Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and related notes included in this Form 10-Q.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, the anticipated financial and operating results of Cantaloupe, Inc. (“Cantaloupe” or the “Company”). For this purpose, forward-looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate,” “could,” “should,” “would,” “likely,” “may,” “will,” “plan,” “intend,” “believes,” “expects,” “anticipates,” “projected,” or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that could cause the Company’s actual results to differ materially from those projected include, for example:
•general economic, market or business conditions unrelated to our operating performance, including inflation, rising interests rates, financial institution disruptions and public health emergencies such as COVID-19;
•our ability to compete with our competitors and increase market share;
•failure to comply with the financial covenants in the Amended JPMorgan Credit Facility (as defined below);
•our ability to raise funds in the future through sales of securities or debt financing in order to sustain operations in the normal course of business or if an unexpected or unusual event were to occur;
•disruptions in or inefficiencies to our supply chain and/or operations;
•the risks related to the availability of, and cost inflation in, supply chain inputs, including labor, raw materials, packaging and transportation;
•whether our current or future customers purchase, lease, rent or utilize ePort devices, Seed’s software solutions or our other products in the future at levels currently anticipated;
•whether our customers continue to utilize the Company’s transaction processing and related services, as our customer agreements are generally cancellable by the customer on thirty to sixty days’ notice;
•our ability to satisfy our trade obligations included in accounts payable and accrued expenses;
•the incurrence by us of any unanticipated or unusual non-operating expenses, which may require us to divert our cash resources from achieving our business plan;
•our ability to predict or estimate our future quarterly or annual revenue and expenses given the developing and unpredictable market for our products;
•our ability to integrate acquired companies into our current products and services structure;
•our ability to retain key customers from whom a significant portion of our revenue is derived;
•the ability of a key customer to reduce or delay purchasing products from us;
•our ability to obtain widespread commercial acceptance of our products and service offerings;
•whether any patents issued to us will provide any competitive advantages or adequate protection for our products, or would be challenged, invalidated or circumvented by others;
•our ability to operate without infringing the intellectual property rights of others;
•the ability of our products and services to avoid disruptions to our systems or unauthorized hacking or credit card fraud;
•geopolitical conflicts, such as the ongoing conflict between Russia and Ukraine;
•whether we are able to fully remediate our material weaknesses in our internal controls over financial reporting or continue to experience material weaknesses in our internal controls over financial reporting in the future, and are not able to accurately or timely report our financial condition or results of operations;
•the ability to remain in compliance with the continued listing standards of the Nasdaq Global Select Market (“Nasdaq”) and continue to remain as a member of the US Small-Cap Russell 2000®;
•whether our suppliers would increase their prices, reduce their output or change their terms of sale;
•the risks associated with cyber attacks and data breaches; and
•the risks associated with the recently settled 2019 Investigation, which remains subject to the SEC’s issuance of its Final Order.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above, or those discussed under Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (“2022 Form 10-K”). We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.
Any forward-looking statement made by us in this Form 10-Q speaks only as of the date of this Form 10-Q. Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
OVERVIEW OF THE COMPANY
Cantaloupe, Inc., is organized under the laws of the Commonwealth of Pennsylvania. We are a software and payments company that provides end-to-end technology solutions for self-service commerce. Cantaloupe is transforming the self-service industry by offering one integrated solution for payments processing, logistics, 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.
On December 1, 2022, the Company acquired all of the equity interests of Three Square Market, Inc., a Wisconsin corporation, and Three Square Market Limited, a UK private limited company (collectively "32M") pursuant to an Equity Purchase Agreement. 32M is a leading provider of software and self-service kiosk-based point of sale and payment solutions that power the micro market industry.
The Company's fiscal year ends June 30. The Company generates revenues in multiple ways. During the three months ended March 31, 2023 and March 31, 2022, we derived approximately 85% and 84%, respectively, from subscription and transaction fees and 15% and 16%, respectively, from equipment sales. During the nine months ended March 31, 2023 and March 31, 2022, we derived approximately 82% and 84%, respectively, from subscription and transaction fees and 18% and 16%, respectively, from equipment sales.
Active Devices (as defined below) operating on the Company’s platform and using our services include those resulting from the sale or lease of our point of sale ("POS") electronic payment devices, telemetry devices or certified payment software or the servicing of similar third-party installed POS terminals or telemetry devices. Customers can obtain POS electronic payment devices from us in the following ways:
•Purchasing devices directly from the Company or one of its authorized resellers;
•Financing devices under the Company’s QuickStart Program, which are non-cancellable sixty-month sales-type leases, through an unrelated equipment financing company, if available, or directly from the Company; and
•Renting devices under the Company’s Cantaloupe One program, which are typically 36 months duration agreements.
