TransAct Technologies rporated(TACT) - 2021 Q3 - Quarterly Report

PART I - Financial Information Item 1. Financial Statements (unaudited) This section presents TransAct Technologies Inc.'s unaudited condensed consolidated financial statements and detailed notes Condensed Consolidated Balance Sheets Total assets increased from $42.2 million to $48.3 million, liabilities decreased, and equity rose significantly | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Cash and cash equivalents | $18,658 | $10,359 | $8,299 | 80.1% | | Accounts receivable, net | $6,501 | $3,377 | $3,124 | 92.5% | | Inventories | $6,369 | $11,286 | $(4,917) | -43.6% | | Total assets | $48,349 | $42,247 | $6,102 | 14.4% | | Total liabilities | $9,069 | $12,011 | $(2,942) | -24.5% | | Total shareholders' equity | $39,280 | $30,236 | $9,044 | 30.0% | Condensed Consolidated Statements of Operations Net sales increased significantly, with Q3 2021 showing $0.9 million net income due to debt forgiveness Three Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Net sales | $10,637 | $7,300 | $3,337 | 45.7% | | Gross profit | $4,317 | $3,349 | $968 | 28.9% | | Operating loss | $(1,604) | $(1,479) | $(125) | 8.5% | | Gain on forgiveness of long-term debt | $2,173 | $0 | $2,173 | N/A | | Net income (loss) | $910 | $(867) | $1,777 | -204.9% | | Basic EPS | $0.10 | $(0.11) | $0.21 | -190.9% | | Diluted EPS | $0.09 | $(0.11) | $0.20 | -181.8% | Nine Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Net sales | $28,263 | $22,832 | $5,431 | 23.8% | | Gross profit | $10,831 | $10,557 | $274 | 2.6% | | Operating loss | $(7,025) | $(5,512) | $(1,513) | 27.4% | | Gain on forgiveness of long-term debt | $2,173 | $0 | $2,173 | N/A | | Net income (loss) | $(3,410) | $(3,712) | $302 | -8.1% | | Basic EPS | $(0.37) | $(0.49) | $0.12 | -24.5% | | Diluted EPS | $(0.37) | $(0.49) | $0.12 | -24.5% | Condensed Consolidated Statements of Comprehensive Income (Loss) Q3 2021 comprehensive income was $0.9 million, a significant improvement, and nine-month comprehensive loss decreased Three Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Net income (loss) | $910 | $(867) | $1,777 | -204.9% | | Foreign currency translation adjustment, net of tax | $23 | $(84) | $107 | -127.4% | | Comprehensive income (loss) | $933 | $(951) | $1,884 | -198.1% | Nine Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Net income (loss) | $(3,410) | $(3,712) | $302 | -8.1% | | Foreign currency translation adjustment, net of tax | $108 | $(3) | $111 | -3700.0% | | Comprehensive income (loss) | $(3,302) | $(3,715) | $413 | -11.1% | Condensed Consolidated Statements of Cash Flows Cash and cash equivalents increased significantly, driven by $11.5 million from a public offering Nine Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Net cash used in operating activities | $(3,939) | $(4,232) | $293 | -6.9% | | Net cash provided by (used in) investing activities | $802 | $(1,234) | $2,036 | -165.0% | | Net cash provided by financing activities | $11,500 | $2,201 | $9,299 | 422.5% | | Increase (decrease) in cash and cash equivalents | $8,299 | $(3,256) | $11,555 | -354.9% | | Cash and cash equivalents, end of period | $18,658 | $947 | $17,711 | 1870.2% | Condensed Consolidated Statements of Changes in Shareholders' Equity Total shareholders' equity increased significantly due to common stock issuance from a public offering and share-based compensation Nine Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Equity beginning balance | $30,236 | $25,926 | $4,310 | 16.6% | | Issuance of common stock, net of issuance cost | $11,201 | $0 | $11,201 | N/A | | Share-based compensation expense | $952 | $644 | $308 | 47.8% | | Net income (loss) | $(3,410) | $(3,712) | $302 | -8.1% | | Equity ending balance | $39,280 | $23,168 | $16,112 | 69.5% | Notes to Condensed Consolidated Financial Statements These notes provide context for financial statements, covering accounting policies, COVID-19 impact, revenue, debt, and taxes Basis of presentation Unaudited interim financial statements are prepared under U.S. GAAP, not including all annual disclosures, and are fairly presented - The accompanying unaudited financial statements are prepared in accordance with U.S. GAAP for interim financial information and do not include all information and footnotes required for full-year statements[18] - Management believes all adjustments necessary for a fair statement of results have been included and are of a normal recurring nature[18] - The results of operations for the three and nine months ended September 30, 2021, are not necessarily indicative of the results to be expected for the full year ending December 31, 2021[20] Impact of the COVID-19 Pandemic COVID-19 negatively impacted demand and supply chains; the company mitigated effects via cost savings, offerings, and PPP loan forgiveness - The COVID-19 pandemic negatively impacted customer demand and disrupted supply chains, with a modest recovery starting in the second