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 six 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 wasis based on the COVID-19 safety guidelines recommended fromby the Centers for Disease Control and Prevention and implements the following operations procedures:
spaced seating in workspaces such as manufacturing cells, lunch/break rooms, conference rooms and other common areas to comply with social distancing guidelines;• | spaced 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 1410 days;
all visitors are prohibited from entering all facilities; and
daily cleaning and disinfecting protocols at all facilities; and
daily temperature checks 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 SeptemberJune 30, 20202021 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 our Q2 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 and September 30, 2020, we determined that no new triggering events had occurred during the second quarter or the third quarter of 2020 and, in accordance with ASC 350-20, an updated impairment review was not performed. Refer to Note 1 to the Consolidated Financial Statements included in Part I, Item 1 of this Report for additional information about the valuation of goodwill, indefinite-lived intangible assets and long-lived assets.
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 nine months ended September 30, 2020.
Results of Operations: Three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020
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 three months ended SeptemberJune 30, 2021 and 2020 and 2019 are reflected in the table below (in thousands, except percentages).were as follows:
| | Three Months Ended | | | Three Months Ended | | | | | | Three Months Ended | | | Three Months Ended | | | | |
| | September 30, 2020 | | | September 30, 2019 | | | $ Change | | | % Change | | |
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POS automation and banking | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | | | June 30, 2021 | | | June 30, 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 whothat may, in turn, ship those printers and terminals to international destinations. |
Net sales for the thirdsecond quarter of 2020 decreased $4.42021 increased $4 million, or 38%76%, from the same period in 2019.2020. Printer, terminal and other hardware sales volume decreased 58%increased 93% year-over-year to approximately 11,00020,000 units for the thirdsecond quarter of 20202021 due to volume decreasesincreases in all our markets butexcept our lottery market. The increase was driven primarily by a 64% decrease182% increase in unit volume from the casino and gaming market and, to a lesser extent, a 45% decrease103% increase in the POS automation market and bankinga 130% increase in the FST market. The average selling price of our printers, terminals and other hardware increased 3%decreased 4% for the thirdsecond quarter of 20202021 compared to the thirdsecond quarter of 20192020, primarily due to a lowerhigher level of POS automation and banking printer sales, which sell at a lower price than our other products. TheAdditionally, sales volume decreases were partially offset by a $1 million, or 157% increase inof our software, labels and other recurring revenue from our food service technology market.FST market increased $1.4 million, or 214%, in the second quarter of 2021 compared to the second quarter of 2020.
International sales for the thirdsecond quarter of 2020 decreased $1.82021 increased $0.7 million, or 64%100%, from the same period in 20192020, primarily due to an 80% decreasea 164% increase in sales in the international casino and gaming market.
Food service 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,media libraries, checklists and procedures,task lists, and 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 typically charged to customers upfrontannually 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 endedSeptember June 30, 20202021 and 20192020 were as follows (in thousands, except percentages):
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Software, labels and other recurring revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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The increase in food service technology sales for the thirdsecond quarter of 2021 compared to the second quarter of 2020 compared to the third 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 85% in the second quarter of 2021 compared to 2020 due largely to sales to an existing national convenience store customer and continued sales to a national travel center customer that started implementing BOHA! in the first quarter of 2021. Sales of BOHA! software recognized on a SaaS subscription basis, labels and other recurring revenue increased by 157%214%, primarily due to increased label sales and, to a lesser extent, increased software sales, compared to the prior year period despite the impact from the COVID-19 pandemic. The increase of label sales for the third quarter of 2020 was primarily due to an initial stocking order to a distributor of a large convenience store chain as well as increased usage by existing customers. Hardware sales for the third quarter of 2020 decreased 42% compared to the third quarter of 2019 primarily due to the impact fromgrowth of the COVID-19 pandemic that resulted in substantially reduced customer operations.installed base of our BOHA! terminals and workstations.
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 SeptemberJune 30, 20202021 and 20192020 were as follows (in thousands, except percentages):
| | Three Months Ended | | | Three Months Ended | | | | | | Three Months Ended | | | Three Months Ended | | | | |
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The decreaseincrease in both domestic and international POS automation and banking product revenue for the thirdsecond quarter of 2021 compared to the second quarter of 2020 compared to the third quarter of 2019 was primarily driven by a 47% decrease161% increase in domestic and international sales of our Ithaca® 9000 printer, largely attributable to fewer salesprimarily to McDonald’s, which we believe resulted fromas POS automation sales improved during the second quarter of 2021 compared to the significant negative impact of the COVID-19 pandemic.pandemic had on sales during the second quarter of 2020.
