XNAS:USAT USA Technologies Inc Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934
 
For the transition period from ____________________ to _____________________
 
Commission file number 000-50054
 
  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 140, 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
     
Name Of Each Exchange On Which Registered
 
Common Stock, no par value
Series A Convertible Preferred Stock
Warrants to Purchase Common Stock
 
The NASDAQ Stock Market LLC
 
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 o No x
 
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 o No x
 
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 x No o
 
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 x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
 
The aggregate market value of the voting common equity securities held by non-affiliates of the Registrant was $35,758,545 as of the last business day of the most recently completed second fiscal quarter, December 30, 2011, based upon the closing price of the Registrant’s Common Stock on that date.
 
As of August 31, 2012, there were 32,687,890 outstanding shares of Common Stock, no par value.
 


 
 

 
 
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;
 
 
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;
 
 
whether our current one-year agreement with VISA relating to interchange rates that expires in October 2012 will be renewed, although management believes that the agreement will be renewed;
 
 
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 and in the “Risk Factors” section 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.
 
 
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 solutions that facilitate electronic payment transactions and value-added services primarily within the unattended Point of Sale (“POS”) market. We are a leading provider in the small ticket, beverage and food vending industry and are expanding our solutions to kiosk and other unattended market segments. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as telemetry and machine-to-machine (“M2M”) services which include the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards and contactless forms, such as mobile payment.
 
We derive the majority of our revenues from license and transaction fees related to our ePort Connect service. Connections to our service stem from the sale or lease of our POS electronic payment devices or certified payment software or the servicing of similar third-party installed POS terminals. The majority of ePort Connect customers pay a monthly fee plus a blended transaction rate on the transaction dollar volume processed by the Company. Customers with higher expected transaction rates might pay a lower or no ePort Connect monthly fee, but a higher blended transaction rate on dollar volume processed by the Company. Connections to the ePort Connect service, therefore, are the most significant driver of the Company’s revenues, particularly revenues from license and transaction fees.
 
As of June 30, 2012, the Company had approximately 164,000 connections to its ePort Connect service, double the number of connections as of June 30, 2010. During the year ended June 30, 2012, the Company processed approximately 103 million cashless transactions totaling approximately $172 million, representing a 43% increase in transaction volume and a 43% increase in dollars processed from the 72 million cashless transactions totaling approximately $120 million during the previous fiscal year ended June 30, 2011.
 
 
 
 
The above chart shows the increase, during the last three fiscal years, in the number of connections,  revenues and the dollar value of transactions handled by us. The vertical bars show the revenues earned during the fiscal years, broken down by recurring revenues and equipment sales revenues. Our connection base, showing the number of connections, as of the end of each of the last three fiscal years, is indicated by the beginning of the solid line and the two arrow points that appear thereafter. Similarly,  the dollar value of transactions handled by us during each of the last three fiscal years is indicated by the beginning of the dotted line, the mid-point of the dotted line, and the end of the dotted line.
 
Our solutions have been designed to simplify the transition to cashless for traditionally cash-only based businesses. As such, they are turnkey and include our comprehensive ePort Connect service and POS electronic payment devices or certified payment software able to process traditional magnetic stripe credit and debit cards, and contactless credit and debit cards. Our solution for near-field communication (“NFC”) equipped mobile phones that allow consumers to make payments using their cell phones is currently in customer trials. Services through ePort Connect are maintained on our proprietary operating systems and include deployment planning, merchant account setup on behalf of the customer, automatic processing and settlement, sales reporting and 24x7 customer support. In addition, the functionality of our solutions include the 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 M2M). By December 31, 2012, we anticipate the commercial launch of other consumer engagement services such as loyalty and prepaid programs.
 
 
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Our customers primarily consist of the following: beverage and food vending machine owners and operators; brand marketers wishing to provide their products or services via kiosks or vending machines; commercial laundry operators servicing colleges, universities and multi-family housing; and equipment manufacturers who incorporate our ePort Connect service into their product offerings.
 
The Company also manufactures and sells energy management products that reduce the electrical power consumption of equipment, such as refrigerated vending machines and glass front coolers, thus reducing the electrical energy costs associated with operating this equipment. We derive equipment revenues through the sale of our energy management products both in the United States and in approximately seven countries worldwide.
 
We have a twenty-year history, a recognized brand name, value proposition for our customers and reputation of innovation in our product and services. We believe that the foregoing positions us to capitalize on industry trends.
 
THE INDUSTRY
 
We operate primarily in the small ticket electronic payments industry and, more specifically, the unattended POS market. We also plan to offer customers with ancillary attended business segments the ability to accept cashless payment “on the go” through mobile-based payment services, which are generally higher ticket transactions. Our solutions facilitate electronic payments in industries that have traditionally relied on cash transactions. We believe the following industry trends will drive growth in demand for electronic payment systems in general and more specifically within the markets we serve:
 
 
the shift toward electronic payment transactions and away from cash and checks;
 
 
the increase in both consumer and merchant/operator demand for electronic transaction functionality; and
 
 
improving POS technology and NFC equipped mobile phone payment technology.
 
Shift toward electronic payment transactions and away from cash and checks
 
There has been a shift away from paper-based methods of payment, including cash and checks, towards electronic-based methods of payment. While consumers continue to use checks and cash to pay for goods and services, there is a migration towards the use of card-based payment to purchase items. According to The Nilson Report, a news and research publication on consumer payment systems, electronic payment transaction volume surpassed paper-based transaction volume for the first time in 2006, continuing the trend of migration of consumer transactions from paper-based to electronic payments. According to The Nilson Report, December 2011, paper-based methods of payment continued to decline in 2010, representing 38.97% of transaction dollars measured compared to 50.45% in 2005. The four card-based systems—credit, debit, prepaid, and electronic benefits transfer—generated $3.81 trillion in the United States in 2010, or 48.12%, compared to 39.98% in 2005. Debit cards and prepaid cards showed the largest increase in transaction dollars over this five-year period. By 2015, The Nilson Report projects spending at merchants on credit, debit and prepaid cards issued in the U.S. to total over $6 trillion, an increase of approximately 57% from 2010.
 
Increase in Consumer and Merchant/Operator Demand for Electronic Payments
 
Increase in Consumer Demand. The unattended, vending and kiosk POS market has historically been dominated by cash purchases. However, oftentimes, cash purchases at unattended POS locations represent a cumbersome transaction for the consumer because they do not have the correct monetary value (paper or coin), or the consumer does not have the ability to convert their bills into coins. We believe electronic payment system providers such as USA Technologies that can meet consumers’ demand within the unattended market will be able to offer retailers, card associations, card issuers and payment processors and business owners an expanding value proposition at the POS.
 
Increase in Merchant/Operator Demand. Increasingly, merchants and operators of unattended payment locations (e.g., vending machines, car wash, tabletop games, etc.) are utilizing electronic payment alternatives as a means to improve business results. The Company works with its customers to help them drive increased revenue of their distributed assets through this expanded market opportunity and many continue to see positive results. In addition, electronic payment systems provide merchants and operators real-time sales and inventory data utilized for back-office reporting and forecasting, helping them to manage their business more efficiently.
 
Increase in Demand for Networked Assets. M2M (machine-to-machine) technology includes capturing value from wireless modules and electronic devices to improve business productivity and customer service. The term M2M describes any kind of 2-way communication system between geographically distributed devices through a centrally managed software application without human intervention. As such, the Company’s integrated POS and ePort Connect remote data management capabilities fall into this category of solution. Our M2M technology provides value to our customers. For example, the Company’s networked assets have the ability to remotely monitor merchandise and track inventory in real-time. 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. Market awareness of M2M applications is considered to be in its nascence. According to a Verizon Wireless 2011 whitepaper (When Machines Talk, Businesses Listen) within ten years the number of machines that can be connected should exceed 60 billion units. The Company believes that its ability to provide machines capable of being networked, its scalable network data capacity, experience with high transaction volume and high quality and reliable data management capabilities make it well suited for the growing opportunities in the M2M market. During Fiscal 2012, the Company engaged in a 10-city, M2M Connected Technology Tour with Verizon Wireless that featured USA Technologies as an M2M solution partner.
 
 
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POS Technology and NFC Equipped Mobile Phone Payment Improvements
 
Increased Consumer Interest in Mobile Payment. Goldman Sachs, in its June 19, 2012 Equity Research Report, explains that the “base case” for mobile payment relies on near field communication (NFC), which allows for a secure, two-way communication between a mobile phone and a POS. In this report, Goldman Sachs looks at how NFC and mobile payments are projected to continue on an upward trajectory, with suggested growth in the value of mobile payments increasing to $617 billion by 2016 driven by nearly 448 million users. This same report cites that the value proposition for consumers will make purchasing faster and easier which potentially translates into increased purchasing and transactions. Mobile payment technologies, such as NFC-enabled POS terminals and digital wallet applications, such as ISIS, Google Wallet and others, stand to benefit from these evolving trends. Digital wallet is essentially a digital service, accessed via the web or a mobile phone application that serves as a substitute for the traditional credit or debit card. Providers and consumers can also benefit from other ancillary offerings such as coupons and loyalty programs.
 
With approximately one-half of the Company’s connections NFC-enabled as of June 30, 2012, we believe that we are well-positioned to benefit from this emerging space.
 
OUR TECHNOLOGY-BASED SOLUTION
 
Our solutions have been designed to be turnkey and include ePort Connect service and POS electronic payment devices or certified payment software able to process traditional magnetic stripe credit and debit cards, contactless credit and debit cards, as well as NFC equipped mobile phones that allows consumers to make payments with their cell phones. We believe that our ability to bundle our products and services, as well as the ability to tailor them to individual customer needs, makes it easy and efficient for our customers to adopt and deploy our technology, and results in a service unmatched in the small-ticket, unattended retail market today.
 
The Product. The Company offers its customers several different devices or software to connect their distributed assets. These range from software to hardware devices consisting of user control boards, running our SDK, magnetic strip card readers, and NFC readers. The devices or software can be embedded inside the host equipment, such as ePort SDK software which reside in the central processing unit of a kiosk or table-top game; it can be integrated as part of the host equipment, such as our ePort® G8 or EDGE hardware that can be attached to the door of a vending machine, or a payment hub in a self service car wash; or it can be a peripheral, stand-alone terminal.
 
The Network. Our network is designed to transmit payment information from our terminals for processing and sales and diagnostic data for storage and reporting to our customers. Also, the network, through server-based software applications, provides remote management information, and enables control of the networked device’s functionality. Through our network we have the ability to upload software and update devices remotely enabling us to manage the devices (e.g., change protocol functionality, provide software upgrades, and change terminal display messages).
 
The Connectivity Mediums. The client devices (described above) are interconnected for the transfer of our customers’ data through our ePort Connect network that provides multiple connectivity options such as phone line, ethernet, and wireless. Greater 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 in the United States and Rogers Wireless in Canada in order to supply our customers with wireless network coverage.
 
Data Security. Visa has listed the Company as a PCI DSS Compliant Service Provider in the North American region as a result of validation conducted by a third party as of January 1, 2012. The USAT listing on Visa’s list of compliant companies can be found online at http://usa.visa.com/download/merchants/cisp-list-of-pcidss-compliant-service-providers.pdf.
 
OUR SERVICES
 
As of June 30, 2012, license and transaction fees generated by our ePort Connect® service represented 81% of the Company’s revenues. ePort Connect is a unique solution in the marketplace that provides customers with all of the following, under one cohesive service umbrella:
 
 
Diverse POS options. Ability to connect to a broad product line 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 (EFTs) to our customers’ bank accounts for all settled card transactions as well as ensure compliance with current processing regulations.
 
 
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Wireless Connectivity. We manage the wireless account activation, distribution, and the relationship with wireless providers for our customers.
 
Customer/Consumer Services. We support our installed base by providing 24-hour help desk support, repairs, and replacement of impaired system solutions. In addition, as the merchant of record on all transactions, all inbound billing inquiries are handled through a 24-hour help desk, thereby eliminating the need for merchants and operators to deal with customer billing inquiries and potential chargebacks.
 
Online Sales Reporting. Via the USALive 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.
 
M2M Telemetry and DEX data transfer. USA Technologies is able to push DEX data to customers’ route management systems through its DEX partner program. USA Technologies operates within the VDI (Vending Data Interchange) standards established by NAMA (National Automatic Merchandising Association) and sends DEX files compatible with most major remote management software systems.
 
Over-the-Air Update Capabilities. Automatic over-the-air updates to software, settings, and security protocol from our network to our ePort card reader keep our customers’ hardware up-to-date and enable customers to benefit from any advancement made after their hardware or software purchase.
 
Value-added Services. Access to additional services such as two-tier pricing, customer engagement programs and unique payment programs such as JumpStart, which help operators acquire the ePort hardware without an up-front capital investment.
 
Deployment Planning. Access to services to help operators successfully deploy cashless payment systems and integrated vending management solutions. Our program is based on extensive market and customer experience data, which helps guide operators to the locations where cashless vending machines would be most successful.
 
We enter into a processing and licensing agreement, or ePort Connect Services Agreement, with our customers pursuant to which we act as a provider of cashless financial services for the customer’s distributed asset, and the customer agrees to pay us an activation fee, monthly service fees, and transaction processing fees. Our agreements are generally cancelable by the customer upon thirty to sixty days notice to us.
 
It typically takes thirty to sixty 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.
 
OUR PRODUCTS
 
ePort® is the Company’s core device, which is currently being utilized in self-service, unattended markets such as vending, kiosk and car wash. Our ePort® product facilitates cashless payments by capturing payment information and transmitting it to our network 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 network for web-based reporting, or to a compatible remote management system. Our ePort products are available in several distinctive modular configurations, and as hardware, software or as an API Web service, offering our customers flexibility to install a POS solution that best fits their needs and customer demands.
 
 
ePort® G-8 provides the same benefits as its predecessor, the G-7, plus important new features at a lower price. The G-8 solution is 65% smaller than the G-7 and combines traditional magnetic strip and NFC equipped mobile phone payment capabilities. 
 
ePort Edge™ product became available for sale to customers during the fourth quarter of the 2009 fiscal year. The ePort Edge™ is a one-piece design and is intended for those in the vending industry who want a magnetic swipe-only cashless system with basic features at a lower price point.
 
