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 DecemberMarch 31, 2017

2020

OR

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

For the transition period from _________ to

_________                         

Commission file number 001-33365

USA Technologies, Inc.


(Exact name of registrant as specified in its charter)

Pennsylvania

23-2679963

Pennsylvania23-2679963
(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

100 Deerfield Lane,Suite 300, Malvern, Pennsylvania

Malvern,

Pennsylvania

19355

(Address of principal executive offices)

(Zip Code)

(610) 989-0340

(610) 989-0340


(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName Of Each Exchange On Which Registered
NoneNoneNone
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

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

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

As of February 2, 2018June 18, 2020 there were 53,623,14364,557,336 outstanding shares of Common Stock, no par value, outstanding.

value.



TableEXPLANATORY NOTE


On May 7, 2020, USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”) filed a Current Report on Form 8-K (the “Form 8-K”) with the U.S. Securities and Exchange Commission (the “Commission”) indicating its reliance on the 45-day extension provided by an order issued by the Commission under Section 36 of Contents

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



USA TECHNOLOGIES, INC.

TABLE OF CONTENTS

3

4

5

6

7

20

32

33

Exhibits

33

34



Table of Contents

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) March 31,
2020
 June 30,
2019
     
Assets    
Current assets:    
Cash and cash equivalents $25,894
 $27,464
Accounts receivable, less allowance of $6,952 and $4,866, respectively 18,418
 21,906
Finance receivables, net 7,941
 6,727
Inventory, net 9,577
 11,273
Prepaid expenses and other current assets 2,319
 1,558
Total current assets 64,149
 68,928
     
Non-current assets:    
Finance receivables due after one year, net 11,541
 12,642
Other assets 2,075
 2,099
Property and equipment, net 8,293
 9,590
Operating lease right-of-use assets 5,903
 
Intangibles, net 23,818
 26,171
Goodwill 63,945
 63,945
Total non-current assets 115,575
 114,447
     
Total assets $179,724
 $183,375
     
Liabilities, convertible preferred stock and shareholders’ equity    
Current liabilities:    
Accounts payable $24,592
 $27,584
Accrued expenses 27,533
 23,351
Finance lease obligations and current obligations under long-term debt 381
 12,497
Income taxes payable 168
 254
Deferred revenue 1,621
 1,681
Total current liabilities 54,295
 65,367
     
Long-term liabilities:    
Deferred income taxes 86
 71
Finance lease obligations and long-term debt, less current portion 12,297
 276
Operating lease liabilities, non-current 5,025
 
Accrued expenses, less current portion 450
 100
Total long-term liabilities 17,858
 447
     
Total liabilities 72,153
 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 $20,778 and $20,111 at March 31, 2020 and June 30, 2019, respectively 3,138
 3,138
Shareholders’ equity: 

 

Preferred stock, no par value, 1,800,000 shares authorized, no shares issued 
 
Common stock, no par value, 640,000,000 shares authorized, 64,448,957 and 60,008,481 shares issued and outstanding at March 31, 2020 and June 30, 2019, respectively 396,044
 376,853
Accumulated deficit (291,611) (262,430)
Total shareholders’ equity 104,433
 114,423
Total liabilities, convertible preferred stock and shareholders’ equity $179,724
 $183,375
See accompanying notes.

3



Table of Contents

USA Technologies, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, Nine months ended March 31,
($ in thousands, except per share data) 2020 2019 2020 2019
Revenue:        
License and transaction fees $34,961
 $31,515
 $105,324
 $89,919
Equipment sales 8,137
 6,189
 25,184
 16,039
Total revenue 43,098
 37,704
 130,508
 105,958
         
Costs of sales:        
Cost of services 22,244
 20,307
 66,912
 58,141
Cost of equipment 9,856
 7,444
 28,420
 17,371
Total costs of sales 32,100
 27,751
 95,332
 75,512
         
Gross profit 10,998
 9,953
 35,176
 30,446
         
Operating expenses:        
Selling, general and administrative 20,069
 11,156
 56,876
 31,537
Investigation and restatement expenses 
 1,408
 4,303
 13,122
Integration and acquisition costs 
 24
 
 1,127
Depreciation and amortization 1,107
 1,083
 3,209
 3,359
Total operating expenses 21,176
 13,671
 64,388
 49,145
         
Operating loss (10,178) (3,718) (29,212) (18,699)
         
Other income (expense):        
Interest income 411
 348
 988
 1,245
Interest expense (683) (913) (1,981) (2,518)
Change in fair value of derivative 1,070
 
 1,070
 
Total other income (expense), net 798
 (565) 77
 (1,273)
         
Loss before income taxes (9,380) (4,283) (29,135) (19,972)
Benefit (provision) for income taxes 85
 (23) (46) (60)
         
Net loss (9,295) (4,306) (29,181) (20,032)
Preferred dividends (334) (334) (668) (668)
Net loss applicable to common shares $(9,629) $(4,640) $(29,849) $(20,700)
Net loss per common share        
Basic $(0.15) $(0.08) $(0.48) $(0.34)
Diluted $(0.15) $(0.08) $(0.48) $(0.34)
Weighted average number of common shares outstanding        
Basic 64,096,778
 60,065,053
 62,591,947
 60,059,594
Diluted 64,096,778
 60,065,053
 62,591,947
 60,059,594
See accompanying notes.

4



Table of Contents

USA Technologies, Inc.

Condensed Consolidated StatementStatements 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.


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

Nine Month Period Ended March 31, 2019
  Common Stock 
Accumulated
Deficit
 Total
($ in thousands) Shares Amount  
Balance, June 30, 2018 59,998,811
 $375,436
 $(232,748) $142,688
Cumulative effect adjustment for ASC 606 adoption 
 
 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
Stock based compensation 5,720
 337
 
 337
Net loss 
 
 (4,306) (4,306)
Balance, March 31, 2019 60,019,438
 $376,700
 $(252,580) $124,120
See accompanying notes.

5



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

  Nine months ended March 31,
($ in thousands) 2020 2019
OPERATING ACTIVITIES:    
Net loss $(29,181) $(20,032)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:    
Non-cash stock based compensation 2,453
 1,393
Loss (gain) on disposal of property and equipment 88
 (39)
Non-cash interest and amortization of debt discount 1,040
 286
Bad debt expense 1,400
 1,537
Provision for inventory reserve (434) 2,699
Depreciation and amortization 5,193
 5,899
Non-cash lease expense 1,398
 
Deferred income taxes 15
 14
Change in fair value of derivative (1,070) 
Changes in operating assets and liabilities:    
Accounts receivable 2,088
 (6,288)
Finance receivables (113) (182)
Inventory 2,204
 (5,349)
Prepaid expenses and other assets (1,045) (1,545)
Accounts payable and accrued expenses (414) (3,836)
Operating lease liabilities (1,102) 
Deferred revenue (60) (316)
Income taxes payable (86) 42
Net cash used in operating activities (17,626) (25,717)
     
INVESTING ACTIVITIES:    
Purchase of property and equipment, including rentals (1,711) (3,156)
Proceeds from sale of property and equipment, including rentals 33
 103
Net cash used in investing activities (1,678) (3,053)
     
FINANCING ACTIVITIES:    
Proceeds from long-term debt issuance by Antara 14,248
 
Proceeds from equity issuance by Antara 17,879
 
Repayment of revolving credit facility (10,000) 
Repayment of finance lease obligations and long-term debt (2,413) (22,313)
Payment of debt and equity issuance costs (1,980) (135)
Proceeds from exercise of common stock options 
 42
Net cash provided by (used in) financing activities 17,734
 (22,406)
     
Net (decrease) increase in cash and cash equivalents (1,570) (51,176)
Cash and cash equivalents at beginning of year 27,464
 83,964
Cash and cash equivalents at end of period $25,894
 $32,788
     
Supplemental disclosures of cash flow information:
    
Interest paid in cash $940
 $2,321
Income taxes paid in cash $25
 $12
Supplemental disclosures of noncash financing and investing activities:    
Equipment and software acquired under finance lease $
 $5
See accompanying notes.

6



USA Technologies, Inc.

Condensed Notes to Consolidated Financial Statements
(Unaudited)

(Unaudited)

1. BUSINESS

USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”)

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

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 marriescombined product offering provides the data-rich Seed system with USAT’s consumer benefits, providing operators with valuable consumer data that results in customized experiences. In addition to new technology and services, due to Cantaloupe’s existing customer base, the acquisition expands the Company’s footprint into new global markets.

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 sixnine months ended DecemberMarch 31, 20172020 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, 20172019 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 beenthe condensed consolidated financial statements for the three months ended December 31, 2019, the Company identified certain adjustments that are required to be made to conformits fiscal year 2019 interim and annual financial statements. As a result, the Company has revised in this filing certain prior year interim and annual amounts in its condensed consolidated balance sheets, statements of operations and statements of cash flows and related disclosures. Such adjustments resulted in a $0.2 million decrease in net loss for the three months ended March 31, 2019 and a $1.5 million decrease in net loss for the nine months ended March 31, 2019. The Company does not believe these adjustments are material to current year’s presentation.  As disclosedthe previously issued financial statements.
A novel strain of coronavirus (COVID-19) was first identified in China in December 2019 and subsequently declared a global pandemic in March 2020 by the World Health Organization. COVID-19 containment measures began in parts of the United States in March 2020 resulting in forced closure of non-essential businesses and social distancing protocols. The effects of COVID-19 are not significant to our financial statements for the quarter ended March 31, 2020. Further disclosure around the impact of COVID-19 as a subsequent event is discussed in Note 3,14.
LIQUIDITY
At June 30, 2019, the Company incurred integrationhad $27.5 million in cash and acquisition expenses during the current period and deemed it appropriate to have such costs individually captioned within the statementa working capital surplus of operations.  Accordingly,$3.6 million. As of June 30, 2019, the Company retrospectively reclassified integrationwas not in compliance with the fixed charge coverage ratio and acquisition costs incurred in the corresponding periodstotal 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.
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 (“SPA”) between the Company and Antara Capital Master Fund LP (“Antara”), the Company sold to Antara 3,800,000 shares of the Company’s common stock at a price of $5.25 per share for gross proceeds of $19,950,000. Antara qualifies as an accredited investor under Rule 501 of the Securities Act of 1933, as amended (the "Act"), and the offer and sale of the shares was exempt from registration under Section 4(a)(2) of the Act. Antara agreed not to dispose of the shares for a period of 90 days from the previous fiscal yearclosing 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 conformwhich Antara committed to extend to the current period’s presentation.

7


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 whichCompany 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 allocatedCompany entered into a Financing Agreement with Antara to that reporting unit.  Additionally, an entity should consider income tax effects from any tax deductible goodwilldraw $15.0 million on the carryingTerm 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 measuringdraws under the goodwill impairment loss, if applicable. ASU 2017-04Term Facility bear interest at 9.75% per annum, payable monthly in arrears. The proceeds of the initial draw were used to repay the outstanding balance of the revolving line of credit loan due to JPMorgan Chase Bank, N.A. in the amount of $10.1 million, including accrued interest payable, and to pay transaction expenses, and the Company intends to utilize the balance for working capital and general corporate purposes. The Commitment Letter provides that the outstanding principal amount of the loan must be paid in full by no later than the maturity date of October 31, 2024; and that the Company is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We early adopted ASU 2017-04 for impairment testsrequired to be performedin 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.

