UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
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☒☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20182020
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission file number 001-33365
USA Technologies, Inc.
(Exact name of registrant as specified in its charter)
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Pennsylvania | | 23-2679963 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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100 Deerfield Lane, | Suite 300, Malvern, Pennsylvania | Malvern, | Pennsylvania | | 19355 |
(Address of principal executive offices) | | (Zip Code) |
(610) 989-0340
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | Trading Symbol | Name Of Each Exchange On Which Registered |
Common Stock, no par value
Series A Convertible Preferred Stock None | USAT
USATP None | The NASDAQ Stock Market LLC The NASDAQ Stock Market LLCNone |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ ☑No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ ☑No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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Large accelerated filer | ☐ | Accelerated filer | ☒☑ |
Non-accelerated filer (Do not check if a smaller reporting company) | ☐ | 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 Act). Yes ☐ No ☒☑
As of September 19, 2019October 30, 2020 there were 60,008,48165,256,631 outstanding shares of Common Stock, no par value.
USA TECHNOLOGIES, INC.
TABLE OF CONTENTS
This Amendment No. 1 on Form 10-Q/A (“Amendment No. 1”) amends our Quarterly Report on Form 10-Q for the three months ended September 30, 2018, as filed with the U.S. Securities and Exchange Commission on October 9, 2019 (the “Original Filing” and the “Original Filing Date”).
Part II, Item 6. has been included herein to reflect new certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, which are filed and furnished herewith, respectively. Because this Amendment No. 1 does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 4 and 5 of the certifications pursuant to Section 302 have been omitted. Except as indicated in this Explanatory Note, no other changes were made to the Original Filing. This Amendment No. 1 speaks as of the Original Filing Date, and does not reflect events that may have occurred subsequent to the Original Filing Date.
Part I. Financial Information
Item 1. Consolidated Financial Statements
USA Technologies, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| | ($ in thousands) | | September 30, 2018 | | June 30, 2018 | |
($ in thousands, except share data) | | ($ in thousands, except share data) | | September 30, 2020 | | June 30, 2020 |
| | | | | | | | | |
Assets | | | | | Assets | |
Current assets: | | | | | Current assets: | |
Cash and cash equivalents | | $ | 68,262 |
| | $ | 83,964 |
| Cash and cash equivalents | | $ | 34,690 | | | $ | 31,713 | |
Accounts receivable, less allowance of $3,125 and $2,754, respectively | | 18,921 |
| | 15,748 |
| |
Accounts receivable, less allowance of $7,313 and $7,676, respectively | | Accounts receivable, less allowance of $7,313 and $7,676, respectively | | 19,175 | | | 17,273 | |
Finance receivables, net | | 5,141 |
| | 4,603 |
| Finance receivables, net | | 7,356 | | | 7,468 | |
Inventory, net | | 6,915 |
| | 8,038 |
| Inventory, net | | 7,005 | | | 9,128 | |
Prepaid expenses and other current assets | | 1,463 |
| | 929 |
| Prepaid expenses and other current assets | | 1,545 | | | 1,782 | |
Total current assets | | 100,702 |
| | 113,282 |
| Total current assets | | 69,771 | | | 67,364 | |
| | | | | |
Non-current assets: | | | | | Non-current assets: | |
Finance receivables due after one year | | 12,770 |
| | 13,246 |
| Finance receivables due after one year | | 10,385 | | | 11,213 | |
Other assets | | 1,900 |
| | 720 |
| Other assets | | 2,156 | | | 1,993 | |
Property and equipment, net | | 9,778 |
| | 11,273 |
| Property and equipment, net | | 7,526 | | | 7,872 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | | 5,417 | | | 5,603 | |
Intangibles, net | | 28,533 |
| | 29,325 |
| Intangibles, net | | 22,249 | | | 23,033 | |
Goodwill | | 64,149 |
| | 64,149 |
| Goodwill | | 63,945 | | | 63,945 | |
Total non-current assets | | 117,130 |
| | 118,713 |
| Total non-current assets | | 111,678 | | | 113,659 | |
| | | | | |
Total assets | | $ | 217,832 |
| | $ | 231,995 |
| Total assets | | $ | 181,449 | | | $ | 181,023 | |
| | | | | | | | |
Liabilities, convertible preferred stock and shareholders’ equity | | | | | Liabilities, convertible preferred stock and shareholders’ equity | |
Current liabilities: | | | | | Current liabilities: | |
Accounts payable | | $ | 19,335 |
| | $ | 30,468 |
| Accounts payable | | $ | 31,791 | | | $ | 27,058 | |
Accrued expenses | | 21,848 |
| | 19,291 |
| Accrued expenses | | 28,880 | | | 30,265 | |
Capital lease obligations and current obligations under long-term debt | | 33,889 |
| | 34,639 |
| |
Income taxes payable | | 11 |
| | — |
| |
Finance lease obligations and current obligations under long-term debt | | Finance lease obligations and current obligations under long-term debt | | 3,871 | | | 3,328 | |
Deferred revenue | | 1,428 |
| | 511 |
| Deferred revenue | | 1,639 | | | 1,698 | |
Total current liabilities | | 76,511 |
| | 84,909 |
| Total current liabilities | | 66,181 | | | 62,349 | |
| | | | | |
Long-term liabilities: | | | | | Long-term liabilities: | |
Deferred income taxes | | 71 |
| | 67 |
| Deferred income taxes | | 143 | | | 137 | |
Capital lease obligations and long-term debt, less current portion | | 932 |
| | 1,127 |
| |
Accrued expenses, less current portion | | 66 |
| | 66 |
| |
Finance lease obligations and long-term debt, less current portion | | Finance lease obligations and long-term debt, less current portion | | 14,066 | | | 12,435 | |
Operating lease liabilities, non-current | | Operating lease liabilities, non-current | | 4,469 | | | 4,749 | |
Total long-term liabilities | | 1,069 |
| | 1,260 |
| Total long-term liabilities | | 18,678 | | | 17,321 | |
| | | | | |
Total liabilities | | $ | 77,580 |
| | $ | 86,169 |
| Total liabilities | | 84,859 | | | 79,670 | |
Commitments and contingencies (Note 14) | |
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Commitments and contingencies (Note 13) | | Commitments and contingencies (Note 13) | | | | |
Convertible preferred stock: | | | | | Convertible preferred stock: | |
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $19,777 and $19,443 at September 30, 2018 and June 30, 2018, respectively | | 3,138 |
| | 3,138 |
| |
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $21,113 and $20,779 at September 30, 2020 and June 30, 2020, respectively | | Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preferences of $21,113 and $20,779 at September 30, 2020 and June 30, 2020, respectively | | 3,138 | | | 3,138 | |
Shareholders’ equity: | | | | | Shareholders’ equity: | |
Preferred stock, no par value, 1,800,000 shares authorized, no shares issued | | — |
| | — |
| |
Common stock, no par value, 640,000,000 shares authorized, 60,012,155 and 59,998,811 shares issued and outstanding at September 30, 2018 and June 30, 2018, respectively | | 375,806 |
| | 375,436 |
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Preferred stock, 0 par value, 1,800,000 shares authorized, 0 shares issued | | Preferred stock, 0 par value, 1,800,000 shares authorized, 0 shares issued | | 0 | | | 0 | |
Common stock, 0 par value, 640,000,000 shares authorized, 65,252,965 and 65,196,882 shares issued and outstanding at September 30, 2020 and June 30, 2020, respectively | | Common stock, 0 par value, 640,000,000 shares authorized, 65,252,965 and 65,196,882 shares issued and outstanding at September 30, 2020 and June 30, 2020, respectively | | 402,742 | | | 401,240 | |
Accumulated deficit | | (238,692 | ) | | (232,748 | ) | Accumulated deficit | | (309,290) | | | (303,025) | |
Total shareholders’ equity | | 137,114 |
| | 142,688 |
| Total shareholders’ equity | | 93,452 | | | 98,215 | |
Total liabilities, convertible preferred stock and shareholders’ equity | | $ | 217,832 |
| | $ | 231,995 |
| Total liabilities, convertible preferred stock and shareholders’ equity | | $ | 181,449 | | | $ | 181,023 | |
See accompanying notes.
USA Technologies, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | | | | | Three months ended |
| | Three months ended September 30, | | September 30, |
($ in thousands, except per share data) | | 2018 | | 2017 (as restated) | ($ in thousands, except per share data) | | 2020 | | 2019 |
Revenue: | | | | | Revenue: | | | | |
License and transaction fees | | $ | 28,971 |
| | $ | 19,397 |
| License and transaction fees | | $ | 33,108 | | | $ | 34,609 | |
Equipment sales | | 4,551 |
| | 5,862 |
| Equipment sales | | 3,769 | | | 8,750 | |
Total revenue | | 33,522 |
| | 25,259 |
| Total revenue | | 36,877 | | | 43,359 | |
| | | | | |
Costs of sales: | | | | | Costs of sales: | |
Cost of services | | 18,544 |
| | 13,247 |
| Cost of services | | 19,336 | | | 22,089 | |
Cost of equipment | | 4,868 |
| | 5,831 |
| Cost of equipment | | 3,301 | | | 9,854 | |
Total costs of sales | | 23,412 |
| | 19,078 |
| Total costs of sales | | 22,637 | | | 31,943 | |
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Gross profit | | 10,110 |
| | 6,181 |
| Gross profit | | 14,240 | | | 11,416 | |
| | | | | | | | |
Operating expenses: | | | | | Operating expenses: | |
Selling, general and administrative | | 9,450 |
| | 6,924 |
| Selling, general and administrative | | 16,780 | | | 17,196 | |
Investigation and restatement expenses | | 4,526 |
| | — |
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Integration and acquisition costs | | 922 |
| | 762 |
| |
Investigation, proxy solicitation and restatement expenses | | Investigation, proxy solicitation and restatement expenses | | 0 | | | 4,476 | |
Depreciation and amortization | | 1,133 |
| | 245 |
| Depreciation and amortization | | 1,068 | | | 1,022 | |
Total operating expenses | | 16,031 |
| | 7,931 |
| Total operating expenses | | 17,848 | | | 22,694 | |
| | | | | | | | |
Operating loss | | (5,921 | ) | | (1,750 | ) | Operating loss | | (3,608) | | | (11,278) | |
| | | | | | | | |
Other income (expense): | | | | | Other income (expense): | |
Interest income | | 405 |
| | 80 |
| Interest income | | 350 | | | 294 | |
Interest expense | | (786 | ) | | (473 | ) | Interest expense | | (3,315) | | | (465) | |
Total other expense, net | | (381 | ) | | (393 | ) | |
Total other income (expense), net | | Total other income (expense), net | | (2,965) | | | (171) | |
| | | | | | | | |
Loss before income taxes | | (6,302 | ) | | (2,143 | ) | Loss before income taxes | | (6,573) | | | (11,449) | |
Provision for income taxes | | (18 | ) | | (28 | ) | Provision for income taxes | | (40) | | | (59) | |
| | | | | | | | |
Net loss | | (6,320 | ) | | (2,171 | ) | Net loss | | (6,613) | | | (11,508) | |
Preferred dividends | | (334 | ) | | (334 | ) | Preferred dividends | | (334) | | | (334) | |
Net loss applicable to common shares | | $ | (6,654 | ) | | $ | (2,505 | ) | Net loss applicable to common shares | | $ | (6,947) | | | $ | (11,842) | |
Net loss per common share | | | | | Net loss per common share | | | | |
Basic | | $ | (0.11 | ) | | $ | (0.05 | ) | Basic | | $ | (0.11) | | | $ | (0.20) | |
Diluted | | $ | (0.11 | ) | | $ | (0.05 | ) | Diluted | | $ | (0.11) | | | $ | (0.20) | |
Weighted average number of common shares outstanding | | | | | Weighted average number of common shares outstanding | |
Basic | | 60,053,912 |
| | 47,573,364 |
| Basic | | 64,859,002 | | | 60,096,852 | |
Diluted | | 60,053,912 |
| | 47,573,364 |
| Diluted | | 64,859,002 | | | 60,096,852 | |
See accompanying notes.
USA Technologies, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
Three Month Period Ended September 30, 2017 (as restated)2020
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Accumulated Deficit | | Total |
($ in thousands) | | Shares | | Amount | | |
Balance, June 30, 2020 | | 65,196,882 | | | $ | 401,240 | | | $ | (303,025) | | | $ | 98,215 | |
Cumulative effect adjustment for ASC 326 adoption | | — | | | — | | | 348 | | | 348 | |
Stock based compensation | | 56,083 | | | 1,502 | | | — | | | 1,502 | |
Net loss | | — | | | — | | | (6,613) | | | (6,613) | |
Balance, September 30, 2020 | | 65,252,965 | | | $ | 402,742 | | | $ | (309,290) | | | $ | 93,452 | |
|
| | | | | | | | | | | | | | | |
| | Common Stock | | Accumulated Deficit | | Total |
($ in thousands) | | Shares | | Amount | | |
Balance, June 30, 2017 | | 40,331,645 |
| | $ | 245,999 |
| | $ | (221,531 | ) | | $ | 24,468 |
|
Issuance of common stock in relation to public offering, net of offering costs incurred of $3,237 | | 9,583,332 |
| | 39,888 |
| | — |
| | 39,888 |
|
Stock based compensation | | 279,754 |
| | 409 |
| | — |
| | 409 |
|
Excess tax benefit from stock plans | | — |
| | — |
| | 67 |
| | 67 |
|
Net loss | | — |
| | — |
| | (2,171 | ) | | (2,171 | ) |
Balance, September 30, 2017 | | 50,194,731 |
| | $ | 286,296 |
| | $ | (223,635 | ) | | $ | 62,661 |
|
Three Month Period Ended September 30, 20182019
| | | | Common Stock | | Accumulated Deficit | | Total | | Common Stock | | Accumulated Deficit | | Total |
($ in thousands) | | Shares | | Amount | | ($ in thousands) | | Shares | | Amount | |
Balance, June 30, 2018 | | 59,998,811 |
| | $ | 375,436 |
| | $ | (232,748 | ) | | $ | 142,688 |
| |
Cumulative effect adjustment for ASC 606 adoption | | — |
| | — |
| | 376 |
| | 376 |
| |
Balance, June 30, 2019 | | Balance, June 30, 2019 | | 60,008,481 | | | $ | 376,853 | | | $ | (262,430) | | | $ | 114,423 | |
Stock based compensation | | 13,344 |
| | 370 |
| | — |
| | 370 |
| Stock based compensation | | — | | | 290 | | | — | | | 290 | |
Net loss | | — |
| | — |
| | (6,320 | ) | | (6,320 | ) | Net loss | | — | | | — | | | (11,508) | | | (11,508) | |
Balance, September 30, 2018 | | 60,012,155 |
| | $ | 375,806 |
| | $ | (238,692 | ) | | $ | 137,114 |
| |
Balance, September 30, 2019 | | Balance, September 30, 2019 | | 60,008,481 | | | $ | 377,143 | | | $ | (273,938) | | | $ | 103,205 | |
See accompanying notes.
USA Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | Three months ended |
| | Three months ended September 30, | | September 30, |
($ in thousands) | | 2018 | | 2017 (as restated) | ($ in thousands) | | 2020 | | 2019 |
OPERATING ACTIVITIES: | | | | | OPERATING ACTIVITIES: | | | | |
Net loss | | $ | (6,320 | ) | | $ | (2,171 | ) | Net loss | | $ | (6,613) | | | $ | (11,508) | |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |
Non-cash stock based compensation | | 415 |
| | 409 |
| Non-cash stock based compensation | | 1,509 | | | 290 | |
Gain on disposal of property and equipment | | 7 |
| | (18 | ) | Gain on disposal of property and equipment | | (3) | | | (15) | |
Non-cash interest and amortization of debt discount | | 22 |
| | 17 |
| Non-cash interest and amortization of debt discount | | 3,125 | | | 338 | |
Bad debt expense | | 509 |
| | 168 |
| Bad debt expense | | 394 | | | (110) | |
Provision for inventory reserve | | 212 |
| | 221 |
| Provision for inventory reserve | | 802 | | | 574 | |
Depreciation and amortization | | 2,147 |
| | 1,370 |
| |
Excess tax benefits | | — |
| | 67 |
| |
Depreciation and amortization included in operating expenses | | Depreciation and amortization included in operating expenses | | 1,068 | | | 1,022 | |
Depreciation included in cost of sales for rentals | | Depreciation included in cost of sales for rentals | | 539 | | | 634 | |
Non-cash lease expense | | Non-cash lease expense | | 269 | | | 491 | |
Deferred income taxes | | 4 |
| | 16 |
| Deferred income taxes | | 5 | | | 5 | |
Changes in operating assets and liabilities: | | | | | Changes in operating assets and liabilities: | |
Accounts receivable | | (3,678 | ) | | (3,149 | ) | Accounts receivable | | (1,540) | | | 3,286 | |
Finance receivables, net | | (63 | ) | | 9,168 |
| |
Inventory, net | | 1,707 |
| | (3,900 | ) | |
Finance receivables | | Finance receivables | | 531 | | | (454) | |
Inventory | | Inventory | | 1,324 | | | 1,232 | |
Prepaid expenses and other assets | | (220 | ) | | (103 | ) | Prepaid expenses and other assets | | 100 | | | (412) | |
Accounts payable and accrued expenses | | (8,665 | ) | | (1,490 | ) | Accounts payable and accrued expenses | | 3,985 | | | 5,288 | |
Operating lease liabilities | | Operating lease liabilities | | (259) | | | (399) | |
Deferred revenue | | (210 | ) | | 171 |
| Deferred revenue | | (58) | | | (33) | |
Income taxes payable | | 11 |
| | (55 | ) | |
Net cash (used in) provided by operating activities | | (14,122 | ) | | 721 |
| |
Net cash provided by operating activities | | Net cash provided by operating activities | | 5,178 | | | 229 | |
| | | | | | | | |
INVESTING ACTIVITIES: | | | | | INVESTING ACTIVITIES: | |
Purchase of property and equipment, including rentals | | (693 | ) | | (720 | ) | |
Proceeds from sale of property and equipment, including rentals | | 30 |
| | 45 |
| |
Purchase of property and equipment | | Purchase of property and equipment | | (483) | | | (420) | |
Proceeds from sale of property and equipment | | Proceeds from sale of property and equipment | | 8 | | | 30 | |
Net cash used in investing activities | | (663 | ) | | (675 | ) | Net cash used in investing activities | | (475) | | | (390) | |
| | | | | | | | |
FINANCING ACTIVITIES: | | | | | FINANCING ACTIVITIES: | |
Proceeds from long-term debt issuance by JPMorgan Chase Bank, N.A., net of debt issuance costs | | Proceeds from long-term debt issuance by JPMorgan Chase Bank, N.A., net of debt issuance costs | | 14,550 | | | 0 | |
Repayment of finance lease obligations and long-term debt | | Repayment of finance lease obligations and long-term debt | | (15,101) | | | (1,763) | |
Proceeds from exercise of common stock options | | 42 |
| | — |
| Proceeds from exercise of common stock options | | 25 | | | 0 | |
Issuance of common stock in public offering, net | | — |
| | 39,888 |
| |
Repayment of capital lease obligations and long-term debt | | (959 | ) | | (809 | ) | |
Net cash (used in) provided by financing activities | | (917 | ) | | 39,079 |
| |
Payment of Antara prepayment penalty and commitment termination fee | | Payment of Antara prepayment penalty and commitment termination fee | | (1,200) | | | 0 | |
Net cash used in financing activities | | Net cash used in financing activities | | (1,726) | | | (1,763) | |
| | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | (15,702 | ) | | 39,125 |
| Net (decrease) increase in cash and cash equivalents | | 2,977 | | | (1,924) | |
Cash and cash equivalents at beginning of year | | 83,964 |
| | 12,745 |
| Cash and cash equivalents at beginning of year | | 31,713 | | | 27,464 | |
Cash and cash equivalents at end of period | | $ | 68,262 |
| | $ | 51,870 |
| Cash and cash equivalents at end of period | | $ | 34,690 | | | $ | 25,540 | |
| | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | Supplemental disclosures of cash flow information: | |
Interest paid in cash | | $ | 740 |
| | $ | 431 |
| Interest paid in cash | | $ | 191 | | | $ | 205 | |
Income taxes paid in cash | | $ | — |
| | $ | — |
| |
Supplemental disclosures of noncash financing and investing activities: | | | | | |
Equipment and software acquired under capital lease | | $ | — |
| | $ | 227 |
| |
See accompanying notes.
