UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2011ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from ________________ to ________________
  Commission file number:  1-13521
  
 HYPERCOM CORPORATION
 (Exact name of registrant as specified in its charter)
 
 Delaware

86-0828608(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)8888 East Raintree Drive, Suite 300

Scottsdale, Arizona

85260(Address of principal executive offices)

(Zip Code)
  (480) 642-5000
 (Registrant’s telephone number, including area code)
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
  Yes [ √ ]                                           No [   ]
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
  Yes [   ]                                           No [   ]
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer [   ]                                                                                                         Accelerated filer [ √ ]
  Non-accelerated filer [   ]                                                                                                           Smaller reporting company [   ]
 (Do not check if a smaller reporting company)
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes [   ]No [ √ ]
 
 Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 Class

Outstanding at May 2, 2011Common Stock, $0.001 par value per share

62,493,343 shares
  
 
 
 HYPERCOM CORPORATION
 INDEX
 
 PagePART I.
FINANCIAL INFORMATION
1Item 1.
Financial Statements
1Consolidated Statements of Operations – Three months ended March 31, 2011 and 2010 (unaudited)
1Consolidated Balance Sheets – March 31, 2011 (unaudited) and December 31, 2010
2Consolidated Statements of Cash Flows – Three months ended March 31, 2011 and 2010 (unaudited)
3Notes to the Consolidated Financial Statements, March 31, 2011 (Unaudited)
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27Item 4.
Controls and Procedures
27PART II.
OTHER INFORMATION
28Item 1.
Legal Proceedings
28Item 1A.
Risk Factors
28Item 6.
Exhibits
28Signatures
29
 
 
 Table of Contents
   PART I — FINANCIAL INFORMATION
 
 Item 1.  Financial Statements.
   HYPERCOM CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)Three Months EndedMarch 31,Amounts in thousands, except share and per share data

2011


2010Net revenue:Products

$
91,229


$
74,119Services


28,061



24,636Total net revenue


119,290



98,755Costs of revenue:Products


63,858



46,684Services


20,518



16,647Amortization of purchased intangible assets


243



704Total costs of revenue


84,619



64,035Gross profit


34,671



34,720Operating expenses:Research and development


12,703



12,112Selling, general and administrative


23,753



18,299Amortization of purchased intangible assets


1,315



1,540Gain on sale of assets


—



(674
)Total operating expenses


37,771



31,277Income (loss) from operations


(3,100
)


3,443Interest income


282



196Interest expense


(3,013
)


(2,786
)Foreign currency gain (loss)


1,185



(545
)Other income (expense)


1



(13
)Income (loss) before income taxes anddiscontinued operations


(4,645
)


295Benefit (provision) for income taxes


1,464



(18
)Income (loss) before discontinued operations


(3,181
)


277Income (loss) from discontinued operations


(266
)


98Net income (loss)

$
(3,447
)

$
375Basic and diluted income (loss) per share:Income (loss) before discontinued operations

$
(0.06
)

$
0.01Income (loss) from discontinued operations


—



—Basic and diluted income (loss) per share

$
(0.06
)

$
0.01Shares used in computing income (loss) percommon share:Basic


55,484,786



53,696,317Diluted


55,484,786



54,853,276The accompanying notes are an integral part of these consolidated financial statements.
   - 1 -
 Table of Contents
   HYPERCOM CORPORATIONCONSOLIDATED BALANCE SHEETS(Unaudited)March 31,


December 31,2011


2010Amounts in thousands, except share and per share dataASSETSCurrent assets:Cash and cash equivalents

$
47,400


$
56,946Accounts receivable, net of allowance for doubtfulaccounts of $4,384 and $4,024, respectively


95,134



100,104Current portion of net investment in sales-type leases


5,357



4,883Inventories


46,649



43,987Prepaid expenses and other current assets


7,480



6,577Deferred income taxes


552



318Prepaid taxes


5,820



4,036Current portion of assets held for sale


5,045



5,778Total current assets


213,437



222,629Property, plant and equipment, net


23,076



23,765Net investment in sales-type leases


7,450



7,226Intangible assets, net


43,736



42,368Goodwill


24,013



22,601Other long-term assets


9,294



8,351Total assets

$
321,006


$
326,940LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
47,888


$
63,750Accrued payroll and related expenses


16,784



14,819Accrued sales and other taxes


4,969



5,761Product warranty liabilities


6,992



5,946Restructuring liabilities


974



2,082Accrued other liabilities


25,374



23,525Deferred revenue


18,664



19,066Income taxes payable


6,593



6,986Current portion of liabilities held for sale


547



1,140Total current liabilities


128,785



143,075Deferred tax liabilities


12,819



12,544Long term debt, net of discount


63,049



60,133Other liabilities


14,494



14,130Total liabilities


219,147



229,882Commitments and contingencies  (see note 13)Stockholders' equity:Common stock, $.001 par value; 100,000,000 shares authorized;62,491,118 and 56,048,865 shares outstandingat March 31, 2011 and December 31, 2010, respectively


66



59Additional paid-in capital


286,552



282,832Accumulated deficit


(142,845
)


(139,398
)Treasury stock, 3,219,583 and 3,196,353 shares (at cost) atMarch 31, 2011 and December 31, 2010, respectively


(23,123
)


(22,911
)Accumulated other comprehensive loss


(18,791
)


(23,524
)Total stockholders' equity


101,859



97,058Total liabilities and stockholders' equity

$
321,006


$
326,940The accompanying notes are an integral part of these consolidated financial statements.
   - 2 -
 Table of Contents
   HYPERCOM CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)Three Months EndedMarch 31,Amounts in thousands

2011


2010Cash flows from operating activities:Net income (loss)

$
(3,447
)

$
375Adjustments to reconcile net income (loss)to net cash used in operating activities:Depreciation and amortization


2,496



2,621Amortization of purchased intangibles


1,558



2,244Interest conversion to debt


1,682



1,708Amortization of debt issuance costs


32



32Amortization of discount on notes payable


1,234



967Provision for doubtful accounts


219



55Provision for excess and obsolete inventory


778



682Provision for warranty and other product charges


1,679



895Foreign currency (gains)  losses


(452
)


629Gain on sale of assets


—



(674
)Non-cash stock-based compensation


1,152



311Other non-cash charges


220



16Deferred income tax provision (benefit)


41



(432
)Changes in operating assets and liabilities, net


(17,118
)


(15,384
)Net cash used in operating activities


(9,926
)


(5,955
)Cash flows from investing activities:Purchase of property, plant and equipment


(2,873
)


(1,264
)Proceeds from the sale of assets


—



1,000Cash paid for acquisitions, net of cash acquired


—



(1,030
)Software development costs capitalized


(680
)


(10
)Net cash used in investing activities


(3,553
)


(1,304
)Cash flows from financing activities:Purchase of treasury stock


(212
)


—Proceeds from issuance of common stock


2,581



86Net cash provided by financing activities


2,369



86Effect of exchange rate changes on cash and cash equivalents


1,471



(1,239
)Net decrease in cash from continuing operations


(9,639
)


(8,412
)Net cash provided by operating activities ofdiscontinued operations


93



79Cash and cash equivalents, beginning of the period


56,946



55,041Cash and cash equivalents, end of the period

$
47,400


$
46,708The accompanying notes are an integral part of these consolidated financial statements.
  - 3 -
 Table of Contents
 
 
 HYPERCOM CORPORATION
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2011
 (Unaudited)
 
 
 1.  Basis of Presentation
  The consolidated financial statements include the accounts of Hypercom Corporation and its wholly-owned subsidiaries (“Hypercom”, the “Company”, “we”, “us”, “our”, or “our business”). The Company owns 100% of the outstanding stock of all of its subsidiaries. All of the Company’s subsidiaries are included in the consolidated financial statements and all significant intercompany accounts and transactions have been eliminated in consolidation.
  The accompanying interim consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“GAAP”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The financial information is unaudited but reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of the Company’s management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 from which the December 31, 2010 balance sheet amounts herein were derived.
 Certain prior period amounts have been reclassified to conform to the current period presentation.
 
