Good day, ladies and gentlemen, and welcome to the USA Technologies’ Third Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I’d now like to turn the conference over to Lauren Sloane.

Thank you. And good morning, everyone. This is Lauren Sloane, Investor Relations, USA Technologies. And welcome to the USA Technologies' third quarter 2016 earnings conference call. With me on the call this morning is Steve Herbert, Chairman and Chief Executive Officer and Lee Maxwell, Interim Chief Financial Officer of USA Technologies. Before we begin today’s call, I’d like to remind you that all statements included in this call other than the statements of historical fact are forward-looking statements. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including, but not limited to business, financial, market and economic conditions. A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included with our filings with the SEC and in the press release issued earlier this morning. Listeners are cautioned not to place undue reliance on any such forward-looking statements, which reflect management’s view only as of the date they are made. USA Technologies undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. This call will also include a discussion of certain non-GAAP financial measures that we believe are useful for among things evaluating USA Technologies' operating results. These non-GAAP financial measures are supplemental to and not a substitute for GAAP financial measures such as net income or loss. Details of these items and a reconciliation of these non-GAAP financial measures to GAAP financial measures can be found in our press release issued earlier this morning and on the Investor Relations page of our website at www.usatech.com. I’d now like to turn the call over to Steve Herbert. Steve, please go ahead.

Thank you, Lauren. And good morning, everyone. Thank you for joining us to discuss our third quarter results. USA Technologies drove record revenue in the quarter and made substantial progress toward our long-term goals, while also integrating an acquisition. We are encouraged by our connections and revenue performance, reinforcing the fact that USA Technologies is a high growth company with the compelling revenue model. Is clear that the growing adoption of our ePort Connect service continues to drive increasing amount of recurring revenue. Let's look more closely at our financial statements which demonstrate the company's continued growth and progress. During the third fiscal quarter, we had net connection adds of 32,000. 26,000 of which were organic and 6,000 from our acquisition. By comparison we added 14,000 a year ago and 20,000 last quarter, a 129% and add 60% increase respectively. Our customer count is now 10,825 and 91% of new connections during the quarter were from existing customers. Revenue of $20.4 million, a record high for USAT of which $14.7 million was in a recurring revenue line of licenses and transactions. Cash from operations was $4.3 million in large part a result of the continued success of our QuickStart leasing program. We are seeing continued accelerations for non-cash payment in the self served retail market. As evident not only by our substance of increases in connections but also by increases in transactions. Both number and dollar. We process more than 82 million transactions during the quarter consisting of more than $151million. And are now on annualized run rate of more than $600 million in transactions. We see a much more robust eco system for unattended retail than ever. Including delivering more value to each connect. We recently launched this service that exemplifies our strategy to add more value to each…

Thank you, Steve. Good morning, everyone. Let’s take a look at the numbers for the quarter. I will start by reviewing our third quarter fiscal 2016 results before I turn to our outlook for fiscal year 2016. To echo what Steve said, we added 38,000 gross connections in the third quarter compared to 24,000 gross connections in Q3 of last year. Net connections for the quarter totaled 32,000 compared to 14,000 in the third quarter of last year, representing a 129% increase. We added 200 new customers ending the quarter with a total of 10,825, a 21% increase in customer count from the March quarter of 2015. We continue to drive increases in connections and revenues primarily from deeper penetration of existing customer accounts. It’s also worth highlighting that we continue to grow both in terms of the number and a dollar value of transactions. This quarter we had 82 million transactions representing $151 million in transaction volume increases of 49% and 54% respectively from last year’s third fiscal quarter. Growth was driven by a year-over-year increase in total connections to our ePort Connect Service, which included 600,000 connections we obtained with the acquisition of VendScreen, driving our total connections to 401,000 which represents a 33% increase from the 302,000 in the same quarter at the end of the same quarter last year. Approximately 91% of gross new connections came from existing customers which is a strong indication to us of the increasing adoption by additional connections by our current customer base. Total revenue for the third quarter was a record $20.4 million, an increase of 33% compared to $15.4 million recorded in the third quarter of fiscal year 2015. License and transaction fees were $14.7 million compared to $11.1 million in the year-ago quarter, representing a 33% increase. These…

