USA Technologies, Inc.
USA TECHNOLOGIES INC (Form: 8-K/A, Received: 01/25/2018 06:05:17)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 8-K/A

(Amendment No. 1)

Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934


Date of report (Date of earliest event reported): November 9, 2017

USA TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Pennsylvania

001-33365

23-2679963

(State or other jurisdiction of incorporation or organization)

(Commission File Number)

(I.R.S. Employer Identification No.)

100 Deerfield Lane, Suite 300
Malvern, Pennsylvania 19355
(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: 610-989-0340

n/a

Former name or former address, if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   


 

Explanatory Note

 

As previously disclosed in its Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on November 15, 2017 (the “Closing 8-K”),  USA Technologies, Inc. (the “Company”) completed its acquisition of  Cantaloupe Systems, Inc. (“Cantaloupe”) on November 9, 2017, pursuant to an Agreement and Plan of Merger dated November 6, 2017 (the “Merger Agreement”) by and among the Company, USAT, Inc., a wholly owned subsidiary of the Company, Cantaloupe,  and Shareholder Representative Services LLC, as stockholders’ representative.

 

The above description of the Merger Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, a copy of which is filed as Exhibit 2.1 to the Current Report on Form 8-K of the Company that was filed with the Commission on November 7, 2017.

 

The Company is filing this Amendment to the Closing 8-K to provide the financial statements of Cantaloupe required under Item 9.01(a) and the pro forma financial information required under Item 9.01(b).

 

Item 9.01. Financial Statements and Exhibits

 

(a)     Financial statements of business acquired.

 

Included herein as Exhibit 99.1.

 

(b)     Pro forma financial information.

 

Included herein as Exhibit 99.2.

 

(d)   Exhibits .

 

 

2


 

SIGNATURES

 

Pursuant to the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

 

 

/s/ Stephen P. Herbert

 

 

 

 

USA TECHNOLOGIES, INC.

 

 

 

By:

/s/ Stephen P. Herbert

Dated: January 24, 2018

 

Stephen P. Herbert,
Chief Executive Officer

 

3


 

Index to Exhibits

 

 

 

 

 

Exhibit No.

    

Description

 

 

 

23.1

 

Consent of Independent Auditors (Moss Adams LLP)

 

 

 

99.1

 

Audited financial statements of Cantaloupe Systems, Inc. as of and for the years ended December 31, 2016 and 2015, and unaudited financial statements of Cantaloupe Systems, Inc. as of September 30, 2017 and for the nine months ended September 30, 2017 and 2016

 

 

 

99.2

 

Unaudited Pro Forma Combined Consolidated Balance Sheet of USA Technologies, Inc. as of September 30, 2017, and Unaudited Pro Forma Combined Consolidated Statements of Operations of USA Technologies, Inc. for the fiscal year ended June 30, 2017 and the three months ended September 30, 2017

 

4


 

Exhibit 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statements on Form S-8  (Nos. 333-217818, 333-199009, and 333-198049) of USA Technologies, Inc., of our report dated September 11, 2017, relating to the financial statements of Cantaloupe Systems, Inc., appearing in this Current Report on Form 8-K/A of USA Technologies, Inc.

/s/ Moss Adams LLP

Campbell, California

January 24, 2018

 


Exhibit 99.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Report of Independent Auditors
and Financial Statements

Cantaloupe Systems, Inc.

Nine months ended September 30, 2017 (unaudited)
and 2016 (unaudited) and
Years ended December 31, 2016 and 2015

 

 

 


 

 

 

Table of Contents

 

 

 

REPORT OF INDEPENDENT AUDITORS

 

2

FINANCIAL STATEMENTS

 

 

    Balance sheets

 

4

    Statements of operations

 

5

    Statements of redeemable convertible preferred stock

 

 

    and stockholders’ deficit

 

6

    Statements of cash flows

 

7

    Notes to financial statements

 

8

 

 

 

 

 

 

 

 

 

Page 1


 

Report of Independent Auditors

To the Board of Directors

and Stockholders

Cantaloupe Systems, Inc.

