For the transition period from _______________ to _______________.
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
See notes to Condensed Consolidated Financial Statements.
See notes to Condensed Consolidated Financial Statements.
See notes to Condensed Consolidated Financial Statements.
See notes to Condensed Consolidated Financial Statements.
See notes to Condensed Consolidated Financial Statements.
TransAct is a global leader in developing and selling software-driven technology and printing solutions for high growth markets including food service technology, point of sale (“POS”) automation, and banking, casino and gaming, lottery, and oil and gas. Our world-class products are designed from the ground up based on market and customer requirements and are sold under the BOHA!™, AccuDate™, Epic®, EPICENTRAL™, Ithaca®, and Printrex® brand names. During 2019, we launched a new line of products for the food service technology market, the BOHA! branded suite of cloud-based applications and companion hardware solutions. The new BOHA! software and hardware products help restaurants, convenience stores and food service operators of all sizes automate the food production in the back-of-house operations. Known and respected worldwide for innovative designs and real-world service reliability, our thermal and inkjet printers and terminals generate top-quality labels, coupons and transaction records such as receipts, tickets and other documents, as well as printed logging and plotting of data. We sell our technology to original equipment manufacturers (“OEMs”), value-added resellers, select distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, New Zealand, Latin America, the Caribbean Islands and the South Pacific. We also offer world-class service, support, labels, spare parts, accessories and printing supplies to our growing worldwide base of products currently in use by our customers. Through our TransAct Services Group (“TSG”), we provide a complete range of supplies and consumables used in the printing and scanning activities of customers in the restaurant and hospitality, banking, retail, casino and gaming, government and oil and gas exploration markets. Through our webstore, www.transactsupplies.com,, and our direct selling team, we address the demand for these products. We operate in one reportable segment, the design, development, and marketing of software-driven technology and printing solutions for high growth markets, and provide related services, supplies and spare parts.
As a result of the COVID-19 pandemic and measures implemented to mitigate its spread, we have experienced decreased demand for our products and lower than anticipated sales beginning in the second half of March 2020 and continuing through the second quarterfirst three months of 2020,2021, particularly in our food service technology and casino and gaming markets. We have seenexperienced some improvement in demand during July and Augustthe second half of 2020 though the first three months of 2021 compared to the second quarter of 2020, as some state and local governments lifted certain measures implemented earlier in 2020 to mitigate the spread of the virus, but demand remainsremained lower than 2019, and we expect this trend to continue forthrough at least the remainderfirst half of the third quarter of 2020, and likely through the end of 2020.2021. Below is a discussion of the impact of COVID-19 that we have experienced, and that we believe we will continue to experience for the foreseeable future in each of our markets.
Our gross margin has been negatively impacted and we expect our gross margin to continue to be negatively impacted bywhile the COVID-19 pandemic.pandemic persists. As a result of an expected significantly lower sales level, we believe our gross margin will declineremain lower than pre-pandemic levels due to fixed manufacturing overhead expenses (such as facility costs, depreciation, etc.) that cannot be reduced or eliminated even with the lower sales level.
We have also experienced supply chain disruptions, including delayed product shipments from our two contract manufacturers located in China and Thailand that conduct approximately 80% and 19%, respectively,almost all of our printer and terminal manufacturing, due to reduced operations and parts shortages at these facilities, which are not yet operating at full capacity.facilities. To date, these disruptions have only minimally impacted deliveries to customers due to our high inventory levels and reduced demand for our products. However, if the delays are sustained they could lead toor additional disruptions from the pandemic occur, we may have insufficient inventory levels and impair our ability to deliver products to our customers on time or at all.
Since the onset of the pandemic, our top priority has been to ensure the health and safety of our employees while continuing to provide our customers with high-quality, personalized service. On March 20, 2020, we instituted work-from-home practices for the majority of our employees to reduce the spread of COVID-19 and to comply with government mandates. Because most of our employees already had laptop computers with remote access into our IT systems, we have experienced only minor reductions in productivity and minimal costs related to the implementation of our work-from-home practices. In addition, even with the move to a work-from-home environment, our existing internal control structure remained operational and unchanged.
Our distribution centers, deemed an essential service, have remained operational throughout the pandemic. WeDuring 2020, we implemented a new COVID-19 policy, which was still in place during the first three months of 2021, to specifically address health and safety guidelines for employees to adhere to and follow when at work or returning to work. This policy was based on the COVID-19 safety guidelines recommended fromby the Centers for Disease Control and Prevention and implements the following operations procedures:
daily temperature checks of all employees before entering all facilities.
| ● | staggered shifts and a rotational/flexible work schedule to minimize the number of employees at any particular facility at a single time; |
| ● | mandated use of protective equipment, such as masks and gloves, when in common areas, which is provided to employees; |
| ● | spacing seating in workspaces such as manufacturing cells, lunch/break rooms, conference rooms and other common areas to comply with social distancing guidelines; |
| ● | employees who (i) show symptoms of COVID-19 or (ii) have been exposed to someone who shows symptoms or has tested positive for COVID-19 are prohibited from reporting to work for 10 days; |
| ● | visitors are prohibited from entering all facilities; |
| ● | cleaning and disinfecting protocols at all facilities; and |
| ● | daily temperature taking of all employees before entering all facilities. |
We have evaluated the recoverability of the assets on our unaudited Condensed Consolidated Balance Sheetcondensed consolidated balance sheet as of June 30, 2020 inMarch 31, 2021 in accordance with relevant authoritative accounting literature. We considered the disruptions caused by the COVID-19 pandemic, including lower than previously forecasted sales and customer demand a decline in the price of our common stock and macroeconomic factors potentially impacting accounts receivable, inventory, investments, intangible assets, goodwill and other assets and liabilities. Where forward-looking estimates are required, we made a good-faith estimate based on information available as of the balance sheet date. We have continued to monitor for indicators of impairment through the date of this Report and reflected accordingly in the accompanying condensed consolidated financial statements.
Notwithstanding the foregoing, there is no assurance that the actions we have taken in response to the pandemic are sufficient or adequate, and we may be required to take additional preventive or responsive measures, as the ultimate extent of the effects of the COVID-19 pandemic on the Company, our financial condition, results of operations, liquidity, and cash flows are uncertain and are dependent on evolving developments which cannot be predicted at this time. See the risk factors contained in Part I, Item 1A, Risk Factors, of the 2019 Form 10-K Part II, Item 1A of our Q1for the year ended December 31, 2020 Form 10-Q and Part II, Item 1A, of this Report for further discussion of risks related to COVID-19.
Critical Accounting Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).America. The presentation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, inventory obsolescence, the valuation of deferred tax assets and liabilities, depreciable lives of equipment, warranty obligations, and contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
Goodwill and Intangible Assets. We acquire businesses in purchase transactions that result in the recognition of goodwill and intangible assets. The determination of the value of intangible assets requires management to make estimates and assumptions. In accordance with ASC 350-20 “Goodwill”, acquired goodwill is not amortized, but is subject to impairment testing at least annually and when an event occurs or circumstances change, which indicates it is more likely than not an impairment exists. As a result of the effect of COVID-19 on overall economic trends, the Company's operating results and the decrease in the Company’s share price as of March 31, 2020, management determined that potential impairment triggers had occurred and performed impairment testing as of March 31, 2020. As of March 31, 2020, when the impairment review was performed, we determined that no goodwill or intangible asset impairment had occurred and the fair value of goodwill was higher than our carrying value. As of June 30, 2020, we determined that no new triggering events had occurred during the second quarter of 2020 and in accordance with ASC 350-20 an updated impairment review was not performed.
For a complete description of our accounting policies other than goodwill and intangible assets, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” of our 2019 Form 10-K. We have reviewed those policies and determined that they remain our critical accounting policies for the six months ended June 30, 2020.