Thank you very much, Lee. Thank you, everyone for joining us this morning. In closing, in the third quarter we continue to build USAT and expand our leadership in the unattended retail payments industry. As Lee indicated, we are expecting a strong fourth quarter with improving profitability as compared to this quarter. As a result, we expect to surpass our initial revenue and connection expectations for 2016. We believe we are seeing an inflection point in the business and USAT is aggressively positioning itself to remain the clear leader for cashless payment in the self served retail market. With that, let me open the call for questions.

[Operator Instructions] Our first question is from George Sutton of Craig Hallum. Your line is open.

Thank you. Steve, we've discussed the inflection that the industry is undergoing for the last few quarters and this quarter, obviously, demonstrates continuation of that. Could you discuss in a broader context longer-term context, what you would anticipate over the next few years? And I think you've used quick service restaurants as an example of kind of where that curve might kick in. Where do you think we are relative to that? Thanks.

George thanks for the question. Regarding the inflection point and where we see the industry is headed, ultimately if you look at this over the next number of years, we believe this market is headed to 100% penetration. Of the self served retail market spending will probably get there first, but it's -- there is historical precedence for this. The quick serve restaurant industry is -- an industry that recently started off a number of years ago, started off with a number of locations that went cashless and then clearly rapidly moved to 100% penetration. In addition to that one of the parallels that we look at in the vending industry in particular is what happen with the implementation and I am dating myself I am sorry to everyone, but with implementation of bill validators or acceptors in the mid to late 80s, in the early days operators including myself back in the days of Pepsi, we believe that it was really the top locations that would take this new payment technology. And then we very quickly learned that it would be necessary and applicable and useful in 100% of the locations. So those are couple of examples of other markets that really lead us to believe that this market is headed to a 100% penetration over a number of years.

Got you. Thank you for that. You gave a little bit more detail on this call around your premium support services. And listed a number of different services, many of which we were aware of, several of which we were not. Can you just give us a sense of how much that's differentiated you in the market? And how typical is it for customers to take that when they're getting more aggressive with their programs?

Well, I'll start with the last question first how typical is it for a customer to take this. It's still -- right now the customer who wants to go to a 100% in a relatively rapid fashion is the exception not the rule. But the fact is that more and more customers are making that decision to go a 100%. So those customers who take on premium services are still a bit of an exception. And I am sorry the first question, George, could you repeat that?

Relative to premium support services. I'm just curious how much that's differentiated you in the industry? That's not something you were doing a year ago. And it seems to be a big differentiator.

Right. Well, it is. It's actually I think they are two things that are very important about it. One, it is the clear differentiator with our company. It's not something that others do in the industry. One simply because they haven't put such program together but another reason is they just don't have the experience. We have on boarded 11,000 customers in 400,000 locations. And we helped dozens of companies with rapid mobilization so we have a deep well of data which we call our knowledge base support from to help guide the effort and then we have this wealth of experience having done this many, many times. So it really does I believe set us apart in the industry in terms of helping our customers not only implement but better leverage this type of change for investment in their business. The other thing that I think is important to note and this is something that we believe as a company, our introduction of premium support services now whether as four quarters ago or five quarters ago, I can't remember exactly when we did it, I believe we had an impact on the industry in having that dialogue not only about going to a 100% and the benefits of doing so, but offering that tool to help customers get there. So in part I think our team can somewhat take credit for the inflection point that is occurring in the industry right now?

Thank you. The next question is from Mike Latimore of Northland Capital Markets. Your line is open.

Yes. Congratulations on the quarter, Steve. Great quarter. I guess just on the penetration opportunity, can you talk a little bit about the VendScreen service? What percent of the market do you think might take that over time?

