Condensed Notes to Consolidated Financial Statements
(Unaudited)
1. BUSINESS
USA Technologies, Inc. (the “Company”, “We”, “USAT”, or “Our”) was incorporated in the Commonwealth of Pennsylvania in January 1992. We are a provider of technology-enabled solutions and value-added services that facilitate electronic payment transactions and consumer engagement services primarily within the unattended Point of Sale (“POS”) market. We are a leading provider in the small ticket, beverage and food vending industry in the United States and are expanding our solutions and services to other unattended market segments, such as amusement, commercial laundry, kiosk and others. Since our founding, we have designed and marketed systems and solutions that facilitate electronic payment options, as well as telemetry and IoT services, which include the ability to remotely monitor, control, and report on the results of distributed assets containing our electronic payment solutions. Historically, these distributed assets have relied on cash for payment in the form of coins or bills, whereas, our systems allow them to accept cashless payments such as through the use of credit or debit cards or other emerging contactless forms, such as mobile payment. The connection to the ePort Connect platform also enables consumer loyalty programs, national rewards programs and digital content, including advertisements and product information to be delivered at the point of sale.
On November 9, 2017, the Company acquired all of the outstanding equity interests of Cantaloupe Systems, Inc. (“Cantaloupe”), pursuant to the Agreement and Plan of Merger (“Merger Agreement”). Cantaloupe is a premier provider of cloud and mobile solutions for vending, micro markets, and office coffee service. The acquisition expanded the Company’s existing platform to become an end-to-end enterprise platform integrating Cantaloupe’s Seed Cloud which provides cloud and mobile solutions for dynamic route scheduling, automated pre-kitting, responsive merchandising, inventory management, warehouse and accounting management, as well as cashless vending. The combined companies complete the value chain for customers by providing both top-line revenue generating services as well as bottom line business efficiency services to help operators of unattended retail machines run their business better. The combined product offering provides the data-rich Seed system with USAT’s consumer benefits, providing operators with valuable consumer data that results in customized experiences. In addition to new technology and services, due to Cantaloupe’s existing customer base, the acquisition expands the Company’s footprint into new global markets.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements and therefore should be read in conjunction with the Company’s June 30, 2019 Annual Report on Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the three months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending June 30, 2020. The balance sheet at June 30, 2019 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
LIQUIDITY
The Company has adopted Accounting Standards Codification, (“ASC”) 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosures in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the results of management’s assessment, plans and conclusion of the Company’s ability to continue as a going concern.
At September 30, 2019, the Company had $25.5 million in cash and a working capital deficit of $9.7 million. As noted in Note 9, as of September 30, 2019, the Company was not in compliance with the fixed charge coverage ratio and the total leverage ratio of its Revolving Credit Facility, which represents an event of default under the credit agreement. As a result, the Company has classified all amounts outstanding ($10.0 million) under these credit facilities as current liabilities. Additionally, as of September 30, 2019, the Company identified sales tax liabilities and related interest in the aggregate amount of $18.0 million. Also, the Company has reported aggregate net losses of $50.8 million for the three year period ended June 30, 2019.
In response to its need to develop a cash management strategy, the Company developed a plan that included potentially seeking to extend the credit borrowings to beyond one year, securing a commitment for the sale of its long-term receivables, and obtaining outside financing.
Pursuant to a Stock Purchase Agreement dated October 9, 2019 between the Company and Antara Capital Master Fund LP (“Antara”), the Company sold to Antara 3,800,000 shares of the Company’s common stock at a price of $5.25 per share for an aggregate purchase price of $19,950,000. Antara qualifies as an accredited investor under Rule 501 of the Securities Act of 1933, as amended (the "Act"), and the offer and sale of the shares was exempt from registration under Section 4(a)(2) of the Act. Antara agreed not to dispose of the shares for a period of 90 days from the closing date. The Company also entered into a registration rights agreement (the "Registration Rights Agreement") with Antara, pursuant to which the Company has agreed, at its expense, to file a registration statement under the Act with the Securities and Exchange Commission (the "SEC") covering the resale of the shares by Antara (the "Registration Statement"). The Company will be required to pay certain negotiated cash payments to Antara in the event that the Registration Statement is not filed within 30 days of the closing date or if the Registration Statement is not declared effective within three months of the closing date, subject to the terms of the Registration Rights Agreement. On November 11, 2019, the Company received an extension of time to file the Registration Statement from Antara until November 26, 2019. In connection with the private placement, William Blair & Company, L.L.C. (“Blair”) acted as exclusive placement agent for the Company and received a cash placement fee of $1.2 million.
