Item 1. Financial Statements
Item 1.
FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
C ONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, 2020
December 31, 2019
Assets:
(In thousands, except share data)
Current assets:
Cash and cash equivalents
$
947
$
4,203
Accounts receivable, net
4,918
6,418
Note receivable
100
1,017
Inventories
12,503
12,099
Prepaid income taxes
88
180
Other current assets
1,213
998
Total current assets
19,769
24,915
Fixed assets, net of accumulated depreciation of $ 19,468 and $ 19,010 , respectively
2,339
2,244
Note receivable, net of current portion
1,566
–
Right-of-use asset
3,794
2,855
Goodwill
2,621
2,621
Deferred tax assets
4,574
2,565
Intangible assets, net of accumulated amortization of $ 3,953 and $ 3,771 , respectively
634
817
Other assets
192
44
15,720
11,146
Total assets
$
35,489
$
36,061
Liabilities and Shareholders’ Equity:
Current liabilities:
Accounts payable
$
2,458
$
2,960
Accrued liabilities
3,053
3,041
Lease liability
857
945
Deferred revenue
479
700
Total current liabilities
6,847
7,646
Long-term debt
2,173
–
Deferred revenue, net of current portion
120
219
Lease liability, net of current portion
3,053
2,104
Other liabilities
128
166
5,474
2,489
Total liabilities
12,321
10,135
Shareholders’ equity:
Common stock, $ 0.01 par value, 20,000,000 shares authorized; 11,593,727 and 11,515,090 shares issued, respectively; 7,548,885 and 7,470,248 shares outstanding, respectively
116
115
Additional paid-in capital
33,560
32,604
Retained earnings
21,636
25,348
Accumulated other comprehensive loss, net of tax
( 34
)
( 31
)
Treasury stock, at cost, 4,044,842 shares
( 32,110
)
( 32,110
)
Total shareholders’ equity
23,168
25,926
Total liabilities and shareholders’ equity
$
35,489
$
36,061
See notes to Condensed Consolidated Financial Statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDE NSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
(In thousands, except per share data)
Net sales
$
7,300
$
11,686
$
22,832
$
34,586
Cost of sales
3,951
6,140
12,275
17,250
Gross profit
3,349
5,546
10,557
17,336
Operating expenses:
Engineering, design and product development
1,445
1,048
4,197
3,328
Selling and marketing
1,258
1,947
4,885
5,890
General and administrative
2,125
2,239
6,987
6,720
4,828
5,234
16,069
15,938
Operating (loss) income
( 1,479
)
312
( 5,512
)
1,398
Interest and other income (expense):
Interest, net
( 19
)
–
( 41
)
( 13
)
Other, net
116
( 71
)
( 60
)
( 123
)
97
( 71
)
( 101
)
( 136
)
(Loss) income before income taxes
( 1,382
)
241
( 5,613
)
1,262
Income tax benefit
( 515
)
( 143
)
( 1,901
)
( 54
)
Net (loss) income
$
( 867
)
$
384
$
( 3,712
)
$
1,316
Net (loss) income per common share:
Basic
$
( 0.11
)
$
0.05
$
( 0.49
)
$
0.18
Diluted
$
( 0.11
)
$
0.05
$
( 0.49
)
$
0.17
Shares used in per-share calculation:
Basic
7,548
7,470
7,533
7,464
Diluted
7,548
7,753
7,533
7,658
See notes to Condensed Consolidated Financial Statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLI DATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
(In thousands)
Net (loss) income
$
( 867
)
$
384
$
( 3,712
)
$
1,316
Foreign currency translation adjustment, net of tax
( 84
)
( 33
)
( 3
)
66
Comprehensive (loss) income
$
( 951
)
$
351
$
( 3,715
)
$
1,382
See notes to Condensed Consolidated Financial Statements.
