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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 001-33365
USA Technologies, Inc.
____________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania
 
23-2679963
(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
None
None
None
Securities registered pursuant to Section 12(g) of the Act: None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ☐  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ☐  No
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, a 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act).   Yes  No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter, December 31, 2019, was $392,704,066.
As of August 31, 2020, there were 65,226,175 outstanding shares of Common Stock, no par value.
 


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USA TECHNOLOGIES, INC.
TABLE OF CONTENTS
 
 
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10‑K 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, including the impact of the coronavirus disease 2019 (COVID-19) pandemic on the Company's operations, financial condition, and the demand for the Company’s products and services;
failure to comply with the financial covenants of our credit agreement with JPMorgan Chase Bank, N.A. entered into on August 14, 2020;
the ability of the Company to raise funds in the future through sales of securities or debt financing in order to sustain its operations in the normal course of business or if an unexpected or unusual event would occur;
the ability of the Company to compete with its competitors to obtain market share;
whether the Company’s current or future customers purchase, lease, rent or utilize ePort devices or our other products in the future at levels currently anticipated by our Company;
whether the Company’s customers continue to utilize the Company’s transaction processing and related services, as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice;
the ability of the Company to satisfy its trade obligations included in accounts payable and accrued expenses;
the ability of the Company to sell to third party lenders all or a portion of our finance receivables, or to do so in a timely manner;
the ability of a sufficient number of our customers to utilize third party financing companies under our QuickStart program in order to improve our net cash used by operating activities;
the incurrence by us of any unanticipated or unusual non-operating expenses which would require us to divert our cash resources from achieving our business plan;
the ability of the Company to predict or estimate its future quarterly or annual revenue and expenses given the developing and unpredictable market for its products;
the ability of the Company to retain key customers from whom a significant portion of its revenue are derived;
the ability of a key customer to reduce or delay purchasing products from the Company;
the ability of the Company to obtain widespread commercial acceptance of its products and service offerings such as ePort QuickConnect, mobile payment and loyalty programs;
whether any patents issued to the Company will provide the Company with any competitive advantages or adequate protection for its products, or would be challenged, invalidated or circumvented by others;
the ability of the Company to operate without infringing the intellectual property rights of others;
the ability of our products and services to avoid unauthorized hacking or credit card fraud;
whether we are able to fully remediate our material weaknesses in our internal controls over financial reporting as of June 30, 2021 or continue to experience material weaknesses in our internal controls over financial reporting in the future, and are not able to accurately or timely report our financial condition or results of operations;
whether our suppliers would increase their prices, reduce their output or change their terms of sale;
whether the listing application for the Company’s securities which has been filed by the Company with The Nasdaq Stock Market LLC (“Nasdaq”) will be granted in a timely manner; and
the risks associated with the currently pending litigation or possible regulatory action arising from the internal investigation conducted by the Audit Committee in fiscal year 2019 and its findings (the “2019 Investigation”), from the failure to timely file our periodic reports with the Securities and Exchange Commission, from the restatement of the affected

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financial statements, from allegations related to the registration statement for the follow-on public offering, or from potential litigation or other claims arising from the shareholder demands for derivative action.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above and in Part I, Item 1A, “Risk Factors” of this Form 10‑K. We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.
Any forward-looking statement made by us in this Form 10‑K speaks only as of the date of this Form 10‑K. 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‑K or to reflect the occurrence of unanticipated events.

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USA TECHNOLOGIES, INC.
PART I
Item 1. Business.
OVERVIEW
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 integrated solutions that facilitate electronic payments 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 in other unattended and self-service market segments, such as amusement, commercial laundry, air/vac, car wash, kiosk and others. Our systems allow distributed assets to accept cashless payments such as through the use of credit cards, debit cards, and mobile payments and support end-to-end logistics with cloud-based software services for advanced analytics, dynamic operational scheduling, automated pre-kitting, proactive malfunction management, responsive merchandising, inventory management, warehouse purchasing and accounting management.

We derive the majority of our revenues from license and transaction fees resulting from transactions on, as well as services provided by, our ePort Connect™ and Seed™ software services. These services include cashless payment, loyalty programs, inventory management, route logistics optimization, warehouse and accounting management, and responsive merchandising. Devices operating on the company’s platform and using our services include those resulting from the sale or lease of our POS electronic payment devices, telemetry devices or certified payment software or the servicing of similar third-party installed POS terminals or telemetry devices. The majority of ePort Connect customers pay a monthly fee plus a blended transaction rate on the transaction dollar volume processed by the Company. Transactions on the ePort Connect service, therefore, are the most significant driver of the Company’s revenues, particularly revenues from software license and transaction fees.

During the fiscal year ended June 30, 2020, the Company processed approximately 881.1 million cashless transactions totaling approximately $1.7 billion in transaction dollars, representing a 4.0% increase in transaction volume and a 5.0% increase in dollars processed from the 847.2 million cashless transactions totaling approximately $1.6 billion during the fiscal year ended June 30, 2019.




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chart-93439721532d552a91d.jpgchart-d737c58054cb5ec6807.jpg
The above charts show the increases over the last five fiscal years in the number of transactions, revenues and the dollar value of transactions handled by us. The vertical bars depict total revenues, segmented by license and transaction and Seed services fees and equipment revenues. The bottom chart depicts the number of transactions on our ePort Connect and Seed services and the dollar value of transactions handled by the Company, as of the end of each of the last five fiscal years. Since 2016, the number of transactions processed annually increased by 31.1%, 51.2%, 35.1%, and 4.0% year-over-year for fiscal years 2017, 2018, 2019, and 2020, respectively. Over the same period, revenues have increased 30.8%, 30.6%, 9.0%, and 12.9%, with a 5-year compound annual growth rate of 16.0%. Our 2020 results were impacted by COVID-19 as discussed later in this section.
Our cashless solutions and services have been designed to simplify the transition to cashless payments for traditionally cash-only based businesses. As such, they are turn-key and include our comprehensive ePort Connect service and POS electronic payment devices or certified payment software, which are able to process traditional magnetic stripe credit and debit cards, contactless credit and debit cards and mobile payments. Standard services through ePort Connect are maintained on our proprietary operating systems and include merchant account setup on behalf of the customer, automatic processing and settlement, sales reporting and 24x7 customer support. Other value-added services that customers can choose from include cashless deployment planning, cashless performance review, loyalty products and services, and vending management solutions. Our solutions also provide flexibility to execute a variety of payment applications on a single system, transaction security, connectivity options, compliance with certification standards, and centralized, accurate, real-time sales and inventory data to manage distributed assets (wireless telemetry and Internet of Things (“IoT”)). Our Seed services complement our cashless services and provide customers with advanced

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operational analytics, dynamic route scheduling, automated pre-kitting, proactive equipment malfunction management, responsive merchandising, inventory management, warehouse purchasing, and accounting management.
Our customers range from global food service organizations to small businesses that operate primarily in the self-serve, small ticket retail markets including beverage and food vending, amusement and arcade machines, smartphones via our ePort Online solution, commercial laundry, and various other self-serve kiosk applications as well as equipment developers or manufacturers who incorporate our ePort Connect service into their product offerings.
We believe that we have a history of being a market leader in cashless payments and software-based back office services for the unattended market with a recognized brand name, a value-added proposition for our customers and a reputation of innovation in our products and services. We believe that these attributes position us to capitalize on industry trends.

COVID-19

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

In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of our employees by implementing work-from-home measures while continuing to serve our customers. Additionally, we have created an internal task force to lead measures to protect the business in light of the volatility and uncertainty caused by the COVID-19 pandemic, including ensuring the safety of our employees and our community by implementing work from home policies, conserving liquidity, evaluating cost saving actions, partnering with customers to position USAT for renewed growth post crisis, and pausing on international expansion. The liquidity conservation and cost savings initiatives include but are not limited to: a 20% salary reduction for the senior leadership team until December 2020; deferral of all cash-based director fees until calendar year 2021; a temporary furlough of about 10% of our employee base; negotiations with and concessions from vendors in regard to cost reductions and/or payment deferrals; an increased collection effort to reduce outstanding accounts receivables; and various supply chain/inventory improvements. Our supply chain network has not been significantly disrupted and we are continuously monitoring it for the impact of COVID-19.

We have agreed to concessions on price and/or payment terms with certain customers who have been negatively impacted by COVID-19 and may negotiate additional concessions on price and/or payment terms. These concessions did not have a material impact on our financial results as of and for the year ended June 30, 2020.

We continue to monitor the rapidly evolving situation and guidance from federal, state and local public health authorities. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, based on current trends and if the pandemic is not substantially contained in the near future, COVID-19 may have a material adverse impact on our revenue growth as well as our overall profitability in fiscal year 2021, and may lead to higher sales-related, inventory-related, and operating reserves. Further, a sustained downturn may also result in a decrease in the fair value of our goodwill or other intangible assets, causing them to exceed their carrying value. This may require us to recognize an impairment to those assets.
Definition of a connection

Management believes that connections provide insight into trends and relationships about the Company’s strategy of driving growth. The Company counts a telemeter and/or cashless payment device (for example, an ePort cashless payment device or Seed telemeter) as a connection upon shipment of an activated device to a customer under contract, at which time the device is capable of transmitting cashless payment and other data to USALive, the Company’s online reporting platform, or utilizing the Seed management services.

The Company counts a self-service retail location that does not utilize our telemeter and/or cashless payment device as a connection upon (i) receipt of notice from a customer under contract of a location that has been enabled with our API software, and (ii) our

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subsequent activation of the location on our platform which enables the location to utilize our payment transaction and logistics management services.

A connection to our device does not necessarily mean that our telemeter or cashless payment device has already been installed by the customer at a location, or has begun accepting and transmitting payment transactions, or has actually begun utilizing management services, or that the Company has begun receiving monthly service fees in connection with the device. Likewise, a non-device connection does not necessarily mean that the location has begun transmitting payment transactions, or has actually begun utilizing the management services, or that the Company has begun receiving monthly service fees. Rather, at the time of shipment of the device or the activation of the non-device location on our platform, the customer becomes obligated to pay the one-time activation fee (if applicable), and is obligated to pay monthly service fees and lease payments (if applicable) in accordance with the terms of the customer’s contract with the Company.

A self-service retail location that utilizes an ePort cashless payment device as well as Seed management services constitutes only one connection.

Our customer contracts provide that the customer may deactivate a device or a non-device location, as the case may be, from our platform by prior notice to us (generally thirty to sixty days). We will no longer count an existing connection as a connection following the receipt of instructions from the customer to deactivate the device or non-device location, as the case may be, upon the expiration of the applicable notice period, provided that the notice is in accordance with the terms of the customer contract. A previously installed telemeter or cashless payment system that is no longer being utilized by our customer is considered and reported as an existing connection unless and until the customer provides the appropriate notice under the contract and the applicable notice period has expired.
THE INDUSTRY
We operate primarily in the small ticket electronic payments and vending management industry and, more specifically, the broad unattended POS market. We provide our customers the ability to accept cashless payment “on the go” through mobile-based payment services. Our solutions and services facilitate electronic payments in industries that used to rely on cash transactions, allowing our customers to simplify inventory, warehouse, logistics, and accounting management. We believe the following industry trends are driving growth in demand for electronic payment systems and advanced logistics management in general and more specifically within the markets we serve:
Shift toward digital payments accelerating as consumers move to adopt contactless payments;
Increase in consumer demand for non-traditional items in unattended retail;
Improving POS and mobile payment technology; and
Increasing demand for business efficiency through modern, cloud-based logistics and inventory management systems.
Shift Toward Digital Payments Accelerating as Consumers Move to Adopt Contactless Payments.
There is an ongoing behavioral shift away from using paper-based methods of payment, including cash and checks, towards that of electronic-based (digital) methods of payment. COVID-19 is accelerating the move to a cashless-preferred economy. In a recent study analyzing 120,000 cashless terminals from January to July 2020, USAT found that cashless payments were accelerating at a rapid pace, with contactless payments driving much of that growth. In January 2020, 53.1% of total sales were made with cashless payments, and by July, 61.7% of total sales were made with cashless payments - with contactless payments growing 51% as a percentage of total cashless payments. In the seven months during this study, USAT has seen contactless payments grow eight times as fast as non-contactless payments, showing that contactless payments are giving consumers a safe, secure and easy way to buy goods and services.
Increase in Consumer Demand for Non-Traditional Items in Unattended Retail.
As Millennials and the first members of Generation Z take a greater share of the workforce and influence in retail, a study released in February 2020 by PYMNTS and USA Technologies found that these younger generations are bringing greater opportunities for retailers to sell non-traditional, higher ticket items such as consumer electronics through unattended channels. According to the Future of Unattended Retail Study, which queried more than 2,300 people across the United States, 35% of Millennials and 29% of Generation Z would be willing to spend more if non-traditional products were offered.

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Increase in Merchant/Operator Demand for Electronic Payments.  
We believe that, increasingly, merchants and operators of unattended payment locations (e.g., vending machines, laundry, tabletop games, etc.) are utilizing electronic payment alternatives, with an emphasis on contactless transactions due to COVID-19 impacts on how consumers pay, as a means to improve business results. In addition, electronic payment systems can provide merchants and operators real-time sales and inventory data utilized for back-office reporting and forecasting, like the Company’s Seed solutions and services, helping them to manage their business more efficiently.
Increase in Demand for Integrated Payment Solutions.
As unattended retailers look to diversify their business and offer more than one business line, an integrated solution becomes critical to operating with full visibility, control and manageable growth across their POS network. According to the 2018 Industry Census conducted by the National Automatic Merchandising Association (NAMA), 62% of owners of unattended retail businesses, were “blended,” offering more than one business line.
We believe that merchants have come to value payment solutions that are integrated or bundled with other solutions and software. As described earlier under Overview, our Seed services provide an end-to-end enterprise solution to our customers. We also view our integrated solutions as a significant advantage over the competition.
Increase in Demand for Networked Assets.
IoT technology includes capturing value from wireless modules and electronic devices to improve business productivity and customer service. In addition, networked assets can provide valuable information regarding consumers’ purchasing patterns and payment preferences, allowing operators to more effectively tailor their offerings to consumers. Our services connect offline machines and devices and bring intelligence and operating efficiencies to the device and operator through our value-added services.

COVID-19’s Impact to Creating More Contactless Experiences in Unattended Retail.