 Impact of Recently Issued Accounting Pronouncements
 
 In October 2009, the Financial Accounting Standards Board (“FASB”) issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010, modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The Company adopted this guidance on January 1, 2011, and is applying it prospectively for new or materially modified arrangements. The adoption did not have a material impact on the Company’s results of operations or financial condition.
 The Company's significant accounting policies as reported in its Annual Report on Form 10-K for the year ended December 31, 2010 were amended in the first quarter of 2011 upon the adoption of the new revenue recognition accounting pronouncements discussed above. While the adoption of the new accounting pronouncements had no material impact on the Company's Consolidated Financial Statements for the first quarter of 2011, the Company's previously disclosed revenue recognition policy related to multiple-element arrangements and software was updated and is presented below, as revised:
 Hypercom enters into multiple-element arrangements, including hardware, software, professional consulting services and maintenance support services with its customers. For arrangements involving multiple deliverables, the Company evaluates and separates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; and (b) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of the Company.
  At the inception of an agreement, the Company allocates the arrangement consideration to each deliverable qualifying as a separate unit of accounting in an arrangement based on the Company’s relative selling prices for each of the deliverables. The Company determines the selling price using VSOE (“Vendor Specific Objective Evidence”), if it exists, and otherwise Third Party Evidence (“TPE”).  If neither VSOE nor TPE exists for a unit of accounting, the Company uses the Estimated Selling Price (“ESP”). Revenue is recognized based on the relative sales price of the delivered elements, limited to the amount of consideration received at the time of delivery given the majority of the Company multiple element arrangements contain future deliverables for which future payment is contingent upon the delivery of additional items or meeting other specified performance conditions both of which are outside the Company’s control.
   - 4 -
 Table of Contents
 
 VSOE is generally limited to the price charged when the same or similar product or service is sold separately or, if applicable, the stated substantive renewal rate in the agreement. The Company defines VSOE as substantial standalone transactions that are priced within a narrow range. TPE is determined based on the prices charged by the Company’s competitors for a similar deliverable when sold separately to similarly situated customers. When the Company is unable to establish selling price using VSOE or TPE, the Company uses ESP when allocating the arrangement consideration. The objective of ESP is to determine the price at which the Company would enter into a transaction with the customer if the products or services were to be sold by the Company on a standalone basis. The Company determines ESP for deliverables in future agreements based on the specific facts and circumstances of the arrangement. Selling prices are analyzed if a significant change in the Company’s business necessitates a more timely analysis or if the Company experiences significant variances in the Company’s selling prices or cost to produce and deliver the Company’s products and services.
  For multiple element arrangements entered into prior to January 1, 2011, the Company has not applied the new guidance and in such arrangements, if the Company has the requisite evidence of selling price for the undelivered elements but not for the delivered elements, the Company applied the residual method to allocate arrangement consideration.  For arrangements involving a lease, revenues under these arrangements continue to be allocated considering the relative selling price of the lease and non-lease deliverables included in the bundled arrangement, based upon the estimated selling price of each element.
  
 2.  Merger Agreement with VeriFone
 
 On November 17, 2010, the Company entered into a definitive merger agreement with VeriFone Systems, Inc. (“VeriFone”), and Honey Acquisition Co, Inc., a direct wholly-owned subsidiary of VeriFone (“Merger Sub”), under which Hypercom will be merged with and into Merger Sub, with Hypercom continuing after the merger as the surviving corporation and a wholly-owned subsidiary of VeriFone, in an all-stock transaction (the “Merger”). The Merger was approved by the Company’s stockholders on February 24, 2011 and is anticipated to close in the second half of 2011, subject to the satisfaction of applicable regulatory approvals and other customary closing conditions. Upon the consummation of the Merger, each share of the Company’s common stock issued and outstanding immediately prior to the merger will be converted into the right to receive 0.23 of a share of VeriFone common stock.
  In connection with the Merger, on April 1, 2011, Hypercom entered into a Stock and Asset Purchase Agreement (the “Purchase Agreement”) with VeriFone and Ingenico S.A. (“Ingenico”), pursuant to which Hypercom will sell to Ingenico, or one or more of its subsidiaries, certain assets and liabilities of Hypercom’s U.S. payment terminal business, including the equity interests in Hypercom’s subsidiary, Netset Americas Centro Servicio, S. de R.L. de C.V. (the “U.S. Divestiture”).
  As consideration for the U.S. Divestiture, Ingenico will pay Hypercom a purchase price of $54 million in cash, subject to certain adjustments pursuant to the terms of the Purchase Agreement.  The U.S. Divestiture has been approved by the boards of directors of Hypercom and Ingenico and is not subject to stockholder approval.  The U.S. Divestiture is subject to certain closing conditions and the Purchase Agreement contains certain termination rights for both Hypercom and Ingenico. The U.S. Divestiture is contingent upon and will occur immediately prior to the Merger.
 
 
 3.  Intangible Assets and Goodwill
  Intangible assets consisted of the following at March 31, 2011 and December 31, 2010 (dollars in thousands):
  
 March 31, 2011


December 31, 2010Gross








GrossCarrying


Accumulated





Carrying


AccumulatedAmount


Amortization


Net


Amount


Amortization


NetCapitalized software

$
7,907


$
(2,594
)

$
5,313


$
7,159


$
(2,626
)

$
4,533Customer and supplier relationships


55,578



(19,662
)


35,916



52,386



(17,114
)


35,272Unpatented technology


3,017



(3,017
)


—



2,840



(2,840
)


—Trademarks, trade names


3,608



(1,877
)


1,731



3,527



(1,776
)


1,751Service know-how


1,330



(554
)


776



1,330



(521
)


809Other


149



(149
)


—



149



(146
)


3$
71,589


$
(27,853
)

$
43,736


$
67,391


$
(25,023
)

$
42,368
 - 5 -
 Table of Contents
   The Company capitalizes certain internal and external expenses related to the development of computer software used in products the Company sells.  Costs incurred prior to the establishment of technological feasibility are charged to research and development (“R&D”) expense.  The increase in capitalized software is primarily related to the Company’s next generation of network equipment products.
 
 Amortization expense related to intangible assets used in continuing operations was $1.6 million and $2.5 million for the three months ended March 31, 2011 and 2010, respectively. Based on the intangible assets recorded at March 31, 2011 and assuming no subsequent impairment of the underlying assets or changes in foreign currency rates, the annual amortization expense for each period is expected to be as follows: $5.4 million for the remainder of 2011, $7.3 million for 2012, $6.4 million for 2013, $6.4 million for 2014, $6.2 million for 2015.
 
 Activity related to goodwill consisted of the following for the three-month period ended March 31, 2011 (dollars in thousands):
  Balance at beginning of the year

$
22,601Currency translation adjustment


1,412Balance, end of period

$
24,013
 
 
 4.  Restructuring and Other Charges
 
 2010 Restructuring
 
 The Company has incurred employee severance and related charges in 2011 as a result of the following restructuring initiatives that commenced in 2010:
 
 ·
Reorganization of the Company’s service businesses in Australia and Brazil;·
Reorganization of the Company’s operations in Asia-Pacific; and·
Reorganization of the Company’s management team in its offices in Arizona, Mexico and the Caribbean.
 
 The Company incurred charges of $0.1 million for the three months ended March 31, 2011 which were recorded in operating expenses and included in the Americas segment related to a management reorganization of the Company’s North America operation and is included in restructuring liabilities in the Company’s consolidated balance sheets as of March 31, 2011.
  The following table summarizes these charges and activities during the three months ended March 31, 2011 (dollars in thousands):
 Balance at








Balance atDecember 31,





Cash


March 31,2010


Additions


Payments


2011Severance and other terminationbenefits

$
1,553


$
119


$
(975
)

$
697
 
 
 The Company expects to pay the remaining amounts accrued in 2011. The amounts recorded and the additional restructuring charges the Company expects to incur are subject to change based on the negotiation of severance with employees and related work groups.
  Thales e-Transactions Restructuring
 
 On April 1, 2008, the Company completed the acquisition of Thales e-Transactions (“TeT”) and began formulating a restructuring plan. At the acquisition date, the Company accrued into the purchase price allocation restructuring costs related to reduction in workforce and future facilities lease obligations of approximately $9.1 million as part of its restructuring plan.
   - 6 -
 Table of Contents
   Activities related to the TeT acquisition restructuring plan are as follows (dollars in thousands):
  
 Balance at








Balance atDecember 31,





Cash


March 31,2010


Additions


Payments


2011Severance and other terminationbenefits

$
529


$
—


$
(252
)

$
277
 The Company expects the remaining amounts accrued to be paid in 2011.  The restructuring plan and the amounts recorded are subject to change based on the negotiation of severance and other workforce reduction plans with employees and related work groups. Accordingly, additional restructuring expenses may be incurred and recorded as an expense in the period of the estimated change in amounts to be paid. Any decrease in the estimated restructuring amounts to be paid will be recorded as a reduction of goodwill and any associated deferred tax accounts.
 
 
 5.  Assets Held for Sale
 
 European Lease and Services Operations
 
 In the fourth quarter of 2009, the Company decided to sell a European lease and services operations, which qualified as discontinued operations. Accordingly, this lease and services business operating results have been classified as discontinued operations in the statements of operations and cash flows for all periods presented.  The Company remains in negotiations with potential buyers of this lease and services operation and expects to enter into a sale agreement during the second half of 2011.
  A summary of the assets and liabilities held for sale related to this European lease and services operations is as follows (dollars in thousands):
  
 March 31,


December 31,2011


2010ASSETSCash and cash equivalents

$
409


$
264Accounts receivable, net


379



473Net investment in sales-type leases


1,894



2,121Inventories


161



171Prepaid expenses and other current assets


286



833Long term assets


26



27Total assets

$
3,155


$
3,889LIABILITIESAccounts payable

$
404


$
545Accrued sales and other taxes


27



460Accrued payroll and related expenses


116



135Total liabilities

$
547


$
1,140
 
 Brazilian building sale
 
 On April 19, 2010, the Company sold its Brazilian building for consideration of R$8.6 million Brazilian Reais (approximately $4.6 million U.S. Dollars), receiving R$2.9 million Brazilian Reais, or $1.7 million U.S. Dollars, upon execution of the sales agreement. The remainder was expected to be received in installments of 40% and 30% within 180 days and 270 days, respectively, of the signing of the sales agreement.  The Company entered into a leaseback transaction with the buyer to allow for a transition of the Company’s services operations for a period of three months that ended on July 19, 2010.
   - 7 -
 Table of Contents
 
 
 The remaining installments have not been received as of March 31, 2011. The Company continues to defer the gain related to the sale as of March 31, 2011. The gain will be recognized once the Company no longer has continuing involvement in the building, the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property, and collectability of the remaining amounts due are reasonably assured either by collection of the majority of the receivable or when the Company is assured the amounts due are not subject to future subordination from a bank or other lender. The net book value of the building was $1.9 million and was classified as assets held for sale in the Company’s consolidated balance sheets as of March 31, 2011 and December 31, 2010, respectively. The $1.7 million received has been recorded as deferred revenue in the Company’s consolidated balance sheet as of March 31, 2011 and December 31, 2010.
  
