TransAct Technologies Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial amounts below are in millions of dollars unless otherwise stated. TransAct develops software-driven technology and printing solutions for restaurant, POS and banking, casino and gaming, lottery, and other markets; it reports one operating segment. Its BOHA! cloud-software and hardware suite, launched in 2019, targets restaurant back-of-house operations.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $11.686 | $15.838 | $34.586 | $42.832 |
| Gross profit / margin | $5.546 / 47.5% | $8.004 / 50.5% | $17.336 / 50.1% | $20.857 / 48.7% |
| Operating income / margin | $0.312 / 2.7% | $3.212 / 20.3% | $1.398 / 4.0% | $5.686 / 13.3% |
| Net income | $0.384 | $2.574 | $1.316 | $4.464 |
| Diluted EPS | $0.05 | $0.33 | $0.17 | $0.57 |
| Operating cash flow | Not stated for the quarter | $0.848 | $3.497 |
Q3 sales fell 26%; hardware unit volume declined 37% to approximately 27,000 units. The principal revenue decline was casino and gaming, down 39% to $5.074 million, reflecting the absence of a large prior-year domestic replacement-printer order and lower OEM sales. Lottery revenue fell 86% to $0.095 million. Restaurant solutions rose 32% to $1.951 million, driven by software, labels and recurring revenue; TSG declined 10%, and POS automation and banking declined 22%.
For the first nine months, sales declined 19%, with casino and gaming down 24%, POS automation and banking down 25%, and lottery down 48%. Restaurant solutions grew 9%, as software, labels and other recurring revenue increased 291%, partly offset by lower hardware sales. Gross margin improved 140 basis points year to date on lower manufacturing overhead and a more favorable mix, but Q3 margin declined 300 basis points versus the unusually strong prior-year quarter.
Liquidity, debt and other financial items
- Cash and cash equivalents were $1.207 million at September 30, down $3.484 million from year-end 2018; $0.2 million was held by the U.K. subsidiary. Current assets were $25.309 million and current liabilities $6.843 million.
- No borrowings were outstanding under the $20 million revolving credit facility; after a lender waiver, the company reported the full $20 million available. It failed the operating-cash-flow-to-total-debt-service covenant at September 30 (reported calculation: negative 21.1x versus a 1.25x minimum). TD Bank waived compliance on November 6, 2019 and amended the covenant’s interest-expense definition.
- Nine-month investing cash use was $2.100 million, including a $1 million loan to an unrelated party, due February 2020 at 4.5%. Financing cash use was $2.225 million, including $2.011 million of dividends. The quarterly dividend was $0.09 per share; the board approved the same amount for Q4.
- ASC 842 adoption added a $3.7 million right-of-use asset and $3.9 million lease liability at adoption. At September 30, lease liabilities totaled $3.261 million; adoption did not affect income or cash flow.
- The company recorded income tax benefits of $0.143 million in Q3 and $0.054 million year to date, partly reflecting the FDII deduction and near-breakeven pretax income.
Outlook, risks and unusual items
- No consolidated revenue or earnings forecast is provided. Management expected full-year 2019 gross margin to be consistent with 2018; engineering expense slightly lower; selling and marketing expense significantly higher; and G&A expense higher. It expected lottery sales to be significantly lower and TSG sales to decline versus 2018.
- BOHA! customer commitments included an initial 1,000-location deployment with a large international foodservice brand, with potential for 2,000–3,000 additional locations over two to three years subject to store expansion and rollout success. Other announced deployments included more than 400 locations by the end of 2021 and 45 locations for a regional operator. These are plans and commitments, not completed deployments.
- Management said cash, operating cash flows and available credit should cover working capital, capital spending, dividends and liquidity needs for at least 12 months. Full-year 2019 capital expenditures and capitalized software costs were expected to be about $1.3 million; expected dividends were about $2.7 million.
- Internal control over financial reporting and disclosure controls were deemed ineffective as of September 30 due to material weaknesses in Oracle user-access/segregation controls and controls over spreadsheet completeness and accuracy. Management said the weaknesses had not caused a material misstatement in the periods presented, but could allow future misstatements to go undetected. The company planned remediation and said it would amend its 2018 Form 10-K to reflect the control conclusion.
- Other risks include variable, project-driven casino, gaming and lottery orders; reliance on customers and OEMs, including IGT and McDonald’s-related printer demand; foreign-exchange exposure; and uncertainty around Brexit. Management did not expect Brexit to have a material consolidated impact based on U.K. operations’ 10% revenue contribution, but could not predict the outcome.
Investor verification priorities
- Check progress and independent validation of remediation for the two material weaknesses, and review the amended 2018 Form 10-K.
- Monitor covenant compliance after the waiver and amendment, cash burn, and continued access to the revolving facility.
- Verify BOHA! rollout timing, customer conversions, recurring software and label revenue, and whether announced deployment potential becomes realized sales.
- Assess whether casino/gaming demand and large-order timing recover, and track ongoing declines in lottery, POS/banking and TSG revenue.
- Evaluate the sustainability of the dividend against operating cash generation and the company’s liquidity needs.