Presto Automation (PRST) - 2023 Q1 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This report contains forward-looking statements regarding future financial performance and business strategies, which are based on management's beliefs and assumptions but are not guarantees of performance - Actual results may differ materially due to various known and unknown risks and uncertainties, including challenges in managing growth, limited operating history with new products, history of net losses, impact of COVID-19, customer concentration, and internal control weaknesses[9][10] PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Presto Automation Inc., including the balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, financial instrument valuations, debt arrangements, and other financial components for the quarter ended September 30, 2022 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2022 | Jun 30, 2022 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Cash and cash equivalents | $59,249 | $3,017 | +$56,232 | | Total current assets | $69,459 | $14,554 | +$54,905 | | Total assets | $79,859 | $30,536 | +$49,323 | | Total current liabilities | $25,750 | $146,609 | -$120,859 | | Total liabilities | $78,692 | $152,995 | -$74,303 | | Total stockholders' equity (deficit) | $1,167 | $(122,459) | +$123,626 | - The significant increase in cash and cash equivalents and total assets, along with the shift from a stockholders' deficit to positive equity, was primarily driven by the completion of the Merger and related financing activities[13] Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) This section outlines the company's financial performance over a period, including revenue, expenses, and net income or loss Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change | | :------------------------------------------------- | :------------------------------ | :------------------------------ | :----- | | Total revenue | $7,779 | $7,229 | +$550 | | Gross profit | $552 | $407 | +$145 | | Total operating expenses | $14,711 | $7,584 | +$7,127 | | Loss from operations | $(14,159) | $(7,177) | $(6,982) | | Change in fair value of warrants and convertible promissory notes | $59,822 | $(13,574) | +$73,396 | | Interest expense | $(3,376) | $(1,388) | $(1,988) | | Net income (loss) and comprehensive income (loss) | $34,789 | $(19,509) | +$54,298 | | Net income (loss) per share, basic | $1.18 | $(0.72) | +$1.90 | | Net income (loss) per share, diluted | $0.86 | $(0.72) | +$1.58 | - The company reported a net income of $34.8 million for the three months ended September 30, 2022, a significant turnaround from a net loss of $19.5 million in the prior year, primarily driven by a substantial gain from the change in fair value of warrants and convertible promissory notes[16] Condensed Consolidated Statements of Stockholders' Equity (Deficit) This section details changes in the company's equity, reflecting capital contributions, net income, and other comprehensive income or loss Condensed Consolidated Statements of Stockholders' Equity (Deficit) Highlights (in thousands) | Metric | Sep 30, 2022 | Jun 30, 2022 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Common stock shares outstanding | 50,639,837 | 27,574,417 | +23,065,420 | | Additional paid-in capital | $167,156 | $78,321 | +$88,835 | | Accumulated deficit | $(165,994) | $(200,783) | +$34,789 | | Total stockholders' equity (deficit) | $1,167 | $(122,459) | +$123,626 | - The significant increase in additional paid-in capital and the shift to positive total stockholders' equity were primarily due to the Merger and PIPE Financing, conversion of convertible notes, and warrants issued with the Credit Agreement[19] Condensed Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities over a period Condensed Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change | | :--------------------------------- | :------------------------------ | :------------------------------ | :----- | | Net cash used in operating activities | $(11,156) | $(15,414) | +$4,258 | | Net cash used in investing activities | $(1,374) | $(449) | $(925) | | Net cash provided by financing activities | $68,762 | $333 | +$68,429 | | Net increase (decrease) in cash and cash equivalents | $56,232 | $(15,530) | +$71,762 | | Cash and cash equivalents at end of period | $59,249 | $21,379 | +$37,870 | - The substantial increase in cash and cash equivalents was primarily driven by significant cash provided by financing activities, including proceeds from term loans ($60.3 million) and contributions from the Merger and PIPE financing ($49.8 million)[22] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Summary of Business and Significant Accounting Policies This note outlines the company's business operations, recent merger, and key accounting principles applied in financial reporting - Presto Automation Inc. (formerly E la Carte, Inc.) completed a reverse recapitalization merger with Ventoux CCM Acquisition Corp. on September 21, 2022, becoming a public company[25][27][38] - The company develops AI-powered solutions for the restaurant industry, including Presto Smart Dining system ('Presto Touch'), voice products ('Presto Voice'), and a computer vision software application ('Presto Vision')[26] Net Cash from Merger and PIPE Investment (in thousands) | Source | Net Cash | | :---------------------------------- | :------- | | Cash—Ventoux Trust and working capital cash | $9,584 | | Cash—PIPE investment | $55,400 | | Less: transaction costs and other payments | $(15,144) | | Total Net Cash from Merger and PIPE | $49,840 | - The company is an emerging growth company and has elected to use the extended transition period for complying with new or revised accounting standards[40][41] - Substantial doubt exists about the Company's ability to continue as a going concern within one year without additional financing[58] Revenue Concentration by Top Three Customers | Customer | 3 Months Ended Sep 30, 2022 Revenue Contribution | 3 Months Ended Sep 30, 2021 Revenue Contribution | | :--------- | :----------------------------------------------- | :----------------------------------------------- | | Customer A | 57% | 48% | | Customer B | 23% | 26% | | Customer C | 12% | 17% | | Total | 92% | 91% | 2. Revenue This note details the company's revenue recognition policies, deferred revenue, and significant customer