UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2022September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
PRESTO AUTOMATION INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 001-39830 |
| 84-2968594 |
(State or other jurisdiction of incorporation or organization) | | (Commission File Number) | | (IRS Employer Identification No.) |
| ||
| ||
985 Industrial Road |
| 94070 |
(Address Of Principal Executive Offices) | | (Zip Code) |
(650) 817-9012
Registrant’s telephone number, including area code
NOT APPLICABLE
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange |
Common | | PRST | | The Nasdaq Stock Market LLC |
| | | | |
Warrants, each whole warrant exercisable for one share of Common | | PRSTW | | The Nasdaq Stock Market LLC |
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☒ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 31,November 13, 2023, 51,364,76659,490,750 shares of Common Stock,common stock, par value $0.0001 per share were issued and outstanding.
PRESTO AUTOMATION INC.
Form 10-Q
For the Quarter Ended December 31, 2022September 30, 2023
Table of Contents
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| Condensed Consolidated Statements of Operations and Comprehensive | 2 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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| 55 |
WHERE YOU CAN FIND MORE INFORMATION
Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, United States Securities and Exchange Commission filings, and public conference calls and webcasts.
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements that Presto Automation Inc. and its subsidiaries (together, the “Company” or “Presto”) believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements relating to expectations for future financial performance, business strategies or expectations for our business. These statements are based on the beliefs and assumptions of the management of the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, it cannot provide assurance that it will achieve or realize these plans, intentions or expectations. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Quarterly Report on Form 10-Q, words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “strive,” “target,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
You should not place undue reliance on these forward-looking statements. Should one or more of a number of known and unknown risks and uncertainties materialize, or should any of our assumptions prove incorrect, the Company’s actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factorsFactors that could cause actual results to differ include, but are not limited to, the following:
● |
Presto’s limited operating history |
● | Presto’s success depends on increasing the number of franchisees of our existing restaurant customers that use its solution, and, in particular, Presto Voice, and the timing of the deployments of contracted locations. |
● | We are evaluating strategic alternatives of our Presto Touch and considering whether to engage in a wind-down which would be a sale, partial sale or abandonment of the Presto Touch business in the coming months and we may |
● | Presto’s sales cycles can be |
● | Presto |
● |
● |
● | Defects, errors or |
● | Presto’s pricing decisions and |
● | If Presto fails to |
● |
● | Presto |
ii
● | Presto and certain of its third-party partners, service providers, and sub processors transmit and store personal information of its customers and their consumers. If the security of this information is compromised, Presto’s reputation may be harmed, and it may be exposed to liability and loss of business. |
● | Presto is subject to stringent and changing privacy laws, regulations and standards, and contractual obligations related to data privacy and security, and noncompliance with such laws could adversely affect its business. |
● |
ii
● | Presto is dependent upon its customers continued and unimpeded access to the internet, and upon their willingness to use the internet for commerce. |
● | Presto’s current liquidity resources raise substantial doubt about its ability to continue as a going concern and to comply with its debt covenants unless it raises additional capital to meet its obligations in the near term. |
● | Presto’s efforts to generate revenues and/or reduce expenditures may |
● | Presto has faced challenges complying with the covenants contained in its credit facility and, unless it can raise additional capital, it may need additional waivers which may not be forthcoming. |
● | Presto requires additional capital, which additional financing |
● |
● | Presto’s |
● |
● |
● | The restaurant technology industry is highly competitive. Presto |
● |
● |
● | Presto’s transaction revenue is partly dependent on its partners to develop and update third-party entertainment applications. The decisions of developers to remove their applications or change the |
● | Payment transactions processed on Presto’s solutions may subject Presto to |
iii
● | Presto relies upon Amazon Web Services, Microsoft Azure and other infrastructure to operate its platform, and any disruption of or interference with its use of these providers would adversely affect its business, results of operations, and financial condition. |
● | Certain estimates and information contained in this report are based on information from third-party sources, and Presto does not independently verify the accuracy or completeness of the data contained in such sources or the methodologies for collecting such data. |
● | Presto’s business is subject to a variety of U.S. laws and regulations, |
● | Significant changes in U.S. and international trade policies that restrict imports or increase tariffs could have a material adverse effect on Presto’s results of operations. |
● |
If Presto fails to adequately protect its intellectual property rights, its competitive position could be impaired and it may lose valuable assets, generate reduced revenue and become subject to costly litigation to protect its rights. |
● | Presto has been, and may in the future be, subject to claims by third parties of intellectual property |
● | Presto uses open-source software in its platform, which could negatively affect its ability to sell its services or subject it to litigation or other actions. |
● |
● | Presto’s senior management team has limited experience managing a public company, and regulatory compliance obligations may divert its attention from the day-to-day management of its business. |
● | As a public reporting company, Presto is subject to filing deadlines for reports that are filed pursuant to the Exchange Act, and its failure to timely file such reports may have material adverse consequences on its business. |
● | As a public reporting company, Presto is subject to rules and regulations established from time to time by the SEC regarding its internal control over financial reporting. If Presto fails to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, it may not be able to accurately report its financial results or report them in a timely manner. |
● | Presto has identified material weaknesses in its internal controls over financial reporting and, if it fails to remediate these deficiencies, it may not be able to accurately or timely report its financial condition or results of operations. |
● | Presto is an emerging growth company, and it cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make its common stock less attractive to investors. |
● | Presto has and will continue to incur significant costs as a result of operating as a public company. |
● | Provisions in Presto’s Charter and Bylaws may discourage, delay or prevent a merger, acquisition or other |
● | Presto’s Charter provides that the Court of Chancery of the State of Delaware and the |
iv
● | A market for Presto’s securities may not continue, which would adversely affect the liquidity and price of its securities. |
● | Nasdaq may delist Presto’s securities from trading on its exchange, which could limit investors’ ability to make transactions in its securities and subject Presto to additional trading restrictions. |
● | Future offerings of debt or offerings or issuances of equity securities by Presto may adversely affect the market price of Presto’s common stock or otherwise dilute all other |
● | If securities or industry analysts do not publish or cease publishing research or reports about Presto, its business, or its market, or if they change their recommendations regarding Presto’s securities adversely, the |
● | Presto may be subject to securities litigation, which is expensive and could divert management’s attention. |
We may also be impacted by other factors disclosed in this Quarterly Report on Form 10-Q and the Company’s other filings with the Securities and Exchange Commission (the “SEC”).
The Company’s forward-looking statements speak only as of the date of their initial issuance, and the Company does not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events, or otherwise.
iiiv
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
PRESTO AUTOMATION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share and par value)
| | | | | | | |
|
| As of |
| As of |
| ||
| | December 31, | | June 30 | | ||
|
| 2022 |
| 2022 |
| ||
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 38,211 | | $ | 3,017 | |
Accounts receivable, net of allowance for doubtful accounts of $137 and $353 as of December 31, 2022 and June 30, 2022, respectively | |
| 2,572 | |
| 1,518 | |
Inventories | |
| 649 | |
| 869 | |
Deferred costs, current | |
| 4,780 | |
| 8,443 | |
Prepaid expenses and other current assets | |
| 2,265 | |
| 707 | |
Total current assets | |
| 48,477 | |
| 14,554 | |
Deferred costs, net of current portion | |
| 436 | |
| 2,842 | |
Investment in non-affiliate | | | 2,000 | | | — | |
Deferred transaction costs | |
| — | |
| 5,765 | |
Property and equipment, net | |
| 1,489 | |
| 1,975 | |
Intangible assets, net | |
| 6,942 | |
| 4,226 | |
Goodwill | |
| 1,156 | |
| 1,156 | |
Other long-term assets | |
| 674 | |
| 18 | |
Total assets | | $ | 61,174 | | $ | 30,536 | |
| | | | | | | |
Liabilities and Stockholders’ Deficit | |
|
| |
|
| |
Current liabilities: | |
|
| |
|
| |
Accounts payable | | $ | 2,982 | | $ | 5,916 | |
Accrued liabilities | |
| 4,356 | |
| 6,215 | |
Financing obligations, current | |
| 6,786 | |
| 8,840 | |
Term loans, current | |
| — | |
| 25,443 | |
Convertible promissory notes and embedded warrants, current | |
| — | |
| 89,663 | |
Deferred revenue, current | |
| 3,533 | |
| 10,532 | |
Total current liabilities | |
| 17,657 | |
| 146,609 | |
Term loans, noncurrent | |
| 52,022 | |
| — | |
PPP loans | |
| — | |
| 2,000 | |
Warrant liabilities | |
| 2,362 | |
| 4,149 | |
Deferred revenue, net of current portion | |
| 609 | |
| 237 | |
Other long-term liabilities | |
| 748 | |
| — | |
Total liabilities | |
| 73,398 | |
| 152,995 | |
| | | | | | | |
Commitments and Contingencies (Refer to Note 8) | |
|
| |
|
| |
Stockholders’ deficit: | |
|
| |
|
| |
Preferred stock, $0.0001 par value–1,500,000 shares authorized as of December 31, 2022 and June 30, 2022, respectively; no shares issued and outstanding as of December 31, 2022 and June 30, 2022 respectively | |
| — | |
| — | |
Common stock, $0.0001 par value–180,000,000 shares authorized as of December 31, 2022 and June 30, 2022, and 51,231,608 and 27,974,439 shares issued and outstanding as of December 31, 2022 and June 30, 2022, respectively | |
| 5 | |
| 3 | |
Additional paid-in capital | |
| 170,794 | |
| 78,321 | |
Accumulated deficit | |
| (183,023) | |
| (200,783) | |
Total stockholders’ deficit | |
| (12,224) | |
| (122,459) | |
Total liabilities and stockholders’ deficit | | $ | 61,174 | | $ | 30,536 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
PRESTO AUTOMATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands, except share and per share amounts)
| | | | | | | | | | | | | |
|
| Three months ended |
| Six months ended |
| ||||||||
| | December 31, | | December 31, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Revenue | | | | | | | | | | | | | |
Platform | | $ | 4,131 | | $ | 5,134 | | $ | 8,529 | | $ | 9,671 | |
Transaction | |
| 3,221 | |
| 2,562 | |
| 6,180 | |
| 5,254 | |
Total revenue | |
| 7,352 | |
| 7,696 | |
| 14,709 | |
| 14,925 | |
| | | | | | | | | | | | | |
Cost of revenue | |
|
| |
|
| |
|
| |
|
| |
Platform | |
| 4,219 | |
| 3,793 | |
| 8,208 | |
| 7,815 | |
Transaction | |
| 2,833 | |
| 2,230 | |
| 5,477 | |
| 4,564 | |
Depreciation and impairment | |
| 291 | |
| 461 | |
| 582 | |
| 927 | |
Total cost of revenue | |
| 7,343 | |
| 6,484 | |
| 14,267 | |
| 13,306 | |
Gross profit | |
| 9 | |
| 1,212 | |
| 442 | |
| 1,619 | |
| | | | | | | | | | | | | |
Operating expenses: | |
|
| |
|
| |
|
| |
|
| |
Research and development | |
| 5,112 | |
| 3,805 | |
| 11,381 | |
| 7,806 | |
Sales and marketing | |
| 2,227 | |
| 1,651 | |
| 4,626 | |
| 2,825 | |
General and administrative | |
| 6,276 | |
| 2,158 | |
| 12,200 | |
| 4,132 | |
Loss on infrequent product repairs | |
| — | |
| 28 | |
| — | |
| 463 | |
Total operating expenses | |
| 13,615 | |
| 7,642 | |
| 28,207 | |
| 15,226 | |
Loss from operations | |
| (13,606) | |
| (6,430) | |
| (27,765) | |
| (13,607) | |
Change in fair value of warrants and convertible promissory notes | |
| (378) | |
| (16,196) | |
| 59,444 | |
| (29,770) | |
Interest expense | |
| (3,030) | |
| (868) | |
| (6,406) | |
| (2,256) | |
Loss on extinguishment of debt and financing obligations | |
| (337) | |
| — | |
| (8,095) | |
| — | |
Other financing and financial instrument (costs) income, net | |
| — | |
| — | |
| (1,768) | |
| — | |
Other income, net | |
| 327 | |
| 11 | |
| 2,355 | |
| 2,641 | |
Total other income (expense), net | |
| (3,418) | |
| (17,053) | |
| 45,530 | |
| (29,385) | |
Income (loss) before provision for income taxes | |
| (17,024) | |
| (23,483) | |
| 17,765 | |
| (42,992) | |
Provision for income taxes | |
| 5 | |
| 24 | |
| 5 | |
| 24 | |
Net income (loss) and comprehensive income (loss) | | $ | (17,029) | | $ | (23,507) | | $ | 17,760 | | $ | (43,016) | |
Net income (loss) per share attributable to common stockholders, basic | | $ | (0.33) | | $ | (0.86) | | $ | 0.44 | | $ | (1.58) | |
Net income (loss) per share attributable to common stockholders, diluted | | | (0.33) | | | (0.86) | | | 0.35 | | | (1.58) | |
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic | |
| 50,998,941 | |
| 27,211,309 | |
| 40,475,200 | |
| 27,157,425 | |
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, diluted | |
| 50,998,941 | |
| 27,211,309 | |
| 50,775,172 | |
| 27,157,425 | |
| | | | | | | |
|
| As of |
| As of |
| ||
| | September 30, | | June 30, | | ||
|
| 2023 |
| 2023 |
| ||
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 3,285 | | $ | 15,143 | |
Restricted cash | | | 10,000 | | | 10,000 | |
Accounts receivable, net of allowance of $744 and $746, respectively | |
| 1,841 | |
| 1,831 | |
Inventories | |
| 520 | |
| 629 | |
Deferred costs, current | |
| 1,852 | |
| 2,301 | |
Prepaid expenses and other current assets | |
| 659 | |
| 1,162 | |
Total current assets | |
| 18,157 | |
| 31,066 | |
Deferred costs, net of current portion | |
| 160 | |
| 92 | |
Investment in non-affiliate | | | 2,000 | | | 2,000 | |
Property and equipment, net | |
| 632 | |
| 909 | |
Intangible assets, net | |
| 11,202 | |
| 10,528 | |
Goodwill | |
| 1,156 | |
| 1,156 | |
Other long-term assets | |
| 833 | |
| 936 | |
Total assets | | $ | 34,140 | | $ | 46,687 | |
| | | | | | | |
Liabilities and Stockholders’ Deficit | |
|
| |
|
| |
Current liabilities: | |
|
| |
|
| |
Accounts payable | | $ | 1,951 | | $ | 3,295 | |
Accrued liabilities | |
| 4,880 | |
| 4,319 | |
Financing obligations, current | |
| 2,360 | |
| 1,676 | |
Term loans, current | |
| 53,088 | |
| 50,639 | |
Deferred revenue, current | |
| 1,191 | |
| 1,284 | |
Total current liabilities | |
| 63,470 | |
| 61,213 | |
Financing obligations, net of current | | | 1,500 | | | 3,000 | |
Warrant liabilities | |
| 4,842 | |
| 25,867 | |
Deferred revenue, net of current portion | |
| 217 | |
| 299 | |
Other long-term liabilities | |
| 184 | |
| 1,535 | |
Total liabilities | |
| 70,213 | |
| 91,914 | |
| | | | | | | |
Commitments and Contingencies (Refer to Note 8) | |
|
| |
|
| |
Stockholders’ deficit: | |
|
| |
|
| |
Preferred stock, $0.0001 par value–1,500,000 shares authorized as of September 30, 2023 and June 30, 2023, respectively; no shares issued and outstanding as of September 30, 2023 and June 30, 2023 respectively | |
| — | |
| — | |
Common stock, $0.0001 par value–180,000,000 shares authorized as of September 30, 2023 and June 30, 2023, and 57,855,594 and 57,180,531 shares issued and outstanding as of September 30, 2023 and June 30, 2023, respectively | |
| 6 | |
| 5 | |
Additional paid-in capital | |
| 193,812 | |
| 190,031 | |
Accumulated deficit | |
| (229,891) | |
| (235,263) | |
Total stockholders’ deficit | |
| (36,073) | |
| (45,227) | |
Total liabilities and stockholders’ deficit | | $ | 34,140 | | $ | 46,687 | |
The accompanying notes are an integral part of these condensed consolidated financial statementsstatements.
21
PRESTO AUTOMATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITOPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands, except share data)and per share amounts)
| | | | | | | |
|
| Three months ended |
| ||||
| | September 30, | | ||||
|
| 2023 |
| 2022 |
| ||
Revenue | | | | | | | |
Platform | | $ | 2,066 | | $ | 4,820 | |
Transaction | |
| 2,819 | |
| 2,959 | |
Total revenue | |
| 4,885 | |
| 7,779 | |
| | | | | | | |
Cost of revenue | |
|
| |
|
| |
Platform | |
| 1,196 | |
| 4,292 | |
Transaction | |
| 2,521 | |
| 2,644 | |
Depreciation and amortization | |
| 965 | |
| 291 | |
Total cost of revenue | |
| 4,682 | |
| 7,227 | |
Gross profit | |
| 203 | |
| 552 | |
| | | | | | | |
Operating expenses: | |
|
| |
|
| |
Research and development | |
| 4,484 | |
| 6,388 | |
Sales and marketing | |
| 1,914 | |
| 2,399 | |
General and administrative | |
| 7,070 | |
| 5,924 | |
Total operating expenses | |
| 13,468 | |
| 14,711 | |
Loss from operations | |
| (13,265) | |
| (14,159) | |
Change in fair value of warrants and convertible promissory notes | |
| 21,025 | |
| 59,822 | |
Interest expense | |
| (3,758) | |
| (3,376) | |
Loss on extinguishment of debt and financing obligations | |
| — | |
| (7,758) | |
Other financing and financial instrument income (costs), net | |
| 1,284 | |
| (1,768) | |
Other income, net | |
| 82 | |
| 2,028 | |
Total other income, net | |
| 18,633 | |
| 48,948 | |
Income before provision (benefit) for income taxes | |
| 5,368 | |
| 34,789 | |
Provision (benefit) for income taxes | |
| (4) | |
| — | |
Net income and comprehensive income | | $ | 5,372 | | $ | 34,789 | |
Net income per share attributable to common stockholders, basic | | $ | 0.09 | | $ | 1.18 | |
Net income per share attributable to common stockholders, diluted | | | 0.08 | | | 0.86 | |
Weighted-average shares used in computing net income per share attributable to common stockholders, basic | |
| 57,842,571 | |
| 29,521,505 | |
Weighted-average shares used in computing net income per share attributable to common stockholders, diluted | |
| 69,148,971 | |
| 40,366,902 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
2
| | | | | | | | | | | | | | | | | | | |
|
| Convertible |
| |
| | |
| Additional |
| |
| Total | ||||||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit | |||||
Balance at June 30, 2021 |
| 28,343,420 | | $ | 28 |
| 5,132,354 | | $ | 5 | | $ | 74,417 | | $ | (144,469) | | $ | (70,019) |
Retrospective application of recapitalization (Note 1) |
| (28,343,420) | |
| (28) |
| 21,980,406 | |
| (2) | |
| 30 | |
| — | |
| — |
Adjusted balance, beginning of period |
| — | |
| — |
| 27,112,760 | |
| 3 | |
| 74,447 | |
| (144,469) | |
| (70,019) |
Issuance of common stock upon exercise of stock options |
| — | |
| — |
| 147,864 | |
| — | |
| 58 | |
| — | |
| 58 |
Stock-based compensation |
| — | |
| — |
| — | |
| — | |
| 954 | |
| — | |
| 954 |
Net loss |
| — | |
| — |
| — | |
| — | |
| — | |
| (43,016) | |
| (43,016) |
Balance at December 31, 2021 |
| — | | $ | — |
| 27,260,624 | | $ | 3 | | $ | 75,459 | | $ | (187,485) | | $ | (112,023) |
PRESTO AUTOMATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | |
| | Convertible | | | | | | | Additional | | | | | Total | |||||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
| | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Deficit | |||||
Balance at June 30, 2022 |
| 28,343,420 | | $ | 28 |
| 6,196,257 | | $ | 6 | | $ | 78,290 | | $ | (200,783) | | $ | (122,459) |
Retrospective application of recapitalization (Note 1) |
| (28,343,420) | |
| (28) |
| 21,778,182 | |
| (3) | |
| 31 | |
| — | |
| — |
Adjusted balance, beginning of period |
| — | |
| — |
| 27,974,439 | |
| 3 | |
| 78,321 | |
| (200,783) | |
| (122,459) |
Issuance of common stock upon exercise of stock options |
| — | |
| — |
| 146,823 | |
| — | |
| 60 | |
| — | |
| 60 |
Fair value of issued warrants on common stock | | — | | | — | | — | | | — | | | 853 | | | — | | | 853 |
Issuance of common stock upon net exercise of warrants |
| — | |
| — |
| 136,681 | |
| — | |
| — | |
| — | |
| — |
Issuance of common stock (Note 9) |
| — | |
| — |
| 133,333 | |
| — | |
| 1,000 | |
| — | |
| 1,000 |
Issuance of common stock upon vesting of restricted stock units (Note 11) |
| — | |
| — |
| 488,598 | |
| — | |
| — | |
| — | |
| — |
Issuance of shares and transfer of warrants upon termination of convertible note agreement (Note 9) |
| — | |
| — |
| 323,968 | |
| — | |
| 2,412 | |
| — | |
| 2,412 |
Conversion of convertible notes into common stock (Note 7) |
| — | |
| — |
| 8,147,938 | |
| 1 | |
| 41,391 | |
| — | |
| 41,392 |
Warrants issued with Credit Agreement (Note 7) |
| — | |
| — |
| — | |
| — | |
| 2,076 | |
| — | |
| 2,076 |
Reclassification of liability classified warrants to equity (Note 10) |
| — | |
| — |
| — | |
| — | |
| 830 | |
| — | |
| 830 |
Contribution by shareholder in conjunction with Credit Agreement (Note 7) |
| — | |
| — |
| — | |
| — | |
| 2,779 | |
| — | |
| 2,779 |
Earnout shares stock-based compensation (Note 1) |
| — | |
| — |
| — | |
| — | |
| 1,874 | |
| — | |
| 1,874 |
Merger and PIPE Financing (Note 1) |
| — | |
| — |
| 13,879,828 | |
| 1 | |
| 35,737 | |
| — | |
| 35,738 |
Stock-based compensation (Note 11) |
| — | |
| — |
| — | |
| — | |
| 3,461 | |
| — | |
| 3,461 |
Net income |
| — | |
| — |
| — | |
| — | |
| — | |
| 17,760 | |
| 17,760 |
Balance at December 31, 2022 |
| — | | $ | — |
| 51,231,608 | | $ | 5 | | $ | 170,794 | | $ | (183,023) | | $ | (12,224) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PRESTO AUTOMATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | |
|
| Convertible |
| |
| | |
| Additional |
| |
| Total | ||||||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit | |||||
Balance at September 30, 2021 |
| 28,343,420 | | $ | 28 | | 5,211,270 | | | 5 | | | 74,922 | | | (163,978) | | | (89,023) |
Retrospective application of recapitalization (Note 1) |
| (28,343,420) | |
| (28) |
| 21,980,406 | | | (2) | | | 30 | |
| — | |
| — |
Adjusted balance, beginning of period |
| — | |
| — |
| 27,191,676 | |
| 3 | |
| 74,952 | |
| (163,978) | |
| (89,023) |
Issuance of common stock upon exercise of stock options |
| — | |
| — |
| 68,948 | |
| — | |
| 38 | |
| — | |
| 38 |
Stock-based compensation |
| — | |
| — |
| — | |
| — | |
| 469 | |
| — | |
| 469 |
Net loss |
| — | |
| — |
| — | |
| — | |
| — | |
| (23,507) | |
| (23,507) |
Balance at December 31, 2021 |
| — | | $ | — |
| 27,260,624 | | $ | 3 | | $ | 75,459 | | $ | (187,485) | | $ | (112,023) |
| | | | | | | | | | | | | | | | | | | |
| | Convertible | | | | | | | Additional | | | | | Total | |||||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit | |||||
Beginning balance at June 30, 2023 |
| — | | $ | — |
| 57,180,531 | | $ | 5 | | $ | 190,031 | | $ | (235,263) | | $ | (45,227) |
Issuance of common stock upon exercise of stock options (Note 11) |
| — | |
| — |
| 362,967 | |
| — | |
| 195 | |
| — | |
| 195 |
Cancellation of warrants |
| — | |
| — |
| — | |
| — | |
| (56) | |
| — | |
| (56) |
Issuance of common stock upon vesting of restricted stock units (Note 11) |
| — | |
| — |
| 409,977 | |
| 1 | |
| 60 | |
| — | |
| 61 |
Cancellation of restricted stock awards in connection with the CyborgOps acquisition (refer to Note 11) | | — | |
| — | | (97,881) | | | — | | | — | | | — | | | — |
Earnout shares stock-based compensation (Note 11) |
| — | |
| — |
| — | |
| — | |
| 1,353 | |
| — | |
| 1,353 |
Stock-based compensation (Note 11) |
| — | |
| — |
| — | |
| — | |
| 2,229 | |
| — | |
| 2,229 |
Net income |
| — | |
| — |
| — | |
| — | |
| — | |
| 5,372 | |
| 5,372 |
Balance at September 30, 2023 |
| — | | $ | — |
| 57,855,594 | | $ | 6 | | $ | 193,812 | | $ | (229,891) | | $ | (36,073) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible | | | | | | | Additional | | | | | Total |
| Convertible |
| |
| | |
| Additional |
| |
| Total | |||||||||||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | ||||||||||||||||||
| | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Deficit |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit | ||||||||||
Balance at September 30, 2022 |
| — | | $ | — |
| 51,039,859 | | $ | 5 | | $ | 167,156 | | $ | (165,994) | | $ | 1,167 | |||||||||||||||||||
Balance at June 30, 2022 |
| 28,343,420 | | $ | 28 |
| 6,196,257 | | $ | 6 | | $ | 78,290 | | $ | (200,783) | | $ | (122,459) | |||||||||||||||||||
Recapitalization upon Merger (Note 2) |
| (28,343,420) | |
| (28) |
| 21,378,160 | |
| (3) | |
| 31 | |
| — | |
| — | |||||||||||||||||||
Adjusted balance, beginning of period |
| — | |
| — |
| 27,574,417 | |
| 3 | |
| 78,321 | |
| (200,783) | |
| (122,459) | |||||||||||||||||||
Issuance of common stock upon exercise of stock options |
| — | |
| — |
| 103,111 | |
| — | |
| 24 | |
| — | |
| 24 |
| — | |
| — |
| 43,712 | |
| — | |
| 36 | |
| — | |
| 36 |
Fair value of issued warrants on common stock | | — | | | — | | — | | | — | | | 853 | | | — | | | 853 | |||||||||||||||||||
Issuance of common stock upon net exercise of warrants | | | | | | | 136,681 | | | | | | — | | | | | | — | |||||||||||||||||||
Issuance of common stock (Note 9) | | | | | | | 133,333 | | | | | | 1,000 | | | | | | 1,000 | |||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units (Note 11) |
| — | |
| — |
| 88,638 | |
| — | |
| — | |
| — | |
| — | | | | | | | 399,960 | | | | | | — | | | | | | — |
Issuance of shares and transfer of warrants upon termination of convertible note agreement (Note 9) | | | | | | | 323,968 | | | | | | 2,412 | | | | | | 2,412 | |||||||||||||||||||
Conversion of convertible notes into common stock (Note 7) | | | | | | | 8,147,938 | | | 1 | | | 41,391 | | | | | | 41,392 | |||||||||||||||||||
Warrants issued with Credit Agreement (Note 7) | | | | | | | | | | | | | 2,076 | | | | | | 2,076 | |||||||||||||||||||
Reclassification of liability classified warrants to equity (Note 10) | | | | | | | | | | | | | 830 | | | | | | 830 | |||||||||||||||||||
Contribution by shareholder in conjunction with Credit Agreement (Note 7) | | | | | | | | | | | | | 2,779 | | | | | | 2,779 | |||||||||||||||||||
Earnout shares stock-based compensation (Note 1) |
| — | |
| — |
| — | |
| — | |
| 1,696 | |
| — | |
| 1,696 | | | | | | | | | | | | | 178 | | | | | | 178 |
Merger and PIPE Financing (Note 2) | | | | | | | 13,879,828 | | | 1 | | | 35,737 | | | | | | 35,738 | |||||||||||||||||||
Stock-based compensation (Note 11) |
| — | |
| — |
| — | |
| — | |
| 1,065 | |
| — | |
| 1,065 |
| — | |
| — |
| — | |
| — | |
| 2,396 | |
| — | |
| 2,396 |
Net income |
| — | |
| — |
| — | |
| — | |
| — | |
| (17,029) | |
| (17,029) | | — | | | — | | — | | | — | | | — | | | 34,789 | | | 34,789 |
Balance at December 31, 2022 |
| — | | $ | — |
| 51,231,608 | | $ | 5 | | $ | 170,794 | | $ | (183,023) | | $ | (12,224) | |||||||||||||||||||
Balance at September 30, 2022 |
| — | | $ | — |
| 50,639,837 | | $ | 5 | | $ | 167,156 | | $ | (165,994) | | $ | 1,167 |
The accompanying notes are an integral part of these condensed consolidated financial statementstatements.
43
a
PRESTO AUTOMATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| | | | | | | |
|
| Six months ended |
| ||||
| | December 31, | | ||||
|
| 2022 |
| 2021 |
| ||
Cash Flows from Operating Activities |
| |
|
| |
|
|
Net income (loss) | | $ | 17,760 | | $ | (43,016) | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
|
| |
|
| |
Depreciation, amortization and impairment | |
| 845 | |
| 1,053 | |
Stock-based compensation | |
| 3,002 | |
| 954 | |
Earnout share stock-based compensation | |
| 1,874 | |
| — | |
Contra-revenue associated with warrant agreement (Refer to Note 2) | | | 615 | | | — | |
Noncash expense attributable to fair value liabilities assumed in Merger | |
| 34 | |
| — | |
Change in fair value of liability classified warrants | |
| (11,188) | |
| 2,768 | |
Change in fair value of warrants and convertible promissory notes | |
| (48,271) | |
| 26,909 | |
Amortization of debt discount and debt issuance costs | |
| 1,884 | |
| 175 | |
Loss on extinguishment of debt and financing obligations | |
| 8,095 | |
| — | |
Paid-in-kind interest expense | |
| 2,366 | |
| — | |
Share and warrant cost on termination of convertible note agreement | |
| 2,412 | |
| — | |
Forgiveness of PPP Loan | |
| (2,000) | |
| (2,599) | |
Change in fair value of unvested founder shares liability | |
| (1,160) | |
| — | |
Noncash lease expense | |
| 168 | |
| — | |
Loss on disposal off property and equipment | |
| 14 | |
| — | |
Changes in operating assets and liabilities: | |
| | |
|
| |
Accounts receivable, net | |
| (1,054) | |
| (459) | |
Inventories | |
| 219 | |
| (321) | |
Deferred costs | |
| 6,308 | |
| 5,958 | |
Prepaid expenses and other current assets | |
| (1,155) | |
| 599 | |
Other long-term assets | |
| — | |
| (83) | |
Accounts payable | |
| 1,388 | |
| (4,777) | |
Vendor financing facility | |
| — | |
| (6,792) | |
Accrued liabilities | |
| (2,090) | |
| (2,656) | |
Deferred revenue | | | (6,627) | | | (7,305) | |
Other long-term liabilities | |
| — | |
| (699) | |
Net cash used in operating activities | |
| (26,561) | |
| (30,291) | |
Cash Flows from Investing Activities | |
|
| |
|
| |
Purchase of property and equipment | |
| (171) | |
| (109) | |
Payments relating to capitalized software | |
| (2,459) | |
| (787) | |
Investment in non-affiliate | | | (2,000) | | | — | |
Net cash used in investing activities | |
| (4,630) | |
| (896) | |
Cash Flows from Financing Activities | |
|
| |
|
| |
Proceeds from the exercise of common stock options | |
| 60 | |
| 58 | |
Proceeds from the issuance of term loans | |
| 60,250 | |
| — | |
Payment of debt issuance costs | |
| (1,094) | |
| — | |
Repayment of term loans | |
| (32,980) | |
| — | |
Payment of penalties and other costs on extinguishment of debt | |
| (6,144) | |
| — | |
Proceeds from issuance of convertible promissory notes and embedded warrants | |
| — | |
| 500 | |
Proceeds from issuance of financing obligations | |
| — | |
| 439 | |
Principal payments of financing obligations | |
| (2,657) | |
| (978) | |
Proceeds from the issuance of common stock | |
| 1,000 | |
| — | |
Contributions from Merger and PIPE financing, net of transaction costs and other payments | |
| 49,840 | |
| — | |
Payments of deferred transaction costs | |
| (1,890) | |
| (105) | |
Net cash provided (used in) by financing activities | |
| 66,385 | |
| (86) | |
| | | | | | | |
Net increase (decrease) in cash and cash equivalents | |
| 35,194 | |
| (31,273) | |
Cash and cash equivalents at beginning of period | |
| 3,017 | |
| 36,909 | |
Cash and cash equivalents at end of period | | $ | 38,211 | | $ | 5,636 | |
Supplemental Disclosure of Non-Cash Investing and Financing Activities | |
|
| |
|
| |
Capitalization of stock-based compensation expense to capitalized software | | $ | 459 | | $ | 9 | |
Issuance of warrants (Refer to Note 2) | | | 853 | | | — | |
Capital contribution from shareholder in conjunction with Credit Agreement | |
| 2,779 | |
| — | |
Issuance of warrants in conjunction with Credit Agreement | |
| 2,076 | |
| — | |
Issuance of warrants in conjunction with Lago Term Loan | |
| 843 | |
| — | |
Convertible note conversion to common stock | |
| 41,392 | |
| — | |
Reclassification of warrants from liabilities to equity | |
| 830 | |
| — | |
Recognition of liability classified warrants upon Merger | |
| 9,388 | |
| — | |
Recognition of Unvested Founder Shares liability | |
| 1,588 | |
| — | |
Forgiveness of PPP Loan | |
| (2,000) | |
| (2,599) | |
Transaction costs recorded in accounts payable and accrued liabilities | |
| — | |
| 3,720 | |
Right of use asset in exchange for operating lease liability | |
| 308 | |
| — | |
| | | | | | | |
|
| Three months ended |
| ||||
| | September 30, | | ||||
|
| 2023 |
| 2022 |
| ||
Cash Flows from Operating Activities |
| |
|
| |
|
|
Net income | | $ | 5,372 | | $ | 34,789 | |
Adjustments to reconcile net income to net cash used in operating activities: | |
|
| |
|
| |
Depreciation and amortization of intangibles | |
| 1,012 | |
| 462 | |
Stock-based compensation | |
| 2,101 | |
| 2,175 | |
Earnout share stock-based compensation | |
| 1,353 | |
| 178 | |
Contra-revenue associated with warrant agreement (Refer to Note 3) | | | 133 | | | — | |
Noncash expense attributable to fair value liabilities assumed in Merger | |
| — | |
| 34 | |
Change in fair value of liability classified warrants | |
| (21,025) | |
| (11,551) | |
Change in fair value of embedded warrants and convertible promissory notes | |
| — | |
| (48,271) | |
Amortization of debt discount and debt issuance costs | |
| 1,283 | |
| 1,371 | |
Loss on extinguishment of debt and financing obligations | |
| — | |
| 7,758 | |
Paid-in-kind interest expense | |
| 1,166 | |
| 281 | |
Share and warrant cost on termination of convertible note agreement | |
| — | |
| 2,412 | |
Forgiveness of PPP Loan | |
| — | |
| (2,000) | |
Change in fair value of unvested sponsor shares liability | |
| (1,284) | |
| (1,175) | |
Noncash lease expense | |
| 82 | |
| 76 | |
Loss on disposal off property and equipment | |
| — | |
| 14 | |
Changes in operating assets and liabilities: | |
| | |
| | |
Accounts receivable, net | |
| (10) | |
| (545) | |
Inventories | |
| 109 | |
| 385 | |
Deferred costs | |
| 192 | |
| 3,466 | |
Prepaid expenses and other current assets | |
| 522 | |
| 260 | |
Accounts payable | |
| (1,911) | |
| 1,678 | |
Accrued liabilities | |
| 621 | |
| 477 | |
Deferred revenue | | | (175) | | | (3,430) | |
Other long-term liabilities | |
| (66) | |
| — | |
Net cash used in operating activities | |
| (10,525) | |
| (11,156) | |
| | | | | | | |
Cash Flows from Investing Activities | |
|
| |
|
| |
Purchase of property and equipment | |
| (56) | |
| (47) | |
Payments relating to capitalized software | |
| (1,225) | |
| (1,327) | |
Net cash used in investing activities | |
| (1,281) | |
| (1,374) | |
Cash Flows from Financing Activities | |
|
| |
|
| |
Proceeds from the exercise of common stock options | |
| 195 | |
| 36 | |
Proceeds from the issuance of term loans | |
| — | |
| 60,250 | |
Payment of debt issuance costs | |
| — | |
| (1,094) | |
Repayment of term loans | |
| — | |
| (32,980) | |
Payment of penalties and other costs on extinguishment of debt | |
| — | |
| (5,734) | |
Principal payments of financing obligations | |
| (247) | |
| (886) | |
Proceeds from the issuance of common stock | |
| — | |
| 1,000 | |
Contributions from Merger and PIPE financing, net of transaction costs and other payments | |
| — | |
| 49,840 | |
Payments of deferred transaction costs | |
| — | |
| (1,670) | |
Net cash (used in) provided by financing activities | |
| (52) | |
| 68,762 | |
| | | | | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| (11,858) | |
| 56,232 | |
Cash, cash equivalents and restricted cash at beginning of period | |
| 25,143 | |
| 3,017 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 13,285 | | $ | 59,249 | |
Reconciliation of cash, cash equivalents and restricted cash: | | | | | | | |
Cash and cash equivalents | | | 3,285 | | | 59,249 | |
Restricted cash | | | 10,000 | | | - | |
Total cash, cash equivalents and restricted cash | | $ | 13,285 | | $ | 59,249 | |
| | | | | | | |
Supplemental Disclosure of Non-Cash Investing and Financing Activities | |
|
| |
|
| |
Capitalization of stock-based compensation expense to capitalized software | | $ | 128 | | $ | 221 | |
Capital contribution from shareholder in conjunction with Credit Agreement | |
| — | |
| 2,779 | |
Issuance of warrants in conjunction with Credit Agreement | |
| — | |
| 2,076 | |
Issuance of warrants in conjunction with Lago Term Loan | |
| — | | | 843 | |
Convertible note conversion to common stock | |
| — | | | 41,392 | |
Reclassification of warrants from liabilities to equity | |
| — | |
| 830 | |
Recognition of liability classified warrants upon Merger | |
| — | |
| 9,388 | |
Recognition of Unvested Sponsor Shares liability | |
| — | |
| 1,588 | |
Forgiveness of PPP Loan | |
| — | |
| (2,000) | |
Transaction costs recorded in accounts payable and accrued liabilities | | | | | | 220 | |
Right of use asset in exchange for operating lease liability | |
| — | |
| 308 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
54
PRESTO AUTOMATION INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are in thousands, except share and per share amounts)unless otherwise noted)
1. Summary of Business and Significant Accounting Policies
Description of Business
Presto Automation Inc. and its subsidiaries (together, “Presto” or the “Company”) isare headquartered in San Carlos, California. Prior to the Merger (as defined below), the Company operated as E laLa Carte, Inc. (“Legacy Presto”). E laLa Carte, Inc. was incorporated in the State of Delaware in October 2008. In 2018, E laLa Carte, Inc. together with its subsidiary adopted “Presto” as its trade name or doing business as (“dba”) name. In February 2019, theThe Company formed Presto Technology, Inc.maintains foreign subsidiaries in Canada and a newly created subsidiary as a wholly owned subsidiary locatedof July 2023 in Ontario, Canada.India.
