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| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2020
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934 |
_________
(Exact name of registrant as specified in its charter)
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| Pennsylvania | 23-2679963 | |||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
| 100 Deerfield Lane, | Suite 300, | Malvern, | Pennsylvania | 19355 | |
(Address of principal executive offices) | (Zip Code) | ||||
(610) 989-0340
(Registrant’s telephone number, including area code)
| Title of Each Class | Trading Symbol | Name Of Each Exchange On Which Registered |
| None | None | None |
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| Large accelerated filer |
| Accelerated filer |
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Non-accelerated filer (Do not check if a smaller reporting company) |
| Smaller reporting company |
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Emerging growth company |
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Part I. Financial Information
December 31, June 30, ($ in thousands, except shares) 2017 2017 (unaudited) (audited) Assets Current assets: Cash and cash equivalents $ 15,386 $ 12,745 Accounts receivable, less allowance of $3,740 and $3,149, respectively 15,472 7,193 Finance receivables, less allowance of $49 and $19, respectively 5,517 11,010 Inventory 11,215 4,586 Prepaid expenses and other current assets 1,971 968 Total current assets 49,561 36,502 Non-current assets: Finance receivables, less current portion 11,215 8,607 Other assets 1,120 687 Property and equipment, net 12,622 12,111 Deferred income taxes 14,774 27,670 Intangibles, net 30,910 622 Goodwill 64,449 11,492 Total non-current assets 135,090 61,189 Total assets $ 184,651 $ 97,691 Liabilities and shareholders’ equity Current liabilities: Accounts payable $ 23,775 $ 16,054 Accrued expenses 6,798 4,130 Line of credit, net — 7,036 Capital lease obligations and current obligations under long-term debt 5,121 3,230 Income taxes payable 6 10 Deferred revenue 595 — Deferred gain from sale-leaseback transactions 198 239 Total current liabilities 36,493 30,699 Long-term liabilities: Revolving credit facility 10,000 — Capital lease obligations and long-term debt, less current portion 23,874 1,061 Accrued expenses, less current portion 65 53 Deferred gain from sale-leaseback transactions, less current portion 49 100 Total long-term liabilities 33,988 1,214 Total liabilities $ 70,481 $ 31,913 Commitments and contingencies (Note 13) Shareholders’ equity: Preferred stock, no par value, 1,800,000 shares authorized, no shares issued — — Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $19,109 and $18,775 at December 31, 2017 and June 30, 2017, respectively 3,138 3,138 Common stock, no par value, 640,000,000 shares authorized, 53,619,898 and 40,331,645 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively 307,053 245,999 Accumulated deficit (196,021) (183,359) Total shareholders’ equity 114,170 65,778 Total liabilities and shareholders’ equity $ 184,651 $ 97,691 Three months ended Six months ended December 31, December 31, ($ in thousands, except shares and per share data) 2017 2016 2017 2016 Revenues: License and transaction fees $ 22,853 $ 16,639 $ 42,797 $ 33,004 Equipment sales 9,653 5,117 15,326 10,340 Total revenues 32,506 21,756 58,123 43,344 Costs of sales: Cost of services 14,362 11,389 27,688 22,632 Cost of equipment 8,943 4,033 14,033 8,211 Total costs of sales 23,305 15,422 41,721 30,843 Gross profit 9,201 6,334 16,402 12,501 Operating expenses: Selling, general and administrative 8,329 5,785 15,075 12,593 Integration and acquisition costs 3,335 8 4,097 109 Depreciation and amortization 737 307 982 515 Total operating expenses 12,401 6,100 20,154 13,217 Operating (loss) income (3,200) 234 (3,752) (716) Other income (expense): Interest income 251 200 331 273 Interest expense (494) (201) (703) (413) Change in fair value of warrant liabilities - - - (1,490) Total other expense, net (243) (1) (372) (1,630) (Loss) income before income taxes (3,443) 233 (4,124) (2,346) (Provision) benefit for income taxes (9,073) - (8,605) 115 Net (loss) income (12,516) 233 (12,729) (2,231) Preferred dividends - - (334) (334) Net (loss) income applicable to common shares $ (12,516) $ 233 $ (13,063) $ (2,565) Net (loss) income per common share Basic (0.24) 0.01 (0.26) (0.07) Diluted (0.24) 0.01 (0.26) (0.07) Weighted average number of common shares outstanding Basic 52,150,106 40,308,934 49,861,735 39,398,469 Diluted 52,150,106 40,730,712 49,861,735 39,398,469 USA Technologies, Inc. Series A Convertible Preferred Stock Common Stock Accumulated ($ in thousands, except shares) Shares Amount Shares Amount Deficit Total Balance, June 30, 2017 445,063 $ 3,138 40,331,645 $ 245,999 $ (183,359) $ 65,778 Issuance of common stock in relation to public offering, net of offering costs incurred of $3,237 (a) — — 9,583,332 39,888 — 39,888 Issuance of common stock as merger consideration(b) — — 3,423,367 19,810 — 19,810 Stock based compensation — — 281,554 1,356 — 1,356 Excess tax benefit from stock plans(c) — — — — 67 67 Net loss — — — — (12,729) (12,729) Balance, December 31, 2017 445,063 $ 3,138 53,619,898 $ 307,053 $ (196,021) $ 114,170 USA Technologies, Inc. Six months ended December 31, ($ in thousands) 2017 2016 OPERATING ACTIVITIES: Net loss $ (12,729) $ (2,231) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Non-cash stock based compensation 1,356 445 Gain on disposal of property and equipment (83) (31) Non-cash interest and amortization of debt discount 86 26 Bad debt expense 291 450 Depreciation and amortization 3,476 2,564 Change in fair value of warrant liabilities - 1,490 Excess tax benefits 67 - Deferred income taxes, net 8,537 (115) Recognition of deferred gain from sale-leaseback transactions (93) (430) Changes in operating assets and liabilities: Accounts receivable (5,290) (2,347) Finance receivables 7,958 2,119 Inventory (5,822) (2,689) Prepaid expenses and other current assets (606) (542) Accounts payable and accrued expenses 6,950 (3,840) Income taxes payable 40 (12) Net cash provided by (used in) operating activities 4,138 (5,143) INVESTING ACTIVITIES: Purchase of property and equipment, including rentals (1,767) (1,944) Proceeds from sale of property and equipment, including rentals 157 61 Cash used for Cantaloupe acquisition (65,181) - Net cash used in investing activities (66,791) (1,883) FINANCING ACTIVITIES: Cash used in retirement of common stock - (31) Proceeds from exercise of common stock warrants - 6,193 Payment of debt issuance costs (445) - Proceeds from issuance of long-term debt 25,100 - Proceeds from revolving credit facility 10,000 - Issuance of common stock in public offering, net 39,888 - Repayment of capital lease obligations and long-term debt (9,249) (374) Net cash provided by financing activities 65,294 5,788 Net increase (decrease) in cash and cash equivalents 2,641 (1,238) Cash and cash equivalents at beginning of year 12,745 19,272 Cash and cash equivalents at end of period $ 15,386 $ 18,034 Supplemental disclosures of cash flow information: Interest paid in cash $ 557 $ 469 Income taxes paid in cash (refund), net $ - $ - Supplemental disclosures of noncash financing and investing activities: Equity issued in connection with Cantaloupe Acquisition $ 19,810 $ - Equipment and software acquired under capital lease $ 227 $ 272 USA Technologies, Inc. the Commitment Letter, the Company paid to Antara a non-refundable commitment fee of $1.2 million. In statements, alleviating any substantial doubt raised by the potential breach in our Term Facility with Antara. 