3G Network discontinuation and upgrade cycle
The Company currently has a large customer base with over 1 million Active Devices connected to our platform which we have built over 30 years of being a key player in the unattended retail industry. The major telecommunication service providers in North America have been phasing out older generation cellular networks (2G and 3G networks) over the past year due to capacity and bandwidth limitations to make room for newer technologies that are faster, more reliable, provides a wider range of coverage, and overall enables a more responsive device. The phase out of these cellular networks was completed on December 31, 2022.
The upgrade in cellular networks has impacted a significant portion of our customer base and Active Devices and has required the Company to offer discounts to strategic customers especially during the fiscal year 2023 to ensure that our existing customer base is properly transitioned to the new platform. These discounts contributed to the decrease in our equipment sales margin in the first half of fiscal year 2023.
Though the 2G and 3G networks were phased out, we have small percentage of customers that were not able to replace all their old devices with 4G devices prior to the old networks being decommissioned. Labor shortages and supply issues have been the primary drivers of the delay. Replacement 4G devices continued to come online during the quarter ended March 31, 2023, and we anticipate the majority of replacements to be completed by June 30, 2023.
Key Developments during the Quarter
Highlights of the Company for the fiscal quarter ended March 31, 2023 are below:
•Revenues of $60.4 million, an increase of 20.0% year over year. The increase was led by an eighth consecutive quarter of record transaction fees revenue;
•As a result of the acquisition of Three Square Market in December 2022, we have seen a successful acceleration in our micro market business where customers both existing and new are migrating their kiosks to the 32M platform;
•We launched a pilot program for our Seed Driver mobile app, the latest iteration in Cantaloupe’s mobile technology features that streamline driver processes and make servicing locations easier and faster than ever before. The product was made available in April 2023; and
•We continued to see significant customer interest and growth in the newly launched Cantaloupe ONE Platform, a bundled subscription model, which provides operators the flexibility and predictability of a monthly, fixed subscription amount covering the hardware and service fees.
As of March 31, 2023, we have approximately 250 employees in the United States and United Kingdom and offices in Malvern, Pennsylvania; Atlanta, Georgia; River Falls, Wisconsin; and Birmingham, United Kingdom.
COVID-19 Update
While there has not been any resurgence of the COVID-19 virus or new strains or variants emerge that significantly impacted the Company, its employees, or its customers, we have experienced lingering effects during fiscal year 2023. We underwent elevated component and supply chain costs necessary for the production and distribution of our hardware products. Additionally, schools and other organizations have re-opened which has led to increased foot-traffic to distributed assets containing our electronic payment solutions, but we have not seen a full return to the office. Many companies have implemented a hybrid approach requiring employees to work in the office several days a week and allow work from home for the remaining days. 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. We will continue to monitor the situation and follow any guidance from federal, state, and local public health authorities. Given the potential uncertainty of the situation, the Company cannot reasonably estimate the longer-term repercussions of COVID 19 on our financial condition, result of operations or cash flows.
QUARTERLY RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes included in this Form 10-Q.
The following table shows certain financial and non-financial data that management believes give readers insight into certain trends and relationships about the Company’s financial performance. We believe the metrics (Active Devices, Active Customers, Total Number of Transactions and Total Dollar Volume) are useful in allowing management and readers to evaluate our strategy of driving growth in devices and transactions.
Active Devices
Active Devices are devices that have communicated with us or have had a transaction in the last twelve months. Included in the number of Active Devices are devices that communicate through other devices that communicate or transact with us. A self-service retail location that utilizes an ePort cashless payment device as well as Seed management services constitutes only one device.
Active Customers
The Company defines Active Customers as all customers with at least one active device.