Casino and 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™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 in real-timereal time at the slot machine. Sales of our worldwide casino and gaming products for the three months endedSeptember June 30, 20202021 and 20192020 were as follows (in thousands, except percentages):
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The decreaseincrease in domestic sales of our casino and gaming products for the second quarter of 2021 compared to the second quarter of 2020 was primarily due to a 46% decline168% increase in domestic sales of our thermal casino printers, in the third quarter of 2020 compared to the third quarter of 2019, driven by industry-wide weakness resulting in lower sales to our OEMs as they were negatively impacted by the COVID-19 pandemic. Many casinos reopened during the third quarter of 2020, although at reduced capacities, which resulted in improved sales in the third quarter of 2020we have experienced some recovery compared to the second quarter of 2020. 2020 when the casino and gaming market was most severely impacted by the COVID-19 pandemic. We had no new EPICENTRAL™ software installationscontinue to experience recovery in the domestic casino and gaming market during the thirdfirst half of 2021 as sales have increased 24% in the second quarter of 2020 or 2019. Sales2021 compared to the first quarter of domestic EPICENTRALTM are project based and, as a result, may fluctuate significantly quarter-to-quarter and year-to-year.2021.
The decrease inSimilar to the domestic sales increase, international sales of our casino and gaming products increased in the thirdsecond quarter of 2021 compared to the second quarter of 2020, compared to the third quarter of 2019 was primarily due to an 81% decreasea 205% increase in sales of our thermal casino printers and a 76% decrease in sales of our off-premise gaming printers attributabledue to the sales recovery experienced in the second quarter of 2021 compared to the second quarter of 2020 when the casino and gaming market was most severely impacted by the COVID-19 pandemic. We continued to experience some recovery from the negative impactsimpact of the COVID-19 pandemic on theas international casino and gaming industry.sales in the second quarter of 2021 increased 14% compared to the first quarter of 2021.
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 SeptemberJune 30, 20202021 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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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 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 endedSeptember June 30, 20202021 and 20192020 were as follows (in thousands, except percentages):
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The decreaseincrease in sales of Printrex printers for the thirdsecond quarter of 2021 compared to the second quarter of 2020 compared to the third quarter of 2019 resulted primarily from lowerhigher domestic and international sales in the oil and gas market which was negatively impacted during the second quarter of 2020 by the decline in worldwide oil prices largely attributable to the COVID-19 pandemic. Due toThough our overall Printrex sales increased in the uncertaintysecond quarter of current2021 and future market conditions, which maywe continue to be negatively impacted by the COVID-19 pandemic,fulfill orders from existing customers, 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.decline over time.
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. Sales in our worldwide TSG market for the three months endedSeptember June 30, 20202021 and 20192020 were as follows (in thousands, except percentages):
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The decrease in domesticDomestic revenue from TSG for the thirdsecond quarter of 2020 as2021 decreased slightly by 2% compared to the thirdsecond quarter of 20192020. The decrease was primarily due to a 77% 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 a 45%27% decrease in service sales primarily related to a service contract with a banking customer that is expected to end in 2020.2021 and a 12% decline from lower lottery printer spare part sales to IGT, which can vary significantly from quarter to quarter. These decreases were partially offset by a 15%78% increase in consumable sales resulting from higher sales of replacement parts, primarilylegacy POS paper when compared to the second quarter of 2020 when many of these customers were negatively impacted by the COVID-19 pandemic. We expect TSG sales to decrease in 2021 compared to 2020 due to higherlower expected sales volume of legacy lottery printer spare parts to IGT which sales can vary significantly from quarter to quarter. We expect TSG sales to decrease for the full year 2020 compared to the full year 2019 due to lower expected sales of the legacy HP inkjet cartridges and lower service sales related to the banking service contract with a banking customer that is expected to end in 2020.noted above.
Internationally, TSG revenue decreased forincreased in the thirdsecond quarter of 20202021 compared to the thirdsecond quarter of 20192020, primarily due to a 52% decrease35% increase in sales of replacement parts and accessories to international casino and gaming customers attributable to the negative impacts of the COVID-19 pandemic and the resulting closures of many casinos and other gaming establishments, which gradually began to reopen during the third quarter of 2020.customers.
Gross Profit. Gross profit for the three months ended SeptemberJune 30, 20202021 and 20192020 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 EPICENTRALTMEPICENTRAL® 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 thirdsecond quarter of 2020,2021, gross profit decreased $2.2increased $1.0 million, or 40%45%, as compared to the third quarter of 2019 due largely to a 38% declinesales increase of 76% for the second quarter in worldwide sales. Gross2021 compared to the second quarter of 2020. Additionally, our gross margin decreased 160760 basis points, to 45.9%35.7%, for the thirdsecond quarter of 2021 compared to 43.3% for the second quarter of 2020. The decrease in gross margin resulted largely from lower margin on our BOHA! hardware sales in the second quarter of 2021 compared to the second quarter of 2020, comparedas we have reduced prices to 47.5% foraccelerate the third quartergrowth of 2019 primarily due 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 saving measures taken in earlier in the year in response to the COVID-19 pandemic.our BOHA! installed base.
Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development expense for the three months ended SeptemberJune 30, 20202021 and 20192020 is summarized below (in thousands, except percentages):
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Engineering, design and product development expenseexpenses primarily includesinclude 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)expenses including those to the third-party licensor of our food service technology software products). Such expenses increased $0.4 million, or 38%32% for the thirdsecond quarter of 2021 compared to the second quarter of 2020, comparedas we gradually return to the third quarter of 2019, primarily due to continuedmore normalized pre-COVID spending levels and expandedcontinue development of our food service technology products.products. We expect engineering, design and product development expense to increase for the full year 20202021 compared to be slightly higher than the full year 2019, as we expect2020 due to continue our strategicthe accelerated investments planned in our food service technology products despite the COVID-19 pandemic.products.
Operating Expenses - Selling and Marketing. Selling and marketing expense for the three months ended SeptemberJune 30, 20202021 and 20192020 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. Such expenses decreased $0.7increased $0.3 million, or 35%25%, for the thirdsecond quarter of 2021 compared to the second quarter of 2020, compared to the third quarter of 2019 primarily due to continuedincreased travel expense, marketing programs and new sales staff. Our level of spending was unusually low during the second quarter of 2020, as we implemented a number of significant cost saving measures implemented during the third quarter of 2020 in response to the expected impact of the COVID-19 pandemic. The Company expectsWe expect selling and marketing expenses to maintain these cost saving measurescontinue to increase for the remainder of 2020.full year 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 including resumed and expanded print advertising and marketing promotions that were deferred from 2020 due to the pandemic.
Operating Expenses - General and Administrative. General and administrative expense for the three months ended SeptemberJune 30, 20202021 and 20192020 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, telecommunicationinformation technology expenses, and other expenses related to being a publicly-traded company. General and administrative expenses decreased $0.1increased $0.3 million, or 5%12%, infor the thirdsecond quarter of 2021 compared to the second quarter of 2020 due to higher recruiting fees and employee compensation, as well as higher consulting fees related to a planned implementation of a new ERP system to be completed in 2022. These increases were partially offset by lower legal and professional fees during the second quarter of 2021 compared to the thirdsecond quarter of 2019 primarily due2020. We expect general and administrative expenses to lower professional and legal expenses and lower discretionarycontinue to increase in 2021 as we gradually return to more normalized pre-COVID-19 spending resulting from the cost saving initiatives implemented in response to the COVID-19 pandemic.levels.
Operating (Loss) Income.Loss. Operating incomeloss for the three months ended SeptemberJune 30, 20202021 and 20192020 is summarized below (in thousands, except percentages):
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Operating income decreased $1.8 millionOur operating loss increased less than 1% for the thirdsecond quarter of 2021 compared to the second quarter of 2020 as increased sales of 76% were almost entirely offset by a decrease in our gross margin of 760 basis points and an increase in operating expenses of $1.1 million during the second quarter of 2021 compared to the third quarter of 2019 primarily due to a 38% decrease in sales and a 160 basis point decline in gross margin resulting from the negative impacts of the COVID-19 pandemic. The decrease in operating income was partially offset by an 8% decrease in operating expenses due to the cost saving initiatives in place during the thirdsecond quarter of 2020.
Interest, net. We recorded net interest expense of $19$29 thousand for the thirdsecond quarter of 20202021 compared to nonet interest income or expense of $25 thousand for the thirdsecond quarter of 2019.2020. The increase in net interest expense was primarily due to lower interest income earned on our cash balances during the second quarter of 2021 compared to the second quarter of 2020. We expect interest expense to increase for the full year 2021 compared to the full year 2020 due to the full year impact of unused borrowing fees incurred for unused borrowings underfrom the Siena Credit Facility which has a higher unused borrowing rate thanand lower interest income due to the TD Bank revolving linecollection of credit that wasthe note receivable in place during the thirdfirst quarter of 2019. We expect net interest expense for the fourth quarter of 2020 to be lower than the third quarter of 2020 due to expected interest income earned on the $8.7 million of net proceeds received from the Offering.2021.
Other, net. We recorded other incomeexpense of $116$17 thousand for the thirdsecond quarter of 20202021 compared to other expense of $71$11 thousand for the thirdsecond quarter of 20192020, primarily due to foreign currency exchange gainslosses recorded by our U.K. subsidiary for the third quarter of 2020 compared to foreign exchanges losses recorded for the third quarter of 2019.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. 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 thirdsecond quarter of 20202021 of $515$687 thousand at an effective tax rate of 37.3%24.5%, compared to an income tax benefit forduring the thirdsecond quarter of 20192020 of $143$921 thousand at an effective tax rate of (59.3%)33.2%. The effective tax rate for the thirdsecond quarter of 2020 was higher becausethan the comparable 2021 period as it included the impact of theour net operating loss (“NOL”) that we expect toincurred during 2020 and will 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 third quarter of 2019 was lower because 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 third quarter of 2019.
Net (Loss) IncomeLoss. We reported a net loss for the thirdsecond quarter of 20202021 of $0.9$2.1 million, or $(0.11)$0.24 per diluted share, compared to net incomeloss of $0.4$1.9 million, or $0.05$0.25 per diluted share, for the thirdsecond quarter of 2019.2020.
