Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Form 10-Q contains certain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things,
the anticipated financial and operating results of the Company. For this purpose, forward-looking statements are any statements
contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include
the words, “estimate,” “could,” “should,” “would,” “likely,” “may,”
“will,” “plan,” “intend,” “believes,” “expects,” “anticipates,”
“projected,” or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous assumptions. Important factors that could cause the Company’s
actual results to differ materially from those projected, include, for example:
|
|
●
|
general economic, market or business conditions unrelated
to our operating performance
;
|
|
|
●
|
the ability of the Company to raise funds in the future through sales of securities or debt financing
in order to sustain its operations if an unexpected or unusual event would occur;
|
|
|
●
|
the ability of the Company to compete with its competitors to obtain market share;
|
|
|
●
|
whether the Company’s current or future customers purchase, lease, rent or utilize ePort
devices or our other products in the future at levels currently anticipated by our Company;
|
|
|
●
|
whether the Company’s customers continue to utilize the Company’s transaction processing
and related services, as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice;
|
|
|
●
|
the ability of the Company to satisfy its trade obligations included in accounts payable and accrued
expenses;
|
|
|
●
|
the
ability of a sufficient number of our customers to utilize third party
financing
companies
under our QuickStart program resulting in improved 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;
|
|
|
●
|
whether any patents issued to the Company will provide the Company with any competitive advantages
or adequate protection for its products, or would be challenged, invalidated or circumvented by others;
|
|
|
·
|
the ability of the Company to operate without infringing the intellectual property rights of others;
|
|
|
●
|
the ability of our products and services to avoid unauthorized hacking or credit card fraud;
|
|
|
●
|
whether our remediation of the control deficiencies that gave rise to the material weakness that
we identified in our internal controls over financial reporting, and which was reflected in our annual report on Form 10-K for
the fiscal year ended June 30, 2016, would be effective;
|
|
|
●
|
whether we experience additional material weaknesses in our internal controls over financial reporting
in the future, and are not able to accurately or timely report our financial condition or results of operations;
|
|
|
●
|
whether our suppliers would increase their prices, reduce their output or change their terms of
sale; and
|
|
|
·
|
our ability to obtain additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired.
|
Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking
statements as a result of various factors including, but not limited to, those described above. We cannot assure you that we have
identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our
management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or
combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should
not place undue reliance on forward-looking statements.
Any forward-looking statement made by us
in this Form 10-Q speaks only as of the date of this Form 10-Q. Unless required by law, we undertake no obligation to publicly
revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-Q or to reflect the occurrence
of unanticipated events.
OVERVIEW OF THE COMPANY
USA Technologies, Inc. (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 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 Company generates revenue in multiple
ways. During the quarters ended September 30, 2016 and 2015, we derived 76% and 78% of our revenues from recurring license and
transaction fees related to our ePort Connect service and 24% and 22% of our revenue from equipment sales, respectively. 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 are the most significant driver of the
Company’s revenues, particularly the recurring revenues from license and transaction fees. Customers can obtain POS electronic
payment devices from us in the following ways:
|
|
●
|
Purchasing devices directly from the Company or one of its authorized resellers;
|
|
|
●
|
Financing devices under the Company’s QuickStart Program, which are non-cancellable sixty
month sales-type leases, through an unrelated equipment financing company or directly from the Company; and
|
|
|
●
|
Renting devices under the Company’s JumpStart Program, which are cancellable month-to-month
operating leases.
|
Highlights of the Company are below:
|
|
·
|
Over 75 employees with its headquarters in Malvern, Pennsylvania as of October 20, 2016
|
|
|
·
|
Over 11,400 customers and 448,000 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
|
|
|
·
|
78 United States and foreign patents are in force
|
|
|
·
|
The Company’s fiscal year ends June 30
th
|
|
|
·
|
The Company has traded on the NASDAQ under the symbol “USAT” since 2007
|
The Company has deferred tax assets of
approximately $28 million resulting from a series of operating loss carry forwards that may be available to offset future taxable
income from federal income taxes over the next five or more years.
CRITICAL ACCOUNTING POLICIES
Our consolidated
financial statements are prepared applying certain critical accounting policies. The SEC defines “critical accounting policies”
as those that require application of management’s most difficult, subjective, or complex judgments. Critical accounting policies
require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly
affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions,
or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Our
financial statements are prepared in accordance with U.S. GAAP, and they conform to general practices in our industry. We apply
critical accounting policies consistently from period to period and intend that any change in methodology occur in an appropriate
manner. Accounting policies currently deemed critical are listed below:
Revenue Recognition
Revenue from the sale or QuickStart lease
of equipment is recognized on the terms of freight-on-board shipping point. Activation fee revenue 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. At the end of the lease period, the customer would have the option to purchase
the device for a nominal fee.
Long Lived Assets
In accordance with ASC 360, “Impairment
or Disposal of Long-Lived Assets”, the Company reviews its definite lived long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of an asset or group
of assets exceeds its net realizable value, the asset will be written down to its fair value. In the period when the plan of sale
criteria of ASC 360 are met, definite lived long-lived assets are reported as held for sale, depreciation and amortization cease,
and the assets are reported at the lower of carrying value or fair value less costs to sell.
Goodwill and Intangible Assets
Goodwill represents the excess of cost
over fair value of the net assets purchased in acquisitions. The Company accounts for goodwill in accordance with ASC 350, “Intangibles
– Goodwill and Other”. Under ASC 350, goodwill is not amortized to earnings, but instead is subject to periodic testing
for impairment. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that
indicate that impairment may have occurred. The Company has selected April 1 as its annual test date.
Non-compete agreements, brand, developed technology,
and customer relationships, with an estimated economic life, are carried at cost less accumulated amortization, which is calculated
on a straight-line basis over their estimated economic life. The Company reviews intangibles, subject to amortization, for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Allowance for Doubtful Accounts
The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, including from
a shortfall in the customer transaction fund flow from which the Company would normally collect amounts due.
