CTLP - Cantaloupe: Overreliance On Cash From Financing

2023-04-02 11:25:11 ET

Summary

• CTLP is currently loss-making in the bottom line and it does not appear likely to become profitable in the foreseeable future.
• The company relies on non-financing means of generating cash which is not sustainable.
• The company may look cheap compared to competitors but without a proven ability to become profitable, I will not regard this as a buy signal.

Investment Thesis

Cantaloupe ( CTLP ) is currently loss-making in the bottom line. The company accumulated huge levels of operating costs that do not look likely to return to profitability in the near team. In my opinion, its long-term prospect of becoming profitable is also uncertain.

The company incurs significant administrative costs due to 'regulatory investigations' and such costs may not be a one-time occurrence, according to the company's annual report.

Even if I give CTLP the benefit of the doubt that the recent costs of 'regulatory investigations' are temporary and remove these costs from the operating income, the resulting adjusted operating income is still not positive. This means the company's operating business is already not profitable, with or without these administrative costs.

Because CTLP is not profitable, it relies heavily on non-operating financing means of generating extra cash, which is against shareholders' interests. Investors should take this into consideration before deciding to take an investment position in CTLP.

Company Overview

CTLP is a technology company that specializes in digital payments and software services for the unattended retail market. Their platform provides end-to-end solutions, ranging from payment processing to inventory management, logistics, and back-office operations. By offering a unified platform, Cantaloupe aims to increase customer engagement and boost sales through digital advertising, loyalty programs, and seamless payment processing.

The company generates revenue from subscription and transaction fees, as well as equipment sales. Their active devices include POS electronic payment devices and certified payment software. Cantaloupe serves a wide range of clients, including vending machine companies, micro-market operators, car washes, electric vehicle charging stations, kiosks, and amusements.

More than 80% of the company's revenue comes from subscription and transaction fees.

Income Statement

Let's take a look at the company's profitability over the last decade.

CTLP's top line has been increasing consistently since 2013. The cost of revenue has been kept low enough to allow the company to have a gross margin that hovers around 30%.

Unfortunately, the operating expenses outstripped the gross margins such that since 2015, the company has been consistently operating with negative operating income. 2019 and 2020 saw the company recording the highest losses since 2013.

From the company's 2020 annual report , we understand the high cost can be attributed to the administrative fees associated with various 'regulatory investigations':

We have incurred significant expenses, including audit, legal, consulting and other professional fees, in connection with the 2019 Investigation, the review of our accounting, the audits, the restatements of previously filed financial statements, bank consents, the remediation of deficiencies in our internal control over financial reporting, the proxy solicitation, and professional services fees to assist the Company with accounting and compliance activities in fiscal year 2020 following the filing of the 2019 Form 10-K. For the years ended June 30, 2020 and 2019 , the Company incurred $21.3 million and $16.1 million of those costs.

First of all , if I assume these costs are one-time and adjust them back to the operating income, the resulting bottom line is still not positive. This means CTLP's core operating business is already not profitable.

Secondly , inferring from the company's latest 2022 annual report , it was explicitly mentioned that these regulatory costs may not be a one-time event and are expected to recur:

Matters relating to or arising from the restatement and the 2019 Investigation, including adverse publicity and potential concerns from our customers, and enforcement proceedings could continue to have an adverse effect on our business and financial condition.

Overall, the company's loss-making trend observed at the bottom line is likely to persist.

Balance Sheet

Next, we move on to the company's balance sheet over the last decade.

Despite CTLP's loss-making bottom line, the company has accumulated a positive amount of cash balance which is generally increasing in most years. In 2018 and 2021, there was an unusual spike in cash.

At the same time, the company appears to be incurring a huge amount of debt. If we use EBITDA as a benchmark, the amount of debt incurred is currently more than 6 times its EBITDA, meaning it might take more than 6 years for the company to pay off its debt using its " cash profits ". I consider a debt level higher than 3 times its EBITDA to be a concern.

From the company's cash flow statement compiled by Seeking Alpha, we observed that since 2018, the company has been increasing its cash flow using a combination of debt refinancing and issuance of company shares.

The result is a significant increase in the cash balance, but with the downside of depressed company valuation (due to the accumulation of debt) and dilution of shareholder's holdings (due to issuance of shares).

Such financing activities appear to have slowed down in the latest year of 2022. Investors should observe whether its picks up again in subsequent years.

If CTLP cannot pay off all its debt soon, we need to be sure the company can still comfortably service the interest incurred on its debt. I defined the "debt servicing ratio" as a percentage of its EBITDA, and any value above 30% as high. If we infer from the table, the company's debt servicing ratio has been high in most recent years (2017 to 2021).

The silver lining is that the last reported Net Interest Expense has been positive meaning CTLP's investment income is able to offset its interest expense. From the latest report, we understand the favorable net interest 'income' is due to the collection of a larger than normal interest on 'finance receivables':

The increase in interest income is primarily driven by a larger finance receivables amount on our balance sheet as of June 30, 2022 compared to June 30, 2021 and June 30, 2020.

Investors should be aware that ' Accounts Receivable Financing ' is a short-term funding method that may not be sustainable in the long run. Therefore, investors should observe whether the company is able to maintain its cash balance using the cash generated from its operating activities rather than heavily relying on short-term financing means.

Cash Flow

Let's look at the company's cash flow :

We discussed earlier that the company is not profitable in the bottom line profits. From CTLP's cash flow statements, we observed the negative profits trickled down to its cash flow from operation even after taking into account the non-cash items. If we include the CAPEX, CTLP's free cash flow is also negative in most years.

Looking at the Net change in cash, the overall cash flow turns positive in some years (in 2018, 2020, 2021) due to the company generating extra cash by non-operating means, as discussed in the previous section. I mentioned earlier that it can be observed:

refinancing activities appear to have slowed down in the latest year of 2022

Without the cash generated by financing, we can observe the company's FCF and net cash level immediately falls back into the negative territory in the year 2022.

Observations of the cash flow statements ascertained my point mentioned earlier that CTLP is over-relying on non-operating means to generate cash flow.

Risk

The risk of the company can be attributed to the observation that CTLP has a track record of generating cash using non-operating financing methods of:

1. Issuing more debt
2. and/or selling more shares

Point 1 reduces the stock's valuation while point 2 dilutes shareholders' holdings. Investors need to observe if the company is able to generate more cash using core operating means instead of relying on such short-term financing means.

Valuation

From Morningstar , we understand that the CTLP competes with the following companies:

• AppTech Payments Corp. ( APCX )
• authID Inc. ( AUID )

CTLP is not consistently profitable, hence, we will compare the Price/Sales ratio against its competitors:

For the last 1 year, CTLP appears to be consistently more undervalued compared to its competitors, meaning the stock price is relatively cheap .

However, until CTLP can prove that it can achieve profitability in the foreseeable future, cheap can get cheaper and I will not regard this undervalued status as a buy signal.

Conclusion

In my opinion, ideally, companies that are 'investment worthy' should at least have the following general attributes, as much as possible:

1. Positive and rising top-line revenue
2. Positive and rising bottom-line profits
3. Positive and rising cash flow
4. Positive working capital
5. Relatively low debt

CTLP failed my criteria for points 2, 3, and 5.

It only passes points 1 and 4.

Until the company can demonstrate that it can pass most (if not all) of the above criteria, my rating for CTLP is a "hold".

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