The Company is evaluating its options with respect to the Financing Agreement, including all rights and remedies that may be available to it. Based upon the current financial forecast for the fourth quarter of fiscal year 2020, without a refinancing or modification of existing terms within the Term Facility, the Company anticipates that as of June 30, 2020, it is highly likely the Company will not be in compliance with the minimum fixed charge coverage ratio and the minimum consolidated EBITDA of its Term Facility. Unless the Commitment Letter is rescinded, amended, or replaced, noncompliance would represent an event of default under the Term Facility, and, following the request of the Required Lenders (as such term is defined in the Term Facility), all unpaid principal of $15.0 million and accrued interest to Antara would immediately become due, in addition to a $0.8 million prepayment premium. In addition, all of the Company's unamortized issuance costs and debt discount related to the Term Facility would be recognized upon repayment of the loan as interest expense in the period of repayment, which as of March 31, 2020 was $2.7 million.
As of June 30, 2019 the Company disclosed potential sales tax and related interest liabilities, which the Company estimated to be $18.2 million in the aggregate as of March 31, 2020. The Company has since engaged additional advisors to help evaluate such potential liabilities and the amount and timing of any such payments.
During the three months ended March 31, 2020, the Company reached a settlement of a shareholder class action lawsuit pending in federal court. On May 29, 2020, the parties filed documents with the Court seeking preliminary approval of the settlement, and on testing dates after July 1, 2017, which didJune 9, 2020, the Court granted preliminary approval of the settlement and issued a scheduling order for further action on the settlement. The Company anticipates the payment of approximately $2.6 million toward that settlement in addition to amounts to be paid by the Company’s insurers. As discussed in Note 13, those amounts are contingent upon certain future events, but are expected to be paid during the next 12 months.
The Company is currently evaluating a variety of financing alternatives, including but not impact ourlimited to negotiating modifications to the existing Term Facility. The Company has received a communication from an investor that it will provide sufficient financing in the event that the Company and Antara fail to agree to modifications to the existing Term Facility and other financing alternatives are not in place. The Company believes that its current financial resources, together with cash generated by operations and the financing available from the investor, if needed, will be sufficient to fund its current twelve-month operating budget from the date of issuance of these consolidated financial statements.

statements, alleviating any substantial doubt raised by the potential breach in our Term Facility with Antara.


2. ACCOUNTING POLICIES

RECENT ACCOUNTING PRONOUNCEMENTS
Accounting pronouncements adopted

In MarchFebruary 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, Compensation2016-02 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 EmployeeNonemployee Share-Based Payment Accounting, which modifiesAccounting.” 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 ofASU 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 Accounting Standards Codification (“ASC”) subtopics including “Compensation - Stock Compensation - Income Taxes” (Topic 718-740), “Business Combinations - Income Taxes” (Topic 805-740) and “Fair Value Measurement - Overall” (Topic 820-10). The primary impact of adoption was the recognition of excess tax benefits in the Company's provision for income taxes which is applied prospectively startingCompany 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.

Theits adoption of ASU No. 2016-09 did not impact our statement of cash flows forhave 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.

8


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 introduceschanges the accounting for estimated credit losses pertaining to certain types of financial instruments including, but not limited to, trade and lease receivables. This pronouncement will be effective for fiscal years beginning after December 15, 2019.  Early adoption of2019, including interim periods within those fiscal years. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.

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

standard is effective for fiscal years beginning after December 15, 2018.

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


In August 2016,December 2019, the FASB issued ASU No. 2016-15, “Statement of Cash Flows2019-12, “Income Taxes (Topic 230), Classification of Certain Cash Receipts740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and Cash Payments.” The newamends existing guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This pronouncement will beimprove consistent application. ASU 2019-12 is effective for the Companyfiscal years beginning with the year ending June 30, 2019,after December 15, 2020 and interim periods within those fiscal years. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.

3. LEASES

Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for office space, warehouses, automobiles and office equipment. USAT’s leases have lease terms of one year to eight years and some include options to extend and/or terminate the lease. The exercise of lease renewal options is at the Company’s sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term. The Company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or any material restrictive covenants.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is the collateralized rate of interest that we would pay to borrow over a similar term an amount equal to the lease payments, based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. USAT has lease agreements with lease and non-lease components, which are accounted for together as a single lease component. Lease expense for operating lease payments are recognized on a straight-line basis over the lease term.
Variable lease payments that are not based on an index or that result from changes to an index subsequent to the initial measurement of the corresponding lease liability are not included in the measurement of lease ROU assets or liabilities and instead are recognized in earnings in the period in which the obligation for those payments is incurred.
At March 31, 2020, the Company has the following balances recorded in the balance sheet related to its lease arrangements:
($ in thousands) Classification As of March 31, 2020
     
Assets    
Operating leases Operating lease right-of-use assets $5,903
Finance leases Property and equipment, net 73
     
Liabilities    
Current:    
Operating leases Accrued expenses 1,082
Finance leases Finance lease obligations and current obligations under long-term debt 55
     
Non-current:    
Operating leases Operating lease liabilities, non-current 5,025
Finance leases Finance lease obligations and long-term debt, less current portion $24



Components of lease cost are as follows:
($ in thousands)Three months ended March 31, 2020 Nine months ended March 31, 2020
    
Finance lease costs:   
   Amortization of ROU assets$25
 $79
   Interest on lease assets3
 8
Operating lease costs*515
 1,970
Total$543
 $2,057
* Includes short-term lease and variable lease costs, which are not material.

Supplemental cash flow information and non-cash activity related to our leases are as follows:
($ in thousands)Nine months ended March 31, 2020
  
Supplemental cash flow information: 
Cash paid for amounts included in the measurement of lease liabilities 
Financing cash flows from finance leases$73
Operating cash flows from finance leases9
Operating cash flows from operating leases1,350
  
Non-cash activity 
Right-of-use assets obtained in exchange for lease obligations: 
Finance lease liabilities12
Operating lease liabilities$3,384

Weighted-average remaining lease term and discount rate for our leases are as follows:
Nine months ended March 31, 2020
Weighted-average remaining lease term (years)
Finance leases1.4
Operating leases5.4
Weighted-average discount rate
Finance leases9.9%
Operating leases6.8%

Maturities of lease liabilities by 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 reflectedyear for our leases are as follows:
($ in thousands)
Operating
Leases
 
Finance
Leases
Remainder of 2020$384
 $27
20211,440
 46
20221,461
 16
20231,493
 2
20241,030
 1
Thereafter1,520
 
Total lease payments$7,328
 $92
Less: Imputed interest(1,221) (13)
Present value of lease liabilities$6,107
 $79


The Company's future minimum lease commitments as of June 30, 2019, under ASC Topic 840, the beginningpredecessor to Topic 842, are as follows:
($ in thousands)
Operating
Leases
 
Capital
Leases
2020$1,326
 $106
20211,151
 34
20221,180
 12
20231,208
 1
2024859
 1
Thereafter1,550
 
Total minimum lease payments$7,274
 $154
Less: interest  (14)
Present value of minimum lease payments, net  140
Less: current obligations under capital leases  (106)
Obligations under capital leases, noncurrent  $34

Lessor Accounting
Lessor accounting remained substantially unchanged with the adoption of ASC Topic 842. The Company offers its customers financing for the lease of our POS electronic payment devices. We account for these transactions as sales-type leases. Our sales-type leases generally have a non-cancellable term of 60 months. Certain leases contain an end-of-term purchase option that is generally insignificant and is reasonably certain to be exercised by the lessee. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases, typically our JumpStart program leases. JumpStart terms are typically 36 months and are cancellable with 30 to 60 days' written notice. As discussed in Note 2, the Company has elected to combine lease and non-lease components for its operating leases and account for the combined components under ASC 606, which is the predominant characteristic of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all ofcombined components. All QuickStart leases are sales-type and do not qualify for the amendmentselection.
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 customer and the interest portion is deferred and recognized as earned. The revenues related to the sales-type leases are included in Equipment sales 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 asConsolidated Statements 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. 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.”  ASU 2017-01 provides guidance in ascertaining whether a collection of assetsOperations and activities is considered a business.  Adoption of the amendment will be applied prospectively effective for annual periods 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 periods and interim periods beginning after December 15, 2017, with early adoption permissible.  The guidance is required to be applied prospectively to awards modified on or after the effective date. Historically, modifications to our share-based payment awards have been  limited.  As such, we do not expect the application of this standard to have a material effect on our results of operations or financial position.

9


3. ACQUISITION OF CANTALOUPE SYSTEMS, INC.

On November 9, 2017, the Company acquired all of the outstanding equity interests of Cantaloupe pursuant to the Merger Agreement, for approximately $85.0 million in aggregate consideration, net of cash acquired. 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. 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 pricelease 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 assumedtransaction fees in the Consolidated Statements of Operations.

Property and equipment used for the operating lease rental program consisted of the following:
($ in thousands) March 31,
2020
 June 30,
2019
Cost $32,572
 36,190
Accumulated depreciation (27,664) (30,473)
Net $4,908
 $5,717

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 March 31, 2020 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 atfees and Equipment sales, as reported in the dateCompany’s Condensed Consolidated Statements of acquisition at their respective fair values using assumptions that are subject to change.Operations. The Company hasbelieves 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 valuationinclude non-recurring charges. Further, we applied the practical expedient to not consider arrangements with an original expected duration of certain assetsone 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 change60 months based on implied and any changes will be recorded as adjustments to the fair value of those assets and liabilities and residualexplicit termination penalties. These amounts will be allocatedconverted into revenue in future periods as work is performed, primarily based on the services provided or at delivery and acceptance of products, depending on the applicable accounting method.

The following table reflects the estimated fees to goodwill. be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
($ in thousands)As of March 31, 2020
  
2020$3,536
202112,668
202211,120
20238,524
2024 and thereafter5,000
Total$40,848


Contract Liabilities

The final valuation adjustments may also require adjustmentCompany’s contract liability (i.e., deferred revenue) balances are as follows:
  Three months ended March 31, Nine months ended March 31,
($ in thousands) 2020 2020
     
Deferred revenue, beginning of the period 1,629
 1,681
Deferred revenue, end of the period 1,621
 1,621
Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period 120
 467


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

Contract Costs

At March 31, 2020, the Company had net capitalized costs to obtain contracts of $0.3 million included in Prepaid expenses and other current assets and $1.7 million included in Other noncurrent assets on the Condensed Consolidated Balance Sheet. None of these capitalized contract costs were impaired. During the three and nine months ended March 31, 2020, amortization of capitalized contract costs was $0.1 million and $0.4 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, along with certain other benefits as more fully described in the Company's Current Report on Form 8-K filed with the SEC on October 18, 2019.
Subsequent to the consolidated statementsCantaloupe acquisition, the Company initiated workforce reductions to integrate the Cantaloupe business for which costs totaled $2.1 million for the year ended June 30, 2018.  The Company included these severance charges under “Integration and acquisition costs” within the Condensed Consolidated Statements of operations and cash flows. The final determinationOperations, with the remaining outstanding balance included within “Accrued expenses” on the Condensed Consolidated Balance Sheet.  All amounts were paid as of these fair values will be completed as soon as possible but no later than one year fromDecember 31, 2019.

No additional severance activity related to the acquisition date.

10


the Cantaloupe business was recorded for the three months ended March 31, 2020. The following table summarizes the fair value of total consideration transferred to the holders of all of the outstanding equity interests of Cantaloupe at the acquisition date of November 9, 2017:

 

 

 

 

 

 

Cantaloupe

($ in thousands)

 

Systems, Inc.

Accounts receivable

 

$

3,232

Finance receivables, current portion

 

 

1,640

Inventory

 

 

782

Prepaid expense and other current assets

 

 

682

Finance receivables, less current portion

 

 

3,483

Other assets

 

 

50

Property and equipment

 

 

1,573

Intangibles

 

 

30,800

Goodwill

 

 

52,957

Total assets acquired

 

 

95,199

Accounts payable

 

 

(1,591)

Accrued expenses

 

 

(1,832)

Deferred revenue

 

 

(626)

Capital lease obligations and current obligations under long-term debt

 

 

(666)

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

 

 

(1,134)

Deferred income tax liabilities

 

 

(4,359)

Total net assets acquired

 

$

84,991

Amounts allocated to intangible assets included $18.9 million related to customer relationships, $10.3 million related to developed technology, and $1.6 million related to trade names. The fair value of the acquired customer relationships was determined using the excess earnings method. The fair value of both the acquired developed technology and the acquired trade names was determined using the relief from royalty method. The estimated useful life of the acquired intangible assets ranged 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 from the acquisition includes the expected synergies between Cantaloupe and the Company, the value of the employee workforce, and intangible assets that do not qualify for separate recognition at the time of acquisition. The goodwill, which is not deductible for income tax purposes, was assigned to the Company’s only reporting unit. 

The amount of Cantaloupe revenues included in the Company’s Consolidated Statements of Operations for both the three and six months ended December 31, 2017 is $4.7 million. The amount of Cantaloupe earnings included in the Company’s Consolidated Statements of Operations for both the three and six months ended December 31, 2017 is $1.8 million, which was primarily driven by an income tax benefit of $1.7 million.