Report on Financial Statements

We have audited the accompanying financial statements of Cantaloupe Systems, Inc. (the Company), which comprise the balance sheets   as of December 31, 2016 and 2015,   and the related statements of operations, of redeemable convertible preferred stock and stockholders’ deficit, and of cash flows for the years   then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Page 2


 

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

/s/ Moss Adams LLP

Campbell, California

September 11, 2017

 

 

 

Page 3


 

CANTALOUPE SYSTEMS, INC.

BALANCE SHEETS

(In thousands, except share and per share amounts)

September 30, 2017 (unaudited) and December 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

December 31,

 

 

2017

 

2016

 

2015

 

 

(unaudited)

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,350

 

$

1,930

 

$

1,698

Accounts receivable, net

 

 

4,748

 

 

2,723

 

 

1,718

Inventories

 

 

851

 

 

537

 

 

501

Deferred costs, current portion

 

 

2,720

 

 

2,058

 

 

1,799

Prepaid expenses and other current assets

 

 

788

 

 

461

 

 

370

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

10,457

 

 

7,709

 

 

6,086

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

6,687

 

 

7,016

 

 

5,651

Intangible assets, net

 

 

528

 

 

611

 

 

659

Goodwill, net

 

 

162

 

 

181

 

 

206

Deferred costs, noncurrent

 

 

6,540

 

 

3,893

 

 

2,915

Other assets

 

 

50

 

 

50

 

 

50

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

24,424

 

$

19,460

 

$

15,567

 

 

 

 

 

 

 

 

 

 

Liabilities, redeemable convertible preferred stock,

 

 

 

 

 

 

 

 

 

and stockholders' deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under line of credit

 

$

500

 

$

1,000

 

$

1,490

Current portion of long-term debt

 

 

585

 

 

680

 

 

648

Current portion of capitalized lease obligations

 

 

 -

 

 

 -

 

 

 -

Accounts payable

 

 

2,898

 

 

1,424

 

 

1,033

Accrued expenses

 

 

2,314

 

 

2,073

 

 

1,888

Deferred revenue, current portion

 

 

3,559

 

 

2,778

 

 

1,856

Related party promissory notes, current portion

 

 

666

 

 

575

 

 

 -

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

10,522

 

 

8,530

 

 

6,915

 

 

 

 

 

 

 

 

 

 

Warrant liability

 

 

 2

 

 

 2

 

 

 2

Long-term debt, less current portion

 

 

 -

 

 

412

 

 

1,091

Deferred revenue, noncurrent

 

 

7,243

 

 

4,491

 

 

2,896

Related party promissory notes, less current portion

 

 

1,288

 

 

1,739

 

 

765

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

19,055

 

 

15,174

 

 

11,669

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock, $0.001 par value per share; 20,127,332 shares authorized at September 30, 2017 (unaudited), December 31, 2016 and 2015.  19,610,224 shares issued and outstanding at September 30, 2017 (unaudited), December 31, 2016 and 2015 (aggregate liquidation preference of $32,351,465, $32,298,916 and $32,228,724 at September 30, 2017 (unaudited), December 31, 2016 and 2015, respectively)

 

 

32,442

 

 

31,890

 

 

31,154

Stockholders' deficit

 

 

 

 

 

 

 

 

 

Common stock, $0.001 par value per share; 36,090,428 shares authorized at September 30, 2017 (unaudited), December 31, 2016 and 2015.  12,202,532, 11,569,116 and 9,633,020 shares issued and outstanding at September 30,  2017 (unaudited), December 31, 2016 and 2015, respectively

 

 

12

 

 

12

 

 

10

Additional paid-in capital

 

 

684

 

 

619

 

 

530

Accumulated deficit

 

 

(27,769)

 

 

(28,235)

 

 

(27,796)

 

 

 

 

 

 

 

 

 

 

Total stockholders' deficit

 

 

(27,073)

 

 

(27,604)

 

 

(27,256)

 

 

 

 

 

 

 

 

 

 

Total liabilities, redeemable convertible preferred stock, and stockholders' deficit

 

$

24,424

 

$

19,460

 

$

15,567

 

 

 

See accompanying notes.

