Q2 2020 Earnings Call

February 19, 2020

Operator 2: Ladies and gentlemen, thank you for standing by, and welcome to the USA Technologies Q2 fiscal year 2020 earnings conference call. At this time, all participants are in listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Monica Gould, Investor Relations for USA Technologies. Please go ahead.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the USA Technologies Q2 fiscal year 2020 earnings conference call. At this time, all participants are in listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Monica Gould, Investor Relations for USA Technologies. Please go ahead.

At this time, all participants are in listen only mode.

After the speakers presentations will be a question and answer session to ask a question. During the session you need to press star one on your telephone if you require any further assistance. Please press star Zero I would now like to handle conference over to your speaker today.

<unk> Investor Relations for USA technologies. Please go ahead.

Monica Gould: Thank you, and good morning, everyone. Welcome to the USA Technologies Q2 fiscal 2020 earnings conference call. With me on the call this morning are Don Layden, Chairman and Interim Chief Executive Officer, and Glenn Gould, 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 last night.

Thank you and good morning, everyone welcome to the USA technologies second quarter fiscal 2020 earnings conference call.

With me on the call. This morning are down laden chairman and interim Chief Executive Officer, and Glenn Gould 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 kinda.

Contemplated by the forward looking statements as result of certain factors, including but not limited to business financial market and economic condition.

We've had discussions of the risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements included with our filings with the FTC and in the press release issued last night listeners are cautioned not to place undue reliance on any such forward looking statements.

Monica Gould: 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.

Reflect management's views only as of today their main.

Lets say technologies undertakes no obligation to update any forward looking statements.

Whether as a result of near information future events or otherwise.

This call will also include a discussion of certain non-GAAP financial measure that we believe are useful for among other things evaluating resi technologies operating results.

These non-GAAP financial measures, our supplemental to not as substitutes for GAAP financial measures such as net income or loss.

Monica Gould: 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 last night, which has been posted on the investor relations section of our website at www.usatech.com. With that, I'd now like to turn the call over to Don Layden. Don?

Details of these non-GAAP financial measure measure 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 last night, which has been posted on the Investor Relations section of our.

Website at Www Dot U.S. ATAC dotcom.

And with that.

Now I'd like to turn the call over to down laden.

Sorry, thank him out again.

Don Layden: Thank you, Monica. I'd like to begin with a review of our progress on the strategic objectives that I outlined on our fiscal Q1 call. I will then review our updated guidance for fiscal 2020, provide an overview of our growth strategy, and then discuss our progress in regaining our Nasdaq listing. I'll then turn the call over to Glenn for a more detailed review of our financials before turning the call back to the operator for the question-and-answer session. We're making consistent and good progress against the strategic objectives we set out last quarter. On our fiscal Q1 earnings call, you may remember that I noted that we launched a series of initiatives to reduce our SG&A expense by an annualized $8 million. I'm pleased to report that we have achieved this goal through the following actions.

I'd like to begin with a review of our progress on the strategic objectives.

That I outlined at our fiscal Q1 called.

I will then review our updated guidance for fiscal 2020.

Provide an overview of our growth strategy.

And then discuss your progress in regaining our NASDAQ listing.

I'll, then turn the call over to Glenn for more detailed review of our financials.

Before turning the call back to the operator for the question answer session.

We're making a consistent good progress against the strategic objectives, we set out last quarter.

On our fiscal Q1 earnings call.

Yeah, you may remember that I noted that we launched a series of initiatives to reduce or Escreen a expense by an annualized $8 million [laughter] I'm pleased to report that we've achieved this go through following actions first.

Don Layden: First, we are in the final stages of negotiating a new transaction processing agreement, which will result in savings of approximately $3.5 million in the first year and total cost savings of approximately $22 million projected over the next five years. This new agreement reduces our annualized transaction processing costs from $6.8 million to $3 million. Second, we continue to reduce our dependence on one of our third-party distributors, rationalizing our distribution channels and eliminating a gateway solutions provider by rerouting transactions through our own gateway, resulting in annualized savings of $1.7 million. Third, our efforts to better manage our equipment supply chain are beginning to take hold, with our equipment margins showing early signs of improvement.

We are in the final stages of negotiating a new transaction processing agreement.

Which will result in savings of approximately $3.5 million in the first year.

Total cost savings of approximately $22 million projected over the next five years. This new agreement reduces our annualized transaction processing cost from 6.8 million the $3 million.

Second.

We continue to reduce our dependence on one of our third party distributors.

Rationalizing or distribution channels, and eliminating a gateway solutions provider.

Hi, rerouting transactions through ran gateway.

Resulting in annualized savings of $1.7 million.

Third.

Our efforts to better manage our equipment supply chain are beginning to take hold.

Our equipment margins showing early signs of improvement.

Don Layden: Fourth, we have reduced our sales and use tax accrual by over $1 million during Q2 of the current fiscal year and expect that we will see a further significant reduction in the $18 million reserve we established in Q4 of 2019. Most of this recovery comes from determining that our customers either self-report or they are exempt from the sales and use tax obligation. Next, we have negotiated new agreements with professional service providers, resulting in annualized savings in excess of $1.5 million. Finally, in addition to these larger-scale efforts, we also continue to rationalize our operating costs in smaller ways by closing offices and eliminating consultants and other nonessential expenses.

Fourth.

We have reduced our sales unused tax accrual by over $1 million during the second quarter of the current fiscal year and expect that we will see a further should give it reduction.

And the $18 million reserve, we established in the fourth quarter of 2019.

Most of this recovery comes from determining that our customers either self report or they exit or they are exam.

From the sales when used tax obligation.

Next we have negotiated new agreements with professional service providers.

Resulting in annualized savings that exists in excess of $1.5 billion.

And finally in addition to these larger scale efforts. We also continue to rationalize your operating cost and smaller ways.

In closing offices, and eliminating consultants and other non essential expansions expenses.

To wrap that up in combination. These initiatives are designed to allow us to achieve.

Don Layden: To wrap that up, in combination, these initiatives are designed to allow us to achieve a 30% EBITDA margin on a net revenue basis after excluding interchange costs. Our annualized interchange costs are about $80 million. Given our consistent progress, we believe that we are in a position to achieve that target in the next 18 months. Our continued strong performance gives us confidence to confirm our guidance on connections and to increase our guidance on revenue from $165 million to $175 million to $185 million. As we noted in our earnings press release, which was issued yesterday, we do not believe that we will be able to meet our previous guidance of $10 to 11 million in adjusted EBITDA.

30% EBITDA margin on a net revenue basis.

After excluding interchange cost.

<unk> annualized entertain foster about $80 million.

Given our consistent progress we believe that we're in a position to achieve that target in the next 18 months.

[noise] our continued strong performance gives us confidence to confirm our guidance on connections.

And do increase our guidance on revenue from 165 million 275 million.

275 million to 185 million [noise].

As we noted in our earnings press release, which was issued yesterday.

We do not believe that when we will be able to meet our previous guidance.

10 to 11 million in adjusted EBITDA.

[noise]. This guidance was said, assuming we would take out all nonrecurring expenses as part of our EBITDA adjusted EBITDA calculation.

Don Layden: This guidance was set assuming we would take out all non-recurring expenses as part of our Adjusted EBITDA calculation. We have calculated what our normalized run rate would look like after eliminating all non-recurring expenses from the company. Those adjustments resulted in an expense run rate of approximately $12.5 million per quarter. Glenn will provide more details regarding this run rate in his remarks. Glenn will also walk you through the specific adjustments that impacted our prior period financials, resulting in favorable adjustments to revenue and expense for those periods. We discovered the errors in the ordinary course of closing the financial statements for this quarter, and the adjustments all relate to weaknesses in our processes that we have earlier identified. We were able to complete all of the revisions within the extension period prescribed by the SEC for filing our Form 10-Q.

We have calculated what our normalized run rate would look like after eliminating all nonrecurring expenses from the company.

Those investments resulted in an expense run rate of approximately 12.5 million per quarter.

Glenn will provide more details regarding this run rate.

In his remarks [noise].