5
TRANSACT TECHNOLOGIES INCORPORATED
CONDE NSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
2020
2019
(In thousands)
Cash flows from operating activities:
Net (loss) income
$
( 3,712
)
$
1,316
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Share-based compensation expense
644
559
Depreciation and amortization
758
747
Deferred income taxes
( 2,008
)
( 104
)
Foreign currency transaction losses
59
153
Changes in operating assets and liabilities:
Accounts receivable
1,429
( 367
)
Inventories
( 446
)
82
Prepaid income taxes
87
11
Other current and long-term assets
150
( 576
)
Accounts payable
( 685
)
( 853
)
Accrued liabilities and other liabilities
( 508
)
( 120
)
Net cash (used in) provided by operating activities
( 4,232
)
848
Cash flows from investing activities:
Capital expenditures
( 634
)
( 796
)
Additions to capitalized software
–
( 304
)
Issuance of note receivable
( 600
)
( 1,000
)
Net cash used in investing activities
( 1,234
)
( 2,100
)
Cash flows from financing activities:
Revolving credit line borrowings
2,756
–
Revolving credit line payments
( 2,756
)
–
Long-term debt borrowings
2,173
–
Payment of common stock issuance costs
( 71
)
–
Payment of dividends on common stock
–
( 2,011
)
Proceeds from stock option exercises
353
–
Withholding taxes paid on stock issuances
( 41
)
( 214
)
Payment of bank financing costs
( 213
)
–
Net cash provided by (used in) financing activities
2,201
( 2,225
)
Effect of exchange rate changes on cash and cash equivalents
9
( 7
)
Decrease in cash and cash equivalents
( 3,256
)
( 3,484
)
Cash and cash equivalents, beginning of period
4,203
4,691
Cash and cash equivalents, end of period
$
947
$
1,207
Supplemental schedule of non-cash investing activities:
Capital expenditures included in accounts payable
$
15
$
91
See notes to Condensed Consolidated Financial Statements.
6
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSO LIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
(In thousands, except per share data)
Equity beginning balance
$
23,888
$
27,431
$
25,926
$
27,567
Common stock
Balance, beginning of period
116
115
115
115
Issuance of shares from stock awards
–
–
1
–
Balance, end of period
116
115
116
115
Additional paid-in capital
Balance, beginning of period
33,329
32,301
32,604
32,129
Share-based compensation expense
231
173
644
559
Issuance of shares from exercise of stock options
–
–
353
–
Relinquishment of stock awards and deferred stock units to pay for withholding taxes
–
–
( 41
)
( 214
)
Balance, end of period
33,560
32,474
33,560
32,474
Retained earnings
Balance, beginning of period
22,503
27,108
25,348
27,515
Net (loss) income
( 867
)
384
( 3,712
)
1,316
Dividends declared and paid on common stock
–
( 672
)
–
( 2,011
)
Balance, end of period
21,636
26,820
21,636
26,820
Treasury stock
Balance, beginning and end of period
( 32,110
)
( 32,110
)
( 32,110
)
( 32,110
)
Accumulated other comprehensive income (loss), net of tax
Balance, beginning of period
50
17
( 31
)
( 82
)
Foreign currency translation adjustment, net of tax
( 84
)
( 33
)
( 3
)
66
Balance, end of period
( 34
)
( 16
)
( 34
)
( 16
)
Equity ending balance
23,168
27,283
23,168
27,283
Supplemental share information
Issuance of shares from stock awards
2
1
93
73
Relinquishment of stock awards to pay withholding taxes
–
–
14
21
Dividends per share of common stock
$
–
$
0.09
$
–
$
0.27
See notes to Condensed Consolidated Financial Statements.
7
TRANSACT TECHNOLOGIES INCORPORATED
N OTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
The accompanying unaudited financial statements of TransAct Technologies Incorporated (“TransAct”, the “Company”, “we”, “us”, or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP to be included in full year financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the periods presented have been included and are of a normal recurring nature. The December 31, 2019 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019.
The financial position and results of operations of our U.K. subsidiary are measured using local currency as the functional currency. Assets and liabilities of such subsidiary have been translated at the end of period exchange rates, and related revenues and expenses have been translated at the exchange rate as of the date the transaction was recognized, with the resulting translation gain or loss recorded in “Accumulated other comprehensive income (loss), net of tax”, in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Changes in Shareholders’ Equity. Transaction gains and losses are included in “Other, net” in the Condensed Consolidated Statements of Operations.
The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020.