COVID-19 has created increased awareness to consumers around contactless payments to provide easy, safe and secure ways of transacting in both retail and unattended retail. According to a Mastercard consumer study conducted in April 2020, 79% of respondents worldwide say they are now using contactless payments. Mastercard also reported that worldwide, contactless transactions grew twice as fast as non-contactless transactions in the grocery and drug store categories between February and March 2020. Along with the rise of digital payments, we believe that while COVID-19 presents challenges for many industries, it is creating opportunities in unattended retail. With many hospital cafeterias closed and human contact fraught due to the COVID-19 pandemic, healthy vending machine companies are stepping in to fill the void, reported Eater.com. Vending machines are also becoming a destination to provide personal protective equipment products directly to consumers; airports are quickly adopting machines to provide consumers easy and safe access to masks, gloves, hand sanitizer, wipes, etc. We believe that POS terminals that are enabled to accept contactless and mobile payments stand to benefit from these evolving trends in mobile payment. Mobile payments include digital wallet applications, including Apple Pay, Google Pay, Samsung Pay, and others, which are popular alternatives to the traditional credit or debit card, providing alternate security protocols and a safe way for consumers to pay.
OUR TECHNOLOGY-BASED SOLUTION
Our solutions are designed to be turn-key and include the ePort Connect service, which is a cashless payment gateway, the Seed services, which provide customers with remote inventory management, logistics, warehouse and accounting management, and product merchandising solutions. Our POS electronic payment devices contain certified payment software which is able to process traditional magnetic stripe as well as contactless credit and debit cards and NFC-equipped mobile devices to enable mobile payments. We believe that our ability to bundle our products and services, as well as the ability to tailor and customize them to individual customer needs, makes it easy and efficient for our customers to adopt and deploy our technology, and results in a leading service in the small-ticket, unattended retail market today.
The Product. The Company offers customers several different ways to connect and manage their distributed assets. These range from our QuickConnect™ Web service and our Seed Cloud platform, more fully described below under the section “OUR PRODUCTS,” and encrypted magnetic stripe card readers to our ePort® hardware that can be attached to the door of a stand-alone terminal.
The Platform. Our ePort Connect service platform is designed to transmit from our customers’ terminals payment information for processing and sales and diagnostic data for storage and reporting to our customers through USA Live and/or Seed Cloud, along with third-party software solutions. Also, the platform, through server-based software applications, provides remote management

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information, and enables control of the networked device’s functionality. Through our platform we have the ability to upload software and update devices remotely enabling us to manage the devices easily and efficiently (e.g., change protocol functionality, provide software upgrades, and change terminal display messages).
The Connectivity Mediums. The client devices (described below) are interconnected for the transfer of our customers’ data through our ePort Connect platform that provides wireless-based connectivity. Increased wireless connectivity options, coverage and reliability have allowed us to service a greater number of geographically dispersed customer locations. Additionally, we make it easy for our customers to deploy wireless solutions by acting as a single point of contact. We have contracted with Verizon Wireless and AT&T Mobility in order to supply our customers with wireless network coverage.
Data Security. We are listed on the Visa Global Registry of Service Providers, meaning that we have provided Visa with a Report on Compliance (RoC) issued by a qualified security assessor validating our compliance with the Payment Card Industry Data Security Standard (PCI DSS). Our entry on this registry is required to be renewed annually, and our next renewal date is December 31, 2020.
OUR SERVICES
For the fiscal year ended June 30, 2020, license and transaction fees generated by our ePort Connect and Seed services represented 82% of the Company’s revenues, compared to 85% of the Company’s revenues for the fiscal year ended June 30, 2019. Our ePort Connect solution provides customers with all of the following services, under one cohesive service umbrella:
Diverse POS options. We offer our customers the ability to connect to a variety of cashless acceptance devices or software.
Card Processing Services. Through our existing relationships with card processors and card associations, we provide merchant account and terminal ID set up, pre-negotiated discounted fees on small ticket purchases, and direct electronic funds transfers to our customers’ bank accounts for all settled card transactions as well as ensure compliance with processing protocols.
Customer/Consumer Services. We support our installed base by providing help desk support, repairs, and replacement services. All inbound consumer billing inquiries are handled through a 24‑hour help desk, thereby reducing our customers’ exposure to consumer billing inquiries and potential chargebacks. Maintenance updates and enhancements to software, settings, and features from our platform are sent over-the-air to our ePort card readers, allowing us to provide remote maintenance services.
Online Sales Reporting. Via the USALive and Seed Cloud online reporting system, we provide customers with a host of sales and operational data, including information regarding their credit and cash transactions, user configuration, reporting by machine and region, by date range and transaction type, data reports for operations and finance, graphical reporting of sales, and condition monitoring for equipment service, as well as activation of new devices and redeployments.
Seed Vending Management. The Seed vending management software provides cloud and mobile solutions for advanced operational analytics, dynamic route scheduling, automated pre-kitting, proactive equipment malfunction management, responsive merchandising, inventory management, warehouse purchasing, and accounting management for any unattended retail points of service, including vending machines, micromarkets, and office coffee services.
Other Services. USAT offers services to support our customers that fully leverages the Company’s industry expertise and access to data. These services include our loyalty program, two-tier pricing and special promotions. In addition, planning, project management, deployment, installation support, Seed implementation, marketing and performance evaluation, as well as wireless account activations, distributions, and relationships with wireless providers.
In connection with ePort Connect services, we enter into a Services Agreement with our customers which provides for processing and licensing of the solution. Under its terms, we act as a provider of cashless financial services for the customer’s distributed assets, and collect certain of our fees from settled funds, including activation fees, monthly service fees, and transaction processing fees.
In connection with providing Seed vending management solutions, we enter into Subscription Agreements with our customers. Pursuant to the Subscription Agreement and the related Master Service Agreement, the customer typically agrees to a term of five years. For some of these customers we serve as the merchant of record and collect our fees from settled funds.

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OUR PRODUCTS
ePort is the Company’s integrated payment device, which is currently deployed in self-service, unattended market applications such as vending, amusement and arcade. Our ePort product facilitates cashless payments by capturing payment information and transmitting it to our platform for authorization with the payment system (e.g., credit card processors). Additional capabilities of our ePort consist of control/access management by authorized users, collection of audit information (e.g., date and time of sale and sales amount), diagnostic information of the host equipment, and transmission of this data back to our platform for web-based reporting, or to a compatible remote management system. Our ePort products are available in several distinctive modular hardware configurations, and as hardware, software-as-a-service, offering our customers flexibility to install a POS solution that best fits their needs and consumer demands. We offer hardware lease and rental options through our JumpStart and QuickStart programs.
ePort G‑9 is a two-piece design for traditional magnetic stripe credit/debit cards and contactless cards with features that support enhanced acceptance options, consumer engagement offerings and advanced diagnostics. This device is also used to support Canada’s unattended retail market with its functionality to accept Interac Flash (tap).
ePort G10-S is a 4G LTE cashless payment device that enables faster processing and enhanced functionality for payment and consumer engagement applications. It supports functionality that requires higher speeds and large data loads, operates on the AT&T and Verizon networks, and has built-in NFC support for mobile payments, traditional credit and debit cards, in addition to EMV-contactless options.
Seed Telemeter is a legacy telemetry device enabling operators to manage machine data across their network to realize the benefit of the Seed Cloud.
ePort Interactive is a 4G LTE cloud-based interactive media and content delivery management system, enabling delivery of nutritional information, remote refunds, loyalty programs, and multimedia-marketing.
We offer integrated software solutions that leverage payment devices in the field, ePort or third-party, to connect into our platform of advanced data management, analytics, route scheduling, as well as other offerings identified below:
QuickConnect is a web service that allows a client application to securely interface with the Company’s ePort Connect service.
ePortConnect is a cashless payments gateway that connects devices through network solutions, to USAT’s back-end platform for processing payments, transferring data into cloud-based management software, inclusive of Seed Cloud and USALive, along with enabling third-party integrations.
USALive is a software-as-a-service, that provides an intuitive portal for ePort cashless device customers. Providing them an easy-to-use interface for tracking cashless and cash sales, machine and device level health, along with sales reporting for management of devices.
Seed Cloud is an enterprise-grade vending management solution which provides cloud and mobile solutions for advanced operational analytics, dynamic route scheduling, automated pre-kitting, proactive equipment malfunction management, responsive merchandising, inventory management, warehouse purchasing, and accounting management that is layered on, and takes advantage of, the data provided by both Seed and ePort devices.
Another form of our ePort technology is ePort Online, which enables customers to use USALive to securely process cards typically held on file for the purpose of online billing and recurring charges. ePort Online helps USAT’s customers reduce paper invoicing and collections.
SPECIFIC MARKETS WE SERVE
Our current customers are primarily in the self-serve, small ticket retail markets in North America, including beverage and food vending and kiosk, commercial laundry, car wash, tolls, amusement and gaming, air and vacuum services, and office coffee. We estimate that there are approximately 16 million to 18 million potential connections in this self-serve, small ticket retail market in North America. The 1,320,000 connections to our service as of June 30, 2020 constitute 7% of these potential connections, compared to 1,169,000 connections to our service as of June 30, 2019, which constituted 6% of these potential connections. While these industry sectors represent only a small fraction of our total market potential, as described below, these are the areas where we have gained the most traction to date. In addition to being our current primary markets, we believe these sectors serve as a proof-of-concept for other unattended POS industry applications.

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Vending. According to the 2018 Census of the Convenience Services Industry conducted by Technomic for NAMA, the convenience services industry, which consists of vending machines, micro markets, office coffee service (OCS) and pantry services, is estimated to represent a total annual revenue of $26 billion, a 4% increase since 2016. The Census found that while the vending segment of the convenience services industry continued to contract (-3% since 2016), micro markets, OCS and pantry service segments have more than made up for the shortfall. According to the Census, micro markets continued their rapid expansion, with revenues growing 99% over the previous two years, while OCS grew at 7%. The Company believes these machines represent a significant market opportunity for electronic payment conversion when compared to the Company’s existing ePort Connect service base and the overall low rate of industry adoption to date. For example, in another study conducted by Automatic Merchandiser (2019 State of the Industry Report) that included a representative 2.1 million machines, cashless adoption was estimated at 59% in 2018. Connected vending machines using telemeters to collect data are now used by 41% of respondents, which is an increase from the last two years, reported Automatic Merchandiser - showing opportunity to remove manual processes with technology solutions. With the continued shift to electronic payments and the advancement in mobile and POS technology, we believe that the traditional beverage and food vending industry will continue to look to cashless payments and telemetry systems to improve their business results.
Kiosk. The kiosk industry posted its third consecutive year of double-digit growth in 2019, according to the 2020 Kiosk Market Census Report which is published annually. Kiosk sales jumped 17.9% in 2019, closely aligning to the growth rates discussed in the previous two years of the report and showing continuous adoption of self-service technology by consumers. Interactive kiosk sales - excluding automated teller, refreshment and amusement vending machines - totaled an estimated $11.9 billion in 2019. We believe that kiosks are becoming increasingly popular as credit, debit or contactless payment options enable kiosks to sell an increased variety of items. In addition, the study points to rising mobile commerce and improved IoT technology as driving growth in self-service markets, similar to the factors discussed in the previous two years of the report. As merchants continue to seek new ways to reach their customers through kiosk applications, we believe the need for a reliable cashless payment provider experienced with machine integration, PCI compliance and cashless payment services designed specifically for the unattended market will be of increasing value in this market. Our existing kiosk customers integrate with our cashless payment services via our QuickConnect Web service using one of our encrypted readers or ePort POS technologies.
Laundry. Our primary opportunities in laundry consist of the coin-operated commercial laundry and multi-housing laundry markets. According to the Coin Laundry Association, the U.S. commercial laundry industry is comprised of about 29,500 coin laundries in the U.S., with an estimated gross annual revenue of nearly $5 billion.
Amusement and Entertainment. Our current customers and primary opportunities in the amusement and entertainment markets are typically classified as “street/route business,” which are standalone businesses that are open to the general public and that offer card/coin-operated games such as claw machines, amusement park machines (i.e. body dryers), bowling alleys and bar entertainment (i.e. digital music machines, dart machines, etc.). According to the 2019 IBISWorld Industry Report on Arcade, Food & Entertainment Complexes in the U.S., this industry represents $2.5 billion, including $1.2 billion from card/coin-operated games, with approximately 6,900 businesses within this segment of the amusement and entertainment market. Our existing customers in the amusement and entertainment markets leverage our ePort Connect Platform to enable cashless acceptance, remote machine monitoring, and pulse capability for cashless devices. ePort Connect’s pulse capability enables coin/token based unattended retail environments to accept cashless by using pulse voltages to imitate coin and bill payments, and trigger machines to play.
OUR COMPETITIVE STRENGTHS
We believe that we benefit in the marketplace, and with our existing customers, from a number of advantages gained through our over twenty-five years in the industry. They include:

1.
One-Stop Shop, End-to-End Solution. We believe that our ability to offer our customers one point of contact through a bundled cashless payment and software solution makes it easy and efficient for our customers to adopt and deploy our comprehensive platform and results in a service that is unmatched in the small ticket, self-service retail market today. To our knowledge, other cashless payment and vending management solutions available in the market today require the operator to set up their own accounts for cashless processing (i.e., act as the merchant of record) and manage multiple service providers (i.e., hardware terminal manufacturer, wireless network provider, and/or credit card processor). We interface directly with our card processor and wireless service provider, and, with our hardware solutions, are able to offer a bundled and integrated solution to our customers for whom we serve as the merchant of record.
2.
Trusted Brand Name. We believe that the ePort has a strong national reputation for quality, reliability, and innovation. Similarly, we believe that the Seed Cloud platform has a strong reputation for providing innovative software solutions that solve every day customer challenges. We believe that card associations, payment processors, and merchants/operators trust our system solutions and services to handle financial transactions in a secure operating environment, along with providing them accurate

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data to manage their business efficiently through our software application. Our trusted brand name is exemplified by our high level of customer retention and a number of multi-year agreements with customers for use of our ePort Connect service. We have agreements with partners like First Data, Visa, MasterCard, Chase Paymentech and Verizon Wireless that allow us to provide these solutions to our customers.
3.
Market Leadership. We believe we have one of the largest installed bases of unattended POS electronic payment systems in the unattended small ticket retail market for food and beverage in the United States and we are continuing to expand to other adjacent markets such as laundry, amusement, gaming, and kiosks. Our installed base supports our sales and marketing initiatives by enhancing our ability to establish or expand our market position. In addition, this data, in combination with our industry experts and analysis, enables us to offer Premium Services to our customers to help them deploy and better leverage our technology in their locations. We believe our installed base also provides multiple opportunities for referrals for new business, either from the merchant or operator of the deployed asset, through one of our several strategic partnerships, or as equipment upgrade and upsell opportunities for new technologies that will occur as part of upcoming industry-wide wireless network upgrades.
4.
Attractive Value Proposition for Our Customers. We believe that our solutions provide our customers an attractive value proposition. Our solutions and services make possible increased purchases by consumers who in the past were limited to the physical cash on hand while making a purchase at an unattended terminal, thereby increasing the universe of potential customers and the size and value of the purchases of those customers. In addition, we offer value-added offerings and services such as Two-Tier Pricing, which allows the operator to charge different amounts for the same product depending upon whether the consumer chooses to pay by cash or credit/debit. Consumer engagement services further extend the potential for customers to build new revenue opportunities, customer loyalty and brand distinction. One of such services is provided through the ePort interactive platform, our cloud-based interactive media and content delivery management system, which enables delivery of nutritional information, remote refunds, loyalty programs, and multimedia-marketing campaigns for the unattended and self-serve retail markets. Lastly, with our Seed Cloud, we provide the ability for customers to pursue additional opportunities to reduce costs and improve operating efficiencies with tools such as advanced operational analytics, dynamic route scheduling, automated pre-kitting, proactive equipment malfunction management, responsive merchandising, inventory management, warehouse purchasing, and accounting management on a modern, cloud-based SaaS offering.
5.
Increasing Scale and Market Footprint. The continued growth in connections to the Company’s ePort Connect and Seed services provides us brand credibility, improved revenue, and the footprint to market and distribute our products and services more effectively and in more markets than most of our competitors.
6.
Customer-Focused Research and Development. Our research and development initiatives focus primarily on adding features and functionality to our electronic payment solutions and logistics management platform based on customer input and emerging market trends. As of June 30, 2020, we have 72 patents (US and International) in force, and 4 United States and 6 international patent applications pending. We have generated considerable intellectual property and know-how associated with creating a seamless, end-to-end experience for our customers.
OUR GROWTH OPPORTUNITY
Our primary objective is to continue to enhance our position as a leading provider of technology that enables electronic payment transactions, advanced logistics management, and value-added services primarily at small-ticket, self-service retail locations such as vending, kiosks, commercial laundry, and other similar markets. We plan to execute our growth strategy organically and through strategic acquisitions. Key elements of our strategy are to:
Leverage Existing Customers/Partners. We have a solid base of key customers across multiple markets, particularly in vending, that have currently deployed our solutions and services to a portion of their deployed base. Approximately 80% of our new connections during the fiscal year ended June 30, 2020 and approximately 86% of our new connections during the fiscal year ended June 30, 2019 were from existing customers. We estimate that our current customers represent approximately 3.3 million potential connections. Based on the 1.3 million connections we service as of June 30, 2020, there remain approximately 2.0 million potential connections from our current customers that could be connected to our service. As a result, they are a key component of our plan to drive future sales. We have worked to build these relationships, drive future deployments, and develop customized network interfaces. Our customers have seen the benefits of our products and services first-hand and we believe they currently represent the largest opportunity to scale recurring revenue and connections to our service.
Expand Distribution and Sales Reach. We are intently focused on driving profitable growth through efficient sales channels. Our sales resources and new distribution relationships have led to increased penetration in markets such as amusement and arcade, and commercial laundry.

