USA Technologies, Inc.
USA TECHNOLOGIES INC (Form: 10-Q, Received: 05/10/2018 17:14:00)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2018

 

OR

 

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

 

For the transition period from                           to                          

 

Commission file number 001-33365

 

USA Technologies, Inc.


(Exact name of registrant as specified in its charter)

 

Pennsylvania

    

23-2679963

(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)

 

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

 

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

 

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

 

Large accelerated filer

 

Accelerated filer

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

 

Smaller reporting company

Emerging growth company 

 

 

 

 

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

 

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

As of May 1, 2018 there were 53,67 0,467 shares of Common Stock, no par value, outstanding.

 

 

 

 

 


 

Table of Contents

USA TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

Part I - Financial Information  

 

 

 

Item 1.  

Consolidated Financial Statements (unaudited)

 

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Operations

4

 

 

 

 

Consolidated Statement of Shareholders’ Equity

5

 

 

 

 

Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.  

Controls and Procedures

34

 

 

 

 

 

 

Part II - Other Information  

 

 

 

Item 1.  

Legal Proceedings

34

 

 

 

Item 3.  

Defaults Upon Senior Securities

34

 

 

 

Item 6.  

Exhibits

34

 

 

 

 

Signatures

36

 

 

 


 

Table of Contents

Part I. Financial Information

Item 1. Consolidated Financial Statements

 

USA Technologies, Inc.

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

March 31, 

 

June 30, 

($ in thousands, except shares)

 

2018

 

2017

 

 

(unaudited)

 

(audited)

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,107

 

$

12,745

Accounts receivable, less allowance of $2,587 and $3,149, respectively

 

 

23,166

 

 

7,193

Finance receivables, less allowance of $42 and $19, respectively

 

 

3,904

 

 

11,010

Inventory

 

 

11,030

 

 

4,586

Prepaid expenses and other current assets

 

 

1,869

 

 

968

Total current assets

 

 

57,076

 

 

36,502

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

Finance receivables, less current portion

 

 

9,679

 

 

8,607

Other assets

 

 

1,214

 

 

687

Property and equipment, net

 

 

12,198

 

 

12,111

Deferred income taxes

 

 

16,911

 

 

27,670

Intangibles, net

 

 

30,119

 

 

622

Goodwill

 

 

64,196

 

 

11,492

Total non-current assets

 

 

134,317

 

 

61,189

 

 

 

 

 

 

 

Total assets

 

$

191,393

 

$

97,691

   

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

29,446

 

$

16,054

Accrued expenses

 

 

7,961

 

 

4,140

Line of Credit, net

 

 

 —

 

 

7,036

Capital lease obligations and current obligations under long-term debt

 

 

4,475

 

 

3,230

Deferred revenue

 

 

441

 

 

 —

Deferred gain from sale-leaseback transactions

 

 

198

 

 

239

Total current liabilities

 

 

42,521

 

 

30,699

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Revolving Credit Facility

 

 

10,000

 

 

 —

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

 

 

22,895

 

 

1,061

Accrued expenses, less current portion

 

 

66

 

 

53

Deferred gain from sale-leaseback transactions, less current portion

 

 

 —

 

 

100

Total long-term liabilities

 

 

32,961

 

 

1,214

 

 

 

 

 

 

 

Total liabilities

 

$

75,482

 

$

31,913

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

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 $19,443 and $18,775 at March 31, 2018 and June 30, 2017, respectively

 

 

3,138

 

 

3,138

Common stock, no par value, 640,000,000 shares authorized, 53,666,718 and 40,331,645 shares issued and outstanding at March 31, 2018 and June 30, 2017, respectively

 

 

307,634

 

 

245,999

Accumulated deficit

 

 

(194,861)

 

 

(183,359)

Total shareholders’ equity

 

 

115,911

 

 

65,778

Total liabilities and shareholders’ equity

 

$

191,393

 

$

97,691

 

See accompanying notes.

