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”, “Company”, "our", "us", or "we"). For this purpose, forward-looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate,” “could,” “should,” “would,” “likely,” “may,” “will,” “plan,” “intend,” “believes,” “expects,” “anticipates,” “projected,” or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that could cause the Company’s actual results to differ materially from those projected include, for example:
•general economic, market or business conditions unrelated to our operating performance, including the impact of the ongoing COVID-19 pandemic, global supply chain disruptions, and inflationary pressures;
•potential mutations of COVID-19 and the efficacy of vaccines and treatment developments and their deployment;
•failure to comply with the financial covenants in the JPMorgan Credit Facility;
•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;
•our ability to compete with our competitors and increase market share;
•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 will 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; and
•the risks associated with the currently pending investigation, potential litigation or possible regulatory action arising from the internal investigation conducted by the Audit Committee in fiscal year 2019 and its findings, from the failure to timely file our periodic reports with the Securities and Exchange Commission, from the restatement of the affected financial statements, from allegations related to the registration statement for the follow-on public offering, or from potential litigation or other claims arising from these events.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above, or those discussed under Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2021 and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (“2021 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., previously known as USA Technologies, Inc., is organized under the laws of the Commonwealth of Pennsylvania. On March 29, 2021, USA Technologies, Inc. filed Articles of Amendment to its Amended and Restated Articles of Incorporation with the Pennsylvania Department of State to effect a change of the Company’s name from “USA Technologies, Inc.” to “Cantaloupe, Inc.,” effective as of April 15, 2021. On April 19, 2021, the Company’s common stock, no par value per share (the “Common Stock”), began trading on Nasdaq under the ticker symbol “CTLP” and the Company’s Series A Convertible Preferred Stock, no par value per share, began trading on the OTC Markets’ Pink Open Market under the trading symbol, “CTLPP”.
Cantaloupe is a digital payments and software services company that provides end-to-end technology solutions for the unattended retail market. We are transforming the unattended retail world by offering a solution for payments processing, as well as one that handles inventory management, pre-kitting, route logistics, warehouse and back-office management. Our enterprise-wide platform is designed to increase consumer engagement and sales revenue through digital payments, digital advertising and customer loyalty programs, while providing retailers with control and visibility over their operations and inventory. As a result, customers ranging from vending machine companies to operators of micro-markets, car wash and electric vehicle charging stations, commercial laundry, kiosks, amusements and more, can run their businesses more proactively, predictably, and competitively.
The Company's fiscal year ends June 30. The Company generates revenue in multiple ways. During the three months ended March 31, 2022 and March 31, 2021, we derived approximately 84% and 81% respectively, from subscription and transaction fees and 16% and 19%, respectively, from equipment sales. During the nine months ended March 31, 2022 and March 31, 2021, we derived approximately 84% and 86%, respectively, from subscription and transaction fees and 16% and 14%, 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, subscription, or financing 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 directly from the Company; and
•Participating in a monthly bundled subscription under the Company's Cantaloupe ONE program, which are 36-month rental agreements that transition to month-to-month agreements after the initial subscription commitment period.
Third Quarter 2022 Highlights
Highlights of the Company for the fiscal quarter ended March 31, 2022 are below:
•22,818 Active Customers (as defined below) and 1.1 million Active Devices (as defined below) on our service.
•Continued success and rollout of the ePort Engage Series, with the release of the ePort Engage Combo to the market in March 2022. The ePort Engage Combo, the latest iteration of the ePort Engage series and touchscreen devices, provides customers an all-in-one card reader and telemeter; a digital touchscreen and payment platform to install directly over the existing bill acceptor.
•The Company announced the general availability of the newly enhanced Yoke Micro Market Platform upgrade that includes new features and functionality for Yoke Pay, Yoke POS, and the Yoke Portal. This next generation platform is being upgraded into all existing Yoke customer locations, along with serving as the newly available product for customers to start deploying in the market.
•Cantaloupe announced and launched a bundled subscription model, the Cantaloupe ONE Platform which provides operators the flexibility and predictability of a monthly, fixed subscription amount covering the hardware and service fees.
•The Company made progress on the partnership announced with HIVERY, a data-science company that specializes in Artificial Intelligence ("AI") technology to streamline category management for retailers in the consumer packaged goods industry.
•Entered into an amended and restated credit agreement (the "Amended JP Morgan Credit Facility") with JP Morgan Chase Bank, N.A. in March 2022 that provides for a $15 million secured revolving credit facility and a $25 million secured term facility, which replaces our previous 2021 JPMorgan Credit Facility.