On October 9, 2019, the Company also entered into a commitment letter (“Commitment Letter”) with Antara, pursuant to which Antara committed to extend to the Company a $30.0 million senior secured term loan facility (“Term Facility”). Upon the execution of the Commitment Letter, the Company paid to Antara a non-refundable commitment fee of $1.2 million. In connection with the Commitment Letter, Blair acted as exclusive placement agent for the Company and received a cash placement fee of $750,000. On October 31, 2019, the Company entered into a Financing Agreement with Antara to draw $15.0 million on the 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 Term Facility bear 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 revolving line of credit loan due to JPMorgan Chase Bank, N.A. in the amount of $10.1 million, including accrued interest payable, and to pay transaction expenses, and the Company intends to utilize the balance for working capital and general corporate purposes. The outstanding principal amount of the loan must be paid in full by no later than the maturity date of October 31, 2024.
As previously disclosed in our periodic reports and proxy statements, our independent Audit Committee chairperson, Robert Metzger is employed by Blair. Mr. Metzger receives discretionary compensation from Blair based on various activities including, among other things, training activities and business development.
The Company believes that its current financial resources, as of the date of the issuance of these consolidated financial statements, are sufficient to fund its current twelve month operating budget, alleviating any substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs for twelve months from the issuance of these consolidated financial statements.
2. ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting pronouncements adopted
In February 2016, the FASB issued ASU 2016-02, Leases, which requires, among other items, lessees to recognize a right of use asset and a related lease liability for most leases on the balance sheet. Lessees and lessors are required to disclose quantitative and qualitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and requires a modified retrospective application, with early adoption permitted. The Company adopted this new guidance on July 1, 2019, using the optional modified retrospective transition method applying the guidance to leases existing as of the effective date. The Company has determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. We will continue to report periods prior to July 1, 2019 in our financial statements under prior guidance as outlined in Topic 840.
The Company’s adoption of ASU No. 2016-02 resulted in an increase in the Company’s assets and liabilities of approximately $3.9 million at July 1, 2019. The Company’s adoption of ASU No. 2016-02 did not have a material impact to the Company’s consolidated statements of operations or its consolidated statements of cash flows. Further, there was no impact on the Company’s covenant compliance under its current debt agreements as a result of the adoption of ASU No. 2016-02. The Company elected the package of practical expedients included in this guidance, which allowed it to not reassess: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and, (iii) the initial direct costs for existing
leases. From a lessee perspective, the Company elected 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 Right-of-Use (“ROU”) assets and lease liabilities. From a lessor perspective, the Company also elected 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.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.” The standard simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The Company adopted this ASU on July 1, 2019, and its adoption did not have a material effect on the Company’s condensed consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements”. These amendments provide clarifications and corrections to certain ASC subtopics including “Compensation - Stock Compensation - Income Taxes” (Topic 718-740), “Business Combinations - Income Taxes” (Topic 805-740) and “Fair Value Measurement - Overall” (Topic 820-10). The Company adopted this ASU on July 1, 2019, and its adoption did not have a material effect on the Company’s condensed consolidated financial statements.
Accounting pronouncements to be adopted
The Company is evaluating whether the effects of the following recent accounting pronouncements, or any other recently issued but not yet effective accounting standards, will have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The new guidance changes the accounting for estimated credit losses pertaining to certain types of financial instruments including, but not limited to, trade and lease receivables. This pronouncement will be effective for fiscal years beginning after December 15, 2019. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other (Topic 350): Internal-Use Software.” This standard aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning July 1, 2020. The Company expects that the adoption of this ASU would not have a material impact on the Company’s condensed consolidated financial statements.
3. LEASES
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for office space, warehouses, automobiles and office equipment. USAT’s leases have lease terms of one year to eight years 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.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. USAT has lease agreements with lease and non-lease components, which are accounted for together as a single lease component. Lease expense for operating lease payments are 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.
At September 30, 2019, the Company has the following balances recorded in the balance sheet related to its lease arrangements:
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Classification
|
|
As of September 30, 2019
|
|
|
|
|
|
Assets
|
|
|
|
|
Operating leases
|
|
Operating lease right-of-use assets
|
|
$
|
6,514
|
|
Finance leases
|
|
Property and equipment, net
|
|
112
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current:
|
|
|
|
|
Operating leases
|
|
Accrued expenses
|
|
1,194
|
|
Finance leases
|
|
Capital lease obligations and current obligations under long-term debt
|
|
90
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
Operating leases
|
|
Operating lease liabilities, non-current
|
|
5,327
|
|
Finance leases
|
|
Capital lease obligations and long-term debt, less current portion
|
|
$
|
25
|
|
Components of lease cost are as follows:
|
|
|
|
|
($ in thousands)
|
Three months ended September 30, 2019
|
|
|
Finance lease costs:
|
|
Amortization of ROU assets
|
$
|
31
|
|
Interest on lease assets
|
3
|
|
Operating lease costs*
|
701
|
|
Total
|
$
|
735
|
|
* Includes short-term lease and variable lease costs, which are not material.