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

 

 

 

 

 

 

 

 

 

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

11


Supplemental disclosure of pro forma information

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 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 earningsseverance activity for the three and six months ended December 31, 2017 were adjusted2019 related to exclude $3.3 millionthe 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 millionCantaloupe devices contractually associated with the Seed platform. Predominately all of integrationthe Company's finance receivables agreements are classified as non-cancellable 60 month sales-type leases. As of March 31, 2020 and acquisition costs, respectively.

The supplemental unaudited pro forma earnings for the six months ended December 31, 2016 were adjusted to include $4.1 million of integration and acquisition costs. 

4. FINANCE RECEIVABLES

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


The Company accounts for theirroutinely evaluates outstanding finance receivables using delinquencyfor impairment based on past due balances or accounts otherwise determined to be at a higher risk of loss.  A finance receivable is classified as nonperforming if it is considered probable the Company will be unable to collect all contractual interest and nonaccrual dataprincipal payments as key performance indicators.  The Company classified $407 thousand and $102 thousand as outstanding and nonperforming as of Decemberscheduled. 
At March 31, 20172020 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

12





As part 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 and Under

 

31 – 60

 

61 – 90

 

Greater than

 

Total

 

 

 

Total

 

 

Days Past

 

Days Past

 

Days Past

 

90 Days Past

 

Non-

 

 

 

Finance

($ in thousands)

 

Due

 

Due

 

Due

 

Due

 

Performing

 

Performing

 

Receivables

QuickStart Leases

 

$

29

 

$

 3

 

$

35

 

$

35

 

$

102

 

$

19,515

 

$

19,617

5. INVENTORY

Inventory, net of reserves, was $11.2 millionthe financing under the Quickstart program and $4.6 million as of December 31, 2017 and June 30, 2017, respectively.  Inventory consists of finished goods. The Company's inventories are valued atCantaloupe devices contractually associated with 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,Seed platform, the Company recognizedhas contractually granted deferred payment terms, where the $23 thousand fair market value step-up as a componententire sequence of cost of equipment, as the inventory acquired was soldup to 60 monthly payments are deferred by an agreed upon period. The “Deferred Payment Arrangements / Timing” column represents amounts subject to the Company’s customers. 

6.agreed upon deferral period or amounts subject to adjustments related to situations where a third party is financing the receivable. The “Other Finance Receivables” column represents an aging schedule for finance receivables not subject to such deferral arrangements and other non-performing receivables.

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

Cash to be collected on our performing finance receivables due for each of the fiscal years are as follows:
($ in thousands) 
2020$4,977
20216,159
20225,513
20233,908
20241,957
Thereafter79
Total amounts to be collected22,593
Less: interest(2,409)
Less: allowance for nonperforming receivables(702)
Total finance receivables$19,482

7. EARNINGS (LOSS) PER SHARE

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 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

13


Table
  Three months ended March 31,
($ in thousands, except per share data) 2020 2019
     
Numerator for basic and diluted loss per share    
Net loss $(9,295) $(4,306)
Preferred dividends (334) (334)
Net loss applicable to common shareholders $(9,629) (4,640)
     
Denominator for basic loss per share - Weighted average shares outstanding
 64,096,778
 60,065,053
Effect of dilutive potential common shares 
 
Denominator for diluted loss per share - Adjusted weighted average shares outstanding
 64,096,778
 60,065,053
     
Basic loss per share $(0.15) $(0.08)
Diluted loss per share $(0.15) $(0.08)


  Nine months ended March 31,
($ in thousands, except per share data) 2020 2019
     
Numerator for basic and diluted loss per share    
Net loss $(29,181) $(20,032)
Preferred dividends (668) (668)
Net loss applicable to common shareholders $(29,849) $(20,700)
     
Denominator for basic loss per share - Weighted average shares outstanding
 62,591,947
 60,059,594
Effect of dilutive potential common shares 
 
Denominator for diluted loss per share - Adjusted weighted average shares outstanding
 62,591,947
 60,059,594
     
Basic loss per share $(0.48) $(0.34)
Diluted loss per share $(0.48) $(0.34)


Anti-dilutive shares excluded from the calculation of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

a)

645,417,  581,621, and 851,407 shares were excludeddiluted loss per share were 1,625,414 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 sixnine months ended DecemberMarch 31, 2017 compared to2020 and 1,240,302 for the same period last year, were due to warrants exercised in connection with our common stock during September 2016.

7.three and nine months ended March 31, 2019.

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

 

 

14


  As of March 31, 2020  
($ in thousands) Gross 
Accumulated
Amortization
 Net 
Amortization
Period
Intangible assets:        
Non-compete agreements $2
 $(2) $
 2 years
Brand and tradenames 1,695
 (642) 1,053
 3 - 7 years
Developed technology 10,939
 (4,649) 6,290
 5 - 6 years
Customer relationships 19,049
 (2,574) 16,475
 10 - 18 years
Total intangible assets $31,685
 $(7,867) $23,818
  
         
Goodwill 63,945
 
 63,945
 Indefinite
         
Total intangible assets & goodwill $95,630
 $(7,867) $87,763
  

Table of Contents

  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 sixnine months ended DecemberMarch 31, 2017,2020 there was $472 thousand$0.8 million and $516 thousand$2.4 million in amortization expense related to intangible assets, respectively, as compared to the three and sixnine months ended DecemberMarch 31, 2016,2019, for which there was $43 thousand$0.8 million and $87 thousand$2.4 million in amortization expense related to intangible assets, respectively.

8.  LINE OF CREDIT

During the fiscal year ended June 30, 2016, the Company entered into a Loan and Security Agreement


9. DEBT AND OTHER FINANCING ARRANGEMENTS
The Company's debt and other ancillary documents (as amended, the “Heritage Loan Documents”) with Heritage Bank of Commerce (“Heritage Bank”), providing for a secured asset-based revolving line of credit in an amount of up to $12.0 million (the “Heritage Line of Credit”) at an interest rate calculated based on the Federal Reserves’ Prime plus 2.25%. The Heritage Line of Credit and the Company’s obligations under the Heritage Loan Documents were secured by substantially all of the Company’s assets, including its intellectual property.

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 datedfinancing arrangements as of March 29, 2016, as amended,31, 2020 and ancillary agreements by and betweenJune 30, 2019 consisted of the Company and Heritage Bankfollowing:

  As of
March 31,
 As of
June 30,
($ in thousands) 2020 2019
     
Term Facility $15,000
 $
Revolving Credit Facility 
 10,000
Term Loan 
 1,458
Other, including finance lease obligations 423
 1,323
Less: unamortized issuance costs and debt discount (2,745) (8)
Total 12,678
 12,773
Less: debt and other financing arrangements, current (381) (12,497)
Debt and other financing arrangements, noncurrent $12,297
 $276
Details 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 balancepresented on the Heritage LineCondensed Consolidated Statements of Credit at December 31, 2017.

9. DEBT

Operations are as follows:

  Three months ended March 31, Nine months ended March 31,
($ in thousands) 2020 2019 2020 2019
Term Facility $542
 $
 $921
 $
Revolving Credit Facility 
 170
 303
 526
Term Loan 
 456
 160
 1,158
Other interest expense 141
 287
 597
 834
Total interest expense $683
 $913
 $1,981
 $2,518

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 mustwere required to be paid in full at maturity on November 9, 2022.

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Loans under the five year credit agreement bearbore 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 Ratiototal leverage ratio as of the last day of each fiscal quarter. The applicable interest rate on the loans for the three and six monthsyear to date ended DecemberOctober 31, 2017 is2019 was LIBOR plus 4%. The Term Loan and Revolving Credit Facility containcontained customary representations and warranties and affirmative and negative covenants and requirerequired the Company to maintain a minimum quarterly Total Leverage Ratiototal 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 Term Facility and the Company classified all amounts outstanding balances forunder 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 $10.0and 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

Thewhich represented the outstanding balance on the date thereof. On October 31, 2019, the Company periodically enters into capital lease obligationsrepaid 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, comprisedand general corporate purposes. The outstanding principal amount of monthly installmentsthe loan must be paid in full by no later than the maturity date of $7 thousandOctober 31, 2024. The Company is required 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 March 31, 2020, the Company was in compliance with its capital expenditures financial covenant.
The Company is evaluating its options with respect to the Financing Agreement, including all rights and remedies that may be available to it. Based upon the current financial forecast for the fourth quarter of fiscal year 2020, without a refinancing or modification of existing terms within the Term Facility, the Company anticipates that as of June 30, 2020, it is highly likely the Company will not be in compliance with the minimum fixed charge coverage ratio and the minimum consolidated EBITDA of its Term Facility. Unless the Commitment Letter is rescinded, amended, or replaced, noncompliance would represent an event of default under the Term Facility, and, following the request of the Required Lenders (as such term is defined in the Term Facility), all unpaid principal of $15.0 million and accrued interest to Antara would immediately become due, in addition to a $0.8 million prepayment premium. In addition, all of the Company's unamortized issuance costs and debt discount related to the Term Facility would be recognized upon repayment of the loan as interest expense in the period of repayment, which as of March 31, 2020 was $2.7 million.
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 includedderivative liability could result in propertya material increase or decrease

in its carrying value. The allocation of the proceeds to the debt component and equipmentthe bifurcation of the embedded derivative liability resulted in a $2.1 million debt discount that will be amortized as a credit to interest expense over the term of the Term Facility.
If the Company does not meet its financial covenants as of June 30, 2020 and depreciated accordingly.

the debt and all accrued interest immediately becomes due as described above, all of the Company's unamortized issuance costs and debt discount would be recognized upon repayment of the loan as interest expense in the period of repayment. At March 31, 2020, the unamortized balance of the $0.9 million debt issuance costs and the $2.1 million debt discount was $2.7 million.

Other Borrowings
In connection with the acquisition of Cantaloupe, the Company assumed debt of $1.8 million.  At Decembermillion with an outstanding balance of $0.3 million and $0.8 million as of March 31, 2017, the debt is2020 and June 30, 2019, respectively, comprised of $550 thousandof: (i) $0.0 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 thousandmonthly; (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 maturingthat 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 initially recorded at fair value. The carrying amounts of December 31, 2017,certain of the Company’s financial instruments, 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 these instruments and are Level 1 assets or liabilities of the fair value hierarchy.
The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows: 
Level 1 ‑ Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company held no levelhas the ability to access at the measurement date.
Level 2 ‑ Inputs are other than quoted prices included within Level 1 levelthat are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or levelsimilar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 financial instruments.

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

The Company's embedded derivative liability is measured at fair value using a probability-weighted discounted cash flow model and is classified as a Level 3 liability of the fair value hierarchy due to the use of significant unobservable inputs. The liability is included as a component of Accrued expenses, less current portion on the consolidated balance sheets and subject to remeasurement to fair value at the end of each reporting period. For the three and nine months ended March 31, 2020, the Company recognized the change as a component of Other income (expense) in its consolidated statements of operations. The assumptions used in the discounted cash flow model of the embedded derivative liability include: (1) management's estimates of the probability and timing of future cash flows and related events; (2) the Company's risk-adjusted discount rate that includes a company-specific risk premium; and (3) the Company's cost of debt. The assumptions used in the discounted cash flow model were based on information known to the Company as of March 31, 2020. As described above, based on current forecasts, it is highly likely the Company will not be in compliance with certain covenants within the Term Facility as of June 30, 2016, 2.2 million warrants2020. The Company is currently pursuing a refinancing or modification of its Term Facility, or alternative financing arrangements. As a result, subsequent to March 31, 2020, the refinancing or modification may have a material impact on the assumptions used in the discounted cash flow model and related embedded derivative liability. If the Company is not in compliance with its covenants on June 30, 2020, this is likely to cause a material decrease in the carrying value of the embedded derivative liability.