 6.  Leases
 
 Sales-Type Leases
 
 The Company’s net investments in sales-type leases consisted of the following at March 31, 2011 and December 31, 2010 (dollars in thousands):
  
 March 31,


December 31,2011


2010Lease contracts receivable


16,486


$
14,836Unearned revenue


(3,054
)


(2,199
)Allowance for bad debt


(625
)


(528
)Net investment in sales-type leases

$
12,807


$
12,109
 
 7.  Inventories
 
 Inventories consisted of the following at March 31, 2011 and December 31, 2010 (dollars in thousands):
 March 31,


December 31,2011


2010Purchased parts

$
9,619


$
10,501Work in progress


242



454Finished goods


36,788



33,032$
46,649


$
43,987
 
 8.  Product Warranty Liability
 
 The following table reconciles the changes to the product warranty liability for the three-month periods ended March 31, 2011 and 2010 (dollars in thousands):
  
 Three Months EndedMarch 31,2011


2010Balance at beginning of period

$
5,946


$
5,444Warranty charges from operations


1,679



895Utilization of warranty liability


(1,280
)


(1,046
)Currency translation adjustment


647



(296
)Balance at end of period

$
6,992


$
4,997
 
 
 Deferred revenue associated with the Company’s extended warranty programs was $3.9 million as of March 31, 2011 and December 31, 2010.
   - 8 -
 Table of Contents
 
 9.  Long-term Debt
 
 Revolving Credit Facilities
 
 On January 15, 2008, certain of the Company’s subsidiaries (the “Borrowers”) entered into a Loan and Security Agreement (the “Loan Agreement”) with a bank and other financial institutions. The Company and certain other subsidiaries are guarantors (together with the Borrowers, the “Obligors”) of the Borrowers’ obligations under the Loan Agreement. The bank also serves as agent for the lenders under the Loan Agreement (the “Agent”). The Loan Agreement provides for a revolving credit facility of up to $25.0 million. Under the Loan Agreement, if certain conditions are met, the Borrowers may request an increase in the credit facility to an aggregate total of up to $40.0 million. Amounts borrowed under the Loan Agreement and repaid or prepaid during the term may be reborrowed. Outstanding amounts under the Loan Agreement bore interest, at the Borrowers’ option, at either (i) LIBOR plus 175 basis points or (ii) the bank’s prime rate.
 
 Availability of borrowings and the issuance of letters of credit under the Loan Agreement are subject to a borrowing base calculation based upon a valuation of the Company’s eligible inventories (including raw materials, finished and semi-finished goods, and certain in-transit inventory) and eligible accounts receivable, each multiplied by an applicable advance rate.
 
 On February 10, 2010, the Loan Agreement was amended to allow the Company to enter into a transaction between its former subsidiary, HBNet, and The McDonnell Group, as well as making additional changes, including, among others, providing for the outstanding amounts under the Loan Agreement to now bear interest, at the Company’s option, at either: (i) LIBOR plus 200 or 250 basis points; or (ii) the bank’s prime rate plus 50 or 75 basis points depending on certain financial ratios. In addition, the borrowing base was amended to eliminate inventory from the borrowing base calculation.
 
 On December 30, 2010, the Loan Agreement was further amended whereby all amounts outstanding are now due on January 14, 2012. In addition, the revolving credit facility under the Loan Agreement is set at a maximum of up to $25.0 million (previously up to $40.0 million if certain conditions were met). No amounts were borrowed against the line of credit as of March 31, 2011. The Company had availability of $7.4 million as of March 31, 2011, which was decreased by outstanding letters of credit totaling $3.8 million at March 31, 2011.
 
 In addition to representations and warranties, covenants, conditions and other terms customary for instruments of this type, the Loan Agreement includes negative covenants that prohibit the Obligors from, among other things, incurring certain types of indebtedness (excluding indebtedness secured by certain assets of the Company and its subsidiaries in an aggregate amount not to exceed $50.0 million for working capital purposes), making annual capital expenditures in excess of prescribed amounts, or disposing of certain assets. The Loan Agreement provides for customary events of default, including failure to pay any principal or interest when due, failure to comply with covenants, failure of any representation made by the Borrowers to be correct in any material respect, certain defaults relating to other material indebtedness, certain insolvency and receivership events affecting the Obligors, judgments in excess of $2.5 million in the aggregate being rendered against the Obligors, and the incurrence of certain liabilities under the Employee Retirement Income Security Act in excess of $1.0 million in the aggregate.
 
 In the event of a default by the Borrowers, the Agent may, at the direction of the lenders, terminate the lenders’ commitments to make loans under the Loan Agreement, declare the obligations under the Loan Agreement immediately due and payable and enforce any and all rights of the lenders or Agent under the Loan Agreement and related documents. For certain events of default related to insolvency and receivership, the commitments of the lenders are automatically terminated and all outstanding obligations become immediately due and payable. The obligations of the Obligors under the Loan Agreement are secured by inventory and accounts receivable of certain of the Company’s subsidiaries in the United States and the United Kingdom. The remaining balance of the Company’s consolidated assets, including the subsidiaries acquired in connection with the TeT acquisition, is unencumbered under the Loan Agreement and, if needed, may be used as collateral for additional debt. The Company’s obligations as guarantor under the Loan Agreement are unsecured.
 
 Acquisition Financing
 
 In February 2008, in connection with the acquisition of TeT, the Company entered into a Credit Agreement with Francisco Partners II, L.P. (“FP II”) pursuant to a commitment letter dated December 20, 2007 between the parties. The Credit Agreement provided for a loan of up to $60.0 million to partially fund the acquisition at closing. The loan under the Credit Agreement bears interest at 10% per annum, provided that, at the election of the Company, interest may be capitalized and added to the principal of the loan to be repaid at maturity on April 1, 2012. The Company can voluntarily make prepayments in increments of $5.0 million without premium or penalty.
   - 9 -
 Table of Contents
   On funding of the loan under the Credit Agreement and the closing of the acquisition, FP II was granted a five-year warrant (the “Warrant”) to purchase approximately 10.5 million shares of the Company’s common stock at $5.00 per share. The estimated fair value of the Warrant at the date issued was $1.68 per share using a Black-Scholes option pricing model. The valuation date for the Warrant was February 14, 2008, when all relevant terms and conditions of the debt agreement had been reached.The total fair value of the Warrant of $17.8 million was recorded as a discount to the acquisition financing and has been recognized in equity as additional paid in capital. The loan discount is being amortized as interest expense over the life of the loan and amounted to $1.2 million and $1.0 million for the three months ended March 31, 2011 and 2010, respectively.
 
 On March 18, 2011, FP II exercised the Warrant in full on a cashless exercise basis and the Company issued 5,923,492 shares of its common stock to FP II upon such exercise.
 
 Long-term debt consisted of the following at March 31, 2011 and December 31, 2010 (dollars in thousands):
  
 March 31,


December 31,2011


2010Credit agreement

$
60,000


$
60,000Interest conversion to debt


19,915



18,233Repayment of debt


(11,000
)


(11,000
)Other


—



—68,915



67,233Unamortized warrant discount


(5,866
)


(7,100
)Long-term debt, net of discount

$
63,049


$
60,133
 
 10.  Share-Based Compensation
 
 The following table summarizes share-based compensation expense included in the consolidated statements of operations for the three months ended March 31, 2011 and 2010 (dollars in thousands):
  
 Three Months EndedMarch 31,2011


2010Costs of revenue

$
62


$
9Research and development


16



29Selling, general and administrative


1,074



273Total

$
1,152


$
311
 As of March 31, 2011, total unrecognized compensation cost, net of forfeitures, related to stock-based options and restricted stock awards was $3.5 million and the related weighted-average period over which it is expected to be recognized is approximately 1.45 years.
 
 Stock Options
 
 At March 31, 2011, the Company had one active share-based employee compensation plan. Stock option awards granted from this plan are granted at the fair market value on the date of grant, and vest over a period determined at the time the options are granted, generally ranging from one to five years, and generally have a maximum term of ten years. For stock options with graded vesting terms, the Company recognizes compensation cost using the accelerated method over the requisite service period.
   - 10 -
 Table of Contents
 
 The Hypercom Corporation 2010 Equity Incentive Plan became effective on June 10, 2010. The plan allocated a total of 5.1 million shares of common stock for issuance, as well as the addition of up to 0.9 million shares that remained available for issuance under the Company’s predecessor plans.
 
 A summary of the Company’s stock option balances at March 31, 2011 is as follows:
 
 WeightedWeighted


Average


AggregateAverage


Remaining


IntrinsicNumber of


Exercise


Contractual


Value (InOptions


Price


Term


Thousands)Outstanding at March 31, 2011


3,777,556


$
4.67



7.26


$
20,996Vested and expected to vest at March 31, 2011


3,610,722


$
4.69



7.18


$
20,009Exercisable at March 31, 2011


2,410,061


$
4.88



6.25


$
12,906
 The aggregate intrinsic value of options exercised during the three-month period ended March 31, 2011 was $3.1 million.
 