When we'll also walk you through the specific adjustments that impacted our prior period financials.

Resulting in favorable adjustments to revenue and expense for those periods.

We discovered the errors in the ordinary course and close into financial statements for this quarter.

And the adjustments already what relate to weaknesses in our processes that we had earlier identified [noise].

We were able to complete all the revisions with any extension period prescribed by the FCC profile your form 10-Q [noise].

[noise] I'd now like to take this opportunity to provide you with a more comprehensive view of our growth strategy.

Don Layden: I'd now like to take this opportunity to provide you with a more comprehensive view of our growth strategy. As you know, our mission is to be the leading integrated software solutions and payment provider for unattended retail markets that have a distributed network of machines and require regular monitoring and servicing. Our go-to-market strategy is to advance our sales efforts as an integrated software and payment solution provider that monetizes software by enabling digital and card payments by consumers. We believe this strategy will allow us to continue to record year-over-year revenue growth in excess of 25% with a target of becoming a $500 million revenue business in five years. The four building blocks of that strategy follow. First, continue to deploy the full suite of Seed services with our existing vending customers.

As you know our mission is to be the leading integrated software solutions and payment provider for unattended retail markets that have a distributed network of machines and require regular monitoring and servicing.

Our go to market strategy is to advance our sales efforts as an integrated software it and payment solution provider that monetize the software by enabling digital in card payments by consumers.

We believe this strategy will allow us to continue to record.

Year over year revenue growth in excess of 25%.

With a target of becoming a 500 million dollar revenue business in five years.

Before building blocks of that strategy follow first [noise].

Continue to deploy the full suite of suite of seed services.

Our existing vending customers.

Don Layden: We are currently about 50% deployed with one or more Seed services being utilized across our customer connections. About half of our customer base is currently addressable for the Seed solution, and we are working on expanding the applicability of the product for further penetration into the long tail of our customer base, such as through self-service onboarding. Second, we intend to expand the categories where our solution is relevant, especially in markets where the average ticket size is higher, our existing customers have a business in these markets, and the underlying growth rate of those markets will be positively impacted by a cashless and software solution. Importantly, we are extending our focus on adjacent markets where the product development investment is small relative to the market opportunity. In other words, we are focused on selling the integrated software solution we have already built.

We are currently about 50% deployed with one or more seats services being utilized across our customer connections.

[noise] about half of our customer base is currently addressable for the seed solution and we're working on expanding the Apple Gil applicability of the product for further penetration into long tail of our customer base such as through self service Onboarding [noise].

Second.

But we intend to expand the categories, where solution is relevant, especially in markets, where the average ticket size is higher.

Our existing customers of business in these markets and the underlying growth rate of those markets will be positively impacted by a cashless and software solution.

Importantly.

We are extending our focus on adjacent markets, where the product development investment is small relative to the market opportunity.

In other words, we are focused on selling the integrated software solution, we have already built.

Don Layden: These markets include laundry and amusement, where we now have salespeople and marketing support focused on those opportunities. Third, we want to expand our international efforts beyond our current business in Australia, Mexico, and Canada to other markets where there is a significant deployment of vending machines that lack an integrated software solution with robust capabilities. Japan, a market with more than 4 million vending machines, is high on our list for international expansion. Fourth, we continue to be focused on selling to our existing 19,000 customers as they deploy additional machines or to replace competitors and to sell additional components of our solutions to those customers.

These markets include laundry and amusement, where we now have salespeople and marketing support.

Just on those opportunities.

Third.

We want to expand or international efforts behind beyond our current business in Australia, Mexico, and Canada [noise].

Two other markets, where there was a significant deployment of vending machine.

Lack and integrated software solution with robust capability [noise].

Japan, a market with more than 4 billion vending machines was high in or last for international expansion.

And fourth we continued to be focused on selling to our existing 19000 customers.

They deploy additional machines or to replace competitors and sell additional components of our solutions to those companies those customers [noise].

Don Layden: We are confident in our ability to execute on this growth strategy, which as I just mentioned, we believe will allow us to continue 25%+ top line growth with a target of being a $500 million revenue business in five years. Let me now turn to some other updates. We remain focused on regaining our Nasdaq listing. While many of you may have seen Nasdaq's recent announcement regarding our delisting, this announcement was in fact related to our earlier failure to timely file our SEC reports and was independent of our recent Nasdaq listing application. We filed a new application with Nasdaq on 19 December 2019, received comments on 13 January 2020, and responded to those comments on 23 January 2020. The application is still pending, and the company continues to cooperate with the Nasdaq staff's review.

We are confident in our ability to execute on this growth strategy, which as he just mentioned we believe will allow us to continue 25% plus topline growth with a target of being a 500 million revenue business in five years.

Let me now turn to some other updates.

We remain focused on regaining our NASDAQ listing.

Well many of you may have seen nasdaq's recent announcement regarding or de listing.

This announcement was in fact related to our earlier failure to timely filer SSC reports.

And with independent of our recent NASDAQ listing application.

We filed the new application with NASDAQ on December 19th 2019.

Received comments on January 13, 2020.

Responded to those comments on January 20 Threerd.

The stats the application is still pending.

And it can the company continues to cooperate with the NASDAQ She asked review.

Don Layden: While this is pending, we continue to review options with our advisors, including the potential for listing on an alternative exchange. Like many companies, we are monitoring the coronavirus and its potential impact on our growth targets. Specifically, our focus is on whether our third-party equipment manufacturer will be forced to delay shipments of some cashless readers. In addition, several of us had previously planned to attend a major Asian vending machine operators trade show scheduled for the first week of March in Guangzhou, China. The trade show was postponed due to the virus, and we are making alternative arrangements to meet with potential partners and distributors. As I said, we continue to monitor, but at this stage we expect that the postponement of the trade show is likely to delay the international expansion efforts that I mentioned a few moments ago.

While this is pending we continue to review options with our advisors, including the potential for listening on an alternative exchange [noise].

[noise] like many companies we are monitoring the Corona virus.

And its potential impact on our growth targets.

Specifically, our focus is on whether our third party equipment manufacturers will be forced to delayed shipments.

Some cashless readers.

In addition, several of US had previously planned to attend the major Asian vending machine operators trade show scheduled for the first week of marching Gonzo China.

The trade show was postponed due to the virus and we are making alternative arrangements to meet with potential partners and distributors.

As I said, we continue to monitor but at this stage, we expected the postponement of the trade show is likely to delay the international expansion effort, but I mentioned a few moments ago.

[noise] during this.

Don Layden: During this quarter, we again maintained our enviable track record of zero customer losses. However, during the period when we were unable to deliver current financial statements to the market, we were placed on a procurement hold by several large customers. Those customers slowed or stopped new sales, but did not replace existing products. I am pleased to report that the large majority of customers have returned to purchasing now that our financial performance and balance sheet warranted lifting this hold. The uncertainty caused by the proxy contest remains a challenge for some of our customers. Our ability to manage through these customer concerns reaffirms our board's view that the Antara financing was this necessary step to enable the company to continue to grow. I think it's important to understand the events that led to the decision to execute the Antara financing.

Quarter, we again maintained or enviable track record of zero customer losses.

However, during the period when we were unable to deliver current financial statements to the market. We replaced on a procurement whole by several large customers.

Those customers slowed or stopped new sales, but did not replace existing products.

Im pleased to report that the large regarding customers have returned to purchasing now that our financial performance and balance sheet warranted lifting this hold.

But on the uncertainty caused by the proxy contest remains a challenge for some of our customers.

Our ability to manage through these customer concerns reaffirms, our board's view that the intera financing was necessary steps when able to company to continue to grow.

I think it's important to understand the events that led to the decision to execute the entire financing.

Don Layden: In late September and October 2019, as part of its review of our financial position and before the filing of our 10-K, our auditor, BDO, discussed with us the possibility of including a going concern qualification to their audit opinion. The prospect of this going concern qualification for BDO, which could have resulted, among other things, in significant sales and customer losses, was weighed against the timeliness and cost for the financing, and the board determined that the financing was the better alternative. The financing improved our balance sheet, and we continue to look for ways to improve liquidity as we contemplate a sale of lease receivables in this quarter of approximately $12 million. When I took over as interim CEO, I said I would push the company forward, set a clear strategic path for success, and rationalize our cost structure to improve our operating results.

