10-Q 1 q2-usatx20181231x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name Of Each Exchange On Which Registered
Common Stock, no par value
Series A Convertible Preferred Stock
USAT
USATP
The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC

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 September 19, 2019 there were 60,008,481 outstanding shares of Common Stock, no par value.



 



USA TECHNOLOGIES, INC.
TABLE OF CONTENTS



EXPLANATORY NOTE
This Quarterly Report on Form 10-Q of USA Technologies, Inc. (the “Company”, “we”, and “us”) for the three and six months ended December 31, 2018, includes restatement of the following previously filed condensed consolidated unaudited financial statements and data (and related disclosures): (1) the condensed consolidated statements of operations and cash flows for the three and six months ended December 31, 2017; and (2) our management’s discussion and analysis of financial condition and results of operations as of and for the three and six months ended December 31, 2017, located in Part I Item 2 of this Form 10-Q. The restatement results from the adjustments proposed as a result of the Audit Committee’s internal investigation. See Note 2, Restatement of Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a detailed discussion of the review and effect of the restatement.
Financial information included in the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017, and any related press releases, earnings releases, management’s report on the effectiveness of internal control over financial reporting, or investor communications should no longer be relied upon.

For more information regarding the restatement and the basis therefore, see the “Explanatory Note” contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 which has been filed concurrently with this Form 10-Q.    





4


Part I. Financial Information
Item 1. Consolidated Financial Statements
USA Technologies, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
($ in thousands)
 
December 31,
2018
 
June 30,
2018
 
 
 
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
63,193

 
$
83,964

Accounts receivable, less allowance of $3,385 and $2,754, respectively
 
10,132

 
15,748

Finance receivables, net
 
5,591

 
4,603

Inventory, net
 
7,343

 
8,038

Prepaid expenses and other current assets
 
2,871

 
929

Total current assets
 
89,130

 
113,282

 
 
 
 
 
Non-current assets:
 
 
 
 
Finance receivables due after one year, net
 
11,910

 
13,246

Other assets
 
1,903

 
720

Property and equipment, net
 
9,546

 
11,273

Intangibles, net
 
27,740

 
29,325

Goodwill
 
64,149

 
64,149

Total non-current assets
 
115,248

 
118,713

 
 
 
 
 
Total assets
 
$
204,378

 
$
231,995

 
 
 
 
 
Liabilities, convertible preferred stock and shareholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
17,570

 
$
30,468

Accrued expenses
 
21,150

 
19,291

Capital lease obligations and current obligations under long-term debt
 
33,235

 
34,639

Income taxes payable
 
25

 

Deferred revenue
 
1,437

 
511

Total current liabilities
 
73,417

 
84,909

 
 
 
 
 
Long-term liabilities:
 
 
 
 
Deferred income taxes
 
76

 
67

Capital lease obligations and long-term debt, less current portion
 
632

 
1,127

Accrued expenses, less current portion
 
101

 
66

Total long-term liabilities
 
809

 
1,260

 
 
 
 
 
Total liabilities
 
$
74,226

 
$
86,169

Commitments and contingencies (Note 14)
 


 


Convertible preferred stock:
 
 
 
 
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $19,777 and $19,443 at December 31, 2018 and June 30, 2018, respectively
 
3,138

 
3,138

Shareholders’ equity:
 
 
 
 
Preferred stock, no par value, 1,800,000 shares authorized, no shares issued
 

 

Common stock, no par value, 640,000,000 shares authorized, 60,013,718 and 59,998,811 shares issued and outstanding at December 31, 2018 and June 30, 2018, respectively
 
376,363

 
375,436

Accumulated deficit
 
(249,349
)
 
(232,748
)
Total shareholders’ equity
 
127,014

 
142,688

Total liabilities, convertible preferred stock and shareholders’ equity
 
$
204,378

 
$
231,995

See accompanying notes.

5


USA Technologies, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three months ended
December 31,
 
Six months ended
December 31,
($ in thousands, except per share data)
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
 
License and transaction fees
 
$
29,837

 
$
23,514

 
$
58,808

 
$
42,911

Equipment sales
 
4,569

 
8,018

 
9,120

 
13,880

Total revenue
 
34,406

 
31,532

 
67,928

 
56,791

 
 
 
 
 
 
 
 
 
Costs of sales:
 
 
 
 
 
 
 
 
Cost of services
 
19,575

 
14,356

 
38,119

 
27,603

Cost of equipment
 
5,588

 
8,004

 
10,456

 
13,835

Total costs of sales
 
25,163

 
22,360

 
48,575

 
41,438

 
 
 
 
 
 
 
 
 
Gross profit
 
9,243

 
9,172

 
19,353

 
15,353

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling, general and administrative
 
10,931

 
9,005

 
20,381

 
15,929

Investigation and restatement expenses
 
7,188

 

 
11,714

 

Integration and acquisition costs
 
181

 
3,335

 
1,103

 
4,097

Depreciation and amortization
 
1,143

 
737

 
2,276

 
982

Total operating expenses
 
19,443

 
13,077

 
35,474

 
21,008

 
 
 
 
 
 
 
 
 
Operating loss
 
(10,200
)
 
(3,905
)
 
(16,121
)
 
(5,655
)
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
381

 
324

 
786

 
404

Interest expense
 
(819
)
 
(770
)
 
(1,605
)
 
(1,243
)
Total other expense, net
 
(438
)
 
(446
)
 
(819
)
 
(839
)
 
 
 
 
 
 
 
 
 
Loss before income taxes
 
(10,638
)
 
(4,351
)
 
(16,940
)
 
(6,494
)
(Provision) benefit for income taxes
 
(19
)
 
157

 
(37
)
 
129

 
 
 
 
 
 
 
 
 
Net loss
 
(10,657
)
 
(4,194
)
 
(16,977
)
 
(6,365
)
Preferred dividends
 

 

 
(334
)
 
(334
)
Net loss applicable to common shares
 
$
(10,657
)
 
$
(4,194
)
 
$
(17,311
)
 
$
(6,699
)
Net loss per common share
 
 
 
 
 
 
 
 
Basic
 
$
(0.18
)
 
$
(0.08
)
 
$
(0.29
)
 
$
(0.13
)
Diluted
 
$
(0.18
)
 
$
(0.08
)
 
$
(0.29
)
 
$
(0.13
)
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
Basic
 
60,059,936

 
52,150,106

 
60,056,924

 
49,861,735

Diluted
 
60,059,936

 
52,150,106

 
60,056,924

 
49,861,735

See accompanying notes.