2019, and its adoption did not have a material effect on the Company’s condensed consolidated financial statements. Company’s condensed consolidated financial statements. adopted In June 2016, the FASB issued ASU No. 2016-13, “Financial 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning July 1, 2020. The Company expects that the adoption of this ASU will not have a material impact on the Company’s condensed consolidated financial statements. the Cantaloupe business was recorded for the three months ended March 31, 2020. The following table summarizes the Cantaloupe ($ in thousands) Systems, Inc. Accounts receivable $ 3,232 Finance receivables, current portion 1,640 Inventory 782 Prepaid expense and other current assets 682 Finance receivables, less current portion 3,483 Other assets 50 Property and equipment 1,573 Intangibles 30,800 Goodwill 52,957 Total assets acquired 95,199 Accounts payable (1,591) Accrued expenses (1,832) Deferred revenue (626) Capital lease obligations and current obligations under long-term debt (666) Capital lease obligations and long-term debt, less current portion (1,134) Deferred income tax liabilities (4,359) Total net assets acquired $ 84,991 Three months ended Six months ended ($ in thousands) December 31, 2017 December 31, 2017 Cost of equipment Acquired inventory fair market value step-up $ 23 $ 23 Operating expenses Integration and acquisition costs 3,335 4,097 Interest expense Write-off of deferred financing costs 55 55 Total integration and acquisition-related costs $ 3,413 $ 4,175 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 December 31, June 30, ($ in thousands) 2017 2017 Total finance receivables $ 16,732 $ 19,617 Less current portion 5,517 11,010 Non-current portion of finance receivables $ 11,215 $ 8,607 December 31, June 30, ($ in thousands) 2017 2017 Performing $ 16,325 $ 19,515 Nonperforming 407 102 Total $ 16,732 $ 19,617 30 and Under 31 – 60 61 – 90 Greater than Total Total Days Past Days Past Days Past 90 Days Past Non- Finance ($ in thousands) Due Due Due Due Performing Performing Receivables QuickStart Leases $ 40 $ 85 $ 162 $ 120 $ 407 $ 16,325 $ 16,732 30 and Under 31 – 60 61 – 90 Greater than Total Total Days Past Days Past Days Past 90 Days Past Non- Finance ($ in thousands) Due Due Due Due Performing Performing Receivables QuickStart Leases $ 29 $ 3 $ 35 $ 35 $ 102 $ 19,515 $ 19,617 Three months ended December 31, 2017 2016 Net Loss Shares Per-Share Net Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Net (loss) income from continuing operations $ (12,516) $ 233 Less: Preferred stock dividends - - Basic EPS Net (loss) income available to common shareholders (12,516) 52,150,106 $ (0.24) 233 40,308,934 $ 0.01 Effect of Dilutive Securities Incremental shares - - (a) - 421,778 Diluted EPS Net (loss) income available to common shareholders plus assumed conversions $ (12,516) 52,150,106 $ (0.24) $ 233 40,730,712 $ 0.01 Six months ended December 31, 2017 2016 Net Loss Shares Per-Share Net Loss Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Net loss from continuing operations $ (12,729) $ (2,231) Less: Preferred stock dividends (334) (334) Basic EPS Net loss available to common shareholders (13,063) 49,861,735 $ (0.26) (2,565) 39,398,469 $ (0.07) Effect of Dilutive Securities Incremental shares - - (a) - - (a) Diluted EPS Net loss available to common shareholders plus assumed conversions $ (13,063) 49,861,735 $ (0.26) $ (2,565) 39,398,469 $ (0.07) As of December 31, 2017 Accumulated Amortization ($ in thousands) Gross Amortization Net Period Intangible assets: Non-compete agreements 2 (2) — 2 years Brand and tradenames 1,695 (96) 1,599 3 - 7 years Developed technology 10,939 (499) 10,440 5 - 6 years Customer relationships 19,049 (178) 18,871 10 - 18 years Total intangible assets $ 31,685 $ (775) $ 30,910 Goodwill 64,449 — 64,449 Indefinite Total intangible assets & goodwill $ 96,134 (775) $ 95,359 As of June 30, 2017 Accumulated Amortization ($ in thousands) Gross Amortization Net Period Intangible assets: Non-compete agreements 2 (2) — 2 years Brand 95 (48) 47 3 years Developed technology 639 (191) 448 5 years Customer relationships 149 (22) 127 10 years Total intangible assets $ 885 $ (263) $ 622 Goodwill 11,492 — 11,492 Indefinite Total intangible assets & goodwill $ 12,377 (263) $ 12,114 For the three and Operations are as follows: with JPMorgan Chase Loans under the five year credit agreement 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 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. 2019. ‑ 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. 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'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. Six months ended December 31, 2017 2016 Expected volatility (percent) 50.21 - 50.89 Expected life (years) 4.0 - 4.5 4.0 Expected dividends — — Risk-free interest rate (percent) 1.64 - 1.72 Number of options granted 179,047 20,080 Weighted average exercise price $ 5.66 $ 4.98 Weighted average grant date fair value $ 2.42 $ 1.98 COMMON STOCK $0.4 million, respectively. 2022. The Company is evaluating the impact of COVID-19 on the FY20 LTI Plan. Three months ended Six months ended December 31, December 31, ($ 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 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. significant driver of the Company’s Purchasing devices directly from the Company or one of its authorized resellers; Financing devices under the Company’s QuickStart Program, which are non-cancellable sixty month sales-type leases, through an unrelated equipment financing company, if available, or directly from the Company; and Renting devices under the Company’s JumpStart Program, The Company’s fiscal year ends June 30th. Recent Accounting Pronouncements TRENDING QUARTERLY FINANCIAL DATA 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. As of and for the three months ended December 31, September 30, June 30, March 31, December 31, 2017 2017 2017 2017 2016 Connections: Gross new connections 317,000 28,000 70,000 40,000 25,000 % from existing customer base Net new connections (a) 311,000 26,000 64,000 35,000 21,000 Total connections 905,000 594,000 568,000 504,000 469,000 Customers: New customers added (a) 1,800 550 Total customers 15,050 13,250 12,700 12,400 11,900 Volumes: Total number of transactions (millions) 144.8 121.1 114.8 104.9 100.1 Total volume (millions) $ 272.7 $ 239.2 $ 225.6 $ 202.5 $ 191.5 Financing structure of connections: JumpStart QuickStart & all others (b) Total Includes credit sales with standard trade receivable terms. Three Months Ended 2019 For the three months ended December 31, Percent ($ in thousands) 2017 2016 Change Revenues: License and transaction fees $ 22,853 $ 16,639 Equipment sales 9,653 