 The key assumptions used in the Black-Scholes valuation model to calculate the fair value of options granted during such periods are as follows:
 
 Three Months EndedMarch 31,2011


2010Weighted average risk-free interest rate


N/A



2.60
%Expected life of the options (in years)


N/A



5.50Expected stock price volatility


N/A



74.0
%Expected dividend yield


N/A



—
 
 There were no stock options granted during the three months ended March 31, 2011.
 
 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The risk-free interest rate is based on the U.S. treasury security rate in effect as of the date of grant. The expected lives of options and stock price volatility are based on historical data of the Company. The weighted average fair value of options granted in the three-month period ended March 31, 2010 was $2.21.
 Restricted Stock Awards
 
 The Company grants restricted stock awards to certain employees. Restricted stock awards are valued at the closing market value of the Company’s common stock on the date of grant, and the total value of the award is expensed using the accelerated method. Share-based compensation expense related to all restricted stock awards outstanding for the three-month periods ended March 31, 2011 and 2010 was approximately $0.7 million and $0.1 million, respectively. As of March 31, 2011, the total amount of unrecognized compensation cost related to nonvested restricted stock awards was $1.6 million, which is expected to be recognized over a weighted-average period of 1.49 years. Compensation expense with respect to the grants could be reduced or reversed to the extent employees receiving the grants leave the Company prior to vesting in the award.
 - 11 -
 Table of Contents
   A summary of nonvested restricted stock activity for the three-month period ended March 31, 2011 is as follows:
 
 WeightedAverageNonvested


Grant DateShares


Fair ValueOutstanding


per ShareBalance at December 31, 2010


1,109,689



3.25Shares vested


(22,334
)


3.18Balance at March 31, 2011


1,087,355



3.25
 There were no restricted stock awards granted during the three months ended March 31, 2011.The total fair value of restricted stock awards granted during the three-month period ended March 31, 2010 was $0.2 million.
 
 11. Equity
 
 Treasury Stock
 Beginning in the second quarter of 2010, the Company elected to give employees a net-settlement option when restricted stock awards vest, whereby the Company buys from the employee the net common shares equal to the minimum statutory tax withholding requirement. The cash value of these awards is then remitted to the taxing authorities to satisfy the minimum statutory tax withholding requirements of the taxing authorities on the employees’ behalf. The Company bought 23,230 shares at a cost of $212 thousand and 34,105 shares at a cost of $162 thousand, which was included in treasury stock at March 31, 2011 and December 31, 2010, respectively.
 
 12. Income Taxes
 
 Income tax benefit (expense) before discontinued operations for federal, state and foreign taxes was $1.5 million and $(18) thousand, respectively, for the three months ended March 31, 2011 and 2010. The Company’s consolidated effective tax rate for the three months ended March 31, 2011 was 31.5%. The Company’s effective tax rate is determined by the level and composition of pre-tax income subject to varying foreign, state and local taxes and other items. The benefit recorded for the three months ended March 31, 2011 is primarily the result of the release of tax contingency reserves upon the expiration of the statute of limitations. The Company continues to provide a full valuation reserve against substantially all of its deferred tax asset balances as of March 31, 2011. The valuation reserve is subject to reversal in future years at such time that the benefits are actually utilized or the operating profits in the United States become sustainable at a level that meets the recoverability criteria.
 
 The total amount of unrecognized tax benefits at March 31, 2011 was $45.8 million, of which $2.0 million would impact the Company’s effective tax rate were it to be recognized.
 
 The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various U.S. state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years prior to 2000. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as part of the tax provision. Accrued interest and penalties at March 31, 2011 and December 31, 2010 were $1.5 million and $1.4 million, respectively. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.
 
 
 13. Commitments and Contingencies
 
 The Company is currently a party to various legal proceedings, including those noted below. While the Company presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on its financial position, results of operations or cash flows, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or, in cases where injunctive relief is sought, an injunction. Were an unfavorable ruling to occur, it is possible such a ruling could have a material adverse impact on the Company’s financial position, results of operations or cash flows in the period in which the ruling occurs or in future periods.
   - 12 -
 Table of Contents
 
 Brazil Tax and Labor Contingencies.The Company’s operations in Brazil are involved in various litigation matters and have received or been the subject of numerous governmental assessments related to indirect and other taxes, as well as disputes associated with former Company employees and employees of various service providers with whom the Company had contracted. The tax matters, which comprise a significant portion of the contingencies, principally relate to claims for taxes on the transfers of inventory, municipal service taxes on rentals and gross revenue taxes. The Company is disputing these tax matters and intends to vigorously defend the Company’s positions. The labor matters principally relate to claims made by former Company employees and by former employees of various vendors that provided contracted services to the Company and who are now asserting that under Brazil law the Company should be liable for the vendors’ failure to pay wages, social security and other related labor benefits, as well as related tax obligations, as if the vendor’s employees had been employees of the Company. As of March 31, 2011, the total amount related to the reserved portion of the tax and labor contingencies was $0.7 million and the unreserved portion of the tax and labor contingencies amounted totaled approximately $23.9 million. With respect to the unreserved balance, these have been assessed by management as being either remote or possible as to the likelihood of ultimately resulting in a loss to the Company. Local laws and regulations often require that the Company to make deposits or post other security in connection with such proceedings. As of March 31, 2011 the Company had $5.4 million of cash deposits in Brazil regarding claims that the Company is disputing, liens on certain Brazilian assets as discussed in Note 6 with a net book value of $1.9 million, and approximately $3.5 million in letters of credit, all providing security with respect to these matters. Generally, any deposits would be refundable and any liens would be removed to the extent the matters are resolved in the Company’s favor. The Company routinely assesses these matters as to the probability of ultimately incurring a liability against its Brazilian operations and records the best estimate of the ultimate loss in situations where it assessed the likelihood of an ultimate loss as probable.
  CardSoft, Inc., et al. v. Hypercom Corporation, et al. (United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2:08-CV-00098, filed on March 6, 2008) . CardSoft, Inc. and CardSoft (Assignment for the Benefit of Creditors), LLC (collectively “CardSoft”) filed this action against the Company and others in March 2008, alleging that certain of the Company’s terminal products infringe two patents allegedly owned by CardSoft: U.S. Patent No. 6,934,945 (the “‘945 Patent”), entitled “Method and Apparatus for Controlling Communications,” issued on August 23, 2005, and U.S. Patent No. 7,302,683 (the “‘683 Patent”), also entitled “Method and Apparatus for Controlling Communications,” issued on November 27, 2007, which is a continuation of the ‘945 patent. CardSoft is seeking a judgment of infringement, an injunction against further infringement, damages, interest and attorneys’ fees. In June 2008, the Company filed its answer, denying liability on the basis of a lack of infringement, invalidity of the ‘945 Patent and the ‘683 Patent, laches, waiver, equitable estoppel and unclean hands, lack of damages and failure to state a claim. The Company also counterclaimed seeking a declaratory judgment of non-infringement and invalidity of the ‘945 Patent and the ‘683 Patent. The Markman hearing is scheduled for July 20, 2011 and trial is scheduled for November 7, 2011. This action is currently in the discovery stage and, as CardSoft has not made a specific claim for damages, the Company is unable to assess its range of potential loss.
  Lisa Shipley v. Hypercom Corporation. (United States District Court for the Northern District of Georgia, Civil Action No. 1:09-CV-0265, filed on January 30, 2009). Lisa Shipley (“Shipley”), a former employee, filed this action against the Company in January 2009, alleging that the Company violated Title VII of the Civil Rights Act by discriminating against her on the basis of her gender, violated the Georgia Wage Payment laws, the Equal Pay Act and Georgia law by paying her lower compensation based on her gender. Ms. Shipley is seeking compensatory damages for emotional distress, damage to reputation, embarrassment, lost wages, back pay, accrued interest, punitive damages, attorney’s fees and expenses, and interest. In February 2009, the Company filed a motion to dismiss based on improper venue or, in the alternative, to transfer venue to the United States District Court for the District of Arizona. In June 2009, the Court denied the motion. In June 2009, the Company filed its answer, generally denying the material allegations of Ms. Shipley’s complaint. In October 2009, Ms. Shipley filed an amended complaint adding an allegation that the Company unlawfully retaliated against her. In November 2009, the Company filed its answer, denying the material allegations of the amended complaint. In February 2010, the Company filed a Motion for Judgment on the Pleadings as to Ms. Shipley's retaliation claim, which the Court subsequently denied. On July 19, 2010, the Company filed a motion for summary judgment on all claims. On February 15, 2011, the magistrate judge recommended that the Court grant the Company’s motion for summary judgment as to Ms. Shipley’s sexual harassment hostile work environment claim, the constructive discharge claim, and the Georgia wage payment statute claim, but denied the Company’s motion for summary judgment as to her disparate treatment, retaliation, Equal Pay Act and Georgia Sex Discrimination in Employment Act claims. The Court adopted the magistrate judge’s recommendations on March 8, 2011. On March 2, 2011, the Company filed a motion for leave to file a motion for partial summary judgment out of time seeking summary judgment on seven components of Ms. Shipley’s disparate treatment Title VII claim, which was denied by the Court on March 8, 2011. This action is in the discovery stage and, as Ms. Shipley has not made a specific claim for damages, the Company is unable to assess its range of potential loss.
   - 13 -
 Table of Contents
  
