TRANSACT TECHNOLOGIES INCORPORATED Forward Looking Statements Certain statements included in this Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 (this "Report"), including without limitation statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology, such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "project" or "continue" or the negative thereof or other similar words. All forward-looking statements involve risks and uncertainties, including, but not limited to those listed in Part 1, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , in Part II, Item 1A of this report and in our other filings with theSEC . Actual results may differ materially from those discussed in, or implied by, the forward-looking statements. The forward-looking statements speak only as of the date of this Report and we assume no duty to update them. As used in this Report, unless the context otherwise requires, references to "we", "us", "our", the "Company" and "TransAct" refer to the consolidated operations ofTransAct Technologies Incorporated , and its consolidated subsidiaries.
Overview
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. 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.
Impact of COVID-19
In December 2019 , a novel strain of coronavirus and the disease it causes,
commonly known as COVID-19, was first reported in China and has since widely
impacted the global public health and economic environment. In March 2020 , the
World Health Organization declared COVID-19, including all additional variations
and strains thereof, a global pandemic. Our business trends through the first
two months of the year were in line with internal expectations; however, the
challenges posed by the COVID-19 pandemic on the United States and global
economy increased significantly as the first quarter progressed in March 2020 .
Unfortunately, massive disruptions across the world persist as of the date of
this Report due to COVID-19 and the measures implemented to mitigate its spread
continue to cause widespread business, government and school closures that
especially affect the casino and gaming and food service industries. We expect
such disruptions to continue to negatively impact our overall business for the
foreseeable future.
As a result of the COVID-19 pandemic and measures implemented to mitigate the
spread of COVID-19, we have experienced decreased demand for our products and
lower than anticipated sales in the second half of March 2020 , particularly from
our food service and casino customers. This trend has continued through April
and into May 2020 , and we expect it to continue for the remainder of the second
quarter of 2020, and likely through the end of 2020. Based on sales orders
booked for the second quarter to date, we expect that sales for the second
quarter of 2020 will be significantly lower compared to the first quarter of
2020. Below is a discussion of the impact of COVID-19 we have experienced and
believe we will continue to experience in each of our markets.
Food service technology and POS automation. In both our food service and POS
automation markets, many restaurants and food service establishments are
currently closed, and those that remain open are doing so under restrictions
that limit them to providing drive through, take out or delivery service without
dine-in options, as well as limiting the volume of customers and employees on
site at any one time. Though some are considering re-opening dine-in service in
the near term, we believe such service offerings will be gradual, beginning with
outdoor seating only, and progressing to indoor dining with seating limitations
based on social distancing guidelines. In addition, many food service providers
will need to develop and implement new or enhanced policies and operating
procedures regarding cleaning, sanitizing and social distancing to ensure the
safety of their employees and customers. As our customers begin to reopen and
recover from the financial impact of being closed for several months, we expect
new capital expenditures to be a lower priority for them in the near term, which
we believe will negatively impact sales of BOHA! hardware, software and label
products, as well as sales of POS printers. However, we believe we have an
opportunity in the long run as our BOHA! software solutions could prove to be
helpful to our food service customers in efficiently and effectively managing
and complying with these new procedures, especially as many establishments will
likely be operating with reduced staff levels.
15
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Casino and gaming. In the casino and gaming market, most casinos and other
gaming establishments have closed worldwide and remain shut down. However,
casinos in Macau have recently begun to open and a small number of U.S. casinos
have announced plans to begin to open later in May. Similar to restaurants, we
believe casino openings, when they begin, will be slow and measured, starting at
reduced capacity with limited game play based on social distancing guidelines,
and progressively increasing capacity over time. As casinos begin to reopen and
recover from the financial impact of being closed for several months, we expect
that casinos' appetite for purchases of new slot machines will be diminished,
which we believe will negatively impact sales of casino and gaming printers
purchased by slot manufacturers for use in slot machines at casinos. We believe
these effects will continue even after operating restrictions are lifted in the
event that the downturn in economic conditions persists.
Lottery. We exited the lottery market at the end of 2019 and expect IGT to make
a final purchase of our lottery printer during the second quarter of 2020.
Therefore, we do not anticipate that COVID-19 will impact our lottery printer
sales.