There were no transfers between Level 1, Level 2, and Level 3 during the periods presented. The following table provides a reconciliation for the opening and closing balances of the embedded derivative liability from October 31, 2019 to March 31, 2020:
($ in millions)  
Balance at October 31, 2019 $1.5
Net change in fair value 
Balance at December 31, 2019 1.5
Net change in fair value (1.1)
Balance at March 31, 2020 $0.4

The Company’s obligations under its long-term debt agreements are carried at amortized cost, which approximates their fair value as of $3.7 million comprised the Company’s Level 3 financial instruments.June 30, 2019. The Level 3 financial instruments consisted of common stock warrants issued by the Company in March 2011 to purchase shares of the Company’s common stock.  The Level 3 financial instruments included features requiring liability treatment of the warrants, with the fair value of the common stock based on valuations performed by an independent third-party valuation firm.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 was determined using proprietary valuation models using the quality of the underlying securitiesCompany's obligations under its long-term debt agreements with Antara as of March 31, 2020 was approximately $16.1 million and considered a Level 3 liability of the warrants, restrictionsfair value hierarchy because this instrument used significant unobservable inputs consistent with those used in determining the embedded derivative liability values.
11. INCOME TAXES

On March 27, 2020, in response to COVID-19 and its detrimental impact to the global economy, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law, which provides a stimulus to the U.S. economy in the form of various individual and business assistance programs as well as temporary changes to existing tax law. Among the changes to the provision in business tax laws include a five-year net operating loss carryback for the 2018, 2019 and 2020 tax
years, a deferral of the employer’s portion of the social security tax, an increase in the interest expense limitation under Section 163(j) from 30% to 50% for the 2019 and 2020 tax years, and others. ASC 740 requires the tax effects of changes in tax laws or rates to be recorded in the period of enactment. None of the income tax provisions of the CARES Act have a material impact on the warrantsCompany, and security underlying the warrants, time restrictions and precedent sale transactions completed in the secondary market or in other private transactions. Duringtherefore no adjustment was recorded.
For the three months ended September 30, 2016, all of the aforementioned warrants were exercised resulting in a $5.2 million reclassification to Common Stock and the net difference of $1.5 million was recorded as a loss on fair value associated with the warrant liability. 

11. 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 are effective for taxable years beginning after DecemberMarch 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 impacting the Company, the most significant of which reduces the Federal corporate statutory tax rate from 34% to 21%.

The staff of the US Securities and Exchange Commission (“SEC”) has recognized the complexity of reflecting the impacts of the Act, and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (“SAB 118”), which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting (the measurement period). SAB 118 describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted.

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The various provisions under the Act deemed most relevant to the Company have been considered in preparation 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. 

For the three and six months ended December 31, 2017,2020, the Company recorded an income tax benefit of $85 thousand. For the nine months ended March 31, 2020, the Company recorded an income tax provision of $46 thousand. As of March 31, 2020, the Company reviewed the existing deferred tax assets in light of COVID-19 and continues to record a full valuation against its deferred tax assets.  The income tax provisions primarily relate to the Company's uncertain tax positions, as well as state income and franchise taxes. As of $9,073 thousand and $8,605 thousand, respectively, (substantially all deferredMarch 31, 2020, the Company had a total unrecognized income taxes) which include a chargetax benefit of $6,592 thousand$0.2 million. The Company is actively working with the tax authorities related to the Act. These provisions aremajority 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 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 treated as a discrete item in the tax provisions for the three and sixnine months ended DecemberMarch 31, 2017. 

The accounting for deferred income taxes in the acquisition of Cantaloupe did not consider the potential effects of IRS Code Section 382 relating to the limitation on use of operating loss carryforwards created by Cantaloupe for its changes in ownership because the analysis required for such determination has not yet been completed. If upon completion of such analysis there are limitations on2020, as 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 during the three months ended December 31, 2017 related to the rate reduction of the deferred tax assets acquired.

For the three and six months ended December 31, 2016, income tax benefits of $0 and $115 thousand, respectively, (substantially all deferred income taxes) were recorded. The benefits are based upon income (loss) before income taxes using an estimated annual effective income tax rate does not provide a reliable estimate of 30% for the fiscal yearincome tax provision. The Company will continue to monitor the status of the COVID-19 pandemic and its impact on our results of operations.


For the three months ended June 30, 2017. However, such benefits actually calculated have been limitedMarch 31, 2019, an income tax provision of $23 thousand was recorded, which primarily relates to $115state income and franchise taxes. For the nine months ended March 31, 2019, an income tax provision of $60 thousand pending the materialization of additionalwas 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 sixnine months ended DecemberMarch 31, 2016 were reduced by2019, as the use of an estimated annual effective income tax rate does not provide a provision for the tax effectreliable estimate of the change in the fair value of warrant liabilities which was treated discretely. All of thoseincome tax provision.
12. EQUITY

WARRANTS
The Company had 23,978 warrants were exercisedoutstanding as of SeptemberMarch 31, 2020 and June 30, 2016.

12. EQUITY

On July 25, 2017, the Company closed its underwritten public offering2019, all of 9,583,332 shares of its common stockwhich were exercisable at a public offering price of $4.50$5.00 per share. The foregoing included the full exercisewarrants 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.

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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 forto 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 CEOChief Executive Officer options vestvested on August 16, 2018, expiring if not exercised prior to August 16, 2024.  The CFOChief Financial Officer options were scheduled to vest 1/3 on August 16, 2018, 1/3 on August 16, 2019 and 1/3 on August 16, 2020, expiring if not exercised prior to August 16, 2024. The CEOChief Executive Officer options arewere intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and the CFOChief Financial Officer options are non-qualified stock options. 

The Company's former Chief Executive Officer exercised all of his 274,267 outstanding options during the three months ended December 31, 2019. The Company's former Chief Financial Officer forfeited the remaining unvested options upon her resignation effective January 7, 2019.

In September 2018, the Company awarded stock options to 102 employees to purchase up to 400,000 shares of common stock at an exercise price of $8.75 which vest 1/3 each year.
In October 2019, the Company awarded stock options to its then-interim Chief Executive Officer to purchase up to 225,000 shares of common stock at an exercise price of $7.18 per share which vested immediately and are non-qualified stock options.
In November 2019, the Company awarded stock options to 11 employees to purchase up to 110,000 shares of common stock at an exercise price of $6.28 which vest 1/3 each year. The options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended.
The fair value of options granted during the sixnine months ended DecemberMarch 31, 20172020 and 20162019 was determined using the following weighted average assumptions:

 

 

 

 

 

Six months ended

 

December 31, 

Nine months ended March 31,

 

2017

 

2016

2020 2019

Expected volatility (percent)

 

 

50.21 - 50.89

 

50.00
74.6% - 90.1%
 58.4% - 70.9%

Expected life (years)

 

 

4.0 - 4.5

 

4.0

3.5 - 4.5
 4.5

Expected dividends

 

 

 —

 

 —

0.0% 0.0%

Risk-free interest rate (percent)

 

 

1.64 - 1.72

 

1.06
1.4% - 1.6%
 2.23% - 2.91%

Number of options granted

 

 

179,047

 

20,080

340,760
 420,000

Weighted average exercise price

 

$

5.66

 

$

4.98

$6.85
 $8.52

Weighted average grant date fair value

 

$

2.42

 

$

1.98

$6.84
 $4.27


Stock based compensation related to all stock options for the sixthree and nine months ended DecemberMarch 31, 20172020 was $0.1 million and 2016 was $276 thousand$1.5 million, respectively, and $95 thousand,$0.2 million and $0.6 million for the three and nine months ended March 31, 2019, respectively.

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COMMON STOCK

On July 1, 2017, $90 thousand of stock grants2, 2018, 6,677 shares were awarded to each non-employee Director based on the closing price of the Company’s Common Stock on June 8, 2017 (the date for which the stock grants were initially approved),director for a total of 98,18440,062 shares. The shares were scheduled to vest ratably on a monthly basis over the two yeartwo-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 scheduled to vest on October 16, 2020.
On November 22, 2019, 104,500 total shares were awarded to 11 employees. The shares vest 1/3 each year.
On February 28, 2020, the Company awarded 186,916 total shares to its Chief Executive Officer. The shares were scheduled to vest 1/4 on February 28, 2021, with the remaining shares scheduled to vest on a quarterly basis thereafter through February 28, 2024. The Company also awarded 10,778 shares each for a total of 21,556 shares which were scheduled to vest on February 28, 2021 to new non-employee directors Kelly Kay and Sunil Sabharwal. The Company also awarded 16,767 total shares to its Chief Financial Officer and 8,982 total shares to its Chief Accounting Officer which vest 1/3 each year.
On November 8, 2019, Albin F. Moschner retired as a member of the Board of Directors, and his remaining unvested shares immediately vested. On February 28, 2020, Steven D. Barnhart, Joel Brooks, and William J. Reilly, Jr. resigned as members of the Board of Directors, and their remaining unvested shares were forfeited immediately. Due to the resignation of the Chief Executive Officer and members of the Board of Directors in the fourth quarter of fiscal year 2020, certain unvested common stock awards were forfeited upon their resignations. See Note 14.
The total expense recognized for these grantsall common stock awards for the six months ending December 31, 2017 was $315 thousand.

During the sixthree and nine months ended DecemberMarch 31, 2017,2020 was $0.4 million and $0.9 million, and for the Company awarded an aggregate of 177,363 shares to its Chief Executive Officer, Chief Financial Officerthree and Chief Services Officer under its fiscal year 2017 long term stock incentive plannine months ended March 31, 2019 was $0.1 million and an aggregate of 6,007 shares to two non-employee Directors in satisfaction of board fees.

$0.4 million, respectively.

LONG TERM INCENTIVE PLANS

The

In October 2019, the Company's Board of Directors approved the Fiscal Year 20182020 Long-Term Stock Incentive Plan (the “2018(“FY20 LTI Stock Plan”) which provides that each executive officersofficer would be awarded shares of common stock of the Company in the event that certain metrics relating to the Company’s 20182020 fiscal year would result in specified ranges of year-over-year percentage growth. The metrics are total number of connections as of June 30, 20182020 as compared to total number of connections as of June 30, 20172019 (40% weighting) and adjusted EBITDA earned during the 20182020 fiscal year as compared to the adjusted EBITDA earned during the 20172019 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.  Themetric (which in any event cannot exceed 150% of the executive officer’s target bonus award). Any shares awarded under the 2018 LTI Stock Planplan 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 is evaluating the impact of COVID-19 on the FY20 LTI Plan.

The Company had long-term stock incentive plans (“LTI”) in prior fiscal years for its then executive officers. Stock based compensation related to the LTI plans was as follows in the three and sixnine months ended March 31, 2020 and 2019:
  Three months ended March 31, Nine months ended March 31,
($ in thousands) 2020 2019 2020 2019
FY20 LTI Plan $(83) $
 $36
 $
FY18 LTI Plan 2
 30
 21
 91
FY17 LTI Plan 
 17
 
 68
Total $(81) $47
 $57
 $159

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

REGISTRATION RIGHTS AGREEMENT

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

Pursuant to an Amendment to Registration Rights Agreement dated as of January 31, 2020 (the “Amendment”), Antara and the Company agreed to terminate the obligation of the Company to register the shares in exchange for a payment of approximately $1.2 million by the Company to Antara. The Amendment provided that the payment would be in full satisfaction of any and all liquidated damages which may be due by the Company to Antara under the Registration Rights Agreement for the failure to timely file the Form S-1 registration statement and/or to obtain and maintain the effectiveness thereof.
Under the Registration Rights Agreement, and prior to the Amendment, the Company was required to file the registration statement by no later than November 8, 2019 (extended by agreement of the parties until November 26, 2019). The Company informed Antara that it would not be able to file the Registration Statement without unreasonable effort and expense because the applicable rules of the SEC require the Company to include certain pre-acquisition financial statements of Cantaloupe in the Registration Statement.
These pre-acquisition financial statements had been filed by the Company as exhibit 99.1 to the Form 8-K/A filed on January 24, 2018. As part of the audit process and subsequent to June 30, 2019, the Company performed an extensive analysis relating to certain of the accounts of Cantaloupe for periods subsequent to the acquisition and made certain adjustments to previously issued financial statements, all of which were described in the Company’s annual report on Form 10-K for the year ended June 30, 2019 and the Amendment No. 1 thereto. The Company determined that to perform such an analysis in connection with the pre-acquisition financial statements required to be included in the registration statement would be unduly time consuming and expensive. The Company also sought to obtain a waiver from the staff of the SEC from the regulations which require the inclusion of these pre-acquisition financial statements in the registration statement. By letter dated December 31, 2017 and 2016:

30, 2019, the SEC staff indicated that it was unable to provide such a waiver.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

December 31, 

 

December 31, 

($ in thousands, except per share data)

    

2017

    

2016

    

2017

    

2016

FY18 LTI Plan

 

$

273

 

$

 —

 

$

489

 

$

 —

FY17 LTI Plan

 

 

64

 

 

85

 

 

128

 

 

155

FY16 LTI Plan

 

 

 9

 

 

23

 

 

19

 

 

50

FY15 LTI Plan

 

 

 —

 

 

 3

 

 

 —

 

 

 3

Total

 

$

346

 

$

111

 

$

636

 

$

208

13. COMMITMENTS AND CONTINGENCIES

During


Eastern District of Pennsylvania Consolidated Shareholder Class Actions

As previously reported, various putative shareholder class action complaints had been filed in the current fiscal year,United States District Court for the District of New Jersey against the Company, expandedits chief executive officer and chief financial officer at the leased space forrelevant time, its headquartersdirectors at the relevant time, and the investment banks who served as underwriters in Malvern, Pennsylvania to a totalthe May 2018 follow-on public offering 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, the Company absorbed(the “Underwriters”). These complaints alleged violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These various actions were consolidated by the Court into one action (the “Consolidated Action”), and the Court granted the Motion to Transfer filed by the Company and its former chief executive officer, and transferred the Consolidated Action to the United States District Court for the Eastern District of Pennsylvania, Docket No. 19-cv-04565. On November 20, 2019, Plaintiff filed an amended complaint, and defendants filed motions to dismiss on February 3, 2020. The Court has not yet ruled on the motions to dismiss. The parties participated in a noncancelable operating lease pertainingprivate mediation on February 27, 2020 which resulted in a settlement. On May 29, 2020, the plaintiffs filed documents with the Court seeking preliminary approval of the settlement, with the defendants supporting approval of the settlement. On June 9, 2020, the Court granted preliminary approval of the settlement and issued a scheduling order for further action on the settlement. The settlement provides for a payment of $15.3 million which includes all administrative costs and plaintiff’s attorneys’ fees and expenses. The Company’s insurance carriers are anticipated to Cantaloupe’s headquarters based in San Francisco, California.  The leased premise consists ofpay approximately 8,400 square feet$12.7 million towards the settlement and calls for rental payments of approximately $46 thousand due each month through its January 31, 2020 expiration date.   

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From time to time, the Company is involvedanticipated to pay approximately $2.6 million towards the settlement, which has been recorded as a liability in various legalthe accompanying condensed consolidated financial statements. Payments will not be distributed pursuant to the settlement until and unless an opt-out process is completed successfully and the Court grants final approval of the settlement. The Company expects but cannot assure that those events will occur later in the calendar year. Should the settlement not be approved the parties will resume litigation of the claims.

Chester County, Pennsylvania Class Action

As previously reported, a putative shareholder class action complaint was filed against the Company, its chief executive officer and chief financial officer at the relevant time, its directors at the relevant time, and the Underwriters, in the Court of Common Pleas, Chester County, Pennsylvania, Docket No. 2019-04821-MJ. The complaint alleged violations of the Securities Act of 1933, as amended. As also previously reported, on September 20, 2019 the Court granted the defendants’ Petition for Stay and stayed the Chester County action until the Consolidated Action reaches a final disposition. On October 18, 2019, plaintiff filed an appeal

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

Subpoena

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

HEC Master Fund LP Lawsuit

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

HEC Master Fund LP Shareholder Demand

By letter dated February 12, 2020, HEC demanded that the Board of Directors investigate, remedy and commence proceedings arising during the normal course of business.  In the opinionagainst certain of the Company’s management, these proceedings will not havecurrent and former officers and directors and other responsible parties for breach of fiduciary duties. The matters alleged to constitute breaches of duty related to the matters raised by HEC during the contest for the election of directors at the 2020 annual meeting. On April 26, 2020, the parties entered into a material adverse effectLetter Agreement pursuant to which HEC withdrew its shareholder demand for board action.
14. SUBSEQUENT EVENTS

Agreement with Hudson Executive Capital LP

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

Chief Executive Officer Resignation

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

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

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

Appointment of New Chief Executive Officer

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

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

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

Under the Feeney Agreement, if Mr. Feeney is terminated without “cause” or resigns for “good reason” (as each term is defined under the Feeney Agreement), then, subject to Mr. Feeney’s execution of a release of claims and continued compliance with the Feeney Agreement, Mr. Feeney will be provided with a severance package consisting of (i) 12 months of continued base salary, (ii) senior executive-level outplacement support for 12 months, and (iii) up to a 12-month COBRA subsidy. However, if such termination occurs within 24 months following a “change of control,” as defined in the Feeney Agreement, then Mr. Feeney will instead be provided a lump sum payment equal to the sum of his base salary and last annual bonus paid in the fiscal year completed prior to such termination.

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

COVID-19
A novel strain of coronavirus (COVID-19) was first identified in China in December 2019 and subsequently declared a global pandemic in March 2020 by the World Health Organization. COVID-19 containment measures began in parts of the United States in March 2020 resulting in forced closure of non-essential businesses and social distancing protocols. As a result, COVID-19 has impacted our business, significantly reducing foot traffic to distributed assets containing our electronic payment solutions and reducing discretionary spending by consumers. The Company did not observe meaningful reductions in processing volume until mid-March, when average daily processing volume decreased approximately 40%. By mid-April, processing volumes began to recover and have shown a steady improvement by approximately 30% over the mid-March levels. At this time we are unable to reasonably estimate the length of time that containment measures will be needed in the United States. Furthermore, even after containment measures are lifted there can be no assurance as to the time required to regain operations and sales at levels prior to the pandemic.
In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of our employees by implementing work-from-home measures while continuing to diligently serve our customers. Additionally, we have created an internal task force to lead measures to protect the business in light of the volatility and uncertainty caused by the COVID-19 pandemic, including ensuring the safety of our employees and our community by implementing work from home policies,

conserving liquidity, evaluating cost saving actions, partnering with customers to position USAT for renewed growth post crisis, and pausing on international expansion. The liquidity conservation and cost savings initiatives include but are not limited to: a 20% salary reduction for the senior leadership team until December 2020; deferral of all cash-based director fees until calendar year 2021; a temporary furlough of about 10% of our employee base; negotiations with and concessions from vendors in regard to cost reductions and/or payment deferrals; an increased collection effort to reduce outstanding accounts receivables; and various supply chain/inventory improvements. Our supply chain network has not been significantly disrupted and we are continuously monitoring for the impact of COVID-19.
Subsequent to March 31, 2020, in response to the outbreak, we have agreed to concessions regarding modifications to price and/or payment terms with certain customers who have been negatively impacted by COVID-19, and may negotiate additional concessions or other contract amendments regarding modifications to price and/or payment terms.

We continue to monitor the rapidly evolving situation and guidance from federal, state and local public health authorities. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial position,condition, results of operations or cash flows.

14. SUBSEQUENT EVENTS

flows in the future. The effects of COVID-19 are not significant to our financial statements for the quarter ended March 31, 2020. However, based on current trends and if the pandemic is not substantially contained in the near future, COVID-19 may have a material adverse impact on our revenue growth as well as our overall profitability for the quarter ended June 30, 2020 and beyond, and may lead to higher sales-related, inventory-related, and operating reserves. Further, a sustained downturn may also result in a decrease in the fair value of our goodwill or other intangible assets, causing them to exceed their carrying value. This may require us to recognize an impairment to those assets.


Paycheck Protection Program Loan

The Company has evaluated subsequent eventsapplied for, and has received, funds under the Paycheck Protection Program after the period end in the amount of $3.1 million. The application for these funds requires the Company to, in good faith, certify that occurred through the datecurrent economic uncertainty made the loan request necessary to support the ongoing operations of the filingCompany. This certification further requires the Company to take into account our current business activity and our ability to access other sources of this Form 10-Q.  No significant events occurred subsequentliquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the balance sheet datebusiness. The receipt of these funds, and priorthe forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the filing date of this Form 10-Q that would have a material impact on the Consolidated Financial Statements.

forgiveness criteria.



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

Forward-Looking Statements

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

20

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

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

Tablefailure to comply with the financial covenants of Contents

our Term Facility;

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

·

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;

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

·

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

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

·

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

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

·

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

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

·

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

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

·

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

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

whether the Company’s customers continue to utilize the Company’s transaction processing and related services, as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice;
the ability of the Company to satisfy its trade obligations included in accounts payable and accrued expenses;
the ability of the Company to sell to third party lenders all or a portion of our finance receivables;
the ability of a sufficient number of our customers to utilize third party financing companies under our QuickStart program in order to improve our net cash used by operating activities;
the incurrence by us of any unanticipated or unusual non-operating expenses which would require us to divert our cash resources from achieving our business plan;
the ability of the Company to predict or estimate its future quarterly or annual revenue and expenses given the developing and unpredictable market for its products;
the ability of the Company to retain key customers from whom a significant portion of its revenue are derived;
the ability of a key customer to reduce or delay purchasing products from the Company;

the ability of the Company to obtain widespread commercial acceptance of its products and service offerings such as ePort QuickConnect, mobile payment and loyalty programs;
whether any patents issued to the Company will provide the Company with any competitive advantages or adequate protection for its products, or would be challenged, invalidated or circumvented by others;
the ability of the Company to operate without infringing the intellectual property rights of others;
the ability of our products and services to avoid unauthorized hacking or credit card fraud;
whether we continue to experience material weaknesses in our internal controls over financial reporting in the future, and are not able to accurately or timely report our financial condition or results of operations; 
whether our suppliers would increase their prices, reduce their output or change their terms of sale;
the ability of the Company to sell to third party lenders all or a portion of our finance receivables, or to do so in a timely manner;
whether the listing application for the Company’s securities which has been filed by the Company with The Nasdaq Stock Market LLC (“Nasdaq”) will be granted in a timely manner;
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; and
the risks associated with the currently pending  litigation or possible regulatory action arising from the internal investigation and its findings, from the failure to timely file our periodic reports with the SEC, from the restatement of the affected financial statements, from allegations related to the registration statement for the follow-on public offering, or from potential litigation or other claims arising from the shareholder demands for derivative action.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above.above, or those discussed under Item 1A. “Risk Factors” in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the "2019 Form 10-K"). We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.

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

OVERVIEW OF THE COMPANY

USA Technologies, Inc. was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutionsprovides wireless networking, cashless transactions, asset monitoring, and other value-added services that facilitate electronic payment transactions and consumer engagement services primarily withinprincipally to the small ticket, unattended Point of Sale (“POS”) market. We are a leading provider in the small ticket, beverage and food vending industry and are expanding our solutions and services to other unattended market segments,Our ePort® technology can be installed and/or embedded into everyday devices such as vending machines, a variety of kiosks, amusement games, and commercial laundry kioskvia either our ePort hardware or our Quick Connect solution. Our associated service, ePort Connect®, is a PCI-compliant, comprehensive service that includes simplified credit/debit card processing and others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options,support, consumer engagement services as well as telemetry, Internet of Things (“IoT”), and machine-to-machine (“M2M”) services, which includeincluding the ability to remotely monitor, control and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment.

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

The Company generates revenue in multiple ways. During the three and sixnine months ended DecemberMarch 31, 2017,2020, we derived 70.3% and 73.6%approximately 81% of our revenuesrevenue from recurring license and transaction fees related to our ePort Connect service or Seed Cloud solution and 29.7% and 26.4%approximately 19% 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

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

·

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

·

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

·

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

As of DecemberMarch 31, 2017,2020, highlights of the Company include:

are below:

·

Over 150 employees, primarily located in our corporate headquarters in Malvern, Pennsylvania and a newly acquired Cantaloupe office location in San Francisco, California. 

Headquarters in Malvern, Pennsylvania;

·

Over 15,000 customers and 900,000 connections to our services, including approximately 1,400 customers and 270,000 connections related to the acquisition of Cantaloupe;

Over 150 employees;

·

Three direct sales teams at the national, regional, and local customer-level and a growing number of OEMs and national distribution partners;

Over 22,000 customers and approximately 1,289,000 connections to our service;

·

85 United States and foreign patents are in force;

Three direct sales teams at the national, regional, and local customer-level and a growing number of OEMs and national distribution partners;

·

The Company’s fiscal year ends June 30th; and

·

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

The Company’s fiscal year ends June 30th.