 
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ePort SDK (software development kit) captures our ePort® technology in software form for PC-based devices such as kiosks. ePort SDK offers customers access to the same turnkey service, reporting and customer support available with the ePort hardware platform.
 
ePort QuickConnect™ was introduced in August 2012. QuickConnect™ is a Web service that allows a client application to securely interface with the Company’s ePort Connect service to process transactions and transfer files.
 
Other trademarked forms of our ePort technology include eSuds™, our solution developed for the commercial laundry industry that enables laundry operators to provide customers cashless transactions via the use of their credit cards, debit cards and other payment mediums such as student IDs. eSuds™ offers an e-mail alert system to notify users regarding machine availability, cycle completion, and other events and supports a variety of value-added services such as custom branding or subscription-based payments. In addition, our eSuds™ service reduces operational costs through utilization of our remote monitoring technology, thereby maximizing the scheduling of service visits and increasing machine up-time.
 
Energy Management Products. Our Company offers energy conservation products (“Energy Misers”®) that reduce the electrical power consumption of various types of existing equipment, such as vending machines, glass front coolers and other “always-on” appliances by allowing the equipment to selectively operate in a power saving mode when the full power mode is not necessary. Each of the Company’s Energy Miser® products utilizes occupancy sensing technology to determine when the surrounding area is vacant or occupied. The Energy Miser® then utilizes occupancy data, product temperatures, and an energy saving algorithm to selectively control certain high-energy components (e.g., compressor and fan) to realize electrical power savings over the long-term use of the equipment. Customers of our VendingMiser® product benefit from reduced energy consumption costs, depending on regional energy costs, machine type, and utilization of the machine. Our Energy Misers® also reduce the overall stress loads on the equipment, helping to reduce associated maintenance costs. Energy Miser products are not currently networked to our ePort Connect service.
 
SPECIFIC MARKETS WE SERVE
 
Our current customers are primarily in the self-serve, small ticket retail markets including beverage and food vending and kiosk, commercial laundry, car wash, tolls, amusement and gaming, and office coffee. 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. In addition to being our primary markets, these sectors serve as a proof-of-concept for other unattended POS industry applications.
 
Vending. According to Vending Times’ 2011 Census of the Industry, annual U.S. sales in the vending industry sector were estimated to be approximately $42 billion. The Company believes these revenues are transacted over millions of terminals representing a significant market opportunity for electronic payment conversion when compared to the Company’s existing ePort Connect service base. In another study conducted by Automatic Merchandiser (State of the Vending Industry, June/July 2012) that included a representative 5.4 million locations, cashless adoption was estimated to be only 3.7% in 2011, increasing from 3.5% the prior year as setbacks posed by the Durbin amendment (see Risk Factors) were offset by operators’ need for a mechanism to support rising retail prices, competitive pressure and a stronger understanding by operators of the benefits that cashless provides. According to the Automatic Merchandiser Report, the decline in revenues experienced by the vending market segment over the last few years as a result of price increases and fewer serviceable locations began to slow in 2011. At the same time, their report noted a concurrent uptick in use of technology, as more operators recognized that such services as DEX-based management, remote machine monitoring and cashless transaction capability can improve sales and profitability. With the continued shift to electronic payments and the advancement in mobile and POS technology, we believe the traditional beverage and food vending industry will continue to look to cashless payments and telemetry systems to increase sales and margins and help growth.
 
Kiosk. According to IHL Consulting Group Market Study dated July 1, 2010, approximately $678 billion was transacted through self-service kiosks in 2009, which represents an increase of 9.7% from the previous year. Furthermore, IHL projects that spending at self-service kiosks will grow approximately 10% during 2010 and that demand for self-service kiosks should push sales at these terminals to over $1 trillion by 2014. Kiosks are becoming increasingly popular as self-service “specialty” shops within larger retail environments as credit, debit or contactless payment options enable kiosks to sell an increased variety of items and at a higher price point as compared to cash-only kiosks that limit consumers to the amount of available cash-on-hand. As merchants continue to seek new ways to reach their customers outside of retail locations and mobile and electronic payment technology make this expansion more plausible, we believe electronic payment system providers who can service the payment needs of kiosk-driven transactions will be able to offer retailers, card associations, card issuers and payment processors an expanding value proposition at the POS. Our ePort® SDK currently powers the POS solutions for unattended kiosk providers such as AMI Entertainment’s Megatouch, Teknovation, Cup Cake Kiosk and Indiana Toll Road, while our ePort G8 is used on kiosks manufactured by Air-Serve and Innovative Foto.
 
Laundry. Our primary targets in laundry consist of the population of coin-operated laundries and coin-operated machines as well as a secondary customer base consisting of over 2 million resident college and university students in the US (U.S. Census Bureau, 2004). The Dry Cleaning and Laundry Facilities Industry Profile published by First Research dated July 11, 2011, states that the laundry services industry includes about 30,000 companies with combined annual revenue of approximately $10 billion. Major companies include Coinmach Service, DRYCLEAN USA, Mac-Gray, and Martin Franchises. The industry includes about 20,000 companies that provide retail laundry and dry cleaning services, and 10,000 that provide services through coin-operated laundromats.
 
 
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Mobile Merchant. New mobile-based payment acceptance technology has made a transformational impact on an entire base of merchants that previously had almost no access to electronic-based payments. Goldman Sachs (Equity Research Report, June 19, 2012) sees the arrival of mobile technology at the micro/small merchant level addressing an estimated 13 million U.S.-based micro merchants that are likely to benefit from the ability to accept electronic payment from mobile devices. The Company anticipates mobile-based acceptance technologies, particularly for its existing customers that need a cashless payment solution for route collections, events, and other ancillary segments of their business, aligns well with the Company’s existing turnkey service platform and is therefore taking steps to enter this market in fiscal 2013.
 
OUR COMPETITIVE STRENGTHS
 
We believe that we benefit from a number of advantages gained through our twenty year history in our 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 solution, as well as the ability to tailor them to individual customer needs, makes it easy and efficient for our customers to adopt and deploy our electronic payment solutions and results in a service unmatched in the small ticket, self-service retail market today. Other cashless payment solutions available in the market today require the operator to set up their own accounts for cashless processing, manage multiple service providers (i.e., hardware terminal manufacturer, wireless network provider, and credit card processor), as well as to implement their own cashless systems.
 
2.
Trusted Brand Name. The ePort and Energy Miser brands have a strong national reputation for quality, reliability, and innovation. We believe that card associations, payment processors, and merchants/operators trust our system solutions to handle financial transactions in a secure operating environment. Our trusted brand name is best exemplified by our high level of customer retention, national level agreements with partners like Visa and Verizon Wireless and several one-way exclusive relationships, averaging three years in duration, which we have solidified with several leading organizations within the unattended POS industry, including AMI Entertainment Network, Inc., Innovative Foto, and Air-Serv.
 
3.
Market Leadership. We believe we have the largest installed base of unattended POS electronic payment systems in the unattended small-ticket retail market for vending and we continue to expand to other adjacent markets. As of June 30, 2012, we had approximately 164,000 connections to our network. Our installed base supports our sales and marketing infrastructure by enhancing our ability to establish or expand our market position. Finally, our installed base provides several opportunities for referrals for new business, either from the merchant or operator of the deployed asset or through one of our several strategic relationships.
 
4.
Attractive Value Proposition for Our Customers. We believe that our solutions provide our customers an attractive value proposition. Our solutions make possible increased purchases by consumers who in the past were limited to the physical cash value on hand while making a purchase at an unattended terminal, thereby increasing the universe of potential customers and the buying activity of those customers. In addition, offerings such as Two-Tier Pricing and M2M telemetry provide operators with the ability to pursue additional opportunities to reduce costs and improve operating efficiencies.
 
5.
Increasing Scale and Financial Stability. Due to the continued growth in connections to the Company’s ePort Connect service, 81% of the Company’s revenue now stems from licensing and processing fees which are recurring in nature. Given the Company’s strong record of customer retention, we believe that this growing scale provides us improved financial stability and the footprint to market and distribute our products more effectively and in more markets than most of our competitors, and to provide our customers with innovative, comprehensive, and reliable system solutions.
 
6.
Customer-Focused Research and Development. Our research and development initiatives focus on adding features and functionality to our electronic payment solutions based on customer input and emerging market trends. Since we began operations in 1992, we have been granted 84 patents (US and International) and currently have 10 patent applications pending and have generated considerable intellectual proprietary and know-how associated with creating a seamless, end-to-end experience for our customers.
 
 
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OUR GROWTH OPPORTUNITY
 
Our objective is to enhance our position as a leading provider of technology that enables electronic payment transactions and value-added services primarily at small-ticket, self-service, retail locations such as vending, kiosks, commercial laundry, car wash, and other similar markets. The Company believes its service-approach business model creates a high-margin stream of recurring revenues that will create a foundation for long-term value and continued growth. The key elements of our strategy are to:
 
Drive Growth in Connections
 
Leverage Existing Customers/Partners. We have a solid base of key customers across multiple markets, particularly in vending, that have deployed our solutions to just a small portion of their deployed base. As a result, they are a key component of our plan to drive 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 represent the largest opportunity to scale our solution.
 
Expand Distribution in Core Markets. We are intently focused on building a broader base of customers within our targeted markets to drive long term revenue and value by expanding our sales reach and distribution. Our efforts in this regard have led to the addition of approximately 1,350 new ePort Connect customers, additional reseller relationships, and the introduction of the Company’s ePort and ePort Connect solutions in Verizon Wireless’ M2M sales toolkit in fiscal year 2012.
 
Further Penetrate Attractive Adjacent Markets. We plan to continue to introduce our turnkey solutions to various markets such as the broad-based kiosk market, car wash, commercial laundry and other similar markets. Using wired and/or wireless networks and centralized, server-based software applications, our solutions address the needs of these customers for cashless transactions, sales analysis, remote monitoring, and optimized machine maintenance.
 
Capitalize on High Growth 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 emerging, high growth electronic payment markets in Europe, Asia, and Latin America. 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. At this time, the Company believes the most efficient route to these markets will be achieved by optimizing and coordinating opportunities with its global partners and customers. Our energy management devices have been shipped to customers located in North America, Europe, and Asia.
 
Expanding the Value of our Service
 
Capitalize on the growing NFC and mobile payments trends. With approximately one-half of our connected base NFC and mobile payments ready, the Company believes that the continued increase in consumer preferences towards contactless payments represents a significant growth opportunity for the Company.
 
Continuous Innovation. We will continue enhancing our solutions in order to satisfy our customers and the end-consumers relying on our products at the POS locations. Our product innovation team enhances the design, size, and speed of data transmission, as well as security and compatibility with other electronic payment solution providers’ technologies. We believe our continued innovation will lead to further adoption in the unattended POS payments market.
 
 Leverage Intellectual Property. We have been granted 84 patents which assert various claims, including claims relating to unattended payment processing, networking and energy management devices. In addition, we own numerous trademarks, copyrights, design rights and trade secrets. We will continue to leverage this intellectual property to add value for customers, attain an increased share of the market, address competition and attempt to 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 media relations, direct mail, conferences, and client referrals. As of August 31, 2012, the Company was marketing and selling its products through its full and part-time staff consisting of thirteen people.
 
Direct Sales
 
We sell directly to the major operators in each of our target markets. Each of our target markets is dominated by a handful of large companies, and these companies comprise our primary customer base. In the small ticket beverage and food vending sector, approximately ten large operators dominate the sector; in the commercial laundry sector, seven operators currently control the majority of the market. 
 
Within the small ticket beverage and food vending industry, our customers include soft drink bottlers and independent vending operators throughout the United States and Canada. On the soft drink bottler side, we are attempting to secure additional distribution agreements and servicing our existing customer’s requirements for cashless locations and the related network services.
 
Indirect Sales/ Distribution
 
We have entered into agreements with resellers and distributors in connection with our energy management products. We also have agreements with select resellers in the car wash, amusement and gaming, and vending markets in an effort of broaden our reach and subsidize direct sales efforts in these markets.
 
Marketing
 
Our marketing strategy includes advertising and outreach initiatives designed to build brand awareness, make clear USATs competitive strengths, and prove the value of our services to our target 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; 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.
 
 
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IMPORTANT RELATIONSHIPS
 
Verizon Wireless
 
In April 2011, we signed an agreement to use Verizon’s digital wireless wide area network for transport of data, including credit card transactions and inventory management data. The initial term of the agreement is three years, expiring April 2014. At the end of the initial term, the agreement automatically renews for successive one month periods unless terminated by either party upon thirty days notice. Verizon Wireless operates the nation’s fastest, most advanced 4G network and largest, most reliable 3G network. The company serves 104 million total wireless connections, including more than 88 million retail customers. We offer Verizon’s wireless services in connection with our ePort® devices which are utilized in the traditional small ticket beverage and food vending market in the United States.
 
On September 21, 2011, the Company and Verizon entered into a Joint Marketing Addendum (the “Verizon Agreement”) which amended the three year 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 Company has agreed to pay to Verizon a one-time referral fee for each customer introduced to the Company by Verizon that would become a customer of the Company. The Verizon Agreement is terminable by either party upon 45 days notice after six months.
 
VISA
 
On April 1, 2009 we entered into a Contactless Terminal Support Agreement with VISA U.S.A. INC. (“VISA”), pursuant to which VISA would pay us the amount of $200 for each ePort® that we deployed prior to December 31, 2009. The agreement covered up to a maximum of 4,000 ePorts®. These ePorts® would accept credit and debit cards utilizing VISA’s contactless technology as well as VISA’s magnetic stripe payment cards. In June 2009, the agreement was amended to provide funding for up to an additional 2,500 ePorts® which may be installed on vending machines owned by The Compass Group. VISA would pay us an aggregate of $800,000 if all 4,000 ePorts® were timely deployed. Our customer (i.e., the location owner) would enter into a three-year exclusive processing agreement with us in connection with the vending machine utilizing the ePort®. The Company deployed a total of 2,961 units, or $592,200, under this agreement during the period of July 1, 2009 through December 31, 2009.
 
On August 16, 2010, we entered into an Acceptance and Promotional Agreement with VISA. Pursuant to the agreement, VISA agreed, among other things, to pay to the Company up to $250,000 per year, for total payments of up to $750,000. The payments to the Company are to be used by the Company over the three year term of the agreement to support and promote the installation and deployment of at least 50,000 additional ePort®, or other payment terminals, in vending machines. If the Company does not install at least 50,000 ePorts®, or other payment terminals, over the term of the three year agreement, the Company would be required to refund a pro-rata portion of the funds.
 