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Further Penetrate Attractive Adjacent Markets. We plan to continue to introduce our turn-key solutions and services to various adjacent markets such as the broad-based kiosk market and other similar markets by leveraging our expertise in cashless payment integration combined with the capacity and uniqueness of our ePort Connect solution.
Capitalize on Opportunities in International Markets. We are currently focused on the U.S. and Canadian markets for our ePort devices and related ePort Connect service but may seek to establish a presence in electronic payment markets outside of the U.S. and Canada. In order to do so, however, we would have to invest in additional sales and marketing and research and development resources targeted towards these regions, and the Company's current focus remains on the U.S. and Canadian markets for the near-term due to resource constraints. At this time, the Company believes the most efficient route to these markets will be achieved by working closely with its global partners to leverage their expertise and experience in navigating those markets.
Capitalize on the emerging contactless, NFC, and growing mobile payments trends. With approximately 93% of our cashless connected base enabled to accept NFC payments (including mobile wallets), the Company believes that continued increases in consumer preferences towards contactless payments, including mobile wallets like Apple Pay and Samsung Pay, represent a significant opportunity for the Company to further drive adoption. Additionally, as of June 30, 2020, the Company has approximately 260 thousand EMV enabled devices and continues to see accelerated adoption. As the variety of payment methods expands and consumer behaviors evolve, the ability to make credit and debit card payments at unattended terminals is highly in demand among consumers, with 70% of U.S., U.K. and Australian respondents in the 2018 TNS Unattended Terminals Survey saying they would prefer unattended vending machines and kiosks to accept both card and cash payments. This same survey found that 57% of adults between the ages of 18 and 34 were willing to make a payment at an unattended terminal with a digital wallet such as Apple Pay, Samsung Pay or Google Pay. Further, 33% of the U.S. respondents said they would be willing to make a payment at an unattended kiosk or vending machine using a wearable device, such as a bracelet, fitness tracker, keyring, etc. As consumers continue to adopt these new methods of cashless payments, it is our belief that adoption will continue to accelerate at a rapid pace and result in more rapid adoption of cashless solutions like the Company’s ePort in the markets that we serve.
Continuous Innovation. We are continuously enhancing our solutions and services in order to satisfy our customers and the end-consumers relying on our products at the POS locations. We are making investments in new products and services, and continously partnering with other players within the ecosystem to drive additional value of combined service offerings to our customers and opportunities. Our product innovation team is always working to enhance our operational and payments platform to drive easier integration and customer implementation as well as establish compatibility with other electronic payment solution providers’ technologies. We believe our continued innovation will lead to further adoption of USAT’s solutions and services in the unattended POS payments market.
Comprehensive Service and Support. In addition to its industry-leading ePort cashless payments system, the Company seeks to provide its customers with a comprehensive, value-added ePort Connect service that is designed to encourage optimal return on investment through business planning and performance optimization; business metrics through the Company’s KnowledgeBase of data; a loyalty and rewards program for consumer engagement; marketing strategy and executional support; sales data and machine alerts; DEX data transmission; and the ability to extend cashless payments capabilities and the full suite of services across multiple aspects of an operator’s business including micro-markets contract food industry, online payments and mobile payments.
Leverage Intellectual Property. Through June 30, 2020, we have 72 U.S. and foreign patents in force that contain various claims, including claims relating to payment processing, networking and energy management devices. In addition, we own numerous trademarks, copyrights, and trade secrets. We will continue to explore ways to leverage this intellectual property in order to add value for our customers, attain an increased share of the market, and generate licensing revenues.
SALES AND MARKETING
The Company’s sales strategy includes both direct sales and channel development, depending on the particular dynamics of each of our markets. Our marketing strategy is diversified and includes demand generation strategies such as paid advertising, search engine optimization, content curation, direct mail, and digital automation; product and partner strategies such as commercialization of new products to market, payment and integration partner webinars, podcasts, joint-studies, and digital advertising; along with marketing events and communications that include media relations, conferences (both virtual and in-person), social media, and client referrals. As of June 30, 2020, the Company was marketing and selling its products primarily through its full and part-time sales and marketing staff consisting of 31 people.
Direct Sales
Our direct sales efforts are currently primarily focused on the convenience services industry in the United States, inclusive of beverage and food vending, although we continue to further develop our presence in other market segments.

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Indirect Sales/ Distribution
As part of our strategy to expand our sales reach while optimizing resources, we have agreements with select resellers in the car wash, amusement and arcade, and vending markets. We also have a distribution and white label program with the Wittern Group (“Wittern”), a manufacturer of vending machines, pursuant to which Wittern embeds our Seed cashless hardware, called GreenLite, into its vending machines and sells Seed services to its customers. We have also entered into agreements with resellers and distributors in connection with our energy management products.
Marketing
Our marketing strategy includes advertising and outreach initiatives designed to build brand awareness, position USAT as thought leaders within unattended retail, make clear USAT’s competitive strengths, and prove the value of our services to our opportunity markets-both for existing and prospective customers. Activities include creating company and product presence on the web including www.usatech.com and www.energymisers.com, digital advertising, SEO (Search Engine Optimization), and social media; the use of direct mail and email campaigns; educational and instructional online training sessions; content curation through blogs, whitepapers, guides, podcasts, and joint industry studies; advertising in vertically-oriented trade publications; participating in industry tradeshows and events; and working closely with customers and key strategic partners on co-marketing opportunities and new, innovative solutions that drive customer and consumer adoption of our services.
IMPORTANT RELATIONSHIPS
Verizon Wireless
In April 2011, we signed an agreement with Verizon for access to their digital wireless wide area network for the transport of data, including credit card transactions and inventory management data. The initial term of the agreement was three years, which was extended until April 2016. Since the end of the term, the agreement automatically renewed and will continue to automatically renew for successive one month periods unless terminated by either party upon thirty days’ notice.
On September 21, 2011, the Company and Verizon entered into a Joint Marketing Addendum (the “Verizon Agreement”) which amended the agreement described above. Pursuant to the Verizon Agreement, the Company and Verizon would work together to help identify business opportunities for the Company’s products and services. Verizon may introduce the Company to existing or potential Verizon customers that Verizon believes are potential purchasers of the Company’s products or services and may attend sales calls with the Company made to these customers. The Company and Verizon would collaborate on marketing and communications materials that would be used by each of them to educate and inform customers regarding their joint marketing work. Verizon has the right to list the Company’s products and services in its Data Solutions Guide for use by its sales and marketing employees and in its external website. The Verizon Marketing Agreement is terminable by either party upon 45 days’ notice.
VISA
As of July 1, 2017, we entered into a three-year agreement with Visa U.S.A. Inc. (“Visa”), pursuant to which Visa has agreed to continue to make available to the Company certain promotional interchange reimbursement fees for small ticket debit and credit card transactions in the unattended beverage and food vending merchant category code, as well as for small ticket regulated debit card transactions in the other unattended vending and/or retail merchant category codes covered by the agreement. As previously reported, following implementation of the Durbin Amendment, Visa had significantly increased its interchange fees for small ticket regulated debit card transactions effective October 1, 2011. The promotional interchange reimbursement fees provided by the aforementioned agreement will continue until September 30, 2020. The Company is having discussions with Visa on a new agreement.
MasterCard
On January 12, 2015, we entered into a three-year MasterCard Acceptance Agreement (“MasterCard Agreement”) with MasterCard International Incorporated ("MasterCard"), pursuant to which MasterCard has agreed to make available to us reduced interchange rates for small ticket debit card transactions in certain merchant category codes. As previously reported, MasterCard had significantly increased its interchange rates for small ticket regulated debit card transactions effective October 1, 2011, and as a result, the Company ceased accepting MasterCard debit card products in mid-November 2011. Pursuant to the MasterCard Agreement, however, the Company is currently accepting MasterCard debit card products for small ticket debit card transactions in the unattended beverage and food vending merchant category code. The Company and MasterCard entered into a first amendment on April 27, 2015, pursuant to which the conditions under, or the transactions to, which the MasterCard custom pricing would be available, was amended. The reduced interchange rates became effective on April 20, 2015. Pursuant to an amendment effective

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July 17, 2018, the agreement was extended until March 1, 2019, and will automatically renew for successive one-year terms thereafter, unless either party provides 60 days’ advance notice of non-renewal.
Chase Paymentech
We entered into a five-year Third Party Payment Processor Agreement, dated April 24, 2015 with Paymentech, LLC, through its member, JPMorgan Chase Bank, N.A. (“Chase Paymentech”), pursuant to which Chase Paymentech will act as the provider of credit and debit card transaction processing services (including authorization, conveyance and settlement of transactions) to the Company, which acts as the merchant of record. The Agreement provides that Chase Paymentech will act as the exclusive provider of transaction processing services to the Company for at least 250 million transactions per year. The Agreement provides that Chase Paymentech may modify the pricing for its services upon 30‑days’ notice, and in connection with certain such increases, the Company has the right to terminate the Agreement upon 120‑days’ notice. Following the expiry of the initial term of the Agreement on April 24, 2020, the Agreement will automatically renew for successive one-year terms unless either party provides 30 days’ advance notice of non-renewal.
First Data

In March 2020, we signed an agreement with First Data Merchant Services LLC (“First Data”), and Wells Fargo Bank, N.A., where First Data became the Company’s primary provider of credit and debit card transaction processing services (including data capture, authorization, or settlement of transactions) for payment transactions submitted from locations in the United States, and First Data will replace Chase Paymentech as the primary provider of credit and debit card transaction processing services to the Company. Following an initial six month implementation period beginning in March 2020, the agreement will continue for a five year period and automatically renews for consecutive one-year periods thereafter unless the agreement is terminated by First Data or the Company upon at least 90-days’ notice prior to the end of the initial five year period or at any time during a one-year renewal term. The Company will pay to First Data the fees and charges set forth in the agreement, including acquiring fees charged by First Data and fees imposed on the payment transactions by the payment organizations and networks and other third parties. The agreement provides that First Data will provide certain incentive or other payments or credits to the Company during the term of the agreement.
Compass/Foodbuy
On June 30, 2009, we entered into a Master Purchase Agreement (“MPA”) with Foodbuy, LLC (“Foodbuy”), the procurement company for Compass Group USA, Inc. (“Compass”) and other customers. The MPA provides, among other things that, USAT shall be a preferred supplier and provider to Foodbuy and its customers, including Compass, of USAT’s products and services. The MPA automatically renews for successive one-year periods unless terminated by either party upon sixty days’ notice prior to the end of any such one-year renewal period. In addition, on July 1, 2009, USAT and Compass, in conjunction with the MPA described above, also entered into a three-year ePort Connect Services Agreement pursuant to which USAT will provide Compass with all card processing, data, network, communications and financial services, and DEX telemetry data services required in connection with all Compass vending machines utilizing ePorts. The agreement automatically renews for successive one-year periods unless terminated by either party upon sixty days’ notice prior to the end of any such one-year renewal period. During the fiscal years ended June 30, 2020 and June 30, 2019, Compass represented approximately 16% and 17% of our total revenues, respectively. Our Seed Pro software is utilized by vending machines operated by Compass for dynamic scheduling, pre-kitting, asset health management, and merchandising to Compass’s customers nationwide.
Global Payments
For many of our customers who receive Seed vending management solutions and Seed cashless services from us, the credit and debit card transaction processing services are provided by Global Payments, Inc. We entered into a three-year agreement with Global Payments on April 6, 2018, pursuant to which Global Payments acts as the provider of credit and debit card transaction processing services (including authorization and conveyance) for transactions on points of sale owned or operated by our customers. Our agreement with Global Payments automatically renews for successive one-year periods unless either party provides 60 days’ notice of non-renewal to the other party.
AT&T
In August 2017, we signed an agreement with AT&T for access to their LTE machine to machine wireless wide area network for the transport of data, including credit card transactions and inventory management data. The initial term of the agreement is five years. The agreement will automatically renew for successive one year periods unless terminated by either party upon thirty days’ notice.

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MANUFACTURING
The Company utilizes independent third-party companies for the manufacturing of its products. Our internal manufacturing process mainly consists of quality assurance of materials and testing of finished goods received from our contract manufacturers. We have not entered into a long-term contract with our contract manufacturers, nor have we agreed to commit to purchase certain quantities of materials or finished goods from our manufacturers beyond those submitted under routine purchase orders, typically covering short-term forecasts.
COMPETITION
Our competitors are increasingly and actively marketing products and services that compete with our products and services in the vending industry, including manufacturers who may include in their new vending machines their own (or another third party’s) cashless payment systems and services. In addition to these competitors, there are also numerous credit card processors that offer card processing services to traditional retail establishments that could decide to offer similar services to the industries that we serve.
In the cashless laundry market, our joint solution with Setomatic Systems competes with hardware manufacturers, who provide joint solutions to their customers in partnership with payment processors, and with at least one competitor who provides an integrated hardware and payment processing solution.
TRADEMARKS, PROPRIETARY INFORMATION, AND PATENTS
The Company owns US federal registrations for the following trademarks and service marks: Because Machines Can't Cry For Help®, Blue Light Sequence®, Business Express®, Buzzbox®, Cantaloupe circle logo (design only), Cantaloupe Systems®, Cantaloupe Systems & design (Cantaloupe circle logo), Compuvend®, CM2iQ®, Creating Value Through Innovation®, EnergyMiser®, ePort®, ePort Connect®, ePort Edge®, ePort GO®, ePort Mobile®, eSuds®, Intelligent Vending®, SnackMiser®, Openvdi®, Routemaster®, Seed®, Seed & design, Seed Office®, SeedCashless & design, TransAct®, USA Technologies® USALive®, VendingMiser®, VendPro®, PC EXPRESS®, VENDSCREEN®, VM2iQ®, and Warehouse Master®.
Much of the technology developed or to be developed by the Company is subject to trade secret protection. To reduce the risk of loss of trade secret protection through disclosure, the Company has entered into confidentiality agreements with its key employees. There can be no assurance that the Company will be successful in maintaining such trade secret protection, that they will be recognized as trade secrets by a court of law, or that others will not capitalize on certain aspects of the Company’s technology.
From the incorporation of our Company in 1992, through June 30, 2020, 130 patents have been granted to the Company or its subsidiaries, including 95 United States patents and 35 foreign patents, and 4 United States and 6 international patent applications are pending. Of the 130 patents, 72 are still in force at June 30, 2020. Our patents expire between 2020 and 2038.
EMPLOYEES
As of June 30, 2020, the Company had 141 full-time employees and 6 part-time employees.
AVAILABLE INFORMATION
The public may read and copy any materials the Company files with the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for our annual stockholder meetings, and amendments to those reports, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and other information regarding issuers that file electronically. Such information can be accessed through the internet at www.sec.gov. These reports are also available free of charge on our website, www.usatech.com, as soon as reasonably practical after we electronically file the material with, or furnish it to, the SEC.


