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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, 2010

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 o 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. o

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 $29,497,056 as of the last business day of the most recently completed second fiscal quarter, December 31, 2009, based upon the closing price of the Registrant’s Common Stock on that date.

As of August 31, 2010, there were 25,910,608 outstanding shares of Common Stock, no par value.
 



USA TECHNOLOGIES, INC.

TABLE OF CONTENTS

         
PAGE
           
PART I
     
       
Item
 
1.
 
5
           
   
1A.
 
21
           
   
2.
 
29
           
   
3.
 
29
           
PART II
     
       
Item
 
5.
 
30
           
   
6.
 
34
           
   
7.
 
35
           
   
7A.
 
41
           
   
8.
 
42
           
   
9.
 
43
           
   
9A(T).
 
43
           
   
9B.
 
43
           
PART III
     
       
Item
 
10.
 
44
           
   
11.
 
47
           
   
12.
 
61
           
   
13.
 
63
           
   
14.
 
64
           
PART IV
     
       
   
15.
 
65


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 sell products at a profit;

 
the ability of the Company to raise funds in the future through sales of securities;

 
whether the Company is able to enter into binding agreements with third parties to assist in product or network development;

 
the ability of the Company to commercialize its developmental products, or if actually commercialized, to obtain commercial acceptance thereof;

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

 
the ability of our Company to receive reductions from the credit card companies of transaction processing charges in the future;

 
the ability of our Company to obtain reduced pricing from its manufacturers for its ePort devices in the future as currently anticipated by our company;

 
whether our Company’s customers lease or purchase ePort devices in the future at levels currently anticipated by our company;

 
whether the Company’s customers participate in the Jump Start program in the future at levels currently anticipated by the company;

 
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 obtain approval of its pending patent applications;

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

 
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 and the lack of established revenues;

 
whether our shares would continue to meet the eligibility requirements for continued listing on The NASDAQ Stock Market, LLC;

 
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; 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.


USA TECHNOLOGIES, INC.

PART I

Item 1. Business.

OVERVIEW

We are a leading provider of technology-enabled solutions that facilitate electronic payment transactions and value-added services within the unattended Point of Sale (“POS”) market. Since our incorporation in 1992 in the Commonwealth of Pennsylvania, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as the ability to remotely monitor, control and report on the results of distributed assets such as vending machines, kiosks, personal computers, photocopiers, and laundry equipment. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept card-based payments such as through the use of a credit card. We derive revenues from both the sale, lease and rental of our POS terminals and transaction fees on installed products. As of June 30, 2010, the Company had approximately 82,000 devices connected to its network. During the year ended June 30, 2010, the Company processed approximately 36.9 million transactions totaling over $67.6 million, representing a 65% increase in transaction volume and a 44% increase in dollars processed from the previous fiscal year ended June 30, 2009.

Our solutions consist of POS electronic payment devices, proprietary operating systems, certified payment software and reporting and communication capabilities. Our solutions are able to process traditional magnetic stripe credit and debit cards, as well as contactless / radio frequency identification (“RFID”) devices. Our proprietary POS solutions enable electronic micro-payments at unattended POS locations.

Our customers are primarily vending machine owners and operators; business center operators, which include hotels and audio visual companies; commercial laundry operators servicing colleges, universities and multi-family housing; brand marketers wishing to provide their products or services via kiosks or vending machines; and equipment manufacturers that would like to incorporate our networked devices (e.g. remote monitoring, reporting and control as well as cashless payments) into their products. The functionality of our solutions includes 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.
 
The Company also manufactures and sells energy management products which 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 from our energy management products through the sale of the product.
 
We have an 18 year history in our industry, 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 in the electronic payments industry and more specifically the unattended POS market. Our solutions facilitate electronic payments in industries that have traditionally relied on cash transactions. In addition, our solutions provide electronic monitoring and online reporting for distributed assets. We believe there are four industry trends which 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;

 
improving POS technology coupled with declining device manufacturing and technology costs; and

 
increased market sponsorship from industry participants (e.g., card associations (e.g., MasterCard and Visa), card issuers (e.g., American Express, Bank of America, Citibank, Discover), payment processors) leading to increased market adoption.


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 December 2009 Nilson Report, U.S. the four card-based systems—credit, debit, prepaid and electronic benefits transfer—generated $3.59 trillion. Payment transactions using credit cards, debit cards, prepaid cards and EBT cards totaled 66.74 billion in 2008—up 6.7%. By 2013, card-based purchases are projected to be at nearly $4.5 trillion with over 89 billion transactions projected for this same period.


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 us that can meet consumers’ demand within the unattended market will be able to offer retailers, card associations, card issuers and payment processors an expanding value proposition at the POS.

Increase in Merchant/Operator Demand. Increasingly, merchants and operators of unattended payment locations (e.g., vending machines, photo kiosks, mobile business centers, etc.) are utilizing electronic payments alternatives. Several of the Company’s customers have been able to drive increased revenue of their distributed assets through this expanded market opportunity. Furthermore, owners have demonstrated the ability to increase price with little to no decline in transaction volume. In addition, electronic payment systems provide merchants and operators real-time sales and inventory data utilized for back-office reporting and forecasting, helping the merchant or operator to manage their business.

Increase in Demand for Networked Assets. According to M2M Magazine (M2M, “Is it Touching Our Everyday Lives?”, November 18, 2008) there are over 50 billion machines capable of being networked. The potential of machines such as robots, trucks and home appliances and billions of machines that contain data is large and continues to grow. Networked assets provide improved internal business processes such as energy management systems capable of collecting diagnostic information and communicating with the operator’s host information system to optimize energy consumption. Networked assets also have the ability to remotely monitor merchandise to maximize sales and track inventory in real-time. In addition, networked assets provide valuable information into consumer’s purchasing patterns and payment preferences allowing operators to more effectively reach and satisfy consumers. Networked assets allow information to be centralized and reported in electronic format enabling the data to be more accurately and thoroughly analyzed and digitally presented and available online. According to the M2M Magazine the networked asset industry is in its nascency and electronic solution providers that can provide interconnectivity between distributed assets offer consumers, retailers, machine operators and manufacturers an expanded value proposition by optimizing the capabilities of a distributed asset.


POS Technology Improvements and Decreasing Costs are Increasing Adoption of Electronic Payment Solutions

Advances in Computing. History has shown that advances in microprocessing technology, storage capacity and software are enabling increasing complexity and functionality of electronic payment systems at unattended POS locations. Such advances are expanding the range of services and functionality offered by electronic payment systems-including credit and debit, prepaid cards, gift cards and loyalty card programs, electronic bill payment and electronic check truncation. In addition, advances in technology, computing and telecommunications over the past decade have reduced the cost of production and operations of more sophisticated electronic payment systems, thereby reducing the barrier of adoption for merchants and operators.

Wireless Connectivity and Reliability. Advancements in wireless technology are providing faster transmission of transaction data at a lower cost, enabling more advanced payment and other value-added applications at the unattended POS. Major telecommunications carriers have expanded their communications networks and lowered fees. The foregoing have opened new markets for electronic payment systems, many of which have been primarily cash-only industries such as vending, kiosks, mobile business centers and quick service restaurants. We believe that lower production costs, combined with increased consumer demand, will lead to increasing merchant and operator adoption of electronic POS solutions at unattended locations.

Card Innovation at the POS. Recent industry developments such as the emergence of contactless/RFID have resulted in the POS becoming an important area of differentiation for card associations, card issuers and payment processors. As the market for issuing credit cards has become more saturated in the U.S., card associations and card issuers are differentiating their brands by expanding their offerings. Payment processors are also differentiating themselves by expanding their offerings as front-end authorization and back-end clearing and settlement have become more commoditized. Card associations, card issuers and payment processors are differentiating their offerings, in part, by offering value-added applications and incorporating innovative technologies including contactless / RFID.

Increased Market Sponsorship

Key Industry Constituents Continue to Drive Market Acceptance. U.S. card associations, card issuers and payment processors continue to look for innovative strategies to increase market opportunity and search for new ways to differentiate their brands by expanding their electronic payment offerings. Unattended POS terminals that have traditionally been dominated by cash-based payments represent a significant growth area for industry participants to increase market opportunity by converting cash-based industries to electronic payments. In addition, the recent emergence of payment technologies such as Tap & Go™, pay-at-the-pump and other POS solutions at unattended or mobile locations such as taxi cabs, restaurants and vending, represent the ongoing shift to electronic payments for everyday transactions. We believe that continued innovation within unattended POS markets by large organizations within the electronic payments industry will drive increased market acceptance and overall market growth.

Increased Participation from Card Associations. According to KioskCom 2008, less than 5% of the approximate eight million traditional beverage and food vending machines in the U.S. accept card payment. With the volume of credit and debit transactions exceeding cash transactions, consumers have clearly shown a preference for card payments. More importantly, the unattended POS market represents a sizeable and attractive growth market for card associations and electronic payment companies. Card associations have been helping accelerate the conversion of the unattended POS industry from a primarily cash-only industry to a card-accepting marketplace. For example, the major credit card associations agreed to waive the signature requirements for purchases of less than $25 making it faster and more efficient to utilize POS terminals with distributed assets. Additionally, the card associations are encouraging unattended POS electronic payment technology by seeding this market through purchases of unattended POS electronic payment devices. Specifically, we have received, to date, approximately $7.8 million for approximately 22,000 ePort® devices from the card associations. These purchases were in collaboration with owners and operators of vending machines in the U.S., and in our opinion helps increase market adoption in the unattended POS electronic payments industry. Our historical data demonstrates that approximately 23% of all of the transactions on traditional beverage and food vending machines utilizing our ePort® terminals consist of credit/debit card transactions.

Favorable Legislation. The revisions to Regulation E by the Federal Reserve eliminate the requirement to provide a receipt for debit card purchases under a specified dollar amount. The rule, effective August 6, 2007, eliminated the receipt requirement for transactions of $15 or less. Previously, Regulation E required that a paper receipt be made available to consumers for all electronic fund transfer systems, including small-dollar transactions such as vending machines in which consumers may not expect a receipt. In many of these environments, the cost and operational challenges of receipt printing limited the deployment of electronic payment acceptance terminals.


SPECIFIC MARKETS WE SERVE

Our current customers are primarily in the vending, kiosk, commercial laundry and business center industry sectors. While these industry sectors represent only a small fraction of our total market potential, 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 Census of the Industry 2008, annual U.S. sales in the vending industry sector were estimated to be approximately $47.5 billion. According to this census, there are an estimated 8 million traditional beverage and food vending locations in the U.S. and 30 million locations worldwide. The market segment that can be addressed by our end-to-end solution consists primarily of vended products retailing for $1.00 or greater. Per census statistics, the overall market growth is 5% to 6% annually, while the addressable market segment for our end-to-end solution is growing more rapidly at 9% annually. Currently, our network supports only approximately .5% of the total traditional beverage and food vending market in the United States. 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 experience growth in offering card-based payment alternatives in addition to cash.

Kiosk. According to IHL Consulting Group Market Study dated July 1, 2010, approximately $678 Billion was transacted through selfservice 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. Value-added services, such as photo enlargement and custom imaging are a prominent example, located within many major retailers. 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 that 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.

Commercial Laundry. According to a 2010 Report on Dry cleaning and Laundry Services published by Anything Research, the current size of the laundry services market is $22.4 billion, and although the industry experienced revenue declines by -5% in 2009 compared to 2008, long term forecasts for the industry project positive growth.  The Dry Cleaning and Laundry Facilities Industry Profile published by First Research dated June 21, 2010, states that the laundry services industry includes about 30,000 companies. 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. The coin-laundry segment is fragmented: the 50 largest firms generate about 40 percent of revenue. This segment of the business is made up of both coin-op laundries and coin-op machines located in multi-family housing developments such as apartments, condominiums and universities. The Coin Laundry Association points out that “...coin laundries thrive in periods of both growth and recession. During periods of recession, when home ownership decreases, the self-service laundry market expands as more people are unable to afford to repair, replace or purchase new washers and dryers, or as they move to apartment housing with inadequate or nonexistent laundry facilities.” The self-service laundry market consists of an estimated primary customer base of 86 million people living in rental housing, as of the 2000 U.S. Census. A secondary customer base consists of the over 2 million resident college and university students in the US (U.S. Census Bureau, 2004). We reach our target market primarily via the seven largest laundry operators in the US.