half of 2020 and continuing into 2021[21] - The company raised net proceeds of $8.7 million in October 2020 and $11.3 million in August 2021 through underwritten public offerings of common stock[22] - The $2.2 million PPP Loan granted on May 1, 2020, was fully forgiven as of July 1, 2021[22] Use of Assumptions and Estimates Management's ability to fund operations relies on judgments and estimates, anticipating negative sales impact through 2021 - Management's belief in funding planned operations for the next 12 months is based on assumptions involving significant judgment and estimates of future revenues, capital expenditures, and operating costs[24] - Current assumptions anticipate that sales in casino and gaming and food service technology will continue to be negatively impacted through at least 2021, despite casinos and restaurants gradually increasing capacity[24] - The presentation of financial statements requires estimates and judgments affecting reported amounts of assets, liabilities, revenue, and expenses, including revenue recognition, inventory obsolescence, and deferred tax assets[25] Revenue Total net sales increased 45.7% to $10.6 million (Q3) and 23.8% to $28.3 million (9 months), driven by market growth Total Net Sales by Market Type (Three Months Ended September 30) | Market Type | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Food service technology | $3,282 | $2,349 | $933 | 39.7% | | POS automation | $1,188 | $742 | $446 | 60.1% | | Casino and gaming | $4,036 | $2,009 | $2,027 | 100.9% | | Printrex | $160 | $107 | $53 | 49.5% | | TransAct Services Group | $1,971 | $2,093 | $(122) | -5.8% | | Total net sales | $10,637 | $7,300 | $3,337 | 45.7% | Total Net Sales by Market Type (Nine Months Ended September 30) | Market Type | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Food service technology | $9,103 | $4,924 | $4,179 | 84.9% | | POS automation | $3,608 | $2,781 | $827 | 29.7% | | Casino and gaming | $10,368 | $8,300 | $2,068 | 24.9% | | Lottery | $0 | $817 | $(817) | -100.0% | | Printrex | $431 | $232 | $199 | 85.8% | | TransAct Services Group | $4,753 | $5,778 | $(1,025) | -17.7% | | Total net sales | $28,263 | $22,832 | $5,431 | 23.8% | Contract balances Total net contract liabilities increased from $50k (asset) to $(342)k (liability), primarily due to deferred revenue Total Net Contract (Liabilities) Assets | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Unbilled receivables, current | $306 | $290 | | Unbilled receivables, non-current | $376 | $591 | | Customer pre-payments | $(49) | $(216) | | Deferred revenue, current | $(768) | $(504) | | Deferred revenue, non-current | $(207) | $(111) | | Total net contract (liabilities) assets | $(342) | $50 | - The company recognized $0.6 million of revenue related to contract liabilities at December 31, 2020, during the nine months ended September 30, 2021[30] Remaining performance obligations As of September 30, 2021, $4.6 million in remaining performance obligations, mostly expected within 12 months - Aggregate amount of transaction prices allocated to remaining performance obligations was $4.6 million as of September 30, 2021[31] - The company expects to recognize $4.1 million of its remaining performance obligations within the next 12 months, $0.4 million within the next 24 months, and the balance within the next 36 months[31] Note receivable The company collected the remaining $1.6 million principal and interest on a note receivable in March 2021 - In March 2021, the company received payment of $1.6 million, representing the remaining principal balance and interest due from a third-party software developer[32] Interest Income from Note Receivable | Period | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Three months ended Sep 30 | $0 | $18 | | Nine months ended Sep 30 | $17 | $49 | Inventories Total inventories decreased by 43.6% from $11.3 million to $6.4 million, due to reductions in raw materials and finished goods Inventories | Component | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Raw materials and purchased component parts | $4,213 | $5,467 | | Finished goods | $2,156 | $5,819 | | Total inventories | $6,369 | $11,286 | Accrued product warranty liability Accrued product warranty liability decreased from $140k to $109k, with $70k in settlements during the period Accrued Product Warranty Liability Activity (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Balance, beginning of period | $140 | $215 | | Warranties issued | $39 | $53 | | Warranty settlements | $(70) | $(107) | | Balance, end of period | $109 | $161 | - As of September 30, 2021, $88k of the accrued product warranty liability was current, and $21k was non-current[35] Debt The $2.2 million PPP Loan was forgiven, and the Siena Credit Facility covenant was amended, with $4.2 million available - The Siena Credit Facility provides a revolving credit line of up to $10.0 million, expiring on March 13, 2023[36] - On July 21, 2021, the Siena Credit Facility's