In late September and October 2019, as part of its review of our financial position and before the filing of our 10-K.

Our auditor video discussed with us the possibility of including a going concern qualification to their audit opinion.

The prospect of this going concern qualification for video, which could have resulted among other things and significant sales and customer losses.

As weighed against the timeliness and cost of the financing and the board determined that and financing was the better alternative.

The financing improved or balance sheet, and we continue to look for ways to improve liquidity.

As we contemplate a sale lease receivables in this quarter of approximately $12 million.

When I took over as interim CEO I said it was pushed the company forward.

Set a clear strategic path for success.

Rationalize our cost structure to improve our operating results [noise].

Don Layden: We have made significant progress against those performance indicators over the past four months, and we plan to continue to execute against that plan. Our customers and our employees are responding favorably to the changes. Our shareholders told me very explicitly that they wanted to see improved results. We have delivered improved operating results, balancing growth and expense rationalization while maintaining strong customer retention. I believe that those improvements will continue. The board and management team remains committed to continuing the fresh start we began after getting back on file in October. Progress is good, and the company is improving every day. Let me comment quickly on the ongoing proxy contest with Hudson Executive Capital.

We have made significant progress against those performance indicators over the past four months and we plan to continue to execute against that plan.

Our customers and our employees are responding favorably to the changes [noise].

Our shareholders told me very explicitly that they wanted to see improved results.

We have delivered improved operating results balancing growth and expense rationalization, while maintaining strong customer retention.

I believe that those improvements will continue.

The board and management team remains committed to continuing to fresh start we began after getting back on file in October.

Progress is good.

The company is improving every day.

Let me kind of quickly on the ongoing proxy contest with Hudson Executive capital.

Don Layden: The board has remained steadfast in their position that if there is going to be a change in the majority of the board, then USAT shareholders deserve a premium for their shares to allow for a change of control. Individual shareholders have their own motivations for actions they take, and our board has tried to factor these motivations as we make decisions that benefit all of our shareholders. For example, we have been advised by legal counsel that Hudson Executive Capital has triggered a provision of Pennsylvania law in their decision to attempt to take control of the USAT board. As a result, Hudson is required to disgorge or surrender to USAT any profits on the sale of their shares in the company for a period of 18 months after triggering the obligation under the statute, including as a result of an M&A transaction.

The board has remained steadfast in their position.

There is going to be a change in the majority of the board the U.S.A.T. shareholders deserve a premium for their shares to allow for change of control.

Individual shareholders have their own motivation actions they take and our board has tried to factor. These motivations as we make decisions that benefit all of our shareholders.

For example.

We have been advised by legal counsel that Hudson executive capital.

It's triggered provision of Pennsylvania law and their decision to attempt to take control the USA keyboard.

As a result Hudson is required to discord jure surrender to U.S.A.T.

Any profits out of sale their shares in the company for a period of 18 months after triggering triggering the obligation under the statute [noise].

Including as result of an M&A transaction [noise].

Don Layden: We believe any of those profits belong to USAT, and so advised Hudson last November. Surprisingly, Hudson never addressed this matter in any of the multiple proxy materials they have been circulating for the past three months. Obviously, an assessment of the likelihood of recovering these profits is among many factors our board has used in assessing Hudson's position. Regardless of this ongoing issue, and as demonstrated by today's results, we are focused on improving the performance of our business and capturing the significant opportunities in our space. To that end, and before I turn the call over to Glen, I want to commend the work of our USA Technologies employees who remain, as always, focused and committed to our mission and to our customers. Today's strong performance is a testament to them.

We believe any of those profits belong to USA tea.

And so advised Hudson last November.

Surprisingly Hudson never addressed this bad or in any of them all multiple proxy materials. They haven't circulating for the past three months.

Obviously, an assessment of the likelihood of recovery needs profits is among many factors our board is used in assessing hudson's position.

Regardless of this ongoing issue.

And as demonstrated by today's results.

We are focused on improving the performance of our business.

And capturing a significant opportunities in our space.

So that end and before I turn the call over to Glenn I want to commend the work of our USA technologies employees, who remain as always focused and committed to our mission and to our customers.

Today's strong performance is a testament to that.

Don Layden: The board and I are pleased with the overall progress we are making and are confident that we will continue to successfully execute on our initiatives and create long-term value for shareholders. With that, I would now like to turn the call over to Glenn to review our financials in more detail.

The board and I are pleased with the overall progress we're making.

And are confident that we will continue this is cut successfully execute on our initiatives.

And create long term value for shareholders.

And with that I would now like to turn the call over to Glenn to review our financials in more detail.

Glenn Gould: Thank you, Don, and good morning, everyone. I'll review our financial and operating performance for the Q2 of our fiscal year, and then conclude with our update of our full year that Don has summarized. We're pleased to deliver another quarter of record revenue. As Don mentioned, total revenue grew 27.7% year-over-year and 1.6% sequentially to $44.1 million. License and Transaction fee revenue increased 20.3% year-over-year to $35.8 million and accounted for 81.2% of our total revenue in the Q2. Equipment revenue increased 74.6% year-over-year to $8.3 million.

Thank you Don and good morning, everyone.

We view, our financial and operating performance for the second quarter fiscal year, and then conclude with our update of.

Our full year that Don has has summarize.

We're pleased to deliver another quarter of record revenue with Tom mentioned total revenue grew 27.7% year over year, and 1.6% sequentially to $44.1 million.

License and transaction fee revenue increased 20.3% year over year to $35.8 million and accounted for 81.2% of our total revenue in the second fiscal quarter.

Equipment revenue increased 74.6% year over year to $8.3 million.

Glenn Gould: We continue to make strides in growing our connection base and customer count, as well as sell a diversified suite of services to an expanding customer base. We added 40,000 net new connections in Q2, bringing our total to over 1.25 million connections, up 16% compared to the same quarter last year. We also added 900 new customers, ending the quarter with a total of 21,200 customers, an increase of 20% compared to 17,650 customers in the same quarter last year. Our total gross margin increased to 29% from 27.4% in Q2 of last fiscal year. The increase was driven by improvements in both our lease and transaction services margin, as well as our equipment margin.

We continue to make strides in growing our connection Bates and customer count as well as tele diversified suite of services to an expanding customer base.

We added 40000 net new connections in the second quarter, bringing our total take over one in a quarter million connection.

16% to the compared to the same quarter last year.

We all thought at 900, new customers ending the quarter with a total of 21200 customers an increase of 20% compared to 17650 customers on the same quarter last year.

Total gross margin increased to 29% from 27.4% in the second quarter of last fiscal year increase was driven by improvements in both our lease.

Transaction services margin as well as our equipment margin.

Glenn Gould: Our license and transaction margin increased to 36.8% from 34.5% in the same period last year, driven primarily by product mix. Looking forward, we look to expect our L&T margins to remain in the same 35% to 38% range. Our equipment margin improved to -5% from -17.6% in the same period last year, reflecting our improvements in our supply chain. As we have mentioned, we expect our equipment margin to be in the breakeven to low negative single digits range going forward. Adjusted EBITDA declined to -$2.3 million from breakeven in the same period in the prior year, due primarily to increased costs of our restatement and audit activities.

License and transaction margin increased from 5% to 36.8% from 34.5% on the same period last year, driven primarily by product mix looking forward, we look to expect or LMP margins to remain in the same 45% to 38% range.

Our equipment margin improved to a negative 5% from a negative 17.6% in the same period last year, reflecting our improvements in our supply chain.

As we've mentioned, we expect our equipment margins being the breakeven to low negative single digits range going forward.

And just adjusted EBITDA declined to a negative 2.3 million dollar mark from breakeven in the same period in the prior year due to primarily to increased cost of our restatement and audit activity.