Single Cup/Office Coffee Service (OCS). In 2008/2009, OCS sales posted a 5 percentage point decline from the prior 12-month period, marking the first setback since 2003/2004. OCS revenues totaled $3.9 billion in 2008/2009, according to the 2009 Automatic Merchandiser State of the Coffee Service Industry Report, July 2009. According to this same publication, the 4-year gain from 2003/2004 to 2007/2008 was the longest consistent growth trend in the industry’s history, driven by higher pricing and investment in better quality products and equipment, and that the decline in sales was a direct result of declining worksite populations and employer cost cutting. .According to the National Coffee Association 2008 National Coffee Drinking Trends survey, 2007 was the first year that daily coffee consumption among adults surpassed soft drink consumption and its more recent study proved daily consumption of coffee beverages among consumers remained consistent in 2009 with 54 percent of the overall adult population partaking. We have entered into a contract with Starbucks pursuant to which Starbucks will offer coffee in unattended locations using the ePort Cashless payment system.

Business Centers. According to the American Hotel & Lodging Association, the hotel and lodging industry is a nearly $134 Billion industry with approximately 47,000 hotels in the United States and 300,000 worldwide during 2008. With the increased globalization of our economies and the increased need for travel both for personal and business, there remains a demand for unattended business center availability in hotels, with ever-greater percentages of travelers needing and expecting use of computers, printers, fax machines, copiers, and other business services.


OUR COMPETITIVE STRENGTHS

We believe that we benefit from a number of advantages gained through our 18-year history in our industry. They include:

Trusted Brand Name. The USA Technologies brand has 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 through several one-way exclusive relationships, each averaging three years in duration, which we have solidified with several leading organizations within the unattended POS industry.

Large Installed Base. We have a large installed base of unattended POS electronic payment systems. As of June 30, 2010, we had approximately 82,000 connections to our network. Our technology provides POS payment solutions as well as real-time POS and diagnostic data to our customers. Our customers maintain both the payment solution as well as the real-time data with one provider rather than through multiple providers. Our installed base supports our sales and marketing infrastructure by enhancing our ability to establish or expand our market position. In addition, our large installed base of unattended POS electronic payment systems makes our proprietary operating systems a preferred choice on which third party developers can create value- added applications for broad distribution of their applications. 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.

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. Rather than search for coins or dollar bills to feed a vending machine, customers have the option of paying by card. We believe our solutions make possible increased convenience and a broader universe of potential customers – those with cash or electronic forms of payment. Furthermore, the cost of our solution continues to decrease making it more economically attractive for our customers to install our devices in their assets. Our historical data demonstrates that approximately 23% of all of the transactions on traditional beverage and food vending machines utilizing our ePort® terminals consist of credit/debit card transactions.

Large and Increasing Scale. During the year ended June 30, 2010, we generated total licensing and processing fees of $9.31 million, successfully processed approximately 36.9 million transactions accounting for more than $67.6 million in purchases and, as of June 30, 2010 had approximately 82,000 distributed assets such as vending machines, kiosks, copiers, personal computers, and laundry equipment connected to our network. We believe that our scale and footprint enable us 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.

Leading Research and Development. Our research and development initiatives focus on adding features and functionality to our system solutions through the development and utilization of our processing and reporting network and new technology. Since we began operations in 1992, we have been granted 78 patents and currently have 14 patent applications pending. We have developed innovative and reliable unattended POS electronic payment devices and solutions over the past several years. For example, our most recent cashless vending solution, the ePort EDGE™, was made available for sale to our customers during the fourth quarter of the 2009 fiscal year. Our new ePortG-8 is an integrated one-piece design, combining the card-reader and processor while enabling both magnetic swipe and RFID card transactions, and is 65% smaller than our previous G-7 model.

One-Stop Shop, End-to-End Solution. We believe that our ability to bundle the services included in our 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 technology, and results in a service unmatched in the vending 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 leaves it to them to implement their cashless systems. Our solution provides all of the following, under one cohesive service umbrella;

 
·
A broad product line of devices or software, consisting of the ePort G8 which can accept multiple forms of cashless payment, from swipe and contactless and the 2010 NAMA-Innovation-Award-winning ePort EDGE.

 
·
Unique payment programs such as our QuickStart and JumpStart programs, which help operators acquire the ePort hardware without an up-front capital investment.

 
·
Our comprehensive end-to-end ePort Connect cashless payment service which includes merchant account set-up, wireless SIM activation, merchant services, over-the-air updates, and 24x7 customer service and support.

 
·
Business deployment planning services to help operators successfully deploy cashless payment systems. This program is based on extensive market data, which helps guide operators to the locations where cashless vending machines would be most successful.


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 at the unattended POS such as traditional beverage and food vending, kiosks and commercial laundry. The key elements of our strategy are to:

Leverage Existing Customers/Partners. We have a solid base of key customers across multiple markets (vending, kiosk, etc.) that have deployed our solutions. 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. These customers are a key component of our plan to drive sales.

Expand Distribution in Core Markets. We have worked to develop a strong market presence in the vending and energy markets. Increasing sales and distribution to our largest customers is important to the long-term success of the Company, but we are intently focused on building a broader base of customers within these core markets to drive long term revenue and value. Our efforts in this regard have led the addition of 525 new customers during the fiscal year 2010.

Further Penetrate Attractive Adjacent Markets. We plan to continue to increase the functionality of our system solutions to address the specific needs of various markets. We currently focus on specific segments of unattended POS markets, including traditional beverage and food vending, kiosk, commercial laundry and business center industry sectors. We believe we have the ability to penetrate a much larger addressable market by selling or licensing our technologies to equipment makers of everyday devices such as toll booths, tire inflation and vacuum equipment, car washes and countless other devices. Using wired and/or wireless networks and centralized, server-based software applications, managers can remotely monitor, control, and optimize a network of devices regardless of where they are located. Networked devices enable cashless transactions, sales analysis, remote monitoring, and optimized machine maintenance.

New Product Innovation. We are a leading innovator of technology that enables electronic payment transactions and value-added services at the unattended POS. We will continue enhancing our solutions in order to satisfy our customers and the end-consumers relying on our products at the POS. Our product innovation team enhances the design, size, speed of data transmission, security, and compatibility with other electronic payment solution providers’ technologies. We believe our continued product innovation will lead to further adoption in the unattended POS payments market. For example, our new ePort G-8™ solution is 65% smaller than our previous model, and the cost of the ePort EDGE™ is $199 per device.

Leverage Intellectual Property. We have been granted 78 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.

Capitalize on High Growth Opportunities in International Markets. We currently are focused on the U.S. and Canadian market for our ePort devices and related network 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, we would have to invest in additional sales and marketing and research and development resources targeted towards these regions. Our energy management devices have been shipped to customers located in the U.S., Canada, Mexico, United Kingdom, Germany, France, Japan, Australia and the Philippines.

OUR PRODUCTS

Our products are available in several distinctive modular configurations, offering our customers flexibility to install a POS solution that best fits their needs and customer demands.

Intelligent Vending™. As of June 30, 2010, we have approximately 73,000 ePort® and other cashless devices on vending machines and kiosks operating for use by the general public that are connected to our ePort Connect® solution. Our ePort Connect® solution for the vending industry enables cashless payments at unattended POS vending machines. ePort Connect® is an end to end suite of cashless payment and telemetry services for the self service retail industries.

During fiscal year 2008, we introduced our ePort® G-7, which offer features of prior versions of the ePort G series such as the ability to accept RFID payment mediums, but also includes additional features including gift, loyalty and prepaid program support, as well as remote upgrade and increased remote diagnostics capabilities. Our latest improvement to Intelligent Vending™ is our ePort® G-8, which provides the same benefits of the G-7, plus important new features at a lower price. The G-8 solution is 65% smaller than the G-7, combines traditional mag-strip and RFID payment capabilities. In addition, our 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 at a retail price of $199 per device. The retail price of the Edge device, under $200, represents a significant decrease in retail price of previous ePort devices, which retailed above $400 and $300 during the 2008 and 2009 fiscal years, respectively.

Kiosk. We provide an ePort® solution that utilizes our ePort® or software Client, USALive®, and our comprehensive technology support and customer service to offer an electronic payment option and web-based remote monitoring and management for all kiosk types. Our ePort® solution enables Kiosks to sell an increased variety of items and at a higher price point as compared to cash-only Kiosks as consumers are typically limited to the amount of available cash-on-hand. Kiosks permit a host of new services to become available at the point-of-demand, such as Sony’s self-service, Picture Station kiosks, where consumers can produce prints from their own digital media. In addition, our ePort® solution powers the POS solutions for unattended Kiosk providers such as Merit Megatouch, Fantasy Photobooth and AIR-serv. In October 2008 Starbucks chose our ePort® mobile solution to deliver their product to customers through coffee Kiosks.

 
Business Express® was originally developed to provide self-service business center solutions to the Hotel and Motel industry. With the introduction of the ePort® SDK and ePort® Transact®, our target market was expanded to include printer and copier dealers and manufacturers. The Business Express® solution includes the ePort® SDK for computer-based transactions such as a Public PC®, and the ePort® Transact® enables printers and copiers to accept credit and debit cards for payment. These products are coupled with our customer service support and ePort Connect® back-end system for payment processing and other value-added services.

ePort® Transact®, which became available in March 2010, is the latest version of our original payment technology system developed for self-service business center devices such as printers and copy machines. It is a cashless-transaction-enabling terminal that permits customers to use office equipment with a swipe for their credit or debit card. The ePort® Transact® can be sold as a stand-alone device to hotel, motel and other locations with business center needs, or to printer and copier dealers and manufacturers to be sold to their customers with the cashless option already installed.
 
eTransAct®, which became available in March 2010, is the latest version of our original payment technology system developed for self-service business center devices, such as fax machines and copiers, is a cashless transaction-enabling terminal that permits customers to use office equipment with the swipe of a major credit card. The eTransAct® device can be sold as a stand-alone unit for customers wishing to integrate it with their own office equipment.

As of June 30, 2010, we have approximately 900 Business Express® units installed nationwide with several of the major hotel chains.

eSuds™. eSuds™ is our solution developed for the commercial laundry industry. 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 advertising or subscription-based payments.

Our eSuds™ system 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. 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. The system increases customer satisfaction through improved maintenance, higher machine availability, specialized services (i.e., e-mail alerts to indicate that laundry cycle is finished) and the convenience of non-cash transactions.

Installations of our eSuds™ product have been completed at 56 universities and are serviced on approximately 7,400 washer and dryer machines. For example, installations of our eSuds™ product have been completed at Carnegie Mellon University, Rutgers University, Case Western Reserve, Johns Hopkins University, Temple University and others. We are working with resellers, such as BlackBoard, and distributors, such as Caldwell & Gregory, to install eSuds™ at other colleges and universities. The Company recently expanded e-Suds into multi-family housing with CoinMach, a firm which has indicated that it operates approximately 850,000 laundry machines in North America.

As of June 30, 2010, we had approximately 800 eSuds™ room controllers servicing approximately 7,400 washer and dryer machines.

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, room and 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.

The Energy Miser® family of energy-control devices includes:

VendingMiser® - installs in a cold drink vending machine and reduces the electrical power consumption of the vending machine.

CoolerMiser™ - reduces the electrical energy used by sliding glass or pull open glass-front coolers that contain non-perishable goods.

VM2IQ® and CM2IQ® - the second generation of the VendingMiser® and CoolerMiser™ devices that is installed directly inside the machine and has the capability to control the cooling system and the advertising lights separately.

SnackMiser® - reduces the amount of electricity used by non-refrigerated snack vending machines.

PlugMiser™ - reduces the amount of electricity used by all types of plug loads including those found in personal or modular offices (printers, personal heaters, and radios), video arcade games, and more.


OUR SERVICES

Through ePort Connect®, we offer end-to-end services to support our ePort devices and ePort SDK™.

The ePort Connect® service includes:

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 EFTs to our customer’s bank account for all settled card transactions as well as ensure compliance with current processing regulations.

Wireless Connectivity. We manage the wireless SIM 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 be bothered with customer billing inquiries and potential chargebacks.

Online Sales Reporting and Remote Management. Effective remote management is essential to cost effective deployment, maintenance and management of unattended POS locations. Via the USALive online reporting system, we provide reporting of 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 for sales and to customers, and condition monitoring for equipment service as well as activation of new devices and location redeployments.

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.