6


USA Technologies, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)


Six Month Period Ended December 31, 2017
 
 
Common Stock
 
Accumulated
Deficit
 
Total
($ in thousands)
 
Shares
 
Amount
 
 
Balance, June 30, 2017
 
40,331,645

 
$
245,999

 
$
(221,531
)
 
$
24,468

Issuance of common stock in relation to public offering, net of offering costs incurred of $3,237
 
9,583,332

 
39,888

 

 
39,888

Stock based compensation
 
279,754

 
409

 

 
409

Excess tax benefit from stock plans
 

 

 
67

 
67

Net loss
 

 

 
(2,171
)
 
(2,171
)
Balance, September 30, 2017
 
50,194,731

 
$
286,296

 
$
(223,635
)
 
$
62,661

Issuance of common stock as merger consideration
 
3,423,367

 
23,279

 

 
23,279

Stock based compensation
 
1,800

 
575

 

 
575

Net loss
 

 

 
(4,194
)
 
(4,194
)
Balance, December 31, 2017
 
53,619,898

 
$
310,150

 
$
(227,829
)
 
$
82,321



Six Month Period Ended December 31, 2018
 
 
Common Stock
 
Accumulated
Deficit
 
Total
($ in thousands)
 
Shares
 
Amount
 
 
Balance, June 30, 2018
 
59,998,811

 
$
375,436

 
$
(232,748
)
 
$
142,688

Cumulative effect adjustment for ASC 606 adoption
 


 


 
376

 
376

Stock based compensation
 
13,344

 
370

 

 
370

Net loss
 

 

 
(6,320
)
 
(6,320
)
Balance, September 30, 2018
 
60,012,155

 
$
375,806

 
$
(238,692
)
 
$
137,114

Stock based compensation
 
1,563

 
557

 

 
557

Net loss
 

 

 
(10,657
)
 
(10,657
)
Balance, December 31, 2018
 
60,013,718

 
$
376,363

 
$
(249,349
)
 
$
127,014

See accompanying notes.

7


USA Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six months ended
December 31,
($ in thousands)
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(16,977
)
 
$
(6,365
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
Non-cash stock based compensation
 
972

 
984

Gain on disposal of property and equipment
 
(29
)
 
(80
)
Non-cash interest and amortization of debt discount
 
45

 
94

Bad debt expense
 
1,308

 
382

Provision for inventory reserve
 
1,211

 
1,091

Depreciation and amortization
 
4,257

 
3,278

Excess tax benefits
 

 
67

Deferred income taxes
 
9

 
(159
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
4,312

 
(5,332
)
Finance receivables, net
 
348

 
7,332

Inventory, net
 
284

 
(7,615
)
Prepaid expenses and other assets
 
(1,588
)
 
(2
)
Accounts payable and accrued expenses
 
(11,095
)
 
7,704

Deferred revenue
 
(201
)
 
570

Income taxes payable
 
25

 
(40
)
Net cash (used in) provided by operating activities
 
(17,119
)
 
1,909

 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
Purchase of property and equipment, including rentals
 
(1,795
)
 
(1,734
)
Proceeds from sale of property and equipment, including rentals
 
82

 
157

Cash paid for acquisitions, net of cash acquired
 

 
(65,181
)
Net cash used in investing activities
 
(1,713
)
 
(66,758
)
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
Proceeds from collateralized borrowing from the transfer of finance receivables
 

 
1,075

Proceeds from exercise of common stock options
 
42

 

Payment of debt issuance costs
 
(53
)
 
(445
)
Proceeds from issuance of long-term debt
 

 
25,100

Proceeds from revolving credit facility
 

 
10,000

Issuance of common stock in public offering, net
 

 
39,888

Repayment of line of credit
 

 
(7,111
)
Repayment of capital lease obligations and long-term debt
 
(1,928
)
 
(1,043
)
Net cash (used in) provided by financing activities
 
(1,939
)
 
67,464

 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
(20,771
)
 
2,615

Cash and cash equivalents at beginning of year
 
83,964

 
12,745

Cash and cash equivalents at end of period
 
$
63,193

 
$
15,360

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid in cash
 
$
1,503

 
$
998

Income taxes paid in cash
 
$
12

 
$
3

Supplemental disclosures of noncash financing and investing activities:
 
 
 
 
Equity issued in connection with Cantaloupe Acquisition, net of post-working capital adjustment for retired shares
 
$

 
$
23,279

Equipment and software acquired under capital lease
 
$

 
$
227

See accompanying notes.

8


USA Technologies, Inc.
Condensed 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 in the United States and are expanding our solutions and services to other unattended market segments, such as amusement, commercial laundry, kiosk and others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as telemetry and IoT services, which include the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment. The connection to the ePort Connect platform 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 condensed 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 June 30, 2018 Annual Report on Form 10-K, which has been filed concurrently with this Form 10-Q.  In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included.  Operating results for the three and six months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the year ending June 30, 2019.  The balance sheet at June 30, 2018 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.
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
Overview
Concurrently with the filing of this Form 10-Q, the Company filed its Annual Report on Form 10-K for the fiscal year ended June 30, 2019 containing our audited consolidated financial statements for the fiscal years ended June 30, 2019 and 2018, which have not previously been filed, as well as restatements of the following previously filed consolidated financial statements: (i) our audited consolidated financial statements for the fiscal year ended June 30, 2017; (ii) our selected financial data as of and for the fiscal years ended June 30, 2017, 2016 and 2015 contained in Item 6 of the Form 10-K; and (iii) our unaudited condensed consolidated financial statements for the fiscal quarters ended September 30, 2017 and 2016, December 31, 2017 and 2016, and March 31, 2018 and 2017, in Note 20, “Unaudited Quarterly Data” of the Notes to Consolidated Financial Statements.
We have not filed and do not intend to file amendments to any of our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatements of our consolidated financial statements. In addition, we have not filed and do not intend to file a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018. Concurrent with this filing, we are filing our Quarterly Reports on Form 10-Q for each of the fiscal quarters ended September 30, 2018 and March 31, 2019 (together with this Form 10-Q, the “Fiscal Year 2019 Form 10-Qs”). We have not timely filed our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 and the Fiscal Year 2019 Form 10-Qs as a result of the internal investigation