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Item 1A. Risk Factors.
Risks Relating to Our Business
We have a history of losses since inception and if we continue to incur losses, the price of our shares can be expected to fall.
We experienced losses from inception through June 30, 2012, and from fiscal year 2015 through fiscal year 2020. For fiscal years 2020, 2019, and 2018, we incurred a net loss of $40.6 million, $29.9 million, and $11.3 million, respectively. In light of our recent history of losses as well as the length of our history of losses, profitability in the foreseeable future is not assured. Until the Company’s products and services can generate sufficient annual revenues, the Company will be required to use its cash and cash equivalents on hand and may raise capital to meet its cash flow requirements including the issuance of common stock or debt financing. Additionally, if we continue to incur losses in the future, the price of our common stock can be expected to fall.
We may require additional financing or find it necessary to raise capital to sustain our operations and without it we may not be able to achieve our business plan.
At June 30, 2020, we had a net working capital surplus of $5.0 million and cash and cash equivalents of $31.7 million. We had net cash (used in) provided by operating activities of $(14.1) million, $(28.2) million, and $12.4 million for fiscal years ended 2020, 2019, and 2018, respectively. Unless we maintain or grow our current level of operations, we may need additional funds to continue these operations. We may also need additional capital to respond to unusual or unanticipated non-operational events. Such non-operational events include but are not limited to shareholder class action lawsuits, government inquiries or enforcement actions that could potentially arise from the circumstances that gave rise to our restatements, extended filing delays in filing our periodic reports and the impact of COVID-19 on our business. Should the financing that we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could have a material adverse effect on our business, operating results, financial condition and prospects.
Failure to comply with any of the financial covenants under the Company’s credit agreement could result in an event of default which may accelerate our outstanding indebtedness or other obligations and have a material adverse impact on our business, liquidity position and financial position.
On August 14, 2020, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A. (the “2021 JPMorgan Credit Agreement”) for a $5 million secured revolving credit facility and a $15 million secured term facility, which includes an uncommitted expansion feature that allows the Company to increase the total revolving commitments and/or add new tranches of term loans in an aggregate amount not to exceed $5 million. The obligations under the 2021 JPMorgan Credit Agreement are secured by first priority security interest in substantially all of the Company's assets. The 2021 JPMorgan Credit Agreement contains financial covenants requiring the Company (i) to maintain an adjusted quick ratio of not less than 2.00 to 1.00, not less than 2.50 to 1.00 beginning October 1, 2020, not less than 2.75 to 1.00 beginning January 1, 2021 and 3.00 to 1.00 beginning April 1, 2021 and (ii) to maintain, as of the end of each of its fiscal quarters commencing with the fiscal quarter ended December 31, 2021, a total leverage ratio of not greater than 3.00 to 1.00.
Failure to comply with the foregoing financial covenants, if not cured or waived, will result in an event of default that could trigger acceleration of our indebtedness, which would require us to repay all amounts owed under the 2021 JPMorgan Credit Agreement and could have a material adverse impact on our business, liquidity position and financial position.
We cannot be certain that our future operating results will be sufficient to ensure compliance with the financial covenants in our 2021 JPMorgan Credit Agreement or to remedy any defaults. In addition, in the event of any event of default and related acceleration, we may not have or be able to obtain sufficient funds to make the accelerated payments required under the 2021 JPMorgan Credit Agreement.
The loss of one or more of our key customers could significantly reduce our revenues, results of operations, and net income.
We have derived, and believe we may continue to derive, a significant portion of our revenues from one large customer or a limited number of large customers. Customer concentrations for the years ended June 30, 2020, 2019 and 2018 were as follows:
 
 
For the year ended June 30,
Single customer
 
2020
 
2019
 
2018
Total revenue
 
16
%
 
17
%
 
16
%

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The loss of such customers could materially adversely affect our revenues. Additionally, a major customer in one year may not purchase any of our products or services in another year, which may negatively affect our financial performance. We have offered, and may in the future offer, discounts to our large customers to incentivize them to continue to utilize our products and services. If we are required to sell products to any of our large customers at reduced prices or unfavorable terms, our results of operations and revenue could be materially adversely affected. Further, there is no assurance that our customers will continue to utilize our transaction processing and related services as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice.
We depend on our key personnel and, if they leave us, or if we are unable to attract highly skilled personnel, our business could be adversely affected.
We are dependent on key management personnel, including the Chief Executive Officer, Sean Feeney, and the rest of the executive leadership team and several functional areas within the Company. The loss of services from these officers and employees could dramatically affect our business prospects. Our executive officers and certain of our officers and employees are particularly valuable to us because:
they have specialized knowledge about our company and operations;
they have specialized skills that are important to our operations; or
they would be particularly difficult to replace.
We have entered into an employment agreement with Mr. Feeney, which contains customary restrictive covenants, including perpetual confidentiality, non-disparagement, and intellectual property covenants, as well as a non-compete, non-solicit of customers and suppliers, and non-solicit of employees (including a no-hire) that each apply during employment and for two years following any termination.
Our success and future growth also depends, to a significant degree, on the skills and continued services of our management team, many of whom are recent hires, including our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Compliance Officer, and our General Counsel. Further, due to the complexity of the work required to make needed improvements within the Company, it may be difficult for us to retain these new hires and other existing senior management, sales personnel, and development and engineering personnel critical to our ability to execute our business plan, which could result in harm to key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs. We may experience a loss of productivity due to the departure of key personnel and the associated loss of institutional knowledge, or while new personnel integrate into our business and transition into their respective roles. Our future success also depends on our ability to attract and motivate highly skilled technical, managerial, sales, marketing and customer service personnel, including members of our management team.

Further, as a significant portion of the executive management team was recently externally hired, a significant amount of on-boarding and training is required to orient these personnel to the business. This risk is also compounded by the departure of several key functional leaders who possessed a deep knowledge of the legacy business, its systems and its processes. There is no assurance that we will be able to acclimate the new leadership team in a manner timely and adequate enough to ensure a successful transition.
Our dependence on proprietary technology and limited ability to protect our intellectual property may adversely affect our ability to compete.
Challenge to our ownership of our intellectual property could materially damage our business prospects. Our technology may infringe upon the proprietary rights of others. Our ability to execute our business plan is dependent, in part, on our ability to obtain patent protection for our proprietary products, maintain trade secret protection and operate without infringing the proprietary rights of others.
As of June 30, 2020, the United States Government and other countries have granted us 130 patents, of which 72 are still in force. We had 10 pending United States and foreign patent applications, and will consider filing applications for additional patents covering aspects of our future developments, although there can be no assurance that we will do so. In addition, there can be no assurance that we will maintain or prosecute these applications. There can be no assurance that:
any of the remaining patent applications will be granted to us;
we will develop additional products that are patentable or that do not infringe the patents of others;

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any patents issued to us will provide us with any competitive advantages or adequate protection for our products;
any patents issued to us will not be challenged, invalidated or circumvented by others; or
any of our products would not infringe the patents of others.
If any of our products or services is found to have infringed any patent, there can be no assurance that we will be able to obtain licenses to continue to manufacture, use, sell, and license such product or service or that we will not have to pay damages and/or be enjoined as a result of such infringement.
If we are unable to adequately protect our proprietary technology or fail to enforce or prosecute our patents against others, third parties may be able to compete more effectively against us, which could result in the loss of customers and our business being adversely affected. Patent and proprietary rights litigation entails substantial legal and other costs and diverts Company resources as well as the attention of our management. There can be no assurance we will have the necessary financial resources to appropriately defend or prosecute our intellectual property rights in connection with any such litigation.
If we are not able to implement successful enhancements and new features for our products and services, our business could be materially and adversely affected.
Our success depends on our ability to develop new products and services to address the rapidly evolving market for cashless payments and cloud and mobile solutions for the self-service retail markets. Rapid and significant technological changes continue to confront the industries in which we operate, including developments in proximity payment devices. These new services and technologies may be superior to, impair, or render obsolete the products and services we currently offer or the technologies we currently use to provide them. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and we may not be successful in realizing a return on these development efforts in a timely manner or at all. There can be no assurance that any new products or services we develop and offer to our customers will achieve significant commercial acceptance. Our ability to develop new products and services may be inhibited by industry-wide standards, payment card networks, existing and future laws and regulations, resistance to change from our customers, or third parties’ intellectual property rights. If we are unable to provide enhancements and new features for our products and services or to develop new products and services that achieve market acceptance or that keep pace with rapid technological developments and evolving industry standards, our business would be materially and adversely affected.
In addition, because our products and services are designed to operate with a variety of systems, infrastructures, and devices, we need to continuously modify and enhance our products and services to keep pace with changes in mobile, software, communication, and database technologies. We may not be successful in either developing these modifications and enhancements or in bringing them to market in a timely and cost-effective manner. Any failure of our products and services to continue to operate effectively with third-party infrastructures and technologies could reduce the demand for our products and services, result in dissatisfaction of our customers, and materially and adversely affect our business.
The termination of our relationships with certain third-party suppliers upon whom we rely for services that are critical to our products could adversely affect our business and delay achievement of our business plan.
The operation of our wireless networked devices depends upon the capacity, reliability and security of services provided to us by our wireless telecommunication services providers, AT&T Mobility and Verizon Wireless. In addition, if we terminate relationships with our current telecommunications service providers, we may have to replace hardware that is part of our existing ePort or Seed products that are already installed in the marketplace in order to make them compatible with a new network. This could significantly harm our reputation and could cause us to lose customers and revenues.
Substantially all of the network service contracts with our customers are terminable for any or no reason upon thirty to sixty days’ advance notice.
Substantially all of our customers may terminate their network service contracts with us for any or no reason upon providing us with thirty or sixty days’ advance notice. Accordingly, consistent demand for and satisfaction with our products by our customers is critical to our financial condition and future success. Problems, defects, or dissatisfaction with our products or services or competition in the marketplace could cause us to lose a substantial number of our customers with minimal notice. If a substantial number of our customers were to exercise their termination rights, it would result in a material adverse effect to our business, operating results, and financial condition.

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Security is vital to our customers and therefore breaches in the security of transactions involving our products or services could adversely affect our reputation and results of operations.
We rely on information technology and other systems to transmit financial information of consumers making cashless transactions and to provide accounting and inventory management services to our customers. As such, the information we transmit and/or maintain are exposed to the ever-evolving threat of compromised security, in the form of a risk of potential breach, system failure, computer virus, or unauthorized or fraudulent use by consumers, customers, company employees, or employees of third party vendors. The steps we take to deter and mitigate these risks, including annual validation of our compliance with the Payment Card Industry Data Security Standard, may not be successful, and any resulting compromise or loss of data or systems could adversely impact the marketplace acceptance of our products and services, and could result in significant remedial expenses to not only assess and repair any damage to our systems, but also to reimburse customers for losses that occur from the fraudulent use of confidential data. Additionally, we could become subject to significant fines, litigation, and loss of reputation, potentially impacting our financial results.
Further, substantially all of the cashless payment transactions handled by our network involve Visa U.S.A. Inc. (“Visa”) or MasterCard International Incorporated ("MasterCard"). If we fail to comply with the applicable standards or requirements of the Visa and MasterCard card associations relating to security, Visa or MasterCard could suspend or terminate our registration with them. The termination of our registration with them or any changes in the Visa or MasterCard rules that would impair our registration with them could require us to stop providing cashless payment services through our network. In such event, our business plan and/or competitive advantages in the market place would be materially adversely affected.
We rely on other card payment processors, and if they fail or no longer agree to provide their services, our customer relationships could be adversely affected, and we could lose business.
We rely on agreements with other large payment processing organizations, primarily First Data, Chase Paymentech and Global Payments, Inc., formerly Heartland Payment Systems, Inc., to enable us to provide card authorization, data capture and transmission, settlement and merchant accounting services for the customers we serve. The termination by our card processing providers of their arrangements with us or their failure to perform their services efficiently and effectively will adversely affect our relationships with the customers whose accounts we serve and may cause those customers to terminate their processing agreements with us.
Disruptions at other participants in the financial system could prevent us from delivering our cashless payment services.
The operations and systems of many participants in the financial system are interconnected. Many of the transactions that involve our cashless payment services rely on multiple participants in the financial system to accurately move funds and communicate information to the next participant in the transaction chain. A disruption for any reason at one of the participants in the financial system could impact our ability to cause funds to be moved in a manner to successfully deliver our services. Although we work with other participants to avoid any disruptions, there is no assurance that such efforts will be effective. Such a disruption could lead to the inability for us to deliver services, reputational damage, lost customers and lost revenue, loss of customers’ confidence, as well as additional costs, all of which could have a material adverse effect on our revenues, profitability, financial condition, and future growth.
We are subject to laws and regulations that affect the products, services and markets in which we operate. Failure by us to comply with these laws or regulations would have an adverse effect on our business, financial condition, or results of operations.
We are, among other things, subject to banking regulations and credit card association regulations. Failure to comply with these regulations may result in the suspension of our business, the limitation, suspension or termination of service, and/or the imposition of fines that could have an adverse effect on our financial condition. Additionally, changes to legal rules and regulations, or interpretation or enforcement thereof, could have a negative financial effect on us or our product offerings. To the extent this occurs, we could be subject to additional technical, contractual or other requirements as a condition of our continuing to conduct our payment processing business. These requirements could cause us to incur additional costs, which could be significant, or to lose revenues to the extent we do not comply with these requirements.
New legislation could be enacted regulating the basis upon which interchange rates are charged for debit or credit card transactions, which could increase the debit or credit card interchange fees charged by bankcard networks. An example of such legislation is the so-called “Durbin Amendment,” an amendment to the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. The Durbin Amendment regulates the basis upon which interchange rates for debit card transactions are made to ensure that interchange rates are “reasonable and proportionate to costs.” Pursuant to regulations that were promulgated by the Federal Reserve, Visa and MasterCard have significantly increased their interchange fees for small ticket debit card transactions.

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Increases in card association and debit network interchange fees could increase our operating costs or otherwise adversely affect our operations.
We are obligated to pay interchange fees and other network fees set by the bankcard networks to the card issuing bank and the bankcard networks for each transaction we process through our network. From time to time, card associations and debit networks increase the organization and/or processing fees, known as interchange fees that they charge. Under our processing agreements with our customers, we are permitted to pass along these fee increases to our customers through corresponding increases in our processing fees. Passing along such increases could result in some of our customers canceling their contracts with us. Consequently, it is possible that competitive pressures will result in our Company absorbing some or all of the increases in the future, which would increase our operating costs, reduce our gross profit and adversely affect our business.
As of July 1, 2017, we entered into a three-year agreement with Visa, pursuant to which Visa has agreed to continue to make available to the Company certain promotional interchange reimbursement fees for small ticket debit and credit card transactions. Similarly, MasterCard has agreed to make available to us reduced interchange rates for small ticket debit card transactions through March 1, 2019, and for successive one-year periods thereafter unless the agreement between the parties is terminated by either party upon sixty days' notice prior to the end of any such one-year renewal period. During the term of the Visa Agreement, the Company does not anticipate accepting any debit cards with interchange fees that are higher than the rates provided under the Visa Agreement. The Company will continue to accept Visa- and MasterCard- branded debit cards in addition to all major credit cards, including Visa, MasterCard, Discover and American Express at its current processing rates. If the Visa or MasterCard Agreements are not extended, our financial results would be materially adversely affected unless we are able to pass these significant additional charges to our customers. The Company is having discussions with Visa on a new agreement.
Any increase in chargebacks not paid by our customers may adversely affect our results of operations, financial condition and cash flows.

In the event a dispute between a cardholder and a customer is not resolved in favor of the customer, the transaction is normally charged back to the customer and the purchase price is credited or otherwise refunded to the cardholder. When we serve as merchant of record, if we are unable to collect such amounts from the customer's account, or if the customer refuses or is unable, due to closure, bankruptcy or other reasons, to reimburse us for a chargeback, we bear the loss for the amount of the refund paid to the cardholder. We may experience significant losses from chargebacks in the future. Any increase in chargebacks not paid by our customers could have a material adverse effect on our business, financial condition, results of operations and cash flows. We have policies to manage customer-related credit risk and attempt to mitigate such risk by monitoring transaction activity. Notwithstanding our programs and policies for managing credit risk, it is possible that a default on such obligations by one or more of our customers could have a material adverse effect on our business.

Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could cause a loss of confidence in our financial reporting and adversely affect the trading price of our common stock.