As indicated in our 2019 Form 10-K, as a result of our failure to comply with our periodic reporting obligations, on September 26, 2019, our securities were suspended from trading on The Nasdaq Stock Market LLC (“Nasdaq”) and are currently quoted on the OTC Markets. On October 8, 2019, and pursuant to applicable Nasdaq rules, we filed an appeal to the Nasdaq Listing and Hearing Review Council (the “Listing Council”) from the Nasdaq Hearing Panel’s determination to delist the Company’s securities from trading. On November 22, 2019, the Company has net deferred tax assetsreceived a notification that the Listing Council had affirmed the decision of approximately $14.8 million predominantly resultingthe Hearing Panel to suspend trading of the Company’s securities on Nasdaq and to delist the Company’s securities. On January 29, 2020, the Company received written notification from Nasdaq that the Nasdaq Board of Directors declined to call for review of the decision of the Listing Council, and that the decision of the Listing Council represented the final action of Nasdaq relating to the decision of the Listing Council. Pursuant to applicable Nasdaq listing rules and the rules promulgated under the Securities Exchange Act of 1934, as amended, on February 4, 2020, Nasdaq issued a series of operating loss carry forwardspress release stating that may be available to offset future taxable income.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared applying certain critical accounting policies. Theit will delist the Company’s securities and will file a Form 25 with the Securities and Exchange Commission to complete the delisting. The delisting of the Company’s securities from Nasdaq became effective on February 18, 2020. Independent of and in addition to the appeal process described above, the Company has applied to relist its common stock and preferred stock on Nasdaq, and the application is currently under review by the staff of the Nasdaq Listing Qualifications Department. There can be no assurance that the listing application will be granted by Nasdaq or granted in a timely manner.


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

COVID-19 Update

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

In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of management’s most difficult, subjective, our employees by implementing work-from-home measures while continuing to diligently serve our customers. Additionally, we have created

an internal task force to lead measures to protect the business in light of the volatility and uncertainty caused by the COVID-19 pandemic, including ensuring the safety of our employees and our community by implementing work from home policies, conserving liquidity, evaluating cost saving actions, partnering with customers to position USAT for renewed growth post crisis, and pausing on international expansion. The liquidity conservation and cost savings initiatives include but are not limited to: a 20% salary reduction for the senior leadership team until December 2020; deferral of all cash-based director fees until calendar year 2021; a temporary furlough of about 10% of our employee base; negotiations with and concessions from vendors in regard to cost reductions and/or complex judgments. Critical accounting policies require numerous estimatespayment deferrals; an increased collection effort to reduce outstanding accounts receivables; and strategic various supply chain/inventory improvements. Our supply chain network has not been significantly disrupted and we are continuously monitoring for the impact of COVID-19.
Subsequent to March 31, 2020, in response to the outbreak, we have agreed to concessions regarding modifications to price and/or economic assumptions that may prove inaccurate or subject to variationspayment terms with certain customers who have been negatively impacted by COVID-19, and may significantly affectnegotiate additional concessions or other contract amendments regarding modifications to price and/or payment terms.

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

Paycheck Protection Program Loan

The Company has applied for, and has received, funds under the Paycheck Protection Program after the period end in the amount of $3.1 million. The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future financial condition and results of operations. Our financial statements are prepared in accordance with U.S. GAAP, and they conformadherence to general practices in our industry. We applythe forgiveness criteria.
CRITICAL ACCOUNTING POLICIES

There have been no significant changes to the critical accounting policies consistently from period to perioddisclosed in “Management’s Discussion and intend that any changeAnalysis 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.

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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.

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TRENDING QUARTERLY FINANCIAL DATA

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

We believe the first three measurements are useful in allowing management and readers to evaluate our strategy of driving growth in connections and transactions and the fourth measurement is useful in allowing management and readers to evaluate the growth of our QuickStart program and direct sales compared to the JumpStart program.


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

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

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

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

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

Five Quarter Select Key Performance Indicators includingIncluding 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
 
March 31,
2020
 December 31, 2019 September 30, 2019 
June 30,
2019
 
March 31, 
2019
Connections:         
Gross new connections37,000
 45,000
 49,000
 47,000
 51,000
Net new connections34,000
 40,000
 46,000
 43,000
 46,000
Total connections1,289,000
 1,255,000
 1,215,000
 1,169,000
 1,126,000
Customers:         
New customers added1,100
 900
 900
 825
 925
Total customers22,300
 21,200
 20,300
 19,400
 18,575
Volumes:         
Total number of transactions (millions)237.3
 243.4
 232.7
 229.6
 217.2
Total volume (millions)$462.7
 $476.4
 $461.2
 $453.0
 $420.3
Financing structure of connections:         
JumpStart1.4% 4.3% 3.4% 10.1% 1.8%
QuickStart & all others (a)
98.6% 95.7% 96.6% 89.9% 98.2%
Total100.0% 100.0% 100.0% 100.0% 100.0%
 

a)

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

b)

Includes credit sales with standard trade receivable terms.

Highlights of USAT’s connections for the quarter ended DecemberMarch 31, 20172020 include:

·

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

·

41,00034,000 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%1,289,000 total connections to our service compared to the same quarter last year of approximately 1,126,000 total connections to our service, an increase of 163,000 connections, or 14%.

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RESULTS OF OPERATIONS

Three Months Ended DecemberMarch 31, 20172020 Compared to Three Months Ended DecemberMarch 31, 2016

2019

Revenue and Gross Profit

 

 

 

 

 

 

 

 

 

 

 

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%

  Three months ended March 31, 
Percent
Change
($ in thousands) 2020 2019 
Revenue:      
License and transaction fees $34,961
 $31,515
 10.9 %
Equipment sales 8,137
 6,189
 31.5 %
Total Revenue 43,098
 37,704
 14.3 %
       
Costs of sales:      
Cost of services 22,244
 20,307
 9.5 %
Cost of equipment 9,856
 7,444
 32.4 %
Total costs of sales 32,100
 27,751
 15.7 %
       
Gross profit:      
License and transaction fees 12,717
 11,208
 13.5 %
Equipment sales (1,719) (1,255) (37.0)%
Total gross profit $10,998
 $9,953
 10.5 %
Revenue. Total revenue increased $10.7$5.4 million for the three months ended DecemberMarch 31, 20172020 compared to the same period in 2016.2019.  The growthchange in total revenue resulted from a $6.2$3.4 million increase in license and transaction fee revenue for the quarterthree months ended DecemberMarch 31, 20172020 compared to the same period in 2016,2019, driven primarily by the increase in connection count which caused an increase in license fee and processing fees, and a $4.5$1.9 million increase in equipment revenue for the three months ended DecemberMarch 31, 20172020 compared to the same period in 2019 driven primarily by higher shipments compared to the same period last year, both driven by an increase in connections and the Cantaloupe acquisition. 

year.

Cost of sales. Cost of sales increased by $7.9$4.3 million for the three months ended DecemberMarch 31, 20172020 compared to the same period last year.in 2019.  The increase was driven by a $3.0$1.9 million increase in cost of services driven primarily by an increase in transaction processing costs following the increase in transactions processed during the quarter and a $4.9$2.4 million increase in cost of equipment sales, both driven byresulting from an increase in connections andequipment revenue due to higher shipments compared to the Cantaloupe acquisition.

same period last year.

Gross margin.  The overallmargin. Total gross margin decreased 0.8%0.9%, from 29.1%26.4% for the three months ended DecemberMarch 31, 20162019 to 28.3%25.5% for the three months ended DecemberMarch 31, 2017.2020.  The change in our gross margin was driven primarily by a decrease in the equipment margin from 21.2%a loss of 20.3% for the three months ended DecemberMarch 31, 20162019 to 7.4%a loss of 29.0% for the three months ended DecemberMarch 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 an2020. The increase in the license feeloss on our equipment margin was due to the low margin the company recognized on a large shipment in the third quarter compared to the same period in 2019. License and transaction margin from 31.6%increased to 36.4% for the three months ended DecemberMarch 31, 20162020 compared to 37.2%35.6% for the three months ended December 31, 2017, which was driven by the impact of the Cantaloupe acquisition. 

Operationalsame period in 2019.

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 
Percent
Change
Category ($ in thousands) 2020 2019 
Selling, general and administrative expenses $20,069
 $11,156
 79.9%
Investigation and restatement expenses 
 1,408
 NM
Integration and acquisition costs 
 24
 NM
Depreciation and amortization 1,107
 1,083
 2.2%
Total operating expenses $21,176
 $13,671
 54.9%
____________
NM — not meaningful

Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately $2.5$8.9 million for the three months ended DecemberMarch 31, 2017,2020, as compared to the same period in 2016.2019.  This change was primarily driven by ana $4.5 million increase in professional services costs primarily related to the Company's restatement project and related audit and legal activities that were not included in one-time costs, a $2.0 million increase in employment related costs, a $2.6 million legal contingency accrual related to ongoing litigation, and a $0.3 million reduction in other selling, general and administrative costsexpenses.
Investigation and restatement expenses. Investigation and restatement expenses were incurred related to Cantaloupe as well as an increase in sales and marketing related consulting expenses as we continue to increase our market sharebeginning 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. The Company did not incur integration and acquisition costs for the three months ended March 31, 2020. Integration and acquisition costs were $24 thousand for the three months ended March 31, 2019 due to the completion of the Cantaloupe acquisition.
Depreciation and amortization. Depreciation and amortization expense was consistent with the same period in 2019.
Other Income (Expense), Net
  Three months ended March 31, 
Percent
Change
($ in thousands) 2020 2019 
Other income (expense):      
Interest income $411
 $348
 18.1 %
Interest expense (683) (913) (25.2)%
Change in fair value of derivative 1,070
 
 NM
Total other income (expense), net $798
 $(565) (241.2)%
____________
NM — not meaningful
Other income (expense), net.  Other income (expense), net increased $3.3approximately $1.4 million for the three months ended DecemberMarch 31, 20172020 as compared to the same period in 2016, due2019. This change was primarily driven by the change in fair value of the Company's derivative related to the costs incurred in connectionAntara debt.
Income Taxes
  Three months ended March 31, 
Percent
Change
($ in thousands) 2020 2019 
Benefit (provision) for income taxes $85
 $(23) (469.6)%
Income taxes.  For the three months ended March 31, 2020, a tax benefit of $85 thousand was recorded which primarily relates to the Company's uncertain tax positions, as well as state income and franchise taxes. As of March 31, 2020, the Company had a total unrecognized income tax benefit of $0.2 million. The Company is actively working with the acquisition

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

Depreciationthis uncertain tax position and amortization.  Depreciation and amortization expenses increased approximately $0.4 millionit 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 DecemberMarch 31, 2017 primarily due to2020, as the amortizationuse of intangible assets recognized in connection with the Cantaloupe acquisition.   

Other Expense, net

 

 

 

 

 

 

 

 

 

 

 

For the three months ended December 31, 

 

Percent

($ in thousands)

 

2017

    

2016

 

Change

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

$

251

 

$

200

 

25.5%

Interest expense

 

 

(494)

 

 

(201)

 

145.8%

Total other expense, net

 

$

(243)

 

$

(1)

 

24200.0%

Other expense, net.  Other expense, net increased $242 thousand for the three months ended December 31, 2017 compared to the same period in 2016.  The increase was primarily driven by the interest incurred in connection with the Term Loan and Revolving Credit Facility utilized to fund a portion of the acquisition of Cantaloupe.

Income Taxes

 

 

 

 

 

 

 

 

 

 

 

For the three months ended December 31, 

 

Percent

($ in thousands)

 

2017

    

2016

 

Change

Provision for income taxes

 

$

(9,073)

 

$

 -

 

100%

Income taxes.  For the three months ended December 31,  2017, an income tax provision of 9,073 thousand (substantially all deferred income taxes) was recorded which includes a charge of $6,592 thousand related to the recent enactment of the U.S. Tax Cuts and Jobs Act.  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 three months ended December 31, 2017.

For the three months ended December 31, 2016, no adjustment for the income tax benefit (provision) (substantially all deferred income taxes) was recorded based upon loss before benefit for income taxes using an estimated annual effective income tax rate does not provide a reliable estimate of 30.0%the income tax provision.