USA Technologies, Inc.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
1. BUSINESS
USA Technologies, Inc. (the(“USAT” or the “Company”, “We”, “USAT”, or “Our”) was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutions and value-added services that facilitate electronic payment transactions and consumer engagement services primarily within the unattended Point of Sale (“POS”) market. We are a leading provider in the small ticket, beverage and food vending industry in the United States and are expanding our solutions and services to other unattended market segments, such as amusement, commercial laundry, kiosk and others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as telemetry and IoTInternet of Things services, which include the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment. The connection to the ePort Connect platform also enables consumer loyalty programs, national rewards programs and digital content, including advertisements and product information to be delivered at the point of sale.
On November 9, 2017, the Company acquired all of the outstanding equity interests of Cantaloupe Systems, Inc. (“Cantaloupe”), pursuant to the Agreement and Plan of Merger (“Merger Agreement”).Merger. Cantaloupe is a premier provider of cloud and mobile solutions for vending, micro markets, and office coffee service. The acquisition expanded the Company’s existing platform to become an end-to-end enterprise platform integrating Cantaloupe’s Seed Cloud which provides cloud and mobile solutions for dynamic route scheduling, automated pre-kitting, responsive merchandising, inventory management, warehouse and accounting management, as well as cashless vending. The combined companies offer a complete the value chainproposition for customers by providing both top-line revenue generating services as well as bottom line business efficiency services to help operators of unattended retail machines run their businessbusinesses better. The combined product offering provides the data-rich Seed system with USAT’s consumer benefits, providing operators with valuable consumer data that results in customized experiences. In addition to new technology and services, due to Cantaloupe’s existing customer base, the acquisition expandsexpanded the Company’s footprint into new global markets.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and therefore should be read in conjunction with the Company’s June 30, 20192020 Annual Report on Form 10-K, which was filed on October 9, 2019 (the “Form 10-K”), and amended by Amendment No. 1 thereto (the “Form 10-K/A”), which has been filed concurrently with this Form 10-Q/A.10-K. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the three months ended September 30, 20182020 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2019.2021. The balance sheet at June 30, 20182020 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
Overview
Concurrently withAs previously disclosed in the filing of this Form 10-Q/A, the Company filed the Form 10-K/A containing our audited consolidated financial statements for the fiscal years endedCompany’s June 30, 2019 and 2018 as well as restatements of the following previously filed consolidated financial statements: (i) our audited consolidated financial statements for the fiscal year ended June 30, 2017; (ii) our selected financial data as of and for the fiscal years ended June 30, 2017, 2016 and 2015 contained in Item 6 of the Form 10-K; and (iii) our unaudited condensed consolidated financial statements for the fiscal quarters ended September 30, 2017 and 2016, December 31, 2017 and 2016, and March 31, 2018 and 2017 in Note 20, “Unaudited Quarterly Data” of the Notes to Consolidated Financial Statements.
We have not filed and do not intend to file amendments to any of our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatements of our consolidated financial statements. In addition, we have not filed and do not intend to file a separate2020 Annual Report on Form 10-K, during the fourth quarter of fiscal year 2020, the Company reclassified certain operating expenses previously reported in the first three quarters of fiscal year 2020 as Selling, general and administrative expenses to Investigation, proxy solicitation and restatement expenses. The reclassifications resulted from management’s conclusion that those operating expenses related to non-recurring professional services fees to assist the Company with accounting and compliance activities following the filing of the 2019 Form 10-K, as well as the proxy solicitation costs incurred in fiscal year 2020. These reclassifications did not affect total operating expenses or net income.
COVID-19
A novel strain of coronavirus (COVID-19) was first identified in China in December 2019 and subsequently declared a global pandemic in March 2020 by the World Health Organization. COVID-19 containment measures began in parts of the United States in March 2020 resulting in forced closure of non-essential businesses and social distancing protocols. As a result, COVID-19 has impacted our business, significantly reducing foot traffic to distributed assets containing our electronic payment solutions and reducing discretionary spending by consumers. The Company did not observe meaningful reductions in processing volume until mid-March, when average daily processing volume decreased approximately 40%. By mid-April, processing volumes began to recover and have steadily improved through September 2020. As of September 30, 2020, our
average daily processing volume has increased 53% from the lows in April. At this time we are unable to reasonably estimate the length of time that containment measures will be needed in the United States. Furthermore, even after containment measures are lifted there can be no assurance as to the time required to regain operations and sales at levels prior to the pandemic.
In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of our employees by implementing work-from-home measures while continuing to diligently serve our customers. Additionally, we have created an internal task force to lead measures to protect the business in light of the volatility and uncertainty caused by the COVID-19 pandemic, including ensuring the safety of our employees and our community by implementing work from home policies, conserving liquidity, evaluating cost saving actions, partnering with customers to position USAT for renewed growth post crisis, and pausing on international expansion. The liquidity conservation and cost savings initiatives include but are not limited to: a 20% salary reduction for the senior leadership team until December 2020; deferral of all cash-based director fees until calendar year 2021; a temporary furlough of about 10% of our employee base; negotiations with and concessions from vendors in regard to cost reductions and/or payment deferrals; an increased collection effort to reduce outstanding accounts receivables; and various supply chain/inventory improvements. Our supply chain network has not been significantly disrupted and we are continuously monitoring for the impact of COVID-19.
We continue to monitor the rapidly evolving situation and guidance from federal, state and local public health authorities. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, based on current trends and if the pandemic is not substantially contained in the near future, COVID-19 may have a material adverse impact on our revenue growth as well as our overall profitability in fiscal year ended June 30, 2018. Concurrent with this filing, we are filing Amendment No. 1 on Form 10-Q/A2021, and may lead to our Quarterly Reports on Form 10-Q for each ofhigher sales-related, inventory-related, and operating reserves. Further, a sustained downturn may also result in a decrease in the fiscal quarters ended December 31, 2018 and March 31, 2019 (together with the Original Filing, the “Fiscal Year 2019 Form 10-Qs”). We had not timely filed our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 and the Fiscal Year 2019 Form
10-Qs as a result of the internal investigation of the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) and the subsequent restatement of certainfair value of our prior period financial statements as more fully described below.goodwill or other intangible assets, causing them to exceed their carrying value. This may require us to recognize an impairment to those assets.
Background
On September 11, 2018, the Company announced that the Audit Committee with the assistance of independent legal and forensic accounting advisors, was in the process of conducting an internal investigation of current and prior period matters relating to certain of the Company’s contractual arrangements, including the accounting treatment, financial reporting and internal controls related to such arrangements. The Audit Committee’s investigation focused principally on certain customer transactions entered into by the Company during fiscal years 2017 and 2018.OUT OF PERIOD ADJUSTMENT
On January 14, 2019, the Company reported that the Audit Committee’s internal investigation was substantially completed, the principal findings of the internal investigation, and the remedial actions to be implemented by the Company as a result of the internal investigation. The Audit Committee found that, for certain of the customer transactions under review, the Company had prematurely recognized revenue. The Audit Committee proposed certain adjustments to previously reported revenues related to fiscal quarters occurring during the 2017 and 2018 fiscal years of the Company. In most cases, revenues that had been recognized prematurely were, or were expected to be, recognized in subsequent quarters, including quarters subsequent to the quarters impacted by the investigative findings. The investigation further found that certain items that had been recorded as expenses, such as the payment of marketing or servicing fees, were more appropriately treated as contra-revenue items in earlier fiscal quarters.
On February 4, 2019, the Board of Directors of the Company, upon the recommendation of the Audit Committee, and based upon the adjustments to previously reported revenues proposed by the Audit Committee, determined that the following financial statements previously issued by the Company should no longer be relied upon: (1) the audited consolidated financial statements for the fiscal year ended June 30, 2017; and (2) the quarterly and year-to-date unaudited condensed consolidated financial statements for September 30, 2017, December 31, 2017, and March 31, 2018.
On October 7, 2019, the Board of Directors of the Company, upon the recommendation of the Audit Committee, and based upon the non-investigatory adjustments described below, determined that the following financial statements previously issued by the Company should no longer be relied upon: (1) the audited consolidated financial statements for the fiscal year ended June 30, 2015; (2) the audited consolidated financial statements for the fiscal year ended June 30, 2016; and (3) the quarterly and year-to-date unaudited condensed consolidated financial statements for September 30, 2016, December 31, 2016, and March 31, 2017.
During the course of the restatement process and related reaudit of prior periodpreparing its financial statements management performed a review of certain historical significant accounting policies, significant transactions, and the methodologies and assumptions underlying significant reserves. As a result, in addition to the adjustments resulting from the Audit Committee investigation described above, the Company also corrected for out of period adjustments and errors identified during management's review of significant accounts and transactions.
The significant account and transaction review adjustments referred to above were reflected where appropriate in the restatement of our fiscal year 2017 financial statements, in the restatement of our financial statements for the fiscal quarters and year-to-date ended September 30, 2016 and 2017, December 31, 2016 and 2017, and March 31, 2017 and 2018 appearing in Note 20 of the Form 10-K/A, and in the restated selected financial data for fiscal years 2015, 2016 and 2017 appearing in Item 6 of the Form 10-K, and primarily relate to the failure to maintain an effective control environment including ensuring that required accounting methodologies, policies and supporting documentation were in place and are primarily the result of:
•Since fiscal year 2014 the Company recognized a partial tax valuation allowance on its deferred tax assets. However, starting in fiscal year 2016 the Company should have recognized a full valuation allowance on its deferred tax assets.
•The Company historically inappropriately accounted for a fiscal year 2014 sale-leaseback transaction as an operating lease. The Company should have accounted for such transaction as a capital lease.
•The Company did not have effective processes and controls to recognize adequate reserves for sales-tax. In addition, the Company did not have effective processes to evaluate and estimate the Company’s reserves for bad debts, sales returns, and excess and obsolete inventory at the lower of cost or net realizable value. It was concluded that the previous processes were based on assumptions that were not sufficiently documented or supported.
•The Company previously capitalized certain sales commissions. The Company concluded that these costs did not meet the applicable criteria for capitalization and should have been expensed as incurred.
•The Company historically incorrectly classified its convertible preferred stock within shareholders’ equity on the Company’s consolidated balance sheets.
Effect of Restatement on Previously Filed September 30, 2017 Form 10-Q
A summary of the impact of these matters on income (loss) before taxes is presented below:
|
| | | |
($ in thousands) | Increase / (Decrease) Restatement Impact |
| Three months ended September 30, 2017 |
Audit Committee Investigation-related Adjustments: | |
Revenue | $ | (411 | ) |
Costs of sales | $ | 165 |
|
Gross profit | $ | (576 | ) |
Operating loss | $ | (576 | ) |
Loss before income taxes | $ | (576 | ) |
| |
Significant Account and Transaction Review and Other: | |
Revenue | $ | 53 |
|
Costs of sales | $ | 497 |
|
Gross profit | $ | (444 | ) |
Operating loss | $ | (622 | ) |
Loss before income taxes | $ | (886 | ) |
A summary of the impact of these matters on the condensed consolidated balance sheet is presented below, excluding any tax effect from the restatement adjustments in the aggregate:
|
| | | |
($ in thousands) | Increase / (Decrease) Restatement Impact |
| As of September 30, 2017 |
Audit Committee Investigation-related Adjustments: | |
Accounts receivable | $ | (315 | ) |
Finance receivables, net | $ | (1,640 | ) |
Inventory, net | $ | 941 |
|
Prepaid expenses and other current assets | $ | 25 |
|
Other assets | $ | 82 |
|
Accounts payable | $ | 270 |
|
Accrued expenses | $ | 803 |
|
| |
Significant Account and Transaction Review and Other: | |
Accounts receivable | $ | 77 |
|
Inventory, net | $ | (305 | ) |
Prepaid expenses and other current assets | $ | (136 | ) |
Other assets | $ | (543 | ) |
Property and equipment, net | $ | (1,149 | ) |
Accounts payable | $ | 25 |
|
Accrued expenses | $ | 8,319 |
|
Capital lease obligations and current obligations under long-term debt | $ | (21 | ) |
Deferred revenue | $ | (27 | ) |
Deferred gain from sale-leaseback transactions | $ | (198 | ) |
Deferred gain from sale-leaseback transactions, less current portion | $ | (99 | ) |
Common stock | $ | (166 | ) |
The restatement adjustments were tax effected and any tax adjustments reflected in the condensed consolidated financial statements in this note relate entirely to the tax effect on the restatement adjustments.
The tables below present the effect of the financial statement adjustments related to the restatement discussed above of the Company's previously reported financial statements as of and for the three months ended September 30, 2017.2020, the Company identified an adjustment totaling $0.8 million related to prior year activity. The adjustment relates to the fact that the Company failed to bill an equipment supplier for USAT-provided parts that the supplier incorporated into the assembly of hardware that was sold to the Company, which resulted in an understatement of accounts receivable and an overstatement of cost of equipment sales in fiscal year 2020.
The effectCompany analyzed the potential impact of the restatement onerror in accordance with the previously filed condensed consolidated balance sheet as of September 30, 2017 is as follows:
|
| | | | | | | | | | | |
| As of September 30, 2017 |
($ in thousands) | As Previously Reported | | Adjustments | | As Restated |
| | | | | |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 51,870 |
| | $ | — |
| | $ | 51,870 |
|
Accounts receivable | 10,288 |
| | (473 | ) | | 9,815 |
|
Finance receivables, net | 3,082 |
| | (1,641 | ) | | 1,441 |
|
Inventory, net | 8,240 |
| | 636 |
| | 8,876 |
|
Prepaid expenses and other current assets | 1,122 |
| | (66 | ) | | 1,056 |
|
Total current assets | 74,602 |
| | (1,544 | ) | | 73,058 |
|
| | | | | |
Non-current assets: | | | | | |
Finance receivables due after one year, net | 7,742 |
| | — |
| | 7,742 |
|
Other assets | 750 |
| | (461 | ) | | 289 |
|
Property and equipment, net | 11,850 |
| | (1,149 | ) | | 10,701 |
|
Deferred income taxes | 28,205 |
| | (28,205 | ) | | — |
|
Intangibles, net | 578 |
| | — |
| | 578 |
|
Goodwill | 11,492 |
| | — |
| | 11,492 |
|
Total non-current assets | 60,617 |
| | (29,815 | ) | | 30,802 |
|
| | | | | |
Total assets | $ | 135,219 |
| | $ | (31,359 | ) | | $ | 103,860 |
|
| | | | | |
Liabilities, convertible preferred stock and shareholders’ equity | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 14,211 |
| | $ | 295 |
| | $ | 14,506 |
|
Accrued expenses | 3,795 |
| | 8,422 |
| | 12,217 |
|
Line of credit, net | 7,051 |
| | — |
| | 7,051 |
|
Capital lease obligations and current obligations under long-term debt | 2,649 |
| | (21 | ) | | 2,628 |
|
Income taxes payable | 10 |
| | (10 | ) | | — |
|
Deferred revenue | — |
| | 439 |
| | 439 |
|
Deferred gain from sale-leaseback transactions | 197 |
| | (197 | ) | | — |
|
Total current liabilities | 27,913 |
| | 8,928 |
| | 36,841 |
|
| | | | | |
Long-term liabilities: | | | | | |
Deferred income taxes | — |
| | 109 |
| | 109 |
|
Capital lease obligations and long-term debt, less current portion | 1,049 |
| | — |
| | 1,049 |
|
Accrued expenses, less current portion | 62 |
| | — |
| | 62 |
|
Deferred gain from sale-leaseback transactions, less current portion | 99 |
| | (99 | ) | | — |
|
Total long-term liabilities | 1,210 |
| | 10 |
| | 1,220 |
|
| | | | | |
Total liabilities | $ | 29,123 |
| | $ | 8,938 |
| | $ | 38,061 |
|
Commitments and contingencies |
|
| |
|
| |
|
|
Convertible preferred stock: | | | | | |
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preference of $19,109 at September 30, 2017 | — |
| | 3,138 |
| | 3,138 |
|
Shareholders’ equity: | | | | | |
Preferred stock, no par value, 1,800,000 shares authorized, no shares issued | — |
| | — |
| | — |
|
Series A convertible preferred stock, 900,000 shares authorized, 445,063 issued and outstanding, with liquidation preference of $19,109 at September 30, 2017 | 3,138 |
| | (3,138 | ) | | — |
|
Common stock, no par value, 640,000,000 shares authorized, 50,194,731 shares issued and outstanding at September 30, 2017 | 286,463 |
| | (167 | ) | | 286,296 |
|
Accumulated deficit | (183,505 | ) | | (40,130 | ) | | (223,635 | ) |
Total shareholders’ equity | 106,096 |
| | (43,435 | ) | | 62,661 |
|
Total liabilities, convertible preferred stock and shareholders’ equity | $ | 135,219 |
| | $ | (31,359 | ) | | $ | 103,860 |
|
The effect ofappropriate guidance, from both a qualitative and quantitative perspective, and concluded that the restatement onerror was not material to any individual interim or annual period in fiscal year 2020 nor the previously filed condensed consolidated statement of operations forfirst quarter or estimated annual period results in fiscal year 2021. Accordingly, during the three months ended September 30, 2017 is2020, the Company recorded the $0.8 million as follows:a decrease to cost of equipment sales and an increase to accounts receivable as a result of this adjustment.