Effective internal control over financial reporting is necessary for us to provide accurate financial information. Section 404 of the Sarbanes-Oxley Act requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K. As discussed in Item 9A., our internal controls over financial reporting were not effective as of June 30, 2020 due to the existence of a material weakness in such controls. Management believes the controls are designed appropriately and is in the process of remediating the material weakness. We cannot provide assurance that our remediation efforts will be adequate to allow us to conclude that such controls will be effective as of June 30, 2021. If we are unable to adequately maintain our internal control over financial reporting in the future, we may not be able to accurately report our financial results, which could cause investors to lose confidence in our reported financial information, negatively affecting the trading price of our common stock, or our ability to access the capital markets.
The accounting review of our previously issued financial statements and the audits of prior fiscal years have been time-consuming and expensive, has resulted in the filing of class action lawsuits and the receipt of derivative demand letters, and may result in additional expense and/or litigation.

In fiscal year 2019, the Audit Committee, with the assistance of independent legal and forensic accounting advisors, conducted an internal investigation of then-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 “2019 Investigation”). Additionally in fiscal year 2019, significant financial reporting issues were identified which were unrelated to the internal investigation and which resulted in further adjustments to the Company’s previously issued or prior fiscal years’ unissued financial statements. As a result of the findings, the Company restated its consolidated financial statements as of and for the fiscal year

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2017, our selected financial data as of and for the fiscal years ended June 30, 2017, June 30, 2016 and June 30, 2015, and our unaudited consolidated financial statements for the quarterly periods ended September 30, 2016, December 31, 2016, March 31, 2017, September 30, 2017, December 31, 2017, and March 31, 2018.
We have incurred significant expenses, including audit, legal, consulting and other professional fees, in connection with the 2019 Investigation, the review of our accounting, the audits, the restatements of previously filed financial statements, bank consents, the remediation of deficiencies in our internal control over financial reporting, the proxy solicitation, and professional services fees to assist the Company with accounting and compliance activities in fiscal year 2020 following the filing of the 2019 Form 10-K. For the years ended June 30, 2020 and 2019, the Company incurred $21.3 million and $16.1 million of those costs. To the extent that steps we are continuing to take to reduce errors in accounting determinations are not successful, we could be forced to incur significant additional time and expense. The incurrence of significant additional expense, or the requirement that management devote significant time that could reduce the time available to execute on our business strategies, could have a material adverse effect on our business, results of operations and financial condition.
Although we have completed the restatement, we cannot guarantee that we will not receive inquiries from the Securities and Exchange Commission (“SEC”) or other regulatory authorities regarding our restated financial statements or matters relating thereto, or that we will not be subject to future claims, investigations or proceedings. Any future inquiries from the SEC or other regulatory authorities, or future claims or proceedings or any related regulatory investigation will, regardless of the outcome, likely consume a significant amount of our internal resources and result in additional legal and accounting costs.
We are also subject to a shareholder class action arising out of the misstatements in our financial statements or public filings. For additional discussion, see Item 3. Legal Proceedings and Note 19 to our Consolidated Financial Statements. Our management has been, and may in the future be, required to devote significant time and attention to this litigation, and this and any additional matters that arise could have a material adverse impact on our results of operations and financial condition as well as on our reputation. While we cannot estimate our potential exposure in these matters at this time, we have already incurred significant expense defending this litigation and expect to continue to need to incur significant expense.
We and certain of our former officers and directors have been named in shareholder class action lawsuits, which could require significant additional management time and attention, result in significant additional legal expenses or result in government enforcement actions.
We and certain of our former officers and directors have been named in shareholder class action lawsuits, and may become subject to further litigation, government investigations or proceedings arising therefrom. The pending litigation has been, and any future litigation, investigation or other actions that may be filed or initiated against us or our former officers or directors may be time consuming and expensive. We cannot predict what losses we may incur in these litigation matters, and contingencies related to our obligations under the federal and state securities laws, or in other legal proceedings or governmental investigations or proceedings related to these matters.
To date, we have incurred significant costs in connection with pending litigation and with the special litigation committee proceedings. Any legal proceedings, if decided adversely to us, could result in significant monetary damages, penalties and reputational harm, and will likely involve significant defense and other costs. We have entered into indemnification agreements with each of our directors and certain of our officers, and our bylaws require us to indemnify each of our directors and officers. Further, our insurance may not cover all claims that have been or may be brought against us, and insurance coverage may not continue to be available to us at a reasonable cost. As a result, we have been and may continue to be exposed to substantial uninsured liabilities, including pursuant to our indemnification obligations, which could materially adversely affect our business, prospects, results of operations and financial condition.
For additional discussion of these matters, refer to Item 3. “Legal Proceedings” and Note 19 to our Consolidated Financial Statements.
Matters relating to or arising from the restatement and the 2019 Investigation, including adverse publicity and potential concerns from our customers could continue to have an adverse effect on our business and financial condition.
We have restated our consolidated financial statements as of and for the fiscal year 2017, our selected financial data as of and for the fiscal years ended June 30, 2017, June 30, 2016 and June 30, 2015, and our unaudited consolidated financial statements for the quarterly periods ended September 30, 2016, December 31, 2016, March 31, 2017, September 30, 2017, December 31, 2017, and March 31, 2018. As a result, we have been and could continue to be the subject of negative publicity focusing on the restatement and adjustment of our financial statements, and may be adversely impacted by negative reactions from our customers or others with whom we do business. Concerns include the perception of the effort required to address our accounting and control environment

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and the ability for us to be a long-term provider to our customers. The continued occurrence of any of the foregoing could harm our business and have an adverse effect on our financial condition. Additionally, as a result of the restatements, we have become subject to a number of additional risks and uncertainties, including substantial unanticipated costs for accounting and legal fees in connection with or related to the restatement. If litigation did occur, we may incur additional substantial defense costs regardless of their outcome. Likewise, such events might cause a diversion of our management’s time and attention. If we do not prevail in any such litigation, we could be required to pay substantial damages or settlement costs.

Matters relating to recent Department of Justice (DOJ) inquiries may require significant time and attention, result in substantial expenses and lead to adverse publicity.

We are and have been responding to inquiries from the DOJ related to the 2019 Investigation associated with fiscal years ended June 30, 2017, June 30, 2016 and June 30, 2015. While these inquiries to date relate to events that took place under prior management that was in place during those years, they will likely require time and attention from current management to provide access to any internal company records that may be requested.

We are unable to predict what consequences, if any, that the investigation performed by the DOJ may have on us. The investigation performed by the DOJ could result in substantial legal and accounting expenses, divert management’s attention from other business concerns and harm our business. Any civil or criminal action commenced against us could result in administrative orders against us, the imposition of significant penalties and/or fines against us, and/or the imposition of civil or criminal sanctions against us or certain of our former officers, directors and/or employees. Any regulatory action could result in the filing of additional restatements of our prior financial statements or require that we take other actions. If we are subject to an adverse finding resulting from the investigation performed by the DOJ, we could be required to pay damages or penalties or have other remedies imposed upon us. The period of time necessary to resolve the investigations by the DOJ is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of our business. Additionally, as a result of these inquiries, we could be the subject of negative publicity including negative reactions from our customers or others with whom we do business.

The coronavirus disease 2019 (COVID-19) pandemic has and will continue to significantly and adversely impact our business.

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

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

A sustained downturn may also result in a decrease in the fair value of our goodwill or other intangible assets, causing them to exceed their carrying value. This may require us to recognize an impairment to those assets. Further, the COVID-19 pandemic could decrease consumer spending, adversely affect demand for our technology and services, cause one or more of our customers and partners to file for bankruptcy protection or go out of business, cause one or more of our customers to fail to renew, terminate, or renegotiate their contracts, affect the ability of our sales team to travel to potential customers, impact expected spending from new customers and negatively impact collections of accounts receivable, all of which could adversely affect our business, results of operations and financial condition. In response to the outbreak, we have agreed to concessions on price and/or payment terms with certain customers who have been negatively impacted by the COVID-19 pandemic, and may negotiate additional concessions on price and/or payment terms.

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


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

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

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

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

On April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that given our circumstances we satisfied all eligible requirements for the PPP Loan, we are later determined to have not been in compliance with these requirements or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. Should we be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the PPP Loan or otherwise, such audit or review could result in the diversion of management’s time and attention and the incurrence of additional costs. Any of these events could have a material adverse effect on our business, results of operations and financial condition.
Our ability to commercially manage the transition from the 3G network could lead to competitive disadvantage in the marketplace.
We will begin to plan transition away from the 3G network in 2021 as the network is being phased out in North America. This transition will affect a large portion of our active devices and will require a new customer retention initiative to ensure that our existing customer base is properly transitioned to the new platform. This change affects our industry and will also lead to changes with our competitors and their customers. Our ability to successfully transition and provide the new platform for our customers is critical to our strategy, our network and to the competitive balance in the marketplace.
Continued dependence on external providers and advisors could limit our ability to decrease operating expenses.
We continue to incur substantial fees associated with a series of external consultants and advisors who are supporting us with on-going accounting and reporting requirements and continued litigation. Our dependence upon these external parties to execute and complete large on-going projects and legal matters and our inability to transition these projects to internal resources may have a continued adverse impact on operating costs.
We may not successfully implement our go-to-market strategy which may adversely affect growth and profitability.
Our current core business is highly concentrated amongst several large customers in the vending industry. We have made inroads into other adjacent markets including laundry, gaming, entertainment and other commercial payments applications and continued expansion into these markets is a substantial piece of our potential future growth prospects. Changing technology, customer preferences, and competitor actions may limit our ability to successfully grow and expand beyond our core business.

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Risks Relating to Our Common Stock
Our securities were delisted from Nasdaq and are now quoted on the OTC Markets. There can be no assurance that our securities will be relisted, or once relisted, our securities might not remain listed.
As a result of our failure to comply with our periodic reporting obligations, on September 26, 2019, our securities were suspended from trading on Nasdaq. The Company’s securities were delisted from Nasdaq on February 18, 2020 and are currently quoted on the OTC Markets. The Company has applied to relist its common stock and preferred stock on Nasdaq, and the application is currently under review by the staff of the Nasdaq Listing Qualifications Department. There can be no assurance that the listing application will be granted by Nasdaq or granted in a timely manner. If our securities are relisted, there can be no assurance that our securities will remain listed on Nasdaq.
The OTC Market is a significantly more limited market than Nasdaq, and the quotation of our securities on the OTC Market may result in a less liquid market available for existing and potential shareholders to trade our securities. Securities traded in the OTC Market generally have less liquidity due to factors such as the reduced number of investors that will consider investing in the securities, the reduced number of market makers in the securities, and the reduced number of securities analysts that follow such securities. As a result, holders of shares of our securities may find it difficult to resell their shares at prices quoted in the market or at all. We may be subject to additional compliance requirements under applicable state laws relating to the issuance of our securities. This could have a long-term adverse effect on our ability to raise capital, which ultimately could adversely affect the market price of our securities. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.
Upon certain fundamental transactions involving the Company, such as a merger or sale of substantially all of our assets, we may be required to distribute the liquidation preference then due to the holders of our Series A Preferred Stock which would reduce the amount of the distributions otherwise to be made to the holders of our common stock in connection with such transactions.
Our articles of incorporation provide that upon a merger or sale of substantially all of our assets or upon the disposition of more than 50% of our voting power, the holders of at least 60% of the preferred stock may elect to have such transaction treated as a liquidation and be entitled to receive their liquidation preference. Upon our liquidation, the holders of our preferred stock are entitled to receive a liquidation preference prior to any distribution to the holders of common stock which, as of June 30, 2020 was approximately $20.8 million.
Director and officer liability is limited.
As permitted by Pennsylvania law, our by-laws limit the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our by-law provisions and Pennsylvania law, shareholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our by-laws and indemnification agreements entered into by the Company with each of the officers and directors provide that we shall indemnify our directors and officers to the fullest extent permitted by law.
If securities and/or industry analysts fail to continue publishing research about our business, if they change their recommendations adversely, or if our results of operations do not meet their expectations, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly for any reason, including continued delisting of our securities by Nasdaq, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. In addition, it is likely that, in some future period, our operating results will be below the expectations of securities analysts or investors. If one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock price could decline.
Item 2. Properties.
The Company leases approximately 27,000 square feet of space located in Malvern, Pennsylvania, for its principal executive office and for general administrative functions, sales activities, product development, and customer support. The lease commenced in December 2016. The Company’s monthly base rent for the premises at June 30, 2020 is approximately $57 thousand, and will increase each year up to a maximum monthly base rent of approximately $61 thousand. The lease expires in November 2023.

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The Company leases approximately 7,800 square feet of office space in Metairie, Louisiana for general operations. The lease commenced in November 2018. The Company’s monthly base rent for the premises at June 30, 2020 is approximately $15 thousand, and will increase each year up to a maximum monthly base rent of approximately $16 thousand. The lease expires in July 2024.
The Company leases approximately 16,700 square feet of office space in Denver, Colorado for general operations. The lease commenced in August 2019. The Company’s monthly base rent for the premises at June 30, 2020 is approximately $45 thousand, and will increase each year up to a maximum monthly base rent of approximately $53 thousand. The lease expires in December 2026.
The Company leases approximately 4,600 square feet of office space in Atlanta, Georgia for general operations. The lease commenced in September 2020 with a one-time rental payment of approximately $82 thousand and expires in October 2021.
Item 3. Legal Proceedings.

Eastern District of Pennsylvania Consolidated Shareholder Class Actions

As previously reported, on September 11, 2018, Stéphane Gouet filed a putative class action complaint against the Company, Stephen P. Herbert, the Chief Executive Officer, and Priyanka Singh, the former Chief Financial Officer, in the United States District Court for the District of New Jersey. The class is defined as purchasers of the Company’s securities from November 9, 2017 through September 11, 2018. The complaint alleges that the Company disclosed on September 11, 2018 that it was unable to timely file its Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (the “2018 Form 10-K”), and that the Audit Committee of the Company’s Board of Directors 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 complaint alleges that the defendants disseminated false statements and failed to disclose material facts and engaged in practices that operated as a fraud or deceit upon Gouet and others similarly situated in connection with their purchases of the Company’s securities during the proposed class period. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “1934 Act”) and Rule 10b-5 promulgated thereunder.

Two additional class action complaints, containing substantially the same factual allegations and legal claims, were filed against the Company, Herbert and Singh in the United States District Court for the District of New Jersey. On September 13, 2018, David Gray filed a putative class action complaint, and on October 3, 2018, Anthony E. Phillips filed a putative class action complaint. Subsequently, multiple shareholders moved to be appointed lead plaintiff, and on December 19, 2018, the Court consolidated the three actions, appointed a lead plaintiff (the “Lead Plaintiff”), and appointed lead counsel for the consolidated actions (the “Consolidated Action”).

On February 28, 2019, the Court approved a Stipulation agreed to by the parties in the Consolidated Action for the filing of an amended complaint within fourteen days after the Company filed its 2018 Form 10-K. On January 22, 2019, the Company and Herbert filed a motion to transfer the Consolidated Action to the United States District Court for the Eastern District of Pennsylvania. On February 5, 2019, the Lead Plaintiff filed its opposition to the Motion to Transfer.  On August 12, 2019, the University of Puerto Rico Retirement System (“UPR”) filed a putative class action complaint in the United States District Court for the District of New Jersey against the Company, Herbert, Singh, the Company’s Directors at the relevant time (Steven D. Barnhart, Joel Books, Robert L. Metzger, Albin F. Moschner, William J. Reilly and William J. Schoch) (“the Independent Directors”), and the investment banking firms who acted as underwriters for the May 2018 follow-on public offering of the Company (the “Public Offering”): William Blair & Company; LLC; Craig-Hallum Capital Group, LLC; Northland Securities, Inc.; and Barrington Research Associates, Inc. (“the Underwriters”). The class is defined as purchasers of the Company’s shares pursuant to the registration statement and prospectus issued in connection with the Public Offering. Plaintiff seeks to recover damages caused by Defendants’ alleged violations of the Securities Act of 1933 (as amended, the “1933 Act”), and specifically Sections 11, 12 and 15 thereof. The complaint generally seeks compensatory damages, rescissory damages and attorneys’ fees and costs. The UPR complaint was consolidated into the Consolidated Action and the UPR docket was closed.