Total Number of Transactions and Total Dollar Volume of Transactions
Transactions are defined as electronic payment transactions that are processed by our technology-enabled solutions. Management uses Total Number and Dollar Volume of transactions to evaluate the effectiveness of our new customer strategy and our ability to leverage existing customers and partners.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the three months ended |
| March 31, 2023 | | December 31, 2022 | | September 30,
2022 | | June 30,
2022 | | March 31, 2022 |
| Devices: | | | | | | | | | |
| Active Devices (thousands) | 1,150 | | | 1,150 | | | 1,151 | | | 1,137 | | | 1,125 | |
| | | | | | | | | |
| Customers: | | | | | | | | | |
| Active Customers | 27,598 | | | 26,335 | | | 25,019 | | | 23,991 | | | 22,818 | |
| | | | | | | | | |
| Volumes: | | | | | | | | | |
| Total Number of Transactions (millions) | 267.8 | | 273.7 | | | 276.3 | | | 274.6 | | | 258.6 | |
| Total Dollar Volume of Transactions (millions) | $ | 653.6 | | | $ | 649.4 | | | $ | 639.5 | | | $ | 616.1 | | | $ | 562.0 | |
Highlights for the quarter ended March 31, 2023 include:
•1.15 million Active Devices compared to the same quarter last year of 1.13 million, an increase of approximately 25 thousand Active Devices, or 2.2%;
•27,598 Active Customers on our service compared to the same quarter last year of 22,818, an increase of 4,780 Active Customers, or 20.9%; and
•$653.6 million in Total Dollar Volume of Transactions for the quarter ended March 31, 2023 compared to $562.0 million for the quarter ended March 31, 2022, an increase of $91.6 million, or 16.3%. See "Revenues and Gross Profit" in Management’s Discussion and Analysis of Financial Condition and Results of Operations below for additional information.
FINANCIAL PERFORMANCE
The following tables summarize our results of operations and significant changes in our financial performance for the periods presented:
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Revenues and Gross Profit
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | Percent
Change |
| ($ in thousands) | | 2023 | | 2022 | |
| Revenues: | | | | | | |
| Subscription and transaction fees | | $ | 51,245 | | | $ | 42,143 | | | 21.6 | % |
| Equipment sales | | 9,111 | | | 8,157 | | | 11.7 | % |
| Total revenues | | 60,356 | | | 50,300 | | | 20.0 | % |
| | | | | | |
| Costs of sales: | | | | | | |
| Cost of subscription and transaction fees | | 29,577 | | | 25,291 | | | 16.9 | % |
| Cost of equipment sales | | 7,886 | | | 8,809 | | | (10.5) | % |
| Total costs of sales | | 37,463 | | | 34,100 | | | 9.9 | % |
| | | | | | |
| Gross profit: | | | | | | |
| Subscription and transaction fees | | 21,668 | | | 16,852 | | | 28.6 | % |
| Equipment sales | | 1,225 | | | (652) | | | 287.9 | % |
| Total gross profit | | $ | 22,893 | | | $ | 16,200 | | | 41.3 | % |
| | | | | | |
| Gross margin: | | | | | | |
| Subscription and transaction fees | | 42.3 | % | | 40.0 | % | | |
| Equipment sales | | 13.4 | % | | (8.0) | % | | |
| Total gross margin | | 37.9 | % | | 32.2 | % | | |
Revenues. Total revenues increased by $10.1 million for the three months ended March 31, 2023 compared to the same period in 2022. The increase in revenues is attributed to a $9.1 million and $1.0 million increase in subscription and transaction fees and equipment sales, respectively.
The increase in subscription and transaction fees was primarily driven by increased processing volumes including $3.2 million contributions from the 32M acquisition which was completed in December 2022, with an approximately 16.3% increase in total dollar volumes of transactions for the current fiscal year quarter relative to the prior year quarter. We continue to benefit as businesses, schools and other organizations across the country continue to maintain normal levels of operations and due to an increase in the average price per transaction and total number of transactions relative to the same period in the prior year. Our subscription fees have increased 22.0% for the three months ended March 31, 2023 compared to the same period in 2022 which is attributed to a continued focus of management to grow our recurring subscription services and the successful expansion of the Cantaloupe One program to our customer base.
The increase in equipment sales in the current fiscal year quarter was primarily driven by additional $2.0 million sales from the 32M acquisition. Our equipment margin improved during the current year quarter as our customers have completed upgrading their hardware devices from 3G to 4G network compatible devises as of December 31, 2022. In the prior year period, we offered strategic discounts to our existing customers to ensure their proper transitions into the new platform. (See 3G Network discontinuation and upgrade cycle section above).
Cost of sales. Cost of sales increased $3.4 million for the three months ended March 31, 2023 compared to the same period in 2022. The increase in cost of sales was primarily due to a $4.3 million increase in subscription and transaction costs, partially offset by a $0.9 million decrease in equipment costs. The increase in subscription and transaction costs was primarily driven by an increase in transaction processing fees corresponding with an increase in processing volumes including contributions from the 32M acquisition.