settlements Deferred Revenue Activity (in thousands) | Metric | Amount | | :------------------------------------ | :------- | | Deferred revenue, June 30, 2022 | $10,769 | | Additions | $681 | | Revenue recognized | $(4,111) | | Deferred revenue, September 30, 2022 | $7,339 | - Approximately $8.1 million of revenue is expected to be recognized from remaining performance obligations, with $7.4 million anticipated within the next 12 months[81] - A settlement with Customer A reduced a $5.0 million marketing development payment to $3.2 million and waived $805 thousand in accrued interest[83] 3. Fair Value Measurements This note describes the valuation methodologies and inputs used for financial liabilities measured at fair value Financial Liabilities Measured at Fair Value (in thousands) | Financial Liabilities | Sep 30, 2022 | Jun 30, 2022 | | :--------------------------------- | :----------- | :----------- | | Unvested founder shares liability | $413 | $— | | Warrant liabilities | $1,999 | $4,149 | | Convertible promissory notes and embedded warrants | $— | $89,663 | | Total | $2,412 | $93,812 | - The fair value of unvested founder shares liability and convertible promissory notes are determined using a Monte Carlo valuation model, while warrant liabilities use the Black-Scholes-Merton model, all relying on 'Level 3' inputs due to lack of market data[91][92][94] - A significant change in fair value of warrants and convertible promissory notes was a gain of $48.3 million for the three months ended September 30, 2022, primarily due to the remeasurement of convertible promissory notes prior to their conversion into common stock[94] 4. Consolidated Balance Sheet Components This note provides a breakdown of key asset and liability categories within the consolidated balance sheets Key Balance Sheet Components (in thousands) | Asset/Liability Category | Sep 30, 2022 | Jun 30, 2022 | Change | | :---------------------------- | :----------- | :----------- | :----- | | Inventories (Finished goods) | $484 | $869 | $(385) | | Property and equipment, net | $1,691 | $1,975 | $(284) | | Intangible assets, net | $5,630 | $4,226 | +$1,404 | | Accrued liabilities | $7,282 | $6,215 | +$1,067 | - The increase in intangible assets was primarily driven by a $1.46 million increase in capitalized software[98] 5. Leases This note details the company's adoption of new lease accounting standards and presents operating lease information - The company adopted ASU No. 2016-02, Leases (Topic 842) on July 1, 2022, using the modified retrospective approach[67][71] Operating Lease Information (in thousands) | Lease Metric | Sep 30, 2022 | | :-------------------------- | :----------- | | Operating lease ROU asset | $748 | | Operating lease liabilities (current) | $349 | | Operating lease liabilities (noncurrent) | $407 | | Operating lease costs (3 months ended Sep 30, 2022) | $95 | | Weighted average remaining lease term | 2.0 years | | Weighted average discount rate | 15.0% | 6. Financing Obligations This note outlines the company's receivable and equipment financing facilities and their current classification Financing Obligations (in thousands) | Financing Obligation | Sep 30, 2022 | Jun 30, 2022 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Receivable financing facility | $5,803 | $5,911 | $(108) | | Equipment financing facility | $1,413 | $2,929 | $(1,516) | | Total financing obligations | $7,216 | $8,840 | $(1,624) | - All financing obligations are classified as current due to the company's liquidity position and defaults on certain equipment financing arrangements[110] - The company continues to roll forward its receivable financing facility and is seeking to remedy defaults on equipment financing via repayment agreements[108][110] 7. Debt Arrangements This note details the company's outstanding debt, including convertible notes, term loans, and PPP loans, and related transactions Outstanding Debt, Net of Discounts (in thousands) | Debt Type | Sep 30, 2022 | Jun 30, 2022 | Change | | :----------------------- | :----------- | :----------- | :----- | | Convertible promissory notes | $— | $89,663 | $(89,663) | | Term loans | $49,424 | $25,443 | +$23,981 | | PPP loans | $— | $2,000 | $(2,000) | | Total debt | $49,424 | $117,106 | $(67,682) | - All convertible promissory notes converted into 8,147,938 shares of common stock, resulting in a $48.3 million gain on remeasurement[112] - Repaid Horizon Loan ($17.0 million) and Lago Loans ($22.4 million), incurring a total loss on early extinguishment of debt of $7.8 million[116][118][119] - Entered into a new Credit Agreement for $55.0 million Term Loans, bearing 15% annual interest, maturing March 21, 2025, and secured by substantially all company assets[120][121][122] - Received forgiveness for the second PPP loan of $2.0 million in July 2022[128] 8. Commitments and Contingencies This note describes the company's product repair costs, legal proceedings, and indemnification obligations - Incurred $658 thousand in costs to refurbish customer tablets for the three months ended September 30, 2022, and maintains a repair cost reserve of $229 thousand[130] - Received a favorable arbitrator ruling for approximately $11.3 million in damages related to product repairs from a third-party subcontractor, but the gain has not been recognized as of September 30, 2022, due to non-realizability criteria[135] - The company provides indemnification to business partners, directors, and executive officers, and is subject to various legal proceedings in the ordinary course of business, none of which are expected to have a material adverse effect[131][132][133] 9. Loss on Infrequent Product Repairs This note explains the nature and cause of the loss incurred from infrequent product repairs in prior periods Loss on Infrequent Product Repairs (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :--------------------------------- | :------------------------------ | :------------------------------ | | Loss on infrequent product repairs | $— | $435 | - The $435 thousand loss in Q3 2021 was due to device damage from strong commercial disinfectants used by customers during COVID-19, which was not covered by standard warranty but addressed by the company as a one-time offer[136][137] 10. Stockholders' Equity (Deficit) This note details changes in authorized and outstanding shares, capital contributions, and shares