Right. Well, I have used this expressive with you Mike in the fantasy world in which I live it would be a 100% right away because there is just so much value to be added there. However, being more realistic as we head into next fiscal year we are thinking somewhere in the 15% to 20% range. Now if we were saying the 20% ranges of all of our connections in the next fiscal year that would be a good start. If you think about where we would probably head next year on connections based upon what you just heard from Lee regarding the end of this year. That's not a small number. So that kind of our -- we are wrapping our heads around to 20% number. We will prepare ourselves for something larger but that's kind of what we are thinking.

Great. That would be a very rapid growth for VendScreen for sure. In terms of the adds in this quarter and I guess kind of the pipeline, are you seeing any mix shift among your customers? Are small midsize guys getting more active or large? Or is it the normal broad-based mix there?

Yes. I would say that I would say that in this particular quarter we had -- it really does vary. Yes, it really does vary. Some quarters we have a stronger SMB performance than others, meaning our smaller customers. But in this particular quarter with 91% of our business coming from existing customers and a number taking very large steps comparative to the past. I'd say in the third quarter we had a slight skew towards the larger customers. Now going into the fourth quarter and the first that might not necessarily be true. But in this particular quarter it feels like a little bit more of nod to the larger customers.

And then last question on margin. Gross margin on the license and transaction. Is this kind of a good number to think about going forward? Or do you see it inching up from there?

Well, I think we've said, if I recall what I've said last time, we are -- we want to continue to make our way a little bit north of there on L&T. So and we have some opportunities to do that. Not only with new services that we are bringing to market but with some efficiencies that we intend to effect with some of our partners who help us deliver the service.

Thank you. The next question is from Joshua Elving of Feltl. Your line is open.

Hi, good morning. So a couple -- just to kind of follow up on Mike's question. Just with regards to thinking about the licensed gross margin. I know specifically given various promotions and opportunities you see, perhaps there are times where you get more aggressive or less aggressive. Could you maybe talk a little bit about the competitive environment today? What you see out there? Do you see the landscape changing at all? If it is in fact a positive environment for you, would that lead to some of those margins creeping up over time?

Right. Well and thanks, thank you for the question. Regarding the competitive environment, it is one that obviously no one is going to let -- we have a very commanding share right now. No one is officially measuring it. I don't even want to throw out a number today but we have a very commanding lead in the market which by the way we don't take for granted. We continue to push the envelop in terms of the things that we do for customers in the service that we bring. All of that said, no one is going to let us cut a swath through this multi billion dollar market all by ourselves. So we anticipate a competitive environment that will be robust and ecosystem that will have more and more participants. That said, what I would say really during this fiscal year, we haven't seen any other major entrance other than the folks that we typically participate within the market. And it's interesting in that we both compete and cooperate with both of these companies Cantaloupe and Crane. Now, one word that you are using-- you used the word discounting and then kind of jumped to competitive activity, one of the things that I like to point out, and I think this as people read through our -- particularly our 10-K, when we make a concession on pricing whenever we might do that, it's more times than not it is strategic move to dig more deeply into a customer in terms of penetration. If you think about it the deeper we dig in as other entrance come into the marketplace, if customers have us in many thousands of locations, the chances of best of them pulling us out are probably going to decrease as we dig in. So really what I am trying to say or we may make a concession to pick up a strategic piece of business. And an example of that might be a Pepsi bottler or a Coke bottler or something like that. It maybe an important player in the kiosk space or in the parking space where we are trying to accelerate, we are trying to get that market to move as fast as vending, so our concession, any concession that we might make are really less reactive and they are more proactive in terms of continuing the position our company as the leader and that's firmly entrenched. I hope that helps.

That's great color. And I certainly didn't mean to suggest you were being reactive.

No. I didn't think -- I didn't think you were, I was taking the opportunity to make that point. So sorry to take liberties with your question.