Gross margin. Total gross margin increased to 37.9% for the three months ended March 31, 2023 from 32.2% for the three months ended March 31, 2022. The increase in gross margin was primarily a result of higher margins in both subscription and transaction fee and equipment sales after the 32M acquisition.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | Percent
Change |
| Category ($ in thousands) | | 2023 | | 2022 | |
| Sales and marketing | | $ | 3,154 | | | $ | 1,937 | | | 62.8 | % |
| Technology and product development | | 4,594 | | | 5,532 | | | (17.0) | % |
| General and administrative expenses | | 7,041 | | | 6,788 | | | 3.7 | % |
| Investigation, proxy solicitation and restatement expenses | | (1,000) | | | — | | | (100.0) | % |
| | | | | | |
| Depreciation and amortization | | 2,364 | | | 1,062 | | | 122.6 | % |
| Total operating expenses | | $ | 16,153 | | | $ | 15,319 | | | 5.4 | % |
Total operating expenses. Operating expenses as a whole increased 5.4% for the three months ended March 31, 2023 compared to the same period in 2022. See further details on individual categories below.
Sales and marketing. Sales and marketing expenses increased approximately $1.2 million for the three months ended March 31, 2023 compared to the same period in 2022 due to increased compensation costs as a result of higher sales and marketing employee headcount in the current quarter to support our expanding business and service offerings in the United States and internationally.
Technology and product development. Technology and product development expenses decreased by $0.9 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to a $1.2 million decrease in compensation related expenses as a result of reduced headcount, partially offset by a $0.5 million increase in professional services related to various projects.
General and administrative expenses. General and administrative expenses increased by $0.3 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to a $0.8 million increase in compensation expense, a $0.5 million increase in professional services and $0.4 increase in rent and other occupancy expense. This was partially offset by a release of our sale tax accrual, which had a net decrease of $0.7 million in the current quarter and $0.8 million of bad debt expense in the prior year.
Investigation, proxy solicitation, and restatement expenses. During the quarter, the Company reached a preliminary settlement with the SEC to resolve its 2019 Investigation. As a result of the settlement, we increased our accrual from $0.5 million to $1.5 million, resulting in $1.0 million of expense in the quarter. Additionally, we received a $2.0 million reimbursement from our directors and officers (D&O) insurance policy for legal fees and expenses incurred in connection with the 2019 Investigation. The D&O reimbursement proceeds was recorded as a reduction of "Investigation, proxy and restatement expenses" on the Company's Condensed Consolidated Statement of Operations for the three ended March 31, 2023.
Depreciation and amortization. Depreciation and amortization expenses increased $1.3 million for the three months ended March 31, 2023 compared to the same period in 2022. The increase was primarily driven by the acquisition of 32M in December 2022.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | Percent
Change |
| ($ in thousands) | | 2023 | | 2022 | |
| Other income (expense): | | | | | | |
| Interest income | | $ | 540 | | | $ | 445 | | | 21.3 | % |
| Interest expense | | (263) | | | 852 | | | (130.9) | % |
| Other income (expense) | | (13) | | | (7) | | | 85.7 | % |
| Total other income (expense), net | | $ | 264 | | | $ | 1,290 | | | (79.5) | % |
Other income (expense), net. Other income (expense), net decreased $1.0 million for the three months ended March 31, 2023 as compared to the same period in 2022. Our interest expense was higher during the current year quarter primarily driven by a higher outstanding debt balance, partially offset by a $0.9 million change in the interest component of the sales tax reserve. In
the prior year period, the reduction in interest expense was primarily due to a $0.9 million change in the interest component of the sales tax reserve.
Nine Months Ended March 31, 2023 Compared to Nine Months Ended March 31, 2022
Revenues and Gross Profit
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended March 31, | | Percent
Change |
| ($ in thousands) | | 2023 | | 2022 | |
| Revenues: | | | | | | |
| Subscription and transaction fees | | $ | 147,252 | | | $ | 123,956 | | | 18.8 | % |
| Equipment sales | | 32,216 | | | 23,215 | | | 38.8 | % |
| Total revenues | | 179,468 | | | 147,171 | | | 21.9 | % |
| | | | | | |
| Costs of sales: | | | | | | |
| Cost of subscription and transaction fees | | 90,149 | | | 76,234 | | | 18.3 | % |
| Cost of equipment sales | | 33,823 | | | 23,871 | | | 41.7 | % |
| Total costs of sales | | 123,972 | | | 100,105 | | | 23.8 | % |
| | | | | | |
| Gross profit: | | | | | | |
| Subscription and transaction fees | | 57,103 | | | 47,722 | | | 19.7 | % |
| Equipment sales | | (1,607) | | | (656) | | | 145.0 | % |
| Total gross profit | | $ | 55,496 | | | $ | 47,066 | | | 17.9 | % |
| | | | | | |
| Gross margin: | | | | | | |
| Subscription and transaction fees | | 38.8 | % | | 38.5 | % | | |
| Equipment sales | | (5.0) | % | | (2.8) | % | | |
| Total gross margin | | 30.9 | % | | 32.0 | % | | |
Revenues. Total revenues increased by $32.3 million for the nine months ended March 31, 2023 compared to the same period in 2022. The increase in revenues was attributed to a $23.3 million increase in subscription and transaction fees, and a $9.0 million increase in equipment sales.