On September 30, 2019, the Court granted the motion to transfer and transferred the Consolidated Action to the United States District Court for the Eastern District of Pennsylvania, Docket No. 19-cv-04565. On November 20, 2019, Plaintiff filed an amended complaint that asserted claims under both the 1933 Act and the 1934 Act.  Defendants filed motions to dismiss on February 3, 2020. Before briefing on the motions was completed, the parties participated in a private mediation on February 27, 2020, which resulted in a settlement. On May 29, 2020, the plaintiffs filed documents with the Court seeking preliminary approval of the settlement, with the defendants supporting approval of the settlement. On June 9, 2020, the Court granted preliminary approval of the settlement and issued a scheduling order for further action on the settlement. The settlement provides for a payment of $15.3 million which includes all administrative costs and plaintiff’s attorneys’ fees and expenses. The Company’s insurance carriers paid $12.7 million towards the settlement and the Company paid $2.6 million towards the settlement, which was made in July

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2020 and was recorded as a liability in the consolidated financial statements as of June 30, 2020. Payments will not be distributed pursuant to the settlement (except for administrative costs of up to $150,000) until and unless the Court grants final approval of the settlement. The Court scheduled the hearing for final settlement approval for October 30, 2020. The Company expects, but cannot assure, that the settlement approval will occur later in the 2020 calendar year. Should the settlement not be approved or be terminated for any reason, the parties will resume litigation of the claims.

Chester County, Pennsylvania Class Action

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

Department of Justice Subpoena

As previously reported, in the third quarter of fiscal year 2020, the Company responded to a subpoena received from the U.S. Department of Justice that sought records regarding Company activities that occurred during prior financial reporting periods, including restatements. The Company is cooperating fully with the agency’s queries.

HEC Master Fund LP Lawsuit

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

HEC Master Fund LP Shareholder Demand

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

Other Shareholder Demand Letters

By letter dated October 12, 2018, Peter D’Arcy, a purported shareholder of the Company, demanded that the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s current and former officers and directors for breach of fiduciary duties. The letter alleged the officers and directors made false and misleading statements that failed to disclose that the Company’s accounting treatment, financial reporting and internal controls related to certain of the Company’s contractual agreements would result in an internal investigation and would delay the Company’s filing of its 2018 Form 10-K, and that the Company failed to maintain adequate internal controls. By letter dated October 18, 2018, Chiu Jen-Ting, a purported shareholder of the Company, demanded that the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s current and former officers and directors for breach of fiduciary duties in connection with issues similar to those asserted by Mr. D’Arcy. By letter dated August 2, 2019, Stan Emanuel, a purported shareholder of the Company, demanded that

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the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s current and former officers and directors for breach of fiduciary duties in connection with issues similar to those asserted by Mr. D’Arcy. In accordance with Pennsylvania law, the Board of Directors formed a special litigation committee (the “SLC”), currently consisting of Lisa P. Baird, Douglas L. Braunstein and Michael K. Passilla, in order to, among other things, investigate and evaluate the demand letters. The SLC and its counsel are currently investigating the matters raised in these letters.
Item 4. Mine Safety Disclosures.
Not applicable.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock was traded on The NASDAQ Global Market under the symbol “USAT” until September 26, 2019, when such trading was suspended by a Nasdaq Hearings Panel due to our failure to comply with our periodic filing obligations. The Company’s securities were delisted from Nasdaq on February 18, 2020 and are currently quoted on the OTC Markets. The Company has applied to relist its common stock and preferred stock on Nasdaq, and the application is currently under review by the staff of the Nasdaq Listing Qualifications Department. Following the suspension of trading in its securities on Nasdaq, the Company’s common stock has been quoted on the OTC Markets’ Pink Open Market under the symbol “USAT.” The Pink Open Market quotations reflect inter-dealer prices, without retail mark-up, mark down or commission and may not represent actual transactions.

As of August 31, 2020, there were 561 holders of record of our common stock and 249 record holders of the preferred stock. This number does not include stockholders for whom shares were held in a “nominee” or “street” name.
The holders of the common stock are entitled to receive such dividends as the Board of Directors of the Company may from time to time declare out of funds legally available for payment of dividends. Through the date hereof, no cash dividends have been declared on the Company’s common stock or preferred stock. No dividend may be paid on the common stock until all accumulated and unpaid dividends on the preferred stock have been paid. As of August 31, 2020, such accumulated unpaid dividends amounted to approximately $16.7 million. The preferred stock is also entitled to a liquidation preference over the common stock which, as of June 30, 2020 equaled approximately $20.8 million.
As of August 31, 2020, shares of common stock reserved for future issuance were as follows:
23,978 shares issuable upon the exercise of common stock warrants at an exercise price of $5.00 per share;
105,140 shares issuable upon the conversion of outstanding preferred stock and cumulative preferred stock dividends;
105,687 shares underlying stock options issued or to be issued under the 2014 Stock Option Incentive Plan;
255,981 shares issuable, and shares underlying stock options issued, under the 2015 Equity Incentive Plan;
1,604,192 shares issuable, and shares underlying stock options to be issued, under the 2018 Equity Incentive Plan;
1,000,000 shares issuable to current CEO upon the exercise of stock options at an exercise price of $6.30 per share; and
140,000 shares issuable to our former CEO George R. Jensen, Jr. upon the occurrence of a USA Transaction.

Please see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” of this Form 10-K for disclosure relating to our equity compensation plans.

RECENT SALES OF UNREGISTERED SECURITIES

During the year ended June 30, 2020, we issued unregistered securities as follows:

1. On October 9, 2019, the Company sold 3,800,000 shares of the Company’s common stock to Antara Capital Master Fund LP at a price of $5.25 per share for an aggregate purchase price of $20.0 million. The net proceeds from the transaction were used for working capital and general corporate purposes. William Blair & Company, L.L.C. acted as exclusive placement agent for the Company and received a cash placement fee of $1.2 million.

2. On June 30, 2020, the Company issued 635,593 shares of the Company’s common stock to funds managed by Hudson Executive Capital LP (“HEC”) in satisfaction of the reimbursement of $4.5 million of the third party costs and expenses incurred by HEC in connection with its proxy solicitation, which amount represented a substantial majority but less than the full amount of the third party costs and expenses incurred by HEC. The reimbursement and issuance is further described in Item 13, “Certain Relationships and Related Transactions, and Director Independence,” of this Form 10-K.

These securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”). The issuances of the securities were undertaken in reliance upon exemptions from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof, to sophisticated and accredited recipients.




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PERFORMANCE GRAPH
The following graph shows a comparison of the 5‑year cumulative total shareholder return for our common stock with The NASDAQ Composite Index and the S&P 500 Information Technology Index in the United States. The graph assumes a $100 investment on June 30, 2015 in our common stock and in the NASDAQ Composite Index and the S&P 500 Information Technology Index, including reinvestment of dividends.
COMPARISON OF 5‑YEAR CUMULATIVE TOTAL RETURN
Among USA Technologies, Inc., The NASDAQ Composite Index and The S&P 500 Information Technology Index
chart-ea690202c3805f3d93c.jpg
Total Return For:
 
Jun-15
 
Jun-16
 
Jun-17
 
Jun-18
 
Jun-19
 
Jun-20
 
 
 
 
 
 
 
 
 
 
 
 
 
USA Technologies, Inc.
 
$
100

 
$
158

 
$
193

 
$
519

 
$
275

 
$
260

NASDAQ Composite
 
$
100

 
$
97

 
$
123

 
$
151

 
$
161

 
$
202

S&P 500 Information Technology Index
 
$
100

 
$
103

 
$
136

 
$
176

 
$
198

 
$
266

The information in the performance graph is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such a filing. The stock price performance included in this graph is not necessarily indicative of future stock price performance.

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Table of Contents

Item 6. Selected Financial Data.

The following selected financial data as of and for the four years ended June 30, 2020 is derived from the audited consolidated financial statements of USA Technologies. The selected financial data as of and for the year ended June 30, 2016 is unaudited and was derived from our unaudited consolidated financial statements which were prepared on the same basis as our audited consolidated financial statements. The selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related Notes thereto included in this 10-K under the caption Item 8, “Financial Statements and Supplementary Data.”
 
 
As of and for the year ended June 30, 
($ in thousands, except per share, connections, and transaction data)
 
2020
 
2019 (4)
 
2018 (3)
 
2017
 
2016
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
(unaudited)
Revenue (1)
 
$
163,153

 
$
144,466

 
$
132,508

 
$
101,436

 
$
77,572

Operating loss
 
$
(39,592
)
 
$
(28,183
)
 
$
(9,223
)
 
$
(4,134
)
 
$
(3,121
)
Net loss (2)
 
$
(40,595
)
 
$
(29,882
)
 
$
(11,284
)
 
$
(7,465
)
 
$
(38,337
)
Cumulative preferred dividends
 
$
(668
)
 
$
(668
)
 
$
(668
)
 
$
(668
)
 
$
(668
)
Net loss applicable to common shares
 
$
(41,263
)
 
$
(30,550
)
 
$
(11,952
)
 
$
(8,133
)
 
$
(39,005
)
Net loss per common share - basic
 
$
(0.66
)
 
$
(0.51
)
 
$
(0.23
)
 
$
(0.20
)
 
$
(1.07
)
Net loss per common share - diluted
 
$
(0.66
)
 
$
(0.51
)
 
$
(0.23
)
 
$
(0.20
)
 
$
(1.07
)
Cash dividends per common share
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
181,023

 
$
183,375

 
$
231,995

 
$
67,544

 
$
59,852

Line of credit, net
 
$

 
$

 
$

 
$
7,036

 
$
7,184

Finance lease obligations and long-term debt, including current portion
 
$
15,763

 
$
12,773

 
$
35,766

 
$
4,259

 
$
6,859

Shareholders’ equity
 
$
98,215

 
$
114,423

 
$
142,688

 
$
24,468

 
$
19,328

 
 
 
 
 
 
 
 
 
 
 
Consolidated Statement of Cash Flows Data:
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
(14,139
)
 
$
(28,172
)
 
$
12,431

 
$
(6,072
)
 
$
11,976

Net cash used in investing activities
 
$
(2,494
)
 
$
(4,759
)
 
$
(68,861
)
 
$
(3,439
)
 
$
(7,434
)
Net cash provided (used in) by financing activities
 
$
20,882

 
$
(23,569
)
 
$
127,649

 
$
2,984

 
$
3,465

Net increase (decrease) in cash and cash equivalents
 
$
4,249

 
$
(56,500
)
 
$
71,219

 
$
(6,527
)
 
$
8,007

Cash and cash equivalents at beginning of year
 
$
27,464

 
$
83,964

 
$
12,745

 
$
19,272

 
$
11,374

Cash and cash equivalents at end of year
 
$
31,713

 
$
27,464

 
$
83,964

 
$
12,745

 
$
19,381

 
 
 
 
 
 
 
 
 
 
 
Connections & Transaction Data (unaudited): (5)
 
 
 
 
 
 
 
 
 
 
Net New Connections
 
151,000

 
141,000

 
460,000

 
140,000

 
95,000

Total Connections
 
1,320,000

 
1,169,000

 
1,028,000

 
568,000

 
428,000

New Customers Added
 
3,600

 
3,200

 
3,500

 
1,650

 
1,450

Total Customers
 
23,000

 
19,400

 
16,200

 
12,700

 
11,050

Total Number of Transactions (millions)
 
881.1

 
847.2

 
627.2

 
414.9

 
316.5

Transaction Volume ($ millions)
 
$
1,729.4

 
$
1,647.0

 
$
1,197.5

 
$
803.0

 
$
584.8

_____________________________________
(1)
As discussed in Note 2—Accounting Policies, revenue for the years ended June 30, 2018 and prior is not comparable to revenue for the years ended June 30, 2019 and after due to our adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.
(2)
Net loss for the year ended June 30, 2016 includes income tax expense of $30 million for the increase of tax valuation allowance.
(3)
Financial statement results beginning in the year ended June 30, 2018 include the results of Cantaloupe since the acquisition by the Company.
(4)
As discussed in Note 2—Accounting Policies, the Company identified certain adjustments that were required to be made to its previously disclosed fiscal year 2019 interim and annual financial statements.
(5)
Connections are defined in Item 1. Business.



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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW OF THE COMPANY
USA Technologies, Inc. provides wireless networking, cashless transactions, asset monitoring, and other value-added services principally to the small ticket, unattended Point of Sale (“POS”) market, primarily in North America. Our ePort® technology can be installed and/or embedded into everyday devices such as vending machines, a variety of kiosks, amusement games, and commercial laundry via either our ePort hardware or our Quick Connect solution. Our associated service, ePort Connect®, is a payment card compliant (“PCI”)-compliant, comprehensive service that includes simplified credit/debit card processing and support, consumer engagement services as well as telemetry, Internet of Things (“IoT”), and machine-to-machine (“M2M”) services, including the ability to remotely monitor, control and report on the results of distributed assets containing our electronic payment solutions.
The Company generates revenue in multiple ways. During the fiscal year ended June 30, 2020, we derived approximately 82% of our revenue from recurring license and transaction fees related to our ePort Connect service and approximately 18% of our revenue from equipment sales. Connections to our service stem from the sale or lease of our POS electronic payment devices, 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 revenue, particularly the recurring revenue from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:
Purchasing devices directly from the Company or one of its authorized resellers;
Financing devices under the Company’s QuickStart Program, which are non-cancellable sixty month sales-type leases, through an unrelated equipment financing company, if available, or directly from the Company; and
Renting devices under the Company’s JumpStart Program, which are cancellable month-to-month operating leases.
Highlights of the Company are below:
Over 23,000 customers and 1,320,000 connections (as defined in Item 1. Business) 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;
72 United States and foreign patents are in force;
Over 140 employees;
Principal locations including Malvern, Pennsylvania and Denver, Colorado;
The Company’s fiscal year ends June 30th.

COVID-19 Update

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

In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of our employees by implementing work-from-home measures while continuing to diligently serve our customers. Additionally, we have created an internal task force to lead measures to protect the business in light of the volatility and uncertainty caused by the COVID-19 pandemic, including ensuring the safety of our employees and our community by implementing work from home policies, conserving liquidity, evaluating cost saving actions, partnering with customers to position USAT for renewed growth post crisis,

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and pausing on international expansion. The liquidity conservation and cost savings initiatives include but are not limited to: a 20% salary reduction for the senior leadership team until December 2020; deferral of all cash-based director fees until calendar year 2021; a temporary furlough of about 10% of our employee base; negotiations with and concessions from vendors in regard to cost reductions and/or payment deferrals; an increased collection effort to reduce outstanding accounts receivables; and various supply chain/inventory improvements. Our supply chain network has not been significantly disrupted and we are continuously monitoring for the impact of COVID-19.

We have agreed to concessions on price and/or payment terms with certain customers who have been negatively impacted by COVID-19 and may negotiate additional concessions on price and/or payment terms. These concessions did not have a material effect on our financial results as of and for the year ended June 30, 2020.

We continue to monitor the rapidly evolving situation and guidance from federal, state and local public health authorities. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, based on current trends and if the pandemic is not substantially contained in the near future, COVID-19 may have a material adverse impact on our revenue growth as well as our overall profitability in fiscal year 2021, and may lead to higher sales-related, inventory-related, and operating reserves. Further, a sustained downturn may also result in a decrease in the fair value of our goodwill or other intangible assets, causing them to exceed their carrying value. This may require us to recognize an impairment to those assets.