|
| | | | | | | | | | | |
| Three months ended September 30, 2017 |
($ in thousands, except per share data) | As Previously Reported | | Adjustments | | As Restated |
| | | | | |
Revenue: | | | | | |
License and transaction fees | $ | 19,944 |
| | $ | (547 | ) | | $ | 19,397 |
|
Equipment sales | 5,673 |
| | 189 |
| | 5,862 |
|
Total revenue | 25,617 |
| | (358 | ) | | 25,259 |
|
| | | | | |
Costs of sales: | | | | | |
Cost of services | 13,326 |
| | (79 | ) | | 13,247 |
|
Cost of equipment | 5,090 |
| | 741 |
| | 5,831 |
|
Total costs of sales | 18,416 |
| | 662 |
| | 19,078 |
|
Gross profit | 7,201 |
| | (1,020 | ) | | 6,181 |
|
| | | | | |
Operating expenses: | | | | | |
Selling, general and administrative | 6,746 |
| | 178 |
| | 6,924 |
|
Integration and acquisition costs | 762 |
| | — |
| | 762 |
|
Depreciation and amortization | 245 |
| | — |
| | 245 |
|
Total operating expenses | 7,753 |
| | 178 |
| | 7,931 |
|
Operating loss | (552 | ) | | (1,198 | ) | | (1,750 | ) |
| | | | | |
Other income (expense): | | | | | |
Interest income | 80 |
| | — |
| | 80 |
|
Interest expense | (209 | ) | | (264 | ) | | (473 | ) |
Total other expense, net | (129 | ) | | (264 | ) | | (393 | ) |
| | | | | |
Loss before income taxes | (681 | ) | | (1,462 | ) | | (2,143 | ) |
Benefit (provision) for income taxes | 468 |
| | (496 | ) | | (28 | ) |
| | | | | |
Net loss | (213 | ) | | (1,958 | ) | | (2,171 | ) |
Preferred dividends | (334 | ) | | — |
| | (334 | ) |
Net loss applicable to common shares | $ | (547 | ) | | $ | (1,958 | ) | | $ | (2,505 | ) |
Net loss per common share | | | | | |
Basic | $ | (0.01 | ) | | $ | (0.04 | ) | | $ | (0.05 | ) |
Diluted | $ | (0.01 | ) | | $ | (0.04 | ) | | $ | (0.05 | ) |
Weighted average number of common shares outstanding | | | | | |
Basic | 47,573,364 |
| | — |
| | 47,573,364 |
|
Diluted | 47,573,364 |
| | — |
| | 47,573,364 |
|
The effect of the restatement on the previously filed condensed consolidated statement of cash flows for the three months ended September 31, 2017 is as follows:
|
| | | | | | | | | | | |
| Three months ended September 30, 2017 |
($ in thousands) | As Previously Reported | | Adjustments | | As Restated |
| | | | | |
OPERATING ACTIVITIES: | | | | | |
Net loss | $ | (213 | ) | | $ | (1,958 | ) | | $ | (2,171 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
Non-cash stock-based compensation | 576 |
| | (167 | ) | | 409 |
|
(Gain) loss on disposal of property and equipment | (18 | ) | | — |
| | (18 | ) |
Non-cash interest and amortization of debt discount | 15 |
| | 2 |
| | 17 |
|
Bad debt expense | 118 |
| | 50 |
| | 168 |
|
Provision for inventory reserve | — |
| | 221 |
| | 221 |
|
Depreciation and amortization | 1,492 |
| | (122 | ) | | 1,370 |
|
Excess tax benefits | 67 |
| | — |
| | 67 |
|
Deferred income taxes | (535 | ) | | 551 |
| | 16 |
|
Recognition of deferred gain from sale-leaseback transactions | (43 | ) | | 43 |
| | — |
|
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | (3,192 | ) | | 43 |
| | (3,149 | ) |
Finance receivables, net | 8,771 |
| | 397 |
| | 9,168 |
|
Inventory, net | (3,648 | ) | | (252 | ) | | (3,900 | ) |
Prepaid expenses and other current assets | (217 | ) | | 114 |
| | (103 | ) |
Accounts payable and accrued expenses | (2,168 | ) | | 678 |
| | (1,490 | ) |
Deferred revenue | — |
| | 171 |
| | 171 |
|
Income taxes payable | — |
| | (55 | ) | | (55 | ) |
Net cash provided by operating activities | 1,005 |
| | (284 | ) | | 721 |
|
| | | | | |
INVESTING ACTIVITIES: | | | | | |
Purchase of property and equipment, including rentals | (992 | ) | | 272 |
| | (720 | ) |
Proceeds from sale of property and equipment, including rentals | 45 |
| | — |
| | 45 |
|
Net cash used in investing activities | (947 | ) | | 272 |
| | (675 | ) |
| | | | | |
FINANCING ACTIVITIES: | | | | | |
Issuance of common stock in public offering, net | 39,888 |
| | — |
| | 39,888 |
|
Repayment of capital lease obligations and long-term debt | (821 | ) | | 12 |
| | (809 | ) |
Net cash provided by financing activities | 39,067 |
| | 12 |
| | 39,079 |
|
| | | | | |
Net increase in cash and cash equivalents | 39,125 |
| | — |
| | 39,125 |
|
Cash and cash equivalents at beginning of year | 12,745 |
| | — |
| | 12,745 |
|
Cash and cash equivalents at end of period | $ | 51,870 |
| | $ | — |
| | $ | 51,870 |
|
3.2. ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting pronouncements adopted
In January 2017, the
ASC Topic 326 - Credit Losses
On July 1, 2020, we adopted Topic 326, Financial Accounting Standards Board (the "FASB") issued Instruments-Credit Losses, which was primarily introduced under Accounting Standards Update (“ASU”) No. 2017-04, Intangibles - Goodwill2016-13, “Financial Instruments – Measurement of Credit Losses on Financial Instruments”. Topic 326 introduces a new credit loss impairment methodology for financial assets measured at amortized cost, requiring recognition of the full lifetime expected credit losses upon initial recognition of the financial asset, replacing current GAAP, which generally requires that a loss be incurred before it is recognized. The expected credit loss model is based on historical experience, current conditions, and Other (Topic 350) - Simplifyingreasonable and supportable economic forecasts of collectability.
We adopted Topic 326 using the Testmodified retrospective approach through a cumulative-effect adjustment to retained earnings on July 1, 2020. The adoption impacted the calculation of our allowance for Goodwill Impairment ("ASU 2017-04"), which eliminates Step 2doubtful accounts on accounts receivables and our allowance for nonperforming finance receivables.
We estimate our allowances using an aging analysis of the receivables balances, primarily based on historical loss experience, as there have been no significant changes in the mix or risk characteristics of the receivable revenue streams used to calculate
historical loss rates. We also take into consideration that receivables for monthly service fees that are collected as part of the flow of funds from our transaction processing service have a lower risk profile than receivables for equipment and service fees billed under the goodwill impairment test. Under ASU 2017-04, an entity should performCompany’s standard payment terms of 30 to 60 days from invoice issuance, and adjust our aging analysis to incorporate those risk assessments. Current conditions are analyzed at each measurement date as we reassess whether our receivables continue to exhibit similar risk characteristics as the prior measurement date, and determine if the reserve calculation needs to be adjusted for new developments, such as a customer’s inability to meet its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment chargefinancial obligations. Lastly, we also factor reasonable and supportable economic expectations into our allowance estimate for the amount byasset’s entire expected life, which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effectivegenerally less than one year for annual or any interim goodwill impairment tests in fiscalaccounts receivable and five years beginning after December 15, 2019. We early adopted ASU 2017-04 for impairment tests to be performed on testing dates after July 1, 2017, which did not impact our condensed consolidated financial statements.finance receivables.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which modifies the accounting for certain aspects of share-based payments to employees. The
new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits are to be separately classified as an operating activity apart from other income tax cash flows. The standard also allows the Company to repurchase more of an employee’s vested shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows. The Company adopted this standard as of July 1, 2017.
The primary impactadoption of adoption was the recognition of excess tax benefits in the Company's provision for income taxes which is applied prospectively starting July 1, 2017 in accordance with the guidance. Adoption of the new standardthis pronouncement resulted in the recognition of $31 thousand of excess tax benefitsa $0.8 million decrease in the Company's provisionallowance for income taxesdoubtful accounts for accounts receivable, mainly related to subsequent favorable settlements of customer balances that were considered in the year ended June 30, 2018. Through June 30, 2017 excess tax benefits were reflected asexpected credit loss calculation, and a reduction of deferred tax assets via reducing actual operating loss carryforwards because such benefits had not reduced income taxes payable. Under$0.4 million increase in the new standard the treatment of excess tax benefits changed and the cumulative excess tax benefitsallowance for nonperforming finance receivables on our opening balance sheet as of June 30, 2017 amounting to $67 thousand were credited to accumulated deficit. July 1, 2020, with a corresponding net increase of $0.3 million in retained earnings.
The adoptionfollowing table represents a rollforward of ASU No. 2016-09 did not impact our statement of cash flowsthe allowance for doubtful accounts for accounts receivable for the three months endedending September 30, 2018 and 2017. 2020:
In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." The standard adds guidance to ASC 740, Income Taxes, that contain SEC guidance related to SAB 118. The standard is effective upon issuance. Refer to Note 12 for further information regarding the impact of the standard. | | | | | | | | |
| | Three months ended September 30, |
($ in thousands) | | 2020 |
| | |
Beginning balance, prior to adopting ASC 326 | | $ | 7,676 | |
Impact of ASC 326 | | (757) | |
Provision for credit losses | | 394 | |
Ending balance | | $ | 7,313 | |
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” ASU 2017-01 provides guidance in ascertaining whether a collection of assets and activities is considered a business. The Company adopted this standard as of July 1, 2018, and its adoption did not have a material effect
For details on the Company’s condensed consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718), Scopeadoption of Modification Accounting.” The standard provides guidance about which changesTopic 326 relating to the terms or conditions of a share-based payment award require modification accounting, which may result in a different fair value for the award. The Company adopted this standard as of July 1, 2018, and it will be applied prospectively to awards modified on or after the adoption date. Its adoption did not have a material effect on the Company's condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments.” The new guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this standard as of July 1, 2018 on a retrospective basis, and its adoption did not have a material effect on the Company’s condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) (“the New Standard”). The New Standard provides a single model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The New Standard also requires expanded qualitative and quantitative disclosures about the nature, timing and uncertainty of revenue and cash flows rising from contracts with customers. The Company adopted the New Standard on July 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of July 1, 2018. Results for reporting periods beginning after July 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic revenue recognition methodology under ASC 605. ReferFinance Receivables, please refer to Note 5 for further discussion.
Accounting pronouncements to be adopted
The Company is evaluating whether- Finance Receivables, including the effectsCompany’s rollforward of the following recent accounting pronouncements, or any other recently issued but not yet effective accounting standards, will have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows.allowance for nonperforming finance receivables.
In February 2016, the FASB issued
ASU 2016-02, "Leases2018-15 - Intangibles—Goodwill and Other (Topic 842)," which will require, among other items, lessees to recognize a right of use asset and a related lease liability for most leases on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. The Company adopted this new guidance on July 1, 2019, using the optional modified retrospective transition method. The Company expects the adoption to result in gross up on its consolidated balance sheets from the recognition of assets and liabilities arising out of operating leases. The Company will recognize assets for the right to use the underlying leased property during the lease term and will recognize liabilities for the corresponding financial obligation to make lease payments to the lessor.350): Internal-Use Software
The Company plans to elect the transition package of practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs. The Company is substantially complete with the evaluation of the impact on the condensed consolidated financial statements of adopting the new lease standard and does not anticipate a material impact on the condensed consolidated statements of operations, shareholders’ equity, and cash flows or to retained earnings. Additionally, the Company does not anticipate the adoption of the standard will impact any debt covenants or result in significant changes to the internal processes, including the internal control over financial reporting. The Company’s operating leases primarily comprise of office facilities, with the most significant leases relating to corporate headquarters in Malvern, Pennsylvania and an office in San Francisco, California. The Company is in the process of finalizing changes to its systems and processes in conjunction with its review of lease agreements and will disclose the actual impact of adopting ASU 2016-02 in its interim report on Form 10-Q for the quarter ended September 30, 2019.
In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements”. These amendments provide clarifications and corrections to certain ASC subtopics including “Compensation - Stock Compensation - Income Taxes” (Topic 718-740), “Business Combinations - Income Taxes” (Topic 805-740) and “Fair Value Measurement - Overall” (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The new guidance changes the accounting for estimated credit losses pertaining to certain types of financial instruments including, but not limited to, trade and lease receivables. This pronouncement will be effective for fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018.The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.” The standard simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal year. The Company expects that the adoption of this ASU would not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other (Topic 350): Internal-Use Software.” This standard aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standardadoption of this ASU on July 1, 2020 did not have a material impact on our condensed consolidated financial statements.
Accounting pronouncements to be adopted
The Company is evaluating whether the effects of the following recent accounting pronouncements, or any other recently issued but not yet effective accounting standards, will have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows.
ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2019, including2020 and interim periods within those fiscal years. The Company does not expect the changes to have a material impact on its financial statements.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard provides practical expedients for contract modifications with the transition from reference rates, such as LIBOR, that are expected to be discontinued. This guidance is applicable for the Company's revolving credit facility and secured term facility with JPMorgan Chase Bank, N.A., which uses LIBOR as a reference rate. The provisions of ASU 2020-04 can be applied at any point on a prospective basis through December 31, 2022. If and when the Company modifies its revolving credit facility and secured term facility with JPMorgan Chase Bank, N.A. to
use an alternative reference rate, the application of ASU 2020-04 would allow for the modification to be considered not substantial and be accounted for prospectively by adjusting the effective interest rate in accordance with ASC 470-50.
3. LEASES
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for office space, warehouses, automobiles and office equipment. USAT’s leases have lease terms of one year to eight years which means that it will be effective for usand some include options to extend and/or terminate the lease. The exercise of lease renewal options is at the Company’s sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the first quarterdetermination of the lease term. The Company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or any material restrictive covenants.
Right-of-Use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. As most of our fiscal year beginning July 1, 2020.leases do not provide an implicit rate, we use our incremental borrowing rate, which is the collateralized rate of interest that we would pay to borrow over a similar term an amount equal to the lease payments, based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. USAT has lease agreements with lease and non-lease components. The Company is currently evaluatingelected the practical expedient related to treating lease and assessing the impact this guidance will have on its condensed consolidated financial statements.
4. ACQUISITION OF CANTALOUPE SYSTEMS, INC.
On November 9, 2017, the Company acquirednon-lease components as a single lease component for all of the outstanding equity interests of Cantaloupe pursuant to the Merger Agreement, for approximately $88.2 million in aggregate consideration. Cantaloupe is a premier provider of cloud and mobile solutions for vending, micro markets, and office coffee service.
The acquisition expanded the Company’s existing platform to become an end-to-end enterprise platform integrating Cantaloupe’s Seed Cloud, which provides cloud and mobile solutions for dynamic route scheduling, automated pre-kitting, responsive merchandising, inventory management, warehouse and accounting management,leases as well as cashless vending. In additionelecting a policy exclusion permitting leases with an original lease term of less than one year to new technologybe excluded from the ROU assets and services, duelease liabilities. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
At September 30, 2020, the Company has the following balances recorded in the balance sheet related to Cantaloupe’s existing customer base, the acquisition expands the Company’s footprint into new global markets.its lease arrangements:
| | | | | | | | | | | | | | |
($ in thousands) | | Classification | | As of September 30, 2020 |
| | | | |
Assets | | | | |
Operating leases | | Operating lease ROU assets | | $ | 5,417 | |
| | | | |
Liabilities | | | | |
Current: | | | | |
Operating leases | | Accrued expenses | | 1,097 | |
| | | | |
Non-current: | | | | |
Operating leases | | Operating lease liabilities, non-current | | $ | 4,469 | |
Components of lease cost are as follows:
| | | | | | | | | | | |
($ in thousands) | Three months ended September 30, 2020 | | Three months ended September 30, 2019 |
| | | |
Operating lease costs* | 529 | | | 701 | |
* Includes short-term lease and variable lease costs, which are not material.
Supplemental cash flow information and non-cash activity related to our leases are as follows:
| | | | | | | | | | | |
($ in thousands) | Three months ended September 30, 2020 | | Three months ended September 30, 2019 |
| | | |
Supplemental cash flow information: | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 346 | | | $ | 495 | |
| | | |
Non-cash activity | | | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating lease liabilities | $ | 0 | | | $ | 3,071 | |
Weighted-average remaining lease term and discount rate for our leases are as follows:
| | | | | | | | | | | |
| | | Three months ended September 30, 2020 |
Weighted-average remaining lease term (years) | | | |
Operating leases | | | 5.0 |
| | | |
Weighted-average discount rate | | | |
Operating leases | | | 6.8 | % |
Maturities of lease liabilities by fiscal year for our leases are as follows:
| | | | | |
($ in thousands) | Operating Leases |
Remainder of 2021 | $ | 1,083 | |
2022 | 1,461 | |
2023 | 1,493 | |
2024 | 1,030 | |
2025 | 627 | |
Thereafter | 893 | |
Total lease payments | $ | 6,587 | |
Less: Imputed interest | (1,021) | |
Present value of lease liabilities | $ | 5,566 | |
Lessor Accounting
The fair valueCompany offers its customers financing for the lease of our POS electronic payment devices. We account for these transactions as sales-type leases. Our sales-type leases generally have a non-cancellable term of 60 months. Certain leases contain an end-of-term purchase option that is generally insignificant and is reasonably certain to be exercised by the lessee. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases, which are typically our JumpStart program leases, which are agreements for renting POS electronic payment devices. JumpStart terms are typically 36 months and are cancellable with 30 to 60 days' written notice.
The Company treats lease and non-lease components as a single component for those leases where the timing and pattern of transfer for the non-lease component and associated lease component are the same and the stand-alone lease component would be classified as an operating lease if accounted for separately. The combined component is then accounted for under Topic 606, Revenue from Contracts with Customers or Topic 842 depending on the predominant characteristic of the purchase pricecombined component, which was Topic 606 for the Company's operating leases. All QuickStart leases are sales-type and do not qualify for the election.
Lessor consideration is allocated between lease components and the non-lease components using the requirements under Topic 606. Revenue from sales-type leases is recognized upon shipment to the customer and the interest portion is deferred and recognized as earned. The revenues related to the sales-type leases are included in Equipment sales in the Condensed
Consolidated Statements of Operations and a portion of the lease payments as interest income. Revenue from operating leases is recognized ratably over the applicable service period with service fee revenue related to the leases included in License and transaction fees in the Condensed Consolidated Statements of Operations.
Property and equipment used for the operating lease rental program consisted of the following:
| | | | | | | | | | | | | | |
($ in thousands) | | September 30, 2020 | | June 30, 2020 |
Cost | | $ | 32,425 | | | 32,445 | |
Accumulated depreciation | | (28,088) | | | (27,745) | |
Net | | $ | 4,337 | | | $ | 4,700 | |
|
| | | | |
($ in thousands) | | |
Cash consideration, net of cash acquired | | $ | 65,181 |
|
USAT shares issued as stock consideration (As Restated) | | 23,279 |
|
Post-closing adjustment for working capital | | (253 | ) |
Total consideration (As Restated) | | $ | 88,207 |
|
The Company financed a portion of the purchase price with proceeds from a $25.0 million term loan (“Term Loan”) and $10.0 million of borrowings under a line of credit (“Revolving Credit Facility”), provided by JPMorgan Chase Bank, N.A., for an aggregate principal amount of $35.0 million. Refer to Note 10 for additional details.