As of March 31, 2022, we have over 200 employees across the United States and offices in Malvern, Pennsylvania and Atlanta, Georgia.
COVID-19 Update
The Company, its employees, and its customers operate in geographic locations in which its business operations and financial performance continues to be affected by the COVID-19 pandemic. While businesses, schools and other organizations re-open, which has led to increased foot-traffic to distributed assets containing our electronic payment solutions, the emergence of new strains and variants and resurgence of the virus, such as the outbreak of the Omicron variant in early 2022, have and may in the future lead to additional shutdowns and closures that impact our operations and financial results. Such impacts to our financial statements have in the past included, and may in the future include the impairment of goodwill and intangible assets, impairment of long-lived assets including operating lease assets, property and equipment and allowance for doubtful accounts for accounts and finance receivables. We have concluded that there are no material impairments as a result of our evaluation for the three and nine months ended March 31, 2022. Where applicable, we have incorporated judgments and estimates of the expected impact of COVID-19 in the preparation of the financial statements based on information currently available. These judgments and estimates may change, as new events develop and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known.
While we are encouraged by our strong operating and financial results, we continue to monitor the evolving situation and follow guidance from federal, state and local public health authorities. Given the potential uncertainty of the situation, the Company cannot, at this time, reasonably estimate the longer-term repercussions of COVID-19 on our financial condition, results of operations or cash flows.
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. Certain prior years' amounts have been made to conform to the current year's presentation. The changes in presentation did not affect our total revenues, total costs of sales, gross profit, total operating expenses, operating loss, net loss or net loss per common share. For further information on the presentation changes, see Item 1. Financial Statements — Note 2. Summary of Significant Accounting Policies.
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 monitor recovery from the COVID-19 pandemic and 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, 2022 | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 |
Devices: | | | | | | | | | |
Active Devices (thousands) | 1,125 | | | 1,123 | | | 1,115 | | | 1,094 | | | 1,085 | |
| | | | | | | | | |
Customers: | | | | | | | | | |
Active Customers | 22,818 | | | 21,315 | | | 20,738 | | | 19,834 | | | 18,763 | |
| | | | | | | | | |
Volumes: | | | | | | | | | |
Total Number of Transactions (millions) | 258.6 | | 261.7 | | 257.9 | | | 241.6 | | | 213.4 | |
Total Dollar Volume of Transactions (millions) | 562 | | 555.3 | | 553.4 | | | 515.0 | | | 412.7 | |
Highlights for the quarter ended March 31, 2022 include:
•1.12 million Active Devices compared to 1.08 million in the same quarter last year, an increase of approximately 40 thousand Active Devices, or 4%;
•22,818 Active Customers on our service compared to 18,763 in the same quarter last year, an increase of 4,055 Active Customers, or 22%; and
•Total Dollar Volumes continue to remain strong and consistent with the quarter ended December 31, 2021 and 36% higher compared to the average processing volumes for the quarter ended March 31, 2021. See "Revenue and Gross Profit" in Management’s Discussion and Analysis of Financial Condition and Results of Operations above for additional information.
FINANCIAL HIGHLIGHTS
The following tables summarize our results of operations and significant changes in our financial performance for the periods presented:
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Revenues and Gross Profit
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | Percent Change |
($ in thousands) | | 2022 | | 2021 | |
Revenues: | | | | | | |
Subscription and transaction fees | | $ | 42,143 | | | $ | 34,686 | | | 21.5 | % |
Equipment sales | | 8,157 | | | 8,074 | | | 1.0 | % |
Total revenues | | 50,300 | | | 42,760 | | | 17.6 | % |
| | | | | | |
Costs of sales: | | | | | | |
Cost of subscription and transaction fees | | 25,291 | | | 20,463 | | | 23.6 | % |
Cost of equipment sales | | 8,809 | | | 9,593 | | | (8.2) | % |
Total costs of sales | | 34,100 | | | 30,056 | | | 13.5 | % |
| | | | | | |
Gross profit: | | | | | | |
Subscription and transaction fees | | 16,852 | | | 14,223 | | | 18.5 | % |
Equipment sales | | (652) | | | (1,519) | | | (57.1) | % |
Total gross profit | | $ | 16,200 | | | $ | 12,704 | | | 27.5 | % |
| | | | | | |
Gross margin: | | | | | | |
Subscription and transaction fees | | 40.0 | % | | 41.0 | % | | |
Equipment sales | | (8.0) | % | | (18.8) | % | | |
Total gross margin | | 32.2 | % | | 29.7 | % | | |
Revenues. Total revenues increased by $7.5 million for the three months ended March 31, 2022 compared to the same period in 2021 substantially all of which is attributable to the $7.5 million increase in subscription and transaction fees.