Fair enough. And then on the SG&A line, if I strip out some of the one-time components of that, probably gets me to a little bit more of a normalized number around $5.5 million in the quarter. Should I take that number as a run rate number, assume it grows a little bit as revenue grows? And then potentially from there strip out some of the efficiencies Lee referenced? Is that the right way to think about it on a go-forward basis?

Josh. Hi, this is Lee. It's good question. We have and Steve has mentioned this before couple of times, we still have some one time charges that we will see in Q4. So that's modifies just stripping it out dollar for dollar I would say. And we are a growing company and any time the company grows you do need to grow your SG&A a little bit as well. There will be a decrease absolutely but we monitor that and we do what's required. There are things going both ways really. Decreasing because of the recurring charges going away but at the same time as we all know we are in the SOX 404 compliance mode and we do need to spend some money in order to comply and do that correctly. So if you take the full amount out I think it's probably inappropriate. At this point, there will be a reduction though obviously from where we are in Q3.

Thank you. The next question is from Gary Prestopino of Barrington Research. Your line is open.

Hi. Good morning, everyone. A couple of questions here on particularly on the equipment gross margin. I think this also came out forth in Q4, you signed a fairly big deal with a customer and there was some kind of incentive to take the ePort. Is that what happened here? I mean we're looking at a pretty big diminution of the gross margin on the equipment sales here.

Yes. Gary, it's Steve. I'll -- Lee may want to add something here but one of the pieces of information I think you all don't have access to that will come through in Q is there was an adjustment in the quarter a year ago of approximately $750,000 that actually helped equipment margin. So that something that contributes to the sort of the magnitude of the year-over-year change in equipment margins. So that was one thing that I believe affected that number. So it's not year-over-year as precipitous as it looks. That said, they were -- so if you take some reduced delta, there are still a change in equipment margins and as I mentioned we did see a fair amount of activity, a good amount of activity with our larger customers. And we along the way made a concession here there once again strategically to dig in more deeply with those existing customers. And I think it's -- yes, sorry go ahead.

No, that just plays into your strategy of getting the connections up. I'm just merely asking because even year over year, yes there's that $750,000 does add a negative comparison but then if you look at it sequentially as well it was down. So I just want to get an -- I'm just trying to get at why that was down so much in the quarter and if it has to do with the fact that you're accelerating connections and you had a big customer sign up, that's fine. That's what I want to get at.

Well, that certainly -- I say that with certainly have contributed to it. And candidly it's not -- it's something that's going to fluctuate. The mix is not -- we talked about a little while ago the mix is not always going to fall that way. So the answer to your question is that in large part you are right. That clearly is one of the contributors.

Okay. And then on the adjusted EBITDA calculation was there anything of one time in nature relating to VendScreen that you didn't back into the adjusted EBITDA number?

Not that we know. I mean we did pretty good analysis of all the ones that were nonrecurring. As I mentioned earlier there will be continuing to be a few in Q4 but we captured all that we know in Q3.

Okay. So a lot of that growth in SG&A in the quarter or some of that is related to VendScreen? Just -- and then you're doing some restructuring there and getting the SG&A down, so that's positive. So okay so a couple other questions here. In terms of the 6,000 connections that were added from the acquisition of VendScreen, did you have any opportunity to drive some more organic growth there? Or is it just too early to even talk about that since you didn't know it was that long?

Well, I am glad you asked that question. We sold everything we had which essentially got into business in February. And I believe to be somewhere between 1,000 and 1,200 units that we had on hand. We sold everything we had for the quarter. I expect as we ramp up production, remember if everyone remember VendScreen only had about 5,000 existing connections or rather -- so let's call it 6,000 but it compared to us it was not a lot. So they had produced a ton of devices so we are working very hard to ramp up that production. So for the next couple of quarters I would anticipate that we will be in a position essentially selling everything that we have. And then of course and answering Mike Latimore's question, you kind of heard Gary where we expected to go.

Okay. A couple more quick questions. Where do you stand on the third-party financing? You've got I think two entities that you're working with. How close are you to signing others? Do you need others? Are they close to being maxed out, the two existing ones that you have?