Glenn Gould: SG&A for Q2 was $18.7 million or 42.5% of revenue, compared to $10.9 million or 31.7% of revenue over the prior period. Our SG&A expenses increased year over year, primarily due to the increase in professional services, service costs related to the company's restatements and audit activities, and an increase in one-time employment-related costs. As Don mentioned, we have a number of initiatives in progress to reduce our operating expenses. As we come through our restatement and multiple-year audit, we expect our professional services cost to decline in the coming months. For reference, we incurred $4.7 million in these professional services costs in Q2. By the end of fiscal 2020, we expect these costs to decline to under $1 million per quarter.

That's you need for the second quarter was 18.7% I'm, sorry, $18.7 million or 42.5% of revenue compared to $10.9 million were 31.7% of revenue over the prior period.

Perhaps unit expenses increased year over year, primarily due to the increase in professional services service costs related to the company's repayments and audit activities and an increase and onetime employment related costs.

As Don mentioned, we have a number of initiatives in progress to reduce our operating expenses.

As we come through our restatement and multiple here audit, we expect our professional services costs to decline in coming months.

For reference we incurred $4.7 million and these professional services costs in Q2 by the end of fiscal 2020, we expect these cost to decline to under 1 million per quarter.

Glenn Gould: In Q2, we incurred $3.2 million in employment-related costs related to compensation and severance. We expect these costs to decline to under $1 million per quarter going forward. Finally, we have other budgetary savings we anticipate through management of travel and other expenses that are not pertinent to the company's growth strategy. We expect an additional $700,000 in quarterly savings from those reductions. Though difficult to predict with certainty, we anticipate that we will reduce our SG&A expense to a run rate of approximately $12.5 million per quarter, as Don has mentioned. If we're able to eliminate these non-recurring expenses by our Q4 of fiscal year 2020, we expect our normalized adjusted EBITDA to be approximately $3.5 million.

In Q2, we incurred $3.2 million unemployment related costs related to compensation in sovereign [noise].

We expect these cost to decline to under $1 million per quarter going forward and finally, we have other budgetary savings, we anticipate through management of travel and other expenses that are not pertinent to the company's growth strategy. We expect an additional $700000 in quarterly savings from those reduction.

So difficult to predict with certainty, we anticipate that we will reduce our cheniere expense to run rate of approximately 12, and a half million dollars per quarter as Don as mentioned.

If we're able to eliminate these nonrecurring expenses by our fourth quarter fiscal year 2020, we expect our normalized adjusted thinking about that approximately three and a half million dollars.

Glenn Gould: Non-GAAP net loss was $4 million, or -$0.06 per share, compared to non-GAAP net loss of $1.6 million, or -$0.03 per share of the same period last year. Our cash balance at the end of Q2 was $37.5 million, compared to $25.5 million at the end of the prior quarter. The increase in cash was primarily driven by the proceeds from the Antara transactions that Don walked through. Net working capital totaled $17.6 million at the end of Q2, compared to $15.7 million at the end of Q2 of last year. During our Q2 close, as Don mentioned, we identified a number of adjustments that impacted prior period financial statements.

Non-GAAP net loss was $4 million.

Or negative six cents per share compared to non-GAAP net loss of $1.6 million were negative three cents per share of the same period last year.

Our cash balance at the end of the second quarter was 37, the half million dollars compared to 25 and a half million at the end of the prior quarter, increasing cash was primarily driven by the proceeds from behind our transaction that dumb luck true.

Net working capital totaled $17.6 million at the end of the second quarter compared to $15.7 million at the end of the second quarter of last year.

During our Q2 close as Don mentioned, we identified a number of adjustments that impacted prior period financial statement.

Glenn Gould: We have reported those adjustments to you in our filings posted yesterday. The adjustments made to both fiscal year 2019 and Q1 of fiscal year 2020 are favorable. In other words, they increase operating income. We don't believe that the adjustments are material to our fiscal year 2019 financial statements, but the adjustments were large enough that we did feel it was appropriate to restate our Q1 fiscal year 2020 filing, which has now been done. These adjustments primarily consist of the following. One, an incorrect allocation of transaction price between equipment revenues and license and transaction fees in connection with a customer contract, which resulted in the inappropriate deferral of equipment revenues on hardware devices shipped during the three months ended 3 June 2019, and the three months ended 30 September 2019.

We have reported though the Jasmine tea when our filings posted yesterday.

Adjustments made for fiscal year, 2019 and quarter one fiscal year 2020 are favorable in other words. They increased operating income we don't believe that the adjustments our material to our fiscal year 2019 financial statements, but the adjustments were large enough that we didn't feel what was appropriate three safe Harbor.

Quarter, one fiscal year, 2020 filing which has now been done.

These adjustments primarily consist of a following one an incorrect allocation of transaction price between equipment revenues in license and transaction fees in connection with a customer contract, which resulted in an appropriate deferral of equipment revenues.

Hardware devices shipped during the three months ended June 32019 in the three months ended September 32019.

Glenn Gould: Secondly, inaccurate accounting treatment of the leasing rental contracts of our wholly owned subsidiary, Cantaloupe Systems, Inc., relating primarily to the fiscal year ended 30 June 2019, and the three months ended 30 September 2019. The cumulative impact of these adjustments resulted in a $2 million increase in operating income in fiscal year 2019 and a $1.6 million increase in operating income in Q1 of fiscal year 2020. We continue to enhance our control environment and work to remediate our material weaknesses we reported to you in our latest Form 10-K filing. As Don mentioned, we are updating our guidance for fiscal year 2020 based on our strong License and Transaction fee growth in our H1 of fiscal year 2020.

And secondly, inaccurate accounting treatment of leasing rental contract, but thats fully on of our wholly owned subsidiary Cantaloupe systems Inc. relating primarily to the fiscal year ended June 32019.

And the three months ended September Thirtyth 2019, the cumulative impact of these adjustments resulted in a 2 million dollar increase and operating income in fiscal year 2019, and a 1.6 million dollar increase and operating income and in Q1 fiscal year 20 Twond.

We continue to enhance our control environment and work to remediate our material weaknesses, we reported to you in our latest.

Form 10-K filing.

As Dawn mentioned, we are updating our guidance for fiscal year 2020.

Based on our strong license and transaction fee growth in our first top in fiscal year 2020, we now expect.

Glenn Gould: We now expect our fiscal year 2020 revenue to be in the range of $175 million to $185 million, and we continue to expect to add 190,000 net new connections to our service. Our reported Q2 Adjusted EBITDA was -$2.3 million and -$8 million for H1 of fiscal 2020. We will not be able to meet our previous guidance of $10 million of annualized Adjusted EBITDA. However, as Don mentioned, if we were able to reduce our non-recurring expenses as anticipated, we expect we would be at a normalized Adjusted EBITDA of approximately $3.5 million by Q4 of fiscal year 2020.

Our fiscal year 2020 revenue to be in the range of 175 million to $185 million and we continue to expect to add 190000 net new connections to our service. Our reported Q2 adjusted EBITDA was negative 2.3 million negative 8 million for the first half of fiscal.

2020.

I will not be able to meet our previous guidance of $10 million of annualized adjusted EBITDA.

However has gone mentioned, if we were able to reduce or nonrecurring expenses and as anticipated. We expect we would be at a normalized adjusted EBITDA of approximately three and a half million dollar by the fourth quarter fiscal year 2020, if we worked and take out all of the nonrecurring expenses I've described.

Glenn Gould: If we were to take out all of the non-recurring expenses I've described, our Q2 adjusted EBITDA would have been +$1.2 million, and our H1 of fiscal year 2020 adjusted EBITDA would have been +$1.1 million. To wrap up, we believe that our scalable financial model, driven by our recurring revenue streams, improved financial position, and enhanced compliance controls position us very well to capitalize on the growth opportunities ahead of us as we execute on the strategic plan that Don discussed in his remarks. We are working very hard and focused on driving our business strategic initiatives, improving our control environment, and driving top line and bottom line improvements in our business. This concludes our financial update. We would now be happy to take your questions, and I'll turn it over to the operator.

Q2, adjusted EBITDA would have been positive $1.2 million and our first half of fiscal year 2020, adjusted EBITDA would have been positive $1.1 million.

To wrap up we believe that our scalable financial model.