Printrex. The oil and gas market has been negatively impacted by the decline in
worldwide oil prices attributable to the COVID-19 pandemic. Due to the
uncertainty of current and future market conditions, we believe sales of our
Printrex oil and gas printers will be negatively impacted until oil and gas
prices recover.
TSG. Due to closures and reduced operating capacity of restaurants, food
service establishments, casinos and other gaming establishments resulting from
the COVID-19 pandemic, we expect sales of spare parts, service and consumable
products to also decline correspondingly due to lower usage while the pandemic
persists.
We also expect our gross margin to be negatively impacted by the COVID-19 pandemic. As a result of an expected significantly lower sales level, we believe our gross margin will decline 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 inChina andThailand that conduct approximately 80% and 19%, respectively, of our printer and terminal manufacturing, due to reduced operations at these facilities, which are not yet operating at full capacity. 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 to insufficient inventory levels and impair our ability to deliver products to our customers on time or at all. While it is difficult to predict the magnitude of the impact that the pandemic and the responsive measures will have on our customers and our business, we have taken several actions to manage our expenses during these turbulent and uncertain times. Such steps include: • the temporary furlough of approximately 10% of our workforce prior to receiving
PPP loan proceeds;
• a 10% reduction in the salaries of all salaried, non-commissioned employees,
including executive officers,
• a reduction in sales commissions for all commissioned employees;
• a 10% reduction of cash retainer fees for all non-employee director; and
• the elimination of discretionary spending wherever possible.
In addition, we have taken further measures to increase liquidity, including the following: • PPP Loan - OnMay 1, 2020 , the Company was granted a$2.2 million loan under
the Paycheck Protection Program (the "PPP Loan") administered by the Small
Business Administration ("SBA") established under the Coronavirus Aid, Relief,
and Economic Security ("CARES") Act, which has enabled us to return our
furloughed employees to full time employment.
• New Credit Facility - We also secured a new revolving credit facility with
million, subject to a borrowing base
• Reduced Capital Expenditures - We also have limited capital expenditures until
market conditions improve. 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. OnMarch 20, 2020 , we instituted work-from-home for the majority of our employees to reduce the spread of COVID-19 and to comply with government mandates. Our existing remote work capabilities, which include providing employees with laptop computers and remote access to our IT systems, mitigated reductions in employee productivity and costs related to the implementation of work-from-home practices in connection with the COVID-19 pandemic. In addition, even with the move to work-from-home, our existing internal control structure remained operational and unchanged. 16 -------------------------------------------------------------------------------- Our distribution centers, deemed an essential service, remain operational. We implemented a new COVID-19 policy 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 from theCenters for Disease Control and Prevention and includes: • staggered shifts and a rotational/flexible work schedule to keep the number of
employees at a facility to a minimum;
• providing and requiring the use of protective equipment such as masks and
gloves when in common areas;
• spacing seating in workspaces such as manufacturing cells, lunch/break rooms,
conference rooms and other common areas to comply with social distancing
guidelines;
• requiring any employee who (i) shows symptoms of COVID-19 or (ii) has been
exposed to someone else who shows symptoms or has tested positive for COVID-19
not to return to work for fourteen days;
• prohibiting any visitors from entering any facility;
• implementing daily 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 sheet as ofMarch 31, 2020 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 Part II, Item 1A, 'Risk Factors" 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 inthe United States of 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 ofMarch 31, 2020 , management determined that potential impairment triggers had occurred and performed impairment testing as ofMarch 31, 2020 . We have determined that no goodwill or intangible asset impairment has occurred and the fair value of goodwill was higher than our carrying value based on our assessment as ofMarch 31, 2020 when the impairment review was 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 Annual Report on Form 10-K for the year endedDecember 31, 2019 . We have reviewed those policies and determined that they remain our critical accounting policies for the three months endedMarch 31, 2020 .