The increase in subscription and transaction fees was primarily driven by increased processing volumes, with an approximately 16% increase in total dollar volumes for the nine months ended March 31, 2023 compared to the same period in 2022. Our transaction fees increased $16.4 million, or 20.3% as we continue to benefit as businesses, schools and other organizations across the country continue to maintain normal levels of operations and due to an increase in the average price per transaction and total number of transactions relative to the same period in the prior year. Our subscription fees increased approximately $6.9 million, or 16% for the nine months ended March 31, 2023 compared to the same period in 2022 which was attributed to a continued focus of management to grow our recurring subscription services, the successful expansion of the Cantaloupe One program to our customer base, and the acquisition of 32M.
The increase in equipment sales relates to more equipment shipments in the current fiscal year compared to the same period last year driven primarily by continued upgrades by our customers from 3G to 4G network compatible devices which was substantially completed as of December 31, 2022. Additionally, the completion of our 32M acquisition in December 2022 contributed additional equipment sales for the nine months ended March 31, 2023.
Cost of sales. Cost of sales increased $23.9 million for the nine months ended March 31, 2023 compared to the same period in 2022. The increase in cost of sales was attributed to a $13.9 million and $10.0 million increase in subscription and transaction costs and equipment costs, respectively.
The increase in subscription and transaction costs was primarily driven by an increase in transaction processing fees corresponding with an increase in processing volumes and total dollar volume of transactions. The acquisition of 32M in December 2022 also contributed an approximately $1.6 million increase in our subscription and transaction costs for the nine months ended March 31, 2023.
The increase in cost of sales for equipment was primarily driven by increased equipment sales and increased cost experienced within our supply chain due to inflation and unfavorable prices paid to secure certain key component parts to meet production and delivery timelines caused by a greater than anticipated surge in the demand for our ePort hardware products. The increased demand in the first half of fiscal year 2023 was related to our customers upgrading their payment devices in anticipation of the 3G network discontinuation events described above (See 3G Network discontinuation and upgrade cycle section). We have taken steps to mitigate the impact of the materials shortages on our business, including increasing the amount of inventory we have on hand and negotiating fixed pricing with suppliers which has resulted in significant margin improvements in the second and third quarter of our fiscal year. Additionally, the acquisition of 32M in December 2022 contributed a $1.5 million increase in our equipment costs for the nine months ended March 31, 2023.
Gross margin. Total gross margin was relatively consistent for the nine months ended March 31, 2023 compared to the same period in 2022.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended March 31, | | Percent
Change |
| Category ($ in thousands) | | 2023 | | 2022 | |
| Sales and marketing | | $ | 8,888 | | | $ | 6,021 | | | 47.6 | % |
| Technology and product development | | 16,757 | | | 16,701 | | | 0.3 | % |
| General and administrative expenses | | 25,179 | | | 21,724 | | | 15.9 | % |
| Investigation, proxy solicitation and restatement expenses | | (453) | | | — | | | (100.0) | % |
| Integration and acquisition expenses | | 2,787 | | | — | | | 100.0 | % |
| Depreciation and amortization | | 5,029 | | | 3,197 | | | 57.3 | % |
| Total operating expenses | | $ | 58,187 | | | $ | 47,643 | | | 22.1 | % |
Total operating expenses. Operating expenses increased approximately $10.5 million for the nine months ended March 31, 2023 compared to the same period in 2022. The increase was attributed to a $3.5 million increase in general and administrative expenses, a $2.9 million increase in sales and marketing expenses, a $2.8 million increase in integration and acquisition expenses, and a $1.8 million increase in depreciation and amortization. See further details on individual categories below.