Driven by our recurring revenue streams improved financial position and enhanced compliance control to position positioned us very well to capitalize on the growth opportunities ahead of us as we execute on the strategic plan. That's on discussed in his remarks.

We are working very hard and focused on driving our business strategic initiatives, improving our control environment and driving topline and bottom line improvements in our business.

This concludes our financial update we would now be happy to take your questions and I'll turn it over to the operator, please provide instructions for queuing <unk> session.

Glenn Gould: Please provide instructions for the Q&A session.

At this time I'd like to remind everyone in order to ask your question. Please press star and the number one on your telephone keypad. Your first question comes from the line of James.

Operator 1: At this time, I'd like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of Jaeson Schmidt from Lake Street. Your line is open.

Operator: At this time, I'd like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of Jaeson Schmidt from Lake Street. Your line is open.

Schmidt from Lake Street Your line is open.

Jaeson Schmidt: Hey, guys. Thanks for taking my questions. Just wanna follow up on the commentary on operating expenses. What sort of timeline do you expect to be able to achieve that $12.5 million in SG&A?

Yes, thanks for taking my questions just one follow up on the commentary on operating expenses.

Timeline do you expect to be able to achieve that 12.5 million asked DNA.

Glenn Gould: We will be tapering off over the next six months. Some of that will happen immediately through Q3. It will not all happen in Q3, but we hope that all of the improvements will be able to be implemented by Q4.

So we will be tapering off over the next six months some of that will happen.

Immediately through the third quarter it will not all happened in the third quarter, but we hope that all of the improvements will be able to be implemented by the fourth quarter.

Okay, and then I know you outlined a number of cost savings initiatives spot.

Jaeson Schmidt: Okay. I know you outlined a number of cost savings initiatives, but do you anticipate needing to add to the sales team in order to address all these new growth opportunities?

We anticipate needing to add to the sales team in order to attract sorry, these new growth opportunities.

I would expect that we would continue evaluate the size of the team basically opportunities that we that are presented to US right. Now we believe that the sales team is probably.

Don Layden: I would expect that we would continue to evaluate the size of the team based on the opportunities that are presented to us. Right now, we believe that the sales team is probably sufficient to address the market opportunities we have. We're in the process, frankly, of making that determination right now as to whether we should add additional sales resources. I suspect that during the course of the next 12 months, we probably will add additional sales resources to address the opportunities we see in the market.

Sufficient to address the market opportunities, we have but where it ran the process frankly of making that determination right now as to whether we should add additional sales resources and I suspect the jury.

The course of the next 12 months, we probably will add additional sales resources to address the opportunities we see in the market.

Okay, and then just the last one for me and I'll jump back into queue wondering if you could comment if you think the Ingenico acquisition that will have any impact on the business.

Jaeson Schmidt: Okay. Just the last one from me, and I'll jump back in the queue. Wondering if you could comment if you think the Ingenico acquisition will have any impact on the business?

We don't we don't in a short run we don't believe that it will have any impact at all.

Don Layden: In the short run, we don't believe that it will have any impact at all. Our relationship with Ingenico has been very modest to almost nonexistent over the course of the last year or year and a half. To the extent the acquisition causes a change in their direction, there may be an opportunity for us to continue to do work with them, but at the moment, it really has almost no impact to us at all.

Our relationship with Ingenico.

Has been has been very modest to almost nonexistent.

Over the course of the last a year to year and a half.

Judy said the acquisition causes a change in their direction.

The their baby an opportunity for us to continue to do work with them, but at the moment. It really has almost no impact to us at all.

Okay. Thanks, guys.

Jaeson Schmidt: Okay. Thanks a lot, guys.

Your next question comes from the line of Bob Nepali from William Blair. Your line is open.

Operator 1: Your next question comes from the line of Bob Napoli from William Blair. Your line is open.

Operator: Your next question comes from the line of Bob Napoli from William Blair. Your line is open.

Bob Napoli: Good morning. Thank you for the opportunity to ask a question. First question is just, Don, I appreciate the guidance or the targets, the five-year revenue target and the EBITDA margin target. Just, you know, at a $500 million revenue run rate in five years, you know, how much of that would be interchange? Because your EBITDA target is the 30% is net of interchange and net revenue, correct? Would that be, you know, what would that revenue be approximately in your target net of interchange?

Good morning. Thank you for the opportunity ask question first question is not just on I. Appreciate the the guidance are the targets the five year revenue target and.

The the EBITDA margin target, but just adding 500 million dollar revenue run rate in five years.

How much of that would be interchange because your target EBITDA target is that 30% is net of interchange and net revenue correct. So would that be what would that revenue be approximately and your target net interchange.

Well my.

Don Layden: Well, you know, Bob, my hope is that the networks would further reduce the interchange burden on the micro-payment space. So far, that seems to not be happening. Right now it would really be a linear increase in the interchange costs, which would mean that if interchange today is about $80 million of our total, I would expect that it would be $220 million roughly at $500 million, maybe a little bit more than that.

Bob I hope is that.

The networks would.

Would reduce their interchange burden on the.

Further reduce the interchange burden on the micro cap space.

But but so far that seems to not be happening. So it right now it would really be a linear increase in the interchange costs.

Which would mean that it's interchange today is about 80 million of our total I would expect that it would be 220 million roughly at 500 million, maybe a little bit more than that.

Okay, and then you know is that now that 30%.

Bob Napoli: Okay. You know, is that 30% EBITDA margin target on that net number, what is the trajectory to get there? I mean, what would you know, hope to achieve in 2020, fiscal 2021, and then, you know, what is the, you know, the timing to get to that 30% number?

EBITDA.

Margin target on.

That net number what is the trajectory to get there I mean, what what would you hope to achieving 20 fiscal 21, and then you know what is the now the timing to get to that 30% number.

Don Layden: I believe that by Q4 of the next fiscal year, our run rate will be at the $30 million EBITDA target.

I I believe the by the fourth quarter of the next fiscal year, our run rate will be at the 30 million.

Don Layden: I believe that by Q4 of the next fiscal year, our run rate will be at the $30 million EBITDA target.

EBITDA targets.

Oh I'm, sorry, then the fourth quarter of next year, you'll be at a run rate of 30 million of EBITDA or 30% margin.

Bob Napoli: I'm sorry. The Q4 of next year you'll be at a run rate of $30 million of EBITDA or a 30% margin?

Oh I'm sorry.

Don Layden: Oh, I'm sorry. Yeah. So in-

[music].

Bob Napoli: Both.

Yeah, so any lucky money.

Bob Napoli: Both.

Don Layden: 18 months.

Bob Napoli: Okay.

Don Layden: In 18 months, I expect the margin to be 30%.

Okay in time, I expect the margin to be 30%.

Bob Napoli: Okay.

Don Layden: The margin in Q4 of our next fiscal year should be in at that number.

Okay. So that the the margin in the fourth quarter of the of our next fiscal year.

Don Layden: The margin in Q4 of our next fiscal year should be in at that number.

It should be it at that number.

Bob Napoli: Okay. Thank you. That's very helpful. I guess just on the growth, the confidence in that 25%+ revenue growth. You know, what kind of visibility do you have into that as we sit here today? Would that growth be the growth of L&T? Would L&T still be around 80% of that revenue?

Okay.

And okay. Thank you that's that's a very helpful.

And then.

I guess just on the growth the confidence in that 25% plus.

Revenue growth they know what kind of visibility do you have into that as we sit here today and its would that growth be.

No the growth abella without one piece, there will be around 80% of that revenue.

Yeah, I think their visibility to that growth rate is probably in the 75% to 80% range and and I would expect to that the that the mix to LNG would continue at about 80% number.

Don Layden: Yeah, I think our visibility to that growth rate is probably in the 75% to 80% range. I would expect that the mix to L&T would continue at about that 80% number.

Okay and just last question in that you know that you're looking at the growth and 21 and 22, how much of that is going to come from some of the.

Bob Napoli: Okay. Just last question. In that, you know, as you're looking at the growth in 2021 and 2022, how much of that is gonna come from some of the initiatives that you laid out, the adjacent markets, you know, laundry, amusement, international? Are you seeing contribution in the near term from some of those initiatives?