OUR TECHNOLOGY-BASED SOLUTION

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 vending market today. This one-stop-shop solution includes the ePort Connect® end-to-end payment and processing services and our cashless payment device or software for distributed assets such as vending machines, kiosks, laundry equipment, photocopiers or personal computers.

The Client. The Company offers its customers several different devices or software to connect their distributed assets. These range from software to hardware devices consisting of control boards, magnetic strip card readers, and RFID readers. The devices or software can be embedded inside the host equipment, such as ePort SDK™ software residing in the central processing unit of a Kiosk or Business Center computer; it can be integrated as part of the host equipment, such as our ePort® hardware that can be attached to the door of a vending machine; or it can be a peripheral, stand-alone terminal, such as our eTransAct® terminal for Copier Express.

ePort® is the Company’s core device, which is currently being utilized in vending and commercial laundry applications. Our ePort® product facilitates cashless payments by capturing the payment media and transmitting the information 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. product or service sold, 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.

eTransAct® is the latest version of the Company’s original cashless, transaction-enabling device developed for self-service business center equipment such as PCs, fax machines and copiers. Similar to ePort®, the eTransAct® capabilities include control/access management, collection of sales data (e.g. date and time of sale, sales amount and product or service purchased), and transmission back to our network for reporting to customers.

The Connectivity Mediums. Our solutions are interconnected for the transfer of our customer’s data through our USALive® network, providing multiple connectivity options such as phone line, Ethernet or wireless. Increasing wireless connectivity options, coverage and reliability have allowed us to service a greater number of 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 AT&T Mobility in the United States and Rogers Wireless in Canada in order to supply our customers with wireless network coverage.


The Network. Our USALive® network is responsible for transmitting payment information from our terminals for processing as well as transmitting 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 push software and update devices remotely enabling us to manage the devices (e.g., change protocol functionality, software upgrades, and change terminal display messages).

USALive® is the enabler of turnkey cashless payment processing for our customers. The network is certified with several cashless payment systems, such as credit card processors and property management systems, facilitating the authorization and settlement of credit cards, debit cards, hotel room keys and student identification cards. The network also has the capability to act as its own payment processing system for other cashless payment media, such as on-line stored value or employee payroll deduction. The network authorizes transactions, occurring at the host equipment, with the appropriate payment system and sends approval or decline responses back to the networked device to allow or terminate the transaction for the purchase of the product or service. The network consolidates successfully approved transactions from multiple devices, batches, and then transmits these batched transactions to the payment system for settlement.

Data Security. On January 14, 2009 the Company received notice from Visa that it had been accepted as a Compliant Service Provider as a result of its third party PCI Report on Compliance. The USAT listing on Visa can be found online at http://usa.visa.com/download/merchants/cisp-list-of-pcidss-compliant-service-providers.pdf.

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, 2010, the Company was marketing and selling its products through its full time staff consisting of eight 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 vending sector, approximately ten large operators dominate the sector; in the commercial laundry sector, seven operators currently control the majority of the market. We also work directly with hoteliers for our eTransAct® and Business Express® products.

Within the 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.

Marketing

Our marketing strategy consists of building our brand by creating a company and product presence at industry conferences and events in order to raise visibility within our industry, create opportunity to conduct product demonstrations, and consult with potential customers one-on-one; sponsoring educational workshops with trade associations such as National Automated Merchandiser Association (“NAMA”), to educate the industry on the importance and benefits of our solution and establish our position as the industry leader; develop several case studies to illustrate the value of our products; the use of direct mail campaigns; advertising in vertically-oriented trade publications such as Vending Times, Automatic Merchandiser and Energy User News; and cultivate a network of state governments and utility companies to provide incentives or underwriting for our energy management products.

IMPORTANT RELATIONSHIPS

MasterCard International

In May 2007, MasterCard International, the Company, and Coca-Cola Enterprises, Inc. entered into an agreement to deploy 7,500 ePort® devices, as more fully described below. The Company had earned a total of approximately $3,248,000 in equipment revenues from this agreement, which was earned during the period of June 1, 2007 through October 31, 2007.

In November 2007, MasterCard International and the Company signed an agreement to deploy 4,051 ePort® devices that accept MasterCard “PayPass™” (the “November 2007 MasterCard Agreement”). The Company had earned a total of approximately $1,600,000 in equipment revenues from this agreement, which was earned during the period of December 1, 2007 through March 31, 2008.


AT&T Mobility

In November 2009, we signed an amendment to our existing agreement to use AT&T’s digital wireless wide area network for transport of data, including credit card transactions and inventory management data. The initial term of the amendment is for period of three years, expiring November 2012. At the end of the initial term, the agreement automatically renews for successive one year terms unless terminated by either party. AT&T is a provider of advanced wireless voice and data services for consumers and businesses, operating the largest digital wireless network in North America and the fastest nationwide wireless data network in the United States. We offer AT&T’s wireless services in connection with our ePort® devices which are utilized in the traditional beverage and food vending market in the U.S.

Coca-Cola Enterprises, Inc.

In February 2007, we entered into a three-year Supply and Licensing Agreement with Coca-Cola Enterprises, Inc. (“CCE”), the world’s largest marketer, producer and distributor of Coca-Cola products. The agreement covered the purchase by CCE from us of our G6 ePort® and related ePort Connect® services for use in CCE’s beverage vending machines, including the purchase of ePorts® by CCE under the MasterCard agreement referred to below. The price of each ePort® was $433. Although the agreement has expired, pursuant to the USALive Services Agreement between CCE and us, we receive 5% of the cashless revenues from each CCE vending machine utilizing our ePort device as a processing fee as well as a monthly payment of $9.95 per ePort device so long as we act as the transaction processor. As of June 30, 2010, we act as the transaction processor for all of the units sold under the agreement.

The agreement also included, as an exhibit, the MasterCard PayPass Participation Agreement entered into between us, CCE, and MasterCard International Incorporated under which CCE had agreed to use commercially reasonable efforts to complete installation of up to 7,500 ePorts® (the “CCE/MasterCard Agreement”). In addition to accepting credit and debit cards, these ePorts® accept payment from credit cards utilizing MasterCard’s PayPass contactless technology and were to be utilized in CCE beverage vending machines in multiple cities throughout the United States. For each ePort® successfully installed by CCE, we received an aggregate of $433 from CCE and MasterCard. All units under this agreement were installed as of December 31, 2007.

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® terminals in vending machines. If the Company does not install at least 50,000 ePorts® over the term of the three year agreement, the Company would be required to refund a pro-rata portion of the funds.

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 billion organization with locations throughout the US, Mexico and Canada, is the leader in vending, foodservice management and support services, is the largest national vending operating company, operating 150 branches and 18,500 client sites, 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.


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.

Merit

In October of 2008, we entered into an exclusive three-year agreement for the supply of ePort® devices and ePort Connect® cashless services with Merit Entertainment. Merit is the provider of Megatouch countertop entertainment systems and selected the ePort® software and ePort Connect® Services to help give Megatouch players the ability to pay with their debit or credit cards. Under this agreement every newly manufactured Megatouch system will include our ePort Connect® software. Merit has indicated to us that it currently has an installed base of over 250,000 touch screen games.

QUICK START PROGRAM

The Quick Start Program (“Quick Start”) eliminates the customer’s up front capital outlay required for the purchase of the company’s ePort® cashless payment products. The Company designed Quick Start in response to customer demands for more convenient and flexible financing alternatives of our product. Quick Start offers vending machine operators and bottlers a convenient ‘no money down’ plan to help them get started with the ePort Connect® service quickly and easily.

Under the program, vending operators or bottlers have no upfront capital cost, but will pay a monthly fee which includes the ePort® device and the full ePort Connect® suite of services. The program will offer the operator several different lease options for the ePort®, such as a fair market value lease or a $1 purchase option lease. On a limited basis, and at the Company’s discretion on which customers would qualify, the program will also include a rental option. The monthly lease or rental fee will be combined with the ePort Connect® Service fees and then automatically deducted from the either the cashless proceeds from the machine or via an automated ACH from the customer’s bank account on a monthly basis.

Quick Start lowers the upfront cost of entry for our products and services, providing our customer the ability to realize enhanced cash flows with the implementation of our ePort® cashless technology. The Company believes providing convenient and flexible financing for our products, thereby lowering the upfront capital outlay requirement of customers will contribute to the increased adoption of cashless payment systems in vending, thus accelerating sales of its ePort® products and services to the vending industry.

On July 1, 2009, USAT and Compass, 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. See Compass/Foodbuy, above, for more details.

JUMP START PROGRAM

In December 2009, the Company commenced a program for its customers referred to as the Jump Start Program. Pursuant to the Jump Start Program, the Company would continue to own the ePort Edge device utilized by its customer. At the time of the shipment of the ePort device, the customer pays to the Company the standard one-time activation fee, each month after the customer pays monthly service fees and the Company receives transaction processing fees generated from the devices. The Jump Start program also includes the ePort Connect® services package for wireless connectivity, card processing, consumer services, online reporting, and over-the-air machine alerts.

Because Jump Start is designed to help vending operators and bottlers acquire the ePort EDGE cashless terminal at no cost, paying only a low monthly service fee, and avoiding the need to make a major upfront capital investment, the Company anticipates that the Jump Start Program would accelerate adoption in the marketplace of its ePort technology as well as increase its license and transaction fee revenues.

When the program was commenced, the Company anticipated that the Jump Start Program would consist of at least 15,000 ePort Edge devices. In May 2010 the Company expanded the program to include the ePort G8 terminal. In July 2010, the Company expanded the program to an aggregate of 35,000 ePort terminals.


MANUFACTURING

The Company utilizes independent third party companies for the manufacturing of its products. The Company purchases other components of its business center (computers, printers, fax and copy machines) through various manufacturers and resellers. Our manufacturing process mainly consists of quality assurance of materials and testing of finished goods received from our contract manufacturers. With the exception of a manufacturer of our ePort® product, 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 cashless vending, remote business service 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. In the cashless vending market, we are not aware of any direct competitor that provides a complete end-to-end solution, offering a cashless/remote monitoring device and turnkey service, which includes card processing services. We are aware of four competitors that offer a cashless hardware device, MEI, Coin Acceptors Inc. (Coinco), Cantaloupe Systems, Inc. and InOne Technology, LLC. 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 one direct competitor that offers a wireless service for cashless processing, Apriva. In addition, there are 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 May 2010, The National Automatic Merchandising Association (“NAMA”), an association serving the vending, coffee service and foodservice management industries, announced a cashless vending program for their members. As described by NAMA on their website, the goal of the program is to enable NAMA members to offer their customers the convenience of cashless payments at a reasonable cost across small and large average transaction pricing in a variety of industry segments. They further describe the NAMA Cashless Solution program as a networked end-to-end solution that is hardware neutral, works with qualified communication suppliers and card associations for payment reconciliation and account management. In addition, NAMA states they are working to provide members with a broad range of preferential financial services. The Company believes this program may include one or more of the competitors to the Company referred to in the preceding paragraph.

In the cashless laundry market, we are aware of one direct competitor, Mac-Gray Corporation. In the automated business center market, we are aware of three direct competitors. In the energy management market, we are aware of one direct competitor for our Energy Miser products in the United States of America; and, we are aware of one competitor for energy management products in Europe. 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. The Company is also aware of several businesses that make available use of the Internet and use of personal computers to hotel guests in their hotel rooms. Such services might compete with the Company’s Business Express, and the locations may not order the Business Express, or if ordered, the hotel guest may not use it. 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 factors include our unique products, our integrated services, product performance and price. In addition, it includes our ability to deliver these as a one-stop-shop, which we believe makes our technology easier to adopt and deploy for the operator. Our competitors are well established, have substantially greater resources than the Company and have established reputations for success in the development, sale and service of high quality products. Any increase in competition in the future may result in reduced sales and/or lower percentages of gross revenues being retained by the Company, or otherwise may reduce potential profits or result in a loss of some or all of its customer base.