The allowance is determined through an
analysis of various factors including the aging of the accounts receivable, the strength of the relationship with the customer,
the capacity of the customer transaction fund flow to satisfy the amount due from the customer, an assessment of collection costs
and other factors. The allowance for doubtful accounts receivable is management’s best estimate as of the respective reporting
date. The Company writes off accounts receivable against the allowance when management determines the balance is uncollectible
and the Company ceases collection efforts. Management believes that the allowance recorded is adequate to provide for its estimated
credit losses.
HIGHLIGHTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2016 INCLUDE:
|
|
|
As of and for the three months ended
|
|
|
|
|
|
(Connections and $'s in thousands, transactions in millions,
|
|
September 30,
|
|
|
|
|
|
eps is not rounded)
|
|
|
2016
|
|
|
|
2015
|
|
|
|
$ Change
|
|
|
|
% Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and transaction fees
|
|
$
|
16,365
|
|
|
$
|
12,925
|
|
|
$
|
3,440
|
|
|
|
27
|
%
|
|
Equipment Sales
|
|
|
5,223
|
|
|
|
3,675
|
|
|
|
1,548
|
|
|
|
42
|
%
|
|
Total revenues
|
|
$
|
21,588
|
|
|
$
|
16,600
|
|
|
$
|
4,988
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and transaction fee margin
|
|
|
31.3
|
%
|
|
|
32.6
|
%
|
|
|
-1.3
|
%
|
|
|
-4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales gross margin
|
|
|
20.0
|
%
|
|
|
22.5
|
%
|
|
|
-2.5
|
%
|
|
|
-11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall Gross Margin
|
|
|
28.6
|
%
|
|
|
30.4
|
%
|
|
|
-1.8
|
%
|
|
|
-6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
$
|
(950
|
)
|
|
$
|
112
|
|
|
$
|
(1,062
|
)
|
|
|
-948
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(2,464
|
)
|
|
$
|
360
|
|
|
$
|
(2,824
|
)
|
|
|
-784
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common shares - basic
|
|
$
|
(0.07
|
)
|
|
$
|
-
|
|
|
$
|
(0.07
|
)
|
|
|
-700
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common shares - diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
|
600
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net New Connections
|
|
|
19
|
|
|
|
16
|
|
|
|
3
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Connections (at period end)
|
|
|
448
|
|
|
|
349
|
|
|
|
99
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Transactions (millions)
|
|
|
95
|
|
|
|
69
|
|
|
|
26
|
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Volume (millions)
|
|
$
|
183
|
|
|
$
|
127
|
|
|
$
|
56
|
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
663
|
|
|
$
|
1,751
|
|
|
$
|
(1,088
|
)
|
|
|
-62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income (loss)
|
|
$
|
(955
|
)
|
|
$
|
61
|
|
|
$
|
(1,016
|
)
|
|
|
-1666
|
%
|
TRENDING QUARTERLY FINANCIAL DATA
The following tables show certain financial
and non-financial data over a five-quarter period that management believes give readers insight into certain trends and relationships
about the Company’s financial performance.
Table 1: Five Quarters of Select Key Performance Indicators
Five Quarter Connections & Other Data
|
|
|
As of and for the three months ended
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
Connections:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross New Connections
|
|
|
22,000
|
|
|
|
33,000
|
|
|
|
34,000
|
|
|
|
23,000
|
|
|
|
20,000
|
|
|
% from Existing Customer Base
|
|
|
86
|
%
|
|
|
83
|
%
|
|
|
91
|
%
|
|
|
89
|
%
|
|
|
86
|
%
|
|
Net New Connections
|
|
|
19,000
|
|
|
|
28,000
|
|
|
|
32,000
|
|
|
|
20,000
|
|
|
|
16,000
|
|
|
Total Connections
|
|
|
448,000
|
|
|
|
429,000
|
|
|
|
401,000
|
|
|
|
369,000
|
|
|
|
349,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Customers Added
|
|
|
350
|
|
|
|
300
|
|
|
|
125
|
|
|
|
350
|
|
|
|
675
|
|
|
Total Customers
|
|
|
11,400
|
|
|
|
11,050
|
|
|
|
10,750
|
|
|
|
10,625
|
|
|
|
10,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Transactions (millions)
|
|
|
95
|
|
|
|
89
|
|
|
|
82
|
|
|
|
76
|
|
|
|
69
|
|
|
Transaction Volume (millions)
|
|
$
|
183
|
|
|
$
|
169
|
|
|
$
|
151
|
|
|
$
|
138
|
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Structure of Connections:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JumpStart
|
|
|
7.7
|
%
|
|
|
6.5
|
%
|
|
|
7.4
|
%
|
|
|
10.1
|
%
|
|
|
13.8
|
%
|
|
QuickStart & All Others *
|
|
|
92.3
|
%
|
|
|
93.5
|
%
|
|
|
92.6
|
%
|
|
|
89.9
|
%
|
|
|
86.2
|
%
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
*Includes credit sales with standard trade receivable terms
Highlights of USAT’s connections for the quarter ended
September 30, 2016 include:
|
|
●
|
19,000 net new connections to our ePort Connect service in the quarter, compared to 16,000 net
connections added in the same quarter last year, an increase of 3,000, or 19%; and
|
|
|
●
|
448,000 connections to the ePort Connect service compared to the same quarter last year of approximately
349,000 connections, an increase of 99,000 connections, or 28%.
