TransAct Technologies Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 16, 2020. This annual filing also reports fourth-quarter results. TransAct develops software-driven technology and printing solutions, with strategic emphasis shifting toward food service technology and casino and gaming.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $45.748 million | $54.587 million |
| Gross profit / margin | $21.935 million / 47.9% | $26.743 million / 49.0% |
| Operating income / margin | $0.343 million / 0.7% | $6.759 million / 12.4% |
| Net income | $0.516 million | $5.426 million |
| Diluted earnings per share | $0.07 | $0.70 |
| Cash from operating activities | $4.846 million | $5.109 million |
- Sales fell 16.2%. Gross margin declined 110 basis points, while operating expenses rose 8.0% to $21.592 million, reflecting investment in BOHA! and higher selling and administrative costs.
- Cash and cash equivalents were $4.203 million at year-end; total assets were $36.061 million and shareholders’ equity was $25.926 million. The company reported no borrowings outstanding.
- Current assets were $24.915 million and current liabilities $7.646 million. The balance sheet included a $1.017 million note receivable; the filing says the loan bears 4.5% interest and was due in April 2020.
- Capital expenditures and capitalized software additions totaled approximately $1.366 million. Dividends paid were $2.683 million, or $0.36 per share. Management said the board ended the quarterly dividend, with the final payment made in December 2019.
Fourth-quarter results
Fourth-quarter 2019 net sales were $11.162 million versus $11.755 million in fourth-quarter 2018. Gross profit was $4.599 million versus $5.886 million. TransAct recorded a fourth-quarter net loss of $0.800 million, or $0.11 per diluted share, compared with net income of $0.962 million, or $0.12 per diluted share, a year earlier.
Business changes and outlook
- Food service technology sales increased 20% to $6.104 million. Software, labels and other recurring revenue rose 264% to $1.935 million, while hardware sales declined 8.5%. BOHA!, launched in 2019, combines cloud software subscriptions with terminals and related hardware.
- Casino and gaming sales decreased 19% to $21.529 million, partly because large 2018 orders did not recur. POS automation and banking declined 20.8% to $5.758 million; lottery fell 58.3% to $1.291 million; and TSG decreased 12.0% to $9.900 million.
- TransAct allowed its IGT lottery agreement to expire at year-end 2019 and expects a final lottery-printer purchase in 2020, with no subsequent lottery sales expected. It exited banking at the end of 2018 and Printrex at the end of 2018, while continuing certain legacy orders during 2020.
- Management expects food service technology sales to increase in 2020 and plans higher investment in BOHA! product development, engineering, sales and marketing. It expects operating expenses to increase more significantly than in 2019; POS, lottery-related and TSG sales are expected to decline. No quantified full-year revenue or earnings guidance is provided.
- International Gaming Technology (IGT) accounted for 14% of 2019 sales, down from 18% in 2018. Backlog was approximately $5.7 million as of February 29, 2020; the company expected to recognize $5.4 million during 2020.
Risks, contingencies and unusual items
- Internal controls: Management and the auditor concluded that internal control over financial reporting was ineffective at December 31, 2019 because of material weaknesses in ERP user access/segregation of duties and controls over key spreadsheets. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal controls. Management had begun remediation; the weaknesses were not yet fully remediated.
- Supply chain and coronavirus: Approximately 80% of printer and terminal manufacturing was conducted by a contract manufacturer in China and 19% by one in Thailand. The filing reported that coronavirus-related restrictions had delayed shipments during 2020; the eventual impact was uncertain. TransAct was also seeking to shift more production from China to Thailand in response to tariffs.
- Customer and supplier concentration: IGT remains a significant customer. TransAct relies heavily on two Asian manufacturers and identifies sole-source or concentrated supply risks, including suppliers of printer mechanisms and inkjet consumables.
- 2020 financing and other subsequent events: On March 13, 2020, TransAct replaced its TD Bank facility with a $10 million revolving Siena facility, secured by substantially all company assets, with a borrowing base and financial covenants. It also advanced an additional $0.6 million to the third-party borrower, bringing the note’s stated principal to $1.6 million.
- Gross margin included approximately $0.2 million of Chinese tariff costs and a $0.4 million write-off of tooling tied to a product design change. The company reported a $0.149 million income tax benefit, primarily reflecting R&D credits against near-break-even pretax income.
- Other disclosed exposures include foreign-currency movements, Brexit-related uncertainty, competition, product acceptance, and the possibility of deferred-tax-asset valuation adjustments. Management reported no legal proceedings expected to have a material adverse effect and no material off-balance-sheet arrangements.
Key investor verification points
- Track BOHA! adoption, subscription and label revenue growth, customer retention, and the spending needed to scale the business.
- Verify whether the decline in legacy-market revenue and the loss of lottery sales after 2020 are offset by growth in food service technology and casino and gaming.
- Monitor remediation and independent validation of the disclosed material weaknesses in financial reporting controls.
- Confirm collection and repayment of the note receivable, including the additional advance, and assess the borrower’s creditworthiness.
- Assess the operational and financial effects of coronavirus-related manufacturing delays, tariffs, and any production transfer from China to Thailand.
- Review the Siena facility’s borrowing-base availability, covenants, fees and actual use, as well as the consequences of ending the dividend.