CUSTOMER CONCENTRATIONS

Approximately 52% and 32% of the Company’s accounts and finance receivables at June 30, 2010 and 2009, respectively, were concentrated with two (28% with one and 24% with another) and one customer(s), respectively. Approximately 11%, 11%, and 61% of the Company’s equipment sale revenues for the years ended June 30, 2010, 2009 and 2008, respectively, were concentrated with one, one, and two (34% with one and 27% with another) customer(s), respectively. Approximately 52%, 44%, and 44% of the Company’s license and transaction processing revenues for the years ended June 30, 2010, 2009 and 2008, respectively, were concentrated with two (35% with one and 17% with another), one, and two (27% with one and 17% with another) customer(s), respectively.  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®, Business Express®, C3X®, Cinemachine®, CM2iQ®, Credit Card Computer Express®, Dial-A-Snack®, Dial-A-Vend®, Dial-A-Vend.com®, Energy Miser®, ePort®, ePort Connect®, ePort Edge®, ePort The Next Generation in Vending®, PC Express®, Public PC®, SnackMiser®, The Office That Never Sleeps®, TransAct®, USA Technologies®, USALive®, VendingMiser®, and VM2iQ®. The Company has three trademarks pending registration, Intelligent Vending™, PayDot, and Creating Value Through Innovation™. Through its wholly owned subsidiary, Stitch Networks, the Company has secured two registered trademarks, including eSuds.net® and Stitch Networks®, and has one trademark pending registration, 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, 2010, 70 United States patents and 8 Foreign patents have been issued to the Company, 9 United States and 5 Foreign patent applications are pending.

The list of issued patents is as follows:

 
U.S. Patent No. 6,856,820 entitled “An in-vehicle device for wirelessly connecting a vehicle to the internet and for transacting e-commerce and e-business”;

 
U.S. Patent No. 5,844,808 entitled “Apparatus and methods for monitoring and communicating with a plurality of networked vending machines”;

 
U.S. Patent No. 7,690,495 entitled “Card reader assembly”;

 
U.S. Patent No. 7,076,329 entitled “Cashless vending transaction management by a Vend Assist mode of operation”;

 
U.S. Patent No. 7,464,867 entitled “Cashless vending transaction management by a Vend Assist mode of operation”;

 
U.S. Patent No. 7,131,575 C1 entitled “Cashless vending transaction management by a Vend Assist mode of operation”;

 
U.S. Patent No. 7,693,602 entitled “Cashless vending transaction management by a vend assist mode of operation”;

 
U.S. Patent No. 6,615,186 entitled “Communicating interactive digital content between vehicles and internet based data processing resources for the purpose of transacting e-commerce or conducting e-business”;

 
U.S. Patent No. 7,003,289 entitled “Communication interface device for managing wireless data transmission between a vehicle and the internet”;

 
Canadian Patent No. 2,207,603 entitled “Credit and debit card operated vending machine”;

 
U.S. Patent No. 5,637,845 entitled “Credit Card and Bank Issued Debit Card Operated System and Method for Controlling a Prepaid Card Encoding/Dispensing Machine”;

 
U.S. Patent No. 6,119,934 entitled “Credit Card and Bank Issued Debit Card Operated System and Method for Controlling a Prepaid Card Encoding/Dispensing Machine”;

 
U.S. Patent No. 6,152,365 entitled “Credit Card and Bank Issued Debit Card Operated System and Method for Controlling a Vending Machine (as Amended)”;

 
U.S. Patent No. 5,619,024 entitled “Credit Card and Bank Issued Debit Card Operated System and Method for Controlling and Monitoring Access of Computer and Copy Equipment”;

 
U.S. Patent No. D423,474 entitled “Dataport”;

 
U.S. Patent No. 6,754,641 entitled “Dynamic identification interchange method for exchanging one form of identification for another”;

 
U.S. Patent No. D428,444 entitled “Electronic Commerce Terminal Enclosure for a Vending Machine”;

 
U.S. Patent No. D437,890 entitled “Electronic Commerce Terminal Enclosure for a Vending Machine”;

 
U.S. Patent No. D441,401 entitled “Electronic Commerce Terminal Enclosure with Brackets”;

 
U.S. Patent No. D428,047 entitled “Electronic Commerce Terminal Enclosure”;

 
U.S. Patent No. 6,243,626 entitled “External power management device with current monitoring precluding shutdown during high current”;


 
U.S. Patent No. D415,742 entitled “Laptop Data Port Enclosure”;

 
Canadian Patent No. D91645 entitled “Laptop Data Port enclosure”;

 
U.S. Patent No. 7,286,907 entitled “Method and Apparatus for Conserving Power Consumed by a Refrigerated Appliance Utilizing Audio Signal Detection”;

 
U.S. Patent No. 6,021,626 entitled “Method and Apparatus for Forming, Packaging, Storing, Displaying and Selling Clothing Articles”;

 
U.S. Patent No. 6,975,926 entitled “Method and Apparatus for Power Management Control of a Compressor-Based Appliance that Reduces Electrical Power Consumption of an Appliance”;

 
U.S. Patent No. 7,200,467 entitled “Method and Apparatus for Power Management Control of a Compressor-Based Appliance that Reduces Electrical Power Consumption of an Appliance”;

 
U.S. Patent No. 6,622,124 entitled “Method of transacting an electronic mail, an electronic commerce, and an electronic business transaction by an electronic commerce terminal operated on a transportation vehicle”;

 
U.S. Patent No. 6,606,605 entitled “Method to obtain customer specific data for public access electronic commerce services”;

 
U.S. Patent No. D480,948 entitled “Mounting bracket for mounting a cashless payment terminal to a vending machine”;

 
U.S. Patent No. D475,750 entitled “Paper guide for a point of sale terminal”;

 
U.S. Design Patent No. D543,588 entitled “Point of Sale Terminal Mountable on a Vending Machine’;

 
U.S. Patent No. 6,801,836 entitled “Power-conservation based on indoor/outdoor and ambient-light”;

 
European Patent No. 1419425 entitled “Power-Conservation System based on Indoor/Outdoor and Ambient-Light” (validated in Germany, Spain, France, the United Kingdom, and Italy);

 
U.S. Patent No. 5,477,476 entitled “Power conservation system for computer peripherals”;

 
U.S. Patent No. D475,414 entitled “Printer bracket for point of sale terminal”;

 
U.S. Patent No. D476,036 entitled “Printer bracket for point of sale terminal”;

 
Australian Patent No. 2001263356 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
Mexican Patent No. 234363 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”.

 
U.S. Patent No. 6,389,822 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
U.S. Patent No. 6,581,396 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
U.S. Patent No. 6,898,942 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
U.S. Patent No. 6,931,869 entitled “Refrigerated vending machine exploiting expanded temperature variance during power-conservation mode”;

 
U.S. Patent No. D418,878 entitled “Sign Holder”;

 
Canadian Patent No. D87998 entitled “Sign Holder”;

 
U.S. Patent No. 7,630,939 entitled “System and method for locally authorizing cashless transactions at point of sale”;

 
U.S. Patent No. 6,056,194 entitled “System and Method for Networking and Controlling Vending Machines”;

 
U.S. Patent No. 6,321,985 entitled “System and Method for Networking and Controlling Vending Machines”;


 
U.S. Patent No. 6,505,095 entitled “System for Providing Remote Audit, Cashless Payment, and Interactive Transaction Capabilities in a Vending Machine” (Stitch);

 
Canadian Patent No. 2,409,228 entitled “Temperature controller for a refrigerated vending machine”;

 
U.S. Patent No. 6,389,337 entitled “Transacting E-commerce and Conducting E-business Related to Identifying and Procuring Automotive Service and Vehicle Replacement Parts” (Stitch);

 
U.S. Patent No. D478,577 entitled “Transceiver base unit”;

 
U.S. Patent No. 6,609,102 entitled “Universal interactive advertising and payment system for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,604,085 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,601,038 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,604,086 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,601,037 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,611,810 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,606,602 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,601,039 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,604,087 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,615,183 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,601,040 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,609,103 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,629,080 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 7,089,209 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,643,623 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,684,197 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,807,532 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
U.S. Patent No. 6,763,336 entitled “Universal interactive advertising and payment system network for public access electronic commerce and business related products and services”;

 
Canadian Patent No. 2,291,015 entitled “Universal interactive advertising and payment system for public access electronic commerce and business related products and services”;

 
U.S. Patent No. D475,751 entitled “User interface bracket for a point of sale terminal”;


 
U.S. Patent No. D476,037 entitled “User interface bracket for a point of sale terminal”;

 
U.S. Patent No. 6,895,310 entitled “Vehicle related wireless scientific instrumentation telematics”;

 
U.S. Patent No. 6,853,894 entitled “Vehicle related wireless scientific instrumentation telematics”;

 
U.S. Patent No. D477,030 entitled “Vending machine cashless payment terminal”;

 
U.S. Patent No. 7,593,897 entitled “Wireless system for communicating cashless vending transaction data and vending machine audit data to remote locations”; and

 
U.S. Patent No. 7,502,672 entitled “Wireless Vehicle Diagnostics Device and Method with Service and Part Determination Capabilities (as amended)”.

The Company believes that one or more of its patents, including the U.S. patent No. 6,505,095 entitled “System for providing remote audit, cashless payment, and interactive transaction capabilities in a vending machine”, 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. Reference is hereby made to our risk factors relating to our intellectual property.

The Company has filed for the reexamination of U.S. Patent No. 7,131,575 (reexamination control no. 90/008,437) and for the reexamination of U.S. Patent No. 6,505,095 (reexamination control no. 90/008,448). 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 $1,864,000, $2,691,000, and $1,679,000 for the years ended June 30, 2010, 2009 and 2008, respectively.

EMPLOYEES

On August 31, 2010 the Company had 39 full-time employees and two part-time employees.


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. We expect to continue to incur losses for the foreseeable future as we expend substantial resources on sales, marketing, and research and development of our products. From our inception through June 30, 2010, our cumulative losses from operations are approximately $188 million. For our fiscal years ended June 30, 2010, 2009 and 2008, we have incurred net losses of $11,571,495, $13,731,818, and $16,417,893, respectively. 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. No assurances can be given that we will ever be profitable.

We may require additional financing to sustain our operations and without it we may not be able to continue operations.

At June 30, 2010, we had working capital of $6,591,763.  We had an operating cash flow deficit of $12,347,182, $8,477,680, and $13,594,054 for the fiscal years ended June 30, 2010, June 30, 2009, and June 30, 2008, respectively.  Based upon past business operations, we do not currently have sufficient financial resources to fund our operations.  Therefore, we anticipate the need for 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, 2011, there can be no assurances that we will be able to continue to generate sufficient funds thereafter. We 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, 2011, 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 install the ePorts® at enough locations 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;

 
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 conditions in the financial markets and the economy generally. The stress being experienced by global financial markets that began in late 2007 continued and substantially increased during 2008 and 2009, and continued into 2010. The availability and cost of credit has been materially affected. These factors, combined with 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 rely on the credit and equity markets for funding our business by issuing debt and 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 52% and 32% of the Company’s accounts and finance receivables at June 30, 2010 and 2009, respectively, were concentrated with two (28% with one customer and 24% with another customer) and one customer, respectively. Approximately 11%, 11%, and 61% of the Company’s equipment sale revenues for the years ended June 30, 2010, 2009 and 2008, respectively, were concentrated with one, one, and two (34% with one customer and 27% with another customer), respectively. Approximately 52%, 44%, and 44% of the Company’s license and transaction processing revenues for the years ended June 30, 2010, 2009 and 2008, respectively, were concentrated with two (36% with one customer and 17% with another customer), one, and one, respectively.  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, George R. Jensen, Jr. The loss of services of Mr. Jensen 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. Jensen that expires on September 30, 2012. We have also entered into employment agreements with other executive officers, each of which contain confidentiality and non-compete agreements. We have obtained a key man life insurance policy in the amount of $1,000,000 on Mr. Jensen and a key man life insurance policy in the amount of $1,000,000 on our President, Stephen P. Herbert. We do not have and do not intend to obtain key man life insurance coverage on any of our other executive officers. As a result, we are exposed to the costs associated with the death of these key employees.

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.


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, 2010, we have 14 pending 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 78 patents as of June 30, 2010. 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;

 
businesses which provide access to the Internet and personal computers to hotel guests. Although these services are not credit card activated, such services would compete with the Company’s Business Express®; and

 
·
two direct competitors, Elstat Electronics Ltd. and Automatic Retailing 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. As stated above under “Business-Competition”, NAMA has announced a cashless vending program for their members which the Company believes would offer the products and services of one or more of the Company’s current competitors.


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.

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.

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 provider, AT&T Mobility. 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, our wireless telecommunication services provider may increase its prices at which it provides services, which would increase our costs. If our wireless telecommunication services provider were to cease to provide essential services or to significantly increase its 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. 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.

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 our customers 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. Our products may be vulnerable to breaches in security due to defects in the security mechanisms, the operating system and applications or the 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.

A large portion of all of the transactions we process 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.

