USA Technologies proxy fight doesn't faze new CEO

USA Technologies Inc., a technology leader in unattended retail that pioneered cashless payment and remote machine monitoring, faces resistance from certain shareholders looking to change the company's board of directors and management. Hudson Executive Capital LP, a shareholder that describes itself as a hedge fund focused on engaging with small to mid-cap public companies, has expressed its dissatisfaction with the existing board's efforts to improve the company's management and has initiated a proxy vote to create a new board and new management.

"Hudson Executive believes the board's blatant failure to impose controls, provide appropriate oversight and hold management accountable has cost shareholders dearly," Hudson stated in a Dec. 9, 2019 news release. "Rather than recruit top talent to move USAT forward, the board has relied on what we believe are a series of under qualified full-time and interim managers who have negatively impacted the company's performance, reputation and brand while paying themselves generous compensation packages. This practice continues despite the loss of hundreds of millions in shareholder value."

USA Technology's management, however, said it has strengthened its team with the recent addition of three c-suite level executives and the appointment of three independent directors to the board.

New CEO optimistic

"We have not lost a single customer, and at the same time we've added a thousand customers per quarter, for the past three quarters," Donald Layden Jr., who took over as interim CEO in October 2019 following the departure of Stephen Herbert, told this website in a phone interview. Layden was named CEO and president on March 2, 2020.

Some observers might agree with Ladyen as the company's most recent quarterly earnings, reported Feb. 19, reflected that total revenue had grown 27.7% year-over-year and 1.6% sequentially to $44.1 million. License and transaction fee revenue was up 20.3% year-over-year to $35.8 million; equipment revenue grew 74.6% year-over-year to $8.3 million. 

The company had a non-GAAP loss of $4 million, or 6 cents a share in the fiscal second quarter, compared with a loss of $1.6 million, or 3 cents in the year-ago period, according to its second-quarter earnings release. The company raised its revenue guidance from $165-$175 million to $175-$185 million for the fiscal year, but said it would not be able to meet its previous guidance for adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $10 million to $11 million. The guidance was based on the ability to take out all non-recurring expenses.

The company said that so far in Q2 it had added 40,000 connections bringing the total to over 1.25 million connections, up 16% compared to the same quarter last year.

Nevertheless, Hudson said in a March press release that it wanted new management and is moving forward with its proxy at the shareholder meeting, which is scheduled for April 30. Hudson criticized the board's decision to appoint Layden, who it claimed has overseen continued lapses in financial controls and repeated operational failures.

Operators offer mixed views

Operators interviewed for this article have been following the shareholder issue and have mixed feelings about it. 

Matthew Marsh, president of First Class Vending, a convenience service operation serving Southern California and Las Vegas, said he isn't concerned about the quality of USA Technologies' current management.

"We've been happy with the customer service," said Marsh, whose company uses USA Technologies' cashless/remote monitoring services but not its Cantaloupe management software. "We've been happy with the sales department and we've been happy with how the system works. Companies make changes all the time. As long as the service standards stay where they're at we're happy, and maybe it will even get better."

A few operators interviewed for this article said they had experienced service issues, but spoke on the condition that they remain anonymous.

CEO acknowledges previous issues

Although Layden acknowledged that some large customers had expressed concern that the company was unable to deliver financial statements during a remediation and financial restatement process, he said things are already improving.

"I wasn't on the board when that happened," Layden said. "I understand the disruption that it caused, the uncertainty that it caused, particularly to our employees and to some of our customers, and my job is to make sure that that is behind us. As we try to service 21,000 customers, we are going to get it wrong every once in a while, but overwhelmingly, I think we get it right."

The proof, he said, is that the company grew last quarter by nearly 28%, which he called "pretty phenomenal growth in the middle of a proxy contest."

Layden also said tech competitors have been taking advantage of the shareholder issues in order to win customers. 

"Unfortunately, our competitors used our inability to deliver financial statements to present a picture of our financial condition — that, as you can imagine, was not very flattering — and caused some of our customers to have some doubt about financial strength," he said. "People use whatever information they can to try to gain a competitive advantage."

Layden has met with some of these customers and believes they have been satisfied about the company's progress.

Layden questions proxy's strength

He also acknowledged that the proxy contest had raised concern among some customers, but he does not believe Hudson's proxy campaign is nearly as strong as some public statements have claimed.

Statements from some shareholders, such as 22NW, said shareholders representing 60.58% of the voting power of USA Technologies had voted in favor of the candidates Hudson has nominated to the board.

That's not the full picture, however, according to Layden, who said only holders of record on the record date, which has not yet been set, would be able to vote at the shareholders meeting. He said the recent volatility in the stock market is likely to have changed sentiments since Hudson solicited its proxies.

"Some of the people who submitted a proxy to Hudson may not even be shareholders anymore, and therefore would not be entitled to vote at the annual meeting," he said. Layden also said there was no alternative slate of nominees when Hudson solicited its proxies. 

"The conversation Hudson had with their shareholders was a one-sided conversation," he said. "Our shareholders heard from Hudson, and I think that our shareholders sent us a pretty strong message that at least (among) the shareholders at the time that there were things that happened in the company's history that they were unhappy about. I wasn't overly surprised by the response from the shareholders."

Although Layden admitted he didn't know what will happen on April 30th, he planned to make the case that changing what was going right would be a mistake. 

Analyst optimistic

Whatever the outcome of the shareholder vote, analyst George Sutton, a partner at Craig Hallum Capital Group LLC, who has followed USA Technologies since 2015, said the company has a positive future.

The opportunity to replace manual labor with technology is an "open- ended opportunity" for USA Technologies, Sutton said. "They're seemingly well-equipped to go after that opportunity, so we're excited about this industry. It's just challenging from an internal perspective."

Sutton said management is making logical moves to lower its processing and gateway costs.

He also gave the management credit for addressing a long-avoided topic of better managing costs. Importantly, he said the cost reductions were not expected to affect sales or service.

Threats to market dominance from competitors could be stemmed with a resolution to the current battle for control, he said. 

Sutton said establishing a board to resolve the dispute is key to the company regaining its NASDAQ listing or a possible listing on the New York Stock Exchange. USAT's shares were delisted from the Nasdaq Global Market Sept. 26 when the company failed to meet a deadline to file required reports with the Securities and Exchange Commission.

In October, the company announced it was in compliance with reporting requirements. 

Whatever the outcome of the shareholder vote next month, Sutton believes having an elected board will better enable the company to fulfill its potential as a technology leader in automated retail.