 

3

 


 

Table of Contents

USA Technologies, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

March 31, 

 

March 31, 

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

    

2018

    

2017

    

2018

    

2017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

License and transaction fees

 

$

27,020

 

$

17,459

 

$

69,817

 

$

50,463

Equipment sales

 

 

8,812

 

 

9,001

 

 

24,138

 

 

19,341

Total revenues

 

 

35,832

 

 

26,460

 

 

93,955

 

 

69,804

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of sales:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

16,012

 

 

11,876

 

 

43,700

 

 

34,508

Cost of equipment

 

 

7,876

 

 

7,959

 

 

21,909

 

 

16,170

Total costs of sales

 

 

23,888

 

 

19,835

 

 

65,609

 

 

50,678

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

11,944

 

 

6,625

 

 

28,346

 

 

19,126

   

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

9,572

 

 

5,947

 

 

24,647

 

 

18,540

Integration and acquisition costs

 

 

1,747

 

 

 -

 

 

5,844

 

 

109

Depreciation and amortization

 

 

1,125

 

 

259

 

 

2,107

 

 

774

Total operating expenses

 

 

12,444

 

 

6,206

 

 

32,598

 

 

19,423

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(500)

 

 

419

 

 

(4,252)

 

 

(297)

   

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

134

 

 

114

 

 

465

 

 

387

Interest expense

 

 

(612)

 

 

(188)

 

 

(1,315)

 

 

(601)

Change in fair value of warrant liabilities

 

 

 -

 

 

 -

 

 

 -

 

 

(1,490)

Total other expense, net

 

 

(478)

 

 

(74)

 

 

(850)

 

 

(1,704)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(978)

 

 

345

 

 

(5,102)

 

 

(2,001)

Benefit (provision) for income taxes

 

 

2,138

 

 

(209)

 

 

(6,467)

 

 

(94)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

1,160

 

 

136

 

 

(11,569)

 

 

(2,095)

Preferred dividends

 

 

(334)

 

 

(334)

 

 

(668)

 

 

(668)

Net income (loss) applicable to common shares

 

$

826

 

$

(198)

 

$

(12,237)

 

$

(2,763)

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

0.02

 

 

(0.00)

 

 

(0.24)

 

 

(0.07)

Diluted

 

 

0.02

 

 

(0.00)

 

 

(0.24)

 

 

(0.07)

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

53,637,085

 

 

40,327,697

 

 

51,101,813

 

 

39,703,690

Diluted

 

 

54,234,566

 

 

40,327,697

 

 

51,101,813

 

 

39,703,690

 

See accompanying notes.

 

 

 

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Table of Contents

USA Technologies, Inc.

Consolidated Statement of Shareholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

 

 

 

 

 

 

 

Convertible

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Accumulated

 

 

($ in thousands, except shares)

   

Shares

  

Amount

   

Shares

  

Amount

   

Deficit

   

Total

Balance, June 30, 2017

  

445,063

  

$

3,138

  

40,331,645

  

$

245,999

  

$

(183,359)

  

$

65,778

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

  

 —

  

 

 —

  

9,583,332

  

 

39,888

  

 

 —

  

 

39,888

Issuance of common stock as merger consideration (b)

  

 —

  

 

 —

  

3,423,367

  

 

19,810

  

 

 —

  

 

19,810

Stock based compensation

  

 —

  

 

 —

  

347,975

  

 

2,114

  

 

 —

  

 

2,114

Excess tax benefit from stock plans (c)

  

 —

  

 

 —

  

 —

  

 

 —

  

 

67

  

 

67

Retirement of common stock

  

 —

  

 

 —

  

(19,601)

  

 

(177)

  

 

 —

  

 

(177)

Net loss

  

 —

  

 

 —

  

 —

  

 

 —

  

 

(11,569)

  

 

(11,569)

Balance, March 31, 2018

  

445,063

  

$

3,138

  

53,666,718

  

$

307,634

  

$

(194,861)

  

$

115,911

 

(a)

Refer to Note 13 regarding the public offering issued during July 2017.

(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.

 

See accompanying notes.