reserved for future issuance - Following the Merger, authorized capital stock increased to 180 million common shares and 1.5 million preferred shares; 50.6 million common shares were issued and outstanding as of September 30, 2022[37][138] Shares Reserved for Future Issuance as of September 30, 2022 | Category | Number of Shares | | :------------------------------------ | :--------------- | | Warrants to purchase common stock | 18,415,453 | | Options to purchase common stock and RSUs | 12,976,520 | | Stock options available for future grants | 4,617,400 | | Earnout shares | 15,000,000 | | Total shares reserved for future issuance | 51,009,373 | - Received a $1.0 million equity investment for 133,333 shares and incurred $2.4 million in expenses related to the termination of a convertible note agreement, involving the issuance of 322,868 common shares and transfer of 500,000 warrants[139][140] 11. Warrants This note describes the classification, valuation, and key transactions related to the company's outstanding warrants - Warrants are classified as liabilities or equity instruments based on specific terms, with liability-classified warrants remeasured at each reporting date[143] - Key warrant transactions in Q3 2022 included: issuance of 169,309 warrants with Lago Loan amendment, net exercise of 141,970 warrants, issuance of 1,500,000 warrants to Credit Agreement Lenders, assumption of 8,625,000 public and 6,125,000 private warrants with the Merger, and reclassification of 294,725 liability-classified warrants to equity[144] 12. Stock-Based Compensation This note outlines the company's stock-based compensation plans, expense recognition, and equity award grants - The company adopted the 2022 Incentive Award Plan, reserving 4,617,400 shares for future issuance[147] Stock-Based Compensation Expense (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change | | :-------------------- | :------------------------------ | :------------------------------ | :----- | | Stock-based compensation expense | $2,175 | $479 | +$1,696 | - Granted 1,200,000 RSUs to a director, resulting in $1.8 million compensation expense for the period, and recognized $178 thousand for earnout shares and $264 thousand for CyborgOps acquisition shares[150][156][159] 13. Income Taxes This note discusses the company's income tax expense and its immaterial impact for the reporting periods - Income tax expense was not material for the three months ended September 30, 2022, and 2021, with no material changes expected for the remainder of the fiscal year[160] 14. Net Income (Loss) Per Share This note presents the basic and diluted net income or loss per share and the weighted-average shares used in their calculation Net Income (Loss) Per Share | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :------------------------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) per share, basic | $1.18 | $(0.72) | | Net income (loss) per share, diluted | $0.86 | $(0.72) | | Weighted-average shares used in basic EPS | 29,521,505 | 27,137,792 | | Weighted-average shares used in diluted EPS | 40,366,902 | 27,137,792 | - 10.8 million dilutive shares (stock options, RSUs, warrants) were included in diluted EPS for Q3 2022, while 19.8 million potential shares were excluded in Q3 2021 due to their anti-dilutive effect[161] 15. Cyborg Ops This note details the bonus and deferred consideration due to CyborgOps founding members following the Merger - Following the Merger, $1.9 million in bonus and deferred consideration became due and payable to CyborgOps founding members, primarily recorded as research and development expense ($1.88 million)[163] 16. Related Party Transactions This note describes significant transactions with related parties, including convertible note conversions and equity investments - $9.6 million in convertible promissory notes and embedded warrants due to related parties as of June 30, 2022, converted into common stock during Q3 2022[164] - Received a $1.0 million equity investment for 133,333 shares from an investor and granted 1,200,000 RSUs to a director with a grant date fair value of $4.56 per RSU[165][166] 17. Subsequent Events This note confirms no subsequent events requiring financial statement adjustment or disclosure after the reporting period - There have been no subsequent events requiring adjustment or disclosure in the condensed consolidated financial statements after the reporting period[167] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Presto Automation Inc.'s financial condition and results of operations for the three months ended September 30, 2022, compared to the prior year. It covers the company's business overview, strategy, the impact of the business combination and COVID-19, revenue model, non-GAAP financial measures, key performance indicators, factors affecting performance, detailed analysis of operating results, liquidity and capital resources, and critical accounting policies Overview This section introduces Presto Automation Inc.'s business, its digital solutions for the restaurant industry, and historical product performance - Presto Automation Inc. provides modular digital solutions to the restaurant industry to increase staff productivity, improve guest experience, and deliver actionable insights[170] - Since 2008, the company has shipped over 250,000 systems, leveraging its technology platform to digitize dining rooms and drive-throughs[170] - While Presto Touch has historically driven most revenue, future growth is expected from Vision and Voice products[172] Strategy This section outlines Presto's strategic focus on digitizing the hospitality industry and future growth plans, including potential acquisitions - Presto aims to overlay next-generation digital solutions onto the $3 trillion hospitality industry, focusing on restaurants to improve guest experience and staff productivity[173][174] - The restaurant hospitality technology market is rapidly growing due to COVID-19, labor shortages, high costs, and increased customer demand for faster service[175] - Future plans include potential acquisitions in CRM, loyalty, POS, front-of-house management, online ordering, AI tools, and integration middleware[177] The Business Combination This section details the reverse recapitalization merger with Ventoux CCM Acquisition Corp. and its accounting treatment - The Business Combination was approved on September 14, 2022, with Ventoux CCM Acquisition Corp. (VTAQ) renamed 'Presto Automation Inc.'