Merger with Ventoux CCM Acquisition Corp.
On September 21, 2022, Ventoux CCM Acquisition Corp. (“Ventoux” or “VTAQ”) and its subsidiaries, then a special purpose acquisition corporation, acquired Legacy Presto via a series of mergers, whereby Legacy Presto became a limited liability company and a wholly owned subsidiary of Ventoux (the “Merger”). Upon completion of the Merger, Ventoux CCM Acquisition Corp. was renamed Presto Automation Inc. Prior to the Merger, Ventoux Acquisition Holdings LLC and Chardan International Investments, LLC were the co-sponsors of Ventoux (together the “Sponsors”) and, with the closeclosing of the Merger, have remained significant shareholders in the Company.
Trust Proceeds and PIPE investment
Following the closing of the Ventoux’s initial public offering on December 30, 2020, $151,500 was placed in a trust account, (the “Trust”), Refer to Note 2 for which various redemptions of amounts in the Trust were made up until the date of the Merger. On the closing date of the Merger, $9,498 of unredeemed funds were released to Ventoux from the Trust.further details.
In connection with the execution of the Merger, Ventoux entered into separate subscription with a number of investors, pursuant to which the subscribers agreed to purchase, and Ventoux agreed to sell to the subscribers, an aggregate of 7,133,687 shares of common stock (the “PIPE Shares”), for an aggregate purchase price of $55,400, in a private placement pursuant to the subscription agreements (the “PIPE”). The PIPE investment closed simultaneously with the consummation of the Merger.
Upon consummation of the Merger, Presto received approximately $49,840 from the Trust and PIPE, net of transaction costs and other payments as set forth as follows:
| | | |
|
| Net Cash | |
Cash—Ventoux Trust and working capital cash | | $ | 9,584 |
Cash—PIPE investment | |
| 55,400 |
Less: transaction costs and other payments(1) | |
| (15,144) |
Total | | $ | 49,840 |
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Legacy Presto Convertible Promissory Notes and Equity and the Exchange
Immediately prior to the closing of the Merger, all convertible promissory notes were converted into Legacy Presto common stock, all shares of outstanding redeemable convertible preferred stock of Legacy Presto were automatically converted into shares of Legacy Presto common stock, and all outstanding warrants for Legacy Presto shares were either exercised or exchanged into warrants of common stock of Presto. Upon the consummation of the Merger, each share of Legacy Presto common stock issued and outstanding was canceled and converted into the right to receive 0.8099 shares (the “Exchange Ratio”) of common stock of Ventoux. Further the outstanding equity awards (including warrant, stock option and RSU holders) of Legacy Presto were canceled and converted using the Exchange Ratio with the holders receiving equivalent outstanding equity awards (including warrant, stock option and RSU holders) in the Company.
Earnout Arrangement with holders of Legacy Presto Common Stock and Outstanding Equity Awards
Concurrent with the closing of the Merger, holders of Legacy Presto common stock and outstanding equity awards (including warrant, stock option and RSU holders) had the right to receive up to an aggregate amount of 15,000,000 shares of Company common stock (or equivalent equity award) that would be issued as follows:
The earnout shares are equity classified since they do not meet the liability classification criteria outlined in ASC 480, Distinguishing Liabilities from Equity and are under ASC 815-40 are both (i) indexed to the Company’s own shares and (ii) meet the criteria for equity classification. The fair value of the earnout shares is determined based on “Level 3” inputs, due to a lack of market data over inputs such as the volatility and the time incurred to meet the minimum VWAP as discussed above. The earnout shares are measured at fair value using the Monte Carlo valuation model. The valuation model utilized various key assumptions, such as volatility, discount rate and time incurred to meet the minimum VWAP. The grant date fair value of each earnout share was $3.17. Of the 15,000,000 earn-out shares, 4,771,116 earnout shares were given to common stock, option and RSU holders that are held by current employees and directors are accounted for under ASC 718. During the period from the date of the Merger through December 31, 2022, the Company recorded stock-based compensation expense associated with earnouts in the amount of $1,874 to equity award holders who held awards associated with the Company’s equity incentive plan and to common stock holders held by current employees and directors, of which $1,267, $455, and $152 are recorded within general and administrative, research and development and sales and marketing expenses, respectively, on the condensed consolidated statement of operations and comprehensive income (loss). During the three months ended December 31, 2022, the Company recorded stock-based compensation expense associated with earnouts, to the same equity award holders as above, in the amount of $1,696, of which $1,135, $423, and $138 are recorded within general and administrative, research and development and sales and marketing expenses, respectively, on the condensed consolidated statement of operations and comprehensive income (loss).
As of December 31, 2022, unrecognized stock-based compensation expense is $12,221 which is expected to be recognized over a weighted-average period of 2.0 years. Unrecognized stock-based compensation expense for awards with a performance-based vesting condition that was not deemed probable to occur as of December 31, 2022 is $1,024 which is expected to time-vest over a remaining weighted-average period of 4.5 years, subject to the performance-based vesting condition being satisfied or deemed probable, at which point the Company will recognize a cumulative adjustment for the service condition satisfied at such point. As of December 31, 2022, 79,837 earnout shares held by current employees and directors were forfeited. The Earnout shares given to common stockholders not held by current employees and directors and warrant holders have been recorded with equal and offsetting effects on additional paid-in capital on its condensed consolidated balance sheet. As of December 31, 2022, all of the earnout shares remain unissued as the conditions to issuance have not been achieved.
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Unvested Founder Share Arrangement with Founders
At the Closing, 444,500 founders shares held by the Sponsors (the “unvested founders shares”) became subject to the following vesting and forfeiture provisions:
A “Stock Price Level” is considered achieved when the VWAP of the common stock is greater than or equal to the applicable threshold for any 40 consecutive trading days within a 60 trading day period. If the applicable Stock Price Level is not achieved on or prior to the date that is five years after the Closing Date, the applicable unvested founder shares shall not vest and shall be automatically forfeited and cancelled for no consideration. In the event of a change of control, any unvested founder shares shall automatically vest. As of December 31, 2022, all of the unvested founder shares remain unvested as the vesting conditions have not been achieved.
The Company has concluded that the unvested founder shares are accounted for as equity-linked instruments under ASC 815-40 and are not indexed to the entity’s own stock and accordingly, such financial instruments are classified as liabilities. With the closing of the Merger, the Company recorded $1,588 within other long-term liabilities. During the period from the closing of the Merger until December 31, 2022 and the three months ended December 31, 2022, the Company recorded a gain on remeasurement of $1,160 and a loss on remeasurement of $15, respectively, which are included in change in fair value of warrants and convertible promissory notes in the condensed consolidated statement of operations and comprehensive income (loss).
Upon the closing of the Merger, Ventoux’s certificate of incorporation was amended and restated to, among other things, change its name from Ventoux CCM Acquisition Corp. to Presto Automation Inc., increase the total number of authorized shares of all classes of capital stock to 181,500,000 shares, of which 180,000,000 shares are designated as common stock, $0.0001 par value per share; and 1,500,000 shares designated preferred stock, $0.0001 par value per share. Immediately following the closing of the Merger, there were 50,639,837 shares of the Company’s common stock issued and outstanding and warrants to purchase 18,415,453 shares of the Company’s common stock outstanding.
The Merger is accounted for as a reverse recapitalization in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Under the guidance in ASC 805, Business Combinations, Ventoux was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on Presto having a majority of the voting power of the post-combination company, Presto’s senior management comprising substantially all of the senior management of the post-combination company, the relative size of Presto compared to Ventoux, and Presto’s operations comprising the ongoing operations of the post-combination company. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Legacy Presto issuing stock for the net assets of Ventoux, accompanied by a recapitalization. Accordingly, all historical financial information presented in the unaudited condensed consolidated financial statements represents the accounts of Presto and its wholly owned subsidiaries as if Legacy Presto is the predecessor to the Company. The shares and net loss per common share, prior to the Merger, have been retroactively restated as shares reflecting the Exchange Ratio established in the Merger (0.8099 shares of Company common stock for every one share of Legacy Presto common stock).
Total net liabilities of Ventoux assumed by the Company was $9,768, which is inclusive of a liability for the private warrants of $9,389 but excludes the $55,400 in PIPE proceeds raised by Ventoux immediately prior to the Merger. The remaining net liabilities assumed from Ventoux were immaterial to the Company.
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Cyborg Ops
On May 23, 2022, the Company entered into an Asset Purchase Agreement (“Asset Purchase Agreement”) with CyborgOps, Inc., a provider of artificial intelligence-based products and services for merchants’ phone answering and ordering systems, to purchase substantially all of its assets and assume certain liabilities.As a consequence toof the closing of the Merger, bonus and deferred consideration amounts owed to certain founding members of CyborgOps became due and payable resulting in an expense of $1,946,$1.9 million, of which $1,878$1.8 million and $68$0.1 million has been recorded within research and development and sales and marketing expenses, respectively, in the condensed consolidated statement of operations and comprehensive income (loss) for the sixthree months ended December 31,September 30, 2022.
Emerging Growth Company Status
The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies.
The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the Company’s condensed consolidated financial statements may not be comparable to financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards based on public company effective dates.
The Company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the Company’s total annual gross revenue is at least $1,070,000,$1.1 billion, (ii) the last day of the fiscal year following the fifth anniversary of the completion of Ventoux’s initial public offering, which occurred on December 30, 2020, (iii) the date on which the Company issued more than $1,000,000$1.0 billion in non-convertible debt securities during the prior three-year period, or (iv) the date on which the Company becomes a large accelerated filer.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAPGAAP”) for interim financial reporting and the rules and regulations
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of the Securities and Exchange Commission (“SEC”). References to ASC and ASU included herein refer to the Accounting Standards Codification and Accounting Standards Update established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative U.S. GAAP. All intercompany balances and transactions have been eliminated in consolidation.
In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. They include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of December 31, 2022,September 30, 2023, and its results of operations for the three and six months ended December 31, 2022 and 2021 and cash flows for the sixthree months ended December 31, 2022,September 30, 2023 and 2021.2022. The results for the three and six months ended December 31,September 30, 2023 and 2022, and 2021, are not necessarily indicative of the results expected for the year or any other periods. These interim financial statements should be read in conjunction with the Legacy Presto’s financial statements and related notes for the fiscal year ended June 30, 20222023 included as Exhibit 99.1in Part II, Item 8 of the CurrentAnnual Report on Form 8-K as10-K filed with the SEC on December 16, 2022, where we includeOctober 10, 2023, which includes additional information on ourthe Company’s critical accounting estimates and policies, and the methods and assumptions used in ourto develop the Company’s estimates. The unaudited condensed consolidated balance sheet as of June 30, 2022,2023, has been derived from the Company’s audited financial statements.
Revision of Prior Financial Statements
For the three months ended September 30, 2022, platform revenue was overstated by $422 and platform cost of revenue was overstated by $422 as the Company recognized revenue generated from Customer D (refer to Concentration of Risks, Significant Customers and Investments section below) using the AI Platform on a gross basis in its condensed consolidated statement of operations. For the three and six months ended December 31, 2022, the Company determined revenue recognized from Customer D should be recognized on a net basis as the Company is the agent in this relationship between its hardware and software vendor and the customer (refer to Note 2) and accordingly, has reclassified the amounts recorded during the three months ended September 30, 2022 to correct this immaterial error in presentation. Further, certain costs incurred of $119 related to a vendor servicing the Company’s contract with Customer D were inappropriately recognized in research and development expense for the three months ended September 30, 2022.
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Accordingly, the Company has reclassified the amounts recorded in research and development expense to platform cost of sales to correct this immaterial error in presentation.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses, and disclosures. Accordingly, actual amounts could differ from those estimates, and those differences could be material.
UsesThe most significant estimates are related to the fair value of certain financial instruments, which includes warrant liabilities. Other uses of estimates include, but are not limited to, the collectability of accounts receivable, the useful lives of property and equipment and intangible assets, inventory valuation, the fair value of financial instruments, valuation of deferred tax assets and liabilities, valuation assumptions utilized in calculating the estimated value of stock-based compensation, valuation of warrants, earnout arrangements and unvested founder shares, valuation of goodwill and intangible assets acquired and impairment of long-lived assets. The Company has assessed the impact and is not aware of any specific events or circumstances that required an update to the Company’s estimates and assumptions or materially affected the carrying value of the Company’s assets or liabilities as of the date of issuance of this report. These estimates may change as new events occur and additional information is obtained.
Risk and Uncertainties
The Company is subject to a number of risks, common to emerging, technology-based companies, including a limited operating history;history, dependence on key individuals; rapid technological changes;individuals, the need to expand the number of its customers, long sales cycles, competition from substitutealternative products and larger companies;companies, the need for additional financing to fund future operations;operations, and the successful development, marketing, and outsourced manufacturing of the Company’s products and services as well as the impact of the novel coronavirus disease (“COVID-19”) on the restaurant industry.
Impact of COVID-19
The Company was and is subjectneed to risks and uncertainties because of the outbreak of COVID-19, declared to be a pandemic in March 2020. The Company first began to experience impacts from COVID-19 in March 2020, as federal, state and local governments reacted to the COVID-19 pandemic by encouraging or requiring social distancing, instituting shelter-in-place orders, and requiring, in varying degrees, reduced operating hours, restaurant dine-in and/or indoor dining limitations, capacity limitations or other restrictions that largely limited restaurants to off-premise sales (take-out and delivery) in the early stages of the pandemic.
Over the course of the pandemic, certain of these restrictions have been relaxed as incidents of infection from the initial outbreak declined, but many of the restrictions were reinstituted as incidents of infection surged. The degree and duration of restriction varied by individual geographic area. The extent of the continuing impact of the COVID-19 pandemic on the Company’s business remains highly uncertain and difficult to predict, as the operating status of restaurants remains fluid and subject to change as government authorities modify existing restrictions or implement new restrictions on restaurant operations in response to changes inreduce the number of COVID-19 infections and the availability and acceptance of vaccines in their respective jurisdictions. Additionally, economies worldwide have been negatively impacted by the COVID-19 pandemic, which resulted in a global economic recession.
The Company has taken several actions to mitigate the effects of the COVID-19 pandemic on its operations and franchisees. In April 2020, the Company received a loan of approximately $2,599 under the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), to assist with the economic hardships caused by the pandemic. In March 2021, the Company received a second loan of approximately $2,000 under the PPP. In August 2021, the Company was granted forgiveness of the first loan of approximately $2,599. In July 2022, the Company was granted forgiveness of the second loan of approximately $2,000. Refer to Note 7human agents required for further details.Presto Voice.
In the three and six months ended December 31, 2021, the volume of repair charges the Company experienced was higher than usual due to a liquid ingress issue resulting from COVID-19 related actions by its customers. The Company’s devices failed primarily due to the use of extremely strong commercial disinfectant solutions by customers to clean the hardware devices as a mandatory precaution protocol due to COVID-19. Due to use of commercial cleaning products, the solution leaked into the hardware causing significant damage to the devices and requiring replacement of such devices. To prevent disruption to customers’ businesses, the Company incurred losses on infrequent customer repairs of $28 and $463 for the three and six months ended December 31, 2021,
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respectively, for this issue. The Company has an outstanding claim to recover the costs from its third-party subcontractor who manufactures the hardware, for which the Company received a favorable arbitrator ruling in June 2022. Refer to Note 8 for further details.
The severity of the continued impact of the COVID-19 pandemic or similar pandemics in the future on the Company’s business will depend on a number of factors, including, but not limited to, how long the pandemic will last, whether/when recurrences of the virus may arise, what restrictions on in-restaurant dining may be enacted or re-enacted, the availability and acceptance of vaccines, the timing, and extent of customer re-engagement with its brands and, in general, what the short- and long-term impact on consumer discretionary spending the COVID-19 pandemic might have on the Company and the restaurant industry as a whole, all of which are uncertain and cannot be predicted. The Company’s future results of operations and liquidity could be impacted adversely by future dine-in restrictions and the failure of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by it and its franchisees. As such, the extent to which the COVID-19 pandemic may continue to materially impact the Company’s financial condition , liquidity, or results of operations remains highly uncertain.
Liquidity and Capital Resources
As of December 31, 2022 and JuneSeptember 30, 2022,2023, the Company’s principal sources of liquidity were cash and cash equivalents of $38,211 and $3,017, respectively,$3.3 million, which wereare held for working capital purposes. The cash and cash equivalents balance of $3.3 million excludes $10.0 million of restricted cash.
Since inception, the Company has financed its operations primarily through financing transactions such as the issuance of convertible promissory notes and loans, and sales of convertible preferred stock and common stock. The Company has incurred recurring operating losses since its inception, including an operating lossesloss of $27,765 and $13,607$13.3 million for the sixthree months ended December 31, 2022 and 2021, respectively.September 30 2023. As of December 31, 2022 and JuneSeptember 30, 2022, respectively,2023, the Company had an accumulated deficit of $183,023 and $200,783$229.9 million and the Company expects to generate operating and net losses for the near term. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from customers. customers and other risks.
While the Company received net cash of $49,840$49.8 million from the completion of the Merger and raised net cash proceeds of $13,730$16.7 million from the issuance of new debt (including the closing of the Third Amendment to the Credit Agreement described in Note 15), and received $12.5 million from the sale of common stock in private placements and paymentanticipates receiving gross proceeds of certain legacy debt obligations,approximately $7.0 million from a registered direct offering entered into on November 17, 2023 (see Note 15), additional capital infusioninfusions will be necessary in order to fund currently anticipated expenditures and to meet the Company’s obligations as they come due. The Company’s future capital requirements will depend on many factors, including the revenue growth rate, subscription renewal activity, billing frequency, the success of future product development, and the timing and extent of spending to support further sales and marketing and research and development efforts.
The Company intends to secure additional fundings from either public or private financing sources, and these plans for additional financings are intended to mitigate the conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern, however as the plans are outside of management’s control, the Company cannot ensure they will be effectively implemented. In the event that additional financing is required from outside sources, the Company may not be able to raise it on terms acceptable to it or at all. If the Company is unable to raise additional capital when desired, its business, results of operations, and financial condition would be materially and adversely affected. As a result, substantial doubt exists about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued. The Company’s condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Concentrations of Risks, Significant Customers and Investments
The Company’s financial instruments are exposed to concentrations of credit risk and consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with high-quality financial institutions with investment-grade ratings.
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Substantial doubt exists about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued. The Company intends to mitigate the conditions or events that raise this substantial doubt, however, as some components of these plans are outside of management’s control, the Company cannot ensure they will be effectively implemented. The Company cannot be sure that any additional financing will be available on acceptable terms, if at all. If the Company is unable to raise additional capital when desired, its business, results of operations, and financial condition would be materially and adversely affected. The Company’s condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Concentrations of Risks, Significant Customers and Investments
The Company’s financial instruments are exposed to concentrations of credit risk and consist primarily of cash, cash equivalents, restricted cash and accounts receivable. The Company maintains its cash, cash equivalents and restricted cash with high-quality financial institutions with investment-grade ratings. In the event of a failure of any financial institutions where the Company
maintains deposits, it may lose timely access to its funds and incur losses to the extent its deposits exceed amounts insured by the Federal Deposit Insurance Corporation, as described below.
The following three largest restaurant logosbrands (including, as applicable, the franchisees of such restaurants aggregated as a single customer for reporting purposes) accounted for more than 10% of revenues:
| | | | | | | | | | | | | | |
| Three months ended December 31, | | | Six months ended December 31, | | | Three months ended September 30, | | ||||||
| 2022 |
| 2021 |
|
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
|
Customer A | 60 | % | 49 | % |
| 60 | % | 52 | % |
| 52 | % | 57 | % |
Customer B | 22 | % | 24 | % |
| 23 | % | 25 | % |
| 15 | % | 23 | % |
Customer C1 | 14 | % | 16 | % |
| 14 | % | 17 | % | |||||
Customer C | | 23 | % | 12 | % | |||||||||
| 96 | % | 89 | % |
| 97 | % | 94 | % |
| 90 | % | 92 | % |
1The decrease in revenue is attributable to the customer relationship cancellation with certain franchisees within Customer C.
The following restaurant logosbrands accounted for more than 10% of accounts receivable:
| | | | | | | | | | |
|
| As of December 31, |
| As of June 30, |
|
| As of September 30, |
| As of June 30, |
|
| | 2022 | | 2022 |
| | 2023 | | 2023 |
|
Customer A |
| 33 | % | 31 | % |
| 38 | % | 43 | % |
Customer B |
| 14 | % | 41 | % |
| 12 | % | 14 | % |
Customer C1 |
| 15 | % | — | % | |||||
Customer D |
| 25 | % | 11 | % |
| 38 | % | 37 | % |
|
| 87 | % | 83 | % |
| 88 | % | 94 | % |
1*Customers with a dash accounted forCustomer C represents less than 10% of accounts receivable and therefore was omitted from the above schedule.
On October 30, 2023, Customer C provided notice of its intent to not renew its contract at the end of the expiration date of December 31, 2023. The customer also sought a limited transition extension period end.through March 31, 2024.
The Company is exposed to vendor concentration risk as it suppliespurchases its next generation version of Presto Touch tablets and other equipment from one vendor and currently sources its hardware and software used in the AI Platform from one vendor.supplier. The Company’s operating results could be adversely affected should any ofin the following occur:event that the vendor used to supply tablets increases theirits prices or either vendor incursexperiences disruptions in its supply of goods or services.
The Company is considering strategic alternatives for its Presto Touch solution and evaluating whether to engage in a wind-down which could be either a sale, partial sale or abandonment of the Presto Touch business in the coming months. The Company has not currently adopted any specific alternative. Refer to Note 15 for further details.
Financial Institutions
Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents and restricted cash on deposit with financial institutions, the balances of which frequently exceed federally insured limits. On March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. If any of the financial institutions with whom the Company does business were to be placed into receivership, we may be unable to access the funds the Company has on deposit with such institutions. If the Company is unable
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to access its funds as needed, its financial position and ability to operate its business could be adversely affected. The Company had $12.8 million in deposits in excess of the FDIC limits at September 30, 2023.
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s Co-CODMs arecomprised a team of the Interim Chief Executive Officer and the President and the Chief FinancialOperating Officer until August 1, 2023, when a new Chief Executive Officer was appointed, who reviewbecame the sole CODM. The Co-CODMs and sole CODM have reviewed financial information consistently throughout presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company’s operations constitute a single operating segment and one reportable segment. The Company had interest income of $299 and $309 for the three and six months ended December 31, 2022. The Company had no interest income during the three and six months ended December 31, 2021.
The Company has operations in the United States, Canada and Canada.India. The Company earns primarilysubstantially all of its revenue in the United States and all of its long-lived assets are held in the United States.
Investment in non-affiliateNon-Affiliate
Investments in non-affiliates include equity security investments in third party entities without a readily determinable fair value in which the Company’s influence is deemed non-significant. Investments in non-affiliates are recorded using the measurement alternative for investments without readily determinable fair values, whereby the investment is measured at cost less any impairment recorded or observable price changes. Any impairments or observable price changes are reported in other income, net in the condensed consolidated statements of operations and comprehensive income (loss).income.
Leases
The Company leases real estate facilities under a non-cancelable operating leaseleases with remaining lease terms of 6six months to 3three years. The Company determines if an arrangement contains a lease at inception based on whether there is an identified property or equipment and whether the Company controls the use of the identified asset throughout the period of use.
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The Company adopted ASU No. 2016-02, Leases (accounts for its leases in accordance with ASC Topic 842,Leases. ) on July 1, 2022, using the modified retrospective approach
Upon adoption the Company recorded a right of use asset (“ROU”) and an operating lease liabilities. The operating lease ROU asset represents the Company’s right to use the underlying asset for the lease term and the lease liability represents the Company’s obligation to make lease payments arising from the lease.
The operating lease liability isliabilities are measured and recognized at the lease inception date based on the present value of lease payments over the lease term discounted based on the more readily determinable of (i) the rate implicit in the lease or (ii) the Company’s incremental borrowing rate (which is the estimated rate the Company would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease). Because the Company’s operating lease does not provide an implicit rate, the Company estimates its incremental borrowing rate based on the information available at lease commencement date for borrowings with a similar term.
The Company’s operating lease ROU asset is measured based on the corresponding operating lease liability adjusted for (i) payments made to the lessor at or before the commencement date, (ii) initial direct costs incurred, and (iii) tenant incentives under the lease. The Company does not assume renewals or early terminations unless it is reasonably certain to exercise these options at commencement. The Company does not allocate consideration between lease and non-lease components. The Company’s lease agreement containsagreements contain variable costs such as common area maintenance, operating expenses, or other costs. Variable lease payments are recognized in the period in which the obligation for those payments are incurred. In addition, the Company does not recognize ROU assets or lease liabilities for leases with a term of 12twelve months or less of all asset classes; lease expense from these leases areis recognized on a straight-line basis over the lease term. The ROU asset as of September 30, 2023 was $0.4 million. Lease activity was immaterial to the condensed consolidation financial statements for three months ended September 30, 2023 and 2022.
Revenue Recognition
The Company accounts for its revenue in accordance with ASC 606 Revenue from Contracts with Customers. Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services, net of any taxes collected from customers (e.g., sales and other indirect taxes), which are subsequently remitted to government authorities. During the three and six months ended December 31,September 30, 2023 and 2022, and 2021, the Company derived its revenues from two revenue streams: (1) sales of the Presto Touch and Presto Voice solutions and leases of the Presto Touch and AI Platform products (“Platform revenue”),solution, which includes hardware, hardware accessories, software and customer support and maintenance
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(“Platform revenue”), and (2) Premium Content (gaming) and other revenue, which includes professional services (“Transaction revenue”).
Platform Revenue
The platformPlatform revenue stream is generated from fees charged to customers for access to the Company’s Presto Touch and Presto Voice solutions, which isare recognized ratably. Partratably over the life of the totalcontract. The majority of the Company’s consideration from the contract value is due upon executionmonthly over the term of the contract. Revenue from the Presto Touch related to continuous access to the Company’s software-as-a-service (“SaaS”) platform is satisfied ratably over the contract andperiod as the remainderservice is due when the customer goes live.provided. The contractsmaster service agreements with customers are generally for a term ranging from 12 to 4836 months. Amounts invoiced in excess of revenue recognized are recorded as deferred revenue. Revenue generated from the AI Platform (previouslyPresto Voice and Vision) was not material for the three and six months ended December 31,September 30, 2023 and 2022.
Pursuant to an agreement with Hi Auto Ltd. (“Hi Auto”), the Company remits a revenue share associated with Presto Voice at Checkers locations. As the Company has determined that it serves as an agent in the relationship because it does not control the Presto Voice hardware, software and other services and is not primarily responsible for fulfilling the obligations to the customer, the Company recognizes this revenue net of the revenue share amount paid to Hi Auto. The revenue share amount ranged from 64% to 68% of the gross billings to the restaurant operators for the three months ended September 30, 2023 and 2022. Revenue for the three months ended September 30, 2023 and 2022 and 2021. Such revenue generated from the AI Platform is inclusive of contra-revenue relatedCheckers also reflects, as a reduction to transaction price, the fair value of the warrant treatedissued to Checkers (refer to Note 3). The Company also pays Hi Auto a fee that is accounted for as a reduction to the transaction pricecost of an AI Platform customer of $409revenue which was $0.3 million and $615$0.2 million for the three and six months ended December 31,September 30, 2023 and 2022, respectively. For further details of the terms of the warrant, refer to Note 10.
The Company also maintains arrangementsan agreement with certain customersa legacy customer whereby the Companyit leases the Presto Touch to itsthat customer.Revenue associated with the lease is recognized on a straight-line basis as platformPlatform revenue over the lease term in the condensed consolidated statements of operations and comprehensive loss.income.
Transaction Revenue
Transaction revenue consists of a single performance obligation recognized at a point in time when the content is delivered and used. Transaction revenue is recognized on a gross basis as the Company is the principal in the relationship and the restaurant acts as a sales agent between the Company and the diner to upsell premium content purchases during the dining experience. The Company is the principal as the Companyit is the primary obligor responsible for fulfillment, the Company controls the gaming license and its accessibility and has influence in establishing the price charged to the diner.guest. The restaurant acts as a sales agent between the Company and the guest to upsell premium gaming content purchases during the dining experience. A portion of gaming serviceTransaction revenue collections withheld byis owed to the restaurant for sales commission areoperator and is recorded to transactionin Transaction cost of revenues.revenue.
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The Company determines revenue recognition through the following steps:
1. | Identification of the contract, or contracts, with a customer — In connection with the Presto Touch solution, the Company enters into a master sales agreement (“ |
2. | Identification of the performance obligations in the contract — The Company’s contracts with customers include promises to transfer multiple goods and services. For all arrangements with multiple services, the Company evaluates whether the individual services qualify as distinct performance obligations. In the Company’s assessment of whether a service is a distinct performance obligation, the Company determines whether the customer can benefit from the service on its own or with other readily available resources and whether the service is separately identifiable from other services in the contract. This evaluation requires the Company to assess the nature of each individual service offering and how the services are provided in the context of the contract, including whether the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment based on the facts and circumstances of the contract. |
The Company identified the following performance obligations: (1) for the MSAs and license agreements, 1) sales or leases of hardware, software-as-a-service (“Saas”)access to the SaaS platform and maintenance asis one combined performance obligation (“Presto Touch”Touch”) and
9
(2) for gaming agreements, 2)the provision of premium content, or gaming.gaming is a separate standalone performance obligation. Professional services were insignificant during the three and six months ended December 31, 2022September 30, 2023 and 2021.2022.
The Presto Touch is considered a single performance obligation because each element of the Presto Touch solution is interdependent and cannot function independently. The software and hardware for the Presto Touch represent one combined output and the customer cannot benefit from the use of one element without the other.
When the Company enters into gaming agreements, the Company’s Presto Touch solution includes the capability of providing entertainment services, designed (either on its own or through other subcontractors) and provided by the Company via internet, that can be purchased by diners.internet. The games are only accessible over the internet and upon the dinerguest making the decision to pay for the content, the dinerguest receives the right to access the game on the Presto Touch.Touch solution. Gaming fees are usage based through the diner’sguest’s use of the device and stipulated in a separate contract with the diner.guest. Any fees that are incurred are collected by the restaurant as part of the normal payment for the dining check from the dinerguest and remitted back to the Company, net of commissions paid to the restaurant as the sales agent. Premium content revenue, or gaming revenue, is therefore one performance obligation.
3. | Determination of the transaction price — |
4. | Allocation of the transaction price to the performance obligations in the contract — As the Presto Touch solution is one combined performance obligation, no reallocation of the contract price is required. The Company’s premium content contract is comprised of one performance obligation and does not require reallocation of the contract price. |
5. | Recognition of revenue when, or as, the Company satisfies a performance obligation — As the customer simultaneously receives and consumes the benefits provided by the Company through continuous access to its SaaS platform, revenue from the Presto Touch is satisfied ratably over the contract period as the service is provided, commencing when the subscription service is made available to the customer. Transaction revenue does not meet the criteria for ratable recognition and is recognized at a point in time when the gaming service is provided. |
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Net Income (Loss) Per Share
The Company computes net income (loss) per share, or earnings per share (“EPS”), following ASC Topic 260, Earnings per Share. Basic EPS is measured as theShare. The Company calculates basic net income or loss availableper share by dividing net income attributable to common stockholders divided by the weighted average commonweighted-average number of ordinary shares outstanding forduring the period. Diluted EPS presentsrepresents the dilutive effect on a per-share basis from the potential conversion of convertible securities or the exercise of options and or warrants; the dilutive impacts of potentially convertible securities are calculated using the if-converted method; the potentially dilutive effect of options or warrants areis computed using the treasury stock method. Securities that arethat have a potentially an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from diluted EPS calculation.
Recently Adopted Accounting Standards
In February 2016, the FASB issued Topic 842 which generally requires companies to recognize operating and financing lease liabilities and corresponding ROU assets on the balance sheet. The Company adopted the standard as of July 1, 2022, using the modified retrospective approach and has elected to use the optional transition method which allows the Company to apply the guidance of ASC Topic 840, Leases, including disclosure requirements, in the comparative periods presented. The Company elected certain practical expedients, including the option not to apply lease recognition for short-term leases; an election to not separate lease from non-lease components; and a package of practical expedients such that, upon the initial adoption of Topic 842, the Company did not reassess whether expired or existing contracts contain leases, nor did the Company reassess the lease classification for expired or existing leases. The Company did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of ROU assets.
The adoption of the new standard resulted in recognition of an operating lease ROU asset and operating lease liability of $510 and $516, respectively, as of July 1, 2022. There was no cumulative impact of transition to retained earnings as of the adoption date. The standard did not impact the accompanying condensed consolidated statements of operations and comprehensive income (loss) and the accompanying condensed consolidated statements of cash flows.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes in order to reduce cost and complexity of its application. The standard is effective for the Company beginning in fiscal year 2023 and interim periods in the following years. Most amendments within this guidance are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We adopted this guidance on July 1, 2022 and it did not have a material impact at the time of adoption on our condensed consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. The standard is effective for the Company beginning in fiscal year 2023 and interim periods within that year. We adopted this guidance on July 1, 2022 and it did not have a material impact at the time of adoption on our condensed consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Topic 326: Credit Losses Measurement of Credit Losses on Financial Instruments (Topic 326), which requires an entity to utilize a new impairment model known as the current expected credit loss (CECL) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This guidance also requires new disclosures for financial assets measured at amortized cost, loans, and available-for-sale debt securities. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The FASB subsequently issued ASU 2018-19, ASU 2019-04, and ASU 2019-10, which clarified the implementation guidance and effective date of Topic 326. Topic 326 is effective for the Company beginning fiscal year 2024. The Company is currently evaluatingadopted ASU No. 2016-13 on July 1, 2023 using the modified retrospective approach. The adoption did not have a material impact ofto the adoption of this standard on the Company’sCompany's condensed consolidated financial statements.
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Recently Issued Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU 2020 06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity, which simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. The standard also simplifies guidance in Topic 815-40 by removing certain criteria that must be satisfied in order to classify a contract as equity and revises the guidance on calculating earnings per share, requiring the use of the if-converted method for all convertible instruments. The standard is effective for the Company beginning in fiscal year 2025. The Company is currently evaluating the impact of the adoption of this standard on the Company’s condensed consolidated financial statements.
In March 2020 with an update in January 2021, the FASB issued ASU 2020 04, Reference Rate Reform (Topic 848): Facilitation
2. Merger
On September 21, 2022, Ventoux and its subsidiaries, then a special purpose acquisition corporation, acquired Legacy Presto via a series of mergers, whereby Legacy Presto became a limited liability company and a wholly owned subsidiary of Ventoux. Upon completion of the EffectsMerger, Ventoux CCM Acquisition Corp. was renamed Presto Automation Inc. The Sponsors, with the close of Reference Rate Reformthe Merger, remained significant shareholders in the Company.
Trust Proceeds and PIPE investment
Following the closing of Ventoux’s initial public offering on Financial ReportingDecember 30, 2020, $151.5 million was placed in a trust account, (the “Trust”), for which various redemptions of amounts in the Trust were made up until the date of the Merger. On the closing date of the Merger, $9.5 million of unredeemed funds were released to Ventoux from the Trust.
In connection with the execution of the Merger, Ventoux entered into separate subscription with a number of investors, pursuant to which the subscribers agreed to purchase, and ASU 2021 01, Reference Rate Reform (Topic 848)Ventoux agreed to sell to the subscribers, an aggregate of 7,133,687 shares of common stock (the “PIPE Shares”), which provides optional expedientsfor an aggregate purchase price of $55.4 million, in a private placement pursuant to the subscription agreements (the “PIPE”). The PIPE investment closed simultaneously with the consummation of the Merger.
Upon consummation of the Merger, Presto received approximately $49.8 million from the Trust and exceptions for applying current U.S. GAAP to contracts, hedging relationships,PIPE, net of transaction costs and other transactions affectedpayments as set forth as follows:
| | | |
|
| Net Cash | |
Cash—Ventoux Trust and working capital cash | | $ | 9,584 |
Cash—PIPE investment | |
| 55,400 |
Less: transaction costs and other payments(1) | |
| (15,144) |
Total | | $ | 49,840 |
(1) | Amount reflects (1) the repayment of $1.9 million of Ventoux related party loans utilizing proceeds from Trust, (2) the payment of $7.8 million in Ventoux transaction costs related to the Merger, (3) the payment of $4.9 million in Legacy Presto transaction costs related to the Merger and (4) the payment of certain other costs not directly related to the Merger in the amount of $0.5 million. Legacy Presto also incurred $2.1 million in transaction costs which were paid via the issuance of 260,000 Company shares. Further in conjunction with the Merger, Legacy Presto incurred $3.2 million in transaction costs which were either paid prior to or after the Merger. As of September 30, 2023, all of the transaction costs incurred by Legacy Presto have been fully paid. Accordingly, in total Legacy Presto incurred transaction costs amounting to $10.4 million. |
Legacy Presto Convertible Promissory Notes and Equity and the Exchange
Immediately prior to the closing of the Merger, all convertible promissory notes were converted into Legacy Presto common stock, all shares of outstanding redeemable convertible preferred stock of Legacy Presto were automatically converted into shares of Legacy Presto common stock, and all outstanding warrants for Legacy Presto shares were either exercised or exchanged into warrants of common stock of Presto. Upon the consummation of the Merger, each share of Legacy Presto common stock issued and outstanding was canceled and converted into the right to receive 0.8099 shares (the “Exchange Ratio”) of common stock of Ventoux. Further the outstanding equity awards (including warrant, stock option and RSU holders) of Legacy Presto were canceled and converted using the Exchange Ratio with the holders receiving equivalent outstanding equity awards (including warrant, stock option and RSU holders) in the Company.