Page 4


 

CANTALOUPE SYSTEMS, INC.

 

 

STATEMENTS OF OPERATIONS

(In thousands)

Nine-Months Ended September 30, 2017 (unaudited) and 2016 (unaudited) and Years Ended December 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Months Ended

 

Years Ended

 

 

September 30,

 

December 31,

 

 

2017

 

2016

 

2016

 

2015

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

16,100

 

$

13,107

 

$

17,961

 

$

14,522

Cost and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

6,000

 

 

5,309

 

 

7,229

 

 

6,386

Research and development

 

 

2,580

 

 

2,442

 

 

3,508

 

 

2,766

Sales and marketing

 

 

2,421

 

 

1,998

 

 

2,480

 

 

2,073

General and administration

 

 

3,867

 

 

2,915

 

 

4,199

 

 

4,036

Total costs and expenses

 

 

14,868

 

 

12,664

 

 

17,416

 

 

15,261

Income (loss) from operations

 

 

1,232

 

 

443

 

 

545

 

 

(739)

Interest and other expense, net

 

 

(213)

 

 

(167)

 

 

(244)

 

 

(216)

Income (loss) before income taxes

 

 

1,019

 

 

276

 

 

301

 

 

(955)

Income tax provision

 

 

(1)

 

 

(2)

 

 

(3)

 

 

(1)

Net income (loss)

 

$

1,018

 

$

274

 

$

298

 

$

(956)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

Page 5


 

 

CANTALOUPE SYSTEMS, INC.

STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(In thousands, except for shares amount)

Nine-Months Ended September 30, 2017 (unaudited) and Years Ended December 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

preferred stock

 

 

Common stock

 

 

 

 

paid-in

 

Accumulated

 

stockholders'

 

 

Shares

 

Amount

 

 

Shares

 

Amount

 

capital

 

deficit

 

deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

16,884,128

 

$

26,019

 

 

9,633,020

 

$

10

 

$

492

 

$

(25,705)

 

$

(25,203)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Series C-1 redeemable convertible preferred stock, for cash

 

2,726,096

 

 

4,000

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock redemption value

 

 -

 

 

1,135

 

 

 -

 

 

 -

 

 

 -

 

 

(1,135)

 

 

(1,135)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

38

 

 

 -

 

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(956)

 

 

(956)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

19,610,224

 

 

31,154

 

 

9,633,020

 

 

10

 

 

530

 

 

(27,796)

 

 

(27,256)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock redemption value

 

 -

 

 

736

 

 

 -

 

 

 -

 

 

 -

 

 

(737)

 

 

(737)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock on exercise of stock options

 

 -

 

 

 -

 

 

1,936,096

 

 

 2

 

 

56

 

 

 -

 

 

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

33

 

 

 -

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

298

 

 

298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

19,610,224

 

 

31,890

 

 

11,569,116

 

 

12

 

 

619

 

 

(28,235)

 

 

(27,604)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock redemption value†

 

 -

 

 

552

 

 

 -

 

 

 -

 

 

 -

 

 

(552)

 

 

(552)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised†

 

 -

 

 

 -

 

 

633,416

 

 

 -

 

 

27

 

 

 -

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation†

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

38

 

 

 -

 

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period†

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,018

 

 

1,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2017†

 

19,610,224

 

$

32,442

 

 

12,202,532

 

$

12

 

$

684

 

$

(27,769)

 

$

(27,073)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

† Unaudited interim reporting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

Page 6


 

CANTALOUPE SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

Nine-Months Ended September 30, 2017 (unaudited) and 2016 (unaudited) and Years Ended December 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Months Ended

 

Years Ended

 

 

September 30,

 

December 31,

 

 

2017

 

2016

 

2016

 

2015

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,018

 

$

274

 

$

298

 

$

(956)

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Loss on disposal of property and equipment

 

 

 -

 

 

 -

 

 

 -

 

 

 1

Bad debt expense

 