 

 

 

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Table of Contents

USA Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

March 31, 

($ in thousands)

    

2018

    

2017

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(11,569)

 

$

(2,095)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Non-cash stock based compensation

 

 

2,005

 

 

678

Gain on disposal of property and equipment

 

 

(112)

 

 

(59)

Non-cash interest and amortization of debt discount

 

 

100

 

 

98

Bad debt expense

 

 

506

 

 

577

Depreciation and amortization

 

 

5,858

 

 

3,774

Change in fair value of warrant liabilities

 

 

 -

 

 

1,490

Excess tax benefits

 

 

67

 

 

 -

Deferred income taxes, net

 

 

6,400

 

 

94

Deferred revenue

 

 

(185)

 

 

 -

Recognition of deferred gain from sale-leaseback transactions

 

 

(143)

 

 

(646)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(12,972)

 

 

(2,388)

Finance receivables

 

 

11,114

 

 

(2,113)

Inventory

 

 

(5,624)

 

 

(2,042)

Prepaid expenses and other assets

 

 

(564)

 

 

(406)

Accounts payable and accrued expenses

 

 

13,808

 

 

(1,257)

Net cash provided by (used in) operating activities

 

 

8,689

 

 

(4,295)

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment, including rentals

 

 

(3,005)

 

 

(2,818)

Proceeds from sale of property and equipment, including rentals

 

 

252

 

 

105

Cash paid for assets acquired from Cantaloupe

 

 

(65,181)

 

 

 -

Net cash used in investing activities

 

 

(67,934)

 

 

(2,713)

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Payment of debt issuance costs

 

 

(445)

 

 

(90)

Issuance of common stock in public offering, net

 

 

39,888

 

 

 -

Proceeds from issuance of long-term debt

 

 

25,100

 

 

 -

Proceeds from Revolving Credit Facility

 

 

12,500

 

 

 -

Repayment of Revolving Credit Facility

 

 

(2,500)

 

 

 -

Repayment of Line of Credit, net

 

 

(7,111)

 

 

 -

Repayment of capital lease obligations and long-term debt

 

 

(3,778)

 

 

(556)

Cash used in retirement of common stock

 

 

(156)

 

 

(31)

Proceeds from exercise of common stock options

 

 

109

 

 

 -

Proceeds from exercise of common stock warrants

 

 

 -

 

 

6,193

Net cash provided by financing activities

 

 

63,607

 

 

5,516

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

4,362

 

 

(1,492)

Cash and cash equivalents at beginning of year

 

 

12,745

 

 

19,272

Cash and cash equivalents at end of period

 

$

17,107

 

$

17,780

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information :

 

 

 

 

 

 

Interest paid in cash

 

$

1,153

 

$

528

Income taxes paid in cash (refund), net

 

$

 -

 

$

 -

Supplemental disclosures of noncash financing and investing activities:

 

 

 

 

 

 

Equity issued in connection with Cantaloupe Acquisition, net of post-working capital adjustment for retired shares

 

$

19,789

 

$

 -

Equipment and software acquired under capital lease

 

$

227

 

$

326

 

See accompanying notes.

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Table of Contents

USA Technologies, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. BUSINESS

 

USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”) was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutions and value-added services that facilitate electronic payment transactions and consumer engagement services primarily within the unattended Point of Sale (“POS”) market. We are a leading provider in the small ticket, beverage and food vending industry and are expanding our solutions and services to other unattended market segments, such as amusement, commercial laundry, kiosk and others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as telemetry Internet of Things (“IoT”) and machine-to-machine (“M2M”) services, which include the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment.  The connection to the ePort Connect platform also enables consumer loyalty programs, national rewards programs and digital content, including advertisements and product information to be delivered at the point of sale. 

On November 9, 2017, the Company acquired all of the outstanding equity interests of Cantaloupe Systems, Inc. (“Cantaloupe”), pursuant to the Agreement and Plan of Merger (“Merger Agreement”).  Cantaloupe is a premier provider of cloud and mobile solutions for vending, micro markets, and office coffee service.  The acquisition expanded the Company’s existing platform to become an end-to-end enterprise platform integrating Cantaloupe’s Seed Cloud which provides cloud and mobile solutions for dynamic route scheduling, automated pre-kitting, responsive merchandising, inventory management, warehouse and accounting management, as well as cashless vending. The combined companies complete the value chain for customers by providing both top-line revenue generating services as well as bottom line business efficiency services to help operators of unattended retail machines run their business better.  The combined product offering provides the data-rich Seed system with USAT’s consumer benefits, providing operators with valuable consumer data that results in customized experiences.  In addition to new technology and services, due to Cantaloupe’s existing customer base, the acquisition expands the Company’s footprint into new global markets.

