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USAT > SEC Filings for USAT > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for USA TECHNOLOGIES INC


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, the anticipated financial and operating results of the Company. For this purpose, forward-looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, "estimate," "could," "should," "would," "likely," "may," "will," "plan," "intend," "believes," "expects," "anticipates," "projected," or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that could cause the Company's actual results to differ materially from those projected, include, for example:

? general economic, market or business conditions;

? the ability of the Company to generate sufficient sales to generate operating profits, or to conduct operations at a profit;

? the ability of the Company to raise funds in the future through sales of securities in order to sustain its operations if an unexpected or unusual event would occur;

? the ability of the Company to compete with its competitors to obtain market share;

? whether the Company's customers purchase or rent ePort devices or our other products in the future at levels currently anticipated by our Company, including our JumpStart Program;

? whether the Company's customers continue to operate or commence operating ePorts received under the JumpStart Program or otherwise at levels currently anticipated by the 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;

? whether the significant increase in the interchange fees charged by Visa and MasterCard for small ticket debit card transactions effective October 1, 2011, would adversely affect our business, including our revenues, gross profits, and anticipated future connections to our network;

? the ability of the Company to obtain sufficient funds through operations or otherwise to repay its debt obligations, or to fund development and marketing of its products;

? the ability of the Company to satisfy its trade obligations included in accounts payable and accrued expenses;

? the incurrence by us of any unanticipated or unusual non-operating expenses, such as in connection with a proxy contest, which would require us to divert our cash resources from achieving our business plan;

? the ability of the Company to predict or estimate its future quarterly or annual revenues and expenses given the developing and unpredictable market for its products;

? the ability of the Company to retain key customers from whom a significant portion of its revenues is derived;

? the ability of a key customer to reduce or delay purchasing products from the Company;

? whether the actions of the former CEO of the Company which resulted in his separation from the Company in October 2011 or the Securities and Exchange Commission's investigation would have a material adverse effect on the future financial results or condition of the Company; and

? as a result of the slowdown in the economy and/or the tightening of the capital and credit markets, our customers may modify, delay or cancel plans to purchase our products or services, and suppliers may increase their prices, reduce their output or change their terms of sale.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above. We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.


Any forward-looking statement made by us in this Form 10-Q speaks only as of the date of this Form 10-Q. Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

Three months ended September 30, 2012 compared to the three months ended September 30, 2011

Results for the fiscal quarter ended September 30, 2012 continued to demonstrate significant growth and improvements in the Company's operations. Highlights of year over year improvements include:

? Total revenue up 25%;

? Recurring license and transaction fee revenue up 27%; and

? Gross profit dollars up 53%.

Revenues for the quarter ended September 30, 2012 were $8,390,277, consisting of $6,906,356 of license and transactions fees and $1,483,921 of equipment sales, compared to $6,705,748 for the quarter ended September 30, 2011, consisting of $5,419,663 of license and transaction fees and $1,286,085 of equipment sales. The increase in total revenue of $1,684,529, or 25%, was primarily due to an increase in license and transaction fees of $1,486,693, or 27%, and an increase in equipment sales of $197,836 or 15%, from the same period in the prior year.

The growing ePort Connect service base of connections drove the 27% increase in license and transaction fee revenue. Revenue from license and transaction fees, which is fueled primarily by monthly ePort Connect® service fees and transaction processing fees, grew to approximately $6.9 million for the first quarter of fiscal 2013 from $5.4 million for the same period a year ago. These recurring revenues represented 82% and 81% of total revenue for the first quarter of fiscal 2013 and 2012, respectively.
License and transaction fee highlights for the quarter ended September 30, 2012 included:

? Margin improvement of approximately 8 percentage points to 39% gross margins for the first quarter fiscal 2013 compared to 31% a year ago.

? Increases in the number of small-ticket, credit/debit transactions and dollars handled in the first quarter of 16% and 19%, respectively, compared to the same period a year ago; and,

? 64% growth in ePort Connect customers from the prior year first quarter, including 425 new customers in the fiscal 2013 first quarter, for 3,725 customers at September 30, 2012.

