Notes to Consolidated Financial Statements
1. BUSINESS
Cantaloupe, Inc., previously known as USA Technologies, Inc., is organized under the laws of the Commonwealth of Pennsylvania. We are a digital payments and software services company that provides end-to-end technology solutions for the unattended retail market. We are transforming the unattended retail world by offering a single platform for self-service commerce which includes integrated payments processing and software solutions that handle inventory management, pre-kitting, route logistics, warehouse and back-office management. Our enterprise-wide platform is designed to increase consumer engagement and sales revenue through digital payments, digital advertising and customer loyalty programs, while providing retailers with control and visibility over their operations and inventory. As a result, customers ranging from vending machine companies to operators of micro-markets, car wash, electric vehicle charging stations, commercial laundry, kiosks, amusements and more, can run their businesses more proactively, predictably, and competitively.
Impact of COVID-19
The Company, its employees, and its customers operate in geographic locations in which its business operations and financial performance continues to be affected by the COVID-19 pandemic. While businesses, schools and other organizations re-open, which has led to increased foot-traffic to distributed assets containing our electronic payment solutions, the emergence of new strains and variants and resurgence of the virus, such as the outbreak of the Omicron variant in early calendar year 2022, have and may in the future lead to additional shutdowns and closures that impact our operations and financial results. Such impacts to our financial statements have in the past included, and may in the future include the impairment of goodwill and intangible assets, impairment of long-lived assets including operating lease assets, property and equipment and allowance for doubtful accounts for accounts and finance receivables. We have concluded that there are no material impairments as a result of our evaluation for the year ended June 30, 2022. Where applicable, we have incorporated judgments and estimates of the expected impact of COVID-19 in the preparation of the financial statements based on information currently available. These judgments and estimates may change, as new events develop and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known.
While we are encouraged by our strong operating and financial results, we continue to monitor the evolving situation and follow guidance from federal, state and local public health authorities. Given the potential uncertainty of the situation, the Company cannot, at this time, reasonably estimate the longer-term repercussions of COVID-19 on our financial condition, results of operations or cash flows.
2. ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION AND PREPARATION
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included.
The Company operates as one operating segment because its chief operating decision maker, who is the Chief Executive Officer, reviews its financial information on a consolidated basis for purposes of making decisions regarding allocating resources and assessing performance.
Consolidated Statements of Operations: operating expenses presentation
Beginning in fiscal year 2022, the Company revised its presentation of operating expenses within its Consolidated Statements of Operations by disaggregating the previously disclosed Selling, general, and administrative costs into Sales and marketing,
Technology and product development, and General and administrative costs. The updated presentation is intended to provide additional transparency to the readers of the financial statements and better align the Company’s financial performance with how management views and monitors business operations and makes strategic decisions. Prior period amounts for fiscal year 2021 and 2020 have been reclassified to conform with current year presentation.
Below is a brief description of the various categories within Operating expenses:
•Sales and marketing: Sales and marketing expenses consist primarily of our sales and marketing team personnel costs which include non-capitalized wages, bonuses, stock-based compensation, sales commissions, severance costs, benefits, and employer taxes. In addition, this category includes fees paid for advertising, trade shows and external consultants who assist in outreach initiatives designed to build brand awareness and showcase the value of our products and services to our opportunity markets.
•Technology and product development: Technology and product development expenses consist primarily of our technology and product team personnel costs and fees paid to external consultants relating to innovating and maintaining our portfolio of products and services and strengthening our network environment and platform. These costs include but are not limited to engineering, platform and software development, fees for software licenses, contract labor and other technology and product related items.
•General, and administrative: General and administrative expenses consist primarily of our customer support, business operations, finance, legal, human resources and other administrative personnel costs and fees paid to external consultants for these respective departments. In addition, this category includes rent and occupancy costs and other miscellaneous costs incurred in the course of operating the business.
•Depreciation and amortization: No changes made to the accounting policies or previously reported amounts included within the Company’s June 30, 2021 Annual Report on Form 10-K for this category. Depreciation expense on our property and equipment, excluding property and equipment used for rentals, and amortization expense on our intangible assets are included within the Depreciation and amortization caption in the Consolidated Statements of Operations.
The presentation changes described above did not impact total operating expenses, operating loss, net loss or net loss per common share.
Consolidated Statements of Operations: updated caption
Beginning in fiscal year 2022, the Company revised the previously reported revenue caption of License and transaction fees to Subscription and transaction fees within its Consolidated Statements of Operations to provide a more accurate description of the revenue stream and align with commonly used terminology by industry participants. No changes were made to the revenue recognition accounting policies or previously reported amounts included within the Company’s June 30, 2021 Annual Report on Form 10-K.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company evaluates these estimates on an ongoing basis.
Estimates, judgments, and assumptions in these consolidated financial statement include, but are not limited to, those related to revenue recognition, capitalization of internal-use software and cloud computing arrangements, evaluation of goodwill and long-lived assets impairment, allowances for accounts and finance receivables, inventory reserves, loss contingencies, income taxes, deferred income tax assets and liabilities, and sales tax reserve.
CASH AND CASH EQUIVALENTS
Cash equivalents represent all highly liquid investments with original maturities of three months or less from time of purchase. Cash equivalents are comprised of money market funds. The Company maintains its cash in bank deposit accounts where accounts may exceed federally insured limits at times. The Company deems this credit risk not to be significant as cash is held at well-capitalized financial institutions in the U.S.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable include amounts due to the Company for sales of equipment, other amounts due from customers, merchant service receivables, contract manufacturers, and unbilled amounts due from customers, net of the allowance for uncollectible accounts. The Company maintains an allowance for doubtful accounts for losses resulting from the inability of its customers to make required payments, including from a shortfall in the customer transaction fund flow from which the Company would normally collect amounts due. The provision for doubtful accounts relating to Accounts receivable balances is recorded within general and administrative expenses in the Consolidated Statements of Operations.
The allowance is calculated under an expected loss model. We estimate our allowance 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 Company’s standard payment terms of 30 to 60 days from invoice issuance, and adjust our aging analysis to incorporate those risk assessments. Accounts receivables are considered past due if the invoices are not collected based on the respective standard payment terms as agreed to with the customers.
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 financial obligations. Lastly, we also factor reasonable and supportable economic expectations into our allowance estimate for the asset’s entire expected life.
The Company writes off receivable balances against the allowance for doubtful accounts when management determines the balance is uncollectible and the Company ceases collection efforts. For the year ended June 30, 2022, the Company experienced increased write-offs compared to the year ended June 30, 2021, as management determined collection of older aged accounts receivable balances was not probable. These older aged accounts receivables balances were predominantly reserved for already as part of the Company's allowance for doubtful accounts estimate.
Estimating an allowance 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 accounts receivables that we are unable to collect may be different than the amounts initially estimated in the allowance.
FINANCE RECEIVABLES
The Company offers extended payment terms to certain customers for equipment sales under its Quick Start Program. Agreements under the Quick Start Program are accounted for as sales-type leases. Accordingly, the discounted future minimum lease payments are classified as finance receivables in the Company’s Consolidated Balance Sheets. Finance receivables or Quick Start leases are generally for a sixty month term. The Company recognizes a portion of the note or lease payments as interest income in the accompanying consolidated financial statements based on the effective interest rate method.
Finance receivables are carried at their contractual amount net of allowance for doubtful accounts. On July 1, 2020, we adopted Topic 326. The effects of implementation of this standard is discussed below under "Measurement of Credits Losses on Financial Instruments". The provision for doubtful accounts relating to Finance receivables is recorded within general and administrative expenses in the Consolidated Statements of Operations.
The allowance is calculated under an expected loss model. We estimate our allowance utilizing 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 a sixty month term 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. Finance receivables are charged off against the allowance for credit losses when management determines that the finance receivables are uncollectible and the Company ceases collection efforts.
Estimating an allowance 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 finance receivables that we are unable to collect may be different than the amounts initially estimated in the allowance.
INVENTORY, NET
Inventory consists of finished goods. The company's inventories are valued at the lower of cost or net realizable value, generally using a weighted-average cost method.
The Company establishes allowances for slow-moving inventory based upon quality considerations and assumptions about future demand and market conditions. The allowance is recorded within Cost of equipment sales in our Consolidated Statements of Operations. The inventory reserve was $2.5 million and $3.5 million for the years ended June 30, 2022 and 2021, respectively.
PROPERTY AND EQUIPMENT, NET
Property and equipment are recorded at either cost or, in the instance of an acquisition, the estimated fair value on the date of the acquisition, and are depreciated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on the straight-line basis over the lesser of the estimated useful life of the asset or the respective lease term. Depreciation expense on our property and equipment, excluding property and equipment used for rentals, is included in “Depreciation and amortization” in the Consolidated Statements of Operations. Depreciation expense on our property and equipment used for rentals is included in “Cost of Subscription and transaction fees” in the Consolidated Statements of Operations. Additions and improvements that extend the estimated lives of the assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred.
GOODWILL
The Company’s goodwill represents the excess of cost over fair value of the net assets purchased in acquisitions. Goodwill is not amortized to earnings, but instead is subject to periodic testing for impairment. We test goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that impairment may have occurred. Goodwill is reviewed for impairment utilizing either a qualitative or a quantitative goodwill impairment test. When we perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When we perform the quantitative goodwill impairment test, we compare the fair value of our reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, then goodwill is not considered impaired. An impairment charge is recognized for the amount by which, if any, the carrying value exceeds the reporting unit’s fair value. However, the loss recognized cannot exceed the reporting unit’s goodwill balance.