For the three months ended March 31, 2019, a tax provision of $23 thousand was recorded which primarily relates to state income and franchise taxes. The provision is based upon actual loss before income taxes for the fiscal yearthree months ended June 30, 2017 netMarch 31, 2019, as the use of an estimated annual effective income tax rate does not provide a provision for the tax effectreliable estimate of the change in the fair value of warrant liabilities which was treated discretely.

income tax provision.


Reconciliation of Net (Loss) IncomeLoss 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

26


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

Table of Contents

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 costscharges that were incurred in connection with the acquisition and integration of Cantaloupe, including a charge for inventorybusinesses, non-recurring fees and charges that were incurred in connection with the Audit Committee investigation and financial statement restatement activities, class action litigation and activist related expenses, changes in the fair value step-up, in the current fiscal yearof our derivative, and the acquisition of the VendScreen business the previous fiscal year.  stock-based compensation expense.

We have excluded the non-cash expense, stock-based compensation, as it does not reflect our cash-based operations. Consistent with the cash-based operationsexclusion of debt interest expense from EBITDA, the Company.debt-related derivative gain recorded for the third quarter was also excluded from adjusted EBITDA. We have excluded the integrationnon-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 yearbusiness acquisitions in order to allow for a more accurate comparison of the financial results to historical operations,operations. We have excluded the professional fees incurred in connection with the class action litigation and the activist related matters as well as the non-recurring costs and expenses related to the Audit Committee investigation and financial statement restatement activities because we believe that they pertain to period operational expensesrepresent charges that are not a core function ofrelated to our business.  operations.
Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, we utilize Adjusted EBITDA as a metric in our executive officer and management incentive compensation plans.

Reconciliation of Net Loss to Non-GAAP Net Loss
  Three months ended March 31,
($ in thousands) 2020 2019
Net loss $(9,295) $(4,306)
Non-GAAP adjustments:    
Non-cash portion of income tax provision 5
 5
Amortization expense 784
 784
Stock-based compensation 421
 421
Change in fair value of derivative (1,070) 
Litigation related professional fees 2,138
 186
Investigation and restatement expenses 
 1,408
Integration and acquisition costs 
 24
Non-GAAP net loss $(7,017) $(1,478)
As used herein, non-GAAP net loss represents GAAP net loss excluding costs or benefits relating to any non-cash portions of the Company’s income tax provision, amortization expense related to our acquisition-related intangibles, non-recurring fees and charges that were incurred in connection with the acquisition and integration of businesses, non-recurring fees and charges that were incurred in connection with the Audit Committee investigation and financial statement restatement activities, class-action litigation or activist related expenses, changes in the fair value of our derivative, and stock-based compensation expense.
Non-GAAP net loss is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. 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

27


Table of Contents

adjustments for future financial periods.  Management believes that non-GAAP net incomeloss 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.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 incomeloss as a metric in its executive officer and management incentive compensation plans.

Six


Nine Months Ended DecemberMarch 31, 20172020 Compared to SixNine Months Ended DecemberMarch 31, 2016

2019

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%

  Nine months ended March 31, 
Percent
Change
($ in thousands) 2020 2019 
Revenue:      
License and transaction fees $105,324
 $89,919
 17.1 %
Equipment sales 25,184
 16,039
 57.0 %
Total Revenue 130,508
 105,958
 23.2 %
       
Costs of sales:      
Cost of services 66,912
 58,141
 15.1 %
Cost of equipment 28,420
 17,371
 63.6 %
Total costs of sales 95,332
 75,512
 26.2 %
       
Gross profit:      
License and transaction fees 38,412
 31,778
 20.9 %
Equipment sales (3,236) (1,332) (142.9)%
Total gross profit $35,176
 $30,446
 15.5 %
Revenue. Total revenue increased $14.8$24.6 million for the sixnine months ended DecemberMarch 31, 20172020 compared to the same period in 2016.2019.  The growth in total revenue resulted from a $9.8$15.4 million increase in license and transaction fee revenue for the sixnine months ended DecemberMarch 31, 20172020 compared to the same period in 2016,2019, mostly driven by the increase in connection count which generated an increase in license fee and processing fees, and a $5.0$9.1 million increase in equipment revenue for the sixnine months ended DecemberMarch 31, 20172020 compared to the same period last year; bothin 2019 driven primarily by anthe 120,000 new net connections delivered for the nine months ended March 31, 2020 compared to 98,000 new net connections delivered in the same period in 2019. This 22,000 increase in new net connections and the Cantaloupe acquisition. 

represents a 22 percent increase year over year.

Cost of sales. Cost of sales increased $10.9$19.8 million for the sixnine months ended DecemberMarch 31, 20172020 compared to the same period last year.in 2019.  The increase was driven by a $5.1$8.8 million increase in cost of services driven by an increase in transaction processing costs following the increase in transactions processed for the period and a $5.8$11.0 million increase in cost of equipment sales, both arisingresulting from an increase in connections andhigher shipments compared to the Cantaloupe acquisition. 

same period last year.

Gross margin.  The overallmargin. Total gross margin decreased 0.6%1.8%, from 28.8%28.7% for the sixnine months ended DecemberMarch 31, 20162019 to 28.2%27.0% for the sixnine months ended DecemberMarch 31, 2017.2020.  The decrease in thewas driven primarily by a lower equipment margin resulting from 20.6% fora large equipment sale made to a strategic customer during the six months ended December 31, 2016 to 8.4% for the six months ended December 31, 2017 reflectedfirst three quarters of fiscal year 2020, reflecting our strategy of using equipment sales as an enabler for driving long-term,longer-term, higher margin license and transaction fees. This decrease was partially offset by an increase in the license feeLicense and transaction margin from 31.4%increased to 36.5% for the sixnine months ended DecemberMarch 31, 20162020 compared to 35.3% for the six months ended December 31, 2017 which was primarily driven by the impact of the Cantaloupe acquisition. 

same period in 2019.

Operating Expenses

28


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

Table of Contents

____________

Operational Expenses

NM — not meaningful

 

 

 

 

 

 

 

 

 

 

 

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$25.3 million for the sixnine months ended DecemberMarch 31, 2017,2020, as compared to the same period in 2016.2019.  This change was primarily driven by ana $15.3


million increase in selling, general and administrativeprofessional services costs primarily related to Cantaloupe as well as anthe Company's restatement project and related audit and legal activities that were not included in one-time costs, a $6.3 million increase in salesemployment related costs, and marketinga $2.6 million legal contingency accrual related consultingto ongoing litigation.
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. The Company did not incur integration and acquisition costs for the nine months ended March 31, 2020. Integration and acquisition costs increased $4.0were $1.1 million for the sixnine months ended DecemberMarch 31, 20172019 due to the completion of the Cantaloupe acquisition.
Depreciation and amortization. Depreciation and amortization expense was consistent with the same period in 2019.
Other Income (Expense), Net
  Nine months ended March 31, 
Percent
Change
($ in thousands) 2020 2019 
Other income (expense):      
Interest income $988
 $1,245
 (20.6)%
Interest expense (1,981) (2,518) (21.3)%
Change in fair value of derivative 1,070
 
 NM
Total other income (expense), net $77
 $(1,273) (106.0)%
____________
NM — not meaningful
Other income (expense), net.  Other income (expense), net increased approximately $1.4 million for the nine months ended March 31, 2020 as compared to the same period in 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 decrease2019. This change was primarily driven by the change in fair value associated withof the exercised warrants recognized during September 2016.

Company's derivative related to the Antara debt.

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)%

  Nine months ended March 31, 
Percent
Change
($ in thousands) 2020 2019 
Provision for income taxes $(46) $(60) (23.3)%
Income taxes.taxes.  For the sixnine months ended DecemberMarch 31, 2017, an income2020, a tax provision of $8,605$46 thousand (substantially all deferred income taxes) was recorded which includesprimarily relates to the Company's uncertain tax positions, as well as state income and franchise taxes. As of March 31, 2020, the Company had a chargetotal unrecognized income tax benefit of $6,592 thousand$0.2 million. The Company is actively working with the tax authorities related to the majority of this uncertain tax reform.position and it is reasonably possible that a majority of the uncertain tax position will be settled within the next 12 months. The tax provision is based upon income (loss)actual 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 sixnine months ended DecemberMarch 31, 2017.

For2020, as the six months ended December 31, 2016, an income tax benefituse 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 does not provide a reliable estimate of 30.0%the income tax provision.

For the nine months ended March 31, 2019, a tax provision of $60 thousand was recorded which primarily relates to state income and franchise taxes. The provision is based upon actual loss before income taxes for the fiscal year ending June 30, 2017 netnine months ended March 31, 2019, as the use of an estimated annual effective income tax rate does not provide a provision for the tax effectreliable estimate of the change in the fair value of warrant liabilities which was treated discretely.

income tax provision.

29



Table of Contents

Reconciliation of Net Loss to Adjusted EBITDA:

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

  Nine months ended March 31,
($ in thousands) 2020 2019
Net loss $(29,181) $(20,032)
Less: interest income (988) (1,245)
Plus: interest expense 1,981
 2,518
Plus: income tax provision 46
 60
Plus: depreciation expense 2,840
 3,530
Plus: amortization expense 2,353
 2,369
EBITDA (22,949) (12,800)
Plus: stock-based compensation 2,453
 1,393
Less: change in fair value of derivative (1,070) 
Plus: litigation related professional expenses 3,367
 289
Plus: investigation and restatement expenses 4,303
 13,122
Plus: integration and acquisition costs 
 1,127
Adjustments to EBITDA 9,053
 15,931
Adjusted EBITDA $(13,896) $3,131
As used herein, Adjusted EBITDA represents net lossincome (loss) before interest income, interest expense, income tax provision (benefit),taxes, depreciation, amortization, change in fair value of warrant liabilities, stock-based compensation expense,non-recurring fees and non-recurring integration and acquisition-related costscharges that were incurred in connection with the acquisition and integration of Cantaloupe, including a charge for inventory fair value step-up,businesses, non-recurring fees and charges that were incurred in connection with the Audit Committee investigation and financial statement restatement activities, class action litigation and activist related expenses, changes 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. our derivative, and stock-based compensation expense.
We have excluded the non-cash expense, stock-based compensation, as it does not reflect our cash-based operations. Consistent with the cash-based operationsexclusion of debt interest expense from EBITDA, the Company.debt-related derivative gain recorded for the third quarter was also excluded from adjusted EBITDA. We have excluded the integrationnon-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 yearbusiness acquisitions in order to allow for a more accurate comparison of the financial results to historical operations,operations. We have excluded the professional fees incurred in connection with the class action litigation and the activist related matters as well as the non-recurring costs and expenses related to the Audit Committee investigation and financial statement restatement activities because we believe that they pertain to period operational expensesrepresent charges that are not a core function ofrelated to our business.  operations.
Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, we utilize Adjusted EBITDA as a metric in our executive officer and management incentive compensation plans.

Reconciliation of Net Loss to Non-GAAP Net Loss
  Nine months ended March 31,
($ in thousands) 2020 2019
Net loss $(29,181) $(20,032)
Non-GAAP adjustments:    
Non-cash portion of income tax provision 15
 14
Amortization expense 2,353
 2,369
Stock-based compensation 2,453
 1,393
Change in fair value of derivative (1,070) 
Litigation related professional fees 3,367
 289
Investigation and restatement expenses 4,303
 13,122
Integration and acquisition costs 
 1,127
Non-GAAP net loss $(17,760) $(1,718)
As used herein, non-GAAP net loss represents GAAP net loss excluding costs or benefits relating to any non-cash portions of the Company’s income tax provision, amortization expense related to our acquisition-related intangibles, non-recurring fees and charges that were incurred in connection with the acquisition and integration of businesses, non-recurring fees and charges that were incurred in connection with the Audit Committee investigation and financial statement restatement activities, class-action litigation or activist related expenses, changes in the fair value of our derivative, and stock-based compensation expense.
Non-GAAP net loss is a non-GAAP financial measure which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. 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. 