The increase in license and transaction fees was due to the growth in ePort Connect service fees and transaction dollar volume from the increased number of ePort® units connected to our ePort Connect service. As of September 30, 2012, the Company had approximately 174,000 connections to the ePort Connect service (including approximately 15,000 non-USAT, third party devices) as compared to approximately 129,000 connections to the ePort Connect service (including approximately 15,000 non-USAT, third party devices) as of September 30, 2011. During the quarters ended September 30, 2012 and 2011, the Company added approximately 10,000 net connections to our network. JumpStart units represented approximately 80% and 60% of connections added during the first quarters of the 2013 and 2012 fiscal years, respectively.

Compared to a quarter a year ago, overall net connections to the ePort Connect service remained flat at 10,000 connections quarter over quarter, due to fewer kiosk-related connections (that utilize the ePort SDK) and third party hardware connections during the September 30, 2012 quarter compared to the September 30, 2011 quarter.


Pursuant to its agreements with customers, the Company in addition to ePort Connect service fees earns transaction processing fees equal to a percentage of the dollar volume processed by the Company, which are included as licensing and transaction processing revenues in its Consolidated Statements of Operations. During the quarter ended September 30, 2012, the Company processed approximately 29 million transactions totaling approximately $50 million compared to approximately 25 million transactions totaling approximately $42 million during the quarter ended September 30, 2011, an increase of approximately 16% in the number of transactions and approximately 19% in the value of transactions processed.

It typically takes 30-60 days for a new connection to begin contributing to the Company's license and transaction fee revenues. The Company counts its ePort Connect connections upon shipment of an active terminal to a customer under contract, at which time activation on its network is performed by the Company, and the terminal is capable of conducting business via the Company's network and related services. An ePort Connect connection does not necessarily mean that the unit is actually installed by the customer on a machine, or that the unit has begun processing transactions, or that the Company has begun receiving monthly service fees in connection with the unit. Rather, at the time of shipment of the ePort, the customer becomes obligated to pay the one-time activation fee, and is obligated to pay monthly service fees in accordance with the terms of the customer's contract with the Company. We anticipate that our license and transaction fee revenues would continue to increase if the number of connections to our network would continue to increase.

In addition, our customer base increased with approximately 425 new ePort Connect customers added during the quarter ended September 30, 2012 bringing the total number of such customers to approximately 3,725 as of September 30, 2012. The Company added approximately 300 new customers in the quarter ended September 30, 2011. By comparison, the Company had approximately 2,275 customers as of September 30, 2011, representing a 64% increase during the past twelve months.

The $197,836 increase in equipment sales was mainly a result of an increase of approximately $423,000 in ePort product sales, offset by a decrease of approximately $219,000 in Energy products. The $423,000 increase in ePort products was directly attributable selling more units during the quarter ended September 30, 2012 than during the quarter ended September 20, 2011, as well as a greater level of activation fees on connections in the quarter compared to the prior year. The $219,000 decrease in Energy products is directly attributable selling fewer units during the quarter ended September 30, 2012 than during the quarter ended September 30, 2011.

Cost of sales consisted of cost of services for network and transaction fee related costs of $4,192,360 and $3,761,577 and equipment costs of $1,053,636 and $895,135, for the quarters ended September 30, 2012 and 2011, respectively. The increase in total cost of sales of $589,284 was due to an increase in cost of services of $430,783 and an increase in equipment costs of $158,501. The increase in cost of services was predominantly related to increases in units connected to the network and increases in transaction processing volume. The increase in equipment costs is directly attributable to selling more units during the quarter ended September 30, 2012 than during the quarter ended September 30, 2011.