 Shareholder Class Action and Derivative Lawsuits. Commencing shortly after VeriFone publicly announced on September 30, 2010 that it had made an offer to acquire Hypercom and continuing following the announcement by the Company and VeriFone on November 17, 2010 that the Company had entered into a definitive merger agreement, certain putative class action lawsuits were filed in Arizona and Delaware state courts alleging variously, among other things, that the board of directors of Hypercom breached its fiduciary duties in connection with the merger and that VeriFone, Honey Acquisition Co., Hypercom, FP Hypercom Holdco, LLC, and Francisco Partners II, L.P. aided and abetted that alleged breach. These actions include: Gerber v. Hypercom, Delaware Court of Chancery, Case no. CA5868 (“Gerber”); Anarkat v. Hypercom, Maricopa County Superior Court, CV2010-032482 (“Anarkat”); Small v. Hypercom Corporation, Delaware Court of Chancery, Case no. CA6031 (Small”); Grayson v. Hypercom Corporation, Delaware Court of Chancery, Case no. CA6044 (Grayson”); and The Silverstein Living Trust v. Hypercom Corporation, Maricopa County Superior Court, Case no. CV2010-030941 (Silverstein”). The Anarkat and Silverstein cases have been consolidated in Maricopa County Superior Court as In Re Hypercom Corporation Shareholder Litigation, Lead Case No. CV2010-032482, and the Small and Grayson cases have been consolidated in the Delaware Court of Chancery as In Re Hypercom Corporation Shareholders Litigation, Consolidated C.A. No. 6031-VCL (the “Actions”). The Gerber case is dormant as the plaintiffs in that case have not prosecuted it since it was filed. On February 14, 2011, counsel for the plaintiffs and defendants in the Actions executed a Memorandum of Understanding (the “Memorandum”) pursuant to which (i) the Company provided additional disclosures recommended by the plaintiffs to supplement its proxy statement filed with the Securities and Exchange Commission, (ii) the defendants agreed to provide plaintiffs’ counsel with reasonable confirmatory discovery regarding the fairness and adequacy of the settlement and the additional disclosures, and (iii) the parties agreed to use their best efforts to execute and present to the court a formal stipulation of settlement within 45 days seeking court approval of (a) the settlement and dismissal of the Actions with prejudice, (b) the stay of all proceedings in the Actions, (c) the conditional certification of the Actions as a class action under Arizona law, (d) the release of all claims against the parties, (e) the defendants’ payment of $510,000 to the plaintiffs’ counsel for their fees and expenses, (f) the defendants’ responsibility for providing notice of the settlement to members of the class, and (g) the dismissal of the Delaware actions following the court’s final approval of the settlement. While the defendants deny that they have committed any violations of law or breaches of duties to the plaintiffs, the class or anyone else, and believe that their disclosures in the proxy statement regarding the merger were appropriate and adequate under applicable law, the defendants are entering into the settlement solely to eliminate the uncertainty, distraction, burden and expense of further litigation and to lessen the risk of any delay of the closing of the merger as a result of the litigation. The defendants have agreed that the payment to the plaintiffs’ counsel will be jointly funded equally by VeriFone and the carrier of Hypercom’s directors and officers liability insurance policy, while the Company will bear the cost of the $250,000 deductible amount under the insurance policy.
 
 
 14. Segment, Geographic, and Customer Information
 
 The Company’s Chief Operating Decision Maker (“CODM”) has been identified as the CEO of the Company. For each of the segments described below, the CODM has access to discrete financial information regarding the revenues, gross margins (using fully burdened manufacturing costs), direct local service costs, direct operating expenses consisting of expenses directly associated with the business segment and indirect operating expenses consisting of global Shared Cost Centers such as global R&D, marketing, corporate general and administrative expenses, and stock-based compensation. The Company’s operations are managed by Managing Directors for each region that report directly to the CODM. These Managing Directors have responsibility for all business activities and combined operating results of their regions and these individuals are compensated and evaluated based on the performance (Direct Trading Profit) of their respective regions (the Americas, Northern EMEA (“NEMEA”), Southern EMEA (“SEMEA”), and Asia-Pacific).
 
 The Company’s four business segments are as follows: (i) the Americas, (ii) NEMEA, (iii) SEMEA and (iv) Asia-Pacific. The countries in the Americas segment consist of the United States, Canada, Mexico, the Caribbean, Central America, and South America. The countries in the NEMEA segment consist of Belgium, Sweden, Turkey, Austria and Germany. The countries in the SEMEA segment consist of France, Spain, the United Kingdom, countries within Western and Central Eastern Europe, Russia, Hungary, the Middle East, and Africa. The countries in the Asia-Pacific segment consist of China, Hong Kong, Indonesia, the Philippines, Singapore, Thailand, Australia, and New Zealand.
 
 
 - 14 -
 Table of Contents
 
 
 Comparative segment data is as follows (dollars in thousands):
 
 Three Months EndedMarch 31,2011


2010Net RevenueAmericas

$
29,102


$
23,502NEMEA


25,640



27,535SEMEA


41,477



35,457Asia-Pacific


23,071



12,261$
119,290


$
98,755
 
  Three Months EndedMarch 31,2011


2010Operating IncomeAmericas

$
3,288


$
5,434NEMEA


4,967



6,149SEMEA


9,189



7,740Asia-Pacific


3,189



2,684Shared cost centers


(23,733
)


(18,564
)Total segment income (loss)

$
(3,100
)

$
3,443Interest income


282



196Interest expense


(3,013
)


(2,786
)Foreign currency gain (loss)


1,185



(545
)Other income (expense)


1



(13
)Income (loss) before income taxesand discontinued operations

$
(4,645
)

$
295
  March 31,


December 31,2011


2010Total AssetsAmericas

$
74,301


$
87,721NEMEA


95,229



96,716SEMEA


86,123



87,216Asia-Pacific


51,116



41,490Shared cost centers


14,237



13,797$
321,006


$
326,940
  
 - 15 -
 Table of Contents
 
 
 15. Comprehensive Income (loss)
 
 Comprehensive income (loss) for the three months ended March 31, 2011 and 2010 consists of the following (dollars in thousands):
 Three Months EndedMarch 31,2011


2010Net income (loss)

$
(3,447
)

$
375Foreign currency translation adjustment


4,733



(5,194
)Total comprehensive income (loss)

$
1,286


$
(4,819
)
 
 
 16.  Earnings per Share
 
 Basic income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if the income were divided by the weighted-average number of common shares outstanding and potentially dilutive common shares from outstanding stock options and warrants. Potentially dilutive common shares are calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company’s outstanding options and warrants. Potentially dilutive securities are not considered in the calculation of dilutive loss per share as their impact would not be dilutive. The following table reconciles the weighted-average shares used in computing basic and diluted income (loss) per share for the three months ended March 31, 2011 and 2010:
 
 
 Three Months EndedMarch 31,2011


2010Shares used in basic income (loss) per sharecomputation (weighted average commonshares oustanding)


55,484,786



53,696,317Dilutive effect of stock options and warrants


—



1,156,959Shares used in diluted income (loss)per share computation


55,484,786



54,853,276Options, stock awards and warrants that couldpotentially dilute income per share in the futurethat were not included in the computationof diluted income per share


4,864,911



15,003,062
  For the three months ended March 31, 2011, outstanding stock options, restricted stock awards and warrants were not included in the computation of diluted loss per share because they were anti-dilutive.
 
 On March 18, 2011, FP II exercised its Warrant in full on a cashless exercise basis and the Company issued 5,923,492 shares of its common stock to the Holder upon such exercise. The weighted average of common shares outstanding for the exercised Warrant as included in the basic shares computation for the three months ended March 31, 2011 was 394,899.
 
 - 16 -
 Table of Contents
   Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
 Cautionary Statements Regarding Forward-looking Statements
  This report and certain information incorporated by reference herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In passing the Private Securities Litigation Reform Act of 1995, as amended (the “Reform Act”), Congress encouraged public companies to make “forward-looking statements” by creating a safe harbor to protect companies from securities law liability in connection with such forward-looking statements. We intend to qualify both our written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions.
 