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Earnout Arrangement with holders of Legacy Presto Common Stock and Outstanding Equity Awards
Concurrent with the closing of the Merger, holders of Legacy Presto common stock and outstanding equity awards (including warrant, stock option and RSU holders) had the right to receive up to an aggregate amount of 15,000,000 shares of Company common stock (or equivalent equity award) that would be issued as follows:
● | 7,500,000 shares, if, during the period from and after the closing of the Merger until the third anniversary of the closing of the Merger, the Volume Weighted Average Price (“VWAP” as defined in the Agreement and Plan of Merger among Ventoux CCM Acquisition Corp., as Acquiror, Ventoux Merger Sub I Inc. as First Merger Sub., Ventoux Merger Sub II LLC as Second Merger Sub and E La Carte, Inc. as the Company, dated November 10, 2021 (the “Business Combination Agreement”) of Presto common stock is greater than or equal to $12.50 for any 20 trading days within a period of 30 consecutive trading days, and |
● | an additional 7,500,000 shares, if, during the period from and after the closing of the Merger until the fifth anniversary of the closing of the Merger, the VWAP of Presto common stock is greater than or equal to $15.00 for any 20 trading days within a period of 30 consecutive trading days. |
The earnout shares are equity classified and the fair value was determined at grant date to be $3.17 per share. Of the 15,000,000 earn-out shares, 4,771,116 earnout shares were given to common stock, option and RSU holders that were held by current employees and directors and are accounted for under ASC 718. Refer to Note 11 for compensation details.
Unvested Sponsor Share Arrangement with Sponsors
At the Closing, 444,500 sponsor shares held by the discontinuationSponsors (the “Unvested Sponsor Shares”) became subject to the following vesting and forfeiture provisions:
(i) | the first 25% of such Unvested Sponsor Shares owned by the Sponsors vest at such time as a $12.00 Stock Price Level is achieved on or before the date that is five years after the Closing Date, |
(ii) | the next 25% of such Unvested Sponsor Shares owned by the Sponsors vests at such time as a $15.00 Stock Price Level is achieved on or before the date that is five years after the Closing Date., |
(iii) | the next 25% of such Unvested Sponsor Shares owned by the Sponsors vest at such time as a $20.00 Stock Price Level is achieved on or before the date that is five years after the Closing Date and |
(iv) | the remaining 25% of such Unvested Sponsor Shares owned by the Sponsors shall vest at such time as a $25.00 Stock Price Level is achieved on or before the date that is five years after the Closing Date. |
A “Stock Price Level” is considered achieved when the VWAP of the London Interbank Offered Rate (“LIBOR”)common stock is greater than or by another reference rate expectedequal to be discontinued. The guidance can be adopted immediately andthe applicable threshold for any 40 consecutive trading days within a 60 trading day period. If the applicable Stock Price Level is applicable to contracts entered intonot achieved on or before December 31, 2022. prior to the date that is five years after the Closing Date, the applicable Unvested Sponsor Shares shall not vest and shall be automatically forfeited and cancelled for no consideration. In the event of a change of control, any Unvested Sponsor Shares shall automatically vest. As of September 30, 2023, all of the Unvested Sponsor Shares remain unvested as the vesting conditions have not been achieved.
The Company has concluded that the Unvested Sponsor Shares are accounted for as equity-linked instruments under ASC 815-40 and are not indexed to the entity’s own stock and accordingly, such financial instruments are classified as liabilities. With the closing of the Merger, the Company recorded $1.6 million within other long-term liabilities. During the three months ended September 30, 2023 and 2022, the Company recorded a gain on remeasurement of $1.3 million and $1.2 million, respectively, which are included in change in fair value of warrants and convertible promissory notes in the condensed consolidated statement of operations and comprehensive income.
The Merger is currently evaluatingaccounted for as a reverse recapitalization in accordance with U.S. GAAP. Under the guidance in ASC 805, Business Combinations, Ventoux was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on Presto having a majority of the voting power of the post-combination company, Presto’s senior management comprising substantially all of the senior management of the post-combination company, the relative size of Presto compared to
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Ventoux, and Presto’s operations comprising the ongoing operations of the post-combination company. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Legacy Presto issuing stock for the net assets of Ventoux, accompanied by a recapitalization. Accordingly, all historical financial information presented in the unaudited condensed consolidated financial statements represents the accounts of Presto and its contracts that reference LIBORwholly owned subsidiaries as if Legacy Presto is the predecessor to the Company. The shares and net income per common share, prior to the potential effectsMerger, have been retroactively restated as shares reflecting the Exchange Ratio established in the Merger (0.8099 shares of adopting this new guidanceCompany common stock for every one share of Legacy Presto common stock).
Total net liabilities of Ventoux assumed by the Company was $9.8 million, which is inclusive of a liability for the private warrants of $9.4 million but does not expect this standardexcludes the $55.4 million in PIPE proceeds raised by Ventoux immediately prior to have a material effect.the Merger. The Company does not intendremaining net liabilities assumed from Ventoux were immaterial to adopt the standard earlyCompany.
2.3. Revenue
Contract Balances
The Company receives payments from customers based on a billing schedule as established in its customer contracts. Accounts receivable is recorded when the Company contractually has the right to consideration. In some arrangements, a right to consideration for its performance under the customer contract may occur before invoicing to the customer, resulting in contract assets. The amount of contract assets included within accounts receivable before allowances for credit losses, in the condensed consolidated balance sheets was $704$0.7 million and $516$0.7 million as of December 31, 2022September 30, 2023 and June 30, 2023, respectively. The beginning balance of accounts receivable was $1.8 million and $1.5 million as of July 1, 2023 and 2022, respectively. The amount of contract assets including deferred costs in the condensed consolidated balance sheets is $2.0 million, $2.4 million and $11.3 million as of September 30, 2023, June 30, 2023 and July 1, 2022, respectively.
Contract liabilities consist of deferred revenue. Deferred revenue represents amounts that have been invoiced in advance of revenue recognition, and the balance is recognized as revenue when transfer of control to customers has occurred or services have been provided. The current portion of deferred revenue balances are recognized during the following 12-monthtwelve-month period.
The following table summarizes the activity in deferred revenue:
| | | | | | |
|
| Deferred |
| Deferred | ||
| | Revenue | | Revenue | ||
Balance as of June 30, 2021 | | $ | 25,623 | |||
Balance as of June 30, 2023 | | $ | 1,583 | |||
Additions | |
| 753 | |
| 1,511 |
Revenue recognized | |
| (8,057) | |
| (1,686) |
Balance as of December 31, 2021 | | $ | 18,319 | |||
Balance as of September 30, 2023 | | $ | 1,408 |
| | | | | | |
|
| Deferred |
| Deferred | ||
| | Revenue | | Revenue | ||
Balance as of June 30, 2022 | | $ | 10,769 | | $ | 10,769 |
Additions | |
| 1,348 | |
| 3,246 |
Revenue recognized | |
| (7,975) | |
| (12,432) |
Balance as of December 31, 2022 | | $ | 4,142 | |||
Balance as of June 30, 2023 | | $ | 1,583 |
As of December 31, 2022,September 30, 2023, approximately $4,450$5.0 million of revenue is expected to be recognized from remaining performance obligations for customer contracts. The Company expects to recognize revenue on approximately $3,841$4.5 million of these remaining performance obligations over the next 12 months with the balance recognized thereafter.
On July 29, 2019, the Company entered into an arrangement with Customer A whereby it agreedTransaction Revenue
The commissions paid to provide a $5,000 marketing development payment once the roll out phase was completed, which occurred on June 4, 2020, with the payment coming due on July 4, 2020. This payment is treated as an offset to revenue recognizedrestaurants under the contract over 4 yearsCompany’s gaming revenue share agreements ranged between 86% - 95% and interest accrues on83% - 96% of premium content revenue by customer logo for the unpaid balance at a rate of 12% per annum. The payment due on July 4, 2020 was not paid by the Company. As of December 31,three months ended September 30, 2023 and 2022, and June 30, 2022, the Company had incurred $0 and $170 of accrued interest expense, respectively.
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On September 29, 2021,Disaggregation of Revenue
No single country other than the Company entered into a settlement agreement with Customer A regarding the payment of a $5,000 marketing development payment and related accrued interest to be made to the customer and $2,000 in handheld services to be provided to the customer under a previous contract. Through the settlement agreement, the Company agreed to provide certain alternative installation and replacement services with a value of $2,000 and cover expenses on behalf of the customer related to a liquid ingress issue resulting from COVID-19 of $3,333. The liquid ingress issue was a resultUnited States represented 10% or more of the Company’s devices failure primarily due to the use of extremely strong commercial disinfectant solutions by the Company’s customers to clean the hardware devices as a mandatory precaution protocol due to COVID-19. In return, the customer agreed to reduce the payment to be made from $5,000 to $3,200, waive the related accrued interest of $805revenue during three months ended September 30, 2023 and no longer request a refund on a $2,000 payment it had previously made for handheld services. Of the amounts, $2,879 was accounted for as contra-loss on infrequent product repairs, $2,434 as a reduction to accounts payable for the principal and accrued interest owed, $274 as a reduction to deferred revenue, and $171 as prepaid interest as of and for the fiscal year ended June 30, 2021. Subsequently, $171 interest expense was recognized against the prepaid interest balance, $3,200 was recognized as a reduction to accounts payable for the payment of the outstanding marketing development amount in October 2021. Revenue relating to the installation and replacement services provided as a part of the contract modification was $99 and $351 for2022.
For the three and six months ended December 31,September 30, 2023 and 2022, $0.6 million and $0.4 million, respectively, and $322 and $354of revenue was recognized as revenue relatingfrom leasing arrangements.
Warrant Issued to the installation and replacement services provided as part of the contract modification for the three and six months ended December 31, 2021. The Company will continue to offset revenue recognized based on the original $5,000 marketing development fund.a Customer
On October 29, 2021, the Company entered into an arrangement with a customer whereby it issued a warrant to purchase 404,961 shares of common stock. Refer to Note 10 for further details. The fair value of the warrant is treated as a reduction to the transaction price of the customer contract and will beis recorded as contra-revenue. Contra-revenue recognized related to the warrant was $409$0.1 million and $615a de minimus amount for the three and six months ended December 31,September 30, 2023 and 2022, respectively. There was no contra-revenue recognized during the three or six months ended December 31, 2021.
AI Platform
The Company remits a share of the gross billings from its arrangement with Customer D to its hardware and software vendor. The Company determined it is the agent in the relationship as it does not control the AI Platform hardware, software, and certain services, and is not primarily responsible for fulfilling the promise to Customer D.
The revenue share paid to the Company’s hardware and software vendor under the Company’s AI Platform revenue share agreement ranged from 64% - 68% of the gross billings to the customer for the three and six months ended December 31, 2022.
Transaction Revenue
The commissions paid to restaurants under the Company’s gaming revenue share agreements ranged between 83% - 90% and 83% - 92% of premium content revenue by customer logo for the three and six months ended December 31, 2022, respectively, while the commissions paid to restaurants under the Company’s gaming revenue share agreements ranged between 81% - 90% and 79% - 96% of premium content revenue by customer logo for the three and six months ended December 31, 2021, respectively.
Disaggregation of Revenue
No single country other than the United States represented 10% or more of the Company’s revenue during three and six months ended December 31, 2022 and 2021.
For the three and six months ended December 31, 2022, $435 and $835 of revenue was from leasing arrangements, respectively, while for the three and six months ended December 31, 2021, $619 and $1,252 of revenue was from leasing arrangements, respectively.
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3.4. Fair Value Measurements
The following table provides a summary of all financial instruments measured at fair value:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| As of December 31, 2022 |
| As of September 30, 2023 | ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 33,341 | | $ | — | | $ | — | | $ | 33,341 | | $ | 2,072 | | $ | — | | $ | — | | $ | 2,072 |
Total financial assets | | $ | 33,341 | | $ | — | | $ | — | | $ | 33,341 | | $ | 2,072 | | $ | — | | $ | — | | $ | 2,072 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Unvested founder shares liability | | $ | — | | $ | — | | $ | 428 | | | 428 | ||||||||||||
Unvested Sponsor Shares liability | | $ | — | | $ | — | | $ | 115 | | | 115 | ||||||||||||
Warrant liabilities | |
| — | |
| — | |
| 2,362 | |
| 2,362 | |
| — | |
| — | |
| 4,842 | |
| 4,842 |
Total financial liabilities | | $ | — | | $ | — | | $ | 2,790 | | $ | 2,790 | | $ | — | | $ | — | | $ | 4,957 | | $ | 4,957 |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| As of June 30, 2022 |
| As of June 30, 2023 | ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
Financial assets: | | |
| | |
| | |
| | |
| ||||||||||||
Cash equivalents: | | | | | | | | | | | | | ||||||||||||
Money market funds | | $ | 13,884 | | $ | — | | $ | — | | $ | 13,884 | ||||||||||||
Total financial assets | | $ | 13,884 | | $ | — | | $ | — | | $ | 13,884 | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Financial liabilities: | | |
| | |
| | |
| | |
| | | | | | | | | | | | |
Convertible promissory notes and embedded warrants | | $ | — | | $ | — | | $ | 89,663 | | $ | 89,663 | ||||||||||||
Unvested Sponsor Shares liability | | $ | — | | $ | — | | $ | 1,399 | | $ | 1,399 | ||||||||||||
Warrant liabilities | |
| — | |
| — | |
| 4,149 | |
| 4,149 | |
| — | |
| — | |
| 25,867 | |
| 25,867 |
Total financial liabilities | | $ | — | | $ | — | | $ | 93,812 | | $ | 93,812 | | $ | — | | $ | — | | $ | 27,266 | | $ | 27,266 |
Valuation Assumptions Related to Unvested FounderSponsor Share Liability
The fair value of the unvested founder sharesUnvested Sponsor Shares liability was determined by the Company using a Monte Carlo valuation model, which requires significant estimates including the expected volatility of ourthe Company’s common stock based on the historical volatility of comparable publicly traded companies and the risk-free rate.
The Company estimated the fair value of the unvested founder share liability using the following weighted average assumptions:
| | | | | |
|
| As of December 31, 2022 | | As of Merger Date |
|
Expected volatility | | 73.3 | % | 76.2 | % |
Expected term (in years) | | 4.7 | | 5.0 | |
Risk-free interest rate | | 3.9 | % | 3.7 | % |
Valuation Assumptions and Other Information Related to Convertible Promissory Notes and Embedded Warrants
The fair value of the convertible promissory notes and embedded warrants is determined based on “Level 3” inputs, due to a lack of market data over inputs such as the probability weighting of the various scenarios that can impact the settlement. The principal amount of the convertible promissory notes, embedded warrants and accrued interest is measured at fair value using the Monte Carlo valuation model. The valuation model utilized various key assumptions, such as enterprise value and management assessments of the probability of expected future events, including conversion upon next financing of private preferred stock, conversion upon a next financing in a public liquidity event, conversion upon a change in control, conversion upon maturity and default. A public liquidity event is defined as the issuance and sale of shares in an initial public offering or a deSPAC. As part of the convertible promissory notes and embedded warrants valuation at each reporting date, the Company determined that credit risk associated with the convertible notes was immaterial.
The Company elected the fair value option to account for the convertible promissory notes and embedded warrants because the Company believes it more accurately reflects the value of the debt in the financial statements. Changes in the fair value of the convertible promissory notes and embedded warrants were included in change in fair value of warrants and convertible promissory notes in the condensed consolidated statement of operations and comprehensive income (loss).
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The Company estimated the fair value of the convertible promissory notes, embedded warrants and accrued interestunvested sponsor share liability using the following weighted average assumptions:
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| | | | | | | | | | |
|
| As of June 30, 2022 | ||||||||
|
| Next |
| Next |
| Change in |
| Maturity |
| |
| | Financing - Private | | Financing - Public | | Control | | Date | | Default |
Probability of conversion | | 10.0 | % | 80.0 | % | 5.0 | % | 5.0 | % | — |
Expected term (in years) | | 0.3 |
| 0.2 |
| 0.2 |
| 0.3 |
| — |
Discount rate | | 16.5 | % | 16.5 | % | 16.5 | % | — | % | — |
The following table sets forth a summary of the difference between the carrying amount and the fair value of Level 3 convertible promissory notes and embedded warrants for which the fair value option was elected:
| | | | | | | | | |
|
| As of June 30, 2022 | |||||||
|
| Carrying |
| Amount |
| | | ||
| | Amount | | Charged to Earnings | | Fair Value | |||
Convertible promissory notes and embedded warrants | | $ | 51,816 | | $ | 37,847 | | $ | 89,663 |
Total | | $ | 51,816 | | $ | 37,847 | | $ | 89,663 |
The Company had no outstanding convertible promissory notes and embedded warrants as of December 31, 2022.
Valuation Assumptions Related to Warrants
| | | | | |
|
| As of September 30, 2023 | | As of June 30, 2023 |
|
Expected volatility | | 68.9 | % | 70.4 | % |
Expected term (in years) | | 4.0 | | 4.2 | |
Risk-free interest rate | | 4.6 | % | 4.2 | % |
The fair value of the warrant liabilities are determined based on “Level 3” inputs, due to the lack of relevant observable market data over fair value inputs (volatility, stock price, risk-free rate, expected term, and dividend yield), used in the Black-Scholes-Merton model. The following table indicates the weighted-average assumptions made in estimating the fair value:
| | | | | | | | | | | | | | |
|
| As of |
| As of |
|
| As of |
| As of |
| ||||
| | December 31, | | June 30, |
| | September 30, | | June 30, |
| ||||
| | 2022 | | 2022 |
| | 2023 | | 2023 |
| ||||
Risk-free interest rate |
| | 4.03 | % | | 3.00 | % |
| | 4.65 | % | | 4.19 | % |
Expected term (in years) |
| | 5.09 |
| | 5.93 | |
| | 4.61 |
| | 4.75 | |
Expected volatility |
| | 61.74 | % | | 65.72 | % |
| | 55.93 | % | | 56.76 | % |
Expected dividend yield |
| | — |
| | — | |
| | — |
| | — | |
Exercise price | | $ | 10.40 | | $ | 7.48 | | | $ | 1.48 | | $ | 4.50 | |
| | | | | | | | | | | | | | |
Valuation Assumptions and Other Information Related to Convertible Promissory Notes and Embedded Warrants
The Company elected the fair value option methodology to account for the convertible promissory notes and embedded warrants because the Company believes it more accurately reflects the value of the debt in the financial statements. Changes in the fair value of the convertible promissory notes and embedded warrants were included in change in fair value of warrants and convertible promissory notes in the consolidated statement of operations and comprehensive income.
The Company had no outstanding convertible promissory notes and embedded warrants as of June 30, 2023.
Level 3 Rollforward
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities:
| | | | | | | | | | | | | | | |
|
| Convertible |
| | |
| | |
| | |
| | | |
| | Promissory | | | | | Unvested | | | | | Unvested | |||
| | Notes and | | | | | Founder | | | | | Sponsor | |||
| | Embedded | | Warrant | | Shares | | Warrant | | Shares | |||||
| | Warrants | | Liabilities | | Liability | | Liabilities | | Liability | |||||
Balance at June 30, 2021 | | $ | 62,581 | | $ | 1,434 | | $ | — | ||||||
Issuance of convertible promissory notes | |
| 500 | |
| — | |
| — | ||||||
Balance at June 30, 2023 | | $ | 25,867 | | $ | 1,399 | |||||||||
Change in fair value | |
| 26,909 | |
| 2,768 | |
| — | |
| (21,025) | |
| (1,284) |
Balance at December 31, 2021 | | $ | 89,990 | | $ | 4,202 | | $ | — | ||||||
Balance at September 30, 2023 | | $ | 4,842 | | $ | 115 |
| | | | | | | | | |
|
| Convertible |
| | |
| | | |
| | Promissory | | | | | Unvested | ||
| | Notes and | | | | | Sponsor | ||
| | Embedded | | Warrant | | Shares | |||
| | Warrants | | Liabilities | | Liability | |||
Balance at June 30, 2022 | | $ | 89,663 | | $ | 4,149 | | $ | — |
Reclassification of liability classified warrants to equity | |
| — | |
| (830) | |
| — |
Issuance of warrants | | | — | | | 843 | | | |
Recognition of warrants and unvested sponsor share liabilities assumed upon the Merger | | | | | | 9,388 | | | 1,588 |
Change in fair value | | | (48,271) | | | (11,551) | | | (1,175) |
Conversion of warrant liabilities and convertible promissory notes | |
| (41,392) | |
| — | |
| — |
Balance at September 30, 2022 | | $ | — | | $ | 1,999 | | $ | 413 |
1915
��� | | | | | | | | | |
|
| Convertible |
| | |
| | | |
| | Promissory | | | | | Unvested | ||
| | Notes and | | | | | Founder | ||
| | Embedded | | Warrant | | Shares | |||
| | Warrants | | Liabilities | | Liability | |||
Balance at June 30, 2022 | | $ | 89,663 | | $ | 4,149 | | $ | — |
Reclassification of liability classified warrants to equity | |
| — | |
| (830) | |
| — |
Issuance of warrants | |
| — | |
| 843 | |
| — |
Recognition of warrants and unvested founder shares liabilities assumed upon Merger | |
| — | |
| 9,388 | |
| 1,588 |
Change in fair value | |
| (48,271) | |
| (11,188) | |
| (1,160) |
Conversion of warrant liabilities and convertible promissory notes | |
| (41,392) | |
| — | |
| — |
Balance at December 31, 2022 | | $ | — | | $ | 2,362 | | $ | 428 |
|
|
|
|
|
|
|
|
|
|
For the Company’s investments without readily determinable fair values, the investment is adjusted if any impairments or observable price changes are identified, which is considered fair value.
The Company measures certain non-financial assets and liabilities, including property and equipment, intangible assets, and inventory, at fair value on a non-recurring basis. Fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analyses of property and equipment, intangible assets and inventory.
4.5. Condensed Consolidated Balance Sheet Components
Inventories
Inventories consisted of the following:
| | | | | | | | | | | | |
|
| As of |
| As of |
| As of |
| As of | ||||
| | December 31, | | June 30, | | September 30, | | June 30, | ||||
| | 2022 | | 2022 | | 2023 | | 2023 | ||||
Finished goods | | $ | 649 | | $ | 869 | | $ | 520 | | $ | 629 |
Total inventories | | $ | 649 | | $ | 869 | | $ | 520 | | $ | 629 |
Investments in Non-Affiliates
In December 2022, the Company entered into a simple agreement for future equity (SAFE) with a non-affiliated entity, with the Company making a $2,000$2.0 million investment in suchthe entity. The non-affiliated entity is a closely heldclosely-held, early stage technology company, focused on the research and development of voice-related AI products, which to date has been financed through equity and other SAFE investments. The Company’s investment was made to provide further financing to the non-affiliated entity’s research and development efforts. The investment does not provide for the voluntary right to redeem or automatic redemption on a stated date, nor does the Company have the right to voluntarily convert. Rather, under a defined next financing, liquidity event, or dissolution conditions of the non-affiliated entity, the investment will either be converted into a future series of preferred stock of the issuer or may be redeemed for cash.
20
The Company has determined that the Company’s investment in the non-affiliate is an equity security, whereby such investment does not give the Company a controlling financial interest or significant influence over the investee. Further, the Company has determined that the Company’s investment in the non-affiliated entity represents an interest in a variable interest entity (“VIE”), for which the Company has determined it is not the primary beneficiary of such non-affiliated entity. Based on the Company’s knowledge and interaction with the non-affiliated entity, in the Company’s judgment, the activities that most significantly impact the non-affiliated entity’s economic performance are those related to the governance and management decisions regarding operations risk. The Company has determined that it does not have the power to direct such activities, because it has no participation on the board of directors of the VIE or through other ways to influence such activities. Accordingly, the Company has accounted for the investment as a financial instrument without a readily determinable fair value. Such investment is recorded using the measurement alternative for investments without readily determinable fair values, whereby the investment is measured at cost less any impairment recorded or adjustments for observable price changes. During the period ended December 31, 2022,September 30, 2023, no impairments or observable price changes were identified or recorded. The Company considers the cost of the investment to be the maximum exposure to loss as a result of its involvement with the non-affiliated entity.The Company has no plans at this time for further investment or other form of financial support.
Property and Equipment, net
Property and equipment, net consisted of the following:
| | | | | | | | | | | | |
|
| As of |
| As of |
| As of |
| As of | ||||
| | December 31, | | June 30, | | September 30, | | June 30, | ||||
| | 2022 | | 2022 | | 2023 | | 2023 | ||||
Tablets | | $ | 5,726 | | $ | 5,663 | | $ | 5,662 | | $ | 5,774 |
Computer equipment | |
| 604 | |
| 519 | |
| 729 | |
| 621 |
Software | |
| 4 | |
| 562 | ||||||
Voice equipment | | | 72 | | | 17 | ||||||
Total property and equipment | |
| 6,334 | |
| 6,744 | |
| 6,463 | |
| 6,412 |
Less: accumulated depreciation | |
| (4,845) | |
| (4,769) | |
| (5,831) | |
| (5,503) |
Property and equipment, net | | $ | 1,489 | | $ | 1,975 | | $ | 632 | | $ | 909 |
16
Depreciation expense was $324$0.3 million and $642$0.3 million for the three and six months ended December 31,September 30, 2023 and 2022, respectively, and $498 and $1,004 for the three and six months ended December 31, 2021, respectively.
Intangible Assets, net
Intangible assets, net consisted of the following:
| | | | | | | | | | | | |
|
| As of |
| As of |
| As of |
| As of | ||||
| | December 31, | | June 30, | | September 30, | | June 30, | ||||
| | 2022 | | 2022 | | 2023 | | 2023 | ||||
Capitalized software | | $ | 5,993 | | $ | 3,135 | | $ | 11,107 | | $ | 9,754 |
Developed technology | |
| 1,300 | |
| 1,300 | |
| 1,300 | |
| 1,300 |
Domain name | |
| 151 | |
| 151 | |
| 151 | |
| 151 |
Intangible assets, gross | |
| 7,444 | |
| 4,586 | |
| 12,558 | |
| 11,205 |
Less: accumulated amortization | |
| (502) | |
| (360) | |
| (1,356) | |
| (677) |
Intangible assets, net | | $ | 6,942 | | $ | 4,226 | | $ | 11,202 | | $ | 10,528 |
Intangible assets have weighted-average amortization periods as follows:
| | |
|
| Years |
Capitalized software |
| 4 |
Developed technology |
| 4 |
Domain Name |
| 15 |
Amortization expense of intangible assets was $88$0.7 million and $203$0.1 million for the three and six months ended December 31,September 30, 2023 and 2022, respectively, andrespectively.
Total future amortization expense for intangible assets was $20 and $50 forestimated as follows:
| | | |
Remainder of 2024 |
| $ | 2,291 |
2025 | |
| 3,043 |
2026 | |
| 3,012 |
2027 | |
| 2,715 |
2028 | |
| 141 |
Total | | $ | 11,202 |
Accrued Liabilities
Accrued liabilities consisted of the three and six months ended December 31, 2021, respectively. Within capitalized software as of December 31, 2022 and June 30, 2022, $5,673 and $2,786 are in-process capitalized software costs and accordingly, the amortization of such costs are excluded from the table below.following:
| | | | | | |
|
| As of |
| As of | ||
| | September 30, | | June 30, | ||
| | 2023 | | 2023 | ||
Accrued expenses | | $ | 992 | | $ | 253 |
Accrued vacation | |
| 884 | |
| 868 |
Accrued payroll | | | 710 | | | 1,208 |
Operating lease liability, current | |
| 336 | |
| 355 |
Accrued interest | |
| 778 | |
| 375 |
Accrued repair cost (Refer to Note 8) | |
| 345 | |
| 392 |
Accrued sales tax | |
| 137 | |
| 134 |
Accrued other | |
| 698 | |
| 734 |
Total accrued liabilities | | $ | 4,880 | | $ | 4,319 |
2117
Total future amortization expense for intangible assets was estimated as follows:
| | | |
Remainder of 2023 |
| $ | 175 |
2024 | |
| 350 |
2025 | |
| 350 |
2026 | |
| 323 |
2027 | |
| 14 |
Thereafter | |
| 57 |
Total | | $ | 1,269 |
Accrued Liabilities
Accrued liabilities consisted of the following:
| | | | | | |
|
| As of |
| As of | ||
| | December 31, | | June 30, | ||
| | 2022 | | 2022 | ||
Accrued expenses | | $ | 1,156 | | $ | 2,176 |
Accrued vacation | |
| 943 | |
| 874 |
Accrued payroll | | | 670 | | | 1,686 |
Operating lease liability, current | |
| 345 | |
| — |
Accrued interest | |
| 222 | |
| 402 |
Accrued repair cost (Refer to Note 8) | |
| 194 | |
| 724 |
Accrued sales tax | |
| 112 | |
| 86 |
Accrued other | |
| 714 | |
| 267 |
Total accrued liabilities | | $ | 4,356 | | $ | 6,215 |
I
Other Long-term Liabilities
Other long-term liabilities consisted of the following:
| | | | | | | | | | | | |
|
| As of |
| As of |
| As of |
| As of | ||||
| | December 31, | | June 30, | | September 30, | | June 30, | ||||
| | 2022 | | 2022 | | 2023 | | 2023 | ||||
Unvested founder shares liability | | $ | 428 | | $ | — | ||||||
Unvested Sponsor Shares liability | | $ | 115 | | $ | 1,399 | ||||||
Operating lease liability, net of current portion | |
| 320 | |
| — | |
| 69 | |
| 136 |
Total other long-term liabilities | | $ | 748 | | $ | — | | $ | 184 | | $ | 1,535 |
5. Leases
As of December 31, 2022, the Company recorded a right of use asset of $656 within other long-term assets on the condensed consolidated balance sheet. As of December 31, 2022, the Company also recorded operating lease liabilities of $665, of which $345 and $320 were included in accrued liabilities and other long-term liabilities, respectively, on the condensed consolidated balance sheet. The Company adopted ASC 842 on July 1, 2022, and accordingly, no amounts were recorded for right of use assets or operating lease liabilities as of June 30, 2022. Refer to Note 1 for further details.
For the three and six months ended December 31, 2022, the Company recorded operating lease costs of $119 and $215, respectively. The operating lease costs for the three and six months ended December 31, 2022 included variable operating lease costs of $35 and $50, respectively.
22
Supplemental information related to the Company’s operating lease was as follows for the six months ended December 31, 2022:
| | | | |
Operating cash flows used for operating lease |
| $ | 213 | |
Operating lease liability arising from obtaining ROU asset (1) | | $ | 665 | |
Weighted average remaining lease term | |
| 1.8 | years |
Weighted average discount rate | |
| 15 | % |
|
|
Future minimum lease payments under the Company’s non-cancelable operating leases with an initial lease term in excess of one year subsequent to December 31, 2022 are as follows:
| | | |
| | As of December 31, | |
| | 2022 | |
Remainder of 2023 |
| $ | 218 |
2024 | |
| 404 |
2025 | |
| 143 |
Gross lease payments | |
| 765 |
Less: imputed interest | |
| (100) |
Present value of net future minimum lease payments | | $ | 665 |
Under the previous lease accounting standard ASC 840, Leases, the aggregate future minimum lease payments under the Company’s non-cancelable operating lease, as of June 30, 2022, was as follows:
| | | |
| | As of June 30, | |
| | 2022 | |
2023 |
| $ | 273 |
2024 | |
| 218 |
2025 | |
| 127 |
Total | | $ | 618 |
Rent expense for the three and six months ended December 31, 2021 was $92 and $200, respectively.
6. Financing Obligations
The Company’s financing obligations, net of discounts, consist of the following:
| | | | | | | | | | | | |
|
| As of December 31, |
| As of June 30, |
| As of September 30, |
| As of June 30, | ||||
| | 2022 | | 2022 | | 2023 | | 2023 | ||||
Receivable financing facility | | $ | 4,628 | | $ | 5,911 | | $ | 3,820 | | $ | 4,067 |
Equipment financing facility |
| | 2,158 |
| | 2,929 |
| | 40 |
| | 609 |
Total financing obligations |
| | 6,786 |
| | 8,840 |
| | 3,860 |
| | 4,676 |
Less: financing obligations, current |
| | (6,786) |
| | (8,840) |
| | (2,360) |
| | (1,676) |
Total financing obligations, noncurrent | | $ | — | | $ | — | | $ | 1,500 | | $ | 3,000 |
23
Receivable Financing Facility
On April 27, 2021, the Company entered into an investment arrangement in which the Company provides future receivables available to an outside investor to invest in, in exchange for an upfront payment. Through this arrangement, the Company obtains financing in the form of a large upfront payment, which the Company accounts for as a borrowing by recording the proceeds received as a financing obligation, which will be repaid through payments collected from accounts receivable debtors relating to future receivables. The financing obligation is non-recourse; however, the Company is responsible for collections as the Company must first collect payments from the debtors and remit them to the investor. The Company recognizes interest on the financed amount using the effective interest method. The effective interest rate is the interest rate that equates the present value of the cash amounts to be received by the investor with the present value of the cash amounts paid by the investor to the Company. TheCompany’s receivable financing facility has a termrequires monthly payments of 5 yearsprincipal and interest totaling an aggregate principal and interest of $1.1 million and $3.0 million for the arrangement allows the Companyremainder of fiscal year 2024 and the financier to mutually agree to roll forward the Company’s borrowings as they come due.fiscal year 2025, respectively.
On August 15, 2021, November 16, 2021, February 22, 2022, May 31, 2022, and August 18, 2022, in accordance with the terms of the receivable financing facility, the Company rolled forward the receivable financing facility, enabling the Company to continue its quarterly borrowings for a minimum of a rolling twelve-months. Subject to the approval of the financier, the Company may continue rolling forward the receivable financing facility.
Equipment Financing Facility
Beginning in 2019, theThe Company entered into arrangementshas equipment financing facilities with third party financiersfinancing partners to secure payments of certain Presto Touch tablet purchases. Such arrangements generally have terms ranging from 3three – 5five years and interest rates ranging from 8%-14%. The Company then leases the tablets monetized by the financiers to one of its customers through operating leases that have 4-year terms.
In fiscal year 2022 and during the six months ended December 31, 2022, due to the Company’s liquidity position and other commitments, the Company postponed certain payments on certain arrangements with third party financiers, which resulted in the Company defaulting on said arrangements. The Company remedied the matter via repayment agreements with its third-party financiers, as discussed below.
On November 4, 2022, the Company executed an amendment with one of its third-party financiers to defer the non-payments, which increased the monthly payments due for the remaining term of the arrangement.
On November 21, 2022, the Company entered into an agreement to early terminate one of its third-party financiers’ arrangement. The Company repaid such arrangement by making a cash disbursement of $410, which extinguished all obligations and resulted in $337 being recorded as a loss on extinguishment of debt and financial obligations on the condensed consolidated statement of operations and comprehensive income (loss).
As a result of the amendment executed on November 4, 2022 and early termination executed on November 21, 2022, the default on payments due as described above has been waived and the Company is in compliance as of December 31, 2022. We have classified all of ourits obligations under these arrangements as short-term within financing obligations, current as of December 31, 2022September 30, 2023 and June 30, 2022.2023.
7. Debt Arrangements
The Company’s outstanding debt, net of debt discounts, consists of the following:
| | | | | | | | | | | | |
|
| As of December 31, |
| As of June 30, |
| As of September 30, |
| As of June 30, | ||||
| | 2022 | | 2022 | | 2023 | | 2023 | ||||
Convertible promissory notes | | $ | — | | $ | 89,663 | ||||||
Term loans |
| | 52,022 |
| | 25,443 | ||||||
PPP Loan |
| | — |
| | 2,000 | ||||||
Credit Agreement |
| $ | 53,088 |
| $ | 50,639 | ||||||
Total debt |
| | 52,022 |
| | 117,106 |
| | 53,088 |
| | 50,639 |
Less: debt, current |
| | — |
| | (115,106) |
| | (53,088) |
| | (50,639) |
Total debt, noncurrent | | $ | 52,022 | | $ | 2,000 | | $ | — | | $ | — |
Term Loan - Credit Agreement
On September 21, 2022, in connection with the consummation of the Merger, the Company entered into a Credit Agreement (the “Credit Agreement”) with the subsidiary guarantors party thereto, Metropolitan Partners Group Administration, LLC, as administrative, payment and collateral agent (the “Agent”), the lenders (“Lenders”) and other parties party thereto, pursuant to which the Lenders extended term loans having an aggregate original principal amount of $55.0 million (the “Term Loans”). The Term Loans were borrowed in full on September 21, 2022. In conjunction with the initial Credit Agreement, the Company issued 1,500,000 warrants to purchase common stock to the Lenders. Such warrants were determined to be equity classified and the Company recorded
2418
the value associated with such warrants of $2.1 million within additional paid in capital, with an offsetting debt discount being recorded.
Refer to Note 15 for the subsequent amendment to the Credit Agreement and Note 10 for further details on the aforementioned warrants.
Amounts outstanding under the Credit Agreement will incur interest at the rate of 15% per annum. During the first 18 months following the closing date, the Company may elect to pay a portion of the accrued and unpaid interest by capitalizing the amount of such interest on a monthly basis and adding the same to the principal balance of the Term Loans, after which such capitalized interest shall accrue interest at the interest rate and otherwise constitute principal under the Term Loan (“PIK Interest”). With respect to interest accruing during the first nine months after the closing date, the Company may elect for 100% of the interest payment to be capitalized as PIK Interest on a monthly basis. This was extended by three months in the First Amendment to the Credit Agreement described below. With respect to interest accruing after the 12-month anniversary of the closing date, but before the 18-month anniversary of the closing date, the Company may elect for 50% of the interest payment to be capitalized as PIK Interest on a monthly basis. Refer to Note 15 for details on revisions to the Credit Agreement. The Term Loans mature on March 21, 2025.
The Company must comply with certain financial covenants as set forth in the Credit Agreement, including a minimum cash covenant and up through and for the three months ended September 30, 2023, a maximum net leverage ratio of 1.20 to 1.00. The net leverage ratio covenant was removed subsequent to the end of the three months ended September 30, 2023. Refer to Note 15 for further details. The Credit Agreement also contains customary affirmative and restrictive covenants, including covenants regarding the incurrence of additional indebtedness or liens, investments, transactions with affiliates, delivery of financial statements, payment of taxes, maintenance of insurance, dispositions of property, mergers or acquisitions, among other customary covenants. The Company is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. The Credit Agreement also includes customary representations and warranties, events of default and termination provisions, upon which the Term Loans may be accelerated and the interest rate applicable to any outstanding payment obligations will increase by 5%. The Credit Agreement, as amended by the Second Amendment covenants as of and for the three months ended September 30, 2023, include: (i) revising the definition of “minimum unrestricted cash” from (A) an amount equal to the operating expenses of the Company determined on a consolidated basis for the prior six months plus $1,100,000 to (B) $10,000,000, to be held in a separate and blocked cash collateral account and (ii) adding a new financial covenant beginning for the month ending June 30, 2023, that restricts the decrease in the Company’s operating cash to no more than $10,000,000 for each rolling three month period, subject to certain customary operating fluctuations and adjustments. The Company was not in compliance with the maximum net leverage ratio and other instances of default occurred as of September 30, 2023 and subsequent to the three months ended September 30, 2023. Refer to Note 15 for further details of the Lender’s waiver of the instances of non-compliance. Further, since the Company cannot be certain it will be in compliance with all covenants in the next twelve months if additional financing is not secured, the Company has classified the balance of the Credit Agreement, as amended, as current on the condensed consolidated balance sheet as of September 30, 2023.