Impact of the COVID-19 Pandemic
The unprecedented and rapid spread of COVID-19 and the resulting social distancing measures, including closures and restricted openings of restaurants and casinos implemented by federal, state and local authorities, have significantly reduced recent customer demand and disrupted portions of our supply chain, including delayed product shipments from our two manufacturers located in China and Thailand. We are monitoring indicators of demand recovery, including our sales pipeline, customer orders and product shipments to ascertain an estimate of the ultimate impact of the COVID-19 pandemic on our business; however, the length and severity of the reduction in demand due to the pandemic remains uncertain. Accordingly, we expect that the fourth quarter of 2020 will continue to be negatively impacted.
While we began to experience a modest recovery during the third quarter of 2020 and expect this recovery to continue in the fourth quarter of 2020, the exact timing and pace of recovery is unknown given uncertainty surrounding future responsive measures that may be implemented in the upcoming winter months and the significant disruption that our customers have already experienced and may continue to experience. In light of this uncertainty, we have implemented measures to help mitigate the impact on our financial position and operations. These measures include, but are not limited to, the following:
Expense Management. With the reduction in net sales, we have implemented, and will continue to implement cost saving initiatives through at least the end of 2020, including:
•
a reduction of our workforce starting in July 2020 by approximately 20 % through a combination of employee terminations and temporary furloughs that we expect to continue through the end of 2020;
•
a 10 % reduction in the salaries of all salaried, non-commissioned employees, including executive officers, starting in March 2020. From May 1, 2020 until early July 2020, employees below the vice president level were paid their full salary as a result of the receipt of the PPP Loan proceeds (defined below);
•
a reduction in sales commissions for all commissioned employees starting in March 2020;
•
a 10 % reduction of cash retainer fees for all non-employee directors starting in March 2020; and
•
the elimination of discretionary spending wherever possible starting in March 2020.
8
Balance Sheet, Cash Flow and Liquidity. In addition to the expense management actions noted above, we have taken the following actions to increase liquidity and strengthen our financial position.
•
Public Offering – On October 16, 2020, the Company raised net proceeds of $ 8.7 million, after deducting underwriting discounts, commissions and offering expenses, through an underwritten public offering (the “Offering”) and sold an aggregate of 1,380,000 shares of common stock. See Note 11 for further details related to the Offering.
•
PPP Loan – On May 1, 2020, the Company was granted a $ 2.2 million loan (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (“SBA”) established under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which enabled us to return our furloughed employees to full time employment and to restore certain pay cuts until the PPP Loan proceeds were exhausted.
•
New Credit Facility – On March 13, 2020, we entered into a new credit with Siena Lending Group LLC that provides a revolving credit line of up to $ 10.0 million, subject to a borrowing base.
•
Reduced Capital Expenditures – We have limited capital expenditures until market conditions improve.
We may further modify or supplement the expense management measures we have implemented and the actions we have taken to increase liquidity as the timing and extent of customer demand recovery develops.
After reviewing whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations over the 12 months following the date on which the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q (this “Report”) were issued, including consideration of the actions taken to manage expenses and liquidity, we believe that our net cash to be provided by operations combined with our cash and cash equivalents, borrowing availability under our revolving credit facility and the net proceeds from the Offering will provide sufficient liquidity to fund our current obligations, capital spending, and working capital requirements and to comply with the financial covenants of our credit facility over at least 12 months following the date that the Consolidated Financial Statements were issued.
Use of Assumptions and Estimates
Management’s belief that the Company will be able to fund its planned operations over the 12 months following the date on which the Consolidated Financial Statements were issued is based on assumptions which involve significant judgment and estimates of future revenues, capital spend and other operating costs. Our current assumptions are that casinos and restaurants remain open and continue to gradually increase capacity limitations during the fourth quarter of 2020 and into the first half of 2021, but that many casinos and restaurants may delay purchases of new slot machines and our BOHA! products, respectively, due to the extended business closures and continuing capacity limitations. Based on these assumptions we anticipate that sales in casino and gaming and food service technology will continue to be negatively impacted for the foreseeable future. We have performed a sensitivity analysis on these assumptions to forecast the potential impact of a slower-than-anticipated recovery and believe that we are well-positioned following the completion of the October 16, 2020 Offering to withstand the impact of lower-than anticipated sales and that we will be able to take additional financial and operations actions if necessary. These actions may include additional expense reductions and capital raising activities .
