The Securities and Exchange Commission (SEC) has taken action against Cantaloupe, Inc., formerly known as USA Technologies, Inc., a company engaged in the manufacturing and distribution of cashless payment devices. The SEC’s investigation revealed that Cantaloupe had misrepresented its revenue by excluding income from bill and hold transactions, which refer to transactions where revenue is recognized before the product is shipped to the customer. These misrepresentations were primarily driven by USAT’s desire to maximize end-of-quarter revenue and meet internal sales targets, in violation of its publicly stated sales and revenue recognition policies, as well as generally accepted accounting principles.
USAT engaged in so-called “bill and hold” sales transactions, which, under certain conditions, allow a company to recognize revenue before delivering the product to the customer. However, USAT failed to adhere to the principles of generally accepted accounting principles (GAAP) when recording these transactions. Additionally, USAT inflated its quarterly sales revenue by knowingly shipping devices to customers that were not ordered or explicitly requested.
The SEC determined that Cantaloupe violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, as well as Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 under those acts. The company’s revenue recognition policy claimed compliance with GAAP, which stipulates that revenue should generally be recognized when it is both earned and realizable.
Furthermore, USAT misrepresented its earned revenue by improperly treating certain device sales as “bill and hold” transactions. This allowed the company to recognize revenue from the sale of payment devices before delivering them to customers, and before USAT expected payment from those customers. Notably, USAT did not disclose its use of bill and hold transactions publicly and did not have a written policy governing their use.
To summarize, the SEC has initiated cease-and-desist proceedings against Cantaloupe, Inc., a Pennsylvania-based manufacturer and distributor of cashless payment devices. The SEC found that USAT had misrepresented its revenue by excluding revenue from bill and hold transactions that did not meet the criteria for proper revenue recognition. USAT’s failure to accurately recognize revenue from incomplete sales and the shipment of incorrect inventory resulted in several issues. In the second quarter of FY 2018, USAT faced a shortage of its “Seed” cashless payment device, resulting in an inability to meet customer demand. Despite this, the company had excess inventory of a different device called “ePort.” USAT urged customers to purchase the available ePort devices, allowing the company to ship goods before the end of the quarter. However, two major customers explicitly expressed no interest in ePorts, yet USAT convinced them to order these devices with the understanding that they could later exchange them for Seeds once new inventory arrived.
In the same quarter, USAT encountered another inventory shortage involving different versions of its ePort device. USAT deliberately sent unwanted device versions to a customer without informing them. When the customer inquired about the shipment, USAT attributed it to “shipping mistakes” and accepted the return of the devices the following quarter. This transaction resulted in approximately $861,000 of improperly recognized revenue for the quarter.
USAT materially misstated its consolidated financial statements for the fiscal year ended June 30, 2017, as well as its quarterly financial statements for the periods ending September 30, 2017, December 31, 2017, and March 30, 2018. These statements were included in the company’s 2017 and 2018 Forms 10-Q. USAT acknowledged that the pressure to meet sales targets