During the three months ended September 30, 2023 and 2022, the Company recorded PIK interest expense amounts of $1.2 million and $0.2 million, respectively, which has been reflected as an increase to the outstanding debt balance. Further, during the three months ended September 30, 2023 and 2022, the Company recorded interest expense associated with the amortization of debt discounts of $1.2 million and $0.1 million, respectively. Accordingly, at September 30, 2023, the term loans, current balance of $53.1 million reflects $55.0 million of principal and $6.6 million of PIK interest accrual, reduced by $8.5 million of unamortized debt issuance costs.
Convertible Promissory Notes
As of June 30, 2022, the Company had $89,663$89.7 million of convertible notes outstanding to various investors, all of which were accounted for under the fair value option. In conjunction with the Merger all convertible promissory notes converted into shares of common stock. Further on the date of the Merger, certain convertible notes which were together with warrants also had the relatedand embedded warrants converted into shares of common stock. As a consequence of the note and warrant conversion, 8,147,938 shares of common stock were issued. Immediately prior to conversion, the convertible promissory notes were remeasured to the then fair value of $41,392,$41.4 million, resulting in a gain on remeasurement of $48,271$48.3 million which was recorded within change in fair value of warrants and convertible promissory notes on the condensed consolidated statement of operations and comprehensive income (loss) for the sixthree months ended December 31,September 30, 2022. As a consequence of the conversion, $41,392$41.4 million was reclassified into additional paid-in capital. Accordingly, for the three months ended December 31, 2022, there wewere no remeasurement effects related to the convertible promissory notes, as such notes were longer outstanding during such three month period.three-month period ended September 30, 2022.
During the six months ended December 31, 2021 the Company issued $50019
Other Term Loans
Horizon Term Loan
On March 4, 2021, the Company entered into a loan agreement (the “Horizon Loan”) with Horizon Technology Finance Corporation, which provided the Company with $15,000,$15.0 million, bears interest at prime rate plus 6.5% per annum, and has a term of 54 months from each loan funding date. The Horizon Loan payment terms require repayment of accrued interest only on the outstanding principal amount over the first 24 payment dates and an equal payment of principal plus accrued interest on the next 30 payment dates identified in the notes applicable to the loan. The Company pledged certain assets against the Horizon Loan. The Horizon Loan contains financial covenants that require the maintenance of an unrestricted cash plus accounts receivable balance and achievement of quarterly bookings targets. On March 11, 2022, the Company amended the Horizon Loan to shorten the total term to 24 months.
In connection with the entry into the Credit Agreement (defined below)(described above), on September 21, 2022 the Company repaid the Horizon Loan making a cash disbursement of $17,012,$17.0 million, of which $15,000$15.0 million was repayment of principal and $649$0.6 million was payment of interest expense and accrued interest. Further on the date of the Merger, $1,737$1.7 million was recorded as a loss on extinguishment of debt and financial obligations on the condensed consolidated statement of operations and comprehensive income (loss) for the sixthree months ended December 31,September 30, 2022.
Lago Term Loans
On March 11, 2022, the Company entered into a loan agreement (the “Lago Loan”) with Lago Innovation Fund I & II, LLC, which provided the Company with $12,600,$12.6 million, bears interest at the greater of 12% plus the greater of 1% or 30 day LIBOR, bears 2% payable in kind interest, and matures on April 1, 2023. The Company pledged certain assets against the Lago Loan. The Lago Loan payment terms require repayment of accrued interest only on the outstanding principal over the first 12 payment dates and payment of principal plus remaining accrued interest on the last payment date identified in the notes applicable to the loan. The Company may prepay at any time for a fee, dependent on the time of prepayment. The Lago Loan contains financial covenants that require the maintenance of unrestricted cash plus accounts receivable balance and achievement of quarterly bookings targets. The Company issued 205,602 warrants to purchase common stock with the Lago Loan. Refer to Note 10 for further details.
On August 4, 2022, the Company amended the Lago Loan which provided the Company with $5,250.$5.3 million. Further, as part of the amendment to the Lago Loan, the Company issued an additional 169,310 warrants to purchase common stock with the additional tranche. The Company determined that the amendment with the lenderLago should be accounted for as an extinguishment of debt and recorded as a loss on extinguishment of debt and financial obligations of $6,022$6.0 million on its condensed consolidated statement of operations and comprehensive income (loss) for the sixthree months ended December 31,September 30, 2022.
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In connection with the entry into the Credit Agreement (defined below)(described above) on September 21, 2022, the Company repaid all outstanding loans to Lago by making a cash disbursement of $22,351,$22.4 million, of which $17,850$17.9 million was repayment of principal, and $130$0.1 million was payment of payable in kindin-kind interest. Further, $4,371$4.4 million of cash was paid related to prepayment and other penalties.
Credit Agreement
On September 21, 2022, in connection with the consummation of the Merger, the Company entered into a Credit Agreement (the “Credit Agreement”) with the subsidiary guarantors party thereto, Metropolitan Partners Group Administration, LLC, as administrative, payment and collateral agent (the “Agent”), the lenders (“Lenders”) and other parties party thereto, pursuant to which the Lenders extended term loans having an aggregate original principal amount of $55,000 (the “Term Loans”).
The Term Loans were borrowed in full on September 21, 2022. Amounts outstanding under the Credit Agreement will incur interest at the rate of 15% per annum. During the first 18 months following the closing date, the Company may elect to pay a portion of the accrued and unpaid interest by capitalizing the amount of such interest on a monthly basis and adding the same to the principal balance of the Term Loans, after which such capitalized interest shall accrue interest at the interest rate and otherwise constitute principal under the Term Loan (“PIK Interest”). With respect to interest accruing during the first six months after the closing date, the Company may elect for 100% of the interest payment to be capitalized as PIK Interest on a monthly basis. With respect to interest accruing after the six month anniversary of the closing date, but before the 18 month anniversary of the closing date, the Company may elect for 50% of the interest payment to be capitalized as PIK Interest on a monthly basis. The Term Loans mature on March 21, 2025.
The Term Loans may be prepaid by the Company; however, any voluntary or mandatory prepayment made prior to the 18 month anniversary of the closing date must be accompanied by payment of a make whole premium equal to the interest and fees that would have accrued on the aggregate principal amount of the Term Loans (including any interest that could have been capitalized as PIK Interest during such period) from the date of payment through the 18 month anniversary of the closing date. The Term Loans may not be reborrowed once repaid. The Company is required to pay the Agent certain upfront fees and administrative fees in connection with the Term Loans. The Company’s obligations under the Credit Agreement are secured by substantially all of the Company’s assets.
The Company must comply with certain financial covenants as set forth in the Credit Agreement, including a minimum cash covenant and maximum net leverage ratio of 1.20 to 1.00. The Credit Agreement also contains customary affirmative and restrictive covenants, including covenants regarding the incurrence of additional indebtedness or liens, investments, transactions with affiliates, delivery of financial statements, payment of taxes, maintenance of insurance, dispositions of property, mergers or acquisitions, among other customary covenants. The Company is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. The Credit Agreement also includes customary representations and warranties, events of default and termination provisions, upon which the Term Loans may be accelerated and the interest rate applicable to any outstanding payment obligations will increase by 5%. As of December 31, 2022, the Company was in compliance with all applicable covenants.
In conjunction with the Credit Agreement, the Company issued 1,500,000 warrants to purchase common stock to the Lenders. Such warrants were determined to be equity classified and the Company recorded the value associated with such warrants of $2,076 within additional paid in capital, with an offsetting debt discount being recorded. Refer to Note 10 for further details on the aforementioned warrants.
As a condition to entering into the Credit Agreement, the Sponsors agreed to transfer 600,000 Presto Automation Inc. shares to the Lender to the Credit Agreement. The share transfer by the Sponsor to the Lenders to the Credit Agreement was such that the substance of the transaction was that the Sponsors made a capital contribution to the Company, and the Company then made a share-based payment to the Lenders as an incentive for the Lenders to enter into the Credit Agreement. Accordingly, the Company recorded the transaction as debt issuance costs discount of $2,779 in condensed consolidated balance sheet with an offsetting increase to additional paid-in capital for the contribution.
The Company incurred other debt issuance costs associated with professional services and fees paid to the lender of $1,006 in conjunction with the signing of the Credit Agreement which were recorded as a debt discount.
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During the three and six months ended December 31, 2022, the Company recorded PIK interest expense amounts of $2,085 and $2,314, respectively, which has been reflected as an increase to the outstanding debt balance. Further, during the three and six months ended December 31, 2022 the Company recorded interest expense associated with the amortization of debt discounts of $523 and $579, respectively. Accordingly, as at December 31, 2022, the term loans, noncurrent balance of $52,022 reflects $55,000 of principal and $2,314 of PIK interest accrual, reduced by $5,292 of unamortized debt issuance costs. The Company had no outstanding amounts related to the Credit Agreement as of June 30, 2022.
Paycheck Protection Program Loans
In April 2020,March 2021, we obtained a Paycheck Protection Program (“PPP”) loan for $2,599in the amount of $2.0 million through the U.S. Small Business Administration. In March 2021, a second PPPThe loan was obtained in the amount of $2,000, for a total of $4,599 received in PPP loans. The loans were to be fully forgiven if the funds received were used for payroll costs, interest on mortgages, rent, and utilities, with at least 60% being used for payroll. The Company utilized the funds for these purposes and applied for loan forgiveness of the PPP funds. The Company’s accounting policy provides that if the loans are forgiven, the forgiven loan balance will be recognized as income in the period of forgiveness. During the sixthree months ended December 31, 2021,September 30, 2022, the Company received forgiveness of the first PPP loan of $2,599$2.0 million and recognized income on forgiveness within other income, net. Duringnet in the six months ended December 31, 2022, the Company received forgivenessCompany’s condensed consolidated statements of the second PPP loan of $2,000operations and recognized income on forgiveness within other income, net.comprehensive income.
Future principal payments on debt including interest payments elected to be capitalized as PIK Interest for the Company’s fiscal years were as follows:
| | | | | | |
|
| As of December 31, |
| As of September 30, | ||
| | 2022 | | 2023 | ||
2023 (remaining) | | $ | — | |||
2024 | | | — | |||
Remainder of 2024 | | $ | — | |||
2025 |
| | 55,000 | | | 61,617 |
Total future payments on debt obligations | | $ | 55,000 | | $ | 61,617 |
8. Commitments and Contingencies
Warranties, Indemnification, and Contingencies
The Company enters into service level agreements with customers which warrant defined levels of uptime and support response times and permit those customers to receive credits for prepaid amounts in the event that those performance and response levels are not met. In the three and six months ended December 31,September 30, 2023 and 2022, the Company has incurred costs to refurbish customer
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tablets of $241$0.3 million and $899, respectively, while in the three and six months ended December 31, 2021, the Company incurred costs to refurbish customer tablets of $1,357 and $1,974,$0.7 million, respectively, recorded in cost of platform revenue in the Company’s condensed consolidated statement of operations and comprehensive income (loss).income. In connection with the service level agreements, the Company has recorded $194$0.3 million and $724$0.4 million in accrued liabilities in the condensed consolidated balance sheets for expected repair costs for customer tablets currently in the Company’s return merchandise authorization process as of December 31, 2022September 30, 2023 and June 30, 2022,2023, respectively.
In the ordinary course of business, the Company enters into contractual arrangements under which the Company agrees to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from the Company’s platformsolutions or the Company’s acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments.
In addition, the Company has agreed to indemnify the Company’s directors and executive officers for costs associated with any fees, expenses, judgments, fines, and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that may enable the Company to recover a portion of any future amounts paid.
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Loss on Infrequent Product Repairs
During the six months ended December 31, 2021, the Company continued to experience higher than normal hardware returns for repair or replacement using a Return Merchandise Authorization (“RMA”). While the Company has incurred RMA charges in the past, the volume of repair charges was extremely unusual and very high due to a liquid ingress issue resulting from COVID-19 related actions by the Company’s customers. The Company’s devices failed primarily due to the use of extremely strong commercial disinfectant solutions by the Company’s customers to clean the hardware devices as a mandatory precaution protocol due to COVID-19. Due to use of commercial cleaning products, the solution leaked into the hardware causing significant damage to the devices and requiring replacement of such devices.
The standard warranty the Company provides covers regular wear and tear and does not cover any damage caused by mishandling of the product. However, given the nature of issues, the Company, in order to prevent disruption to the Company’s customers’ businesses, incurred approximately $28 and $463 of repair and replacement expenses related to this issue during the three and six months ended December 31, 2021, respectively. The Company provided repair and replacement of its hardware devices to all of its customers as a one-time only offer due to COVID-19. The Company has also made a claim to recover the costs from its third-party subcontractor who manufactures the hardware. The Company incurred no repair and replacement expenses related to this issue in the three and six months ended December 31, 2022.
Legal Proceedings
In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes, or claims. The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These estimates are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter. In general, the resolution of a legal matter could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results. The outcomes of legal proceedings and other contingencies are, however, inherently unpredictable, and subject to significant uncertainties. At this time, other than identified below, the Company does not have any such matters that, if resolved unfavorably, wouldcould reasonably be expected to have a material impact on its financial condition, results of operations or cash flows.
In February 2022, the Company was added as a co-defendant in a patent infringement lawsuit in the U.S. District Court for the district of Delaware that was brought against Hi Auto, Inc. by Valyant AI, Inc. (“Valyant”) in December 2021, alleging infringement of Valyant’s patent relating to a speech-based/natural language order process system. The lawsuit seeks to enjoin the co-defendants from continued alleged infringement and sought unspecified statutory and other damages. On October 23, 2023, the patent infringement lawsuit for which the Company was named as a co-defendant was dismissed.
In June 2022, the Company received a favorable arbitrator ruling from the Singapore International Arbitration Center related to a matter with its third-party subcontractor and was awarded approximately $11,304$11.3 million in damages related to the Company’s loss on infrequent product repairs and to cover its legal expenses. This arbitration ruling was affirmed by the appellate court in the country of the arbitration ruling on March 6, 2023. The vendor appealed the ruling to the highest court in that country in May 2023 and the appeal is currently pending. As a result, the award has not met the criteria to be considered realizable as of December 31, 2022.September 30, 2023. As a result, the Company has not recognized any gain related to this settlement in its condensed consolidated statement of operations and comprehensive income (loss).income.
During fiscal year 2023, the Company received a legal demand with certain former employees who were part of its May 2022 acquisition of Cyborg Ops, Inc. The demand relates to the basis of their change in employment status and whether certain unvested equity in the amount of 256,891 restricted stock awards for employee terminations during fiscal year 2023, which were forfeited and cancelled upon their departure in accordance with the terms of their employment contracts, warranted full and accelerated vestiture upon their last date of employment with the Company. A further termination occurred in the three months ended September 30, 2023 for which an incremental amount of restricted stock units of 97,881 are included in the legal demand. The Company maintains that it is not probable that there is a financial obligation related to this matter nor can the Company estimate any reasonable possible loss at this time, accordingly the Company has not recorded a charge for this matter.
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In July 2023, the Company and certain of its current and former executive officers received notices of preservation and subpoenas from the staff of the SEC stating that the SEC had commenced a formal investigation into disclosures that the Company had made regarding certain aspects of its AI technology. The Company also received a preliminary request for information from the U.S. Department of Justice (DOJ) regarding substantially the same subject matter. The Company is cooperating fully with the SEC and DOJ, including responding to the subpoena and requests for information. The timing and outcome of these investigations is difficult to predict. The Company has incurred, and may continue to incur, significant expenses related to legal, accounting and other professional services in connection with these investigations. At this stage, the Company is unable to assess whether any material loss is reasonably possible as a result of these investigations or estimate the range of any potential loss.
9. Stockholders’ Deficit
Effective with the closing of the Merger the Company restated its articles of incorporation. Under the amended and restated articles of incorporation the Company is authorized to issue 180,000,000 shares of common stock and 1,500,000 shares of preferred stock. The holders of common stock shall have the right to one vote for each share of common stock held. The holders of non-voting common stock do not have the right to vote on any matter.
On September 15, 2022, the Company (then Legacy Presto), received an equity investment of $1,000$1.0 million from an investor in exchange for 133,333 shares in the Company. Further, such investor held a significant portion of outstanding convertible notes on the date the investment was made. The Company recorded the proceeds received as an increase to additional paid-in capital.
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On September 21, 2022, in connection with the closing of the Merger, Ventoux and Legacy Presto and a proposed convertible note lender (“Silver Rock”) agreed to terminate the proposed amended and restated convertible note subscription agreement, dated July 25, 2022, which was to be funded at the closing of the Merger. Pursuant to the termination agreement, Silver Rock agreed to the termination in exchange for 400,000 shares of common stock of Legacy Presto which were converted into 322,868323,968 shares of Company common stock pursuant to the terms of the Merger Agreement. The share transfer was determined to be termination fee valued at $1,646$1.6 million recorded within other financing and financial instrument (costs) income, net on the condensed consolidated statement of operations and comprehensive income, (loss), with an offsetting increase to additional paid-in capital. The Company also agreed to pay certain expenses of Silver Rock in the amount of $531$0.5 million which is recorded within other financing and financial instrument (costs) income, net on the condensed consolidated statement of operations and comprehensive income (loss).income. In addition to the consideration transferred directly by the Company, 500,000 warrants to purchase common stock, held by the Sponsors, were transferred to Silver Rock. The substance of the warrant transfer by the Sponsor to Silver Rock under the termination agreement was such that the Sponsors made a capital contribution to the Company, and the Company then made a share-based payment to Silver Rock in exchange for termination of the convertible note agreement. Accordingly, the Company recorded the transaction as an other financing cost of $766$0.8 million within other financing and financial instrument (costs) income, net on the condensed consolidated statement of operations and comprehensive income (loss) with an offsetting increase to additional paid-in capital for the contribution.
The Company has the following shares of common stock reserved for future issuance:
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| As of |
| |
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| |
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Warrants to purchase common stock | |
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Common stock options and RSUs | |
|
Equity awards available for future grants |
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Earnout shares |
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10. Warrants
Since inception, the Company has issued warrants in conjunction with various debt financings. The Company accounts for its warrants in accordance with ASC 815-40 as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Warrants are classified as liabilities when there is variability in the number of shares, and when the variability is not related to an implicit or explicit input to the valuation of the Company. Liability-classified warrants are remeasured at each reporting date until settlement, with changes in the fair value recognized in change in fair value of warrants and convertible promissory notes in the condensed consolidated statement of operations and comprehensive income (loss).income. Warrants that meet the fixed-for-fixed criteria or contain variability related to an implicit or explicit input to the valuation of the Company are classified as equity instruments. Warrants classified as equity instruments are initially recognized at fair value and are not subsequently remeasured.
During the period from June 30, 2022, through the date of the Merger, the Company had various warrant transactions:
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The following tables represent the warrants on common stock outstanding:outstanding as of September 30, 2023 and June 30, 2023:
| | | | | | | | | | | |
|
| As of December 31, 2022 | |||||||||
| | Expiration date |
| Exercise Price |
| Number of Shares |
| Term (years) |
| Classification | |
Common | | [C] | | $ | 7.80 | | 12,811 | | 7 | | Equity |
Common |
| [C] | | $ | 7.80 |
| 41,636 |
| 7 |
| Equity |
Common |
| [C] | | $ | 7.80 |
| 16,654 |
| 7 |
| Equity |
Common |
| March 2026 | | $ | 9.25 |
| 84,461 |
| 6.5 |
| Liability |
Common |
| June 2028 | | $ | 0.01 |
| 404,961 | [E] | 6.7 |
| Equity |
Common |
| [F] | | $ | 0.37 |
| 178,395 | | 10 |
| Equity |
Common |
| March 2026 | | $ | 0.37 |
| 57,952 | | 10 |
| Liability |
Common |
| July 2027 | | $ | 9.25 |
| 86,532 | | 6 |
| Liability |
Common |
| July 2027 | | $ | 0.37 |
| 402,679 | | 6 |
| Equity |
Common |
| [A] | | $ | 8.16 |
| 182,158 | | [A] |
| Equity |
Common |
| January 2031 | | $ | 8.16 |
| 27,577 | | 10 |
| Liability |
Common |
| [B] | | $ | 6.53 |
| 294,725 | [B] | 10 |
| Equity |
Common |
| March 2032 | | $ | 8.16 |
| 374,912 | | 10 |
| Liability |
Common |
| September 2027 | | $ | 11.50 |
| 1,500,000 |
| 5 |
| Equity |
Common |
| September 2027 | | $ | 8.21 |
| 8,625,000 |
| 5 |
| Equity |
Common |
| September 2027 | | $ | 11.50 |
| 6,125,000 |
| 5 |
| Liability |
Total |
| | |
|
|
| 18,415,453 |
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|
|
|
| | | | | | | | | | | | | | | | | | | | | | |
|
| As of June 30, 2022 |
| As of September 30, 2023 and June 30, 2023 | ||||||||||||||||||
| | Expiration date |
| Exercise Price |
| Number of Shares |
| Term (years) |
| Classification | | Expiration date |
| Exercise Price |
| Number of Shares |
| Term (years) |
| Classification | ||
Common | | [C] | | $ | 7.80 | | 12,811 | | 7 | | Equity | | [C] | | $ | 7.80 | | 12,811 | | 7 | | Equity |
Common |
| [C] | | $ | 7.80 |
| 41,636 |
| 7 |
| Equity |
| [C] | | $ | 7.80 |
| 41,636 |
| 7 |
| Equity |
Common |
| [C] | | $ | 7.80 |
| 16,654 |
| 7 |
| Equity |
| [C] | | $ | 7.80 |
| 16,654 |
| 7 |
| Equity |
Common |
| March 2026 | | $ | 9.25 |
| 84,461 |
| 10 |
| Liability |
| March 2026 | | $ | 5.85 | * | 84,461 |
| 6.5 |
| Liability |
Common |
| October 2027 | | $ | 0.37 |
| 141,970 |
| 10 |
| Equity |
| June 2028 | | $ | 0.01 |
| 404,961 | [D] | 6.7 |
| Equity |
Common |
| [D] | | $ | 0.01 |
| 2,575,190 |
| [D] |
| Liability |
| [E] | | $ | 0.37 |
| 178,395 | | 10 |
| Equity |
Common |
| June 2028 | | $ | 0.01 |
| 404,961 | [E] | 6.7 |
| Equity |
| March 2026 | | $ | 0.37 |
| 57,952 | | 10 |
| Liability |
Common |
| March 2026 | | $ | 0.37 |
| 178,395 |
| 10 |
| Equity |
| July 2027 | | $ | 5.85 | * | 86,532 | | 6 |
| Liability |
Common |
| March 2026 | | $ | 0.37 |
| 57,952 |
| 10 |
| Liability |
| July 2027 | | $ | 0.37 |
| 402,679 | | 6 |
| Equity |
Common |
| July 2027 | | $ | 9.25 |
| 86,532 |
| 10 |
| Liability |
| [A] | | $ | 8.16 |
| 182,158 | | [A] |
| Equity |
Common |
| July 2027 | | $ | 7.80 |
| 402,679 |
| 10 |
| Liability |
| January 2031 | | $ | 8.16 |
| 27,577 | | 10 |
| Liability |
Common |
| [A] | | $ | 8.16 |
| 182,158 |
| [A] |
| Equity |
| [B] | | $ | 6.53 |
| 294,725 | [B] | 10 |
| Equity |
Common |
| January 2031 | | $ | 8.16 |
| 27,577 |
| 10 |
| Liability |
| March 2032 | | $ | 8.16 |
| 374,912 | | 10 |
| Liability |
Common |
| March 2031 | | $ | 6.53 |
| 294,725 | [B] | 10 |
| Liability |
| September 2027 | | $ | 11.50 |
| 1,500,000 |
| 5 |
| Equity |
Common |
| March 2032 | | $ | 8.16 |
| 205,602 |
| 10 |
| Liability |
| September 2027 | | $ | 8.21 |
| 8,625,000 | [H] | 5 |
| Equity |
Common |
| September 2027 | | $ | 11.50 |
| 6,125,000 | [I] | 5 |
| Liability | |||||||||||
Common | | March 2028 | | $ | 0.01 | | 400,000 | [F] | 5 | | Liability | |||||||||||
Common | | May 2028 | | $ | 0.01 | | 2,500,000 | [G] | 5 | | Liability | |||||||||||
Total |
| | |
|
|
| 4,713,303 |
|
|
|
|
| | |
|
|
| 21,315,453 | |
|
|
|
* Prior period presentation of exercise price has been corrected to reflect the adjusted contractual price.
[A] — | Warrants will expire at the earliest of a consummation of an acquisition or one year after the effective date of a registration statement for an initial public offering. |
[B] — | Warrant has the option of being converted into a variable number of shares based on the class of shares that the warrant is exercised at the discretion of the warrant holder. The Company notes the most likely conversion is to |
[C] — | Warrants expire 5 years from the effective date of a registration statement for an initial public offering should one occur. |
[D] — | Warrants |
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[ | Warrants will expire at the earliest of 10 years from the issuance date of March 11, 2016, a consummation of an acquisition or one year after the effective date of a registration statement for an initial public offering. The Merger did not satisfy either of these criteria. |
[F] — | In connection with the First Amendment to the Credit Agreement, the Company issued 400,000 warrants to the Lenders as a fee. The warrant holder may redeem for cash, the First Amendment Warrants at their fair value in the event of a (i) consolidation or merger with or into another party, (ii) a sale, assignment, transfer or disposal of substantially all of the Company’s assets, (iii) purchase, sale or tender of the Company’s common stock where the beneficial owner owns more than 50% of the Company’s common stock, and (iv) a reorganization, recapitalization or reclassification of the Company’s common stock. Refer to Note 7 for further details. |
[G] — | In connection with the effectiveness of the Second Amendment to the Credit Agreement, the Company issued the Second Amendment Warrants. The Second Amendment Warrants may be exercised for cash or pursuant to a net exercise at any time on or before the date that is the five year anniversary of the date of the issuance of the warrants; provided, that the Company shall not affect the exercise of any portion of the warrant to the extent that giving effect to such exercise, the holder thereof, together with its affiliates collectively would beneficially own in excess of 4.99% of the common stock outstanding immediately after giving effect to such exercise. The warrant holder may redeem the Second Amendment Warrants for cash at their fair value in the event of a (i) consolidation or merger with or into another party, (ii) a sale, assignment, transfer or |
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disposal of substantially all of the Company’s assets, (iii) purchase, sale or tender of the Company’s common stock where the beneficial owner owns more than 50% of the Company’s common stock, and (iv) a reorganization, recapitalization or reclassification of the Company’s common stock. Refer to Note 7 for further details.
[H] — | Represents 17,250,000 public warrants, assumed as part of the Merger, that are exercisable for one-half of a share of the Company’s common stock for an exercise price of $8.21 per whole share. The Company may redeem the public warrants at an exercise price of $0.01 per share if, and only if, the reported last sale price of the share of common stock equals or exceeds 165% of the volume weighted average per share, for 20 trading days starting on the trading day prior to the day on which the Company consummated the Merger for any twenty (20) trading days within a thirty (30) trading day period ending on the third business day prior to the date on which notice of redemption is given within a 30-trading day period ending on the third business day prior to the notice of redemption. |
[I] — | The private warrants are exercisable for a price of $11.50 per whole share and are non-redeemable so long as they are held by the initial purchasers or their affiliates. If transferred, the Company may redeem the public warrants at an exercise price of $0.01 per share if, and only if, the reported last sale price of the share of common stock equals or exceeds $16.50 per share, for any 20 trading days within a 30-trading day period ending on the third business day prior to the notice of redemption. |
11. Stock-Based Compensation
Stock-Based Compensation Plans
Effective with the Merger, the Board of Directors adopted the 2022 Incentive Award Plan (the “2022 Plan”). Prior to the Merger, the Company utilized the 2018 equity incentive plan (“2018 Plan”) which replaced the 2008 Stock Incentive Plan (“2008 Plan”). Effective with the Merger, the Board of Directors adopted the 2022 Incentive Award Plan (the “2022 Plan”). As of December 31, 2022,September 2023, the number of shares of common stock reserved for future issuance under the 2022 Plan was 4,617,400.920,989. The Board of Directors may grant incentive and non-statutory stock options and restricted stock units (“RSUs”) to employees, outside directors, investors and consultants at an exercise price of not less than 100% of the fair market value, as determined by the Board of Directors, at the date of grant. Awards generally vest ratably over periods determined by the Board of Directors, generally 4four or five years, and expire no later than ten years from the date of grant. For options and RSUs subject to the one-year cliff, the expense is recognized as 25% or 20% of the total option value, which is recognized on a straight-line basis over the first year and remaining option expense continues to be recognized straight-line as vesting occurs monthly thereafter.
In July 2022,The Company had 300,376 stock options with performance and service vesting requirements in the Company granted 836,657 RSUs to its employees and consultants that contain athree months ended September 30, 2022. The service-based vesting condition and a performance-based vesting condition, with a grant date fair value of $8.26 per RSU. Such RSUs are in addition to the 350,426 of RSUs that were outstanding at June 30, 2022, which contain the same vesting conditions. The service-based vesting condition is generally satisfied by rendering continuous service for 54 years with 20% after the performance-based vesting each year.condition occurs. The performance-based vesting condition is satisfied in connection with an initiala public offering or a change in control. However,liquidity event. Effective with the consummationclosing of the deSPAC does not result in satisfaction ofMerger, the public liquidity event performance condition.condition was achieved. The Company did not record compensationrecognized an immaterial amount of expense duringassociated with these options for the sixthree months ended December 31, 2022 related to these RSUs as achievement of the performance-based vesting condition was not deemed probable of occurring. As of December 31, 2022, $9,190 of stock-based compensation related to these RSUs remains unrecognized, which is expected to time-vest over a remaining weighted-average period of 4.5 years, subject to the performance-based vesting condition being satisfied or deemed probable at which point the Company will recognize a cumulative adjustment for the service condition satisfied at such point.September 30, 2022.
In September 2022, the Company granted 1,200,000 of RSUs to a director of the Company with a grant date fair value of $4.56 per RSU. The RSUs vest in the following tranches, subject to the continuous service through each applicable vesting date: 33.33% of the RSUs vestedshall vest on September 30, 2022, 56.67% of the RSUs has, and shall continue to, vest in equal monthly installments on the last day of each month during the subsequent 23-month period, and the remaining 10% shall vest upon the third anniversary of the vesting commencement date. The Company recorded compensation expense during the three and six months ended December 31,September 30, 2023 and 2022 related to the RSUs of $411$0.4 million and $2,235,$1.8 million, respectively. As of December 31, 2022, $3,238 of stock-based compensation related to the RSU remains unrecognized, which is expected to be recognized over a remaining weighted-average period of 2.7 years. The RSUs time-based vesting would accelerate upon an acquisition of the Company. A deSPAC does not meet the definition of an acquisition as defined in the 2018 Plan.
During fiscal year 2021, the Company granted 600,752 performance-based options that contained a service-based vesting condition and a performance-based vesting condition. The service-based vesting condition is satisfied by rendering continuous service for 4 years after the performance-based vesting condition occurs. The performance-based vesting condition is satisfied in connection with a financing event or a public liquidity event for a first group of 300,376 options and in connection with a public liquidity event for a second group of 300,376 options. A financing event occurred as of June 30, 2021 that satisfied the performance-based vesting condition for the first group of 300,376 options. Effective with the closing of the Merger, the public liquidity event performance condition was achieved for the second group of 300,376 options. The Company recognized expense associated with these options in the amount of $49 and $76 for the three and six months ended December 31, 2022, respectively. Compensation costs attributable to such awards were insignificant during the three and six months ended December 31, 2021.
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In the event of voluntary or involuntary termination of employment with the Company for any reason, with or without cause, all unvested options are forfeited and all vested options must be exercised within a 90-day period under the 2018 Plan and within a 30-day period under the 2008 Plan or they are forfeited. Under the 2022 Plan, in the event of voluntary or involuntary termination of employment with the Company for any reason, with or without cause, all unvested RSUs are forfeited.
24
The following summary of the equity incentive plan activity is shown collectively for the 2022 Plan, the 2018 Plan and the 2008 Plan:
| | | | | | | | | | | | | | | | | | | | |
|
| Number of |
| Weighted- |
| Weighted- |
| Aggregate |
| Number of |
| Weighted- |
| Weighted- |
| Aggregate | ||||
| | Options | | Average | | Average Remaining | | Intrinsic | | Options | | Average | | Average Remaining | | Intrinsic | ||||
| | Outstanding |
| Exercise Price |
| Contractual Life (years) |
| Value | | Outstanding |
| Exercise Price |
| Contractual Life (years) |
| Value | ||||
Balance – June 30, 2022 | | 13,845,291 | | $ | 0.59 | | 6.66 | | | | ||||||||||
Retrospective application of recapitalization | | (2,631,676) | | | 0.14 | | | | | | ||||||||||
Adjusted Balance – beginning of period |
| 11,213,615 |
| | 0.73 |
| 6.66 |
| | | ||||||||||
Balance – June 30, 2023 | | 9,901,703 | | | 0.72 |
| 4.40 | | | | ||||||||||
Exercised |
| (146,823) | | | 0.39 |
| |
| | |
| (362,967) | | | 0.33 |
| |
| | |
Forfeited and expired |
| (113,368) | | | 1.57 |
| |
| | |
| (29,800) | | | 1.30 |
| |
| | |
Balance –December 31, 2022 |
| 10,953,424 | | | 0.73 |
| 6.11 |
| | | ||||||||||
Vested and expected to vest at December 31, 2022 |
| 10,953,424 | | | 0.73 |
| 6.11 | | $ | 17,741 | ||||||||||
Exercisable at December 31, 2022 |
| 8,745,509 | | | 0.46 |
| 5.62 | | | 16,141 | ||||||||||
Balance –September 30, 2023 |
| 9,508,936 | | | 0.73 |
| 3.94 |
| | | ||||||||||
Vested and expected to vest at September 30, 2023 |
| 9,508,936 | | | 0.73 |
| 3.94 | | $ | 8,134 | ||||||||||
Exercisable at September 30, 2023 |
| 8,905,601 | | | 0.60 |
| 3.69 | | | 8,082 |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2023, the unrecognized stock-based compensation expense related to outstanding unvested stock options was $1.5 million which is expected to be recognized over a weighted-average period of 1.68 years.
The following is a summary of the equity incentive plan RSU activity for the 2022 Plan and the 2018 Plan:
|
|
|
|
|
|
| | | | | | | | | | |
|
| Number of |
| Weighted- Average |
| Number of |
| Weighted- Average | ||
| | Awards Outstanding |
| Grant Date Fair Value | | Awards Outstanding |
| Grant Date Fair Value | ||
Unvested Balance – June 30, 2022 | | 432,666 | | $ | 6.46 | |||||
Retrospective application of recapitalization | | (82,240) | | | 1.52 | |||||
Adjusted, unvested balance – beginning of period |
| 350,426 | | | 7.98 | |||||
Unvested Balance – June 30, 2023 | | 4,560,645 | | | 4.00 | |||||
Granted |
| 2,036,629 | | | 6.85 |
| 769,123 | | | 3.05 |
Vested |
| (488,660) | | | 4.56 |
| (409,977) | | | 3.46 |
Forfeited |
| (95,297) | | | 6.46 |
| (280,423) | | | 3.58 |
Unvested Balance - December 31, 2022 |
| 1,803,098 | | | 7.02 | |||||
Unvested Balance - September 30, 2023 |
| 4,639,368 | | | 3.48 |
As of September 30, 2023, the unrecognized stock-based compensation expense related to outstanding unvested RSUs was $14.4 million which is expected to be recognized over a weighted-average period of 3.97 years.
Stock-based Compensation Expense
Stock-based compensation expense, excluding stock-based compensation in capitalized software, related to employees and non-employees, including the expense associated with the earnout shares, by function is as follows:
| | | | | | | | | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Six months ended December 31, |
|
| Three months ended September 30, |
| ||||||||||||
| | 2022 |
| 2021 | | 2022 |
| 2021 | | | 2023 |
| 2022 | | ||||||
Research and development | | $ | 132 | | $ | 145 | | $ | 277 | | $ | 250 | | | $ | 1,508 | | $ | 183 | |
Sales and marketing | | | 86 | | | 114 | | | 184 | | | 213 | | | | 320 | | | 113 | |
General and administrative |
| | 614 |
| | 210 |
| | 2,541 |
| | 485 |
|
| | 1,626 |
| | 2,057 |
|
| | $ | 832 | | $ | 469 | | $ | 3,002 | | $ | 948 | | | $ | 3,454 | | $ | 2,353 | |
Stock-based compensation allocated to cost of goods sold was not material for the three and six months ended December 31, 2022September 30, 2023 and 2021. As of December 31, 2022, the unrecognized stock-based compensation expense related to outstanding unvested stock options was $3,580, which is expected to be recognized over a weighted-average period of 2.6 years.2022.
During the three and six months ended December 31, 2022 the Company recorded $1,696 and $1,874, respectively, of stock-based compensation expense associated with earnout shares granted to holders of common stock held by current employees and directors and holders of options and RSUs. No amounts were recorded during the three and six months ended December 31, 2021 associated with earnout shares. Refer to Note 1 for further discussion of compensation recorded related to earnout shares granted to holders of common stock, options and RSUs.
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Employee Stock Purchase Plan
Effective with the closing of the Merger, the Company adopted andan employee stock purchase plan (“ESPP”). There was no activity under the plan during the three months ended September 30, 2023 and 2022, as the Company has not yet conducted any offerings pursuant to the ESPP.
The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations, during designated 6 month offering periods. At the end of each offering period, employees are able to purchase shares at the lesser of (i) 85% of the fair market value of the Company’s common stock on the first day of the offering period and (ii) 85% of the fair market value of the Company’s common stock on the last day of the offering period, based on the closing sales price of the Company’s common stock as quoted on the NASDAQ on such date.
There was no activity under the plan during the three and six months ended December 31, 2022.25
Other Stock-based Compensation
Earnout Arrangement with holders of Legacy Presto Common Stock and Outstanding Equity Awards
As of September 30, 2023, unrecognized stock-based compensation expense for earnout awards is $5.8 million which is expected to be recognized over a weighted-average period of 1.08 years. As of September 30, 2023, 678,340 earnout shares held by current employees and directors were forfeited. The earnout shares given to common stockholders not held by current employees and directors and warrant holders have been recorded with equal and offsetting effects on additional paid-in capital on its condensed consolidated balance sheet. As of September 30, 2023, all of the earnout shares remain unissued as the conditions to issuance have not been achieved.
