TransAct Technologies Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing compares results with FY2019; quarterly figures below are for Q4 where noted. TransAct develops software-driven technology and printing solutions, with a strategic emphasis on its BOHA! food-service technology ecosystem and casino and gaming products.
Financial results and liquidity
- Revenue: $30.6 million, down 33.1% from $45.7 million. Food-service technology revenue rose 26.7% to $7.7 million, including a 96.2% increase in software, labels and other recurring revenue to $3.8 million. Casino and gaming revenue fell 49.0% to $11.0 million.
- Profitability: Gross profit was $12.9 million, down 41.1%; gross margin was 42.3%, versus 47.9%. Operating loss was $8.2 million, compared with operating income of $0.3 million. Net loss was $5.6 million, or $0.72 per diluted share, versus net income of $0.5 million, or $0.07 per diluted share. A $2.5 million income-tax benefit partly reduced the loss.
- Cash flow: Cash used in operating activities was $3.5 million, versus $4.8 million provided in 2019. Investing activities used $1.3 million, including $0.6 million lent to a third-party software developer. Financing activities provided $11.0 million, chiefly from the stock offering and PPP loan.
- Cash and debt: Cash and cash equivalents were $10.4 million at year-end, up from $4.2 million. Long-term debt included the $2.2 million PPP loan; no borrowings were outstanding on the Siena revolving facility. The company reported $4.5 million of borrowing capacity available under that facility at year-end. Operating lease liabilities totaled $3.7 million.
- Other: Capital expenditures and capitalized software additions were $0.7 million. The quarterly dividend was discontinued in January 2020; no dividend was paid for FY2020.
Material changes versus FY2019
- COVID-19-related closures and operating restrictions weighed on customer demand, especially in casino and gaming and food service. Total hardware unit volume fell 44%; gross margin declined 560 basis points, primarily as lower sales reduced absorption of fixed manufacturing overhead.
- Food-service technology was the only reported market with higher annual sales. POS automation and banking declined 34.5%, lottery 36.7%, Printrex 74.3%, and TransAct Services Group (TSG) 29.3%.
- The company raised $8.7 million net from an October 2020 offering of 1.38 million shares, increasing shares outstanding. It also received a $2.2 million PPP loan and entered a new, secured, asset-based revolving facility in March 2020.
- Operating expenses declined 2% overall, despite higher product-development spending, as selling and marketing costs fell. Engineering, design and product development expense rose 29.8% to $5.7 million.
- Q4 revenue was $7.8 million, versus $11.2 million in Q4 2019; Q4 net loss was $1.9 million, versus net income of $0.8 million.
Outlook, risks and unusual items
- Management expected demand to remain below 2019 levels at least through the first half of 2021, with continued uncertainty around pandemic effects and customer recovery. It expected 2021 operating expenses to rise significantly as it resumed investment in food-service sales, marketing and product development; 2021 capital expenditures and capitalized software additions were estimated at approximately $1.4 million.
- Management stated that cash, expected operating cash flows, available borrowing capacity and cost controls should fund operations and liquidity needs for at least the next 12 months. This outlook depends on uncertain assumptions about customer reopening and recovery; management said additional cost reductions or capital raising could be considered if needed.
- The $2.2 million PPP loan had not been submitted for forgiveness as of the filing. Forgiveness was uncertain; absent forgiveness, the filing said $1.5 million of principal and interest would be due in 2021, with the balance due in 2022.
- Key risks include prolonged weakness in food service and gaming, reliance on two Asian contract manufacturers and a third-party BOHA! software developer and host, customer concentration (IGT represented 15% of sales), supply-chain disruption, and the risk that BOHA! investment does not generate sufficient growth. The Siena facility has a borrowing base and financial covenants; the company reported compliance at year-end.
- Management reported one remaining material weakness in internal control over financial reporting, involving completeness and accuracy controls for key spreadsheets. A separate user-access weakness was remediated in 2020. Management concluded internal controls and disclosure controls were not effective at year-end; the auditor’s opinion on the financial statements was unmodified, and the auditor did not express an opinion on control effectiveness.
- The company performed interim and annual impairment assessments and reported no goodwill or intangible-asset impairment. The auditor identified revenue recognition for a new bundled BOHA! service offering as a critical audit matter; FY2020 revenue from that offering was approximately $0.9 million, and management made judgments about performance obligations, pricing allocation and financing components. No material pending or threatened legal proceedings were reported.
Important facts for investors to verify
- Whether BOHA! subscription, label and other recurring revenue growth persists, and how much is recurring versus hardware or distributor stocking orders.
- The pace of recovery in restaurant and casino customer spending, and the resulting effect on sales, gross margin and cash generation.
- Progress remediating the spreadsheet-control weakness and whether future filings report effective internal controls.
- The status and amount of PPP loan forgiveness, and any associated repayment obligations.
- Current borrowing-base availability and covenant compliance under the Siena facility, alongside the company’s cash use and financing needs.
- Collection of the $1.7 million note receivable from the BOHA! software developer and continuity of the licensed software and hosting relationship.