TransAct Technologies Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Business context and reporting period
TransAct develops software-driven technology and printing solutions for food service, POS automation, casino and gaming, and other markets, and sells related supplies and services. The company operates as one reportable segment. COVID-19 disrupted customer demand and supply chains, particularly in food service and casino and gaming. Management reported a modest demand recovery in Q3 versus Q2, but sales remained below 2019 levels.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $7.30 | $11.69 | $22.83 | $34.59 |
| Gross profit | $3.35 | $5.55 | $10.56 | $17.34 |
| Gross margin | 45.9% | 47.5% | 46.2% | 50.1% |
| Operating income (loss) | $(1.48) | $0.31 | $(5.51) | $1.40 |
| Net income (loss) | $(0.87) | $0.38 | $(3.71) | $1.32 |
| Diluted earnings (loss) per share | $(0.11) | $0.05 | $(0.49) | $0.17 |
- Q3 sales fell 37.5% year over year; nine-month sales fell 34.0%. Casino and gaming revenue declined 60.4% in Q3 and 48.7% year to date. Q3 POS automation and banking revenue decreased 51.0%.
- Food service technology revenue rose 20.4% in Q3 and 14.9% year to date. Software, labels and other recurring food service revenue grew 157% in Q3 and 129% for the first nine months; hardware sales declined.
- Q3 gross margin fell 160 basis points year over year; nine-month gross margin fell 390 basis points, primarily reflecting fixed manufacturing overhead against lower sales.
- Operating expenses were $4.83 million in Q3, down 8% year over year. Engineering and product development expense increased as the company continued investment in food service technology.
- Operating cash flow was negative $4.23 million for the first nine months, compared with positive $0.85 million in 2019. Investing cash outflow was $1.23 million and financing cash inflow was $2.20 million. Cash declined $3.26 million to $0.95 million at September 30.
- At September 30, current assets were $19.77 million and current liabilities were $6.85 million. The balance sheet included $2.17 million of long-term debt, reflecting the PPP loan, and $3.91 million of lease liabilities. No Siena revolver borrowings were outstanding at quarter-end; additional borrowing capacity was reported at $6.6 million.
Material changes and capital actions
- The company received a $2.2 million Paycheck Protection Program loan in May 2020, bearing 1% interest and maturing in May 2022. It intends to seek forgiveness, but forgiveness and its amount depend on SBA approval.
- On October 16, 2020, after quarter-end, TransAct completed an offering of 1.38 million shares at $7.10 per share and reported approximately $8.7 million in net proceeds. The company expected to use the proceeds for working capital and general corporate purposes.
- The quarterly dividend was discontinued in January 2020; the final payment was made in December 2019. No dividend was paid in the first nine months of 2020.
- TransAct exited the lottery market: IGT made its final printer purchase in Q2 2020, and the company does not expect further lottery printer sales.
Outlook, risks and unusual items
- Management expected Q4 2020 to remain negatively affected by COVID-19. It anticipated a gradual recovery but noted substantial uncertainty around the pandemic, reopening restrictions and customer spending. Restaurants and casinos could defer capital purchases; oil and gas weakness could continue to weigh on Printrex sales.
- Management stated that cash, expected operating cash flows, the October offering proceeds, revolver availability and cost reductions were expected to fund requirements for at least 12 months after issuance of the financial statements. This assessment depends on assumptions about demand recovery; further cost reductions or capital raising could be needed if recovery is slower than expected.
- Cost actions included a workforce reduction of approximately 20% beginning in July, salary and commission reductions, lower director retainers and reduced discretionary spending. Capital expenditures were curtailed.
- Supply chain delays at contract manufacturers in China and Thailand had minimally affected deliveries to date, partly because of inventory and weaker demand, but sustained disruption could impair the company’s ability to supply customers.
- The March 2020 goodwill and intangible asset impairment assessment found no impairment. No new Q3 triggering event was identified, but management cautioned that prolonged COVID-19 disruption could lead to future impairment.
- The company reported compliance with Siena facility covenants at September 30. The facility is secured by substantially all company assets and has a minimum EBITDA covenant. PPP loan forgiveness remained unresolved.
- Disclosure controls were deemed ineffective because a material weakness concerning completeness and accuracy of key accounting spreadsheets remained unremediated. A separate ERP access-control weakness was reported as remediated. Management stated that the interim financial statements were fairly stated and reliable.
Most important facts for investors to verify
- Whether demand, especially in casino and gaming and food service, recovered as management assumed, and how that affected revenue, margins and operating cash flow.
- Whether the PPP loan was forgiven, and whether the company maintained covenant compliance and sufficient borrowing availability.
- How the $8.7 million offering proceeds affected cash runway, share dilution and the need for additional financing.
- Whether BOHA! recurring revenue growth continued beyond distributor stocking orders and whether food service hardware demand improved.
- Whether the remaining spreadsheet-control material weakness was remediated and whether any future impairment or supply disruption arose.