|
Table 2: Quarter Ended September 30, 2016 compared to Quarter
Ended September 30, 2015
|
|
|
For
the three months ended September 30,
|
|
|
|
|
|
|
|
|
($ in thousands, except shares and per share data)
|
|
2016
|
|
|
% of Sales
|
|
2015
|
|
|
% of Sales
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and transaction fees
|
|
$
|
16,365
|
|
|
|
75.8
|
%
|
|
$
|
12,925
|
|
|
|
77.9
|
%
|
|
$
|
3,440
|
|
|
|
27
|
%
|
|
Equipment sales
|
|
|
5,223
|
|
|
|
24.2
|
%
|
|
|
3,675
|
|
|
|
22.1
|
%
|
|
|
1,548
|
|
|
|
42
|
%
|
|
Total revenues
|
|
|
21,588
|
|
|
|
100.0
|
%
|
|
|
16,600
|
|
|
|
100.0
|
%
|
|
|
4,988
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales/revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
11,243
|
|
|
|
68.7
|
%
|
|
|
8,705
|
|
|
|
67.4
|
%
|
|
|
2,538
|
|
|
|
29
|
%
|
|
Cost of equipment
|
|
|
4,178
|
|
|
|
80.0
|
%
|
|
|
2,848
|
|
|
|
77.5
|
%
|
|
|
1,330
|
|
|
|
47
|
%
|
|
Total costs of sales/revenues
|
|
|
15,421
|
|
|
|
71.4
|
%
|
|
|
11,553
|
|
|
|
69.6
|
%
|
|
|
3,868
|
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,167
|
|
|
|
28.6
|
%
|
|
|
5,047
|
|
|
|
30.4
|
%
|
|
|
1,120
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
6,909
|
|
|
|
32.0
|
%
|
|
|
4,796
|
|
|
|
28.9
|
%
|
|
|
2,113
|
|
|
|
44
|
%
|
|
Depreciation and amortization
|
|
|
208
|
|
|
|
1.0
|
%
|
|
|
139
|
|
|
|
0.8
|
%
|
|
|
69
|
|
|
|
50
|
%
|
|
Total operating expenses
|
|
|
7,117
|
|
|
|
33.0
|
%
|
|
|
4,935
|
|
|
|
29.7
|
%
|
|
|
2,182
|
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(950
|
)
|
|
|
-4.4
|
%
|
|
|
112
|
|
|
|
0.7
|
%
|
|
|
(1,062
|
)
|
|
|
-948
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
73
|
|
|
|
0.3
|
%
|
|
|
51
|
|
|
|
0.3
|
%
|
|
|
22
|
|
|
|
43
|
%
|
|
Interest expense
|
|
|
(212
|
)
|
|
|
-1.0
|
%
|
|
|
(119
|
)
|
|
|
-0.7
|
%
|
|
|
(93
|
)
|
|
|
78
|
%
|
|
Change in fair value of
warrant liabilities
|
|
|
(1,490
|
)
|
|
|
-6.9
|
%
|
|
|
343
|
|
|
|
2.1
|
%
|
|
|
(1,833
|
)
|
|
|
-534
|
%
|
|
Total other income (expense), net
|
|
|
(1,629
|
)
|
|
|
-7.5
|
%
|
|
|
275
|
|
|
|
1.7
|
%
|
|
|
(1,904
|
)
|
|
|
-692
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(2,579
|
)
|
|
|
-11.9
|
%
|
|
|
387
|
|
|
|
2.3
|
%
|
|
|
(2,966
|
)
|
|
|
-766
|
%
|
|
Benefit (provision) for income taxes
|
|
|
115
|
|
|
|
0.5
|
%
|
|
|
(27
|
)
|
|
|
-0.2
|
%
|
|
|
142
|
|
|
|
-526
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,464
|
)
|
|
|
-11.4
|
%
|
|
|
360
|
|
|
|
2.2
|
%
|
|
|
(2,824
|
)
|
|
|
-784
|
%
|
|
Cumulative preferred dividends
|
|
|
(334
|
)
|
|
|
-1.5
|
%
|
|
|
(334
|
)
|
|
|
-2.0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
Net income (loss) applicable to common shares
|
|
$
|
(2,798
|
)
|
|
|
-13.0
|
%
|
|
$
|
26
|
|
|
|
0.2
|
%
|
|
|
(2,824
|
)
|
|
|
-10862
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share - basic
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
(0.07
|
)
|
|
|
-700
|
%
|
|
Net earnings (loss) per common share - diluted
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
$
|
(
0.01
|
)
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
600
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding
|
|
|
38,488,005
|
|
|
|
|
|
|
|
35,848,395
|
|
|
|
|
|
|
|
2,639,610
|
|
|
|
7
|
%
|
|
Diluted weighted average number of common shares outstanding
|
|
|
38,488,005
|
|
|
|
|
|
|
|
36,487,879
|
|
|
|
|
|
|
|
2,000,126
|
|
|
|
5
|
%
|
Revenue.
The increase in net new
connections of approximately 19,000 for the three-month period ended September 30, 2016 compared to approximately 16,000 in the
same period last year represents an increase of 19%. The Company’s total connections have grown to 448,000 at September 30,
2016 compared to 349,000 at September 30, 2015, or a 28% increase year-over-year. The increase in total connections is driving
the growth in license and transaction fees of 27% quarter-over-quarter. The increase in equipment revenue is due to more units sold in the three-month period ended September 30, 2016 compared to the same period last year.
Gross Margin.
License and transaction
fees gross margin for the three-month period ended September 30, 2016 decreased from 32.6% to 31.3% compared to the three-month
period ended September 30, 2015. The decrease in license and transaction gross margin is attributable to the increase in Visa and
MasterCard assessment fees, and the change in mix of cards used
.
Equipment gross margin decreased from 22.5%
for the three-month period ended September 30, 2015 to 20.0% for the three-month period ended September 30, 2016. The decrease
in equipment gross margin quarter over quarter is primarily attributable to an increase in inventory reserves related primarily
to product returned under various upgrade programs. Increases to the reserve are charged to the Cost of Equipment account in the
Statement of Operations.
Operating Expenses
Operating expenses
increased $2.2 million or 44% for the three-month period ended September 30, 2016 compared to the prior period in 2015. The increases
are due to an increase in professional services of $1.7 million and $0.4 million increase in salaries and benefits. The $1.7 million
professional services increase as compared to the prior corresponding quarter is attributable to SOX 404 compliance, internal
audit, and audit of our financial statements driven primarily by our status as a first time accelerated filer which required an
audit of our annual SOX 404 assessment. The $0.4 million increase in salaries and benefits is due to an increase in employee
compensation, headcount and employee related medical benefits. The operating expenses as a percentage of sales increased for the
three months ended September 30, 2016 to 33% compared to 30% for the three months ended September 30, 2015. Management expects
decreased quarterly SG&A expenses during the remainder of fiscal year 2017 due to, among other things, anticipated cost reductions
in professional services.