The quantitative impairment test process requires valuation of the reporting unit, which we determine using the income approach, the market approach or a combination of the two approaches. Under the income approach, we calculate the fair value of the reporting unit based on the present value of estimated future cash flows derived from assumptions that include expected growth rates and revenues, projected expenses, discount rates, capital expenditures and income tax rates. Under the market approach, we estimate the fair value based on the quoted stock price, recent equity transactions of our business, market transactions involving similar businesses and market comparables.
The Company has selected April 1 as its annual test date. The Company has concluded there has been no impairment of goodwill during the years ended June 30, 2022, 2021, or 2020. Subsequent to our annual impairment test, no indicators of impairment were identified.
INTANGIBLE AND LONG-LIVED ASSETS
The Company's intangible assets include trademarks, non-compete agreements, brand, developed technology, customer relationships and tradenames and were acquired in a purchase business combination. The Company carries these intangibles at cost, less accumulated amortization. Amortization is recorded on a straight-line basis over the estimated useful lives of the respective assets, which span between three and eighteen years, and are included in “Depreciation and amortization" in the Consolidated Statements of Operations.
There were no indefinite-lived intangible assets at June 30, 2022 or 2021.
The Company reviews its finite-lived intangible and other long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The carrying amount of an asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Fair value of finite-lived intangible assets and property and equipment is based on various valuation techniques. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset will be written down to its fair value.
The Company has concluded that the carrying amount of intangible assets is recoverable as of June 30, 2022 and 2021. The Company recorded an impairment charge relating to our right-of-use assets of $1.6 million for the year ended June 30, 2021.
FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
CONCENTRATION OF RISKS
Concentration of revenue with customers subject the Company to operating risks. Approximately 14%, 16% and 16% of the Company’s revenue for the years ended June 30, 2022, 2021 and 2020, respectively, were concentrated with one customer. The Company’s customers are principally located in the United States.
Accounts receivable from one single contract manufacturer represented 16% and 5% of accounts receivables, net of allowance, as of June 30, 2022 and 2021, respectively.
REVENUE RECOGNITION
The revenue recognition guidance provides a single model to determine when and how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company recognizes revenue using a five-step model resulting in revenue being recognized as performance obligations within a contract have been satisfied. The steps within that model include: (i) identifying the existence of a contract with a customer; (ii) identifying the performance obligations within the contract; (iii) determining the contract’s transaction price; (iv) allocating the transaction price to the contract’s performance obligations; and, (v) recognizing revenue as the contract’s performance obligations are satisfied. Judgment is required to apply the principles-based, five-step model for revenue recognition. Management is required to make certain estimates and assumptions about the Company’s contracts with its customers, including, among others, the nature and extent of its performance obligations, its transaction price amounts and any allocations thereof, the events which constitute satisfaction of its performance obligations, and when control of any promised goods or services is transferred to its customers. The standard also requires certain incremental costs incurred to obtain or fulfill a contract to be deferred and amortized on a systematic basis consistent with the transfer of goods or services to the customer.
The Company provides an end-to-end payment solution which integrates hardware, software, and payment processing in the unattended 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 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, the Company sells cashless payment devices (e.g., e-Ports, Seed), which are either directly sold or leased through the Company's QuickStart or Cantaloupe ONE programs.
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, when we are the Merchant of Record, 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, these transactions are recorded on a net basis. These are transactions in which we are not the Merchant of Record, and the customer is entering into a separate arrangement with a third party payment processor for the fulfillment of the payment service.
Cashless vending services represent a single performance obligation as the combination of the services provided gives the customer the ability to accept cashless payments. The Company’s customers are contracting for integrated cashless services in connection with purchasing or leasing unattended point-of-sale devices. The activities when combined together are so integral to the customer’s ability to derive benefit from the service, that the activities are effectively inputs to a single promise to the customer. Certain services are distinct, but are not accounted for separately as the rights are coterminous, 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. Payment is due based on the Company’s standard payment terms which is typically within 30 to 60 days of invoice issuance.
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 when the equipment is delivered to the customer. Revenues related to Cantaloupe ONE equipment are recognized over time as the customer obtains the right to use the equipment through an operating lease. Clients are billed for equipment sales on a monthly basis, with payment due based on the Company’s standard payment terms which is typically within 30 to 60 days of invoice issuance.
The Company will occasionally offer volume discounts, rebates or credits on certain contracts, which is considered variable consideration. The Company 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 limited to prevent possible significant reversals of revenue in future reporting periods.
The Company assesses the goods and/or services promised in each customer 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’s standard payment terms are payment is due within 30 to 60 days of invoice issuance. The Company uses the practical expedient and does not recognize a significant financing component for payment considerations of less than one year.
Warranties
The Company offers standard warranties that provide the customer with assurance that its equipment will function in accordance with contract specifications. The Company's standard warranties are not sold separately, but are included with each customer purchase. Warranties are not considered separate performance obligations and, therefore, are estimated and recorded at the time of sale.
Accounts Receivable and Contract Liabilities
A contract with a customer creates legal rights and obligations. As the Company satisfies 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.
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. Contract costs are amortized on a systematic basis consistent with the transfer to the customer 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. The Company’s contracts frequently contain performance obligations satisfied at a point in time and overtime. In these instances, the Company amortizes the contract costs proportionally with the timing and pattern of revenue recognition. Amortization of costs to obtain a contract are included within sales and marketing expenses within the Consolidated Statements of Operations. In addition, these 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 Cantaloupe 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.
Revenue from the sale of QuickStart lease of equipment is recognized when equipment is shipped to the customer. Transaction processing revenue is recognized upon the usage of the Company’s cashless payment and control network. Subscription fees for access to the Company’s devices and network services are recognized on a monthly basis. In all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collection of the resulting receivable is reasonably assured. The Company estimates an allowance for subscription and transaction fee refunds on a monthly basis.
Hardware is available to customers under the QuickStart program pursuant to which the customer would enter into a five-year non-cancelable lease with either the Company or a third-party leasing company for the devices. 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 QuickStart contracts qualify for sales type lease accounting. At lease inception, the Company recognizes revenue and creates a finance receivable in an amount that represents the present value of minimum lease payments. Accordingly, a portion of the lease payments are recognized as interest income. At the end of the lease period, the customer would have the option to purchase the device at its residual value. Any customer payments received in advance and prior to the Company satisfying any performance obligations are recorded as deferred revenue and amortized as revenue is recognized.
Equipment Rental
The Company offers its customers a rental program for its hardware devices, Cantaloupe ONE platform. Cantaloupe ONE terms are 36 months rental agreements that transition to month-to-month agreements after the initial subscription commitment period. In accordance with ASC 842, “Leases”, the Company classifies the rental agreements as operating leases, with service fee revenue related to the leases included in subscription and transaction fees in the Consolidated Statements of Operations. Costs for the Cantaloupe ONE revenue, which consist of depreciation expense on the Cantaloupe ONE equipment, are included in cost of services in the Consolidated Statements of Operations. Equipment utilized by the Cantaloupe ONE program is included in property and equipment, net on the Consolidated Balance Sheets.
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 and office equipment. Cantaloupe’s leases have lease terms of one year to eight years and 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 determination 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 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. Operating lease Right-of-Use (“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 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. Cantaloupe has lease agreements with lease and non-lease components. The Company uses the practical expedient related to treating lease and non-lease components as a single lease component for all leases as well as electing a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the ROU assets and lease liabilities. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
Variable lease payments that are not based on an index or that result from changes to an index subsequent to the initial measurement of the corresponding lease liability are not included in the measurement of lease ROU assets or liabilities and instead are recognized in earnings in the period in which the obligation for those payments is incurred.
The Company reviews its ROU assets for events or changes in circumstances that may indicate that the carrying amount of such assets may not be recoverable. The carrying amount of an asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount of an ROU exceeds its net realizable value, the asset will be written down to its fair value. The Company recorded a right-of-use asset impairment charge relating to optimizing its corporate real estate footprint of $1.6 million for the year ended June 30, 2021. The Company did not recognize an impairment charge related to the right-of-use assets for the year ended June 30, 2022.
Lessor Accounting
The Company offers its customers financing for the lease of our POS electronic payment devices through our QuickStart program. 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, typically our Cantaloupe ONE rental program. Cantaloupe ONE agreements are 36-month rental agreements that transition to month-to-month agreements after the initial subscription commitment period.
The Company also uses the practical expedient related to treating 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 or Topic 842 depending on the predominant characteristic of the combined 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 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 Subscription and transaction fees in the Consolidated Statements of Operations.
SHIPPING AND HANDLING
Shipping and handling fees billed to our customers in connection with sales are recorded as revenue. The costs incurred for shipping and handling of our product are recorded as cost of equipment.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed as incurred and primarily consist of personnel, contractors and product development costs. Research and development expenses, which are included within the technology and product development expenses and general and administrative expenses in the Consolidated Statements of Operations, were approximately $3.5 million, $3.9 million and $3.8 million, for the fiscal years ended June 30, 2022, 2021, and 2020, respectively. Our research and development initiatives focus on adding features and functionality to our system solutions through the development and utilization of our processing and reporting network and new technology.
CAPITALIZATION OF INTERNAL-USE SOFTWARE AND CLOUD COMPUTING ARRANGEMENTS
We have significant expenditures associated with the technological maintenance and improvement of our network and technology offerings. These expenditures include both the cost of internal employees, who spend portions of their time on various technological projects, and the use of external temporary labor and consultants. Capitalization of internal-use software occurs when we have completed the preliminary project stage, management authorizes the project, management commits to funding the project, it is probable the project will be completed and the project will be used to perform the function intended. We are required to assess these expenditures and make a determination as to whether the costs should be expensed as incurred or are subject to capitalization. In making these determinations, we consider the stage of the development project, the probability of successful development and if the development is resulting in increased features and functionality. In addition, if we determine that a project qualifies for capitalization, the amount of capitalization is subject to various estimates, including the amount of time spent on the development work and the cost of internal employees and external consultants. Internal-use software is included within Property and equipment, net on our Consolidated Balance Sheets and is amortized over its estimated useful life, which is typically 3 to 7 years.