Paycheck Protection Program Loan

The Company has applied for, and has received, funds under the Paycheck Protection Program in the amount of $3.1 million. The application for these funds required the Company to, in good faith, to certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared applying certain critical accounting policies. The Securities and Exchange Commission (“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. generally accepted accounting principles (“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. The Company derives revenue primarily from the sale or lease of equipment and services to the small ticket, unattended POS market.
The Company’s application of the accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements may require significant judgment in contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment.
The Company enters into arrangements with multiple performance obligations, which may include various combinations of equipment and services. Our equipment and service deliverables qualify as separate performance obligations and can be sold on a standalone basis. A deliverable constitutes a separate unit of accounting when it has standalone value and, where return rights exist, delivery or performance of the undelivered items is considered probable and substantially within the Company’s control. For these multiple deliverable arrangements, the Company allocates revenue to the deliverables based on their relative selling prices. To the extent that a deliverable is subject to specific guidance on whether and/or how to allocate the consideration in a multiple element arrangement, that deliverable is accounted for in accordance with such specific guidance. The Company limits the amount of revenue recognition for delivered items to the amount that is not contingent on the future delivery of products or services or meeting other future performance obligations.

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Deferred Income Tax Assets and Liabilities. The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies in accordance with applicable accounting standards and are based on management’s assumptions and estimates regarding future operating results and levels of taxable income, as well as management’s judgment regarding the interpretation of the provisions of applicable accounting standards. The carrying values of liabilities for income taxes currently payable are based on management’s interpretations of applicable tax laws and incorporate management’s assumptions and judgments regarding the use of tax planning strategies in various taxing jurisdictions.
We evaluate the recoverability of these deferred tax assets by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. We use our historical experience and our short and long-term business forecasts to provide insight. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. As of June 30, 2020 and June 30, 2019, we had federal and state net operating loss carryforwards of $403 million and $349 million, respectively, to offset future taxable income, the majority of which expire through approximately 2039. Federal and some state net operating loss carryforwards generated in tax years ending after December 31, 2017 can be carried forward indefinitely. These federal and state net operating loss carryforwards are reserved with a full valuation allowance because, based on the available evidence, we believe it is more likely than not that we would not be able to utilize those deferred tax assets in the future. If the actual amounts of taxable income differ from our estimates, the amount of our valuation allowance could be materially impacted. Federal operating loss carryforwards start to expire in 2022 and certain state operating loss carryforwards are currently expiring.
Goodwill. Pursuant to applicable accounting standards, we test goodwill for impairment at least annually by comparing the fair value of our reporting unit to its carrying value using a market approach. An impairment charge is recognized for the amount by which, if any, the carrying value exceeds the reporting unit’s fair value. However, the loss recognized cannot exceed the reporting unit’s goodwill balance.
The Company has selected April 1 as its annual test date. The Company has concluded there has been no impairment of goodwill during the years ended June 30, 2020, 2019, or 2018. As of the date of our annual impairment test for fiscal year 2020, the fair value of our reporting unit exceeded its carrying value by a margin of approximately $350 million. As of June 30, 2020, if our estimate of the fair value of our reporting unit was 10% lower, no goodwill impairment would have existed.
Impairment of Long-Lived Assets. Long-lived assets are reviewed for impairment at the asset group level whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment is indicated. A loss is then recognized for the difference, if any, between the fair value of the asset (as estimated by management using its best judgment) and the carrying value of the asset. If actual market value is less favorable than that estimated by management, additional write-downs may be required.
Allowances for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Estimating this amount requires us to analyze the financial strengths of our customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. By its nature, such an estimate is highly subjective, and it is possible that the amount of accounts receivable that we are unable to collect may be different than the amount initially estimated. Our allowance for doubtful accounts on June 30, 2020 and 2019 was $7.7 million and $4.9 million, respectively. The increase in the allowance for doubtful accounts was primarily due to an increase in the aging of our trade accounts receivable from June 30, 2019 to June 30, 2020. To the extent the actual collectability of our accounts receivable differs from our estimates by 10%, our June 30, 2020 net income would be higher or lower by approximately $0.8 million, on an after-tax basis, depending on whether the actual collectability was better or worse, respectively, than the estimated allowance.
Inventories. We determine the value of inventories using the lower of cost or net realizable value. We write down inventories for the difference between the carrying value of the inventories and their net realizable value. If actual market conditions are less favorable than those projected by management, additional write-downs may be required.
We estimate our reserves for inventory obsolescence by continuously examining our inventories to determine if there are indicators that carrying values exceed net realizable values. Experience has shown that significant indicators that could require the need for additional inventory write-downs are the age of the inventory, the length of its product life cycles, anticipated demand for our products, changes to technical standards required by payment companies or by law, and current economic conditions. While we believe that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, actual demand could be less than forecasted demand for our products and we could experience additional inventory write-downs in the future. Our inventory reserve on June 30, 2020 and 2019 was $2.8 million and $5.9 million, respectively. The decrease in the inventory reserve was primarily due to the disposal of inventory during the year ended June 30, 2020. To the extent that actual obsolescence of our inventory differs from our estimate by 10%, our June 30, 2020 net income would be higher or lower by approximately $0.3 million, on an after-tax basis.

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Loss Contingencies. Loss contingencies are uncertain and unresolved matters that arise in the ordinary course of business and result from events or actions by others that have the potential to result in a future loss. Such contingencies include, but are not limited to, litigation.
When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the low-end of such range. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be continuously evaluated to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss.
Disclosure is provided for material loss contingencies when a loss is probable but a reasonable estimate cannot be made, and when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We regularly review all contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.
See Note 19 to the consolidated financial statements for further information.
RESULTS OF OPERATIONS
The following tables set forth our results of operations for the periods presented. The period-to-period comparison of our historical results is not necessarily indicative of the results that may be expected in the future.
Certain prior period amounts have been reclassified to conform with current year presentation. Additionally, in connection with the preparation of the condensed consolidated financial statements for the three months ended December 31, 2019, the Company identified certain adjustments that are required to be made to its fiscal year 2019 annual financial statements which resulted in a $2.1 million decrease in net loss for the year ended June 30, 2019. The Company does not believe these adjustments are material to the previously issued financial statements.
Revenue and Gross Profit
 
Year Ended June 30,
 
Percent Change
($ in thousands)
2020
 
2019
 
2018
 
2020 v. 2019
 
2019 v. 2018
Revenue:
 
 
 
 
 
 
 
 
 
License and transaction fees
$
133,167

 
$
122,908

 
$
96,872

 
8.3
%
 
26.9
 %
Equipment sales
29,986

 
21,558

 
35,636

 
39.1
%
 
(39.5
)%
Total revenue
163,153

 
144,466

 
132,508

 
12.9
%
 
9.0
 %
 
 
 
 
 
 
 
 
 
 
Cost of sales:
 
 
 
 
 
 
 
 
 
Cost of services
82,980

 
79,980

 
61,175

 
3.8
%
 
30.7
 %
Cost of equipment
33,900

 
24,301

 
35,657

 
39.5
%
 
(31.8
)%
Total cost of sales
116,880

 
104,281

 
96,832

 
12.1
%
 
7.7
 %
 
 
 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
 
 
License and transaction fees
50,187

 
42,928

 
35,697

 
16.9
%
 
20.3
 %
Equipment sales
(3,914
)
 
(2,743
)
 
(21
)
 
42.7
%
 
NM

Total gross profit
$
46,273

 
$
40,185

 
$
35,676

 
15.1
%
 
12.6
 %
____________
NM — not meaningful
Revenue
Total revenue for the year ended June 30, 2020 was $163.2 million, consisting of $133.2 million of license and transactions fees and $30.0 million of equipment sales, compared to $144.5 million for the year ended June 30, 2019, consisting of $122.9 million

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of license and transaction fees and $21.6 million of equipment sales. The $18.7 million increase in total revenue from the prior fiscal year was attributable to a $10.3 million increase in license and transaction fees driven primarily by an increase in connection count compared to the same period last year and a $8.4 million increase in equipment sales driven primarily by higher shipments compared to the same period last year due to a large equipment sale made to a strategic customer during the first three quarters of fiscal year 2020. To date, the fee concessions through June 30, 2020 granted to customers whose locations were affected by COVID-19 shutdowns totaled approximately $0.7 million, which was not material to the financial results as of and for the year ended June 30, 2020.
Total revenue for the year ended June 30, 2019 was $144.5 million, consisting of $122.9 million of license and transactions fees and $21.6 million of equipment sales, compared to $132.5 million for the year ended June 30, 2018, consisting of $96.9 million of license and transaction fees and $35.6 million of equipment sales. The $12.0 million increase in total revenue from the prior fiscal year was attributable to a $26.0 million increase in license and transaction fees offset by a $14.1 million decrease in equipment sales. The increase in license and transaction fees is driven by approximately 141,000 net new connections in FY2019. The decrease in equipment sales is driven by lower shipments in 2019.
Cost of sales
Total cost of sales for the year ended June 30, 2020 was $116.9 million, consisting of $83.0 million of cost of services and $33.9 million of equipment costs, compared to $104.3 million for the year ended June 30, 2019, consisting of $80.0 million of cost of services and $24.3 million of equipment costs. The $12.6 million increase in total cost of sales from the prior fiscal year was attributable to a $3.0 million increase in cost of services driven primarily by an increase in connection count compared to the same period last year and a $9.6 million increase in equipment costs driven primarily by higher shipments compared to the same period last year.
Total cost of sales for the year ended June 30, 2019 was $104.3 million, consisting of $80.0 million of cost of services and $24.3 million of equipment costs, compared to $96.8 million for the year ended June 30, 2018, consisting of $61.2 million of cost of services and $35.7 million of equipment costs. The $7.4 million increase in total cost of sales from the prior fiscal year was attributable to a $18.8 million increase in cost of services offset by a $11.4 million decrease in equipment costs, driven by lower shipments in fiscal year 2019.
Gross Margin
Overall gross margin increased from 27.8% for fiscal year 2019 to 28.4% for fiscal year 2020. This increase is attributable to an increase in the license and transaction fee margin from 34.9% for fiscal year 2019 to 37.7% for fiscal year 2020 and a relatively flat change in equipment margin from (12.7)% for fiscal year 2019 to (13.1)% for fiscal year 2020. The increase in the license and transaction fee margin is primarily due to higher license and transaction fee margin earned in fiscal year 2020 from a strategic customer.
Overall gross margin increased from 26.9% for fiscal year 2018 to 27.8% for fiscal year 2019. This increase occurred despite decreases in the license and transaction fee margin from 36.8% for fiscal year 2018 to 34.9% for fiscal year 2019 and the equipment margin from (0.1)% for fiscal year 2018 to (12.7)% for fiscal year 2019. Low or negative margin equipment sales were a much lower proportion of total revenue in fiscal year 2019 at 15% compared to 27% in fiscal year 2018.
Operating Expenses
 
Year ended June 30,
 
Percent Change
Category ($ in thousands)
2020
 
2019
 
2018
 
2020 v. 2019
 
2019 v. 2018
Selling, general and administrative expenses
$
60,266

 
$
46,527

 
$
34,647

 
29.5
%
 
34.3
%
Investigation, proxy solicitation and restatement expenses
21,292

 
16,073

 

 
32.5
%
 
NM

Integration and acquisition costs

 
1,338

 
7,048

 
NM

 
(81.0
%)
Depreciation and amortization
4,307

 
4,430

 
3,204

 
(2.8
%)
 
38.3
%
Total operating expenses
$
85,865

 
$
68,368

 
$
44,899

 
25.6
%
 
52.3
%
____________
NM — not meaningful

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Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended June 30, 2020 were $60.3 million, compared to $46.5 million for the year ended June 30, 2019. The $13.7 million increase from the prior fiscal year was primarily attributable to $7.5 million in increased employee related costs due to higher headcount in 2020 to further invest in the Company’s strategic plans for growth and increased severance and stock compensation related to employee and officer transitions, a $3.8 million increase in professional fees due to increased staff augmentation costs to support the Company’s operations and $2.6 million of additional sales tax related liabilities.
Selling, general and administrative expenses for the year ended June 30, 2019 were $46.5 million, compared to $34.6 million for the year ended June 30, 2018. The $11.9 million increase from the prior fiscal year was attributable to a $5.3 million net increase of employee related costs, $2.2 million of tax expense driven by sales tax exposure, $2.1 million of increased reserve for bad debt expense, and $0.7 million of increased expenses related to the Company's premises. The Company also experienced increased audit fees related to all of the Company’s fiscal year 2019 filings and associated restatements.
Investigation, proxy solicitation and restatement expenses

In fiscal year 2019, the Audit Committee, with the assistance of independent legal and forensic accounting advisors, conducted an internal investigation of then-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 “2019 Investigation”). Additionally in fiscal year 2019, significant financial reporting issues were identified which were unrelated to the internal investigation and which resulted in further adjustments to the Company’s previously issued or prior fiscal years’ unissued financial statements. As a result of the findings, the Company restated its consolidated financial statements as of and for the fiscal year 2017, our selected financial data as of and for the fiscal years ended June 30, 2017, June 30, 2016 and June 30, 2015, and our unaudited consolidated financial statements for the quarterly periods ended September 30, 2016, December 31, 2016, March 31, 2017, September 30, 2017, December 31, 2017, and March 31, 2018.
Investigation, proxy solicitation and restatement expenses were incurred both in fiscal years 2020 and 2019 in connection with the 2019 Investigation and the restatements of previously filed financial statements, bank consents, the remediation of deficiencies in our internal control over financial reporting, the proxy solicitation, and professional services fees to assist with accounting and compliance activities in fiscal year 2020 following the filing of the 2019 Form 10-K.
The Company incurred $21.3 million for accounting and legal services during fiscal year 2020 and $16.1 million during fiscal year 2019 in connection with these expenses.
Integration and acquisition costs
The Company did not incur integration and acquisition costs for the year ended June 30, 2020.
Integration and acquisition costs for the year ended June 30, 2019 were $1.3 million, compared to $7.0 million incurred for the year ended June 30, 2018. The Company acquired Cantaloupe and incurred the majority of integration and acquisition costs in the year ended June 30, 2018, and completed those costs in the year ended June 30, 2019.
Depreciation and amortization
Depreciation and amortization expenses for the year ended June 30, 2020 were $4.3 million, compared to $4.4 million for the year ended June 30, 2019. The change was consistent with the same period in prior year.
Depreciation and amortization expenses for the year ended June 30, 2019 were $4.4 million, compared to $3.2 million for the year ended June 30, 2018. The $1.2 million increase from the prior fiscal year was attributable to intangible asset amortization resulting from the acquisition of Cantaloupe in fiscal year 2018.

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Other Expense, Net
 
Year ended June 30,
 
Percent Change
Category ($ in thousands)
2020
 
2019
 
2018
 
2020 v. 2019
 
2019 v. 2018
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest income
$
1,595

 
$
1,555

 
$
943

 
2.6
%
 
64.9
%
Interest expense
(2,597
)
 
(2,992
)
 
(3,105
)
 
(13.2
%)
 
(3.6
%)
Total other expense, net
$
(1,002
)
 
$
(1,437
)
 
$
(2,162
)
 
(30.3
%)
 
(33.5
%)
____________
NM — not meaningful
Total Other Expense, Net
Total other expense, net for the fiscal year ended June 30, 2020 was $1.0 million, compared to $1.4 million for the fiscal year ended June 30, 2019. The change was primarily driven by a $0.8 million decrease in the fair value of the embedded derivative liability related to the senior secured term loan facility (“2020 Antara Term Facility”) with Antara Capital Master Fund LP (“Antara”) offset by $0.3 million of additional interest expense related to our sales tax accrual.
Total other expense, net for the fiscal year ended June 30, 2019 was $1.4 million, compared to $2.2 million for the fiscal year ended June 30, 2018. The $0.7 million decrease is primarily due to an increase in interest income from agreements under the Company's Quick Start Program.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, we utilize Adjusted EBITDA as a metric in our executive officer and management incentive compensation plans.