Supplemental cash flow information and non-cash activity related to our leases are as follows:
|
|
|
|
|
($ in thousands)
|
Three months ended September 30, 2019
|
|
|
Supplemental cash flow information:
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
Financing cash flows from finance leases
|
$
|
23
|
|
Operating cash flows from finance leases
|
3
|
|
Operating cash flows from operating leases
|
495
|
|
|
|
Non-cash activity
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Finance lease liabilities
|
—
|
|
Operating lease liabilities
|
$
|
3,071
|
|
Weighted-average remaining lease term and discount rate for our leases are as follows:
|
|
|
|
|
Three months ended September 30, 2019
|
|
|
Weighted-average remaining lease term
|
|
Finance leases
|
1.5
|
|
Operating leases
|
5.6
|
|
|
|
Weighted-average discount rate
|
|
Finance leases
|
9.0
|
%
|
Operating leases
|
6.8
|
%
|
Maturities of lease liabilities by fiscal year for our leases are as follows:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Operating
Leases
|
|
Finance
Leases
|
Remainder of 2020
|
$
|
1,259
|
|
|
$
|
79
|
|
2021
|
1,361
|
|
|
41
|
|
2022
|
1,379
|
|
|
12
|
|
2023
|
1,400
|
|
|
1
|
|
2024
|
998
|
|
|
1
|
|
Thereafter
|
1,520
|
|
|
—
|
|
Total lease payments
|
$
|
7,917
|
|
|
$
|
134
|
|
Less: Imputed interest
|
1,396
|
|
|
19
|
|
Present value of lease liabilities
|
$
|
6,521
|
|
|
$
|
115
|
|
In September 2019, the Company entered into an amendment to the lease for its headquarters in Malvern, Pennsylvania that has not yet commenced. The amendment grants the Company approximately 3,400 additional square feet of space in exchange for future minimum lease payments of approximately $350 thousand. The amendment did not alter the lease term and will expire on November 30, 2023.
The Company's future minimum lease commitments as of June 30, 2019, under ASC Topic 840, the predecessor to Topic 842, are as follows:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Operating
Leases
|
|
Capital
Leases
|
2020
|
$
|
1,326
|
|
|
$
|
106
|
|
2021
|
1,151
|
|
|
34
|
|
2022
|
1,180
|
|
|
12
|
|
2023
|
1,208
|
|
|
1
|
|
2024
|
859
|
|
|
1
|
|
Thereafter
|
1,550
|
|
|
—
|
|
Total minimum lease payments
|
$
|
7,274
|
|
|
$
|
154
|
|
Less: interest
|
|
|
(14
|
)
|
Present value of minimum lease payments, net
|
|
|
140
|
|
Less: current obligations under capital leases
|
|
|
(106
|
)
|
Obligations under capital leases, noncurrent
|
|
|
$
|
34
|
|
Lessor Accounting
Lessor accounting remained substantially unchanged with the adoption of ASC Topic 842. The Company offers its customers financing for the lease of our POS electronic payment devices. We account for these transactions as sales-type leases. Our sales-type leases generally have a non-cancellable term of 60 months. Certain leases contain an end-of-term purchase option that is
generally insignificant and is reasonably certain to be exercised by the lessee. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases, typically our JumpStart program leases. JumpStart terms are typically 36 months and are cancellable with 30 to 60 days' written notice. As discussed in Note 2, the Company has elected to combine lease and non-lease components for its operating leases and account for the combined components under ASC 606, which is the predominant characteristic of the combined components. 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 ASC 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 License and transaction fees in the Consolidated Statements of Operations.
Property and equipment used for the operating lease rental program consisted of the following:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
September 30,
2019
|
|
June 30,
2019
|
Cost
|
|
$
|
30,503
|
|
|
36,285
|
|
Accumulated depreciation
|
|
(26,417
|
)
|
|
(30,978
|
)
|
Net
|
|
$
|
4,086
|
|
|
$
|
5,307
|
|
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 September 30, 2019 are disclosed within the Finance Receivables footnote. Refer to Note 6 for additional information.
4. REVENUE
Disaggregated Revenue
Based on similar operational and economic characteristics, the Company’s revenue from contracts with customers is disaggregated by License and transaction fees and Equipment sales, as reported in the Company’s Condensed Consolidated Statements of Operations. The Company believes these revenue categories depict how the nature, amount, timing, and uncertainty of its revenue and cash flows are influenced by economic factors, and also represent the level at which management makes operating decisions and assesses financial performance.