5,117 Total revenues 32,506 21,756 Costs of sales: Cost of services 14,362 11,389 Cost of equipment 8,943 4,033 Total costs of sales 23,305 15,422 Gross profit: License and transaction fees 8,491 5,250 Equipment sales 710 1,084 Total gross profit $ 9,201 $ 6,334 year. same period last year. For the three months ended December 31, Percent Category ($ in thousands) 2017 2016 Change Selling, general and administrative expenses $ 8,329 $ 5,785 Integration and acquisition costs 3,335 8 Depreciation and amortization 737 307 Total operating expenses $ 12,401 $ 6,100 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. For the three months ended December 31, Percent ($ in thousands) 2017 2016 Change Other income (expense): Interest income $ 251 $ 200 Interest expense (494) (201) Total other expense, net $ (243) $ (1) For the three months ended December 31, Percent ($ in thousands) 2017 2016 Change Provision for income taxes $ (9,073) $ - income tax provision. For the three months ended December 31, ($ in thousands) 2017 2016 Net (loss) income $ (12,516) $ 233 Less interest income (251) (200) Plus interest expense 494 201 Plus income tax provision 9,073 — Plus depreciation expense 1,512 1,220 Plus amortization expense 472 43 EBITDA (1,216) 1,497 Plus stock-based compensation 780 233 Plus integration and acquisition costs and inventory step-up 3,358 8 Adjustments to EBITDA 4,138 241 Adjusted EBITDA $ 2,922 $ 1,738 As used herein, Adjusted EBITDA represents net income (loss) Three months ended December 31, ($ in thousands) 2017 2016 Operating (loss) income $ $ Plus integration and acquisition costs and inventory step-up Plus amortization expense Adjusted operating income $ $ Three months ended December 31, ($ in thousands) 2017 2016 Net (loss) income $ (12,516) $ 233 Non-GAAP adjustments: Non-cash portion of income tax provision (benefit) 9,073 — Amortization expense 472 43 Stock-based compensation 780 233 Litigation related professional fees — — Integration and acquisition-related costs 3,413 8 Non-GAAP net income $ 1,222 $ 517 2019 For the six months ended December 31, Percent ($ in thousands) 2017 2016 Change Revenues: License and transaction fees $ 42,797 $ 33,004 Equipment sales 15,326 10,340 Total revenues 58,123 43,344 Costs of sales: Cost of services 27,688 22,632 Cost of equipment 14,033 8,211 Total costs of sales 41,721 30,843 Gross profit: License and transaction fees 15,109 10,372 Equipment sales 1,293 2,129 Total gross profit $ 16,402 $ 12,501 represents a 22 percent increase year over year. same period last year. For the six months ended December 31, Percent Category ($ in thousands) 2017 2016 Change Selling, general and administrative expenses $ 15,075 $ 12,593 Integration and acquisition costs 4,097 109 Depreciation and amortization 982 515 Total operating expenses $ 20,154 $ 13,217 Selling, general and administrative expenses. Selling, general and administrative expenses increased approximately 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. For the six months ended December 31, Percent ($ in thousands) 2017 2016 Change Other income (expense): Interest income $ 331 $ 273 Interest expense (703) (413) Change in fair value of warrant liabilities - (1,490) Total other expense, net $ (372) $ (1,630) Company's derivative related to the Antara debt. For the six months ended December 31, Percent ($ in thousands) 2017 2016 Change (Provision) benefit for income taxes $ (8,605) $ 115 (7,583)% Reconciliation of Net Loss to Adjusted For the six months ended December 31, ($ in thousands) 2017 2016 Net loss $ (12,729) $ (2,231) Less interest income (331) (273) Plus interest expense 703 413 Plus income tax provision (benefit) 8,605 (115) Plus depreciation expense 2,960 2,477 Plus amortization expense 516 87 EBITDA (276) 358 Plus loss on fair value of warrant liabilities — 1,490 Plus stock-based compensation 1,356 445 Plus litigation related professional fees — 33 Plus integration and acquisition costs and inventory step-up 4,120 109 Adjustments to EBITDA 5,476 2,077 Adjusted EBITDA $ 5,200 $ 2,435 Six months ended December 31, ($ in thousands) 2017 2016 Operating loss $ $ Plus integration and acquisition costs and inventory step-up Plus amortization expense Adjusted operating income (loss) $ $ Six months ended December 31, ($ in thousands) 2017 2016 Net loss $ (12,729) $ (2,231) Non-GAAP adjustments: Non-cash portion of income tax benefit 8,605 (115) Fair value of warrant adjustment — 1,490 Amortization expense 516 87 Stock-based compensation 1,356 445 Litigation related professional fees — 33 Integration and acquisition-related costs 4,175 109 Non-GAAP net income (loss) $ 1,923 $ (182) of $7.6 million. same period last year. closing date. In aforementioned prepayment premium. financing alternatives, including but not limited to negotiating modifications to the existing Term Facility. The Company has received a communication from an investor that it will provide sufficient financing in the event that the Company and Antara fail to agree to modifications to the existing Term Facility and other financing alternatives are not in place. The Company believes that its period as a result of the material weaknesses in our internal control over financial reporting, which are described in Item 9A. of our 2019 Form 10-K. As discussed in Item 9A. of our 2019 Form 10-K, we have implemented a broad range of remedial procedures to address the material weaknesses in our internal control over financial reporting. These remedial procedures entailed significant changes in our internal control over financial reporting throughout the course of the fiscal year ended June 30, 2019 and were not complete as of March 31, 2020, and will continue through fiscal year 2020, with the goal to fully remediate all remaining material weaknesses by fiscal year end. 31.2 32.1 32.2 101 The following financial information from our Quarterly Report on Form 10-Q for the quarter ended Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. USA TECHNOLOGIES, INC. Date: /s/ Chief Executive Officer Date: /s/ Chief Financial Officer ($ 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 3 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 4StatementStatements of Shareholders’ Equity(Unaudited)(a)Refer to Note 12 regarding the public offering issued during July 2017.