As of October 12, 2011, following implementation of the Durbin Amendment, we entered into a new agreement with VISA to establish a new, fixed debit interchange rate. The agreement superseded all previous agreements between Visa and the Company. The agreement covers a one year term and expires on October 11, 2012. Management believes that the agreement will be renewed.
 
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. As per its website, Compass is a $9.9 billion organization with locations throughout the US, Mexico, and Canada, is the leader in vending, food service management and support services, is the largest national vending operating company, operating 200 branches, has 18,000 locations, and is one of the leading owners and operators of vending machines in the United States. Compass is a division of UK-based Compass Group PLC.
 
The MPA provides, among other things, that for a period of thirty-six months, Foodbuy on behalf of Compass shall utilize USAT as the sole credit or debit card vending system hardware and related software and connect services provider for not less than seventy-five percent of the vending machines of Compass utilizing cashless payments solutions. The MPA also provides that for a period of thirty-six months, USAT shall be a preferred supplier and provider to Foodbuy and its customers, including Compass, of USAT’s products and services. The MPA provides for initial pricing for the ePort hardware and monthly service and DEX telemetry fees at USAT’s standard pricing. Foodbuy’s customers have the right under the MPA to acquire USAT’s G-8 or Edge ePort devices through USAT’s Quick Start Program. The MPA also provides for the ability of the customer to obtain DEX telemetry services from USAT in connection with vending machines utilizing the ePort devices.
 
 
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On July 1, 2009, USAT and Compass, in conjunction with the MPA described above, entered into a Quick Start Master Lease Agreement pursuant to which Compass could purchase USAT’s G-8 or Edge ePort devices utilizing USAT’s Quick Start Program. The Quick Start Program enables Compass to acquire USAT’s ePort through a 36 month non-cancellable lease. Under the Quick Start Program, Compass will pay USAT a monthly amount, per terminal, that includes the lease of the ePort hardware and activation fee. The total monthly payment due under the Quick Start Program would be deducted by USAT directly out of the gross revenues generated from the Compass vending machines. Compass would be able to utilize the Quick Start Program to acquire ePorts during the three year term of the Master Purchase Agreement referred to above.
 
On July 1, 2009, USAT and Compass, in conjunction with the MPA described above, also entered into a new 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.
 
On June 30, 2012, the agreement automatically rolled over for an additional one year term.
 
AMI Entertainment
 
On August 22, 2011, we entered into an exclusive three-year agreement with AMI Entertainment (“AMI”) as their exclusive processor of credit and debit cards and other electronic payments in connection with equipment operated on AMI’s network in the U.S. and Canada. The agreement is subject to renewal for one year periods thereafter, subject to notice of non-renewal by either party. AMI manufactures various types of amusement, entertainment and music equipment for sale to third party users.
 
Crane Payment Solutions
 
In December 2010, Crane Payment Solutions (“Crane”), a business unit within the Merchandising Systems Segment of Crane Co. and the Company entered into a three-year Strategic Partnership Agreement to deliver a combined cashless vending solution to Crane customers in North America. Under the agreement, USA Technologies will become the lead provider and supplier of all card processing, wireless communications, and data services for Crane’s customers in conjunction with the new Currenza® cashless bill validator card reader. In addition to the card processing capabilities of the Company, the Company will provide certain hardware solutions and grant Crane a license for designated USAT patents as a part of the relationship.
 
JUMP START PROGRAM
 
In order to accelerate adoption in the marketplace as well as increase the Company’s license and transaction fee revenues, the Company commenced a program for its customers referred to as the JumpStart Program (“JumpStart”) in December 2009. Pursuant to the JumpStart Program, customers acquire the ePort cashless terminal at no upfront cost by paying a higher monthly service fee, avoiding the need to make a major upfront capital investment. The Company would continue to own the ePort device utilized by its customer. At the time of the shipment of the ePort device, the customer is obligated to pay to the Company the standard one-time activation fee, is obligated to pay monthly ePort Connect service fees, adjusted for JumpStart in accordance with the terms of the customer’s contract with the Company, and the Company receives transaction processing fees generated from the device.
 
In fiscal 2012, the Company funded approximately two-thirds 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.
 
MANUFACTURING
 
The Company utilizes independent third party companies for the manufacturing of its products. Our 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 beyond those submitted under routine purchase orders, typically covering short-term forecasts.
 
COMPETITION
 
The electronic payment and energy conservation industries are competitive markets. While the Company offers unique products and services within smaller niche markets of these industries, a number of competitors in the broader market may offer products and services within our niche market in the future. 
 
 
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In the electronic payment market there are a wide variety of companies that develop hardware and software solutions for our addressable market. While several of the competitors below have formed partnerships in an attempt to offer customers an end-to-end solution, we are not aware of any direct competitor that provides a complete end-to-end solution like ours. We are aware of at least five competitors that offer a cashless hardware device: Crane Payment Systems, MEI, Coin Acceptors Inc. (Coinco), Cantaloupe Systems, Inc., and Vend Screen. We are aware of four competitors that offer a remote monitoring device: MEI, Cantaloupe Systems, Inc., InOne Technology, LLC, and Crane Streamware. We are aware of several competitors that offer a wireless service for cashless processing: Apriva, Cantaloupe Systems, and InOne Technology/CoinCo. In addition, the National Automatic Merchandising Association (“NAMA”), an association serving the vending, coffee service and food service management industries, offers a program through Bank of America Merchant Services. 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, we are aware of one direct competitor, Mac-Gray Corporation. In the energy management market, while we are aware of one direct competitor for our Energy Miser products in the United States; competition is growing as more energy efficient products enter the market. The businesses which have developed unattended, credit card activated control systems currently in use in non-vending machine applications (e.g., gasoline dispensing, public telephones, prepaid telephone cards, and ticket dispensing machines), might be capable of developing products or utilizing their existing products in direct competition with our ePort® control systems targeted to the vending industry. Finally, the production of highly efficient vending machines and glass front coolers or alternative energy conservation products may reduce or replace the need for our energy management products.
 
The Company’s key competitive strengths are described in detail above, under the heading “OUR COMPETITIVE STRENGTHS.
 
CUSTOMER CONCENTRATIONS
 
Financial instruments that subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts and finance receivables. The Company maintains cash and cash equivalents with various financial institutions. Approximately 46% and 22% of the Company’s accounts and finance receivables at June 30, 2012 and 2011, respectively, were concentrated with two and one customer(s), respectively. Approximately 43%, 48%, and 52% of the Company’s license and transaction processing revenues for the years ended June 30, 2012, 2011, and 2010, respectively, were concentrated with two customers: 25%, 23%, and 17%, respectively, with one; and 18%, 25%, and 35%, respectively, with another. There was no concentration of equipment sales revenue for the year ended June 30, 2012. For each of the years ended June 30, 2011 and 2010 approximately zero and 11% of the Company’s equipment sales revenue was concentrated with one customer. The Company’s customers are principally located in the United States.
 
TRADEMARKS, PROPRIETARY INFORMATION, AND PATENTS
 
The Company received federal registration approval of the following trademarks: Blue Light Sequence®, CM2iQ®, EnergyMiser®, ePort®, ePort Connect®, ePort Edge®, Intelligent Vending®, PC Express®, Public PC®, SnackMiser®, The Office That Never Sleeps®, TransAct®, USA Technologies & Design®, USALive®, VendingMiser®, and VM2iQ®. The Company has three trademarks pending registration: Pay Dot™, Creating Value Through Innovation™, and eSuds™.
 
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.
 
Through June 30, 2012, 73 United States patents and eleven foreign patents have been issued to the Company, and five United States and five foreign patent applications are pending.
 
The Company believes that one or more of its patents, including U.S. Patent No. 6,505,095 entitled “System for providing remote audit, cashless payment, and interactive transaction capabilities in a vending machine” and U.S. Patent No. 7.131.575 entitled “MDB Transaction String Effectuated Cashless Vending”, are important in protecting its intellectual property used in its e-Port® control system targeted to the vending industry. The aforesaid patent expires in July 2021. 
 
The Company filed for reexamination of U.S. Patent No. 7,131,575 (Reexamination Control No. 90/008,437) and for reexamination of U.S. Patent No. 6,505,095 (Reexamination Control No. 90/008,448). On January 6, 2009, the U.S. Patent Office issued an Ex Parte Reexamination Certificate in connection with U.S. Patent No. 7.131.575 confirming patentability without any amendment to the claims. On August 11, 2009, the U.S. Patent Office issued an Ex Parte Reexamination Certificate in connection with U.S. Patent No. 6,505,095 which, among other things, approved amendments to certain of the prior claims and approved twelve new claims, for a total of 43 claims.
 
RESEARCH AND DEVELOPMENT
 
Research and development expenses, which are included in selling, general and administrative expense in the Consolidated Statements of Operations, were approximately $1,768,000, $997,000, and $1,864,000, for the years ended June 30, 2012, 2011, and 2010, respectively.
 
EMPLOYEES
 
On August 31, 2012, the Company had forty-two full-time employees and five part-time employees.

 
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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 have experienced losses since inception. Although the Company anticipates nearing profitability during the 2013 fiscal year, profitability is not assured. From our inception through June 30, 2012, our cumulative losses from operations are approximately $199 million. For our fiscal years ended June 30, 2012, 2011, and 2010, we have incurred net losses of $5,211,238, $6,457,067, and $11,571,495, respectively due primarily to the fact that our revenues have not been sufficient to sustain our operations. If we continue to incur losses, the price of our common stock can be expected to fall.
 
We may require additional financing to sustain our operations and without it we may not be able to continue operations.
 
At June 30, 2012, we had working capital of $2,197,851. We had an operating cash flow of $78,236, ($908,227), and ($9,841,900), for the fiscal years ended June 30, 2012, 2011, and 2010, respectively, reflecting a reclassification of cash used for acquisition of property for the JumpStart Program. We may not currently have sufficient financial resources to fund our operations after July 1, 2013. Therefore, we may need additional funds to continue these operations. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.
 
Our existence is dependent on our ability to raise capital that may not be available.
 
There can be no assurance that our business will prove financially profitable or generate sufficient revenues to cover our expenses. From inception, we have generated funds primarily through the sale of securities. Although we believe that we have adequate existing resources to provide for our funding requirements through at least July 1, 2013, there can be no assurances that we will be able to continue to generate sufficient funds thereafter. We would expect to raise funds in the future through sales of our debt or equity securities until such time, if ever, as we are able to operate profitably. Subsequent to July 1, 2013, our inability to obtain needed funding can be expected to have a material adverse effect on our operations and our ability to achieve profitability. If we fail to generate increased revenues or fail to sell additional securities, you may lose all or a substantial portion of your investment.
 
Our products may fail to gain widespread market acceptance. As a result, we may not generate sufficient revenues or profit margins to become successful.
 
There can be no assurances that demand for our products will be sufficient to enable us to generate sufficient revenue or become profitable. Likewise, no assurance can be given that we will be able to have a sufficient number of ePorts® connected to our network or sell equipment utilizing our network or our energy management products to enough locations to achieve significant revenues or that our operations can be conducted profitably. Alternatively, the locations which would utilize the network may not be successful locations and our revenues would be adversely affected. We may in the future lose locations utilizing our products to competitors, or may not be able to install our products at competitors’ locations, or may not obtain future locations which would be obtained by our competitors. In addition, there can be no assurance that our products could evolve or be improved to meet the future needs of the marketplace.
 
We may be required to incur further debt to meet future capital requirements of our business. Should we be required to incur additional debt, the restrictions imposed by the terms of such debt could adversely affect our financial condition and our ability to respond to changes in our business.
 
If we incur additional debt, we may be subject to the following risks:
 
 
our vulnerability to adverse economic conditions and competitive pressures may be heightened;
 
 
our flexibility in planning for, or reacting to, changes in our business and industry may be limited;
 
 
our debt covenants may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;
 
 
a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and therefore, may be able to take advantage of opportunities that our indebtedness would prevent us from pursuing;
 
 
the covenants contained in the agreements governing our outstanding indebtedness may limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments;

 
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a significant portion of our cash flows could be used to service our indebtedness;
 
 
we may be sensitive to fluctuations in interest rates if any of our debt obligations are subject to variable interest rates; and
 
 
our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired.
 
We cannot assure you that our leverage and such restrictions will not materially and adversely affect our ability to finance our future operations or capital needs or to engage in other business activities. In addition, we cannot assure you that additional financing will be available when required or, if available, will be on terms satisfactory to us.
 
Current conditions in the global financial markets and the distressed economy may materially adversely affect our business, results of operations and ability to raise capital.
 
Our business and results of operations may be materially adversely affected by the continued adverse conditions in the financial markets and the economy generally. Declining business and consumer confidence and the risks of increased or continued unemployment, have precipitated an economic slowdown and ongoing recession. These events and the continuing market upheavals may have an adverse effect on us, our suppliers and our customers. The demand for our products could be adversely affected in an economic downturn and our revenues may decline under such circumstances.
 
We have historically relied on the equity markets for funding our business by issuing equity securities. We may find it difficult, or we may not be able, to access the credit or equity markets, or we may experience higher funding costs as a result of the current adverse market conditions. Continued instability in these markets may limit our ability to access the capital we may require to fund and grow our business.
 
The loss of one or more of our key customers could significantly reduce our revenues and profits.
 
We have derived, and believe we may continue to derive, a significant portion of our revenues from a limited number of large customers. Approximately 46% and 22% of the Company’s accounts and finance receivables at June 30, 2012 and 2011, respectively, were concentrated with two and one customer(s), respectively. Approximately 43%, 48%, and 52% of the Company’s license and transaction processing revenues for the years ended June 30, 2012, 2011, and 2010, respectively, were concentrated with two customers: 25%, 23%, and 17%, respectively, with one; and 18%, 25%, and 35%, respectively, with another. There was no concentration of equipment sales revenue for the year ended June 30, 2012 and 2011. For the year ended June 30, 2010 approximately 11% of the Company’s equipment sales revenue was concentrated with one customer. The Company’s customers are principally located in the United States.
 