Results of Operations: Three months ended June 30, 2020March 31, 2021 compared to three months ended June 30, 2019March 31, 2020
Net Sales.Sales: Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the three months endedJune 30, March 31, 2021 and 2020 and 2019 are reflected in the table below (in thousands, except percentages). We have reclassified sales of labels and other recurring revenue items, which includes extended warranty and service contracts, and technical support services related to our food service technology market, previously included in TSG, to Food service technology for all periods presented in this Report. were as follows:
| | Three Months Ended | | | Three Months Ended | | | | | | Three Months Ended | | | Three Months Ended | | | | |
| | June 30, 2020 | | | June 30, 2019 | | | $ Change | | | % Change | | |
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POS automation and banking | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | | | March 31, 2021 | | | March 31, 2020 | | | $ Change | | | % Change | |
Food service technology (“FST”) | | | | | | | | | | | | | | | | | | | | | | | | | |
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* | International sales do not include sales of printers and terminals made to domestic distributors or other domestic customers who may, in turn, ship those printers and terminals to international destinations. |
Net sales for the secondfirst quarter of 20202021 decreased $6.1$1.9 million, or 53%19%, from the same period in 2019.2020. Printer, terminal and other hardware unit sales volume decreased 64%27% to approximately 10,00018,000 units, for the second quarter of 2020 drivendue primarily byto a 79%sales volume decrease in unit volume from the casino and gaming market of 42% and, to a lesser extent, a 58%17% decrease in the POS automation and banking market. These decreases wereThe volume decrease was partially offset by a 373%an increase in unitFST hardware volume of 129% in the lottery market. first quarter of 2021 compared to the first quarter of 2020. The average selling price of our printers, terminals and other hardware increased 4% for7% during the secondfirst quarter of 2021 compared to the first quarter of 2020 compared to the second quarter of 2019primarily due primarily to a lowerhigher level of POS automation and banking printerFST hardware sales, which sell at a lower pricehigher prices than our other products. The sales volume decreases were partially offset by a $0.6 million, or 96%, increase in software, labels and other recurring revenue from our food service technology market.
International sales for the secondfirst quarter of 20202021 decreased $2.0$1.5 million, or 74%54%, from the same period in 20192020 primarily due primarily to an 82% decrease indecreased sales in the international casino and gaming market.
Food service technology.technology: Our primary offering in the food service technology market is our BOHA! ecosystem, which combines our latest generation terminal,terminal/workstation, cloud-based software applications and related hardware into a unique solution to automate back-of-house operations in restaurants, convenience stores and food service operations. The software component of BOHA! consists of a suite of software-as-a-service (“SaaS”)-based applications for both Android and iOS, including applications for inventory management, temperature monitoring of food and equipment, timers, food safety labeling, food recalls, checklists and procedures, equipment service management, and delivery management. These applications are combined into a single platform with the associated hardware, which includes the BOHA! terminal,terminal/workstation, handheld devices, tablets, temperature probes and temperature sensors. The BOHA! terminal combines the software and hardware components in a device that includes an operating system, touchscreen and one or two thermal print mechanisms that print easy-to-read food rotation labels, grab and gograb-and-go labels for prepared foods, and “enjoy by” date labels. The BOHA! Workstation uses an iPad instead of an integrated touchscreen. Both the BOHA! terminal isand workstation are equipped with the TransAct Enterprise Management System to ensure that only approved applications and functions are available on the device and allows over-the-air updates to the applications and operating system. BOHA! helps food service establishments and restaurants (including fine dining, casual dining, fast casual and quick-serve restaurants, convenience stores, hospitality establishments and contract food service providers) effectively manage food safety and grab-and-go initiatives, as well as automate and manage back-of-house operations. Recurring revenue from BOHA! is generated by software sales, including software subscriptions that are charged to customers upfront on a per-application basis, as well as sales of labels, extended warranty and service contracts, and technical support services. Sales of our worldwide food service technology products for the three months ended June 30, 2020March 31, 2021 and 20192020 were as follows (in thousands, except percentages):follows:
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Software, labels and other recurring revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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The increase in food service technology sales for the secondfirst quarter of 2021 compared to the first quarter of 2020 compared to the second quarter of 2019 was driven primarily by an increase in sales of ourboth hardware and BOHA! software, labels and other recurring revenue. Hardware sales increased 104% in the first quarter of 2021 compared to 2020 due largely to sales to an existing national convenience store customer and a new national travel center customer. Sales of BOHA! software recognized on a SaaS subscription basis, labels and other recurring revenue increased by 103%96%, including a 116% increase inprimarily due to increased label sales and, to a 291% increase inlesser extent, increased software sales, compared to the prior year period despite the impact from the COVID-19 pandemic, though such sales had a low base following the launch of BOHA! in March 2019. Hardware sales for the second quarter of 2020 decreased 32% compared to the second quarter of 2019 primarily due to the impact fromgrowth of the COVID-19 pandemic that resulted in widespread store closings and/or substantially reduced customer operations.installed base of our BOHA! terminals.
POS automation and banking.automation: Revenue from the POS automation and banking market includes sales of thermal printers used primarily by quick serve restaurants located either at the checkout counter or within self-service kiosks to print receipts for consumers or print on linerless labels. Prior to 2020, revenue included sales of inkjet printers used by banks, credit unions and other financial institutions to print deposit or withdrawal receipts and/or validate checks at bank teller stations. We exited the banking market during 2018. SalesSales of our worldwide POS automation and banking products for the three months ended June 30, 2020March 31, 2021 and 20192020 were as follows (in thousands, except percentages):follows:
| | Three Months Ended | | | Three Months Ended | | | | | | Three Months Ended | | | Three Months Ended | | | | |
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The decrease in both domestic and international POS automation and banking product revenue forsales during the secondfirst quarter of 2021 compared to the first quarter of 2020 compared to the second quarter of 2019 was primarily driven by a 70%25% decrease in domestic sales of our Ithaca® 9000 printer duelargely attributable to fewer sales to McDonald’s which we believe resulted from the continued impact of the COVID-19 pandemic on sales to McDonald’s.
Casino and gaming.gaming: Revenue from the casino and gaming market includes sales of thermal ticket printers used in slot machines, video lottery terminals, and other gaming machines that print tickets or receipts instead of issuing coins at casinos and racetracks and other gaming venues worldwide. Revenue from this market also includes sales of thermal roll-fed printers used in the international off-premise gaming market in gaming machines such as Amusement with Prizes, Skills with Prizes and Fixed Odds Betting Terminals at non-casino gaming and sports betting establishments. Revenue from this market also includes royalties related to our patented casino and gaming technology. In addition, casino and gaming market revenue includes sales of the EPICENTRAL™ print system, our software solution (including annual software maintenance), that enables casino operators to create promotional coupons and marketing messages and to print them real-timein real time at the slot machine. Sales of our worldwide casino and gaming products for the three months ended June 30, 2020March 31, 2021 and 20192020 were as follows (in thousands, except percentages):follows:
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The decrease in domestic sales of our casino and gaming products for the first quarter of 2021 compared to the first quarter of 2020 was primarily due to a 74% decline23% decrease in domestic sales of our thermal casino printers, in the second quarter of 2020 compared to the second quarter of 2019, driven by industry-wide weakness resulting in lower sales to our OEMs as they werethat continue to be impacted by casino closures, through most of the second quarter of 2020 due tocapacity limitations and lower customer demand resulting from the COVID-19 pandemic. We had no new EPICENTRAL™ software installations duringhave started to experience some recovery from the secondnegative impact of the COVID-19 pandemic as domestic casino sales in the first quarter of 2020 or 2019. Sales2021 increased 11% compared to the fourth quarter of domestic EPICENTRALTM are project based and as a result, may fluctuate significantly quarter-to-quarter and year-to-year.2020.
The decrease in international sales of our casino and gaming products insales during the secondfirst quarter of 2021 compared to the first quarter of 2020 compared to the second quarter of 2019 was primarily due to a 76% decrease64% decline in sales of our thermal casino printers and a 92% decrease39% decline in international sales of our off-premise gaming printers dueattributable to the continued negative impactimpacts of the COVID-19 pandemic.pandemic on the international casino and gaming industry.
Lottery. Revenue from the lottery market includes sales of thermal on-line and other lottery printers primarily to International Game Technology and its subsidiaries (“IGT”) and, to a lesser extent, other lottery system companies for various lottery applications. Sales of our worldwide lottery printers for the three months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):
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Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations that IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year. Our sales to IGT are not indicative of IGT’s overall business or revenue. On December 31, 2019, we allowed our non-exclusive agreement to provide lottery terminal printers to IGT to expire as we have decided to exit the lottery market and to shift our focus towards our higher-value, technology enabled food service technology and casino and gaming products. As a result, IGT made a final purchase of our lottery printers during the second quarter of 2020 and we do not expect any further lottery printer sales in the future.