The acquisition of Cantaloupe was accounted for as a business combination using the acquisition method. Under the acquisition method of accounting, the assets acquired and liabilities assumedCompany’s net investment in the transaction were recorded at the date of acquisition at their respective fair values using assumptions that are subject to change. The Company has finalized its valuation of certain assets and liabilities recorded in connection with this transaction as of June 30, 2018.
The following table summarizes the fairsales-type leases (carrying value of total consideration transferred to the holders of all of the outstanding equity interests of Cantaloupe at the acquisition date of November 9, 2017:
|
| | | | |
($ in thousands) | | November 9, 2017 (As Restated) |
Accounts receivable | | $ | 2,921 |
|
Finance receivables | | 1,480 |
|
Inventory | | 282 |
|
Prepaid expense and other current assets | | 646 |
|
Finance receivables due after one year | | 3,603 |
|
Other assets | | 50 |
|
Property and equipment | | 2,234 |
|
Intangibles | | 30,800 |
|
Total assets acquired | | 42,016 |
|
Accounts payable | | (1,591 | ) |
Accrued expenses | | (2,401 | ) |
Deferred revenue | | (518 | ) |
Capital lease obligations and current obligations under long-term debt | | (666 | ) |
Capital lease obligations and long-term debt, less current portion | | (1,134 | ) |
Deferred income tax liabilities | | (157 | ) |
Total identifiable net assets | | 35,549 |
|
Goodwill | | 52,658 |
|
Total fair value | | $ | 88,207 |
|
Amounts allocated to intangible assets included $18.9 million related to customer relationships, $10.3 million related to developed technology, and $1.6 million related to trade names. The fair value of the acquired customer relationships was determined using the excess earnings method. The fair value of both the acquired developed technologylease receivables) and the acquired trade names was determined using the relief from royalty method. The estimated useful life of the acquired intangible assets ranged from 6 to 18 years, with a weighted average estimated useful life of 13 years. The related amortization will be recorded on a straight-line basis.
Goodwill of $52.7 million arising from the acquisition includes the expected synergies between Cantaloupe and the Company, the value of the employee workforce, and intangible assets that do not qualify for separate recognition at the time of acquisition. The goodwill, which is not deductible for income tax purposes, was assigned to the Company’s only reporting unit.
Supplemental disclosure of pro forma information
The following supplemental unaudited pro forma information presents the combined results of USAT and Cantaloupe as if the acquisition of Cantaloupe occurred on July 1, 2016. This supplemental pro forma information has been prepared for comparative purposes and does not purportfuture minimum amounts to be indicative of what would have occurred had the acquisition been madecollected on July 1, 2016, nor are they indicative of any future results.
The pro forma results include adjustments for the preliminary purchase accounting impact of the Cantaloupe acquisition (including, but not limited to, amortization associated with the acquired intangible assets, and the interest expense and amortization of deferred financing fees associated with the Term Loan and Revolving Credit Facility that were used to finance a portion of the purchase price, along with the related tax impacts) and the alignment of accounting policies. Other material non-recurring adjustments are reflected in the pro forma and described below:
|
| | | | |
| | Three months ended September 30, 2017 (as restated) |
($ in thousands, except per share data) | |
Revenue | | $ | 30,889 |
|
Net loss attributable to USAT | | (2,020 | ) |
Net loss attributable to USAT common shares | | $ | (2,354 | ) |
Net loss per share: | | |
Basic | | $ | (0.04 | ) |
Diluted | | $ | (0.04 | ) |
Weighted average number of common shares outstanding: | | |
Basic | | 53,548,814 |
|
Diluted | | 53,548,814 |
|
The supplemental unaudited pro forma earnings for the three months ended September 30, 2017 were adjusted to exclude $0.8 million of integration and acquisition costs.
5. REVENUE
Adoption of ASC 606, Revenue from Contracts with Customers
In applying the new revenue guidance, the Company evaluated its population of open contracts with customers on July 1, 2018. The effect of adoption of this new guidance on the Condensed Consolidated Balance Sheet as of July 1, 2018 was to increase prepaid expenses and other current assets, other assets, and deferred revenue, with an offsetting decrease in the opening accumulated deficit, as follows:
|
| | | | | | | | | | | |
| June 30, 2018 | | | | July 1, 2018 |
($ in thousands) | As Reported | | Adjustment | | Revised |
| | | | | |
ASSETS | | | | | |
Prepaid expenses and other current assets | $ | 929 |
| | $ | 251 |
| | $ | 1,180 |
|
Other assets | 720 |
| | 1,254 |
| | 1,974 |
|
LIABILITIES | | | | | |
Deferred revenue | 511 |
| | 1,127 |
| | 1,638 |
|
SHAREHOLDERS' EQUITY | | | | | |
Accumulated deficit | (232,748 | ) | | 376 |
| | (232,372 | ) |
The impact of the adoption of ASC 606 by financial statement line item within the Condensed Consolidated Balance Sheetthese lease receivables as of September 30, 2018 and Condensed Consolidated Statement of Operations for the three months ended September 30, 2018 is as follows:2020 are disclosed within Note 5 - Finance Receivables.
4. REVENUE
|
| | | | | | | | | | | |
| September 30, 2018 | | | | September 30, 2018 |
($ in thousands) | As Reported | | Adjustment | | Under Legacy Guidance |
| | | | | |
BALANCE SHEET | | | | | |
Prepaid expenses and other current assets | $ | 1,463 |
| | $ | (253 | ) | | $ | 1,210 |
|
Other assets | 1,900 |
| | (1,264 | ) | | 636 |
|
Deferred revenue | 1,428 |
| | (1,116 | ) | | 312 |
|
Accumulated deficit | (238,692 | ) | | (400 | ) | | (239,092 | ) |
STATEMENT OF OPERATIONS | | | | |
|
|
License and transaction fees | 28,971 |
| | (11 | ) | | 28,960 |
|
Selling, general and administrative | 9,450 |
| | 12 |
| | 9,462 |
|
Net loss | (6,320 | ) | | (23 | ) | | (6,343 | ) |
The adoption of ASC 606 had no effect on the cash flows from operating activities, investing activities or financing activities included in the Condensed Consolidated Statement of Cash Flows for the three months ended September 30, 2018.
Revenue Recognition Under ASC 606 (Periods commencing after July 1, 2018)
The Company provides an end-to-end payment solution which integrates hardware, software, and payment processing in the self-service retail market. The Company has contractual agreements with customers that set forth the general terms and conditions of the relationship, including pricing of goods and services, payment terms and contract duration. Revenue is recognized when the obligation under the terms of the Company’s contract with its customer is satisfied and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services.
The foundation of the Company’s business model is to act as the Merchant of Record for its sellers. We provide cashless vending payment services in exchange for monthly service fees, in addition to collecting usage-based consideration for completed transactions. The contracts we enter into with third-party suppliers provide us with the right to access and direct their services when processing a transaction. The Company combines the services provided by third-party suppliers to enable customers to accept cashless payment transactions, indicating that it controls all inputs in directing their use to create the combined service. Additionally, we sell cashless payment devices (e.g., e-Ports, Seed), which are either directly sold or leased through the Company’s QuickStart or JumpStart programs.
Cashless vending services represent a single performance obligation as the combination of the services provided gives the customer the ability to accept cashless payments. Certain services are distinct, but are not accounted for separately as the rights are conterminous, they are transferred concurrently and the outcome is the same as accounting for the services as individual performance obligations. The single performance obligation is determined to be a stand-ready obligation to process payments whenever a consumer intends to make a purchase at a point-of-sale device. As the Company is unable to predict the timing and quantity of transactions to be processed, the assessment of the nature of the performance obligation is focused on each time increment rather than the underlying activity. Therefore, cashless vending services are viewed to comprise a series of distinct days of service that are substantially the same and have the same pattern of transfer to the customer. As a result, the promise to stand ready is accounted for as a single performance obligation.
Revenue related to cashless vending services is recognized over the period in which services are provided, with usage-based revenue recognized as transactions occur. Consideration for this service includes fixed fees for standing ready to process transactions, and generally also includes usage-based fees, priced as a percentage of transaction value and/or a specified fee per transaction processed. The total transaction price of usage-based services is determined to be variable consideration as it is based on unknown quantities of services to be performed over the contract term. The underlying variability is satisfied each day the service is performed and provided to the customer. Clients are billed for cashless vending services on a monthly basis and for transaction processing as transactions occur.
Equipment sales represent a separate performance obligation, the majority of which is satisfied at a point in time through outright sales or sales-type leases (ASC 840) when the equipment is delivered to the customer. Revenues related to JumpStart equipment
are recognized over time as the customer obtains the right to use the equipment through an operating leases, however these are not significant to the Company’s total revenue.
USAT will occasionally offer volume discounts, rebates or credits on certain contracts, which is considered variable consideration. USAT uses either the most-likely or estimated value method to estimate the amount of the consideration, based on what the Company expects to better predict the amount of consideration to which it will be entitled to on a contract-by-contract basis. The Company will qualitatively assess if the variable consideration should be constrained to prevent possible significant reversal of revenue, as applicable.
The Company assesses the goods and/or services promised in each customer the contract and separately identifies a performance obligation for each promise to transfer to the customer a distinct good or service. The Company then allocates the transaction price to each performance obligation in the contract using relative standalone selling prices. The Company determines standalone selling prices based on the price at which a good or service is sold separately. If the standalone selling price is not observable through historic data, the Company estimates the standalone selling price by considering all reasonably available information, including market data, trends, as well as other company or customer-specific factors.
The Company recognizes fees charged to our customers primarily on a gross basis as transaction revenue when we are the principal in respect of completing a payment transaction. As a principal to the transaction, we control the service of completing payments for our customers through the payment ecosystem. The fees paid to payment processors and other financial institutions are recognized as transaction expense. For certain transactions in which we act in the capacity as an agent, those transactions are recorded on a net basis.
Disaggregated Revenue
Based on similar operational and economic characteristics, the Company’s revenue from contracts with customers is disaggregated by License and Transaction Feestransaction fees and Equipment Sales,sales, as reported in the Company’s Condensed Consolidated Statements of Operations. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are influenced by economic factors, and also representsrepresent the level at which management makes operating decisions and assesses financial performance.
Transaction Price Allocated to Future Performance Obligations
In determining the transaction price allocated to unsatisfied performance obligations, we diddo not include non-recurring charges. Further, we appliedapply the practical expedient to not consider arrangements with an original expected duration of one year or less, which are primarily month to month rental agreements. The majority of our contracts are considered to have a contractual term of between 36 and 60 months based on implied and explicit termination penalties. These amounts will be converted into revenue in future periods as work is performed, primarily based on the services provided or at delivery and acceptance of products, depending on the applicable accounting method.method for the services or products being delivered.
The following table reflects the estimated fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
| | | | | |
($ in thousands) | As of September 30, 2020 |
| |
Remainder of 2021 | $ | 9,215 | |
2022 | 10,940 | |
2023 | 8,808 | |
2024 | 4,751 | |
2025 and thereafter | 1,660 | |
Total | $ | 35,374 | |
|
| | | |
($ in thousands) | As of September 30, 2018 |
| |
2020 | 7,551 |
|
2021 | 9,256 |
|
2022 | 7,443 |
|
2023 | 5,887 |
|
2024 and thereafter | 3,629 |
|
Total | $ | 33,766 |
|
Warranties and Returns
Accounts Receivable, Contract Assets and Contract Liabilities
A contract with a customer creates legal rights and obligations. As the Company performs performance obligations under customer contracts, a right to unconditional consideration is recorded as an account receivable.
Contract liabilities represent consideration received from customers in excess of revenues recognized (i.e., deferred revenue). Contract liabilities are classified as current or noncurrent based on the nature of the underlying contractual rights and obligations.Liabilities
The Company’s contract liability (i.e., deferred revenue) balances are as follows:
| | | | | | | | | | | | | | |
| | Three months ended September 30, | | Three months ended September 30, |
($ in thousands) | | 2020 | | 2019 |
| | | | |
Deferred revenue, beginning of the period | | $ | 1,698 | | | $ | 1,681 | |
Deferred revenue, end of the period | | 1,639 | | | 1,649 | |
Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period | | $ | 93 | | | $ | 129 | |
|
| | | | |
| | Three months ended September 30, |
($ in thousands) | | 2018 |
| | |
Deferred revenue, beginning of the period | | $ | 511 |
|
Plus: adjustment for adoption of ASC 606 | | 1,127 |
|
Deferred revenue, beginning of the period, as adjusted | | 1,638 |
|
Deferred revenue, end of the period | | 1,428 |
|
Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period | | 156 |
|
The change in the contract liabilitiesliability balances period-over-period is primarily attributable to the result of timing difference between the Company’s satisfaction of a performance obligation and payment from the customer.
Contract Costs
The Company incurs costs to obtain contracts with customers, primarily in the form of commissions to sales employees. The Company recognizes as an asset the incremental costs of obtaining a contract with a customer if it expects to recover these costs. The Company currently does not incur material costs to fulfill its obligations under a contract once it is obtained but before transferring goods or services to the customer. At September 30, 2018,2020 and June 30, 2020, the Company had net capitalized costs to obtain contracts of $0.3 million and $1.3$0.4 million included in prepaidPrepaid expenses and other current assets and other$1.8 million included in Other noncurrent assets on the condensed consolidated balance sheet, respectively.
Contract costs are amortized on a systematic basis consistent with the transfer to the customerCondensed Consolidated Balance Sheet. None of the goods or services to which the asset relates. A straight-line or proportional amortization method is used depending upon which method best depicts the pattern of transfer of the goods or services to the customer. In addition, these capitalized contract costs are evaluated for impairment by comparing, on a pooled basis, the expected future net cash flows from underlying customer relationships to the carrying amount of the capitalized contract costs.
In order to determine the appropriate amortization period for contract costs, the Company considers a number of factors, including expected early terminations, estimated terms of customer relationships, the useful lives of technology USAT uses to provide goods and services to its customers, whether future contract renewals are expected and if there is any incremental commission to be paid on a contract renewal. The Company amortizes these assets over the expected period of benefit. Costs to obtain a contract with an expected period of benefit of one year or less are expensed when incurred.were impaired. During the three months ended September 30, 2018,2020 and 2019, amortization of capitalized contract costs was $0.1 million.
6. RESTRUCTURING/INTEGRATION COSTS
Subsequent to the Cantaloupe acquisition, the Company initiated workforce reductions to integrate the Cantaloupe business for which costs totaled $2.1 million for the year ended June 30, 2018. The Company included these severance charges under “Integration and acquisition costs” within the Condensed Consolidated Statements of Operations, with the remaining outstanding balance included within “Accrued expenses” on the Condensed Consolidated Balance Sheet. Liabilities for severance will generally be paid during the next twelve months.both periods.
The following table summarizes the Company’s severance activity for the three months ended September 30, 2018:
|
| | | | |
($ in thousands) | | Workforce reduction |
Balance at July 1, 2018 | | $ | 1,019 |
|
Plus: additions | | 137 |
|
Less: cash payments | | (301 | ) |
Balance at September 30, 2018 | | $ | 855 |
|
7.5. FINANCE RECEIVABLES
Finance
The Company's finance receivables consist of financed devices under the Quickstart program and Cantaloupe devices contractually associated with the Seed platform. Predominately all of the Company’s finance receivables agreements are classified as non-cancellable sixty month sales-type leases. As of September 30, 2020 and June 30, 2020, finance receivables consist of the following:
| | | | | | | | | | | | | | |
($ in thousands) | | September 30, 2020 | | June 30, 2020 |
Current finance receivables, net | | $ | 7,356 | | | 7,468 | |
Finance receivables due after one year | | 10,385 | | | 11,213 | |
Total finance receivables, net of nonperforming allowance of $559 and $150, respectively | | $ | 17,741 | | | $ | 18,681 | |
|
| | | | | | | | |
($ in thousands) | | September 30, 2018 | | June 30, 2018 |
Finance receivables, net | | $ | 5,141 |
| | $ | 4,603 |
|
Finance receivables due after one year | | 12,770 |
| | 13,246 |
|
Total finance receivables, less allowance of $7 and $12, respectively | | $ | 17,911 |
| | $ | 17,849 |
|
On July 1, 2020, the Company adopted Topic 326 using the modified retrospective approach, and began calculating our allowance for nonperforming finance receivables under an expected loss model rather than an incurred loss model. Prior to July 1, 2020, the allowance was based on an estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date.
We collect lease payments from customers as part of the flow of funds from our transaction processing service. Balances are considered past due if customers do not have sufficient transaction revenue to cover the monthly lease payment by the end of the monthly billing period. The Company routinely evaluates outstandingmonitors customer payment performance and uses prior payment performance as a measure to assess the capability of the customer to repay contractual obligations of the lease agreements as scheduled. On an as-needed basis, qualitative information may be taken into consideration if new information arises related to the customer’s ability to repay the lease.
Credit risk for these receivables is continuously monitored by management and reflected within the allowance for nonperforming finance receivables by aggregating leases with similar risk characteristics into pools that are collectively assessed. Because the Company’s lease contracts generally have similar terms, customer characteristics around transaction processing volume and sales were used to disaggregate the leases. Our key credit quality indicator is the amount of transaction revenue we process for impairment based on pasteach customer relative to their lease payment due, balancesas we consider this customer characteristic to be the strongest predictor of the risk of customer default. Customers with low processing volume or accounts otherwise determinedwith transaction sales that are insufficient to cover the lease payment are considered to be at a higher risk of loss. A finance receivable is classified as nonperforming if it is considered probable the Company will be unablecustomer default.
Customers are pooled based on their ratio of gross sales to collect all contractual interestrequired monthly lease obligations into two categories for high ratio and principal payments as scheduled. low ratio customers. Using these two categories, we performed an analysis of historical write-offs to calculate reserve percentages by aging buckets for each category of customer.