CyborgOps
In connection with the acquisition of CyborgOps, (refer to Note 1), the Company issued 475,638 shares of common stock to former employees of CyborgOps who havehad continued employment with the Company, andwhich are accounted for as stock-based compensation because the shares are subject to forfeiture based on post-acquisition time-based service vesting. The shares vest in monthly increments over four years commencing on June 11, 2022. The fair value was determined to be $8.75 per share based on the acquisition date fair value. During the three and six months ended December 31,September 30, 2023 and 2022, the Company recognized $264$0.1 million and $528$0.3 million of stock-based compensation expense related to these equity awards, respectively. As of December 31, 2022, unrecognized stock-based compensation expense associated with theseSeptember 30, 2023, there are no longer any outstanding equity awards was $3,525, which is expected to be recognized over a weighted-average period of 3.37 years.former CyborgOps employees as all employees have terminated employment with the Company. All unvested restricted stock awards were cancelled.
12. Income Taxes
The Company is subject to U.S. federal, state, and local corporate income taxes. The Company’s income tax expense was not material for the three and six months ended December 31, 2022September 30, 2023 and 2021.2022. The Company does not expect any material changes in tax position for the remainder of the fiscal year.
13. Net Income (Loss)income Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share attributable to common stockholders for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Six months ended December 31, |
|
| Three months ended September 30, |
| ||||||||||||
| | 2022 |
| 2021 | | 2022 |
| 2021 | | | 2023 |
| 2022 | | ||||||
Numerator: | |
| | |
| | |
| | |
| | | |
| | |
| | |
Net income (loss) attributable to common stockholders, basic and diluted | | $ | (17,029) | | $ | (23,507) | | $ | 17,760 | | $ | (43,016) | | |||||||
Net income attributable to common stockholders, basic and diluted | | $ | 5,372 | | $ | 34,789 | | |||||||||||||
| | | | | | | | |||||||||||||
Denominator: | |
|
| |
|
| |
|
| |
|
| | |
|
| |
|
| |
Weighted-average shares used in computing net income (loss) per share attributable to common stockholders, basic | |
| 50,998,941 | |
| 27,211,309 | |
| 40,475,200 | |
| 27,157,425 | | |||||||
Weighted-average shares used in computing net income per share attributable to common stockholders, basic | |
| 57,842,571 | |
| 29,521,505 | | |||||||||||||
Add: Weighted average dilutive effect of stock options, RSUs and warrants | |
| — | |
| — | |
| 10,299,972 | |
| — | | |
| 11,306,400 | |
| 10,845,397 | |
Weighted average shares outstanding - diluted | |
| 50,998,941 | |
| 27,211,309 | |
| 50,775,172 | |
| 27,157,425 | | |
| 69,148,971 | |
| 40,366,902 | |
Net income (loss) per share attributable to common stockholders, basic | | $ | (0.33) | | $ | (0.86) | | $ | 0.44 | | $ | (1.58) | | |||||||
Net income (loss) per share attributable to common stockholders, diluted | | $ | (0.33) | | $ | (0.86) | | $ | 0.35 | | $ | (1.58) | | |||||||
Net income per share attributable to common stockholders, basic | | $ | 0.09 | | $ | 1.18 | | |||||||||||||
Net income per share attributable to common stockholders, diluted | | $ | 0.08 | | $ | 0.86 | |
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The potential weighted average shares of common stock that were excluded from the computation of diluted net lossincome per share attributable to common stockholders for the periods presented because including them would have been antidilutive are as follows:
| | | | | | | | | |
|
| Three months ended December 31, |
| Six Months Ended December 31, |
| ||||
| | 2022 |
| 2021 | | 2022 |
| 2021 | |
Stock options and RSUs | | 12,904,421 | | 12,094,129 | | 198,692 | | 12,107,168 | |
Convertible notes |
| — |
| 4,632,311 |
| — |
| 4,491,455 |
|
Common stock warrants |
| 18,150,077 |
| 3,564,182 |
| 10,129,619 |
| 3,520,164 |
|
Total potential shares of common stock excluded from the computation of diluted net income (loss) per share |
| 31,054,498 |
| 20,290,622 |
| 10,328,311 |
| 20,118,787 |
|
| | | | | |
|
| Three Months Ended September 30, |
| ||
| | 2023 |
| 2022 | |
Stock options and RSUs | | 689,431 | | 221,140 | |
Common stock warrants |
| 17,371,466 |
| 2,887,771 |
|
Total potential shares of common stock excluded from the computation of diluted net income per share |
| 18,060,897 |
| 3,108,911 |
|
Warrants to purchase a weighted average of 10,129,619 shares of common stock were outstanding during the six months ended December 31, 2022 but were not included in the computation of diluted EPS because the warrants’ exercise prices were greater than the average market price of the common shares.
The Company excluded a weighted average of 1,803,098 RSUs and 987,782 RSUs for the three and six months ended December 31, 2022, respectively, and the Company excluded a weighted average of 300,376 options for the three and six months ended December 31, 2021. These equity awards were excluded1,187,030 RSU’s from the calculation of diluted EPS as they are subject to performance conditions for which the necessary conditions havehad not been satisfied. as of September 30, 2022.
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The Company excluded a weighted average of14,321,660 and 15,000,000 and 8,315,217 earnout shares from the calculation of diluted EPS for the threeas of September 30, 2023 and six months ended December 31, 2022 as they are subject to market conditions for which the necessary conditions have not been satisfied.
14. Related Party Transactions
As of June 30, 2022,During the Company had $9,566 of convertible promissory notes and embedded warrants with entities in which a member of the Company’s board of directors is an officer of the entity and has a financial interest in the entity (“affiliated entities”), classified as a current liability on the condensed consolidated balance sheet at that time. The convertible promissory notes and embedded warrants due to a related party were converted into shares of common stock in the Company during the sixthree months ended December 31, 2022. As of December 31, 2022, the Company has no convertible promissory notes and embedded warrants balance due to a related party. Refer to Note 7 for further details.
During the six months ended December 31,September 30, 2022, the Company received an equity investment of $1,000$1.0 million from an investor in exchange for 133,133133,333 shares in the Company. Refer to Note 9 for further details.
Additionally, during the sixthree months ended December 31,September 30, 2022, the Company granted 1,200,000 of RSUs to a director and the previous interim CEOof the Company with a grant date fair value of $4.56 per RSU. Refer to Note 11 for further details.11.
15. Subsequent Events
November Capital Raise
Capital Raise and New Board Members
On February 8,November 17, 2023, at the meetingCompany entered into agreements (the “Purchase Agreements”) with a related party, Remus Capital-affiliated syndicate of investors, to sell 7,000,000 shares of common stock of the Company in a registered offering. The offering also includes the issuance to a related party, Remus Capital-affiliated investor, who led the investment round of an additional 750,000 shares, for a total of 7,750,000 shares issued. The Company anticipates the offering will result in gross proceeds of approximately $7.0 million. The offering is expected to close on November 21, 2023.
As part of the transaction, the Company increased the size of its Board of Directors from 7 to 9. Remus Capital also appointed two additional directors: Mr. Tewfik Cassis and Ms. Sasha Hoffman.
The Purchase Agreements include antidilution provisions relating to future issuances or deemed issuances of the Company’s boardcommon stock from November 21, 2023 to April 1, 2024 at a price per share below $1.00, which would require the Company to issue additional shares of directors,common stock to the following resolutions were approved:Purchasers, upon the terms and subject to the conditions contained in the Purchase Agreements. If these anti-dilution provisions are triggered in the future, the issuance of additional shares thereunder will dilute the percentage ownership interest of all stockholders, will dilute the book value per share of the Company’s common stock and will increase the number of the Company’s outstanding shares, which could depress the market price of the Company’s common stock.
The offering of securities in connection with this offering triggered such anti-dilution provisions in the Purchase Agreement and the Third Amendment Conversion Warrants. The Company agreed with each of CA and the Lenders that the “New Issuance Price” (as defined in the Purchase Agreement and Third Amendment Conversion Warrants, respectively) would be $1.00. As a result, we are required to issue an additional 1,500,000 shares to CA and increase the amount of common stock issuable upon the exercise of the Third Amendment Conversion Warrants from 3,000,000 shares to 6,000,000 shares.
Presto Touch Update
The Company expectsis considering strategic alternatives related to record increased stock-based compensation expense, beginningits Presto Touch solution including evaluating whether to engage in an exit from Presto Touch, which could be either a sale, partial sale or abandonment in the third quartercoming months. The Company has not adopted any specific alternative and intends to pursue an approach that offers the greatest benefit for shareholders and allows for dedicated focus and efforts on its Presto Voice solution. The estimated monthly reduction in expenditures and the incurrence of fiscal yearnonrecurrent expenses is included in the full implementation of the steps set out under “Cost Savings Initiative”.
Cost Savings Initiative
On November 15, 2023, attributablethe Company took additional steps in its ongoing efforts to reduce costs, improve profitability, and streamline operations by implementing a reduction in force plan of approximately 17% of the Company’s personnel globally. The current execution of this cost reduction plan has immediately reduced monthly expenditures by $0.4 million for which the Company incurred approximately $0.2 million in one time cost reduction charges. Additionally, through future execution of this cost reduction plan and as part of the broader Presto Touch strategic alternatives described in Presto Touch Update, the Company estimates total
27
cumulative cost savings rising to $1.2 million per month no later than 8 months with total cumulative one time costs reductions charges amounting to $0.4 million.
Voice Customer Update
Previously the Company has disclosed certain of its Presto Voice customers and in the three months ended September 30, 2023, one of those customers, Del Taco, decided not to continue with the Presto Voice solution. This will not have a material impact on the Company’s financial statements. Some of the Presto Voice customers continue to include Carl’s Jr. and Hardee’s, Wienerschnitzel and Checkers.
October Capital Raise and Amendment to Credit Facility
Third Amendment to Credit Agreement
On October 10, 2023, the Company entered into a Third Amendment to the modificationsCredit Agreement (the “Third Amendment”) with Metropolitan, the administrative, payment and collateral agent for Lenders, pursuant to which the parties amended certain covenants of the existing Credit Agreement, the Lenders agreed to waive existing events of default, advance an additional $3.0 million of Term Loans to the Company, and exchange an aggregate of approximately $6.0 million of accrued and previously capitalized interest for warrants to purchase 3,000,000 shares of common stock optionsat an exercise price of $0.01 per share (the “Third Amendment Conversion Warrants”). The effectiveness of the Third Amendment was conditioned, in part upon, (1) evidence of a gross amount of additional equity investments of $3.0 million from Presto CA LLC (the “Purchaser”), a related party with greater than 10% investment in the Company and RSUs,of which an officer is a Board member of the Company, to be used for working capital purposes, which was committed and any associated earnout compensation effects.executed under a Securities Purchase Agreement on October 10, 2023 and closed on October 16, 2023 (see below), and (2) the Company hiring a chief financial officer reasonably satisfactory to Metropolitan, which the Company satisfied on October 10, 2023, and (3) evidence that the Company has engaged the services of an investment bank reasonably acceptable to Metropolitan on terms reasonably acceptable to Metropolitan to provide capital markets advisory services in connection with upcoming capital raises. All conditions precedent were satisfied and the Third Amendment closed on October 17, 2023.
The anti-dilution provisions of the Third Amendment were triggered with the November 17, 2023 capital raise and the Company was required to increase the number of shares issuable under the Third Amendment Warrants from 3,000,000 to 6,000,000 shares of common stock.
Upon the effectiveness of the Third Amendment, the Company obtained waivers of all previous financial covenant breaches. Further, the Third Amendment also eliminates all financial covenants with the exception of two which are a minimum cash collateral balance of $10.0 million and the “cash burn” covenant. The definition of the “cash burn” covenant was revised to allow for the exclusion of certain expenses from the calculation, including those related to severance and certain outside professional fees. New agreed upon “cash burn” covenant levels were also agreed upon. Subject to certain excluded payments, the decrease in operating cash may not exceed an agreed amount for each rolling three-month period, subject to certain customary operating fluctuations and adjustments. The amount is set at $10.7 million for October 2023, $11.4 million for November 2023 and $10.3 million for December 2023, and declines after that date. Without an injection of further capital, the Company anticipates being unable to comply with the minimum unrestricted cash covenant by approximately the end of February 2024.
The Third Amendment also provides that, with respect to interest accruing for the interest periods ending September 30, 2023 through to January 31, 2024, the Company may elect that 100% of the accrued but unpaid interest under the Term Loans may be capitalized as principal, or “PIK Interest” on a monthly basis. After January 31, 2024, the Company may request that 100% of the accrued but unpaid interest under the Term Loans may be capitalized as principal, or “PIK Interest” on a monthly basis, subject to the prior approval by the Agent. Absent such a request or in the absence of approval by the Agent, such interest is required to be paid in cash on a monthly basis.
Third Amended and Restated Fee Letter
On October 10, 2023, Presto, in connection with the Third Amendment and in consideration for Metropolitan’s entering into the Third Amendment, entered into the Third Amended and Restated Fee Letter (the “Third Amendment Fee Letter”) with Metropolitan, pursuant to which the Company paid an amendment fee equal to $0.1 million and granted warrants to purchase 25,000 shares of common stock, par value $0.0001 per share of the Company, with an exercise price of $0.01 per share (the “Third Amendment Fee Warrants”) and, together with the Third Amendment Conversion Warrants, the “Third Amendment Warrants”), to Metropolitan Entities.
3428
Warrants to Purchase Common Stock
On October 10, 2023, in accordance with the terms of the Third Amendment and the Third Amendment Fee Letter, the Company executed the Third Amendment Warrants to purchase common stock with each of the Metropolitan Entities. The Third Amendment Warrants were granted in connection with Metropolitan entering into the Third Amendment and the Third Amendment Fee Letter and contain similar terms as the First Amendment Warrants and Second Amendment Warrants. See Note 10 for further details.
Lock-Up Agreements
On October 10, 2023, in connection with the Third Amendment, certain holders of the Company’s common stock entered into lock-up agreements with the Company agreeing not to transfer their shares until December 23, 2024. These shareholders included related party Presto CA LLC, entities affiliated with related party REMUS Capital and related party Romulus Capital, entities affiliated with related party I2BF Global Ventures and various other shareholders.
In connection with a certain investment in the November 17, 2023 capital raise, the Company waived the lock-up restrictions under its bylaws with respect to (i) 638,076 shares of common stock in the Company held by Zaffran Special Opportunities LLC, for which Mr. Gupta, the Company’s Chairman of the Board, is the sole general partner (the “Zaffran shares”), and (ii) an aggregate of 440,890 shares of common stock in the Company held by two other investors in this offering. Without such waiver, these shares would have been subject to lock-up restrictions until March 21, 2024. In addition, with consent of the Lenders, the Company waived the lock-up restrictions under a lock-up agreement entered into in connection with the Third Amendment that were applicable to the Zaffran shares. Without such waiver, the Zaffran shares would have been subject to lock-up restrictions until December 23, 2024.
Securities Purchase Agreement
On October 10, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the Purchaser, which closed on October 16, 2023, pursuant to which the Company agreed to sell an aggregate of 1,500,000 newly issued shares of the Company’s common stock, at a purchase price of $2.00 per share (the “Private Placement”) for an aggregate purchase price of $3.0 million. The Purchase Agreement contains customary representations, warranties and covenants of the parties, and the closing is subject to customary closing conditions. In addition, the Purchase Agreement includes anti-dilution provisions relating to future issuances or deemed issuances of common stock from the closing date to April 1, 2024 at a price per share below $2.00 per share, which would require the Company to issue additional shares of common stock to the Purchaser, upon the terms and subject to the conditions contained in the Purchase Agreement. The anti-dilution provisions were triggered with the November 17, 2023 capital raise and required the Company to issue 1,500,000 additional shares as noted above, which adjusted the purchase price to $1.00 per share from $2.00 per share in the Purchase Agreement.
Registration Rights Agreement
On October 10, 2023, in connection with the terms of the Third Amendment, the Company entered into the Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchaser, pursuant to which Presto agreed to provide customary registration rights to the Purchaser with respect to the shares of common stock issuable pursuant to the Purchase Agreement described above.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Presto’s condensed consolidated financial statements and related notes appearing elsewhere in the Quarterly Report on Form 10-Q and our audited consolidated financial statements as of and for the years ended June 30, 20222023 and 20212022 and the related notes contained in Exhibit 99.1Part II, Item 8 of the Current ReportAnnual Financial Statements on Form 8-K10-K filed with the SEC on December 16, 2022.October 10, 2023. This discussion contains forward-looking statements, within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Presto’s actual results could differ materially from such forward-looking statements. The Company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the Company’s disclosures under the heading “Cautionary Statement Regarding Forward-Looking Statements” included in the this report. Additionally, Presto’s historical results are not necessarily indicative of the results that may be expected in any future period. Amounts are presented in U.S. dollars.
You should not place undue reliance on these forward-looking statements. Should one or more of a number of known and unknown risks and uncertainties materialize, or should any of our assumptions prove incorrect, the Company’s actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, those identified below and those discussed in Part I, Item 1A “Risk Factors” of the Annual Report on Form 10-K filed with the SEC on October 10, 2023:
Unless the context otherwise requires, all references in this section to “we,” “us,” or “our” refers to the business and operations of E La Carte Inc. (“Legacy Presto”) and its consolidated subsidiary prior to the Merger (defined below) and to Presto Automation Inc. (“Presto”) and its subsidiaries following the Business Combination.Combination (defined below).
Business Overview
Presto offers a comprehensive set of modular, targetedWe provide enterprise grade AI and automation solutions to the restaurant industrytechnology industry. Our solutions are designed to increasedecrease labor costs, improve staff productivity, improveincrease revenue and enhance the guest experienceexperience. We offer our industry-leading AI solution, Presto Voice, to quick service restaurants (QSR) and deliver actionable insightsour pay-at-table tablet solution, Presto Touch, to restaurants. Sincecasual dining chains. Some of the most recognized restaurant names in the United States are among our customers, including Carl’s Jr. and Hardee’s, Wienerschnitzel and Checkers for Presto Voice and Applebee’s, Chili’s and Red Lobster for Presto Touch.
Following our founding in 2008, we haveinitially focused exclusively on Presto Touch. As of June 30, 2023, we had shipped over 250,000 systems of Presto enterprise-grade digital solutions to the restaurant hospitality industry. We have leveraged our deep domain experience to build a technology platform that digitizes on-premise restaurant dining rooms and drive-throughs with the goal of maximizing restaurant profitability and enhancing the guest dining experience.
Our latest generation277,000 Presto Touch product, called Presto Flex, functions as an all-in-one server handheld or tabletop guest ordering, payment, customer personalization and gaming device. Our Vision product consiststablets to three of an AI-powered computer vision software application that delivers unique and real-time insights to operators. Our Voice products use speech recognition technologythe largest casual dining chains in the customerUnited States. Presto Voice addresses the pressing needs of drive-thru restaurant operators by improving order processaccuracy, reducing labor costs and connectincreasing revenue through menu upselling, while also providing guests with restaurant POS systems to maximize efficiency and minimize costs by automatically transmitting orders to the restaurant’s POS system.
Ouran improved drive-thru experience. While Presto Touch product has accounted for the majoritysubstantially all of our historical revenue. However,revenues, we expectbelieve that Presto Voice will contribute an increasing mixportion of our future revenue to come from our AI Platform (previously Voice and Vision) products.revenues in the future.
We are considering strategic alternatives related to our Presto Touch solution and including evaluating whether to engage in an exit from Presto Touch, which could include either a sale, partial sale or abandonment in the coming months. We have not adopted any specific alternative and intend to pursue an approach that offers the greatest benefit from a predictable, recurring revenue model from enterprise restaurant chains.for our shareholders and allows us to focus our efforts on our Presto Voice solution.
Strategy
We seek to overlay next-generation digital solutions onto the approximately $3 trillion hospitality industry given its current primarily analog nature and substantial reliance on labor. At present, we are focused on the restaurant industry.
Our business is underpinnedguided by the guiding principles that our solutions should improve the guest experience and seamlessly and effortlessly increase revenue for restaurant operators, improve productivity for staff.of the restaurant staff and enhance the guest experience. These principles ensure that our product focus remains aligned with the objectivespriorities of our customers and with our objective of being a leader in the restaurant hospitality technology market.
The restaurant hospitality technology market, iswhile still nascent, continues to rapidly growing. The COVID-19 pandemic createddevelop and evolve in response to the challenges faced by restaurant operators and the productivity enhancements available to them through the use of technological advances. While growing and robust, the restaurant industry today faces increasing labor and other costs. At the same time, a higher percentage of restaurant guests are ordering food and drinks via the drive-thru. In an industry reset, driving restaurantsera of high inflation, restaurant operators need to further embracesimultaneously lower their costs and generate higher revenues to leverage their cost structures. We believe our solutions help restaurant operators address these concerns with compelling end-to-end solutions that seamlessly integrate with a restaurant’s existing technology to solve industry challenges. The restaurant hospitality industry has been racked with labor challenges including unprecedented shortages and high costs. Customers also have a greater desire for faster service, which increases demand for on-premise technology.
Process automation is a long-term priority for all physical businesses. As a result, restaurants need reliable and scalable products and technology that easily integrates with old, legacy systems.stacks.
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OurWe are currently focused on enhancing, marketing and deploying our proprietary AI technology platform, enablesPresto Voice, to meet the needs of our customers and their guests. We expect the market for Presto Voice to improve important factors that drive profitability in a low-margin industry. With Presto’s platform, restaurants can benefit from increased table per server ratios, order accuracy, check size,further develop and customer data collection.
Inevolve as the future, we may take advantage of several acquisition opportunities in customer relationship management and loyalty, POS products, front of house management, online ordering, AI tools, and integration middleware.restaurant technology market continues to grow, thereby increasing the demand for our solution.
Merger with Ventoux CCM Acquisition Corp.
On November 10, 2021 and as subsequently amended on April 1, 2022 and July 25, 2022, Ventoux CCM Acquisition Corp. (“Ventous”Ventoux” or “VTAQ”), Ventoux Merger Sub I, Ventoux Merger Sub II and Presto entered into the Merger Agreement, pursuant to which (a) Ventoux Merger Sub I merged with and into Presto, with Presto being the Surviving Corporation in the First Merger and continuing (immediately following the First Merger) as a wholly-owned subsidiary of VTAQ and (b) immediately following the First Merger and as part of the same overall transaction as the First Merger, the Surviving Corporation merged with and into Ventoux Merger Sub II, with Ventoux Merger Sub II being the surviving entity in the Second Merger and continuing (immediately following the Second Merger) as a wholly-owned subsidiary of VTAQ. On September 14, 2022, VTAQ held a special meeting of its stockholders and voted to approve the Proposed Business Combination (“the Business Combination” or “the Merger”). Upon the Closing, VTAQ was renamed “Presto Automation Inc.” and the VTAQ Common Stockcommon stock and the Public Warrants continue to be listed on Nasdaq and trade under the ticker symbols “PRST” and “PRSTW,” respectively.
The Merger has been accounted for as a reverse recapitalization in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP.GAAP”). Under the guidance in ASC 805, Business Combinations, VTAQ, who is the legal acquirer, has been treated as the “acquired” company for financial reporting purposes and Presto has been treated as the accounting acquirer. This determination was primarily based on Presto having a majority of the voting power of the post-combination company, Presto’s senior management comprising substantially all of the senior management of the post-combination company, the relative size of Presto compared to VTAQ, and Presto’s operations comprising the ongoing operations of the post-combination company. Accordingly, for accounting purposes, the Merger has been treated as the equivalent of a capital transaction in which Presto is issuing stock for the net assets of VTAQ. The net assets of VTAQ have been stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger are those of Presto, as Presto is considered the predecessor for financial reporting purposes.
Public Company Costs
Subsequent to the Merger, New Presto is an SEC-registered and Nasdaq-listed company. Accordingly, we have hired and expect to hire additional staff and implement new processes and procedures to address public company requirements. We also expect to incur substantial additional expenses for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external costs for investor relations, accounting, audit, legal and other functions.
Impact of COVID-19
Presto was and is subject to risks and uncertainties as a result of the outbreak of a novel strain of coronavirus, designated “COVID-19” and declared to be a pandemic in March 2020. Presto began to experience impacts from COVID-19 in March 2020, as federal, state and local governments reacted to the COVID-19 pandemic by encouraging or requiring social distancing, instituting shelter-in-place orders, and requiring, in varying degrees, reduced operating hours, restaurant dine-in and/or indoor dining limitations, capacity limitations or other restrictions that largely limited restaurants to off-premise sales (take-out and delivery) in the early stages of the pandemic. At the same time, COVID-19 has also had a significant impact on the restaurant and hospitality sector in which Presto operates. Many restaurants closed completely due to lockdowns and staff shortages, especially as multiple waves of COVID-19 continued to debilitate the restaurant and hospitality industry.Key Factors Affecting Our Performance
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Presto experienced two impacts from the initial onset of COVID-19 that resulted in significant charges to the statement of operations for the periods presented:
Over the course of fiscal year 2022 and the six months ended December 31, 2022, certain COVID-19 restrictions were relaxed as incidents of infection from the initial outbreak declined, but many of the restrictions were reinstituted as incidents of infection surged. The degree and duration of restriction varied by individual geographic area. The extent of the continuing impact of the COVID-19 pandemic on Presto’s business remains highly uncertain and difficult to predict, as the operating status of restaurants remains fluid and subject to change as government authorities modify existing restrictions or implement new restrictions on restaurant operations in response to changesContinued Expansion in the numberNumber of COVID-19 infections andLocations in which Our Solutions are Used
We intend to expand the availability and acceptance of vaccineslocations in their respective jurisdictions. Additionally, economies worldwide have been negatively impactedwhich our solutions are used by the COVID-19 pandemic, which resultedrolling out our Presto Voice solution to franchisee customers in a global economic recession.
Presto has taken several actions to mitigate the effects of the COVID-19 pandemic on its operations and franchisees. In April 2020, Presto received a loan of approximately $2.6 million under the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), to assist with the economic hardships caused by the pandemic. In March 2021, Presto received a second loan of $2.0 million under SBA PPP. In August 2021, Presto was granted forgiveness of the first loan in an amount of approximately $2.6 million. In July 2022, Presto was granted forgiveness of the second loan in an amount of approximately $2.0 million.
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The severity of the continued impact of the COVID-19 pandemic on Presto’s business will depend on a number of factors, including, but not limited to, how long the pandemic will last, whether/when recurrences of the virus may arise, what restrictions on in-restaurant dining may be enacted or re-enacted, the availability and acceptance of vaccines, the timing and extent of consumer re-engagement with our customers and, in general, what the short- and long-term impact on consumer discretionary spending the COVID-19 pandemic might have on Presto and the restaurant industrygroups with which we have entered into master services agreements. We view the expansion of Presto Voice to these franchisee customers as a whole, allkey driver of which are uncertain and cannot be predicted. Presto’s future results of operations and liquidity could be impacted adversely by future dine-in restrictions and the failure of any initiatives or programs that Presto may undertake to address financial and operational challenges faced by it and its franchisees. As such, the extent to which the COVID-19 pandemic may continue to materially impact our financial condition, liquidity, or results of operations remains highly uncertain.
Our Revenue Model
Our revenue is driven by our ability to attract new customers, retain existing customers, increase sales from both new and existing customers, and ultimately help our customers grow their businesses. We serve casual dining, quick serve and fast casual restaurants that are made up primarily of named logos with tens to thousands of locations, consisting of both corporates and franchisees.
During the three and six months ended December 31, 2022 and 2021, we derived our revenues from two revenue streams: (1) sales and leases of the Presto Touch and AI Platform products (“platform revenue”), which includes hardware, hardware accessories, software and customer support and maintenance, and (2) Premium Content (gaming) and other revenue, which includes professional services (“transaction revenue”).
We also maintain arrangements with a certain legacy customer whereby we lease the Presto Touch product to that customer. Revenue associated with the lease was recognized on a straight-line basis as platform revenue over the lease term in the condensed consolidated statements of operationsnear term and comprehensive loss.
We have historically incurred operating losses and negative cash flows from operating activities. We expect to continue to incur operating losses for the foreseeable future as we work to expand our customer base andtrack the number of locations in which Presto Voice is installed.
Maintaining Relationships with Existing Customers
For the three months ended September 30, 2023 and 2022, our products are used, increase salesthree largest restaurant customers (including, as applicable, the franchisees of such restaurants aggregated as a single customer for reporting purposes) generated an aggregate of approximately 90% and 92% of our AI Platform products, increaserevenue, respectively. These customers have entered into contracts for our platform revenuesPresto Touch that expire and maintain our relationships with current customers.
Our ability to achieve profitabilityare up for renewal between December 31, 2023 and positive cash flows from operating activities will depend primarily on our ability to increase revenues due to the following factors:
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June 30, 2024. We have encountered in the past,undertaken an effort to satisfy our lender to pursue renewals of Presto Touch with all our existing customers with a transition to our next generation technology and, may encounter in the future, risksif this is not achieved by December 31, 2023, to provide and uncertainties frequently experienced by growing companies in rapidly changing industries. For example, the size and timing of customer rollouts from quarter-to-quarter can vary given our focus on large chain restaurants, which often have different decision-making cycles and levels of internal preparedness. Lastly, another COVID-19 surge could adversely affect the restaurant industry and our customer base by decreasing restaurant demand throughimplement a decrease in consumer visits and foot traffic (which we believe ultimately drives our customers’ top line revenues), thereby decreasing demand for our equipment.
Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States of America (“U. S. GAAP”), we use certain non-GAAP financial measures, as described below,strategic wind-down plan that is reasonably acceptable to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly-titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered as substitutes for, or superior to, the financial information prepared and presented in accordance with GAAP contained in this Form 10-Q.
We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparencyMetropolitan with respect to important metrics used by our management for financial and operational decision-making.Presto Touch. We are presenting these non-GAAP metrics to assist investors in seeing our financial performance using a management view. We believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.
Adjusted Gross Profit
Adjusted Gross Profit is calculated as gross profit adjusted to add back depreciation, contra-revenue from warrants granted to a customer, and hardware repair expensesconsidering strategic alternatives related to COVID.our Presto Touch solution and evaluating whether to engage in an exit from Presto Touch, which could include either a sale, partial sale or abandonment in the coming months.
We use Adjusted Gross Profitagreed to understand and evaluate our core operating performance and trends. We believeextend one of the customer contracts that was set to expire on December 31, 2023 to March 31, 2024. Although we were able to extend the term of the contract, we were unable to transition this metric is a useful measure to us andcustomer to our investors to assist in evaluating our performance because it removes the impact of events that do not reflect our core operating performance, thereby providing consistency and direct comparability with our past financial performance and between fiscal periods.
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The following table provides a reconciliation of gross profit to Adjusted Gross Profit for each of the periods indicated:next generation technology.
| | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Six months ended December 31, |
| ||||||||
(in thousands) | | 2022 |
| 2021 | | 2022 |
| 2021 | | ||||
Gross profit | | $ | 9 | | $ | 1,212 | | $ | 442 | | $ | 1,619 | |
Depreciation |
| | 291 |
| | 461 |
| | 582 |
| | 927 |
|
Contra-revenue associated with warrant agreement | | | 409 | | | — | | | 615 | | | — | |
Hardware repair expenses related to COVID |
| | — |
| | 737 |
| | — |
| | 1,110 |
|
Adjusted Gross Profit | | $ | 709 | | $ | 2,410 | | $ | 1,639 | | $ | 3,656 | |
Adjusted EBITDA
Adjusted EBITDA is defined as net loss, adjusted to exclude interest expense, other income, net, income taxes, depreciation and amortization expense, stock-based compensation expense, earnout stock-based compensation expense, change in fair value of warrant liabilities and convertible promissory notes, loss extinguishment of debt and financing obligations, other financing and financial instrument (costs) income, net, deferred compensation and bonuses earned upon closing of the Merger, public relations fee due upon closing of the Merger, loss on infrequent product repairs, contra-revenue from warrants granted to a customer, and hardware repair expenses related to COVID.
We believe Adjusted EBITDA is useful for investors to use in comparing our financial performance to other companies and from period to period. Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation and amortization, interest expense, and interest income, which can vary substantially from company to company depending on their financing and capital structures and the method by which their assets were acquired. In addition, Adjusted EBITDA eliminates the impact of certain items that do not reflect our core operating performance, thereby providing consistency and direct comparability with our past financial performance and between fiscal periods. We have also excluded COVID-related expenses relating to loss on infrequent product repairs and excessive hardware repair expenses as the expenses are non-recurring as they occurred directly as a result of issues arising from COVID-19 protocols. They were not present in the years prior to the onset of COVID-19 and are not expected to recur. Excluding these COVID-related expenses serves to better reflect our operating performance and provides consistency and comparability with our past financial performance. We have also excluded nonrecurring costs related to the closing of the Merger, including a deferred compensation and bonuses earned upon the closing of the Merger, and a public relations fee due upon closing of the Merger. Excluding these costs attributable to the Merger better reflects our operating performance and provides consistency and comparability with our past financial performance. Adjusted EBITDA also has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. For example, although depreciation expense is a non-cash charge, the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new asset acquisitions. In addition, Adjusted EBITDA excludes stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy. Adjusted EBITDA also does not reflect changes in, or cash requirements for, our working capital needs; interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces the cash available to us; or tax payments that may represent a reduction in cash available to us. The expenses and other items we exclude in our calculation of Adjusted EBITDA may differ from the expenses and other items that other companies may exclude from Adjusted EBITDA when they report their financial results.
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The following table provides a reconciliation of net loss to Adjusted EBITDA for each of the periods presented:
| | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Six months ended December 31, |
| ||||||||
(in thousands) | | 2022 |
| 2021 | | 2022 |
| 2021 | | ||||
Net income (loss) | | $ | (17,029) | | $ | (23,507) | | $ | 17,760 | | $ | (43,016) | |
Provision for income taxes | | | 5 | | | 24 | | | 5 | | | 24 | |
Interest expense |
| | 3,030 |
| | 868 |
| | 6,406 |
| | 2,256 |
|
Other income, net |
| | (327) |
| | (11) |
| | (2,355) |
| | (2,641) |
|
Depreciation and amortization |
| | 412 |
| | 518 |
| | 845 |
| | 1,053 |
|
Stock-based compensation expense |
| | 827 |
| | 475 |
| | 3,002 |
| | 954 |
|
Earnout stock-based compensation expense |
| | 1,696 |
| | — |
| | 1,874 |
| | — |
|
Change in fair value of warrants and convertible promissory notes |
| | 378 |
| | 16,196 |
| | (59,444) |
| | 29,770 |
|
Loss on extinguishment of debt and financial obligations |
| | 337 |
| | — |
| | 8,095 |
| | — |
|
Other financing and financial instrument (costs) income, net |
| | — |
| | — |
| | 1,768 |
| | — |
|
Deferred compensation and bonuses earned upon closing of the Merger |
| | — |
| | — |
| | 2,232 |
| | — |
|
Public relations fee due upon closing of the Merger |
| | — |
| | — |
| | 250 |
| | — |
|
Loss on infrequent product repairs(1) |
| | — |
| | 28 |
| | — |
| | 463 |
|
Contra-revenue associated with warrant agreement | | | 409 |
| | — |
| | 615 |
| | — | |
Hardware repair expense related to COVID(1) |
| | — |
| | 737 |
| | — |
| | 1,110 |
|
Adjusted EBITDA | | $ | (10,262) | | $ | (4,672) | | $ | (18,947) | | $ | (10,027) | |
Key Performance Indicator
We use one primary key performance indicator to evaluate our operational and financial performance: net revenue retention.
Our ability to retain and increase revenue from our existing customer base is a key driver of our business growth. We expand within our existing customer base by selling additional products, adding more locations, and helping restaurants generate greater sales per location.
Given the long-term and recurring nature of our customer contracts, we use net revenue retention as a key metric. Net revenue retention compares our revenue associated with a set of active restaurant logos in a one-year period to the same set of restaurant logos in the prior year period. We calculate net revenue retention by dividing a particular period’s recurring revenue, including both platform and transaction revenue, by the prior period’s recurring revenue using the same set of restaurant logos. Net revenue retention is an indicator of the propensity of our customers to continue working with us and expanding their relationship with us. We assess our net revenue retention on a rolling six-month basis comparing year-over-year. For the six months ended December 31, 2022, our net revenue retention was 99%, while for the six months ended December 31, 2021, it was 103%. The slight decrease in the six months ended December 31, 2022 was primarily due to contract terminations by a limited number of franchisees of existing enterprise customers.
We believe net revenue retention is useful for investors by providing a consistent comparison of customer results and growth across comparable periods within our core, established customer base, unaffected by the impact of new customers on our business.
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Key Factors Affecting Our Performance
Support of our Customers’ Revenue Growth
We believe our long-term revenue growth is correlated with the growth of our existing customers’ businesses, and we strive to support their success. Our revenue grows with that of our customers — as our customers generate more sales, we generally see higher platform and transaction revenue. We have a demonstrated track record of partnering with restaurants to help grow their revenue and will continue to invest in our customer success team and in new products that help customers thrive.
Adoption of Additional Products
We offer additional products to existing customers through a combination of customer relationship management investments, product-led growth, and the introduction of new products. We believe that we provide the most value when our customers have multiple touchpoints across our platform. We also believe that adoption of additional products will drive labor savings and profitability improvements for our customers, allowing them to reinvest in their success. Decisions by our customers to adopt more of our products will depend on a number of factors, including our customers’ satisfaction with our platform, competition, pricing, and our ability to demonstrate the value proposition of our products.
Expansion of Locations Per Customer
As our customers grow their businesses and open new locations, we expect to see a corresponding increase in locations on our platform. To that end, we work closely with restaurants across our customer-facing teams to support their expansion efforts. We believe that we are well-positioned to extend our reach to and onboard these new locations based on our customers’ desire to use a single, integrated platform across all locations. This impacts our ability to service individual customers with a dedicated, core team using the appropriate technological resources and personnel, creating operating efficiencies of scale while maintaining growth.
AcquisitionAttraction of New LocationsCustomers
We believe there is a substantial opportunity to continue to grow our restaurant locationssolutions across the casual dining, quick service and fast casualQSR sectors in the United States. Since the third quarter of 2022, we have signed several pilot agreements with new customers for Presto Voice. We intendhope to continue to drive new location growth through
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convert each of our differentiated go-to-market strategy, including an industry advisor network, and enterprise sales representatives who are deeply integratedpilot customers into broader customer relationships in the local restaurantfiscal years 2024 and hospitality sector. In addition, we2025. We believe that this will continue to invest in marketing efforts in key U.S. cities to grow our brand awareness. Our ability to acquire new locations will depend on a number of factors, including the effectiveness and growth of our sales team, the success of our marketing efforts, and the continued satisfaction of, and word-of-mouth referrals generated by, our existing customers. We expect our absolute investment in sales and marketing and other customer acquisition costs related to our hardware and professional services to increase as we continue to grow.
The number of locations is not in itself a key performance indicator utilized by our management because of varying financial arrangements and contribution. Rather, our management uses number of locationsserve as a general measuredriver of scale acrossrevenue in the future.
