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USAT > SEC Filings for USAT > Form 10-Q on 14-May-2014All Recent SEC Filings

Show all filings for USA TECHNOLOGIES INC

Form 10-Q for USA TECHNOLOGIES INC


14-May-2014

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

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

? whether the Company's current or future customers purchase, rent or utilize ePort devices or our other products in the future at levels currently anticipated by our Company, including appropriate diversification resulting from sources other than our JumpStart Program;

? 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 incurrence by us of any unanticipated or unusual non-operating expenses which would require us to divert our cash resources from achieving our business plan;

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

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

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

? the ability of the Company to obtain widespread commercial acceptance of its products and service offerings such as ePort QuickConnect, mobile payment and loyalty and prepaid 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;

? whether our suppliers would increase their prices, reduce their output or change their terms of sale; and

? the ability of the Company to operate without infringing the proprietary rights of others.

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 March 31, 2014 compared to the three months ended March 31, 2013

Results for the quarter ended March 31, 2014 continued to demonstrate growth and improvements in the Company's operations as compared to the quarter ended March 31, 2013. Highlights of year over year improvements include:

? $26.7 million of deferred tax assets recognized;

? Recurring license and transaction fee revenue up 19% to $9.0 million; and

? Total connections to its ePort Connect service as of March 31, 2014 up 24% as compared to March 31, 2013.

Revenues for the quarter ended March 31, 2014 were $10,443,932, consisting of $8,999,689 of license and transaction fees and $1,444,243 of equipment sales, compared to $8,980,804 for the quarter ended March 31, 2013, consisting of $7,562,589 of license and transaction fees and $1,418,215 of equipment sales. The increase in total revenue of $1,463,128, or 16%, was primarily due to an increase in license and transaction fees of $1,437,100, or 19%, and an increase in equipment sales of $26,028 or 2%, from the same period in the prior fiscal year.

Revenue from license and transaction fees, which represented 86% of total revenue for the quarter ended March 31, 2014, is primarily attributable to monthly ePort Connect® service fees and transaction processing fees. Highlights for the quarter ended March 31, 2014 included:

? Adding 20,000 net connections to our service, consisting of 22,000 new connections to our ePort Connect service in the quarter, offset by 2,000 deactivations, compared to 10,000 net connections added in the same quarter of fiscal 2013;

? As of March 31, 2014, the Company had approximately 244,000 connections to the ePort Connect service compared to approximately 196,000 connections to the ePort Connect service as of March 31, 2013, an increase of 48,000 connections, or 24%;

? Increases in the number of small-ticket, credit/debit transactions and dollars handled for the quarter ended March 31, 2014 of 32% and 36%, respectively, compared to the same period a year ago; and

? ePort Connect customer base grew 47% from March 31, 2013.

The increase in license and transaction fees was due to the growth in ePort Connect service fees and transaction dollars that stems from the increased number of connections to our ePort Connect service. As of March 31, 2014, the Company had approximately 244,000 connections to the ePort Connect service as compared to approximately 196,000 connections to the ePort Connect service as of March 31, 2013. During the quarter ended March 31, 2014, the Company added approximately 20,000 net connections to our network compared to approximately 10,000 net connections added during the quarter ended March 31, 2013.

Pursuant to its agreements with customers, in addition to ePort Connect service fees the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company. During the quarter ended March 31, 2014, the Company processed approximately 42.8 million transactions totaling approximately $73.9 million compared to approximately 32.4 million transactions totaling approximately $54.5 million during the quarter ended March 31, 2013, an increase of approximately 32% in the number of transactions and approximately 36% in the value of transactions processed.

New customers added to our ePort® Connect service during the quarter ended March 31, 2014 totaled 575, bringing the total number of customers to approximately 6,650 as of March 31, 2014. The Company added approximately 425 new customers in the quarter ended March 31, 2013. By comparison, the Company had approximately 4,525 customers as of March 31, 2013, representing 2,125 customers added, or a 47% increase during the past twelve months. The Company views the total installed base of machines managed by its customers that have yet to transition to cashless payment, as a key strategic opportunity for future growth in connections. We count a customer as a new customer upon the signing of their ePort Connect service agreement. When a reseller sells our ePort, we count a customer as a new customer upon the signing of the applicable services agreement with the customer.

The $26,028 increase in equipment revenue was a result of reversing approximately $152,000 of rebate charges from a prior period, offset by a decrease of approximately $110,000 in sales of Energy Misers and by a decrease of approximately $16,000 in other product sales.