(Unaudited)(b)Refer to Note 3 regarding the business acquisition executed during November 2017.(c)Refer to Note 2 regarding the adoption of ASU 2016-09. Common Stock Total ($ in thousands) Shares Amount Balance, June 30, 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 Common Stock Total ($ in thousands) Shares Amount Balance, June 30, 2018 59,998,811 $ 375,436 $ (232,748 ) $ 142,688 Cumulative effect adjustment for ASC 606 adoption — — 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 5 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 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 6USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”)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.combination also marriescombined product offering provides the data-rich Seed system with USAT’s consumer benefits, providing operators with valuable consumer data that results in customized experiences. In addition to new technology and services, due to Cantaloupe’s existing customer base, the acquisition expands the Company’s footprint into new global markets.USA Technologies, Inc.the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and therefore should be read in conjunction with the Company’s June 30, 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 PRESENTATIONCertain reclassificationsprior 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.3,14.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 Facilityprevious 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.conformwhich Antara committed to extend to the current period’s presentation.72. ACCOUNTING POLICIESRECENT ACCOUNTING PRONOUNCEMENTSAccounting pronouncements adopted in fiscal year 2018January 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.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.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.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 840.2016-09, 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.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.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. adopted.In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) (“the New Standard”).” This ASU was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year. The new guidance provides a single model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The new standard also requires expanded qualitative and quantitative disclosures about the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU is now effective for fiscal years, and interim reporting periods within those years, beginning with the year ending June 30, 2019.The Company’s project plan includes a three-phase approach to implementing this standard update. The Company is currently evaluating the impact of the potential changes identified by its initial phase one assessment work which included internal surveys of the business, holding revenue recognition workshops with sales and business unit finance leadership, and reviewing a representative sample of revenue arrangements across the business to initially identify a set of applicable qualitative revenue recognition changes related to the new standard update. During the quarter, the Company completed an acquisition of Cantaloupe and has commenced the phase one assessment of the recently acquired business.8The objectives for the second phase of the project will be to establish and document key accounting policies and assess disclosures, business process and control impacts resulting from the New Standard. New policies and procedures identified during phase two will be applied to both historical Company revenue streams and those of the recently acquired business to ensure compliance with the New Standard. Lastly, the objectives of phase three will comprise effectively implementing the new standard update and embedding the new accounting treatment into the Company’s business processes and controls to support the financial reporting requirements. Phase three is expected to be completed in the fourth quarter of fiscal year 2018.The Company is still evaluating the impact that the New Standard will have on the Company’s consolidated financial statements and will be unable to quantify its impact until the third phase of the project has been completed. The standard is expected to impact the Company’s revenue recognition processes, primarily in the areas of the allocation of contract revenues. An entity can elect to apply the guidance under one of the following two methods: (i) retrospectively to each prior reporting period presented – referred to as the full retrospective method; or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings – referred to as the modified retrospective method. The method of adoption has not yet been determined and is not expected to be finalized until the second phase of the project plan has been completed.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.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.permitteda service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The2018.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.($ 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 ($ in thousands) Three months ended March 31, 2020 Nine months ended March 31, 2020 Finance lease costs: Amortization of ROU assets $ 25 $ 79 Interest on lease assets 3 8 Operating lease costs* 515 1,970 Total $ 543 $ 2,057 ($ in thousands) Nine months ended March 31, 2020 Supplemental cash flow information: Cash paid for amounts included in the measurement of lease liabilities Financing cash flows from finance leases $ 73 Operating cash flows from finance leases 9 Operating cash flows from operating leases 1,350 Non-cash activity Right-of-use assets obtained in exchange for lease obligations: Finance lease liabilities 12 Operating lease liabilities $ 3,384 Nine months ended March 31, 2020 Weighted-average remaining lease term (years) Finance leases 1.4 Operating leases 5.4 Weighted-average discount rate Finance leases 9.9 % Operating leases 6.8 % 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) Remainder of 2020 $ 384 $ 27 2021 1,440 46 2022 1,461 16 2023 1,493 2 2024 1,030 1 Thereafter 1,520 — Total lease payments $ 7,328 $ 92 Less: Imputed interest (1,221 ) (13 ) Present value of lease liabilities $ 6,107 $ 79 beginningpredecessor to Topic 842, are as follows:($ in thousands) 2020 $ 1,326 $ 106 2021 1,151 34 2022 1,180 12 2023 1,208 1 2024 859 1 Thereafter 1,550 — Total minimum lease payments $ 7,274 $ 154 Less: interest (14 ) Present value of minimum lease payments, net 140 Less: current obligations under capital leases (106 ) Obligations under capital leases, noncurrent $ 34 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.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.93. 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 $35.0 million. Refer to Note 9 for additional details.The acquisition of Cantaloupe was accounted for as a business combination using the acquisition method. Under the acquisition method of accounting, the assets acquired and liabilities assumedtransaction fees in the Consolidated Statements of Operations.($ in thousands) March 31,
2020 June 30,
2019Cost $ 32,572 36,190 Accumulated depreciation (27,664 ) (30,473 ) Net $ 4,908 $ 5,717 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.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.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 2021 12,668 2022 11,120 2023 8,524 2024 and thereafter 5,000 Total $ 40,848 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 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.acquisition date.10fair 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: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, 2017:11Supplemental disclosure of pro forma informationThe 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: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) 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 $ — $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 $4.1 million of integration and acquisition costs. 4. FINANCE RECEIVABLESFinanceJune 30, 2019 finance receivables consist of the following:($ in thousands) March 31,