We capitalize certain costs related to hosting arrangements that are service contracts (cloud computing arrangements) following the internal-use software capitalization criteria described above. Our cloud computing arrangements involve services we use to support internal corporate functions, our platforms and technology offerings. Capitalized costs relating to cloud computing arrangements are included within Prepaid expenses and other current assets or Other assets on our Consolidated Balance Sheets and are amortized on a straight-line basis over the estimated useful life, which is typically 3 to 5 years.
ACCOUNTING FOR EQUITY AWARDS
The cost of services received in exchange for an award of equity instruments related to employees and non-employees is based on the grant-date fair value of the award and allocated over the requisite service period of the award. When the requisite service period precedes the grant date, the Company begins recognizing compensation cost before a grant date is established.
These costs are recorded within operating expenses in the Consolidated Statements of Operations.
LOSS CONTINGENCIES
From time to time, we are involved in litigation, claims, contingencies and other legal matters. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company's management team evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates it is probable that a loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates a loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. Expected legal costs associated with assessing or potentially settling a contingent liability are expensed as incurred.
SALES TAX RESERVE
The Company has recorded a contingent liability for sales tax, included in accrued expenses in the Consolidated Balance Sheets. On a quarterly basis, the Company accrues interest on the unpaid balance. The estimated liability is adjusted upon the payment of sales tax related to the accrual, the changes in state tax laws that may impact the accrual and the expiration of the statute of limitations for open years under review. The liability includes significant judgments and estimates that may change in the future, and the actual liability may be different from our current estimate. Future changes to the sales tax reserve amount will be recorded within general and administrative expenses and interest expense in the Consolidated Statements of Operations and accrued expenses in the Consolidated Balance Sheets.
INCOME TAXES
Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence, it is more likely than not such benefits will be realized.
Tax positions must meet a “more-likely-than-not” recognition threshold to be recognized. The Company recognizes interest and penalties, if any, related to uncertain tax positions within general and administrative expenses in the Consolidated Statements of Operations. Interest and penalties related to uncertain tax positions incurred during the fiscal years ended June 30, 2022, 2021, and 2020 were immaterial.
The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions. The tax years ended June 30, 2017 through June 30, 2021 remain open to examination by taxing jurisdictions to which the Company is subject. While the statute of limitations has expired for years prior to the year ended June 30, 2017, changes in reported losses for those years are examinable by tax authorities to the extent that operating loss carryforwards from those prior years impact upon taxable income in current years. As of June 30, 2022, the Company did not have any income tax examinations in process.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share are calculated by dividing net income (loss) applicable to common shares by the weighted average common shares outstanding for the period. Diluted earnings (loss) per share are calculated by dividing net income (loss) applicable to common shares by the weighted average common shares outstanding for the period plus the dilutive effects of common stock equivalents unless the effects of such common stock equivalents are anti-dilutive. For the years ended June 30, 2022, 2021 and 2020, no effect for common stock equivalents was considered in the calculation of diluted earnings (loss) per share because their effect was anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting pronouncements adopted
Measurement of Credit Losses on Financial Instruments
The Company adopted "Financial Instruments - Credit Losses" (Topic 326) on July 1, 2020 using the modified retrospective approach through an adjustment to retained earnings, and began calculating our allowance for accounts and finance receivables under an expected loss model rather than an incurred loss model.
The following table represents the impact of adoption of Topic 326 and a roll forward of the allowance for doubtful accounts for accounts and finance receivables for the years ending June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended June 30, |
| 2022 | | 2021 |
($ in thousands) | Accounts Receivable | | Finance Receivable | | Accounts Receivable | | Finance Receivable |
Balance, beginning of period | $ | 7,715 | | | $ | 1,109 | | | $ | 8,777 | | | $ | 150 | |
Impact of adoption of Topic 326 | — | | | — | | | (757) | | | 409 | |
Provision for expected losses | 3,435 | | | 36 | | | 686 | | | 550 | |
Write-offs | (1,822) | | | (385) | | | (991) | | | — | |
Balance, end of period | $ | 9,328 | | | $ | 760 | | | $ | 7,715 | | | $ | 1,109 | |
ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
On July 1, 2021, the Company adopted 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. The adoption of this accounting standard did not materially impact the Company’s 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 consolidated financial position, results of operations or cash flows.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020 and January 2021, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU 2021-01, “Reference Rate Reform: Scope”, respectively. Together, the ASUs provide temporary optional expedients and exceptions for applying U.S. GAAP guidance on contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. These optional expedients and exceptions are effective beginning March 12, 2020 through December 31, 2022 and adoption is permitted at any time in the effective period. The Company is currently evaluating and assessing the impact these accounting standards will have on its consolidated financial statements and related disclosures and if it will elect these optional standards.
Lessor Classification
In July 2021, the FASB issued ASU 2021-05, “Lessors – Certain Leases with Variable Lease Payments” which requires lessors to classify leases as operating leases if they have variable lease payments that do not depend on an index or rate and would have selling losses if they were classified as sales-type or direct financing leases. ASU 2021-05 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. We plan to adopt this pronouncement for our fiscal year beginning July 1, 2022. The Company has evaluated the impact of this accounting standard and does not expect there to be a material effect at adoption to our consolidated financial statements.
Accounting for Debt and Equity Instruments
In August 2020, the FASB issued ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” which simplifies accounting for convertible instruments and the derivatives scope exception for contracts in an entity's own equity and improves and amends the related earnings per share ("EPS") guidance. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. We plan to adopt this pronouncement for our fiscal year beginning July 1, 2022. The Company has evaluated the impact of this accounting standard and does not expect there to be a material effect at adoption to our consolidated financial statements.
3. LEASES
Lessee accounting
We have operating leases which are primarily real estate leases used for corporate functions, product development, sales, and other purposes. The following table provides supplemental balance sheet information related to the Company's operating leases:
| | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Balance Sheet Classification | As of June 30, 2022 | | As of June 30, 2021 |
| | | | | |
| Assets | | | | | |
| Operating leases | | Operating lease right-of-use assets | $ | 2,370 | | | $ | 3,049 | |
| | | | | |
| Liabilities | | | | | |
| Current | | Accrued expenses | 1,538 | | | 1,166 | |
| Long-term | | Operating lease liabilities, non-current | 2,366 | | | 3,645 | |
| Total lease liabilities | | | $ | 3,904 | | | $ | 4,811 | |
Components of lease cost are as follows:
| | | | | | | | | | | |
| ($ in thousands) | Year ended June 30, 2022 | | Year ended June 30, 2021 |
| | | |
| Operating lease costs* | $ | 1,923 | | | $ | 2,079 | |
* 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) | Year ended June 30, 2022 | | Year ended June 30, 2021 |
| | | |
| Supplemental cash flow information: | | | |
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,737 | | | $ | 1,635 | |
| | | |
| Non-cash activity | | | |
| Right-of-use assets obtained in exchange for lease obligations | | | |
| Operating lease liabilities | $ | 471 | | | $ | — | |
Weighted-average remaining lease term and discount rate for our leases are as follows:
| | | | | | | | | | | |
| Year ended June 30, 2022 | | Year ended June 30, 2021 |
| Weighted-average remaining lease term (years) | | | |
| Operating leases | 3.4 | | 4.3 |
| | | |
| Weighted-average discount rate | | | |
| Operating leases | 6.8 | % | | 6.9 | % |
Maturities of lease liabilities by fiscal year for our leases are as follows: | | | | | |
| ($ in thousands) | Operating
Leases |
| 2023 | $ | 1,758 | |
| 2024 | 1,029 | |
| 2025 | 707 | |
| 2026 | 628 | |
| 2027 | 265 | |
| Thereafter | — | |
| Total lease payments | $ | 4,387 | |
| Less: Imputed interest | (483) | |
| Present value of lease liabilities | $ | 3,904 | |
Lessor accounting
Property and equipment used for the Company's operating lease rental program consisted of the following:
| | | | | | | | | | | | | | |
| ($ in thousands) | | June 30,
2022 | | June 30,
2021 |
| Cost | | $ | 25,242 | | | 26,753 | |
| Accumulated depreciation | | (22,914) | | | (24,487) | |
| Net | | $ | 2,328 | | | $ | 2,266 | |
The Company’s net investment in sales-type leases (carrying value of lease receivables) and the future minimum amounts to be collected on these lease receivables as of June 30, 2022 are disclosed within Note 7, Finance Receivables.
4. REVENUE
Disaggregated Revenue
Beginning in fiscal year 2022, the Company disaggregated Subscription and transaction fees presented on the Consolidated Statements of Operations to Transaction fees and Subscription fees categories (described below) as this additional disclosure provides greater visibility into the Company's revenue streams and better aligns the Company’s financial performance including how management views and monitors business operations and makes strategic decisions.
•Transaction fees: The Company charges its customers a transaction fee generally calculated as a percentage rate on volumes processed through our payment devices.
•Subscription fees: Subscription fees are primarily comprised of the monthly service fee charged to our customers for our cashless payment services, service fees originated through our rental program and Seed software services that include inventory management, route logistics optimization, warehouse and accounting management, and responsive merchandising.