9


of the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) and the subsequent restatement of certain of our prior period financial statements as more fully described below.
Background
On September 11, 2018, the Company announced that the Audit Committee with the assistance of independent legal and forensic accounting advisors, was in the process of conducting an internal investigation of current and prior period matters relating to certain of the Company’s contractual arrangements, including the accounting treatment, financial reporting and internal controls related to such arrangements. The Audit Committee’s investigation focused principally on certain customer transactions entered into by the Company during fiscal years 2017 and 2018.
On January 14, 2019, the Company reported that the Audit Committee’s internal investigation was substantially completed, the principal findings of the internal investigation, and the remedial actions to be implemented by the Company as a result of the internal investigation. The Audit Committee found that, for certain of the customer transactions under review, the Company had prematurely recognized revenue. The Audit Committee proposed certain adjustments to previously reported revenues related to fiscal quarters occurring during the 2017 and 2018 fiscal years of the Company. In most cases, revenues that had been recognized prematurely were, or were expected to be, recognized in subsequent quarters, including quarters subsequent to the quarters impacted by the investigative findings. The investigation further found that certain items that had been recorded as expenses, such as the payment of marketing or servicing fees, were more appropriately treated as contra-revenue items in earlier fiscal quarters.
On February 4, 2019, the Board of Directors of the Company, upon the recommendation of the Audit Committee, and based upon the adjustments to previously reported revenues proposed by the Audit Committee, determined that the following financial statements previously issued by the Company should no longer be relied upon: (1) the audited consolidated financial statements for the fiscal year ended June 30, 2017; and (2) the quarterly and year-to-date unaudited condensed consolidated financial statements for September 30, 2017, December 31, 2017, and March 31, 2018.

On October 7, 2019, the Board of Directors of the Company, upon the recommendation of the Audit Committee, and based upon the non-investigatory adjustments described below, determined that the following financial statements previously issued by the Company should no longer be relied upon: (1) the audited consolidated financial statements for the fiscal year ended June 30, 2015; (2) the audited consolidated financial statements for the fiscal year ended June 30, 2016; and (3) the quarterly and year-to-date unaudited condensed consolidated financial statements for September 30, 2016, December 31, 2016, and March 31, 2017.
In addition to the Audit Committee investigation matter described above, the Company also corrected for (i) out of period adjustments and errors related to the Company's acquisition and financial integration of Cantaloupe and (ii) out of period adjustments and errors identified during management's review of significant accounts and transactions.
The acquisition and financial integration-related adjustments referred to in (i) above were made in the restatement and relate to errors in the purchase accounting for our acquisition of Cantaloupe and errors in periods subsequent to the acquisition resulting from an ineffective integration of the financial systems and processes of the acquired entity with those of the Company.
The significant account and transaction review adjustments referred to in (ii) above were made in the restatement and relate to revenue recognition, deferred income tax accounting, sales-tax reserves, reserves for bad debts, inventory reserves, sale-leaseback accounting, balance sheet classification of preferred stock, and various other matters.

10


Effect of Restatement on Previously Filed December 31, 2017 Form 10-Q
A summary of the impact of these matters on income (loss) before taxes is presented below:
($ in thousands)
Increase / (Decrease) Restatement Impact
 
Three months ended December 31, 2017
Audit Committee Investigation-related Adjustments:
 
Revenue
$
(866
)
Costs of sales
$
(1,225
)
Gross profit
$
359

Operating loss
$
359

Loss before income taxes
$
357

 
 
Acquisition and Financial Integration-related Adjustments:
 
Revenue
$
(60
)
Costs of sales
$
(33
)
Gross profit
$
(27
)
Operating loss
$
(288
)
Loss before income taxes
$
(223
)
 
 
Significant Account and Transaction Review and Other:
 
Revenue
$
(47
)
Costs of sales
$
313

Gross profit
$
(360
)
Operating loss
$
(775
)
Loss before income taxes
$
(1,041
)

11


($ in thousands)
Increase / (Decrease) Restatement Impact
 
Six months ended December 31, 2017
Audit Committee Investigation-related Adjustments:
 
Revenue
$
(1,277
)
Costs of sales
$
(1,060
)
Gross profit
$
(217
)
Operating loss
$
(217
)
Loss before income taxes
$
(219
)
 
 
Acquisition and Financial Integration-related Adjustments:
 
Revenue
$
(60
)
Costs of sales
$
(33
)
Gross profit
$
(27
)
Operating loss
$
(288
)
Loss before income taxes
$
(223
)
 
 
Significant Account and Transaction Review and Other:
 
Revenue
$
6

Costs of sales
$
810

Gross profit
$
(804
)
Operating loss
$
(1,397
)
Loss before income taxes
$
(1,927
)

12


A summary of the impact of these matters on the condensed consolidated balance sheet is presented below, excluding any tax effect from the restatement adjustments in the aggregate:
($ in thousands)
Increase / (Decrease) Restatement Impact
 
As of December 31, 2017
Audit Committee Investigation-related Adjustments:
 
Accounts receivable
$
(1,774
)
Finance receivables, net
$
(1,269
)
Inventory, net
$
2,166

Prepaid expenses and other current assets
$
25

Other assets
$
76

Property and equipment, net
$
(162
)
Accounts payable
$
106

Accrued expenses
$
580

 
 
Acquisition and Financial Integration-related Adjustments:
 
Cash and cash equivalents
$
(26
)
Accounts receivable
$
1,133

Finance receivables, net
$
(1,324
)
Inventory, net
$
(500
)
Prepaid expenses and other current assets
$
(35
)
Finance receivables due after one year, net
$
(191
)
Other assets
$
(139
)
Property and equipment, net
$
721

Goodwill
$
4,121

Accrued expenses
$
785

Deferred revenue
$
(153
)
Common stock
$
3,469

 
 
Significant Account and Transaction Review and Other:
 
Accounts receivable
$
(8
)
Finance receivables, net
$
371

Inventory, net
$
(861
)
Prepaid expenses and other current assets
$
(150
)
Other assets
$
(600
)
Finance receivables due after one year, net
$
703

Property and equipment, net
$
(737
)
Accounts payable
$
27

Accrued expenses
$
9,087

Capital lease obligation and current obligations under long-term debt
$
367

Capital lease obligation and long-term debt, less current portion
$
697

Deferred revenue
$
(27
)
Deferred gain from sale-leaseback transactions
$
(198
)
Deferred gain from sale-leaseback transactions, less current portion
$
(49
)
Common stock
$
(372
)

13


The restatement adjustments were tax effected and any tax adjustments reflected in the condensed consolidated financial statements in this note relate entirely to the tax effect on the restatement adjustments.
The tables below present the effect of the financial statement adjustments related to the restatement discussed above of the Company's previously reported financial statements as of and for the three and six months ended December 31, 2017.