Cost of sales consisted of license and transaction fee related costs of $5,785,721 and $4,525,244 and equipment costs of $660,423 and $774,221 for the quarters ended March 31, 2014 and 2013, respectively. The increase in total cost of sales of $1,146,679, or 22%, was primarily due to an increase in cost of services of $1,260,477 that stemmed from the greater number of connections to the Company's ePort Connect service and increases in transaction dollars processed by those connections, offset by a decrease in cost of equipment sales of $113,798, or 15%, which was primarily due to selling fewer ePort devices as over 65% of the current quarter's new connections came from the Company's JumpStart Program.

Gross profit ("GP") for the quarter ended March 31, 2014 was $3,997,788 compared to GP of $3,681,339 from the same quarter in the prior fiscal year, an increase of $316,449, or 9%, of which $176,623 represents increases attributable to license and transaction fees GP and $139,826 of greater equipment sales GP. Overall gross profit margins decreased from 41% to 38% due to a decrease in license and transaction fee margins to 36%, from 40% in the prior corresponding fiscal quarter, offset by an increase in equipment sales margins to 54% from 45% in the prior corresponding fiscal quarter. The decrease in license and transaction fees margins is largely attributable to approximately 23,000 deactivations since March 31, 2013, as well as certain sales incentives. The increase in equipment revenue fees margins is largely attributable to the reversal of the $152,000 rebate discussed above and non-recurring service revenues.

Selling, general and administrative ("SG&A") expenses of $3,479,300 for the quarter ended March 31, 2014, increased by $476,069, or 16%, from the same quarter in the prior fiscal year. The overall increase in SG&A is attributable to increases of approximately $407,000 in employee compensation and benefits expense and $72,000 in travel related expense predominately as a result of increased sales and marketing related efforts.

Other income and expense for the quarter ended March 31, 2014, primarily consisted of a reduction of $26.7 million of the valuation allowance we had on our deferred tax assets as the Company believes that it is more likely than not it will be able to utilize net operating loss carryforwards to offset future taxable earnings. Also included is $168,897 of non-cash expense for the change in the fair value of the Company's warrant liabilities. The primary factor affecting the change in fair value is the increase in the Black-Scholes value of the warrants from December 31, 2013 to March 31, 2014, which factored in the increase in the Company's stock price during that period.

The quarter ended March 31, 2014 resulted in net income of $26,866,526 compared to a net loss of $1,015,943 for the quarter ended March 31, 2013. Included in net income for the quarter ended March 31, 2014 is a benefit for income taxes of $26,727,720. After preferred dividends of $332,226 for each fiscal quarter, net income (loss) applicable to common shareholders was $26,534,300 and $(1,348,169) for the quarters ended March 31, 2014 and 2013, respectively. For the quarter ended March 31, 2014, net earnings per common share, basic and diluted, was $0.75, compared to net loss per common share, basic and diluted, of $(0.04), for the prior corresponding fiscal quarter.

Non-GAAP net income was $321,526, compared to non-GAAP net income of $293,011 for the quarters ended March 31, 2014 and 2013, respectively. Non-GAAP net loss per common share, basic and diluted, were $0.00 for each of the quarters ended March 31, 2014 and 2013. Management believes that non-GAAP net income and non-GAAP net earnings per common share are important measures of USAT's business. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. We believe that these non-GAAP financial measures serve as useful metrics for our management and investors because they enable a better understanding of the long-term performance of our business and facilitate comparisons of our operating results over multiple periods, and when taken together with the corresponding GAAP (United States' Generally Accepted Accounting Principles) financial measures and our reconciliations, enhance investors' overall understanding of our current financial performance.

A reconciliation of GAAP net income (loss) to Non-GAAP net income for the quarters ended March 31, 2014 and 2013 is as follows:

                                                         Three months ended
                                                             March 31,
                                                       2014              2013
    Net income (loss)                              $  26,866,526     $ (1,015,943 )
    Non-GAAP adjustments:
    Fair value of warrant adjustment                     168,897        1,308,954
    Benefit from reduction of valuation
    allowances                                       (26,713,897 )              -
    Non-GAAP net income                            $     321,526     $    293,011

    Net income (loss)                              $  26,866,526     $ (1,015,943 )
    Non-GAAP net income                            $     321,526     $    293,011

    Cumulative preferred dividends                      (332,226 )       (332,226 )
    Net income (loss) applicable to common
    shares                                         $  26,534,300     $ (1,348,169 )
    Non-GAAP net loss applicable to common
    shares                                         $     (10,700 )   $    (39,215 )

    Net earnings (loss) per common share (basic
    and diluted)                                   $        0.75     $      (0.04 )
    Non-GAAP net loss per common share (basic
    and diluted)                                   $           -     $          -

    Weighted average number of common shares
    outstanding (basic and diluted)                   35,504,911       32,821,345

As used herein, non-GAAP net income represents GAAP net income (loss) excluding costs or benefits relating to any adjustment for fair value of warrant liabilities and changes in the Company's valuation allowances for taxes. As used herein, non-GAAP net loss per common share is calculated by dividing non-GAAP net loss applicable to common shares by the weighted average number of shares outstanding.