Total Other Income (Expense).
Includes
interest expense, other income, and the change in the fair value of warrants. The primary driver for volatility in Other Income
/ (Expense) has been non-cash changes to the fair value of the warrant liabilities which are based on the Company’s stock
price. Using the Black-Scholes model, the Company adjusts the warrant liability for fair value through the income statement quarterly.
For the three-month period ended September 30, 2016 the Company recorded expense of $1.5 million for the change in the fair value
of warrant liabilities compared to income of $0.3 million for the three months ended September 30, 2015. The change in both periods
can be primarily attributed to the increase or decrease in the market price of the Company’s common stock at the respective
valuation dates.
Net
Income (Loss).
Net income (loss) is a function
of the items described above. Net loss for the first quarter was $2.5 million compared to net income of $0.4 million for the comparable
period a year ago. This quarter’s net loss is primarily attributable to the increase in the fair value of warrant liabilities
of $1.5 million, as well as the operating loss which reflects a $1.7 million dollar increase in professional service fees as compared
to the prior corresponding quarter, which is related to SOX 404 compliance, internal audit, and audit of our financial statements
driven primarily by our status as a first time accelerated filer which required an audit of our annual SOX 404 assessment. The
warrants requiring liability accounting treatment were all exercised by the September expiration date.
Adjusted EBITDA.
For the three months
ended September 30, 2016 adjusted EBITDA decreased from $1.7 million at September 30, 2015 to $0.7 million at September 30, 2016.
The $1.0 million decrease was primarily due to increases in professional service fees and salaries and benefits reflected in SG&A.
Non-GAAP Net Income (Loss).
For
the three months ended September 30, 2016 non-GAAP net income decreased $1.0 million primarily due to a decrease of the non-cash
portion of the income tax provision of $0.9 million compared to the previous period in 2015.
Weighted Average Shares Outstanding.
The increase in the weighted average number of common shares was due to exercises of warrants and to stock issued through the Company’s
stock based compensation programs.
Table 4: Reconciliation of Net Income (Loss) to Adjusted
EBITDA:
|
|
|
Three months ended
|
|
|
|
|
September 30,
|
|
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
Net income (loss)
|
|
$
|
(2,464
|
)
|
|
$
|
360
|
|
|
Less interest income
|
|
|
(73
|
)
|
|
|
(51
|
)
|
|
Plus interest expenses
|
|
|
212
|
|
|
|
119
|
|
|
Plus income tax provision / (Less income tax benefit)
|
|
|
(115
|
)
|
|
|
27
|
|
|
Plus depreciation expense
|
|
|
1,257
|
|
|
|
1,350
|
|
|
Plus amortization expense
|
|
|
44
|
|
|
|
-
|
|
|
EBITDA
|
|
|
(1,139
|
)
|
|
|
1,805
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus loss on fair value of warrant liabilities / (Less gain on fair value of warrant liabilities)
|
|
|
1,490
|
|
|
|
(343
|
)
|
|
Plus stock-based compensation
|
|
|
211
|
|
|
|
272
|
|
|
Plus VendScreen non-recurring charges
|
|
|
101
|
|
|
|
17
|
|
|
Adjustments to EBITDA
|
|
|
1,802
|
|
|
|
(54
|
)
|
|
Adjusted EBITDA
|
|
$
|
663
|
|
|
$
|
1,751
|
|
As used herein, Adjusted EBITDA represents
net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, non-recurring fees and charges
that were incurred in connection with the integration of the VendScreen business, change in fair value of warrant liabilities and
stock-based compensation expense. We have excluded the non-operating item, change in fair value of warrant liabilities, because
it represents a non-cash gain or charge that is not related to the Company’s operations. We have excluded the non-cash expense,
stock-based compensation, as it does not reflect the cash-based operations of the Company. We have excluded the non-recurring costs
and expenses incurred in connection with the VendScreen transaction in order to allow more accurate comparison of the financial
results to historical operations. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP
(Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation
or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss
of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations
in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance
with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented
because we believe it is useful to investors as a measure of comparative operating performance. Additionally, the Company utilizes
Adjusted EBTIDA as a metric in its executive officer and management incentive compensation plans.