 

 -

 

 

 -

 

 

142

 

 

115

Depreciation and amortization

 

 

1,767

 

 

1,476

 

 

1,994

 

 

1,262

Stock-based compensation

 

 

38

 

 

29

 

 

33

 

 

38

Change in fair value of warrant liability

 

 

 -

 

 

 -

 

 

 -

 

 

33

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,025)

 

 

(453)

 

 

(1,147)

 

 

392

Inventories

 

 

(314)

 

 

(402)

 

 

(35)

 

 

(225)

Deferred costs

 

 

(3,309)

 

 

(348)

 

 

(1,237)

 

 

561

Prepaid expenses and other current assets

 

 

(328)

 

 

(114)

 

 

(90)

 

 

102

Other assets

 

 

 -

 

 

 -

 

 

 -

 

 

(33)

Accounts payable

 

 

1,716

 

 

158

 

 

391

 

 

(1,234)

Accrued expenses

 

 

 -

 

 

 -

 

 

184

 

 

159

Deferred revenue

 

 

3,533

 

 

1,633

 

 

2,517

 

 

(313)

Net cash provided by (used in) operating activities

 

 

2,096

 

 

2,253

 

 

3,050

 

 

(98)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,330)

 

 

(2,852)

 

 

(3,250)

 

 

(3,767)

Payment for intangible assets

 

 

(6)

 

 

(22)

 

 

(37)

 

 

(52)

Net cash used in investing activities

 

 

(1,336)

 

 

(2,874)

 

 

(3,287)

 

 

(3,819)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net payments on line of credit

 

 

(916)

 

 

(760)

 

 

(490)

 

 

(2,650)

Proceeds from related party promissory notes

 

 

 -

 

 

1,336

 

 

1,550

 

 

2,000

Repayment of term debt

 

 

(451)

 

 

 -

 

 

(649)

 

 

(678)

Proceeds from the sale of redeemable convertible preferred stock

 

 

 -

 

 

 -

 

 

 -

 

 

4,000

Proceeds from issuance of common stock on exercise of stock options

 

 

27

 

 

48

 

 

58

 

 

 -

Net cash (used in) provided by financing activities

 

 

(1,340)

 

 

624

 

 

469

 

 

2,672

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(580)

 

 

 3

 

 

232

 

 

(1,245)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

 

1,930

 

 

1,698

 

 

1,698

 

 

2,943

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period and year

 

$

1,350

 

$

1,701

 

$

1,930

 

$

1,698

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

215

 

$

167

 

$

196

 

$

244

Cash paid for income taxes

 

$

 -

 

$

 -

 

$

 1

 

$

 1

Non-cash investing and financing items:

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock redemption value

 

$

552

 

$

552

 

$

736

 

$

1,135

 

 

 

 

 

See accompanying notes.

Page 7


 

CANTALOUPE SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

 

 

 

NOTE 1 –   THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Cantaloupe Systems, Inc. (the Company), was incorporated in the state of Delaware in 2010.  The Company is a leading provider of enterprise cloud computing applications and related devices for the vending machine and unattended retail industry and is based in San Francisco, California. The Company provides a comprehensive web-based application that captures vending machine and unattended retail transactions from embedded devices using wireless technology communicating with the Company’s servers. This data, along with analytical tools, are then made available over the internet to vending machine and unattended retail location owners on a subscription basis. The Company’s customers are primarily based in the United States and Australia.


The Company also manufactures hardware used to transmit data from the customer’s location to the Company’s servers.  This hardware is either sold directly to the customer, sold to third party leasing partners, or provided to the customers under certain service plans that include the use of the hardware.  Revenue recognition of these hardware sales are more fully described in the revenue recognition paragraph below.

