Good morning, ladies and gentlemen. And welcome to the USA Technologies First Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] Also as a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Monica Gould, Investor Relations for USA Technologies. Please go ahead.

Thank you, Whitney. And good morning, everyone. Welcome to the USA Technologies’ First Quarter Fiscal 2020 Earnings Conference Call. With me on the call this morning are Don Layden, Chairman and Interim Chief Executive Officer and Glen Goold, Interim Chief Financial Officer. Before we begin today’s call, I would like to remind you that all statements included in this call, other than statements of historical facts, are forward-looking in nature. 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 other 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 non-GAAP financial measures, a presentation of the most directly comparable GAAP financial measures and the reconciliation between these non-GAAP financial measures, as well as the most comparable GAAP financial measures can be found in our press release issued earlier this morning, which has been posted on the Investor Relations section of our website at www.usatech.com. And with that, I’d now like to turn the call over to Don Layden. Don?

Thanks, Monica, and good morning, everyone. Thank you all for joining today’s call. Having just completed my third week as CEO, I’ve now had the opportunity to meet with many of our top customers and employees. These meetings have been very productive and it confirmed that our customers are pleased with the USAT solutions they have deployed, which have enabled them to increase revenue and lower their operating costs. Through our discussions, we’ve also identified some areas for improvement to help us do an even better job serving our customers and I’ll discuss some of those later in my remarks. First, I’d like to review a few key highlights of our first quarter of fiscal 2020. We are pleased to report a solid first quarter performance led by a resumption of strong revenue growth both year-over-year and sequentially. Total first quarter revenue was a record $42.1 million reflecting a 26% year-over-year and 10% sequential growth from the fourth quarter of fiscal 2019. Revenue growth was driven by the addition of 900 new customers and 46,000 net new connections which bring our total connection count to over 1.2 million. Importantly, we continue to have 100% customer retention. Our unique value proposition remains compelling to customers, both large and small, and this is reflected in our continued ability to maintain our industry leadership position, serving almost 19,000 customers while winning new business and enhancing the competitiveness of our offerings. For example, USAT was recognized by Retail CIO Outlook in March as the Top 10 Retail Payment Consulting/Services Company for 2018 and in August as a Top 10 Retail Kiosk Solution Provider further validating the leading innovations we offer in self-serve retail and how our best-in-class end-to-end payment and logistics system is enabling operators to connect with consumer preferences and manage, simplify and…

Thanks Don. And I'll echo the thanks to everyone for joining the call. Good morning. I will start by providing an update on some of the key financial highlights since our last earnings call. Certainly recognize that it's been some time since our last earnings call, we appreciate your patience. We're excited that we can now dialogue with you in this way and have these communications. After the financial highlights since our last earnings call, I’ll review our financial and operating performance for the first quarter of 2020 of our fiscal year 2020. And I'll conclude with an outlook for the full fiscal year 2020. In October, we reported our financial and operating results for the fiscal year 2018 and 2019. And we completed our restatement of certain select financial data for fiscal year 2015, 2016 and 2017 and quarterly periods from September, 2016 to March, 2018. As a result of these filings and our Q1 report that will come out later today, we're pleased to report that we are now current on our periodic filing requirements. We made a number of improvements to our control environment. We have enhanced our internal compliance through the creation of a compliance committee of the board of directors and hired a Chief Compliance Officer who reports directly to the committee. Now these additions have provided great value to our company already and we continued to seek improvements in these areas. Additionally, we took significant steps in improving our financial position. As subsequent to quarter-end, we entered into an equity financing and debt arrangement with Antara Capital that will support our operating activities. Under the agreement, we received approximately $20 million from the sale of our common stock in a private placement and we entered into a commitment for a $30 million senior secure…

Thanks Glen. Before I open up the line for questions, I'd like to briefly address the public statements made by one of our shareholders, Hudson Executive Capital. Through the effect that intends to nominate several individuals to stand for election to the board of directors. As you have seen from the press releases issued by the company, members of the board and management have engaged in good faith discussions with Hudson and we continue to be open to a constructive dialogue. The purpose of today's call, however is to discuss our earnings and as such, I would ask that you keep your questions confined to our earnings for the quarter. With that, we can open up the line for questions.

[Operator Instructions] Your first question is from George Sutton [Craig-Hallum].

Good morning. This is Adam on for George. Thanks for taking my questions. Don and Glen, I just wanted to get a little clarification. You talked about reducing OpEx but as well adding different verticals. Could you go into a little more detail about the balance there between growth and profitability?