The increase in subscription and transaction fees is primarily driven by increased processing volumes, with an approximately 36% increase in total dollar volumes for the current fiscal year quarter relative to the prior year quarter. We are currently exceeding pre-pandemic (COVID-19) levels of processing volumes. We continue to benefit from a broader macroeconomic recovery across the United States as businesses, schools and other organizations across the country continue to maintain normal levels of operations. Increase in revenues is also attributed to continued focus of management to grow our recurring services to our customer base and a 3% increase in the Active Devices count compared to the same period last year.
Equipment sales have remained consistent compared to the same period last year as customers in both periods continued to upgrade their devices to be 4G compliant as it gets closer to the discontinuation of 3G network support in 2022. We expect equipment revenue to continue increasing through the 3G network discontinuation date in North America through the end of the 2022 calendar year.
Cost of sales. Cost of sales increased $4.0 million for the three months ended March 31, 2022 compared to the same period in 2021. The increase in cost of sales is attributed primarily to a $4.8 million increase in subscription and transaction costs offset by a $0.8 million decrease in equipment costs. The increase in subscription and transaction costs was primarily driven by an increase in transaction processing fees corresponding with an increase in processing volumes. The decrease in equipment costs is in line with management's strategy to maintain a flat margin on equipment sales.
Gross margin. Total gross margin increased from 29.7% for the three months ended March 31, 2021 to 32.2% for the three months ended March 31, 2022. The increase in gross margin was primarily a result of a change in revenue mix of higher transaction fees during the current quarter compared to the same period in 2021. Even though transaction processing is inherently a lower margin revenue stream than our subscription model, we were able to operate at a higher margin for that specific product than the prior year due to the improvements in our payment processor and payment networks pricing that reduced our costs of sales. Furthermore, we have seen an increase in average price per transaction relative to the same period in the prior year which is additive to our gross margin.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | Percent Change |
Category ($ in thousands) | | 2022 | | 2021 | |
Sales and marketing | | $ | 1,937 | | | $ | 1,754 | | | 10.4 | % |
Technology and product development | | 5,532 | | | 4,425 | | | 25.0 | % |
General and administrative expenses | | 6,788 | | | 7,552 | | | (10.1) | % |
Depreciation and amortization | | 1,062 | | | 991 | | | 7.2 | % |
Total operating expenses | | $ | 15,319 | | | $ | 14,722 | | | 4.1 | % |
Total operating expenses. Operating expenses increased by $0.6 million for the three months ended March 31, 2022 compared to the same period in 2021. This change is attributed primarily to an increase of $1.1 million in technology and product development expenses, $0.2 million increase in sales and marketing partially offset by a $0.8 million decrease in general and administrative expenses. The change in total operating expenses reflects the Company's overall objectives to reduce general and administrative expenses and utilize savings to invest in innovative technologies and products and increase marketing spend to penetrate new and existing customers with our products and services. See further details on individual categories below.
Sales and marketing. Sales and marketing expenses were relatively consistent for the three months ended March 31, 2022 and March 31, 2021.
Technology and product development. Technology and product development expenses increased approximately $1.1 million for the three months ended March 31, 2022, as compared to the same period in 2021. The increase was driven primarily by the Company's objectives of investing in innovative technologies and to further strengthen our network environment and platform through utilizing a combination of company personnel and external consultants.
General and administrative expenses. General and administrative expenses decreased approximately $0.8 million for the three months ended March 31, 2022, as compared to the same period in 2021. The decrease in general and administrative expenses was primarily driven by a decrease of $1.3 million in stock based compensation expense related to a combination of forfeitures, lower Company stock price and valuation of performance based options, a decrease of $0.8 million in professional fees due to reduced reliance on external consultants who previously supported the Company’s accounting, financial reporting and legal functions, and a decrease of $0.8 million change in sales tax reserve. The above decreases were partially offset by an increase in bad debt expense of approximately $1 million, an increase of $0.6 million in cash compensation expense and a settlement of customer related expenses of $0.5 million in the prior year.