Continued Innovation of Our AI Technology
Given the machine learning associated with all AI technology, including our platform.
Innovation and Developmentsolution, we use an approach which is commonly employed in the AI industry referred to as human-in-the loop (HITL) to ensure the desired level of New Products
accuracy in order taking is achieved. We have a culture of continuous innovation evidenced by our history of consistent and timely product launches and refinements. We intendare currently close to continue to invest in research and development to expand and improveprofitable at the functionality ofrestaurant location level based on our current platformlevel of HITL and broadenexpect to achieve profitability at the restaurant location level in the near future with continued advances in our capabilitiestechnology and its implementation. If we are unable to address new market opportunities. As a result, we expect our total operating expenses will increase over time and, in some cases, have short-term negative impacts on our operating margin. Our ability to successfully develop, market, and sell new products to our customers will affect our competitive posturereduce the degree or cost of HITL and/or achieve greater efficiencies with our competitors.human agents, our results of operations and business may be adversely affected.
Seasonality
We experience seasonality in our transactionTransaction revenue, which is largely driven by the level of gross payment volume processed through our platform.Presto Touch. For example, customersrestaurant operators typically haveobtain greater sales during the warmer months, though this effect varies regionally. As a result, our transactionTransaction revenue per location has historically been stronger in the secondfirst and third quarters.fourth quarters of our fiscal year. We believe that transactionTransaction revenue from both existing and potential future productssolutions will continue to represent a material proportion of our overall revenue mix at least in the near term and seasonality will continue to impact our results of operations.
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We became a public company through a deSPAC process on September 21, 2022 upon the consummation of the Business Combination and, as a result, are incurring costs related to, among other things, directors’ and officers’ liability insurance and audit, legal and other functions. We have taken several steps during 2023 to operate our business more efficiently, improve profitability, streamline operations and reduce costs, including a reduction in force of our global full-time employees by 17% on November 15, 2023. The current execution of this cost reduction plan has immediately reduced monthly expenditures by $0.4 million for which we incurred approximately $0.2 million in one time cost reduction charges. Additionally, through future execution of this cost reduction plan and as part of the broader Presto Touch strategic alternatives described in Presto Touch Update, we estimate total cumulative cost savings rising to $1.2 million per month no later than 8 months with total cumulative one time costs reductions charges amounting to $0.4 million. In addition, we have implemented initiatives including realigning personnel and other resources consistent with our current business needs and strategic plans. We intend to continue to evaluate opportunities to enhance our efficiencies, including further cost reductions as necessary.
Components of Results of Operations
Revenue
We generate revenueDuring the three months ended September 30, 2023 and 2022, we derived our revenues from two main sources that are further described below:revenue streams: (1) platform revenuesales and leases of the Presto Touch and Presto Voice solutions (“Platform revenue”), which includes hardware, hardware accessories, software and customer support and maintenance, and (2) transaction revenue.premium gaming content and other revenue, which includes professional services (“Transaction revenue”). We are considering strategic alternatives for our Presto Touch solution and evaluating whether to engage in a wind-down which could be either a sale, partial sale or abandonment of the Presto Touch business in the coming months. We have not currently adopted any specific alternative. This will adversely impact our total revenue in the short-term, but we believe it will position us for revenue growth in the long-term.
Platform Revenue
Platform revenue is generated from fees charged to customers for access to our Presto Touch and AI Platform productsPresto Voice solutions and is recognized ratably. For Presto Touch, partratably over the life of the contract, with a portion of the total contract value is due upon execution of the contract and the remainder is due upon installationmonthly over the term of the systems.contract. Our contractsmaster service agreements with customers are generally for a term rangingtypically range from 12 to 48 months.36 months in duration. Amounts invoiced in excess of revenue recognized are recorded as deferred revenue. We also maintained arrangements with a certain legacy customer whereby we leasedRevenue generated from Presto Voice was not material for the Presto Touch product to that customer. Revenue associated with the lease was recognized on a straight-line basis as platform revenue over the lease term in the consolidated statements of operationsthree months September 30, 2023 and comprehensive loss. 2022.
Pursuant to the primary AI Platform arrangement that we maintained during the three and six months ended December 31, 2022,an agreement with Hi Auto, we remit a revenue share toassociated with our hardware and software vendor and accordingly, such revenue share is not recognized in our financial statements. RatherPresto Voice at Checkers locations. As we have determined that we areserve as an agent in the agent andrelationship because we do not control the AI Platformrelated Voice hardware, software and
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other services and are not primarily responsible for fulfilling the promiseobligations to the customer.customer, we recognize this revenue net of the revenue share amount paid to Hi Auto. The revenue share paid to our hardware and software vendor under our AI Platform revenue share agreementamount ranged from 64% -to 68% of the gross billings to the customerrestaurant operators for the three and six months ended December 31,September 30, 2023 and 2022. Revenue, in our role as agent, that was generated from AI Platform products was not materialOur revenue for the three and six months ended December 31,September 30, 2023 and 2022, and 2021. Such revenue generated from AI Platform products is inclusive of $0.4 million and $0.6 million of contra-revenue relatedCheckers also reflects, as a reduction to transaction price, the fair value of the warrant treatedissued to Checkers. (See Note 3 of this Quarterly Report on Form 10-Q for further details). We also pay Hi Auto a fee that is accounted for as a reduction to the transaction pricecost of a customerrevenue which was $0.3 million and $0.2 million for the three and six months ended December 31, 2022, respectively.September 30, 2023 and 2022.
Transaction revenue consists ofWe also maintain an agreement with a single performance obligation recognized at a point in time whenlegacy customer whereby we lease Presto Touch to that customer.Revenue associated with the content is delivered and used. Transaction revenuelease is recognized on a grossstraight-line basis as Platform revenue over the lease term in the condensed consolidated statements of operations and comprehensive income.
Transaction Revenue
Transaction revenue is primarily generated from the delivery to, and use of premium gaming content by, restaurant guests. We act as the principal in this transaction as we are the principal in the relationship and the restaurant acts as a sales agent between us and the diner to upsell premium content purchases during the dining experience. We are the principal as we are the primary obligor responsible for fulfillment, weretain control of the gaming license and its accessibility and have influence in establishing the price charged to the diner.guest. The restaurant operator acts as a sales agent between us and the guest to upsell premium gaming content purchases during the dining experience. Transaction revenue is recognized on a gross basis. A portion of gaming serviceTransaction revenue collections withheld byis owed to the restaurant for sales commissionoperator and is recorded to transactionin Transaction cost of revenues. Werevenue.
To a lesser extent, we also generate revenue from professional services, which primarily consists of fees from developing premium content to be used on the devices and installation. We recognize revenue from professional service engagements that occur over a period of time on a proportional performance basis as labor hours are incurred.
Cost of Revenue
Platform cost of revenue consists of four categories: product costs, shipping/freight costs, installation costs and other costs. Product costs consist primarily of the cost to purchase the hardware and hardware accessories for our Presto Touch and Presto Voice solutions. Shipping/freight costs consist of all costs to transport equipment to restaurants. Installation costs consist primarily of the labor cost to install the hardware in each restaurant. Other costs include the amortization of capitalized software and product support costs, as well as certain costs paid to vendors supporting the development of software and hardware offerings used in Presto Touch and Presto Voice. Other costs also include the costs of human agents (located offsite of the restaurant) to enter, review, validate and correct orders received by Presto Voice.
Transaction cost of revenue consists primarily of the portion of the fees collected from guests that are paid to the restaurant as part of the revenue share agreement with each restaurant. As we bear primary responsibility for the solution, we are the principal in the premium content transaction and restaurants act as the agent, whereby we collect all of the fees paid as revenue and remit the revenue share to the restaurants as cost of revenue. The portion of the fees collected from guests that are withheld by and payable to the restaurant as part of the revenue share agreement with each restaurant is recorded to Transaction cost of revenue. The commissions paid to restaurants under our gaming revenue share agreements range on average between 86% to 95% and 83% to 96% of premium gaming content revenue by customer brand for the three months ended September 30, 2023 and 2022, respectively.
Depreciation and amortization cost of revenue consists primarily of the costs of leased assets that are included in property and equipment, net in the balance sheet that are amortized to cost of revenue as well as capitalized software amortization.
Our cost of revenue includes costs to refurbish and repair our Presto Touch tablets. These costs are expensed in the period in which they are incurred, and as the costs are generally linear, they are generally expected to match the timing of revenue recognized over time. In connection with these costs, we also accrue a liability at each reporting period for expected repair costs for customer tablets currently in our repair and return merchandise authorization (“RMA”) process as of the reporting period, which are charged to Platform cost of revenue.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. The largest single component of operating expenses is employee-related expenses, which include salaries, commissions and bonuses, stock-based compensation, and employee benefit and other related payroll costs.
33
We have and will continue to implement measures to streamline operations, improve efficiencies, increase profitability and reduce costs on a go forward basis, including a realignment of personnel and other resources consistent with our strategic plans. We may nonetheless face increased legal expenses as we address litigation and government investigations.
Research and development. Research and development expenses consist primarily of employee-related costs associated with maintenance and the development of our solutions, and expenses associated with the use of third-party software directly related to the preliminary development and maintenance of our solutions and services, as well as allocated overhead. These costs are expensed as incurred unless they meet the requirements for capitalization.
Sales and Marketing. Sales and marketing expenses consist primarily of employee-related costs incurred to acquire new customers and increase product adoption across our existing customer base. Marketing expenses also include fees incurred to generate demand through various advertising channels and allocated overhead costs.
General and administrative. General and administrative expenses consist primarily of expenses related to facilities, finance, human resources and administrative personnel and systems. General and administrative expenses also include costs related to fees paid for certain professional services, including legal, tax and accounting services and bad debt expenses.
Change in Fair Value of Warrants and Convertible Promissory Notes
We account for our warrants in accordance with ASC 815-40 as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Warrants are classified as liabilities when there is variability in the number of shares, and when the variability is not related to an input in the Black-Scholes-Merton valuation model. Liability-classified warrants are remeasured at each reporting date until settlement, with changes in the fair value recognized in the change in fair value of warrants and convertible promissory notes in the condensed consolidated statement of operations and comprehensive income. Warrants that meet the fixed-for-fixed criteria or contain variability related to an input in the Black-Scholes-Merton valuation model are classified as equity instruments. Warrants classified as equity instruments are initially recognized at fair value and are not subsequently remeasured.
Other Income, Net
Other income, net includes income of $2.0 million due to the forgiveness of our Paycheck Protection Program (“PPP”) loans in the three months ended September 30, 2022. During the year ended June 30, 2023, we made an investment in a non-affiliated entity in the amount of $2.0 million. We have determined that the investment does not have a readily determinable fair value and therefore account for the investment at cost, as adjusted for any impairments and observable price changes. There were no adjustments recorded for impairments and observable price changes during the three months ended September 30, 2023.
Interest Expense
Interest expense primarily consists of interest incurred on our financing obligations and outstanding loans.
Loss on Extinguishment of Debt and Financial Obligations
Loss on extinguishment of debt and financial obligations consists of losses incurred related to the extinguishment of our term loans outstanding prior to the Merger during the three months ended September 30, 2022 and the extinguishment of our financial obligation with third parties during the three months ended September 30, 2023 and 2022.
Other financing and financial instrument expenses, net
Other financing and financial instrument expenses, net primarily consists of expense related to the issuance of shares of common stock and the transfer of warrants upon termination of a convertible note agreement in the three months ended September 30, 2022, and associated legal fees, offset by the remeasurement of the liability related to the Unvested Sponsor Shares.
We account for the arrangement related to the Unvested Sponsor Shares in accordance with ASC 815-40 as equity-linked instruments which are not indexed to the entity’s own stock and accordingly such instruments are liability classified.
34
Provision (Benefit) for Income Taxes
We account for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when management estimates that it is “more-likely-than-not” that deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon future pretax earnings, the reversal of temporary differences between book and tax income, and the expected tax rates in future periods.
We are required to evaluate whether tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax expense in the current year. The amount recognized is subject to estimate and management judgment with respect to the likely outcome of each uncertain tax
position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount that is initially recognized.
We record interest and penalties related to income tax matters in income tax expense.
In accordance with the 2017 Tax Act, research and experimental (R&E) expenses under Internal Revenue Code Section 174 are required to be capitalized beginning in 2022. R&E expenses are required to be amortized over a period of 5 years for domestic expenses and 15 years for foreign expenses.
Results of Operations
Comparison of three months ended September 30, 2023 and 2022
The following table summarizes our results of operations:
| | | | | | | |
|
| Three months ended September 30, |
| ||||
(in thousands) | | 2023 |
| 2022 | | ||
Revenue | |
| | |
| | |
Platform | | $ | 2,066 | | $ | 4,820 | |
Transaction | |
| 2,819 | |
| 2,959 | |
Total revenue | |
| 4,885 | |
| 7,779 | |
Cost of revenue | | | | | | | |
Platform | |
| 1,196 | |
| 4,292 | |
Transaction | |
| 2,521 | |
| 2,644 | |
Depreciation and amortization | |
| 965 | |
| 291 | |
Total cost of revenue | |
| 4,682 | |
| 7,227 | |
Gross profit | |
| 203 | |
| 552 | |
Operating expenses: | | | | | | | |
Research and development | |
| 4,484 | |
| 6,388 | |
Sales and marketing | |
| 1,914 | |
| 2,399 | |
General and administrative | |
| 7,070 | |
| 5,924 | |
Total operating expenses | |
| 13,468 | |
| 14,711 | |
Loss from operations | |
| (13,265) | |
| (14,159) | |
Change in fair value of warrants and convertible promissory notes | |
| 21,025 | |
| 59,822 | |
Interest expense | |
| (3,758) | |
| (3,376) | |
Loss on extinguishment of debt and financial obligations | |
| — | |
| (7,758) | |
Other financing and financial instrument income (costs), net | |
| 1,284 | |
| (1,768) | |
Other income, net | |
| 82 | |
| 2,028 | |
Total other income, net | |
| 18,633 | |
| 48,948 | |
Net income before provision for income taxes | |
| 5,368 | |
| 34,789 | |
Provision (benefit) for income taxes | |
| (4) | |
| — | |
Net income and comprehensive income | | $ | 5,372 | | $ | 34,789 | |
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Revenue
| | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Change |
|
| |||||||
(in thousands) | | 2023 |
| 2022 | | Amount |
| % | | | |||
Platform | | $ | 2,066 | | $ | 4,820 | | $ | (2,754) | | (57) | % | |
Transaction |
| | 2,819 |
| | 2,959 |
| | (140) |
| (5) | % |
|
Total revenue | | $ | 4,885 | | $ | 7,779 | | $ | (2,894) |
| (37) | % | |
Total revenue decreased 37% to $4.9 million for the three months ended September 30, 2023, as compared to $7.8 million for the three months ended September 30, 2022.
Platform revenue decreased 57% to $2.1 million for the three months ended September 30, 2023, as compared to $4.8 million for the three months ended September 30, 2022. The decrease is primarily attributable to the amortization and roll-off of deferred revenue related to legacy Touch contracts.
Transaction revenue decreased 5% to $2.8 million for the three months ended September 30, 2023, as compared to $3.0 million for the three months ended September 30, 2022. This is primarily attributable to lower volume of games being played by restaurant guests, partially offset by increases in pricing for our gaming fees.
Cost of Revenue
| | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Change |
|
| |||||||
(in thousands) | | 2023 |
| 2022 | | Amount |
| % | | | |||
Platform | | $ | 1,196 | | $ | 4,292 | | $ | (3,096) | | (72) | % | |
Transaction |
| | 2,521 |
| | 2,644 |
| | (123) |
| (5) | % |
|
Depreciation and amortization |
| | 965 |
| | 291 |
| | 674 |
| 232 | % |
|
Total costs of revenue | | $ | 4,682 | | $ | 7,227 | | $ | (2,545) |
| (35) | % | |
Cost of revenue decreased 35% to $4.7 million for the three months ended September 30, 2023, as compared to $7.2 million for the three months ended September 30, 2022.
Our Platform cost of revenue consists of four categories:decreased 72% to $1.2 million for the three months ended September 30, 2023, as compared to $4.3 million for the three months ended September 30, 2022. The decrease was in line with the decrease in Platform revenue which impacted product costs, shipping/freightdeferred costs, installation and shipping costs and other costs. Product costs consist primarily of the cost to purchase the hardware and hardware accessories for the Presto Touch products. Shipping/freight costs consist of all costs to transport equipment to customers. Installation costs include the labor cost to install the hardware in each restaurant. Other costs include the amortization of capitalized software and product support costs, as well as certain costs paid to a vendor supporting the development of the vendor’s software and hardware offerings used in the AI Platform.
We also incur costs to refurbish and repair our tablets. These costs are expensed in the period they are incurred, as the costs are expected to be linear and therefore, will match with the timing of revenue recognition over time. In connection with these costs, we also accrue a liability at each reporting period for expected repair costs for customer tablets currently in our Return Merchandize Authorization (“RMA”) process as of the reporting period, which get charged to platform cost of revenue. Our hardware repair expense was higher induring the three and six months ended December 31, 2021 dueSeptember 30, 2023, relative to COVID-related volume, whereby customers sent back tablets either simply to be checked or reset, or for cosmetic reasons or minor repairs.the three months ended September 30, 2022.
Our Transaction cost of revenue consists primarily of the portion of the fees collected from diners that are then paiddecreased 5% to the restaurant as part of the revenue share agreement with each restaurant. As we bear the primary responsibility of the product, we are the principal in the premium content transactions and restaurants act as the agent, whereby we collect all of the fees paid as revenue and remit the revenue share to the restaurants as cost of revenue. The commissions paid to restaurants under our gaming revenue share agreements range on average between 83% - 90% and 83% - 92% of premium content revenue by customer logo$2.5 million for the three and six months ended December 31, 2022, respectively. The commissions paidSeptember 30, 2023, as compared to restaurants under the Company’s gaming revenue share agreements ranged between 81% - 90% and 79% - 96% of premium content revenue by customer logo$2.6 million for the three and six months ended December 31, 2021, respectively.September 30, 2022. The decrease was in line with the decrease in Transaction revenue.
Cost of Revenue — Depreciation and amortization
Our depreciation and amortization in cost of revenue increased by $0.7 million to $1.0 million for the three months ended September 30, 2023 as compared to $0.3 million for the three months ended September 30, 2022 due to an increase in amortization of intangibles of $0.7 million for capitalized software that became ready for its intended use at the end of fiscal year 2023.
Operating Expenses
| | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Change |
|
| |||||||
(in thousands) | | 2023 |
| 2022 | | Amount |
| % | | | |||
Research and development | | $ | 4,484 | | $ | 6,388 | | $ | (1,904) | | (30) | % | |
Sales and marketing |
| | 1,914 |
| | 2,399 |
| | (485) |
| (20) | % |
|
General and administrative |
| | 7,070 |
| | 5,924 |
| | 1,146 |
| 19 | % |
|
Total operating expenses | | $ | 13,468 | | $ | 14,711 | | $ | (1,243) |
| (8) | % | |
Operating expenses decreased by 8% to $13.5 million for the three months ended September 30, 2023, as compared to $14.7 million for the three months ended September 30, 2022.
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Depreciation and impairment cost of revenue consists primarily of the costs of leased assets that are included in property and equipment, net in the balance sheet that are amortized to cost of revenue and related impairment charges.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, customer and warehouse operations, and general and administrative expenses. The largest single component of operating expenses is employee-related expenses, which include salaries, commissions and bonuses, stock-based compensation, and employee benefit and payroll costs.
Research and development. Development
Research and development expenses consistdecreased 30% to $4.5 million for the three months ended September 30, 2023, as compared to $6.4 million for the three months ended September 30, 2022. The decrease resulted primarily from a decrease in salaries and employee benefits expense of employee-related costs associated with maintenance$2.4 million due to a decrease in overall headcount and a decrease in bonuses paid to employees from the acquisition of our platformCyborgOps, Inc for the three months ended September 30, 2022, decrease in professional fees of $0.3 million, and the evaluation and developmentdecrease in other expenses of new product offerings, as well as allocated overhead and expenses associated with the use$0.4 million, offset by an increase of third-party software directly related to preliminary development and maintenance of our products and services. These costs are expensed as incurred unless they meet the requirements for capitalization.$1.3 million in stock-based compensation expense.
We plan to continue to hire employees to support our research and development efforts to expand the capabilities and scope of our platform and related products and services. As a result, we expect that research and development expenses will increase on an absolute dollar basis as we continue to invest to support these activities and innovate over the long-term.
Sales and Marketing.
Sales and marketing expenses consistdecreased 20% to $1.9 million for the three months ended September 30, 2023, as compared to $2.4 million for the three months ended September 30, 2022. The decrease resulted primarily from a decrease in salaries and employee benefits expense of employee-related costs incurred to acquire new customers and increase product adoption across our existing customer base. Marketing expenses also include fees incurred to generate demand through various advertising channels and allocated overhead costs.
We expect that sales and marketing expenses will increase on an absolute dollar basis as we invest to grow our field-based sales team, increase demand generation, and enhance our brand awareness. We expect sales and marketing expenses$0.3 million, as a percentageresult of revenue will vary from period-to-period overa decrease in headcount, and a decrease in professional fees as a result of a public relations fee paid upon the short-term and decrease overcompletion of the long-term.Merger of $0.3 million in the three months ended September 30, 2022, offset by an increase of $0.2 million in stock-based compensation expense.
General and administrative. Administrative
General and administrative expenses consistincreased 19% to $7.1 million for the three months ended September 30, 2023, as compared to $5.9 million for the three months ended September 30, 2022. The increase resulted primarily from an increase of expenses related to facilities, finance, human resources and administrative personnel and systems. General and administrative expenses also include costs related to$1.5 million in professional fees paid for certain professional services, including legal, tax and accounting services and bad debt expenses.
We expect that general and administrative expenses will increase on an absolute dollar basis as we add personnel and enhance our systems, processes, and controls to support the growth of our business as well as our increasedaudit, public company compliance and reporting requirements as a public company. We expect generalother expenses and administrative expenses as a percentagean increase of revenue will vary from period-to-period over the short-term and decrease over the long-term.
Loss on infrequent product repairs. Loss on infrequent product repairs expenses consist primarily of charges incurred in connection with hardware returned for repair or replacement using an RMA. While we have incurred RMA charges in the past, in the three and six months ended December 31, 2021, the volume of repair charges was extremely unusual and very high due to a liquid ingress issue resulting from COVID-19 related actions by our customers. Our devices failed primarily due to the use of extremely strong commercial disinfectant solutions by our customers to clean the hardware devices as a mandatory precaution protocol due to COVID-19. Due to use of commercial cleaning products, the solution leaked into the hardware causing significant damage to the devices and requiring replacement of such devices.
The standard warranty that we provide covers regular wear and tear and does not cover any damage caused by mishandling of the product. However, given the nature of issues, in order to prevent disruption to our customers’ businesses, we incurred approximately $28 thousand and $0.5 million of repair and replacement expenses related to this issue during the three and six months ended December 31, 2021. There were no similar expenses incurred during the three and six months ended December 31, 2022. We have also made a claim to recover the costs from our third-party subcontractor who manufactures the hardware. In June 2022, the Company received a favorable arbitrator ruling related to a matter with its third-party subcontractor and was awarded approximately $11.3$0.2 million in damages related to the Company’s loss on infrequent product repairsdirectors’ and to cover its legal expenses. The award has not met the criteria to be considered realizable asofficers’ insurance fees, offset by a decrease of December 31, 2022. As$0.4 million in stock-based compensation expense and a result, the Company has not recognized any gain related to this settlementdecrease of $0.3 million in its condensed consolidated statement of operationssalaries and comprehensive income (loss).employee benefits expense.
44
Change in Fair Value of Warrants and Convertible Promissory Notes
We account for our warrants in accordance with ASC 815-40 as either liabilities or as equity instruments depending on
| | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Change |
|
| |||||||
(dollars in thousands) | | 2023 |
| 2022 | | Amount |
| % | | | |||
Change in fair value of warrants and convertible promissory notes | | $ | 21,025 | | $ | 59,822 | | $ | (38,797) | | 65 | % | |
During the specific terms of the warrant agreement. Warrants are classified as liabilities when there is variability in the number of shares, and when the variability is not related to an input in the Black-Scholes valuation model. Liability-classified warrants are remeasured at each reporting date until settlement, with changes in the fair value recognized inthree months ended September 30, 2023, the change in fair value of warrants and convertible promissory notes in the condensed consolidated statementwas a gain of operations and comprehensive income (loss). Warrants that meet the fixed-for-fixed criteria or contain variability related$21.0 million, as compared to an input in the Black-Scholes valuation model are classified as equity instruments. Warrants classified as equity instruments are initially recognized at fair value and are not subsequently remeasured.
We elected the fair value option to account for the convertible promissory notes and embedded warrants because we believe it more accurately reflects the valuea gain of the debt in our financial statements. The principal amount of the convertible promissory notes is measured at fair value using the Monte Carlo valuation model. The valuation model utilized various key assumptions, such as enterprise value and the probability of expected future events.
Other Income, Net
Other income, net includes income of $2.0$59.8 million and $2.6 million due to the forgiveness of our PPP loans in the six months ended December 31, 2022 and 2021, respectively. Duringduring the three months ended December 31,September 30, 2022, due to the Company made an investmentwarrants being remeasured, resulting in a non-affiliated entitygain of $21.0 million, driven by a decrease in the amount $2.0 million. The Company has determined that the investment does not have a readily determinable fair value and therefore accounts for the investment at cost, as adjusted for impairments and observableour stock price changes. There were no adjustments recorded for impairments and observable price changes during the three and six months ended December 31,September 30, 2023.
The remeasurement gain recorded during the three months ended September 30, 2022, was primarily driven by two factors. First, immediately prior to the closing of the Merger, the convertible notes and warrants were remeasured to their then fair value of $41.4 million, resulting in a gain on remeasurement of $48.3 million. Second, with the closing of the Merger, the Company assumed $9.4 million of warrant liabilities associated with the private warrants of VTAQ and issued additional warrants with a fair value of $0.8 million. At September 30, 2022, the warrants were remeasured to fair value based on the September 30, 2022 price of our common stock, resulting in $11.6 million gain on remeasurement. The primary factor affecting the change in fair value of the warrants was the assumption of the private warrants, the issuance of additional warrant shares, and the decrease in the Company’s stock price during the three months ended September 30, 2022.
Interest ExpenseCost of Revenue
Interest expense primarily consists
| | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Change |
|
| |||||||
(in thousands) | | 2023 |
| 2022 | | Amount |
| % | | | |||
Platform | | $ | 1,196 | | $ | 4,292 | | $ | (3,096) | | (72) | % | |
Transaction |
| | 2,521 |
| | 2,644 |
| | (123) |
| (5) | % |
|
Depreciation and amortization |
| | 965 |
| | 291 |
| | 674 |
| 232 | % |
|
Total costs of revenue | | $ | 4,682 | | $ | 7,227 | | $ | (2,545) |
| (35) | % | |
Cost of interest incurred on our financing obligations and outstanding loans.
Loss on Extinguishment of Debt and Financial Obligations
Loss on extinguishment of debt and financial obligations consists of losses incurred relatedrevenue decreased 35% to $4.7 million for the extinguishment of our term loans outstanding prior to the Merger during the sixthree months ended December 31, 2022September 30, 2023, as compared to $7.2 million for the three months ended September 30, 2022.
Our Platform cost of revenue decreased 72% to $1.2 million for the three months ended September 30, 2023, as compared to $4.3 million for the three months ended September 30, 2022. The decrease was in line with the decrease in Platform revenue which impacted product deferred costs, installation and the extinguishment of our financial obligation with third party financiersshipping costs during the three months ended December 31, 2022.
Other Financing and Financial Instrument (Costs) Income, Net
Other financing and financial instrument (costs) income, net primarily consists of expense recognized relatedSeptember 30, 2023, relative to the issuancethree months ended September 30, 2022.
Our Transaction cost of shares and the transfer of warrants upon termination of a convertible note agreement and associated legal fees, offset by the remeasurement of the liability relatedrevenue decreased 5% to the unvested founder shares.
We account$2.5 million for the arrangement relatedthree months ended September 30, 2023, as compared to the unvested founder shares in accordance with ASC 815-40 as equity-linked instruments and are not indexed to the entity’s own stock and accordingly such instruments are liability classified.
Provision for Income Taxes
We account for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect$2.6 million for the three months ended September 30, 2022. The decrease was in line with the decrease in Transaction revenue.
Cost of Revenue — Depreciation and amortization
Our depreciation and amortization in cost of revenue increased by $0.7 million to $1.0 million for the three months ended September 30, 2023 as compared to $0.3 million for the three months ended September 30, 2022 due to an increase in amortization of intangibles of $0.7 million for capitalized software that became ready for its intended use at the end of fiscal year in which2023.
Operating Expenses
| | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Change |
|
| |||||||
(in thousands) | | 2023 |
| 2022 | | Amount |
| % | | | |||
Research and development | | $ | 4,484 | | $ | 6,388 | | $ | (1,904) | | (30) | % | |
Sales and marketing |
| | 1,914 |
| | 2,399 |
| | (485) |
| (20) | % |
|
General and administrative |
| | 7,070 |
| | 5,924 |
| | 1,146 |
| 19 | % |
|
Total operating expenses | | $ | 13,468 | | $ | 14,711 | | $ | (1,243) |
| (8) | % | |
Operating expenses decreased by 8% to $13.5 million for the differences are expectedthree months ended September 30, 2023, as compared to affect taxable income. A valuation allowance is established when management estimates that it is more likely than not that deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon future pretax earnings,$14.7 million for the reversal of temporary differences between book and tax income, and the expected tax rates in future periods.
We are required to evaluate whether tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. The amount recognized is subject to estimate and management judgment with respect to the likely outcome of eachthree months ended September 30, 2022.
4536
uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount that is initially recognized.Research and Development
We record interestResearch and penalties relateddevelopment expenses decreased 30% to income tax matters in income tax expense.
Results of Operations
Comparison of the Three and Six Months Ended December 31, 2022 and 2021
The following table summarizes our results of operations:
| | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Six months ended December 31, |
| ||||||||
(in thousands) | | 2022 |
| 2021 | | 2022 |
| 2021 | | ||||
Revenue | |
| | |
| | |
| | |
| | |
Platform | | $ | 4,131 | | $ | 5,134 | | $ | 8,529 | | $ | 9,671 | |
Transaction | |
| 3,221 | |
| 2,562 | |
| 6,180 | |
| 5,254 | |
Total revenue | |
| 7,352 | |
| 7,696 | |
| 14,709 | |
| 14,925 | |
Cost of revenue | |
| | | | | | | | | | | |
Platform | |
| 4,219 | |
| 3,793 | |
| 8,208 | |
| 7,815 | |
Transaction | |
| 2,833 | |
| 2,230 | |
| 5,477 | |
| 4,564 | |
Depreciation and impairment | |
| 291 | |
| 461 | |
| 582 | |
| 927 | |
Total cost of revenue | |
| 7,343 | |
| 6,484 | |
| 14,267 | |
| 13,306 | |
Gross profit | |
| 9 | |
| 1,212 | |
| 442 | |
| 1,619 | |
Operating expenses: | |
|
| |
| | | | | | | | |
Research and development | |
| 5,112 | |
| 3,805 | |
| 11,381 | |
| 7,806 | |
Sales and marketing | |
| 2,227 | |
| 1,651 | |
| 4,626 | |
| 2,825 | |
General and administrative | |
| 6,276 | |
| 2,158 | |
| 12,200 | |
| 4,132 | |
Loss on infrequent product repairs | |
| — | |
| 28 | |
| — | |
| 463 | |
Total operating expenses | |
| 13,615 | |
| 7,642 | |
| 28,207 | |
| 15,226 | |
Loss from operations | |
| (13,606) | |
| (6,430) | |
| (27,765) | |
| (13,607) | |
Change in fair value of warrants and convertible promissory notes | |
| (378) | |
| (16,196) | |
| 59,444 | |
| (29,770) | |
Interest expense | |
| (3,030) | |
| (868) | |
| (6,406) | |
| (2,256) | |
Loss on extinguishment of debt and financial obligations | |
| (337) | |
| — | |
| (8,095) | |
| — | |
Other financing and financial instrument (costs) income, net | |
| — | |
| — | |
| (1,768) | |
| — | |
Other income, net | |
| 327 | |
| 11 | |
| 2,355 | |
| 2,641 | |
Total other income (expense), net | |
| (3,418) | |
| (17,053) | |
| 45,530 | |
| (29,385) | |
Income (loss) before provision for income taxes | |
| (17,024) | |
| (23,483) | |
| 17,765 | |
| (42,992) | |
Provision for income taxes | |
| 5 | |
| 24 | |
| 5 | |
| 24 | |
Net income (loss) and comprehensive income (loss) | | $ | (17,029) | | $ | (23,507) | | $ | 17,760 | | $ | (43,016) | |
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three months ended December 31, | | Change |
|
| Six months ended December 31, |
| Change |
|
| ||||||||||||||
(in thousands) | | 2022 |
| 2021 | | Amount |
| % | | | 2022 |
| 2021 | | Amount |
| % | | | ||||||
Platform | | $ | 4,131 | | $ | 5,134 | | $ | (1,003) | | (20) | % | | $ | 8,529 | | $ | 9,671 | | $ | (1,142) | | (12) | % | |
Transaction |
| | 3,221 |
| | 2,562 |
| | 659 |
| 26 | % |
| | 6,180 |
| | 5,254 |
| | 926 |
| 18 | % |
|
Total revenue | | $ | 7,352 | | $ | 7,696 | | $ | (344) | | (4) | % | | $ | 14,709 | | $ | 14,925 | | $ | (216) |
| (1) | % | |
Total revenue decreased 4% to $7.4$4.5 million for the three months ended December 31, 2022,September 30, 2023, as compared to $7.7$6.4 million for the three months ended December 31, 2021.September 30, 2022. The decrease resulted primarily from a decrease in salaries and employee benefits expense of $2.4 million due to a decrease in overall headcount and a decrease in bonuses paid to employees from the acquisition of CyborgOps, Inc for the three months ended September 30, 2022, decrease in professional fees of $0.3 million, and decrease in other expenses of $0.4 million, offset by an increase of $1.3 million in stock-based compensation expense.
Platform revenueSales and Marketing
Sales and marketing expenses decreased 20% to $4.1$1.9 million for the three months ended December 31, 2022,September 30, 2023, as compared to $5.1$2.4 million for the three months ended December 31, 2021.September 30, 2022. The decrease isresulted primarily attributablefrom a decrease in salaries and employee benefits expense of $0.3 million, as a result of a decrease in headcount, and a decrease in professional fees as a result of a public relations fee paid upon the completion of the Merger of $0.3 million in the three months ended September 30, 2022, offset by an increase of $0.2 million in stock-based compensation expense.
General and Administrative
General and administrative expenses increased 19% to contract terminations by a limited number of franchisees of existing enterprise customers.
46
Transaction revenue increased 26% to $3.2$7.1 million for the three months ended December 31, 2022,September 30, 2023, as compared to $2.6$5.9 million for the three months ended December 31, 2021. This is due to increasesSeptember 30, 2022. The increase resulted primarily from an increase of $1.5 million in pricingprofessional fees for the Company’s gaminglegal, audit, public company compliance and other expenses and an increase of $0.2 million in directors’ and officers’ insurance fees, offset by a decrease of $0.4 million in the first quarterstock-based compensation expense and a decrease of fiscal year 2023.$0.3 million in salaries and employee benefits expense.
Change in Fair Value of Warrants and Convertible Promissory Notes
Total revenue decreased 1% to $14.7 million for
| | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Change |
|
| |||||||
(dollars in thousands) | | 2023 |
| 2022 | | Amount |
| % | | | |||
Change in fair value of warrants and convertible promissory notes | | $ | 21,025 | | $ | 59,822 | | $ | (38,797) | | 65 | % | |
During the sixthree months ended December 31, 2022,September 30, 2023, the change in fair value of warrants and convertible promissory notes was a gain of $21.0 million, as compared to $14.9a gain of $59.8 million forduring the sixthree months ended December 31, 2021.
Platform revenue decreased 12%September 30, 2022, due to $8.5the warrants being remeasured, resulting in a gain of $21.0 million, fordriven by a decrease in our stock price during the sixthree months ended December 31, 2022, as compared to $9.7 million forSeptember 30, 2023.
The remeasurement gain recorded during the sixthree months ended December 31, 2021.September 30, 2022, was primarily driven by two factors. First, immediately prior to the closing of the Merger, the convertible notes and warrants were remeasured to their then fair value of $41.4 million, resulting in a gain on remeasurement of $48.3 million. Second, with the closing of the Merger, the Company assumed $9.4 million of warrant liabilities associated with the private warrants of VTAQ and issued additional warrants with a fair value of $0.8 million. At September 30, 2022, the warrants were remeasured to fair value based on the September 30, 2022 price of our common stock, resulting in $11.6 million gain on remeasurement. The primary factor affecting the change in fair value of the warrants was the assumption of the private warrants, the issuance of additional warrant shares, and the decrease was attributable to contract terminations by a limited number of franchisees of existing enterprise customers.
Transaction revenue increased 18% to $6.2 million forin the sixCompany’s stock price during the three months ended December 31, 2022, as compared to $5.3 million for the six months ended December 31, 2021. This is due to increases in pricing for the Company’s gaming fees in the first quarter of fiscal year 2023.September 30, 2022.
At present, the substantial majority of our revenue is generated from our three largest customers (including, as applicable, the franchisees of such restaurants aggregated as a single customer for reporting purposes), which in the three and six months ended December 31, 2022 generated an aggregate of approximately, 96% and 97% of our revenue, respectively, while for the three and six months ended December 31, 2021, they generated an aggregate of approximately, 89% and 94%. The successful renewal of our agreements with those customers is critical to our near-term results of operations and is dependent on product execution, key customer relationships, and in part, the health of the franchisees of some of our customers that have a predominantly franchised model. Although we experienced customer relationship cancellations with the enterprise and certain associated franchisees, the most significant franchisee relationships are still in business and have renewed with us with existing equipment. Some of these agreements are subject to renewal in calendar year 2023.