Printrex.Printrex: Printrex branded printers are sold into markets that include wide format, desktop and rack mounted and vehicle mounted black/white thermal printers used by customers to log and plot oil field, seismic and down hole well drilling data in the oil and gas exploration industry. It also includes high-speed color inkjet desktop printers used to print logs at the data centers of the oil and gas field service companies. Sales of our worldwide Printrex printers for the three months endedJune 30, March 31, 2021 and 2020 and 2019 were as follows (in thousands, except percentages):follows:
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(In thousands, except percentages) | | | | | | | | | $ Change | | | | |
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The decreaseincrease in sales of Printrex printers for the secondfirst quarter of 2021 compared to the first quarter of 2020 compared to the second quarter of 2019 resulted primarily from lower domestic andincreased international sales in the oil and gas market whichmarket. This increase was negatively impactedpartially offset by a decrease in domestic Printrex printer sales during the decline in worldwide oil prices attributablefirst quarter of 2021 compared to the COVID-19 pandemic. Due to the uncertaintyfirst quarter of current and future market conditions attributable to the COVID-19 pandemic,2020. Though our overall Printrex sales increased, we are unableno longer focused on this market and expect sales to reasonably estimate the ultimate impact to our Printrex market, but we expect Printrex sales in fiscal year 2020 to be less than Printrex sales in fiscal year 2019.
TSG.TSG: Revenue generated by our TSG includes sales of consumable products (inkjet(POS receipt paper, inkjet cartridges, ribbons POS receipt paper, and other printing supplies)supplies for legacy products), replacement parts, maintenance and repair services, testing services, refurbished printers, and shipping and handling charges. TSG sales for all periods presented in this Report exclude the sales of labels, extended warranty and service contracts, and technical support services related to our food service technology market, which have been reclassified to Food Service Technology. Sales in our worldwide TSG market for the three months ended June 30, 2020March 31, 2021 and 20192020 were as follows (in thousands, except percentages):follows:
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The decrease in domestic revenue from TSG for the secondfirst quarter of 20202021 as compared to the secondfirst quarter of 20192020 was due primarily due to a 83% decline in consumable sales resulting largely from lower sales of legacyreplacement parts, consumable products and service revenue. Replacement part sales decreased 31% primarily from lower lottery printer spare part sales to IGT which can vary significantly from quarter to quarter. Consumable sales declined 57% due primarily to lower sales of HP inkjet cartridges used in our banking printers, as we exited the banking market at the end of 2018, and to a lesser extent, lower sales of legacy POS receiptprinter paper. In addition, we experienced a 24% decrease in sales of replacement parts, primarily due to lower sales volume of lottery printer spare parts to IGT, which sales can vary significantly from quarter to quarter, and a 35% decrease in service sales Service revenue declined 43% primarily related to a service contract with a banking customer that is expected to end later in 2020.2021. We expect TSG sales to decrease for the full year 2020in 2021 compared to 20192020 due to lower expected sales of legacy lottery printer spare printer parts to IGT as we exited the lottery market at the end of 2019 and lower service sales related to the service contract with a banking customer that is expected to end in 2020.2021.
Internationally, TSG revenue decreased for the secondfirst quarter of 20202021 compared to the secondfirst quarter of 20192020 primarily due to a 60%66% decrease in sales of replacement parts and accessories to international casino and gaming customers due to the negative impact offrom the COVID-19 pandemic and the resulting closures of many casinos and other gaming establishments, which are gradually being reversed.pandemic.
Gross Profit. Gross profit information for the three months ended June 30,March 31, 2021 and 2020 and 2019 is summarized below (in thousands, except percentages):
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Gross profit is measured as revenue less cost of sales, which includes primarily the cost of all raw materials and component parts, direct labor, manufacturing overhead expenses, cost of finished products purchased directly from our contract manufacturers, and expenses associated with installations and support of our EPICENTRALTM print system and BOHA! ecosystem.ecosystem and royalty payments to third parties, including to the third-party licensor of our food service technology software products. For the secondfirst quarter of 2020,2021, gross profit decreased $3.4$1.7 million, or 60%35%, due primarilylargely to a 53% declinesales decrease of 19% for the first quarter in sales during the second quarter of 20202021 compared to the secondfirst quarter of 2019. Gross2020. Additionally, our gross margin decreased 700960 basis points, to 43.3%38.4% for the secondfirst quarter of 20202021 compared to 50.3%48.0% for the secondfirst quarter of 2019 due2020. The decrease in gross margin resulted from lower sales of our higher margin casino printers and lower margin on our BOHA! hardware sales in the first quarter of 2021 compared to the impactfirst quarter of fixed manufacturing overhead expenses on lower sales volume as a result of the effects of the COVID-19 pandemic, partially offset by cost saving measures taken in late March in response to the COVID-19 pandemic.2020.
Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development expenseinformation for the three months ended June 30,March 31, 2021 and 2020 and 2019 is summarized below (in thousands, except percentages):
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Engineering, design and product development expense primarily includes salary and payroll related expenses for our hardware and software engineering staff, depreciation and design expenses (including prototype printer expenses, outside design, development and testing services, supplies and contract software development expenses). Such expenses increased $252 thousand, or 23% for the second quarter of 2020 comparedincluding those to the second quarter of 2019, primarily due to continued and expanded developmentthird-party licensor of our food service technology productssoftware products). .Engineering, design and product development expenses increased $418 thousand, or 30%, for the first quarter of 2021 compared to the first quarter of 2020, primarily due to the continued development for our food service technology products. We expect engineering, design and product development expense for the full yearto increase in 2021 compared to 2020 related to be slightly higher than the full year 2019 as we expect to continue our strategicaccelerated investments inplanned for our food service technology products despite the COVID-19 pandemic.products.
Operating Expenses - Selling and Marketing. Selling and marketing expenseinformation for the three months ended June 30,March 31, 2021 and 2020 and 2019 is summarized below (in thousands, except percentages):
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Selling and marketing expenseexpenses primarily includesinclude salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, public relations, e-commerce and other promotional marketing expenses. SuchSelling and marketing expenses decreased $670by $765 thousand, or 32%35%, for the secondfirst quarter of 2021 compared to the first quarter of 2020 comparedprimarily due to lower expenses from travel, trade shows and marketing programs in the first quarter of 2021. The first quarter of 2020 reflected pre-COVID 19 levels of sales and marketing expenses before costs saving measures were taken once we were impacted by the pandemic. We expect selling and marketing expenses to increase in 2021 as we gradually return to more normalized pre-COVID-19 spending levels as well as make substantial strategic investments in our food service technology sales and marketing groups that were deferred from 2020 due to the second quarter of 2019 due to cost saving measures taken in late March 2020 in response to the expected impact of the COVID-19 pandemic. The Company expects to maintain these cost saving measures in the near term.
Operating Expenses - General and Administrative. General and administrative expenseinformation for the three months ended June 30,March 31, 2021 and 2020 and 2019 is summarized below (in thousands, except percentages):
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General and administrative expenses primarily include salaries, incentive compensation, and other payroll related expenses for our executive, accounting, human resources, business development and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunication expenses, and other expenses related to being a publicly-traded company. General and administrative expenses increased $51 thousand, or 2%, indecreased less than 1% for the secondfirst quarter of 20202021 compared to the secondfirst quarter of 2019 due primarily2020. We expect general and administrative expenses to higher professional and legal expenses partially offset by a decreaseincrease in discretionary2021 as we gradually return to more normalized pre-COVID-19 spending due to cost saving initiatives enacted in response to the COVID-19 pandemic.levels.
Operating (Loss) Income.Loss. Operating incomeloss information for the three months ended June 30,March 31, 2021 and 2020 and 2019 is summarized below (in thousands, except percentages):
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Operating income decreased $3Our operating loss increased $1.4 million, foror 106%, in the secondfirst quarter of 2021 compared to the first quarter of 2020 compareddue to the second quarter of 2019 due primarily to thea decrease in sales of 53%19% resulting from the negative impact of COVID-19 on sales and a 700 basis point declinedecrease in our gross margin due to the impact from the COVID-19 pandemic. Theof 960 basis points. This decrease in operating income was partially offset by a 7% decrease6% decline in operating expenses dueduring the first quarter of 2021 compared to the cost saving initiatives in place for the secondfirst quarter of 2020.