14


The effect of the restatement on the previously filed condensed consolidated balance sheet as of December 31, 2017 is as follows:
 
As of December 31, 2017
($ in thousands)
As Previously Reported
 
Adjustments
 
As Restated
 
 
 
 
 
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
15,386

 
$
(26
)
 
$
15,360

Accounts receivable
15,472

 
(765
)
 
14,707

Finance receivables, net
5,517

 
(2,221
)
 
3,296

Inventory, net
11,215

 
804

 
12,019

Prepaid expenses and other current assets
1,971

 
(361
)
 
1,610

Total current assets
49,561

 
(2,569
)
 
46,992

 
 
 
 
 
 
Non-current assets:
 
 
 
 
 
Finance receivables due after one year, net
11,215

 
513

 
11,728

Other assets
1,120

 
(662
)
 
458

Property and equipment, net
12,622

 
(179
)
 
12,443

Deferred income taxes
14,774

 
(14,774
)
 

Intangibles, net
30,910

 

 
30,910

Goodwill
64,449

 
(46
)
 
64,403

Total non-current assets
135,090

 
(15,148
)
 
119,942

 
 
 
 
 
 
Total assets
$
184,651

 
$
(17,717
)
 
$
166,934

 
 
 
 
 
 
Liabilities, convertible preferred stock and shareholders’ equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
23,775

 
$
133

 
$
23,908

Accrued expenses
6,798

 
9,825

 
16,623

Capital lease obligations, current obligations under long-term debt, and collateralized borrowings
5,121

 
367

 
5,488

Income taxes payable
6

 
(6
)
 

Deferred revenue
595

 
135

 
730

Deferred gain from sale-leaseback transactions
198

 
(198
)
 

Total current liabilities
36,493

 
10,256

 
46,749

 
 
 
 
 
 
Long-term liabilities:
 
 
 
 
 
Revolving credit facility
10,000

 

 
10,000

Deferred income taxes

 
91

 
91

Capital lease obligations, long-term debt, and collateralized borrowings, less current portion
23,874

 
696

 
24,570

Accrued expenses, less current portion
65

 

 
65

Deferred gain from sale-leaseback transactions, less current portion
49

 
(49
)
 

Total long-term liabilities
33,988

 
738

 
34,726

 
 
 
 
 
 
Total liabilities
$
70,481

 
$
10,994

 
$
81,475

Commitments and contingencies


 


 


Convertible preferred stock:
 
 
 
 
 
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preference of $19,109 at December 31, 2017

 
3,138

 
3,138

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 preference of $19,109 at December 31, 2017
3,138

 
(3,138
)
 

Common stock, no par value, 640,000,000 shares authorized, 53,619,898 shares issued and outstanding at December 31, 2017
307,053

 
3,097

 
310,150

Accumulated deficit
(196,021
)
 
(31,808
)
 
(227,829
)
Total shareholders’ equity
114,170

 
(31,849
)
 
82,321

Total liabilities, convertible preferred stock and shareholders’ equity
$
184,651

 
$
(17,717
)
 
$
166,934


15


The effect of the restatement on the previously filed condensed consolidated statement of operations for the three and six months ended December 31, 2017 is as follows:
 
Three months ended December 31, 2017
($ in thousands, except per share data)
As Previously Reported
 
Adjustments
 
As Restated
 
 
 
 
 
 
Revenue:
 
 
 
 
 
License and transaction fees
$
22,853

 
$
661

 
$
23,514

Equipment sales
9,653

 
(1,635
)
 
8,018

Total revenue
32,506

 
(974
)
 
31,532

 
 
 
 
 
 
Costs of sales:
 
 
 
 
 
Cost of services
14,362

 
(6
)
 
14,356

Cost of equipment
8,943

 
(939
)
 
8,004

Total costs of sales
23,305

 
(945
)
 
22,360

Gross profit
9,201

 
(29
)
 
9,172

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Selling, general and administrative
8,329

 
676

 
9,005

Integration and acquisition costs
3,335

 

 
3,335

Depreciation and amortization
737

 

 
737

Total operating expenses
12,401

 
676

 
13,077

Operating loss
(3,200
)
 
(705
)
 
(3,905
)
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
Interest income
251

 
73

 
324

Interest expense
(494
)
 
(276
)
 
(770
)
Total other expense, net
(243
)
 
(203
)
 
(446
)
 
 
 
 
 
 
Loss before income taxes
(3,443
)
 
(908
)
 
(4,351
)
(Provision) benefit for income taxes
(9,073
)
 
9,230

 
157

 
 
 
 
 
 
Net loss
(12,516
)
 
8,322

 
(4,194
)
Preferred dividends

 

 

Net loss applicable to common shares
$
(12,516
)
 
$
8,322

 
$
(4,194
)
Net loss per common share
 
 
 
 
 
Basic
$
(0.24
)
 
$
0.16

 
$
(0.08
)
Diluted
$
(0.24
)
 
$
0.16

 
$
(0.08
)
Weighted average number of common shares outstanding
 
 
 
 
 
Basic
52,150,106

 

 
52,150,106

Diluted
52,150,106

 

 
52,150,106


16


 
Six months ended December 31, 2017
($ in thousands, except per share data)
As Previously Reported
 
Adjustments
 
As Restated
 
 
 
 
 
 
Revenue:
 
 
 