In addition, the presentation of the accompanying unaudited 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.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets
We perform a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of December 31) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The Company utilizes the option to first assess qualitative factors to determine whether it is necessary to perform the Step 1 quantitative goodwill impairment test in accordance with the applicable accounting standards. Under the qualitative assessment, management considers relevant events and circumstances including but not limited to macroeconomic conditions, industry and market considerations, Company performance and events directly affecting the Company. If the Company determines that the Step 1 quantitative impairment test is required, management estimates the fair value of the reporting unit primarily using the income approach, which reflects management’s cash flow projections, and also evaluates the fair value using the market approach. Our 2019 quantitative impairment test of goodwill and indefinite-lived intangible assets indicated that there was no indication of impairment as of December 31, 2019 because the fair value exceeded our carrying value.
9
During the three months ended March 31, 2020, our stock price declined to the lowest price since 2009. We determined that the significant decline in our market capitalization and broader economic downturn arising from the COVID-19 pandemic was a triggering event and an indicator that it was more likely than not that the carrying value of goodwill exceeded fair value. Therefore, we concluded that quantitative analyses were required to be performed due to the triggering event occurring during the first quarter of 2020.
We view our operations and manage our business as one operating unit . We utilized an implied market value method under the market approach to calculate the fair value of the Company as of March 31, 2020, which we determined was the best approximation of fair value in the current social and economic environment. Based on our interim impairment assessment as of March 31, 2020, we determined that no goodwill or intangible asset impairment occurred and the fair value of goodwill was substantially higher than our carrying value.
As of September 30, 2020, we determined that no new triggering events had occurred during the third quarter of 2020 and as a result an updated impairment review was not performed. Based on our impairment assessment performed on March 31, 2020 and subsequent market performance of our stock we do not expect to record an impairment charge in the near future but many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods as a result of both Company-specific and overall economic conditions, including the impacts of COVID-19. We will continue to monitor and evaluate the carrying value of goodwill. We may be subject to impairments in the future depending on how long the economic and social disruptions resulting from COVID-19 pandemic persist.
2. Revenue
We account for revenue in accordance with ASC Topic 606: Revenue from Contracts with Customers.
Disaggregation of revenue
The following table disaggregates our revenue by market-type, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Sales and usage-based taxes are excluded from revenues. 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.
Three Months Ended
Three Months Ended
September 30, 2020
September 30, 2019
(In thousands)
United States
International
Total
United States
International
Total
Food service technology
$
2,081
$
268
$
2,349
$
1,730
$
221
$
1,951
POS automation and banking
739
3
742
1,494
20
1,514
Casino and gaming
1,552
457
2,009
2,849
2,225
5,074
Lottery
-
-
-
95
-
95
Printrex
5
102
107
213
83
296
TransAct Services Group
1,910
183
2,093
2,490
266
2,756
Total net sales
$
6,287
$
1,013
$
7,300
$
8,871
$
2,815
$
11,686
Nine Months Ended
Nine Months Ended
September 30, 2020
September 30, 2019
(In thousands)
United States
International
Total
United States
International
Total
Food service technology
$
4,376
$
548
$
4,924
$
3,825
$
462
$
4,287
POS automation and banking
2,774
7
2,781
4,392
43
4,435
Casino and gaming
5,080
3,220
8,300
9,765
6,423
16,188
Lottery
817
-
817
924
2
926
Printrex
72
160
232
740
183
923
TransAct Services Group
5,184
594
5,778
6,947
880
7,827
Total net sales
$
18,303
$
4,529
$
22,832
$
26,593
$
7,993
$
34,586
10
Contract balances