2020 June 30,
2019Current 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 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. 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:12ContentsAge Analysis of Past Due Finance ReceivablesAs of December 31, 2017Age Analysis of Past Due Finance ReceivablesAs of June 30, 20175. INVENTORYInventory, 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 ($ in thousands) 2020 $ 4,977 2021 6,159 2022 5,513 2023 3,908 2024 1,957 Thereafter 79 Total amounts to be collected 22,593 Less: interest (2,409 ) Less: allowance for nonperforming receivables (702 ) Total finance receivables $ 19,482 13 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 ) 62,591,947 60,059,594 Effect of dilutive potential common shares — — 62,591,947 60,059,594 Basic loss per share $ (0.48 ) $ (0.34 ) Diluted loss per share $ (0.48 ) $ (0.34 ) Contentsa)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, 2019.14 As of March 31, 2020 ($ in thousands) Gross Net 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 As of June 30, 2019 ($ in thousands) Gross Net 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 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 CREDITDuring the fiscal year ended June 30, 2016, the Company entered into a Loan and Security Agreementancillary 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 Commerce. The Company recorded a charge of $55 thousand to write-off any remaining deferred financing costs related to the Heritage Line of Credit to interest expense for the three and six months ended December 31, 2017. Pursuant to such payment, all commitments of Heritage Bank of Commerce were terminated, and the Heritage Loan and Security Agreement was terminated. As such, there was no outstanding balancepresented on the Heritage LineCondensed Consolidated Statements of Credit at December 31, 2017.9. DEBT Three months ended March 31, Nine months ended March 31, ($ 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 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, 2022.15bearbore 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.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.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 BorrowingsThewhich 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.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.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.acquired equipment is includedderivative liability could result in propertya material increase or decreaseequipmentthe 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.depreciated accordingly.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) $0.1 million as of June 30, 2019 of promissory notes bearing an interest rate of 12% and maturingthat matured on December 15, 2019 with principal and interest payments due quarterly.OF FINANCIAL INSTRUMENTSAsMEASUREMENTSDecember 31, 2017,certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses, are carried at cost which approximates fair value due to the short-term maturity of these instruments and are Level 1 assets or liabilities of the fair value hierarchy.held no levelhas the ability to access at the measurement date.levelthat are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or levelsimilar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).financial instruments.2016, 2.2 million warrants2020. The Company is currently pursuing a refinancing or modification of its Term Facility, or alternative financing arrangements. As a result, subsequent to March 31, 2020, the refinancing or modification may have a material impact on the assumptions used in the discounted cash flow model and related embedded derivative liability. If the Company is not in compliance with its covenants on June 30, 2020, this is likely to cause a material decrease in the carrying value of the embedded derivative liability.($ 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 $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.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.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 TAXESOn 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.16The 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.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.were exercisedoutstanding as of SeptemberMarch 31, 2020 and June 30, 2016.12. EQUITYOn 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.17WARRANTSDuring 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: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. (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. sixnine months ended DecemberMarch 31, 20172020 and 20162019 was determined using the following weighted average assumptions:Nine months ended March 31, 2020 2019 50.00 74.6% - 90.1% 58.4% - 70.9% 3.5 - 4.5 4.5 0.0 % 0.0 % 1.06 1.4% - 1.6% 2.23% - 2.91% 340,760 420,000 $ 6.85 $ 8.52 $ 6.84 $ 4.27 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.181, 2017, $90 thousand of stock grants2, 2018, 6,677 shares were awarded to each non-employee Director based on the closing price of the Company’s Common Stock on June 8, 2017 (the date for which the stock grants were initially approved),director for a total of 98,18440,062 shares. The shares were scheduled to vest ratably on a monthly basis over the two yeartwo-year period following July 1, 2017. 2, 2018. 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.The20182020 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 - $420,000 (150% of base salary and subject to pro ration). Assuming the minimum threshold year-over-year percentage target goal would be achieved for a particular metric, the number of shares to be awarded for that metric would be determined on a pro rata basis, provided that the award would not exceed the maximum distinguished award for that metric. Themetric (which in any event cannot exceed 150% of the executive officer’s target bonus award). Any shares awarded under the 2018 LTI Stock Planplan would vest as follows: one-third at the time of issuance; one-third on June 30, 2019;2021; and one-third on June 30, 2020. (“LTI”) in prior fiscal years for its then executive officers. Stock based compensation related to the LTI plans was as follows in the three and sixnine months ended March 31, 2020 and 2019: Three months ended March 31, Nine months ended March 31, ($ 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 31, 2017 and 2016:30, 2019, the SEC staff indicated that it was unable to provide such a waiver.Duringcurrent 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. 19From 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.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.position,condition, results of operations or cash flows.14. SUBSEQUENT EVENTSevaluated 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.