Based on similar operational characteristics, the Company's revenue is disaggregated as follows:
| | | | | | | | | | | | | | | | | |
| Year-ended June 30, |
| ($ in thousands) | 2022 | | 2021 | | 2020 |
| Transaction fees | $ | 110,695 | | | $ | 85,497 | | | $ | 81,244 | |
| Subscription fees | 58,155 | | | 53,745 | | | 51,923 | |
| Subscription and transaction fees | 168,850 | | | 139,242 | | | 133,167 | |
| Equipment sales | 36,352 | | | 27,697 | | | 29,986 | |
| Total revenues | $ | 205,202 | | | $ | 166,939 | | | $ | 163,153 | |
Contract Liabilities
The Company's contract liability (i.e., deferred revenue) balances are as follows:
| | | | | | | | | | | |
| Year ended June 30, |
| ($ in thousands) | 2022 | | 2021 |
| | | |
| Deferred revenue, beginning of the period | $ | 1,763 | | | $ | 1,698 | |
| Deferred revenue, end of the period | 1,893 | | | 1,763 | |
| Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period | 383 | | | 595 | |
The change in the contract liabilities year-over-year is primarily the result of timing difference between the Company's satisfaction of a performance obligation and payment from the customer.
Contract Costs
At June 30, 2022, the Company had net capitalized costs to obtain contracts of $0.5 million included in Prepaid expenses and other current assets and $2.3 million included in Other noncurrent assets on the Consolidated Balance Sheets. None of these capitalized contract costs were impaired. During the year ended June 30, 2022, amortization of capitalized contract costs was $0.7 million.
At June 30, 2021, the Company had net capitalized costs to obtain contracts of $0.4 million included in Prepaid expenses and other current assets and $2.0 million included in Other noncurrent assets on the Consolidated Balance Sheets. None of these capitalized contract costs were impaired. During the year ended June 30, 2021, amortization of capitalized contract costs was $0.6 million.
Future Performance Obligations
The Company will recognize revenue in future periods related to remaining performance obligations for certain open contracts. Generally, these contracts have terms of one year or less. The amount of revenue related to unsatisfied performance obligations in which the original duration of the contract is greater than one year is not significant.
5. LOSS PER SHARE CALCULATION
The following table presents the calculation of basic and diluted loss per share:
| | | | | | | | | | | | | | | | | |
| Year ended June 30, |
| ($ in thousands, except share and per share data) | 2022 | | 2021 | | 2020 |
| | | | | |
| Numerator for basic and diluted loss per share | | | | | |
| Net loss | $ | (1,703) | | | $ | (8,705) | | | $ | (40,595) | |
| Preferred dividends | (668) | | | (668) | | | (668) | |
| Net loss available to common shareholders | $ | (2,371) | | | $ | (9,373) | | | $ | (41,263) | |
| | | | | |
Denominator for basic loss per share - Weighted average shares outstanding | 71,091,790 | | | 67,002,438 | | | 62,980,193 | |
| Effect of dilutive potential common shares | — | | | — | | | — | |
Denominator for diluted loss per share - Adjusted weighted average shares outstanding | 71,091,790 | | | 67,002,438 | | | 62,980,193 | |
| | | | | |
| Basic and diluted loss per share | $ | (0.03) | | | $ | (0.14) | | | $ | (0.66) | |
Potentially anti-dilutive shares excluded from the calculation of diluted loss per share were approximately 5 million, 4 million, and 3 million for the year ended June 30, 2022, 2021 and 2020, respectively.
6. ACQUISITION
In August 2021, we completed the acquisition of certain assets and liabilities of Delicious Nutritious LLC, doing business as Yoke Payments (“Yoke”), a micro market payments company. The acquisition of Yoke was accounted for as a business combination using the acquisition method of accounting which includes the results of operations of the acquired business from the date of acquisition. The purchase price of the acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values using primarily Level 3 inputs under ASC Topic 820, Fair Value Measurement, with the residual of the purchase price recorded as goodwill.
Through the acquisition, Yoke’s point of sale platform will now extend its offering to provide self-checkout while seamlessly integrating with Cantaloupe’s inventory management and payment processing platforms. We plan to differentiate ourselves by providing a single platform to manage consumer and operational aspects of micro markets, while also integrating multiple service providers for flexibility and ultimate ease to our customers.
The consideration transferred for the acquisition includes payments of $3 million in cash at the close of the transaction and $1 million in deferred cash payment due on or before July 30, 2022 based on the achievement of certain sales growth targets. As of the date of the acquisition and as of the year ended June 30, 2022, we expected to pay the entire deferred cash payment and we accrued a contingent consideration liability of $1 million which is included within Accrued expenses in our Consolidated Balance Sheet. On July 27, 2022, the Company made the cash payment of $1 million in accordance with the agreement consideration.
Additionally in connection with the acquisition, the Company will issue common stock to the former owners of Yoke based on the achievement of certain sales growth targets for software licenses through July 31, 2024 and continued employment as of the respective measurement dates. The accounting treatment for these awards in the context of the business combination is to recognize the awards as a post-combination expense and were not included in the purchase price. We will begin recognizing compensation expense for these awards over the requisite service period when it becomes probable that the performance condition would be satisfied. At each reporting date, we assess the probability of achieving the sales targets and fulfilling the performance condition. For the year ended June 30, 2022, we determined that it is not probable that the performance condition would be satisfied and, accordingly, have not recognized compensation expense related to these awards.
The following table summarizes the total consideration paid for Yoke, total net assets acquired, identifiable assets and goodwill recognized at the acquisition date:
| | | | | |
| ($ in thousands) | Amount |
| Consideration | |
| Cash | $ | 2,966 | |
| Contingent consideration arrangement | 1,000 | |
| Fair value of total consideration transferred | 3,966 | |
| |
| Recognized amounts of identifiable assets | |
| Total net assets acquired | 21 | |
| Identifiable intangible assets | 1,235 | |
| Total identifiable net assets | 1,256 | |
| |
| Goodwill | $ | 2,710 | |
Amounts allocated to identifiable intangible assets included $0.9 million related to developed technology, $0.3 million related to customer relationships, and $0.1 million related to other intangible assets. The fair value of the acquired developed technology was determined using a multi-period excess earnings method. The fair value of the acquired customer relationships was determined using the with-and-without method which estimates the value using the cash flow impact in a scenario where the customer relationships are not in place. The recognized intangible assets will be amortized on a straight-line basis over the estimated useful lives of the respective assets.
Goodwill of $2.7 million arising from the acquisition includes the expected synergies between Yoke and the Company and intangible assets that do not qualify for separate recognition at the time of acquisition. The goodwill, which is deductible for income tax purposes, was assigned to the Company’s only reporting unit.
The above table represents the final allocation of the purchase price, noting no material measurement period adjustments. Pro forma financial information of the acquisition is not presented due to the immaterial impact of the financial results of Yoke in the Company's Consolidated Financial Statements.
7. FINANCE RECEIVABLES
The Company’s finance receivables consist of financed devices under the QuickStart program and devices contractually associated with the Seed platform. Predominately all of the Company’s finance receivables agreements are classified as non-cancellable sixty-month sales-type leases. As of June 30, 2022 and 2021, finance receivables consist of the following:
| | | | | | | | | | | |
| As of June 30, |
| ($ in thousands) | 2022 | | 2021 |
| | | |
| Current finance receivables, net | $ | 6,721 | | | $ | 7,967 | |
| Finance receivables due after one year, net | 14,727 | | | 11,632 | |
Total finance receivables, net of allowance of $760 and $1,109, respectively | $ | 21,448 | | | $ | 19,599 | |
We collect lease payments from customers primarily 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 monitors 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 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 each customer relative to their lease payment due, as we consider this customer characteristic to be the strongest predictor of the
risk of customer default. Customers with low processing volume or with transaction sales that are insufficient to cover the lease
payment are considered to be at a higher risk of customer default.