Gross profit ("GP") for the quarter ended September 30, 2012 was $3,144,281 compared to GP of $2,049,036 for the previous corresponding quarter, an increase of $1,095,245, of which $1,055,910 represents increases attributable to license and transaction fees and $39,335 equipment sales GP. Overall margins increased from 31% to 37% due to license and transaction fees margins having increased from 31% to 39% offset by equipment sales margins having decreased from 30% to 29%. License and transaction fee margins increased due to improved efficiencies stemming from recent partnership agreements and a larger ePort Connect service base. The Company was anticipating margins on license and transaction fees to be slightly in excess of 40%, however a credit issued to customer during the quarter caused the margin to fall below 40%. The decrease in equipment sales margins was mainly due to increased costs associated with inventory and warranty reserves in the quarter ended September 30, 2012.

Selling, general and administrative ("SG&A") expenses of $3,215,125 for the quarter ended September 30, 2012, decreased by $252,945, or 7%, from the same quarter in the prior fiscal year. Included in the $3.2 million of SG&A expenses during the quarter ended September 30, 2012 were approximately $328,000 in charges related to the proxy contest, related litigation and settlement.

Outside of the proxy contest and litigation expenses, SG&A expenses decreased approximately $581,000 in the first quarter as compared to the same quarter in the fiscal 2012. This decrease in expenses is due primarily to $180,000 decrease in employee compensation and benefit costs, mostly associated with the resignation of the Company's former CEO in October 2011, $160,000 of sales tax expenses in the quarter ended September 30, 2011, which we did not have in the current period and other net decreases of $241,000.

The quarter ended September 30, 2012 resulted in net income of $39,140 compared to a net loss of $78,954 for the quarter ended September 30, 2011, an improvement of $118,094 from the prior corresponding fiscal quarter. For the fiscal quarters ended September 30, 2012 and 2011, the loss per common share was $0.01.


For the quarter ended September 30, 2012, the Company had a positive Adjusted EBITDA of $730,707 that includes approximately $328,000 of proxy related expenses. Reconciliation of net income (loss) to Adjusted EBITDA for the quarters ended September 30, 2012 and 2011 is as follows:

                                                           Three months ended
                                                              September 30,
                                                          2012            2011
     Net income (loss)                                 $   39,140     $    (78,954 )

    Less interest income                                  (20,166 )        (17,867 )

    Plus interest expense                                  23,006           11,164

    Plus income tax expense                                 6,921                -

    Plus depreciation expense                             834,006          563,125

    Plus amortization expense                             185,600          258,600

    Less change in fair value of warrant liabilities     (463,133 )     (1,736,609 )

    Plus stock-based compensation                         125,333          240,453

    Adjusted EBITDA                                    $  730,707     $   (760,088 )

As used herein, Adjusted EBITDA represents net income (loss) before interest income, interest expense, income taxes, depreciation, amortization, change in fair value of warrant liabilities, stock-based compensation expense, and impairment expense on intangible assets. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash charge that is not related to the Company's operations. We have excluded the non-cash expenses, stock-based compensation, and impairment expense, as they do not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net income or net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company's net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company's profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for changes in fair value of warrant liabilities and stock-based compensation expense.

LIQUIDITY AND CAPITAL RESOURCES

For the quarter ended September 30, 2012, net cash provided by operating activities was $678,010 as result of net income of $39,140, which included non-cash charges of $682,598, offset by $43,728 net cash used by the change in operating assets and liabilities. The most significant non-cash charges during the quarter were of depreciation and amortization of assets, and charges for the vesting and issuance of common stock for employee and director compensation, offset by the reduction in fair value of warrant liabilities. The cash used for the $43,728 change in the Company's operating assets and liabilities was primarily the result of decreases of $1,451,446 in accrued expenses and $115,452 in accounts payable, offset by decreases in inventory, receivables and other assets of $1,331,390, $112,151, and $79,629, respectively.

During the quarter ended September 30, 2012, the Company used $2,076,915 for investing activities of which $2,075,390 related to the purchase of equipment for the JumpStart Program. The Company obtained net cash of $1,175,963 through financing activities, $1,337,779 of which are proceeds from the Line of Credit and $161,816 related to repayment of debt.