Cost of Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Change |
|
| Six months ended December 31, |
| Change |
|
|
| Three months ended September 30, |
| Change |
|
| |||||||||||||||||||||
(in thousands) | | 2022 |
| 2021 | | Amount |
| % | | | 2022 |
| 2021 | | Amount |
| % | | | | 2023 |
| 2022 | | Amount |
| % | | | |||||||||
Platform | | $ | 4,219 | | $ | 3,793 | | $ | 426 | | 11 | % | | $ | 8,208 | | $ | 7,815 | | $ | 393 | | 5 | % | | | $ | 1,196 | | $ | 4,292 | | $ | (3,096) | | (72) | % | |
Transaction |
| | 2,833 |
| | 2,230 |
| | 603 |
| 27 | % |
| | 5,477 |
| | 4,564 |
| | 913 |
| 20 | % |
|
| | 2,521 |
| | 2,644 |
| | (123) |
| (5) | % |
|
Depreciation and impairment |
| | 291 |
| | 461 |
| | (170) |
| (37) | % |
| | 582 |
| | 927 |
| | (345) |
| (37) | % |
| |||||||||||||
Depreciation and amortization |
| | 965 |
| | 291 |
| | 674 |
| 232 | % |
| |||||||||||||||||||||||||
Total costs of revenue | | $ | 7,343 | | $ | 6,484 | | $ | 859 |
| 13 | % | | $ | 14,267 | | $ | 13,306 | | $ | 961 |
| 7 | % | | | $ | 4,682 | | $ | 7,227 | | $ | (2,545) |
| (35) | % | |
Cost of revenue increased 13%decreased 35% to $7.3$4.7 million for the three months ended December 31, 2022,September 30, 2023, as compared to $6.5$7.2 million for the three months ended December 31, 2021.September 30, 2022.
Our platformPlatform cost of revenue increased 11%decreased 72% to $4.2$1.2 million for the three months ended December 31, 2022,September 30, 2023, as compared to $3.8$4.3 million for the three months ended December 31, 2021.September 30, 2022. The increasedecrease was primarily attributable to in line with the decrease in Platform revenue which impactedincreases in product deferred costs, installation and shipping costs during the three months ended December 31, 2022,September 30, 2023, relative to the three months ended December 31, 2021.September 30, 2022.
Our transactionTransaction cost of revenue increased 27%decreased 5% to $2.8$2.5 million for the three months ended December 31, 2022,September 30, 2023, as compared to $2.2$2.6 million for the three months ended December 31, 2021.September 30, 2022. The increasedecrease was primarily attributable to increases in line with the revenue share owed to restaurants as a result of increasesdecrease in pricing for the Company’s gaming fees.Transaction revenue.
Cost of revenue increased 7% to $14.3 million for the six months ended December 31, 2022, as compared to $13.3 million for the six months ended December 31, 2021.
Our platform cost of revenue increased 5% to $8.2 million for the six months ended December 31, 2022, as compared to $7.8 million for the six months ended December 31, 2021. The increase was primarily attributable to increases in installation and shipping costs during the six months ended December 31, 2022, relative to the six months ended December 31, 2021.
Our transaction cost of revenue increased 20% to $5.5 million for the six months ended December 31, 2022, as compared to $4.6 million for the six months ended December 31, 2021. The increase was primarily attributable to increases in the revenue share owed to restaurants as a result of increases in pricing for the Company’s gaming fees.
47
Cost of Revenue — Depreciation and Impairmentamortization
Our depreciation and impairmentamortization in cost of revenue decreased 37%increased by $0.7 million to $1.0 million for the three and six months ended December 31, 2022, respectively,September 30, 2023 as compared to $0.3 million and $0.6 million from $0.5 million and $0.9 million duringfor the three and six months ended December 31, 2021, respectively. The decreases were primarily attributableSeptember 30, 2022 due to an increase in amortization of intangibles of $0.7 million for capitalized software that became ready for its intended use at the returnend of leased tablets in fiscal year 2022, which resulted in a lower amount of tablets in use and being depreciated.2023.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Change |
|
| Six months ended December 31, |
| Change |
|
| ||||||||||||||
(in thousands) | | 2022 |
| 2021 | | Amount |
| % | | | 2022 |
| 2021 | | Amount |
| % | | | ||||||
Research and development | | $ | 5,112 | | $ | 3,805 | | $ | 1,307 | | 34 | % | | $ | 11,381 | | $ | 7,806 | | $ | 3,575 | | 46 | % | |
Sales and marketing |
| | 2,227 |
| | 1,651 |
| | 576 |
| 35 | % |
| | 4,626 |
| | 2,825 |
| | 1,801 |
| 64 | % |
|
General and administrative |
| | 6,276 |
| | 2,158 |
| | 4,118 |
| 191 | % |
| | 12,200 |
| | 4,132 |
| | 8,068 |
| 195 | % |
|
Loss on infrequent product repairs |
| | — |
| | 28 |
| | (28) |
| (100) | % |
| | — |
| | 463 |
| | (463) |
| (100) | % |
|
Total operating expenses | | $ | 13,615 | | $ | 7,642 | | $ | 5,973 |
| 78 | % | | $ | 28,207 | | $ | 15,226 | | $ | 12,981 |
| 85 | % | |
| | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Change |
|
| |||||||
(in thousands) | | 2023 |
| 2022 | | Amount |
| % | | | |||
Research and development | | $ | 4,484 | | $ | 6,388 | | $ | (1,904) | | (30) | % | |
Sales and marketing |
| | 1,914 |
| | 2,399 |
| | (485) |
| (20) | % |
|
General and administrative |
| | 7,070 |
| | 5,924 |
| | 1,146 |
| 19 | % |
|
Total operating expenses | | $ | 13,468 | | $ | 14,711 | | $ | (1,243) |
| (8) | % | |
Operating expenses increaseddecreased by 78%8% to $13.6$13.5 million for the three months ended December 31, 2022,September 30, 2023, as compared to $7.6$14.7 million for the three months ended December 31, 2021.September 30, 2022.
Operating expenses increased by 85% to $28.2 million for the six months ended December 31, 2022, as compared to $15.2 million for the six months ended December 31, 2021.36
Research and Development
Research and development expenses increased 34%decreased 30% to $5.1$4.5 million for the three months ended December 31, 2022,September 30, 2023, as compared to $3.8$6.4 million for the three months ended December 31, 2021.September 30, 2022. The increasedecrease resulted primarily from an increasea decrease in salaries and employee benefits expense of $0.7$2.4 million asdue to a resultdecrease in overall headcount and a decrease in bonuses paid to employees from the acquisition of an increaseCyborgOps, Inc for the three months ended September 30, 2022, decrease in headcountprofessional fees of $0.3 million, and decrease in other expenses of $0.4 million, offset by an increase of $0.4$1.3 million ofin stock-based compensation expense.
Research and development expenses increased 46% to $11.4 million for the six months ended December 31, 2022, as compared to $7.8 million for the six months ended December 31, 2021. The increase resulted primarily from an increase in salaries and employee benefits expense of $2.6 million and an increase to stock-based compensation expense of $0.5 million, both as a result of an increase in our headcount.
Sales and Marketing
Sales and marketing expenses increased 35%decreased 20% to $2.2$1.9 million for the three months ended December 31, 2022,September 30, 2023, as compared to $1.7$2.4 million for the three months ended December 31, 2021.September 30, 2022. The increasedecrease resulted primarily from an increasea decrease in salaries and employee benefits expense of $0.4$0.3 million, as a result of an increasea decrease in headcount.
Salesheadcount, and marketing expenses increased 64% to $4.6 million for the six months ended December 31, 2022, as compared to $2.8 million for the six months ended December 31, 2021. The increase resulted primarily from an increasea decrease in salaries and employee benefits expense of $1.1 million,professional fees as a result of an increase in headcount, and a public relations fee paid upon the completion of the Merger of $0.3 million in the sixthree months ended December 31, 2022.September 30, 2022, offset by an increase of $0.2 million in stock-based compensation expense.
General and Administrative
General and administrative expenses increased 191%19% to $6.3$7.1 million for the three months ended December 31, 2022,September 30, 2023, as compared to $2.2 $5.9 million for the three months ended December 31, 2021.September 30, 2022. The increase resulted primarily from an increase of $1.5 million in professional fees for legal, expense, accounting services expenseaudit, public company compliance and temporary servicesother expenses of $1.7 million,and an increase of $0.2 million in directors’ and officers’ insurance fees, offset by a decrease of $0.4 million in stock-based compensation expense and a decrease of $1.5$0.3 million and an increase of salaries and employee benefits expense of $0.4 million.
General and administrative expenses increased 195% to $12.2 million for the six months ended December 31, 2022, as compared to $4.1 million for the six months ended December 31, 2021. The increase resulted primarily from an increase in stock-
48
based compensation expense of $3.3 million, and an increase in legal expense, accounting services expense and temporary services expenses of $2.8 million, $0.8 million of which are ancillary professional services fees in preparation for the Merger, an increase in salaries and employee benefits expense of $1.4 million as a result of increased headcount, and an increase in insurance expense of $0.4 million.
Loss on Infrequent Product Repairs
We had no loss on infrequent product repairs for the three and six months ended December 31, 2022, as compared to $28 thousand and $0.5 million for the three and six months ended December 31, 2021, respectively. The decrease is due to the decrease in the repair and replacement expenses related to damage caused to hardware caused by our customers’ use of extremely strong commercial disinfectant solutions to clean the hardware devices as a mandatory precaution protocol due to COVID-19 in the six months ended December 31, 2022 and compared to the six months ended December 31, 2021.expense.
Change in Fair Value of Warrants and Convertible Promissory Notes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Change |
|
| Six months ended December 31, |
| Change |
|
|
| Three months ended September 30, |
| Change |
|
| |||||||||||||||||||||
(dollars in thousands) | | 2022 |
| 2021 | | Amount |
| % | | | 2022 |
| 2021 | | Amount |
| % | | | | 2023 |
| 2022 | | Amount |
| % | | | |||||||||
Change in fair value of warrants and convertible promissory notes | | $ | (378) | | $ | (16,196) | | $ | 15,818 | | 98 | % | | $ | 59,444 | | $ | (29,770) | | $ | 89,214 | | 300 | % | | | $ | 21,025 | | $ | 59,822 | | $ | (38,797) | | 65 | % | |
During the three months ended December 31, 2022,September 30, 2023, the change in fair value of warrants and convertible promissory notes was a lossgain of $0.4$21.0 million, as compared to a lossgain of $16.2$59.8 million during the three months ended December 31, 2021, primarilySeptember 30, 2022, due to the fact that allwarrants being remeasured, resulting in a gain of the convertible promissory notes converted due to the consummation of the Merger on September 21, 2022. During$21.0 million, driven by a decrease in our stock price during the three months ended December 31, 2021, all of the Company’s outstanding convertible promissory notes and liability classified warrants were subject to remeasurement as such instruments were accounted for at fair value.September 30, 2023.
In the six months ended December 31, 2022, the change in fair value of warrants and convertible promissory notes changed due to a gain of $59.4 million, as compared to a loss of $29.8 million in the six months ended December 31, 2021.
The remeasurement gain recorded during the sixthree months ended December 31,September 30, 2022, was primarily driven by two factors. First, immediately prior to the closing of the Merger, the convertible notes and embedded warrants were remeasured to their then fair value of $41.4 million, resulting in a gain on remeasurement of $48.3 million. Second, with the closeclosing of the Merger, the Company assumed $9.4 million of warrant liabilities associated with the legacy private warrants of VTAQ and issued additional warrants with a fair value of $0.8 million. As of December 31,At September 30, 2022, all of the Company’s liability classified warrants were remeasured to fair value based on the December 31,September 30, 2022 price of our common stock, price, resulting in an $11.2$11.6 million gain on remeasurement for the six months ended December 31, 2022.remeasurement. The primary factor affecting the change in fair value of the warrants was the assumption of the Private Warrants,private warrants, the issuance of additional warrant shares, and the decrease in the Company’s stock price during the sixthree months ended December 31,September 30, 2022.
During the six months ended December 31, 2021, the convertible notes and embedded warrants had a change in fair value resulting in a loss of $29.8 million, reflecting the increased stock price of the then privately held entity. Such increases to the stock price were in contemplation of the anticipated Merger.
Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Change | |
| Six months ended December 31, |
| Change | |
|
| Three months ended September 30, |
| Change | |
| |||||||||||||||||||||
(dollars in thousands) | | 2022 |
| 2021 | | Amount |
| % | | | 2022 |
| 2021 | | Amount |
| % | | | | 2023 |
| 2022 | | Amount |
| % | | | |||||||||
Interest expense | | $ | 3,030 | | $ | 868 | | $ | 2,162 | | 249 | % | | $ | 6,406 | | $ | 2,256 | | $ | 4,150 | | 184 | % | | | $ | 3,758 | | $ | 3,376 | | $ | 382 | | 11 | % | |
Interest expense increased 249%11% to $3.0$3.8 million for the three months ended December 31, 2022,September 30, 2023, as compared to $0.9$3.4 million for the three months ended December 31, 2021, while interest expense increased 184% to $6.4 million for the six months ended December 31, 2022, as compared to $2.3 million for the six months ended December 31, 2021.September 30, 2022. The increase was due to the Companyus having higher interest-bearing term loan debt outstanding during the three and six months ended December 31, 2022September 30, 2023 as compared to the three and six months ended December 31, 2021.
September 30, 2022.
4937
Loss on Extinguishment of Debt and Financial Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Change | |
| Six months ended December 31, |
| Change | |
|
| Three months ended September 30, |
| Change | |
| |||||||||||||||||||||
(dollars in thousands) | | 2022 |
| 2021 | | Amount |
| % | | | 2022 |
| 2021 | | Amount |
| % | | | | 2023 |
| 2022 | | Amount |
| % | | | |||||||||
Loss on extinguishment of debt and financial obligations | | $ | 337 | | $ | — | | $ | 337 | | N/A | | | $ | 8,095 | | $ | — | | $ | 8,095 | | N/A | | | | $ | — | | $ | 7,758 | | $ | (7,758) | | (100) | | |
Loss on extinguishment of debt and financial obligations was $0.3 and $8.1 milliondecreased 100% for the three and six months ended December 31, 2022, as compared to zero forSeptember 30, 2023 with a loss of $7.8 million recorded in the three and six months ended December 31, 2021.September 30, 2022. The increasechange is due to the Company’s loss on the extinguishment of its term loans outstanding prior to the Merger during six months ended December 31, 2022 in the amount of $7.8 million. Further during the three and six months ended December 31, 2022, the Company recorded a loss of $0.3 million related to the extinguishment of certain financing obligations.Merger.
Other Financing and Financial Instrument (Costs) Income, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three months ended December 31, |
| Change | |
| Six months ended December 31, |
| Change | |
|
| Three months ended September 30, |
| Change | |
| |||||||||||||||||||||
(dollars in thousands) | | 2022 |
| 2021 | | Amount |
| % | | | 2022 |
| 2021 | | Amount |
| % | | | | 2023 |
| 2022 | | Amount |
| % | | | |||||||||
Other financing and financial instrument (costs) income, net | | $ | — | | $ | — | | $ | — | | N/A | | | $ | (1,768) | | $ | — | | $ | (1,768) | | N/A | | | |||||||||||||
Other financing and financial instrument income (costs), net | | $ | 1,284 | | $ | (1,768) | | $ | 3,052 | | (173) | | |
Other financing and financial instrument costs, net were $1.8 millioncost increased 173% for the sixthree months ended December 31, 2022September 30, 2023 due to the Company’s expense related to$1.3 million of income from the remeasurement of the Unvested Sponsor Shares liability for the three months ended September 30, 2023. During the three months ended September 30, 2022, we incurred $2.4 million of expense related to the issuance of shares of common stock and transfer of warrants upon termination of a convertible note agreement and $0.5 million of associated legal fees, partially offset by $1.2 million of income from the remeasurement of the unvested founder shares liability.Unvested Sponsor Shares liability for the three months ended September 30, 2022.
Other Income, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Three months ended December 31, |
| Change | |
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| Change | |
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| Three months ended September 30, |
| Change | |
| |||||||||||||||||||||
(dollars in thousands) | | 2022 |
| 2021 | | Amount |
| % | | | 2022 |
| 2021 | | Amount |
| % | | | | 2023 |
| 2022 | | Amount |
| % | | | |||||||||
Other income, net | | $ | 327 | | $ | 11 | | $ | 316 | | 2,873 | % | | $ | 2,355 | | $ | 2,641 | | $ | (286) | | (11) | % | | | $ | 82 | | $ | 2,028 | | $ | (1,946) | | (96) | % | |
Other income, net increaseddecreased to $0.3$0.1 million for the three months ended December 31, 2022,September 30, 2023, as compared to $11 thousandother income, net of $2.0 million for the three months ended December 31, 2021.September 30, 2022. The increasedecrease was primarily due to interest earned on proceeds received from the Merger which were held in money market accounts during the three months ended December 31, 2022.
Other income, net decreased to $2.4 million for the six months ended December 31, 2022, as compared to $2.6 million for the six months ended December 31, 2021. The gains were primarily due to the forgiveness of our PPP loansloan during the sixthree months ended December 31, 2022 and 2021, respectively.September 30, 2022.
Provision for Income Taxes
Provision for income taxes was not material in the three and six months ended December 31, 2022September 30, 2023 and 2021.2022.
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Liquidity and Capital Resources
As of December 31, 2022September 30, 2023 and June 30, 2022,2023, our principal sources of liquidity were cash and cash equivalents of $38.2$3.3 million and $3.0$15.1 million, respectively, which were held for working capital purposes. This excludes $10.0 million of restricted cash as of September 30, 2023 and June 30, 2023.
Since inception, we have financed our operations primarily through financing transactions such as the issuance of convertible promissory notes and loans, and sales of convertible preferred stock and common stock. We have incurred recurring operating losses since our inception, including operating losses of $27.8$13.3 million and $13.6$14.2 million for the sixthree months ended December 31,September 30, 2023 and 2022, and 2021, respectively. As of December 31, 2022September 30, 2023 and June 30, 2022, we had an accumulated deficit of $183.0$229.9 million and $200.8$235.3 million, respectively, and we expect to continue to generate operating losses for the near term. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from customers and other risks.
While we received cash of $49.8 million from the completion of the Merger and net cash of $13.7$16.7 million from the issuance of the Credit Agreement and concurrent repaymentsubsequent Third Amendment and received $12.5 million from the sale of other debt obligations,common stock in private placements and expect to receive $7 million from the closing of the private placement on November 17, 2023, additional capital infusion will be
50
necessary in order to fund currently anticipated expenditures, and to meet our obligations as they come due.
Substantial doubt exists about our ability to continue as a going concern within one year after the date that the financial statements are available to be issued. Our future capital requirements will depend on many factors, including the revenue growth rate, subscription renewal activity, billing frequency, the success of future product development, and the timing and extent of spending to support further sales and marketing and research and development efforts.
While the Merger and concurrent debt financing improved our financial position, in the future we expect to require additional funding from either public or private financing sources. These plans for additional financings are intended to mitigate the conditions or events that raise this substantial doubt about our ability to continue as a going concern,, however, as some aspects of the planplans are outside of our control, we cannot ensure they will be effectively implemented. In the event that additional financing is required from outside sources, weWe cannot be sure that any additional financing will be available to us on acceptable terms if at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be materially and adversely affected. As a result, substantial doubt exists about our ability to continue as a going concern within one year after the date that the financial statements are available to be issued. Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Summary of Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Six months ended December 31, |
| Change | |
| Three months ended September 30, |
| Change | | ||||||||||||||
(in thousands) | | 2022 |
| 2021 | | $ |
| % | | | 2023 |
| 2022 | | $ |
| % | | ||||||
Net cash (used in) operating activities | | $ | (26,561) | | $ | (30,291) | | $ | 3,730 | | (12) | % | | $ | (10,525) | | $ | (11,156) | | $ | 631 | | 6 | % |
Net cash (used in) investing activities |
| | (4,630) |
| | (896) |
| | (3,734) |
| 417 | |
| | (1,281) |
| | (1,374) |
| | 93 |
| 7 | |
Net cash provided by (used in) financing activities |
| | 66,385 |
| | (86) |
| | 66,471 |
| (77,292) | | ||||||||||||
Net cash (used in) provided by financing activities |
| | (52) |
| | 68,762 |
| | (68,814) |
| (100) | | ||||||||||||
Net increase (decrease) in cash | | $ | 35,194 | | $ | (31,273) | | $ | 66,467 | | (213) | % | | $ | (11,858) | | $ | 56,232 | | $ | (68,090) | | (121) | % |
Operating Activities
For the sixthree months ended December 31, 2022,September 30, 2023, net cash used in operating activities decreased by 12%6%, from $26.6to $10.5 million, as compared to $11.2 million for the sixthree months ended December 31, 2022, as compared to $30.3 million for the six months ended December 31, 2021.September 30, 2022.
For the sixthree months ended December 31, 2022,September 30, 2023, net cash used in operating activities was $26.6$10.5 million. This consisted of our net income of $17.8 million and a net use of cash from changes in operating assets and liabilities of $3.0$0.7 million and non-cash adjustments of $15.2 million, partially offset by adjustments for non-cash gains,our net income of $41.3$5.4 million. The net use of cash from changes in operating assets and liabilities primarily relaterelates to a increase in accounts receivable of $1.1 million, an increase in prepaids and other current assets of $1.2 million, a decrease in accrued liabilities of $2.1 million and a decrease in deferred revenue of $6.6 million. Such uses of cash were partially offset by a decrease in deferred costs of $6.3 million and a decrease in accounts payable of $1.4 million.$1.9 million, partially offset by an increase in accrued liabilities of $0.6 million and a decrease of $0.5 million in prepaid expenses and other current assets. The non-cash adjustments primarily relate to gains associated with changes in the fair value of warrants and convertible promissory notes of $21.0 million and changes in the fair value of Unvested Sponsor Shares liability of $1.3 million, partially offset by stock-based compensation expense of $2.1 million, paid in-kind interest expense of $1.2 million, earnout share stock-based compensation expense of $1.4 million, amortization of debt discount and debt issuance costs of $1.3 million, and depreciation and amortization of $1.0 million.
For the three months ended September 30, 2022, net cash used in operating activities was $11.2 million. This consisted of adjustments for non-cash charges of $48.2 million partially offset by net income of $34.8 million and net proceeds of cash from changes in operating assets and liabilities of $2.3 million. The net proceeds of cash from changes in operating assets and liabilities primarily relate to decreases in deferred costs of $3.5 million and increases in accrued liabilities of $0.5 million, partially offset by
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decreases in deferred revenue of $3.4 million and an increase in accounts payable of $1.7 million. The non-cash adjustments primarily relate to the change in fair value of warrants and convertible promissory notes of $48.3 million, and change in fair value of our liability-classifiedliability classified warrants of $11.2$11.6 million, forgiveness of our outstanding PPP loan of $2.0 million, and change in fair value of unvested founder sharesUnvested Sponsor Shares liability of $1.2 million, partially offset by loss on debt extinguishment of debt and financing obligations of $8.1 million,earnout share stock-based compensation expense of $3.0$0.2 million, paid in-kind interestother stock-based compensation expense of $2.4$2.2 million, share and warrant cost on termination of convertible note agreement of $2.4 million, earnout share stock-based compensation expenseloss on debt extinguishment of $1.9$7.8 million, and amortization of debt discount and debt issuance costs of $1.9 million, and depreciation, amortization and impairment of $0.8 million,.$1.4 million.
For the six months ended December 31, 2021, net cash used in operating activities was $30.3 million. This consisted of our net loss of $43.0 million and a net use of cash from changes in operating assets and liabilities of $16.5 million partially offset by adjustments for non-cash charges of $29.2 million. The net use of cash from changes in operating assets and liabilities primarily relate to decreases in deferred revenue of $7.3 million, vendor financing facility of $6.8 million, accounts payable of $4.8 million and accrued liabilities of $2.7 million, partially offset by decreases in deferred costs of $6.0 million. The non-cash adjustments primarily relate to change in fair value of convertible promissory notes of $26.9 million, change in fair value of our liability-classified warrants of $2.8 million, depreciation and amortization of $1.1 million and stock-based compensation expense of $1.0 million, partially offset by forgiveness of one of our PPP loans of $2.6 million.
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Investing Activities
For the sixthree months ended December 31, 2022,September 30, 2023, net cash used in investing activities increased from $4.6decreased to $1.3 million, as compared to $1.4 million for the sixthree months ended December 31, 2022, as compared to $0.9 million for the six months ended December 31, 2021.September 30, 2022.
For the sixthree months ended December 31, 2022,September 30, 2023, cash used in investing activities was $4.6 million which primarily consisted of cash outflows for capitalized software of $2.5 million and a cash outflow for an investment in non-affiliate of $2.0$1.2 million.
For the sixthree months ended December 31, 2021,September 30, 2022, cash used in investing activities was $0.9 million which primarily consisted of cash outflows for capitalized software of $0.8$1.3 million.
Financing Activities
For the sixthree months ended December 31, 2022,September 30, 2023, net cash provided byused in financing activities increased $66.5decreased to $0.1 million of cash, as compared to $66.4$68.8 million of cash provided by financing activities for the sixthree months ended December 31, 2022, as compared to $0.1 millionSeptember 30, 2022.
For the three months ended September 30, 2023, cash used in financing activities forwas $0.1 million, which consisted primarily of principal payments of financing obligations of $0.3 million, partially offset by proceeds from the sixexercise of stock options of $0.2 million.
For the three months ended December 31, 2021.
For the six months ended December 31,September 30, 2022, cash provided by financing activities was $66.4$68.8 million, which consisted primarily of proceeds from the issuance of term loans of $60.3 million, contributions from the Merger and PIPE financing, net of transaction costs, of $49.8 million, proceeds from the issuance of common stock of $1.0 million, partially offset by repayment of term loans of $33.0 million, penalties and other costs on extinguishment of debt of $6.1$5.7 million, payment of deferred transactions costs of $1.9 million,and principal payments of financing obligations of $2.7$0.9 million, and payment of debt issuance costs of $1.1 million, and payment of deferred transactions costs of $1.7 million.
For the six months ended December 31, 2021, cash usedCapital Raise
On November 17, 2023, we entered into agreements with a related party Remus Capital-affiliated syndicate of investors to sell 7,000,000 shares of our common stock in financing activities was $0.1 million, which consisted primarilya registered offering that resulted in gross proceeds of payments of financing obligations of $1.0 million and payments of deferred transaction costs of $0.1 million, partially offset by proceeds fromapproximately $7.0 million. The offering also includes the issuance to a related party Remus Capital-affiliated investor who led the investment round of convertible promissory notesan additional 750,000 shares, for a total of $0.5 million7,750,000 shares issued in the offering. The offering is expected to close on November 21, 2023.
The offering of our securities triggered anti-dilution provisions in the Purchase Agreement with Presto CA, LLC and the Third Amendment Conversion Warrants. We agreed with each of CA and the Lenders that the “New Issuance Price” (as defined in the Purchase Agreement and Third Amendment Conversion Warrants, respectively) would be $1.00. As a result, we were required to issue an additional 1,500,000 shares to CA and increase the amount of common stock issuable upon the exercise of the Third Amendment Conversion Warrants from the issuance3,000,000 shares to 6,000,000 shares.
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Financing Obligations
As of December 31, 2022September 30, 2023 and June 30, 2022,2023, the Company’s financing obligations consisted of the following:
| | | | | | | | | | | | |
|
| As of December 31, |
| As of June 30, |
| As of September 30, |
| As of June 30, | ||||
(in thousands) | | | 2022 | | | 2022 | | | 2023 | | | 2023 |
Receivable financing facility | | $ | 4,628 | | $ | 5,911 | | $ | 3,820 | | $ | 4,067 |
Equipment financing facility |
| | 2,158 |
| | 2,929 |
| | 40 |
| | 609 |
Total financing obligations |
| | 6,786 |
| | 8,840 |
| | 3,860 |
| | 4,676 |
Less: financing obligations, current |
| | (6,786) |
| | (8,840) |
| | (2,360) |
| | (1,676) |
Total financing obligations, non-current | | $ | — | | $ | — | | $ | 1,500 | | $ | 3,000 |
Receivable Financing Facility
On April 27, 2021,June 20, 2023, we entered into ana second consolidated and amended and restated investment arrangement in which we provide future receivables available to anwith the outside investor to invest in exchange for an upfront payment. Through this arrangement, we obtain financing inamend the form of a large upfrontperiodic payment which we account for as a borrowing by recording the proceeds received as a financing obligation, which will be repaid through payments collected from accounts receivable debtors relating to future receivables. The financing obligation is non-recourse; however, we are responsible for collections as we must first collect payments from the debtors and remit them to the investor. We recognize interest on the financed amount using the effective interest method. The effective interest rate is the interest rate that equates the present value of the cash amounts to be received bymade under the investor withinvestment arrangement. The amended arrangement calls for monthly payments of principal and interest totaling an aggregate of $1.1 million and $3.0 million in the present valueremainder of the cash amounts paid by the investor to us. The receivable financing facility has a term of 5fiscal years 2024 and the arrangement allows us and the financier to mutually agree to roll forward our borrowings as they come due.
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On August 15, 2021, November 16, 2021, February 22, 2022, May 31, 2022, and August 18, 2022, in accordance with the terms of the receivable financing facility, we rolled forward the receivable financing facility, enabling us to continue our quarterly borrowings for a minimum of twelve-months. Subject to the approval of the financier, we may continue rolling forward the receivable financing facility.fiscal year 2025, respectively.
Equipment Financing Facility
Beginning in 2019, we entered into arrangementsWe have equipment financing facilities with third party financiersfinancing partners to secure payments of certain tablet purchases. Such arrangements generally have terms ranging from 3 to 5three – five years and interest rates ranging from 8% to 14%-14%. We then lease the tablets monetized by the financiers to one of our customers through operating leases that have 4-year terms.
In fiscal year 2023, due to our liquidity position and other commitments, we postponed certain payments on certain arrangements with third party financiers, which resulted in us defaulting on said arrangements. We have remedied the matter via repayment agreements with our third party financiers, as discussed below.
On November 4,21, 2022, the Companywe executed an amendment with one of itsour third-party financiers to defer non-payments,financing partners, under which increased the monthly payments due for the remaining term of the arrangment.
On November 21, 2022, the Company executed an amendment with one of its third-party financiers. The Companywe repaid one of the arrangements by making a cash disbursement of $0.4 million, of which extinguished all obligations and resulted in $0.3 million being recorded as a loss on extinguishment of debt and financial obligations on the condensed consolidated statement of operations and comprehensive income (loss).
As a result of the amendment executed on November 4, 2022 and early termination executed on November 21, 2022, the default on payments due as described above has been waived and the Company is in compliance as of December 31, 2022. We have classified all of our obligations under these arrangements as short-term within financing obligations, current as of December 31, 2022 and June 30, 2022.
income.
Debt Arrangements
As of December 31, 2022September 30, 2023 and June 30, 2022, our outstanding debt, net of debt discounts, consisted of the following:
| | | | | | |
|
| As of December 31, |
| As of June 30, | ||
(in thousands) | | 2022 | | 2022 | ||
Convertible promissory notes | | $ | — | | $ | 89,663 |
Term loans |
| | 52,022 |
| | 25,443 |
PPP Loans |
| | — |
| | 2,000 |
Total debt |
| | 52,022 |
| | 117,106 |
Less: debt, current |
| | — |
| | (115,106) |
Total debt, noncurrent | | $ | 52,022 | | $ | 2,000 |
| | | | | | |
|
| As of September 30, |
| As of June 30, | ||
(in thousands) | | 2023 | | 2023 | ||
Term loans |
| | 53,088 |
| | 50,639 |
Total debt |
| | 53,088 |
| | 50,639 |
Less: debt, current |
| | (53,088) |
| | (50,639) |
Total debt, noncurrent | | $ | — | | $ | — |
Convertible Promissory NotesTerm Loan - Credit Agreement
As
General
On September 21, 2022, in connection with the consummation of June 30, 2022,the Merger, we had convertible notes outstandingentered into a Credit Agreement (the “Credit Agreement”), with the subsidiary guarantors party thereto, Metropolitan Partners Group Administration, LLC (“Metropolitan”), as administrative, payment and collateral agent (the “Agent”), the lenders party thereto (“Lenders”) and other parties party thereto, pursuant to various investors, allwhich the Lenders extended term loans having an aggregate original principal amount of $55.0 million (the “Initial Term Loans” and which were accounted for under the fair value option. As of June 30, 2022,Lenders have agreed to extend by an additional $3.0 million (the “Third Amendment Term Loans” and together with the fair value of such convertible promissory notes was $89.7 million.Initial Term Loans, the “Term Loans”) . In conjunction with the Merger, all convertible promissory notes converted into shares of common stock. Further certain convertible notes which were together withinitial Credit Agreement, we issued 1,500,000 warrants also had the related warrants converted into shares of common stock. As a consequence of the note and warrant conversion, 8,147,938 shares ofto purchase common stock were issued. Immediately prior to conversion, the convertible promissory notes were remeasured to the then fairLenders as debt discount. Such warrants were determined to be equity classified and we recorded the value associated with such warrants of $41.4$2.1 million resultingwithin additional paid in capital, with an offsetting debt discount being recorded. Refer to Note 10 for further details on the aforementioned warrants. We also pay a gain on remeasurementdebt monitoring fee under the Credit Agreement of $48.3$0.1 million per quarter which wasis recorded within changeas interest expense in fair value of warrants and convertible promissory notes on the condensed consolidated statement of operations and comprehensive income (loss) for the six months ended December 31, 2022.income.
5341
Third Amendment and Related Purchase Agreement
On October 10, 2023, we entered into a Third Amendment to the Credit Agreement (the “Third Amendment”) pursuant to which the parties amended or removed certain covenants of the Credit Agreement (including the removal of a covenant in respect of a maximum net leverage ratio of 1.20 to 1.00) and, the Lenders agreed to waive existing defaults under the Credit Facility, advance an additional $3 million of Term Loans to us, and exchange an aggregate of $6.0 million of accrued and previously capitalized interest for warrants to purchase 3,000,000 shares of common stock at an exercise price of $0.01 per share (the “Third Amendment Conversion Warrants”). The effectiveness of the Third Amendment was conditioned, in part, upon (1) evidence of a gross amount of additional equity investment of $3.0 million, to be used for working capital purposes, which closed on October 16, 2023, in private placement with an affiliate of our existing shareholder, Cleveland Avenue, (described below), (2) the Company hiring a chief financial officer reasonably satisfactory to the Agent, which was satisfied on October 10, 2023, (3) by no later than October 16, 2023, evidence that we have engaged the services of an investment bank reasonably acceptable to Metropolitan on terms reasonably acceptable to Metropolitan in connection with upcoming capital raises. The conditions precedent were satisfied and the Amendment was closed on October 17, 2023.
The anti-dilution provisions of the Third Amendment were triggered with the November 17, 2023 capital raise and we were required to increase the number of shares issuable under the Third Amendment Warrants from 3,000,000 to 6,000,000 shares of common stock.
Concurrent with the Third Amendment, we entered into a Securities Purchase Agreement (“Purchase Agreement”) which closed on October 16, 2023, with Presto CA LLC, an affiliate of Cleveland Avenue, pursuant to which we sold an aggregate of 1,500,000 newly issued shares of common stock at a purchase price of $2.00 per share for an aggregate purchase price of $3.0 million. The Purchase Agreement contains customary representations, warranties and covenants of the parties. In addition, the Purchase Agreement includes anti-dilution provisions relating to future issuances or deemed issuances of common stock from the closing date to April 1, 2024 at a price per share below $2.00 per share, which would require us to issue additional shares of common stock to the purchaser, upon the terms and subject to the conditions contained in the Purchase Agreement. The anti-dilution provision was triggered upon the November 17, 2023 capital raise and we were required to issue 1,500,000 newly issued shares of common stock based on a revised purchase price of $1.00 per share from $2.00 in the Purchase Agreement.
The Term Loans were borrowed in full at closing. Amounts outstanding under the Credit Agreement will incur interest at the rate of 15% per annum. The amendments to the Credit Agreement provide that, with respect to interest accruing for the interest periods ending September 30, 2023 through to January 31, 2024, we may elect that 100% of the accrued but unpaid interest under the Term Loans may be capitalized as principal, or “PIK Interest” on a monthly basis. After January 31, 2024, we may request that 100% of the accrued but unpaid interest under the Term Loans may be capitalized as principal, or “PIK Interest” on a monthly basis, subject to the prior approval by Agent. Absent such a request or in the absence of approval by the Agent, such interest is required to be paid in cash on a monthly basis.
During the three months ended September 30, 2023, we recorded PIK interest expense amounts of $1.2 million, which have been reflected as an increase to the outstanding debt balance. Further, during the three months ended September 30, 2023, we recorded interest expense associated with the amortization of debt discounts in the amount $1.2 million. Accordingly at September 30, 2023, the term loans, current balance of $53.1 million reflects $55.0 million of principal and $6.6 million PIK interest accrual, as reduced by unamortized debt issuance costs of $8.5 million.
Covenants and Waivers
We must comply with certain financial covenants as set forth in the Credit Agreement,
● | Minimum Unrestricted Cash. We must maintain $10.0 million in separate and blocked cash collateral account. |
● | Net Adjusted Decrease in Operating Cash. Subject to certain excluded payments, the decrease in our operating cash may not exceed an agreed amount for each rolling three-month period, subject to certain customary operating fluctuations and adjustments. The amount is set at $10.7 million for October 2023, $11.4 million for November 2023 and $10.3 million for December 2023, and declines after that date. |
Without an injection of further capital, we anticipate being unable to comply with the minimum unrestricted cash covenant by approximately the end of February 2024.
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We have also undertaken to pursue renewals of Presto Touch with all our existing customers with a transition to our next generation technology and, if this is not achieved by December 31, 2023, to provide and implement a strategic wind-down plan that is reasonably acceptable to Metropolitan with respect to Presto Touch. We are considering strategic alternatives with regards to our Presto Touch solution and are evaluating whether to engage in a wind-down which could be either a sale, partial sale or abandonment of the Presto Touch business in the coming months. The estimated monthly reduction in expenditures and the incurrence of nonrecurrent expenses is included in the full implementation of the steps set out in this Item 2, under the heading, “Continued Implementation of On-Going Cost Improvement Program,” on the cost reduction initiated on November 15, 2023.
We have not adopted any specific alternative and intend to pursue an approach that offers the greatest benefit for our shareholders and allows us to focus our efforts on our Presto Voice business.
The Credit Agreement also contains customary affirmative and restrictive covenants, including covenants regarding the incurrence of additional indebtedness or liens, investments, transactions with affiliates, delivery of financial statements, payment of taxes, maintenance of insurance, dispositions of property, mergers or acquisitions, among other customary covenants. We are also restricted from paying dividends or making other distributions or payments on our capital stock, subject to limited exceptions. The Credit Agreement also includes customary representations and warranties, events of default and termination provisions, upon which the Term Loans may be accelerated and the interest rate applicable to any outstanding payment obligations will increase by 5%.
As of March 31, 2023, we obtained a waiver in the First Amendment noted above, of the minimum cash covenant for February 28, 2023 and March 31, 2023, the historic net leverage ratio for the period from February 28, 2023 through May 31, 2023 and any default occurring from the Chief Executive Officer separation from the Board of Directors. Upon the effectiveness of the Third Amendment, we obtained waivers of the historic net leverage ratio for the period from May 31, 2023 through June 30, 2023, our failure to make timely payments on July 1, 2023 and various reporting obligations that were not satisfied.