 
 
License and transaction fees
$
42,797

 
$
114

 
$
42,911

Equipment sales
15,326

 
(1,446
)
 
13,880

Total revenue
58,123

 
(1,332
)
 
56,791

 
 
 
 
 
 
Costs of sales:
 
 
 
 
 
Cost of services
27,688

 
(85
)
 
27,603

Cost of equipment
14,033

 
(198
)
 
13,835

Total costs of sales
41,721

 
(283
)
 
41,438

Gross profit
16,402

 
(1,049
)
 
15,353

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Selling, general and administrative
15,075

 
854

 
15,929

Integration and acquisition costs
4,097

 

 
4,097

Depreciation and amortization
982

 

 
982

Total operating expenses
20,154

 
854

 
21,008

Operating loss
(3,752
)
 
(1,903
)
 
(5,655
)
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
Interest income
331

 
73

 
404

Interest expense
(703
)
 
(540
)
 
(1,243
)
Total other expense, net
(372
)
 
(467
)
 
(839
)
 
 
 
 
 
 
Loss before income taxes
(4,124
)
 
(2,370
)
 
(6,494
)
(Provision) benefit for income taxes
(8,605
)
 
8,734

 
129

 
 
 
 
 
 
Net loss
(12,729
)
 
6,364

 
(6,365
)
Preferred dividends
(334
)
 

 
(334
)
Net loss applicable to common shares
$
(13,063
)
 
$
6,364

 
$
(6,699
)
Net loss per common share
 
 
 
 
 
Basic
$
(0.26
)
 
$
0.13

 
$
(0.13
)
Diluted
$
(0.26
)
 
$
0.13

 
$
(0.13
)
Weighted average number of common shares outstanding
 
 
 
 
 
Basic
49,861,735

 

 
49,861,735

Diluted
49,861,735

 

 
49,861,735



17


The effect of the restatement on the previously filed condensed consolidated statement of cash flows for the six months ended December 31, 2017 is as follows:
 
Six months ended December 31, 2017
($ in thousands)
As Previously Reported
 
Adjustments
 
As Restated
 
 
 
 
 
 
OPERATING ACTIVITIES:
 
 
 
 
 
Net loss
$
(12,729
)
 
$
6,364

 
$
(6,365
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
Non-cash stock-based compensation
1,356

 
(372
)
 
984

(Gain) loss on disposal of property and equipment
(83
)
 
3

 
(80
)
Non-cash interest and amortization of debt discount
86

 
8

 
94

Bad debt expense
291

 
91

 
382

Provision for inventory reserve

 
1,091

 
1,091

Depreciation and amortization
3,476

 
(198
)
 
3,278

Excess tax benefits
67

 

 
67

Deferred income taxes
8,537

 
(8,696
)
 
(159
)
Recognition of deferred gain from sale-leaseback transactions
(93
)
 
93

 

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(5,290
)
 
(42
)
 
(5,332
)
Finance receivables, net
7,958

 
(626
)
 
7,332

Inventory, net
(5,822
)
 
(1,793
)
 
(7,615
)
Prepaid expenses and other current assets
(606
)
 
604

 
(2
)
Accounts payable and accrued expenses
6,950

 
754

 
7,704

Deferred revenue

 
570

 
570

Income taxes payable
40

 
(80
)
 
(40
)
Net cash provided by operating activities
4,138

 
(2,229
)
 
1,909

 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchase of property and equipment, including rentals
(1,767
)
 
33

 
(1,734
)
Proceeds from sale of property and equipment, including rentals
157

 

 
157

Cash paid for acquisitions, net of cash acquired
(65,181
)
 

 
(65,181
)
Net cash used in investing activities
(66,791
)
 
33

 
(66,758
)
 
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
 
Proceeds from transfer of finance receivables

 
1,075

 
1,075

Payment of debt issuance costs
(445
)
 

 
(445
)
Proceeds from issuance of long-term debt
25,100

 

 
25,100

Proceeds from revolving credit facility
10,000

 

 
10,000

Issuance of common stock in public offering, net
39,888

 

 
39,888

Repayment of line of credit

 
(7,111
)
 
(7,111
)
Repayment of capital lease obligations and long-term debt
(9,249
)
 
8,206

 
(1,043
)
Net cash provided by financing activities
65,294

 
2,170

 
67,464

 
 
 
 
 
 
Net increase in cash and cash equivalents
2,641

 
(26
)
 
2,615

Cash and cash equivalents at beginning of year
12,745

 

 
12,745

Cash and cash equivalents at end of period
$
15,386

 
$
(26
)
 
$
15,360

3. ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting pronouncements adopted
In January 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment ("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

18


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 condensed 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 year ended June 30, 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 six months ended December 31, 2018 and 2017. 
In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." The standard adds guidance to ASC 740, Income Taxes, that contain SEC guidance related to SAB 118. The standard is effective upon issuance. Refer to Note 12 for further information regarding the impact of the standard.
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. The Company adopted this standard as of July 1, 2018, and its adoption did not have a material effect on the Company’s condensed 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. The Company adopted this standard as of July 1, 2018, and it will be applied prospectively to awards modified on or after the adoption date. Its adoption did not have a material effect on the Company's condensed consolidated financial statements.
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. The Company adopted this standard as of July 1, 2018 on a retrospective basis, and its adoption did not have a material effect on the Company’s condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) (“the New Standard”). 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 Company adopted the New Standard on July 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of July 1, 2018. Results for reporting periods beginning after July 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic revenue recognition methodology under ASC 605. Refer to Note 5 for further discussion.
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 condensed consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which will require, among other items, lessees to recognize a right of use asset and a related lease liability for most leases on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. The Company adopted