·general economic, market or business conditions unrelated to our operating performance;·the ability of the Company to raise funds in the future through sales of securities or debt financing in order to sustain its operations if an unexpected or unusual event would occur;·the ability of the Company to compete with its competitors to obtain market share;·whether the Company’s current or future customers purchase, lease, rent or utilize ePort devices or our other products in the future at levels currently anticipated by our Company;·whether the Company’s customers continue to utilize the Company’s transaction processing and related services, as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice;·the ability of the Company to satisfy its trade obligations included in accounts payable and accrued expenses;·the ability of the Company to sell to third party lenders all or a portion of our finance receivables;·the ability of a sufficient number of our customers to utilize third party financing companies under our QuickStart program in order to improve our net cash used by operating activities;·the incurrence by us of any unanticipated or unusual non-operating expenses which would require us to divert our cash resources from achieving our business plan;·the ability of the Company to predict or estimate its future quarterly or annual revenues and expenses given the developing and unpredictable market for its products;·the ability of the Company to retain key customers from whom a significant portion of its revenues are derived;·the ability of a key customer to reduce or delay purchasing products from the Company;·the ability of the Company to obtain widespread commercial acceptance of its products and service offerings such as ePort QuickConnect, mobile payment and loyalty programs;20
the 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;
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;·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 Company’s ability to efficiently and flexibly manage its business and financial resources amid uncertainties related to COVID-19;·the ability of the Company to operate without infringing the intellectual property rights of others;
uncertainty around the duration of the COVID-19 virus’ impact;·the ability of our products and services to avoid unauthorized hacking or credit card fraud;
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 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 compete with its competitors to obtain market share;·whether our suppliers would increase their prices, reduce their output or change their terms of sale; and
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;·our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.above.above, or those discussed under Item 1A. “Risk Factors” in 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.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.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 most21revenues,revenue, particularly the recurring revenuesrevenue from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:··· or Cantaloupe’s rental program, which are cancellable month-to-month operating leases.DecemberMarch 31, 2017,2020, highlights of the Company include:are below:
Headquarters in Malvern, Pennsylvania;·Over 150 employees, primarily located in our corporate headquarters in Malvern, Pennsylvania and a newly acquired Cantaloupe office location in San Francisco, California.
Over 150 employees;·Over 15,000 customers and 900,000 connections to our services, including approximately 1,400 customers and 270,000 connections related to the acquisition of Cantaloupe;
Over 22,000 customers and approximately 1,289,000 connections to our service;·Three direct sales teams at the national, regional, and local customer-level and a growing number of OEMs and national distribution partners;
Three direct sales teams at the national, regional, and local customer-level and a growing number of OEMs and national distribution partners;·85 United States and foreign patents are in force;·The Company’s fiscal year ends June 30th; and·The Company has traded on the NASDAQ under the symbol “USAT” since 2007.has net deferred tax 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 POLICIESOur 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.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.those that require applicationto the time required to regain operations and sales at levels prior to the pandemic.management’s most difficult, subjective, our employees by implementing work-from-home measures while continuing to diligently serve our customers. Additionally, we have createdcomplex 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.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.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.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.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 RecognitionRevenue 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 QuickStart22contracts qualify for sales type lease accounting. Accordingly, the Company recognizes a portion of lease payments as interest income. At the end of the lease period, the customer would have the option to purchase the device at its residual value.Long Lived AssetsIn accordance with ASC 360, “Impairment or Disposal of Long-Lived Assets”, the Company reviews its definite lived long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset will be written down to its fair value. In the period when the plan of sale criteria of ASC 360 are met, definite lived long-lived assets are reported as held for sale, 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 AssetsGoodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. The Company accounts for goodwill in accordance with ASC 350, “Intangibles – Goodwill and Other”. Under ASC 350, goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred.Company intangible assets include non-compete agreements, brand, developed technology, and customer relationships. They are carried at cost less accumulated amortization, which is calculated on a straight-line basis over their estimated economic life. The Company reviews intangibles, subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.Allowance for Doubtful AccountsThe Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, including from a shortfall in the customer transaction fund flow from which the Company would normally collect amounts due.The allowance is determined through an analysis of various factors including the aging of the accounts receivable, the strength of the relationship with the customer, the capacity of the customer transaction fund flow to satisfy the amount due from the customer, an assessment of collection costs and other factors. The allowance for doubtful accounts receivable is management’s best estimate as of the respective reporting date. The Company writes off accounts receivable against the allowance when management determines the balance is uncollectible and the Company ceases collection efforts. Management believes that the allowance recorded is adequate to provide for its estimated credit losses.Valuation AllowanceThe Company follows the provisions of FASB ASC 740, Accounting for Uncertainty in Income Taxes, which provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in 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.