I mean, we have focused on both areas certainly with our cost structure and our struggle historically been positive on our operating income. We have immediately looked at some improvements that we can readily make on our SG&A line. That is a focus of ours, but at the same time, the improvements that we are seeking to make are in no way impacting our ability to grow. We have very deliberate strategies in place that are being executed to help us explore, further expanding our services into our white space in our market as well as, as Don has mentioned, explore other vertical adjacencies that we have. So these are in process, we continued to pursue them, but they're really dual paths that we are trying to make improvements in both areas. And it's certainly possible to do.

Let me just add some color to Glen's answer and address part of the implication, I think in your question that moving into new verticals is a costly proposition. As we expand the capabilities of our products, we have had initiatives to be able to address additional vertical markets for some period of time. And so what we're now seeing is the conclusion of that product development and sales cycle, generating some returns on investments made in earlier periods. And in addition, we believe that the vertical markets that we can continue to attract will require a relatively low product investment to enter into those markets. So those are the markets that we're pursuing most aggressively.

Great. Thank you. And then in terms of getting relisted on the NASDAQ, what items are you already aware of? Where do you feel that you sit in that process so far and then does that also include holding an annual meeting?

So let me answer the first part. We are not aware of the remediation requirements or conditions that NASDAQ may impose. We're still going through the appeal process. We have to complete the appeal process before we can begin re-listing. We are – to some extent, we're in a little bit of uncharted waters and so we don't know exactly what NASDAQ may require. As you know, however, NASDAQ did impose a number of conditions during the remediation process and we suspect that they will have additional things that they may require us to do. And to the answer to your last question is yes, I expect that the NASDAQ requirements will include holding an annual meeting. We just want to make sure that we understand what other requirements may be imposed that may impact the annual meeting. So that we're prepared to address those at the same time and get us back on NASDAQ and provide liquidity back to our investors.

Great. And then just going through this process, especially considering other vertical markets, has there been any discussion of a potential M&A?

Some of you know my background, you know that I've spent my entire career doing deals. And so I think about doing deals in my sleep. And I suspect that we will continue to have conversations internally and externally about whether that's an opportunity for the company.

Great. Thank you.

Your next question is from Jaeson Schmidt [Lake Street Capital Markets].

Hey guys, thanks for taking my questions. Just wondering if you could comment on what you're seeing from a competitive landscape and more specifically if you've seen your competitors become more aggressive in pricing over the last year?

Yes. The competitive market remains very strong. We are clearly the leader in vending, but particularly in some other vertical markets. We do see very strong competition in those markets and we see a very strong competition in the global markets as well.

Okay. And can you just comment on how you're thinking about the cross-selling opportunities for the Cantaloupe offering today?

Sure, those efforts have been ongoing. We intend to continue those efforts and frankly to expand their sales resources to take advantage of those.

And the last one for me and I'll jump back into queue. Your comments on expanding into additional vertical markets, what specific markets outside your core, are you most excited about or you think provide the biggest opportunity for the company?

Yes, I think that we're continuing to see strong growth in the micro-market area. And I think that our software solution is particularly well suited to that market and we need to continue to find strong partners so that we can deliver our software solution into that space. I do think that the entertainment space, which we closed our first deal in is – has a very strong opportunities. When we also think that a number of our operators have a position in other vertical markets that we ought to be able to cross-sell into those vertical markets. And we're looking very hard at that, once we have a customer relationship to expand the wallet share we have with those customers is a high priority for us.

Okay. Thanks a lot.

[Operator Instructions] The next question is from Mike Latimore [Northland Capital Markets]

Great, thanks. Yes, it's nice to have an earnings call again. Very good. So on the SG&A comment, I guess, I think you've talked about getting the $8 million in annualized savings. So should we think about that kind of $18.2 million SG&A going to $16.2 million or is that – is it comment sort of incremental to the professional services changes that might occur?

I would think that's incremental, Mike. I think the $18.2 million was kind of a high point with our audit restatement project and the amount of cost that we had to incur to go through that project. Those costs will come significantly down. Those are outside of the $2 million that Don was mentioning. Keep in mind that the $2 million is annualized, so I don't expect that just a straight $2 million that will come off as to SG&A line in Q2. That'll be benefited from the changes we're making. The largest downturn that you'll see from Q1 to Q2 is a reduction in professional service fees, primarily related to our audit activity.

Right. So it sounds like, just to be clear, the $8 million in annualized savings is, excuse me, is – are you saying there'll be incremental savings beyond that as additional professional services come down? I'm just trying to get a sense of where the – like where the SG&A line might be by year-end, let's say in the fourth quarter?

