The honeymoon is over between vending-machine payments provider USA Technologies Inc. and its largest investor, which on Monday accused the company’s board of directors of “value-destructive conduct” and blasted its top brass for “lack of management qualifications or accountability.”
The surly announcement by New York City-based hedge fund Hudson Executive Capital LP, which beneficially owns 16% of USA Technologies, came just days after USAT filed a number of long-overdue financial reports whose lateness prompted the Nasdaq Global Market to suspend trading of the company’s shares Sept. 26. The late filings and restatements in others stemmed from a 13-month-long internal investigation of accounting problems that had led to an overstatement of revenues of about $5.5 million.
In a letter to shareholders, Hudson Executive Capital said it plans to nominate a slate of independent directors at the company’s next annual meeting, which hasn’t yet been scheduled. Without mentioning long-time chief executive Stephen P. Herbert by name, the letter also shows HEC wants him out. “We have urged the board to make necessary executive changes for some time,” it says. “Even in our most recent meeting, the board was unwilling to commit to management change, yet at the same time openly expressed uncertainty about the CEO’s future status on the board.”
Malvern, Pa.-based USAT fired back a few hours later with a press release headlined “USA Technologies Rejects Effort by Hudson Executive Capital To Take Over Board.”
USAT said HEC’s founder and managing partner, Douglas L. Braunstein, has rejected its efforts to work with him on board nominees, “including considering board candidates that Hudson may propose.”
Braunstein has “demanded instead that majority control of the board immediately be turned over to him and his nominees,” USAT said. “Mr. Braunstein noted that anything short of that would result in an expensive proxy contest and litigation—the latest in a series of ultimatums delivered by him to our board. Likewise, we have been skeptical of Hudson’s track record in ‘assisting’ companies which they have targeted.”
It was only in May, during the midst of the accounting investigation, that HEC announced it had taken a 12% stake in USAT, saying its beaten-down shares were undervalued and “an attractive investment.” USAT’s stock jumped on that news but has fallen since then as the company missed several Nasdaq filing deadlines.
Since becoming involved with USAT over the past 10 months, HEC claims the board has “repeatedly rejected our offers of resources and expertise and continued on its own value-destructive path.” The letter faults the board for not completing the audit in a timely manner and “failure to hold management accountable for its repeated failures.”
The letter further claims a $50-million equity-and-debt financing package USAT announced last week with investment firm Antara Capital has “onerous, off-market terms,” with USAT selling stock to Antara at a 27% discount and incurring debt at interest rates above its current debt facility.
But USAT said “many of the initiatives recommended by Hudson are already well underway,” that it “did not lose a single customer” because of the audit, and that it has strengthened management with the recent addition of three C-level executives and three independent directors.
Braunstein is a former JPMorgan Chase & Co. chief financial officer and vice chairman, and he currently is a director at ATM network owner Cardtronics plc.
USAT’s shares currently are offered over the counter, but the company is working to get trading resumed on the Nasdaq.