Table 5: Selling General & Administrative (SG&A)
Expenses
|
|
|
Three
months ended
|
|
|
($ in thousands)
|
|
September 30,
|
|
|
% of
|
|
June 30,
|
|
|
% of
|
|
March 31,
|
|
|
% of
|
|
December 31,
|
|
|
% of
|
|
September 30,
|
|
|
% of
|
|
|
|
2016
|
|
|
SG&A
|
|
2016
|
|
|
SG&A
|
|
2016
|
|
|
SG&A
|
|
2015
|
|
|
SG&A
|
|
2015
|
|
|
SG&A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefit costs
|
|
$
|
3,129
|
|
|
|
45.3
|
%
|
|
$
|
3,050
|
|
|
|
45.4
|
%
|
|
$
|
2,760
|
|
|
|
45.4
|
%
|
|
$
|
2,786
|
|
|
|
58.6
|
%
|
|
$
|
2,685
|
|
|
|
56.0
|
%
|
|
Marketing related expenses
|
|
|
329
|
|
|
|
4.8
|
%
|
|
|
635
|
|
|
|
9.4
|
%
|
|
|
362
|
|
|
|
5.9
|
%
|
|
|
335
|
|
|
|
7.0
|
%
|
|
|
333
|
|
|
|
6.9
|
%
|
|
Professional services
|
|
|
2,520
|
|
|
|
36.5
|
%
|
|
|
1,533
|
|
|
|
22.8
|
%
|
|
|
1,152
|
|
|
|
18.9
|
%
|
|
|
839
|
|
|
|
17.6
|
%
|
|
|
782
|
|
|
|
16.3
|
%
|
|
Bad debt expense
|
|
|
97
|
|
|
|
1.4
|
%
|
|
|
470
|
|
|
|
7.0
|
%
|
|
|
505
|
|
|
|
8.3
|
%
|
|
|
239
|
|
|
|
5.0
|
%
|
|
|
236
|
|
|
|
4.9
|
%
|
|
Premises, equipment and insurance costs
|
|
|
499
|
|
|
|
7.2
|
%
|
|
|
555
|
|
|
|
8.3
|
%
|
|
|
460
|
|
|
|
7.5
|
%
|
|
|
347
|
|
|
|
7.3
|
%
|
|
|
399
|
|
|
|
8.3
|
%
|
|
Research and development expenses
|
|
|
124
|
|
|
|
1.8
|
%
|
|
|
123
|
|
|
|
1.8
|
%
|
|
|
131
|
|
|
|
2.1
|
%
|
|
|
37
|
|
|
|
0.8
|
%
|
|
|
191
|
|
|
|
4.0
|
%
|
|
VendScreen non-recurring charges
|
|
|
101
|
|
|
|
1.5
|
%
|
|
|
258
|
|
|
|
3.8
|
%
|
|
|
461
|
|
|
|
7.6
|
%
|
|
|
106
|
|
|
|
2.2
|
%
|
|
|
17
|
|
|
|
0.4
|
%
|
|
Litigation related professional fees
|
|
|
33
|
|
|
|
0.5
|
%
|
|
|
51
|
|
|
|
0.8
|
%
|
|
|
105
|
|
|
|
1.7
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
Other expenses
|
|
|
77
|
|
|
|
1.1
|
%
|
|
|
46
|
|
|
|
0.7
|
%
|
|
|
158
|
|
|
|
2.6
|
%
|
|
|
73
|
|
|
|
1.5
|
%
|
|
|
153
|
|
|
|
3.2
|
%
|
|
Total SG&A expenses
|
|
$
|
6,909
|
|
|
|
100
|
%
|
|
$
|
6,721
|
|
|
|
100
|
%
|
|
$
|
6,094
|
|
|
|
100
|
%
|
|
$
|
4,762
|
|
|
|
100
|
%
|
|
$
|
4,796
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
21,588
|
|
|
|
|
|
|
$
|
21,944
|
|
|
|
|
|
|
$
|
20,361
|
|
|
|
|
|
|
$
|
18,503
|
|
|
|
|
|
|
$
|
16,600
|
|
|
|
|
|
|
SG&A expenses as a percentage of revenue
|
|
|
32.0
|
%
|
|
|
|
|
|
|
30.6
|
%
|
|
|
|
|
|
|
29.9
|
%
|
|
|
|
|
|
|
25.7
|
%
|
|
|
|
|
|
|
28.9
|
%
|
|
|
|
|
Salaries and Benefit Costs
.
Includes employee compensation and benefits, directors’
fees, incentives, and stock-based compensation. The increase in cost for the three-month period ended September 30, 2016, related
to increases in employee compensation, headcount, primarily due to the VendScreen acquisition and employee health benefits
.
Marketing Related.
Marketing related
costs were relatively flat for the three-month period ended September 30, 2016 in comparison to this same period 2015.
Professional Services.
Includes information
technology, legal, public relations, auditing, SOX 404 and other consulting work. The increase for the three-month period ended
September 30, 2016 is related to SOX 404 compliance, internal audit, and audit of our financial statements driven primarily
by our status as a first time accelerated filer which required an audit of our annual SOX 404 assessment. The Company anticipates
decreased professional services fees during the remainder of fiscal 2017.
Bad Debt expense.
Provision for
bad debt reflects the most current assessment of reserves required.
Premises, equipment and insurance costs.
Includes facilities, supplies, printing and postage, sales & use taxes, and workers compensation. The increase for the three-month
period ended September 30, 2016 compared to the same period in 2015 was from increases in rent expense for the addition of the
Portland Office in January 2016 and new lease agreements for its Malvern, PA offices, and liability insurance.
Research and development.
Includes
product development costs that cannot be capitalized, including materials and contractors.
Non-recurring charges
. Includes
VendScreen integration expenses for professional fees.
Litigation related professional fees.
Includes
legal and other professional fees incurred in connection with the class action litigation and investigation conducted by the Special
Litigation Committee of the Board of Directors described in our Form 10-K for the 2016 fiscal year (the “SLC Investigation”).
Other expenses.
Includes bank fees,
recruiting expenses, non-inventory supplies, and subscriptions.
Table 6: Non-GAAP Earnings (Loss) per
Share
|
|
|
Three Months ended
|
|
|
|
|
September 30,
|
|
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,464
|
)
|
|
$
|
360
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
Non-cash portion of income tax provision
|
|
|
(115
|
)
|
|
|
27
|
|
|
Fair value of warrant adjustment
|
|
|
1,490
|
|
|
|
(343
|
)
|
|
VendScreen non-recurring charges
|
|
|
101
|
|
|
|
17
|
|
|
Litigation related professional fees
|
|
|
33
|
|
|
|
-
|
|
|
Non-GAAP net income (loss)
|
|
$
|
(955
|
)
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,464
|
)
|
|
$
|
360
|
|
|
Cumulative preferred dividends
|
|
|
(334
|
)
|
|
|
(334
|
)
|
|
Net income (loss) applicable to common shares
|
|
$
|
(2,798
|
)
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income (loss)
|
|
$
|
(955
|
)
|
|
$
|
61
|
|
|
Cumulative preferred dividends
|
|
|
(334
|
)
|
|
|
(334
|
)
|
|
Non-GAAP net income (loss) applicable to common shares
|
|
$
|
(1,289
|
)
|
|
$
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - basic
|
|
$
|
(0.07
|
)
|
|
$
|
-
|
|
|
Net income (loss) per common share - diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
Non-GAAP net income (loss) per common share - basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
Non-GAAP net income (loss) per common share - diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
Basic weighted average number of common shares outstanding
|
|
|
38,488,005
|
|
|
|
35,848,395
|
|
|
Diluted weighted average number of common shares outstanding
|
|
|
38,488,005
|
|
|
|
36,487,879
|
|
The increase in the weighted average number
of common shares was due to exercises of warrants and to stock issued through the Company’s stock based compensation programs.