Depreciation and amortization. Depreciation and amortization expenses were relatively consistent for the three months ended March 31, 2022 and March 31, 2021.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | Percent Change |
($ in thousands) | | 2022 | | 2021 | |
Other income (expense): | | | | | | |
Interest income | | $ | 445 | | | $ | 302 | | | 47.4 | % |
Interest expense | | 852 | | | (88) | | | (1,068.2) | % |
Other income (expense) | | (7) | | | — | | | (100.0) | % |
Total other income (expense), net | | $ | 1,290 | | | $ | 214 | | | (502.8) | % |
Other income (expense), net. Other income (expense), net increased $1.1 million for the three months ended March 31, 2022 as compared to the same period in 2021. The increase in interest income was driven by a larger finance receivables amount on our balance sheet as of March 31, 2022 compared to March 31, 2021.
The reduction in interest expense is primarily attributable to a $0.9 million change in the interest component of the sales tax reserve compared to the same period in the prior fiscal year. The change in the sales tax reserve was driven by the expiration of statute of limitations and other factors considered by management while establishing the reserve.
Nine Months Ended March 31, 2022 Compared to Nine Months Ended March 31, 2021
Revenues and Gross Profit
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended March 31, | | Percent Change |
($ in thousands) | | 2022 | | 2021 | |
Revenues: | | | | | | |
Subscription and transaction fees | | $ | 123,956 | | | $ | 101,008 | | | 22.7 | % |
Equipment sales | | 23,215 | | | 16,913 | | | 37.3 | % |
Total revenues | | 147,171 | | | 117,921 | | | 24.8 | % |
| | | | | | |
Costs of sales: | | | | | | |
Cost of subscription and transaction fees | | 76,234 | | | 60,415 | | | 26.2 | % |
Cost of equipment sales | | 23,871 | | | 18,262 | | | 30.7 | % |
Total costs of sales | | 100,105 | | | 78,677 | | | 27.2 | % |
| | | | | | |
Gross profit: | | | | | | |
Subscription and transaction fees | | 47,722 | | | 40,593 | | | 17.6 | % |
Equipment sales | | (656) | | | (1,349) | | | (51.4) | % |
Total gross profit | | $ | 47,066 | | | $ | 39,244 | | | 19.9 | % |
| | | | | | |
Gross margin: | | | | | | |
Subscription and transaction fees | | 38.5 | % | | 40.2 | % | | |
Equipment sales | | (2.8) | % | | (8.0) | % | | |
Total gross margin | | 32.0 | % | | 33.3 | % | | |
Revenues. Total revenues increased by $29.3 million for the nine months ended March 31, 2022 compared to the same period in 2021. The increase in revenues is attributed to a $22.9 million and $6.3 million increase in subscription and transaction fees and equipment sales, respectively.
The increase in subscription and transaction fees is primarily driven by increased processing volumes, with an approximately 24% increase in total dollar volumes for the nine months ended March 31, 2022 compared to the same period in 2021. We are currently exceeding pre-pandemic (COVID-19) levels of processing volumes. We continue to benefit from a broader macroeconomic recovery across the United States as businesses, schools and other organizations across the country continue to maintain normal levels of operations. Increase in revenues is also attributed to continued focus of management to grow our recurring services to our customer base and a slight increase in the Active Devices count compared to the same period last year.
The increase in equipment sales relates to more equipment shipments in the current quarter compared to same period last year driven by customers focused on liquidity during fiscal year 2021 due to the pandemic with many committing to 4G device upgrades but holding off on delivery until closer to the discontinuation of 3G network support in 2022. We expect equipment revenue to continue increasing through the 3G network discontinuation date in North America through the end of the 2022 calendar year.
Cost of sales. Cost of sales increased $21.4 million for the nine months ended March 31, 2022 compared to the same period in 2021. The increase in cost of sales is attributed to a $15.8 million and $5.6 million increase in subscription and transaction costs and equipment costs respectively. The increase in cost of sales was primarily driven by an increase in transaction processing fees and equipment sales corresponding with an increase in processing volumes and equipment sales respectively.