 “Forward-looking statements” include expressed expectations of future events and the assumptions on which the expressed expectations are based. The words “believe,” “expect,” “anticipate,” “intend,” “forecast,” “estimate,” “project,” “will” and similar expressions identify forward-looking statements. Such statements may include, but are not limited to, the severity and duration of the current economic and financial conditions; the state of the electronic payments industry and competition within the industry; projections regarding specific demand for our products and services; the level of demand and performance of the major industries we serve, including but not limited to the banking sector; the commercial feasibility and acceptance of new products, services and market development initiatives; our ability to successfully penetrate the vertical and geographic markets that we have targeted; our ability to improve our cost structure, including reducing our product and operating costs; our ability to develop more recurring revenue streams; our ability to successfully manage our contract manufacturers and our joint development manufacturing model, including the impact on inventories; our ability to allocate research and development resources to new product and service offerings; our ability to increase market share and our competitive strength; our future financial performance and financial condition; the adequacy of our current facilities and management systems infrastructure to meet our operational needs; the status of our relationship with and condition of third parties upon whom we rely in the conduct of our business; the sufficiency of reserves for assets and obligations exposed to revaluation; our ability to successfully expand our business and increase revenue; our ability to manage expenses, maintain or grow our revenue, and other risks associated with our company being merged with and into VeriFone Systems, Inc. as contemplated by a definitive merger agreement between the two companies and our pending sale of U.S. assets to Ingenico S.A. as contemplated by a definitive purchase agreement; our ability to integrate and obtain expected results and benefits from future acquisitions; our ability to effectively manage our exposure to foreign currency exchange rate fluctuations; our ability to sustain our current income tax structure; the impact of current and future litigation matters on our business; our ability to fund our projected liquidity needs and pay down outstanding debt obligations from cash flow from operations and our current cash reserves; our ability to remain compliant with and provide transaction security as required by relevant industry standards and government regulations; and future access to capital on terms that are acceptable, as well as assumptions related to the foregoing. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and are subject to numerous unquantifiable risks and uncertainties, some of which are unknown, that could cause actual events or results to differ materially from those projected. Due to such risks and uncertainties, you should not place undue reliance on our written or oral forward-looking statements. We are under no obligation, nor do we intend, to update or revise such forward-looking statements to reflect future developments, changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time.
  For additional information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see the “Risk Factors” section of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2010, as well as our subsequent reports on Form 8-K, as may be amended from time to time, which identify events and important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements. Except as required by law, Hypercom disclaims any obligation to update any such forward-looking statements or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
  Information about our Business
  Hypercom is one of the largest global providers of complete electronic payment solutions and value-added services at the point of transaction. Our vision is to be the world’s most recognized and trusted brand for electronic transaction solutions through a suite of secure and certified, end-to-end electronic payment products and software, as well as through a wide range of support and maintenance services. Our customers include domestic and international financial institutions, electronic payment processors, retailers, independent sales organizations and distributors. We also sell our products to companies in the hospitality, transportation, healthcare, prepaid card and restaurant industries. Customers around the globe select us because of our proven leadership and expertise in the global electronic payments industry, commitment to our customers’ success, continued support of past and future technologies and the quality and reliability of our products and services. We deliver convenience and value to businesses that require reliable, secure, high-speed and high-volume information/data transfers.  Approximately 64% of our sales are denominated in a currency other than the U.S. Dollar, with approximately 36% of our sales denominated in Euros.  Changes in currency rates, especially with respect to the Euro, could cause our future financial results to differ materially from our previously reported historical results.
 
 Merger Agreement with VeriFone
 
 On November 17, 2010, we entered into a definitive merger agreement with VeriFone and Merger Sub under which we will be merged with and into Merger Sub, with Hypercom continuing after the merger as the surviving corporation and a wholly-owned subsidiary of VeriFone, in an all-stock transaction. The Merger was approved by our stockholders on February 24, 2011 and is anticipated to close in the second half of 2011, subject to the satisfaction of applicable regulatory approvals and other customary closing conditions. Upon the consummation of the Merger, each share of our common stock issued and outstanding immediately prior to the merger will be converted into the right to receive 0.23 of a share of VeriFone common stock.
  In connection with the Merger, on April 1, 2011, we entered into the Purchase Agreement with VeriFone and Ingenico pursuant to which we will sell to Ingenico, or one or more of its subsidiaries, certain assets and liabilities of our U.S. payment terminal business, including the equity interests in our subsidiary, Netset Americas Centro Servicio, S. de R.L. de C.V.
  As consideration for the U.S. Divestiture, Ingenico will pay us a purchase price of $54 million in cash, subject to certain adjustments pursuant to the terms of the Purchase Agreement.  The U.S. Divestiture has been approved by our and Ingenico’s boards of directors and is not subject to stockholder approval.  The U.S. Divestiture is subject to certain closing conditions and the Purchase Agreement contains certain termination rights for us and Ingenico. The U.S. Divestiture is contingent upon and will occur immediately prior to the Merger.
  The Merger, together with the U.S. Divestiture transaction, has created some uncertainty in the marketplace that has adversely impacted our business and financial results and may continue to do so in the future. We have current and potential customers, as well as suppliers, that remain uncertain about the ongoing support that will be provided for our products and services, despite the contractual requirements by the acquiring companies to continue to support our products and services after the transactions are consummated. To mitigate the impact of this uncertainty, we continue to reiterate to our customers and suppliers that our contractual commitments to them will remain in effect following the closing of these transactions.
   - 17 -
 Table of Contents
 
 Result of Operations
 
 Net Revenue
  The following tables set forth our product revenue and services revenue for the three months ended March 31, 2011 and 2010 (dollars in thousands):
   Three Months Ended March 31,Change2011


2010


Amount


PercentNet product revenue

$
91,229


$
74,119


$
17,110



23.1
%Net service revenue


28,061



24,636



3,425



13.9
%Total

$
119,290


$
98,755


$
20,535



20.8
%
  Product Revenue
  The increase in product revenue for the three months ended March 31, 2011 compared to the same period in 2010 was principally due to increased sales of $9.0 million in our Asia-Pacific segment which was driven by stronger demand in our countertop products and a $5.2 million revenue increase in our Americas segment primarily due to $4.1 million of new product sales of countertop products in Brazil. Also, sales in Southern EMEA (“SEMEA”) increased by $5.1 million due to stronger demand for virtually all our product lines.
  Services Revenue
  Services revenue increased by $3.4 million for the three months ended March 31, 2011 compared to the same period in 2010 primarily due to a large service contract in Australia which was entered into during the second half of 2010.
  Segment Revenue
  Our operations are managed and reviewed through four geographic regions that we designate as reportable segments.
  The following table sets forth the revenues by business segment for the three months ended March 31, 2011 and 2010 (dollars in thousands):
   Three Months Ended March 31,Change2011


2010


Amount


PercentAmericas

$
29,102


$
23,502


$
5,600



23.8
%NEMEA


25,640



27,535



(1,895
)


(6.9
)%SEMEA


41,477



35,457



6,020



17.0
%Asia-Pacific


23,071



12,261



10,810



88.2
%Total

$
119,290


$
98,755


$
20,535



20.8
%
   - 18 -
 Table of Contents
   Net revenue for the Americas segment increased by $5.6 million for the three months ended March 31, 2011 compared to the same period in 2010, principally as a result of $4.1 million of new product sales in Brazil. Mexico and Central America’s product revenue increased by $2.6 million, primarily due to higher demands in our countertop and mobile products.
  Net revenue for the NEMEA segment decreased by $1.9 million for the three months ended March 31, 2011 compared to the same period in 2010, principally due to $6.4 million of lower revenue in Austria due to strong demand for countertop products in the first quarter of 2010 when compared to 2011. This decrease was partially offset by a $4.2 million increase in mobile sales in Scandinavia and Nordic regions.
  Net revenue for the SEMEA segment increased by $6.0 million for the three months ended March 31, 2011 compared to the same period in 2010, mainly driven by strong product demand in most of our product lines. This stronger demand primarily occurred in France and the United Kingdom.
  Net revenue for the Asia-Pacific segment increased by $10.8 million for the three months ended March 31, 2011 compared to the same period in 2010, primarily due to higher countertop sales in Australia and Indonesia.
  Gross Profit
 
 Our costs of revenue include the cost of raw materials, manufacturing, supply chain, service labor, overhead and subcontracted manufacturing costs, telecommunications costs, inventory valuation provisions and loan loss provisions with respect to sales-type leases included in continuing operations.
  The following table sets forth the product and services gross profit for the three months ended March 31, 2011 and 2010 (dollars in thousands):
  
 Three Months Ended March 31,Gross Margin





Gross Margin


Change2011


Percentage


2010


Percentage


Amount


PercentProduct gross profit

$
27,371



30.0
%

$
27,435



37.0
%

$
(64
)


(7.0
)%Service gross profit


7,543



26.9
%


7,989



32.4
%


(446
)


(5.5
)%Amortization of purchasedintangible assets


(243
)


(0.2
)%


(704
)


(0.7
)%


461



(0.5
)%Gross profit

$
34,671



29.1
%

$
34,720



35.2
%

$
(49
)


(6.1
)%
 
 
 Product Gross Margin
 
 The decrease in the product gross margin percentage for the three months ended March 31, 2011 compared to the same period in 2010 was primarily due to the following; a) Our product cost was negatively impacted by $2.3 million of higher product costs and $0.8 million of higher warranty charges and; b) Our product mix was negatively impacted by higher sales with lower gross margins in Indonesia and in Brazil.
 
 - 19 -
 Table of Contents
 
 
 Services Gross Margin
  The decrease in services gross margin for the three months ended March 31, 2011 and 2010 was primarily a result of higher contract labor in Brazil related to our reorganization of our service business. In addition, there were two items that occurred during the first quarter of 2010 that did not occur during the first quarter of 2011 — a favorable sales tax position in Brazil ($0.4 million) and a software sale of $0.3 million in North America.
 
 Operating Expenses—Research and Development
  
 Three Months Ended March 31,Change2011


2010


Amount


PercentResearch and development

$
12,703


$
12,112


$
591



4.9
%
 
 
 Research and development (“R&D”) expenses consist mainly of software and hardware engineering costs and the cost of development personnel.
 
 R&D expenses increased $0.6 million for the three months ended March 31, 2011 compared to the same period in 2010. The increase was attributable to the development of our next generation of products. The increased development expenses are expected to continue for the remainder of 2011.
  Operating Expenses—Selling, General and Administrative
   Three Months Ended March 31,Change2011


2010


Amount


PercentSelling, general and administrative

$
23,753


$
18,299


$
5,454



29.8
%
 
 
 Selling, general and administrative (“SG&A”) expenses consist primarily of sales and marketing expenses, administrative personnel costs, and facilities operations.
 