Well, I think quarterly our run rate is roughly $11 million to $12 million. Our SG&A line, I think you'll see that will – I think we'll be a little higher than that in Q2, but we'll get down to that same rate Q3 and start improving on that starting in Q4.

So then just – again, just to be clear, that $18.2 million should be somewhere, what, around 11 exiting in year 10 or 11.

By the end of the year?

Yes.

Yes, I would say by Q4, I think that’s a good estimate.

Okay, got it. And then on the, license and transaction gross margin, it improved from the fourth quarter sequentially. I guess, can you give a little bit of explanation of why that occurred and then going forward, you talk about it being stable, I guess, how should we think about the stability there given, typically the transaction volumes grow pretty rapidly.

Yes. So, one of the drivers of margin is product mix as we add connections and add our monthly, our software to our connection base, that’s our high margin revenue line. And as that product mix continues with additional connections to our service that’s driving it up. I will say that we have activities in place to pursue cost improvements, on our license and transactioning fees. And we expect these dialogues that we’re having with our supply chain, with some of the services that go into our license and transactioning line of revenue to improve over this year. So, with the improvement in the cost structure as well as in additional, connections with our monthly service fees that we are enhancing and selling into the market, that’s what’s driving the margin improvement.

Got it.

You are correct. That transaction processing is certainly increasing as well. So that is a dynamic that does impact our L&T margin for sure.

Okay. And then, in terms of the connection guidance for the year, what percent of that would be sort of the Cantaloupe, VMS Software versus Cashless or is it all kind of considered cashless?

Well, it’s both. It’s both Cashless and VMS. We have not gone through the exercise of quantifying and breaking out the full cap between the two. To be honest, as we’re going forward, we look at our company as one company and now we have not spent a lot of time bifurcating what revenue is coming from historical Cantaloupe activity versus, we’re two years beyond the acquisition. We look at ourselves as one unified company at this point. To your point though, we do have, these different connections that we sell and we are seeking to add the VMS type services to our platform. And as a deliberate strategy that we have, we are seeking to add those services to our existing connection base. So that is certainly part of the guidance that you’re referring to Mike.

Great. And just last one. Do you have the amount, the dollar amount of transaction volumes in the quarter?

I do not have that at the tip of my tongue. It’s just not something I came prepared with. We can get that though.

Okay, thanks a lot.

Yes.

Your next question is from Cris Kennedy.

Hey guys, it’s Cris in for Bob Napoli. Thanks for taking the question. Any update on your long-term margin targets? The prior management team had some targets out there. Any thoughts on those? Thank you.

Yes, so I think, Cris in the previous, guidance in this regard that we have sent out is long-term range, 30% to 35% gross margin overall, license and transaction fees 40% to 45%. I think in the near-term we’ll be hard pressed, especially on the total gross margin line to hit that 30% to 35%. I think, for the near-term, somewhere in the 26% perhaps 30% as we improve some of the cost structure of our L&T revenue line. Similarly, I think the 40% to 45% is a little aggressive. I think for the near-term, I would say, 36% to 38% is more realistic. I think as we continue to work for cost improvement and efficiencies that we are working on, we can perhaps improve that guidance upwards. But in the near term, that’s where I see it.

Okay. And then anything on EBITDA margins longer term?

Yes, so I think on the EBITDA the previous regime had guided to 15% to 18%. Again, I think that’s a little aggressive. If you take our $10 million to $11 million on a $180 million of revenue that’s in the low-single digits, I think guiding to the, I’m sorry, the high-single digits, I think guiding to 6% to 10% in the near-term is probably where I would say, we’re looking again in the near term, certainly not long-term where I think we want to be and we’re putting in place some strategies to improve that. But near term, I say that’s where we’re at.

Okay, great. Thanks for taking the question.

Yes.

I am showing no further questions at this time. I would now like to turn the conference back to Don Layden, CEO.

Thank you. And thanks for everybody for participating in today’s call and for the thoughtful questions. I strongly believe in our ability to make it easy and efficient for customers to adopt and deploy our leading technology, continues to provide us with a unique competitive advantage. We remain a trusted brand name known for quality, reliability and innovation. And our market leading installed base provides a powerful foundation from which to continue to expand and grow our business. As we look ahead, we’re focused on reaching new customers, expanding our footprint within our existing customer base, all while leading the industry in terms of innovation and customer service. I share with you my five priorities, get back on NASDAQ, lower expense base, continue to expand into new verticals, love our customers with even better customer service and improve our already strong capital position through the sale of receivables. I think you’ll continue to see us do that and execute on those five priorities. Thanks again for joining us today and for your continued support. We look forward to updating you on our progress, next quarter. Thanks.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.