What I would say is that we have a very active effort in bringing on other lenders, other sources of leasing for our devices. And I think we'll probably be concluding sooner rather than later one or two of those -- one of our suppliers in that regard and Lee please correct if I use banks buys and sell things so many times, I believe one of our supplier was purchased by was BB&T. So they now have a new owner which is good and that they have bigger pockets, but we are going to a little bit of transition with them with their new ownership. So we are working on that as well. So we view that as a positive development.

Okay. And then just a couple more here. Do you -- if you start to displace your ePorts of your existing customer with the VendScreen product, what benefit does that bring to you from a revenue standpoint?

Gary, I am sorry you are going to have repeat that question. It sort of broke up.

Okay. Can you hear me now? What I'm asking is, you've got organic growth goals with VendScreen, but if you were to start replacing ePort's with the VendScreen on your existing clients, what benefit does that bring to you? I assume the transaction revenue stays the same or goes up slightly? What happens if you displace some of your existing ePorts?

Well, I am going to answer that in two parts. First of all, we have a -- when one removes -- we are not going to get into details today but when one removes an existing ePort and replaces it with an ePort Interactive, it has a substantive impact on that location. So what we know is that performance that we giving customers today markedly improve when you move to an interactive screen on multiple dimensions which is great. That's it. That's a terrific thing. All of that said our focus since -- let's call our penetration rate with our existing customers, somewhere between, I don't know 20% and 23%, let's call 23%. I don't want to spend a lot of time. Lee, I am going to use as an example, I don't want to spend a lot of time going back and retrofitting existing locations that are connected. We'd rather take them forward and say, Lee, you are going to get here is what we've learned from G92 interactive. Your result are going to improve on parameters a, b and c. So going forward this is something that you should seriously consider. We are going to focus on the new connections. And at some point we'll probably circle back with Lee to some of those initial installations.

Thank you. The next question is from Kevin Dede of Rodman. Your line is open.

Hi. Thanks for taking the question, Steve. Just going back to Gary's question on the rollout of interactive. Do you speak to that specifically with regard, I mean I know you offered a disclosure or disclaimer not wanting to go into much detail, but could you just talk a little bit about how your financing and pricing of that service might be different than what you're offering today? And when you think or whether or not you think you'll have to change those parameters? And offering your customers the standard ePort that you have now versus interactive?

Okay. I want to make sure; first of all, I didn't confuse everyone. I am glad you asked this question. When I mentioned that performance improves we had some test results that we will be putting out soon. That clearly indicates a change in performance a location -- when comparing a location with our G9 product which is cashless contact et cetera moving to interactive, a number of things happening including an increase in overall transactions and things like that. So there is an improved performance. Now moving over to your question regarding what the model might look like as we offer this to the marketplace. We've already gone out there and there are two things that are notably different about the model. The monthly fee will in most cases be higher because the customer for instance may say; I want nutritional information at point of sale. So if their monthly fee for having that nutritional information at point of sale will be some amount higher on a monthly basis to connect to the service. Remember, adding value to every connection. It's kind of like -- it's kind of somebody like adding a new channel to a network or whatever you are charging more money there. So first and foremost there will be a change in the monthly fee. The device itself is also more expensive. So the device itself will cost more and hopefully give us an opportunity to make a little bit more margin with what one would call a flagship product. So data pricing on hardware for us and in addition to that the ability to drive increased monthly revenue per connection.

Okay. You mentioned the work that you're doing with BB&T and converting one of your finance suppliers. Does that, in any way, hinder or do you expect it to hinder your marketing effort on equipment?

No. No. What I meant to communicate thee was that BB&T actually purchased one of the leasing companies that we were doing business with. So what that means is that you had an independent leasing company with a certain amount of resources to bring to bear with leasing funds and now they are owned by BB&T. So the good news is that they have deeper pockets and the other news is that we are simply working through that. They have new owners now. So we are working through that transition, going from doing business with a small leasing company to a bank. But it's something that we expect a net effect of that to be positive.