Unaudited interim financial information - The accompanying interim balance sheet as of September 30, 2017, the statements of operations and cash flows for the nine-months ended September 30, 2017 and 2016, and the statements of redeemable convertible preferred stock and stockholders’ deficit for the nine-months ended September 30, 2017, are unaudited. This unaudited interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of the Company’s management, the unaudited interim financial information has been prepared on the same basis as the audited financial statements and includes all adjustments, which include only normal recurring adjustments necessary for the fair presentation of the Company’s financial position as of September 30, 2017, and its results of its operations and its cash flows for the nine-months ended September 30, 2017 and 2016. The financial data and other financial information disclosed in these notes to financial statements related to September 30, 2017 and the nine-months ended September 30, 2017 and 2016 are also unaudited. The results for the nine-months ended September 30, 2017 and 2016 are not necessarily indicative of the results expected for the full fiscal year.

Liquidity –The Company was profitable and generated positive cash flow during 2016 and for the nine-months ended September 30, 2016 (unaudited) and was profitable for the nine-months ended September 30, 2017 (unaudited).  Through December 31, 2015, the Company had incurred recurring operating losses resulting in an accumulated deficit at December 31, 2016, of approximately $28,235,000.  Management believes the Company will continue to be profitable and generate positive cash flow; however, any changes could have a material adverse effect on the Company’s business and results of operations.

Estimates   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair value of financial instruments   The Company applies the fair value measurement accounting standard (“Accounting Standards Codification 820 - Fair Value Measurement”) whenever other accounting pronouncements require or permit fair value measurements. Fair value is defined in the accounting standard as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy under current accounting guidance prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3). Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.

Cash equivalents   The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents.  As of September 30,  2017,  December 31, 2016,  and December 31, 2015, cash and cash equivalents consist of cash deposited with banks and money market funds.  The recorded carrying amount of cash equivalents, which is cost plus accrued interest, approximates fair value.  The Company has determined that its investment in a money market account of approximately $84,000 (unaudited),  $83,000, and $100,000 at September 30,  2017,  December 31, 2016 and December 31, 2015, respectively, is a Level 1 asset in the fair value measurements hierarchy.  The Company made this determination after considering that inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Concentrations of credit risk   The Company’s product revenues are concentrated in enterprise cloud computing applications and related devices for the vending machine industry which is highly competitive and rapidly changing.  Significant technological changes in the industry or customer requirements, or the emergence of competitive products with new capabilities or technologies, could adversely affect the Company’s operating results.

Page 8


 

CANTALOUPE SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

 

 

 

Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable.  Cash and cash equivalents are deposited with federally insured commercial banks in the United States and at times cash balances may be in excess of federal insurance limits.  Accounts receivable are stated at the amount the Company expects to collect. The Company generally does not require collateral or other security in support of accounts receivable.  To reduce credit risk, management considers the following factors when determining the collectability of specific customer accounts: past transaction history with the customer, the number of days that billings are past due, and changes in customer payment terms. Past due balances over 62 days and other higher risk amounts are reviewed individually for collectability.  Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.  As of September 30,  2017,  December 31, 2016,  and December 31, 2015, the Company has reserves of approximately $146,000 (unaudited),  $118,000 and $205,000, respectively, for estimated credit losses. To date, the Company has not had significant write-offs of bad debt.

One customer accounted for approximately 21%  (unaudited) and two customers accounted for approximately 20% (unaudited) of total accounts receivable at September 30,  2017 and 2016, respectively, and approximately 16%  (unaudited) and 23% (unaudited) of net revenue for the nine-months ended September 30, 2017 and 2016, respectively.  During the year ended December 31, 2016, one customer accounted for approximately 22% of net revenue and two customers accounted for approximately 25%  of total accounts receivable at December 31,  2016.    During the year ended December 31, 2015, no customer accounted for more than 10% of net revenue, but one customer accounted for approximately 16% of total accounts receivable at December 31, 2015. 

Net purchases include purchases from one vendor of approximately $7,206,000 (unaudited) and two vendors of approximately $4,800,000 (unaudited) for the nine-months ended September 30, 2017 and 2016, respectively.  Net purchases include purchases from one vendor of approximately $6,176,000 and two vendors of approximately $6,175,000 for the years ended December 31, 2016 and 2015, respectively.  Accounts payable to these vendors were approximately $2,314,000 (unaudited), $556,000 (unaudited), $839,000 and $572,000 as of September 30, 2017 and 2016 and December 31, 2016 and 2015, respectively.