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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)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.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)loss as a metric in its executive officer and management incentive compensation plans.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided byused in operating activities was $4.1$17.6 million for the sixnine months ended DecemberMarch 31, 20172020 compared to cash used of $5.1$25.7 million used in the same period in 2016.fiscal year 2019. The $9.3change reflects a change in net expense for non-cash operating activities of $1.7 million, increase inand net cash provided by the change in various operating activities wasassets and liabilities of $18.9 million. The change in operating assets and liabilities is primarily driven by a cash inflow of $5.8 million from the payment for finance receivables related to a significant order received by us during the fourth quarter of the prior fiscal year as well as a cash inflow of $10.8 million related to the timingchange of accounts payablereceivable of $8.4 million and accrued expenses, partially offset by a $2.8 million increase in merchant receivables due to timing differences related to the remittancechange 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.

of $7.6 million.

Cash used in investing activities was $66.8$1.7 million for the sixnine months ended DecemberMarch 31, 20172020 compared to $1.9cash used of $3.1 million forin the same period in 2016.  The $64.9 million increase isfiscal year 2019, primarily relateddriven by a decrease in equipment purchases for rental equipment compared to net cash consideration paid for the acquisition of Cantaloupe.

same period last year.

Cash provided by financing activities was $65.3$17.7 million for the sixnine months ended DecemberMarch 31, 20172020 compared to $5.8cash used of $22.4 million forin the same period in 2016.fiscal year 2019. The $59.5 million increasechange was primarily due to proceeds received from the public offering which closed in July 2017 with net proceedsTerm Facility and equity financing provided by Antara, offset by payments of $39.9 million as well as an increaseissuance fees for the Term Facility and the repayment of $35.0 million related to 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 partially offset by $6.2to $10 million inwhich represented the outstanding balance on the date thereof. On October 31, 2019, the Company repaid the outstanding balance on the Revolving Credit Facility.
Pursuant to a Stock Purchase Agreement dated October 9, 2019 between the Company and Antara Capital Master Fund LP (“Antara”), the Company sold to Antara 3,800,000 shares of the Company’s common stock at a price of $5.25 per share for gross proceeds receivedof $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 exercise of the warrants during the six months ended September 30, 2016 and an increase in repayments of debt during the six months ended December 31, 2017 of $8.9 million.

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closing date. 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 quarters 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 primarily through the JumpStart rental program. Under Jumpstart, the Company records an investing capital expenditure cash outflow for the equipment provided and fixed assets on the balance sheet, and then receives rental income from a month-to-month lease. Customers who utilize third party finance companies in connection with the QuickStart program improve ourprivate placement, William Blair & Company, L.L.C. (“Blair”) acted as exclusive placement agent for the Company and received a cash placement fee of $1.2 million. In connection with the Stock Purchase Agreement, the Company also entered into a registration rights agreement with Antara, pursuant to which the Company agreed, at its expense, to file a registration statement under the Act with the Securities and Exchange Commission covering the resale of the shares by Antara. Subsequently, Antara and the Company agreed to terminate the obligation of the Company to register the shares in exchange for a payment of approximately $1.2 million by the Company to Antara which was made during the three months ended March 31, 2020.

On October 9, 2019, the Company also entered into a commitment letter (“Commitment Letter”) with Antara, pursuant to which Antara committed to extend to the Company a $30.0 million senior secured term loan facility (“Term Facility”). Upon the execution of the Commitment Letter, the Company paid to Antara a non-refundable commitment fee of $1.2 million. In connection with the Commitment Letter, Blair acted as exclusive placement agent for the Company and received a cash placement fee of $750,000. On October 31, 2019, the Company entered into a Financing Agreement with Antara to draw $15.0 million on the Term Facility and agreed to draw an additional $15.0 million at any time between July 31, 2020 and April 30, 2021, subject to the terms of the Financing Agreement. The outstanding amount of the draws under the Term Facility bear interest at 9.75% per annum, payable monthly in arrears. The proceeds of the initial draw were used to repay the outstanding balance of the revolving line of credit loan due to JPMorgan Chase Bank, N.A. in the amount of $10.1 million, including accrued interest payable, and to pay transaction expenses, and the Company intends to utilize the balance for working capital and general corporate purposes. The outstanding principal amount of the loan must be paid in full by no later than the maturity date of October 31, 2024.
We may prepay any principal amount outstanding on the Term Facility plus a prepayment premium of 5% (if prepaid on or prior to December 31, 2020), 3% (between January 1, 2021 - December 31, 2021), 1% (between January 1, 2022 - December 31, 2022) and 0% thereafter. Under the Term Facility we are subject to mandatory prepayments as a result of certain asset sales, insurance proceeds, issuances of disqualified capital stock, and issuances of debt. These mandatory prepayments are subject to the prepayment premium that applies to voluntary prepayments. We are also subject to annual mandatory prepayments ranging from 0% of excess cash flow from operations, and our QuickStart program reducesto 75% of excess 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,depending upon the majorityconsolidated total leverage ratio measured at the end of QuickStart sales consummated have been with customers entering into agreements directlyeach fiscal year beginning 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,ending June 30, 2020. These mandatory prepayments are not subject to QuickStart and sales under normal trade receivable terms, which accounted for 89%, 91%, and 93% of our gross connections in fiscal years 2015, 2016, and 2017 respectively.  JumpStart was approximately 1% of our gross new connections for the six months ended December 31, 2017.

aforementioned prepayment premium.

The Company is continually seekingrequired to expandbe 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 March 31, 2020, the Company was in compliance with its outside financing partners in ordercapital expenditures financial covenant.
The Company is evaluating its options with respect to accommodate expected growth.

Sourcesthe Financing Agreement, including all rights and remedies that may be available to it. Based upon the current financial forecast for the fourth quarter of Cash

The Company’s net working capital, which is defined as current assets less current liabilities, increased $7.3 million from $5.8 millionfiscal year 2020, without a refinancing or modification of existing terms within the Term Facility, the Company anticipates that as of June 30, 2017,2020, it is highly likely the Company will not be in compliance with the minimum fixed charge coverage ratio and the minimum consolidated EBITDA of its Term Facility. Unless the Commitment Letter is rescinded, amended, or replaced, noncompliance would represent an event of default under the Term Facility, and, following the request of the Required Lenders (as such term is defined in the Term Facility), all unpaid principal of $15.0 million and accrued interest to $13.1Antara would immediately become due, in addition to a $0.8 million prepayment premium. In addition, all of the Company's unamortized issuance costs and debt discount related to the Term Facility would be recognized upon repayment of the loan as interest expense in the period of repayment, which as of March 31, 2020 was $2.7 million.


As of June 30, 2019 the Company disclosed potential sales tax and related interest liabilities, which the Company estimated to be $18.2 million in the aggregate as of March 31, 2020. The Company has since engaged additional advisors to help evaluate such potential liabilities and the amount and timing of any such payments.
During the three months ended March 31, 2020, the Company reached a settlement of a shareholder class action lawsuit pending in federal court, and anticipates the payment of approximately $2.6 million toward that settlement in addition to amounts to be paid by the Company’s insurers. As discussed in Note 13, those amounts are contingent upon certain future events, but are expected to be paid during the next 12 months.
The Company has the following primary sources of capital available: (1) cash and cash equivalents on hand of $25.9 million as of DecemberMarch 31, 2017.  As2020; (2) the cash which may be provided by operating activities; and (3) an aggregate amount of December$15 million under the Term Facility to be drawn between July 31, 2017,2020 and April 30, 2021 as described above, if the Company’s primary sourcesTerm Facility were to be modified with similar draw terms. In addition, management has recently implemented efficiencies in working capital that are designed to increase our cash balances.
The Company is currently evaluating a variety of cash include:

·

Cash on hand of approximately $15.4 million;

·

$2.5 million available under the Revolving Credit Facility provided we continue to satisfy the various covenants set forth in the loan agreement, including the requirement to meet the minimum quarterly Total Leverage Ratio and Fixed Charge Coverage Ratio;

·

Sales to third party lenders of all or a portion of our $16.7 million of finance receivables which may occur in future quarters; and

·

Anticipated cash which may be provided by operating activities in future quarters.

financing alternatives, including but not limited to negotiating modifications to the existing Term Facility. The Company has received a communication from an investor that it will provide sufficient financing in the event that the Company and Antara fail to agree to modifications to the existing Term Facility and other financing alternatives are not in place. The Company believes that its existingcurrent financial resources, together with cash generated by operations and the financing available cash resources described above, would providefrom the investor, if needed, will be sufficient capital resources to operatefund its anticipated business overcurrent twelve-month operating budget from the next twelve months.

date of issuance of these consolidated financial statements, alleviating any substantial doubt raised by the potential breach in our Term Facility with Antara.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

There have been no significant changes


We are exposed to our market risk since June 30, 2017. Forrelated to changes in interest rates on our cash investments, which earn a discussionfloating rate of interest. The uncertainty that exists with respect to the economic impact of the global coronavirus (COVID-19) pandemic has introduced significant volatility in the financial markets. We invest our excess cash in money market funds that we believe are highly liquid and marketable in the short term. These investments are not held for trading or other speculative purposes. Consequently, our exposure to market risk, referrisks for interest rate changes related to Part II,our money market funds is not material. 

In addition, as described above under Item 7A. “Quantitative and Qualitative Disclosures about 1A - “Risk Factors”, there may be implications on our business with regard to the COVID-19.

Market Risk,” contained in our Annual Report on Form 10-K for the year ended June 30, 2017.

risks related to fluctuations of foreign currencies are not material.

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Item 4. Controls and Procedures.

(a) Disclosure Controls and Procedures

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

period as a result of the material weaknesses in our internal control over financial reporting, which are described in Item 9A. of our 2019 Form 10-K.

(b) Changes in Internal Control over Financial Reporting

There


Other than the remediation actions disclosed in Item 9A. of the 2019 Form 10-K, there were no changes in our internal controls over financial reporting that occurred during the quarter ended DecemberMarch 31, 20172020 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

As discussed in Item 9A. of our 2019 Form 10-K, we have implemented a broad range of remedial procedures to address the material weaknesses in our internal control over financial reporting. These remedial procedures entailed significant changes in our internal control over financial reporting throughout the course of the fiscal year ended June 30, 2019 and were not complete as of March 31, 2020, and will continue through fiscal year 2020, with the goal to fully remediate all remaining material weaknesses by fiscal year end.


Part II - Other Information

Item 1. Legal Proceedings.

Eastern District of Pennsylvania Consolidated Shareholder Class Actions

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

Chester County, Pennsylvania Class Action

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

Subpoena

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

HEC Master Fund LP Lawsuit

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


HEC Master Fund LP Shareholder Demand

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

Item 1A. Risk Factors. 

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

Item 3. Defaults Upon Senior Securities. 

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

Item 6. Exhibits

Exhibits.

Exhibit

Number

Description

Exhibit
Number

Description

10.1

3.1
3.2
4.1
10.1**

10.2

10.2*

10.3*
10.4*
10.5*

10.3

10.6*

10.7*
10.8*
10.9*
10.10*
10.11*
10.12


31.1

10.13
31.1

31.2

32.1

32.2

101

The following financial information from our Quarterly Report on Form 10-Q for the quarter ended DecemberMarch 31, 2017,2020, filed with the SEC on February 8,  2018,June 24, 2020, formatted in Extensible Business Reporting Language (XBRL): (1) the Consolidated Balance Sheets as of DecemberMarch 31, 20172020 and June 30, 2017,2019, (2) the Consolidated Statements of Operations for the three-month and six-monthnine-month periods ended DecemberMarch 31, 20172020 and 2016,2019, (3) the Consolidated Statements of Shareholders’ Equity for the six-month periodnine-month periods ended DecemberMarch 31, 2017,2020 and 2019, (4) the Consolidated Statements of Cash Flows for the six-month periodnine-month periods ended DecemberMarch 31, 20172020 and 2016,2019, and (5) the Notes to Consolidated Financial Statements.

*Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 6 of this report.
**Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).


33


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

USA TECHNOLOGIES, INC.

Date: February 9, 2018

June 24, 2020

/s/ Stephen P. Herbert

Sean Feeney

Stephen P. Herbert,

Sean Feeney

Chief Executive Officer

Date: February 9, 2018

June 24, 2020

/s/ Priyanka Singh

Michael Wasserfuhr

Priyanka Singh

Michael Wasserfuhr

Chief Financial Officer


34

49