Other Term Loans
Horizon Loan
On March 4, 2021, we entered into a loan agreement (the “Horizon Loan”) with Horizon Technology Finance Corporation (“Horizon”), which provided us with $15.0 million, bearsbore interest at prime rate plus 6.5% per annum, and hashad a term of 54 months from each loan funding date. The Horizon Loan payment terms require repayment of accrued interest only on the outstanding principal amount over the first 24 payment dates and an equal payment of principal plus accrued interest on the next 30 payment dates identified in the notes applicable to the loan. We pledged certain assets against the Horizon Loan. The Horizon Loan contains financial covenants that require the maintenance of an unrestricted cash plus accounts receivable balance and achievement of quarterly bookings targets. On March 11, 2022, we amended the Horizon Loan to shorten the total term to 24 months with a maturity date of March 20, 2023.
In connection with the entry into the Credit Agreement, (defined below), on September 21, 2022, we repaid the Horizon Loan making a cash disbursement of $17.0 million, of which $15.0 million was repayment of principal and $0.6 million was payment of interest expense and accrued interest. Further, $1.7 million was recorded as a loss on extinguishment of debt and financial obligations on our condensed consolidated statement of operations and comprehensive income (loss).income.
Lago Term Loans
On March 11, 2022, we entered into a loan agreement (the “Lago Loan”) with Lago Innovation Fund I & II, LLC, which provided us with $12.6 million, bearsbore interest at the greater of 12% plus the greater of 1% or 30 day LIBOR, bearsbore 2% payable in kind interest, and maturesmatured on April 1, 2023. We pledged certain assets against the Lago Loan. The Lago Loan payment terms require repayment of accrued interest only on the outstanding principal over the first 12 payment dates and payment of principal plus remaining accrued interest on the last payment date identified in the notes applicable to the loan. We may prepay at any time for a fee, dependent on the time of prepayment. The Lago Loan contains financial covenants that require the maintenance of unrestricted cash plus accounts receivable balance and achievement of quarterly bookings targets. We issued 205,602 warrants to purchase common stock with the Lago Loan. Refer to Note 10 of Item 1 of this Quarterly Report on Form 10-Q for further details.
On August 4, 2022, we received an additional tranche of term loan in the amount of $5.3 million via an amendment to the Lago Loan. Further, we issued an additional 169,310 warrants to purchase common stock with the additional tranche. We determined that the amendment with the lender should be accounted for as an extinguishment and recorded a loss on extinguishment of debt and financial obligations of $6.0 million on our condensed consolidated statement of operations and comprehensive income (loss).income.
In connection with the entry into the Credit Agreement (defined below) on September 21, 2022, we repaid all outstanding loans by making a cash disbursement of $22.4 million, of which $17.8$17.9 million was repayment of principal and $0.1 million was payment of payable in kindin-kind interest. Further $4.4 million of cash was paid related to prepayment and other penalties.
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Credit Agreement
On September 21, 2022, in connection with the consummation of the Merger, we entered into a Credit Agreement (the “Credit Agreement”) with the subsidiary guarantors party thereto, Metropolitan Partners Group Administration, LLC, as administrative, payment and collateral agent (the “Agent”), the lenders (“Lenders”) and other parties party thereto, pursuant to which the Lenders extended term loans having an aggregate original principal amount of $55.0 million (the “Term Loans”).
The Term Loans were borrowed in full at closing. Amounts outstanding under the Credit Agreement will incur interest at the rate of 15% per annum. During the first 18 months following the closing date, we may elect to pay a portion of the accrued and unpaid interest by capitalizing the amount of such interest on a monthly basis and adding the same to the principal balance of the Term Loans, after which such capitalized interest shall accrue interest at the interest rate and otherwise constitute principal under the Term Loan (“PIK Interest”). With respect to interest accruing during the first six months after the closing date, we may elect for 100% of the interest payment to be capitalized as PIK Interest on a monthly basis. With respect to interest accruing after the six month anniversary of the closing date, but before the 18 month anniversary of the closing date, we may elect for 50% of the interest payment to be capitalized as PIK Interest on a monthly basis. The Term Loans mature on March 21, 2025.
The Term Loans may be prepaid by us; however, any voluntary or mandatory prepayment made prior to the 18 month anniversary of the closing date must be accompanied by payment of a make whole premium equal to the interest and fees that would have accrued on the aggregate principal amount of the Term Loans (including any interest that could have been capitalized as PIK Interest during such period) from the date of payment through the 18 month anniversary of the closing date. The Term Loans may not be reborrowed once repaid. We are required to pay the Agent certain upfront fees and administrative fees in connection with the Term Loans. Our obligations under the Credit Agreement are secured by substantially all of our assets.
We must comply with certain financial covenants as set forth in the Credit Agreement, including a minimum cash covenant and maximum net leverage ratio of 1.20 to 1.00. The Credit Agreement also contains customary affirmative and restrictive covenants, including covenants regarding the incurrence of additional indebtedness or liens, investments, transactions with affiliates, delivery of financial statements, payment of taxes, maintenance of insurance, dispositions of property, mergers or acquisitions, among other customary covenants. We are also restricted from paying dividends or making other distributions or payments on our capital stock, subject to limited exceptions. The Credit Agreement also includes customary representations and warranties, events of default and termination provisions, upon which the Term Loans may be accelerated and the interest rate applicable to any outstanding payment obligations will increase by 5%. As of December 31, 2022, we were in compliance with all applicable covenants.
In conjunction with the Credit agreement, we issued 1,500,000 warrants to purchase common stock to the Lenders. Such warrants were determined to be equity classified and we recorded the value associated with such warrants of $2.1 million within additional paid in capital, with an offsetting debt discount being recorded.
As a condition to entering into the Credit Agreement, Ventoux Acquisition Holdings LLC and Chardan International Investments LLC, the co-sponsors of VTAQ (“the Sponsors”) agreed to transfer 600,000 shares to the Lenders to the Credit Agreement. The share transfer by the Sponsor to the Lenders to the Credit Agreement was such that the substance of the transaction was that the Sponsors made a capital contribution to us, and we then made a share-based payment to the Lenders as an incentive for the Lenders to enter into the Credit Agreement. Accordingly, we recorded the transaction as debt issuance costs discount of $2.8 million in our condensed consolidated balance sheet with an offsetting increase to additional paid-in capital for the contribution.
We incurred cash debt issuance costs of $1.0 million in conjunction with the signing of the Credit Agreement which were recorded as a debt discount.
During the three and six months ended December 31, 2022, we recorded PIK interest expense amounts of $2.1 million and $2.3 million, respectively, which has been reflected as an increase to the outstanding debt balance. Further, during the three and six months ended December 31, 2022, we recorded interest expense associated with the amortization of debt discounts in the amount $0.5 million and $0.6 million, respectively. Accordingly at December 31, 2022, the term loans, noncurrent balance of $52.0 million reflects $55.0 million of principal and $2.3 million PIK interest accrual, as reduced by unamortized debt issuance costs of $5.3 million.
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Paycheck Protection Program Loan
In April 2020, the CompanyMarch 2021 we obtained a Paycheck Protection Program (“PPP”)PPP loan for $2.6in the amount of $2.0 million through the U.S. Small Business Administration. In March 2021, a second PPPThe loan was obtained in the amount of $2.0 million, for a total of $4.6 million. The loans willto be fully forgiven if the funds arereceived were used for payroll costs, interest on mortgages, rent, and utilities, with at least
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60% being used for payroll. We usedThe Company utilized the funds for these expensespurposes and applied for loan forgiveness of the PPP funds. No collateral or personal guarantees were required for the loan. The PPP loans would bear an interest rate of 1% and a maturity of two years for the first loan and five years for the second loan. We account forCompany’s accounting policy provides that if the loans are forgiven, the forgiven loan balance will be recognized as debt subject toincome in the accounting guidance in ASC 470, Debt.
period of forgiveness. During the sixthree months ended December 31, 2021 weSeptember 30, 2022, the Company received forgiveness forof the first PPP loan of $2.6$2.0 million and recognized as other income net. In July 2022, we were grantedon forgiveness of the second loan in an amount of approximately $2.0 million, which was recognized aswithin other income, net onin the Company’s condensed consolidated statementstatements of operations and comprehensive income.
Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States of America (“U. S. GAAP”), we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly-titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered as substitutes for, or superior to, the financial information prepared and presented in accordance with GAAP contained in this Form 10-Q.
We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects, and allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making. We are presenting these non-GAAP metrics to assist investors in seeing our financial performance using a management view. We believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.
Adjusted Gross Profit
Adjusted Gross Profit is calculated as gross profit adjusted to add back depreciation.
We use Adjusted Gross Profit to understand and evaluate our core operating performance and trends. We believe this metric is a useful measure to us and to our investors to assist in evaluating our performance because it removes the impact of events that do not reflect our core operating performance, thereby providing consistency and direct comparability with our past financial performance and between fiscal periods.
The following table provides a reconciliation of gross profit to Adjusted Gross Profit for each of the periods indicated:
| | | | | | | |
|
| Three months ended September 30, |
| ||||
(in thousands) | | 2023 |
| 2022 | | ||
Gross profit | | $ | 203 | | $ | 552 | |
Depreciation and amortization |
| | 965 |
| | 291 |
|
Adjusted Gross Profit | | $ | 1,168 | | $ | 843 | |
Adjusted EBITDA
Adjusted EBITDA is defined as net income, (loss)adjusted to exclude interest expense, other income, net, income taxes, depreciation and amortization expense, stock-based compensation expense, earnout stock-based compensation expense, change in fair value of warrant liabilities and convertible promissory notes, loss on extinguishment of debt and financing obligations, other financing and financial instrument (costs) income, net, deferred compensation and bonuses earned upon closing of the Merger, and the public relations fee paid upon closing of the Merger.
We believe Adjusted EBITDA is useful for investors to use in comparing our financial performance to other companies and from period to period. Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation and amortization, interest expense, and interest income, which can vary substantially from company to company depending on their financing and capital structures and the method by which their assets were acquired. In addition, Adjusted EBITDA eliminates the impact of certain items that do not reflect our core operating performance, thereby providing consistency and direct comparability with our past financial performance and between fiscal periods. We have also excluded non-recurring costs related to the closing of the Merger, including deferred compensation and bonuses earned upon the closing of the Merger, and a public relations fee due upon closing of the Merger. Excluding these costs attributable to the Merger better reflects our operating performance and provides consistency and comparability with our past financial performance. Adjusted EBITDA also has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis
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of our results as reported under GAAP. For example, although depreciation expense is a non-cash charge, the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new asset acquisitions. In addition, Adjusted EBITDA excludes stock-based compensation expense, which has been, and will continue to be for the six months ended December 31, 2022.foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy. Adjusted EBITDA also does not reflect changes in, or cash requirements for, our working capital needs; interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces the cash available to us; or tax payments that may represent a reduction in cash available to us. The expenses and other items we exclude in our calculation of Adjusted EBITDA may differ from the expenses and other items that other companies may exclude from Adjusted EBITDA when they report their financial results.
The following table provides a reconciliation of net income to Adjusted EBITDA for each of the periods presented:
| | | | | | | |
|
| Three months ended September 30, |
| ||||
(in thousands) | | 2023 |
| 2022 | | ||
Net income | | $ | 5,372 | | $ | 34,789 | |
Interest expense |
| | 3,758 |
| | 3,376 |
|
Other income, net |
| | (82) |
| | (2,028) |
|
Provision (benefit) for income taxes | | | (4) | | | - | |
Depreciation and amortization |
| | 1,012 |
| | 433 |
|
Stock-based compensation expense |
| | 2,101 |
| | 2,175 |
|
Earnout stock-based compensation expense |
| | 1,353 |
| | 178 |
|
Change in fair value of warrants and convertible promissory notes |
| | (21,025) |
| | (59,822) |
|
Loss on extinguishment of debt and financial obligations |
| | — |
| | 7,758 |
|
Other financing and financial instrument expenses, net |
| | (1,284) |
| | 1,768 |
|
Deferred compensation and bonuses earned upon closing of the Merger |
| | — |
| | 2,232 |
|
Public relations fee due upon closing of the Merger |
| | — |
| | 250 |
|
Adjusted EBITDA | | $ | (8,799) | | $ | (8,891) | |
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2022September 30, 2023 and June 30, 2022.2023.
Other Recent DevelopmentsUpdates
In June 2022, we received a favorable arbitrator ruling from the Singapore International Arbitration Center related to a matter with our third-party subcontractor and were awarded approximately $11.3 million in damages related to our loss on infrequent product repairs and to cover our legal expenses. This arbitration ruling was affirmed by the appellate court in Singapore on March 6, 2023. On May 2, 2023, the vendor appealed the ruling to the highest court in Singapore and the appeal is currently pending. The award has not met the criteria to be considered realizable as of December 31, 2022.September 30, 2023. As a result, we have not recognized any gain related to this settlement in our condensed consolidated statement of operations and comprehensive income (loss).income.
Related Party Transactions
We have certain convertible promissory notes and embedded warrants with entities in which a member of our board of directors is an officer ofDuring the entity and has a financial interest in the entity (“affiliated entities”). As of June 30, 2022, $9.6 million of our convertible promissory notes and embedded warrants balance is due to a related party, all of which are due within 12 months. The convertible notes and embedded warrants converted into shares of common stock during the sixthree months ended December 31, 2022. Refer to Note 7 for further details.
During the six months ended December 31,September 30, 2022, we received an equity investment of $1,000$1.0 million from an investor in exchange for 133,333 shares of common stock in the Company. Refer to Note 9 of Item 1 of this Quarterly Report on Form 10-Q for further details. for further details.
In addition, during the six monththree months ended December 31,September 30, 2022 we granted 1,200,000 of RSUs to a director and former interim CEO of the Company with a grant date fair value of $4.56 per RSU. Refer to Note 11 of Item 1 of this Quarterly Report on Form 10-Q for further details.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make certain estimates and assumptions. These estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and disclosures. Accordingly, actual amounts could differ from those estimates, and those differences could be material.
Our most significant estimates and judgments are related to the fair value of certain financial instruments which includes warrant liabilities. Other uses of estimates include, but are not limited to, the collectability of accounts receivable, the useful lives of property and equipment and intangible assets, inventory valuation, the fair value of financial instruments, valuation of deferred tax assets and liabilities, valuation assumptions utilized in calculating the estimated value of stock-based compensation, valuation of warrants, earnout and unvested founder shares arrangements, valuation of investments in non-affiliates, valuation of goodwill and intangible assets acquired and impairment of long-lived assets. Actual results may differ from these estimates. ToWe have assessed the extentimpact and are not aware of any specific events or circumstances that there are differences betweenrequired an update to our estimates and actual results,assumptions or materially affected the carrying value of our future financial statement presentation, financial condition, resultsassets or liabilities as of operations,the date of issuance of this report. Those estimates may change as new events occur and cash flows will be affected.additional information is obtained.
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We believe that the accounting policies described below involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. For further information, see Note 1 to the audited consolidated financial statements as of and for the years ended June 30, 20222023 and 20212022 and the related notes contained in exhibit 99.1Part II, Item 8, of the CurrentAnnual Report on Form 8-K10-K filed with the SEC on December 16, 2022.October 10, 2023.
Revenue Recognition
We account for our revenue in accordance with ASC 606 Revenue from Contracts with Customers. Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services, net of any taxes collected from customers (e.g., sales and other indirect taxes), which are subsequently remitted to government authorities.
Revenue is recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services, net of any taxes collected from customers (e.g., sales and other indirect taxes), which are subsequently remitted to government authorities.
During the three and six months ended December 31,September 30, 2023 and 2022, and 2021, we derived our revenues from two revenue streams: (1) Platform revenue consisting of sales of the Presto Touch and Presto Voice solutions and leases of the Presto Touch and AI Platform products (“Platform revenue”), which includessolution, including hardware, hardware accessories, software, customer support and maintenance, and (2) Premium Content (gaming)Transaction revenue consisting of premium gaming content and other revenue, which includes professional services (“Transaction revenue”).
Platform Revenue
The platform revenue stream is generated from fees charged to customers for access to our Presto Touch product and is recognized ratably. Part of the total contract value is due upon execution of the contract, and the remainder is due monthly over the term of the contract. Our contracts with customers are generally for a term ranging from 12 to 48 months. Amounts invoiced in excess of revenue recognized are recorded as deferred revenue. Revenue generated from AI Platform products was not material for the three and six months ended December 31, 2022 and 2021. Such revenue generated from AI Platform products is inclusive of $0.4 million and $0.6 million of contra-revenue related to the fair value of the warrant treated as a reduction to the transaction price of a customer for the three and six months ended December 31, 2022, respectively. Refer to the Components of Results of Operations above for further details. We also maintain arrangements with a certain customer whereby we leased the Presto Touch product to that customer. Revenue associated with the lease was recognized on a straight-line basis as platform revenue over the lease term in the condensed consolidated statements of operations and comprehensive income (loss). Refer to the Components of Results of Operationssection above for further details.
Transaction Revenue
Transaction revenue consists of a single performance obligation recognized at a point in time when the content is delivered and used. Transaction revenue is recognized on a gross basis as we are the principal in the relationship and the restaurant acts as a sales agent between us and the diner to upsell premium content purchases during the dining experience. We are the principal as we are the primary obligor responsible for fulfillment, we control the gaming license and its accessibility and have influence in establishing the price charged to the diner. The portion of gaming service collections withheld by the restaurant for sales commission is recorded to transaction cost of revenue.services.
We determine revenue recognition through the following steps:
1. | Identification of the contract, or contracts, with a customer — |
2. | Identification of the performance obligations in the contract — Our contracts with customers include promises to transfer multiple services. For all arrangements with multiple services, we evaluate whether the individual services qualify as distinct performance obligations. In our assessment of whether a service is a distinct performance obligation, we determine whether the customer can benefit from the service on its own or with other readily available resources and whether the service is separately identifiable from other services in the contract. This evaluation requires us to assess the |
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nature of each individual service offering and how the services are provided in the context of the contract, including whether the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment based on the facts and circumstances of the contract. |
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We identified the following performance obligations: for the MSAs and license agreements, 1) sales or leases of hardware, SaaS and maintenance asare one combined performance obligation for the Presto Touch product, and for gaming agreements, 2) providing premium content, or gaming.gaming, is a single performance obligation for the gaming agreements. Professional services were insignificant during the three and six months ended December 31, 2022September 30, 2023 and 2021.2022.
Our Presto Touch solution is considered to have a single performance obligation because each element of the Presto Touch product is interdependent and cannot function independently. The software and hardware for the Presto Touch product represents one combined output and the customer cannot benefit from the use of one element without the other.
When we enter into gaming agreements, our Presto Touch product includes the capability of providing entertainment services, designed (either on its own or through other subcontractors) and provided by us via internet, that can be purchased by diners.guests. The games are only accessible over the internet, and upon the dinerguest making the decision to pay for the content, the dinerguest receives the right to access the game on the Presto Touch product. Gaming fees are usage based through the diner’sguest’s use of the device and stipulated in a separate contract with the diner.guest. Any fees that are incurred are collected by the restaurant as part of the normal payment for the dining check from the dinerguest and remitted back to us, net of commissions paid to the restaurant as the sales. Premium content revenue, or gaming revenue, is therefore one performance obligation.obligation
3. | Determination of the transaction price — |
4. | Allocation of the transaction price to the performance obligations in the contract — The Presto Touch and premium content contracts are each comprised of one performance obligation and do not require reallocation of the contract |
5. | Recognition of revenue when, or as, we satisfy a performance obligation — As the customer simultaneously receives and consumes the benefits provided by us through continuous access to our SaaS platform, revenue from the Presto Touch |
Stock-Based Compensation
We have a stock incentive plan under which incentive stock options and restricted stock units (“RSUs”) are granted to employees and directors and non-qualified stock options are granted to employees, investors, directors and consultants. The options and RSU’s granted vest over time with a specified service period, except for performance-based grants. Stock-based compensation expense related to equity awards is recognized based on the fair value of the awards granted. The RSUs grant date fair value ofis determined based on our common stock underlying the awards has historically been determined by the board of directors with input from management and third-party valuation specialists, as there was no public market for our common stock. The board of directors determines the fair value of the common stock by considering a number of objective and subjective factors including: the valuation of comparable companies, our operating and financial performance, the lack of liquidity of common stock, transactions in our preferred or common stock, and general and industry specific economic outlook, amongst other factors.
The fair value of each option award is estimated on the grant date using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of subjective assumptions, including the fair value of the underlying common stock, risk-free interest rates, the expected term of the option, expected volatility, and expected dividend yield. The fair value of each RSU is the fair value of the underlying common stock on the grant date. The related stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the awards, which is generally four years. For awards with performance
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conditions, the related cumulative stock-based compensation expense from inception to date is recognized when it is probable that the performance condition will be achieved. We account for forfeitures as they occur.
We estimated the fair values of each option awardedprice on the date of grant using the Black-Scholes-Merton option pricing model utilizing the assumptions noted below.
We did not grant options duringgranted in the three and six months ended December 31,September 30, 2023 and 2022.
The earnout shares are equity classified since they do not meet the liability classification criteria outlined in ASC 480, Distinguishing Liabilities from Equity and are under ASC 815-40 are both (i) indexed to the Company’s own shares and (ii) meet the criteria for equity classification. The initial fair value of the earnout shares is determined based on “Level 3” inputs, due to a lack of market data over inputs such as the volatility and the time incurred to meet the minimum VWAP as discussed above.volume weighted average price (“VWAP”). At initial recognition, the earnout shares were measured at fair value using the Monte Carlo valuation model. The valuation model utilized various key assumptions, such as volatility, discount rate and time incurred to meet the minimum VWAP.
Inventories
Inventories are valued at the lower of cost or net realizable value using the weighted average cost method, which approximates the first-in first-out inventory method. This method is consistent and valued separately across new inventories and refurbished inventories. Inventories are comprised of finished goods (tablets) and related component parts. We purchase our inventories from a third-party manufacturer as finished goods and store the inventory partially in our own warehouse and partially at a third-party warehouse. We establish provisions for excess and obsolete inventories after an evaluation of historical sales, future demand and market conditions, expected product life cycles, and current inventory levels to reduce such inventories to their estimated net realizable value. Such provisions are made in the normal course of business and are charged to cost of revenue in the consolidated statements of operations and comprehensive loss. The provision for excess and obsolete inventories was immaterial for the three and six months ended December 31, 2022 and 2021.
Fair Value Measurements
Fair value is defined as the exchange price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A
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financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
● | Level 1— Quoted prices in active markets for identical assets as of the reporting date. |
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● | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets. |
● | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. |
Financial instruments consist of cash equivalents, accounts receivable, accounts payable, convertible promissory notes and embedded warrants, warrant liabilities, and unvested founder sharesUnvested Sponsor Share liability. Accounts receivable and accounts payable are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date.
We elected the fair value option to account for the convertible promissory notes and embedded warrants because we believe it more accurately reflects the value of the debt in the financial statements. The principal amount of the convertible promissory notes, embedded warrants and accrued interest is measured at fair value using the Monte Carlo valuation model. The valuation model utilized various key assumptions, such as enterprise value and management assessments of the probability of expected future events, including conversion upon next private financing of preferred stock, conversion upon next financing in a public liquidity event, conversion upon a change in control, conversion upon maturity and default. Other inputs included a discount rate of 16.5% for the principal amount of the convertible promissory notes as of June 30, 2022. Changes in the fair value of the convertible promissory notes and embedded warrants were included in change in fair value of warrants and convertible promissory notes in the condensed consolidated statement of operations and comprehensive loss.
The fair value of the unvested founder sharesUnvested Sponsor Share liability was determined using a Monte Carlo valuation model, which requires significant estimates including the expected volatility of our common stock. The expected annual volatility of our common stock was estimated to be 76.2%68.9% and 73.3%76.0% as of the Merger dateSeptember 30, 2023 and December 31, 2022, respectively, based on the historical volatility of comparable publicly traded companies.
Investment in Non-Affiliate
Investments in non-affiliates include equity security investments in third party entities without a readily determinable fair value in which the Company’s influence is deemed nonsignificant. Investments in non-affiliates are recorded using the measurement alternative for investments without readily determinable fair values, whereby the investment is measured at cost less any impairment recorded or observable price changes. Any impairments or observable price changes are reported in other income, net on the condensed consolidated statements of operations and comprehensive income (loss).
Impairment of Long-Lived Assets
We evaluate the carrying value of long-lived assets on an annual basis, or more frequently whenever circumstances indicate a long-lived asset may be impaired. When indicators of impairment exist, we estimate future undiscounted cash flows attributable to such assets. In the event cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair value.
Business Combinations
The Company accounts for acquisitions using the acquisition method of accounting. Assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration transferred in a business combination, including any contingent consideration, is allocated to the assets acquired and liabilities assumed based on their respective fair values. The excess of the consideration transferred over the fair values of the assets acquired and the liabilities assumed is recorded as goodwill.
Recent Accounting Pronouncements
See the sections entitled “Recently Adopted Accounting Standards” and “Recently Issued Accounting Standards Not Yet Adopted” in Note 1 of Item 1 of this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the filing date of this Quarterly Report on Form 10-Q.
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Emerging Growth Company
We are an emerging growth company, as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations in the United States and in Canada, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, credit and inflation risks. We are not exposed to significant foreign exchange risk.
Interest Rate Sensitivity
Our cash and cash equivalents are held primarily in cash deposits and money market funds. The fair value of our cash and cash equivalents would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of these instruments. A hypothetical 10% change in interest rates would not have a material impact on our current results of operations due to the short-term nature of our cash and cash equivalents. Additionally, changes to interest rates will not impact the
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cost of our currently outstanding borrowings. Interest rates on the Credit Agreement are fixed. Potential changes in interest rates would also not materially impact the interest expense associated with our financing obligations.
Credit Risk
We are exposed to credit risk on accounts receivable and merchant cash advance balances. A small number of customers represent significant portions of our consolidated accounts receivable and revenue. We evaluate the solvency of our customers on an ongoing basis to determine if allowances for doubtful accounts need to be recorded.
The following customers accounted for more than 10% of revenues during the following periods:
| | | | | | | | | | | |
|
| Three months ended December 31, |
|
| Six months ended December 31, |
|
| ||||
| | 2022 |
| 2021 |
| | 2022 |
| 2021 |
| |
Customer A | | 60 | % | 49 | % | | 60 | % | 52 | % | |
Customer B |
| 22 | % | 24 | % |
| 23 | % | 25 | % |
|
Customer C1 |
| 14 | % | 16 | % |
| 14 | % | 17 | % |
|
|
| 96 | % | 89 | % |
| 97 | % | 94 | % |
|
1 The decrease in revenue is attributable to the customer relationship cancellation with certain franchisees within Customer C.
| | | | | | |
|
| Three months ended September 30, |
|
| ||
| | 2023 |
| 2022 |
| |
Customer A | | 52 | % | 57 | % | |
Customer B |
| 15 | % | 23 | % |
|
Customer C |
| 23 | % | 12 | % |
|
|
| 90 | % | 92 | % |
|
The following customers accounted for more than 10% of accounts receivable as of December 31, 2022September 30, 2023 and June 30, 2022:
| | | | | | | | | | |
|
| As of December 31, |
| As of June 30, |
|
| As of September 30, |
| As of June 30, |
|
| | 2022 |
| 2022 |
| | 2023 |
| 2023 |
|
Customer A | | 33 | % | 31 | % | | 38 | % | 31 | % |
Customer B |
| 14 | % | 41 | % |
| 12 | % | 41 | % |
Customer C1 |
| 15 | % | — | % | |||||
Customer D |
| 25 | % | 11 | % |
| 38 | % | 11 | % |
|
| 87 | % | 83 | % |
| 88 | % | 83 | % |
1*Customers with a dash accounted forCustomer C represents less than 10% of accounts receivable and therefore was omitted from the above schedule.
On October 30, 2023, Customer C provided notice of its intent to not renew its contract at the end of the expiration date of December 31, 2023. The customer also sought and was granted a limited transition extension period end.through March 31, 2024.
We are exposed to vendor concentration risk as we supplyit purchases its next generation version of Presto Touch tablets from one vendor and currently source our hardware and software used in the AI Platformother equipment from one vendor. Our operating results could be adversely affected should any ofin the following occur:event that the vendor used to supply tablets increases theirits prices or either vendor incurs disruptions in its supply of goods or services.
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Inflation Risk
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you our business will not be affected in the future by inflation.
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Financial Institutions
Financial instruments that potentially expose us to concentrations of credit risk consist principally of cash and cash equivalents and restricted cash on deposit with financial institutions, the balances of which frequently exceed federally insured limits. On March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. If any of the financial institutions with whom we do business were to be placed into receivership, we may be unable to access to the cash we have on deposit with such institutions. If we are unable to access our cash and cash equivalents and restricted cash as needed, our financial position and ability to operate our business could be adversely affected. The Company has $12.8 million in deposits in excess of the FDIC limits as of September 30, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principle executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended December 31, 2022,September 30, 2023, as such term is defined in Rules 13a-15(e) and 15d-15(e) under Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial officer have concluded that as of December 31, 2022,September 30, 2023, our disclosure controls and procedures were not effective due to material weaknesses in our internal control over financial reporting, as discussed in more detail below. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Notwithstanding the identified material weaknesses, management, including our principal executive officer and principal financial officer, believes the condensed consolidated financial information included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Material Weakness
We previously identified four material weaknesses, as disclosed in our S-1 registration statement,Annual Report on Form 10-K, filed with the SEC on October 21, 2022.10, 2023. The material weaknesses as of June 30, 20222023 that we have identified are listed below.
● | We did not maintain an effective control environment, including not having designed a risk assessment process and not having designed formalized internal controls, including a lack of policies supporting segregation of duties. |
● | We did not design and maintain effective controls to address the initial application of complex accounting standards and accounting of non-routine, unusual or complex events and transactions. Further, we did not maintain sufficient accounting resources with appropriate technical knowledge to support our financial reporting requirements. |
● | We did not design and maintain effective controls over our financial statement closing process. Specifically, we did not design and maintain effective controls over certain account analyses and account reconciliations. |
● | We did not maintain internal accounting records to adequately support the reporting of certain transactions in our financial statements. |
These material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim condensed consolidated financial statements that would not be prevented or detected.
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Management’s Remediation Initiatives
We are in the early stages of designing and implementing a plan to remediate the material weaknesses identified. Our plan includes the following actions:
● | Designing and implementing a risk assessment process supporting the identification of risks facing Presto. |
● | Implementing controls to enhance our review of significant accounting transactions and other new technical accounting and financial reporting issues and preparing and reviewing accounting memoranda addressing these issues. Hiring additional experienced accounting, financial reporting and internal control personnel and changing roles and responsibilities of our personnel as we transition to complying with Section 404 of the Sarbanes Oxley Act of 2002. We have recently hired additional resources and we are engaging with a third-party consulting firm to assist us with our formal internal control plan and provide staff augmentation of our internal audit function. |
● | Implementing controls to enable an effective and timely review of account analyses and account reconciliations. |
● | Implementing controls to enable an accurate and timely review of accounting records that support our accounting processes and maintain documents for internal accounting reviews. |
We cannot assure you that these measures will significantly improve or remediate the material weaknesses described above. The implementation of these remediation measures is in the early stages and will require validation and testing of the design and operating effectiveness of our internal controls over a sustained period of financial reporting cycles and, as a result, the timing of when we will be able to fully remediate the material weaknesses is uncertain and we may not fully remediate these material weaknesses during the year ended June 30, 2023.2024. If the steps we take do not remediate the material weaknesses in a timely manner, there could be a reasonable possibility that these control deficiencies or others may result in a material misstatement of our annual or interim financial statements that would not be prevented or detected on a timely basis. This, in turn, could jeopardize our ability to comply with our reporting obligations, limit our ability to access the capital markets and adversely impact our stock price.
Changes in Internal Control over Financial Reporting
Other than the actions taken as described in “Management’s Remediation Initiatives” above to improve the Company’s internal control over financial reporting, there have been no changes in our internal control over financial reporting during the most recent fiscal quarter that materially affected, or which are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we mayDiscussion of legal matters is in Part I, Note 8, “Commitments and Contingencies,” of this document, and should be subject to claims arising in the ordinary courseconsidered an integral part of business or become involved in litigation or other legal proceedings. We are not currently a party to any litigation or legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.Part II, Item 1 “Legal Proceedings.”
Item 1A. Risk Factors
In addition toA comprehensive discussion of our other risk factors is included in the other information set forth in this Quarterly Report“Risk Factors” section of our annual report on Form 10-Q, you should carefully consider10-K for the risk factors disclosed in our Current Report on Form 8-Kyear ended June 30, 2023 which was filed with the SEC on September 27, 2022, andOctober 10, 2023. The risks described in our Form 10-K are not the other reports thatonly risks we have filed with the SEC. Any of the risks discussed in such reports, as well as additionalface. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial couldalso may materially and adversely affect our results of operations,business, financial condition and/or prospects.operating results. During the period covered by this Quarterly Reportquarterly report on Form 10-Q, there have been no material changes in our risk factors as previously disclosed.disclosed except the following:
We may be unable to realize the benefits we expect from our Touch business.
We are considering strategic alternatives for our Presto Touch solution and evaluating whether to engage in a wind-down which would either be a sale, partial sale or abandonment of the Presto Touch business in the coming months. We have not adopted any specific alternative and intend to pursue an approach that offers the greatest benefit for our shareholders and allows us to focus our efforts on our Presto Voice business. The estimates of the savings that we hope to accrue and the non-recurring costs associated with these actions may be based on mistaken assumptions or may change as a result of intervening events. In addition, these actions will require management time and attention which could distract from our focus on our Presto Voice business. We may be unable to realize the benefits we expect from the wind-down of either a sale, partial sale or abandonment of the Touch business which could adversely impact our overall business going forward.
We are currently listed on the Nasdaq Stock Market. If we are unable to maintain listing of our securities on the Nasdaq Stock Market or any stock exchange, our stock price could be adversely affected and the liquidity of our stock and our ability to obtain financing could be impaired and it may be more difficult for our shareholders to sell their securities.
Although our common stock is currently listed on the Nasdaq Stock Market, we may not be able to continue to meet the exchange’s minimum listing requirements or those of any other national exchange. For example, Nasdaq Listing Rule 5450(a)(1) requires our common stock to meet the minimum bid price requirement of $1.00. The delisting of our common stock from the Nasdaq Stock Market, including for failure to meet the minimum bid price requirement, may make it more difficult for us to raise capital on favorable terms in the future. Such a delisting would likely a result in a reduction in some or all of the following may occur, each of which could have a material adverse effect on our shareholders and may impair your ability to sell or purchase our common stock when you wish to do so:
● | the liquidity of our common stock; |
● | the market price of our common stock; |
● | our ability to obtain financing for the continuation of our operations; |
● | the number of investors that will consider investing in our common stock; |
● | the number of market makers in our common stock; |
● | the availability of information concerning the trading prices and volume of our common stock; and |
● | the number of broker-dealers willing to execute trades in shares of our common stock. |
Further, if we were to be delisted from the Nasdaq Stock Market and we are unable to obtain listing on another national securities exchange, our common stock would cease to be recognized as covered securities and we would be subject to regulation in each state in which we offer our securities.
We granted anti-dilution protection to certain of our investors, which will cause additional significant dilution to our stockholders and may have a material adverse impact on the market price of our common stock and make it more difficult for us to raise funds through future equity offerings.
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We have granted antidilution protections as follows:
● | On October 10, 2023, the Company entered into a Securities Purchase Agreement (the “CA Purchase Agreement”) with Presto CA LLC (“CA”), pursuant to which the Company sold 1,500,000 shares of common stock, at a purchase price of $2.00 per share, for an aggregate purchase price of $3.0 million (the “Private Placement”). The Private Placement closed on October 16, 2023. The CA Purchase Agreement includes anti-dilution provisions relating to future issuances or deemed issuances of the Company’s common stock from October 16, 2023 to April 1, 2024 at a price per share below $2.00, which would require the Company to issue additional shares of common stock to CA, upon the terms and subject to the conditions contained in the CA Purchase Agreement. |
● | On October 10, 2023, the Company entered into a Third Amendment (the “Third Amendment”) to the Credit Agreement (“Credit Agreement”) dated as of September 21, 2022, as amended on March 31, 2023 and May 22, 2023, with the Metropolitan Partners Group Administration, LLC, Metropolitan Levered Partners Fund VII, LP, Metropolitan Partners Fund VII, LP, Metropolitan Offshore Partners Fund VII, LP and CEOF Holdings LP (collectively, the “Lenders”). Pursuant to the Third Amendment, the Lenders agreed to, among other things, exchange an aggregate of $6,000,000 of accrued and previously capitalized interest for warrants to purchase 3,000,000 shares of common stock at a purchase price of $0.01 per share (the “Third Amendment Conversion Warrants”). The Third Amendment Conversion Warrants are subject to anti-dilution provisions relating to future issuances or deemed issuances of the Company’s common stock from October 16, 2023 to April 1, 2024 at a price per share below $2.00, upon the terms and subject to the conditions contained in the Third Amendment Conversion Warrants. |
● | On November 17, 2023, the Company entered into Purchase Agreements for the issuance of $7.0 million of common stock (the “November Offering”). The Purchase Agreements include antidilution provisions relating to future issuances or deemed issuances of the Company’s common stock from November 21, 2023 to April 1, 2024 at a price per share below $1.00, which would require the Company to issue additional shares of common stock to the Purchasers, upon the terms and subject to the conditions contained in the Purchase Agreements. |
The November Offering triggered the antidilution provisions in the Purchase Agreement and the Third Amendment Conversion Warrants. The Company agreed with each of CA and the Lenders that the “New Issuance Price” (as defined in the Purchase Agreement and Third Amendment Conversion Warrants, respectively) would be $1.00. As a result, we were required to issue an additional 1,500,000 shares to CA and increase the amount of common stock issuable upon the exercise of the Third Amendment Conversion Warrants from 3,000,000 shares to 6,000,000 shares.
If the foregoing anti-dilution provisions are triggered in the future, the issuance of additional shares thereunder will dilute the percentage ownership interest of all stockholders, will dilute the book value per share of the Company’s common stock and will increase the number of the Company’s outstanding shares, which could depress the market price of the Company’s common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
(a) None.
(b) None
(c) During the fiscal quarter ended September 30, 2023, none of our directors or officers adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
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Item 6. Exhibits.
The following exhibits are filed or furnished as an exhibit to this Quarterly Report on Form 10-Q.
| | |
Exhibit Number |
| Description |
2.1† | | |
2.2 | | |
2.3 | | |
3.1 | | |
3.2 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101.INS | | Inline XBRL Instance Document.* |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document.* |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document.* |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document.* |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* |
104 | | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit) |
† | Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Company agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request. |
* | Filed herewith. |
** | Furnished herewith. |
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SIGNATURE
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 hereunto duly authorized.
| | |
Dated: | PRESTO AUTOMATION INC. | |
| | |
| By: | /s/ |
| Name: |
|
| Title: | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| By: | /s/ |
| Name: |
|
| Title: | Interim Chief Financial Officer |
| | (Principal Financial Officer) |
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