Customers are pooled based on their ratio of gross sales to required monthly lease obligations. We categorize outstanding receivables into two categories: high ratio customers (customers who have adequate transaction processing volumes to cover monthly fees) and low ratio customers (customers that do not consistently have adequate transaction processing volumes to cover monthly fees). 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 June 30, 2022, the gross lease receivable 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 | | $ | 7,451 | | | $ | 5,047 | | | $ | 2,758 | | | $ | 2,593 | | | $ | 2,807 | | | $ | 103 | | | $ | 20,759 | |
| 30 days and under | | 18 | | | 10 | | | 32 | | | 56 | | | 94 | | | 3 | | | 213 | |
| 31 - 60 days | | 25 | | | 23 | | | 26 | | | 58 | | | 100 | | | — | | | 232 | |
| 61 - 90 days | | 25 | | | 14 | | | 20 | | | 46 | | | 91 | | | — | | | 196 | |
| Greater than 90 days | | 41 | | | 47 | | | 97 | | | 232 | | | 391 | | | — | | | 808 | |
| Total finance receivables | | $ | 7,560 | | | $ | 5,141 | | | $ | 2,933 | | | $ | 2,985 | | | $ | 3,483 | | | $ | 106 | | | $ | 22,208 | |
At June 30, 2021, the gross lease receivable 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 | | $ | 6,736 | | | $ | 3,970 | | | $ | 3,942 | | | $ | 3,081 | | | $ | 1,358 | | | $ | 31 | | | $ | 19,118 | |
| 30 days and under | | 19 | | | 67 | | | 90 | | | 93 | | | 11 | | | 1 | | | 281 | |
| 31 - 60 days | | 4 | | | 9 | | | 22 | | | 2 | | | 1 | | | — | | | 38 | |
| 61 - 90 days | | 10 | | | 42 | | | 66 | | | 54 | | | 10 | | | — | | | 182 | |
| Greater than 90 days | | 46 | | | 69 | | | 490 | | | 419 | | | 54 | | | 11 | | | 1,089 | |
| Total finance receivables | | $ | 6,815 | | | $ | 4,157 | | | $ | 4,610 | | | $ | 3,649 | | | $ | 1,434 | | | $ | 43 | | | $ | 20,708 | |
At June 30, 2022, 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 | | $ | 7,498 | | | $ | 4,853 | | | $ | 2,688 | | | $ | 2,623 | | | $ | 2,950 | | | $ | 102 | | | $ | 20,714 | |
| Low ratio customers | | 62 | | | 288 | | | 245 | | | 362 | | | 533 | | | 4 | | | 1,494 | |
| Total finance receivables | | $ | 7,560 | | | $ | 5,141 | | | $ | 2,933 | | | $ | 2,985 | | | $ | 3,483 | | | $ | 106 | | | $ | 22,208 | |
At June 30, 2021, 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 | | $ | 6,415 | | | $ | 3,824 | | | $ | 3,793 | | | $ | 2,920 | | | $ | 1,290 | | | $ | 24 | | | $ | 18,266 | |
| Low ratio customers | | 400 | | | 333 | | | 817 | | | 729 | | | 144 | | | 19 | | | 2,442 | |
| Total finance receivables | | $ | 6,815 | | | $ | 4,157 | | | $ | 4,610 | | | $ | 3,649 | | | $ | 1,434 | | | $ | 43 | | | $ | 20,708 | |
The following table represents a rollforward of the allowance for finance receivables for the year ending June 30, 2022 and 2021: | | | | | | | | | | | |
| |
| ($ in thousands) | Year ended June 30, 2022 | | Year ended June 30, 2021 |
| | | |
| Balance at June 30 | $ | 1,109 | | | $ | 150 | |
| Impact of ASC 326* | — | | | 409 | |
| Provision for expected losses | 36 | | | 550 | |
| Write-offs | (385) | | | — | |
| Balance June 30 | $ | 760 | | | $ | 1,109 | |
* The Company adopted ASC 326 on July 1, 2020.
Cash to be collected on our performing finance receivables due for each of the fiscal years after June 30, 2022 are as follows:
| | | | | |
| ($ in thousands) | |
| |
| 2023 | $ | 2,937 | |
| 2024 | 1,841 | |
| 2025 | 3,420 | |
| 2026 | 6,039 | |
| 2027 | 9,368 | |
| Thereafter | 1,384 | |
| Total amounts to be collected | 24,989 | |
| Less: interest | (2,781) | |
| Less: allowance for doubtful accounts | (760) | |
| Total finance receivables | $ | 21,448 | |
8. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | As of June 30, 2022 |
| ($ in thousands) | Useful
Lives | | Cost | | Accumulated
Depreciation | | Net |
| Computer equipment and software | 3-7 years | | $ | 6,758 | | | $ | (6,404) | | | $ | 354 | |
| Internal-use software | 3-5 years | | 12,787 | | | (2,859) | | | 9,928 | |
| Property and equipment used for rental program | 5 years | | 25,242 | | | (22,914) | | | 2,328 | |
| Furniture and equipment | 3-7 years | | 1,529 | | | (1,396) | | | 133 | |
| Leasehold improvements | (a) | | 286 | | | (245) | | | 41 | |
| | | $ | 46,602 | | | $ | (33,818) | | | $ | 12,784 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | As of June 30, 2021 |
| ($ in thousands) | Useful
Lives | | Cost | | Accumulated
Depreciation | | Net |
| Computer equipment and software | 3-7 years | | $ | 6,497 | | | $ | (6,212) | | | $ | 285 | |
| Internal-use software | 3-5 years | | 4,523 | | | (1,821) | | | 2,702 | |
| Property and equipment used for rental program | 5 years | | 26,753 | | | (24,487) | | | 2,266 | |
| Furniture and equipment | 3-7 years | | 1,471 | | | (1,222) | | | 249 | |
| Leasehold improvements | (a) | | 192 | | | (124) | | | 68 | |
| | | $ | 39,436 | | | $ | (33,866) | | | $ | 5,570 | |
(a) Lesser of lease term or estimated useful life
The Company's total depreciation expense is comprised of depreciation included in our cost of sales for rental equipment and depreciation included in our operating expenses. Depreciation expense included within cost of sales for rental equipment was $1.0 million, $1.4 million, and $2.7 million for the years ended June 30, 2022, 2021, and 2020, respectively. Depreciation expense included within operating expenses for the years ended June 30, 2022, 2021, and 2020 was $1.1 million, $1.0 million and $1.2 million, respectively.
9. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible asset balances consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2022 | | Amortization
Period |
| ($ in thousands) | Gross | | Accumulated Amortization | | Net | |
| | | | | | | |
| Intangible assets: | | | | | | | |
| Brand and tradenames | $ | 1,705 | | | $ | (1,133) | | | $ | 572 | | | 1 - 7 years |
| Developed technology | 11,819 | | | (8,761) | | | 3,058 | | | 5 - 6 years |
| Customer relationships | 19,339 | | | (5,022) | | | 14,317 | | | 5 - 18 years |
| Total intangible assets | $ | 32,863 | | | $ | (14,916) | | | $ | 17,947 | | | |
| | | | | | | |
| Goodwill | $ | 66,656 | | | $ | — | | | $ | 66,656 | | | Indefinite |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2021 | | Amortization
Period |
| ($ in thousands) | Gross | | Accumulated Amortization | | Net | |
| | | | | | | |
| Intangible assets: | | | | | | | |
| Brand and tradenames | $ | 1,640 | | | $ | (840) | | | $ | 800 | | | 3 - 7 years |
| Developed technology | 10,939 | | | (6,890) | | | 4,049 | | | 5 - 6 years |
| Customer relationships | 19,049 | | | (3,906) | | | 15,143 | | | 10 - 18 years |
| Total intangible assets | $ | 31,628 | | | $ | (11,636) | | | $ | 19,992 | | | |
| | | | | | | |
| Goodwill | $ | 63,945 | | | $ | — | | | $ | 63,945 | | | Indefinite |
For the years ended June 30, 2022, 2021 and 2020, amortization expense related to intangible assets was $3.3 million, $3.1 million and $3.1 million, respectively. The weighted-average remaining useful life of the finite-lived intangible assets was 10.5 years as of June 30, 2022, of which the weighted-average remaining useful life for the brand and tradenames was 2.3 years, for the developed technology was 2 years, and for the customer relationships was 13.0 years.
Estimated annual amortization expense for intangible assets is as follows (in thousands):
| | | | | |
| 2023 | $ | 3,270 | |
| 2024 | 2,151 | |
| 2025 | 1,389 | |
| 2026 | 1,292 | |
| 2027 | 1,069 | |
| Thereafter | 8,776 | |
| $ | 17,947 | |
10. ACCRUED EXPENSES
Accrued expenses consisted of the following as of June 30, 2022 and 2021:
| | | | | | | | | | | |
| As of June 30, |
| ($ in thousands) | 2022 | | 2021 |
| | | |
| Accrued sales tax | $ | 14,694 | | | $ | 17,099 | |
| Accrued compensation and related sales commissions | 3,289 | | | 4,233 | |
| Operating lease liabilities - current | 1,538 | | | 1,166 | |
| Accrued professional fees | 4,200 | | | 1,739 | |
| Contingent consideration arrangement for Yoke Acquisition | 1,000 | | | — | |
| Accrued other taxes and filing fees | 2,036 | | | 1,450 | |
| Accrued other | 1,397 | | | 773 | |
| Total accrued expenses | $ | 28,154 | | | $ | 26,460 | |
11. DEBT AND OTHER FINANCING ARRANGEMENTS
The Company's debt and other financing arrangements as of June 30, 2022 and 2021 consisted of the following:
| | | | | | | | | | | |
| As of June 30, |
| ($ in thousands) | 2022 | | 2021 |
| | | |
| JPMorgan Credit Facility* | 14,813 | | | 14,437 | |
| Other obligations | 70 | | | 113 | |
| Less: unamortized issuance costs and debt discount | (261) | | | (231) | |
| Total | 14,622 | | | 14,319 | |
| Less: debt and other financing arrangements, current | (692) | | | (675) | |
| Debt and other financing arrangements, noncurrent | $ | 13,930 | | | $ | 13,644 | |
*See discussion below on amendment to the JPMorgan Credit Facility.Details of interest expense presented on the Consolidated Statements of Operations are as follows:
| | | | | | | | | | | | | | | | | |
| Year ended June 30, |
| ($ in thousands) | 2022 | | 2021 | | 2020 |
| 2020 Antara Term Facility | $ | — | | | $ | 2,779 | | | $ | 1,218 | |
| 2021 JPMorgan Credit Facility | 904 | | | 1,006 | | | — | |
| Interest expense related to change in sales tax reserve | (386) | | | 218 | | | 558 | |
| 2018 JPMorgan Revolving Credit Facility | — | | | — | | | 303 | |
| 2018 JPMorgan Term Loan | — | | | — | | | 160 | |
| Other interest expense | 6 | | | 10 | | | 358 | |
| Total interest expense | $ | 524 | | | $ | 4,013 | | | $ | 2,597 | |
JPMorgan Chase Bank Credit Facility
JPMorgan Credit Agreement dated August 14, 2020 and amendment dated March 2, 2021
On 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 entered into a credit agreement with JPMorgan Chase Bank, N.A.(the “2021 JPMorgan Credit Agreement”).
The 2021 JPMorgan Credit Agreement provided 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, as amended, the “2021 JPMorgan Credit Facility”), which included an uncommitted expansion feature that allowed 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.