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For the fiscal year ended June 30, 2020, the Company had Adjusted EBITDA of $(8.3) million compared to Adjusted EBITDA of $(1.5) million for the fiscal year ended June 30, 2019 and Adjusted EBITDA of $7.4 million for the fiscal year ended June 30, 2018. Reconciliation of net loss to Adjusted EBITDA for the fiscal years ended June 30, 2020, 2019, and 2018 is as follows:
 
Year ended June 30,
($ in thousands)
2020
 
2019
 
2018
 
 
 
 
 
 
Net loss
$
(40,595
)
 
$
(29,882
)
 
$
(11,284
)
Less: interest income
(1,595
)
 
(1,555
)
 
(943
)
Plus: interest expense
2,597

 
2,992

 
3,105

Plus (less): income tax provision (benefit)
1

 
262

 
(101
)
Plus: depreciation expense included in cost of sales for rentals
2,711
 
3,074
 
4,625
Plus: depreciation and amortization expense in operating expenses
4,307

 
4,430

 
3,204

EBITDA
(32,574
)
 
(20,679
)
 
(1,394
)
Plus: stock-based compensation
3,029

 
1,750

 
1,794

Plus: investigation, proxy solicitation and restatement expenses
21,292

 
16,073

 

Plus: integration and acquisition costs

 
1,338

 
7,048

Adjustments to EBITDA
24,321

 
19,161

 
8,842

Adjusted EBITDA
$
(8,253
)
 
$
(1,518
)
 
$
7,448

For the three months ended June 30, 2020, the Company had Adjusted EBITDA of $(0.1) million compared to Adjusted EBITDA of $(4.6) million for the three months ended June 30, 2019. Reconciliation of net loss to Adjusted EBITDA for the three months ended June 30, 2020 and 2019 is as follows:
 
Three months ended June 30,
($ in thousands)
2020
 
2019
 
 
 
 
Net loss
$
(11,414
)
 
$
(9,850
)
Less: interest income
(607
)
 
(310
)
Plus: interest expense
1,686

 
474

Plus (less): income tax provision (benefit)
(45
)
 
202

Plus: depreciation expense included in cost of sales for rentals
727
 
534
Plus: depreciation and amortization expense in operating expenses
1,098

 
1,071

EBITDA
(8,555
)
 
(7,879
)
Plus: stock-based compensation
576

 
357

Plus: investigation, proxy solicitation and restatement expenses
7,894

 
2,662

Plus: integration and acquisition costs

 
211

Adjustments to EBITDA
8,470

 
3,230

Adjusted EBITDA
$
(85
)
 
$
(4,649
)
As used herein, Adjusted EBITDA represents net loss before interest income, interest expense, income taxes, depreciation, amortization, non-recurring fees and charges that were incurred in connection with the acquisition and integration of businesses, non-recurring fees and charges that were incurred in connection with the 2019 Investigation and financial statement restatement activities as well as proxy solicitation costs, and stock-based compensation expense.
We have excluded the non-cash expense, stock-based compensation, as it does not reflect our cash-based operations. We have excluded the non-recurring costs and expenses incurred in connection with business acquisitions in order to allow more accurate comparison of the financial results to historical operations. We have excluded the professional fees incurred in connection with the non-recurring costs and expenses related to the 2019 Investigation, financial statement restatement activities, and proxy solicitation costs because we believe that they represent charges that are not related to our operations.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations primarily through cash from operating activities, debt financings, and equity issuances. Our principal source of liquidity is cash totaling $31.7 million and $27.5 million as of June 30, 2020 and June 30, 2019, respectively. On July 25, 2017 and May 25, 2018, the Company closed its underwritten public offerings resulting in gross proceeds, before deducting underwriting discounts and commissions and other offering expenses of approximately $43.1 million and $69.6 million, respectively. In October 2019, the Company also sold shares to Antara for gross proceeds of $20.0 million and entered into the 2020 Antara Term Facility to draw $15.0 million on a $30.0 million senior secured term loan facility.
On August 14, 2020, the Company repaid all amounts outstanding under the 2020 Antara Term Facility and entered into a credit agreement (the “2021 JPMorgan Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”). The 2021 JPMorgan Credit Agreement provides for a $5 million secured revolving credit facility and a $15 million secured term facility, which includes an uncommitted expansion feature that allows the Company to increase the total revolving commitments and/or add new tranches of term loans in an aggregate amount not to exceed $5 million.
Operating Activities
For the year ended June 30, 2020, net cash used in operating activities was $14.1 million. The foregoing reflects a net benefit for non-cash operating activities of $21.6 million, and net cash provided by the change in various operating assets and liabilities of $4.9 million. Major non-cash charges included $7.0 million of depreciation and amortization expense, $1.3 million of non-cash interest expense, $3.0 million of stock compensation expense, $4.5 million for the reimbursement of shareholder proxy costs, and $3.0 million of bad debt expense.

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For the year ended June 30, 2019, net cash used in operating activities was $28.2 million. The foregoing reflects a net benefit for non-cash operating activities of $15.9 million, and net cash provided by the change in various operating assets and liabilities of $14.2 million. Major non-cash charges included $7.5 million of depreciation and amortization expense and $1.8 million of stock compensation expense.
For the year ended June 30, 2018, net cash provided by operating activities was $12.4 million. The foregoing reflects a net benefit for non-cash operating activities of $11.5 million, and net cash provided by the change in various operating assets and liabilities of $12.3 million, which includes an increase in accounts payable and accrued expenses of $16.9 million. Major non-cash charges included $7.8 million of depreciation and amortization expense, $0.2 million due to deferred income taxes, and $1.8 million of stock compensation expense.
Investing Activities
During the fiscal year ended June 30, 2020, $2.5 million of cash was used in investing activities primarily for the purchase of property and equipment.
During the fiscal year ended June 30, 2019, $4.8 million of cash was used in investing activities primarily for the purchase of property and equipment.
During the fiscal year ended June 30, 2018, $68.9 million of cash was used in investing activities of which $65.2 million was cash paid for the Cantaloupe acquisition and the remainder was primarily cash used for the purchase of property and equipment.
Financing Activities
Net cash provided by financing activities during the fiscal year ended June 30, 2020 was $20.9 million, primarily from the sale of shares to Antara for $20.0 million and draw on the 2020 Antara Term Facility for $15.0 million, partially offset by the repayment of borrowings under a line of credit provided by JPMorgan (“2018 JPMorgan Revolving Credit Facility”) of $10.0 million as well as the repayments of other long-term debt and finance lease obligations.
Net cash used in financing activities during the fiscal year ended June 30, 2019 was $23.6 million, generated by the repayments of long-term debt and finance lease obligations.
Net cash provided by financing activities during the fiscal year ended June 30, 2018 was $127.6 million, generated predominantly by proceeds from the issuance of common stock of $104.8 million, $37.6 million from the proceeds of issuance of long-term debt and draws from the 2018 JPMorgan Revolving Credit Facility, and $1.1 million from the transfer of finance receivables, partially offset by $15.0 million in repayments of long-term debt and capital lease obligations.
Sources and Uses of Cash

The Company has the following primary sources of capital available: (1) cash and cash equivalents on hand of $31.7 million as of June 30, 2020; (2) the cash which may be provided by operating activities; and (3) amounts borrowed from the 2021 JPMorgan Credit Agreement after repayment of the 2020 Antara Term Facility. In addition, management has recently implemented efficiencies in working capital that are designed to increase our cash balances.

On September 30, 2019, the Company prepaid the remaining principal balance of the term loan with JPMorgan (“2018 JPMorgan Term Loan”) of $1.5 million and agreed to permanently reduce the amount available under the 2018 JPMorgan Revolving Credit Facility to $10 million which represented the outstanding balance on the date thereof.

Pursuant to a Stock Purchase Agreement dated October 9, 2019 between the Company and Antara, the Company sold to Antara 3,800,000 shares of the Company’s common stock at a price of $5.25 per share for gross proceeds of $19,950,000 and incurred a cash placement fee of $1.2 million. In connection with the Stock Purchase Agreement, the Company also agreed to file a registration statement under the Securities Act of 1933 with the Securities and Exchange Commission covering the resale of the shares by Antara. Subsequently, Antara and the Company agreed to terminate the obligation of the Company to register the shares in exchange for $1.2 million, paid during the third quarter of fiscal year 2020.

On October 9, 2019, the Company also entered into a commitment letter (“Commitment Letter”) with Antara, pursuant to which Antara committed to extend to the Company a $30.0 million term facility. Upon the execution of the Commitment Letter, the Company paid to Antara a non-refundable commitment fee of $1.2 million and incurred a cash placement fee of $750,000. On October 31, 2019, the Company entered into a Financing Agreement with Antara to draw $15.0 million on the 2020 Antara Term

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Facility. The proceeds of the initial draw were used to repay the outstanding balance of the 2018 JPMorgan Revolving Credit Facility in the amount of $10.1 million, including accrued interest, and to pay transaction expenses.

As of June 30, 2020, the Company intended to prepay the principal amount outstanding on the 2020 Antara Term Facility. The Company recorded a liability for the commitment termination fee and prepayment premium for $1.2 million as of June 30, 2020. In addition, all of the Company's unamortized issuance costs and debt discount related to the 2020 Antara Term Facility will be recognized as interest expense during the fiscal quarter ending September 30, 2020, which as of June 30, 2020 was $2.6 million. On August 14, 2020, the Company entered into the 2021 JPMorgan Credit Agreement with JPMorgan. The 2021 JPMorgan Credit Agreement provides for a $5 million secured revolving credit facility and a $15 million secured term facility, which includes an uncommitted expansion feature that allows the Company to increase the total revolving commitments and/or add new tranches of term loans in an aggregate amount not to exceed $5 million. In connection with the consummation of the 2021 JPMorgan Credit Agreement, the Company repaid all amounts outstanding under the 2020 Antara Term Facility.

As of June 30, 2019 the Company disclosed and recorded potential sales tax and related interest and penalty liabilities, which the Company estimated to be $20.0 million in the aggregate as of June 30, 2020. The Company continues to evaluate these liabilities and the amount and timing of any such payments.

During the year ended June 30, 2020, the Company reached a settlement of a shareholder class action lawsuit pending in federal court. The Company’s insurance carriers paid $12.7 million towards the settlement and the Company paid $2.6 million towards the settlement, which was made in July 2020. As discussed in Note 19, those amounts are contingent upon certain future events, but are expected to be distributed pursuant to the settlement during the next 12 months. The Company recorded the $2.6 million as a liability in the consolidated financial statements as of June 30, 2020.

The Company believes that its current financial resources will be sufficient to fund its current twelve-month operating budget from the date of issuance of these consolidated financial statements.
CONTRACTUAL OBLIGATIONS
As of June 30, 2020, the Company had certain contractual obligations due over a period of time as summarized in the following table:
 
 
Payments Due by Fiscal Year
($ in thousands)
 
Total
 
2021
 
2022-2023
 
2024-2025
 
2026 and Beyond
Debt Obligations
 
$
19,499

 
$
4,486

 
$
13

 
$
15,000

 
$

Finance Lease Obligations
 
65

 
46

 
18

 
1

 

Operating Lease Obligations
 
6,944

 
1,440

 
2,954

 
1,657

 
893

Total Contractual Obligations
 
$
26,508

 
$
5,972

 
$
2,985

 
$
16,658

 
$
893

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As of June 30, 2020 and 2019, we were exposed to market risk related to changes in interest rates on our outstanding borrowings.

As of June 30, 2020, the Company was in active negotiations to refinance its senior secured term loan facility (“2020 Antara Term Facility”) bearing interest at 9.75% per annum, which were successfully completed on August 14, 2020. A 10% change in the level of interest rates on the 2020 Antara Term Facility would not have a material impact on our interest expense or consolidated financial statements at June 30, 2020.

As of June 30, 2019, the Company had borrowed $10,000,000 outstanding under a line of credit and approximately $1,500,000 under a term loan with JP Morgan Chase Bank, N.A. which was repaid during the year ended June 30, 2020. The applicable interest rate on the loans as of June 30, 2019 was LIBOR plus 4%. A 10% change in LIBOR would not have a material impact on our interest expense or consolidated financial statements. 

We are also exposed to market risk related to changes in interest rates on our cash investments. We invest our excess cash in money market funds that we believe are highly liquid and marketable in the short term. These investments earn a floating rate of interest and are not held for trading or other speculative purposes. Consequently, our exposure to market risks for interest rate changes related to our money market funds is not material. Market risks related to fluctuations of foreign currencies are not material and we have no freestanding derivative instruments as of June 30, 2020 or 2019.

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Item 8. Financial Statements and Supplementary Data.
USA TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
 
 
 

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Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
USA Technologies, Inc.
Malvern, Pennsylvania

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of USA Technologies, Inc. (the “Company”) as of June 30, 2020 and 2019, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2020, and the related notes and schedules listed in Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated September 11, 2020 expressed an adverse opinion thereon.

Change in Accounting Principle 

As discussed in Note 2 to the consolidated financial statements, effective July 1, 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification (“ASC”) Topic 842, Leases, and effective July 1, 2018, the Company changed its method of accounting for recognizing revenue from contracts with customers due to the adoption of  ASC Topic 606, Revenue from Contracts with Customers

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ BDO USA, LLP

We have served as the Company’s auditor since 2019.
Philadelphia, Pennsylvania
September 11, 2020

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Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
USA Technologies, Inc.
Malvern, Pennsylvania

Opinion on Internal Control over Financial Reporting

We have audited USA Technologies, Inc.’s (the “Company’s”) internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of June 30, 2020, based on the COSO criteria.  

We do not express an opinion or any other form of assurance on management’s statements referring to any remedial measures taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of June 30, 2020 and 2019, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2020, and the related notes and financial statement schedule listed in Item 15 (collectively referred to as “the financial statements”) and our report dated September 11, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to maintain controls over non-routine and complex transactions has been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 financial statements, and this report does not affect our report dated September 11, 2020 on those financial statements.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.


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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ BDO USA, LLP

Philadelphia, Pennsylvania
September 11, 2020


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USA Technologies, Inc.
Consolidated Balance Sheets
 
As of June 30,
($ in thousands, except per share data)
2020
 
2019
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,713

 
$
27,464

Accounts receivable, less allowance of $7,676 and $4,866, respectively
17,273

 
21,906

Finance receivables, net
7,468

 
6,727

Inventory, net
9,128

 
11,273

Prepaid expenses and other current assets
1,782

 
1,558

Total current assets
67,364

 
68,928

 
 
 
 
Non-current assets:
 
 
 
Finance receivables due after one year, net
11,213

 
12,642

Other assets
1,993

 
2,099

Property and equipment, net
7,872

 
9,590

Operating lease right-of-use assets
5,603

 

Intangibles, net
23,033

 
26,171

Goodwill
63,945

 
63,945

Total non-current assets
113,659

 
114,447

 
 
 
 
Total assets
$
181,023

 
$
183,375

 
 
 
 
Liabilities, convertible preferred stock and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
27,058

 
$
27,584

Accrued expenses
30,265

 
23,705

Finance lease obligations and current obligations under long-term debt
3,328

 
12,497

Deferred revenue
1,698

 
1,681

Total current liabilities
62,349

 
65,467

 
 
 
 
Long-term liabilities:
 
 
 
Deferred income taxes
137

 
71

Finance lease obligations and long-term debt, less current portion
12,435

 
276

Operating lease liabilities, non-current
4,749

 

Total long-term liabilities
17,321

 
347

 
 
 
 
Total liabilities
$
79,670

 
$
65,814

Commitments and contingencies (Note 19)


 


Convertible preferred stock:
 
 
 
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $20,779 and $20,111 at June 30, 2020 and 2019, respectively
3,138

 
3,138

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

 

Common stock, no par value, 640,000,000 shares authorized, 65,196,882 and 60,008,481 shares issued and outstanding at June 30, 2020 and 2019, respectively
401,240

 
376,853

Accumulated deficit
(303,025
)
 
(262,430
)
Total shareholders’ equity
98,215

 
114,423

Total liabilities, convertible preferred stock and shareholders’ equity
$
181,023

 
$