Results of Operations: Three months ended
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 endedMarch 31, 2020 and 2019 were as follows (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. 17 --------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019 $ Change % Change
Food service technology $ 1,371 13.4 % $ 1,213 10.5 % $ 158 13.0 %
POS automation and banking 1,558 15.2 % 1,277 11.1 % 281 22.0 %
Casino and gaming 4,931 48.1 % 5,483 47.4 % (552 ) (10.1 %)
Lottery - 0.0 % 697 6.0 % (697 ) (100.0 %)
Printrex 117 1.1 % 342 3.0 % (225 ) (65.8 %)
TSG 2,270 22.2 % 2,538 22.0 % (268 ) (10.6 %)
$ 10,247 100.0 % $ 11,550 100.0 % $ (1,303 ) (11.3 %)
International * $ 2,832 27.6 % $ 2,543 22.0 % $ 289 11.4 %
* 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 quarter of 2020 decreased$1.3 million , or 11%, from the same period in 2019. Printer, terminal and other hardware sales volume decreased 12% to approximately 25,000 units, driven primarily by no sales volume of lottery printers due to our decision to exit the lottery market at the end of 2019 and a 10% decrease in unit volume in the casino and gaming market, partially offset by a 22% increase in unit volume from the POS automation and banking market for the first quarter of 2020 compared to the first quarter of 2019. The average selling price of our printers, terminals and other hardware decreased 4% for the first quarter of 2020 compared to the first quarter of 2019 due primarily to higher POS automation and banking sales, which sell at a lower price than our other products.
International sales for the first quarter of 2020 increased
Food service technology. The primary offering in the food service technology
market is our BOHA! ecosystem, which combines our latest generation terminal,
cloud-based software applications and related hardware into a unique solution to
automate back-of-house operations in restaurants and food service operations.
The software component of BOHA! consists of a suite of software-as-a-service
("SaaS")-based applications, 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, 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 go labels for prepared foods, and
"enjoy by" date labels. The BOHA! terminal is 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 March 31, 2020 and 2019 were as follows (in thousands, except
percentages):
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019 $ Change % Change
Domestic $ 1,239 90.4 % $ 1,117 92.1 % $ 122 10.9 %
International 132 9.6 % 96 7.9 % 36 37.5 %
$ 1,371 100.0 % $ 1,213 100.0 % $ 158 13.0 %
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019 $ Change % Change
Hardware $ 755 55.1 % $ 903 74.4 % $ (148 ) (16.4 %)
Software, labels and
other recurring
revenue 616 44.9 % 310 25.6 % 306 98.7 %
$ 1,371 100.0 % $ 1,213 100.0 % $ 158 13.0 %
18-------------------------------------------------------------------------------- The increase in food service technology sales for the first quarter of 2020 compared to the first quarter 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 99%, including an 88% increase in label sales and a 385% increase in software sales, compared to the prior year period, though such sales had a low base for first quarter of 2019 following the launch of BOHA! inMarch 2019 . Hardware sales declined approximately 16% primarily due to the initial impact from the COVID-19 pandemic that resulted in widespread store closings and/or substantially reduced operations. POS automation and banking. 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 2019. Sales of our worldwide POS automation and banking products for the three months endedMarch 31, 2020 and 2019 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended March 31, 2020 March 31, 2019 $ Change % Change Domestic$ 1,554 99.7 %$ 1,259 98.6 %$ 295 23.4 % International 4 0.3 % 18 1.4 % (14 ) (77.8 %)$ 1,558 100.0 %$ 1,277 100.0 %$ 281 22.0 % The increase in POS automation and banking product revenue for the first quarter of 2020 compared to the first quarter of 2019 was driven primarily by a 25% increase in sales of our Ithaca® 9000 printer, in large part from increased sales to McDonald's. 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 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-time at the slot machine. Sales of our worldwide casino and gaming products for the three months endedMarch 31, 2020 and 2019 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended March 31, 2020 March 31, 2019 $ Change % Change Domestic$ 2,558 51.9 %$ 3,424 62.4 %$ (866 ) (25.3 %) International 2,373 48.1 % 2,059 37.6 % 314 15.3 %$ 4,931 100.0 %$ 5,483 100.0 %$ (552 ) (10.1 %) The decrease in domestic sales of our casino and gaming products for the first quarter of 2020 compared to the first quarter of 2019 was primarily due to a 24% decrease in domestic sales of our thermal gaming printers driven primarily by industry-wide weakness resulting in lower sales to our OEMs as they began to experience the impact of casino closures due to the COVID-19 pandemic in late March. We had no new EPICENTRAL™ software installations during the first quarter 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. International casino and gaming product sales increased for the first quarter of 2020 compared to the first quarter of 2019 due to a 17% increase in sales of our thermal casino printers largely from resumed sales to a large OEM inEurope who had substantially reduced sales during 2019. This increase was somewhat offset by lower sales to an Asian OEM.