INTERIM FINANCIAL INFORMATION

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2017.  In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included.  Operating results for the three and nine months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending June 30, 2018.  The balance sheet at June 30, 2017 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

BASIS OF PRESENTATION

Certain reclassifications of prior year’s data have been made to conform to current year’s presentation.  As disclosed in Note 3, the Company incurred integration and acquisition costs during the current fiscal year and deemed it appropriate to have such costs individually captioned within the Statement of Operations.  Accordingly, the Company retrospectively reclassified integration and acquisition costs incurred in the corresponding periods from the previous fiscal year to conform to the current period’s presentation.

 

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2. ACCOUNTING POLICIES

RECENT ACCOUNTING PRONOUNCEMENTS

Accounting pronouncements adopted in fiscal year 2018

In January 2017, 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 charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We early adopted ASU 2017-04 for impairment tests to be performed on testing dates after July 1, 2017, which did not impact our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which modifies the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits are to be separately classified as an operating activity apart from other income tax cash flows. The standard also allows the Company to repurchase more of an employee’s vested shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows. The Company adopted this standard as of July 1, 2017.

The primary impact of adoption was the recognition of excess tax benefits in the Company's provision for income taxes which is applied prospectively starting July 1, 2017 in accordance with the guidance. Adoption of the new standard resulted in the recognition of $31 thousand of excess tax benefits in the Company's provision for income taxes for the nine months ended March 31, 2018. Through June 30, 2017 excess tax benefits were reflected as a reduction of deferred tax assets via reducing actual operating loss carryforwards because such benefits had not reduced income taxes payable. Under the new standard the treatment of excess tax benefits changed and the cumulative excess tax benefits as of June 30, 2017 amounting to $67 thousand were credited to accumulated deficit.

The adoption of ASU No. 2016-09 did not impact our statement of cash flows for the nine months ended March 31, 2017. 

Accounting pronouncements to be adopted

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

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) (“the New Standard”).  This New Standard was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year. The New Standard provides a single model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The New Standard also requires expanded qualitative and quantitative disclosures about the nature, timing and uncertainty of revenue and cash flows rising from contracts with customers. The New Standard 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 New Standard. The Company has completed its initial assessment work for the consolidated company, during which the Company identified 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.  

 

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The objectives for the second phase of the project will be to establish and document key accounting policies and assess disclosures, business process and control impacts resulting from the New Standard. New policies and procedures identified during phase two will be applied to the consolidated company. Lastly, the objectives of phase three will comprise effectively implementing the New Standard and embedding the new accounting treatment into the Company’s business processes and controls to support the financial reporting requirements. Phase two and three are expected to be completed in the fourth quarter of 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 New 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 New Standard 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 New Standard recognized at the date of initial application in retained earning – referred to as the modified retrospective method. The method of adoption has not yet been determined and is not expected to be finalized until the second phase of the project plan has been completed.

 

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

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326).”  The new guidance introduces the accounting for estimated credit losses pertaining to certain types of financial instruments, including but not limited to, trade and lease receivables.  This pronouncement will be effective for fiscal years beginning after December 15, 2019.  Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018.

 

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

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.”  ASU 2017-01 provides guidance in ascertaining whether a collection of assets and activities is considered a business.  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.

 

 

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3. ACQUISITION OF CANTALOUPE SYSTEMS, INC.

On November 9, 2017, the Company acquired all of the outstanding equity interests of Cantaloupe pursuant to the Merger Agreement, for approximately $84.7 million in aggregate consideration.  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 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)

Post-closing adjustment for working capital (3)

 

 

253

Total consideration

 

$

(84,738)

 

(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.

(3)

During the third quarter ended March 31, 2018, the Company recorded a receivable of  $232 thousand and cancelled 3,577 of our shares that had been held in escrow with a fair value of $21 thousand to reflect the final net working capital adjustment, as set forth in the Merger Agreement.

The Company financed a portion of the purchase price with proceeds from a $25.0 million term loan (“Term Loan”) and $10.0 million of borrowings under a line of credit (“Revolving Credit Facility”), provided by JPMorgan Chase Bank, N.A., for an aggregate principal amount of $35.0 million.  Refer to Note 10 for additional details.