Interest, net.Interest. We recorded net interest expense of $25$13 thousand for the secondfirst quarter of 20202021 compared to $7net interest income of $3 thousand for the secondfirst quarter of 2019. The increase2020. Interest expense in interest expense2021 was primarily due to unused borrowing fees under the Siena Credit Facility that was entered into on March 13, 2020, partially offset by interest income earned on borrowings from our revolving line of credit in the second quarter of 2020 compared to no borrowings during the second quarter of 2019. note receivable and a long-term revenue contract. We expect net interest expense to increase forin the full year 20202021 compared to the full year 20192020 due to anticipated borrowings from our revolving linethe full year impact of credit in 2020 resultingunused borrowing fees incurred from the COVID-19 pandemicSiena Credit Facility and lower interest income due to the ramping upcollection of investmentthe note receivable in our food service technology market compared to no borrowings during 2019.the first quarter of 2021.
Other, net. We recorded other expense of $11$83 thousand for the secondfirst quarter of 2021 compared to other expense of $165 thousand for the first quarter of 2020 compared to $142 thousand for the second quarter of 2019primarily due to lower foreign currency exchange losses recorded by our U.K. subsidiary for the second quarter of 2020 compared to the second quarter of 2019.UK subsidiary. Going forward, we may continue to experience more foreign exchange gains or losses depending on the level of sales to European customers through our U.K.UK subsidiary and the fluctuation in exchange rates of the Euro and Pound Sterling against the U.S. Dollar, which may be impacted by volatility in global economic conditions due to the COVID-19 pandemic.
Income Taxes. We recorded an income tax benefit for the secondfirst quarter of 20202021 of $921$556 thousand at an effective tax rate of 33.2%20.1%, compared to an income tax benefit forduring the secondfirst quarter of 20192020 of $26$465 thousand at an effective tax rate of -16.3%31.9%. The effective tax rate for the secondfirst quarter of 2020 was higher as it included the impact of theour net operating loss (“NOL”) that we expect to carry back to prior years. The CARES Act permits NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. We expect to generate a NOL for 2020 which we will carry back to tax years that had a federal statutory tax rate of 34% compared to 21% in 2020. The effective tax rate for the second quarter of 2019 was lower as it included the foreign-derived intangible income (“FDII”) deduction under the Tax Cuts and Jobs Act of 2017 as well as near breakeven pre-tax income in the second quarter of 2019.
Net (Loss) Income. We reported a net loss for the second quarter of 2020 of $1.9 million, or $(0.25) per diluted share, compared to net income of $0.2 million, or $0.02 per diluted share, for the second quarter of 2019.
Results of Operations: Six months ended June 30, 2020 compared to six months ended June 30, 2019
Net Sales. Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the six months ended June 30, 2020 and 2019 are reflected in the table below (in thousands, except percentages). We have reclassified sales of labels and other recurring revenue items, which includes extended warranty and service contracts, and technical support services related to our food service technology market, previously included in TSG, to Food service technology for all periods presented in this Report.
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* | International sales do not include sales of printers and terminals made to domestic distributors or other domestic customers who may, in turn, ship those printers and terminals to international destinations. |
Net sales for the first six months of 2020 decreased $7.4 million, or 32%, from the same period in 2019. Printer, terminal and other hardware sales volume decreased by 38% to approximately 35,000 units for the first six months of 2020 driven by decreases across all our markets. These volume decreases were primarily due to a 45% decrease in unit volume from the casino and gaming market and, to a lesser extent, a 23% and 27% unit decrease in our POS automation and banking market and lottery market, respectively. The average selling price of our printers, terminals and other hardware remained consistent decreasing 1% for the first six months of 2020 compared to the first six months of 2019.
International sales decreased $1.7 million, or 32%, primarily driven by a 34% decrease of international casino and gaming sales.
Food service technology. Sales of our worldwide food service technology products for the six months ended June 30,during 2020 and 2019 are reflected in the tables below (in thousands, except percentages). We have reclassified sales of labels and other recurring revenue items, which includes extended warranty and service contracts, and technical support services related to our food service technology market, previously included in TSG to Food service technology for all periods presented in this Report.
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The increase in food service technology sales in the first six months of 2020 compared to the first six months of 2019 was driven primarily by sales of our BOHA! software, labels and other recurring revenue. Sales of BOHA! software recognized on a SaaS subscription basis, labels and other recurring revenue increased by 101%, including a 102% increase in label sales and a 333% increase in software sales compared to the prior year period, though off a low base following the launch of BOHA! in March 2019. Hardware sales declined by 24% primarily attributable to lower sales of our AccuDate 9700 terminal due to the impact from the COVID-19 pandemic that resulted in widespread store closings and/or substantially reduced customer operations.
POS automation and banking. Sales of our worldwide POS automation and banking products for the six months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):
The decrease in both domestic and international POS automation and banking sales for the first six months of 2020 compared to the first six months of 2019 was primarily driven by a 29% decrease in domestic sales of our Ithaca® 9000 printer due to the impact of the COVID-19 pandemic on sales to McDonald’s.
Casino and gaming. Sales of our worldwide casino and gaming products for the six months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):
The decrease in domestic sales of our casino and gaming products for the first half of 2020 compared to the first half of 2019 was due primarily to a 49% decrease in domestic sales of our thermal casino printer, driven by industry-wide weakness resulting in lower sales to our OEMs as they were impacted by casino closures through most of the second quarter of 2020 due to the COVID-19 pandemic. We had no new EPICENTRAL™ software installations during the first six months of 2020 or 2019. Sales of domestic EPICENTRALTM are project based, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year.
The decrease in international casino and gaming sales for the first half of 2020 compared to the first half of 2019 was due primarily to a 73% decline in international sales of our off-premise gaming printers and a 21% decline in sales of our thermal casino printer due to the negative impact of the COVID-19 pandemic.
Lottery. Sales of our worldwide lottery printers for the six months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):
Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations that IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year. Our sales to IGT are not indicative of IGT’s overall business or revenue. On December 31, 2019, we allowed our non-exclusive agreement to provide lottery terminal printers to IGT to expire as we have decided to exit the lottery market and to shift our focus towards our higher-value, technology enabled food service technology and casino and gaming products. As a result, IGT made a final purchase of our lottery printers during the second quarter of 2020 and we do not expect any further lottery printer sales in the future.
Printrex. Sales of our worldwide Printrex printers for the six months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):
The decrease in sales of Printrex printers for the first six months of 2020 compared to the first six months of 2019 resulted primarily from lower domestic and international sales in the oil and gas market which was negatively impacted by the decline in worldwide oil prices attributable to the COVID-19 pandemic.
TSG. Sales in our worldwide TSG market for the six months ended June 30, 2020 and 2019 are reflected in the table below (in thousands, except percentages). TSG sales for all periods presented in this Report exclude the sales of labels, extended warranty and service contracts, and technical support services related to our food service technology market, which have been reclassified to Food service technology.
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The decrease in domestic TSG sales for the first six months of 2020 as compared to the first six months of 2019 was primarily due to a 71% decline in consumable sales resulting largely from lower sales of legacy HP inkjet cartridges used in our banking printers, as we exited the banking market at the end of 2018, and to a lesser extent, lower sales of legacy POS receipt paper. In addition, we experienced 27% lower service sales primarily related to a service contract with a banking customer that is expected to end in 2020. This decrease was partially offset by 7% higher sales of replacement parts, primarily from higher lottery printer spare parts to IGT which can vary significantly from quarter to quarter.
Internationally, TSG sales decreased for the first six months of 2020 compared to the first six months of 2019 primarily due to a 44% decrease in sales of replacement parts and accessories to international casino and gaming customers.
Gross Profit. Gross profit for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):
Gross profit decreased $4.6 million, or 39%, for the first six months of 2020 compared to the first six months of 2019 due primarily to a 32% decline in sales for the first six months of 2020 compared to the same period in the prior year. Gross margin decreased 510 basis points, to 46.4% for the first six months of 2020 compared to 51.5% for the first six months of 2019 due primarily to the impact of fixed manufacturing overhead expenses on lower sales volume as a result of the effects of the COVID-19 pandemic, partially offset by cost savings measures taken in late March 2020 in response to the COVID-19 pandemic.
Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development expense for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):
Engineering, design and product development expenses increased $472 thousand, or 21%, in the first six months of 2020 compared to the first six months of 2019 primarily due to continued and expanded development for our food service technology products despite the COVID-19 pandemic.
Operating Expenses - Selling and Marketing. Selling and marketing expense for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):
Selling and marketing expenses decreased $316 thousand, or 8%, during the first six months of 2020 compared to the first six months of 2019 due to cost saving measures taken in late March 2020 in response to the expected impact of the COVID-19 pandemic which more than offset the increase in sales and marketing expenses from new and expanded marketing programs and promotions to support our food service technology products that were implemented during the first quarter of 2020 prior to the COVID-19 outbreak.
Operating Expenses - General and Administrative. General and administrative expense for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):
General and administrative expenses increased $381 thousand, or 9%, in the first six months of 2020 compared to the first six months of 2019 due primarily to higher professional and legal expenses partially offset by a decrease in discretionary spending due to cost saving initiatives enacted in response to the COVID-19 pandemic.
Operating (Loss) Income. Operating (loss) income for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):
Our operating income decreased $5.1 million during the first six months of 2020 compared to the first six months of 2019 due to the decrease in sales of 32%, the 510 basis point decrease in gross margin and 5% increase in operating expenses during the first six months of 2020 compared to the first six months of 2019.
Interest, net. We recorded net interest expense of $22 thousand for the first six months of 2020 compared to $13 thousand for the first six months of 2019. The increase in interest expense was due to interest on borrowings from our revolving line of credit in the second quarter of 2020 compared to no borrowings during the first half of 2019.
Other, net. We recorded other expense of $176 thousand for the first six months of 2020 compared to $52 thousand for the first six months of 2019 due to higher foreign currency exchange losses recorded by our U.K. subsidiary for the first six months of 2020 compared to the first six months of 2019.
Income Taxes. We recorded an income tax benefit for the first six months of 2020 of $1.4 million at an effective tax rate of 32.8%, compared to an income tax provision during the first six months of 2019 of $0.1 million at an effective tax rate of 8.7%. The effective tax rate for the first six months of 2020 was higher as it included the impact of the net operating loss (“NOL”) that we expect towill carry back to prior years. The CARES Act enacted on March 27, 2020 permits NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. We expect to generate agenerated an NOL forin 2020 which we will carry back to tax years that had a federal statutory tax rate of 34% compared to 21% in 2020. The effective tax rate for the first six months of 2019 was unusually low as it included the FDII deduction and the impact on the tax rate on lower pre-tax income.
Net (Loss) IncomeLoss. We reported a net loss for the first six monthsquarter of 20202021 of $2.8$2.2 million, or $(0.38)$0.25 per diluted share, compared to a net incomeloss of $0.9$1.0 million, or $0.12$0.13, per diluted share, for the first six monthsquarter of 2019.
Liquidity and Capital Resources
Cash Flow
For the first sixthree months of 2020,2021, our cash and cash equivalents balance decreased $1.1$1.6 million, or 27%16%, from December 31, 2019.2020. We ended the secondfirst quarter of 20202021 with $3.1$8.7 million in cash and cash equivalents, of which $0.1 million was held by our U.K. subsidiary, and outstanding borrowings of $2.2 million primarily from the PPP Loan.subsidiary.
Operating activities: The following significant factors affected our cash used in operating activities of $2.3$3.1 million for the first sixthree months of 20202021 as compared to cash provided byused in operating activities of $1.6$3.6 million for the first sixthree months of 2019:2020:
During the first sixthree months of 2021:
| ● | We reported a net loss of $2.2 million. |
| ● | We recorded depreciation and amortization of $0.2 million, and share-based compensation expense of $0.3 million. |
| ● | Accounts receivable increased $1.3 million, or 40%, primarily due to increased sales volume late in the first quarter of 2021. |
| ● | Inventory decreased $1.3 million, or 11%, due to the utilization of inventory on hand to fulfill sales in response to the pandemic. |
| ● | Other current and long-term assets increased $0.1 million, or 7%, due largely to advance payments made in the first quarter of 2021 for annual ERP software maintenance. |
| ● | Accounts payable increased $0.2 million, or 13%, due primarily to the timing of payments during the first quarter of 2020. |
| ● | Accrued liabilities and other liabilities decreased $1.0 million, or 13%, due primarily to the payment of 2020 annual bonuses in March 2021. |
During the first three months of 2020:
| ● | We reported a net loss of $2.8$1.0 million. |
| ● | We recorded depreciation and amortization of $0.5$0.2 million, and share-based compensation expense of $0.4$0.2 million. |
| ● | Accounts receivable decreased $3.1$0.1 million, or 48%1%, primarily due primarily to lower sales volume during the second quarterfirst three months of 2020. |
| ● | Inventories decreased by less than 1%Inventory increased $0.6 million, or 5%, due primarily to the utilizationpurchase of inventory on handduring the first quarter of 2020 to fulfillsupport anticipated sales and delaying inventory purchasesthat did not occur due to the second halfimpact of the COVID-19 pandemic on our sales in March 2020. |
| ● | Other current and long-term assets increased $0.3 million, or 26%, due largely to advance payments made in the first quarter of 2020 for our annual ERP software maintenance. |
| ● | Accounts payable decreased $1.7$1.2 million, or 56%42%, due primarily to inventory purchases made towards the end of the fourth quarter of 2019 that were subsequently paid in the first quarter of 2020 and delaying inventory purchases to the second half of 2020 to improve our liquidity.2020. |
| ● | Accrued liabilities and other liabilities decreased $0.7$0.8 million, or 10%11%, due primarily to the payment of 2019 annual bonuses in March 2020. |
During the first six months of 2019:
| ● | We reported net income of $0.9 million. |
| ● | We recorded depreciation and amortization of $0.5 million and share-based compensation expense of $0.4 million.
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| ● | Accounts receivable decreased $1.7 million, or 21%, due primarily to the collection of receivables for 2018 sales and lower sales volume in the second quarter of 2019.
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| ● | Inventories increased $1.4 million, or 11%, due primarily to the buildup of inventory on hand to support future anticipated sales of BOHA! hardware products in the Food service technology market. |
| ● | Other current and long term assets increased $0.3 million, or 46% due primarily to an advanced payment of royalty fees to a technology partner for software solutions used in our Food service technology market.
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| ● | Accounts payable increased $0.3 million, or 8%, due primarily to the timing of inventory purchases made during the second quarter of 2019.
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| ● | Accrued liabilities and other liabilities decreased $0.6 million, or 15%, due primarily to the payment of 2018 annual bonuses in March 2019.
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Investing activities: Our capital expenditures including capitalized software costs, were $0.5 million and $0.4 million$68 thousand for the first sixthree months of 2020 and 2019, respectively. Expenditures2021 compared to $328 thousand for the first six monthsquarter of 2020. Expenditures in 2021 were for computer and networking equipment and new product tooling equipment. Expenditures in 2020 were primarily for computer and networking equipment, new product tooling equipment and leasehold improvements at our Las Vegas facility and computer and networking equipment. Expendituresfacility. Investing activities also provided $1.6 million for the first sixthree months of 2019 were primarily for new product tooling equipment and,2021 upon the collection of the remaining $1.6 million note receivable balance from an unaffiliated third-party compared to a lesser extent, computer and networking equipment. Additionally,$0.6 million of cash used in investing activities during the first quarterthree months of 2020 prior to widespread shutdowns in the United States in responsefor a loan to the COVID-19 pandemic, we loaned an additional $0.6 million to ansame unaffiliated third party.third-party.
Capital expenditures and additions to capitalized software for 2020 were2021 are expected to be approximately $1.1$1.4 million, primarily for new product tooling, new computer software and equipment purchasescomputer and leasehold improvementsnetworking equipment to support our food service technology market. In response to the COVID-19 pandemic we have curtailed portions of our planned capital expenditures until market conditions improve.