Initiatives that you laid out the the adjacent markets laundry amusement a international.

Well what is.

Are you seeing contribution in the near term from some of those initiatives.

Don Layden: Yeah. You know, the good news about our growth strategy is that not all the things that I outlined have to happen in short order for us to be able to continue to hit that 25% number. I suspect that our international markets would be a very small contribution to that number. The adjacent markets, our hope is that that continues to you know be a driver of growth. As you know, as we had previously reported, you know, we had good opportunity in the amusement space that we announced in the last quarter and that we continue to deliver on.

Yeah.

Good news about our growth strategy is that.

Not all the things that I outlined to have to.

Has to happen in a intro to order for us to be able to continue to hit that 25% number and so I suspect after that.

Our international markets will be would be a very small contribution to that number.

The adjacent markets. Our hope is that that continues to.

You would be a driver of growth as you know as we look we had previously recorded.

Had we had a good opportunity in the amusement space.

In the we announced the last quarter, we continue to deliver on.

Don Layden: Honestly, the underlying vending market, we believe, will continue to grow strongly and will make up the vast majority of the growth that we're forecasting over the next year.

And and.

Don Layden: Honestly, the underlying vending market, we believe, will continue to grow strongly and will make up the vast majority of the growth that we're forecasting over the next year.

But but honestly the underlying vending market, we believe we'll continue to grow.

Strongly in and and we'll make up the vast majority of the growth that we're forecasting over the next year.

Bob Napoli: Thank you. Last question for me is, you know, you have great growth in volume and transactions, you know, good revenue. Appreciate the increase in the revenue guide. You know, the revenue per transaction or the revenue yield went down. Is that a mix? Did you have a very large customer? You know, what drove the lower revenue per transaction or revenue yield?

Thank you last question for me is the a great growth in volume and transactions.

You know good revenue appreciate the the increase and the revenue guide doesn't have the you know the revenue per transaction or the revenue yield went down is that a mix did you have a very large customer now what drove the lower revenue per transaction or revenue yield.

Oh, we did deliver on a large customer transaction over Q1, and Q2 that had a slight impact on revenue per transaction.

Glenn Gould: We did deliver on a large customer transaction over both Q1 and Q2 that had a slight impact on revenue per transaction. If you look over the last year, this was the first quarter where it dipped a little bit. We are showing larger ticket prices per transaction. You know, the trend over the last year has been slightly up. You're right, it did dip very slightly this quarter compared to the same quarter previous year. You know, a large portion of that is our average ticket price that we look at. You know, over the last year, that number has been increasing. This quarter, I think, was a little bit of an anomaly.

But if you looked over the last year. This was the first quarter, where I said, a little bit we are showing larger ticket prices per transaction.

So.

Trend over the last year, it's been a slightly up.

But you're right it's.

Very slightly this quarter compared to the same quarter previous here.

Yes, a large portion of that is our average ticket price.

That we look at but.

No over the last year that that number has been increasing.

That's what I think quarter was a little bit of an anomaly.

Great.

Bob Napoli: All right. Thank you.

Thank you.

Your next question comes from a line of George Sutton from Craig Hallum. Your line is open.

Operator 1: Your next question comes from the line of George Sutton from Craig-Hallum. Your line is open.

Operator: Your next question comes from the line of George Sutton from Craig-Hallum. Your line is open.

George Sutton: Thank you. I've always looked at the US market as a fairly open-ended growth opportunity with an explosion of unattended use cases, and you're just going to your existing customers to penetrate them. Thus, I'm surprised to hear about Japan being a potential strategy. Actually, having lived in Japan, it's a very developed, very competitive market, so I'm curious how you would be going after that market, what you would be giving up in the US market to do so.

Thank you I've always looked at the U.S. market is a fairly open ended growth opportunity with an explosion of unintended use cases, and you're just exists you're going to your existing customers to penetrate the lawson surprised to hear about Japan being a potential strategy actually having lived in Japan, It's a very developed very competitive market.

I'm curious how you would be going after that market, what you would be giving up in the U.S. market to do so.

Don Layden: We don't think we have to give anything up in the US market. We think that a focused effort on delivering our software solution in the Japanese market would be very attractive. You're right, Japan is a very well-developed vending market with a lot of vending machines. It has a very distributed group of payments providers. Our strategy to go to Japan is, A, to find the right partner to help us move into that market, and B, to deliver the software solution that we already have into the market because we believe that the Japanese operators would find the kind of benefits that the Seed software provides in the US to be applicable to the Japanese market.

We don't think we have to give anything up in the U.S. market.

We didn't get a focused effort on delivering our software solution in the Japanese market would be very attractive youre right, Japan is a very well developed vending market with a lot of vending machines.

It has a very distributed a group of payments providers.

So our strategy to go to Japan is a to find the right partner to help us move into that market and b to deliver the software solution that we already have into the market because we believe the Japanese operators would find that had a benefits that the seats.

For provides the U.S. to be applicable to the Japanese market.

Don Layden: That's based on the work that we have done to date, and based on the discussions that we've had with potential partners.

And that's based on the work that we've done today.

And based on discussions that we've had with potential partners.

Got you you a you mentioned in your prepared comments in a change of control that you felt shareholders deserve the premium for their shares which I'm not sure I fully understand if it's simply a board for board changeover. When you say premium for their shares theres been speculation.

George Sutton: Gotcha. You mentioned in your prepared comments in a change of control that you felt shareholders deserved a premium for their shares, which I'm not sure I fully understand if it's simply a board for board changeover. When you say premium for their shares, there's been speculation of a potential sale of the business, which, you know, would not necessarily be good from these current levels. I just wanna make sure I understood the thoughts behind the comment.

Have a potential sale of the business, which you know would not necessarily be good from these current level. So just want to make sure I understood the thoughts behind the comment.

I know I'm not sure I understand the question I think we've been pretty consistent in saying that.

Don Layden: I'm not sure I understand the question. I think we've been pretty consistent in saying that if there is going to be a wholesale change in the composition of the board, where a majority of the board is replaced or removed, that in a transaction like that, normally you would see a control premium paid, that that would happen as a result of an acquisition. That's not what Hudson is proposing. Hudson's simply proposing replacing the board without paying to acquire the company.

If there is going to be a wholesale change in the composition of the board where a majority of the board if he is replaced or removed that.

In a transaction like that.

The normally you would see a.

You would see a controlled premium paid but there was that that would that would happen as a result of an acquisition.

That's not what Hudson is proposing Hudson simply proposing.

Replacing the board.

Without paying to acquire the company.

Your next question comes from the line of Mike Latimore from Northland Capital. Your line is open.

Operator 1: Your next question comes from the line of Mike Latimore from Northland Capital. Your line is open.

Operator: Your next question comes from the line of Mike Latimore from Northland Capital. Your line is open.

Alright, great. Thanks.

Michael Latimore: All right. Great. Thanks. So just on the OpEx guidance, I guess you had $18.7 million of SG&A in the quarter. Given your comments, it sounds like that $18.7 million should be $12.5 million in Q1 of fiscal 2021. Is that the right way to think about it?

Just on the the Opex guidance I guess, yeah at 18.7 million unless you in a in the quarter.

And your comments it sounds like that 18.7 should be 12.5 in the first quarter fiscal 21 is that the right way to think about it.

Glenn Gould: That is correct.

That is correct.

Michael Latimore: Okay, got it. The $3.5 million of EBITDA comment, was that what it would be for the full year fiscal 2020, excluding these non-recurring?

Okay got it.

And then the 3.5 million of EBITDA comment was that what it would be for the full year fiscal swanee, excluding these nonrecurring.

Glenn Gould: No, that was for Q4 alone.

No that was for Q4 alone.

So were alone okay.

Michael Latimore: Q4 alone. Okay. Got it. Okay.

Got it okay that was intended to reflect what we think the.

Glenn Gould: That was intended to reflect what we think the kinda run rate EBITDA by quarter would be if we're able to achieve the $12.5 million OpEx mark.

