USA Technologies: A Proxy Fight To Control The Future Of A Promising Payment Processor

| About: USA Technologies, (USAT)

USA Technologies (NASDAQ:USAT) is in the middle of a proxy contest to control the board of directors of the company. The company is a leading provider of cashless payment solutions (payment processing) and other products, primarily to the vending industry. The dispute is between the current management team, led by CEO Stever Herbert, and a group led by shareholder advocate Bradley Tirpak, called Shareholder Advocates for Value Enhancement (S.A.V.E.). Each side believes their business plan is the best path for the company to increase shareholder value. The fight has been protracted and ugly, culminating at the end of the month with a proxy vote. The following is a summary of the arguments by the respective parties:

USA Technologies

  • Believes the current strategy it is using is working.
  • A heavy reliance on a customer acquisition strategy called JumpStart to increase the number of connections of vending machines using USA Technologies product, specifically the e-Port solution.
  • JumpStart has helped add 85,000 connections and tripled the number of customers (2,050) since initiating the program.
  • JumpStart is well positioned for the future with 75,000 connections using the NFC enabled technology.
  • USA Technologies is innovating by introducing new platforms like prepaid, customer loyalty programs, two tiered pricing, and digital media.
  • USA Technologies announced better than expected first quarter financial results on May 2, 2012, with adjusted EBITDA improving by $1.2 million to over $300K for the quarter.
  • The company announced an increase in connections in the second quarter and believe results should be better in this quarter than the 1st quarter of 2012.
  • Management believes USA Technologies will achieve bottom line profitability by the end of 2012.
  • The assumptions included for profitability are:
  1. No change in the fair value of USA Technolgies Warrants.
  2. Customer connections stay at the same level of 155,000.
  3. The gross margin of the entire business stays the same or slightly increases.
  4. USA Technologies renews the existing agreement with VISA on the same terms (it expires in October of 2012). In addition, regulated interchange fees from Visa and Mastercard will return to rates prior to the passage of the Durbin Amendment.
  5. USA Technologies can implement two tiered pricing with customers so an increase in interchange can be passed along.
  6. The Proxy Contest has no effect on customers.
  • Leading Proxy Advisor Firms ISS and Glass-Lewis are voting for the current management group.

Shareholder Advocates for Value Enhancement

The dissident investment group and its nominees for the board own 9.8% of USA Technologies common stock, or 3,196,739 shares. As a result, the group has a large financial interest in the company growing into a strong profitable business. There are several key points which the S.A.V.E. group emphasize in its efforts for control of the company:

  • JumpStart gives away hardware at zero cost to customers with no long term commitment. In the mobile phone industry, Apple uses a model which requires a two year financial commitment by customers.
  • JumpStart is causing significant cash burn at USA Technologies, with cash on hand reduced to $6.2 million from $13.0 million only 9 months ago.
  • S.A.V.E. believes higher functioning hardware with additional services being sold to existing customers is a quicker and more sustainable road to profitability.
  • USA Technologies connections per customers fell from 61.8-51.7, a total reduction of 16%. The fall shows that management is not succeeding in concentrating on repeat business by existing customers, versus adding new customers with E-ports.
  • S.A.V.E. believes current management has not emphasized vendor route management for existing customers as there is no end to end solution to help current vendors reduce costs and increase revenues.

USA Technologies management issued a press release investigating the past history of S.A.V.E. leader Bradley Tirpak. The report details Mr. Tirpak's past efforts as a dissident shareholder when he took control of Direct Insite Group (DIRI.OB). If Mr. Tirpak and his associates believe they can do a better job of leading USA Technologies than the current management, certainly their history and background as leaders of other companies is pertinent information for USA Technologies shareholders to consider.

As a current shareholder (I wrote a Seeking Alpha article about USAT in 2011), in evaluating the arguments made by both sides, a combination of both strategies is probably a good compromise for both parties. The USA Technologies business is growing and adding customers and connections at a rapid clip, aided by the e-Port solution. Connections per customer should also be a focus as well, in addition to making sure current customers have a robust solution which benefits both sides.

Instead of fighting each other with press releases to influence shareholders in the proxy vote, management and the S.A.V.E. group would better serve all parties by meeting and finding ways to work together to accelerate profitability and help USA Technologies achieve its potential. However, with respect to the proxy vote, my vote was with the current management as I think they have done a nice job in growing the business to its current state. Still, I do believe the S.A.V.E. group makes valid points about how to improve the business and they should be considered by the current management.

Disclosure: I am long USAT.

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