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"). Sales of our worldwide lottery printers for the three
months ended
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019 $ Change % Change
Domestic $ - 0.0 % $ 697 100.0 % $ (697 ) (100.0 %)
International - 0.0 % - 0.0 % - 0.0 %
$ - 0.0 % $ 697 100.0 % $ (697 ) (100.0 %)
19-------------------------------------------------------------------------------- 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. OnDecember 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, we expect IGT to make a final purchase of our lottery printers during the second quarter of 2020 and we expect full year 2020 lottery sales to be less than 2019 full year lottery sales. 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 endedMarch 31, 2020 and 2019 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended March 31, 2020 March 31, 2019 $ Change % Change Domestic$ 61 52.1 %$ 297 86.8 %$ (236 ) (79.5 %) International 56 47.9 % 45 13.2 % 11 24.4 %$ 117 100.0 %$ 342 100.0 %$ (225 ) (65.8 %) The decrease in sales of Printrex printers for the first quarter of 2020 compared to the first quarter of 2019 resulted primarily from lower domestic sales in the oil and gas market which was negatively impacted by the decline in worldwide oil prices attributable to the COVID-19 pandemic. Due to the uncertainty of current and future market conditions, attributable to the COVID-19 pandemic, we are unable 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. Revenue generated by our TSG includes sales of consumable products (inkjet cartridges, ribbons, receipt paper, and other printing supplies), 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 endedMarch 31, 2020 and 2019 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended March 31, 2020 March 31, 2019 $ Change % Change Domestic$ 2,003 88.2 %$ 2,213 87.2 %$ (210 ) (9.5 %) International 267 11.8 % 325 12.8 % (58 ) (17.8 %)$ 2,270 100.0 %$ 2,538 100.0 %$ (268 ) (10.6 %) The decrease in domestic revenue from TSG for the first quarter of 2020 as compared to the first quarter of 2019 was primarily due to a 58% decline in consumable sales due largely 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 printer paper. This decrease was partially offset by 42% higher sales of replacement parts, primarily from higher lottery printer spare parts to IGT which can vary significantly from quarter to quarter. We expect TSG sales to decrease for the full year 2020 compared to 2019 due to lower expected sales of lottery printer spare parts to IGT as we exited the lottery market at the end of 2019 and lower service sales related to a service contract with a banking customer that is expected to end in 2020.
Internationally, TSG revenue decreased for the first quarter of 2020 compared to the first quarter of 2019 primarily due to a 30% decrease in sales of replacement parts and accessories to international casino and gaming customers.
Gross Profit. Gross profit information for the three months ended
Three Months Ended
March 31, Percent Percent of Percent of
2020 2019 Change Total Sales - 2020 Total Sales - 2019
$ 4,918 $ 6,086 (19.2 %) 48.0 % 52.7 %
20-------------------------------------------------------------------------------- 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. For the first quarter of 2020, gross profit decreased$1.2 million , or 19%, due largely to a sales decrease of 11% for the first quarter in 2020 compared to the first quarter of 2019 and tariffs on imports from our contract manufacturers located inChina . Our gross margin decreased 470 basis points, to 48% for the first quarter of 2020 compared to 52.7% for the first quarter of 2019. The decreased gross margin resulted from higher sales of POS printers, which carry lower margins than our other products, higher tariff expense incurred during the first quarter of 2020 and the impact of fixed overhead expenses on lower sales volume as a result of the initial effects of the COVID-19 pandemic. Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development information for the three months endedMarch 31, 2020 and 2019 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019$ 1,385 $ 1,165 18.9 % 13.5 % 10.1 % Engineering, design and product development expenses 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). Engineering, design and product development expenses increased$220 thousand , or 19%, for the first quarter of 2020 compared to the first quarter of 2019, primarily due to continued and expanded development for our food service technology products.