We rely on other card payment processors and service providers; if they fail or no longer agree to provide their services, our merchant relationships could be adversely affected and we could lose business.

We rely on agreements with other large payment processing organizations, primarily Elavon, Inc., to enable us to provide card authorization, data capture, settlement and merchant accounting services and access to various reporting tools for the merchants we serve. Many of these organizations and service providers are our competitors and 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 merchants whose accounts we serve and may cause those merchants 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.


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, 2010, the unpaid and cumulative dividends on the series A convertible preferred stock are $9,968,194. 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 years ended June 30, 2010 and 2009 no series A convertible preferred stock or cumulative preferred dividends were converted into shares of common stock.

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, 2010, we had issued and outstanding options to purchase 160,000 shares of our common stock and warrants to purchase 13,804,418 shares of our common stock. The shares underlying none of these options, and 11,205,154 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 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.


The substantial market overhang of our shares will tend to depress the market price of our shares.

The substantial number of our shares currently eligible for sale in the open market will tend to depress the market price of our shares. As of August 31, 2010, these shares consisted of the following:

 
25,909,108 shares of common stock

 
444,468 shares of series A convertible preferred stock

 
9,968 shares issuable upon conversion of the accrued and unpaid dividends on the series A convertible preferred stock

 
11,205,154 shares underlying common stock warrants

 
19,247 shares issuable under our 2008 Stock Incentive Plan

 
300,000 shares issuable under our 2010 Stock Incentive Plan.

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.

Our common stock may be delisted from The NASDAQ Stock Market, which could negatively impact the price of our common stock and our ability to access the capital markets.

Our common stock is currently listed on The NASDAQ Global Market. A condition of continued listing on The NASDAQ Stock Market, LLC (“NASDAQ”) is that the closing bid price of our common stock must be a least $1.00. On June 14, 2010, we  received a letter from The NASDAQ Stock Market Listing Qualifications Department that we no longer meet the requirement that listed securities maintain a minimum bid price of $1.00 per share set forth in NASDAQ Listing Rule 5450(a)(1) (the “Minimum Bid Price Requirement”). We received the notification of deficiency pursuant to NASDAQ Listing Rule 5810(c)(3)(A) because, for 30 consecutive business days, our common stock did not maintain a minimum closing bid price per share of at least $1.00.

The notification of non-compliance has no immediate effect on the listing or trading of our securities on The NASDAQ Global Market.

Under NASDAQ Listing Rule 5810(c)(3)(A), we may regain compliance with the Minimum Bid Price Requirement if during the 180 calendar days following the date of the notification, or by December 13, 2010, the closing bid price of our common stock is at least $1.00 for a minimum of 10 consecutive business days (subject to extension by the NASDAQ Listing Qualifications Department).

If we do not achieve compliance with the Minimum Bid Price Requirement by December 13, 2010, NASDAQ will provide written notification to us that our securities are subject to delisting. We may, at that time, appeal NASDAQ’s determination to a NASDAQ Hearing Panel. Alternatively, if at that time we are in compliance with all initial listing standards for The NASDAQ Capital Market other than the Minimum Bid Price Requirement, we could apply to transfer the listing of our securities to The NASDAQ Capital Market. If our application to transfer is approved, we would have an additional 180 days to regain compliance with the Minimum Bid Price Requirement in order to remain on The NASDAQ Capital Market.


The delisting of our common stock from NASDAQ would significantly negatively affect the ability of investors to trade our securities and would significantly negatively affect the value and liquidity of our common stock. In addition, the delisting of our common stock could materially adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from NASDAQ could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.

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 used for general administrative functions, sales activities, and product development. The lease term expires on December 31, 2010. As of June 30, 2010, the Company’s rent payment for this facility is $37,373 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, 2010. As of June 30, 2010, the Company’s rent payment for this facility is $14,617 per month with escalating rental payments through the remainder of the lease.

Item 3. Legal Proceedings.

The Company is not a party to any legal proceedings.



Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The common stock of the Company has been trading on The NASDAQ Global Market under the symbol USAT since August 1, 2007. Prior thereto, and since March 17, 2007, the common stock traded on The NASDAQ Capital Market. Prior thereto, the common stock of the Company was traded on the OTC Electronic Bulletin Board under the symbol USAT.

The high and low bid prices on The NASDAQ Capital Market and The NASDAQ Global Market, as the case may be, for the common stock were as follows.

Year ended June 30, 2010
 
High
   
Low
 
First Quarter (through September 30, 2009)
  $ 3.01     $ 1.35  
Second Quarter (through December 31, 2009)
  $ 1.82     $ 1.50  
Third Quarter (through March 31, 2010)
  $ 3.17     $ 1.04  
Fourth Quarter (through June 30, 2010)
  $ 1.29     $ 0.48  
                 
Year ended June 30, 2009
               
First Quarter (through September 30, 2008)
  $ 6.00     $ 2.92  
Second Quarter (through December 31, 2008)
  $ 4.20     $ 0.90  
Third Quarter (through March 31, 2009)
  $ 3.54     $ 1.44  
Fourth Quarter (through June 30, 2009)
  $ 3.17     $ 1.56  

On August 31, 2010 there were 634 record holders of the Common Stock and 395 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, 2010, such accumulated unpaid dividends amounted to $9,968,194.

As of June 30, 2010, equity securities authorized for issuance by the Company with respect to compensation plans were as follows:

Plan category
 
Number of Securities to be issued upon exercises of outstanding options and warrants
(a)
   
Weighted average exercise price of outstanding options and warrants
(b)
   
Number of securities remaining available for future issuance (excluding securities reflected in column(a))
(c)
 
Equity compensation plans approved by security holders
                320,747 (3)
                         
Equity compensation plans not approved by security holders
    160,000 (1)   $ 7.52       140,000 (2)
                         
Total
    160,000     $ 7.52       460,747  

1) Represents stock options outstanding as of June 30, 2010 for the purchase of shares of Common Stock of the Company expiring at various times from April 2011 through June 2013. All such options were granted to 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 Chief Executive Officer under the terms of his employment agreement. Shareholder approval of the foregoing was not required because each of the foregoing was adopted by the Company prior to the Company’s shares being listed on The NASDAQ Stock Market LLC.

3) Represents 20,747 shares of Common Stock issuable under the Company’s 2008 Stock Incentive Plan as approved by shareholders on February 28, 2008 and 300,000 shares of Common Stock issuable under the Company’s 2010 Stock Incentive Plan as approved by shareholders on June 15, 2010 for use in compensating employees, directors and consultants. The shares have been registered with the Securities and Exchange Commission as an employee benefit plan under Form S-8.


As of August 31, 2010, shares of Common Stock reserved for future issuance were as follows:

 
-
160,000 shares issuable upon the exercise of stock options at exercise prices ranging from $7.50 to $8.00 per share;

 
-
13,804,418 shares issuable upon the exercise of common stock warrants at exercise prices ranging from $1.13 to $7.70 per share; 9,289,011 of which were exercisable as of August 31, 2010 at prices ranging from $1.13 to $7.70 per share; 3,015,407 will be exercisable in January 2011 at $1.13 per share; and 1,500,000 will be exercisable at $5.25 and $6 per share when certain performance hurdles are met;

 
-
14,413 shares issuable upon the conversion of outstanding Preferred Stock and cumulative Preferred Stock dividends;

 
-
19,247 shares issuable under the 2008 Stock Incentive Plan;

 
-
300,000 shares issuable under the 2010 Stock Incentive Plan;

 
-
140,000 shares issuable to Mr. Jensen under his employment agreement upon the occurrence of a USA Transaction; and

 
-
5,001,408 shares issuable to Lincoln Park Capital, LLC pursuant to the Purchase Agreement dated July 27, 2010.


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, 2005 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

 
Total Return For
 
Jun-05
   
Jun-06
 
Jun-07
 
Jun-08
 
Jun-09
 
Jun-10
 
                             
USA Technologies, Inc.
  $ 100     $ 56     $ 77     $ 43     $ 21     $ 4  
NASDAQ Composite
    100       105       126       112       89       103  
S&P 500 Information Technology Index
    100       100       124       115       92       106  

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.


Purchases of Equity Securities

(c) Issuer purchases of Equity Securities during the Quarter ended June 30, 2010

The following table provides information relating to the Company’s purchases of its Series A Convertible Preferred Stock during the quarter ended June 30, 2010:

Period
 
Total number of shares (1)
   
Average price paid per share
   
Total number of shares purchased as part of publicly announced plans or programs
   
Approximate dollar value of shares that yet may be purchased under the plans or programs (2)
 
                         
April 1 through April 30, 2010: Series A Convertible Preferred Stock
    1,800     $ 8.50       1,800     $ 224,223  
                                 
May 1 through May 31, 2010: Series A Convertible Preferred Stock
    5,565     $ 8.45       5,565     $ 177,220  
                                 
June 1 through June 30, 2010: Series A Convertible Preferred Stock
    17,782     $ 8.79       17,782     $ ---  
Total, Preferred
    25,147     $ 8.69       25,147     $ ---  

(1) The Board of Directors authorized the purchase by the Company in the open market of up to $1,000,000 of Common Stock or Series A Preferred Stock through June 30, 2010. All purchases of Common Stock must be in compliance with the Securities and Exchange Commission’s Rule 10b-18.
(2) Reflects dollar amount available for purchase of either Common Stock and/or Preferred Stock under the plan as of June 30, 2010, excluding fees.


Item 6. Selected Financial Data.

The following selected financial data for the five years ended June 30, 2010 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
 
                               
   
2010
   
2009
   
2008
   
2007
   
2006
 
OPERATIONS DATA
                             
                               
Revenues
  $ 15,771,106     $ 12,020,123     $ 16,103,546     $ 9,158,012     $ 6,414,803  
                                         
Net loss
    (11,571,495 )     (13,731,818 )     (16,417,893 )     (17,782,458 )     (14,847,076 )
                                         
Cumulative preferred dividends
    (735,139 )     (772,997 )     (780,588 )     (781,451 )     (783,289 )
Loss applicable to common shares
  $ (12,306,634 )     (14,504,815 )   $ (17,198,481 )   $ (18,563,909 )   $ (15,630,365 )
                                         
Loss per common share (basic and diluted)
  $ (0.55 )   $ (0.95 )   $ (1.21 )   $ (2.13 )   $ (3.15 )
                                         
Cash dividends per common share
  $     $     $     $     $  
                                         
BALANCE SHEET DATA
                                       
Total assets
  $ 29,848,424     $ 25,980,378     $ 40,055,651     $ 34,491,497     $ 23,419,466  
Long-term debt
  $ 596,155     $ 820,059     $ 967,518     $ 1,029,745     $ 7,780,853  
Shareholders’ equity
  $ 22,812,172     $ 19,972,272     $ 32,576,549     $ 28,084,206     $ 11,177,064  


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 energy management products and services. The Company markets and sells its products and services principally to the vending, hospitality, retail and laundry industries. Our technology, ePort® and ePort SDK™, can be installed and/or embedded into everyday devices such as vending machines, kiosks and copiers, as well as our eSuds™ technology for washer and dryers. Our associated network service, ePort Connect®, provides wireless connectivity that facilitates cashless transaction processing and remote monitoring of assets, through the collection of financial/sales and machine diagnostic data, which is made accessible to our customers via our USALive® website. 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. The Company generates revenue through the sale of equipment and/or through the licensing of its technology. In addition, we generate recurring revenues through our associated services. The Company charges a monthly network service fee for each device that is connected to the Company’s network. In addition, we charge a transaction processing fee for every cashless transaction we process. Since our energy management products are a stand-alone, non-networked device, we only generate revenue through the sale of equipment.

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.

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 ASC 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. During 2009 and 2010, we experienced a decline in our market capitalization due to a decline in our stock price. As of June 30, 2010, our market capitalization was less than our book value and as of September 17, 2010 it was slightly higher than book value. We believe the decline in our stock price has, in part, been influenced by the current national credit crises and national economic recession. We believe that it is appropriate to view the current credit crisis and recession as relatively temporary in relation to reporting units that have demonstrated long-lived / enduring franchise value. Accordingly, we believe that a variance between market capitalization and fair value can exist and that difference could be significant at points in time due to intervening macroeconomic influences. 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, 2010, April 1, 2009 and April 1, 2008.