[179] - The transaction was accounted for as a reverse recapitalization, with Presto treated as the accounting acquirer, and VTAQ's net assets stated at historical cost[180] Public Company Costs This section discusses the anticipated increase in expenses due to becoming a publicly traded, SEC-registered company - As a newly SEC-registered and Nasdaq-listed company, Presto expects to incur substantial additional expenses for staff, processes, directors' and officers' liability insurance, director fees, and external costs for investor relations, accounting, audit, and legal functions[181] Impact of COVID-19 This section describes the pandemic's effects on the company's operations, product repairs, and the forgiveness of PPP loans - The COVID-19 pandemic significantly impacted Presto's business and the restaurant industry, leading to operational restrictions and staff shortages[182][184] - Presto incurred $0.4 million in loss on infrequent product repairs in Q3 2021 due to device damage from commercial disinfectants used by customers as a COVID-19 precaution[186] - The company received forgiveness for two PPP loans: $2.6 million in August 2021 and $2.0 million in July 2022, to mitigate economic hardships[185] Our Revenue Model This section explains Presto's revenue generation from platform and transaction streams and its expectation of future operating losses - Presto's revenue is driven by attracting and retaining customers, increasing sales, and supporting customer growth within the casual dining, quick service, and fast casual sectors[188] - Revenue streams include platform revenue (from Presto Touch hardware, software, and support, recognized ratably) and transaction revenue (from premium content/gaming, recognized at point of use)[189] - The company expects to incur operating losses for the foreseeable future as it expands its customer base and increases sales of Vision and Voice products[189] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, including Adjusted Gross Profit and Adjusted EBITDA Adjusted Gross Profit This subsection defines and presents the calculation of Adjusted Gross Profit, a non-GAAP measure - Adjusted Gross Profit is a non-GAAP measure calculated as gross profit adjusted to add back depreciation and hardware repair expenses related to COVID-19[193] Adjusted Gross Profit (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change | | :-------------------------------- | :------------------------------ | :------------------------------ | :----- | | Gross profit | $552 | $407 | +$145 | | Depreciation | $291 | $466 | $(175) | | Hardware repair expenses related to COVID | $— | $373 | $(373) | | Adjusted Gross Profit | $843 | $1,246 | $(403) | Adjusted EBITDA This subsection defines and presents the calculation of Adjusted EBITDA, a key non-GAAP performance metric - Adjusted EBITDA is a non-GAAP measure that excludes interest, other income, taxes, depreciation and amortization, stock-based compensation, fair value adjustments, debt extinguishment losses, other financing costs, and merger-related/COVID-related expenses[196] Adjusted EBITDA (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change | | :------------------------------------------------- | :------------------------------ | :------------------------------ | :----- | | Net income (loss) | $34,789 | $(19,509) | +$54,298 | | Interest expense | $3,376 | $1,388 | +$1,988 | | Depreciation and amortization | $433 | $535 | $(102) | | Stock-based compensation expense | $2,175 | $479 | +$1,696 | | Change in fair value of warrants and convertible promissory notes | $(59,822) | $13,574 | $(73,396) | | Loss on debt extinguishment | $7,758 | $— | +$7,758 | | Adjusted EBITDA | $(8,891) | $(5,355) | $(3,536) | Key Performance Indicator This section identifies net revenue retention as the primary KPI and explains factors influencing its performance - Presto uses net revenue retention as its primary key performance indicator to evaluate operational and financial performance[199][200] Net Revenue Retention | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | | Net revenue retention | 105% | 119% | - The decrease in net revenue retention was primarily due to customer relationship cancellations with certain franchisees of its third-largest customer[200] Key Factors Affecting Our Performance This section discusses factors influencing the company's long-term revenue growth, product adoption, and R&D investment needs - Long-term revenue growth is correlated with the growth of existing customers' businesses[203] - Performance is affected by the adoption of additional products (especially Vision and Voice), expansion of locations per customer, and acquisition of new locations[204][205][206] - Continuous innovation and development of new products require ongoing investment in R&D, which is expected to increase operating expenses and may have short-term negative impacts on operating margin[208] Seasonality This section explains the seasonal impact on transaction revenue, typically stronger in warmer months, and its expected continuation - The company experiences seasonality in its transaction revenue, which is largely driven by higher customer sales during warmer months, typically stronger in the second and third quarters[210] - Seasonality is expected to continue impacting overall results as transaction revenue remains a material proportion of the overall revenue mix[210] Components of Results of Operations This section defines the various revenue, cost, and expense categories that comprise the company's results of operations Revenue This subsection details the sources of revenue, including platform and transaction streams, and their recognition methods - Revenue is generated from two main sources: platform revenue (Presto Touch products, recognized ratably) and transaction revenue (premium content/gaming, professional services, recognized at point of delivery or proportionally)[211][212][213] - Revenue generated from Voice and Vision products was not material for the three months ended September 30, 2022, and 2021[212] Cost of Revenue This subsection describes the components of platform, transaction, and depreciation costs of revenue - Platform cost of revenue includes product, shipping, installation, capitalized software amortization, product