TransAct Technologies Inc. (NASDAQ: TACT) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. Dollar amounts are in millions unless noted.
Business context
TransAct develops and sells software-driven technology and printing solutions for food service technology, POS automation, casino and gaming, and other markets. Its BOHA! offering combines hardware, cloud software, labels and related services. The company operates as one reportable segment.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $9.325 | $5.285 | $17.626 | $15.532 |
| Gross profit | $3.325 | $2.290 | $6.514 | $7.208 |
| Gross margin | 35.7% | 43.3% | 37.0% | 46.4% |
| Operating loss | $(2.755) | $(2.738) | $(5.421) | $(4.033) |
| Net loss | $(2.114) | $(1.853) | $(4.320) | $(2.845) |
| Diluted loss per share | $(0.24) | $(0.25) | $(0.48) | $(0.38) |
- Q2 sales rose 76%, led by Food Service Technology (FST), up 155%, POS automation, up 161%, and casino and gaming, up 155%. Lottery sales ceased following the company’s exit from that market; Q2 2020 included a final IGT purchase.
- Q2 hardware unit volume increased 93% to approximately 20,000 units. FST software, labels and other recurring revenue increased 214% to $2.066 million.
- Despite Q2 sales growth, gross margin fell 7.6 percentage points, primarily because of lower BOHA! hardware margins as the company reduced prices to grow its installed base. Higher operating expenses largely offset the gross-profit increase, leaving operating loss nearly unchanged.
- For the first half, sales increased 13.5%, but gross profit fell 9.6% and operating loss widened 34.4%. Margin pressure and operating expense growth outweighed the increase in revenue. Net loss increased to $4.320 million.
Cash, liquidity and debt
- Cash and cash equivalents were $7.960 million at June 30, down from $10.359 million at December 31, 2020. Current assets were $25.798 million and current liabilities were $6.797 million.
- Operating cash use was $3.919 million in the first half, compared with $2.309 million a year earlier. Investing activities provided $1.447 million, including collection of a $1.6 million note receivable; financing activities provided $0.146 million. Capital expenditures were $0.159 million.
- The balance sheet reported $2.173 million of long-term debt, consisting of the PPP loan. The company had no borrowings under its Siena revolving facility and reported $4.7 million of availability at June 30. The facility provides up to $10 million subject to a borrowing base and is secured by substantially all company assets.
- On July 8, 2021, the SBA and lender notified the company that the $2.2 million PPP loan, including accrued interest, was fully forgiven. The company expected to recognize the forgiveness in Q3 2021, not in the June 30 results.
- A July 21 facility amendment replaced the minimum EBITDA covenant with a requirement to maintain at least $750,000 of excess availability, tested monthly beginning July 31, 2021. Management said cash, operating cash flows and available borrowing capacity were expected to fund obligations and operations for at least 12 months after issuance.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance was provided. Management expected a gradual recovery to continue during the remainder of 2021, while warning that customer demand and the pace of recovery remained uncertain.
- The company expected casino and food-service customers to defer some capital purchases as they recover from pandemic disruption. It anticipated that pandemic-related effects could continue to weigh on sales and gross margin through at least 2021.
- Supply-chain delays and parts shortages at manufacturers in China and Thailand had so far only minimally affected customer deliveries, aided by inventory on hand. Further or prolonged disruption could impair timely product delivery.
- Management expected 2021 engineering and product-development spending to increase, including investment in FST products; selling and marketing costs were also expected to rise as spending normalized and strategic FST investment resumed. Capital expenditures and capitalized software additions for 2021 were projected at approximately $1.2 million.
- Other business changes include cessation of the dividend, with the final payment made in December 2019, and planned implementation of a new ERP system targeted for 2022. Management expected TSG sales to decline in 2021, partly due to a banking service contract expected to end during the year; Printrex sales were expected to decline over time as the company de-emphasizes that market.
- Disclosure controls were not effective as of June 30, 2021 because a material weakness remained in controls over the completeness and accuracy of key spreadsheets supporting accounting records. New controls had been implemented, but management needed additional time to validate effectiveness and expected remediation by year-end 2021. Management stated the weakness had not caused a material misstatement and the financial statements remained reliable.
- The company reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether BOHA! growth and recurring revenue can continue while hardware pricing actions and customer mix pressure gross margins.
- Whether pandemic recovery, customer purchasing and international casino demand improve as management anticipates, and whether supply-chain disruptions worsen.
- How the PPP forgiveness is recorded in Q3 and how the new excess-availability covenant affects usable revolving credit capacity.
- Whether operating cash use moderates as sales grow and working-capital balances change.
- Whether the spreadsheet-control material weakness is fully remediated and validated by the company’s stated year-end target.