Our customers may buy less of our products or services depending on their own technological developments, end-user demand for our products and internal budget cycles. 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. If any of our large customers significantly reduce or delay purchases from us or if we are required to sell products to them at reduced prices or unfavorable terms, our results of operations and revenue could be materially adversely affected.
 
We depend on our key personnel and if they would leave us, our business could be adversely affected.
 
We are dependent on key management personnel, particularly the Chairman and Chief Executive Officer, Stephen P. Herbert. The loss of services of Mr. Herbert or other executive officers would dramatically affect our business prospects. Certain of our 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. Herbert that expires on January 1, 2013. We have also entered into an employment agreement with another executive officer, which contains confidentiality and non-compete agreements. We have obtained a key person life insurance policy in the amount of $1,000,000 on Mr. Herbert. We do not have and do not intend to obtain key person life insurance coverage on our other executive officer. As a result, we are exposed to the costs associated with the death of this key employee.
 
We also may be unable to retain 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.

 
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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.
 
Through June 30, 2012, we had 10 pending United States and foreign patent applications, and intend to file applications for additional patents covering our future products, 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. The United States Government and other countries have granted us 84 patents as of June 30, 2012. 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 do not infringe the patents of others;
 
 
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 the products are found to have infringed any patent, there can be no assurance that we will be able to obtain licenses to continue to manufacture and license such product or that we will not have to pay damages as a result of such infringement. Even if a patent application is granted for any of our products, there can be no assurance that the patented technology will be a commercial success or result in any profits to us.
 
If we are unable to adequately protect our proprietary technology, 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 rights in connection with any such litigation.
 
Competition from others could prevent the Company from increasing revenue and achieving profitability.
 
Competition from other companies, including those that are well established and have substantially greater resources may reduce our profitability or reduce our business opportunities. Many of our competitors have established reputations for success in the development, sale and service of high quality products. We face competition from the following groups:
 
 
companies offering automated, credit card activated control systems in connection with facsimile machines, personal computers, debit card purchase/revalue stations, vending machines, and use of the Internet and e-mail which directly compete with our products;
 
 
companies which have developed unattended, credit card activated control systems currently used in connection with public telephones, prepaid telephone cards, gasoline dispensing machines, or vending machines and are capable of developing control systems in direct competition with the Company; and,
 
 
one direct competitor, Elstat Electronics Ltd. in the energy management industry.
 
In addition, it is also possible that a company not currently engaged in any of the businesses described above could develop services and products that compete with our services and products. Competition may result in lower profit margins on our products or may reduce potential profits or result in a loss of some or all of our customer base. To the extent that our competitors are able to offer more attractive technology, our ability to compete could be adversely affected. In addition, NAMA, an industry association  serving the vending, coffee service and foodservice management industries, offers a program for its members that competes with our cashless solutions through Bank of America Merchant Services.
 
The termination of any of our relationships with third parties upon whom we rely for supplies and services that are critical to our products could adversely affect our business and delay achievement of our business plan.
 
We depend on arrangements with third parties for a variety of component parts used in our products. We have contracted with various suppliers to assist us to develop and manufacture our ePort® products and with various suppliers to manufacture our Energy Miser® products. For other components, we do not have supply contracts with any of our third-party suppliers and we purchase components as needed from time to time. We have contracted with DBSi to host our network in a secure, 24/7 environment to ensure the reliability of our network services. We also have contracted with multiple land-based telecommunications providers to ensure the reliability of our land-based network. If these business relationships are terminated, the implementation of our business plan may be delayed until an alternative supplier or service provider can be retained. If we are unable to find another source or one that is comparable, the content and quality of our products could suffer and our business, operating results and financial condition could be harmed.
 
 
16

 
 
A disruption in the manufacturing capabilities of our third-party manufacturers, suppliers or distributors would negatively impact our ability to meet customer requirements.
 
We depend upon third-party manufacturers, suppliers and distributors to deliver components free from defects, competitive in functionality and cost, and in compliance with our specifications and delivery schedules. Since we generally do not maintain large inventories of our products or components, any termination of, or significant disruption in, our manufacturing capability or our relationship with our third-party manufacturers or suppliers may prevent us from filling customer orders in a timely manner.
 
We have occasionally experienced, and may in the future experience, delays in delivery of products and delivery of products of inferior quality from third-party manufacturers. Although alternate manufacturers and suppliers are generally available to produce our products and product components, the number of manufacturers or suppliers of some of our products and components is limited, and a qualified replacement manufacturer or supplier could take several months. In addition, our use of third-party manufacturers reduces our direct control over product quality, manufacturing timing, yields and costs. Disruption of the manufacture or supply of our products and components, or a third-party manufacturer’s or supplier’s failure to remain competitive in functionality, quality or price, could delay or interrupt our ability to manufacture or deliver our products to customers on a timely basis, which would have a material adverse effect on our business and financial performance.
 
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 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.
 
Our reliance on our wireless telecommunication service provider exposes us to a number of risks over which we have no control, including risks with respect to increased prices and termination of essential services.
 
The operation of our wirelessly 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. We have no control over the operation, quality or maintenance of these services or whether the vendor will improve its services or continue to provide services that are essential to our business. In addition, subject to our existing contracts with them, our wireless telecommunication services providers may increase their prices, which would increase our costs. If our wireless telecommunication services providers were to cease to provide essential services or to significantly increase prices, we could be required to find alternative vendors for these services. With a limited number of vendors, we could experience significant delays in obtaining new or replacement services, which could lead to slowdowns or failures of our network. In addition, we may have to replace our existing ePort® devices that are already installed in the marketplace and which are utilizing the existing vendor’s services. This could significantly harm our reputation and could cause us to lose customers and revenues.
 
Our products may contain defects that may be difficult or even impossible to correct, which could result in lost sales, additional costs and customer erosion.
 
We offer technically complex products which, when first introduced or released in new versions, may contain software or hardware defects that are difficult to detect and correct. The existence of defects and delays in correcting them could result in negative consequences, including the following:
 
delays in shipping products;
 
cancellation of orders;
●             additional warranty expense;
 
delays in the collection of receivables;
 
product returns;
 
the loss of market acceptance of our products;
 
diversion of research and development resources from new product development; and
 
inventory write-downs.
 
Even though we test all of our products, defects may continue to be identified after products are shipped. In past periods, we have experienced various issues in connection with product launches, including the need to rework certain products and stabilize product designs. Correcting defects can be a time-consuming and difficult task. Software errors may take several months to correct, and hardware errors may take even longer.
 
 
17

 
 
We may accumulate excess or obsolete inventory that could result in unanticipated price reductions and write downs and adversely affect our financial results.
 
Managing the proper inventory levels for components and finished products is challenging. In formulating our product offerings, we have focused our efforts on providing products with greater capability and functionality, which requires us to develop and incorporate the most current technologies in our products. This approach tends to increase the risk of obsolescence for products and components we hold in inventory and may compound the difficulties posed by other factors that affect our inventory levels, including the following:
 
 
the need to maintain significant inventory of components that are in limited supply;
 
 
buying components in bulk for the best pricing;
 
 
responding to the unpredictable demand for products;
 
 
responding to customer requests for short lead-time delivery schedules;
 
 
failure of customers to take delivery of ordered products; and
 
 
product returns.
 
If we accumulate excess or obsolete inventory, price reductions and inventory write-downs may result, which could adversely affect our results of operation and financial condition.
 
We may not be able to adapt to changing technology and our customers’ technology needs.
 
We face rapidly changing technology and frequent new service offerings by competitors that can render existing services obsolete or unmarketable. Our future depends, in part, on our ability to enhance existing services and to develop, introduce and market, on a timely and cost effective basis, new services that keep pace with technological developments and customer requirements. Developing new products and technologies is a complex, uncertain process requiring innovation and accurate anticipation of technological and market trends. When changes to the product line are announced, we will be challenged to manage possible shortened life cycles for existing products, continue to sell existing products and prevent customers from returning existing products. Our inability to respond effectively to any of these challenges may have a material adverse effect on our business and financial success.
 
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.
 
Protection against fraud is of key importance to purchasers and end-users of our products. We incorporate security features, such as encryption software and secure hardware, into our products to protect against fraud in electronic payment transactions and to ensure the privacy and integrity of consumer data. We design and test our products to high security standards, and our products and methodologies are under constant review and improvement. We also maintain the highest level PCI validation standard as mandated by the card industry and engage third party auditors not only to ensure that we meet the highest industry standards, but also to advise us on improving our security methods. Nevertheless, our products may be vulnerable to breaches in security due to defects in our security mechanisms, the operating system and applications in our hardware platform. Security vulnerabilities could jeopardize the security of information transmitted or stored using our products. In general, liability associated with security breaches of a certified electronic payment system belongs to the institution that acquires the financial transaction. In addition, we have not experienced any material security breaches affecting our business. However, if the security of the information in our products is compromised, our reputation and marketplace acceptance of our products will be adversely affected, which would adversely affect our results of operations, and subject us to potential liability. If our security applications are breached and sensitive data is lost or stolen, we could incur significant costs 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 the data. We may also be subject to fines and penalties from the credit card associations in the event of the loss of confidential card information. Adverse publicity raising concerns about the safety or privacy of electronic transactions, or widely reported breaches of our or another provider’s security, have the potential to undermine consumer confidence in the technology and could have a materially adverse effect on our business.
 
Our products and services may be vulnerable to security breach.
 
Credit card issuers have promulgated credit card security guidelines as part of their ongoing efforts to battle identity theft and credit card fraud. We continue to work with credit card issuers to assure that our products and services comply with these rules. There can be no assurances, however, that our products and services are invulnerable to unauthorized access or hacking. When there is unauthorized access to credit card data that results in financial loss, there is the potential that parties could seek damages from us.
 
If we fail to adhere to the standards of the Visa and MasterCard credit card associations, our registrations with these associations could be terminated and we could be required to stop providing payment processing services for Visa and MasterCard.
 
Substantially all of the transactions handled by our network involve Visa or MasterCard. If we fail to comply with the applicable requirements of the Visa and MasterCard credit card associations, 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 payment processing services through our network.
 
 
18

 
 
We rely on other card payment processors and service providers; 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 Elavon, Inc. (“Elavon”), to enable us to provide card authorization, data capture, settlement and merchant accounting services and access to various reporting tools for the customers we serve. Many of these organizations and service providers are our competitors and our agreements are subject to termination by them.
 
The termination by our service providers of their arrangements with us or their failure to perform their services efficiently and effectively may adversely affect our relationships with the customers whose accounts we serve and may cause those customers to terminate their processing agreements with us.
 
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 or revocation 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. The payment processing industry may become subject to regulation as a result of recent data security breaches that have exposed consumer data to potential fraud. 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,” 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. On October 12, 2011, the Company and Visa entered into a one-year agreement (the “Visa Agreement”) pursuant to which Visa has agreed to make available to the Company reduced interchange fees for debit card transactions. The interchange reimbursement fees made available to the Company will allow the Company to continue to accept Visa’s debit products over the one-year term without adversely impacting the Company’s historical gross profit from license and transaction fee revenues. If the Visa Agreement is not renewed, our financial results would be materially adversely affected unless we are able to pass these significant additional charges to our customers. Although management believes that the agreement will be renewed there can be no assurance thereof.
 
Increases in card association and debit network interchange fees could increase our operating costs or otherwise adversely affect our operations. If we do not pass along to our customers any future increases in credit or debit card interchange fees, assessments and transaction fees, our gross profits would be reduced.
 
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.
 
While the Company and Visa have entered into a one-year agreement pursuant to which Visa has agreed to make available to the Company reduced interchange fees for debit card transactions, MasterCard has, since October 1, 2011, increased its interchange fees for small ticket category transactions paid for through debit cards issued by regulated banks from 1.55% of a transaction plus 4 cents, to 0.5% of a transaction plus 22 cents, which represents an increase of approximately 247% based on a transaction of $1.67, which was the average transaction experienced by the Company during fiscal year 2012.
 
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- branded debit and pre-paid cards in addition to all major credit cards, including Visa, MasterCard, Discover and American Express at its current processing rates. If the Visa Agreement is not renewed, our financial results would be materially adversely affected unless we are able to pass these significant additional charges to our customers. Although management believes that the agreement will be renewed there can be no assurance thereof.
 
The future occurrence of unusual or unanticipated non-operational expenses may require us to divert our cash resources from achieving our business plan, adversely affecting our financial performance and resulting in the decline of our stock price.

Our fiscal year 2013 business plan assumes that no material unusual or unanticipated non-operational expenses would be incurred by us. In the event we would incur any such expenses, we would anticipate diverting our cash resources from our JumpStart program in order to fund any such expenses. During the fiscal year ending June 30, 2013, we anticipate utilizing substantial cash resources in connection with the JumpStart program. Any such reduction may cause our anticipated connections, revenues, gross profits, Adjusted EBITDA, and other financial metrics for the 2013 fiscal year and beyond to be materially adversely affected. In such event, the price of our common stock could be expected to fall.

During our fiscal year ended June 30, 2012, we incurred approximately $2.2 million in connection with the proxy contest and related litigation and $975,000 in connection with the Audit Committee’s investigation and resignation of our former CEO. Our business plan for the 2013 fiscal year does not anticipate that any such similar events, including another proxy contest, would occur during the fiscal year. The occurrence of any such event could have a material adverse effect on our financial performance and share price.
 
 
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Risks Related to Our Common Stock
 
We do not expect to pay cash dividends in the foreseeable future and therefore investors should not anticipate cash dividends on their investment.
 
The holders of our common stock and series A convertible preferred stock are entitled to receive dividends when, and if, declared by our board of directors. Our board of directors does not intend to pay cash dividends in the foreseeable future, but instead intends to retain any and all earnings to finance the growth of the business. To date, we have not paid any cash dividends on our common stock or our series A convertible preferred stock and there can be no assurance that cash dividends will ever be paid on our common stock.
 
In addition, our articles of incorporation prohibit the declaration of any dividends on our common stock unless and until all unpaid and accumulated dividends on the series A convertible preferred stock have been declared and paid. Through August 31, 2011, the unpaid and cumulative dividends on the series A convertible preferred stock are $10,599,646. Each share of series A convertible preferred stock is convertible into 1/100th of a share of common stock at the option of the holder. The unpaid and cumulative dividends on the series A convertible preferred stock are convertible into shares of our common stock at the rate of $1,000 per share at the option of the holder. During the year ended June 30, 2012, none of our series A convertible preferred stock and no cumulative preferred dividends were converted into shares of common stock.
 
