TransAct Technologies Inc. (TACT) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 14, 2022. TransAct develops software-driven technology and printing products for food service, POS automation, and casino and gaming markets, along with related services and supplies. It reports one operating segment.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $17.9 million | $10.6 million | $40.2 million | $28.3 million |
| Gross profit / margin | $8.2 million / 45.9% | $4.3 million / 40.5% | $16.2 million / 40.3% | $11.1 million / 39.2% |
| Operating income (loss) | $0.4 million | $(1.6) million | $(8.2) million | $(6.8) million |
| Net income (loss) | $0.5 million | $0.9 million | $(6.2) million | $(3.2) million |
| Diluted EPS | $0.05 | $0.09 | $(0.63) | $(0.35) |
Q3 sales grew 67.9% year over year; hardware unit volume rose 105% to approximately 44,000 units, while average hardware selling prices increased 4%. Higher volume, favorable product mix, and price increases lifted gross margin by 5.4 percentage points. Operating expenses rose 32%, reflecting investment and higher normalized spending; the quarter returned to operating profitability, but net income was lower than in Q3 2021, which included a $2.2 million PPP-loan forgiveness gain.
For the first nine months, sales increased 42.2%, while gross margin improved to 40.3%. The operating loss widened 20.5% and net loss widened year over year as operating expenses increased 36%, more than offsetting gross-profit growth. 2021 results included the $2.2 million PPP forgiveness gain; it did not recur in 2022.
Revenue mix and operating developments
- Q3 market sales: POS automation $5.2 million, up 340%; casino and gaming $7.7 million, up 91.8%; food service technology $3.7 million, up 14.2%; TSG $1.1 million, down 42.3%. Printrex sales were zero following the company’s exit from that market.
- POS automation and casino sales rebounded as production improved and the company worked through order backlogs. Casino sales remained constrained in part by the global chip shortage. International sales were $4.4 million in Q3, up 134.6%.
- Food service technology recurring revenue (software, labels, and related items) increased 27% in Q3, while hardware sales declined 6%. For the first nine months, FST sales were up 2.3%, with recurring revenue growth partly offset by lower hardware sales, including reduced sales to a national convenience-store customer.
- TSG sales declined, primarily due to fewer replacement-parts sales for legacy lottery printers. The company exited Printrex effective December 31, 2021.
Cash, debt, and liquidity
- Cash and equivalents were $6.4 million at September 30, 2022, down from $19.5 million at December 31, 2021. Current assets were $33.8 million and current liabilities $14.4 million.
- Operating cash use was $14.2 million for the first nine months, versus $3.9 million in the comparable 2021 period. Major working-capital uses included a $6.3 million increase in accounts receivable and a $3.6 million increase in inventory. Capital expenditures were $1.0 million.
- The company had $2.3 million outstanding under its asset-secured revolving Siena facility and $2.5 million of net borrowing capacity. The facility provides up to $10 million, subject to a borrowing base, and matures March 13, 2025. The company reported compliance with its excess-availability covenant.
- The amended facility requires minimum borrowings of $2.25 million while the company can direct deposit-account funds; if that control changes, interest is payable on at least that amount even if not fully borrowed. The filing expects interest expense to rise with required borrowing and market rates.
- Management stated that cash, expected operating cash flows, and available borrowing capacity should fund obligations, capital spending, and working capital for at least the next 12 months. A $1.5 million employee retention credit receivable was recorded; the company expected collection within 12 months.
Outlook, risks, and notable items
Management expected demand recovery to continue through the remainder of 2022 and into 2023, supported by a strong backlog and market expansion, and expected to continue fulfilling POS and casino printer orders. It cautioned that timing and pace depend on economic conditions. The company said price increases had offset most cost increases to date, but future inflation, shipping costs, supply constraints, or inability to pass through further costs could pressure margins and delivery.
Key risks include global supply-chain and component availability issues, inflation and rising interest rates, COVID-19-related disruption, and uncertainty from the Russia-Ukraine war, including potential effects on logistics, currencies, markets, and customer support. Management’s liquidity assessment relies on estimates of future revenue, costs, and operating conditions. The filing reported no material pending legal proceedings and no material changes to previously disclosed risks other than the Russia-Ukraine risk described.
Effective April 1, 2022, TransAct changed inventory costing from standard costing approximating FIFO to average cost and retrospectively adjusted comparative periods. The change raised nine-month 2021 gross profit by $245,000 and net income by $192,000; 2021 comparisons in this summary reflect the adjusted figures. Q3 2022 tax benefit included reversal of a U.K. deferred-tax valuation allowance. Management reported disclosure controls effective and said the new ERP implementation did not materially affect internal controls.
Important facts for investors to verify
- Whether backlog converts to sales on schedule and whether supply constraints, especially the chip shortage, continue to limit production.
- Whether Q3 sales growth and improved gross margin are sustainable as price increases, product mix, and costs evolve.
- Cash-burn trajectory, working-capital needs, collection of receivables and the employee retention credit, and dependence on the revolving facility.
- Facility borrowing-base availability, covenant compliance, required minimum borrowing terms, and the effect of higher floating rates.
- FST recurring-revenue growth and hardware trends, POS customer/order concentration, and continued weakness in TSG legacy parts revenue.
- Effects of the retrospective inventory-accounting change when comparing reported results with earlier disclosures.