Patents, trademarks and the non-compete agreement are carried at cost less accumulated amortization, which is calculated on a straight-line basis over their estimated economic life. The Company reviews intangibles 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. As of June 30, 2010 and 2009, the Company has concluded there has been no impairment of patents or trademarks. As of June 30, 2009 the non-compete agreement is fully amortized; and there was no impairment of the non-compete agreement as of June 30, 2008.


Intangible assets include patents, trademarks and non-compete arrangements purchased in acquisitions. Amortization expense related to these intangible assets was $1,034,400, $1,040,379, and $1,236,600, during the years ended June 30, 2010, 2009, and 2008, respectively.

INVESTMENTS

The Company accounts for investments in accordance with ASC 320, "Investments - Debt and Equity Securities". Management determines the appropriate classifications of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of shareholders’ equity in accumulated other comprehensive income (loss). If the investment sustains an other-than-temporary decline in fair value, the investment is written down to its fair value by a charge to earnings.

As of June 30, 2010 and June 30, 2009, available-for-sale securities consisted of $0, par value of auction rate securities (“ARS”). The Company’s ARS consisted of long-term variable rate securities whose dividend rates were reset every seven days through a “dutch auction” conducted by investment banks. Our ARS were all AAA or Aaa rated, and represented preferred stock of closed-end investment firms. Our ARS had no fixed maturity dates.

During the year ended June 30, 2009, the ARS broker-dealer purchased the remaining $6,875,000 of the Company’s ARS at par. As such, there were no unrealized losses recorded in the year ended June 30, 2009 in connection with these investments.


RESULTS OF OPERATIONS

FISCAL YEAR ENDED JUNE 30, 2010 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2009

Revenues for the year ended June 30, 2010 were $15,771,106 compared to $12,020,123 for the year ended June 30, 2009. This $3,750,983 or 31% increase was primarily due to an increase in license and transaction fees of $3,444,994, and an increase in equipment sales of $305,989. The increase in license and transaction fees was primarily due to the increase in the number of ePort® units on our USALive® network as well as increased revenue on those connected units. As of June 30, 2010, the Company had approximately 82,000 distributed assets connected to our USALive® network generating license fee revenue as compared to approximately 52,000 distributed assets connected to our USALive network as of June 30, 2009. In regards to transaction fees, during the year ended June 30, 2010, the Company processed approximately 36.9 million transactions totaling approximately $67.6 million compared to approximately 22.4 million transactions totaling over $47.1 million during the year ended June 30, 2009, an increase of approximately 65% in transaction volume and approximately 44% in dollars processed.

The $305,989 increase in equipment sales was derived from increases in sales of ePort® and Energy Miser products of $488,545 and $234,888, respectively, offset by decreases in business center and other equipment sales of $359,339 and $58,105, respectively.

Cost of sales for the 2010 fiscal year consisted of equipment costs of $4,049,433 and network and transaction services related costs of $6,861,642. The increase in total cost of sales of $1,740,469 or 19% over the prior fiscal year was due to increases in network and transaction services of $2,181,555 offset by a decrease in equipment costs of $441,086. The increase in network and transaction services costs was directly related to increases in units connected to the network, processing volume, as well as increases in costs from third party transaction suppliers for the first six months of the 2010 fiscal year. The decrease in equipment costs was due to a decrease of approximately $331,000 in equipment costs related to lower equipment sales volume, and a decrease of approximately $110,000 related to our estimate for product warranty liabilities.

Gross profit for the year ended June 30, 2010 was $4,860,031 compared to gross profit of $2,849,517 for the previous fiscal year, an increase of $2,010,514, of which $747,075 is attributable to equipment sales and $1,263,439 from license and transaction fees. The increase in equipment sales gross profit of approximately $750,000 was a result of an approximate $640,000 increase in gross profit on higher equipment sales and approximately $110,000 related to a reduction in product warranty liabilities. The approximate $1.26 million increase in gross profit related to license and transaction fee revenue was generated by additional devices connected to our network, offset by increased transaction supplier charges incurred during the first six months of the 2010 fiscal year. The reduction in supplier costs associated with a recently negotiated amendment to a supplier contract took effect in December 2009. Therefore, the full impact of the new negotiated agreement was not realized until the second half of the 2010 fiscal year. Percentage based total gross profit (“GP”) increased overall from 24% to 31%, equipment sales GP increased from 27% to 37%, and license and transaction fees GP increased from 20% to 26%. Considering the reduction for product warranty liabilities and for comparability purposes, GP would have been as follows for the year ended June 30, 2010 had the change not been made – total GP would have increased to 30%, equipment sales GP would have increased to 36%, and license and transaction fees GP would have remained at 24% as it was not affected by the reduction.

Selling, general and administrative expense of $14,885,685, decreased by $298,162 or 2%, primarily due to a decrease in compensation and benefit expenses of approximately $1,042,000 and decreases in other professional services of approximately $635,000, travel and entertainment of approximately $137,000 and product development of approximately $186,000, offset by an increase in professional services related to the proxy contest and related litigation of approximately $1,579,000 (net of insurance carrier contribution). Of the approximate $1,579,000 in proxy contest and litigation costs (net of insurance carrier contribution), approximately $710,000 (net of insurance carrier contribution) was for the legal settlement, approximately $200,000 (net of insurance carrier contribution) was for legal expenses of the Company related to the litigation, and approximately $669,000 was for proxy contest costs. Selling, general and administrative expense excluding the proxy contest and litigation costs was $13,306,685 a decrease of $1,877,162 or 12% as compared to the prior fiscal year, primarily due to cost reduction measures taken by the Company during the third quarter of fiscal 2009.

Compensation expense decreased by approximately $1,042,000 primarily due to a decrease of approximately $1,486,000 in salaries and benefits as well as an increase of $419,000 in non-cash charges related to the LTIP Program.

The year ended June 30, 2010 resulted in a net loss of $11,571,495 (including approximately $2 million of non-cash charges) compared to a net loss of $13,731,818 (including approximately $2.6 million of non-cash charges) for the year ended June 30, 2009. Net loss for the 2010 fiscal year was the lowest fiscal year net loss since our shares become listed on The NASDAQ Stock Market in March 2007.


FISCAL YEAR ENDED JUNE 30, 2009 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2008

Revenues for the year ended June 30, 2009 were $12,020,123 compared to $16,103,546 for the year ended June 30, 2008. This $4,083,423 or 25% decrease was primarily due to a decrease in equipment sales of $6,226,853, offset by an increase in license and transaction fees of $2,143,430. The decrease in equipment sales was due to a decrease in sales of approximately $4,924,000 of ePort® vending equipment and approximately $1,250,000 in energy conservation equipment, as well as a net decrease in other equipment sales of approximately $53,000. The decrease in ePort® vending equipment sales was primarily related to a decrease in capital spending by some of our customers due to the current economic slowdown, as well as key customers awaiting the availability of the ePort® G8 and ePort Edge™ products. The ePort® G8 product was available for sale to our customers at the end of the third quarter of fiscal 2009, and the ePort Edge™ product was available for sale to our customers during the fourth quarter of fiscal 2009. The increase in license and transaction fees was primarily due to the increase in the number of ePort® units on our USALive® network.

In regards to license fees, as of June 30, 2009, the Company had approximately 52,000 distributed assets connected to our USALive® network as compared to approximately 38,000 distributed assets connected to our USALive network as of June 30, 2008.

In regards to transaction fees, during the year ended June 30, 2009, the Company processed approximately 22.4 million transactions totaling over $47.1 million compared to approximately 11.3 million transactions totaling over $34.4 million during the year ended June 30, 2008, an increase of approximately 98% in transaction volume and approximately 37% in dollars processed.

Cost of sales for the 2009 fiscal year consisted of equipment costs of $4,490,519 and network and transaction services related costs of $4,680,087. The decrease in total cost of sales of $3,514,086 or 28% over the prior fiscal year was due to a decrease in equipment costs of $5,212,955 and an increase in network and transaction services related costs of $1,698,869.

Gross profit for the year ended June 30, 2009 was $2,849,517 compared to gross profit of $3,418,854 for the previous fiscal year. The decrease was primarily the result of a reduction in equipment sales. During the same periods, percentage based gross profit increased to 24% from 21%; this increase is primarily due to an increase in the profit margin of ePort® vending equipment sales as a result of lower production costs primarily due to offshore production.

Selling, general and administrative expense of $15,183,847, decreased by $3,459,369 or 19% primarily due to decreases in compensation expenses of approximately $3,067,000, recruiting fees of approximately $349,000, trade show expenses of approximately $197,000, travel and entertainment expenses of approximately $195,000, and bad debt expense of approximately $155,000, offset by increases in professional and consulting services of approximately $282,000 and product development costs of approximately $183,000. The overall decrease was due to cost reduction measures taken by the Company during the third and fourth quarters of fiscal year 2008 and during the third quarter of fiscal year 2009. The increase in product development costs and consulting services is directly attributable to the costs related to the development of our new ePort® G-8 and ePort Edge™ products.

Compensation expense decreased by approximately $3,067,000 primarily due to a decrease of approximately $1,855,000 in non-cash charges related to the LTIP Program (See Note 10 of the Consolidated Financial Statements), as well as a $1,212,000 decrease in compensation and benefits expense.

The year ended June 30, 2009 resulted in a net loss of $13,731,818 (including approximately $2.6 million of non-cash charges) compared to a net loss of $16,417,893 (including approximately $3.2 million of non-cash charges) for the year ended June 30, 2008.

 
FISCAL QUARTER ENDED JUNE 30, 2010 COMPARED TO FISCAL QUARTER ENDED JUNE 30, 2009
 
Revenues for the quarter ended June 30, 2010 were $4,479,106 compared to $3,646,083 for the quarter ended June 30, 2009. This $833,023 or 23% increase was primarily due to an increase in license and transaction fees of $1,274,781, offset by a decrease in equipment sales of $441,758. The increase in license and transaction fees was primarily due to the increase in the number of ePort® units on our USALive® network as well as increased revenue on those connected units. As of June 30, 2010, the Company had approximately 82,000 distributed assets connected to our USALive® network generating license fee revenue as compared to approximately 52,000 distributed assets connected to our USALive network as of June 30, 2009. In regards to transaction fees, during the quarter ended June 30, 2010, the Company processed approximately 11.7 million transactions totaling approximately $20.8 million compared to approximately 6.7 million transactions totaling over $13.5 million during the quarter ended June 30, 2009, an increase of approximately 73% in transaction volume and approximately 54% in dollars processed.
 
The $441,758 decrease in equipment sales was a result of a decrease of approximately $650,000 in sales of ePort®, offset by an increase in sales of Energy Miser products of $180,000. The decrease in ePort® sales is due mainly to a significant portion of the ePort® units shipped during the quarter ended June 30, 2010 were shipped under the Jump Start Program, for which the Company records a one-time activation fee, but does not record an equipment sale. The JumpStart program did not exist during the quarter ended June 30, 2009, therefore the Company recorded an equipment sale for all ePort® units shipped during the quarter ended June 30, 2009.
 
Cost of sales consisted of equipment costs of $920,767 and $1,550,990 and network and transaction services related costs of $2,033,420 and $1,405,298 for the quarters ended June 30, 2010 and 2009, respectively. The decrease in total cost of sales of $2,101 over the prior fiscal quarter was due to a decrease in equipment costs of $630,223, offset by an increase in network and transaction services of $628,122. The decrease in equipment costs was a direct result of shipping more units under the Jump Start Program. The costs associated with the Jump Start units were recorded to Property and Equipment on the Consolidated Balance Sheet. The Jump Start Program did not exist during the quarter ended June 30, 2009. The increase in network and transaction services costs was directly related to increases in units connected to the network and increases in processing volume, offset by decreases in third party supplier costs due to an amendment to a contract which occurred in the quarter ended December 31, 2009.
 
Gross profit for the quarter ended June 30, 2010 was $1,524,919 compared to gross profit of $689,796 for the same quarter in the previous fiscal year, an increase of $835,122, of which $646,658 is attributable to license and transaction fees and $188,464 is from equipment sales. The increase in gross profit related to license and transaction fee revenue was generated by additional devices connected to our network and a decrease in third party supplier costs related to a negotiated amendment to a contract, which took effect in December 2009. Percentage based total gross profit (“GP”) increased overall from 19% to 34%, equipment sales GP increased from 22% to 41%, and license and transaction fees GP increased from 15% to 31%.
 
Selling, general and administrative expense of $3,261,803, increased by $49,034 or 2%, primarily due to an increase in compensation expenses of approximately $115,000 and other net increases of approximately $56,000 offset by a decrease in consulting and other professional services of approximately $122,000.
 