Our articles of incorporation also provide that the preferred stock has a liquidation preference over the common stock in the amount of $10 per share plus accrued and unpaid dividends. As of June 30, 2012, the liquidation preference was $15,361,522.
 
We may issue additional shares of our common stock, which could depress the market price of our common stock and dilute your ownership.
 
As of August 31, 2012, we had issued and outstanding options to purchase 45,333 shares of our common stock and warrants to purchase 7,754,187 shares of our common stock. The shares underlying none of these options, and 6,782,040 of these warrants have been registered and may be freely sold. Market sales of large amounts of our common stock, or the potential for those sales even if they do not actually occur, may have the effect of depressing the market price of our common stock. In addition, if our future financing needs require us to issue additional shares of common stock or securities convertible into common stock, the supply of common stock available for resale could be increased which could stimulate trading activity and cause the market price of our common stock to drop, even if our business is doing well. Furthermore, the issuance of any additional shares of our common stock including those pursuant to the exercise of warrants by the holders thereof, or securities convertible into our common stock could be substantially dilutive to holders of our common stock if they do not invest in future offerings.
 
Our stock price may be volatile.
 
The trading price of our common stock is expected to be subject to significant fluctuations in response to various factors including, but not limited to, the following:
 
 
quarterly variations in operating results and achievement of key business metrics;
 
 
changes in earnings estimates by securities analysts, if any;
 
 
any differences between reported results and securities analysts’ published or unpublished expectations;
 
 
announcements of new contracts, service offerings or technological innovations by us or our competitors;
 
 
market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors;
 
 
demand for our services and products;
 
 
shares being sold pursuant to Rule 144 or upon exercise of warrants;
 
 
regulatory matters;
 
 
concerns about our financial position, operating results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights;
 
 
potential dilutive effects of future sales of shares of common stock by shareholders and by the Company, and subsequent sale of common stock by the holders of warrants and options;
 
 
our ability to obtain working capital financing; and
 
 
general economic or stock market conditions unrelated to our operating performance.
 
The securities market in recent years has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations, as well as general economic conditions, may also materially and adversely affect the market price of our common stock.
 
 
20

 
 
The substantial market overhang of our shares may tend to depress the market price of our shares.
 
As of August 31, 2012, there were outstanding warrants to purchase 2,518,040 of our shares at the exercise price of $1.13 per share at any time before December 31, 2013, and 4,264,000 of our shares at the exercise price of $2.6058 per share at any time before September 18, 2016. The Company has agreed and/or intends to register for resale in the open market of the shares underlying these warrants. Sales in the public market of a substantial number of the shares underlying these warrants, or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, the sale of these shares could impair our ability to raise capital, should we wish to do so, through the sale of additional common stock. We are unable to estimate the number of shares that may be sold because this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors.
 
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.
 
Our publicly-filed reports are reviewed by the SEC from time to time and any significant changes required as a result of any such review may result in material liability to us, and have a material adverse impact on the trading price of our common stock.
 
The reports of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements and to enhance the overall effectiveness of companies’ public filings, and comprehensive reviews of such reports are now required at least every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports will comply in all material respects with the published SEC rules and regulations, we could be required to modify or reformulate information contained in prior filings as a result of an SEC review. Any modification or reformulation of information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of our common stock.

 
21

 

Item 2. Properties.
 
The Company conducts its operations from various facilities under operating leases. The Company leases 17,249 square feet of space located in Malvern, Pennsylvania for its principal executive office and for general administrative functions, sales activities, and product development. The lease term expires on April 30, 2016. As of June 30, 2012, the Company’s rent payment for this facility is $29,000 per month.
 
The Company also leases 13,377 square feet of space located in Malvern, Pennsylvania for its product warehousing, shipping and customer support. The lease term expires December 31, 2012 with the option to extend the lease thereafter for an additional 24-month period. As of June 30, 2012, the Company’s rent payment for this facility is $15,000 per month for the duration of the amended lease period.
 
Item 3. Legal Proceedings.
 
On April 13, 2012, the Company received a notice from a former director and shareholder that he intended to nominate himself and six other persons for election as directors at the upcoming 2012 annual meeting of shareholders. In connection with the proxy contest, on May 3, 2012 the Company commenced a legal action against the former director and his nominees and certain other parties (collectively, “SAVE”). As part of the litigation, in July 2012 certain members of SAVE filed counterclaims against the Company and Stephen P. Herbert relating to, among other things, the 2012 annual meeting of shareholders. On August 16, 2012, the Company and SAVE entered into a Settlement and Release Agreement (the “Settlement Agreement”). Pursuant to the Settlement Agreement, SAVE accepted the election of all nine of the Company’s director nominees by the shareholders at the June 28, 2012 annual meeting of shareholders and have agreed not to contest or challenge the election results and the Company and SAVE have dismissed with prejudice the civil action filed on May 3, 2012 in the United States District Court for the Eastern District of Pennsylvania known as USA Technologies, Inc. v. Bradley Tirpak, et al., v. Stephen P. Herbert (Civil Action No. 12-2399-TJS) as well as all of the claims and counterclaims alleged therein.  In connection with the proxy contest and related litigation, the Company incurred substantial expenses during the 2012 fiscal year which are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 
22

 

 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
The common stock of the Company trades on The NASDAQ Global Market under the symbol USAT. The high and low bid prices on The NASDAQ Global Market for the common stock were as follows:

Year ended June 30, 2012
 
High
   
Low
 
First Quarter (through September 30, 2011)
    2.47       1.13  
Second Quarter (through December 31, 2011)
    1.70       0.94  
Third Quarter (through March 31, 2012)
    1.33       0.93  
Fourth Quarter (through June 30, 2012)
    1.98       1.12  
                 
Year ended June 30, 2011
 
High
   
Low
 
First Quarter (through September 30, 2010)
    1.50       0.46  
Second Quarter (through December 31, 2010)
    1.60       0.97  
Third Quarter (through March 31, 2011)
    2.75       1.04  
Fourth Quarter (through June 30, 2011)
    3.74       1.93  
 
On August 31, 2012, there were 617 record holders of the Common Stock and 358 record holders of the Preferred Stock.
 
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, 2012, such accumulated unpaid dividends amounted to $11,264,098. The Preferred Stock is also entitled to a liquidation preference over the Common Stock which as of June 30, 2012 equaled $15,361,552.
 
As of June 30, 2012, equity securities authorized for issuance by the Company with respect to compensation plans were as follows:

   
Number of
Securities to be
issued upon
exercises of
outstanding options
and warrants
       
Weighted
average exercise
price of
outstanding
options and
warrants
   
Number of
securities remaining
available for future
issuance (excluding
securities reflected
in column(a)
 
Plan category
 
(a)
       
(b)
   
(c)
 
Equity compensation plans approved by security holders
    -           -       555,941   (3)
                             
Equity compensation plans not approved by security holders
    45,333   (1)               140,000   (2)
                             
Total
    45,333           -       695,941  
 
(1)  Represents stock options outstanding as of June 30, 2012 for the purchase of shares of Common Stock of the Company expiring at various times from March 2013 through June 2013. All such options were granted to then current employees and directors of the Company. Exercise prices for all the options outstanding were at prices that were either equal to or greater than the market price of the Company’s Common Stock on the dates the options were granted. Shareholder approval of these options was not required because the options were granted prior to the Company’s shares being listed on The NASDAQ Stock Market LLC.
 
(2)  Represents shares of Common Stock issuable to the Company’s former Chief Executive Officer upon a USA Transaction. Shareholder approval of the foregoing was not required because the agreement was entered into by the Company prior to the Company’s shares being listed on The NASDAQ Stock Market LLC.
 
(3)  Represents 10,941 shares of Common Stock issuable under the Company’s 2010 Stock Incentive Plan as approved by shareholders on June 15, 2010, 45,000 shares of Common Stock issuable under the Company’s 2011 Stock Incentive Plan as approved by shareholders on June 13, 2011, and 500,000 shares of Common Stock issuable under the Company’s 2012 Stock Incentive Plan as approved by shareholders on June 28, 2012 for use in compensating employees, officers and directors. The shares either have been, or will be registered with the Securities and Exchange Commission as an employee benefit plan under Form S-8.
 
 
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As of August 31, 2012, shares of Common Stock reserved for future issuance were as follows:
 
 
45,333 shares issuable upon the exercise of stock options at exercise prices ranging from $7.50 to $8.00 per share;
 
 
7,754,187 shares issuable upon the exercise of common stock warrants at exercise prices ranging from $1.13 to $7.70 per share; all warrants were exercisable as of August 31, 2012;
 
 
15,694 shares issuable upon the conversion of outstanding Preferred Stock and cumulative Preferred Stock dividends;
 
 
10,941 shares issuable under the 2010 Stock Incentive Plan;
 
 
45,000 shares issuable under the 2011 Stock Incentive Plan; and
 
 
500,000 shares issuable under the 2012 Stock Incentive Plan.
 
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 for small cap companies in the United States. The graph assumes a $100 investment on June 30, 2007 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
 
(LINE GRAPH)

Total Return For:
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
             
USA Technologies, Inc.
 $           100
 $             77
 $             37
 $               6
 $             29
 $             13
NASDAQ Composite
              100
              106
                85
                98
              126
              113
S&P 500 Information Technology Index
              100
              115
                92
              105
              129
              119
 
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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Item 6. Selected Financial Data.
 
The following selected financial data for the five years ended June 30, 2012 are derived from the audited consolidated financial statements of USA Technologies, Inc. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.
                               
   
Year ended June 30,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
OPERATIONS DATA
                             
                               
Revenues
  $ 29,017,243     $ 22,868,789     $ 15,771,106     $ 12,020,123     $ 16,103,546  
                                         
Net loss
  $ (5,211,238 )   $ (6,457,067 )   $ (11,571,495 )   $ (13,731,818 )   $ (16,417,893 )
                                         
Cumulative preferred dividends
    (664,452 )     (665,577 )     (735,139 )     (772,997 )     (780,588 )
Loss applicable to common shares
  $ (5,875,690 )   $ (7,122,644 )   $ (12,306,634 )   $ (14,504,815 )   $ (17,198,481 )
                                         
Loss per common share (basic and diluted)
  $ (0.18 )   $ (0.26 )   $ (0.55 )   $ (0.95 )   $ (1.21 )
                                         
Cash dividends per common share
    -       -       -       -       -  
                                         
BALANCE SHEET DATA
                                       
Total assets
  $ 33,219,657     $ 36,004,005     $ 29,848,424     $ 25,980,378     $ 40,055,651  
Long-term debt
  $ 728,330     $ 253,061     $ 596,155     $ 820,059     $ 967,518  
Shareholders’ equity
  $ 21,655,022     $ 26,125,531     $ 22,812,172     $ 19,972,272     $ 32,576,549  
 
The following unaudited quarterly financial operations data for the two years ended June 30, 2012 and June 30, 2011 is derived from the audited consolidated financial statements of USA Technologies, Inc. and its interim reports for the quarters therein. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.
 
 
25

 

   
UNAUDITED
 
YEAR ENDED JUNE 30, 2012
 
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
   
Year
 
 
                             
Revenues
  $ 6,705,748     $ 6,881,598     $ 7,527,051     $ 7,902,846     $ 29,017,243  
 
                                       
Gross profit
  $ 2,049,036     $ 1,938,456     $ 2,795,220     $ 3,178,339     $ 9,961,051  
                                         
Net loss
  $ (78,954 )   $ (1,821,061 )   $ (538,618 )   $ (2,772,605 )   $ (5,211,238 )
                                         
Cumulative preferred dividends
  $ (332,226 )   $ -     $ (332,226 )   $ -     $ (664,452 )
                                         
Loss applicable to common shares
  $ (411,180 )   $ (1,821,061 )   $ (870,844 )   $ (2,772,605 )   $ (5,875,690 )
                                         
Loss per common share (basic & diluted)
  $ (0.01 )   $ (0.06 )   $ (0.03 )   $ (0.09 )   $ (0.18 )
                                         
Weighted average number of common shares outstanding (basic & diluted)
    32,288,638       32,448,040       32,466,528       32,496,327       32,423,987  
                                         
   
UNAUDITED
 
YEAR ENDED JUNE 30, 2011
 
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
   
Year
 
 
                                       
Revenues
  $ 4,440,665     $ 6,016,516     $ 5,522,977     $ 6,888,631     $ 22,868,789  
                                         
Gross profit
  $ 1,355,567     $ 2,488,021     $ 1,553,132     $ 2,351,938     $ 7,748,658  
                                         
Net loss
  $ (1,886,614 )   $ (133,131 )   $ (2,514,268 )   $ (1,923,054 )   $ (6,457,067 )
                                         
Cumulative preferred dividends
  $ (333,351 )   $ -     $ (332,226 )   $ -     $ (665,577.00 )
                                         
Loss applicable to common shares
  $ (2,219,965 )   $ (133,131 )   $ (2,846,494 )   $ (1,923,054 )   $ (7,122,644 )
                                         
Loss per common share (basic & diluted)
  $ (0.09 )   $ (0.01 )   $ (0.11 )   $ (0.06 )   $ (0.26 )
                                         
Weighted average number of common shares outstanding (basic & diluted)
    25,842,604       26,005,257       26,914,004       31,929,532       27,665,345  
 
The following unaudited quarterly cash flow data for the two years ended June 30, 2012 and June 30, 2011 is derived from the audited consolidated financial statements of USA Technologies, Inc. and its interim reports for the quarters therein. The data reflects the reclassification of the cash used for purchase of property for the rental program from operating activities to investing activities. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information.
 