financial covenant was amended from a minimum EBITDA covenant to an excess availability covenant of at least $750 thousand[37] - As of September 30, 2021, the company had no outstanding borrowings under the Siena Credit Facility and $4.2 million of borrowing capacity available[37] - The $2.2 million PPP Loan was fully forgiven by the SBA as of July 1, 2021, and reported as a 'Gain on forgiveness on long-term debt' in the Condensed Consolidated Statement of Operations[39] Earnings per share Basic EPS for Q3 2021 was $0.10 (vs $(0.11) in 2020), and nine-month EPS was $(0.37) (vs $(0.49) in 2020) Net Income (Loss) Per Common Share (Three Months Ended September 30) | Metric | 2021 | 2020 | | :---------------------------------------- | :--- | :---- | | Net income (loss) | $910 | $(867) | | Basic EPS | $0.10 | $(0.11) | | Diluted EPS | $0.09 | $(0.11) | | Basic shares (thousands) | 9,408 | 7,548 | | Diluted shares (thousands) | 9,846 | 7,548 | Net Income (Loss) Per Common Share (Nine Months Ended September 30) | Metric | 2021 | 2020 | | :---------------------------------------- | :--- | :---- | | Net income (loss) | $(3,410) | $(3,712) | | Basic EPS | $(0.37) | $(0.49) | | Diluted EPS | $(0.37) | $(0.49) | | Basic shares (thousands) | 9,112 | 7,533 | | Diluted shares (thousands) | 9,112 | 7,533 | Shareholders' equity The Board of Directors ceased the quarterly cash dividend program in January 2020 to accelerate investment in the BOHA! ecosystem - The Board of Directors announced the cessation of the quarterly cash dividend program on January 23, 2020, with the final payment made in December 2019[42] Leases Operating lease expense for Q3 2021 was $235k, and lease liabilities decreased from $3.7 million to $2.8 million Operating Lease Expense | Period | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Three months ended Sep 30 | $235 | $243 | | Nine months ended Sep 30 | $717 | $735 | Lease Liabilities and Terms | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Total lease liabilities | $2,772 | $3,701 | | Weighted average remaining lease term (years) | 3.7 | 4.9 | | Weighted average discount rate | 4.4% | 4.1% | Income taxes An income tax benefit was recorded, with Q3 2021 benefit significantly impacted by non-taxable PPP Loan forgiveness Income Tax Benefit and Effective Tax Rate | Period | Income Tax Benefit (in thousands) | Effective Tax Rate | | :---------------------- | :-------------------------- | :----------------- | | Three months ended Sep 30, 2021 | $439 | -93.2% | | Three months ended Sep 30, 2020 | $515 | 37.3% | | Nine months ended Sep 30, 2021 | $1,682 | 33.0% | | Nine months ended Sep 30, 2020 | $1,901 | 33.9% | - The tax benefit for the third quarter of 2021 was due to the recognition of the gain on the forgiveness of the PPP Loan, which is not taxable[47] - The company recognized $24 thousand of previously unrecognized tax benefits in the third quarter of 2021 as the statute of limitations on the 2017 research and development credit expired[49] Subsequent events The company evaluated all events up to the issuance date and identified no additional subsequent events requiring adjustment or disclosure - The company did not identify any additional subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements[51] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, highlighting COVID-19 impact, revenue/expense analysis, and liquidity Forward Looking Statements This section contains forward-looking statements involving risks and uncertainties, which the company does not undertake to update - This report contains forward-looking statements that involve risks and uncertainties, including those related to the COVID-19 pandemic, which could cause actual results to differ materially[52] - The company does not undertake any obligation to update forward-looking statements to reflect the impact of subsequent events or circumstances, except as required by law[52] Overview TransAct is a global leader in software-driven technology and printing solutions for high-growth markets, operating in one segment - TransAct is a global leader in developing and selling software-driven technology and printing solutions for high-growth markets[53] - Key markets include food service technology (BOHA!), point of sale (POS) automation, casino and gaming, and oil and gas (Printrex)[53] - The company operates in one reportable segment, focusing on the design, development, and marketing of software-driven technology and printing solutions, and providing related services, supplies, and spare parts[53] Impact of the COVID-19 Pandemic COVID-19 continued to negatively impact demand, but the company enhanced liquidity through offerings and PPP loan forgiveness - The COVID-19 pandemic continued to cause massive economic and social disruptions, negatively impacting demand for products, particularly in food service technology and casino and gaming markets[55][56] - The company raised net proceeds of $11.3 million from an underwritten public