Inventories   Inventories are stated at the lower of cost, using a first-in, first-out, method or market.  The Company principally contracts for the manufacture of its products from other vendors. The Company periodically reviews its inventories for potential slow-moving or obsolete items and writes down specific items to net realizable value as appropriate. At September 30,  2017 (unaudited) and December 31, 2016 and 2015, inventory consisted primarily of finished goods.

Property and equipment   Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets, generally 36 to 60 months.  Leasehold improvements are amortized over the shorter of estimated useful lives of the assets or the lease term.  Expenditures for repairs and maintenance are charged to expense as incurred.  Upon disposition, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss is reflected in the statement of operations.

Goodwill and intangible assets    Goodwill represents the difference between the fair value of the consideration transferred (purchase price) for an acquired business,  and the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in the business combination. Goodwill is amortized on a straight-line basis over ten years and is assessed for impairment if an event or circumstances indicate that the fair value of the Company may be less than its carrying amount. A goodwill impairment loss is recognized to the extent the carrying amount of the Company including goodwill exceeds its fair value. The Company has determined that there is no impairment as of September 30, 2017 (unaudited),  December 31, 2016 and 2015.  

Intangible assets are presented at cost, net of accumulated amortization. Amortization of intangible assets is computed on a straight-line method over the estimated useful lives ranging from three to ten years. Intangible assets primarily include customer lists, patent and trademark costs and are stated at cost less accumulated amortization. Patent cost amortization begins as of the application date and is calculated using the straight-line method over the remaining lives of the granted patents. Patents and trademarks pending represent the legal cost associated with filing of various patents and trademarks pending issuance. No assurance can be given that such patents or trademarks, upon issuance, will not be challenged by competitors.    Costs deferred are written off if, and when, a patent application is abandoned or allowed to expire.

Long-lived assets   The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  No such impairments have been identified to date.

Page 9


 

CANTALOUPE SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

 

 

 

Warranty   The Company provides standard warranty coverage on its systems for 12 months, providing labor and parts necessary to repair the systems during the warranty period.  The Company accounts for the estimated warranty cost as a charge to cost of revenues when revenue is recognized.  The estimated warranty cost is based on historical product performance and field expenses.  Utilizing actual service records, the Company calculates the average service hours and parts expense per system and applies the actual labor and overhead rates to determine the estimated warranty charge.  The Company updates these estimated charges every year.  The actual product performance and/or field expense profiles may differ, and in those cases the Company adjusts warranty accruals accordingly.

Revenue recognition   The Company provides its on-demand software application as a service under hosting arrangements in which the client cannot take possession of the software. As a result, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605-55, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware , these arrangements are outside the scope of FASB ASC 985-605-25, Software Revenue Recognition . The Company, therefore, recognizes revenue under the provisions of FASB ASC 605-25, Revenue Arrangements with Multiple Deliverables .

The Company derives its revenues primarily from the sale and lease of devices at a fixed price and monthly service fees for access to the Company’s proprietary web application that allows vending machine owners to view data generated from devices and use various analytical tools. The Company also provides certain training and installation services when requested by customers. The Company recognizes revenue when all the following conditions are met:

·

There is persuasive evidence of an arrangement;

·

Delivery of devices has occurred, or services have been provided to the customer;

·

Collectability is reasonably assured; and

· The amounts to be paid are fixed or determinable.

The Company recognizes the sale of devices and related subscription services as a single unit of accounting. Therefore, revenues related to device sales are deferred and are recognized ratably over the period that the related subscription services are expected to be provided.

Stock-based compensation   The Company uses the estimated grant-date fair value method of accounting for stock-based compensation.  The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four to five years.

Research and development   Research and development costs incurred to establish the technological feasibility of computer software products are charged to operations as incurred.