The 2021 JPMorgan Credit Facility had a three year maturity, with interest determined, at the Company’s option, on a base rate of LIBOR or Prime Rate plus an applicable spread tied to the Company’s total leverage ratio and having ranges between 2.75% and 3.75% for Prime rate loans and between 3.75% and 4.75% for LIBOR rate loans. In the event of default, the interest rate may be increased by 2.00%. The 2021 JPMorgan Credit Facility carries a commitment fee of 0.50% per annum on the unused portion. From August 14, 2020 through March 2, 2021, the applicable interest rate was Prime Rate plus 3.75%. On March 2, 2021, the Company entered into an amendment (the “First Amendment”) to the 2021 JPMorgan Credit Facility lowering the interest rate charged to the Company. In conjunction with the First Amendment, the Company elected to convert its loans to a Eurodollar borrowing which is subject to a LIBOR based interest rate.
The Company’s obligations under the 2021 JPMorgan Credit Facility were secured by first priority security interests in substantially all of the assets of the Company. The 2021 JPMorgan Credit Agreement included customary representations, warranties and covenants, and acceleration, indemnity and events of default provisions, including a financial covenant requiring the Company to maintain an adjusted quick ratio of not less than 2.75 to 1.00 beginning January 1, 2021, and not less than 3.00 to 1.00 beginning April 1, 2021, and a financial covenant requiring the Company to maintain, as of the 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.
JP Morgan amended and restated Credit Agreement dated March 17, 2022
On March 17, 2022, the Company entered into an amended and restated credit agreement with JPMorgan Chase Bank, N.A. which provides for a $15 million secured revolving credit facility (the “Amended Revolving Facility”) and a $25 million secured term facility (the “Amended Secured Term Facility” and together with the Amended Revolving Facility, the “Amended JPMorgan Credit Facility”), and fully replaces our previous 2021 JPMorgan Credit Facility. The Amended Secured Term Facility includes a $10 million increase from the 2021 JPMorgan Secured Term Facility which is available for a period of up to twelve months following the Closing Date.
The proceeds of the Amended JPMorgan Credit Facility may be used to refinance certain existing indebtedness of the Company and its subsidiaries, to finance the working capital needs, and for general corporate purposes (including permitted acquisitions), of the Company and its subsidiaries.
The Amended JPMorgan Credit Facility has a four year maturity. Interest on the Amended JPMorgan Credit Facility will be based, at the Company’s option, on a base rate or SOFR plus an applicable margin tied to the Company’s total leverage ratio and having ranges of between 2.50% and 3.00% for base rate loans and between 3.50% and 4.00% for SOFR loans; provided that until June 30, 2022 the applicable margin shall be 2.75% for base rate loans and 3.75% for SOFR loans. Subject to the occurrence of a material acquisition and the Company’s total leverage ratio exceeding 3.00 to 1.00, the interest rate on the loans may increase by 0.25%. In an event of default, the interest rate may be increased by 2.00%. The Amended JPMorgan Credit Facility will also carry a commitment fee of 0.50% per annum on the unused portion. As of June 30, 2022, the total applicable interest rate for the Amended Secured Term Facility is 4.4%.
The Amended JPMorgan Credit Facility includes customary representations, warranties and covenants, and acceleration, indemnity and events of default provisions, including, among other things, two financial covenants. One financial covenant requires the Company to maintain, at all times, a total leverage ratio of not more than 3.00 to 1.00 on the last day of any fiscal quarter. The other financial covenant is conditional on a material acquisition occurring: if a material acquisition occurs, the Company is required to maintain a total leverage ratio not greater than 4.00 to 1.00 for the next four fiscal quarters following the material acquisition.
The Amended Secured Term Facility was accounted for as a modification of the 2021 JPMorgan Secured Term Facility. The previously unamortized debt issuance costs remain capitalized, the new fees paid to the creditor were capitalized, and allocated third-party costs incurred allocated to the term facility were charged to expense. We have also evaluated that the borrowing capacity of the Amended Revolving Facility is greater than the borrowing capacity of the 2021 JPMorgan Revolving Facility. The previously unamortized debt issuance costs remain capitalized, the new fees paid to the creditor and allocated third-party costs were capitalized. The Company capitalized $0.3 million of issuance costs related to the Amended JPMorgan Credit Facility during the year-ended June 30, 2022.
The Company was in compliance with its financial covenants as of June 30, 2022.
Term Facility with Antara
On October 9, 2019, the Company entered into a commitment letter with Antara Capital Master Fund LP (“Antara”), pursuant to which Antara committed to extend to the Company a $30.0 million senior secured term loan facility (“2020 Antara Term Facility”). On October 31, 2019, the Company entered into a Financing Agreement with Antara to draw $15.0 million on the 2020 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 terms of the Financing Agreement. 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 Revolving Credit Facility (as defined below) due to 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 October 9, 2019, the Company also 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 of which $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, which was de-recognized during the three months ended September 30, 2020.
On August 14, 2020, the Company repaid all amounts outstanding under the 2020 Antara Term Facility and entered into the 2021 JPMorgan Credit Agreement. The Company recorded a liability for the commitment termination fee and prepayment premium for $1.2 million as of June 30, 2020. As of June 30, 2021, the Company has no outstanding obligations related to the 2020 Antara Term Facility.
Other Long-Term Borrowings
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 used the PPP Loan in accordance with the provisions of the CARES Act. The loan bore 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 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 not significantly detrimental to the business. The receipt of these funds and the forgiveness of the loan 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.
On June 8, 2021, the Company received notification from the Small Business Administration that they approved the forgiveness of the full $3.1 million PPP loan and related accrued interest. The Company recorded the forgiveness as a gain on debt extinguishment in Other income in our consolidated financial statements. The SBA reserves the right to audit any PPP loan, regardless of size. These audits may occur after forgiveness has been granted. Under the CARES Act, all borrowers are required to maintain their loan documentation for six years after the PPP loan was forgiven or repaid in full and to provide that documentation to the SBA upon request.
The expected maturities associated with the Company’s outstanding debt and other financing arrangements as of June 30, 2022, were as follows:
| | | | | |
| 2023 | 770 | |
| 2024 | 897 | |
| 2025 | 1,250 | |
| 2026 | 11,966 | |
| 2027 | — | |
| Principal amounts payable | 14,883 | |
| Unamortized issuance costs | (261) | |
| Total outstanding debt | $ | 14,622 | |
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses, are carried at cost which approximates fair value due to their liquid or short-term nature. 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 June 30, 2022, as the debt facility was recently amended and expanded in March 2022 and the interest rates applicable are variable in nature. The fair value of the Company’s obligations under its long-term debt agreements with JPMorgan were considered Level 2 liabilities of the fair value hierarchy because these instruments have interest rates that reset frequently.
13. EQUITY
PRIVATE PLACEMENTS
On February 24, 2021, the Company entered into separate subscription agreements in identical form and substance (the “Subscription Agreements”) with institutional accredited investors (the “Purchasers”) relating to a private placement (the “Private Placement”) with respect to the sale of an aggregate of 5,730,000 shares of the Company’s common stock. The Private
Placement closed on March 4, 2021 and the Company received aggregate gross proceeds of approximately $55 million based on the offering price of $9.60 per share (the “Purchase Price”). The Company incurred $2.6 million in direct and incremental issuance costs relating to the Private Placement that were accounted as a reduction in the proceeds of the stock. The syndicate for the Private Placement included affiliates of Hudson Executive, a greater than 10% shareholder and a related party of the Company. Affiliates of Hudson Executive purchased 975,000 of the shares sold in the Private Placement for the same purchase price and on the same terms as the other purchasers.
Pursuant to the Subscription Agreements, the Company agreed to file a registration statement with the U.S. Securities and Exchange Commission covering the resale of the Shares within 45 days following the date of the Subscription Agreements and
to cause the registration statement to become effective within 60 days following the filing deadline. On April 5, 2021, the Company filed the registration statement with the U.S. Securities and Exchange Commission and, on April 14, 2021, the registration statement was declared effective.
WARRANTS
During fiscal year 2021, the Company had 23,978 warrants exercisable at $5 per share outstanding which were exercised and resulted in 12,154 shares issued pursuant to a cashless exercise option election made by the holder. As of June 30, 2022 and June 30, 2021, the Company does not have any warrants outstanding.
14. INCOME TAXES
On December 21, 2020, Congress approved the Consolidated Appropriations Act, 2021 (the “Appropriations Act”), which was signed into law by the President on December 27, 2020. The Appropriations Act funds the federal government to the end of the fiscal year and provides further COVID-19 economic relief. Some of the business provisions included in the Appropriations Act are additional Paycheck Protection Program ("PPP") loans, clarification of the deductibility of business expenses that were paid for with PPP funds, expansion of the employee retention credit, and temporary full deduction for business expenses for food and beverages provided by a restaurant. The Appropriations Act did not have a material impact on the Company’s income taxes. The Company will continue to monitor for additional legislation related to COVID-19 and its impact on our results of operations.
The Company has significant deferred tax assets, a substantial amount of which result from operating loss carryforwards. The Company routinely evaluates its ability to realize the benefits of these assets to determine whether it is more likely than not that such benefit will be realized. In accordance with the history of losses generated, the Company believes that for the year ended June 30, 2022 and 2021, it is more likely than not that its deferred tax assets will not be realized. Accordingly, the Company re-established a full valuation allowance on its net deferred tax assets.