support, and tablet repair costs[214][215] - Transaction cost of revenue primarily consists of commissions paid to restaurants, ranging from 83%-96% of premium content revenue in Q3 2022 (vs. 77%-98% in Q3 2021)[216] - Depreciation and impairment cost of revenue consists of costs of leased assets amortized to cost of revenue[217] Operating Expenses This subsection outlines the categories of operating expenses and their expected trends due to growth and public company requirements - Operating expenses include research and development, sales and marketing, general and administrative, and loss on infrequent product repairs[218] - R&D and sales & marketing expenses are expected to increase in absolute dollars due to growth investments, while G&A will increase with public company requirements[220][222][224] Change in Fair Value of Warrants and Convertible Promissory Notes This subsection explains the accounting treatment and remeasurement of warrants and convertible promissory notes at fair value - Warrants are classified as liabilities or equity, with liability-classified warrants remeasured at each reporting date. Convertible promissory notes and embedded warrants are accounted for at fair value using the fair value option[227][228] Other Income, Net This subsection identifies the primary components of other income, net, mainly gains from PPP loan forgiveness - Other income, net, primarily consists of gains from the forgiveness of PPP loans ($2.0 million in Q3 2022 and $2.6 million in Q3 2021)[229] Interest Expense This subsection describes the main drivers of interest expense, including financing obligations and outstanding loans - Interest expense primarily consists of interest incurred on financing obligations and outstanding loans[230] Loss on Early Extinguishment of Debt This subsection explains the nature of losses incurred from the early repayment of term loans prior to the Merger - Loss on early extinguishment of debt consists of losses incurred related to the repayment of term loans outstanding prior to the Merger[231] Other Financing and Financial Instrument (Costs) Income, Net This subsection details expenses and income related to share issuance, warrant transfers, and remeasurement of founder shares liability - This category includes expenses related to the issuance of shares and transfer of warrants upon termination of a convertible note agreement and associated legal fees, partially offset by income from the remeasurement of the unvested founder shares liability[232] (Benefit) Provision for Income Taxes This subsection outlines the company's accounting method for income taxes and the evaluation of tax positions - The company uses the asset and liability method for income taxes, establishing a valuation allowance when deferred tax assets are unlikely to be realized[234] - Tax positions are evaluated for a 'more-likely-than-not' sustainability threshold, and related interest and penalties are recorded as income tax expense[235][236] Results of Operations This section provides a detailed comparative analysis of the company's financial performance for the three months ended September 30, 2022 and 2021 Comparison of the Three Months Ended September 30, 2022 and 2021 This subsection presents a consolidated overview of key financial metrics for the comparative three-month periods Consolidated Results of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :------------------------------------------------- | :------------------------------ | :------------------------------ | | Total revenue | $7,779 | $7,229 | | Total cost of revenue | $7,227 | $6,822 | | Gross profit | $552 | $407 | | Total operating expenses | $14,711 | $7,584 | | Loss from operations | $(14,159) | $(7,177) | | Change in fair value of warrants and convertible promissory notes | $59,822 | $(13,574) | | Interest expense | $(3,376) | $(1,388) | | Loss on early extinguishment of debt | $(7,758) | $— | | Other financing and financial instrument (costs) income, net | $(1,768) | $— | | Other income, net | $2,028 | $2,630 | | Net income (loss) and comprehensive income (loss) | $34,789 | $(19,509) | Revenue This subsection analyzes the changes in platform and transaction revenue, including contributing factors and customer concentration Revenue Performance (in thousands) | Revenue Type | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change Amount | Change % | | :-------------------------- | :------------------------------ | :------------------------------ | :------------ | :------- | | Platform | $4,820 | $4,537 | $283 | 6% | | Transaction | $2,959 | $2,692 | $267 | 10% | | Total revenue | $7,779 | $7,229 | $550 | 8% | - Platform revenue increased due to increases in certain replacement equipment, while transaction revenue increased due to higher pricing for gaming fees[239] - The top three customers accounted for 92% of total revenue in Q3 2022, compared to 91% in Q3 2021[240] Cost of Revenue This subsection examines the changes in platform, transaction, and depreciation costs of revenue and their underlying reasons Cost of Revenue Performance (in thousands) | Cost of Revenue Type | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change Amount | Change % | | :---------------------------------- | :------------------------------ | :------------------------------ | :------------ | :------- | | Platform | $4,292 | $4,022 | $270 | 7% | | Transaction | $2,644 | $2,334 | $310 | 13% | | Depreciation and impairment | $291 | $466 | $(175) | (38)% | | Total costs of revenue | $7,227 | $6,822 | $405 | 6% | - Platform cost of revenue increased due to higher installation and shipping costs. Transaction cost of revenue increased due to higher revenue share owed to restaurants from increased gaming fees[242][243] - Depreciation and impairment cost of revenue decreased due to the return of leased tablets in fiscal year 2022[244] Operating Expenses This subsection details the changes in research and development, sales and marketing, and general and administrative expenses Operating Expenses Performance (in thousands) | Operating Expense Type | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change Amount | Change % | | :------------------------------------ | :------------------------------ | :------------------------------ | :------------ | :------- | | Research and development | $6,388 | $4,001 | $2,387 | 60% | | Sales and marketing | $2,399 | $1,174 | $1,225 | 104% | | General and administrative | $5,924 | $1,974 | $3,950 | 200% | | Loss on infrequent product repairs | $— | $435 | $(435) | (100)% | | Total operating expenses | $14,711 | $7,584 | $7,127 | 94% | - R&D increase primarily from $1.9 million in salaries and employee benefits. Sales and marketing increase primarily from $0.7 million in salaries and employee benefits and a $0.3 million public relations fee[246][247] - G&A increase primarily from $1.7 million in stock-based compensation, $1.0 million in salaries and employee benefits, and $1.1 million in legal, accounting, and temporary services (including $0.8 million for Merger preparation)[248] Change in Fair Value of Warrants and Convertible Promissory Notes This subsection explains the significant gain from the remeasurement of convertible notes and warrant liabilities Change in Fair Value of Warrants and Convertible Promissory Notes (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change Amount | Change % | | :------------------------------------------------- | :------------------------------ | :------------------------------ | :------------ | :------- | | Change in fair value of warrants and convertible promissory notes | $59,822 | $(13,574) | $73,396 | 541% | - The $59.8 million gain was primarily driven by a $48.3 million remeasurement gain on convertible notes prior to conversion and an $11.6 million gain on remeasurement of warrant liabilities, influenced by the assumption of private warrants and a decrease in the company's stock price[252] Interest Expense This subsection analyzes the increase in interest expense due to higher outstanding interest-bearing debt Interest Expense (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change Amount | Change % | | :-------------------- | :------------------------------ | :------------------------------ | :------------ | :------- | | Interest expense | $3,376 | $1,388 | $1,988 | 143% | - The increase was due to the company having more interest-bearing debt outstanding during the period[254] Loss on Early Extinguishment of Debt This subsection details the loss incurred from the early repayment of term loans prior to the Merger Loss on Early Extinguishment of Debt (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change Amount | Change % | | :--------------------------------- | :------------------------------ | :------------------------------ | :------------ | :------- | | Loss on early extinguishment of debt | $7,758 | $— | $7,758 | 100% | - The loss resulted from the extinguishment of term loans outstanding prior to the Merger during the three months ended September 30, 2022[255] Other Financing and Financial Instrument (Costs) Income, Net This subsection explains the expenses and income related to share issuance, warrant transfers, and founder shares liability remeasurement Other Financing and Financial Instrument (Costs) Income, Net (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change Amount | Change % | | :------------------------------------------------- | :------------------------------ | :------------------------------ | :------------ | :------- | | Other financing and financial instrument (costs) income, net | $1,768 | $— | $1,768 | 100% | - This was driven by $2.4 million in expenses related to share issuance and warrant transfer upon convertible note termination and $0.5 million in associated legal fees, partially offset by a $1.2 million income from remeasuring the unvested founder shares liability[256] Other Income, Net This subsection attributes the gains in other income, net, to the forgiveness of Paycheck Protection Program loans Other Income, Net (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change Amount | Change % | | :-------------------- | :------------------------------ | :------------------------------ | :------------ | :------- | | Other income, net | $2,028 | $2,630 | $(602) | (23)% | - The gains in both periods were due to the forgiveness of PPP loans[257] (Benefit) Provision for Income Taxes This subsection notes the immaterial impact of income tax benefit or provision for the reporting periods - The benefit/provision for income taxes was not material for both the three months ended September 30, 2022, and 2021[258] Liquidity and Capital Resources This section assesses the company's ability to meet its financial obligations, focusing on cash flows, financing, and debt arrangements Cash Flows This subsection provides a summary of cash flows from operating, investing, and financing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Change | | :-------------------------------- | :------------------------------ | :------------------------------ | :----- | | Net cash (used in) operating activities | $(11,156) | $(15,408) | +$4,252 | | Net cash (used in) investing activities | $(1,374) | $(455) | $(919) | | Net cash provided by financing activities | $68,762 | $333 | +$68,429 | | Net increase (decrease) in cash | $56,232 | $(15,530) | +$71,762 | Operating Activities This subsection analyzes the net cash used in operating activities and the factors influencing its change - Net cash used in operating activities decreased to $11.2 million in Q3 2022 from $15.4 million in Q3 2021[264][265] - Q3 2022 operating cash flow was influenced by $34.8 million net income, offset by $48.2 million non-cash charges (fair value changes) and $2.3 million net cash from changes in operating assets/liabilities[264] Investing Activities This subsection examines the net cash used in investing activities, primarily due to capitalized software expenditures - Net cash used in investing activities increased to $1.4 million in Q3 2022 from $0.5 million in Q3 2021, primarily due to higher cash outflows for capitalized software[266] Financing Activities This subsection details the significant cash provided by financing activities, including term loans and merger-related proceeds - Net cash provided by financing activities significantly increased to $68.8 million in Q3 2022 from $0.3 million in Q3 2021[268][269] - Q3 2022 cash provided by financing activities included proceeds from term loans ($60.3 million) and Merger/PIPE financing ($49.8 million), offset by term loan repayments ($33.0 million) and debt extinguishment penalties ($5.7 million)[268] Financing Obligations This subsection summarizes the company's receivable and equipment financing obligations