Transaction Price Allocated to Future Performance Obligations
In determining the transaction price allocated to unsatisfied performance obligations, we did not include non-recurring charges. Further, we applied the practical expedient to not consider arrangements with an original expected duration of one year or less, which are primarily month to month rental agreements. The majority of contracts are considered to have a contractual term of between 36 and 60 months based on implied and explicit termination penalties. These amounts will be converted into revenue in future periods as work is performed, primarily based on the services provided or at delivery and acceptance of products, depending on the applicable accounting method.
The following table reflects the estimated fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:
|
|
|
|
|
($ in thousands)
|
As of September 30, 2019
|
|
|
2020
|
$
|
9,867
|
|
2021
|
11,317
|
|
2022
|
9,453
|
|
2023
|
6,514
|
|
2024 and thereafter
|
2,521
|
|
Total
|
$
|
39,672
|
|
Contract Liabilities
The Company’s contract liability (i.e., deferred revenue) balances are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
($ in thousands)
|
|
|
|
2019
|
|
|
|
|
|
Deferred revenue, beginning of the period
|
|
|
|
1,539
|
|
Deferred revenue, end of the period
|
|
|
|
2,949
|
|
Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period
|
|
|
|
129
|
|
The change in the contract liabilities period-over-period is primarily the result of timing difference between the Company’s satisfaction of a performance obligation and payment from the customer.
Contract Costs
At September 30, 2019, the Company had net capitalized costs to obtain contracts of $0.3 million included in Prepaid expenses and other current assets and $1.6 million included in Other noncurrent assets on the Condensed Consolidated Balance Sheet. None of these capitalized contract costs were impaired. During the three months ended September 30, 2019, amortization of capitalized contract costs was $0.1 million.
5. RESTRUCTURING/INTEGRATION COSTS
Subsequent to the Cantaloupe acquisition, the Company initiated workforce reductions to integrate the Cantaloupe business for which costs totaled $2.1 million for the year ended June 30, 2018. The Company included these severance charges under “Integration and acquisition costs” within the Condensed Consolidated Statements of Operations, with the remaining outstanding balance included within “Accrued expenses” on the Condensed Consolidated Balance Sheet. Liabilities for severance will generally be paid during the next twelve months.
The following table summarizes the Company’s severance activity for the three months ended September 30, 2019:
|
|
|
|
|
|
($ in thousands)
|
|
Workforce
reduction
|
Balance at July 1, 2019
|
|
$
|
175
|
|
Plus: additions
|
|
26
|
|
Less: cash payments
|
|
—
|
|
Balance at September 30, 2019
|
|
$
|
201
|
|
6. FINANCE RECEIVABLES
The Company's finance receivables consist of financed devices under the Quickstart program and Cantaloupe devices contractually associated with the Seed platform. Predominately all of the Company's finance receivables agreements are classified as non-cancellable 60 month sales-type leases. As of September 30, 2019 and June 30, 2019 finance receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
September 30,
2019
|
|
June 30,
2019
|
Finance receivables, net
|
|
$
|
7,216
|
|
|
6,260
|
|
Finance receivables due after one year, net
|
|
12,710
|
|
|
11,596
|
|
Total finance receivables, net of allowance of $607 and $606, respectively
|
|
$
|
19,926
|
|
|
$
|
17,856
|
|
The Company routinely evaluates outstanding finance receivables for impairment based on past due balances or accounts otherwise determined to be at a higher risk of loss. A finance receivable is classified as nonperforming if it is considered probable the Company will be unable to collect all contractual interest and principal payments as scheduled.