Results of Operations: NineSix months ended SeptemberJune 30, 20202021 compared to ninesix months ended SeptemberJune 30, 20192020
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 ninesix months ended SeptemberJune 30, 20202021 and 20192020 are reflected in the table below (in thousands, except percentages).were as follows:
| | Nine Months Ended | | | Nine Months Ended | | | | | | Six Months Ended | | | Six Months Ended | | | | |
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POS automation and banking | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
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* | International sales do not include sales of printers and terminals made to domestic distributors or other domestic customers whothat may, in turn, ship those printers and terminals to international destinations. |
Net sales for the first ninesix months of 2020 decreased $11.82021 increased $2.1 million, or 34%14%, from the same period in 2019.2020. Printer, terminal and other hardware sales volume decreasedincreased by 45%8% to approximately 46,00038,000 units for the first ninesix months of 20202021 driven by decreases acrossvolume increases in all our markets. Thesemarkets except our lottery market. The primary volume decreasesincreases were primarily due to a 51% decrease129% increase in unit volume from the casino and gamingFST market and to a lesser extent, a 30%20% unit decreasevolume increase in our POS automation and banking market. The average selling price of our printers, terminals and other hardware remained consistentincreased 2% for the first ninesix months of 20202021 compared to the first ninesix months of 2019. The2020, primarily due to a higher level of sales volume decreases were partially offset by a $1.6 million, or 129% increase inof FST hardware, which sell at higher prices than our other products. Additionally, sales of our software, labels and other recurring revenue from our food service technology market.FST market increased $2.0 million, or 157%, in the first six months of 2021 compared to the first six months of 2020.
International sales decreased $3.5$0.8 million, or 43%24%, primarily driven by a 50%30% decrease ofin international casino and gaming sales.
Food service technology. Sales of our worldwide food service technology products for the ninesix months ended SeptemberJune 30, 2021 and 2020 and 2019 are reflected in the tables below (in thousands, except percentages).were as follows:
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Software, labels and other recurring revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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The increase in food service technology sales in the first nine monthshalf of 20202021 compared to the first nine monthshalf of 20192020 was driven primarily by an increase in sales of ourboth hardware and BOHA! software, labels and other recurring revenue. Hardware sales increased 96% in the first half of 2021 compared to the first half of 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 129%157%, primarily due to increased label sales and, to a lesser extent, increased software sales, compared to the prior year period. Sales for the prior year period were significantly lower due principally to the launchgrowth of the installed base of our BOHA! not occurring until March 2019. The large increase of label sales for the first nine months of 2020 was primarily due to an initial stocking order to a distributor of a large convenience store chain for the third quarter of 2020 as well as increased usage by existing customers. Hardware sales for the first nine month of 2020 decreased 32% compared to the first nine months of 2019 primarily due to the impact from the COVID-19 pandemic that resulted in widespread store closings and/or substantially reduced customer operations.terminals and workstations.
POS automation and banking.automation. Sales of our worldwide POS automation and banking products for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 were as follows (in thousands, except percentages):follows:
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The decreaseincrease in both domestic and international POS automation and banking salesproduct revenue for the first nine monthshalf of 20202021 compared to the first nine monthshalf of 20192020 was primarily driven by a 35% decrease19% increase in domestic and international sales of our Ithaca® 9000 printer, largely attributable to fewer salesprimarily to McDonald’s, which we believe resulted fromas POS automation sales began to improve in the first half of 2021 compared to the significant negative impact of the COVID-19 pandemic.pandemic on POS automation sales during the second quarter 2020.
Casino and gaming. Sales of our worldwide casino and gaming products for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 were as follows (in thousands, except percentages):follows:
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The decreaseincrease in domestic sales of our casino and gaming products for the first ninesix months of 20202021 compared to the first ninesix months of 20192020 was primarily due to a 48% decrease28% increase in domestic sales of our thermal casino printer, driven by industry-wide weakness resulting in lower sales to our OEMs that were impacted by casino closures in responseprinters, as we have experienced some recovery during the first six months of 2021 compared to the COVID-19 pandemic, which were in place for mostfirst six months of 2020, and particularly the second quarter of 2020, before gradually reopening at reduced capacities duringwhen the third quarter of 2020. We had no new EPICENTRAL™ software installations during the first nine 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 market was most severely impacted by the COVID-19 pandemic.
International sales forof our casino and gaming products decreased in the first ninesix months of 20202021 compared to the first ninesix months of 2019 was2020, primarily due to a 43% decline31% decrease in sales of our thermal casino printers and a 74% decline21% decrease in international sales of our off-premise gaming printers attributabledue to the continued negative impactsimpact of the COVID-19 pandemic on the international casino and gaming industry.industry which is recovering at a slower pace than the domestic casino and gaming market.