and their current classification Financing Obligations (in thousands) | Financing Obligation | Sep 30, 2022 | Jun 30, 2022 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Receivable financing facility | $5,803 | $5,911 | $(108) | | Equipment financing facility | $1,413 | $2,929 | $(1,516) | | Total financing obligations | $7,216 | $8,840 | $(1,624) | - All obligations are classified as current due to liquidity position and defaults on equipment financing arrangements[274] Receivable Financing Facility This subsection describes the non-recourse receivable financing facility and its repayment mechanism - The receivable financing facility provides upfront payments, accounted for as borrowings, repaid through collections from accounts receivable debtors[271] - The 5-year facility is non-recourse, and the company expects to continue rolling it forward quarterly[271][272] Equipment Financing Facility This subsection details the equipment financing arrangements, including terms, interest rates, and default implications - Equipment financing facilities secure tablet purchases with 3-5 year terms and 8%-14% interest rates[273] - Defaults on certain arrangements in fiscal year 2022 due to liquidity issues resulted in all obligations being classified as short-term[274] Debt This subsection provides an overview of the company's outstanding debt, including convertible notes, term loans, and PPP loans Outstanding Debt, Net of Discounts (in thousands) | Debt Type | Sep 30, 2022 | Jun 30, 2022 | Change | | :----------------------- | :----------- | :----------- | :----- | | Convertible promissory notes | $— | $89,663 | $(89,663) | | Term loans | $49,424 | $25,443 | +$23,981 | | PPP loans | $— | $2,000 | $(2,000) | | Total debt | $49,424 | $117,106 | $(67,682) | Convertible Promissory Notes This subsection explains the conversion of all outstanding convertible promissory notes into common stock during the Merger - All $89.7 million of convertible promissory notes outstanding at June 30, 2022, converted into 8,147,938 shares of common stock in conjunction with the Merger, resulting in a $48.3 million gain on remeasurement[277] Term Loans This subsection details the repayment of prior term loans and the resulting loss on early extinguishment of debt - The company repaid the Horizon Loan ($17.0 million cash disbursement, including $15.0 million principal) and Lago Loans ($22.3 million cash disbursement, including $17.8 million principal) in connection with the new Credit Agreement[279][282] - These repayments resulted in a total loss on early extinguishment of debt of $7.8 million[279][281] Credit Agreement This subsection describes the new Credit Agreement, including loan terms, interest rates, security, and financial covenants - On September 21, 2022, the company entered into a Credit Agreement for $55.0 million in Term Loans, bearing 15% annual interest and maturing on March 21, 2025[283][284] - The loans are secured by substantially all company assets and include financial covenants. The company issued 1,500,000 equity-classified warrants to lenders and recorded $2.8 million in debt issuance costs from a sponsor capital contribution and $1.0 million in cash debt issuance costs[285][286][287][288][289] Paycheck Protection Program Loan This subsection discusses the forgiveness of the company's second PPP loan and its recognition as other income - The company received forgiveness for its second PPP loan of $2.0 million in July 2022, which was recognized as other income, net. The first PPP loan of $2.6 million was forgiven in fiscal year 2022[291] Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements for the reporting periods - The company did not have any off-balance sheet arrangements as of September 30, 2022, and June 30, 2022[292] Other Recent Developments This section highlights a favorable arbitrator ruling for product repair damages, which remains unrecognized due to realizability criteria - In June 2022, the company received a favorable arbitrator ruling for $11.3 million in damages related to product repairs from a third-party subcontractor, but this gain has not been recognized as of September 30, 2022, as it has not met the criteria to be considered realizable[293] Related Party Transactions This section details significant transactions with related parties, including convertible note conversions and equity investments - $9.6 million in convertible promissory notes and embedded warrants due to related parties as of June 30, 2022, converted into common stock during Q3 2022[294] - Received a $1.0 million equity investment for 133,333 shares from an investor and granted 1,200,000 RSUs to a director[295] Critical Accounting Policies and Estimates This section outlines the key accounting policies and estimates that require significant management judgment and can materially impact financial results Revenue Recognition This subsection describes the company's policies for recognizing platform and transaction revenue based on performance obligations - Revenue is recognized when promised goods or services are transferred to the customer, net of any taxes collected[298] - Platform revenue (Presto Touch products, SaaS, maintenance) is a single performance obligation, recognized ratably over the contract period[300][303][306] - Transaction revenue (premium content/gaming) is a single performance obligation, recognized at a point in time when content is delivered. Professional services revenue is recognized on a proportional performance basis[301][304][306] Stock-Based Compensation This subsection details the accounting for stock-based compensation, including valuation models and subjective assumptions - Stock-based compensation expense for equity awards (options, RSUs) is recognized based on fair value over the requisite service period[305] - Options are valued using the Black-Scholes option pricing model, requiring subjective assumptions (risk-free rate, expected term, volatility, dividend yield)[305][312] - Earnout shares are equity-classified and valued using a Monte Carlo valuation model with Level 3 inputs[309] Inventories This subsection explains the valuation method for inventories and the provisions for excess and obsolete items - Inventories, consisting of finished goods (tablets) and component parts, are valued at the lower of cost or net realizable value using the weighted average cost