Our contract liabilities consist of customer pre-payments and deferred revenue. Customer prepayments are reported as “Accrued liabilities” in current liabilities in the Condensed Consolidated Balance Sheets and represent customer payments made in advance of performance obligations in instances where credit has not been extended and are recognized as revenue when the performance obligation is complete. Deferred revenue is reported separately in current liabilities and non-current liabilities and consists of our extended warranty contracts, technical support for our food service technology terminals, EPICENTRAL™ maintenance contracts and testing service contracts and prepaid software subscriptions for our BOHA! software applications, and is recognized as revenue as (or when) we perform under the contract. We did not have any contract asset balances as of September 30, 2020 or December 31, 2019 . For the first nine months of 2020, we recognized revenue of $ 1.0 million related to our contract liabilities at December 31, 2019 . For the nine months ended September 30, 2019 , we recognized revenue of $ 0.5 million related to our contract liabilities at December 31, 2018. Total contract liabilities consisted of the following:
September 30,
2020
December 31,
2019
(In thousands)
Customer pre-payments
$
126
$
232
Deferred revenue, current
479
700
Deferred revenue, non-current
120
219
Total contract liabilities
$
725
$
1,151
Remaining performance obligations
Remaining performance obligations represent the transaction price of firm orders for which a good or service has not been delivered to our customer. As of September 30, 2020, the aggregate amount of transaction prices allocated to remaining performance obligations was $ 2.2 million. The Company expects to recognize revenue on $ 2.1 million of its remaining performance obligations within the next 12 months following September 30, 2020 and $ 0.1 million within the next 24 months following September 30, 2020.
3. Note receivable
The note receivable balance relates to a loan given to a third party with an interest rate of 4.5 % , which was due in April 2020. We intend to collect the remaining principal and interest due under the note pursuant to a lender recourse provision that enables us to apply payments that would have been due to the third party under a previously signed long-term royalty agreement towards the loan balance. A $ 100 thousand royalty fee is scheduled to be paid to the third party in January 2021 that will instead be applied towards the note receivable balance as it becomes due. As a result, $ 100 thousand of the balance was classified as current and the remaining $ 1.6 million is expected to be reduced thereafter using the lender recourse provision. Notes receivable are stated at unpaid balances and interest income is recognized on the accrual method. In March 2020, we loaned an additional $ 600 thousand to the third party. For the three and nine months ended September 30, 2020 we recorded $ 18 thousand and $ 49 thousand of interest income, respectively. As of September 30, 2020 , we have no allowances for loan losses, unamortized deferred loan fees or unearned discounts.
4. Inventories
The components of inventories were:
September 30,
2020
December 31,
2019
(In thousands)
Raw materials and purchased component parts
$
4,561
$
7,724
Work-in-process
8
–
Finished goods
7,934
4,375
$
12,503
$
12,099
11
5. Accrued product warranty liability
We generally provide warranties on our products for up to 24 months and record the estimated cost of such product warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experience of product repairs and the related estimated cost of labor and material to make the necessary repairs.
The following table summarizes the activity recorded in the accrued product warranty liability during the nine months ended September 30, 2020 and 2019:
Nine Months Ended
September 30,
2020
2019
(In thousands)
Balance, beginning of period
$
215
$
273
Warranties issued
53
138
Warranty settlements
( 107
)
( 190
)
Balance, end of period
$
161
$
221
As of September 30, 2020, $ 128 thousand of the accrued product warranty liability was classified as current in “Accrued liabilities” in the Condensed Consolidated Balance Sheets and the remaining $ 33 thousand was classified as non-current in “Other liabilities”.
6. Debt
On March 13, 2020, we entered into a new credit facility (the “Siena Credit Facility”) with Siena Lending Group LLC. The Siena Credit Facility provides for a revolving credit line of up to $ 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 was $ 245 thousand, which were reported as “other current assets” in current assets and “other assets” in non-current assets in the Condensed Consolidated Balance Sheets. 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. The Siena Credit Facility imposes a minimum EBITDA financial covenant on the Company and borrowings are subject to a borrowing base based on (i) 85 % of eligible accounts receivable plus the lesser of (a) $ 5.0 million and (b) 50 % of eligible raw material and 60 % of finished goods inventory. As of September 30, 2020, we had $ 6.6 million of additional borrowing capacity available under the Siena Credit Facility. We were in compliance with all financial covenants of the Siena Credit Facility at September 30, 2020.