 
26

 

   
UNAUDITED
 
YEAR ENDED JUNE 30, 2012
 
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
   
Year
 
                               
 Net cash provided by (used in) operating activities
  $ (496,789 )   $ (2,527,097 )   $ 232,171     $ 2,869,951     $ 78,236  
                                         
Net cash used in investing activities
  $ (1,294,956 )   $ (1,134,983 )   $ (1,256,676 )   $ (2,546,199 )   $ (6,232,814 )
                                         
Net cash provided by (used in) financing activities
  $ (99,829 )   $ (107,476 )   $ (111,841 )   $ (91,142 )   $ (410,288 )
                                         
Net increase (decrease) in cash and cash equivalents
    (1,891,574 )     (3,769,556 )     (1,136,346 )     232,610       (6,564,866 )
Cash and cash equivalents at beginning of period
    12,991,511       11,099,937       7,330,381       6,194,035       12,991,511  
Cash and cash equivalents at end of period
  $ 11,099,937     $ 7,330,381     $ 6,194,035     $ 6,426,645     $ 6,426,645  
                                         
   
UNAUDITED
 
YEAR ENDED JUNE 30, 2011
 
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
   
Year
 
                                         
Net cash provided by (used in) operating activities
  $ (1,441,190 )   $ 3,096,868     $ (1,503,735 )   $ 5,396,897     $ 5,548,840  
                                         
Net cash provided by (used in) investing activities
  $ (583,586 )   $ (3,454,131 )   $ 17,029     $ (534,004 )   $ (4,554,692 )
                                         
Net cash provided by (used in) financing activities
  $ (112,167 )   $ (114,122 )   $ 9,782,587     $ 1,293,808     $ 10,850,106  
                                         
Net increase (decrease) in cash and cash equivalents
    (2,136,943 )     (471,385 )     8,295,881       6,156,701       11,844,254  
Cash and cash equivalents at beginning of period
    7,604,324       5,467,381       4,995,996       13,291,877       7,604,324  
Cash and cash equivalents at end of period
  $ 5,467,381     $ 4,995,996     $ 13,291,877     $ 19,448,578     $ 19,448,578  
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
USA Technologies, Inc. provides wireless networking, cashless transactions, asset monitoring and other value-added services principally to the small ticket unattended retail markets. Our ePort® technology can be installed and/or embedded into everyday devices such as vending machines, kiosks, as well as our eSuds™ technology for washer and dryers. Our associated network service, ePort Connect®, is a comprehensive service that provides wireless connectivity that facilitates electronic payment options as well as telemetry 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. In addition, the Company provides energy management products, such as its VendingMiser® and CoolerMiser™, which reduce energy consumption in vending machines and coolers.
 
The Company generates revenue in multiple ways. We derive the majority of our revenues from license and transaction fees related to our ePort Connect service. Connections to our service stem from the sale, or lease of our POS electronic payment devices or certified payment software or the servicing of similar third-party installed POS terminals. The majority of ePort Connect customers pay a monthly fee plus a blended transaction rate on the dollar volume processed by the Company. Customers with higher expected transaction rates might pay a lower or no ePort Connect monthly fee, but a higher blended transaction rate on dollar volume processed by the Company. Connections to the ePort Connect service, therefore, are the most significant driver of the Company’s revenues, particularly revenues from license and transaction fees.
 
The Company also generates equipment revenue through the direct sale or rental of ePort® technology as well as our stand-alone, non-networked energy management products.
 
CRITICAL ACCOUNTING POLICIES
 
GENERAL
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. We believe the policies and estimates related to revenue recognition, software development costs, impairment of long-lived assets, goodwill and intangible assets, and investments represent our critical accounting policies and estimates. Future results may differ from our estimates under different assumptions or conditions.
 
 
27

 
 
REVENUE RECOGNITION
 
Revenue from the sale of equipment is recognized on the terms of freight-on-board shipping point, or upon installation and acceptance of the equipment if installation services are purchased for the related equipment. Activation fee revenue is recognized when the Company’s cashless payment device is initially activated for use on the Company network. Transaction processing revenue is recognized upon the usage of the Company’s cashless payment and control network. License fees for access to the Company’s devices and network services are recognized on a monthly basis. In all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company estimates an allowance for product returns at the date of sale.
 
IMPAIRMENT OF LONG LIVED ASSETS
 
In accordance with the Financial Accounting Standards Board Accounting Standards Codification® (“ASC”) Topic 360 “Impairment or Disposal of Long-lived Assets”, the Company reviews its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset will be written down to its fair value. In the period when the plan of sale criteria of ASC 360 are met, long-lived assets are reported as held for sale, depreciation and amortization cease, and the assets are reported at the lower of carrying value or fair value less costs to sell.
 
GOODWILL AND INTANGIBLE ASSETS
 
Goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. The Company accounts for goodwill in accordance with ASC 350, “Intangibles – Goodwill and Other”. Under ASC 350, goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. The Company tests goodwill for impairment using a two-step process. The first step screens for potential impairment, while the second step measures the amount of impairment. The Company uses a discounted cash flow analysis to complete the first step in this process. We also give consideration to our market capitalization. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date. The Company has concluded there has been no impairment of goodwill as a result of its testing on April 1, 2012, April 1, 2011, and April 1, 2010.
 
The Company trademarks with an indefinite economic life are not being amortized. The trademarks, not subject to amortization, are related to the miser asset group and consist of the following trademarks: 1) VendingMiser, 2) CoolerMiser, 3) PlugMiser and 4) SnackMiser. The Company tests indefinite-lived intangible assets for impairment using a two-step process. The first step screens for potential impairment, while the second step measures the amount of impairment. The Company uses a discounted cash flow analysis to complete the first step in this process. Testing for impairment is to be done at least annually and at other times if events or circumstances arise that indicate that impairment may have occurred. The Company has selected April 1 as its annual test date for its indefinite-lived intangible assets. The Company concluded there was an impairment of its indefinite-lived trademarks as a result of its testing in its fiscal year 2011, and has recorded a $581,900 impairment expense in fourth quarter of the fiscal year ended June 30, 2011 (see Note 5 to the Consolidated Financial Statements). There was no impairment expense recorded during the fiscal year ended June 30, 2012 and 2010.
 
Patents and trademarks, with an estimated economic life, are carried at cost less accumulated amortization, which is calculated on a straight-line basis over their estimated economic life. The Company reviews intangibles, subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset is considered to be impaired when the sum of the undiscounted future net cash flows resulting from the use of the asset and its eventual disposition is less than its carrying amount. The amount of the impairment loss, if any, is measured as the difference between the net book value of the asset and its estimated fair value. Other than described above, as of June 30, 2012, 2011, and 2010, the Company has concluded there has been no impairment of its other patents or trademarks that are subject to amortization.

 
28

 

RESULTS OF OPERATIONS
 
FISCAL YEAR ENDED JUNE 30, 2012 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2011
 
Results for the year ended June 30, 2012 continued to demonstrate significant growth and improvements in the Company’s operations. Highlights of year over year improvements include:
 
 
Total revenue up 27%;
 
Recurring license and transaction fee revenue up 42%;
 
New connections up 38%; and,
 
Gross profit dollars up 29%.
 
The growing ePort Connect service base of connections drove the 42% 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 $23 million for fiscal 2012 from $16 million for fiscal 2011. These recurring revenues represented 81% of total revenue for the fiscal 2012 year.
 
License and transaction fee highlights for the year ended June 30, 2012 included:
 
 
45,000 additional net connections to the Company’s ePort Connect service in fiscal 2012;
Total connected service base to 164,000 as of June 30, 2012, compared to 119,000 as of June 30, 2011, an increase of approximately 38% compared to connections at June 30, 2011;
 
Increases in the number of small-ticket, credit/debit transactions and dollars handled in the fiscal year of 43% each compared to the same period a year ago; and,
 
69% growth in ePort Connect customers, fueled by 1,350 new customers in the 2012 fiscal year for 3,300 customers at June 30, 2012.
 
Revenues for the fiscal year ended June 30, 2012 were $29,017,243, consisting of $23,370,754 of license and transactions fees and $5,646,489 of equipment sales, compared to $22,868,789 for the fiscal year ended June 30, 2011, consisting of $16,442,485 of license and transaction fees and $6,426,304 of equipment sales. The increase in total revenue of $6,148,454, or 27%, was primarily due to an increase in license and transaction fees of $6,928,269, or 42%, from the prior year, and a decrease in equipment sales of $779,815 or 12%, from the prior year.
 
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 connections to our ePort Connect service. As of June 30, 2012, the Company had approximately 164,000 connections to the ePort Connect service (including approximately 15,000 non-USAT, third party devices) as compared to approximately 119,000 connections to the ePort Connect service (including approximately 13,000 non-USAT, third party devices) as of June 30, 2011. During the year ended June 30, 2012, the Company added approximately 45,000 connections to our network as compared to approximately 37,000 connections during the year ended June 30, 2011. The JumpStart Program units represented approximately 65% and 60% of connections added during the 2012 and 2011 fiscal years, respectively.
 
Pursuant to its agreements with customers, the Company, in addition to ePort Connection 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 year ended June 30, 2012, the Company processed approximately 103 million transactions totaling approximately $171 million compared to approximately 72 million transactions totaling approximately $120 million during the year ended June 30, 2011, an increase of approximately 43% in the number and 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 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.
 
 
29

 
 
In addition, our customer base increased with approximately ­­­1,350 new customers added to our ePort® Connect service during the fiscal year ended June 30, 2012, bringing the total number of such customers to approximately 3,300 as of June 30, 2012. The Company added approximately 875 new customers in the year ended June 30, 2011. By comparison, the Company had approximately 1,950 customers as of June 30, 2011, representing a 69% increase during the past twelve months. 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 $779,815 decrease in equipment sales was a result of decreases of approximately $359,000 related to ePort® products, approximately $395,000 in Energy Miser products and approximately $26,000 in other products. The $359,000 decrease in ePort products is attributable to $322,000 of activation fees on non-USAT, third party devices and other activation services performed in the 2011 fiscal year. Also contributing to the decrease in ePort product sales were revenues recorded in the 2011 fiscal year of $225,000 of Visa support funding and approximately $73,000 of revenue recognized under our May 2008 agreement with a customer. These decreases were offset by a $261,000 increase in ePort product revenues attributable to increased activation fees on JumpStart units and equipment sales. The decrease in Energy Miser equipment sale revenue is due directly to fewer units sold during the year ended June 30, 2012 than during the year ended June 30, 2011.
 
Cost of sales consisted of cost of services for license and transaction fee related costs of $15,312,966 and $11,651,138 and equipment costs of $3,743,226 and $3,468,993, for the year ended June 30, 2012 and 2011, respectively. The increase in total cost of sales of $3,936,061 was due to an increase in cost of services of $3,661,828 and an increase in equipment costs of $274,233. The increase in cost of services was predominantly related to increases in units connected to the network and increases in transaction dollars. In addition, approximately $316,000 of the $3,661,828 increase in cost of services was attributable to increased debit card processing costs incurred because of the significant increase of interchange fees charged by Visa and MasterCard, which became effective on October 1, 2011. The impact on margins caused by these increases in the second fiscal quarter did not impact the subsequent quarters in fiscal 2012 as the Visa Agreement that went effect on October 14, 2011 essentially restored Visa debit interchange rates to pre-October 1, 2011 levels during the one-year term of the agreement, and the Company ceased the acceptance of MasterCard debit cards in mid-November 2011. Also contributing to the increase in cost of services was approximately $199,000 of costs for electronic communication of software updates to connected ePorts®. The increase in equipment costs related to the increased freight-in costs of approximately $140,000 associated with our Verizon enabled ePorts as well as slightly higher costs to manufacture the Verizon enabled ePorts.
 
Gross profit (“GP”) for the year ended June 30, 2012 was $9,961,051 compared to GP of $7,748,658 for the previous fiscal year, an increase of $2,212,393, of which $3,266,441 is attributable to license and transaction fees GP, offset by a decrease of $1,054,048 of equipment sales GP. The increase in GP dollars from license and transaction fees was mainly generated by additional devices connected to our network. The decrease in GP from equipment sales is predominantly due to the fiscal 2011 revenue items mentioned above and the additional costs incurred for freight-in of the Verizon enabled ePorts. Overall margins were consistent at 34%, while license and transaction fee margins increased from 29% to 34%, offset by equipment margins having decreased from 46% to 34%. License and transaction fee margins increased due to improved efficiencies stemming from recent partnership agreements, a larger ePort Connect service base, as well as having a larger number of JumpStart rental units with fees in the 2012 fiscal year versus a year ago when a larger number of JumpStart units had a longer period before monthly fees commenced. These improvements were offset by the additional costs incurred during the second fiscal quarter for interchange fees described above, and electronic communication of device software updates.
 
Selling, general and administrative (“SG&A”) expenses of $15,460,668 for the fiscal year ended June 30, 2012, increased by $4,030,058 or 35%, from the prior fiscal year. The most significant components of the increase are detailed in the table below and relate to expenses for the proxy contest and related litigation as further described in the Legal Proceedings section (Item 3.) of this Form 10-K, and the Company’s Audit Committee investigation of postings concerning the Company on an internet message board and the resignation of the Company’s former Chief Executive Officer. The approximate expenses for these two matters in the 2012 fiscal year are as follows:
                   
   
Proxy contest
and litigation
   
Investigation and
former CEO
separation
   
Total
 
Legal
  $ 1,435,000     $ 202,000     $ 1,637,000  
Public relations
    160,000       38,000       198,000  
Other services
    634,000       213,000       847,000  
Severance
    -       411,000       411,000  
Severance, stock compensation
    -       111,000       111,000  
    $ 2,229,000     $ 975,000     $ 3,204,000  
 
 
30

 
 
Outside of the two matters described above, SG&A increased approximately $831,000 in fiscal 2012 as compared to fiscal 2011. The overall increase is comprised of approximately $769,000 of additional employee and director compensation and benefit expenses, $311,000 in increased travel, tradeshow, sales and advertising expenses, and $194,000 in additional sales tax and penalty expenses estimated as a result of a state’s revenue audit, offset by approximately $450,000 of expense reductions. The expense reductions include $140,000 less bad debt expense in the 2012 fiscal year, as well as various other cost saving measures approximating $310,000, net.
 
The fiscal year ended June 30, 2012 resulted in a net loss of $5,211,238 compared to a net loss of $6,457,067 for the fiscal year ended June 30, 2011, a decrease in net loss of $1,245,829 between fiscal years. After preferred dividends, net loss applicable to common shareholders was $5,875,690, or $.18 per share, compared to a net loss applicable to common shareholders of $7,122,644, or $0.26 per share for the prior corresponding fiscal year.
 