Advertising   The Company expenses the costs of advertising, including promotional expenses, as incurred.  Advertising expenses for the nine-months ended September 30,  2017 and 2016 was approximately $67,000 (unaudited) and $56,000 (unaudited), respectively.  Advertising expenses for the years ending December 31, 2016 and 2015 was approximately $67,000 and $49,000, respectively.

Sales taxes   Sales taxes collected from customers and remitted to governmental authorities are not included in revenue.  

Deferred revenue and costs     Deferred revenue consists of unearned billings for the Company’s device sales that are recognized over the estimated life of a customer of 60 months. Deferred costs consist of the cost of devices sold in advance of revenue recognition and are recognized in conjunction with the applicable deferred revenue.

Deferred activation fees consist of fees charged to customers for activating devices on the network and are recognized over the life of the contract. These one-time fees vary by customer and by contract.

Income taxes   Deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss (NOL) and tax credit carryforwards.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Page 10


 

CANTALOUPE SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

 

 

 

The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies any liabilities for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.  The Company had no liabilities for unrecognized tax benefits at December 31, 2016, 2015 and September 30,  2017 (unaudited).

New accounting pronouncements    In March 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09, Compensation –   Stock Compensation (Topic 718) , which is seeking to simplify the accounting for share-based payment transactions, including the income tax consequences and classification of awards as neither equity nor liabilities. The standard will be effective for nonpublic business entities beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating this new standard and the impact it will have on its financial statements, information technology systems, processes, and internal controls.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which requires lessees to recognize a liability associated with obligations to make payments under the terms of the arrangement in addition to a right-of-use asset representing the lessee’s right to use, or control the use of the given asset assumed under the lease. The standard will be effective for nonpublic business entities for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating this new standard and the impact it will have on its financial statements and processes.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements  –  Going Concern (Subtopic 205-40) , which addresses management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. Management's evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The Company adopted the amended guidance for the year ended December 31, 2016. The adoption of the amended guidance did not impact the Company’s financial statements.

In May 2014, the FASB issued ASU No. 2014‐09, Revenue from Contracts with Customers (Topic  606 ) , which is a new standard on revenue recognition. The new standard contains principles that an entity will need to apply to determine the measurement of revenue and timing of when revenue is recognized. The underlying principle is to recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard has a five‐step approach which includes identifying the contract or contracts, identifying the performance obligations, determining the transaction price, allocating the transaction price, and recognizing revenue. The standard also significantly expands the quantitative and qualitative disclosure requirements for revenue, which are intended to help users of financial statements, understand the nature, amount, timing, and uncertainty of revenue and the related cash flows. The standard is effective for annual periods beginning after December 15, 2018, for nonpublic entities and early application is only permitted in certain circumstances. The Company is currently evaluating this new standard and the impact it will have on its financial statements, information technology systems, processes, and internal controls.

Reclassifications – Certain reclassifications were made to the 2015 financial statements to conform them to the 2016 financial statements. 

 

 

 

 

 

 

 

 

Page 11


 

CANTALOUPE SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

 

 

 

NOTE 2 –  SIGNIFICANT BALANCE SHEET COMPONENTS

Property and equipment   Property and equipment consisted of approximately the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2017

 

2016

 

2015

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computers and equipment

 

$

650

 

$

590

 

$

553

Hardware deployed at a customer site

 

 

11,415

 

 

10,169

 

 

6,957

Furniture and fixtures

 

 

124

 

 

110

 

 

109

Leasehold improvements

 

 

94

 

 

94

 

 

94

Factory tooling

 

 

158

 

 

148

 

 

147

 

 

 

12,441

 

 

11,111

 

 

7,860

Less: accumulated depreciation and amortization

 

 

(5,754)

 

 

(4,095)

 

 

(2,209)

Property and equipment, net

 

$

6,687

 

$

7,016

 

$

5,651

 

Depreciation and amortization expense of property and equipment for the nine-months ended September 30,  2017 and 2016 and the years ended December 31, 2016 and 2015 was approximately $1,659,000 (unaudited),  $1,372,000 (unaudited), $1,886,000 and $1,151,000, respectively.