At September 30, 20182020, the gross lease payable by current payment performance on a contractual basis and June 30, 2018, credit quality indicatorsyear of origination consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Leases by Origination |
($ in thousands) | | Up to 1 Year Ago | | Between 1 and 2 Years Ago | | Between 2 and 3 Years Ago | | Between 3 and 4 Years Ago | | Between 4 and 5 Years Ago | | More than 5 Years Ago | | Total |
Current | | $ | 4,680 | | | $ | 4,013 | | | $ | 4,986 | | | $ | 3,073 | | | $ | 248 | | | $ | 18 | | | $ | 17,018 | |
30 days and under | | 24 | | | 51 | | | 102 | | | 11 | | | 0 | | | 0 | | | 188 | |
31-60 days | | 5 | | | 8 | | | 31 | | | 10 | | | 1 | | | 0 | | | 55 | |
61-90 days | | 26 | | | 29 | | | 64 | | | 13 | | | 2 | | | 0 | | | 134 | |
Greater than 90 days | | 82 | | | 164 | | | 519 | | | 100 | | | 31 | | | 9 | | | 905 | |
Total finance receivables | | $ | 4,817 | | | $ | 4,265 | | | $ | 5,702 | | | $ | 3,207 | | | $ | 282 | | | $ | 27 | | | $ | 18,300 | |
At June 30, 2020, the gross lease payable by current payment performance on a contractual basis and year of origination consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Leases by Origination |
($ in thousands) | | Up to 1 Year Ago | | Between 1 and 2 Years Ago | | Between 2 and 3 Years Ago | | Between 3 and 4 Years Ago | | Between 4 and 5 Years Ago | | More than 5 Years Ago | | Total |
Current | | $ | 4,950 | | | $ | 4,406 | | | $ | 4,811 | | | $ | 2,730 | | | $ | 555 | | | $ | 22 | | | $ | 17,474 | |
30 days and under | | 40 | | | 66 | | | 121 | | | 28 | | | 11 | | | 1 | | | 267 | |
31-60 days | | 13 | | | 15 | | | 13 | | | 0 | | | 0 | | | 0 | | | 41 | |
61-90 days | | 10 | | | 44 | | | 62 | | | 19 | | | 3 | | | 0 | | | 138 | |
Greater than 90 days | | 22 | | | 263 | | | 537 | | | 67 | | | 14 | | | 8 | | | 911 | |
Total finance receivables | | $ | 5,035 | | | $ | 4,794 | | | $ | 5,544 | | | $ | 2,844 | | | $ | 583 | | | $ | 31 | | | $ | 18,831 | |
At September 30, 2020, credit quality indicators by year of origination consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Leases by Origination |
($ in thousands) | | Up to 1 Year Ago | | Between 1 and 2 Years Ago | | Between 2 and 3 Years Ago | | Between 3 and 4 Years Ago | | Between 4 and 5 Years Ago | | More than 5 Years Ago | | Total |
High ratio customers | | $ | 4,321 | | | $ | 3,607 | | | $ | 4,434 | | | $ | 2,519 | | | $ | 121 | | | $ | 9 | | | $ | 15,011 | |
Low ratio customers | | 496 | | | 658 | | | 1,268 | | | 688 | | | 161 | | | 18 | | | 3,289 | |
Total finance receivables | | $ | 4,817 | | | $ | 4,265 | | | $ | 5,702 | | | $ | 3,207 | | | $ | 282 | | | $ | 27 | | | $ | 18,300 | |
The following table represents a rollforward of the allowance for nonperforming finance receivables for the three months ending September 30, 2020 and 2019:
| | | | | | | | | | | | | | |
| | Three months ended September 30, | | Three months ended September 30, |
($ in thousands) | | 2020 | | 2019 |
| | | | |
Beginning balance, prior to adopting ASC 326 | | $ | 150 | | | $ | 606 | |
Impact of ASC 326 | | 409 | | | — | |
Provision for credit losses | | 0 | | | 1 | |
Charge-offs | | 0 | | | 0 | |
Ending balance | | $ | 559 | | | $ | 607 | |
|
| | | | | | | | |
($ in thousands) | | September 30, 2018 | | June 30, 2018 |
Performing | | $ | 17,911 |
| | $ | 17,849 |
|
Nonperforming | | 7 |
| | 12 |
|
Total | | $ | 17,918 |
| | $ | 17,861 |
|
Cash to be collected on our performing finance receivables due for each of the fiscal years are as follows: | | | | | |
($ in thousands) | |
2021 | $ | 8,563 | |
2022 | 5,607 | |
2023 | 4,447 | |
2024 | 2,675 | |
2025 | 1,126 | |
Thereafter | 44 | |
Total amounts to be collected | 22,462 | |
Less: interest | (3,603) | |
Less: allowance for nonperforming receivables | (559) | |
Total finance receivables | $ | 18,300 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Age Analysis of Past Due Finance Receivables |
As of September 30, 2018 |
($ in thousands) | | Current | | 30 and Under Days Past Due | | 31 – 60 Days Past Due | | 61 – 90 Days Past Due | | Greater than 90 Days Past Due | | Total Finance Receivables |
QuickStart Leases | | $ | 17,465 |
| | $ | 126 |
| | $ | 44 |
| | $ | 102 |
| | $ | 181 |
| | $ | 17,918 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Age Analysis of Past Due Finance Receivables |
As of June 30, 2018 |
($ in thousands) | | Current | | 30 and Under Days Past Due | | 31 – 60 Days Past Due | | 61 – 90 Days Past Due | | Greater than 90 Days Past Due | | Total Finance Receivables |
QuickStart Leases | | $ | 17,609 |
| | $ | 56 |
| | $ | 7 |
| | $ | 56 |
| | $ | 133 |
| | $ | 17,861 |
|
8.6. EARNINGS (LOSS) PER SHARE
The calculation of basic earnings (loss) per share (“EPS”) and diluted EPS are presented below:
| | | | | | | | | | | | | | |
| | Three months ended September 30, |
($ in thousands, except per share data) | | 2020 | | 2019 |
| | | | |
Numerator for basic and diluted loss per share | | | | |
Net loss | | $ | (6,613) | | | $ | (11,508) | |
Preferred dividends | | (334) | | | (334) | |
Net loss applicable to common shareholders | | $ | (6,947) | | | $ | (11,842) | |
| | | | |
Denominator for basic loss per share - Weighted average shares outstanding | | 64,859,002 | | | 60,096,852 | |
Effect of dilutive potential common shares | | 0 | | | 0 | |
Denominator for diluted loss per share - Adjusted weighted average shares outstanding | | 64,859,002 | | | 60,096,852 | |
| | | | |
Basic loss per share | | $ | (0.11) | | | $ | (0.20) | |
Diluted loss per share | | $ | (0.11) | | | $ | (0.20) | |
|
| | | | | | | | |
| | Three months ended September 30, |
($ in thousands, except per share data) | | 2018 | | 2017 (as restated) |
| | | | |
Numerator for basic and diluted loss per share | | | | |
Net loss | | $ | (6,320 | ) | | $ | (2,171 | ) |
Preferred dividends | | (334 | ) | | (334 | ) |
Net loss available to common shareholders | | $ | (6,654 | ) | | $ | (2,505 | ) |
| | | | |
Denominator for basic loss per share - Weighted average shares outstanding | | 60,053,912 |
| | 47,573,364 |
|
Effect of dilutive potential common shares | | — |
| | — |
|
Denominator for diluted loss per share - Adjusted weighted average shares outstanding | | 60,053,912 |
| | 47,573,364 |
|
| | | | |
Basic loss per share | | $ | (0.11 | ) | | $ | (0.05 | ) |
Diluted loss per share | | $ | (0.11 | ) | | $ | (0.05 | ) |
AntidilutiveAnti-dilutive shares excluded from the calculation of diluted loss per share were 1,420,301 and 1,206,4712,534,225 for the three months ended September 30, 20182020 and 1,293,317 for the three months ended September 30, 2017.2019.
9.
7. GOODWILL AND INTANGIBLES
Intangible asset balances and goodwill consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 | | |
($ in thousands) | | Gross | | Accumulated Amortization | | Net | | Amortization Period |
Intangible assets: | | | | | | | | |
Brand and tradenames | | $ | 1,695 | | | $ | (756) | | | $ | 939 | | | 3 - 7 years |
Developed technology | | 10,939 | | | (5,571) | | | 5,368 | | | 5 - 6 years |
Customer relationships | | 19,049 | | | (3,107) | | | 15,942 | | | 10 - 18 years |
Total intangible assets | | $ | 31,683 | | | $ | (9,434) | | | $ | 22,249 | | | |
| | | | | | | | |
Goodwill | | 63,945 | | | — | | | 63,945 | | | Indefinite |
| | | | | | | | |
Total intangible assets & goodwill | | $ | 95,628 | | | $ | (9,434) | | | $ | 86,194 | | | |
| | | | As of September 30, 2018 | | | As of June 30, 2020 | |
($ in thousands) | | Gross | | Accumulated Amortization | | Net | | Amortization Period | ($ in thousands) | | Gross | | Accumulated Amortization | | Net | | Amortization Period |
Intangible assets: | | | | | | | | Intangible assets: | | | | | | | | |
Non-compete agreements | | $ | 2 |
| | $ | (2 | ) | | $ | — |
| | 2 years | Non-compete agreements | | $ | 2 | | | $ | (2) | | | $ | 0 | | | 2 years |
Brand and tradenames | | 1,695 |
| | (291 | ) | | 1,404 |
| | 3 - 7 years | Brand and tradenames | | 1,695 | | | (699) | | | 996 | | | 3 - 7 years |
Developed technology | | 10,939 |
| | (1,882 | ) | | 9,057 |
| | 5 - 6 years | Developed technology | | 10,939 | | | (5,110) | | | 5,829 | | | 5 - 6 years |
Customer relationships | | 19,049 |
| | (977 | ) | | 18,072 |
| | 10 - 18 years | Customer relationships | | 19,049 | | | (2,841) | | | 16,208 | | | 10 - 18 years |
Total intangible assets | | $ | 31,685 |
| | $ | (3,152 | ) | | $ | 28,533 |
| | Total intangible assets | | $ | 31,685 | | | $ | (8,652) | | | $ | 23,033 | | |
| | | | | | | | | | | | | | |
Goodwill | | 64,149 |
| | — |
| | 64,149 |
| | Indefinite | Goodwill | | 63,945 | | | — | | | 63,945 | | | Indefinite |
| | | | | | | | |
Total intangible assets & goodwill | | $ | 95,834 |
| | $ | (3,152 | ) | | $ | 92,682 |
| | Total intangible assets & goodwill | | $ | 95,630 | | | $ | (8,652) | | | $ | 86,978 | | |
|
| | | | | | | | | | | | | | |
| | As of June 30, 2018 | | |
($ in thousands) | | Gross | | Accumulated Amortization | | Net | | Amortization Period |
Intangible assets: | | | | | | | | |
Non-compete agreements | | $ | 2 |
| | $ | (2 | ) | | $ | — |
| | 2 years |
Brand | | 1,695 |
| | (226 | ) | | 1,469 |
| | 3 - 7 years |
Developed technology | | 10,939 |
| | (1,421 | ) | | 9,518 |
| | 5 - 6 years |
Customer relationships | | 19,049 |
| | (711 | ) | | 18,338 |
| | 10 - 18 years |
Total intangible assets | | $ | 31,685 |
| | $ | (2,360 | ) | | $ | 29,325 |
| | |
| | | | | | | | |
Goodwill | | 64,149 |
| | — |
| | 64,149 |
| | Indefinite |
| | | | | | | | |
Total intangible assets & goodwill | | $ | 95,834 |
| | $ | (2,360 | ) | | $ | 93,474 |
| | |
For the three months ended September 30, 20182020 and September 30, 20172019, there was $0.8 million and $44 thousandfor each respective period in amortization expense related to intangible assets, respectively.assets.
As set forth in the Merger Agreement, the Company finalized a post-working capital adjustment of $0.3 million during the quarter ended March 31, 2018. Accordingly, this post-working capital adjustment is reflected within goodwill as of June 30, 2018.
10.8. DEBT AND OTHER FINANCING ARRANGEMENTS
The Company's debt and other financing arrangements as of September 30, 20182020 and June 30, 20182020 consisted of the following:
| | | | | | | | | | | | | | |
| | As of September 30, | | As of June 30, |
($ in thousands) | | 2020 | | 2020 |
| | | | |
2020 Antara Term Facility | | $ | 0 | | | $ | 15,000 | |
2021 JPMorgan Credit Facility | | 15,000 | | | 0 | |
Other, including finance lease obligations | | 3,258 | | | 3,358 | |
Less: unamortized issuance costs and debt discount | | (321) | | | (2,595) | |
Total | | 17,937 | | | 15,763 | |
Less: debt and other financing arrangements, current | | (3,871) | | | (3,328) | |
Debt and other financing arrangements, noncurrent | | $ | 14,066 | | | $ | 12,435 | |
|
| | | | | | | |
| As of September 30, | | As of June 30, |
($ in thousands) | 2018 | | 2018 |
| | | |
Revolving Credit Facility | $ | 10,000 |
| | $ | 10,000 |
|
Term Loan | 22,708 |
| | 23,333 |
|
Other | 2,355 |
| | 2,689 |
|
Less: unamortized issuance costs | (242 | ) | | (256 | ) |
Total | 34,821 |
| | 35,766 |
|
Less: debt and other financing arrangements, current | (33,889 | ) | | (34,639 | ) |
Debt and other financing arrangements, noncurrent | $ | 932 |
| | $ | 1,127 |
|
Details of interest expense presented on the Condensed Consolidated Statements of Operations are as follows: | | | | Three months ended September 30, | | | | Three months ended September 30, |
($ in thousands) | | 2018 | | 2017 (as restated) | ($ in thousands) | | 2020 | | 2019 |
Heritage Line of Credit | | $ | — |
| | $ | 133 |
| |
Revolving Credit Facility | | 175 |
| | — |
| |
Term Loan | | 350 |
| | — |
| |
2020 Antara Term Facility | | 2020 Antara Term Facility | | | $ | 2,779 | | | $ | 0 | |
2021 JPMorgan Credit Facility | | 2021 JPMorgan Credit Facility | | 172 | | | 0 | |
2018 JPMorgan Revolving Credit Facility | | 2018 JPMorgan Revolving Credit Facility | | 0 | | | 77 | |
2018 JPMorgan Term Loan | | 2018 JPMorgan Term Loan | | 0 | | | 160 | |
Other interest expense | | 261 |
| | 340 |
| Other interest expense | | 364 | | | 228 | |
Total interest expense | | $ | 786 |
| | $ | 473 |
| Total interest expense | | $ | 3,315 | | | $ | 465 | |
Avidbank Line of
JPMorgan Chase Bank Credit Agreement
On January 15, 2016,August 14, 2020, the Company repaid all amounts outstanding under the $30.0 million senior secured term loan facility (“2020 Antara Term Facility”) with Antara Capital Master Fund LP (“Antara”) and Avidbank Corporate Finance, a division of Avidbank (“Avidbank”) entered into a Fifteenth Amendment (the “Amendment”) to the Loan and Securitycredit agreement with JPMorgan Chase Bank, N.A.
The 2021 JPMorgan Credit Agreement (as amended, the “Avidbank Loan Agreement”) previously entered into between them. The Avidbank Loan Agreement providedprovides for a $5 million secured revolving line of credit facility (the “Avidbank Line of Credit”“2021 JPMorgan Revolving Facility”) of up to $7.0 million and a three-year$15 million secured term loan tofacility (the “2021 JPMorgan Secured Term Facility” and together with the 2021 JPMorgan Revolving Facility, the “2021 JPMorgan Credit Facility”), which includes an uncommitted expansion feature that allows the Company to increase the total revolving commitments and/or add new tranches of term loans in an aggregate amount not to exceed $5 million. In connection with the principal amountconsummation of $3.0 million (the
“Avidbank Term Loan”). The Amendment increased the amount available under2021 JPMorgan Credit Agreement, the Avidbank Line of Credit to $7.5 million less the amount thenCompany repaid all amounts outstanding under the Avidbank2020 Antara Term Loan.Facility. The outstanding balanceCompany recognized $2.8 million of interest expense related to the 2020 Antara Term Facility during the fiscal quarter ended September 30, 2020, including the recognition of $2.6 million of unamortized issuance costs and debt discount as interest expense, reflecting the difference between the carrying value of the amounts advanced2020 Antara Term Facility and the amount due upon repayment.
The 2021 JPMorgan Credit Facility has a three year maturity, with interest determined, at the Company’s option, on a base rate of LIBOR plus an applicable margin tied to the Company’s total leverage ratio and having ranges between 2.75% and 3.75% for base rate loans and between 3.75% and 4.75% for LIBOR loans. In the event of default, the interest rate may be increased by 2.00%. The 2021 JPMorgan Credit Facility will also carry a commitment fee of 0.50% per annum on the unused portion. Through December 31, 2021, the applicable interest rate will be LIBOR plus 4.75%. Principal payments are due in quarterly installments of $187,500 beginning December 31, 2020 for a total annual repayment of $750,000.
The Company’s obligations under the Avidbank Line2021 JPMorgan Credit Facility are secured by first priority security interests in substantially all of the assets of the Company. The 2021 JPMorgan Credit bear interest at 2% above the prime rate as published in The Wall Street Journal or five percent (5%), whichever is higher. The Avidbank Term Loan was used byAgreement includes customary representations, warranties and covenants, and acceleration, indemnity and events of default provisions, including a financial covenant requiring the Company to repaymaintain an adjusted quick ratio of not less than 2.00 to Avidbank an advance that had been made1.00, not less than 2.50 to the Company under the Avidbank Line of Credit in December 2015,1.00 beginning October 1, 2020, not less than 2.75 to 1.00 beginning January 1, 2021 and which had been used by3.00 to 1.00 beginning April 1, 2021, and a financial covenant requiring the Company to pay for the VendScreen business. The Avidbank Term Loan provides that interest only is payable monthly during year one, interest and principal is payable monthly during years two and three, and all outstanding principal and accrued interest is due and payable on the third anniversarymaintain, as of the Avidbank end of each of its fiscal quarters commencing with the fiscal quarter ended December 31, 2021, a total leverage ratio of not greater than 3.00 to 1.00.
Term Loan. The Avidbank Term Loan bears interest at an annual rate equal to 1.75% above the prime rate as published from time to time by The Wall Street Journal, or five percent (5%), whichever is higher.Facility with Antara
Heritage Line of Credit
In March 2016,On October 9, 2019, the Company entered into a Loan and Security Agreementcommitment letter with Heritage Bank of Commerce (“Heritage Bank”), providing forAntara, pursuant to which Antara committed to extend to the Company a $30.0 million senior secured revolving line of credit in an amount of up to $12.0 million (the “Heritage Line of Credit”) at an interest rate calculated based on the Federal Reserve’s Prime plus 2.25%. The Heritage Line of Credit and the Company’s obligations under the Heritage Loan Documents were secured by substantially all of the Company’s assets, including its intellectual property. The Company utilized approximately $7.0 million under the Heritage Line of Credit to satisfy the existing Avidbank Line of Credit and related Avidbank Term Loan.
During March 2017,term loan facility. On October 31, 2019, the Company entered into a Financing Agreement with Antara to draw $15.0 million on the third amendment with Heritage Bank that extended2020 Antara Term Facility and agreed to draw an additional $15.0 million at any time between July 31, 2020 and April 30, 2021, subject to the maturity dateterms of the LineFinancing Agreement. If the Company failed to make the subsequent draw on the 2020 Antara Term Facility by April 30, 2021, the Company would pay Antara a commitment termination fee equal to 3% of the subsequent draw commitment. The outstanding amount of the draws under the 2020 Antara Term Facility bore interest at 9.75% per annum, payable monthly in arrears. The proceeds of the initial draw were used to repay the outstanding balance of the 2018 JPMorgan Revolving Credit from March 29, 2017Facility (as defined below) due to September 30, 2018.JPMorgan in the amount of $10.1 million, including accrued interest, and to pay transaction expenses. The Company would also incur a prepayment premium of 5% of the principal balance if prepaid on or prior to December 31, 2020.
On NovemberOctober 9, 2017,2019, the Company paidalso sold shares of the Company’s common stock to Antara at a price below market value. Since the 2020 Antara Term Facility and equity issuance were negotiated in contemplation of each other and executed within a short period of time, the Company evaluated the debt and equity financing as a combined arrangement, and estimated the fair values of the debt and equity components to allocate the proceeds, net of the registration rights agreement liability on a relative fair value basis between the debt and equity components. The non-lender fees incurred to establish the debt and equity financing arrangement were allocated to the debt and equity components on a relative fair value basis and capitalized on the Company’s balance sheet. $0.9 million was allocated to debt issuance costs and $0.1 million was allocated to debt commitment fees. The 2020 Antara Term Facility agreement also contained a mandatory prepayment feature that was determined to be an embedded derivative, requiring bifurcation and fair value recognition for the derivative liability. The allocation of the proceeds to the debt component and the bifurcation of the embedded derivative liability resulted in a $2.1 million debt discount.