On a run rate EBITDA by quarter would be if were able to achieve the 12 and a half million dollar.

Mark.

Okay.

Michael Latimore: Okay. If OpEx was $12.5 in Q4, EBITDA would be $3.5, is the idea?

Sorry, if opex was 12 and a half in the fourth quarter EBITDA would it be reporting back.

Glenn Gould: That's correct.

That's correct.

Michael Latimore: Okay. It looks like your transaction volume growth really accelerated in the quarter, the mid-30% range from low 20% range, you know, last couple quarters. What caused that volume growth?

Okay, and then it looks like yard transaction volume growth really accelerated in the quarter to mid 30% range from low 20% range.

You know last couple of quarters, what caused that volume growth.

Yeah, I I, it's hard for me to speculate on what.

Glenn Gould: You know, it's hard for me to speculate on what you know what's causing the number of transactions to go up. It's part of the growth of the company. We continue to add connections, which certainly drive volume of transactions. That's certainly one component of it. Other than that, the customer use of our platform as it's in place.

What's causing that number up.

Transactions pick out a lot.

As part of.

The growth of the company, we continue to add connections, which certainly drive volume of transactions.

That's certainly one component of it other than that but that the customer use of our of our platform have that's in place.

Michael Latimore: Okay. It was a big acceleration, so I'm just kinda curious. But that transaction volume, I mean, there's no reason why it would decline sequentially, right?

Yeah.

It's just it was a big accelerations I, just kind of curious so but that transaction volume I mean, there's no reason why would decline sequentially right.

I wouldn't expect no.

Glenn Gould: I wouldn't expect so, no.

Michael Latimore: Okay. You talked about product mix.

Yeah.

And you're talking about product mix so.

Glenn Gould: Similar to our

Michael Latimore: Yeah, sure.

Similar to our revenue line as we add connection revenue needs to go out the kind of lending or that way.

Glenn Gould: Similar to our revenue line, as we add connections, our revenue continues to go up. It's kind of linear that way, you know?

Michael Latimore: Okay. You talked about a product mix affecting gross margin. Can you just elaborate on that a little bit?

And you're talking about a product mix affecting gross margin can you just elaborate on that a little bit.

Glenn Gould: Yeah, yeah. As I look at it's just a comparison, and it fluctuates. That's why it's a little bit of a moving target as we give guidance to 45% to 40% margin for transaction services. It's somewhat dependent on the combination of our service fees and the transaction processing fees, driven by volume. That product mix impacts the margin that we see. That's the product mix I'm referring to.

As as I look at it it's just a comparison as fluctuate have.

Why it's a little bit of a moving target.

Guidance to 45% to 40%.

Hi margin for transaction services Hi.

It's somewhat dependent on the combination of our service fees and the transaction processing fee.

And by volume.

And.

With that product mix impact.

The margin that we see so that's the other back I'm referring to.

Michael Latimore: Mm-hmm. Just last on the vending management solution or Seed, you know, how is that performing relative to cashless?

HM.

And just last on the lending management solution or proceed.

You know how is that performing relative to the cashless.

We.

Glenn Gould: We think it's performing very well. As we look at our strategy to integrate the Cantaloupe Seed software into our installed network, we think we're about 50% there. We have work to do to address that additional white space that's in process. The integration is going very, very well, and they're very well received by our customers.

We think is performing very well.

As we looked at our strategy to integrate the cantaloupe feed software into our installed network or think were about 50%. There. We have worked to do to address that that additional white space that's in process, but.

The integration is going very very well and hi, there very well received by our customers.

It is a growing at the same rate as license and transaction revenue or.

Michael Latimore: Is it growing at the same rate as License and Transaction revenue or above or below that?

Above or below.

I would say that is probably not quite sad.

Glenn Gould: I would say that it's probably not quite as the curve that the transaction revenue is growing, but it absolutely is growing. It's a significant part of our strategy to continue to add the software component to our network. It absolutely is growing and a big part of our strategic growth that we envision for the future.

Hi, quite the curve that the transaction revenue is growing but it absolutely is growing at a significant part of our strategy to continue to add to software component to our network.

So it absolutely is growing in a big part of our strategic growth that we envision for the future.

And just last that's kind of housekeeping what should stock comp the.

Michael Latimore: All right. Just last, what should stock comp be on a quarterly basis going forward?

On a quarterly basis going forward.

We think are on a quarterly basis it should be in a 300, a 400000 dollar range.

Glenn Gould: We think, on a quarterly basis, it should be in the $300 to 400 thousand range.

Okay, great. Thank you.

Michael Latimore: Okay, great. Thank you.

Again, it seems like asked a question. Please press star and number one on your telephone keypad. Your next question comes from a line of Bob Napoleon from William Blair. Your line is open.

Operator 2: Again, if you'd like to ask a question, please press star and the number one on your telephone keypad. Your next question comes from the line of Bob Napoli from William Blair. Your line is open.

Operator: Again, if you'd like to ask a question, please press star and the number one on your telephone keypad. Your next question comes from the line of Bob Napoli from William Blair. Your line is open.

Bob Napoli: Thank you. A couple more, I guess. Don, the 30% margin target in 18 months, appreciate that. I mean, I would think that you have some good operating leverage in this business. What are your thoughts on the trajectory of margins, you know, once you get to that level over the next several years? Is this something where margins should, you know, improve, you know, 100 basis points a year if you're growing at 20%, or is that conservative? Just some thoughts on the operating margin leverage over the medium to long term.

Thank you couple more I guess.

On.

The the 30% margin target in 18 months.

Appreciate that but what should be there I mean, I would think that you have some good operating leverage in this business what are your thoughts on kind of the trajectory of margins.

You know once you get to that level over the next several years, if something were margin should.

Prove a you know 100 basis points a year, if you're growing at 20% or is that conservative. So just some thoughts on the operating margin leverage.

Over the medium to long term.

Don Layden: Bob, thanks for the question. You know, for payments companies, what has happened historically, and I think as we try to benchmark ourselves against other payments companies, and software companies that monetize their software through a payments network, there's been a range of EBITDA margin. Once you hit 30%, which I think is largely you know a target benchmark for most payment companies, you see the range move up to about 33%, 34%, 35%. It's a fairly narrow range, and at that level, you begin to see some market-based pressure to share some of the profitability through reduced pricing from customers.

Hi, Bob Thanks for the question.

For for payments companies or what what has happened or historically and I think as we try to benchmark ourselves against.

Other payments companies.

And software companies that monetize their their software through a payments network.

There's there's been a range of EBITDA margin what once you once you hit 30%.

Which I think is largely.

You know a target benchmark for most payment companies.

Are you see the range move up to about 30, 330, 435% a fairly narrow range.

And and his dad and at that level, you begin to see some market based pressure to share some of the profitability through reduced.

Pricing.

From customers.

Don Layden: I think that there is a natural hedge against the growth of that margin based on the market, you know, the competitive market realities and the expectation that customers have that some of that will be shared with them.

And so I think that there is a and a natural hedge against the growth of that margin.

Based on the market you know the competitive market realities of the expectation of the customers have but that some of that will be shared with them.

Okay. Yeah, we're still seeing margins go up at some of the big so them. So there maybe some sharing but there's still getting you know you're still seeing operating leverage even at the very massive.

Bob Napoli: Okay. Yeah, we're still seeing margins go up at some of the big, you know, so there may be some sharing, but they're still getting, you know, you're still seeing operating leverage even at the very massive payments companies.

Payments companies.

Don Layden: The advantage they have there, one of the things that we're focused on in our growth strategy is that they have a higher ticket price per transaction. We're in the micro-payment space.

And that and it any advantage they have there and what are the things that we're focused on an hour and our growth strategy is that they have a higher.

Ticket price per transaction, where are the micromanaged space Yep. So it it is harder to drive that operating leverage because of the small dollar value of the transactions. If we're successful.

Bob Napoli: Right. Yep.

Don Layden: It is harder to drive that operating leverage because of the small dollar value of the transactions. If we are successful, as we believe we will be over time, moving into markets with higher ticket prices, and therefore moving our average ticket up from, you know, less than $2 per transaction where we currently sit, then you might see some of that improvement that you're talking about. In a micro-payment space, it is much more challenging to do that.