offering in August 2021 and had its $2.2 million PPP Loan fully forgiven in July 2021, enhancing liquidity[67] - Gross margin has been negatively impacted by lower sales levels and increased material and shipping costs due to worldwide supply disruptions caused by the pandemic[62] - The company implemented work-from-home practices and new COVID-19 safety policies, and as of October 4, 2021, all employees were fully vaccinated, leading to a return-to-work plan[65][66] Critical Accounting Judgments and Estimates Financial statements require significant estimates and judgments, including revenue recognition, inventory, and deferred tax assets - The presentation of financial statements requires management to make estimates and judgments that affect reported amounts of assets, liabilities, revenue, and expenses[71] - Key estimates include those related to revenue recognition, inventory obsolescence, valuation of deferred tax assets and liabilities, depreciable lives of equipment, warranty obligations, and contingent liabilities[71] Results of Operations: Three months ended September 30, 2021 compared to the three months ended September 30, 2020 Q3 2021 net sales increased 46%, driven by strong market growth, leading to net income due to PPP Loan forgiveness Net Sales Total net sales increased 45.7% to $10.6 million, driven by significant growth in casino, POS, and food service technology Net Sales by Market (Three Months Ended September 30) | Market Type | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Food service technology | $3,282 | $2,349 | $933 | 39.7% | | POS automation | $1,188 | $742 | $446 | 60.1% | | Casino and gaming | $4,036 | $2,009 | $2,027 | 100.9% | | Printrex | $160 | $107 | $53 | 49.5% | | TSG | $1,971 | $2,093 | $(122) | -5.8% | | Total net sales | $10,637 | $7,300 | $3,337 | 45.7% | - Printer, terminal, and other hardware sales volume increased 91% year-over-year to approximately 22,000 units, driven by increases in casino and gaming (111%), POS automation (64%), and FST (74%)[74] - International sales increased $0.9 million (85%) primarily due to a 202% increase in the international casino and gaming market[75] Food service technology FST sales increased 39.7% to $3.3 million, with hardware up 64.1% and recurring revenue up 27.8%, driven by key customers Food Service Technology Sales (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Hardware | $1,265 | $771 | $494 | 64.1% | | Software, labels and other recurring revenue | $2,017 | $1,578 | $439 | 27.8% | | Total FST sales | $3,282 | $2,349 | $933 | 39.7% | - Hardware sales increased due to sales of BOHA! terminals to an existing national convenience store customer and AccuDate 9700 terminals to McDonald's[76] POS automation POS automation revenue increased 60.1% to $1.2 million, primarily due to a 60% increase in Ithaca® 9000 printer sales POS Automation Sales (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Domestic | $1,188 | $739 | $449 | 60.8% | | International | $0 | $3 | $(3) | -100.0% | | Total POS automation sales | $1,188 | $742 | $446 | 60.1% | - The increase was driven by a 60% increase in sales of Ithaca® 9000 printers, primarily to McDonald's, as sales improved from the negative impact of COVID-19[79] Casino and gaming Casino and gaming revenue surged 100.9% to $4.0 million, with strong domestic and international sales reflecting recovery Casino and Gaming Sales (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Domestic | $2,656 | $1,552 | $1,104 | 71.1% | | International | $1,380 | $457 | $923 | 202.0% | | Total casino and gaming sales | $4,036 | $2,009 | $2,027 | 100.9% | - Domestic sales of thermal casino printers increased 75%, and international sales increased 256%, primarily in Europe, as the market continued to recover from the COVID-19 pandemic[80][81] Printrex Printrex sales increased 49.5% to $0.16 million, driven by higher international sales, with plans to exit this market by year-end Printrex Sales (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Domestic | $0 | $5 | $(5) | -100.0% | | International | $160 | $102 | $58 | 56.9% | | Total Printrex sales | $160 | $107 | $53 | 49.5% | - The increase resulted from higher international sales in the oil and gas market, which was negatively impacted by declining oil prices in 2020[82] - The company plans to exit the Printrex market at the end of 2021, with no future sales expected beyond this year[82] TSG TSG revenue decreased 5.8% to $2.0 million, primarily due to lower service sales from a legacy banking contract TSG Sales (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Domestic | $1,856 | $1,910 | $(54) | -2.8% | | International | $115 | $183 | $(68) | -37.2% | | Total TSG sales | $1,971 | $2,093 | $(122) | -5.8% | - Domestic service sales decreased 57% due to a legacy banking customer contract, and consumable sales declined 55% from lower legacy POS printer paper sales[83] Gross Profit Gross profit increased 29% to $4.3 million, but gross margin