19


this new guidance on July 1, 2019, using the optional modified retrospective transition method. The Company expects the adoption to result in gross up on its consolidated balance sheets from the recognition of assets and liabilities arising out of operating leases. The Company will recognize assets for the right to use the underlying leased property during the lease term and will recognize liabilities for the corresponding financial obligation to make lease payments to the lessor.
The Company plans to elect the transition package of practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. The Company is substantially complete with the evaluation of the impact on the condensed consolidated financial statements of adopting the new lease standard and does not anticipate a material impact on the condensed consolidated statements of operations, shareholders’ equity, and cash flows or to retained earnings. Additionally, the Company does not anticipate the adoption of the standard will impact any debt covenants or result in significant changes to the internal processes, including the internal control over financial reporting. The Company’s operating leases primarily comprise of office facilities, with the most significant leases relating to corporate headquarters in Malvern, Pennsylvania and an office in San Francisco, California. The Company is in the process of finalizing changes to its systems and processes in conjunction with its review of lease agreements and will disclose the actual impact of adopting ASU 2016-02 in its interim report on Form 10-Q for the quarter ended September 30, 2019.
In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements”. These amendments provide clarifications and corrections to certain ASC subtopics including “Compensation - Stock Compensation - Income Taxes” (Topic 718-740), “Business Combinations - Income Taxes” (Topic 805-740) and “Fair Value Measurement - Overall” (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The new guidance changes the accounting for estimated credit losses pertaining to certain types of financial instruments including, but not limited to, trade and lease receivables. This pronouncement will be effective for fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018.The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.” The standard simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal year. The Company expects that the adoption of this ASU would not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other (Topic 350): Internal-Use Software.” This standard aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning July 1, 2020. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.
4. 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 $88.2 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.

20


The fair value of the purchase price consideration consisted of the following:
($ in thousands)
 
 
Cash consideration, net of cash acquired
 
$
65,181

USAT shares issued as stock consideration (As Restated)
 
23,279

Post-closing adjustment for working capital
 
(253
)
Total consideration (As Restated)
 
$
88,207

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 $35.0 million.  Refer to Note 10 for additional details.
The acquisition of Cantaloupe was accounted for as a business combination using the acquisition method. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the transaction were recorded at the date of acquisition at their respective fair values using assumptions that are subject to change. The Company has finalized its valuation of certain assets and liabilities recorded in connection with this transaction as of June 30, 2018.
The following table summarizes the fair value of total consideration transferred to the holders of all of the outstanding equity interests of Cantaloupe at the acquisition date of November 9, 2017:
($ in thousands)
 
November 9, 2017
(As Restated)
Accounts receivable
 
$
2,921

Finance receivables
 
1,480

Inventory
 
282

Prepaid expense and other current assets
 
646

Finance receivables due after one year
 
3,603

Other assets
 
50

Property and equipment
 
2,234

Intangibles
 
30,800

Total assets acquired
 
42,016

Accounts payable
 
(1,591
)
Accrued expenses
 
(2,401
)
Deferred revenue
 
(518
)
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
 
(157
)
Total identifiable net assets
 
35,549

Goodwill
 
52,658

Total fair value
 
$
88,207

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 revenue included in the Company’s Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2017 is $4.7 million. The amount of Cantaloupe earnings included in the Company’s Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2017 is $1.5 million.  

21


Supplemental disclosure of pro forma information
The following supplemental unaudited pro forma information presents the combined results of USAT and Cantaloupe as if the acquisition of Cantaloupe occurred on July 1, 2016.  This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on July 1, 2016, nor are they indicative of any future results.
The pro forma results include adjustments for the preliminary purchase accounting impact of the Cantaloupe acquisition (including, but not limited to, amortization associated with the acquired intangible assets, and the interest expense and amortization of deferred financing fees associated with the Term Loan and Revolving Credit Facility that were used to finance a portion of the purchase price, along with the related tax impacts) and the alignment of accounting policies. Other material non-recurring adjustments are reflected in the pro forma and described below:
 
 
Three months ended
 
Six months ended
($ in thousands, except per share data)
 
December 31, 2017
Revenue
 
 
 
$
33,970

 
$
64,859

Net loss attributable to USAT
 
 
 
(2,339
)
 
(4,359
)
Net loss attributable to USAT common shares
 
 
 
$
(2,339
)
 
$
(4,693
)
Net loss per share:
 
 
 
 
 
 
Basic
 
 
 
$
(0.04
)
 
$
(0.09
)
Diluted
 
 
 
$
(0.04
)
 
$
(0.09
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
Basic
 
 
 
53,619,921

 
53,584,368

Diluted
 
 
 
53,619,921

 
53,584,368

The supplemental unaudited pro forma earnings for the three and six months ended December 31, 2017 were adjusted to exclude $3.3 million and $4.1 million of integration and acquisition costs, respectively.
5. REVENUE
Adoption of ASC 606, Revenue from Contracts with Customers
In applying the new revenue guidance, the Company evaluated its population of open contracts with customers on July 1, 2018. The effect of adoption of this new guidance on the Condensed Consolidated Balance Sheet as of July 1, 2018 was to increase prepaid expenses and other current assets and other assets and to reduce deferred revenues, with an offsetting decrease in 2018 opening retained earnings (accumulated deficit), as follows:
 
June 30, 2018
 
 
 
July 1, 2018
($ in thousands)
As Reported
 
Adjustment
 
Revised
 
 
 
 
 
 
ASSETS
 
 
 
 
 
Prepaid expenses and other current assets
$
929

 
$
251

 
$
1,180

Other assets
720

 
1,254

 
1,974

LIABILITIES
 
 
 
 
 
Deferred revenue
511

 
1,127

 
1,638

SHAREHOLDERS' EQUITY
 
 
 
 
 
Accumulated deficit
(232,748
)
 
376

 
(232,372
)

22


The impact of the adoption of ASC 606 by financial statement line item within the Condensed Consolidated Balance Sheet as of December 31, 2018 and Condensed Consolidated Statement of Operations for the six months ended December 31, 2018 is as follows:
 
December 31, 2018
 
 
 
December 31, 2018
($ in thousands)
As Reported
 
Adjustment
 
Under Legacy Guidance
 
 
 
 
 
 
BALANCE SHEET
 
 
 
 
 
Prepaid expenses and other current assets
$
2,871

 
$
(253
)
 
$
2,618

Other assets
1,903

 
(1,265
)
 
638

Deferred revenue
1,437

 
(1,080
)
 
357

Accumulated deficit
(249,349
)
 
(438
)
 
(249,787
)
STATEMENT OF OPERATIONS
 
 
 
 
 
License and transaction fees
58,808

 
(47
)
 
58,761

Selling, general and administrative
20,381

 
14

 
20,395

Net loss
(16,977
)
 
(60
)
 
(17,037
)
The impact of the adoption of ASC 606 by financial statement line item within the Condensed Consolidated Statement of Operations for the three months ended December 31, 2018 is as follows:
 
December 31, 2018
 
 
 
December 31, 2018
($ in thousands)
As Reported
 
Adjustment
 
Under Legacy Guidance
 
 
 
 
 
 
STATEMENT OF OPERATIONS
 
 
 
 
 
License and transaction fees
29,837

 
(36
)
 
29,801

Selling, general and administrative
10,931

 
2

 
10,933

Net loss
(10,657
)
 
(37
)
 
(10,694
)
The adoption of ASC 606 had no effect on the cash flows from operating activities, investing activities or financing activities included in the Condensed Consolidated Statement of Cash Flows for the three and six months ended December 31, 2018.