On August 14, 2020, the Company repaid all amounts due onoutstanding under the Loan2020 Antara Term Facility and Security Agreement with Heritage Bank of Commerce.entered into the 2021 JPMorgan Credit Agreement. The Company recorded a chargeliability for the commitment termination fee and prepayment premium for $1.2 million as of $0.1 million to write-off any remaining debt issuance costs related toJune 30, 2020, which was paid during the Line of Credit to interest expense in the quarter ending December 31, 2017. Pursuant to such payment, all commitments of Heritage Bank of Commerce were terminated, and the Heritage Loan and Security Agreement was terminated.three months ended September 30, 2020.
Revolving Credit Facility and Term Loan with JPMorgan Chase
On November 9, 2017, in connection with the acquisition of Cantaloupe, the Company entered into a five year credit agreement among the Company, as the borrower, its subsidiaries, as guarantors, and JPMorgan, Chase Bank, N.A., as the lender and administrative agent for the lender (the “Lender”), pursuant to which the Lender (i) made a $25 million term loan (“2018 JPMorgan Term LoanLoan”) to the Company and (ii) provided the Company with thea line of credit (“2018 JPMorgan Revolving Credit FacilityFacility”) under which the Company may borrow revolving credit loans in an aggregate principal amount not to exceed $12.5 million at any time.
The proceeds of the Term Loan and borrowings All advances under the Revolving Credit Facility, in an aggregate principal amount equal to $35.0 million, were used by the Company to finance a portion of the purchase price for the acquisition of Cantaloupe ($27.8 million) and repay existing indebtedness to Heritage Bank of Commerce ($7.2 million). Future borrowings under the Revolving Credit Facility may be used by the Company for working capital and general corporate purposes of the Company and its subsidiaries. The principal amount of the Term Loan is payable quarterly beginning on December 31, 2017 and the Term Loan, all advances under the2018 JPMorgan Revolving Credit Facility and all other obligations mustwere required to be paid in full at maturity on November 9, 2022.
Loans under the five year credit agreement bear interest, at the Company's option, by reference to a base rate or a rate based on LIBOR, in either case, plus an applicable margin determined quarterly based on the Company's Total Leverage Ratio as of the last day of each fiscal quarter. The applicable interest rate on the loans for the three months ended September 30, 2018 is2019 was LIBOR plus 4%. The Term Loan and Revolving Credit Facility contain customary representations and warranties and affirmative and negative covenants and require the Company to maintain a minimum quarterly Total Leverage Ratio and Fixed Charge Coverage Ratio. The Revolving Credit Facility and Term Loan also require the Company to furnish various financial information on a quarterly and annual basis.
Due to the Company's delay in filing its periodic reports, between September 28, 2018, and September 30, 2019, the parties entered into various agreements to provide for the extension of the delivery of the Company’s financial information required under the terms of the credit agreement. In connection with these agreements, the Company incurred extension fees due to the lender, totaling $0.2 million between September 28, 2018 and June 30, 2019. Additionally, during the quarter ended March 31, 2019 the Company prepaid $20.0 million of the balance outstanding under the Term Loan, $0.6 million of which was applied to the installment payment due on March 31, 2019 and the remainder of which was applied to the last repayment installment obligations due under the Term Loan. On September 30, 2019, the Company prepaid the remaining principal balance of the 2018 JPMorgan Term Loan, of $1.5 million and agreed to permanently reduceon October 31, 2019, the amount available under the Revolving Credit Facility to $10 million which representedCompany repaid the outstanding balance on the date thereof. The agreements also provide that the Company cannot incur additional borrowings on
the2018 JPMorgan Revolving Credit Facility without the Lender‘s prior consent. Further, the parties agreed that the applicable interest rate on the Revolving Credit Facility and Term Loan will be LIBOR plus 4% until such time as the Company delivers certain financial information required under the credit agreement.Facility.
On March 29, 2019 and September 18, 2019, the Company obtained waivers of an event of default under the credit agreement. The event of default is the result of the Company having maintained deposits on account with a financial institution in excess of the amounts permitted by the credit agreement and not having transferred certain deposit accounts to the Lender. The waiver requires the Company to remedy the event of default by March 31, 2020 by which time the Company expects to be in compliance with the underlying covenant. As of June 30, 2019, the Company is not in compliance with the fixed charge coverage ratio and the total leverage ratio, which represents an event of default under the credit agreement. The Company has classified all amounts outstanding under the Revolving Credit Facility and Term Loan as current liabilities as of September 30, 2018 and June 30, 2018.
Other Long-Term Borrowings
In connection with the acquisition of Cantaloupe, the Company assumed debt of $1.8 million, with an outstanding balance of $1.3$0.1 million and $1.4$0.2 million as of September 30, 20182020 and June 30, 2018 respectively. The balance for the period ended September 30, 2018 and June 30, 2018 is2020, respectively, comprised of: (i) $0.4 million and $0.4 million of promissory notes bearing an interest rate of 5% and maturing on April 5, 2020 with principal and interest payments due monthly; (ii) $0.6 million and $0.7 million of promissory notes bearing an interest rate of 10% and maturing on April 1, 2021 with principal and interest payments due quarterly;quarterly.
In the fourth quarter of fiscal year 2020, we received loan proceeds of approximately $3.1 million (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and (iii) $0.2 million and $0.3 millionEconomic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). We intend to use the PPP Loan in accordance with the provisions of promissory notes bearing anthe CARES Act. The loan bears a fixed interest rate of 12%1% over a two year term from the approval date of April 28, 2020. The application for these funds required the Company to, in good faith, certify that the current economic uncertainty caused by COVID-19 made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account our current business activity and maturingour ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on December 15, 2019 with principalthe Company having initially qualified for the loan and interest payments due quarterly.qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.
The Company periodically enters into capital lease obligations to finance certain office and network equipment for use in its daily operations. At
9. ACCRUED EXPENSES
Accrued expenses consisted of the following as of September 30, 20182020 and June 30, 2018, such capital lease obligations were $0.3 million and $0.4 million , respectively. The interest rates on these obligations range from approximately 5.6% to 9.0% and the lease terms range from 2 to 5 years.2020:
| | | | | | | | | | | | | | |
| | As of September 30, | | As of June 30, |
($ in thousands) | | 2020 | | 2020 |
| | | | |
Accrued sales tax | | $ | 21,114 | | | $ | 20,036 | |
Accrued compensation and related sales commissions | | 3,350 | | | 2,757 | |
Operating lease liabilities - current | | 1,097 | | | 1,075 | |
Accrued professional fees | | 1,427 | | | 924 | |
Income taxes payable | | 93 | | | 123 | |
Accrued other taxes and filing fees | | 218 | | | 220 | |
Accrued other, including settlement of shareholder class action lawsuit | | 1,581 | | | 5,130 | |
Total accrued expenses | | $ | 28,880 | | | $ | 30,265 | |
11.
10. FAIR VALUE MEASUREMENTS
The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1 ‑ Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 ‑ Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 ‑ Inputs are unobservable and reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.
Financial assets and liabilities are initially recorded at fair value. The carrying amounts of certain of the Company’s financial instruments, principally accounts receivable,including cash equivalents, accounts receivable, accounts payable and accrued expenses, and short-term finance receivables, are carried at cost which approximates fair value due to the short-term maturity of these instruments.instruments and are Level 1 assets or liabilities of the fair value hierarchy. We have not identified material impacts from COVID-19 on the fair value of our financial assets and liabilities.
The Company’s obligations under its long-term debt agreements are carried at amortized cost, which approximates their fair value as of September 30, 2020. The fair value of the Company’s obligations under its long-term debt agreements approximate their carryingwith JPMorgan Chase were considered Level 2 liabilities of the fair value hierarchy because these instruments have interest rates that reset frequently. The fair value of the Company's obligations under its long-term debt agreements with Antara as such instruments areof June 30, 2020 was approximately $15.8 million and considered a Level 3 liability of the fair value hierarchy because this instrument used significant unobservable inputs consistent with those used in determining the embedded derivative liability values, as discussed below.
As discussed in Note 8, the Company’s 2020 Antara Term Facility agreement contained a mandatory prepayment feature that was determined to be an embedded derivative, requiring bifurcation and fair value recognition. At June 30, 2020, the Company’s embedded derivative liability was measured at market rates currently available tofair value using a probability-weighted discounted cash flow model including assumptions for (1) management's estimates of the Company.probability and timing of future cash flows and related events; (2) the Company's risk-adjusted discount rate that includes a company-specific risk premium; and (3) the Company's cost of debt; and was classified as a Level 3 liability of the fair value hierarchy and included as a component of Accrued expenses on the
12.consolidated balance sheets as of June 30, 2020. The Company paid the prepayment premium on the 2020 Antara Term Facility and derecognized the embedded derivative liability during the three months ended September 30, 2020.
11. INCOME TAXES
On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was signed into law. Substantially all of the provisions of the Act are effective for taxable years beginning after December 31, 2017. The Act includes significant changes to the Internal Revenue Code of 1986 (as amended, the “Code”), including amendments which significantly change the taxation of individuals and business entities. The Act contains numerous provisions impacting the Company, the most significant of which reduces the Federal corporate statutory tax rate from 34% to 21%, as well as the elimination of the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized, the creation of a new limitation on deductible interest expense, and the change in rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The various provisions under the Act deemed most relevant to the Company have been considered in preparation of its condensed consolidated financial statements as of September 30, 2018. To the extent that clarifications or interpretations materialize in the future that would impact upon the effects of the Act incorporated into the September 30, 2018 financial statements, those effects will be reflected in the future as or if they materialize.
For the three months ended September 30, 2018,2020, the Company recorded an income tax provision of $18 thousand, which$40 thousand. As of September 30, 2020, the Company reviewed the existing deferred tax assets in light of COVID-19 and continues to record a full valuation against its deferred tax assets. The income tax provisions primarily relatesrelate to the Company's uncertain tax positions, as well as state income and franchise taxes. As of September 30, 2020, the Company had a total unrecognized income tax benefit of $0.2 million. The provision is based upon actual loss before income taxes for the three months ended September 30, 2018,2020, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision. The Company will continue to monitor the status of the COVID-19 pandemic and its impact on our results of operations.
For the three months ended September 30, 2019, an income tax provision of $59 thousand was recorded. As of September 30, 2019, the Company continued to record a full valuation against its deferred tax assets. The income tax provision primarily relates to the Company’s uncertain tax positions, as well as state income and franchise taxes. As of September 30, 2019, the Company had a total unrecognized income tax benefit of $0.2 million. The provision is based upon actual loss before income taxes for the three months ended September 30, 2019, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.
The accounting for deferred income taxes in the acquisition of Cantaloupe did not consider the potential effects of IRS Code Section 382 relating to the limitation on use of operating loss carryforwards created by Cantaloupe for its changes in ownership because the analysis required for such determination has not yet been completed. If upon completion of such analysis there are limitations on the use of operating loss carryforwards created by Cantaloupe totaling approximately $16.3 million. The potential impact is immaterial to the condensed consolidated financial statements due to the existing valuation allowance recorded against the Company’s deferred tax assets.
For the three months ended September 30, 2017, an income tax provision of $28 thousand was recorded. The provision is based upon actual loss before income taxes for the three months ended September 30, 2017, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.
13.12. EQUITY
On July 25, 2017, the Company closed its underwritten public offering of 9,583,332 shares of its common stock at a public offering price of $4.50 per share. The foregoing included the full exercise of the underwriters' option to purchase 1,249,999 additional shares from the Company. The gross proceeds to the Company from the offering, before deducting underwriting discounts and commissions and other offering expenses, was approximately $43.1 million.
On November 6, 2017, the Company entered into a Merger Agreement with Cantaloupe for cash and 3,423,367 shares of the company’s stock valued at $23.3 million. Refer to Note 4 for details on the Merger Agreement.
WARRANTS
The Company had 23,978 warrants outstanding as of September 30, 20182020 and June 30, 2018,2020, all of which were exercisable at $5.00 per share. The warrants have an expiration date of March 29, 2021.
STOCK OPTIONS
The Company estimates the grant date fair value of the stock options it grants using a Black-Scholes valuation model. The Company’s assumption for expected volatility is based on its historical volatility data related to market trading of its own common stock. The Company bases its assumptions foruses the simplified method to determine expected term, as the Company does not have adequate historical exercise and forfeiture behavior on which to base the expected life of the new stock option grants on the life of the option granted, and if relevant, its analysis of the historical exercise patterns of its stock options.assumption. The dividend yield assumption is based on dividends expected to be paid over the expected life of the stock option. The risk-free interest rate assumption is determined by using the U.S. Treasury rates of the same period as the expected option term of each stock option.
In July 2017, 135,000 stock options were granted for 11 employees vesting 1/3 on July 26, 2018, 1/3 on July 26, 2019 and 1/3 on July 26,
During the three months ended September 30, 2020, expiring if not exercised prior to July 26, 2022. The options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended.
In August 2017, the Company awardedgranted stock options to its Chief Executive Officer and Chief Financial Officer to purchase up to 19,047 and 25,000 shares respectivelycertain employees which vest each year over a three-year period. Certain of commonthose stock at an exercise price of $5.25 per share. The Chief Executive Officer options vest on August 16, 2018, expiring if not exercised prior to August 16, 2024. The Chief Financial Officer options vest 1/3 on August 16, 2018, 1/3 on August 16, 2019 and 1/3 on August 16, 2020, expiring if not exercised prior to August 16, 2024. The Chief Executive Officer options are intendedalso subject to qualify as incentivethe achievement of performance goals to be established by the Company for each fiscal year. Because the performance conditions of those stock options granted have not yet been established as of September 30, 2020, a measurement date under Section 422 of the Internal Revenue Code of 1986, as amended, and the Chief Financial Officer options are non-qualified stock options.
In September 2018, the Company awardedASC 718, Compensation - Stock Compensation, has not yet been established for those stock options to 102 employees to purchase up to 400,000 shares of common stock at an exercise price of $8.75.and compensation cost will not be measured and recorded until the date on which those specific performance terms are established and mutually understood with the awardee.
The fair value of all options granted during the three months ended September 30, 2018 and 20172020 was determined using the following assumptions:assumptions and includes only options with an established measurement date under ASC 718:
| | | | | | | | |
| | Three months ended September 30, |
| | 2020 |
Expected volatility (percent) | | 76.6% - 77.3% |
Expected life (years) | | 4.5 |
Expected dividends | | 0.0 | % |
Risk-free interest rate (percent) | | 0.2% - 0.3% |
Number of options granted | | 467,500 | |
Weighted average exercise price | | $ | 7.49 | |
Weighted average grant date fair value | | $ | 4.41 | |
|
| | | | | | | |
| Three months ended September 30, |
| 2018 | | 2017 |
Expected volatility (percent) | 58.4 | % | | 50.2 - 50.9% |
|
Expected life (years) | 4.5 |
| | 4.0 - 4.5 |
|
Expected dividends | 0.0 | % | | 0.0 | % |
Risk-free interest rate (percent) | 2.91 | % | | 1.64 - 1.72% |
|
Number of options granted | 400,000 |
| | 179,047 |
|
Weighted average exercise price | $ | 8.75 |
| | $ | 5.66 |
|
Weighted average grant date fair value | $ | 4.37 |
| | $ | 2.42 |
|
Stock based compensation related to all stock options for the three months ended September 30, 20182020 and 2019 was $0.1$1.1 million and $0.1$0.2 million, respectively.
COMMON STOCK
There were no significant new common stock awards granted during the three months ended September 30, 2020.
The total expense recognized for all common stock awards for the three months ended September 30, 2020 and 2019 was $0.4 million and $42 thousand, respectively.
13. COMMITMENTS AND CONTINGENCIES
We are a party to litigation and other proceedings that arise in the ordinary course of our business. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. In accordance with the accounting guidance for contingencies, we reserve for litigation claims and assessments asserted or threatened against us when a loss is probable (as defined in such guidance) and the amount of the loss can be reasonably estimated. We cannot predict the outcome of legal or other proceedings with certainty.
Eastern District of Pennsylvania Consolidated Shareholder Class Actions
As previously reported, on September 11, 2018, Stéphane Gouet filed a putative class action complaint against the Company, Stephen P. Herbert, the then-current Chief Executive Officer, and Priyanka Singh, the then-current Chief Financial Officer, in the United States District Court for the District of New Jersey. The class was defined as purchasers of the Company’s securities from November 9, 2017 through September 11, 2018. The complaint alleged that the Company disclosed on September 11, 2018 that it was unable to timely file its Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (the “2018 Form 10-K”), and that the Audit Committee of the Company’s Board of Directors was in the process of conducting an internal investigation of current and prior period matters relating to certain of the Company’s contractual arrangements, including the accounting treatment, financial reporting and internal controls related to such arrangements. The complaint alleged that the defendants disseminated false statements and failed to disclose material facts and engaged in practices that operated as a fraud or deceit upon Gouet and others similarly situated in connection with their purchases of the Company’s securities during the proposed class period. The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “1934 Act”) and Rule 10b-5 promulgated thereunder.
Two additional class action complaints, containing substantially the same factual allegations and legal claims, were filed against the Company, Herbert and Singh in the United States District Court for the District of New Jersey. On September 13, 2018, David Gray filed a putative class action complaint, and on October 3, 2018, Anthony E. Phillips filed a putative class action complaint. Subsequently, multiple shareholders moved to be appointed lead plaintiff, and on December 19, 2018, the Court consolidated the three actions, appointed a lead plaintiff (the “Lead Plaintiff”), and appointed lead counsel for the consolidated actions (the “Consolidated Action”).
On February 28, 2019, the Court approved a Stipulation agreed to by the parties in the Consolidated Action for the filing of an amended complaint within fourteen days after the Company filed its 2018 Form 10-K. On January 22, 2019, the Company and Herbert filed a motion to transfer the Consolidated Action to the United States District Court for the Eastern District of Pennsylvania. On February 5, 2019, the Lead Plaintiff filed its opposition to the Motion to Transfer. On August 12, 2019, the University of Puerto Rico Retirement System (“UPR”) filed a putative class action complaint in the United States District Court for the District of New Jersey against the Company, Herbert, Singh, the Company’s Directors at the relevant time (Steven D. Barnhart, Joel Books, Robert L. Metzger, Albin F. Moschner, William J. Reilly and William J. Schoch) (the “Independent Directors”), and the investment banking firms who acted as underwriters for the May 2018 follow-on public offering of the Company (the “Public Offering”): William Blair & Company; LLC; Craig-Hallum Capital Group, LLC; Northland Securities, Inc.; and Barrington Research Associates, Inc. (the “Underwriters”). The class was defined as purchasers of the Company’s shares pursuant to the registration statement and prospectus issued in connection with the Public Offering. Plaintiff sought to recover damages caused by Defendants’ alleged violations of the Securities Act of 1933 (as amended, the “1933 Act”), and specifically Sections 11, 12 and 15 thereof. The complaint generally sought compensatory damages, rescissory damages and attorneys’ fees and costs. The UPR complaint was consolidated into the Consolidated Action and the UPR docket was closed.