Financing activities: Financing activities used $15 thousand of cash during the first three months of 2021 to pay $75 thousand for withholding taxes on stock issued from our stock compensation plans and $31 thousand on the final payment of financing costs associated with our Siena Credit Facility, partially offset by proceeds of $91 thousand from stock option exercises. During the first three months of 2020, financing activities provided $2.3$0.9 million of cash for the first six monthsfrom net borrowings of 2020 primarily$794 thousand from the $2.2 million in funds received from the PPP Loanour Siena Credit Facility and proceeds of $0.4 million$353 thousand from stock option exercises, partially offset by the payment of financing costs associated with signing our Siena Credit Facility. During the first six months of 2020 we borrowed and subsequently repaid $2.8 million from our Siena Credit Facility. During the first six months of 2019, we used $1.6 million of cash from financing activities to pay dividends of $1.3 million and $0.2 million related to the relinquishment of shares to pay for withholding taxes on stock issued from our stock compensation plan.
Credit Facility and Borrowings.Borrowings
On March 13, 2020, we entered into the Siena Credit Facility with Siena Lending Group LLC and terminated our credit facility with TD Bank N.A..N.A. The Siena Credit Facility provides for a revolving credit line of up to $10 million expiring on March 13, 2023. Borrowings under the Siena Credit Facility bear a floating rate of interest equal to the greatest of (i) the prime rate plus 1.75%, (ii) the federal funds rate plus 2.25%, and (iii) 6.50%. The total deferred financing costs related to expenses incurred to complete the Siena Credit Facility were $245 thousand. We also pay a fee of 0.50% on unused borrowings under the Siena Credit Facility. Borrowings under the Siena Credit Facility are secured by a lien on substantially all the assets of the Company. Borrowings under the Siena Credit Facility are subject to a borrowing base based on (i) 85% of eligible accounts receivable plus the lesser of (a) $5 million and (b) 50% of eligible raw material and 60% of finished goods inventory.
The Siena Credit Facility imposes a quarterly financial covenant on the Company and restricts, among other things, our ability to incur additional indebtedness and the creation of other liens. The three month period from April 1, 2020 to June 30, 2020 was the first period we were subject to the financial covenant, which required the Company to maintain a minimum EBITDA. As of June 30, 2020,March 31, 2021, we had $6 thousand ofno outstanding borrowings under the Siena Credit Facility and were in compliance with our financial covenant. The agreement governing the Siena Credit Facility provides for the parties to update the financial covenant for periods ending after March 31, 2021 based on updated financial projections of the Company. The Company does not anticipate a material change in the financial covenant, nor does it anticipate any other material change in the terms or covenants pertaining to its current credit facilities. The following table listsdemonstrates our compliance with the financial covenant at June 30, 2020.March 31, 2021.
| | | | Calculation at June 30,for the period from April 1, 2020 to March 31, 2021 |
| | Minimum of $(3,131)$(7,984) | | |
On May 1, 2020, (the “Loan Date”), the Company entered into the PPP Loan with Berkshire Bank in the aggregate amount of $2.2 million, pursuant to the Paycheck Protection Program (the “PPP”)PPP which is administered by the SBA and was established under Division A, Title I of the CARES Act, enacted March 27, 2020.
The PPP Loan, which is evidenced by a Note dated the Loan Date issued by the Company (the “Note”), matures on May 1, 2022 and bears interest at a fixed rate of 1.0% per annum, accruing from the Loan Date and payable monthly. No payments arewere due on the PPP Loan for six months from the date of first disbursement, and if a loan forgiveness application is submitted to the SBA within 10 months after the end of the covered period, no payments are due until the date on which the SBA remits the loan forgiveness amount to the PPP Lender (or notifies the PPP Lender that no loan forgiveness is allowed), but interest will continue to accrue during the deferment period. If no loan forgiveness is allowed, the Company will be required to pay the PPP Lender equal monthly payments of principal and interest based on the principal amount outstanding on the PPP Loan, plus interest outstanding at the end of the deferment period, and taking into account any reductions in the principal amount due to forgiveness, if any. The Note is unsecured and guaranteed by the SBA. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Note provides for customary defaults, including failure to make payment when due or to fulfill the Company’s obligations under the Note or related documents, reorganizations, mergers, consolidations or other changes to the Company’s business structure, and certain defaults on other indebtedness, bankruptcy events, adverse changes in financial condition or civil or criminal actions. The PPP Loan may be accelerated upon the occurrence of a default.
Under the terms of the PPP, the PPP Loan may be forgiven to the extent that funds from the PPP Loan are used for payroll costs and costs to continue group health care benefits, as well as for interest on mortgage obligations incurred before February 15, 2020, rent under lease agreements in effect before February 15, 2020, utilities for which service began before February 15, 2020, and interest on debt obligations incurred before February 15, 2020 (collectively, “qualifying expenses”),qualifying expenses, subject to conditions and limitations provided in the CARES Act. At least 60% (as amended) of the proceeds of the PPP Loan must be used for eligible payroll costs for the PPP Loan to be forgivable. The Company has maximized the use of the PPP Loan proceeds for qualifying expenses and intends to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020. Whether forgiveness will be granted and in what amount is subject to an application to, and approval by, the SBA and may also be subject to further requirements in any regulations and guidelines the SBA may adopt. The PPP Loan is classified as “Long-term debt” in the Condensed Consolidated Balance Sheet until the forgiveness determination has been made by the SBA.
Shareholder Dividend Payments
In 2012, our Board of Directors initiated a quarterly cash dividend program which was subject to the Board’s approval each quarter. Our Board of Directors declared an increase to the quarterly cash dividend from $0.06 to $0.07 per share in May 2013, from $0.07 to $0.08 per share in May 2014, and from $0.08 to $0.09 per share in May 2017. Dividends declared and paid on our common stock totaled $0.7 million or $0.09 per in the three months ended June 30, 2019. On January 23, 2020, our Board of Directors announced the cessation of theour quarterly cash dividend on the Company’s common stock to accelerate the investment in sales and marketing, continued product development and infrastructure of the BOHA! ecosystem. The final dividend payment was made in December 2019.
Stock Repurchase Program
Prior to its expiration on December 31, 2019, we maintained a stock repurchase program (the "2018 Stock Repurchase Program") whereby we were authorized to repurchase up to $5 million of our outstanding shares of common stock from time to time in the open market at prevailing market prices based on market conditions, share price and other factors. We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account. Repurchases of our common stock are accounted for as of the settlement date. During the six months ended June 30, 2020 and 2019, we did not repurchase any shares of our common stock. As of June 30, 2020, we did not have an authorized stock repurchase program.
Resource Sufficiency
Given the unprecedented uncertainty related to the impact of the COVID-19 pandemic on the food service and casino industries, the Company is closely monitoring its cash generation, usage and preservation including the management of working capital to generate cash. The Company does not currently anticipate requiring any additional credit facilities within the next twelve months beyond our Siena Credit Facility and the PPP Loan, which are discussed above,above. The agreement governing the Siena Credit Facility provides for the parties to update the financial covenant for periods ending after March 31, 2021 based on updated financial projections of the Company. The Company does not anticipate a material change in the financial covenant, nor does it anticipate aany other material change in the terms or covenants pertaining to its current credit facilities. To better align costs with the current business environment, on March 24, 2020 the Company announced several cost reduction actions. Such actions included the furlough of approximately 10% of the Company’s workforce, a 10% reduction in the salaries of all salaried, non-commissioned employees, including the executive officers, a reduction in sales commissions for all commissioned employees, a 10% reduction of cash retainer fees for all non-employee directors and the elimination of discretionary spending wherever possible. Upon receipt of the PPP Loan, management was able to bring back the furloughed employees and intends to apply for forgiveness by maximizing the use of the PPP Loan proceeds for qualifying expenses. However, after fully using the proceeds of the PPP Loan by June 30, 2020, we took additional cost saving actions in July 2020 that included reducing our workforce by approximately 20% through a combination of temporary furloughs and permanent headcount reductions as well as instituting a 10% pay reduction for all hourly employees.