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.includingIncluding Connections44% 82% 93% 88% 80% 300 500 500 0.4% 4.1% 3.3% 8.6% 6.8% 99.6% 95.9% 96.7% 91.4% 93.2% 100.0% 100.0% 100.0% 100.0% 100.0% As of and for the three months ended December 31, 2019 September 30, 2019 Connections: Gross new connections 37,000 45,000 49,000 47,000 51,000 Net new connections 34,000 40,000 46,000 43,000 46,000 Total connections 1,289,000 1,255,000 1,215,000 1,169,000 1,126,000 Customers: New customers added 1,100 900 900 825 925 Total customers 22,300 21,200 20,300 19,400 18,575 Volumes: Total number of transactions (millions) 237.3 243.4 232.7 229.6 217.2 Total volume (millions) $ 462.7 $ 476.4 $ 461.2 $ 453.0 $ 420.3 Financing structure of connections: JumpStart 1.4 % 4.3 % 3.4 % 10.1 % 1.8 % 98.6 % 95.7 % 96.6 % 89.9 % 98.2 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % a) Activity for the three months ended December 31, 2017 includes net new connections and new customers related to the acquisition of Cantaloupe of approximately 270,000 and 1,400, respectively. b)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%.24DecemberMarch 31, 20172020 Compared to Three Months Ended DecemberMarch 31, 201637.3% 88.6% 49.4% 26.1% 121.7% 51.1% 61.7% (34.5%) 45.3% Three months ended March 31, ($ 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 % $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. 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$2.4 million increase in cost of equipment sales, both driven byresulting from an increase in connections andequipment revenue due to higher shipments compared to the Cantaloupe acquisition.margin. The overallmargin. Total gross margin decreased 0.8%0.9%, from 29.1%26.4% for the three months ended DecemberMarch 31, 20162019 to 28.3%25.5% for the three months ended DecemberMarch 31, 2017.2020. The change in our gross margin was driven primarily by a decrease in the equipment margin from 21.2%a loss of 20.3% for the three months ended DecemberMarch 31, 20162019 to 7.4%a loss of 29.0% for the three months ended DecemberMarch 31, 2017, reflected our strategy of using equipment sales as an enabler for driving long-term, higher margin license and transaction fees. This decrease was partially offset by an2020. The increase in the license feeloss on our equipment margin was due to the low margin the company recognized on a large shipment in the third quarter compared to the same period in 2019. License and transaction margin from 31.6%increased to 36.4% for the three months ended DecemberMarch 31, 20162020 compared to 37.2%35.6% for the three months ended December 31, 2017, which was driven by the impact of the Cantaloupe acquisition. Operationalsame period in 2019.44.0% 41,587.5% 140.1% 103.3% Three months ended March 31, Category ($ 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 % $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 $0.3 million reduction in other selling, general and administrative costsexpenses.related to Cantaloupe as well as an increase in sales and marketing related consulting expenses as we continue to increase our market sharebeginning in the cashless-transaction vending industry. Three months ended March 31, ($ 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 )% $3.3approximately $1.4 million for the three months ended DecemberMarch 31, 20172020 as compared to the same period in 2016, due2019. This change was primarily driven by the change in fair value of the Company's derivative related to the costs incurred in connectionAntara debt. Three months ended March 31, ($ in thousands) 2020 2019 Benefit (provision) for income taxes $ 85 $ (23 ) (469.6 )% acquisition25of 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, net25.5% 145.8% 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 Taxes100% 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 $6,592 thousand related to the recent enactment of the U.S. Tax Cuts and Jobs Act. The tax provision is based upon income (loss) before income taxes using an estimated negative annual effective income tax rate of 49.20%, which is primarily driven by the impact of permanent differences. The tax rate reduction related to tax reform was treated as a discrete item in the tax provision for the three months ended December 31, 2017.For the three months ended December 31, 2016, no adjustment for the income tax benefit (provision) (substantially all deferred income taxes) was recorded based upon loss before benefit for income taxes using an estimated annual effective income tax rate does not provide a reliable estimate of 30.0%the income tax provision.fiscal yearthree months ended June 30, 2017 netMarch 31, 2019, as the use of an estimated annual effective income tax rate does not provide a provision for the tax effectreliable estimate of the change in the fair value of warrant liabilities which was treated discretely.(Loss) IncomeLoss to Adjusted EBITDA:26 Three months ended March 31, ($ 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 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.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. 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 ) Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, the Company utilizes Adjusted EBTIDA as a metric in its executive officer and management incentive compensation plans.Reconciliation of Operating (Loss) Income to Adjusted Operating Income:(3,200) 234 3,358 8 472 43 630 285 As used herein, adjusted operating income represents operating (loss) income before the non-recurring integration and acquisition costs incurred in connection with the acquisition of Cantaloupe, including a charge for inventory fair value step-up, and VendScreen transaction and amortization expenses related to our acquisition-related intangibles. We have excluded these non-recurring costs and amortization expenses in order to allow for a more accurate comparison of the financial results to historical operations and we believe such a comparison is useful to investors as a measure of comparative operating performance. This is the first financial period for which we have adjusted for the amortization expenses related to our acquisition-related intangibles, and we intend to make such adjustments for future financial periods. Reconciliation of Net (Loss) Income to Non-GAAP Net Income:As used herein, non-GAAP net income represents GAAP net (loss) income excluding costs or benefits relating to any non-cash portions of the Company’s income tax benefit, adjustment for fair value of warrant liabilities, non-recurring costs and expenses that were incurred in connection with the acquisition and integration of Cantaloupe, including a charge for inventory fair value step-up and write-off of deferred financing costs, during the current fiscal year and VendScreen during the prior fiscal year, and non-cash expenses for equity awards under our equity incentive plans. This is the first financial period for which we have adjusted for the non-cash expenses attributable to equity awards, and we intend to make such27adjustments for future financial periods. Management believes that non-GAAP net 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.SixDecemberMarch 31, 20172020 Compared to SixNine Months Ended DecemberMarch 31, 201629.7% 48.2% 34.1% 22.3% 70.9% 35.3% 45.7% (39.3%) 31.2% Nine months ended March 31, ($ 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 % $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. $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$11.0 million increase in cost of equipment sales, both arisingresulting from an increase in connections andhigher shipments compared to the Cantaloupe acquisition. margin. The overallmargin. Total gross margin decreased 0.6%1.8%, from 28.8%28.7% for the sixnine months ended DecemberMarch 31, 20162019 to 28.2%27.0% for the sixnine months ended DecemberMarch 31, 2017.2020. The decrease in thewas driven primarily by a lower equipment margin resulting from 20.6% fora large equipment sale made to a strategic customer during the six months ended December 31, 2016 to 8.4% for the six months ended December 31, 2017 reflectedfirst three quarters of fiscal year 2020, reflecting our strategy of using equipment sales as an enabler for driving long-term,longer-term, higher margin license and transaction fees. This decrease was partially offset by an increase in the license feeLicense and transaction margin from 31.4%increased to 36.5% for the sixnine months ended DecemberMarch 31, 20162020 compared to 35.3% for the six months ended December 31, 2017 which was primarily driven by the impact of the Cantaloupe acquisition. same period in 2019.28 Nine months ended March 31, Category ($ 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 % Operational Expenses19.7% 3,658.7% 90.7% 52.5% $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 $15.3selling, 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. as we continue to increase our market share. Investigation and restatement expenses were incurred beginning in the cashless-transaction vending industry.increased $4.0were $1.1 million for the sixnine months ended DecemberMarch 31, 20172019 due to the completion of the Cantaloupe acquisition. Nine months ended March 31, ($ 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 )% 2016, due to the $4.1 million incurred in connection with the acquisition of Cantaloupe, partially offset by $0.1 million of acquisition costs incurred in the same period of fiscal year 2017 pertaining to the acquisition of VendScreen. Depreciation and amortization. Depreciation and amortization expenses increased approximately $0.5 million for the six months ended December 31, 2017 primarily due to the amortization of intangible assets recognized in connection with the Cantaloupe acquisition. Other Expense, net21.2% 70.2% (100.0%) (77.2%) Other expense, net. Other expense, net decreased $1.3 million for the six months ended December 31, 2017 compared to the same period in 2016. The decrease2019. This change was primarily driven by the change in fair value associated withof the exercised warrants recognized during September 2016. Nine months ended March 31, ($ in thousands) 2020 2019 Provision for income taxes $ (46 ) $ (60 ) (23.3 )% 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 $115 thousand (substantially all deferred income taxes) was recorded based upon loss before benefit for income taxes using an estimated annual effective income tax rate does not provide a reliable estimate of 30.0%the income tax provision.fiscal year ending June 30, 2017 netnine months ended March 31, 2019, as the use of an estimated annual effective income tax rate does not provide a provision for the tax effectreliable estimate of the change in the fair value of warrant liabilities which was treated discretely.income tax provision.29EBITDA: Nine months ended March 31, ($ 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 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.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. 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 ) Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, the Company utilizes Adjusted EBTIDA as a metric in its executive officer and management incentive compensation plans.Reconciliation of Operating Loss to Adjusted Operating Income (Loss):(3,752) (716) 4,120 109 516 87 884 (520) As used herein, adjusted operating loss represents operating loss before the non-recurring integration and acquisition costs and expenses incurred in connection with the acquisition of Cantaloupe, including a charge for inventory fair value step-up, and VendScreen transaction, and the amortization expenses related to our acquisition-related intangibles. We have excluded these non-recurring costs and expenses in order to allow for a more accurate comparison of the financial results to historical operations and we believe such a comparison is useful to investors as a measure of comparative operating performance. This is the first financial period for which we have adjusted for the amortization expenses related to our acquisition-related intangibles, and we intend to make such adjustments for future financial periods. 30Reconciliation of Net Loss to Non-GAAP Net Income (Loss):As used herein, non-GAAP net income (loss) represents GAAP net income (loss) excluding costs or benefits relating to any non-cash portions of the Company’s income tax benefit, adjustment for fair value of warrant liabilities, professional fees incurred in connection with the class action litigation and the special litigation committee investigation, and non-recurring costs and expenses that were incurred in connection with the acquisition and integration of Cantaloupe, including a charge for inventory fair value step-up and a write-off of deferred financing costs, during the current fiscal year and VendScreen during the prior fiscal year. This is the first financial period for which we have adjusted for the non-cash expenses attributable to equity awards under our equity incentive plans, and we intend to make such adjustments for future financial periods. Management believes that non-GAAP net income (loss)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.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.$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.$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.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.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.31 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.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.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.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 CashThe 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.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.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.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.There have been no significant changes 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. 7A. “Quantitative and Qualitative Disclosures about 1A - “Risk Factors”, there may be implications on our business with regard to the COVID-19.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.(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.ThereDecemberMarch 31, 20172020 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.ExhibitNumberDescriptionDescription 10.13.1 3.2 4.1 10.1** 10.210.3* 10.4* 10.5* 10.310.7* 10.8* 10.9* 10.10* 10.11* 10.12 31.110.13 31.1 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). 33February 9, 2018Stephen P. HerbertStephen P. Herbert,February 9, 2018Priyanka SinghPriyanka Singh34