 

The acquisition of Cantaloupe was accounted for as a business combination using the acquisition method. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the transaction were recorded at the date of acquisition at their respective fair values using assumptions that are subject to change. The Company has not finalized its valuation of certain assets and liabilities recorded in connection with this transaction. Thus, the estimated measurements recorded to date are subject to change and any changes will be recorded as adjustments to the fair value of those assets and liabilities and residual amounts will be allocated to goodwill. The final valuation adjustments may also require adjustment to the consolidated statements of operations and cash flows. The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date.

 

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The following table summarizes the fair value of total consideration transferred to the holders of all of the outstanding equity interests of Cantaloupe at the acquisition date of November 9, 2017:

 

 

 

 

 

 

Cantaloupe

($ in thousands)

 

Systems, Inc.

Accounts receivable

 

$

3,232

Finance receivables, current portion

 

 

1,640

Inventory

 

 

782

Prepaid expense and other current assets

 

 

682

Finance receivables, less current portion

 

 

3,483

Other assets

 

 

50

Property and equipment

 

 

1,573

Intangibles

 

 

30,800

Goodwill

 

 

52,704

Total assets acquired

 

 

94,946

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

 

$

84,738

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 $52.7 million arising from the acquisition includes the expected synergies between Cantaloupe and the Company, the value of the employee workforce, and intangible assets that do not qualify for separate recognition at the time of acquisition. The goodwill, which is not deductible for income tax purposes, was assigned to the Company’s only reporting unit. 

The amount of Cantaloupe revenues included in the Company’s Consolidated Statements of Operations for the three and nine months ended March 31, 2018 is $8.9 million and $13.6 million, respectively. The amount of Cantaloupe earnings included in the Company’s Consolidated Statements of Operations for the three and nine months ended March 31, 2018 is $0.9 million and $2.7 million, respectively.  The Cantaloupe earnings for the three and nine months ended March 31, 2018 included an income tax provision of $0.3 million and an income tax benefit of $1.4 million, respectively. 

Supplemental disclosure of pro forma information

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

The pro forma results include adjustments for the preliminary purchase accounting impact of the Cantaloupe acquisition (including, but not limited to, amortization associated with the acquired intangible assets, and the interest expense and amortization of deferred financing fees associated with the Term Loan and Revolving Credit Facility that were used to

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finance a portion of the purchase price, along with the related tax impacts) and the alignment of accounting policies. Other material non-recurring adjustments are reflected in the pro forma and described below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

Nine months ended March 31, 

(In thousands, except per share data)

 

2018

 

2017

 

2018

 

2017

Revenues

 

$

35,832

 

$

32,265

 

$

103,474

 

$

86,969

Net income (loss) attributable to USAT

 

 

2,488

 

 

(339)

 

 

(8,064)

 

 

(6,898)

Net income (loss) attributable to USAT common shares

 

$

2,154

 

$

(673)

 

$

(8,732)

 

$

(7,566)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

$

(0.01)

 

$

(0.16)

 

$

(0.14)

Diluted

 

$

0.04

 

$

(0.01)

 

$

(0.16)

 

$

(0.14)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

53,637,085

 

 

53,334,396

 

 

53,601,684

 

 

52,686,654

Diluted

 

 

54,234,566

 

 

53,334,396

 

 

53,601,684

 

 

52,686,654

 

The supplemental unaudited pro forma earnings for the three and nine months ended March 31, 2018 were adjusted to exclude $1.7 million and $5.8 million of integration and acquisition costs, respectively.

 

The supplemental unaudited pro forma earnings for the nine months ended March 31, 2017 were adjusted to include $5.8 million of integration and acquisition costs. 

 

4.  RESTRUCTURING/INTEGRATION COSTS

 

Subsequent to the Cantaloupe acquisition, the Company has initiated workforce reductions to integrate the Cantaloupe business.  For the three and nine months ended March 31, 2018, severance charges for these activities totaled $338 thousand and $381 thousand, respectively.  The Company has included these severance charges under “Integration and acquisition costs” within the Consolidated Statements of Operations, with the remaining outstanding balance included within “Accrued expenses” on the Consolidated Balance Sheet.  Liabilities for severance will generally be paid during the next twelve months.