As used herein, non-GAAP net income (loss)
represents GAAP (Generally Accepted Accounting Principles) net income (loss) excluding costs or benefits relating to any adjustment
for fair value of warrant liabilities and non-cash portions of the Company’s income tax benefit (provision), non-recurring
fees and charges that were incurred in connection with the integration of the VendScreen business, and professional fees incurred
in connection with the class action litigation and the SLC Investigation. Non-GAAP net earnings (loss) per common share - diluted is calculated by dividing non-GAAP net income
(loss) applicable to common shares by the number of diluted weighted average shares outstanding. Management believes that non-GAAP
net income (loss) is an important measure of USAT’s business. Non-GAAP net income (loss) is a non-GAAP financial measure
which is not required by or defined under GAAP. The presentation of this financial measure is not intended to be considered in
isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income
or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have
limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined
in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Management
believes that non-GAAP net income (loss) and non-GAAP net earnings (loss) per share are important measures of the Company's business.
Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an
understanding of our comparative operating performance. We believe that this non-GAAP financial measure serves as a useful metric
for our management and investors because they enable a better understanding of the long-term performance of our core business and
facilitate comparisons of our operating results over multiple periods, and when taken together with the corresponding GAAP financial
measures and our reconciliations, enhance investors’ overall understanding of our current and future financial performance.
Additionally, the Company utilizes non-GAAP net income (loss) as a metric in its executive officer and management incentive compensation
plans.
Table 7: Balance Sheet as of September
30, 2016 Compared to June 30, 2016
|
($ in thousands)
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
18,198
|
|
|
$
|
19,272
|
|
|
$
|
(1,074
|
)
|
|
|
-6
|
%
|
|
Accounts receivable, less allowance
|
|
|
5,840
|
|
|
|
4,899
|
|
|
|
941
|
|
|
|
19
|
%
|
|
Finance receivables
|
|
|
3,349
|
|
|
|
3,588
|
|
|
|
(239
|
)
|
|
|
-7
|
%
|
|
Inventory, net
|
|
|
4,264
|
|
|
|
2,031
|
|
|
|
2,233
|
|
|
|
110
|
%
|
|
Prepaid expenses and other current assets
|
|
|
1,439
|
|
|
|
987
|
|
|
|
452
|
|
|
|
46
|
%
|
|
Deferred income taxes
|
|
|
2,271
|
|
|
|
2,271
|
|
|
|
-
|
|
|
|
0
|
%
|
|
Total current assets
|
|
|
35,361
|
|
|
|
33,048
|
|
|
|
2,313
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables, less current portion
|
|
|
3,962
|
|
|
|
3,718
|
|
|
|
244
|
|
|
|
7
|
%
|
|
Other assets
|
|
|
163
|
|
|
|
348
|
|
|
|
(185
|
)
|
|
|
-53
|
%
|
|
Property and equipment, net
|
|
|
9,570
|
|
|
|
9,765
|
|
|
|
(195
|
)
|
|
|
-2
|
%
|
|
Deferred income taxes
|
|
|
25,568
|
|
|
|
25,453
|
|
|
|
115
|
|
|
|
0
|
%
|
|
Intangibles, net
|
|
|
754
|
|
|
|
798
|
|
|
|
(44
|
)
|
|
|
-6
|
%
|
|
Goodwill
|
|
|
11,703
|
|
|
|
11,703
|
|
|
|
-
|
|
|
|
0
|
%
|
|
Total assets
|
|
$
|
87,081
|
|
|
$
|
84,833
|
|
|
$
|
2,248
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,693
|
|
|
$
|
12,354
|
|
|
$
|
(3,661
|
)
|
|
|
-30
|
%
|
|
Accrued expenses
|
|
|
3,912
|
|
|
|
3,458
|
|
|
|
454
|
|
|
|
13
|
%
|
|
Line of credit, net
|
|
|
7,258
|
|
|
|
7,119
|
|
|
|
139
|
|
|
|
2
|
%
|
|
Current obligations under long-term debt
|
|
|
834
|
|
|
|
629
|
|
|
|
205
|
|
|
|
33
|
%
|
|
Income taxes payable
|
|
|
8
|
|
|
|
18
|
|
|
|
(10
|
)
|
|
|
-56
|
%
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
3,739
|
|
|
|
(3,739
|
)
|
|
|
100
|
%
|
|
Deferred gain from sale-leaseback transactions
|
|
|
685
|
|
|
|
860
|
|
|
|
(175
|
)
|
|
|
-20
|
%
|
|
Total current liabilities
|
|
|
21,390
|
|
|
|
28,177
|
|
|
|
(6,787
|
)
|
|
|
-24
|
%
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
1,517
|
|
|
|
1,576
|
|
|
|
(59
|
)
|
|
|
-4
|
%
|
|
Accrued expenses, less current portion
|
|
|
11
|
|
|
|
15
|
|
|
|
(4
|
)
|
|
|
-27
|
%
|
|
Deferred gain from sale-leaseback transactions, less current portion
|
|
|
-
|
|
|
|
40
|
|
|
|
(40
|
)
|
|
|
-100
|
%
|
|
Total long-term liabilities
|
|
|
1,528
|
|
|
|
1,631
|
|
|
|
(103
|
)
|
|
|
-6
|
%
|
|
Total liabilities
|
|
|
22,918
|
|
|
|
29,808
|
|
|
|
(6,890
|
)
|
|
|
-23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value
|
|
|
3,138
|
|
|
|
3,138
|
|
|
|
-
|
|
|
|
0
|
%
|
|
Common stock, no par value
|
|
|
244,996
|
|
|
|
233,394
|
|
|
|
11,602
|
|
|
|
5
|
%
|
|
Accumulated deficit
|
|
|
(183,971
|
)
|
|
|
(181,507
|
)
|
|
|
(2,464
|
)
|
|
|
1
|
%
|
|
Total shareholders’ equity
|
|
|
64,163
|
|
|
|
55,025
|
|
|
|
9,138
|
|
|
|
17
|
%
|
|
Total liabilities and shareholders’ equity
|
|
$
|
87,081
|
|
|
$
|
84,833
|
|
|
$
|
2,248
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net working capital
|
|
$
|
13,971
|
|
|
$
|
4,871
|
|
|
$
|
9,100
|
|
|
|
187
|
%
|