We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities and borrowings available under our Siena Credit Facility and savings from the cost reduction actions discussed above will provide sufficient resources to meet our working capital needs, finance our capital expenditures and meet our liquidity requirements through at least the next twelve months. Notwithstanding this belief, the duration and extent of the pandemic remain uncertain and its ultimate impact unknown. As a result, we are currently evaluatingcontinue to evaluate several different strategies to enhance our liquidity position as a result of the significant financial and operational impacts due to the COVID-19 pandemic. These strategies may include, but are not limited to, seeking to raise additional capital through an equity or debt financing and applying for additional relief through other programs established under the CARES Act.
Contractual Obligations / Off-Balance Sheet Arrangements
The disclosureAs of paymentsMarch 31, 2021, we had no off-balance sheet arrangements that have committedhad or that we expect would be reasonably likely to make under our contractual obligations is set forth under Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” of our 2019 Form 10-K.
On February 28, 2020, we entered into an amendment to extend the leasehave a future material effect on our facility in Ithaca, New York. The lease, which was last amended on January 14, 2016, was scheduled to expire on May 31, 2021. The lease amendment provides for an extension of the lease for four additional years from June 1, 2021 to May 31, 2025. Other than the extension of the Ithaca facility lease, there have been no materialfinancial condition, changes in our contractual obligations since December 31, 2019.
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
TransAct is a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K, and is not required to provide information under this item.
The disclosure of our exposure to market risk is set forth under Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, of our 2019 Form 10-K. There has been no material change in our exposure to market risk during the six months ended June 30, 2020.
Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act as of June 30, 2020.March 31, 2021. In the Amendment to our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on November 21, 2019, we disclosed that management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of December 31, 2018, due to two material weaknesses in our internal control over financial reporting as described below.reporting. As of June 30, 2020, theseMarch 31, 2021, one material weaknesses wereweakness was not fully remediated and our disclosure controls and procedures were not effective as of June 30, 2020.March 31, 2021. Management is undertakinghas begun remediation efforts to remediateon the remaining material weaknesses,weakness, which are described below.
Notwithstanding thesethe material weaknesses,weakness, our management, including our CEO and CFO, has concluded that our consolidated financial statements included in our 2019Annual Report on Form 10-K for the year ended December 31, 2020 and the Condensed Consolidated Financial Statementscondensed consolidated financial statements included in this Report for the sixthree months ended June 30, 2020 are March 31, 2021, fairly statedpresent, in all material respects, in accordance with GAAPour financial condition, results of operations and cash flows for each of the periods presented in conformity with generally accepted accounting principles, and that they can still be relied upon.
Material WeaknessesWeakness in Internal Control Over Financial Reporting
We identified the followinga control deficienciesdeficiency that constituted a material weaknessesweakness in our internal control over financial reporting as of June 30, 2020March 31, 2021 and December 31, 20192020 and 2018.
We did not design and maintain effective controls over user access within the Company’s ERP system, Oracle, to ensure appropriate segregation of duties and to adequately restrict user access to appropriate personnel. Specifically, the provisioning and user recertification controls are not designed to ensure users maintain proper segregation of duties and therefore could have inappropriate access rights. (the “Access Control Weakness”).
We2019. The material weakness was that we did not design and maintain effective controls over the completeness and accuracy of information included in key spreadsheets supporting our accounting records (the “Spreadsheet Control Weakness”).
TheseThe control deficienciesdeficiency constituted a material weaknesses, but did not result in a material misstatement toof our annual or interim consolidated financial statements. However, if the these material weaknesses areweakness is not remediated, a material misstatement of account balances or disclosures may not be prevented, and may go undetected, which could result in a material misstatement of future annual or interim consolidated financial statements.
Remediation Efforts to Address Material Weaknesses
Weakness
Beginning December 31, 2019, we commenced developing and implementing a plan to enhance the design and operating effectiveness of our internal control over financial reporting, which includes takingreporting. As of December 31, 2020 we have taken the following steps to remediate the identified control deficienciesdeficiency and material weaknesses:weakness:
To address the AccessSpreadsheet Control Weakness, for each key spreadsheet we utilizedplan to evaluate and determine (1) if a standard Oracle report exists containing the servicessame information as the spreadsheet, and if so, we would utilize the standard Oracle report (without modification) instead of the spreadsheet to support our accounting records and (2) if a standard Oracle report cannot be used, we will implement a new key control whereby an employee performs a formal validation that the information from Oracle consulting firmis completely and anaccurately transferred (automatically or manually) to a spreadsheet by verifying totals and other information on a test basis. For all key spreadsheets, we plan to design and implement a new key control to validate the completeness and accuracy of information supporting our accounting firm unrelated to our Independent Registered Accounting Firm, to assist us in analyzingrecords. During 2020 and reviewing Oracle access for all users. During the first quarter of 20202021, we completed the analysis and deployed an action plan. Basedevaluation process for each key spreadsheet based on the analysisabove criteria, and action plan, duringwe implemented a new key control for approximately 30% of our key spreadsheets to validate the second quarter of 2020 we created new Oracle responsibilities for each employee for which a conflict was identified to remove Oracle transactional responsibilities that we believed to be conflictingcompleteness and reassigned those responsibilities to a different employee to ensure proper segregation of duties. We completed the implementationaccuracy of the new Oracle responsibilities for all users in July 2020. Currently, we are finalizing the enhancementinformation contained within and implementation provisioning and user certification controls to ensure we maintain the appropriate segregation of duties within Oracle following the analysis as well as test for operational effectiveness of the newly implemented controls.supporting each such spreadsheet. We expect to complete the remediation of the AccessSpreadsheet Control Weakness during the third quarter of 2020.
• | To address the Spreadsheet Control Weakness, for each key spreadsheet we plan to evaluate and determine (1) if a standard Oracle report exists containing the same information as the spreadsheet, and if so, we would utilize the standard Oracle report (without modification) instead of the spreadsheet to support our accounting records and (2) if a standard Oracle report cannot be used, we will implement a new key control whereby an employee performs a formal validation that the information from Oracle is completely and accurately transferred (automatically or manually) to a spreadsheet by verifying totals and other information on a test basis. For all other key spreadsheets, we plan to design and implement a new key control to validate completeness and accuracy of information supporting our accounting records. During the first six months of 2020, we began the process of evaluating each key spreadsheet based on the above criteria, and for several key spreadsheets, we implemented a new key control to validate the completeness and accuracy of the information contained within and supporting each such spreadsheet.
|
2021.
We believe these steps will address the material weaknesses described above.
Changes in Internal Control Over Financial Reporting
Other than the changes intended to remediate the material weakness noted above, no changechanges in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2020March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. As of June 30, 2020,March 31, 2021, we are unaware of any material pending legal proceedings, pending or threatened, against the Company that management believes are likely to have aof any material adverse effect on our business, financial condition or results of operations.
legal proceedings contemplated by government authorities.
In light of recent developments related to the COVID-19 pandemic, the Company is supplementing theInformation regarding risk factors disclosed inappears under Part I, Item 1A, “Risk Factors,” of our 2019Annual Report on Form 10-K andfor the year ended December 31, 2020. There have been no material changes from the risk factors previously disclosed in Part II, Item 1A ofthat Annual Report on Form 10-K. The risks factors described in our Q1 2020Annual Report on Form 10-Q to include the following risk factors.
The COVID-19 pandemic has had, and is likely to continue to have, an adverse impact on our business, operations, financial condition, results of operations and capital resources, as well as on the operations and financial performance of many of our suppliers and customers. We are unable to predict the ultimate extent to which the pandemic and related effects will adversely impact our business, operations, financial condition, results of operations, capital resources and the achievement of our strategic objectives.