On May 1, 2020 (the “Loan Date”), the Company was granted the PPP Loan from Berkshire Bank in the aggregate amount of $ 2.2 million, pursuant to the PPP.
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 may be forgiven to the extent that funds from the PPP Loan are used for payroll costs and costs to continue group health care benefits, as well as for interest on mortgage obligations incurred before February 15, 2020, rent under lease agreements in effect before February 15, 2020, utilities for which service began before February 15, 2020, and interest on debt obligations incurred before February 15, 2020 (collectively, “qualifying expenses”), subject to conditions and limitations provided in the CARES Act. At least 60% (as amended) of the proceeds from the PPP Loan must be used for eligible payroll costs for the PPP Loan to be forgiven. The Company has maximized 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, as amended by the Paycheck Protection Flexibility Act of 2020. Whether forgiveness will be granted and in what amount is subject to an application to, and approval by, the SBA and may also be subject to further requirements in any regulations and guidelines the SBA may adopt. The PPP Loan is classified as “Long-term debt” in the Condensed Consolidated Balance Sheet until the forgiveness determination has been made by the SBA.
12
7. Earnings per share
The following table sets forth the reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020
2019
2020
2019
(In thousands, except per share data)
Net (loss) income
$
( 867
)
$
384
$
( 3,712
)
$
1,316
Shares:
Basic: Weighted average common shares outstanding
7,548
7,470
7,533
7,464
Add: Dilutive effect of outstanding options and restricted stock units as determined by the treasury stock method
–
283
–
194
Diluted: Weighted average common and common equivalent shares outstanding
7,548
7,753
7,533
7,658
Net (loss) income per common share:
Basic
$
( 0.11
)
$
0.05
$
( 0.49
)
$
0.18
Diluted
$
( 0.11
)
$
0.05
$
( 0.49
)
$
0.17
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options and restricted stock units, when the average market price of the common stock is lower than the exercise price of the related stock award during the period, as the inclusion of these stock awards in the computation of diluted earnings would be anti-dilutive. For the three months ended September 30, 2020 and 2019 , there were 1.4 million and 0.3 million, respectively, of potentially dilutive shares consisting of stock awards that were excluded from the calculation of earnings per diluted share. For the nine months ended September 30, 2020 and 2019 , there were 1.4 million and 0.5 million, respectively, of potentially dilutive shares consisting of stock awards that were excluded from the calculation of earnings per diluted share. Regarding the three and nine months ended September 30, 2020, when a net loss is reported, basic and diluted net loss per common share are calculated using the same method.
8. Shareholders’ equity
For the three months ended September 30, 2019 , dividends declared and paid totaled $ 0.7 million, or $ 0.09 per share. Dividends declared and paid totaled $ 2.0 million, or $ 0.27 per share for the nine months ended September 30, 2019. On January 23, 2020, our Board of Directors announced the cessation of our quarterly cash dividend on the Company’s common stock. The final dividend payment was made in December 2019.
9. Leases
We account for leases in accordance with ASC Topic 842: Leases.
We enter into lease agreements for the use of real estate space and certain other equipment under operating leases and we have no financing leases. Our leases are included in Right-of-use-assets and Lease liabilities in our Condensed Consolidated Balance Sheet. Our leases have remaining lease terms of one year to seven years , some of which include options to extend. The majority of our leases with options to extend provide for extensions of up to five years with the ability to terminate the lease within one year . Our right-of-use-asset and lease liability was higher at September 30, 2020 compared to December 31, 2019 due to the extension of one of our leases. On February 28, 2020, we entered into an amendment to extend the lease on our facility in Ithaca, New York, which resulted in recording an additional right-of-use-asset and lease liability of $ 1.5 million . 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. Lease expense is recognized on a straight-line basis over the lease term.
Operating lease expense for the three months ended September 30, 2020 and 2019 was $ 243 thousand and $ 256 thousand, respectively, and are reported as “Cost of sales”, “Engineering, design and product development expense”, “Selling and marketing expense”, and “General and administrative expense” in the Condensed Consolidated Statements of Operations. Operating lease expense for the nine months ended September 30, 2020 and 2019 was $ 735 thousand and $ 764 thousand, respectively. Operating expenses include short-term lease costs which were immaterial during the period.