Sales and marketing. Sales and marketing expenses increased approximately $2.9 million for the nine months ended March 31, 2023 compared to the same period in 2022 primarily due to higher sales and marketing employee headcount in the current year to support our expanding business and service offerings in the United States and internationally.
General and administrative expenses. General and administrative expenses increased approximately $3.5 million for the nine months ended March 31, 2023, as compared to the same period in 2022. The increase in general and administrative expenses was primarily driven by a $1.4 million increase in personnel compensation cost as a result of our growing business, a $1.3 million increase in professional services fees relating to additional compliance costs incurred as a result of our delayed annual report filing.
Investigation, proxy solicitation, and restatement expenses. During the quarter, the Company reached a preliminary settlement with the SEC to resolve its 2019 Investigation. As a result of the settlement, we increased our accrual from $0.5 million to $1.5 million, resulting in $1.0 million of expense in the quarter. Additionally, we received a $2.0 million reimbursement from our directors and officers (D&O) insurance policy for legal fees and expenses incurred in connection with the 2019 Investigation. The D&O reimbursement proceeds was recorded as a reduction of "Investigation, proxy and restatement expenses" on the Company's Condensed Consolidated Statement of Operations for the nine months ended March 31, 2023.
Integration and acquisition. On December 1, 2022, the Company acquired all of the equity interests of Three Square Market, Inc., a Wisconsin corporation, and Three Square Market Limited, a UK private limited company (collectively "32M") pursuant to an Equity Purchase Agreement. For the nine months ended March 31, 2023, the Company incurred professional services fees of $2.8 million from accounting, legal and investing banking advisors leading up to and for the successful completion of the 32M acquisition. The Company did not incur any material integration and acquisition expenses for the nine months ended March 31, 2022.
Depreciation and amortization. During the nine months ended March 31, 2023, the Company had an increase in depreciation and amortization costs of $1.8 million compared to the same period in the prior year due to the acquisition of 32M in December 2022 and increased depreciation for our growing Internal-use software as various projects and initiatives get implemented. Our
increase in internal-use software is attributable to management's focus on developing innovative technologies to further strengthen our network environment and platform.
Other Income (Expense)
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended March 31, | | Percent
Change |
| ($ in thousands) | | 2023 | | 2022 | |
| Other income (expense): | | | | | | |
| Interest income | | $ | 1,985 | | | $ | 1,363 | | | 45.6 | % |
| Interest expense | | (1,258) | | | (100) | | | 1,158.0 | % |
| Other income (expense) | | (112) | | | (83) | | | 34.9 | % |
| Total other income | | $ | 615 | | | $ | 1,180 | | | (47.9) | % |
Other income (expense), net. Other income (expense), net decreased $0.6 million for the nine months ended March 31, 2023 as compared to the same period in 2022 primarily driven by an increase in interest expense of $1.2 million due to higher outstanding debt balance in the current year, partially offset by an increase in interest income of approximately $0.6 million and a $0.4 million change in interest component of the sales tax reserve. The interest expense in the prior year period was lower due to a $0.9 million change in the interest component of the sales tax reserve.
Non-GAAP Financial Measures - Adjusted EBITDA
Adjusted earnings before income taxes, depreciation, and amortization (“Adjusted EBITDA”) is a non-GAAP financial measure which is not required by or defined under GAAP. We use this non-GAAP financial measure for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We believe that this non-GAAP financial measure provides useful information about our operating results, enhances the overall understanding of past financial performance and future prospects and allows for greater transparency with respect to metrics used by our management in its financial and operational decision making. The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including our net income or net loss or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with our net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of our profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance. Additionally, we utilize Adjusted EBITDA as a metric in our executive officer and management incentive compensation plans.
We define Adjusted EBITDA as U.S. GAAP net loss before (i) interest income, (ii) interest expense on debt and reserves, (iii) income tax provision, (iv) depreciation, (v) amortization, (vi) stock-based compensation expense, (vii) fees and charges, net of reimbursement from insurance proceeds, that were incurred in connection with the 2019 Investigation and financial statement restatement activities as well as proxy solicitation costs that are not indicative of our core operations, (viii) certain other significant infrequent or unusual losses and gains that are not indicative of our core operations such as integration and acquisition expenses, and (ix) severance expenses that are non-recurring and are not indicative of our core operations.