decreased 530 basis points due to lower hardware margins and higher costs Gross Profit (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Gross profit | $4,317 | $3,349 | $968 | 28.9% | | Gross margin | 40.6% | 45.9% | -5.3% | -11.5% | - The decrease in gross margin resulted largely from lower margin on BOHA! hardware sales due to price reductions to accelerate installed base growth, as well as higher material and shipping costs[84] Operating Expenses - Engineering, Design and Product Development Expenses increased 30% to $1.9 million, reflecting normalized spending and continued investment in food service technology Engineering, Design and Product Development Expense (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Expense | $1,876 | $1,445 | $431 | 29.8% | | % of Total Sales | 17.6% | 19.8% | -2.2% | -11.1% | - The increase is due to a gradual return to more normalized pre-COVID spending levels and continued development of food service technology products[85] Operating Expenses - Selling and Marketing Expenses increased 51% to $1.9 million, driven by increased marketing, new sales staff, and higher commissions Selling and Marketing Expense (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Expense | $1,899 | $1,258 | $641 | 51.0% | | % of Total Sales | 17.9% | 17.2% | 0.7% | 4.1% | - The increase is primarily due to increased marketing programs, new sales staff to support BOHA! products, higher sales commissions, and travel expenses, reflecting a return to more normalized pre-COVID spending[86] Operating Expenses - General and Administrative Expenses increased 1% to $2.1 million, as higher compensation was offset by lower severance expense General and Administrative Expense (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Expense | $2,146 | $2,125 | $21 | 1.0% | | % of Total Sales | 20.2% | 29.1% | -8.9% | -30.6% | - Higher recruiting fees and employee compensation were almost entirely offset by lower severance expense in the 2020 period[87] Operating Loss Operating loss increased 9% to $(1.6) million, as increased sales were offset by lower gross margin and higher expenses Operating Loss (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Operating loss | $(1,604) | $(1,479) | $(125) | 8.5% | | % of Total Sales | -15.1% | -20.3% | 5.2% | -25.6% | Interest, net Net interest expense increased to $29k from $19k, primarily due to lower interest income from the collected note receivable Interest, net (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Interest, net | $(29) | $(19) | - The increase in net interest expense was primarily due to lower interest income earned from the note receivable to a third-party software developer that was collected in March 2021[89] Other, net The company recorded other expense of $69k compared to income of $116k, mainly due to foreign exchange losses Other, net (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Other, net | $(69) | $116 | - The change from income to expense was primarily due to foreign exchange losses recorded by the U.K. subsidiary in 2021 compared to gains in 2020[90] Gain on Forgiveness of Long-Term Debt A $2.2 million gain was recorded in Q3 2021 due to the forgiveness of the PPP Loan - A $2.2 million gain was recorded in the third quarter of 2021 resulting from the forgiveness of the PPP Loan in July 2021[91] Income Taxes An income tax benefit of $439k was recorded, with an effective tax rate of -93.2%, due to non-taxable PPP Loan forgiveness Income Tax Benefit (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Income tax benefit | $439 | $515 | | Effective tax rate | -93.2% | 37.3% | - A tax benefit was recorded on pre-tax income due to the recognition of the gain on the forgiveness of the PPP Loan, which is not taxable[92] Net Income (Loss) The company reported net income of $0.9 million, or $0.09 per diluted share, a significant improvement from prior year Net Income (Loss) (Three Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Net income (loss) | $910 | $(867) | | Diluted EPS | $0.09 | $(0.11) | Results of Operations: Nine months ended September 30, 2021 compared to nine months ended September 30, 2020 Nine-month net sales increased 24%, driven by FST, Printrex, and casino, with net loss improving due to PPP Loan forgiveness Net Sales Total net sales increased 23.8% to $28.3 million, driven by strong growth in FST, Printrex, and casino and gaming Net Sales by Market (Nine Months Ended September 30) | Market Type | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | FST | $9,103 | $4,924 | $4,179 | 84.9% | | POS automation | $3,608 | $2,781 | $827 | 29.7% | | Casino and gaming | $10,368 | $8,300 | $2,068 | 24.9% | | Lottery | $0 | $817 | $(817) | -100.0% | | Printrex | $431 | $232 | $199 | 85.8% | | TSG | $4,753 | $5,778 | $(1,025) | -17.7% | | Total net sales | $28,263 | $22,832 | $5,431 | 23.8% | - Printer, terminal, and other hardware sales volume increased by 28% to approximately 59,000 units, driven by increases in casino and