Accrued expenses   Accrued expenses consisted of approximately the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2017

 

2016

 

2015

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee-related liabilities

 

$

1,085

 

$

1,084

 

$

967

Warranty reserve

 

 

11

 

 

11

 

 

11

Professional and other fees

 

 

1,218

 

 

978

 

 

910

 

 

$

2,314

 

$

2,073

 

$

1,888

NOTE 3 –  GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist principally of pre-existing intellectual property and customer lists and other intangible assets purchased during 2016 and 2015.  Both goodwill and intangible assets are being amortized using the straight-line method over their estimated useful lives of ten years. Amortization expense of goodwill and intangible assets was approximately $40,000 (unaudited) and $36,000 (unaudited) during the nine-months ended September 30,  2017 and 2016, respectively.  Amortization expense of goodwill and intangible assets was $110,000 for both years ended December 31, 2016 and 2015. Future amortization is not expected to be significant in any future period.

NOTE 4 –  FINANCING ARRANGEMENTS

On December 19, 2012, the Company entered into a loan and security agreement (the Original Loan Agreement) with a bank that included both a $1,000,000 term loan and a $5,000,000 revolving line of credit, all of which were collateralized by the Company’s cash, trade receivables, inventory, and personal property.

On July 24, 2015, the Company amended and restated the loan agreement (the Restated Loan Agreement) with the bank. The Restated Loan Agreement provides for borrowings of up to $2,000,000 for equipment advances and increasing the available amount on the revolving line of credit to $6,000,000, all of which are collateralized by substantially all assets of the Company.

Term debt    Under the Original Loan Agreement, the full amount allowed under the term loan was borrowed on December 19, 2012, at 6% interest, with interest-only payments due through June 30, 2013, and thereafter thirty (30) equal monthly payments of principal and accrued interest.  Approximately $418,000 was outstanding at December 31, 2014.  The remaining balance was fully paid as of December 31, 2015.  Under the Restated Loan Agreement, this term loan may not be re-borrowed.

Page 12


 

CANTALOUPE SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

 

 

 

Under the Restated Loan Agreement, the Company was eligible to make up to six equipment advances, not to exceed $2,000,000, in aggregate, to finance eligible equipment as defined by the Restated Loan Agreement until May 31, 2016. Each equipment advance shall immediately amortize and be payable in thirty-six (36) equal installments of principal, plus accrued interest. Borrowings bear interest at the prime rate plus 1.5%. After repayment, no equipment advances may be re-borrowed. There are no outstanding borrowings under this agreement at September 30, 2017 (unaudited), December 31, 2016 and 2015. 

Under the Restated Loan Agreement, $2,000,000 of the remaining balance under the line of credit available under the Original Loan Agreement described below was converted into a new term loan. Commencing on July 1, 2015, the new term loan is payable in thirty-six (36) equal installments of principal, plus accrued interest. After repayment, the term loan may not be reborrowed.    Approximately $585,000 (unaudited), $1,091,000 and $1,738,000 was outstanding at September 30,  2017 and December 31, 2016 and 2015, respectively.

Line of credit   Under the Original Loan Agreement and the Restated Loan Agreement, the revolving line of credit is subject to an interest rate of prime plus 1.5% that is due monthly  (5.25% (unaudited), 5.25% and 5.00% at September 30,  2017, December 31, 2016 and 2015, respectively). Availability under the revolving line of credit is based on total Software-as-a-Service (SaaS) revenue times a multiplier, with 4.5x being the largest multiplier. The available multiplier is in turn driven by the renewal rate of service-related revenue, with 95% being the largest threshold. The Company had outstanding borrowings of  $500,000 (unaudited), $1,000,000 and $1,490,000 against the line of credit at September 30,  2017 and December 31, 2016 and 2015, respectively.

In conjunction with the Original Loan Agreement, the Company issued a warrant to purchase 138,009 shares of Series C redeemable convertible preferred stock (Series C) at a purchase price of $1.4673 per share that expires on December 19, 2022. Using the Black-Scholes option pricing model with the following assumptions to estimate fair value: term of seven years, average volatility of 85%, and risk-free in