For the quarter ended March 31, 2014, the Company had Adjusted EBITDA of $1,839,080, compared to $1,688,438 for the quarter ended March 31, 2013. Reconciliation of GAAP net income (loss) to Adjusted EBITDA for the quarters ended March 31, 2014 and 2013 is as follows:

                                                           Three months ended
                                                               March 31,
                                                         2014              2013
  Net income (loss)                                  $  26,866,526     $ (1,015,943 )

  Less interest income                                      (3,102 )        (11,082 )

  Plus interest expense                                     60,934           61,379

  Plus income tax expense (benefit)                    (26,727,720 )          6,911

  Plus depreciation expense                              1,413,521        1,003,610

  Plus amortization expense                                      -          185,600

  Plus change in fair value of warrant liabilities         168,897        1,308,954

  Plus stock-based compensation                             60,024          149,009

  Adjusted EBITDA                                    $   1,839,080     $  1,688,438

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 and stock-based compensation expense. We have excluded the non-operating item, change in fair value of warrant liabilities, because it represents a non-cash charge that is not related to the Company's operations. We have excluded the non-cash expense, stock-based compensation, as it does not reflect the cash-based operations of the Company. 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.

Nine-months ended March 31, 2014 compared to nine-months ended March 31, 2013

Results for the nine-month period ended March 31, 2014 continued to demonstrate growth and improvements in the Company's operations as compared to the nine-month period ended March 31, 2013. Highlights of year over year improvements include:

? $26.7 million of deferred tax assets recognized;

? Total revenue up 19% to $31.1 million;

? Recurring license and transaction fee revenue up 20% to $26.2 million; and

? Total ePort Connect service base as of March 31, 2014 up 24% as compared to March 31, 2013.

Revenues for the nine-month period ended March 31, 2014 were $31,137,504, consisting of $26,177,818 of license and transaction fees and $4,959,686 of equipment sales, compared to $26,255,403 for the nine-month period ended March 31, 2013, consisting of $21,872,187 of license and transaction fees and $4,383,216 of equipment sales. The increase in total revenue of $4,882,101, or 19%, was primarily due to an increase in license and transaction fees of $4,305,631, or 20%, and an increase in equipment sales of $576,470 or 13%, from the same period in the prior fiscal year.

Revenue from license and transaction fees, which represented 84% of total revenue for the nine-month period ended March 31, 2014, is primarily attributable to monthly ePort Connect® service fees and transaction processing fees. Highlights for the nine-month period ended March 31, 2014 included:

? Adding 30,000 net connections to our service, consisting of 53,000 new connections to our ePort Connect service in the nine-month period ended March 31, 2014, offset by 23,000 deactivations, compared to 32,000 net connections added in the same nine-month period of fiscal 2013;

? Increases in the number of small-ticket, credit/debit transactions and dollars handled for the nine-month period ended March 31, 2014 of 31% and 35%, respectively, compared to the same period a year ago; and

? 1,600 ePort Connect customers added in the first nine-months, 31% more than were added in the same period a year ago, for 6,650 customers at March 31, 2014.

The increase in license and transaction fees was due to the growth in ePort Connect service fees and transaction dollars that stems from the increased number of connections to our ePort Connect service. As of March 31, 2014, the Company had approximately 244,000 connections to the ePort Connect service as compared to approximately 196,000 connections to the ePort Connect service as of March 31, 2013. During the nine-month period ended March 31, 2014, the Company added approximately 30,000 net connections to our network compared to approximately 32,000 net connections added during the nine-month period ended March 31, 2013.

Pursuant to its agreements with customers, in addition to ePort Connect service fees the Company earns transaction processing fees equal to a percentage of the dollar volume processed by the Company. During the nine-month period ended March 31, 2014, the Company processed approximately 121.5 million transactions totaling approximately $210.9 million compared to approximately 92.6 million transactions totaling approximately $156.3 million during the nine-month period ended March 31, 2013, an increase of approximately 31% in the number of transactions and approximately 35% in the value of transactions processed.

New customers added to our ePort® Connect service during the nine-month period ended March 31, 2014 totaled 1,600, bringing the total number of customers to approximately 6,650 as of March 31, 2014. The Company added approximately 1,225 new customers in the nine-month period ended March 31, 2013. By comparison, the Company had approximately 4,525 customers as of March 31, 2013, representing 2,125 customers added, or a 47% increase during the past twelve months. The Company views the total installed base of machines managed by its customers that have yet to transition machines to cashless payment, as a key strategic opportunity for future growth in connections. We count a customer as a new customer upon the signing of their ePort Connect service agreement. When a reseller sells our ePort, we count a customer as a new customer upon the signing of the applicable services agreement with the customer.