Lottery. Sales of our worldwide lottery printers for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 were as follows (in thousands, except percentages):follows:
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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. Sales of our worldwide Printrex printers for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 were as follows (in thousands, except percentages):follows:
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The decreaseincrease in sales of Printrex printers for the first nine monthshalf of 20202021 compared to the first nine monthshalf of 20192020 resulted primarily from lower domesticincreased 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 largely attributablefirst half of 2021 compared to the COVID-19 pandemic.first half of 2020. Though our overall Printrex sales increased and we continue to fulfill orders from existing customers, we are no longer focused on this market and expect sales to decline over time.
TSG. Sales in our worldwide TSG market for the ninesix months ended SeptemberJune 30, 2021 and 2020 and 2019 are reflected in the table below (in thousands, except percentages).were as follows:
| | Nine Months Ended | | | Nine Months Ended | | | | | | Six Months Ended | | | Six Months Ended | | | | |
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(In thousands, except percentages) | | | | | | | | | | | | | |
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The decrease in domestic revenue from TSG sales for the first ninesix months of 20202021 as compared to the first ninesix months of 20192020 was due primarily due to a 71% decline in consumable sales resulting largely from lower sales of legacyreplacement parts, consumable products and service revenue. Replacement part sales decreased 24% primarily from lower lottery printer spare part sales to IGT, which can vary significantly from quarter to quarter. Consumable sales declined 20%, 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 receipt paper. In addition, we experienced 33% lower service sales2018. Service revenue declined 36%, primarily related to a service contract with a banking customer that is expected to end later in 2020. This decrease was partially offset by a 10% increase in sales of replacement parts, related to an increase in sales of lottery printer spare parts to IGT, which can vary significantly from quarter to quarter.2021.
Internationally, TSG salesrevenue decreased for the first ninesix months of 20202021 compared to the first ninesix months of 20192020, primarily due to a 46%33% decrease in sales of replacement parts and accessories to international casino and gaming customers.customers and a 79% decrease in international consumable sales due to the negative impact from the COVID-19 pandemic.
Gross Profit. Gross profit for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 is summarized below (in thousands, except percentages):
Nine Months Ended September 30, | | | | | | | | | | |
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Six Months Ended June 30, | | | | | | | | | | |
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Gross profit decreased $6.8$0.7 million, or 39%10%, for the first ninesix months of 20202021 compared to the first ninesix months of 20192020, primarily due to a 34% declinedecrease in sales as compared the prior year period. Grossgross margin decreased 390of 940 basis points, to 46.2%37.0% for the first ninesix months of 2021 compared to 46.4% for the first six months of 2020. The decrease in gross margin resulted largely from lower margin on our BOHA! hardware sales during the first six months of 2021 compared to the six months of 2020 comparedas we have reduced prices to 50.1% foraccelerate the first nine monthsgrowth of 2019 primarily due 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 implemented in late March 2020 and maintained through the third quarter of 2020 in response to the COVID-19 pandemic.our BOHA! installed base.
Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development expense for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 is summarized below (in thousands, except percentages):
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Engineering, design and product development expenses increased $0.9 million, or 26%31%, forduring the first ninesix months of 2021 compared to first six months of 2020, comparedas we gradually return to the first nine months of 2019 primarily due to continuedmore normalized pre-COVID spending levels and expandedcontinue development for our food service technology products.products.
Operating Expenses - Selling and Marketing. Selling and marketing expense for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 is summarized below (in thousands, except percentages):
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Selling and marketing expenses decreased $1$0.4 million, or 17%12%, for the first ninesix months of 20202021 compared to the first ninesix months of 2019 2020 primarily due to cost saving measures implementedlower expenses from travel, trade shows and marketing programs in late March 2020 and maintained through the thirdfirst six months of 2021. The first quarter of 2020 in response to the COVID-19 pandemic, which more than offset the increase inreflected pre-COVID-19 levels of sales and marketing expenses resulting from the new and expanded marketing programs and promotions to support our food service technology products thatbefore costs saving measures were implemented duringonce we were impacted by the pandemic late in the first quarter of 2020 prior to the COVID-19 outbreak.2020.
Operating Expenses - General and Administrative. General and administrative expense for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 is summarized below (in thousands, except percentages):
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General and administrative expenses increased $0.3 million, or 4%5%, for the first ninehalf of 2021 compared to first half of 2020 due to higher recruiting fees and employee compensation, as well as higher consulting fees related to a planned implementation of a new ERP system to be completed in 2022. These increases were partially offset by lower legal and professional fees during the first six months of 20202021 compared to the first ninesix months of 2019 primarily due to higher compensation expense and professional and legal expenses partially offset by a decrease in discretionary spending resulting from cost saving initiatives implemented in the first quarter of 2020 in response to the COVID-19 pandemic.2020.
Operating (Loss) Income.Loss. Operating (loss) incomeloss for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 is summarized below (in thousands, except percentages):
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Our operating income decreased $6.9loss increased $1.4 million, or 34%, for the first ninesix months of 20202021 compared to the first ninesix months of 2019 primarily2020 on 14% higher sales due to the 34%a decrease in sales and the 390 basis point decrease inour gross margin forof 940 basis points and an increase in operating expenses of $0.7 million during the first ninesix months of 20202021 compared to the first ninesix months of 2019.2020.