Key points from the Balance Sheet as of September 30, 2016 compared
to June 30, 2016 include:
|
|
·
|
$9.1
million increase to shareholders’ equity primarily due to $11.4 million increase
in common stock offset by our $2.5 million net loss. Common stock increased by $6.2 million
of cash proceeds and $5.2 million of fair value, both attributable to warrants exercised
for issuance of approximately 2.4 million shares of common stock;
|
|
|
·
|
$9.1 million increase in net working capital primarily attributable to $3.7 million decrease in
accounts payable as a result of last day of the quarter occurring on a Friday and elimination of any warrant liabilities as of
September 30, 2016;
|
|
|
·
|
$3.7 million decrease in warrant liabilities due to exercise of all remaining applicable warrants during the
current quarter;
|
|
|
·
|
$3.7 million decrease in accounts payable primarily as a result of the last day of the quarter occurring on
a Friday, which has the highest level of routine customer payments of all weekdays; and,
|
|
|
·
|
$2.2 million increase in inventory
to
provide stock for anticipated sales in subsequent quarters.
|
LIQUIDITY AND CAPITAL RESOURCES
Table 8: Quarterly Cash Flows
|
|
|
Three months ended
|
|
|
($ in thousands)
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,464
|
)
|
|
$
|
(872
|
)
|
|
$
|
(5,420
|
)
|
|
$
|
(874
|
)
|
|
$
|
360
|
|
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges incurred in connection with the vesting and issuance of common stock for employee and director compensation
|
|
|
211
|
|
|
|
198
|
|
|
|
142
|
|
|
|
237
|
|
|
|
272
|
|
|
Gain on disposal of property and equipment
|
|
|
-
|
|
|
|
(110
|
)
|
|
|
(15
|
)
|
|
|
(41
|
)
|
|
|
(1
|
)
|
|
Non-cash interest and amortization of debt discount
|
|
|
105
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Bad debt expense
|
|
|
97
|
|
|
|
470
|
|
|
|
506
|
|
|
|
238
|
|
|
|
236
|
|
|
Depreciation
|
|
|
1,257
|
|
|
|
1,272
|
|
|
|
1,190
|
|
|
|
1,323
|
|
|
|
1,350
|
|
|
Amortization of intangible assets
|
|
|
44
|
|
|
|
43
|
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
Impairment of intangible asset
|
|
|
|
|
|
|
432
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Change in fair value of warrant liabilities
|
|
|
1,490
|
|
|
|
(18
|
)
|
|
|
4,805
|
|
|
|
1,230
|
|
|
|
(343
|
)
|
|
Deferred income taxes, net
|
|
|
(115
|
)
|
|
|
(748
|
)
|
|
|
(93
|
)
|
|
|
154
|
|
|
|
27
|
|
|
Recognition of deferred gain from sale-leaseback transactions
|
|
|
(215
|
)
|
|
|
(215
|
)
|
|
|
(215
|
)
|
|
|
(215
|
)
|
|
|
(215
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,038
|
)
|
|
|
2,977
|
|
|
|
(1,872
|
)
|
|
|
(767
|
)
|
|
|
38
|
|
|
Finance receivables
|
|
|
(5
|
)
|
|
|
(2,587
|
)
|
|
|
(154
|
)
|
|
|
533
|
|
|
|
(583
|
)
|
|
Inventory
|
|
|
(2,223
|
)
|
|
|
(82
|
)
|
|
|
250
|
|
|
|
649
|
|
|
|
219
|
|
|
Prepaid expenses and other assets
|
|
|
(224
|
)
|
|
|
(397
|
)
|
|
|
(160
|
)
|
|
|
(254
|
)
|
|
|
48
|
|
|
Accounts payable
|
|
|
(3,661
|
)
|
|
|
329
|
|
|
|
4,154
|
|
|
|
(1,623
|
)
|
|
|
(1,044
|
)
|
|
Accrued expenses
|
|
|
486
|
|
|
|
115
|
|
|
|
1,166
|
|
|
|
(13
|
)
|
|
|
(2
|
)
|
|
Income taxes payable
|
|
|
(10
|
)
|
|
|
453
|
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
-
|
|
|
Net change in operating assets and liabilities
|
|
|
(6,675
|
)
|
|
|
808
|
|
|
|
3,384
|
|
|
|
(1,545
|
)
|
|
|
(1,324
|
)
|
|
Net cash provided (used) by operating activities
|
|
|
(6,265
|
)
|
|
|
1,273
|
|
|
|
4,328
|
|
|
|
507
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase and additions of intangible assets, property and equipment
|
|
|
(168
|
)
|
|
|
(207
|
)
|
|
|
(164
|
)
|
|
|
(118
|
)
|
|
|
(49
|
)
|
|
Purchase of property for rental program
|
|
|
(642
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from sale of property and equipment
|
|
|
-
|
|
|
|
265
|
|
|
|
19
|
|
|
|
101
|
|
|
|
4
|
|
|
Cash paid for assets acquired from VendScreen
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,625
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(810
|
)
|
|
|
58
|
|
|
|
(5,770
|
)
|
|
|
(17
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for the retirement of common stock
|
|
|
(31
|
)
|
|
|
(173
|
)
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
-
|
|
|
Proceeds from exercise of common stock warrants
|
|
|
6,193
|
|
|
|
3,237
|
|
|
|
1,652
|
|
|
|
-
|
|
|
|
29
|
|
|
Proceeds (payments) from line of credit
|
|
|
-
|
|
|
|
138
|
|
|
|
33
|
|
|
|
3,000
|
|
|
|
-
|
|
|
Repayment of long-term debt
|
|
|
(161
|
)
|
|
|
(162
|
)
|
|
|
(151
|
)
|
|
|
(233
|
)
|
|
|
(128
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
6,001
|
|
|
|
3,040
|
|
|
|
1,534
|
|
|
|
2,727
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(1,074
|
)
|
|
|
4,371
|
|
|
|
92
|
|
|
|
3,217
|
|
|
|
218
|
|
|
Cash at beginning of period
|
|
|
19,272
|
|
|
|
14,901
|
|
|
|
14,809
|
|
|
|
11,592
|
|
|
|
11,374
|
|
|
Cash at end of period
|
|
$
|
18,198
|
|
|
$
|
19,272
|
|
|
$
|
14,901
|
|
|
$
|
14,809
|
|
|
$
|
11,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid in cash
|
|
$
|
87
|
|
|
$
|
147
|
|
|
$
|
191
|
|
|
$
|
107
|
|
|
$
|
106
|
|
|
Depreciation expense allocated to cost of services