At September 30, 2019 and June 30, 2019, credit quality indicators consisted of the following:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
September 30,
2019
|
|
June 30,
2019
|
Performing
|
|
$
|
19,926
|
|
|
$
|
17,856
|
|
Nonperforming
|
|
607
|
|
|
606
|
|
Total
|
|
$
|
20,533
|
|
|
$
|
18,462
|
|
An aged analysis of the Company's finance receivables as of September 30, 2019 and June 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
September 30,
2019
|
|
June 30,
2019
|
Current
|
|
$
|
19,338
|
|
|
$
|
17,506
|
|
30 days and under past due
|
|
182
|
|
|
200
|
|
31 - 60 days past due
|
|
79
|
|
|
43
|
|
61 - 90 days past due
|
|
200
|
|
|
145
|
|
Greater than 90 days past due
|
|
734
|
|
|
568
|
|
Total finance receivables
|
|
$
|
20,533
|
|
|
$
|
18,462
|
|
Cash to be collected on our finance receivables due for each of the fiscal years are as follows:
|
|
|
|
|
($ in thousands)
|
|
2020
|
$
|
8,141
|
|
2021
|
5,758
|
|
2022
|
5,113
|
|
2023
|
3,505
|
|
2024
|
1,678
|
|
Thereafter
|
255
|
|
Total amounts to be collected
|
24,450
|
|
Less: interest
|
$
|
3,917
|
|
Total finance receivables
|
$
|
20,533
|
|
7. EARNINGS (LOSS) PER SHARE
The calculation of basic earnings (loss) per share (“EPS”) and diluted EPS are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
($ in thousands, except per share data)
|
|
2019
|
|
2018
|
|
|
|
|
|
Numerator for basic and diluted loss per share
|
|
|
|
|
Net loss
|
|
$
|
(12,897
|
)
|
|
$
|
(6,320
|
)
|
Preferred dividends
|
|
(334
|
)
|
|
(334
|
)
|
Net loss available to common shareholders
|
|
$
|
(13,231
|
)
|
|
$
|
(6,654
|
)
|
|
|
|
|
|
Denominator for basic loss per share - Weighted average shares outstanding
|
|
60,096,852
|
|
|
60,053,912
|
|
Effect of dilutive potential common shares
|
|
—
|
|
|
—
|
|
Denominator for diluted loss per share - Adjusted weighted average shares outstanding
|
|
60,096,852
|
|
|
60,053,912
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.11
|
)
|
Diluted loss per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.11
|
)
|
Anti-dilutive shares excluded from the calculation of diluted loss per share were 1,293,317 for the three months ended September 30, 2019 and 1,420,301 for the three months ended September 30, 2018.
8. GOODWILL AND INTANGIBLES
Intangible asset balances and goodwill consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
($ in thousands)
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortization
Period
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
2 years
|
Brand and tradenames
|
|
1,695
|
|
|
(527
|
)
|
|
1,168
|
|
|
3 - 7 years
|
Developed technology
|
|
10,939
|
|
|
(3,727
|
)
|
|
7,212
|
|
|
5 - 6 years
|
Customer relationships
|
|
19,049
|
|
|
(2,042
|
)
|
|
17,007
|
|
|
10 - 18 years
|
Total intangible assets
|
|
$
|
31,685
|
|
|
$
|
(6,298
|
)
|
|
$
|
25,387
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
64,149
|
|
|
—
|
|
|
64,149
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
Total intangible assets & goodwill
|
|
$
|
95,834
|
|
|
$
|
(6,298
|
)
|
|
$
|
89,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
($ in thousands)
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortization
Period
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
2 years
|
Brand and tradenames
|
|
1,695
|
|
|
(470
|
)
|
|
1,225
|
|
|
3 - 7 years
|
Developed technology
|
|
10,939
|
|
|
(3,266
|
)
|
|
7,673
|
|
|
5 - 6 years
|
Customer relationships
|
|
19,049
|
|
|
(1,776
|
)
|
|
17,273
|
|
|
10 - 18 years
|
Total intangible assets
|
|
$
|
31,685
|
|
|
$
|
(5,514
|
)
|
|
$
|
26,171
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
64,149
|
|
|
—
|
|
|
64,149
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
Total intangible assets & goodwill
|
|
$
|
95,834
|
|
|
$
|
(5,514
|
)
|
|
$
|
90,320
|
|
|
|
For the three months ended September 30, 2019 and 2018 each there was $0.8 million in amortization expense related to intangible assets.
9. DEBT AND OTHER FINANCING ARRANGEMENTS
The Company's debt and other financing arrangements as of September 30, 2019 and June 30, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
|
|
As of
June 30,
|
($ in thousands)
|
|
2019
|
|
2019
|
|
|
|
|
|
Revolving Credit Facility
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Term Loan
|
|
—
|
|
|
1,458
|
|
Other, including capital lease obligations
|
|
1,010
|
|
|
1,323
|
|
Less: unamortized issuance costs
|
|
—
|
|
|
(8
|
)
|
Total
|
|
11,010
|
|
|
12,773
|
|
Less: debt and other financing arrangements, current
|
|
(10,826
|
)
|
|
(12,497
|
)
|
Debt and other financing arrangements, noncurrent
|
|
$
|
184
|
|
|
$
|
276
|
|
Details of interest expense presented on the Condensed Consolidated Statements of Operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
($ in thousands)
|
|
|
|
|
|
2019
|
|
2018
|
Revolving Credit Facility
|
|
|
|
|
|
$
|
77
|
|
|
$
|
175
|
|
Term Loan
|
|
|
|
|
|
160
|
|
|
350
|
|
Other interest expense
|
|
|
|
|
|
228
|
|
|
261
|
|
Total interest expense
|
|
|
|
|
|
$
|
465
|
|
|
$
|
786
|
|
Revolving Credit Facility and Term Loan
On November 9, 2017, in connection with the acquisition of Cantaloupe, the Company entered into a five year credit agreement among the Company, as the borrower, its subsidiaries, as guarantors, and JPMorgan Chase Bank, N.A., as the lender and administrative agent for the lender (the “Lender”), pursuant to which the Lender (i) made a $25 million Term Loan to the Company and (ii) provided the Company with the Revolving Credit Facility under which the Company may borrow revolving credit loans in an aggregate principal amount not to exceed $12.5 million at any time.