For the fiscal year ended June 30, 2012, the Company had an Adjusted EBITDA loss of $2,777,338 which includes approximately $3,204,000 of cash expenses related to the proxy contest and former CEO matters outlined in the above table. Reconciliation of net loss to Adjusted EBITDA for the years ended June 30, 2012, 2011, and 2010 is as follows:

   
Year ended June 30,
 
   
2012
   
2011
   
2010
 
Net loss
  $ (5,211,238 )   $ (6,457,067 )   $ (11,571,495 )
                         
Less interest income
    (72,059 )     (82,234 )     (85,144 )
                         
Plus interest expense
    83,993       35,953       60,942  
                         
Plus income tax expense
    12,599       -       -  
                         
Plus depreciation expense
    2,443,054       1,553,978       783,415  
                         
Plus amortization expense
    997,900       1,034,400       1,034,400  
                         
Plus (less) change in fair value of warrant liabilities
    (1,813,687 )     815,131       -  
                         
Plus stock-based compensation
    782,100       356,866       130,525  
                         
Plus intangible asset impairment
    -       581,900       -  
                         
Adjusted EBITDA loss
  $ (2,777,338 )   $ (2,161,073 )   $ (9,647,357 )
 
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.

 
31

 
 
FISCAL YEAR ENDED JUNE 30, 2011 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2010
 
Revenues for the year ended June 30, 2011 were $22,868,789, consisting of $6,426,304 of equipment sales and $16,442,485 of license and transactions fees, compared to $15,771,106, consisting of $6,464,006 of equipment sales and $9,307,100 of license and transaction fees for the year ended June 30, 2010. The increase in total revenue of $7,097,683, or 45%, was primarily due to an increase in license and transaction fees of $7,135,385, or 77%, from the prior period, offset by a decrease in equipment sales of $37,702 or 1%, from the prior period. The increase in license and transaction fees was primarily due to the increase in the number of connections to our ePort Connect network, and the associated fees generated by these connected units. License and transaction fee revenues consist of service fees and transaction processing fees. 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.
 
As of June 30, 2011, the Company had approximately 119,000 connections to our ePort Connect service (including approximately 13,000 third party devices) as compared to approximately 82,000 connections (including approximately 7,000 third party devices) as of June 30, 2010. During the year ended June 30, 2011, the Company added approximately 37,000 connections. Units sold under the JumpStart Program represented slightly above 60% and 45% of connections added during the June 2011 and June 2010 fiscal years, respectively.
 
During the year ended June 30, 2011, the Company processed approximately 72 million transactions totaling approximately $120 million of transaction processing volume compared to approximately 37 million transactions totaling approximately $68 million of transaction processing volume during the year ended June 30, 2010, an increase of approximately 95% in the number of transactions and approximately 76% in dollars processed. During the fiscal year ended June 30, 2011, approximately 82% of the transactions handled by our network consisted of small ticket debit card transactions. Pursuant to its agreements with customers, the Company 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..
 
In addition, our customer base increased with approximately 875 new customers added to our ePort Connect network during the year ended June 30, 2011 bringing the total number of such customers to approximately 1,950 as of June 30, 2011. The Company added approximately 300 new customers in the year ended June 30, 2010. By comparison, the Company had approximately 1,075 customers as of June 30, 2010, representing an 83% increase during the past fiscal year.
 
The $37,702 decrease in equipment sales was a result of an increase of approximately $365,000 related to Energy Miser products offset by a net decrease of approximately $157,000 in sales of ePort® products and fees and a decrease of approximately $246,000 in sales of the Business Center and eSuds® product lines combined. The net decrease in ePort® related sales revenue of $157,000 is attributable to reduced hardware sales of approximately $683,000, offset by increases of approximately $526,000 in revenue associated with other aspects of our ePort business described below. The decrease in hardware sale revenue is due mainly to the fact that a significant portion of the ePort® units shipped during the year ended June 30, 2011were part of the JumpStart Program, for which the Company records a one-time activation fee, but does not record an equipment (hardware) sale.
 
The JumpStart Program began in December 2009, therefore most ePort® units shipped during the year ended June 30, 2010 were sold to our customers and an equipment (hardware) sale was recorded. Pursuant to the JumpStart Program, the Company is entitled to receive a one-time activation fee upon shipment of the device, a monthly service fee, generally commencing the month after shipment, and transactional processing fees due in connection with the cashless activity generated by the device. The decrease in hardware sales was offset by increases of (1) approximately $228,000 in activation related fees related to JumpStart Program units, (2) $225,000 of Visa support funding for installation and making operational Visa accepting ePorts, and (3) approximately $73,000 of revenue recognized under our May 2008 agreement with a customer.
 
The Company entered into an Acceptance and Promotional Agreement with Visa USA, Inc. on August 16, 2010. Under the first program year of the agreement, the Company is entitled to receive up to $225,000 to be used to support the installation and making operational of up to 9,000 terminals, which accept the Visa brand, by no later than December 31, 2010. During the year ended June 30, 2011, the Company recorded $225,000 of revenue related to the support funding for installation and making operational of Visa accepting terminals. As required by the Visa agreement, the Company supported the installation and made operational at least 9,000 terminals by December 31, 2010.
 
Cost of sales consisted of equipment costs of $3,468,993 and $4,049,433 and network and transaction services related costs of $11,651,138 and $6,861,642 for the year ended June 30, 2011 and 2010, respectively. The increase in total cost of sales of $4,209,056 over the prior fiscal year was due to a decrease in equipment costs of $580,440, offset by an increase in network and transaction services of $4,789,496. The decrease in equipment costs was a direct result of shipping more units under the JumpStart Program. The costs associated with the JumpStart units were recorded to Property and Equipment on the Consolidated Balance Sheets. The increase in network and transaction services costs was directly related to increases in units connected to the network and increases in transaction dollar processing volume, offset by decreases in third party supplier costs due to an amendment to a contract which occurred in the quarter ended March 31, 2010.
 
 
32

 
 
Gross profit (“GP”) for the year ended June 30, 2011 was $7,748,658 compared to gross profit of $4,860,031 for the previous fiscal year, an increase of $2,888,627, of which $542,738 is attributable to equipment sales and $2,345,889 is attributable to license and transaction fees. The increase in GP from equipment sales is predominately due to the increase in activation fees on JumpStart connections as compared to the prior fiscal year as well as the Visa support funding recorded during the year ended June 30, 2011. The increase in GP dollars from license and transaction fees was generated by additional devices connected to our network and a decrease in third party supplier costs related to the contract amendment referred to above. GP increased overall from 31% to 34%, equipment sales GP increased from 37% to 46% due mainly to (1) approximately $228,000 increase in activation related fees related to JumpStart Program units added during the fiscal year 2011 compared to the JumpStart Program units added during the year ended June 30, 2010, (2) $225,000 of Visa support funding for installation and making operational Visa accepting ePorts during the year ended June 30, 2011 and $0 during the year ended June 30, 2010, and (3) approximately $73,000 of revenue recognized under our May 2008 agreement with a customer during the year ended June 30, 2011, and license and transaction fees GP increased from 26% to 29% due mainly to the decrease in third party supplier costs related to the contract amendment referred to above.
 
Selling, general and administrative (“SG&A”) expenses of $11,430,610 for the year ended June 30, 2011, decreased by $3,455,075 or 23%, from the prior fiscal year, due to an approximate $2,300,000 decrease as a result of the Company’s expense reduction efforts and an approximate $1,156,000 decrease in proxy contest, litigation and settlement expenses. The Company’s expense reduction of $2,300,000 consisted of decreases in consulting and other professional services of approximately $1,511,000, compensation expenses of approximately $581,000, facility expenses of approximately $128,000, product development material costs of approximately $127,000, offset by net increases of approximately $47,000.
 
The consulting and other professional services decrease of approximately $1,511,000 was primarily due to $522,000 of reductions in costs of information technology, as well as reductions in costs of research and development of approximately $496,000, legal costs of approximately $220,000, accounting charges of approximately $116,000 and expenses for other services of approximately $156,000, net. The compensation expense net decrease of approximately $581,000 was due to a decrease of approximately $664,000 in salaries, severances and commissions, as well as a decrease of approximately $143,000 in benefit costs, offset by an increase of approximately $226,000 related to non-cash compensation expenses.
 
During the fiscal year ended June 30, 2011, the Company recorded an impairment charge of $581,900 on an intangible asset. The intangible asset impaired is related to the Miser energy products and consists of the trademarks: 1) VendingMiser, 2) CoolerMiser, 3) PlugMiser and 4) SnackMiser. This asset is unrelated to the Company’s core operations related to the ePort wireless, cashless products. The Company believes the impairment of this non-core asset, and the factors surrounding its impairment do not in any way effect the ongoing operations of the Company.
 
The year ended June 30, 2011 resulted in a net loss of $6,457,067 (including approximately $4.6 million of non-cash charges) compared to a net loss of $11,571,495 (including approximately $2 million of non-cash charges) for the year ended June 30, 2010, an improvement of $5,114,428, or 44%. Net loss for the year ended June 30, 2011 was the lowest net loss of any fiscal year since our shares became listed on The NASDAQ Stock Market in March 2007. For the year ended June 30, 2011, the net loss applicable to common shareholders was $7,122,644, or $.26 per share, as compared to a loss per common share of $12,306,634, or $.55 per share, for the prior fiscal year.

 
33

 
 
FISCAL QUARTER ENDED JUNE 30, 2012 COMPARED TO FISCAL QUARTER ENDED JUNE 30, 2011
 
Results for the fiscal quarter ended June 30, 2012 continued to demonstrate significant growth and improvements in the Company’s operations. Highlights of year over year improvements include:
 
 
Total revenue up 15%;
 
Recurring license and transaction fee revenue up 27%;
 
New connections added up 129%; and
 
Gross profit dollars up 35%.
 
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 $6.4 million for the fourth quarter of fiscal 2012 from $5 million for same period a year ago. These recurring revenues represented 81% of total revenue for the fourth quarter of fiscal 2012 year as compared to 73% for the same prior period.
 
License and transaction fee highlights for the quarter ended June 30, 2012 included:
 
 
16,000 additional net connections to the Company’s ePort Connect service, an increase of approximately 129% compared to connections added during the fourth quarter a year ago;
 
16,000 increase in the total connected service base during the quarter ended  June 30, 2012, compared to 7,000 increase in total connections added during the quarter ended  June 30, 2011;
 
Increases in the number of small-ticket, credit/debit transactions and dollars handled in the fourth quarter of 22% and 27%, respectively, compared to the same period a year ago; and,
 
69% growth in ePort Connect customers from the prior year fourth quarter, fueled by 450 new customers in the fiscal 2012 fourth quarter, for 3,300 customers at June 30, 2012.
 
Revenues for the quarter ended June 30, 2012 were $7,902,846, consisting of $6,382,575 of license and transactions fees and $1,520,271 of equipment sales, compared to $6,888,631 for the quarter ended June 30, 2011, consisting of $5,028,820 of license and transaction fees and $1,859,811 of equipment sales. The increase in total revenue of $1,014,216, or 15%, was primarily due to an increase in license and transaction fees of $1,353,755, or 27%, from the prior year quarter, and a decrease in equipment sales of $339,540 or 18%, from the same period in the prior year.
 
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 June 30, 2012, the Company had approximately 164,000 connections to the ePort Connect service (including approximately 15,000 non-USAT, third party devices) as compared to approximately 119,000 connections to the ePort Connect service (including approximately 13,000 non-USAT, third party devices) as of June 30, 2011. During the quarter ended June 30, 2012, the Company added approximately 16,000 connections to our network as compared to approximately 7,000 connections added during the quarter ended June 30, 2011. The JumpStart Program units represented approximately 75% and 40% of connections added during the fourth quarters of the 2012 and 2011 fiscal years, respectively.
 
Pursuant to its agreements with customers, the Company in addition to ePort Connection 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 June 30, 2012, the Company processed approximately 28 million transactions totaling approximately $47 million compared to approximately 23 million transactions totaling approximately $37 million during the quarter ended June 30, 2011, an increase of approximately 22% in the number of transactions and approximately 27% in the value of transactions processed.
 
In addition, our customer base increased with approximately ­­­450 new customers added to its ePort® Connect service during the quarter ended June 30, 2012 bringing the total number of such customers to approximately 3,300 as of June 30, 2012. The Company added approximately 275 new customers in the quarter ended June 30, 2011. By comparison, the Company had approximately 1,950 customers as of June 30, 2011, representing a 69% increase during the past twelve months.
 
The $339,540 decrease in equipment sales was a result of decreases of approximately $318,000 in Energy products, and $28,000 in ePort products, offset by an increase of approximately $6,000 in other product revenues. The $318,000 decrease in Energy products is directly attributable selling fewer units during the quarter ended June 30, 2012 than during the quarter ended June 30, 2011.
 
Cost of sales consisted of cost of services for network and transaction fee related costs of $3,818,276 and $3,342,525 and equipment costs of $906,231 and $1,194,168, for the quarters ended June 30, 2012 and 2011, respectively. The increase in total cost of sales of $187,814 was due to an increase in cost of services of $475,751 and a decrease in equipment costs of $287,937. The increase in cost of services was predominantly related to increases in units connected to the network and increases in transaction processing volume. The decrease in equipment costs is directly attributable to selling fewer units during the quarter ended June 30, 2012 than during the quarter ended June 30, 2011.
 
 
34

 
 
Gross profit (“GP”) for the quarter ended June 30, 2012 was $3,178,339 compared to GP of $2,351,938 for the previous corresponding quarter, an increase of $826,401, of which $51,603 represents decreased equipment sales GP and an increase of $878,004 attributable to license and transaction fees. Overall margins increased from 34% to 40% due to license and transaction fees margins having increased from 34% to 40% and by equipment sales margins having increased from 36% to 40%. License and transaction fee margins increased due to improved efficiencies stemming from recent partnership agreements, a larger ePort Connect service base, as well as having a larger number of JumpStart rental units with fees in the quarter versus a year ago when a larger number of JumpStart units had not yet had monthly fees commence. The increase in equipment sales margins was mainly due to increased activation fees, which have no direct costs associated with them.
 