Below is a reconciliation of U.S. GAAP net loss to Adjusted EBITDA:
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| ($ in thousands) | | 2023 | | 2022 |
| U.S. GAAP net income | | $ | 6,948 | | | $ | 2,136 | |
| Less: interest income | | (540) | | | (445) | |
| Plus: interest expense | | 263 | | | (852) | |
| Plus: income tax provision | | 56 | | | 35 | |
| Plus: depreciation expense included in costs of sales for rentals | | 297 | | | 220 | |
| Plus: depreciation and amortization expense in operating expenses | | 2,364 | | | 1,062 | |
| EBITDA | | 9,388 | | | 2,156 | |
Plus: stock-based compensation (a) | | 1,410 | | | 1,495 | |
Plus: investigation, proxy solicitation and restatement expenses (b) | | (1,000) | | | — | |
| | | | |
Plus: severance expenses (c) | | 273 | | | — | |
| Adjustments to EBITDA | | 683 | | | 1,495 | |
| Adjusted EBITDA | | $ | 10,071 | | | $ | 3,651 | |
| | | | |
(a) As an adjustment to EBITDA, we have excluded stock-based compensation, as it does not reflect our cash-based operations.
(b) As an adjustment to EBITDA, we have excluded the costs and corresponding reimbursements related to the 2019 Investigation, because we believe that they represent charges that are not related to our core operations. During the three months ended March 31, 2023, we incurred costs of $1.0 million relating to the settlement of the 2019 Investigation, but received a $2.0 million D&O insurance reimbursement for legal fees and expenses incurred in connection with the 2019 Investigation. Accordingly, Adjusted EBITDA contains a $1.0 million negative adjustment.
(c) As an adjustment to EBITDA, we have excluded expenses incurred in connection with a one-time, non-recurring severance charges related to work force reduction.
| | | | | | | | | | | | | | |
| | Nine months ended March 31, |
| ($ in thousands) | | 2023 | | 2022 |
| U.S. GAAP net (loss) income | | $ | (2,199) | | | $ | 377 | |
| Less: interest income | | (1,985) | | | (1,363) | |
| Plus: interest expense | | 1,258 | | | 100 | |
| Plus: income tax provision | | 123 | | | 226 | |
| Plus: depreciation expense included in costs of sales for rentals | | 852 | | | 738 | |
| Plus: depreciation and amortization expense in operating expenses | | 5,029 | | | 3,197 | |
| EBITDA | | 3,078 | | | 3,275 | |
Plus: stock-based compensation (a) | | 2,889 | | | 4,624 | |
Plus: investigation, proxy solicitation and restatement expenses (b) | | (453) | | | — | |
Plus: integration and acquisition expenses (c) | | 2,787 | | | — | |
Plus: severance expenses (d) | | 273 | | | — | |
| Adjustments to EBITDA | | 5,496 | | | 4,624 | |
| Adjusted EBITDA | | $ | 8,574 | | | $ | 7,899 | |
| | | | |
(a) As an adjustment to EBITDA, we have excluded stock-based compensation, as it does not reflect our cash-based operations.
(b) As an adjustment to EBITDA, we have excluded the costs and corresponding reimbursements related to the 2019 Investigation, because we believe that they represent charges that are not related to our core operations. During the nine months ended March 31, 2023, we incurred additional costs relating to the settlement of the 2019 Investigation, but received a $2.0 million D&O insurance reimbursement for legal fees and expenses incurred in connection with the 2019 Investigation. Accordingly, Adjusted EBITDA contains a negative adjustment.
(c) As an adjustment to EBITDA, we have excluded expenses incurred in connection with business acquisitions as it does not represent recurring costs or charges related to our core operations.
(d) As an adjustment to EBITDA, we have excluded expenses incurred in connection with a one-time, non-recurring severance charges related to work force reduction.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Historically, we have financed our operations primarily through cash from operating activities, debt financings, and equity issuances. The Company's primary sources of capital available are cash and cash equivalents on hand of $46.7 million as of March 31, 2023 and the cash that we expect to be provided by operating activities by the Company.
The Company also has estimated and recorded for potential sales tax and related interest and penalty liabilities of $13.2 million in the aggregate as of March 31, 2023. The Company continues to evaluate these liabilities and the amount and timing of any such payments.
The Company believes that its current financial resources will be sufficient to fund its current twelve-month operating budget from the date of issuance of these condensed consolidated financial statements. Our primary focus as part of our core operations to increase cash flow from operating activities is to prioritize collection efforts to reduce outstanding accounts receivable, utilize existing inventory to support equipment sales over the next year, focusing on various operational efficiencies to improve overall profitability of the business and continued to grow our business both domestically and internationally.