gaming (28%), POS automation (32%), and FST (108%)[96] - International sales increased by less than 1%, with a 137% increase in Printrex and a 3% increase in casino and gaming, largely offset by a 39% decrease in TSG[97] FST (Food Service Technology) FST sales increased 84.9% to $9.1 million, with hardware up 84.2% and recurring revenue up 85.3%, driven by key customers Food Service Technology Sales (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Hardware | $3,815 | $2,071 | $1,744 | 84.2% | | Software, labels and other recurring revenue | $5,288 | $2,853 | $2,435 | 85.3% | | Total FST sales | $9,103 | $4,924 | $4,179 | 84.9% | - Hardware sales increased due to sales to an existing national convenience store customer, a new national travel center customer, and higher sales of AccuDate 9700 terminals to McDonald's[97] POS automation POS automation revenue increased 29.7% to $3.6 million, primarily due to a 30% increase in Ithaca® 9000 printer sales POS Automation Sales (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Domestic | $3,600 | $2,774 | $826 | 29.8% | | International | $8 | $7 | $1 | 14.3% | | Total POS automation sales | $3,608 | $2,781 | $827 | 29.7% | - The increase was driven by a 30% increase in sales of Ithaca® 9000 printers, primarily to McDonald's, as sales began to improve from the significant negative impact of COVID-19[98] Casino and gaming Casino and gaming revenue increased 24.9% to $10.4 million, reflecting recovery, though international recovery is slower Casino and Gaming Sales (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Domestic | $7,058 | $5,080 | $1,978 | 38.9% | | International | $3,310 | $3,220 | $90 | 2.8% | | Total casino and gaming sales | $10,368 | $8,300 | $2,068 | 24.9% | - Domestic sales of thermal casino printers increased 42%, reflecting recovery from the severe impact of COVID-19 in 2020[99] - International sales of thermal casino printers increased 5%, with the international market recovering at a slower pace than the domestic market[100] Lottery Lottery sales ceased in 2021, down 100% from $0.8 million, as the company exited this market to focus on higher-value products Lottery Sales (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Domestic | $0 | $817 | $(817) | -100.0% | | International | $0 | $0 | $0 | 0.0% | | Total lottery sales | $0 | $817 | $(817) | -100.0% | - The company exited the lottery market at the end of 2019 to shift focus towards higher-value food service technology and casino and gaming products[101] Printrex Printrex sales increased 85.8% to $0.4 million, driven by higher international sales, with plans to exit this market by year-end Printrex Sales (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Domestic | $52 | $72 | $(20) | -27.8% | | International | $379 | $160 | $219 | 136.9% | | Total Printrex sales | $431 | $232 | $199 | 85.8% | - The increase resulted from increased international sales in the oil and gas market[103] - The company plans to exit the Printrex market at the end of 2021, with no future sales expected beyond this year[103] TSG TSG revenue decreased 17.7% to $4.8 million, primarily due to lower service revenue and consumable sales TSG Sales (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Domestic | $4,388 | $5,184 | $(796) | -15.4% | | International | $365 | $594 | $(229) | -38.6% | | Total TSG sales | $4,753 | $5,778 | $(1,025) | -17.7% | - Domestic service revenue declined 42% due to a legacy banking customer contract, and consumable sales declined 28% from lower HP inkjet cartridges[104] Gross Profit Gross profit increased 3% to $10.8 million, but gross margin decreased 790 basis points due to lower hardware margins and higher costs Gross Profit (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Gross profit | $10,831 | $10,557 | $274 | 2.6% | | Gross margin | 38.3% | 46.2% | -7.9% | -17.1% | - The decrease in gross margin resulted largely from lower margin on BOHA! hardware sales due to price reductions and higher material and shipping costs from worldwide supply disruptions[106] Operating Expenses - Engineering, Design and Product Development Expenses increased 31% to $5.5 million, reflecting normalized spending and continued investment in food service technology Engineering, Design and Product Development Expense (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Expense | $5,483 | $4,197 | $1,286 | 30.6% | | % of Total Sales | 19.4% | 18.4% | 1.0% | 5.4% | - The increase is due to a gradual return to more normalized pre-COVID spending levels and continued development for food service technology products[107] Operating Expenses - Selling and Marketing Expenses increased 5% to $5.1 million, primarily due to returning to more normalized pre-COVID-19 spending levels Selling and Marketing Expense (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Expense | $5,109 | $4,885 | $224 | 4.6% | | % of Total Sales | 18.1% | 21.4% | -3.3% | -15.4% | - The increase is primarily due to returning to more