Okay. You've offered premium support now for a couple of quarters, Steve. Can you talk to the effect it's had on winning customers to taking more equipment and building your penetration within them? What's -- is there any way to sort of gauge how these customers are receiving that additional service?

The additional service of

The premium support. That you've offered lately.

Well, I have to say premium support has been a success in excess of our expectations. And it's something that we expect our customers to continue to enthusiastically embrace. If you believe what I said that this industry is going to go a 100% penetration, that's a lot of work for a lot of companies and they are going to need this type of help. So it's -- if something that a, we not only have an enthusiastic response to now but b, we are planning for the expansion of that services.

So is there any way to offer us any sort of metrics on gauging that penetration? How well your customer base has accepted it or is it something you are offering probably machine to machine basis or just on a customer basis?

Well, premium service is something that we offer on a customer by customer basis. So the typical candidate for a customer for premium services would be, Lee, I am going to use as example again, let say Lee has 5,000 machines in his market and he has may be 2,000 on our service and he wants to get the rest of the 5,000 on the service. And he wants to do so in a way that is efficient and is quick. We move in with premium services and we essentially help Lee's team manage through that process. And we engage everyone, Lee as the owner of the business all the way through to the accounting people, the marketing people et cetera. Everyone has the job to do and it's well thought out, well honed execution plan to get all of Lee's locations up and running. So it's typically a customer by customer basis. And that's a classic candidate. Someone who wants to move quickly and get to 100% penetration. The key motivator for someone like that is usually if there are a number of things on the list but usually it's the incremental net operating profit that Lee is seeing from his initial 2,000 locations. And he says to himself, I don't want to leave that money on the table anymore on the other 3,000 locations. And I want to move in order to realize that. The other big motivator I mean we sometimes talk about this on our call is mobile payment. Lee looks at that and he says, he thinks to himself how can I let consumer walk by 3,000 of my retail locations which these are the ones that don't accept any form of cashless. How can let them walk by two forms of cashless payment that I can't take. Credit and debit cards as well as mobile payment. So those are the two big motivators that make someone likely want to go from 2,000 to 5,000 quickly. That's -- candidly that's been the greatest benefit to us as mobile payment. It's made people want to move more quickly. And not those consumers who walk around the payment method they can't use.

One last question if I may, Steve. I known I'm pushing the envelope on time and I apologize. But this one is kind of interesting and it relates back to George's question early on and your effort to break into more verticals outside of vending vis-à-vis the expense I see in retail. And the pressure in those -- or for on those operators by minimum wage requirements. I noticed in Newark Airport, there seemed to be more attended -- unattended vending kiosks. And I just want an understanding from your perspective on how important it is to sort of put that same sort of land grab philosophy in place that you have on vending in, say, in unattended retail kiosk and how you think we can start monitoring your progress there?

Well, I'd say is that the dynamic that you mentioned, the dynamic you mentioned is something that everyone in the self served retail market, all of the customers that we do business with, whether is in vending or in kiosk and other markets, this is very much a topic of discussion what positive impact can we meaning the players in those industries, what can they expect in terms of growth as a result of increases in minimum wage. That is going to have some sort of positive impact. We don't know exactly what that would be. In terms of really the only way for us to measure, turning to your other question, the only way for us to measure our progress in the other vertical is essentially periodically we will be announcing deals that show progress in that regard and then obviously we should be looking at connections in some of those markets as the they continue to get more traction. Right now vending is getting a lot of attention because it's clearly hitting inflection point. But we continue to have concerted efforts to land customers in the kiosk space and some of these companies have global brands. I mean some of the top brands in the world. So what I would say there is stay tune.

Thank you. At this point, we do not have time for additional questions. I'll now turn the call back over to Mr. Herbert for closing comments.

Well, I wanted to thank everyone for taking the time today to join us for earnings call. We appreciate your interest in and support of our company and very much look forward to reporting out to you on our next call. Hope everyone has a great day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.