Interest, net. We recorded net interest expense of $41$42 thousand for the first ninesix months of 20202021 compared to $13net interest expense of $22 thousand for the first ninesix months of 2019.2020. The increase in net interest expense was primarily due to interest on borrowingsa full six months of unused borrowing fees under the Siena Credit Facility in the second quarter of 2020 and higher fees for unused borrowings under the Siena Credit Facility as compared to no borrowings and lower fees for unused borrowings under the TD Bank revolving line of credit for the first nine months of 2019.that was entered into on March 13, 2020.
Other, net. We recorded other expense of $60$100 thousand for the first ninesix months of 20202021 compared to $123other expense of $176 thousand for the first ninesix months of 20192020 primarily due to lower foreign currency exchange losses recorded by our U.K. subsidiary.
Income Taxes. We recorded an income tax benefit for the first ninesix months of 20202021 of $1.9$1.2 million at an effective tax rate of 33.9%22.3%, compared to an income tax benefit forduring the first ninesix months of 20192020 of $54 thousand$1.4 million at an effective tax rate of (4.3%)32.8%. The effective tax rate for the first ninesix months of 2020 was higher becausethan the comparable 2021 period as it included the impact of the net operating loss (“NOL”)our NOL that we expect toincurred during 2020 and will 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 nine months of 2019 was unusually low because it included the FDII deduction and the impact of the tax rate on lower pre-tax income.
Net (Loss) IncomeLoss. We reported a net loss for the first ninesix months of 20202021 of $3.7$4.3 million, or $(0.49)$0.48 per diluted share, compared to net incomeloss of $1.3$2.8 million, or $0.17$0.38 per diluted share, for the first ninesix months of 2019.2020.
Liquidity and Capital Resources
Cash Flow
For the first ninesix months of 2020,2021, our cash and cash equivalents balance decreased $3.3$2.4 million, or 77%23%, from December 31, 2019.2020. We ended the thirdsecond quarter of 20202021 with $0.9$8.0 million in cash and cash equivalents, of which $0.1$0.3 million was held by our U.K. subsidiary, and outstanding borrowings of $2.2 million fromunder the PPP Loan.
Operating activities: The following significant factors affected our cash used in operating activities of $4.2$3.9 million for the first ninesix months of 20202021 as compared to cash provided byused in operating activities of $0.8$2.3 million for the first ninesix months of 2019:2020:
During the first ninesix months of 2021:
| ● | We reported a net loss of $4.3 million. |
| ● | We recorded depreciation and amortization of $0.5 million and share-based compensation expense of $0.7 million. |
| ● | Accounts receivable increased $2.4 million, or 70%, primarily due to increased sales volume during the second quarter of 2021. |
| ● | Inventories decreased $2.6 million, or 23%, due to the utilization of inventory on hand to fulfill sales. |
| ● | Accounts payable increased $1.0 million, or 60%, due primarily to the timing of payments during the second quarter of 2021. |
| ● | Accrued liabilities and other liabilities decreased $0.9 million, or 11%, due primarily to the payment of 2020 annual bonuses in March 2021. |
During the first six months of 2020:
| ● | We reported a net loss of $3.7$2.8 million. |
| ● | We recorded depreciation and amortization of $0.8$0.5 million, and share-based compensation expense of $0.6 million.$0.4 million. |
| ● | Accounts receivable decreased $1.4$3.1 million, or 22%48%, due primarily due to lower sales volume during the thirdsecond quarter of 2020. |
| ● | Inventories decreased by less than 1% due primarily to the utilization of inventory on hand to fulfill sales and delaying inventory purchases to the second half of 2020. |
| ● | Inventories increased $0.4Accounts payable decreased $1.7 million, or 4%56%, primarily due to the buildup of inventory from non-cancellable purchase orders that were placed before the onset of the COVID-19 pandemic. |
| ● | Accounts payable decreased $0.7 million, or 23%, primarilydue to inventory purchases made towards the end of the fourth quarter of 2019 that were subsequently paid in the first quarter of 2020.
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| ● | Accrued liabilities and other liabilities decreased $0.5 million, or 7%, primarily due to decreased deferred revenue. |
During the first nine months of 2019:
| ● | We reported net income of $1.3 million. |
| ● | We recorded depreciation and amortization of $0.7 million, and share-based compensation expense of $0.6 million.
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| ● | Accounts receivable increased $0.4 million, or 5%, primarily due to sales for the third quarter 2019 occurring late in the quarter.
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| ● | Inventories decreased by less than 1% duedelaying inventory purchases to the utilizationsecond half of inventory on hand2020 to fulfill sales. |
| ● | Other current and long term assets increased $0.6 million, or 81% primarily due to an advanced payment of royalty fees to a technology partner for software solutions used inimprove our food service technology market.liquidity.