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The following information represents supplemental disclosure for the statement of cash flows related to operating leases (in thousands):
Nine Months Ended
September 30,
2020
2019
Operating cash outflows from leases
$
779
$
772
The following summarizes additional information related to our leases as of September 30, 2020:
September 30, 2020
December 31, 2019
Weighted average remaining lease term (in years)
5.1
5.0
Weighted average discount rate
4.1
%
3.7
%
The maturity of the Company’s operating lease liabilities as of September 30, 2020 and December 31, 2019 were as follows (in thousands):
September 30, 2020
December 31, 2019
2020
$
261
$
1,042
2021
969
711
2022
876
434
2023
711
268
2024
715
273
Thereafter
800
616
Total undiscounted lease payments
4,332
3,344
Less imputed interest
422
295
Total lease liabilities
$
3,910
$
3,049
10. Income taxes
We recorded an income tax benefit for the third quarter of 2020 of $ 515 thousand at an effective tax rate of 37.3 % , compared to an income tax benefit for the third quarter of 2019 of $ 143 thousand at an effective tax rate of ( 59.3 %) . For the nine months ended September 30, 2020 , we recorded an income tax benefit of $ 1.9 million at an effective tax rate of 33.9 % , compared to an income tax benefit for the nine months ended September 30, 2019 of $ 54 thousand at an effective tax rate of ( 4.3 %) . The effective tax rates for the three and nine months ended September 30, 2020 were higher than usual as it included the impact of the net operating loss (“NOL”) that we expect to carry back to prior years. The CARES Act permits NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. We expect to generate a NOL for 2020 which we will carry back to tax years that had a federal statutory tax rate of 34 % compared to 21 % in 2020. The effective tax rate for the three and nine months ended September 30, 2019 were lower than usual as it included the foreign-derived intangible income (“FDII”) deduction under the Tax Cuts and Jobs Act of 2017 as well as near breakeven pre-tax income in the third quarter of 2019.
We are subject to U.S. federal income tax, as well as income tax in certain U.S. state and foreign jurisdictions. We have substantially concluded all U.S. federal, state and local income tax, and foreign tax regulatory examination matters through 2016. However, our federal tax returns for the years 2017 through 2019 remain open to examination. Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the Condensed Consolidated Financial Statements.
As of September 30, 2020, we had $ 80 thousand of total gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. For the third quarter of 2020, we recognized $ 27 thousand of previously unrecognized tax benefits as the statute of limitations on the use of our 2016 resarch and development credit expired during the third quarter of 2020.
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We recognize interest and penalties related to uncertain tax positions as income tax (benefit) provision. As of September 30, 2020, we had $ 15 thousand of accrued interest and penalties related to uncertain tax positions. The Company maintains a valuation allowance against certain deferred tax assets to reduce the future income tax benefits to expected realizable amounts.
11. Subsequent events
The Company has evaluated events and transactions subsequent to September 30, 2020 and through the date these Condensed Consolidated Financial Statements were included in this Form 10-Q and filed with the SEC.
On October 13, 2020, the Company announced the commencement of an underwritten public offering of the Company’s common stock, $ 0.01 par value per share. On October 16, 2020, the Company closed the Offering and sold an aggregate of 1,380,000 shares of common stock (the “Shares”), including 180,000 Shares sold as a result of the exercise in full of the overallotment option granted to the Underwriters (as defined below), at a public offering price of $ 7.10 per Share. The Shares were issued and sold pursuant to an underwriting agreement, dated October 14, 2020 (the “Underwriting Agreement”) between the Company and Roth Capital Partners, LLC, as representative of the several underwriters named therein (the “Underwriters”). Pursuant to the Underwriting Agreement, the Shares were sold to the Underwriters at a discount of 6 % to the public offering price, and the Company agreed to reimburse the Underwriters for certain fees and expenses. After deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, the net proceeds of approximately $ 8.7 million are expected to be used for working capital and other general corporate purposes, which may include funding the further development of the food service technology business and related sales, marketing and product development efforts, technology improvements and personnel costs in support of the Company’s growth strategy.
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