As we believe we will be over time moving into markets with a higher ticket prices and therefore movie or average ticket up from you know $2 less than $2 per transaction that we currently we're currently set.

Then you might see some of that improvement that you're talking about.

In a micro payment space. It is much more challenging to do that.

Bob Napoli: Understood. You know, what is your expectation for equipment margins and L&T margins, so gross margins, you know, over the next few years?

Understood and then.

Then what is your expectation for equipment margins in LNG margin. So gross margins over the next few years.

Yeah, I think I think the delay that were required to account for that you're going to see the equipment margin come to a natural point of of breakeven or a slight loss.

Don Layden: Yeah, I think that the way that we're required to account for that, you're gonna see the equipment margin come to a natural point of breakeven or a slight loss, because the accounting rules require us to reallocate our transaction agreements so that our equipment is valued at fair market value. One way or another, I think you're gonna see the equipment margins get back to some level of breakeven. I think that our supply chain initiatives will further drive some value into that and should further improve that margin. I think you're looking at marginal improvements in that margin. Our real focus is to drive recurring revenue through our software platform monetized by payments.

Because the accounting rules require us to.

The to reallocate our.

Our transaction agreements so that our equipment is valued at fair market value.

The.

So I can so one way or another I think you're going to see the equipment margins get back to some level of.

Breakeven.

You didn't get our supply chain initiatives will further drive some value into that interest in should further improve that margin, but but I think you're I think you're looking at at marginal improvements in that margin.

Our real focus is to drive recurring revenue there our software platform monetize my payments and the the.

Don Layden: The equipment at its current pricing doesn't really drive, we think, the long-term value of the business, but is an important enabler for us to drive connections and to drive that recurring revenue stream, which is what we intend to continue to focus on.

The equipment.

At a at its current pricing.

Is it really drive.

We think the long term value of the business.

And we'll but will but what is an important enabler for us to drive connections and to drive that recurring revenue stream, which is what we intend to continue to focus on.

And the LNG margins.

Bob Napoli: The L&T margins?

Hey, Bob you might find this interesting if you.

Glenn Gould: I mean, Bob, you might find this interesting. If you apply the $3.5 million a year savings that we anticipate through our processing improvement that we are negotiating, the net margin for H1 2020, we reported as 36.5%. If you roll that 3.5% savings into that, it becomes 38.6%.

If you apply the three and a half million dollar for the year savings that we anticipate.

Through our processing improvement that we are negotiating.

He.

Ellen team margin for the first half 2020, we reported is 36.5% if you roll that 3.5% savings into that it becomes 38.6% for now.

Don Layden: $3.5 million.

Turning to happen in dollar, yes, if you roll out those savings into.

Glenn Gould: $3.5 million. Yeah. If you roll out those savings into the results, our margin would be 38.6%. I think approaching the 40% level as we have previously been discussing with our shareholder base is certainly a good mark to think about of where we're heading as we improve the costing of our structure and implement the processing change that we will be. I think that 40% mark is a good way to think about it.

Into the results our margins would be 38.6 per fan I think are approaching the 40% level has we have previously been discussing with our shareholder base is certainly a good mark you to think about of where we're heading.

As we improve the costing of of our structure and implement processing change that we will be I think that 40% market. That's a good.

A good way to think about it.

Bob Napoli: Okay. Just on Cantaloupe. The cross-sell of Cantaloupe was a big focus when that company was acquired a few years ago. How was the cross-sell progressing?

Okay, and just on Cantaloupe to cross sell up Cantaloupe was a big.

Focus one that company was acquired a few years ago, how was the cross sell progressing.

As I mentioned that with its about 50%.

Glenn Gould: As I mentioned, it's about 50%.

Bob Napoli: Okay.

Glenn Gould: We have strategic marks in place to look at the white space on that side of our business and to attack it. It is a certain growth strategy that we look at, a way to improve and increase our software deployment. It is something that we're working on right now. It's about 50%. More to come.

Okay, we have a strategic.

Marks in place to look at the white space on that side of our business and that's socket.

It is a certain <unk> growth strategy that we looked at a way to.

Improve and increase our software deployment. So it is something that we're working on right now it's about 50% more to more to come.

And maybe just one last one I guess it just I Don you've been there yeah as CEO now a few months or what have you what are your thoughts I mean, what has surprised you.

Bob Napoli: You know, maybe just one last one, I guess. Just, Don, you've been there, you know, as CEO now a few months. What are your thoughts? I mean, what has surprised you? Do you need to add to your team? You've been around the payments industry a long time. Are there senior executives that you know, want to add to the team to drive growth? I know it's, you know, you're going through a big process here, still driving good growth, but are there add-on M&A thoughts over the medium term?

Do you need to ER to add to your team you've been around the payments industry, a long time there there.

Senior executives that you.

One to add.

To the team to drive growth in our there and I know, it's gone through a big process here still driving good growth but are there.

Add on M&A thoughts.

Over the long in the medium term.

Yes, hi number.

Don Layden: Yeah.

Bob Napoli: That's a number of questions.

Don Layden: Yes. I appreciate that. I have no plans to add anybody else to the management team. I think that we have a strong team. We've diversified the talent pool by adding some talent from Denver in addition to the strong talent we already have in Malvern, and in New Orleans. That has improved, I think, the mix of talent that we have in an appropriate way. You know, as you know, we don't comment on M&A speculation, but this is a market that has a lot of competitors. I think like any other payments market, there is going to probably be some consolidation in that market.

Yes, I appreciate that.

I have I have no plans to add anybody else to the management team.

I think that.

We had a we have a strong team.

Weve diversified the talent pool by adding some talent from Denver. In addition to the strong talent, we already have in Melbourne.

And then in New Orleans.

That that has approved I think the the mix of talent that we haven't it appropriately.

The.

The Oh, we don't you know as you know we don't comment on an M&A speculation, but this is a market.

That has a lot of competitors.

And and and I think like any other payments market there is going to probably be some consolidation in that market.

Don Layden: There's going to be, I think, a fair amount of coopetition in the market as well. We are really focused on our go-to-market strategy, on delivering a software solution that's monetized through the payment network. There are other folks who have a very different go-to-market strategy and where our software solution embedded in their hardware or in their payment capabilities could be very attractive. From a commercial perspective, we are absolutely looking at every one of those potential transactions to build out our base of vending and other unattended retail outlets with our software solution, because we believe it's the strongest, most robust software solution that exists in the marketplace for unattended retail.

And there is going to be I think a fair amount of.

Have a pull opposition to the market as well.

We are really focused on our go to market strategy.

Delivering a software solution, that's monetized through the payment network.

There are other folks who have a very different go to market strategy and where our software solution. It better than there are in their hardware or in there in their payment capabilities could be very attractive and from a commercial perspective, we are absolutely looking at every one of those potential trying.

The actions or two to to build out our base of of vending and other unattended retail.

Outlets with our with our software solutions, because we believe it is the strongest.

Most robust software solution that exists in the marketplace for unattended retail.

Bob Napoli: All right. Thank you. Appreciate it.

Alright. Thank you appreciate it.

There are no further questions at this time I'll turn the call back over to dawn for closing remarks.

Operator 2: There are no further questions at this time. I'll turn the call back over to Don Layden for closing remarks.

Operator: There are no further questions at this time. I'll turn the call back over to Don Layden for closing remarks.

Yeah, Thanks, very much for participating today in our earnings call again, I want to really highlight the hard work and dedication of our employees.

Don Layden: Yeah. Thank you very much for participating today in our earnings call. Again, I wanna really highlight the hard work and dedication of our employees. They really are the ones who delivered these results this quarter and will continue to deliver the results as we go forward. Thanks very much.

They really are the ones who delivered these results.

This quarter and we'll continue to deliver the the results as we go forward thanks very much.

This concludes today's conference call you may now disconnect.

Operator 2: This concludes today's conference call. You may now disconnect.

Operator: This concludes today's conference call. You may now disconnect.

[music].

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