The proceeds of the Term Loan and borrowings under the Revolving Credit Facility, in an aggregate principal amount equal to $35.0 million, were used by the Company to finance a portion of the purchase price for the acquisition of Cantaloupe ($27.8 million) and repay existing indebtedness ($7.2 million). All advances under the Revolving Credit Facility and all other obligations must be paid in full at maturity on November 9, 2022.
Loans under the five year credit agreement bear interest, at the Company's option, by reference to a base rate or a rate based on LIBOR, in either case, plus an applicable margin determined quarterly based on the Company's Total Leverage Ratio as of the last day of each fiscal quarter. The applicable interest rate on the loans for the three months ended September 30, 2019 is LIBOR plus 4%. The Term Loan and Revolving Credit Facility contain customary representations and warranties and affirmative and negative covenants and require the Company to maintain a minimum quarterly total leverage ratio and fixed charge coverage ratio. The Revolving Credit Facility and Term Loan also require the Company to furnish various financial information on a quarterly and annual basis.
Due to the Company's delay in filing its periodic reports, between September 28, 2018, and September 30, 2019, the parties entered into various agreements to provide for the extension of the delivery of the Company’s financial information required under the terms of the credit agreement. In connection with these agreements, the Company incurred extension fees due to the lender, totaling $0.2 million, between September 28, 2018 and September 30, 2019. Additionally, during the quarter ended March 31, 2019 the Company prepaid $20.0 million of the balance outstanding under the Term Loan, $0.6 million of which was applied to the installment payment due on March 31, 2019 and the remainder of which was applied to the last repayment installment obligations due under the Term Loan. On September 30, 2019, the Company prepaid the remaining principal balance of the Term Loan of $1.5 million and agreed to permanently reduce the amount available under the Revolving Credit Facility to $10 million which represented the outstanding balance on the date thereof. The agreements also provide that the Company cannot incur additional borrowings on the Revolving Credit Facility without the Lender‘s prior consent. Further, the parties agreed that the applicable interest rate on the Revolving Credit Facility and Term Loan will be LIBOR plus 4% until such time as the Company delivers certain financial information required under the credit agreement. On October 31, 2019, the Company repaid the outstanding balance on the Revolving Credit Facility.
On March 29, 2019 and September 18, 2019, the Company obtained waivers of an event of default under the credit agreement. The event of default is the result of the Company having maintained deposits on account with a financial institution in excess of the amounts permitted by the credit agreement and not having transferred certain deposit accounts to the Lender. The waiver requires the Company to remedy the event of default by March 31, 2020 by which time the Company expects to be in compliance with the underlying covenant. As of September 30, 2019, the Company is not in compliance with the fixed charge coverage ratio and the total leverage ratio, which represents an event of default under the credit agreement. The Company has classified all amounts outstanding under the Revolving Credit Facility and Term Loan as current liabilities as of September 30, 2019 and June 30, 2019.
On October 31, 2019, the Company entered into a Financing Agreement with Antara to draw $15.0 million on the 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 Term Facility bear 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 revolving line of credit loan
due to JPMorgan Chase Bank, N.A. in the amount of $10.1 million, including accrued interest payable, and to pay transaction expenses, and the Company intends to utilize the balance for working capital and general corporate purposes. The outstanding principal amount of the loan must be paid in full by no later than the maturity date of October 31, 2024.
Other Long-Term Borrowings
In connection with the acquisition of Cantaloupe, the Company assumed debt of $1.8 million with an outstanding balance of $0.6 million and $0.8 million as of September 30, 2019 and June 30, 2019, respectively, comprised of: (i) $0.1 million and $0.2 million of promissory notes bearing an interest rate of 5% and maturing on April 5, 2020 with principal and interest payments due monthly; (ii) $0.4 million and $0.4 million of promissory notes bearing an interest rate of 10% and maturing on April 1, 2021 with principal and interest payments due quarterly; and (iii) $0.1 million and $0.1 million of promissory notes bearing an interest rate of 12% and maturing on December 15, 2019 with principal and interest payments due quarterly.
10. FAIR VALUE MEASUREMENTS
The Company’s financial instruments are carried at cost which approximates fair value. The Company classifies its financial instruments, which are primarily cash equivalents, accounts receivable, accounts payable and accrued expenses as Level 1 investments of the fair value hierarchy because these instruments are carried at cost which approximates fair value due to the short-term maturity of these instruments.