On September 30, 2019, the Court granted the motion to transfer and transferred the Consolidated Action to the United States District Court for the Eastern District of Pennsylvania, Docket No. 19-cv-04565. On November 20, 2019, Plaintiff filed an amended complaint that asserted claims under both the 1933 Act and the 1934 Act. Defendants filed motions to dismiss on February 3, 2020. Before briefing on the motions was completed, the parties participated in a private mediation on February 27,
2020, which ultimately resulted in a settlement. On May 29, 2020, the plaintiffs filed documents with the Court seeking preliminary approval of the settlement, with the defendants supporting approval of the settlement. On June 9, 2020, the Court granted preliminary approval of the settlement and issued a scheduling order for further action on the settlement. The settlement provides for a payment of $15.3 million which includes all administrative costs and plaintiffs’ attorneys’ fees and expenses. The Company’s insurance carriers paid approximately $12.7 million towards the settlement and the Company paid approximately $2.6 million towards the settlement. The settlement payments were deposited into an escrow account in July 2020. Only one putative class member submitted an objection to the settlement. On October 30, 2020, the Court held a hearing on the motion for final settlement approval and granted approval. Under the settlement, payment of plaintiffs’ counsel’s fees and expenses may be distributed within three business days of approval (subject to being returned if the settlement is reversed based on any appeal). Once the final settlement approval order is no longer at risk of being reversed or revised on appeal, administration of the remaining settlement proceeds to claimants will begin. Should the settlement approval be reversed for any reason, the parties will resume litigation of the claims.
Chester County, Pennsylvania Class Action
As previously reported, a putative shareholder class action complaint was filed against the Company, its chief executive officer and chief financial officer at the relevant time, its directors at the relevant time, and the Underwriters, in the Court of Common Pleas, Chester County, Pennsylvania, Docket No. 2019-04821-MJ. The complaint alleged violations of the 1933 Act. As also previously reported, on September 20, 2019 the Court granted the defendants’ Petition for Stay and stayed the Chester County action until the Consolidated Action reaches a final disposition. On October 18, 2019, plaintiff filed an appeal to the Pennsylvania Superior Court from the Order granting defendants’ Petition for Stay, Docket No. 3100 EDA 2019. On December 6, 2019, the Pennsylvania Superior Court issued an Order stating that the Stay Order does not appear to be final or otherwise appealable and directed plaintiff to show cause as to the basis of the Pennsylvania Superior Court’s jurisdiction. The plaintiff filed a Response to the Order to Show Cause on December 16, 2019, and the defendants filed an Application to Quash Appeal on December 26, 2019. On February 20, 2020, the Pennsylvania Superior Court quashed the appeal. Absent further action by the Chester County Court, this action will remain stayed until the Consolidated Action reaches final disposition.
Department of Justice Subpoena
As previously reported, in the third quarter of fiscal year 2020, the Company responded to a subpoena received from the U.S. Department of Justice that sought records regarding Company activities that occurred during prior financial reporting periods, including restatements. The Company is cooperating fully with the agency’s queries.
Other Shareholder Demand Letters
By letter dated October 12, 2018, Peter D’Arcy, a purported shareholder of the Company, demanded that the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s former officers and directors for breach of fiduciary duties. The letter alleged the officers and directors made false and misleading statements that failed to disclose that the Company’s accounting treatment, financial reporting and internal controls related to certain of the Company’s contractual agreements would result in an internal investigation and would delay the Company’s filing of its 2018 Form 10-K, and that the Company failed to maintain adequate internal controls. By letter dated October 18, 2018, Chiu Jen-Ting, a purported shareholder of the Company, demanded that the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s former officers and directors for breach of fiduciary duties in connection with issues similar to those asserted by Mr. D’Arcy. By letter dated August 2, 2019, Stan Emanuel, a purported shareholder of the Company, demanded that the Board of Directors investigate, remedy and commence proceedings against certain of the Company’s former officers and directors for breach of fiduciary duties in connection with issues similar to those asserted by Mr. D’Arcy. In accordance with Pennsylvania law, the Board of Directors formed a special litigation committee (the “SLC”), currently consisting of Lisa P. Baird, Douglas L. Braunstein and Michael K. Passilla, in order to, among other things, investigate and evaluate the demand letters. The SLC and its counsel are currently investigating the matters raised in these letters.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, the anticipated financial and operating results of USA Technologies, Inc. (“USAT” or the “Company”). For this purpose, forward-looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate,” “could,” “should,” “would,” “likely,” “may,” “will,” “plan,” “intend,” “believes,” “expects,” “anticipates,” “projected,” or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that could cause the Company’s actual results to differ materially from those projected, include, for example:
•general economic, market or business conditions unrelated to our operating performance, including the impact of the coronavirus disease 2019 (COVID-19) pandemic on the Company's operations, financial condition, and the demand for the Company’s products and services;
•failure to comply with the financial covenants of our credit agreement with JPMorgan Chase Bank, N.A. entered into on August 14, 2020;
•the ability of the Company to raise funds in the future through sales of securities or debt financing in order to sustain its operations in the normal course of business or if an unexpected or unusual event would occur;
•the ability of the Company to compete with its competitors to obtain market share;
•whether the Company’s current or future customers purchase, lease, rent or utilize ePort devices or our other products in the future at levels currently anticipated by our Company;
•whether the Company’s customers continue to utilize the Company’s transaction processing and related services, as our customer agreements are generally cancelable by the customer on thirty to sixty days’ notice;
•the ability of the Company to satisfy its trade obligations included in accounts payable and accrued expenses;
•the ability of the Company to sell to third party lenders all or a portion of our finance receivables, or to do so in a timely manner;
•the ability of a sufficient number of our customers to utilize third party financing companies under our QuickStart program in order to improve our net cash used by operating activities;
•the incurrence by us of any unanticipated or unusual non-operating expenses which would require us to divert our cash resources from achieving our business plan;
•the ability of the Company to predict or estimate its future quarterly or annual revenue and expenses given the developing and unpredictable market for its products;
•the ability of the Company to retain key customers from whom a significant portion of its revenue is derived;
•the ability of a key customer to reduce or delay purchasing products from the Company;
•the ability of the Company to obtain widespread commercial acceptance of its products and service offerings such as ePort QuickConnect, mobile payment and loyalty programs;
•whether any patents issued to the Company will provide the Company with any competitive advantages or adequate protection for its products, or would be challenged, invalidated or circumvented by others;
•the ability of the Company to operate without infringing the intellectual property rights of others;
•the ability of the Company to maintain the resilience of our electronic platforms, soundness of our business continuity and disaster recovery plans and to avoid unauthorized hacking or credit card fraud;
•whether we are able to fully remediate our material weaknesses in our internal controls over financial reporting as of December 31, 2020 or continue to experience material weaknesses in our internal controls over financial reporting in the future, and are not able to accurately or timely report our financial condition or results of operations;
•whether our suppliers would increase their prices, reduce their output or change their terms of sale;
•whether the listing application for the Company’s securities which has been filed by the Company with The Nasdaq Stock Market LLC will be granted in a timely manner; and
���the risks associated with the currently pending litigation or possible regulatory action arising from the internal investigation conducted by the Audit Committee in fiscal year 2019 and its findings (the “2019 Investigation”), from the failure to timely file our periodic reports with the Securities and Exchange Commission, from the restatement of the affected financial statements, from allegations related to the registration statement for the follow-on public offering, or from potential litigation or other claims arising from the shareholder demands for derivative action or from the subpoena the Company received from the U.S. Department of Justice.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above, or those discussed under Item 1A. “Risk Factors” in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (“2020 Form 10-K”). We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.
Any forward-looking statement made by us in this Form 10-Q speaks only as of the date of this Form 10-Q. Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
OVERVIEW OF THE COMPANY
USA Technologies, Inc. provides wireless networking, cashless transactions, asset monitoring, and other value-added services principally to the small ticket, unattended Point of Sale (“POS”) market. Our ePort® technology can be installed and/or embedded into everyday devices such as vending machines, a variety of kiosks, amusement games, and commercial laundry via either our ePort hardware or our Quick Connect solution. Our associated service, ePort Connect®, is a PCI-compliant, comprehensive service that includes simplified credit/debit card processing and support, consumer engagement services as well as telemetry, Internet of Things, and machine-to-machine services, including the ability to remotely monitor, control and report on the results of distributed assets containing our electronic payment solutions.
The Company generates revenue in multiple ways. During the three months ended September 30, 2020, we derived approximately 90% of our revenue from recurring license and transaction fees related to our ePort Connect service and approximately 10% of our revenue from equipment sales. Connections to our service stem from the sale or lease of our POS electronic payment devices, certified payment software, or the servicing of similar third-party installed POS terminals. Connections to the ePort Connect service are the most significant driver of the Company’s revenue, particularly the recurring revenue from license and transaction fees. Customers can obtain POS electronic payment devices from us in the following ways:
•Purchasing devices directly from the Company or one of its authorized resellers;
•Financing devices under the Company’s QuickStart Program, which are non-cancellable sixty month sales-type leases, through an unrelated equipment financing company, if available, or directly from the Company; and
•Renting devices under the Company’s JumpStart Program, which are cancellable month-to-month operating leases.
As of September 30, 2020, highlights of the Company are below:
•Approximately 23,700 customers and approximately 1,335,000 connections to our service;
•Three direct sales teams at the national, regional, and local customer-level and a growing number of original equipment manufacturers and national distribution partners;
•Over 140 employees;
•Principal locations including Malvern, Pennsylvania and Denver, Colorado; and
•The Company’s fiscal year ends June 30th.
COVID-19 Update
A novel strain of coronavirus (COVID-19) was first identified in China in December 2019 and subsequently declared a global pandemic in March 2020 by the World Health Organization. COVID-19 containment measures began in parts of the United States in March 2020 resulting in forced closure of non-essential businesses and social distancing protocols. As a result, COVID-19 has impacted our business, significantly reducing foot traffic to distributed assets containing our electronic payment solutions and reducing discretionary spending by consumers. The Company did not observe meaningful reductions in processing volume until mid-March, when average daily processing volume decreased approximately 40%. By mid-April, processing volumes began to recover and have steadily improved through September 2020. As of September 30, 2020, our average daily processing volume has increased 53% from the lows in April. At this time we are unable to reasonably estimate the length of time that containment measures will be needed in the United States. Furthermore, even after containment measures are lifted there can be no assurance as to the time required to regain operations and sales at levels prior to the pandemic.
In response to the outbreak and business disruption, first and foremost, we have prioritized the health and safety of our employees by implementing work-from-home measures while continuing to diligently serve our customers. Additionally, we have created an internal task force to lead measures to protect the business in light of the volatility and uncertainty caused by the COVID-19 pandemic, including ensuring the safety of our employees and our community by implementing work from home policies, conserving liquidity, evaluating cost saving actions, partnering with customers to position USAT for renewed growth post crisis, and pausing on international expansion. The liquidity conservation and cost savings initiatives include but are not limited to: a 20% salary reduction for the senior leadership team until December 2020; deferral of all cash-based director fees until calendar year 2021; a temporary furlough of about 10% of our employee base; negotiations with and concessions from vendors in regard to cost reductions and/or payment deferrals; an increased collection effort to reduce outstanding accounts receivables; and various supply chain/inventory improvements. Our supply chain network has not been significantly disrupted and we are continuously monitoring for the impact of COVID-19.
We continue to monitor the rapidly evolving situation and guidance from federal, state and local public health authorities. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, based on current trends and if the pandemic is not substantially contained in the near future, COVID-19 may have a material adverse impact on our revenue growth as well as our overall profitability in fiscal year 2021, and may lead to higher sales-related, inventory-related, and operating reserves. Further, a sustained downturn may also result in a decrease in the fair value of our goodwill or other intangible assets, causing them to exceed their carrying value. This may require us to recognize an impairment to those assets.
FINANCIAL HIGHLIGHTS
The following tables summarize our results of operations and significant changes in our financial performance for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Percent Change |
($ in thousands, except per share data) | | 2020 | | 2019 | |
Revenue | | $ | 36,877 | | | $ | 43,359 | | | (15.0) | % |
Cost of sales | | 22,637 | | | 31,943 | | | (29.1) | % |
Gross profit | | 14,240 | | | 11,416 | | | 24.7 | % |
Operating expenses | | 17,848 | | | 22,694 | | | (21.4) | % |
Operating loss | | (3,608) | | | (11,278) | | | (68.0) | % |
Other expense, net | | (2,965) | | | (171) | | | 1,633.9 | % |
Provision for income taxes | | (40) | | | (59) | | | (32.2) | % |
Net loss | | (6,613) | | | (11,508) | | | (42.5) | % |
Net loss per common share - diluted | | $ | (0.11) | | | $ | (0.20) | | | (45.0) | % |
Revenues decreased $6.5 million for the three months ended September 30, 2017.2020 from the comparable prior period. Approximately $5.0 million of the decrease relates to fewer equipment shipments and revenue in the quarter as compared to the prior year, which included revenue for the initial shipments of equipment to a new, larger contract in the prior year. Additionally, $1.5 million of the decrease relates to lower transaction volumes due to the impacts of COVID-19 in the current quarter vs. the prior year quarter.
COMMON STOCK
On July 2, 2018, 6,677 shares were awarded to each non-employee director for a totalCost of 40,062 shares. The shares vest on a monthly basis over the two year period following July 2, 2018. The total expense recognized for these grantssales decreased $9.3 million for the three months ended September 30, 20182020 from the comparable prior period. The decrease was $0.2 million.
LONG TERM INCENTIVE PLANS
The Board approved the Fiscal Year 2018 Long-Term Stock Incentive Plan (the “2018 LTI Stock Plan”) which provides that executive officers would be awarded shares of common stock of the Companylargely driven by a significant equipment sale in the event that certain metrics relating tofirst quarter of 2020 and the Company’s 2018 fiscal year would result in specified rangesimpacts of year-over-year percentage growth. The metrics are total number of connections as of June 30, 2018 as compared to total number of connections as of June 30, 2017 (40% weighting)COVID-19 on our transaction processing revenue. See “Revenue and adjusted EBITDA earned during the 2018 fiscal year as compared to the adjusted EBITDA earned during the 2018 fiscal year (60% weighting). If none of the minimum threshold year-over-year percentage target goals are achieved, the executive officers would not be awarded any shares. If all of the year-over-year percentage target goals are achieved, the executive officers would be awarded shares having the following value: Chief Executive Officer - $840,000 (160% of base salary), Chief Financial Officer - $300,000 (100% of base salary), Chief Services Officer - $275,000 (100% of base salary), and Chief Product Officer - $280,000 (100% of base salary and to be prorated to reflect the actual period of employment during the fiscal year). If all of the maximum distinguished year over year percentage target goals are achieved, the executive officers would be awarded shares having the following value: Chief Executive Officer - $1,260,000 (240% of base salary), Chief Financial Officer - $450,000 (150% of base salary), Chief Services Officer - $412,500 (150% of base salary), and Chief Product Officer - $420,000 (150% of base salary and to be prorated to reflect the actual period of employment during the fiscal year). Assuming the minimum threshold year-over-year percentage target goal would be achievedGross Profit” below for a particular metric,discussion on the numbersignificant changes in the cost of shares to be awardedsales.
Operating expenses decreased $4.8 million for that metric would be determined on a pro rata basis, provided that the award would not exceed the maximum distinguished award for that metric. The shares awarded under the 2018 LTI Stock Plan would vest as follows: one-third at the time of issuance; one-third on June 30, 2019; and one-third on June 30, 2020.
The Company did not award any long-term stock incentive compensation to its executive officers during the 2019 fiscal year.
The Company had long-term stock incentive plans (“LTI”) in prior fiscal years for its then executive officers. Stock based compensation related to the LTI plans was as follows in the three months ended September 30, 20182020 from the comparable prior period. See “Operating Expenses” below for a discussion of the significant changes in our operating expenses.
TRENDING QUARTERLY FINANCIAL AND NON-FINANCIAL DATA
The following table shows certain financial and 2017:non-financial data that management believes give readers insight into certain trends and relationships about the Company’s financial performance. We believe the first three measurements are useful in allowing management and readers to evaluate our strategy of driving growth in connections and transactions and the fourth measurement is useful in allowing management and readers to evaluate the growth of our QuickStart program and direct sales compared to the JumpStart program.
Gross new connections, net new connections, and total connections.
Connections to the Company’s service include those resulting from the sale or lease of our POS electronic payment devices, telemetry devices or certified payment software or the servicing of similar third-party installed POS terminals or telemetry devices. The Company records a connection upon shipment of an activated device or the activation of a non-device location on our platform to a customer under contract. A self-service retail location that utilizes an ePort cashless payment device as well as Seed management services constitutes only one connection. If a customer provides sufficient notice to deactivate a device or non-device location, in accordance with the terms of the contract, we stop counting the existing connection as a connection after the applicable notice period. A previously installed telemeter or cashless payment system that is no longer being utilized by our customer is still considered and reported as an existing connection until the customer requests deactivation and the contractual notice period has expired.
Net new connections during the quarter are defined as gross new connections during the quarter less deactivated connections during the quarter. We derive the majority of our revenues from license and transaction fees resulting from connections to, as well as services provided by, our ePort Connect service, and management tracks new connection growth and total connections to evaluate the effectiveness of our revenue strategy.
New customers added and total customers.
New customers are defined as new entities that have not previously purchased our hardware or services. Management uses new customer growth and total customer base to evaluate the effectiveness of our distribution and sales reach and ability to further penetrate attractive adjacent markets.
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| | | | | | | | |
| | Three months ended September 30, |
($ in thousands) | | 2018 | | 2017 (as restated) |
FY18 LTI Plan | | $ | 30 |
| | $ | 50 |
|
FY17 LTI Plan | | 26 |
| | 64 |
|
FY16 LTI Plan | | — |
| | 9 |
|
Total | | $ | 56 |
| | $ | 123 |
|
Total number of transactions and total dollar volume of transactions.Transactions are defined as electronic payment transactions that are processed by our technology-enabled solutions. Management uses total number and dollar volume of transactions to evaluate the effectiveness of our new customer strategy and ability to leverage existing customers and partners. 14. COMMITMENTS AND CONTINGENCIES
Financing structure of connections.
The financing structure of connections is determined by identifying the gross new connections during the quarter and determining which connections were due to devices financed by the JumpStart program compared to connections due to devices financed by the QuickStart program or purchased outright. We monitor this metric as we are able to increase cash collections from direct sales to customers or under QuickStart sales by utilizing lease companies which improves cash provided by operating activities.