method[310] - Provisions for excess and obsolete inventories are established based on historical sales, future demand, market conditions, and expected product life cycles[310] Fair Value Measurements This subsection outlines the fair value hierarchy and valuation models used for financial assets and liabilities - Financial assets and liabilities are measured at fair value using a three-level hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs; Level 3: unobservable inputs)[311][313] - Convertible promissory notes, embedded warrants, and unvested founder shares liability are measured using Level 3 inputs and Monte Carlo valuation models[314][315] - Warrant liabilities are measured using Level 3 inputs and the Black-Scholes-Merton model[94] Impairment of Long-Lived Assets This subsection describes the company's policy for evaluating and recognizing impairment of long-lived assets - Long-lived assets are evaluated for impairment annually or more frequently when circumstances indicate potential impairment[316] - Assets are written down to their estimated fair value if undiscounted future cash flows are insufficient to recover their recorded value[316] Business Combinations This subsection explains the accounting method for acquisitions, including the recognition of assets, liabilities, and goodwill - Acquisitions are accounted for using the acquisition method, recording acquired assets and assumed liabilities at their respective fair values at the acquisition date[317] - The excess of the consideration transferred over the fair values of the assets acquired and liabilities assumed is recorded as goodwill[317] Recent Accounting Pronouncements This subsection refers to Note 1 for details on recently adopted and issued accounting pronouncements - This section refers to Note 1 of the condensed consolidated financial statements for details on recently adopted and recently issued accounting pronouncements not yet adopted[318] Emerging Growth Company This subsection discusses the company's election to use the extended transition period for new accounting standards as an emerging growth company - As an emerging growth company under the JOBS Act, Presto has elected to use the extended transition period for complying with new or revised accounting standards[319] - This election may result in financial statements not being comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates[319] Item 3. Quantitative and Qualitative Disclosures About Market Risk Presto Automation Inc. is exposed to market risks including interest rate, credit, and inflation risks, but not significant foreign exchange risk. The company's interest rate exposure is limited due to short-term cash holdings and fixed-rate debt. Credit risk is concentrated in a few major customers and a single tablet supplier. Inflation risk is currently deemed immaterial but could impact future results Interest Rate Sensitivity This section assesses the impact of interest rate changes on the company's cash and fixed-rate debt - The fair value of cash and cash equivalents would not be significantly affected by interest rate changes due to their short-term nature[322] - Changes in interest rates will not materially impact the cost of currently outstanding borrowings as interest rates on the Credit Agreement are fixed[322] Credit Risk This section identifies customer and vendor concentration as key sources of credit risk for the company - The company is exposed to credit risk on accounts receivable, with a small number of customers representing significant portions of its consolidated accounts receivable and revenue[323] Customer Concentration for Revenue and Accounts Receivable | Customer | Q3 2022 Revenue Contribution | Sep 30, 2022 Accounts Receivable | | :--------- | :--------------------------- | :------------------------------- | | Customer A | 57% | 39% | | Customer B | 23% | 17% | | Customer C | 12% | —% | | Customer D | —% | 22% | | Total (top customers) | 92% | 78% | - The company is exposed to vendor concentration risk as it supplies tablets from one vendor[325] Inflation Risk This section discusses the historical and potential future impact of inflation on the company's financial performance - The effects of inflation on the company's results of operations and financial condition have been immaterial to date[326] - The company cannot assure that its business will not be affected by inflation in the future[326] Item 4. Controls and Procedures As of September 30, 2022, management concluded that disclosure controls and procedures were not effective due to identified material weaknesses in internal control over financial reporting. These weaknesses include an ineffective control environment, insufficient accounting resources for complex transactions, ineffective controls over the financial statement closing process, and inadequate internal accounting records. Remediation efforts are underway, but their timely effectiveness is uncertain Evaluation of Disclosure Controls and Procedures This section concludes on the effectiveness of disclosure controls and procedures, noting material weaknesses in internal control - Management concluded that disclosure controls and procedures were not effective as of September 30, 2022, due to material weaknesses in internal control over financial reporting[327] - Despite the weaknesses, management believes the condensed consolidated financial information in this report fairly represents the financial condition, results of operations, and cash flows[328] Material Weakness This section identifies specific material weaknesses in internal control over financial reporting and their potential impact - Four material weaknesses were identified as of June 30, 2022: an ineffective control environment, insufficient accounting resources for complex transactions, ineffective controls over the financial statement closing process, and inadequate internal accounting records[331] - These material weaknesses could result in a misstatement of account balances or disclosures that would not be prevented or detected on a timely basis[330] Management's Remediation Initiatives This section outlines the company's plans to address identified material weaknesses, including process and personnel enhancements - Remediation plans include designing a risk assessment process, enhancing review of significant accounting transactions, hiring additional experienced acco