Compensation expense increased by approximately $115,000 primarily due to a one-time charge of approximately $200,000 related to severance payments offset by decreases of approximately $59,000 in salaries, commissions and benefits as well as a decrease of approximately $26,000 in non-cash charges related to the LTIP Program.
 
The quarter ended June 30, 2010 resulted in a net loss of $2,089,801 compared to a net loss of $2,918,337 for the quarter ended June 30, 2009. Net loss for the June 30, 2010 fiscal quarter was the lowest quarterly net loss since our shares became listed on The NASDAQ Stock Market in March 2007.

 
39

 
LIQUIDITY AND CAPITAL RESOURCES

For the year ended June 30, 2010, net cash of $12,347,182 was used by operating activities, primarily due to the net loss of $11,571,495 offset by non-cash charges totaling $1,972,893, representing the vesting and issuance of common stock for employee compensation, bad debt recovery, loss on disposal of equipment and the depreciation and amortization of assets. In addition to these non-cash charges, the Company’s net operating assets increased by $2,748,580 primarily due to increases in accounts and finance receivables, and inventory, offset by increases in accrued expenses and accounts payable and a decrease in prepaid expenses and other assets.

The Company received cash of $13,724,079 in financing activities during the year ended June 30, 2010 due to cash proceeds from the issuances of common stock under the 2009 subscription rights offering of $12,958,159 and under the 2010 public offering of $1,974,014 and proceeds from long-term debt of $7,500.  These inflows of cash were offset by debt repayments of $607,462 and the purchase in the open market of $598,464 of preferred stock which was subsequently canceled and retired, and the cancellation of Common Stock which had been held by an executive officer in order to satisfy payroll withholding tax obligations of the officer in connection with shares of Common Stock which vested during January 2009.

The Company has incurred losses since inception. Our accumulated deficit through June 30, 2010 is composed of cumulative losses amounting to approximately $187,500,000, 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 continued to raise capital through equity offerings to fund operations.

As of June 30, 2010 the Company had $7,604,324 of cash and cash equivalents on hand.

During the 2011 fiscal year, the Company anticipates incurring capital expenditures of approximately $3,800,000 in connection with ePort units expected to be used in the JumpStart Program and additional capital expenditures of $790,000 for other fixed assets.

The Company has stated goals to achieve at least 100,000 connections by December 31, 2010 and positive earnings before interest, taxes, depreciation and amortization (EBITDA, a non-GAAP financial measure) for the quarter then ending. At August 31, 2010 the Company had approximately 86,000 connections on its network. We expect to achieve the additional connections needed to achieve our goal of 100,000 connections mainly via our Jump Start program. Each Jump Start connection has a one-time activation fee due the Company upon shipment of the device, a monthly recurring fee and transactional fees from the cashless activity generated by the unit. During the last six months of fiscal year 2010 (January 1, 2010 through June 30, 2010) the Company added approximately 19,000 ePort connections, of which, approximately 14,000 were from the Jump Start program. For the quarter ended June 30, 2010, the Company had an EBITDA loss of $1,603,027 as detailed below.
 
Reconciliation of quarterly net loss to EBITDA for the quarter ended June 30, 2010:

Net loss
  $ (2,089,803 )
         
Less interest income
    (48,281 )
         
Plus interest expense
    12,184  
         
Plus income tax expense
    --  
         
Plus depreciation expense
    264,273  
         
Plus amortization expense
    258,600  
         
EBITDA
  $ (1,603,027 )

As a result of the connections added during the past six months, recurring revenue from license and transaction fees increased from approximately $2,074,000 for the three months ended December 31, 2009 to approximately $2,930,000 for the three months ended June 30, 2010, an increase of 41%. In addition, total gross profit has increased since introducing the Jump Start program – total gross profit for the three months ended December 31, 2009 of approximately $1,009,000 increased to approximately $1,525,000 for the three months ended June 30, 2010, an increase of 51%.

Our average monthly cash-based selling, general and administrative (SG&A) expenses during the quarter ended June 30, 2010 were approximately $1,100,000. This included approximately $200,000 of nonrecurring charges related to severance payments. Excluding these charges, our average monthly cash-based SG&A expenses were $1,033,000. The Company has been engaged in planned reductions of its monthly cash-based SG&A expenses. The Company began to reduce these costs in June 2010, and will continue to reduce these costs throughout the quarter ending September 30, 2010. The cost reductions consist mainly of the termination of consulting contracts due to the completion of certain development projects, reduction in employee headcount and associated benefits and reductions in other professional fees. We expect at the conclusion of these reductions our cash-based SG&A expenses to be slightly under $800,000, and the full impact of these reductions should be realized beginning in October 2010.

We expect revenues from license and transaction fees, as well as gross profit, to continue to increase as the Company’s connections to its network grow. We believe these increases, coupled with the anticipated reductions in SG&A expenses described above, will allow the Company to achieve positive EBITDA for the quarter ending December 31, 2010.

Based on the above, the Company believes its existing cash and cash equivalents as of June 30, 2010, should provide sufficient funds to meet the Company’s cash requirements, including capital for the Jump Start Program, capital expenditures and repayment of long-term debt, through at least July 1, 2011.

On July 27, 2010, the Company signed a purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Pursuant to the purchase agreement, and subject to the conditions set forth therein, we have the right to sell to Lincoln Park, and Lincoln Park has the obligation to purchase from us, up to 4,851,408 shares of common stock over a 25 month period with an aggregate purchase price not to exceed $5 million. We are not required to sell any shares to Lincoln Park, and we will control the timing and amount of any sales of shares to Lincoln Park. The purchase agreement may be terminated by us at any time at our discretion without any cost to us. The sale of any shares to Lincoln Park is subject to our registering the shares under the Securities Act of 1933. In August 2010, we filed a registration statement covering the shares with the Securities and Exchange Commission and anticipate that the registration statement will become effective during the second quarter of the fiscal year.


Based on the Company’s operating plan described above, we do not anticipate selling any shares to Lincoln Park under the purchase agreement at this time, if ever.

In the event actual results do not materialize as described above, the Company believes its existing cash and cash equivalents as of June 30, 2010, as well as the net proceeds available from the Lincoln Park agreement, and the Company’s ability to continue to reduce expenses, should result in sufficient available funds to meet the Company’s cash requirements, including capital for the Jump Start Program, capital expenditures and repayment of long-term debt, through at least July 1, 2011.

CONTRACTUAL OBLIGATIONS

As of June 30, 2010, the Company had certain contractual obligations due over a period of time as summarized in the following table:

   
Payments due by period
 
Contractual Obligations
 
Total
   
Less Than
1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
Long-Term Debt Obligations
  $ 344,984     $ 162,840     $ 157,840     $ 24,304     $  
Capital Lease Obligations
    302,864       216,384       85,803       677        
Operating Lease Obligations
    95,824       91,064       4,760              
Purchase Obligations
                             
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP
                             
Total
  $ 743,672     $ 470,288     $ 248,403     $ 24,981     $  

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. Regarding the Company’s exposure to market risks related to Available-for-sale securities, see “Investments” in Item 7 above. Market risks related to fluctuations of foreign currencies are not significant and the Company has no derivative instruments.


Item 8. Financial Statements and Supplementary Data.

USA TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial Statements:
   
     
Report of Independent Registered Public Accounting Firm
 
F-1
Consolidated Balance Sheets
 
F-2
Consolidated Statements of Operations
 
F-3
Consolidated Statements of Shareholders’ Equity
 
F-4
Consolidated Statements of Cash Flows
 
F-7
Notes to Consolidated Financial Statements
 
F-9


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, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2010.  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.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2010, 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.

We were not engaged to examine management’s assessment of the effectiveness of USA Technologies, Inc.’s internal control over financial reporting as of June 30, 2010, included in the accompanying management’s annual report on internal control over financial reporting and, accordingly, we do not express an opinion thereon.

 
 /s/ McGladrey & Pullen, LLP

New York, NY
September 21, 2010

 
F-1


USA Technologies, Inc.
Consolidated Balance Sheets

   
June 30
 
   
2010
   
2009
 
             
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 7,604,324     $ 6,748,262  
Accounts receivable, less allowance for uncollectible accounts of $41,000 and $42,000, respectively
    2,048,421       1,468,052  
Finance receivables
    242,452       212,928  
Inventory
    2,633,971       1,671,226  
Prepaid expenses and other current assets
    847,344       1,078,026  
Total current assets
    13,376,512       11,178,494  
                 
Finance receivables, less current portion
    339,341       121,624  
Property and equipment, net
    4,511,889       2,081,909  
Intangibles, net
    3,810,653       4,845,053  
Goodwill
    7,663,208       7,663,208  
Other assets
    146,821       90,090  
Total assets
  $ 29,848,424     $ 25,980,378  
                 
Liabilities and shareholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 4,570,730     $ 3,794,691  
Accrued expenses
    1,869,367       1,393,356  
Current obligations under long-term debt
    344,652       494,850  
Total current liabilities
    6,784,749       5,682,897  
                 
Long-term debt, less current portion
    251,503       325,209  
Total liabilities
    7,036,252       6,008,106  
                 
Commitments and contingencies (Note 14)
               
                 
Shareholders’ equity:
               
Preferred stock, no par value:
               
Authorized shares- 1,800,000 Series A convertible preferred- Authorized shares- 900,000 Issued and outstanding shares-  444,468 and 510,270, respectively (liquidation preference of $14,079,523 and $15,451,307, respectively)
    3,148,676       3,614,554  
Common stock, no par value: Authorized shares- 640,000,000 Issued and outstanding shares-  25,497,155 and 15,423,022, respectively
    209,958,552       194,948,693  
Accumulated deficit
    (190,295,056 )     (178,590,975 )
Total shareholders’ equity
    22,812,172       19,972,272  
Total liabilities and shareholders’ equity
  $ 29,848,424     $ 25,980,378  

See accompanying notes.

 
F-2


USA Technologies, Inc.
Consolidated Statements of Operations

   
Year ended June 30
 
   
2010
   
2009
   
2008
 
                   
Revenues:
                 
Equipment sales
  $ 6,464,006     $ 6,158,017     $ 12,384,870  
License and transaction fees
    9,307,100       5,862,106       3,718,676  
Total revenues
    15,771,106       12,020,123       16,103,546  
                         
Cost of equipment
    4,049,433       4,490,519       9,703,474  
Cost of services
    6,861,642       4,680,087       2,981,218  
Gross profit
    4,860,031       2,849,517       3,418,854  
                         
Operating expenses:
                       
Selling, general and administrative
    14,885,685       15,183,847       18,643,215  
Depreciation and amortization
    1,570,043       1,583,426       1,923,491  
Total operating expenses
    16,455,728       16,767,273       20,566,706  
Operating loss
    (11,595,697 )     (13,917,756 )     (17,147,852 )
                         
Other income (expense):
                       
Interest income
    85,144       282,930       877,159  
Interest expense
    (60,942 )     (96,992 )     (147,200 )
Total other income, net
    24,202       185,938       729,959  
Net loss
    (11,571,495 )     (13,731,818 )     (16,417,893 )
Cumulative preferred dividends
    (735,139 )     (772,997 )     (780,588 )
Loss applicable to common shares
  $ (12,306,634 )   $ (14,504,815 )   $ (17,198,481 )
Loss per common share (basic and diluted)
  $ (0.55 )   $ (0.95 )   $ (1.21 )
Weighted average number of common shares outstanding (basic and diluted)
    22,370,068       15,263,788       14,158,298  

See accompanying notes.

 
F-3


USA Technologies, Inc.
Consolidated Statements of Shareholders’ Equity

   
Series A
Convertible
Preferred Stock
   
Common
Stock
   
Accumulated
Deficit
   
Total
 
                         
Balance, June 30, 2007
  $ 3,686,218     $ 172,822,868     $ (148,424,880 )   $ 28,084,206  
Issuance of 886,908 shares of common stock to an accredited investor at varying prices per share, less issuance costs of $1,410
          5,671,847             5,671,847  
Issuance of 2,142,871 shares of common stock to an accredited investor at $7.00 per share, less issuance costs of $1,012,597
          13,987,500             13,987,500  
Exercise of 58,543 warrants at $6.40 per share resulting in the issuance of 58,543 shares of Common Stock
          374,675             374,675  
                                 
Retirement of 650 shares of common stock
          (7,138 )           (7,138 )
Issuance of 31,500 fully-vested shares of common stock to employees and vesting of restricted shares granted under the 2007-A Stock Compensation Plan
          221,953             221,953  
Reclassification of charges from Long-Term Equity Incentive Program for Fiscal Year 2007 to a share-based liability until settlement
          (599,311 )           (599,311 )
Issuance of 225,249 net shares of common stock for settlement of the Long-Term Equity Incentive Program liability for Fiscal Year 2007
          1,189,222             1,189,222  
Charges incurred in connection with stock options
          71,488             71,488  
                                 
Net loss
                (16,417,893 )     (16,417,893 )
                                 
Balance, June 30, 2008
  $ 3,686,218     $ 193,733,104     $ (164,842,773 )   $ 32,576,549  

See accompanying notes.