Selling, general and administrative (“SG&A”) expenses of $5,420,955 for the quarter ended June 30, 2012, increased by $2,026,883, net or 60%, from the same quarter in the prior fiscal year. The significant component of the net increase is detailed in the table below and relates to expenses for the proxy contest and related litigation as further described in the Legal Proceedings section (Item 3.) of this Form 10-K. The expenses for this matter in the fourth quarter of the 2012 fiscal year are summarized as follows:
       
   
Proxy contest
and litigation
 
Legal
  $ 1,435,000  
Public relations
    160,000  
Other consultants
    634,000  
    $ 2,229,000  
 
Outside of the proxy contest and litigation expenses summarized above, SG&A decreased approximately $202,000 in fiscal 2012’s fourth quarter as compared to the same quarter in the fiscal 2011.
 
The quarter ended June 30, 2012 resulted in a net loss of $2,772,605 compared to a net loss of $1,923,054 for the quarter ended June 30, 2011. For the quarter ended June 30, 2012, the loss per common share was $0.09 as compared to a loss per common share of $0.06 for the prior corresponding fiscal quarter.
 
For the quarter ended June 30, 2012, the Company had an Adjusted EBITDA loss of $1,414,879 which includes approximately $2,229,000 of proxy related expenses outlined in the above table. Reconciliation of net loss to Adjusted EBITDA loss for the quarters ended June 30, 2012 and 2011 is as follows:

   
Three months ended
 
   
June 30
 
   
2012
   
2011
 
Net loss
  $ (2,772,605 )   $ (1,923,054 )
                 
Less interest income
    (26,877 )     (25,519 )
                 
Plus interest expense
    13,237       3,529  
                 
Plus income tax expense
    12,599       -  
                 
Plus depreciation expense
    695,609       480,703  
                 
Plus amortization expense
    222,100       258,600  
                 
Less change in fair value of warrant liabilities
    169,755       (35,609 )
                 
Plus (less) stock-based compensation
    271,303       293,381  
                 
Plus intangible asset impairment
    -       581,900  
                 
Adjusted EBITDA loss
  $ (1,414,879 )   $ (366,069 )
 
 
35

 
 
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 year ended June 30, 2012, net cash provided by operating activities was $78,236. The net loss of $5,211,238 was offset by cash  provided by changes in the Company’s operating assets and liabilities of $2,781,428 and  by non-cash charges totaling $2,508,046, representing the change in fair value of common stock warrants, vesting and issuance of common stock for employee and director compensation, bad debt expense, provision for deferred tax liabilities, loss on disposal of equipment and the depreciation and amortization of assets.
 
The cash provided by the $2,781,428 change in the Company’s operating assets and liabilities was primarily the result of increases of $2,513,898 in accrued expenses and $498,082 in accounts payable, offset by an $820,412 increase in accounts receivable. Of the $2,781,428 increase in accrued expenses, $993,000 relates to the proxy contest, and of the $498,082 increase in accounts payables, $15,000 relates to the proxy contest.
 
During the year ended June 30, 2012, the Company used $6,232,814 in investing activities of which $5,754,670 related to the purchase of equipment for the JumpStart Program and $478,144 for network equipment. The Company used $410,288 for financing activities of which $368,917 related to repayment of long-term debt.
 
The Company has incurred losses since inception. Our accumulated deficit through June 30, 2012 is composed of cumulative losses amounting to approximately $199,160,000, 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 $5,029,000 for the three months ended June 30, 2011 to approximately $6,383,000 for the three months ended June 30, 2012, an increase of 27%. In addition, total GP dollars and GP margins have increased from $2,352,000 and 34% for the three months ended June 30, 2011 to $3,178,000 and 40% for the three months ended June 30, 2012, an increase of 35% in GP dollars and a six point improvement in margins. Our average monthly cash GP during the three months ended June 30, 2012, excluding non-cash depreciation expense included in cost of sales during the quarter of approximately $556,000, approximates $1,245,000 and is expected to increase in the next fiscal quarter due to recognizing recurring revenue on units shipped during the quarter ended June 30, 2012.
 
Our average monthly SG&A expenses during the three months ended June 30, 2012 were approximately $1,807,000. This includes charges during the quarter of approximately $2,229,000 related to the proxy contest matter, and other non-cash net charges of approximately $401,000. Excluding these charges, our average monthly cash-based SG&A expenses during the three months ended June 30, 2012 was approximately $930,000.
 
The excess of cash-based GP over the cash-based SG&A expenses described above should manifest itself in positive Adjusted EBITDA. 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. For only the second time in its history, the Company reported positive Adjusted EBITDA for the quarter ended March 31, 2012 of approximately $336,000. 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 to support sustainability, and as our connection base increases, we believe Adjusted EBITDA will continue to grow as well. Although the Company reported an Adjusted EBITDA loss of approximately $1,415,000 for the quarter ended June 30, 2012, included in that loss is approximately $2.2 million of expenses related to the proxy contest matter, which we believe are unrelated to the core operations of our business. Therefore, excluding these costs, Adjusted EBITDA for the June 30, 2012 quarter would have shown further improvement to approximately $814,000 positive Adjusted EBITDA.
 
 
36

 
 
During the 2013 fiscal year, and provided there are no unanticipated or unusual non-operational expenses, the Company anticipates utlizing 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 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. In fiscal 2012, the Company funded approximately two-thirds 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.
 
As a result of the above described improvements in cash flow, and provided there are no unanticipated or unusual non-operational expenses during 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 $6,426,645 at June 30, 2012; (2) the anticipated growing level of Adjusted EBITDA (as described above) 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 (see “Avidbank Line of Credit” below). 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 June 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.
 
AVIDBANK LINE OF CREDIT
 
On July 10, 2012, to help fund growth initiatives like the JumpStart Program, the Company entered into a Loan and Security Agreement and other ancillary documents (the “Loan Documents”) with Avidbank Corporate Finance, a division of Avidbank (“Avidbank” or the “Bank”), providing for a secured asset-based revolving line of credit in an amount of up to $3.0 million (the “Line of Credit”). The Line of Credit is the first bank provided lending  arrangement (excluding capital leases) the Company has obtained since its listing on The NASDAQ Stock Market in 2007. Due to the historical losses and cash burn of the Company, bank provided lending was difficult to secure and the Company has historically relied on equity raises as a source of working capital. The Company believes its ability to obtain this Line of Credit is a result of its improving financial performance and business model, and represents an opportunity to obtain working capital from a source other than equity financing. The Company further believes that as it establishes a  history of performing under the Line of Credit and its financial performance continues to improve, additional bank debt financing opportunities and/or arrangements would become available to the Company.
 
The Loan Documents provide that the aggregate amount of advances under the Line of Credit shall not exceed the lesser of (i) $3.0 million, or (ii) 75% of eligible accounts receivable as defined in the Loan Documents plus 80% of the prior two months transaction processing revenues and networking service fees as defined in the Loan Documents, provided that the amounts advanced on account of such processing revenues and service fees shall not exceed $1,000,000 without the Avidbank’s prior consent. The foregoing limits the amount available to the Company under the Line of Credit to approximately $1.5 million.
 
The outstanding balance of the amounts advanced under the Line of Credit will bear interest at 2% above the prime rate as published in The Wall Street Journal or 5% whichever is higher. Interest is payable by the Company to the Bank on a monthly basis, provided, that the minimum interest payable by the Company to the Bank with respect to each six month period shall be $20,000.
 
The Line of Credit and the Company’s obligations under the Loan Documents are secured by substantially all of the Company’s assets, including its intellectual property.
 
The term of the Line of Credit is one year. At the time of maturity all outstanding advances under the Line of Credit as well as any unpaid interest is due and payable. Prior to maturity of the Line of Credit, the Company may prepay amounts due under the Line of Credit without penalty, and subject to the terms of the Loan Documents, may re-borrow any such amounts.
 
The Loan Documents contain customary affirmative and negative covenants. The Loan Documents also require the Company to achieve a minimum Adjusted EBITDA, as defined in the Loan Documents, measured on a quarterly basis, and to maintain a balance of $3.0 million of unrestricted cash in accounts with the Bank. The Company achieved the June 30, 2012 Adjusted EBITDA covenant as defined in the Loan Documents. We also believe we will achieve the Adjusted EBITDA covenants in the Loan Documents for the September 30, 2012 and December 31, 2012 quarters.
 
The Loan Documents also contain customary events of default, including, among other things, payment defaults, breaches of covenants, and bankruptcy and insolvency events, subject to grace periods in certain instances. Upon an event of default, the Bank may declare all of the outstanding obligations of the Company under the Line of Credit and Loan Documents to be immediately due and payable, and exercise any other rights provided for under the Loan Documents. In the event the Bank would declare all of the outstanding obligations of the Company under the Line of Credit and Loan Documents to be immediately due and payable, the $3.0 million of unrestricted cash  deposited with the Bank would be sufficient to satisfy all of the outstanding  principal obligations due to the Bank, and the Bank would not have any further recourse against any other assets of the Company.
 
 
37

 
 
CONTRACTUAL OBLIGATIONS
 
As of June 30, 2012, the Company had certain contractual obligations due over a period of time as summarized in the following table:

    Payments due by period  
                               
         
Less Than
               
More than
 
Contractual Obligations
 
Total
   
1 year
   
1-3 years
   
3-5 years
   
5 years
 
Long-Term Debt Obligations
  $ 321,822     $ 296,466     $ 25,356     $ -     $ -  
Capital Lease Obligations
    457,954       209,534       248,420       -       -  
Operating Lease Obligations
    1,517,650       450,368       1,067,282       -       -  
Purchase Obligations
    -       -       -       -       -  
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP
    -       -       -       -       -  
Total
  $ 2,297,426     $ 956,368     $ 1,341,058     $ -     $ -  
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
The Company’s exposure to market risks for interest rate changes is not significant. Interest rates on its long-term debt are generally fixed and its investments in cash equivalents are not significant. The Company has no exposure to market risks related to Available-for-sale securities. Market risks related to fluctuations of foreign currencies are not significant and the Company has no derivative instruments.

 
38

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

 
39

 

Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders
USA Technologies, Inc.
 
We have audited the accompanying consolidated balance sheets of USA Technologies, Inc. and subsidiaries as of June 30, 2012 and 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2012. Our audits also included the financial statement schedule of USA Technologies, Inc. listed in Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above presents fairly, in all material respects, the financial position of USA Technologies, Inc. and subsidiaries as of June 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
/s/ McGladrey LLP
 
New York, NY
September 25, 2012

 
F-1

 

USA Technologies, Inc.

   
June 30,
 
   
2012
   
2011
 
             
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 6,426,645     $ 12,991,511  
Accounts receivable, less allowance for uncollectible accounts of $25,000 and $113,000, respectively
    2,441,941       1,634,719  
Finance receivables
    206,649       285,786  
Inventory
    2,511,748       2,670,332  
Prepaid expenses and other current assets
    555,823       846,033  
Total current assets
    12,142,806       18,428,381  
                 
Finance receivables, less current portion
  $ 336,198     $ 195,601  
Property and equipment, net
    11,800,108       7,395,775  
Intangibles, net
    1,196,453       2,194,353  
Goodwill
    7,663,208       7,663,208  
Other assets
    80,884       126,687  
Total assets
  $ 33,219,657     $ 36,004,005  
                 
Liabilities and shareholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 6,136,443     $ 5,638,361  
Accrued expenses
    3,342,456       1,088,090  
Current obligations under long-term debt
    466,056       155,428  
Total current liabilities
    9,944,955       6,881,879  
                 
Long-term liabilities:
               
Long-term debt, less current portion
    262,274       97,633  
Accrued expenses, less current portion
    426,241       166,709  
Deferred tax liabilities
    12,599       -  
Warrant liabilities, non-current
    918,566       2,732,253  
Total long-term liabilities
    1,619,680       2,996,595  
Total liabilities
    11,564,635       9,878,474  
                 
Commitments and contingencies (Note 15)
               
                 
Shareholders’ equity:
               
Preferred stock, no par value:
               
Authorized shares- 1,800,000 Series A convertible preferred- Authorized shares- 900,000 Issued and outstanding shares- 442,968 (liquidation preference of $15,361,552 and $14,697,100, respectively)
    3,138,056       3,138,056  
Common stock, no par value: Authorized shares- 640,000,000 Issued and outstanding shares- 32,510,069 and 32,281,140, respectively
    220,513,327       219,772,598  
Accumulated deficit
    (201,996,361 )     (196,785,123 )
Total shareholders’ equity
    21,655,022       26,125,531  
Total liabilities and shareholders’ equity
  $ 33,219,657     $ 36,004,005  
 
See accompanying notes.
 
 
F-2

 
 
USA Technologies, Inc.

    Year ended June 30  
   
2012
   
2011
   
2010
 
                   
Revenues:
                 
License and transaction fees
  $ 23,370,754     $ 16,442,485     $ 9,307,100  
Equipment sales
    5,646,489       6,426,304       6,464,006  
Total revenues
    29,017,243       22,868,789       15,771,106  
                         
Cost of services
    15,312,966       11,651,138       6,861,642  
Cost of equipment
    3,743,226       3,468,993       4,049,433  
Gross profit
    9,961,051       7,748,658       4,860,031  
                         
Operating expenses:
                       
Selling, general and administrative
    15,460,668       11,430,610       14,885,685  
Depreciation and amortization
    1,500,775       1,424,365       1,570,043  
Impairment of intangible asset
    -       581,900       -  
Total operating expenses
    16,961,443       13,436,875       16,455,728  
Operating loss
    (7,000,392 )     (5,688,217 )     (11,595,697 )
                         
Other income (expense):
                       
Interest income
    72,059       82,234       85,144  
Interest expense
    (83,993 )     (35,953 )     (60,942 )
Change in fair value of warrant liabilities
    1,813,687       (815,131 )     -  
Total other income (expense), net
    1,801,753       (768,850 )     24,202  
                         
Loss before provision for income taxes
    (5,198,639 )     (6,457,067 )     (11,571,495 )
Provision for income taxes
    (12,599 )     -       -  
                         
Net loss
    (5,211,238 )     (6,457,067 )     (11,571,495 )
Cumulative preferred dividends
    (664,452 )     (665,577 )     (735,139 )
Loss applicable to common shares
  $ (5,875,690 )   $ (7,122,644 )   $ (12,306,634 )
Loss per common share (basic and diluted)
  $ (0.18 )   $ (0.26 )   $ (0.55 )
Weighted average number of common shares outstanding (basic and diluted)
    32,423,987