 SG&A expenses for the three months ended March 31, 2011 increased by $5.5 million compared to the same period in 2010. The increase is primarily related to $2.1 million of professional fees related to the Merger. Bonus, retention bonuses and commission expenses increased by $2.7 million due to increased sales and as part of a plan to retain key employees during the three months ended March 31, 2011 when compared to 2010. Also stock based compensation increased by $0.8 million primarily due to timing of the issuance of awards and higher per share valuation due to the increase of our stock price.
 
 Operating Expenses—Gain on sale of assets
 
 During the first quarter of 2010 we recorded a gain of $0.7 million on the sale of assets to create a new venture, Phoenix Managed Networks, LLC, with The McDonnell Group.
   - 20 -
 Table of Contents
   Segment Operating Income (loss) from operations
   Three Months Ended March 31,Change2011


2010


Amount


PercentAmericas

$
3,288


$
5,434


$
(2,146
)


(39.5
)%NEMEA


4,967



6,149



(1,182
)


(19.2
)%SEMEA


9,189



7,740



1,449



18.7
%Asia-Pacific


3,189



2,684



505



18.8
%Shared Cost Centers


(23,733
)


(18,564
)


(5,169
)


(27.8
)%Total

$
(3,100
)

$
3,443


$
(6,543
)


(190.0
)%
  
 Operating income in the Americas segment decreased by $2.1 million for the three months ended March 31, 2011 from the same period in 2010, primarily as a result of lower margin sales of countertop products in Brazil.
  Operating income in the NEMEA segment decreased by $1.2 million for the three months ended March 31, 2011 compared to the same period in 2010. The decrease was primarily due to lower revenues and higher product costs.
  Operating income in the SEMEA segment increased by $1.4 million, for the three months ended March 31, 2011 compared to the same period in 2010, principally due to higher sales volume.
  Operating income in the Asia-Pacific segment increased by $0.5 million for the three months ended March 31, 2011 compared to the same period in 2010, principally due to higher sales volume, partially offset by lower margin sales in Indonesia.
  Shared Cost Centers expenses increased by $5.2 million the three months ended March 31, 2011 compared to the same period in 2010. The increases are primarily due to higher legal expenses related to merger and divestiture activities, higher warranty charges, and by higher global R&D development costs for our planned next generation of terminal products.
 
 Non-GAAP Measures
  We provide non-GAAP supplemental information, which excludes items such as restructuring costs, stock-based compensation, amortization of purchased intangibles, gain on sale of assets, non-cash amortization for discount on warrants issued for long-term debt, and professional fees related to the Merger, to facilitate meaningful period-to-period comparisons of underlying operational performance. These non-GAAP measurements are used for internal management assessments because such measures provide additional insight into ongoing financial performance. We believe that the presentation of non-GAAP financial information may be useful to investors and analysts for many of the same reasons that management finds these measures useful.
 
 Non-GAAP financial measures exclude many significant items that are also important to understanding and assessing our financial performance. Additionally, in evaluating alternative measures of operating performance, it is important to understand that there are no standards for these calculations. Accordingly, the lack of standards can result in subjective determinations by management about which items may be excluded from the calculations, as well as the potential for inconsistencies between different companies that have similarly titled alternative measures. Accordingly, our non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, disclosures made in accordance with GAAP.
 
 Pursuant to Regulation G, a reconciliation of GAAP and non-GAAP measures are presented below:
  
 Three Months Ended March 31,2011


2010GAAP net revenue

$
119,290


$
98,755Constant currency rate adjustment


(2,397
)


—Non-GAAP net revenue

$
116,893


$
98,755
   Management refers to constant currency rate adjustment as growth in a constant currency basis or adjusting for currency so that the business results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the company's business performance.  Generally, when the U.S. Dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates.
  - 21 -
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   Three Months Ended March 31,2011


2010GAAP income (loss) before discontinued operations

$
(3,181
)

$
277Restructuring charges included in:Costs of product revenue


—



118Costs of service revenue


(13
)


110Operating expenses


132



85Stock-based compensation included in:Costs of product revenue


62



9Operating expenses


1,090



302Amortization of purchased intangibles included in:Costs of revenue


243



704Operating expenses


1,315



1,540Gain on sale of assets:Operating expenses


—



(674
)Incurred fees on M&A related activities:Operating expenses


2,188



—Non-cash amortization for discount on warrants issued for long-term debt:Non-operating expense


1,234



967Non-GAAP income before discontinued operations

$
3,070


$
3,438Non-GAAP diluted  income per share before discontinued operations

$
0.05


$
0.06
 
 
 The weighted average shares used in computing Non-GAAP diluted income per share before discontinued operations were 63,516,668 and 54,853,276 for the three months ended March 31, 2011 and 2010, respectively, which includes outstanding stock options, restricted stock awards and warrants for both periods because they were dilutive.
   - 22 -
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   Three Months Ended March 31,2011


2010GAAP operating income (loss)

$
(3,100
)

$
3,443Restructuring charges


119



313Stock-based compensation


1,152



311Amortization of purchased intangibles


1,558



2,244Gain on sale of assets


—



(674
)Incurred fees on M&A related activities


2,188



—Non-GAAP operating income

$
1,917


$
5,637
  
 Three Months Ended March 31,2011


2010Product revenue

$
91,229


$
74,119Service revenue


28,061



24,636Total net revenue

$
119,290


$
98,755GAAP product gross profit

$
27,371


$
27,435Restructuring charges


—



118Stock-based compensation


62



9Amortization of purchased intangibles


243



704Non-GAAP product gross profit

$
27,676


$
28,266Non-GAAP Percentage of product revenue


30.3
%


38.1
%GAAP service gross profit

$
7,543


$
7,989Restructuring charges (reversal)


(13
)


110Non-GAAP service gross profit

$
7,530


$
8,099Non-GAAP Percentage of service revenue


26.8
%


32.9
%GAAP gross profit

$
34,671


$
34,720Restructuring charges (reversal)


(13
)


228Stock-based compensation


62



9Amortization of purchased intangibles


243



704Non-GAAP gross profit

$
34,963


$
35,661Non-GAAP Percentage of total net revenue


29.3
%


36.1
%
 
  - 23 -
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 Three Months Ended March 31,2011


2010GAAP operating expenses

$
37,771


$
31,277Restructuring charges


(132
)


(85
)Stock-based compensation


(1,090
)


(302
)Amortization of purchased intangibles


(1,315
)


(1,540
)Gain on sale of assets


—



674Incurred fees on M&A related activities


(2,188
)


—Non-GAAP operating expenses

$
33,046


$
30,024Non-GAAP Percentage of total net revenue


27.7
%


30.4
%
 
 
 Three Months Ended March 31,2011


2010Operating income (loss)

$
(3,100
)

$
3,443Depreciation and amortization


4,054



4,865Restructuring charges


119



313Stock-based compensation


1,152



311Gain on sale of assets


—



(674
)Incurred fees on M&A related activities


2,188



—Adjusted EBITDA

$
4,413


$
8,258
 
 
 Non-Operating Income
  Non-operating income consists of net interest expense, foreign currency gains and losses, and other income and losses. For the three months ended March 31, 2011, our interest expense net of interest income was $3.0 million, compared to $2.7 million for the same period in 2010. The increase was due to the interest conversion into additional debt.
   - 24 -
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 Provision for Income Taxes
  Income tax benefit before discontinued operations for federal, state and foreign taxes was $1.5 million for the three months ended March 31, 2011, compared to an income tax expense of $18 thousand for the three months ended March 31, 2010. The income tax benefit for the three months ended March 31, 2011 was principally due to the release of tax contingency reserves due to statutes of limitation that have expired.
  Our effective tax rate is determined by the level and composition of pre-tax income subject to varying foreign, state and local taxes and other items. The consolidated effective tax rate for the three months ended March 31, 2011 is impacted by our cumulative net operating loss position and the provision of a full valuation reserve against our deferred tax assets.
  As of March 31, 2011, we continue to provide a valuation reserve against substantially all deferred tax asset balances. The valuation reserve is subject to reversal in future years at such time that the benefits are actually utilized or the operating profits in the U.S. and other jurisdictions become sustainable.
  Income from Discontinued Operations
  During the three months ended March 31, 2011, we recorded a loss from discontinued operations of $0.3 million compared to income of $0.1 million for the three months ended March 31, 2010, as a result of the discontinuance of a European lease and services operation.
 
 Cash Flows, Liquidity and Capital Resources
  We have historically financed our operations primarily through cash generated from operations and from borrowings under a revolving credit facility and other debt facilities.
 
 Cash Flows
 
 Cash used in operating activities includes net income (loss) adjusted for non-cash items and changes in operating assets and liabilities. Cash used in operating activities for the three months ended March 31, 2011 was $9.9 million compared to cash used in operations of $6.0 million for the same period in 2010. The principal reason for the decrease in cash used by operations was an increase in working capital needs to cover current and expected product demands.
  We believe that our cash reserves, available financing and future operating cash flows will be sufficient to fund our projected liquidity and capital resource requirements through 2011. However, should operating results be unfavorable, we may need to obtain additional sources of financing to meet our short-term liquidity and capital resource requirements.
 
 Liquidity and Capital Resources
  At March 31, 2011, cash and cash equivalents was $47.4 million compared to $56.9 million at December 31, 2010. Working capital increased to $84.5 million from $79.6 million at December 31, 2010. We had availability of $7.4 million under our revolving credit facility as of March 31, 2011, which was decreased by outstanding letters of credit totaling $3.8 million as of March 31, 2011.
  The Company does not have financial covenants associated with the revolving credit facility.  We are in compliance with our administrative covenants as of March 31, 2011.
 
