compensation	—		—	281,554		1,356		—		1,356
Excess tax benefit from stock plans(c)	—		—	—		—		67		67
Net loss	—		—	—		—		(12,729)		(12,729)
Balance, December 31, 2017	445,063	$	3,138	53,619,898	$	307,053	$	(196,021)	$	114,170


	Cantaloupe
($ in thousands)	Systems, Inc.
Accounts receivable	$	3,232
Finance receivables, current portion		1,640
Inventory		782
Prepaid expense and other current assets		682
Finance receivables, less current portion		3,483
Other assets		50
Property and equipment		1,573
Intangibles		30,800
Goodwill		52,957
Total assets acquired		95,199
Accounts payable		(1,591)
Accrued expenses		(1,832)
Deferred revenue		(626)
Capital lease obligations and current obligations under long-term debt		(666)
Capital lease obligations and long-term debt, less current portion		(1,134)
Deferred income tax liabilities		(4,359)
Total net assets acquired	$	84,991


	Three months ended December 31,				Six months ended December 31,
(In thousands, except per share data)	2017		2016		2017		2016
Revenues	$	34,772	$	27,521	$	67,642	$	54,704
Net loss attributable to USAT		(10,632)		(428)		(10,552)		(5,458)
Net loss attributable to USAT common shares	$	(10,632)	$	(428)	$	(10,886)	$	(5,792)
Net loss per share - basic and diluted		(0.20)		(0.01)		(0.20)		(0.11)
Weighted average number of common shares outstanding - basic and diluted		53,619,921		53,315,633		53,584,368		52,369,824


	30 and Under		31 – 60		61 – 90		Greater than		Total				Total
	Days Past		Days Past		Days Past		90 Days Past		Non-				Finance
($ in thousands)	Due		Due		Due		Due		Performing		Performing		Receivables
QuickStart Leases	$	40	$	85	$	162	$	120	$	407	$	16,325	$	16,732


	As of December 31, 2017
			Accumulated				Amortization
($ in thousands)	Gross		Amortization		Net		Period
Intangible assets:
Non-compete agreements		2		(2)		—	2 years
Brand and tradenames		1,695		(96)		1,599	3 - 7 years
Developed technology		10,939		(499)		10,440	5 - 6 years
Customer relationships		19,049		(178)		18,871	10 - 18 years
Total intangible assets	$	31,685	$	(775)	$	30,910

Goodwill		64,449		—		64,449	Indefinite

Total intangible assets & goodwill	$	96,134		(775)	$	95,359


	As of June 30, 2017
			Accumulated				Amortization
($ in thousands)	Gross		Amortization		Net		Period
Intangible assets:
Non-compete agreements		2		(2)		—	2 years
Brand		95		(48)		47	3 years
Developed technology		639		(191)		448	5 years
Customer relationships		149		(22)		127	10 years
Total intangible assets	$	885	$	(263)	$	622

Goodwill		11,492		—		11,492	Indefinite

Total intangible assets & goodwill	$	12,377		(263)	$	12,114


	As of and for the three months ended
	December 31,		September 30,		June 30,		March 31,		December 31,
	2017		2017		2017		2017		2016
Connections:
Gross new connections		317,000		28,000		70,000		40,000		25,000
% from existing customer base		44%		82%		93%		88%		80%
Net new connections (a)		311,000		26,000		64,000		35,000		21,000
Total connections		905,000		594,000		568,000		504,000		469,000

Customers:
New customers added (a)		1,800		550		300		500		500
Total customers		15,050		13,250		12,700		12,400		11,900

Volumes:
Total number of transactions (millions)		144.8		121.1		114.8		104.9		100.1
Total volume (millions)	$	272.7	$	239.2	$	225.6	$	202.5	$	191.5

Financing structure of connections:
JumpStart		0.4%		4.1%		3.3%		8.6%		6.8%
QuickStart & all others (b)		99.6%		95.9%		96.7%		91.4%		93.2%
Total		100.0%		100.0%		100.0%		100.0%		100.0%


a)		~~Activity for the three months ended December 31, 2017 includes net new connections and new customers related to the acquisition of Cantaloupe of approximately 270,000 and 1,400, respectively.~~


	For the three months ended December 31,				Percent
($ in thousands)	2017		2016		Change
Revenues:
License and transaction fees	$	22,853	$	16,639	37.3%
Equipment sales		9,653		5,117	88.6%
Total revenues		32,506		21,756	49.4%

Costs of sales:
Cost of services		14,362		11,389	26.1%
Cost of equipment		8,943		4,033	121.7%
Total costs of sales		23,305		15,422	51.1%

Gross profit:
License and transaction fees		8,491		5,250	61.7%
Equipment sales		710		1,084	(34.5%)
Total gross profit	$	9,201	$	6,334	45.3%


	For the six months ended December 31,				Percent
($ in thousands)	2017		2016		Change
Revenues:
License and transaction fees	$	42,797	$	33,004	29.7%
Equipment sales		15,326		10,340	48.2%
Total revenues		58,123		43,344	34.1%

Costs of sales:
Cost of services		27,688		22,632	22.3%
Cost of equipment		14,033		8,211	70.9%
Total costs of sales		41,721		30,843	35.3%

Gross profit:
License and transaction fees		15,109		10,372	45.7%
Equipment sales		1,293		2,129	(39.3%)
Total gross profit	$	16,402	$	12,501	31.2%

~~Exhibit~~
~~Number~~		~~Description~~
Exhibit Number		Description
~~10.1~~		~~Visa Small Ticket Deployment and Incentive Agreement dated as of October 31, 2017 (Portions of this exhibit were redacted pursuant to a confidential treatment request).~~
31.1
~~10.2~~		Credit Agreement by and among the Company, its subsidiaries, and JPMorgan Chase Bank, N.A., dated November 9, 2017 (Portions of this exhibit were redacted pursuant to a confidential treatment request).

~~10.3~~		~~Employment, Non-Interference, Non-Solicitation, Non-Competition and Invention Assignment Agreement by and between the Company and Mandeep Arora dated November 9, 2017.~~

~~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 for the quarter ended December 31, ~~2017,~~2019, filed with the SEC on February ~~8, 2018,~~18, 2020, formatted in Extensible Business Reporting Language (XBRL): (1) the Consolidated Balance Sheets as of December 31, ~~2017~~2019 and June 30, ~~2017,~~2019, (2) the Consolidated Statements of Operations for the three-month and six-month periods ended December 31, ~~2017~~2019 and ~~2016,~~2018, (3) the Consolidated Statements of Shareholders’ Equity for the six-month ~~period~~periods ended December 31, ~~2017,~~2019 and 2018, (4) the Consolidated Statements of Cash Flows for the six-month ~~period~~periods ended December 31, ~~2017~~2019 and ~~2016,~~2018, and (5) the Notes to Consolidated Financial Statements.



	USA TECHNOLOGIES, INC.

Date: February ~~9, 2018~~ 18, 2020		/s/ ~~Stephen P. Herbert~~ Donald W. Layden, Jr.
		~~Stephen P. Herbert,~~ Donald W. Layden, Jr.
		Interim Chief Executive Officer

Date: February ~~9, 2018~~ 18, 2020		/s/ ~~Priyanka Singh~~ Glen E. Goold
		~~Priyanka Singh~~ Glen E. Goold
		Interim Chief Financial Officer