Gross margin. Total gross margin decreased from 33.3% for the nine months ended March 31, 2021 to 32.0% for the nine months ended March 31, 2022. The decrease in gross margin was primarily as a result of a change in revenue mix with transaction fees making a larger percentage of our total revenues and subscription fees making up a lower percentage of our total revenues during the current year. Transaction processing is inherently a lower margin revenue stream than our subscription model resulting in a reduction of gross margin. We were able to offset a portion of the decrease in the total gross margin with an increase in our transaction fees margin by lowering costs for our payment processor and payment networks. Additionally, we have seen an increase in average price per transaction relative to the same period in the prior year, which is additive to our gross margin.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended March 31, | | Percent Change |
Category ($ in thousands) | | 2022 | | 2021 | |
Sales and marketing | | $ | 6,021 | | | $ | 4,873 | | | 23.6 | % |
Technology and product development | | 16,701 | | | 11,422 | | | 46.2 | % |
General and administrative expenses | | 21,724 | | | 28,076 | | | (22.6) | % |
Depreciation and amortization | | 3,197 | | | 3,111 | | | 2.8 | % |
Total operating expenses | | $ | 47,643 | | | $ | 47,482 | | | 0.3 | % |
Total operating expenses. Operating expenses as a whole remained consistent for the nine months ended March 31, 2022 compared to the same period in 2021. The increase of $0.2 million is attributed to a decrease of $6.4 million in general and administrative expenses, offset by a $5.3 million increase in technology and product development expenses and a $1.1 million increase in sales and marketing costs. The change in total operating expenses reflects the Company's overall objectives to reduce general and administrative expenses and utilize savings to invest in innovative technologies and products and increase marketing spend to penetrate new and existing customers with our products and services. See further details on individual categories below.
Sales and marketing. Sales and marketing expenses increased approximately $1.1 million for the nine months ended March 31, 2022, as compared to the same period in 2021 and relates primarily to an increase in advertising, trade show costs and sales and marketing employee headcount in the current year to support our expanding business and service offerings in the United States and internationally.
Technology and product development. Technology and product development expenses increased approximately $5.3 million for the nine months ended March 31, 2022, as compared to the same period in 2021. The increase was driven primarily by the Company's objectives of investing in innovative technologies and to further strengthen our network environment and platform through utilizing a combination of company personnel and external consultants.
General and administrative expenses. General and administrative expenses decreased approximately $6.4 million for the nine months ended March 31, 2022, as compared to the same period in 2021. The decrease in general and administrative expenses was primarily driven by a $3.8 million decrease in professional fees due to reduced reliance on external consultants who previously supported the Company’s accounting, financial reporting and legal functions, a $1.8 million change relating to the network incident in the prior year, a $2 million change in sales tax reserve, $0.4 million decrease in compensation and benefits partially offset by an increase in bad debt expense of approximately $1.2 million and an increase in travel and expense costs of $0.5 million during the current year.
Depreciation and amortization. Depreciation and amortization expenses were consistent for the nine months ended March 31, 2022 and March 31, 2021.
Other Income (Expense), Net
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended March 31, | | Percent Change |
($ in thousands) | | 2022 | | 2021 | |
Other income (expense): | | | | | | |
Interest income | | $ | 1,363 | | | $ | 978 | | | 39.4 | % |
Interest expense | | (100) | | | (3,970) | | | (97.5) | % |
Other income (expense) | | (83) | | | — | | | (100.0) | % |
Total other income (expense), net | | $ | 1,180 | | | $ | (2,992) | | | 139.4 | % |
Other income (expense), net. Other income (expense), net increased $4.2 million for the nine months ended March 31, 2022 as compared to the same period in 2021. The higher interest expense for the nine months ended March 31, 2021 was primarily related to the recognition of the remaining balance of unamortized debt issuance costs and debt discount associated with the senior secured term loan facility with Antara Capital Master Fund LP of $2.6 million into interest expense, when the Antara Term Facility was fully repaid and terminated. The remaining reduction in interest expense was mainly due to a $1.1 million change in the interest component of the sales tax reserve compared to the same period in the prior fiscal year. The change in the sales tax reserve was driven by the expiration of statute of limitations and other factors considered by management while establishing the reserve.
Non-GAAP Financial Measures - Adjusted EBITDA
Adjusted EBITDA (as defined below) 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 income (loss) before (i) interest income, (ii) interest expense on debt and reserves, (iii) income tax expense, (iv) depreciation, (v) amortization, (vi) stock-based compensation expense, and (vii) certain other significant infrequent or unusual losses and gains that 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) | | 2022 | | 2021 |
U.S. GAAP net income (loss) | | $ | 2,136 | | | $ | (1,848) | |
Less: interest income | | (445) | | | (302) | |
Plus: interest expense | | (852) | | | 88 | |
Plus: income tax provision | | 35 | | | 44 | |
Plus: depreciation expense included in costs of sales for rentals | | 220 | | | 2 | |
Plus: depreciation and amortization expense in operating expenses | | 1,062 | | | 991 | |
EBITDA | | 2,156 | | | (1,025) | |
Plus: stock-based compensation (a) | | 1,495 | | | 3,216 | |
Adjustments to EBITDA | | 1,495 | | | 3,216 | |
Adjusted EBITDA | | $ | 3,651 | | | $ | 2,191 | |
| | | | |
(a) As an adjustment to EBITDA, we have excluded stock-based compensation, as it does not reflect our cash-based operations.