 
F-4


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

   
Series A
Convertible
Preferred
Stock
   
Common
Stock
   
Accumulated
Deficit
   
Total
 
                         
Retirement of 162,599 shares of common stock
  $     $ (375,584 )   $     $ (375,584 )
Retirement of 10,122 shares of preferred stock
    (71,664 )           (16,384 )     (88,048 )
Issuance of 56,487 fully-vested shares of common stock to employees and vesting of shares granted under the 2007-A Stock Compensation Plan
          284,117             284,117  
Issuance of 239,253 fully-vested shares of common stock to officers and employees and vesting of shares granted under the 2008 Stock Incentive Plan
          1,040,526             1,040,526  
Issuance of 134,611 net shares of common stock for settlement of the Long-Term Equity Incentive Program liability for Fiscal Year 2008
          266,530             266,530  
                                 
Net loss
                (13,731,818 )     (13,731,818 )
                                 
Balance, June 30, 2009
  $ 3,614,554     $ 194,948,693     $ (178,590,975 )   $ 19,972,272  

See accompanying notes.

 
F-5


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

   
Series A
Convertible
Preferred
Stock
   
Common
Stock
   
Accumulated
Deficit
   
Total
 
                         
Retirement of 5,113 shares of common stock
  $     $ (9,668 )   $     $ (9,668 )
Retirement of 65,802 shares of preferred stock
    (465,878 )           (132,586 )     (598,464 )
Issuance of 40,000 fully-vested shares of common stock to officers and employees and vesting of shares granted under the 2008 Stock Incentive Plan
          87,354             87,354  
Issuance of 7,285,792 shares of common stock at $2.00 per share, less issuance costs of $1,613,425
          12,958,159             12,958,159  
Issuance of 2,753,454 shares of common stock at $0.90 per share, less issuance costs of $504,095
            1,974,014               1,974,014  
Net loss
                (11,571,495 )     (11,571,495 )
                                 
Balance, June 30, 2010
  $ 3,148,676     $ 209,958,552     $ (190,295,056 )   $ 22,812,172  

See accompanying notes.

 
F-6


USA Technologies, Inc.
Consolidated Statements of Cash Flows

   
Year ended June 30
 
   
2010
   
2009
   
2008
 
OPERATING ACTIVITIES:
                 
Net loss
  $ (11,571,495 )   $ (13,731,818 )   $ (16,417,893 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Charges incurred (reduced) in connection with the vesting and issuance of common stock for employee and officer compensation
    87,354       1,324,643       (377,358 )
Charges incurred (reduced) in connection with the Long-term Equity Incentive Program
    43,171       (375,866 )     1,479,479  
Charges incurred in connection with stock options
                71,488  
Loss on disposal of property and equipment
    25,059              
Depreciation, $247,772 of which is allocated to cost of services for the year ended June 30, 2010
    783,415       632,408       686,891  
Amortization
    1,034,400       1,040,379       1,236,600  
Bad debt expense (recovery)
    (506 )     (17,158 )     137,931  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (579,863 )     2,032,772       (1,352,404 )
Finance receivables
    (247,241 )     489,211       (213,747 )
Inventory
    (3,468,027 )     627,776       734,790  
Prepaid expenses and other assets
    337,672       181,114       (423,612 )
Accounts payable
    776,039       (210,858 )     112,242  
Accrued expenses
    432,840       (470,283 )     731,539  
                         
Net cash used in operating activities
    (12,347,182 )     (8,477,680 )     (13,594,054 )
                         
INVESTING ACTIVITIES:
                       
Purchase of property and equipment, net
    (520,835 )     (264,863 )     (572,278 )
Net proceeds (purchases) from redemption/sale of available-for-sale securities
          6,875,000       (525,000 )
                         
Net cash provided by (used in) investing activities
    (520,835 )     6,610,137       (1,097,278 )

See accompanying notes.

 
F-7


USA Technologies, Inc.
Consolidated Statements of Cash Flows (Continued)

   
Year ended June 30
 
   
2010
   
2009
   
2008
 
FINANCING ACTIVITIES:
                 
Net proceeds from the issuance (payments for retirement) of common stock and exercise of common stock warrants
  $ 14,922,505     $ (375,584 )   $ 20,026,884  
                         
Payments for retirement of preferred stock
    (598,464 )     (88,048 )      
Proceeds from the issuance of long-term debt
    7,500             332,740  
Repayment of long-term debt
    (607,462 )     (891,254 )     (861,445 )
                         
Net cash provided by (used in) financing activities
    13,724,079       (1,354,886 )     19,498,179  
                         
Net increase (decrease) in cash and cash equivalents
    856,062       (3,222,429 )     4,806,847  
Cash and cash equivalents at beginning of year
    6,748,262       9,970,691       5,163,844  
Cash and cash equivalents at end of year
  $ 7,604,324     $ 6,748,262     $ 9,970,691  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid for interest
  $ 63,883     $ 97,385     $ 168,332  
Equipment and software acquired under capital lease
  $ 17,337     $ 424,612     $ 262,701  
Equipment and software financed with long-term debt
  $ 195,000     $     $  
Prepaid insurance financed with long-term debt
  $     $ 225,785     $ 203,777  
Prepaid software licenses and maintenance financed with long-term debt
  $     $ 93,398     $  
Disposal of property and equipment
  $ 581,124     $     $  
Reclass of inventory to fixed assets for rental units
  $ 2,505,282     $     $  

See accompanying notes.

 
F-8


USA Technologies, Inc.
Notes to Consolidated Financial Statements

1. BUSINESS

USA Technologies, Inc. (the “Company”) was incorporated in the Commonwealth of Pennsylvania in January 1992. The Company is a leading supplier of cashless, remote management, reporting and energy management solutions serving the unattended Point of Sale market. Our networked devices and associated services enable the owners and operators of everyday, stand-alone, distributed assets, such as vending machines, kiosks, personal computers, photocopiers, and laundry equipment, the ability to remotely monitor, control and report on the results of these distributed assets, as well as the ability to offer their customers cashless payment options. As part of our Intelligent Vending™ solution, our Company also manufactures and sells energy management products which reduce the electrical power consumption of various existing equipment, such as refrigerated vending machines and glass front coolers, thus reducing the electrical energy costs associated with operating this equipment. The Company’s customers are principally located in the United States.

The Company has incurred losses from its inception through June 30, 2010 and losses have continued through August 2010 and are expected to continue during fiscal year 2011. The Company’s ability to meet its future obligations is dependent upon the success of its products and services in the marketplace and the available capital resources. Until the Company’s products and services can generate sufficient operating revenues, the Company will be required to use its cash and cash equivalents on hand, as well as raise capital to meet its cash flow requirements including the issuance of Common Stock and the exercise of outstanding Common Stock warrants. Note 15 details subsequent events related to product deployment and capital resources.

2. ACCOUNTING POLICIES

CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Stitch Networks Corporation (“Stitch”) and USAT Capital Corp LLC (“USAT Capital”). All significant intercompany accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

CASH EQUIVALENTS

Cash equivalents represent all highly liquid investments with original maturities of three months or less. Cash equivalents are comprised of certificates of deposit and a money market fund. The Company maintains its cash in bank deposit accounts, which may exceed federally insured limits at times.

AVAILABLE-FOR-SALE SECURITIES

The Company accounts for investments in accordance with ASC 320, "Investments - Debt and Equity Securities". Management determines the appropriate classifications of securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of shareholders’ equity in accumulated other comprehensive income (loss). If the investment sustains an other-than-temporary decline in fair value, the investment is written down to its fair value by a charge to earnings.

The Company’s available-for-sale securities consisted of auction rate securities (“ARS”). During the year ended June 30, 2009, the ARS broker-dealer purchased the remaining $6,875,000 of the Company’s ARS at par. As such, there were no unrealized losses recorded in the year ended June 30, 2009 in connection with these investments. As of June 30, 2010 and 2009 there were no ARS held by the Company.

ACCOUNTS RECEIVABLE

Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts. The Company estimates doubtful accounts for accounts receivable and finance receivables based on historical bad debts, factors related to specific customers’ ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when management determines the balance is uncollectible and the Company ceases collection efforts. Management believes that the allowance accrued is adequate to provide for its estimated credit losses.

 
F-9


USA Technologies, Inc.
Notes to Consolidated Financial Statements

2. ACCOUNTING POLICIES (CONTINUED)

FINANCE RECEIVABLES

The Company offers extended payment terms to certain customers for equipment sales. Through June 30, 2009 payment terms consisted of fixed term notes. During the year ended June 30, 2010 the Company started offering customers its Quick Start Program. In accordance with ASC Topic 840, “Leases”, agreements under the Quick Start program qualify for sales-type lease accounting. Accordingly, the future minimum lease payments are classified as finance receivables in the Company’s consolidated balance sheets. Notes receivable or Quick Start leases are generally for a 36 month term. Finance receivables are carried at their contractual amount and charged off against the allowance for credit losses when management determines that recovery is unlikely and the Company ceases collection efforts. The Company recognizes a portion of the note or lease payments as interest income in the accompanying consolidated financial statements based on the effective interest rate method.

INVENTORY

Inventory consists of finished goods and packaging materials. The Company’s inventory is stated at the lower of cost (average cost basis) or market.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Property and equipment are depreciated on the straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on the straight-line basis over the lesser of the estimated useful life of the asset or the respective lease term.

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. During 2009 and 2010, we experienced a decline in our market capitalization due to a decline in our stock price. As of June 30, 2010, our market capitalization was less than our book value and as of September 17, 2010 it was slightly higher than book value. We believe the decline in our stock price has, in part, been influenced by the current national credit crises and national economic recession. We believe that it is appropriate to view the current credit crisis and recession as relatively temporary in relation to reporting units that have demonstrated long-lived / enduring franchise value. Accordingly, we believe that a variance between market capitalization and fair value can exist and that difference could be significant at points in time due to intervening macroeconomic influences. 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, 2010, April 1, 2009 and April 1, 2008.

Patents, trademarks and the non-compete agreement are carried at cost less accumulated amortization, which is calculated on a straight-line basis over their estimated economic life. The Company reviews intangibles 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. As of June 30, 2010 and 2009, the Company has concluded there has been no impairment of patents or trademarks. As of June 30, 2009 the non-compete agreement is fully amortized; and there was no impairment of the non-compete agreement as of June 30, 2008.

IMPAIRMENT OF LONG LIVED ASSETS

In accordance with ASC 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. The Company has concluded that the carrying amount of long-lived assets is recoverable as of June 30, 2010 and 2009.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable, finance receivables-current portion, other current assets, accounts payable and accrued expenses reported in the consolidated balance sheets equal or approximate fair value due to their short maturities. The fair value of the Company’s long-term finance receivables and long-term debt approximates book value as such instruments are at market rates currently available to the Company.

 
F-10


USA Technologies, Inc.
Notes to Consolidated Financial Statements

2. ACCOUNTING POLICIES (CONTINUED)

CONCENTRATION OF CREDIT RISK

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 52% and 32% of the Company’s accounts and finance receivables at June 30, 2010 and 2009, respectively, were concentrated with two (28% with one and 24% with another) and one customer(s), respectively. Approximately 11%, 11%, and 61% of the Company’s equipment sale revenues for the years ended June 30, 2010, 2009 and 2008, respectively, were concentrated with one, one, and two (34% with one and 27% with another) customer(s), respectively. Approximately 52%, 44%, and 44% of the Company’s license and transaction processing revenues for the years ended June 30, 2010, 2009 and 2008, respectively, were concentrated with two (35% with one and 17% with another), one, and two (27% with one and 17% with another) customer(s), respectively.  The Company’s customers are principally located in the United States.