The Company’s obligations under its long-term debt agreements are carried at amortized cost, which approximates their fair value. The fair value of the Company’s obligations under its long-term debt agreements are considered Level 2 investments of the fair value hierarchy because these instruments have interest rates that reset frequently.
11. INCOME TAXES
For the three months ended September 30, 2019, the Company recorded an income tax provision of $59 thousand. As of September 30, 2019, the Company continued to record a full valuation against its deferred tax assets. The income tax provision primarily relates to the Company's uncertain tax positions, as well as state income and franchise taxes. As of September 30, 2019, the Company had a total unrecognized income tax benefit of $0.2 million. The Company is actively working with the tax authorities related to the majority of this uncertain tax position and it is reasonably possible that a majority of the uncertain tax position will be settled within the next 12 months. The provision is based upon actual loss before income taxes for the three months ended September 30, 2019, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.
For the three months ended September 30, 2018, an income tax provision of $18 thousand was recorded, which primarily relates to state income and franchise taxes. The provision is based upon actual loss before income taxes for the three months ended September 30, 2018, as the use of an estimated annual effective income tax rate does not provide a reliable estimate of the income tax provision.
12. EQUITY
WARRANTS
The Company had 23,978 warrants outstanding as of September 30, 2019 and June 30, 2019, all of which were exercisable at $5.00 per share. The warrants have an expiration date of March 29, 2021.
STOCK OPTIONS
The Company estimates the grant date fair value of the stock options it grants using a Black-Scholes valuation model. The Company’s assumption for expected volatility is based on its historical volatility data related to market trading of its own common stock. The Company bases its assumptions for expected life of the new stock option grants on the life of the option granted, and if relevant, its analysis of the historical exercise patterns of its stock options. The dividend yield assumption is based on dividends expected to be paid over the expected life of the stock option. The risk-free interest rate assumption is determined by using the U.S. Treasury rates of the same period as the expected option term of each stock option.
In July 2017, 135,000 stock options were granted for 11 employees vesting 1/3 on July 26, 2018, 1/3 on July 26, 2019 and 1/3 on July 26, 2020 expiring if not exercised prior to July 26, 2022. The options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended.
In August 2017, the Company awarded stock options to its Chief Executive Officer and Chief Financial Officer to purchase up to 19,047 and 25,000 shares respectively of common stock at an exercise price of $5.25 per share. The Chief Executive Officer options vest on August 16, 2018, expiring if not exercised prior to August 16, 2024. The Chief Financial Officer options vest 1/3 on August 16, 2018, 1/3 on August 16, 2019 and 1/3 on August 16, 2020, expiring if not exercised prior to August 16, 2024. The Chief Executive Officer options are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and the Chief Financial Officer options are non-qualified stock options.
In September 2018, the Company awarded stock options to 102 employees to purchase up to 400,000 shares of common stock at an exercise price of $8.75 which vest 1/3 each year.
The Company did not award any stock options during the quarter ended September 30, 2019.
The fair value of options granted during the three months ended September 30, 2018 was determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
2018
|
Expected volatility (percent)
|
|
|
58.4
|
%
|
Expected life (years)
|
|
|
4.5
|
|
Expected dividends
|
|
|
0.0
|
%
|
Risk-free interest rate (percent)
|
|
|
2.91
|
%
|
Number of options granted
|
|
|
400,000
|
|
Weighted average exercise price
|
|
|
$
|
8.75
|
|
Weighted average grant date fair value
|
|
|
$
|
4.37
|
|
Stock based compensation related to all stock options for the three months ended September 30, 2019 was $0.2 million and $0.1 million for the three months ended September 30, 2018.
COMMON STOCK
On July 2, 2018, 6,677 shares were awarded to each non-employee director for a total of 40,062 shares. The shares vest on a monthly basis over the two year period following July 2, 2018. The total expense recognized for these grants for the three months ended September 30, 2019 was $42 thousand and for the three months ended September 30, 2018 was $0.2 million.
LONG TERM INCENTIVE PLANS
The Company did not award any long-term stock incentive compensation to its executive officers during the 2019 fiscal year.
