TransAct Technologies Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020. TransAct develops and sells software-driven technology and printing solutions, including BOHA! food-service products, POS printers, casino and gaming printers, and related supplies and services. It operates as one reportable segment. The filing was delayed under SEC COVID-19 relief, citing disruption to finance and accounting processes and additional pandemic-related analysis.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $10.247 million | $11.550 million; down 11.3% |
| Gross profit / margin | $4.918 million / 48.0% | $6.086 million / 52.7% |
| Operating income (loss) | $(1.295) million; (12.6)% margin | $0.777 million; 6.7% margin |
| Net income (loss) | $(0.992) million; $(0.13) per diluted share | $0.746 million; $0.10 per diluted share |
| Operating cash flow | $(3.571) million | $(1.554) million |
| Cash and cash equivalents | $0.615 million at March 31 | $4.203 million at December 31, 2019 |
- Cash used in investing was $0.928 million, including $0.600 million lent to an unaffiliated third party; cash provided by financing was $0.905 million, including net revolving-credit borrowings.
- At March 31, total assets were $35.787 million, current assets $20.986 million, and current liabilities $6.473 million. Revolver borrowings were $0.794 million. Lease liabilities totaled $4.336 million, including current and long-term amounts.
- The Siena revolving facility provides up to $10 million subject to a borrowing base; the company reported $6.8 million of additional availability at March 31. It is secured by substantially all company assets and includes a minimum-EBITDA covenant.
Material changes versus the prior comparable period
- Revenue declined $1.303 million. Casino and gaming sales fell 10.1% to $4.931 million; lottery sales were nil versus $0.697 million after the company exited that market; Printrex sales fell 65.8% to $0.117 million; and TSG sales fell 10.6% to $2.270 million. Food-service technology increased 13.0% to $1.371 million, while POS automation and banking increased 22.0% to $1.558 million.
- Within food-service technology, software, labels and other recurring revenue rose 98.7% to $0.616 million, while hardware sales declined 16.4%. POS growth was driven largely by higher Ithaca 9000 printer sales, including sales to McDonald’s.
- Gross margin declined 4.7 percentage points, reflecting product mix, higher tariffs on imports from China, and fixed manufacturing overhead against lower sales. Operating expenses rose 17%, including continued food-service product development and sales and marketing investment.
- Cash fell $3.588 million during the quarter. Operating cash use increased from the prior year, reflecting the net loss and working-capital movements, including inventory accumulation and payments of accounts payable and annual bonuses.
- The quarterly dividend was discontinued in January 2020; the final payment was made in December 2019. The company paid $0.668 million in dividends in Q1 2019.
Outlook, risks and unusual items
- Management said COVID-19 reduced demand, particularly from food-service and casino customers, with lower-than-expected sales in the second half of March; the trend continued through April and into May. Based on orders booked to date, management expected Q2 2020 sales to be significantly below Q1 and expected pandemic-related weakness to persist through at least the remainder of Q2 and likely through year-end. No numerical sales guidance was provided.
- Management expected lower sales to pressure gross margin through fixed overhead costs. It also anticipated weaker customer capital spending, lower TSG sales, and reduced Printrex sales amid oil-market weakness. Delayed shipments from contract manufacturers in China and Thailand were a supply-chain risk; together they account for approximately 99% of printer and terminal manufacturing.
- Cost actions included furloughing about 10% of the workforce before PPP proceeds, 10% salary cuts for salaried non-commissioned employees, reduced commissions and director retainers, and discretionary-spending reductions. Capital spending was curtailed.
- After quarter-end, on May 1, the company received a $2.2 million PPP loan at 1% interest, maturing May 1, 2022. Forgiveness is conditional on qualifying use of proceeds and SBA approval; forgiveness was not assured. Management said the proceeds enabled furloughed employees to return to full-time employment.
- Management concluded cash, expected operating cash flows, credit availability, the PPP loan and cost savings would fund needs for at least 12 months. This assessment depends on assumptions about customer reopening and recovery; slower recovery could require further cost reductions or capital raising. The company reported no goodwill or intangible-asset impairment from its March 31 review, but warned future impairment remains possible.
- The company recorded a $0.465 million income-tax benefit, partly reflecting an expected 2020 net operating loss carryback under the CARES Act. Other expense was $0.165 million, primarily from foreign-currency losses, versus other income of $0.090 million a year earlier.
- Disclosure controls were not effective at March 31 because previously identified material weaknesses in ERP user-access controls and spreadsheet controls had not been fully remediated. Management stated the financial statements were fairly stated in all material respects and could be relied upon. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether customer demand, especially in food service and casino markets, recovered as assumed, and how that affected subsequent revenue, margins and cash flow.
- PPP loan forgiveness status and the company’s continuing liquidity, borrowing-base availability and compliance with the Siena facility’s EBITDA covenant.
- Whether supplier delays, customer payment issues or inventory obsolescence affected deliveries, working capital or results after March 31.
- Whether the goodwill and intangible-asset impairment assessment remained supportable as pandemic and market conditions evolved.
- Progress in remediating the ERP-access and spreadsheet-control material weaknesses.