The provision for income taxes for the years ended June 30, 2022, 2021 and 2020 is comprised of the following:
| | | | | | | | | | | | | | | | | |
| Year ended June 30, |
| ($ in thousands) | 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | — | | | $ | — | | | $ | 126 | |
| State | (179) | | | (328) | | | (57) | |
| Total current | (179) | | | (328) | | | 69 | |
| Deferred: | | | | | |
| Federal | (18) | | | (12) | | | (156) | |
| State | 11 | | | (30) | | | 86 | |
| Total deferred | (7) | | | (42) | | | (70) | |
| Total income tax provision | $ | (186) | | | $ | (370) | | | $ | (1) | |
A reconciliation of the provision for income taxes for the years ended June 30, 2022, 2021 and 2020 to the indicated provision based on income (loss) before the provision for income taxes at the federal statutory rate of 21.0% for the fiscal years ended June 30, 2022, June 30, 2021, and June 30, 2020 is as follows:
| | | | | | | | | | | | | | | | | |
| Year ended June 30, |
| ($ in thousands) | 2022 | | 2021 | | 2020 |
| Indicated benefit at federal statutory rate | $ | 319 | | | $ | 1,648 | | | $ | 8,514 | |
| Effects of permanent differences | | | | | |
| Stock compensation | (184) | | | 168 | | | (226) | |
| Other permanent differences | (106) | | | 608 | | | (106) | |
| State income taxes, net of federal benefit | (275) | | | 116 | | | 1,393 | |
| Changes related to prior years | — | | | — | | | 489 | |
| Changes in valuation allowances | 184 | | | (2,927) | | | (10,139) | |
| Other | (124) | | | 17 | | | 74 | |
| Provision for income taxes | $ | (186) | | | $ | (370) | | | $ | (1) | |
As of June 30, 2022 the Company had federal and state operating loss carryforwards of approximately $190 million and $222 million, respectively, to offset future taxable income. As of June 30, 2021 the Company had federal and state operating loss carryforwards of approximately $187 million and $221 million, respectively, to offset future taxable income. The timing and extent to which the Company can utilize operating loss carryforwards in any year may be limited because of provisions of the Internal Revenue Code regarding changes in ownership of corporations (i.e. IRS Code Section 382). Federal and state operating loss carryforwards start to expire in 2022 and certain state operating loss carryforwards are currently expiring.
The net deferred tax assets arose primarily from net operating loss carryforwards, as well as the use of different accounting methods for financial statement and income tax reporting purposes as follows:
| | | | | | | | | | | |
| As of June 30, |
| ($ in thousands) | 2022 | | 2021 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 47,984 | | | $ | 46,851 | |
| Asset reserves | 6,666 | | | 7,231 | |
| Deferred research and development | 1,503 | | | 1,420 | |
| Stock-based compensation | 3,416 | | | 2,620 | |
| Other | (143) | | | 2,135 | |
| 59,426 | | | 60,257 | |
| Deferred tax liabilities: | | | |
| Intangibles | (4,316) | | | (4,956) | |
| Deferred tax assets, net | 55,110 | | | 55,301 | |
| Valuation allowance | (55,296) | | | (55,480) | |
| Deferred tax liabilities | $ | (186) | | | $ | (179) | |
As of June 30, 2022, the Company had total unrecognized income tax benefits of $0.6 million related to its nexus in certain state tax jurisdictions. If recognized in future years, $0.6 million of these currently unrecognized income tax benefits would impact the income tax provision and effective tax rate. The following table summarizes the activity related to unrecognized income tax benefits:
| | | | | | | | | | | | | | | | | |
| Year ended June 30, |
| ($ in thousands) | 2022 | | 2021 | | 2020 |
| Balance at the beginning of the year | $ | 444 | | | $ | 207 | | | $ | 210 | |
| Gross increases and decreases related to current period tax positions | — | | | — | | | — | |
| Gross increases and decreases related to prior period tax positions | 128 | | | 237 | | | (3) | |
| Balance at the end of the year | $ | 572 | | | $ | 444 | | | $ | 207 | |
15. STOCK BASED COMPENSATION PLANS
The Company has four active stock based compensation plans at June 30, 2022 as shown in the table below:
| | | | | | | | | | | | | | | | | | | | |
| Date Approved | | Name of Plan | | Type of Plan | | Authorized
Shares |
| | | | | | |
| June 2013 | | 2013 Stock Incentive Plan | | Stock | | 500,000 | |
| June 2014 | | 2014 Stock Option Incentive Plan | | Stock options | | 750,000 | |
| June 2015 | | 2015 Equity Incentive Plan | | Stock & stock options | | 1,250,000 | |
| April 2018 | | 2018 Equity Incentive Plan | | Stock & stock options | | 4,000,000 | |
| | | | | | 6,500,000 | |
As of June 30, 2022, the Company had reserved shares of Common Stock for future issuance for the following:
| | | | | | | | |
| Common Stock | | Reserved Shares |
| Conversions of Preferred Stock and cumulative Preferred Stock dividends | | 106,141 | |
| Issuance upon exercise of stock options granted to current CEO | | 1,000,000 | |
Issuance of shares to former CEO George Jensen upon the occurrence of a Cantaloupe transaction (1) | | 140,000 | |
| Issuance under 2014 Stock Option Incentive Plan | | 115,687 | |
| Issuance under 2015 Equity Incentive Plan | | 392,159 | |
| Issuance under 2018 Equity Incentive Plan | | 179,843 | |
| Total shares reserved for future issuance | | 1,933,830 | |
__________________________________________
(1)Represents 140,000 shares issuable to our former CEO George Jensen upon the occurrence of a "USA Transaction" as such term is defined in the Jensen Stock Agreement dated September 27, 2011 by and between the Company and George R. Jensen.
STOCK OPTIONS
Stock options are granted at exercise prices equal to the fair market value of the Company's common stock at the date of grant. The options typically vest over a three year period and each option, if not exercised or terminated, expires on the seventh anniversary of the grant date.
The Company estimates the grant date fair value of the stock options with service conditions (i.e., a condition that requires an employee to render services to the Company for a stated period of time to vest) 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 uses 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 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.
The fair value of options granted during the years ended June 30, 2022, 2021, and 2020 was determined using the following assumptions:
| | | | | | | | | | | | | | | | | |
| For the year ended June 30, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| Expected volatility | 73.2 - 74.6% | | 74.3 - 77.3% | | 74.6 - 90.1% |
| Expected life (years) | 4.5 - 4.6 | | 4.5 | | 3.5 - 4.8 |
| Expected dividends | 0.0% | | 0.0% | | 0.0% |
| Risk-free interest rate | 1.0 - 2.9% | | 0.2-0.7% | | 0.3-1.6% |
The following tables provide information about outstanding options for the years ended June 30, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended June 30, 2022 |
| Number of Options | | Weighted Average
Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value
(in thousands) |
| Outstanding options, beginning of period | 2,952,092 | | | $ | 6.97 | | | 5.6 | | $ | 14,419 | |
| Granted | 904,500 | | | $ | 8.86 | | | | | |
| Exercised | (121,248) | | | $ | 6.30 | | | | | $ | (53) | |
| Forfeited | (205,511) | | | $ | 8.09 | | | | | |
| Expired | — | | | $ | — | | | | | |
| Outstanding options, end of period | 3,529,833 | | | $ | 7.41 | | | 4.5 | | $ | 194 | |
| Exercisable options, end of period | 1,538,302 | | | $ | 6.79 | | | 4.5 | | $ | 183 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended June 30, 2021 |
| Number of Options | | Weighted Average
Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value
(in thousands) |
| Outstanding options, beginning of period | 2,437,425 | | | $ | 6.43 | | | 6.2 | | $ | 1,411 | |
| Granted | 755,000 | | | $ | 8.40 | | | | | |
| Exercised | (74,667) | | | $ | 3.81 | | | | | $ | (601) | |
| Forfeited | (165,666) | | | $ | 6.90 | | | | | |
| Expired | — | | | $ | — | | | | | |
| Outstanding options, end of period | 2,952,092 | | | $ | 6.97 | | | 5.6 | | $ | 14,419 | |
| Exercisable options, end of period | 1,040,131 | | | $ | 6.52 | | | 5.1 | | $ | 5,558 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended June 30, 2020 |
| Number of Options | | Weighted Average
Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value
(in thousands) |
| Outstanding options, beginning of period | 1,127,098 | | | $ | 4.84 | | | 4.3 | | $ | 2,917 | |
| Granted | 2,075,760 | | | $ | 6.47 | | | | | |
| Exercised | (440,435) | | | $ | 2.48 | | | | | $ | (595) | |
| Forfeited | (324,998) | | | $ | 6.55 | | | | | |
| Expired | — | | | $ | — | | | | | |
| Outstanding options, end of period | 2,437,425 | | | $ | 6.43 | | | 6.2 | | $ | 1,411 | |
| Exercisable options, end of period | 560,871 | | | $ | 6.01 | | | 4.8 | | $ | 559 | |
The weighted average grant date fair value per share for the Company's stock options granted during the years ended June 30, 2022, 2021, and 2020 was $5.12, $4.92, and $3.84, respectively. The total fair value of stock options vested during the years ended June 30, 2022, 2021, and 2020 was $3.0 million, $2.4 million, and $1.7 million, respectively.
Performance based awards
The Company has awarded stock options to certain executives which vest each year over a three to four year period. These stock options are also subject to the achievement of performance goals to be established by the Company's Board for each fiscal
year.