 Cash used in investing activities was $3.6 million for the three months ended March 31, 2011 compared to $1.3 million for the same period in 2010. Cash used in investing activities for the three months ended March 31, 2011 consisted primarily of $2.9 million of purchases of property, plant and equipment.
  Contractual Obligations
  Other than changes in the ordinary course of business, our estimates as to future contractual obligations have not materially changed from the disclosure included under the subheading “Contractual Obligations” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
   - 25 -
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 Critical Accounting Policies and Estimates
  Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis we evaluate past judgments and our estimates, including those related to bad debts, product returns, long-term contracts, inventories, goodwill and other intangible assets, income taxes, financing operations, foreign currency, and contingencies and litigation.
  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in our Annual Report on Form 10-K as filed with the SEC are those that depend most heavily on these judgments and estimates.
 The Company's significant accounting policies as reported in Hypercom’s Form 10-K for the year ended December 31, 2010 have been amended in the first quarter of 2011 upon the adoption of the new revenue recognition accounting pronouncements discussed above. While the adoption of the new accounting pronouncements had no material impact on the Company's Consolidated Financial Statements for the first quarter of 2011, the Company's previously disclosed revenue recognition policy related to multiple-element arrangements and software was updated, and is presented below as revised.
 
 Hypercom enters into multiple-element arrangements with its customers including hardware, software, professional consulting services and maintenance support services. For arrangements involving multiple deliverables, when deliverables include software and non-software products and services, the Company evaluates and separates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; and (b) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of the Company.
 
 At the inception of an agreement, we allocate the arrangement consideration to each deliverable qualifying as a separate unit of accounting in an arrangement based on our relative selling prices for each of the deliverables. We determines the selling price using VSOE (“Vendor Specific Objective Evidence”), if it exists, and otherwise Third Party Evidence (“TPE”).  If neither VSOE nor TPE exists for a unit of accounting, we use the Estimated Selling Price (“ESP”). Revenue is recognized based on the relative sales price of the delivered elements, limited to the amount of consideration received at the time of delivery given the majority of our multiple element arrangements contain future deliverables for which future payment is contingent upon the delivery of additional items or meeting other specified performance conditions both of which are within the customer’s control.
 
 VSOE is generally limited to the price charged when the same or similar product or service is sold separately or, if applicable, the stated substantive renewal rate in the agreement. We define VSOE as substantial standalone transactions that are priced within a narrow range. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately to similarly situated customers. When we are unable to establish selling price using VSOE or TPE, we use ESP when allocating the arrangement consideration. The objective of ESP is to determine the price at which we would enter into a transaction with the customer if the products or services were to be sold by us on a standalone basis. We determine ESP for deliverables in future agreements based on the specific facts and circumstances of the arrangement. Selling prices are analyzed if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices or cost to produce and deliver our products and services.
  For multiple element arrangements entered into prior to January 1, 2011, we not applied the new guidance and in such arrangements, if we have the requisite evidence of selling price for the undelivered elements but not for the delivered elements, we applied the residual method to allocate arrangement consideration. For arrangements involving a lease, revenues under these arrangements continue to be allocated considering the relative selling price of the lease and non-lease deliverables included in the bundled arrangement, based upon the estimated selling price of each element.
 
 Effect of Inflation
  Inflation has not had a significant effect on our operations for any period presented above.
  Quarterly Trends and Fluctuations
  We expect that our quarterly results of operations will fluctuate in the first quarter of our fiscal year versus the remaining quarters, principally due to decreased demand for our products from North American retailers in such quarter.
   - 26 -
 Table of Contents
 
 
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk.
 
 At March 31, 2011, our cash equivalent investments are primarily in money market accounts and certificates of deposit and are reflected as cash equivalents because all maturities are within 90 days from date of purchase. Our interest rate risk with respect to existing investments is limited due to the short-term duration of these arrangements and the yields earned, which approximate current interest rates for similar investments. We have no short-term investments at March 31, 2011.
 
 We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates in connection with our foreign operations and markets. Nevertheless, the fair value of our investment portfolio or related income would not be significantly impacted by a 100 basis point increase or decrease in interest rates, principally due to the short-term nature of the major portion of our investment portfolio.
 
 A substantial portion of our revenue and capital spending is transacted in either U.S. Dollars or Euros. However, we do at times enter into transactions in other currencies, such as the Hong Kong Dollar, Australian Dollar, Brazilian Real, British Pound and other Central and South American, Asian and European currencies. We are not currently engaged in hedging activities due to the cost of entering into forward contracts, the possible short term cash requirements for forward contract payables, along with the inability to repatriate cash from foreign countries on a short term basis to offset any hedge forward contract payable. We are currently reviewing our hedging strategy for the remainder of 2011. At March 31, 2011, we had no foreign currency forward contracts.
 
 All of our long-term debt obligations are at a fixed interest rate over the term of the agreement and there are no borrowings under our revolving credit facility at March 31, 2011. However, as of March 31, 2011, we have $3.8 million outstanding against the line of credit to cover various letters of credit guarantees.
 
 During the normal course of business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest rate movements and fluctuations in foreign currency exchange rates, as discussed above, and collectability of accounts receivable. We continuously assess these risks and have established policies and procedures to protect against the adverse effects of these and other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future.
 
 
 Item 4.  Controls and Procedures.
 
 Evaluation of Disclosure Controls and Procedures
 
 We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) designed to ensure information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and timely reported as specified in the SEC’s rules and forms. They are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
 Our management, with the participation of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective, having been effectively designed to ensure that information we are required to disclose in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported timely as specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosures.
 
 Changes in Internal Control over Financial Reporting
 
 There were no changes in our internal control over financial reporting, as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f), that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
   - 27 -
 Table of Contents
 
 
 PART II — OTHER INFORMATION
 
 Item 1.  Legal Proceedings.
  The description of our material pending legal proceedings is set forth in Note 13 to the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
   Item 1A.  Risk Factors.
  We refer you to documents filed by us with the SEC, specifically “Item 1A. Risk Factors” in our most recent annual report on Form 10-K, as amended, for the fiscal year ended December 31, 2010, which identify important risk factors that could materially affect our business, financial condition and future results. We also refer you to the factors and cautionary language set forth in the section entitled “Cautionary Statements Regarding Forward-looking Statements” of this quarterly report on Form 10-Q. This quarterly report on Form 10-Q, including the consolidated financial statements and related notes, should be read in conjunction with such risks and other factors for a full understanding of our operations and financial condition. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The risk factors included in our annual report on Form 10-K, as amended, for the fiscal year ended December 31, 2010 have not materially changed.
 
 
 Item 6.  Exhibits.
  
 Exhibit Number
Description of Exhibit3.1
Amended and Restated Certificate of Incorporation of Hypercom Corporation (incorporated by reference to Exhibit 3.1 to Hypercom Corporation’s Registration Statement on Form S-1 (Registration No. 333-35641))3.2
Second Amended and Restated Bylaws of Hypercom Corporation (incorporated by reference to Exhibit 3.1 to Hypercom Corporation’s Current Report on Form 8-K filed on November 6, 2006)3.3
Certificate of Designation of the Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to Hypercom Corporation’s Current Report on Form 8-K filed on September 30, 2010)4.1
Warrant to Purchase Common Stock dated April 1, 2008 (incorporated by reference to Exhibit 4.1 to Hypercom Corporation’s Current Report on Form 8-K filed on April 2, 2008, as amended by the Current Report on Form 8-K/A filed on June 16, 2008)4.2
Registration Rights Agreement, dated as of April 1, 2008, by and between Hypercom Corporation and FP Hypercom Holdco, LLC (incorporated by reference to Exhibit 4.2 to Hypercom Corporation’s Current Report on Form 8-K filed on April 2, 2008, as amended by the Current Report on Form 8-K/A filed on June 16, 2008)4.3
Form of Rights Agreement between Hypercom Corporation and Computershare Trust Company, N.A. as Rights Agent (incorporated by reference to Exhibit 4.1 to Hypercom Corporation’s Current Report on Form 8-K filed on September 30, 2010)10.1
Manufacturing Agreement, dated as of February 1, 2011, by and between Hypercom Corporation and MiTAC International Corporation (incorporated by reference to Exhibit 10.38 to Hypercom Corporation’s Annual Report on Form 10-K filed on March 10, 2011) †31.1
Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2
Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
 * Filed herewith.
  ** Furnished herewith.
  † Certain Confidential Information contained in this Exhibit was omitted by means of redacting a portion of the text and replacing it with an asterisk. This Exhibit has been filed separately with the Secretary of the Securities and Exchange Commission without the redaction pursuant to Confidential Treatment Request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
   - 28 -
 Table of Contents
   SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 HYPERCOM CORPORATION
 
 Date: May 9, 2011
By: /s/ Philippe Tartavull
 Philippe Tartavull
 Chief Executive Officer and President (duly authorized officer and principal executive officer)
 
 
 Date: May 9, 2011
By: /s/ Thomas B. Sabol
 Thomas B. Sabol
 Chief Financial Officer (principal financial officer)
 
 
 Date: May 9, 2011
By: /s/ Shawn C. Rathje
 Shawn C. Rathje
 Chief Accounting Officer and Controller (principal accounting officer)