Revenue Recognition Under ASC 606 (Periods commencing after July 1, 2018)

The Company provides an end-to-end payment solution which integrates hardware, software, and payment processing in the self-service retail market. The Company has contractual agreements with customers that set forth the general terms and conditions of the relationship, including pricing of goods and services, payment terms and contract duration. Revenue is recognized when the obligation under the terms of the Company’s contract with its customer is satisfied and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.

The foundation of the Company’s business model is to act as the Merchant of Record for its sellers. We provide cashless vending payment services in exchange for monthly service fees, in addition to collecting usage-based consideration for completed transactions. The contracts we enter into with third-party suppliers provide us with the right to access and direct their services when processing a transaction. The Company combines the services provided by third-party suppliers to enable customers to accept cashless payment transactions, indicating that it controls all inputs in directing their use to create the combined service. Additionally, we sell cashless payment devices (e.g., e-Ports, Seed), which are either directly sold or leased through the Company’s QuickStart or JumpStart programs.

Cashless vending services represent a single performance obligation as the combination of the services provided gives the customer the ability to accept cashless payments. Certain services are distinct, but are not accounted for separately as the rights are conterminous, they are transferred concurrently and the outcome is the same as accounting for the services as individual performance obligations. The single performance obligation is determined to be a stand-ready obligation to process payments whenever a consumer intends to make a purchase at a point-of-sale device. As the Company is unable to predict the timing and quantity of transactions to be processed, the assessment of the nature of the performance obligation is focused on each time increment rather than the underlying activity. Therefore, cashless vending services are viewed to comprise a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer. As a result, the promise to stand ready is accounted for as a single performance obligation.

23



Revenue related to cashless vending services is recognized over the period in which services are provided, with usage-based revenue recognized as transactions occur. Consideration for this service includes fixed fees for standing ready to process transactions, and generally also includes usage-based fees, priced as a percentage of transaction value and/or a specified fee per transaction processed. The total transaction price of usage-based services is determined to be variable consideration as it is based on unknown quantities of services to be performed over the contract term. The underlying variability is satisfied each day the service is performed and provided to the customer. Clients are billed for cashless vending services on a monthly basis and for transaction processing as transactions occur.

Equipment sales represent a separate performance obligation, the majority of which is satisfied at a point in time through outright sales or sales-type leases (ASC 840) when the equipment is delivered to the customer. Revenues related to JumpStart equipment are recognized over time as the customer obtains the right to use the equipment through an operating leases, however these are not significant to the Company’s total revenue.

USAT will occasionally offer volume discounts, rebates or credits on certain contracts, which is considered variable consideration. USAT uses either the most-likely or estimated value method to estimate the amount of the consideration, based on what the Company expects to better predict the amount of consideration to which it will be entitled to on a contract-by-contract basis. The Company will qualitatively assess if the variable consideration should be constrained to prevent possible significant reversal of revenue, as applicable.

The Company assesses the goods and/or services promised in each customer the contract and separately identifies a performance obligation for each promise to transfer to the customer a distinct good or service. The Company then allocates the transaction price to each performance obligation in the contract using relative standalone selling prices. The Company determines standalone selling prices based on the price at which a good or service is sold separately. If the standalone selling price is not observable through historic data, the Company estimates the standalone selling price by considering all reasonably available information, including market data, trends, as well as other company or customer-specific factors.

The Company recognizes fees charged to our customers primarily on a gross basis as transaction revenue when we are the principal in respect of completing a payment transaction. As a principal to the transaction, we control the service of completing payments for our customers through the payment ecosystem. The fees paid to payment processors and other financial institutions are recognized as transaction expense. For certain transactions in which we act in the capacity as an agent, those transactions are recorded on a net basis.

Disaggregated Revenue

Based on similar operational and economic characteristics, the Company’s revenue from contracts with customers is disaggregated by License and Transaction Fees and Equipment Sales, as reported in the Company’s Condensed Consolidated Statements of Operations. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are influenced by economic factors, and also represents the level at which management makes operating decisions and assesses financial performance.

Transaction Price Allocated to Future Performance Obligations

In determining the transaction price allocated to unsatisfied performance obligations, we did not include non-recurring charges. Further, we applied the practical expedient to not consider arrangements with an original expected duration of one year or less , which are primarily month to month rental agreements. The majority of contracts are considered to have a contractual term of between 36 and 60 months based on implied and explicit termination penalties. These amounts will be converted into revenue in future periods as work is performed, primarily based on the services provided or at delivery and acceptance of products, depending on the applicable accounting method.

24


The following table reflects the estimated fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
($ in thousands)
As of December 31, 2018
 
 
2020
$
5,447

2021
10,161

2022
8,343

2023
6,754

2024 and thereafter
4,704

Total
$
35,409


Warranties and Returns

The Company offers standard warranties that provide the customer with assurance that its equipment will function in accordance with contract specifications. The Company’s standard warranties are not sold separately, but are included with each customer purchase. Warranties are not considered separate performance obligations, and therefore, are estimated and recorded at the time of sale. The Company estimates an allowance for equipment returns at the date of sale on a monthly basis.

Accounts Receivable, Contract Assets and Contract Liabilities

A contract with a customer creates legal rights and obligations. As the Company performs performance obligations under customer contracts, a right to unconditional consideration is recorded as an account receivable.