| | | | | | | | | | | | | | |
| | Nine months ended March 31, |
($ in thousands) | | 2022 | | 2021 |
U.S. GAAP net income (loss) | | $ | 377 | | | $ | (11,363) | |
Less: interest income | | (1,363) | | | (978) | |
Plus: interest expense | | 100 | | | 3,970 | |
Plus: income tax provision | | 226 | | | 133 | |
Plus: depreciation expense included in costs of sales for rentals | | 738 | | | 1,055 | |
Plus: depreciation and amortization expense in operating expenses | | 3,197 | | | 3,111 | |
EBITDA | | 3,275 | | | (4,072) | |
Plus: stock-based compensation (a) | | 4,624 | | | 6,366 | |
Plus: asset impairment charge (b) | | — | | | 333 | |
Adjustments to EBITDA | | 4,624 | | | 6,699 | |
Adjusted EBITDA | | $ | 7,899 | | | $ | 2,627 | |
| | | | |
(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 non-cash impairment charges related to long-lived operating lease assets because we believe that these do not represent charges that are related to our core operations.
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 has the following primary sources of capital available: (1) cash and cash equivalents on hand of $75.1 million as of March 31, 2022; (2) the cash that may be provided by operating activities; and (3) up to $15 million available to be drawn on the Amended JPMorgan Credit Facility.
The Company also has estimated and recorded for potential sales tax and related interest and penalty liabilities of $14.5 million in the aggregate as of March 31, 2022. 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.
Below are charts that reflect our cash liquidity and outstanding debt as of March 31, 2022 and June 30, 2021:
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, 2022, net cash used in operating activities was $3.9 million, which primarily reflects 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 is 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 is a result of the Company planning ahead for customers who are continuing to upgrade 3G devices to 4G as the 3G network sunset date approaches in 2022 and purchases for our new ePort Engage devices. Cash used in accrued expenses of $0.2 million is primarily attributable to the reduction of accounts payable and accrued expenses. 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, 2021, net cash provided by operating activities was $7.8 million which reflects our net loss of $11.4 million, $1.1 million of cash utilized by working capital accounts, partially offset by non-cash operating charges of $18.1 million. Non-cash operating charges primarily consisted of the recognition of $2.7 million in unamortized issuance costs and debt discount related to the repayment of the 2020 Antara Term Facility, $6.4 million in stock-based compensation, and depreciation and amortization expenses of $4.2 million.
Net cash used in investing activities
Net cash used in investing activities was $10.2 million for the nine months ended March 31, 2022. Increase in cash used is due to the cash paid for the Yoke acquisition of $3 million and $7.2 million for increased property and equipment balances driven primarily by the Company's continued focus on investing in innovative technologies and products.
Net cash used in investing activities was $1.3 million for the nine months ended March 31, 2021 which was primarily used to increase property and equipment.
Net cash used in financing activities
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 the Amended JPMorgan Credit Facility 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.
Net cash used in financing activities was $50.3 million for the nine months ended March 31, 2021. For the nine months ended March 31, 2021, the Company raised $52.4 million of proceeds (net of issuance costs) through a private placement transaction with respect to the sale of an aggregate of 5,730,000 shares of the Company’s common stock to accredited investors. The Company paid $1.2 million as a prepayment penalty and commitment termination fee to Antara as part of the repayment of the
2020 Antara Term Facility and paid $0.5 million of debt issuance costs as a result of entering into the 2021 JPMorgan Credit Facility.
CONTRACTUAL OBLIGATIONS
During the nine months ended March 31, 2022, we entered into an amended credit agreement with JPMorgan Chase Bank, N.A. See Note 9 - Debt and Other Financing Arrangements to the condensed consolidated financial statements for a description of the amendment. There were no other significant changes 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, 2021.
CRITICAL ACCOUNTING POLICIES
During the nine months ended March 31, 2022, there were no significant changes to our critical accounting policies 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, 2021.
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, 2021.
On March 17, 2022, the Company entered into an amended credit agreement with JPMorgan Chase Bank, N.A. See Note 9 - Debt and Other Financing Arrangements to the condensed consolidated financial statements for a description of the amendment.
Our exposures to market risk have not changed materially since June 30, 2021.