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The following table summarizes the Company’s severance activity for the three and nine months ended March 31, 2018 (in thousands):

 

 

 

 

 

 

 

Workforce

($ in thousands)

 

reduction

Balance at July 1, 2017

 

$

Additional liability recorded

 

 

Less cash payments

 

 

Balance at September 30, 2017

 

 

Additional liability recorded

 

 

43

Less cash payments

 

 

(20)

Balance at December 31, 2017

 

 

23

Additional liability recorded

 

 

338

Less cash payments

 

 

(166)

Balance at March 31, 2018

 

$

195

 

5. FINANCE RECEIVABLES

 

Finance receivables consist of the following:

 

 

 

 

 

 

 

 

   

 

March 31, 

 

June 30, 

($ in thousands)

    

2018

    

2017

Finance receivables, current

 

$

3,904

 

$

11,010

Finance receivables, non-current

 

 

9,679

 

 

8,607

Total finance receivables

 

$

13,583

 

$

19,617

 

The Company routinely evaluates outstanding finance receivables for impairment based on past due balances or accounts otherwise determined to be at a higher risk of loss.  A finance receivable is classified as nonperforming if it is considered probable the Company will be unable to collect all contractual interest and principal payments as scheduled.  In addition, all leases and all customer accounts over ninety days past due are considered nonperforming and on nonaccrual status.

 

At March 31, 2018 and June 30, 2017, credit quality indicators consisted of the following:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

June 30, 

($ in thousands)

    

2018

    

2017

Performing

 

$

13,508

 

$

19,515

Nonperforming

 

 

75

 

 

102

Total

 

$

13,583

 

$

19,617

 

Age Analysis of Past Due Finance Receivables

As of March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 and Under

 

31 – 60

 

61 – 90

 

Greater than

 

Total

 

 

 

 

Days   Past

 

Days Past

 

Days Past

 

90 Days Past

 

Finance

($ in thousands)

 

Current

 

Due

 

Due

 

Due

 

Due

 

Receivables

QuickStart Leases

 

$

13,010

 

$

275

 

$

200

 

$

23

 

$

75

 

$

13,583

 

Age Analysis of Past Due Finance Receivables

As of June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 and Under

 

31 – 60

 

61 – 90

 

Greater than

 

Total

 

 

 

 

Days   Past

 

Days Past

 

Days Past

 

90 Days Past

 

Finance

($ in thousands)

 

Current

 

Due

 

Due

 

Due

 

Due

 

Receivables

QuickStart Leases

 

$

19,515

 

$

29

 

$

 3

 

$

35

 

$

35

 

$

19,617

 

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6. INVENTORY

 

Inventory, net of reserves, was $11.0 million and $4.6 million as of March 31, 2018 and June 30, 2017, respectively.  Inventory consists of finished goods. The Company's inventories are valued at the lower of cost or net realizable value.

 

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

 

The fair value of Cantaloupe inventories acquired included a fair market value step-up of $23 thousand.  In the nine months ended March 31, 2018, the Company recognized the $23 thousand fair market value step-up as a component of cost of equipment, as the inventory acquired was sold to the Company’s customers. 

 

7. EARNINGS (LOSS) PER SHARE

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

2018

 

2017

 

 

Net Income

 

Shares

 

Per-Share

 

Net Income

 

Shares

 

Per-Share

 

 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Net income from continuing operations

 

$

1,160

 

 

 

 

 

 

$

136

 

 

 

 

 

Less: Preferred stock dividends

 

 

(334)

 

 

 

 

 

 

 

(334)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

 

826

 

53,637,085

 

$

0.02

 

 

(198)

 

40,327,697

 

$

(0.00)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental shares

 

 

 -

 

597,481

(a)

 

 

 

 

 -

 

 -

(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

826

 

54,234,566

 

$

0.02

 

$

(198)

 

40,327,697

 

$

(0.00)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended March 31, 

 

 

2018

 

2017

 

 

Net Loss

 

Shares

 

Per-Share

 

Net Loss

 

Shares

 

Per-Share

 

 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Net loss from continuing operations

 

$

(11,569)

 

 

 

 

 

 

$

(2,095)

 

 

 

 

 

Less: Preferred stock dividends

 

 

(668)

 

 

 

 

 

 

 

(668)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss available to common shareholders

 

 

(12,237)

 

51,101,813

 

$

(0.24)

 

 

(2,763)

 

39,703,690

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental shares

 

 

 -

 

 -