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| ● | Accounts payable decreased $0.9 million, or 24%, primarily due to the utilization of inventory on hand to fulfill sales, which in turn resulted in a lower level of inventory purchases during the third quarter of 2019. |
| ● | Accrued liabilities and other liabilities decreased $0.1$0.7 million, or 3%10%, due primarily to the payment of 2019 annual bonuses in March 2020. |
Investing activities: Our capital expenditures including capitalized software costs, were $0.6 million and $1.1$0.2 million for the first ninesix months of 2020 and 2019, respectively. Expenditures2021 compared to $0.5 million for the first ninesix months of 2020. Expenditures in 2021 were primarily for computer and networking equipment and new product tooling equipment. Expenditures in 2020 were primarily for new product tooling equipment, leasehold improvements at our Las Vegas facility and computer and networking equipment. ExpendituresInvesting activities also provided $1.6 million for the first ninesix months of 2019 were primarily for new product tooling equipment and, to a lesser extent, computer and networking equipment. Additionally,2021 upon the collection of the remaining $1.6 million note receivable balance from an unaffiliated third-party during the first quarter of 2021, compared to $0.6 million of cash used in investing activities during the first six 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$1.2 million, primarily for new product tooling, new computer software and equipment purchasescomputer and leasehold improvementsnetworking equipment to support our food service technology market. In responsemarket and to the COVID-19 pandemic, we have curtailed portions of our planned capital expenditures until market conditions improve.
a lesser extent, new product tooling.
Financing activities: Financing activities provided $2.2$0.1 million of cash for the first ninesix months of 2021 from proceeds from stock option exercises of $0.3 million, partially offset by $0.1 million for the payment of 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. During the first six months of 2020, financing activities provided $2.3 million of cash primarily from the $2.2 million in funds received from the PPP Loan and proceeds of $0.4 million from stock option exercises, partially offset by the payment of financing costs associated with signing our Siena Credit Facility. DuringAdditionally, during the first ninesix months of 2020, we borrowed and subsequently repaid $2.8 million from our Siena Credit Facility. During the first nine months of 2019, we used $2.2 million of cash from financing activities to pay dividends of $2 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$10.0 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$5.0 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 monththree-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.EBITDA and continued through the 12-month period from April 1, 2020 to March 31, 2021. On July 21, 2021, the Company entered into an amendment (the “Credit Facility Amendment”) to the Siena Credit Facility. The Credit Facility Amendment changed the financial covenant under the Siena Credit Facility from a minimum EBITDA covenant to an excess availability covenant requiring that the Company maintain excess availability of at least $750,000 under the Siena Credit Facility, tested as of the end of each calendar month, beginning with the calendar month ending July 31, 2021. As of SeptemberJune 30, 2020,2021, we had no outstanding borrowings under the Siena Credit Facility and were in compliance with our financial covenant. The following table demonstrates our compliance with$4.7 million of available borrowing capacity under the financial covenant at September 30, 2020.
| | Calculation for the period from
April 1, 2020 to September 30, 2020
|
| | |
Siena Credit Facility.
On May 1, 2020 (the “Loan Date”), the Company entered intowas granted the PPP Loan withfrom 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 are due on the PPP Loan for six months from the date of first disbursement, but interest will continue to accrue during the deferment period. 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 maywould be forgiven to the extent that funds from the PPP Loan arewere 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 payments under lease agreements in effect before February 15, 2020, utilitiesutilized for which service began before February 15, 2020 and interest on debt obligations incurred before February 15, 2020, (collectively, “qualifying expenses”), subject to conditions and limitations provided in the CARES Act. At least 60% (as(under the PPP terms, as amended) of the proceeds of the PPP Loan must beneeded to have been used for eligible payroll costs for the PPP Loan to be forgivable.forgiven. The Company has maximizedsubmitted its PPP loan forgiveness application in May 2021 to the use ofSBA through Berkshire Bank and submitted the related loan necessity questionnaire in June 2021. On July 8, 2021, the Company received notifications from Berkshire Bank and the SBA that its 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 approvalloan (including all interest accrued thereon) had been fully forgiven by the SBA and may also be subjectthat the forgiveness payment date was July 1, 2021.
The PPP Loan, which was evidenced by a Note dated the Loan Date issued by the Company (the “Note”) in favor of Berkshire Bank as a lender, was scheduled to further requirements in any regulationsmature on May 1, 2022 and guidelineshad a fixed interest rate of 1.0% per annum, accruing from the Loan Date and payable monthly. No payments were due on the PPP Loan for six months from the date of first disbursement, and because a loan forgiveness application was submitted to the SBA may adopt.within 10 months after the end of the covered period, no payments were due until the date on which the SBA remitted the loan forgiveness amount to the PPP Lender, and interest that accrued during the deferment period was included in the forgiveness amount. The Note was unsecured and guaranteed by the SBA. The PPP Loan is classified as “Long-term debt” in the Condensed Consolidated Balance Sheet untilSheet. The forgiveness of the forgiveness determination has been made byPPP loan will be recognized under “Interest and other expense” section in the SBA.Condensed Consolidated Statement of Operations during the quarter ending September 30, 2021.