Operating Expenses - Selling and Marketing. Selling and marketing information
for the three months ended
Three Months Ended
March 31, Percent Percent of Percent of
2020 2019 Change Total Sales - 2020 Total Sales - 2019
$ 2,208 $ 1,854 19.1 % 21.5 % 16.1 %
Selling and marketing expenses primarily include 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. Selling and marketing expenses increased by $354 thousand , or 19%,
for the first quarter of 2020 compared to the first quarter of 2019 primarily
due to the impact from the hiring of food service technology positions during
2019 and new and expanded marketing programs and promotions to support our food
service technology products that were implemented prior to the COVID-19
outbreak. In response to the COVID-19 pandemic, we have postponed further
increases in spending and have implemented a number of cost reduction
initiatives that will reduce selling and marketing expenses in the near term.
Operating Expenses - General and Administrative. General and administrative
information for the three months ended
Three Months Ended
March 31, Percent Percent of Percent of
2020 2019 Change Total Sales - 2020 Total Sales - 2019
$ 2,620 $ 2,290 14.4 % 25.6 % 19.8 %
General and administrative expenses primarily include salaries, incentive
compensation, and other payroll related expenses for our executive, accounting,
human resources 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 $330 thousand , or 14%, for the first quarter
of 2020 compared to the first quarter of 2019 due primarily to higher
professional and legal expenses.
21--------------------------------------------------------------------------------
Operating Income (Loss). Operating income (loss) information for the three months endedMarch 31, 2020 and 2019 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019$ (1,295 ) $ 777 (266.7 %) (12.6 %) 6.7 % Our operating income decreased$2.1 million , or 267%, in the first quarter of 2020 compared to the first quarter of 2019 due to a decrease in sales of 11%, increase in operating expenses of 17% related to investments made in our food service technology market during 2020 prior to the COVID-19 outbreak, and a decrease in our gross margin of 470 basis points. Interest. We recorded net interest income of$3 thousand for the first quarter of 2020 compared to net interest expense of$6 thousand for the first quarter of 2019 due to interest income earned on the note receivable during the 2020 period partially offsetting interest expense. We expect interest expense to increase in the full year 2020 compared to the full year 2019 due to anticipated borrowings from our revolving line of credit in 2020 resulting from the COVID-19 pandemic and the ramping up of investment in our food service technology market compared to no borrowings during 2019. Other, net. We recorded other expense of$165 thousand for the first quarter of 2020 compared to other income of$90 thousand for the first quarter of 2019. We incurred other expense in the 2020 period primarily due to foreign currency exchange losses recorded by ourU.K. subsidiary for the first quarter of 2020 compared to foreign currency exchange gains in the first quarter of 2019. Going forward, we may continue to experience more foreign exchange gains or losses depending on the level of sales toEurope through ourU.K. subsidiary and the fluctuation in exchange rates of the Euro and Pound Sterling against theU.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 first quarter of 2020 of$465 thousand at an effective tax rate of 31.9%, compared to an income tax provision during the first quarter of 2019 of$115 thousand at an effective tax rate of 13.4%. The effective tax rate for the first quarter of 2020 was higher as it included the impact of net operating loss ("NOL") that we expect to carry back to prior years. The CARES Act was enacted onMarch 27, 2020 and 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.
Net Income. We reported a net loss for the first quarter of 2020 of
Liquidity and Capital Resources
Cash Flow For the first three months of 2020, our cash and cash equivalents balance decreased$3.6 million , or 85%, fromDecember 31, 2019 . We ended the first quarter of 2020 with$0.6 million in cash and cash equivalents, of which$0.1 million was held by ourU.K. subsidiary, and$0.8 million of outstanding borrowings under our revolving line of credit. Operating activities: The following significant factors affected our cash used in operating activities of$3.6 million for the first three months of 2020 as compared to cash used in operating activities of$1.6 million for the first three months of 2019:
During the first three months of 2020:
? We reported a net loss of
? We recorded depreciation and amortization of
compensation expense of
? Accounts receivable decreased
volume during the first three months of 2020.
? Inventory increased
during the first quarter of 2020 to support anticipated sales that did not
occur due to the impact of the COVID-19 pandemic on our sales in March.
? Other current and long-term assets increased
to advance payments made in the first quarter of 2020 for annual ERP software
maintenance.
? Accounts payable decreased
purchases made towards the end of the fourth quarter of 2019 that were
subsequently paid in the first quarter of 2020.