As a result of the COVID-19 pandemic and the numerous disease control measures being taken to limit the spread of COVID-19, we have experienced, and can be expected to continue to experience, disruptions to our business, our operations, the delivery of our products and customer demand for our products, including the following:
operating losses in excess of those we anticipated in transitioning our business focus toward the food service technology market, which, in addition to the factors discussed below, may require us to seek to obtain additional capital through debt or equity financings or other arrangements to fund operations, or if such arrangements10-K are not available, to take additional significant cost-cutting measures;
supply chain disruptions, including delayed product shipments from two contract manufacturers located in China and Thailand that conduct approximately 80% and 19%, respectively, ofthe only risks facing our printer and terminal manufacturing, which, if sustained, could lead to insufficient inventory levels and harm our ability to deliver products to our customers on time or at all;
continuing or new restrictions on the operations of our customers in the casino industry and food service industry, including, in some cases, partial or complete business shutdowns, which have resulted in, and are likely to continue to result in, reduced demand for our products in the two primary markets that we serve;
an inability of our customers to make payments in a timely fashion or at all, which may continue even after operating restrictions are lifted in the event that the downturn in economic conditions persists;
devotion of significant time, management attention and resources to monitoring the COVID-19 pandemic and its impacts, and anticipated impacts, on our business, and seeking to mitigate the effects of the pandemic on our business and workforce, which diverts management’s attention and resources away from strategic initiatives, new business opportunities, the transition of our business toward the food service and casino and gaming markets, and the overall profitability of our business;
necessary modifications to our business practices and operations, including suspension of employee travel, cancellation of physical participation in meetings, events and conferences and social distancing measures, including work-from-home policies, and such further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and suppliers, which may adversely impact efficiency and productivity and may increase operational risks, including cybersecurity risks, and have affected the way that we conduct our product development, marketing, customer support and other activities;
a permanent reduction in workforce, furlough of workers and an across-the-board 10% salary reduction, as well as other cost-cutting measures we have taken to help mitigate the impact of the COVID-19 crisis on our business, which may, along with any additional such measures that may be taken in the future, impair our ability to operate and have a negative effect on employee loyalty and our reputation and, if furloughed employees do not return following the crisis, or if employees seek higher-paying jobs, may limit our ability to restart operations following the crisis and to grow our food service technology business as planned;
a possible future reduction in the value of goodwill or other intangible assets causing the carrying value of such assets to exceed their fair value, which could require us to recognize asset impairment;
difficulty predicting our manufacturing requirements accurately due to volatile economic conditions and uncertainty as to when our customers may resume operations, which could result, in the case of an underestimate, in inadequate manufacturing capacity or inventory, interruptions in production and delayed deliveries to customers (with resulting losses in orders or customers lowering our net sales), or in the case of an overestimate, in an excess inventory of component parts or manufactured products;
increases in prices and/or decreases in availability of component parts and raw materials needed to produce our products;
foreign exchange rate fluctuations due to volatile global economic conditions, which could negatively affect earnings and the value of our assets held outside the United States, and if we increase prices to absorb a portion of the currency impact, could cause demand to decrease;
volatility of, and decreases in, trading prices of our common stock;
the possibility that we may need to raise additional capital through an equity or debt financing to support operations but are unable to do so due to, among other things, global economic conditions, conditions in the global financing markets, trading prices of our common stock and the outlook for the industries that we serve, all of which could be negatively impacted by the COVID-19 pandemic, such that there can be no assurance that such financing would be available to us.
If we issue equity or debt securities to raise additional funding, our existing shareholders may experience dilution and we may incur significant financing costs. If we issue debt securities or otherwise incur additional debt, we would have additional debt service obligations, could become subject to additional restrictions limiting our ability to operate our business, and may be required to further encumber our assets.
The COVID-19 pandemic continues to evolve rapidly, and additional material impacts and disruptions are likely to occur. The factors described above, which may worsen, have had and, along with other factors that we cannot predict, can be expected to continue to have, a material adverse impact on our business, operations, financial condition, results of operations and capital resources. The ultimate impact of the COVID-19 pandemic on the Company is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, additional or modified government actions, new information that may emerge concerning the severity and impact of the COVID-19 pandemic and the actions taken to contain COVID-19 or address its impact in the short and long term, among others. We do not yet know and cannot predict the full extent of potential impacts on our business, operations, financial condition, results of operations and capital resources.
In addition, any of theCompany. Additional risks and uncertainties, set forth in Part I, Item 1A of our 2019 Form 10-K can be expected to be further heightened by the COVID-19 pandemic and have a material adverse effect on the Company’s business, prospects, financial condition, results of operations and capital resources and the achievement of our strategic objectives.
The agreement governing our credit facility contains restrictions and limitations that could significantly affect our ability to operate our business, as well as significantly affect our liquidity.
The loan and security agreement (the “Loan Agreement”) governing the Siena Credit Facility contains a number of significant covenants that could adversely affect our ability to operate our business, our liquidity, and our results of operations. These covenants restrict, among other things, our ability, and the ability of any future domestic subsidiary, to:
merge, consolidate, form subsidiaries or dispose of assets;
acquire assets outside the ordinary course of business;
enter into other transactions outside the ordinary course of business;
sell, transfer, return or dispose of collateral;
make loans to or investments in, or enter into transactions with, affiliates;
incur or guarantee indebtedness, incur liens;
redeem equity interests while borrowings are outstanding under the credit facility;
change our capital structure; or
dissolve, divide, change our line of business or cease or suffer a disruption to all or a material portion of our business.
Additionally, the Loan Agreement requires us to comply with a minimum EBITDA covenant, the amount of which is based on financial forecasts provided to the lender. The breach of any covenants or obligations in the Loan Agreement, if not otherwise waived or amended, could result in a default under the Loan Agreement and could trigger acceleration of our obligations thereunder and permit the lender to foreclose on the collateral securing our obligations under the Loan Agreement and exercise other rights of secured creditors.
Availability under the Siena Credit Facility is subject to a borrowing base, which is based on eligible accounts receivable and inventory. To the extent that our eligible accounts receivable and inventory decline in value, our borrowing base will decrease, and the availability under the Siena Credit Facility currently is and may continue to be less than its stated amount and may decrease. In addition, if at any time the amount of outstanding borrowings and letters of credit under that facility exceeds the borrowing base, we are required to prepay borrowings and/or cash collateralize letters of credit sufficient to eliminate the excess.
Our ability to comply with the covenants under the Loan Agreement or to maintain our borrowing base may be affected by events beyond our control, including deteriorating economic conditions and consequences of the COVID-19 crisis. For example, the minimum EBITDA covenant, as applicable to periods through March 31, 2021, is based on financial projections prepared before most COVID-19-related operating restrictions were put in place in the United States, and our actual EBITDA for any of those periods may be substantially less than projected in such forecasts. In such event, we may not be able to comply with the covenant. In addition, reductions in the value of accounts receivable and inventory have occurred and are likely to continue to occur due to decreases in sales and production that have occurred as a result of the COVID-19 pandemic. Further, certain slow-moving inventory and accounts receivable that remain unpaid for a specified period of time are excluded from the borrowing base calculation. Thus, a decline in economic conditions and/or a decline in the financial condition of customers in the industries we serve, such as the decline that has occurred in the casino and food service industries in connection with the COVID-19 pandemic, has impacted and may continue to negatively impact the borrowing base both by decreasing the value of existing accounts and reducing the number and amount of new accounts. If we overestimate our inventory needs due to the uncertainty surrounding the COVID-19 pandemic and the duration of its impact on customer closures and economic conditions, we may have inventory that is considered slow-moving and thus excluded from the borrowing base calculation, and any reduction in production in response to decreased demand would also result in a lower inventory value and thus a lower borrowing base.
Any of these events could require us to seek waivers or amendments of covenants or alternative sources of financing or to reduce expenditures. We cannot assure you that such waivers, amendments or alternative financing could be obtained, or if obtained, would be on terms acceptableknown to us or that we wouldcurrently deem to be able to reduce expenditures enough to offset any decrease in the borrowing base,immaterial, also may materially adversely affect our business, financial condition or that we could make such reductions without a material negative impact on our business.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
None.
| | Second Amendment to Lease by and between 2319 Hamden Center I, L.L.C. and TransAct Technologies Incorporated 2014 Equity Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement on Schedule 14A (000-21121) filed with the SEC ondated April 23, 2020). 30, 2021. |
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).Document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
† | Management contract or compensatory plan or arrangement. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TRANSACT TECHNOLOGIES INCORPORATED |
| (Registrant) |
| |
| By: /s/ Steven A. DeMartino |
Dated: August 10, 2020May 13, 2021 | Steven A. DeMartino |
| President, Chief Financial Officer, Treasurer and Secretary |
| (Principal Financial Officer) |
| |
| |
| By: /s/ David B. Peters |
Dated: August 10, 2020May 13, 2021 | David B. Peters |
| Vice President and Chief Accounting Officer |
| (Principal Accounting Officer) |