Shareholder Dividend Payments
In 2012, our Board of Directors initiated a quarterly cash dividend program whichthat was subject to the Board’s approval each quarter. Dividends declared and paid on our common stock totaled $0.7 million or $0.09 per in the three months ended September 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 nine months ended September 30, 2020 and 2019, we did not repurchase any shares of our common stock. As of September 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 areis discussed above, nor does it anticipate a material change in the terms or covenants pertaining to its current 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.above.
We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities proceeds raised through the Offering on October 16, 2020,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 is 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 disclosure of payments we have committed 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 lease 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 material changes in our contractual obligations since December 31, 2019.
As of SeptemberJune 30, 2020,2021, we had no off-balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in 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 nine months ended September 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 SeptemberJune 30, 2020.2021. 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 SeptemberJune 30, 2020, we have fully remediated one of the material weaknesses, while2021, one material weakness was not fully remediated;remediated and as a result, our disclosure controls and procedures were not effective as of SeptemberJune 30, 2020.2021. Management is undertaking effortshas completed the implementation of new controls to remediate the remaining material weakness whichbut is required to allow sufficient time to pass to validate that the implemented controls are operating effectively. The details of our remediation efforts are described below.
Notwithstanding the material weakness, our management, including our CEO and CFO, has concluded that our Consolidated Financial Statementsconsolidated 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 arefor the six months ended June 30, 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 deficiency that constituted a material weakness in our internal control over financial reporting as of December 31, 2019 and 2018 which has been fully remediated as of SeptemberJune 30, 2020.
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 were not designed to ensure that users maintain proper segregation of duties and, as a result, users could have had inappropriate access rights (the “Access Control Weakness”).
We identified the following control deficiency that constituted a material weakness in our internal control over financial reporting as of September 30, 20202021 and December 31, 20192020 and 2018.
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,weakness, but did not result in a material misstatement toof our annual or interim consolidated financial statements. However, if the remaining material weakness 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 June 30, 2021, 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 evaluated and determined (1) if a standard Oracle report exists containing the same information as the spreadsheet, and if so, we utilized the servicesstandard Oracle report (without modification) instead of the spreadsheet to support our accounting records and (2) if a standard Oracle report cannot be used, we implemented 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 have designed and implemented 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 2020,2021, we completed the analysisevaluation process for each key spreadsheet based on the above criteria, and deployed an action plan. Based on this analysis and action plan, during the second quarter of 2020,2021, we created new Oracle responsibilities for each employee for which a conflict was identified to remove Oracle transactional responsibilities that we believed to be conflicting and reassigned those responsibilities to a different employee to ensure proper segregation of duties. We completed the implementation of new key controls for all of our key spreadsheets to validate the completeness and accuracy of the information contained within and supporting each such spreadsheet. We expect to complete the remediation of the Spreadsheet Control Weakness by the end of 2021, as the new Oracle responsibilitiescontrols are evaluated for all users in July 2020. Duringeffectiveness during the third quarterremainder of 2020, we completed the enhancement and implementation provisioning and user certification controls to ensure we maintain the appropriate segregation of duties within Oracle. The Access Control Weakness was deemed to be remediated as of September 30, 2020.
2021.
• | 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 key spreadsheets, we plan to design and implement a new key control to validate the completeness and accuracy of information supporting our accounting records. During the first nine 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.
|
We believe these steps will address the material weakness 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 three monthsfiscal quarter ended SeptemberJune 30, 20202021 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 SeptemberJune 30, 2020,2021, 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.
AsInformation regarding risk factors appears under Part I, Item 1A, “Risk Factors,” of September 30, 2020, there hasour Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material change inchanges from the risk factors previously disclosed under Part I, Item 1A of the 2019in that Annual Report on Form 10-K. The risks factors described in our Annual Report on Form 10-K as supplemented byare not the risk factors included in Part II, Item 1A ofonly risks facing our 1Q 2020 Form 10-QCompany. Additional risks and uncertainties, not currently known to us or that we currently deem to be immaterial, also may materially adversely affect our 2Q 2020 Form 10-Q.business, financial condition or future results.
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.
10.1 | | Underwriting Agreement between TransAct Technologies Incorporated and Roth Capital Partners, LLC, as representative, dated October 14, 2020 (incorporated by reference to Exhibit 1.1 of the Company’s Current Report on form 8-K (SEC File No. 000-21121) filed with the SEC on October 16, 2020).
|
| | 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). |
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). |
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: November 9, 2020August 11, 2021 | Steven A. DeMartino |
| President, Chief Financial Officer, Treasurer and Secretary |
| (Principal Financial Officer) |
| |
| |
| By: /s/ David B. Peters |
Dated: November 9, 2020August 11, 2021 | David B. Peters |
| Vice President and Chief Accounting Officer |
| (Principal Accounting Officer) |