Contract liabilities represent consideration received from customers in excess of revenues recognized (i.e., deferred revenue). Contract liabilities are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations. The Company’s contract liability (i.e., deferred revenue) balances are as follows:
 
 
Three months ended December 31,
 
Six months ended December 31,
($ in thousands)
 
2018
 
2018
 
 
 
 
 
Deferred revenue, beginning of the period
 
$
1,428

 
$
511

Plus: adjustment for adoption of ASC 606
 

 
1,127

Deferred revenue, beginning of the period, as adjusted
 
$
1,428

 
$
1,638

Deferred revenue, end of the period
 
1,437

 
1,437

Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period
 
65

 
221


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

Contract Costs

The Company incurs costs to obtain contracts with customers, primarily in the form of commissions to sales employees. The Company recognizes as an asset the incremental costs of obtaining a contract with a customer if it expects to recover these costs. The Company currently does not incur material costs to fulfill its obligations under a contract once it is obtained but before transferring goods or services to the customer. At December 31, 2018, the Company had net capitalized costs to obtain contracts of $0.3 million and $1.3 million included in prepaid expenses and other current assets and other noncurrent assets on the condensed consolidated balance sheet, respectively.

Contract costs are amortized on a systematic basis consistent with the transfer to the customer of the goods or services to which the asset relates. A straight-line or proportional amortization method is used depending upon which method best depicts the pattern of transfer of the goods or services to the customer. In addition, these contract costs are evaluated for impairment by comparing, on a pooled basis, the expected future net cash flows from underlying customer relationships to the carrying amount of the capitalized contract costs.


25


In order to determine the appropriate amortization period for contract costs, the Company considers a number of factors, including expected early terminations, estimated terms of customer relationships, the useful lives of technology USAT uses to provide goods and services to its customers, whether future contract renewals are expected and if there is any incremental commission to be paid on a contract renewal. The Company amortizes these assets over the expected period of benefit. Costs to obtain a contract with an expected period of benefit of one year or less are expensed when incurred. During the three and six months ended December 31, 2018, amortization of capitalized contract costs was $0.1 million and $0.1 million, respectively.

6. RESTRUCTURING/INTEGRATION COSTS
Subsequent to the Cantaloupe acquisition, the Company initiated workforce reductions to integrate the Cantaloupe business for which costs totaled $2.1 million for the year ended June 30, 2018.  The Company included these severance charges under “Integration and acquisition costs” within the Condensed Consolidated Statements of Operations, with the remaining outstanding balance included within “Accrued expenses” on the Condensed Consolidated Balance Sheet.  Liabilities for severance will generally be paid during the next twelve months.
The following table summarizes the Company’s severance activity for the three and six months ended December 31, 2018 (in thousands):
($ in thousands)
 
Workforce
reduction
Balance at July 1, 2018
 
$
1,019

Plus: additions
 
137

Less: cash payments
 
(301
)
Balance at September 30, 2018
 
855

Plus: additions
 
74

Less: cash payments
 
(538
)
Balance at December 31, 2018
 
$
391

7. FINANCE RECEIVABLES
Finance receivables consist of the following:
($ in thousands)
 
December 31,
2018
 
June 30,
2018
Finance receivables, net
 
$
5,591

 
$
4,603

Finance receivables due after one year, net
 
11,910

 
13,246

Total finance receivables, net of allowance of $601 and $12, respectively
 
$
17,501

 
$
17,849

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. 
At December 31, 2018 and June 30, 2018, credit quality indicators consisted of the following:
($ in thousands)
 
December 31,
2018
 
June 30,
2018
Performing
 
$
17,501

 
$
17,849

Nonperforming
 
601

 
12

Total
 
$
18,102

 
$
17,861

Age Analysis of Past Due Finance Receivables
As of December 31, 2018
($ in thousands)
 
Current
 
30 and Under
Days Past
Due
 
31 – 60
Days Past
Due
 
61 – 90
Days Past
Due
 
Greater than
90 Days Past
Due
 
Total
Finance
Receivables
QuickStart Leases
 
$
17,466

 
$
50

 
$
110

 
$
117

 
$
359

 
$
18,102


26


Age Analysis of Past Due Finance Receivables
As of June 30, 2018
($ in thousands)
 
Current
 
30 and Under
Days Past
Due
 
31 – 60
Days Past
Due
 
61 – 90
Days Past
Due
 
Greater than
90 Days Past
Due
 
Total
Finance
Receivables
QuickStart Leases
 
$
17,609

 
$
56

 
$
7

 
$
56

 
$
133

 
$
17,861

Sale of Finance Receivables
Transfers of finance receivables that do not qualify for sale accounting are reported as collateralized borrowings. Accordingly, the related assets remain on the Company’s balance sheet and continue to be reported and accounted for as if the transfer had not occurred. Cash proceeds from these transfers are reported as financing obligations (debt), with attributable interest expense recognized over the life of the related transactions. During December 2017, the Company transferred certain groups of finance receivables to third-party financing entities for approximately $1.1 million. Such transfers are subject to recourse provisions for the first 3 months after the date of transfer, after which the recourse provisions expire. Accordingly, the related finance receivables remained on the balance sheet at December 31, 2017 and the cash proceeds of approximately $1.1 million were reported as financing obligations at December 31, 2017. During March 2018, the recourse provisions expired resulting in the finance receivables and financing obligations being derecognized.
8. EARNINGS (LOSS) PER SHARE
The calculation of basic earnings (loss) per share (“EPS”) and diluted EPS are presented below:
 
 
Three months ended December 31,
($ in thousands, except per share data)
 
2018
 
2017
 
 
 
 
 
Numerator for basic and diluted loss per share
 
 
 
 
Net loss
 
$
(10,657
)
 
$
(4,194
)
Preferred dividends
 

 

Net loss available to common shareholders
 
$
(10,657
)
 
$
(4,194
)
 
 
 
 
 
Denominator for basic loss per share - Weighted average shares outstanding
 
60,059,936

 
52,150,106

Effect of dilutive potential common shares
 

 

Denominator for diluted loss per share - Adjusted weighted average shares outstanding
 
60,059,936

 
52,150,106

 
 
 
 
 
Basic loss per share
 
$
(0.18
)
 
$
(0.08
)
Diluted loss per share
 
$
(0.18
)
 
$
(0.08
)

27