The $576,470 increase in equipment sales was a result of $180,000 increase in sales of ePort® products, $375,000 of revenue recorded under our Isis Marketing Agreement and $152,000 reversal of rebate charges originally recorded in a prior period, offset by a decrease of approximately $116,000 in the sales of Energy Miser products and by a decrease of approximately $40,000 in other product sales.

Cost of sales consisted of license and transaction fee related costs of $16,690,569 and $13,080,816 and equipment costs of $3,036,243 and $2,748,785 for the nine-months ended March 31, 2014 and 2013, respectively. The increase in total cost of sales of $3,897,211, or 25%, was primarily due to an increase in cost of services of $3,609,753, or 28%, that stemmed from the greater number of connections to the Company's ePort Connect service and increases in transaction dollars processed by those connections. The increase in total cost of sales was also attributable to an increase in cost of equipment sales of $287,458, or 10%, which was primarily due to an increase in sales of ePort® products, as a result of increased sales during the nine-month period ended March 31, 2014 compared to March 31, 2013.

GP for the nine-month period ended March 31, 2014 was $11,410,692 compared to GP of $10,425,802 for the previous corresponding nine-month period, an increase of $984,890, or 9%, of which $695,878 represents increases attributable to license and transaction fees GP and $289,012 of greater equipment sales GP. Overall gross profit margins decreased from 40% to 37% due to a decrease in license and transaction fees margins to 36%, from 40% in the previous corresponding nine-month period and, offset by an increase in equipment sales margins to 39% from 37% in the previous corresponding nine-month period. The decrease in license and transaction fees margins is largely attributable to approximately 23,000 deactivations since March 31, 2013, as well as certain sales incentives. The increase in equipment revenue fees margins is largely attributable to the reversal of the $152,000 rebate discussed above and non-recurring service revenues.

Selling, general and administrative ("SG&A") expenses of $9,968,212 for the nine-month period ended March 31, 2014, increased by $1,050,182, or 12%, from the same nine-month period in the prior fiscal year. Included in the $8,918,030 for the nine-month period ended March 31, 2013 was approximately $328,000 in charges related to the 2012 proxy contest, related litigation and settlement.

Exclusive of these charges, SG&A increased approximately $1,378,000, or 16%, in the nine-month period ended March 31, 2014 compared to the same nine-month period a year ago. The overall increase in SG&A is attributable to increases of approximately $794,000 in employee compensation and benefits expense; $222,000 in professional services expense; $210,000 in travel related expenses; and smaller, numerous, net increases in other expenses totaling $152,000.

Other income and expense for the nine-month period ended March 31, 2014, primarily consisted of a reduction of $26.7 million of the valuation allowance we had on our deferred tax assets as the Company believes that it is more likely than not it will be able to utilize net operating loss carryforwards to offset future taxable earnings.

Also included is $182,315 of interest expense and $12,304 of non-cash gain for the change in the fair value of the Company's warrant liabilities. The primary factor affecting the change in fair value is the decrease in the Black-Scholes value of the warrants from June 30, 2013 to March 31, 2014, which factored in the increase in the Company's stock price as well as a decrease in its volatility during that period.

The nine-month period ended March 31, 2014 resulted in net income of $27,569,371 compared to a net loss of $823,044 for the nine-month period ended March 31, 2013, an improvement of $28,392,415. Included in net income for the nine-months ended March 31, 2014 is a benefit for income taxes of $26,713,897. After preferred dividends of $664,452 in each nine-month period, net income (loss) applicable to common shares was $26,904,919 and $(1,487,496) for the nine-months ended March 31, 2014 and 2013, respectively. As a result, net earnings per common share, basic and diluted, were $0.78 for the nine-month period ended March 31, 2014, compared to net loss per common share, basic and diluted, of $(0.05) for the prior corresponding nine-month period.

Non-GAAP net income was $843,170, compared to non-GAAP net income of $754,412 for the nine-month periods ended March 31, 2014 and 2013, respectively. Non-GAAP net earnings per common share, basic and diluted, were $0.01 for the nine-month period ended March 31, 2014, compared to Non-GAAP net earnings per common share, basic and diluted, of $0.00 for the prior corresponding nine-month period. Management believes that non-GAAP net income and non-GAAP net earnings per common share are important measures of USAT's business. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. We believe that these non-GAAP financial measures serve as useful metrics for our management and investors because they enable a better understanding of the long-term performance of our business and facilitate comparisons of our operating results over multiple periods, and when taken together with the corresponding GAAP (United States' Generally Accepted Accounting Principles) financial measures and our reconciliations, enhance investors' overall understanding of our current and future financial performance.

A reconciliation of GAAP net income (loss) to Non-GAAP net income for the nine-months ended March 31, 2014 and 2013 is as follows:

                                                             Nine months ended
. . .
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