Below are charts that reflect our cash liquidity and outstanding debt as of March 31, 2023 and June 30, 2022:
Cash Flows
See Condensed Consolidated Statement of Cash Flows in Part I, Item 1 of this Quarterly Report for details on the changes in cash and cash equivalents classified by operating, investing and financing activities during our respective reporting periods.
Net cash provided by (used in) operating activities
For the nine months ended March 31, 2023, net cash provided by operating activities was $5.8 million which reflects our net loss of $2.2 million, $2.7 million of cash utilized by working capital accounts, partially offset by non-cash operating charges of $10.7 million. The change in working capital accounts was primarily driven by a $9.6 million increase of accounts receivable, $8.2 million cash used to increase our inventory on hand, and a reduction in accounts payable and accrued expenses of $2.9 million in the period. Increase in inventory was driven by increased equipment sales as well as strategic planning to mitigate potential supply chain disruptions. Increase in cash utilized by accounts receivable was a result of increased sales during fiscal year 2023 compared to the prior year period.
For the nine months ended March 31, 2022, net cash used in operating activities was $3.9 million, which reflected our net income of $0.4 million and $16.2 million of cash utilized by working capital accounts, partially offset by non-cash operating charges of $11.9 million. The change in working capital accounts was primarily driven by cash used of $9 million to increase our inventory on hand, increase in accounts receivable of $4.4 million, reduction of accounts payable and accrued expenses of approximately $0.2 million, and an increase in prepaid expenses and other assets of $1.9 million. The increase in inventory was a result of the Company anticipating customers' 3G to 4G device upgrade needs and demands for the new ePort Engage devices in 2022.
Non-cash operating charges primarily consisted of stock-based compensation, depreciation of property and equipment, amortization of our intangible assets, and provisions for expected losses for the nine months ended March 31, 2023 and 2022.
Net cash used in investing activities
Net cash used in investing activities was $48.5 million for the nine months ended March 31, 2023. We paid $35.9 million in cash for the 32M acquisition and invested $12.6 million in property and equipment as the Company continued to focus on investing in innovative technologies and products, and increasing rental devices enrolled in the Company's Cantaloupe One program.
Net cash used in investing activities was $10.2 million for the nine months ended March 31, 2022 which was a result of $3.0 million paid for the Yoke acquisition and the remaining $7.2 million used to increase property and equipment.
Net cash provided by financing activities
Net cash provided by financing activities was $21.3 million for the nine months ended March 31, 2023 which was primarily due to a $25 million borrowing from our Credit Facility to fund a portion of the cash consideration for the 32M acquisition, offset by $2.2 million cash used to repurchase our Series A Convertible Stock and a $1.0 million payment for contingent consideration relating to the Yoke acquisition.
Net cash provided by financing activities was $1.0 million for the nine months ended March 31, 2022 which was primarily due to $0.7 million in proceeds from long-term debt and $0.8 million in proceeds related to stock exercises, offset by $0.4 million in repayments on outstanding debt attributable to the Amended JPMorgan Credit Facility.
CONTRACTUAL OBLIGATIONS
During the nine months ended March 31, 2023, the Company borrowed an additional $25 million from its credit facility with JPMorgan Chase Bank, N.A. to fund the acquisition of Three Square Markets. See Note 10 - Debt and Other Financing Arrangements and Note 5 - Acquisition to the condensed consolidated financial statements for additional details on the transaction.
During the nine months ended March 31, 2023, the Company extended an existing operating lease for an additional 70-months period. The lease extension will commence on October 1, 2023. As such, this was not included in the Operating lease right-of-use assets or liabilities on the Condensed Consolidated Balance Sheets for as of March 31, 2023.
There were no other significant changes to our contractual obligations from those disclosed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
CRITICAL ACCOUNTING ESTIMATES
As of March 31, 2023, we are exposed to market risk related to changes in interest rates on our outstanding borrowings. Our 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. As of March 31, 2023, we have $39.3 million total outstanding borrowings, an increase of 100 basis points in SOFR Rate would result in a change in interest expense of $0.4 million per year.
We are also exposed to market risk related to changes in interest rates on our cash investments. We invest our excess cash in money market funds that we believe are highly liquid and marketable in the short term. These investments earn a floating rate of interest and are not held for trading or other speculative purposes. Consequently, our exposure to market risks for interest rate changes related to our money market funds is not material. Market risks related to fluctuations of foreign currencies are not material and we have no freestanding derivative instruments as of March 31, 2023.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to the condensed consolidated financial statements for a description of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Our exposures to market risk have not changed materially since June 30, 2022.