normalized pre-COVID-19 levels of sales and marketing expense compared to reduced costs during the first nine months of 2020[109] Operating Expenses - General and Administrative Expenses increased 4% to $7.3 million, driven by higher recruiting, compensation, and consulting fees General and Administrative Expense (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Expense | $7,264 | $6,987 | $277 | 4.0% | | % of Total Sales | 25.7% | 30.6% | -4.9% | -16.0% | - The increase is due to higher recruiting fees, employee compensation, and consulting fees related to a planned ERP system implementation, partially offset by lower legal and professional fees and severance expense[110] Operating Loss Operating loss increased 27% to $(7.0) million, as higher sales were offset by lower gross margin and increased expenses Operating Loss (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Operating loss | $(7,025) | $(5,512) | $(1,513) | 27.4% | | % of Total Sales | -24.9% | -24.1% | -0.8% | 3.3% | Interest, net Net interest expense increased to $71k from $41k, due to lower interest income and full-year unused borrowing fees Interest, net (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Interest, net | $(71) | $(41) | - The increase in net interest expense was primarily due to lower interest income from the note receivable collected in March 2021 and a full nine months of unused borrowing fees under the Siena Credit Facility[112] Other, net The company recorded other expense of $169k compared to $60k in the prior year, primarily due to foreign exchange losses Other, net (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Other, net | $(169) | $(60) | - The increase in other expense was primarily due to foreign exchange losses recorded by the U.K. subsidiary[113] Gain on Forgiveness of Long-Term Debt A $2.2 million gain was recorded in Q3 2021 due to the forgiveness of the PPP Loan - A $2.2 million gain was recorded in the third quarter of 2021 resulting from the forgiveness of the PPP Loan in July 2021[113] Income Taxes An income tax benefit of $1.7 million was recorded, with an effective tax rate of 33.0%, including non-taxable PPP Loan forgiveness Income Tax Benefit (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Income tax benefit | $1,682 | $1,901 | | Effective tax rate | 33.0% | 33.9% | - The tax benefit for the nine months ended September 30, 2021, was unusually high as it included the recognition of the non-taxable gain on the forgiveness of the PPP Loan[114] Net Loss The company reported a net loss of $3.4 million, or $(0.37) per diluted share, an improvement from the prior year Net Loss (Nine Months Ended September 30) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :---------------------- | :------------------ | :------------------ | | Net loss | $(3,410) | $(3,712) | | Diluted EPS | $(0.37) | $(0.49) | Liquidity and Capital Resources Cash and cash equivalents increased significantly due to financing activities, and the PPP Loan was forgiven Cash Flow Cash and cash equivalents increased by $8.3 million to $18.7 million, primarily from $11.5 million in financing activities - Cash and cash equivalents increased $8.3 million (80%) from December 31, 2020, to $18.7 million at September 30, 2021, primarily due to financing activities[116] - Financing activities provided $11.5 million of cash, largely from an underwritten public offering that raised $11.3 million net proceeds[116][119] - Net cash used in operating activities was $3.9 million for the first nine months of 2021, an improvement from $4.2 million in 2020[117] - Investing activities provided $0.8 million, primarily from the collection of a $1.6 million note receivable in March 2021[117] Credit Facility and Borrowings The $2.2 million PPP Loan was forgiven, and the Siena Credit Facility covenant was amended, with $4.2 million available - The Siena Credit Facility provides a revolving credit line of up to $10.0 million, expiring on March 13, 2023[120] - The financial covenant under the Siena Credit Facility was amended to require maintaining excess availability of at least $750 thousand, which the company was in compliance with as of September 30, 2021[121] - As of September 30, 2021, the company had no outstanding borrowings under the Siena Credit Facility and $4.2 million of available borrowing capacity[121] - The $2.2 million PPP Loan was fully forgiven by the SBA as of July 1, 2021[123] Shareholder Dividend Payments The company ceased its quarterly cash dividend program in January 2020 to reallocate funds for investment in the BOHA! ecosystem - The Board of Directors announced the cessation of the quarterly cash dividend program on January 23, 2020, with the final payment made in December 2019[124] - The decision was made to accelerate investment in sales and marketing, product development, and infrastructure of the BOHA! ecosystem[124] Resource Sufficiency The company believes current resources, including cash and credit, provide sufficient