The Company has incurred losses since inception. Our accumulated deficit through September 30, 2012 is composed of cumulative losses amounting to approximately $199,120,000, preferred dividends converted to common stock of approximately $2,690,000, and charges incurred for the open-market purchases of preferred stock of approximately $150,000. The Company has historically raised capital through equity offerings in order to fund operations.


As a result of the continued growth in connections to our ePort Connect service, recurring revenue from license and transaction fees increased from $5,419,663 for the three months ended September 30, 2011 to $6,906,356 for the three months ended September 30, 2012, an increase of 27%. In addition, total GP dollars and GP margins have increased from $2,049,036 and 31% for the three months ended September 30, 2011 to $3,144,281 and 37% for the three months ended September 30, 2012, an increase of 53% in GP dollars and a six-point improvement in margins. Our average monthly cash GP during the three months ended September 30, 2012, excluding non-cash depreciation expense included in cost of sales during the quarter of approximately $676,000, approximates $1,273,000 and is expected to increase in the next fiscal quarter due to recognizing recurring revenue on units shipped during the quarter ended September 30, 2012.

Our average monthly SG&A expenses during the three months ended September 30, 2012 were approximately $1,072,000. This includes charges during the quarter of approximately $328,000 related to the proxy contest matter, and other non-cash net charges of approximately $119,000. Excluding these charges, our average monthly cash-based SG&A expenses during the three months ended September 30, 2012 was approximately $923,000.

The excess of cash-based GP over the cash-based SG&A expenses described above resulted in positive Adjusted EBITDA during the quarter of $730,707 (see table above). The Company reports Adjusted EBITDA to reflect the liquidity of operations and a measure of operational cash flow. Adjusted EBITDA excludes significant non-cash charges such as depreciation, amortization of intangibles, fair value warrant liability changes and stock-based compensation from net income. We believe that, provided there are no unusual or unanticipated material non-operational expenses, achieving positive Adjusted EBITDA is sustainable predominately because the current connection base is driving the necessary level of recurring revenue from license and transaction fees and associated gross profits, and as our connection base increases, we believe Adjusted EBITDA will continue to grow as well.

During the remaining 2013 fiscal year, and provided there are no unanticipated or unusual non-operational expenses, the Company anticipates utilizing substantial cash resources in connection with ePort units expected to be used in the JumpStart Program. In the event we incur any unanticipated or unusual non-operational expenses during the remaining 2013 fiscal year, the Company may reduce the ePort units used in the JumpStart Program, thereby also reducing or eliminating the cash used for the program. During the quarter ended September 30, 2012, the Company funded approximately 80% of its new connections through JumpStart. The Company anticipates using the JumpStart Program for approximately 55% to 60% of its anticipated connections in fiscal 2013 as a result of the potential diversification from the kiosk market, where many customers only require our ePort SDK or our newly introduced Quick Connect Web service.

Provided there are no unanticipated or unusual non-operational expenses during the remainder of the 2013 fiscal year, we believe we are adequately positioned to fund and grow the business including the JumpStart Program. The Company has three sources of cash available to fund and grow the business: (1) cash on hand of $6,203,703 at September 30, 2012; (2) the anticipated growing level of Adjusted EBITDA which indicates the business has the potential to generate cash; and (3) the availability of the line of credit with Avidbank that was established in July 2012. Although the line initially has an availability of approximately $1.5 million, the Company anticipates that the availability would increase as our business and relationship with Avidbank grows, provided we continue to satisfy the various affirmative and negative covenants set forth in the loan agreement.

Therefore, based upon the above assumptions, the Company believes its existing cash and cash equivalents as of September 30, 2012, would provide sufficient funds through at least July 1, 2013 in order to meet its cash requirements, including payment of its accrued expenses and payables, cash resources anticipated to be utilized for the JumpStart program and other anticipated capital expenditures, and the repayment of long-term debt.


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