Shares of USA Technologies (USAT) are down massively, here at $3.20 a share at the time of this writing, good for a 55% decline. To get right to the point, the company and its auditors basically have been incompetent, and the Street has no ideas where to value shares as it has to restate earnings and such after a new audit. This is damning news but could be a possible opportunity to scalp some profit here. Use caution, but we see a chance to make some moves.

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Source: BAD BEAT Investing

As you can see this is a major selloff. Shares are more than cut in half. Is it an overreaction? Probably. The numbers, unless completely fabricated, are likely to be changed, but not so drastically that it values the company this much lower. Let us not forget how much value has already been lost:

(Click on image to enlarge)

Source: BAD BEAT Investing

The stock is retesting December lows. While this is a high-risk play, a sharp bounce is probable. However, you may want to keep tight stops. Would recommend keeping any position small, but this does seem to be left for dead.

Recommended Bad Beat play

Target entry: $3.15-$3.30

Target exit: $3.65+

Stop loss $3.05

Discussion

Earlier in the year, it seemed that senior management had been a bit incompetent if not dishonest in late 2017. As 2018 moved on the company acquired Cantaloupe Systems, a provider of cloud and mobile solutions fir vending, micro markets, and office coffee services.

This acquisition was valued at $85 million which along with some organic growth seemed to double or more the connection base of the company. It had expanded its reach significantly. The stock had rallied big time to nearly $17 per share. A far cry from today at $3.20. The company announced an investigation into accounting last year and shares plummeted to below $4.00.

This was the first time we saw the company and stock and passed on recommending it at 5-6. The stock began to rally from December lows with the market. Last month, the company announced preliminary results for its investigation which affected less than 3% of revenues so they said. Most of the management has now been fired.

So what happened to cause the stock to drop? Well, the auditors were fired basically. RSM US LLP notified the Audit Committee of the Board of Directors its resignation as the Company’s independent registered public accounting firm. RSM’s previously issued report on the consolidated financial statements for the fiscal year ended June 30, 2017, did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles. As of February 1, 2019, RSM had not completed its audit procedures or issued any reports on the Company’s internal control over financial reporting and consolidated financial statements for the fiscal year ended June 30, 2018.

During the last two fiscal years of the Company, and the subsequent period through February 1, 2019, and except as stated in the letter from RSM to the Audit Committee, there were no disagreements with RSM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of RSM, would have caused RSM to make reference to the subject matter of the disagreements in their reports. RSM indicated in its letter to the Audit Committee that, based on the totality of the information, it had concluded in its professional judgment that it can no longer rely on management representations in connection with the audit of the Company’s 2017 internal control over financial reporting and consolidated financial statements.

So what now? Well, the Audit Committee is currently seeking a new independent registered public accounting firm and intends to engage such firm as soon as practicable. RSM has been authorized to respond fully to the inquiries of the successor independent registered accounting firm.

What we know is that as previously reported, on a net basis, the proposed aggregate reduction to previously reported revenues during the fiscal quarters in question is not expected to exceed $5.5 million. In most cases, revenues that had been recognized prematurely were, or are expected to be, recognized in subsequent quarters, including quarters subsequent to the quarters impacted by the investigative findings. The investigation further found that certain items that had been recorded as expenses, such as the payment of marketing or servicing fees, were more appropriately treated as contra-revenue items in earlier fiscal quarters.

Sale?

Recently, Barrington Research thought a sale is the best option for USA Technologies shareholders and values the potential sale at $10 to $15 per share. The firm said USAT's position as a unique asset in the unattended retail market is offset by "the credibility gap" following the internal investigation and rebuilding of the senior exec team.

Well, let's assume that valuation is now in half. So $5-$7.50 based on today's action. Probably more. This puts a sale likely in a 100%-200% gain range. No guarantee and faith is lost.

Take home

Shares look like a good dice roll here for a bounce.