liquidity for at least the next twelve months - The company believes its cash and cash equivalents, expected cash flows from operations, proceeds from public offerings, and available borrowings under the Siena Credit Facility will provide sufficient liquidity for at least the next twelve months[126] - Despite ongoing uncertainties related to the COVID-19 pandemic, the company continues to evaluate strategies to enhance its liquidity position, including potentially raising additional capital[126] Off-Balance Sheet Arrangements As of September 30, 2021, the company had no material off-balance sheet arrangements - As of September 30, 2021, the company had no off-balance sheet arrangements that are expected to have a future material effect on its financial condition or results of operations[127] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, TransAct is not required to provide information under this item - TransAct is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[128] Item 4. Controls and Procedures Disclosure controls were not effective due to a material weakness, but financial statements are deemed reliable Evaluation of Disclosure Controls and Procedures Disclosure controls were not effective due to an unremediated material weakness, but financial statements are fairly presented and reliable - Management concluded that disclosure controls and procedures were not effective as of September 30, 2021, due to an unremediated material weakness in internal control over financial reporting[129] - Despite the material weakness, management concluded that the consolidated financial statements fairly present the company's financial condition, results of operations, and cash flows and can be relied upon[130] Material Weakness in Internal Control Over Financial Reporting A material weakness was identified regarding controls over key spreadsheets, posing a future risk if not remediated - A material weakness was identified regarding the design and maintenance of effective controls over the completeness and accuracy of information included in key spreadsheets supporting accounting records (the 'Spreadsheet Control Weakness')[131] - The material weakness did not result in a material misstatement of annual or interim consolidated financial statements but could lead to one if not remediated[132] Remediation Efforts to Address Material Weakness The company implemented new controls for key spreadsheets and expects to complete remediation of the weakness by year-end 2021 - The company has implemented new key controls for all key spreadsheets to validate the completeness and accuracy of information, either by using standard Oracle reports or formal validation processes[133] - Remediation of the Spreadsheet Control Weakness is expected to be completed by the end of 2021, pending evaluation of the effectiveness of new controls[133] Changes in Internal Control Over Financial Reporting No material changes in internal control occurred during the quarter, other than those addressing the identified material weakness - No material changes in internal control over financial reporting occurred during the fiscal quarter ended September 30, 2021, other than those intended to remediate the material weakness[135] PART II - Other Information Item 1. Legal Proceedings As of September 30, 2021, the company was unaware of any material pending or contemplated legal proceedings - As of September 30, 2021, the company was unaware of any material pending legal proceedings or any material legal proceedings contemplated by government authorities[136] Item 1A. Risk Factors No material changes to risk factors from the 2020 Form 10-K, and additional unknown risks may also affect the business - There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[137] - Additional risks and uncertainties, not currently known or deemed immaterial, may also materially adversely affect the business, financial condition, or future results[137] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds for the period - No unregistered sales of equity securities and use of proceeds to report[138] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities for the period - No defaults upon senior securities to report[139] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[139] Item 5. Other Information The company reported no other information for the period - No other information to report[139] Item 6. Exhibits This section lists the exhibits filed with the 10-Q, including an underwriting agreement and CEO/CFO certifications - Exhibits include an Underwriting Agreement, CEO and CFO certifications (Section 302 and 906 of Sarbanes-Oxley Act), and Inline XBRL documents[140] SIGNATURES The report is signed by the President, CFO, Treasurer, Secretary, and VP/Chief Accounting Officer, certifying its submission - The report is signed by Steven A. DeMartino (President, Chief Financial Officer, Treasurer and Secretary) and David B. Peters (Vice President and Chief Accounting Officer)[146]