On January 27, 2021, the Compensation Committee of the Board of Directors established the performance metrics as a price target for the trading price of the Company’s common stock in each applicable fiscal year. The price target is achieved if the average closing price of the common stock during any consecutive 30-trading-day period during the applicable fiscal year meets or exceeds: (i) $10.50 in the case of fiscal year 2021; (ii) $13.50 in the case of fiscal year 2022; (iii) $16.50 in the case of fiscal year 2023; and (iv) $19.50 in the case of fiscal year 2024. If at least 80% of the performance goals for an applicable fiscal year are achieved, the Compensation Committee may determine that the portion of the option eligible to vest based on such fiscal year’s performance will vest on a prorated basis. In so determining, the Compensation Committee will consider the Company’s performance relative to its market competitors and any other considerations deemed relevant by the Compensation Committee. The Compensation Committee’s guideline is generally that for every percentage point the achieved price falls below the price target, the percentage of the performance options eligible to vest in respect of the applicable fiscal year should be reduced by 2%, but the Compensation Committee may vary this formula in its sole discretion.
For these performance based awards that provide discretion to the Compensation Committee, a mutual understanding of the key
terms and conditions between the Company and the employees have not yet been met and a grant date has not been established. When the service period begins prior to the grant date, the Company begins recognizing compensation cost before there is a grant date. The Company estimates the award's fair value at each reporting period for these equity classified awards, until the grant date, utilizing a Monte Carlo simulation valuation model. The total expense recognized during the years ended June 30, 2022 and 2021 for these awards was $1.0 million and $2.1 million, respectively.
STOCK GRANTS
The Company makes annual grants of restricted shares of common stock to executive officers pursuant to long-term stock incentive plans (“LTIPs”) which vest annually, typically over three years.
The Company also grants restricted stock units ("RSU"s) to members of the board of directors as compensation for their service on the board as well as to employees as additional compensation. These stock awards typically vest over a one to three year period.
Two employees of Hudson Executive, a greater than 10% shareholder and a related party of the Company, entered into consulting agreements with the Company in August and September of 2020, respectively, under which the consultants were to provide financial and strategic analysis and advisory services to the Company's CEO through July 31, 2021. As consideration for the services, in March 2021 the consultants were granted a total of 80,000 restricted stock units. The total expense recognized as of June 30, 2021 for these agreements was $0.8 million. These restricted stock units had fully vested as of June 30, 2021.
During August and September of 2021, the Company extended these consulting agreements to provide advisory services from August 1, 2021 through July 31, 2022. As consideration for the extended agreements the consultants were granted an additional 20,000 restricted stock units. The restricted stock units granted to each consultant vested in equal installments on January 1, 2022 and July 1, 2022. On February 2, 2022, the Board of Directors of the Company appointed one of the above mentioned employees of Hudson Executive as a director of the Company, effective immediately. In connection with the appointment to the Board, the consulting agreement for that individual was terminated, effective February 2, 2022. Total expense recognized for the year ended June 30, 2022 for these consulting agreements was $0.2 million.
A summary of the status of the Company’s nonvested common shares and RSUs as of June 30, 2022, 2021, and 2020, and changes during the years then ended is presented below:
| | | | | | | | | | | |
| Shares | | Weighted-Average
Grant-Date
Fair Value |
| Nonvested at June 30, 2019 | 38,971 | | | $ | 9.19 | |
| Granted | 651,715 | | | 7.28 | |
| Vested | (109,050) | | | 7.52 | |
| Forfeited | (368,622) | | | 7.89 | |
| Nonvested at June 30, 2020 | 213,014 | | | $ | 6.50 | |
| Granted | 187,848 | | | 10.33 | |
| Vested | (248,016) | | | 7.71 | |
| Forfeited | (15,000) | | | $ | 6.28 | |
| Nonvested at June 30, 2021 | 137,846 | | | $ | 9.57 | |
| Granted | 507,729 | | | 7.33 | |
| Vested | (101,515) | | | 10.34 | |
| Forfeited | (95,152) | | | 8.89 | |
| Nonvested at June 30, 2022 | 448,908 | | | $ | 7.00 | |
STOCK BASED COMPENSATION EXPENSE
The Company applies the fair value method to recognize compensation expense for stock-based awards. Using this method, the estimated grant-date fair value of the award is recognized over the requisite service period using the accelerated attribution method. The Company accounts for forfeitures as they occur.
A summary of the Company's stock-based compensation expense recognized during the years ended June 30, 2022, 2021, and 2020 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended June 30, |
| Award type | | 2022 | | 2021 | | 2020 |
| Stock options | | $ | 4,424 | | | $ | 7,806 | | | $ | 2,181 | |
| Stock grants | | 1,824 | | | 1,269 | | | 848 | |
| Total stock-based compensation expense | | $ | 6,248 | | | $ | 9,075 | | | $ | 3,029 | |
The Company recognized tax benefits of $0.6 million, $2.4 million, and $0.5 million related to stock compensation expense for the years ended June 30, 2022, 2021, and 2020.
A summary of the Company's unrecognized stock-based compensation expense as of June 30, 2022 is as follows:
| | | | | | | | | | | | | | |
| | As of June 30, 2022 |
| Award type | | Unrecognized Expense
(in thousands) | | Weighted Average Recognition Period
(in years) |
| Stock options | | $ | 4,223 | | | 2.4 |
| Stock grants | | $ | 2,131 | | | 1.5 |
16. PREFERRED STOCK
The authorized Preferred Stock may be issued from time to time in one or more series, each series with such rights, preferences or restrictions as determined by the Board of Directors. As of June 30, 2022 each share of Series A Convertible Preferred Stock is convertible into 0.1988 of a share of Common Stock and each share of Series A Convertible Preferred Stock is entitled to 0.1988 of a vote on all matters on which the holders of Common Stock are entitled to vote. Series A Convertible Preferred Stock provides for an annual cumulative dividend of $1.50 per share, payable when, and if declared by the Board of Directors, to the shareholders of record in equal parts on February 1 and August 1 of each year. Any and all accumulated and unpaid cash dividends on the Series A Convertible Preferred Stock must be declared and paid prior to the declaration and payment of any dividends on the Common Stock.
The Series A Convertible Preferred Stock may be called for redemption at the option of the Board of Directors for a price of $11.00 per share plus payment of all accrued and unpaid dividends. No such redemption has occurred as of June 30, 2022. In the event of any liquidation as defined in the Company’s Articles of Incorporation, the holders of shares of Series A Convertible Preferred Stock issued shall be entitled to receive $10.00 for each outstanding share plus all cumulative unpaid dividends. If funds are insufficient for this distribution, the assets available will be distributed ratably among the preferred shareholders. The Series A Convertible Preferred Stock liquidation preference as of June 30, 2022 and 2021 is as follows:
| | | | | | | | | | | |
| ($ in thousands) | June 30,
2022 | | June 30,
2021 |
For shares outstanding at $10.00 per share | $ | 4,451 | | | $ | 4,451 | |
| Cumulative unpaid dividends | 17,662 | | | 16,996 | |
| $ | 22,113 | | | $ | 21,447 | |
The Company has determined that its Series A Convertible Preferred Stock is contingently redeemable due to the existence of deemed liquidation provisions contained in its certificate of incorporation, and therefore classifies its convertible preferred stock outside of permanent equity. The Company has not made any adjustments to the carrying value of the Series A Convertible Preferred Stock to reflect the liquidation value of the shares because the Company has determined that a deemed liquidation event is not probable of occurring.
Cumulative unpaid dividends are convertible into common shares at $1,000 per common share at the option of the shareholder. During the years ended June 30, 2022, 2021 and 2020, no shares of Preferred Stock nor cumulative preferred dividends were converted into shares of common stock.
17. RETIREMENT PLAN
The Company’s 401(k) Plan (the “Retirement Plan”) allows employees to make voluntary contributions, beginning on their first day of active employment, up to a maximum of 100% of their annual compensation, as defined in the Retirement Plan. The Company may, in its discretion, make a matching contribution, a profit sharing contribution, a qualified non-elective contribution, and/or a safe harbor 401(k) contribution to the Retirement Plan. The Company must make an annual election, at the beginning of the plan year, as to whether it will make a safe harbor contribution to the plan. In fiscal years 2022, 2021 and 2020, the Company elected and made safe harbor matching contributions of 100% of the participant’s first 3% and 50% of the next 2% of compensation deferred into the Retirement Plan. The Company’s safe harbor contributions for the years ended June 30, 2022, 2021 and 2020 approximated $0.7 million, $0.2 million and $0.5 million, respectively, and are included within general and administrative expenses within our Consolidated Statements of Operations.
18. COMMITMENTS AND CONTINGENCIES
Litigation
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 and the amount of the loss can be reasonably estimated. We cannot predict the outcome of legal or other proceedings with certainty.
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 (“DOJ”) that sought records regarding Company activities that occurred during prior financial reporting periods, including restatements. During the current fiscal year, the DOJ staff has notified us that they have concluded their investigation and that they do not intend to proceed with any further investigation or enforcement.
Securities and Exchange Commission (“SEC”) Inquiries
Since fiscal year 2019, the Company has received inquiries from the SEC into the facts and circumstances of the 2019 Investigation and has fully cooperated with these inquiries.
Purchase Commitments
As of June 30, 2022, the Company had firm commitments to purchase inventory of approximately $21.4 million over the next two years.
19. RELATED PARTY TRANSACTIONS
A member of our Board of Directors serves as a strategic advisor to a consulting firm that we utilize for payments analytics and advisory services. These services are utilized by the Company to reduce the cost of our interchange and other processing fees charged by payment processors and credit card networks. As consideration for the services, we pay the consulting firm a success fee based on the savings realized by the Company and a recurring monthly subscription fee for the analytics services. The total expense recognized within Cost of subscription and transaction fees for the year ended June 30, 2022 for these arrangements was $1.1 million. The Company did not recognize an expense related to this arrangement for the ended June 30, 2021.
See Note 15 - Stock-based Compensation for information on transactions relating to Hudson Executive.