? Accrued liabilities and other liabilities decreased
primarily to the payment of 2019 annual bonuses inMarch 2020 . 22
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During the first three months of 2019:
? We reported net income of
? We recorded depreciation and amortization of
compensation expense of
? Accounts receivable decreased
receivables for 2018 sales.
? Inventory increased
hand to support future anticipated sales of BOHA! hardware product for the food
service technology market.
? Prepaid income taxes decreased
? Other current and long-term assets increased
primarily to an advanced payment of royalty fees.
? Accounts payable decreased
purchases made towards the end of the fourth quarter of 2018 that were
subsequently paid in the first quarter of 2019.
? Accrued liabilities and other liabilities decreased
primarily to the payment of 2018 annual bonuses in
Investing activities: Our capital expenditures, including capitalized software were$0.3 million for the first three months of both 2020 and 2019. Expenditures in 2020 were primarily for computer and networking equipment, new product tooling equipment and leasehold improvements at ourLas Vegas facility. Expenditures in 2019 were primarily for new product tooling equipment and, to a lesser extent, computer and networking equipment and leasehold improvements at ourIthaca facility. Additionally, during the first quarter of 2020, prior to widespread shutdowns inthe United States in response to the COVID-19 pandemic, we loaned an additional$0.6 million to an unaffiliated third party. Capital expenditures and additions to capitalized software for 2020 were expected to be approximately$1.1 million , primarily for new product tooling, new computer software and equipment purchases and leasehold improvements 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 provided$0.9 million of cash during the first three months of 2020 from net borrowings of$0.8 million from our Siena Credit Facility (defined below) 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. During the first three months of 2019, we used$0.9 million of cash from financing activities to pay dividends of$0.7 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 OnMarch 13, 2020 , we signed a new credit facility (the "Siena Credit Facility") withSiena Lending Group LLC and terminated our TD Bank Credit Facility. The Siena Credit Facility provides for a revolving credit line of up to$10 million expiring onMarch 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 was$234 thousand . We also pay a fee of 0.50% on unused borrowings under the facility. Borrowings under the 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 first period we will be subject to the financial covenant, which require the Company to maintain a minimum EBITDA, is the three months endingJune 30, 2020 . As ofMarch 31, 2020 , we had$0.8 million of outstanding borrowings under the Siena Credit Facility. OnMay 1, 2020 (the "Loan Date"), the Company was granted a loan (the "PPP Loan") fromBerkshire Bank in the aggregate amount of$2.2 million , pursuant to the PPP administered by the SBA and established under Division A, Title I of the CARES Act, which was enactedMarch 27, 2020 . The PPP Loan, which is evidenced by a Note dated the Loan Date issued by the Company (the "Note"), matures onMay 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. 23
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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 beforeFebruary 15, 2020 , rent under lease agreements in effect beforeFebruary 15, 2020 , utilities for which service began beforeFebruary 15, 2020 , and interest on debt obligations incurred beforeFebruary 15, 2020 (collectively, "qualifying expenses"), subject to conditions and limitations provided in the CARES Act. At least 75% of such forgiven amounts must be used for eligible payroll costs. The Company intends to maximize the use of 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. 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. 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 inMay 2013 , from$0.07 to$0.08 per share inMay 2014 , and from$0.08 to$0.09 per share inMay 2017 . Dividends declared and paid on our common stock totaled$0.7 million or$0.09 per in the three months ended 2019. OnJanuary 23, 2020 , our Board of Directors announced the cessation of the 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 inDecember 2019 . Stock Repurchase Program Prior to its expiration onDecember 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 three months endedMarch 31, 2020 and 2019, we did not repurchase any shares of our common stock. As ofMarch 31, 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, 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, onMarch 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. We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities, borrowings available under ourSiena Credit Facility and PPP Loan, 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. 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 Annual Report on Form 10-K for the year endedDecember 31, 2019 . OnFebruary 28, 2020 , we entered into an amendment to extend the lease on our facility inIthaca, New York . The lease, which was last amended onJanuary 14, 2016 , was scheduled to expire onMay 31, 2021 . The lease amendment provides for an extension of the lease for four additional years fromJune 1, 2021 toMay 31, 2025 . Other than the extension of theIthaca facility lease, there have been no material changes in our contractual obligations sinceDecember 31, 2019 .
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