The Company had long-term stock incentive plans (“LTI”) in prior fiscal years for its then executive officers. Stock based compensation related to the LTI plans was as follows in the three months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
($ in thousands)
|
|
|
|
|
|
2019
|
|
2018
|
FY18 LTI Plan
|
|
|
|
|
|
$
|
8
|
|
|
$
|
30
|
|
FY17 LTI Plan
|
|
|
|
|
|
—
|
|
|
26
|
|
Total
|
|
|
|
|
|
$
|
8
|
|
|
$
|
56
|
|
13. COMMITMENTS AND CONTINGENCIES
Eastern District of Pennsylvania Consolidated Shareholder Class Actions
As previously reported, various putative shareholder class actions had been filed in the United States District Court for the District of New Jersey against the Company, its chief executive officer and chief financial officer at the relevant time, its directors at the relevant time, and the investment banks who served as underwriters in the May 2018 follow-on public offering of the Company (the “Underwriters”). These complaints alleged violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These various actions were consolidated by the Court into one action (the “Consolidated Action”). On September 30, 2019, the Court granted the Motion to Transfer filed by the Company and its former chief executive officer, and
transferred the Consolidated Action to the United States District Court for the Eastern District of Pennsylvania, Docket No. 19-cv-04565. On October 18, 2019, the Court entered an Order approving the parties’ stipulation which provided for the filing of an amended complaint by no later than November 20, 2019, a date for the defendants to respond thereto, and a briefing schedule, if necessary.
Chester County, Pennsylvania Class Action
As previously reported, a putative shareholder class action was filed against the Company, its chief executive officer and chief financial officer at the relevant time, its directors at the relevant time, and the Underwriters, in the Court of Common Pleas, Chester County, Pennsylvania, Docket No. 2019-04821-MJ. The complaint alleged violations of the Securities Act of 1933, as amended. As also previously reported, on September 20, 2019 the Court granted the defendants’ Petition for Stay and stayed the action until the Consolidated Action reaches a final disposition. On October 18, 2019, plaintiff filed an appeal to the Pennsylvania Superior Court from the Order granting defendants’ Petition for Stay, Docket No. 3100 EDA 2019.
14. SUBSEQUENT EVENTS
CEO resignation
On October 17, 2019, Stephen P. Herbert resigned as Chief Executive Officer (the "CEO") and as a member of the Company's Board of Directors. On the same date, the Company's Board of Directors appointed Donald W. Layden, Jr., as interim CEO of the Company. Mr. Layden has served as a member of the Company's Board of Directors since April 2019.
In the course of finalizing the severance package for our prior CEO, Stephen Herbert, we identified payments made on Mr. Herbert’s behalf to the Company’s business travel partner, American Express, prior to Mr. Herbert providing reimbursement to the Company. These payments may be classified as loans. The Company is in the process of arranging the final severance amounts to Mr. Herbert taking into account the outstanding balance of approximately $30,000.
Shareholder rights plan and dividend distribution
On October 18, 2019, the Company’s Board of Directors adopted a shareholder rights plan and declared a dividend distribution of one right on each outstanding share of the Company’s common stock. The rights plan will be put to a vote of shareholders at the next annual meeting, and will automatically terminate if approval is not obtained. If shareholder approval is obtained at the meeting, the shareholder rights plan will expire on October 18, 2020.
The rights will be exercisable only if a person or group acquires 15% or more of the Company’s outstanding common stock. If a shareholder's beneficial ownership of common stock as of the time of this announcement is at or above the 15% threshold, that shareholder's existing ownership percentage would be grandfathered, but the rights would become exercisable if at any time after this announcement the shareholder acquires beneficial ownership of additional shares. Each right will entitle shareholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $30.
If a person or group acquires 15% of the Company’s outstanding common stock, each right will entitle its holder (other than such person or members of such group) to purchase for $30, a number of Company common shares having a market value of twice such price. In addition, at any time after a person or group acquires 15% of the Company’s outstanding common stock, the Company’s Board of Directors may exchange one share of the Company’s common stock for each outstanding right (other than rights owned by such person or group, which would have become void).
Prior to the acquisition by a person or group of beneficial ownership of 15% of the Company’s common stock, the rights are redeemable for one cent per right at the option of the Board of Directors.
The dividend distribution was made to holders of record as of October 28, 2019, and was not taxable to shareholders.
2020 Long-Term Stock Incentive Plan
In October 2019, the Company's Board of Directors approved the Fiscal Year 2020 Long-Term Stock Incentive Plan which provides that each executive officer would be awarded shares of common stock of the Company in the event that certain metrics relating to the Company’s 2020 fiscal year would result in specified ranges of year-over-year percentage growth. The metrics are total number of connections as of June 30, 2020 as compared to total number of connections as of June 30, 2019 (40% weighting) and
adjusted EBITDA earned during the 2020 fiscal year as compared to the adjusted EBITDA earned during the 2019 fiscal year (60% weighting). If none of the minimum threshold year-over-year percentage target goals are achieved, the executive officers would not be awarded any shares. Assuming the minimum threshold year-over-year percentage target goal would be achieved for a particular metric, the number of shares to be awarded for that metric would be determined on a pro rata basis, provided that the award would not exceed the maximum distinguished award for that metric (which in any event cannot exceed 150% of the executive officer’s target bonus award). Any shares awarded under the plan would vest as follows: one-third at the time of issuance; one-third on June 30, 2021; and one-third on June 30, 2022.