Five Quarter Select Key Performance Indicators Including Connections
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the three months ended |
| September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 |
Connections: | | | | | | | | | |
Gross new connections | 22,000 | | | 39,000 | | | 37,000 | | | 45,000 | | | 49,000 | |
Net new connections | 15,000 | | | 31,000 | | | 34,000 | | | 40,000 | | | 46,000 | |
Total connections | 1,335,000 | | | 1,320,000 | | | 1,289,000 | | | 1,255,000 | | | 1,215,000 | |
Customers: | | | | | | | | | |
New customers added | 700 | | | 700 | | | 1,100 | | | 900 | | | 900 | |
Total customers | 23,700 | | | 23,000 | | | 22,300 | | | 21,200 | | | 20,300 | |
Volumes: | | | | | | | | | |
Total number of transactions (millions) | 201.9 | | | 167.7 | | | 237.3 | | | 243.4 | | | 232.7 | |
Total volume (millions) | $ | 406.3 | | | $ | 329.1 | | | $ | 462.7 | | | $ | 476.4 | | | $ | 461.2 | |
Financing structure of connections: | | | | | | | | | |
JumpStart | 3.0 | % | | 6.2 | % | | 1.4 | % | | 4.3 | % | | 3.4 | % |
QuickStart & all others (a) | 97.0 | % | | 93.8 | % | | 98.6 | % | | 95.7 | % | | 96.6 | % |
Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
a) Includes credit sales with standard trade receivable terms.
Highlights of USAT’s connections for the quarter ended September 30, 2020 include:
•15,000 additional net new connections during the quarter; and
•1,335,000 total connections to our service compared to the same quarter last year of approximately 1,215,000 total connections to our service, an increase of 120,000 connections, or 9.9%.
RESULTS OF OPERATIONS
Network Incident
During the three months ended September 30, 2020, the Company experienced a network incident on its ePort transaction processing platform, resulting in certain devices being unable to process payment transactions during the outage. The Company has remediated the incident. For the three months ended September 30, 2020, we accrued approximately $1.4 million of costs associated with the event, of which $1.1 million is included in selling, general and administrative expenses and $0.3 million is included in cost of sales. In addition to these direct costs, the Company estimates the incident reduced our transaction revenue by approximately $0.4 million. The Company anticipates there may be additional customer-related costs in the future.
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Revenue and Gross Profit
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Percent Change |
($ in thousands) | | 2020 | | 2019 | |
Revenue: | | | | | | |
License and transaction fees | | $ | 33,108 | | | $ | 34,609 | | | (4.3) | % |
Equipment sales | | 3,769 | | | 8,750 | | | (56.9) | % |
Total revenue | | 36,877 | | | 43,359 | | | (15.0) | % |
| | | | | | |
Costs of sales: | | | | | | |
Cost of services | | 19,336 | | | 22,089 | | | (12.5) | % |
Cost of equipment | | 3,301 | | | 9,854 | | | (66.5) | % |
Total costs of sales | | 22,637 | | | 31,943 | | | (29.1) | % |
| | | | | | |
Gross profit: | | | | | | |
License and transaction fees | | 13,772 | | | 12,520 | | | 10.0 | % |
Equipment sales | | 468 | | | (1,104) | | | 142.4 | % |
Total gross profit | | $ | 14,240 | | | $ | 11,416 | | | 24.7 | % |
Revenue. Total revenue decreased $6.5 million for the three months ended September 30, 2020 compared to the same period in 2019. Approximately $5.0 million of the decrease relates to fewer equipment shipments and revenue in the quarter as compared to the prior year, which included revenue for the initial shipments of equipment to a new, larger contract in the prior year. Additionally, $1.5 million of the decrease relates to lower transaction volumes due to the impacts of COVID-19 in the current quarter vs. the prior year quarter.
Cost of sales. Cost of sales decreased $9.3 million for the three months ended September 30, 2020 compared to the same period in 2019. The change was driven by a $6.6 million decrease in cost of equipment, primarily related to a $5.5 million sale of equipment to a strategic partner in the prior year quarter, and a $0.8 million reduction of equipment costs as more fully discussed in Note 1 - Business. Additionally, cost of services decreased $2.7 million due to lower transaction volumes and a decrease in network service fees.
Gross margin. Total gross margin increased from 26.3% for the three months ended September 30, 2019 to 38.6% for the three months ended September 30, 2020. The change was driven primarily by decreased costs of equipment, lower transaction processing volumes and the prior year adjustment related to equipment costs referred in Note 1 - Business.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Percent Change |
Category ($ in thousands) | | 2020 | | 2019 | |
Selling, general and administrative expenses | | $ | 16,780 | | | $ | 17,196 | | | (2.4) | % |
Investigation, proxy solicitation and restatement expenses | | — | | | 4,476 | | | NM |
Depreciation and amortization | | 1,068 | | | 1,022 | | | 4.5 | % |
Total operating expenses | | $ | 17,848 | | | $ | 22,694 | | | (21.4) | % |
____________
NM — not meaningful
Selling, general and administrative expenses. Selling, general and administrative expenses decreased approximately $0.4 million for the three months ended September 30, 2020, as compared to the same period in 2019. This change was primarily driven by $2.8 million in lower professional services costs due to lower audit and network consulting fees and $0.5 million in lower travel expenses.This decrease was offset by $2.9 million of charges, primarily related to $1.1 million of costs related to the network incident discussed above and $1.8 million in compensation expense, which consisted primarily of an increase in stock-based compensation in the current quarter over the prior year quarter.
Investigation, proxy solicitation and restatement expenses. Investigation, proxy solicitation and restatement expenses were incurred in fiscal year 2018,2020 in connection with the 2019 Investigation and the restatements of previously filed financial statements, bank consents, the remediation of deficiencies in our internal control over financial reporting, the proxy solicitation, and professional services fees to assist with accounting and compliance activities in fiscal year 2020 following the filing of the 2019 Form 10-K.
Depreciation and amortization. Depreciation and amortization expense was consistent with the same period in 2019.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Percent Change |
($ in thousands) | | 2020 | | 2019 | |
Other income (expense): | | | | | | |
Interest income | | $ | 350 | | | $ | 294 | | | 19.0 | % |
Interest expense | | (3,315) | | | (465) | | | 612.9 | % |
Total other income (expense), net | | $ | (2,965) | | | $ | (171) | | | 1,633.9 | % |
Other income (expense), net. Other income (expense), net decreased approximately $2.8 million for the three months ended September 30, 2020 as compared to the same period in 2019. This change was primarily related to the recognition of the remaining balance of unamortized issuance costs and debt discount related to the senior secured term loan facility (the “2020 Antara Term Facility”) with Antara Capital Master Fund LP (“Antara”) of $2.6 million into interest expense, related to the repayment of all amounts outstanding under the 2020 Antara Term Facility.
Reconciliations of Non-GAAP Measures
Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, we utilize Adjusted EBITDA as a metric in our executive officer and management incentive compensation plans.
We define Adjusted EBITDA as net loss before (i) interest income, (ii) interest expense, (iii) income taxes, (iv) depreciation, (v) amortization, (vi) stock-based compensation expense, and (vii) non-recurring fees and charges that were incurred in connection with the 2019 Investigation and financial statement restatement activities as well as proxy solicitation costs.
We have excluded stock-based compensation, as it does not reflect our cash-based operations. We have excluded the professional fees incurred in connection with the non-recurring costs and expenses related to the 2019 Investigation, financial statement restatement activities, and proxy solicitation costs because we believe that they represent charges that are not related to our operations.
| | | | | | | | | | | | | | |
| | Three months ended September 30, |
($ in thousands) | | 2020 | | 2019 |
Net loss | | $ | (6,613) | | | $ | (11,508) | |
Less: interest income | | (350) | | | (294) | |
Plus: interest expense | | 3,315 | | | 465 | |
Plus: income tax provision | | 40 | | | 59 | |
Plus: depreciation expense included in cost of sales for rentals | | 539 | | | 634 | |
Plus: depreciation and amortization expense in operating expenses | | 1,068 | | | 1,022 | |
EBITDA | | (2,001) | | | (9,622) | |
Plus: stock-based compensation | | 1,509 | | | 290 | |
Plus: investigation, proxy solicitation and restatement expenses | | — | | | 4,476 | |
Adjustments to EBITDA | | 1,509 | | | 4,766 | |
Adjusted EBITDA | | $ | (492) | | | $ | (4,856) | |
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $5.2 million for the three months ended September 30, 2020 compared to cash provided of $0.2 million in the same period in the prior year. The change in cash provided by operating activities reflects net cash provided by a $4.9 million decrease in net loss and an increase in non-cash operating expenses of $4.5 million, offset by net cash used by the change in various operating assets and liabilities of $4.4 million. The change in operating assets and liabilities is primarily driven by the net cash used by the change of accounts receivable of $4.8 million and change of accounts payable and accrued expenses of $1.3 million.
Cash used in investing activities was $0.5 million for the three months ended September 30, 2020 compared to cash used of $0.4 million in the same period in the prior year, as purchases for equipment were relatively consistent compared to the same period last year.
Cash used in financing activities was $1.7 million for the three months ended September 30, 2020 compared to cash used of $1.8 million in the same period in the prior year. For the three months ended September 30, 2020, the Company expandedpaid $1.2 million as a prepayment penalty and commitment termination fee to Antara as part of the leased space for its headquarters in Malvern, Pennsylvania torepayment of the 2020 Antara Term Facility and paid $0.5 million of debt issuance costs as a totalresult of 23,138 square feet. The Company’s monthly base rent is approximately $48 thousand with a lease expiration date of Novemberentering into the 2021 JPMorgan Credit Facility (as defined below). For the three months ended September 30, 2023.
Through the Cantaloupe acquisition during fiscal year 2018,2019, the Company acquired a noncancelable operating lease pertainingrepaid the remaining principal balance of $1.5 million on the term loan pursuant to Cantaloupe’s headquarters based in San Francisco, California. The leased premise consiststhe Credit Agreement, dated November 9, 2017, among the Company, as borrower, its subsidiaries, as guarantors, and JPMorgan, as the lender and administrative agent for the lender.
Sources and Uses of approximately 8,400 square feet and calls for rental payments of approximately $45 thousand due each month up to a maximum monthly base rent of approximately $47 thousand through its January 31, 2020 expiration date.Cash
The Company has the following primary sources of capital available: (1) cash and cash equivalents on hand of $34.7 million as of September 30, 2020; (2) the cash which may be provided by operating activities; and (3) up to $5 million available to be drawn on the 2021 JPMorgan Revolving Facility (as defined below). In addition, management has recently implemented efficiencies in working capital that are designed to increase our cash balances.
In the three months ended September 30, 2020, the Company entered into the 2021 JPMorgan Credit Agreement (as defined below) and repaid all amounts outstanding under the 2020 Antara Term Facility. The Company also paid $1.2 million to Antara for the commitment termination fee and prepayment premium, and paid $2.6 million towards the settlement of a shareholder class action lawsuit.
The Company also has estimated and recorded for potential sales tax and related interest and penalty liabilities of $21.1 million in the aggregate as of September 30, 2020. The Company continues to evaluate these liabilities and the amount and timing of any such payments.
In the fourth quarter of fiscal year 2020, we received loan proceeds of approximately $3.1 million (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). We intend to use the PPP Loan in accordance with the provisions of the CARES Act. The loan bears a fixed interest rate of 1% over a two year term from the approval date of April 28, 2020. The application for these funds required the Company to, in good faith, certify that the current economic uncertainty caused by COVID-19 made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is involvednot significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.
The Company believes that its current financial resources will be sufficient to fund its current twelve-month operating budget from the date of issuance of these consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
As a result of the July 1, 2020 adoption of Topic 326, the Company has updated the critical accounting policies disclosed in various legal proceedings“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Form 10-K as follows:
Allowances for Doubtful Accounts and Nonperforming Finance Receivables. We maintain lifetime expected loss allowances for doubtful accounts and nonperforming finance receivables based on historical experience of payment performance, current conditions of the customer, and reasonable and supportable economic forecasts of collectability for the asset’s entire expected life, which is generally less than one year for accounts receivable and five years for finance receivables. Historical loss experience is utilized as there have been no significant changes in the mix or risk characteristics of the receivable revenue streams used to calculate historical loss rates. Current conditions are analyzed at each measurement date to reassess whether our receivables continue to exhibit similar risk characteristics as the prior measurement date, and determine if the reserve calculation needs to be adjusted for new developments, such as a customer’s inability to meet its financial obligations. Reasonable and supportable macroeconomic trends also are incorporated into the analysis. Estimating the allowances therefore requires us to apply judgment in relying on historical customer payment experience, regularly analyzing the financial condition of our customers, and developing macroeconomic forecasts to adequately cover expected credit losses on our receivables. By nature, such estimates are highly subjective, and it is possible that the amount of receivables that we are unable to collect may be different than the amounts initially estimated in the allowances.
Recent Accounting Pronouncements
See Note 2 - Accounting Policies to the interim Condensed Consolidated Financial Statements for a description of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
On August 14, 2020, the Company repaid all amounts outstanding under the 2020 Antara Term Facility and entered into a credit agreement with JPMorgan Chase Bank, N.A (the “2021 JPMorgan Credit Agreement”) for a $5 million secured revolving credit facility (the “2021 JPMorgan Revolving Facility”) and a $15 million secured term facility (the “2021 JPMorgan Secured Term Facility” and together with the 2021 JPMorgan Revolving Facility, the “2021 JPMorgan Credit Facility”). Through December 31, 2021, the applicable interest rate on the 2021 JPMorgan Credit Facility will be LIBOR plus 4.75%. An increase of 100 basis points in LIBOR would not have a material impact of on our interest expense or condensed consolidated financial statements.
Our other exposures to market risk have not changed materially since June 30, 2020.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures
Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness as of the end of the period covered by this Form 10-Q of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"). We maintain disclosure controls and procedures to ensure 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 Securities and Exchange Commission rules, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. Based on this evaluation, our management, including our chief executive officer and chief financial officer, has concluded that our disclosure controls and procedures were not effective as of the end of such period, as a result of the material weakness in our internal control over financial reporting, which are described in Item 19A. of Part IIour 2020 Form 10-K.
(b) Changes in Internal Control over Financial Reporting 15. SUBSEQUENT EVENTS
For a discussionOther than the remediation plan disclosed in Item 9A. of the Company's significant subsequent events, please refer2020 Form 10-K for the material weakness identified in fiscal year 2020 related to the accounting impact of a non-routine and complex transaction, there were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. As discussed in Item 9A. of our 2020 Form 10-K/A which10-K, we reinforced our existing internal control structure to ensure that one-time and unusual transactions are subject to timely and formal evaluation by senior finance and accounting leadership to ensure proper accounting treatment to address the material weakness in our internal control over financial reporting. The material weakness cannot be considered remediated until the control has been filed concurrently withoperated for a sufficient period of time and until management has concluded, through testing, that the control is operating effectively. We expect to remediate this Form 10-Q/A.material weakness by December 31, 2020.
Part II - Other Information
Item 1. Legal Proceedings.
The information required by this Item is incorporated herein by reference to the Notes to Condensed Consolidated Financial Statements, Note 13 – Commitments and Contingencies in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
For a discussion of the Company’s risk factors, see the information under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020, as supplemented by the amended risk factor set forth below.
Disruptions to our systems, breaches in the security of transactions involving our products or services, or failure of our processing systems could adversely affect our reputation and results of operations.
We rely on information technology and other systems to transmit financial information of consumers making cashless transactions and to provide accounting and inventory management services to our customers. As such, the information we transmit and/or maintain is exposed to the ever-evolving threat of compromised security, in the form of a risk of potential breach, system failure, computer virus, cyber-attack or unauthorized or fraudulent use by consumers, customers, company employees, or employees of third party vendors. In addition, our processing systems may experience errors, interruptions, delays or damage from a number of causes, including, but not limited to, power outages, hardware, software and network failures, internal design, manual or usage errors, terrorism, workplace violence or wrongdoing, catastrophic events, natural disasters and severe weather conditions. The steps we take to deter and mitigate these risks, including annual validation of our compliance with the Payment Card Industry Data Security Standard, may not be successful, and any resulting compromise or loss of data or systems could adversely impact the marketplace acceptance of our products and services, and could result in significant remedial expenses to not only assess and repair any damage to our systems, but also to reimburse customers for losses that occur from service interruptions or the fraudulent use of confidential data. Additionally, we could become subject to significant fines, litigation, and loss of reputation, potentially impacting our financial results.
Further, substantially all of the cashless payment transactions handled by our network involve Visa U.S.A. Inc. (“Visa”) or MasterCard International Incorporated ("MasterCard"). If we fail to comply with the applicable standards or requirements of the Visa and MasterCard card associations relating to security, Visa or MasterCard could suspend or terminate our registration with them. The termination of our registration with them or any changes in the Visa or MasterCard rules that would impair our registration with them could require us to stop providing cashless payment services through our network. In such event, our business plan and/or competitive advantages in the market place would be materially adversely affected.
Item 3. Defaults Upon Senior Securities.
There were no defaults on any senior securities. On August 1, 2020, an additional $334 thousand of dividends were accrued on our cumulative Series A Convertible Preferred Stock. The total accrued and unpaid dividends on our Series A Convertible Preferred Stock as of September 30, 2020 was $21.1 million. The dividend accrual dates for our Preferred Stock are February 1 and August 1. The annual cumulative dividend on our Preferred Stock is $1.50 per share.
Item 6. Exhibits.
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Exhibit Number | | Description |
| | |
3.1 | | |
| | |
3.2 | | |
| | |
4.1 | | |
| | |
Exhibit
Number10.1†
| | Description |
| | |
31.110.2† | | |
| | |
10.3† | | |
| | |
10.4 | | |
| | |
10.5 | | |
| | |
10.6† | | |
| | |
10.7† | | |
| | |
31.1* | | |
| | |
31.231.2* | | |
| | |
32.132.1* | | |
| | |
32.232.2* | | |
| | |
| | | | | | | | |
101 | | The following financial information from our Quarterly Report on Form 10-Q/A10-Q for the quarter ended September 30, 2018,2020, filed with the SEC on November 14, 2019,6, 2020, is formatted in Inline Extensible Business Reporting Language (XBRL)(“iXBRL”): (1) the Condensed Consolidated Balance Sheets as of September 30, 20182020 and June 30, 2018,2020, (2) the Condensed Consolidated Statements of Operations for the three-month periods ended September 30, 20182020 and 2017,2019, (3) the Condensed Consolidated Statements of Shareholders’ Equity for the three-month periodperiods ended September 30, 2018,2020 and 2019, (4) the Condensed Consolidated Statements of Cash Flows for the three-month periodperiods ended September 30, 20182020 and 2017,2019, and (5) the Notes to Consolidated Financial Statements.
|
| | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| | |
101.SCH* | | Inline XBRL Taxonomy Extension Schema |
| | |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase |
| | |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase |
| | |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase |
| | |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase |
| | |
104 | | The cover page from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 6, 2020, is formatted as Inline iXBRL and contained in Exhibit 101. |
* Filed herewith.
† Management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| USA TECHNOLOGIES, INC. |
| |
Date: November 6, 2020 | USA TECHNOLOGIES, INC./s/ Sean Feeney |
| Sean Feeney |
Date: November 14, 2019 | /s/ Donald W. Layden, Jr. |
| Donald W. Layden, Jr., |
| Interim Chief Executive Officer |
| |
Date: November 14, 20196, 2020 | /s/ Glen E. GooldR. Wayne Jackson |
| Glen E. GooldR. Wayne Jackson |
| Interim Chief Financial Officer |