|
|
$
|
1,072
|
|
|
$
|
1,139
|
|
|
$
|
1,051
|
|
|
$
|
1,186
|
|
|
$
|
1,199
|
|
|
Reclass of rental program property to inventory, net
|
|
$
|
(11
|
)
|
|
$
|
415
|
|
|
$
|
347
|
|
|
$
|
777
|
|
|
$
|
(279
|
)
|
|
Prepaid items financed with debt
|
|
$
|
54
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
103
|
|
|
Warrant issuance for debt discount
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
52
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Debt financing cost financed with debt
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Equipment and software acquired under capital lease
|
|
$
|
254
|
|
|
$
|
-
|
|
|
$
|
409
|
|
|
$
|
-
|
|
|
$
|
35
|
|
|
Disposal of property and equipment
|
|
$
|
-
|
|
|
$
|
555
|
|
|
$
|
189
|
|
|
$
|
238
|
|
|
$
|
99
|
|
Operating cash flow for the quarter
ended September 30, 2016 decreased by $6.6 million from the quarter ended September 30, 2015. The decrease is primarily due to:
|
|
·
|
$5.4
million decrease in cash provided by operating assets and liabilities, comprised primarily
of
|
|
|
○
|
$2.6
million used for accounts payable attributable to the last day of the current quarter
being a Friday, the weekday on which we transfer the largest routine payments to our
customers for their cashless transaction proceeds net of our license and transaction
fees; and
|
|
|
○
|
$2.4
million used for inventory for anticipated sales in subsequent quarters.
|
|
|
·
|
$1.3
million decrease in net income (loss) as adjusted for non-cash operating items comprised
of
|
|
|
○
|
$2.5
million net loss offset by $2.9 million of non-cash operating items for the quarter ended
September 30, 2016, as compared to
|
|
|
○
|
$0.4
million of net income and $1.3 million of non-cash operating items for the quarter ended
September 30, 2015.
|
Financing activities, namely $6.2 million
of proceeds from exercise of common stock warrants, contributed to positive cash flow from financing activities during the three
months ended September 30, 2016.
In September 2014, the Company reintroduced
QuickStart, a program whereby our customers are able to purchase our ePort hardware via a five-year, non-cancellable finance agreement.
Under the QuickStart program, the Company sells the equipment to customers and creates a long-term and current finance receivable
for five-year agreements. In the third and fourth quarters of fiscal 2015, the Company signed vendor agreements with two finance
companies, whereby our customers would enter into agreements directly with the finance companies as part of our QuickStart program.
Under this scenario, the Company invoices the finance company for the equipment financed by our customer, and typically receives
full payment within thirty days. Prior to the reintroduction of QuickStart, the Company had financed its customers’ acquisition
of ePort equipment primarily through the JumpStart rental program. Under Jumpstart, the Company records an investing capital expenditure
cash outflow for the equipment provided and fixed assets on the balance sheet, and then receives rental income from a month-to-month
lease. QuickStart through third-party finance companies reduces cash flow needed for investing activities and improves the cash
flow from operations.
Since entering into vendor agreements
with two third-party finance companies, the majority of QuickStart sales consummated have been with customers entering into agreements
directly with the finance companies. Our customers have shifted from acquiring our products via JumpStart, which accounted for
65% of our gross connections in fiscal year 2014, to QuickStart and sales under normal trade receivable terms, which accounted
for 89% and 91% of our gross connections in fiscal year 2015 and 2016, respectively. JumpStart was approximately 8% of gross connections
in the first three months of fiscal year 2017.
The Company is seeking to expand its
outside financing partners. The goal of the program would be to have enough finance partners so that the Company would not need
to provide financing to its customers.
Sources of Cash
The Company’s liquidity position
is demonstrated by its net working capital, which is defined as current assets less current liabilities, which was $14.0 million,
$4.9 million, ($0.2) million, $9.9 million, and $7.7 million over the last five quarter-end reporting dates beginning September
30, 2016 and working backwards. As of September 30, 2016, the Company’s primary sources of cash include:
|
|
·
|
Cash
on hand of approximately $18.2 million;
|
|
|
·
|
$4.7
million available under the line of credit provided we continue to satisfy the various
covenants set forth in the loan agreement, including the requirement to meet minimum
quarterly adjusted EBITDA, as defined in the loan agreement;
|
|
|
·
|
Sales
to third party lenders of all or a portion of our finance receivables; and
|
|
|
·
|
Anticipated
cash which may be provided by operating activities in future quarters.
|
The Company believes its existing cash
and available cash resources described above, would provide sufficient capital resources to operate its anticipated business over
the next twelve months.