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Basis of presentation

6 Months Ended

Jun. 30, 2020

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 six months ended June 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 full-year impact; however, the length and severity of the reduction in demand due to the pandemic is uncertain. Accordingly, we expect that the second half of 2020 will continue to be negatively impacted.

While we do expect a modest recovery in the second half of 2020 as state and local authorities continue to lift business closures and restrictions, the exact timing and pace of recovery is uncertain given the significant disruption of the pandemic on the operations of our customers. In response to these developments, 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, including:

•	a reduction of our workforce starting in July by approximately 20% through a combination of employee terminations and temporary furloughs which 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. From May 1, 2020 subsequent to receiving the PPP Loan (see definition below) until early July 2020, employees below the vice president level were paid their full salary in order to maximize the use of the PPP Loan proceeds. Beginning in July 2020, we also instituted a 10% pay reduction for all hourly employees;

•	a reduction in sales commissions for all commissioned employees starting in March;

•	a 10% reduction of cash retainer fees for all non-employee directors starting in March; and

•	the elimination of discretionary spending wherever possible starting in March.

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.

•

PPP Loan - On May 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 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 until the PPP Loan was fully utilized by allowable payroll costs through June 30, 2020.

•	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 also 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 next twelve months, 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 and borrowing availability under our revolving credit facility 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 twelve months from the date these financial statements were issued.

Use of Assumptions and Estimates

Management’s belief that the Company will be able to fund its planned operations over at least the next 12 months 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 will continue to gradually reopen, although in a limited capacity, during the second half of 2020, but that many casinos and restaurants may delay purchases of new slot machines and our BOHA! products, respectively, due to the extended business closures. Based on these assumptions we anticipate that sales in casino and gaming and food service technology will continue to be negatively impacted. We have performed a sensitivity analysis on these assumptions to forecast the impact of a slower-than-anticipated recovery and believe that we will be able to take additional financial and operational actions if necessary to mitigate the impact of lower-than-anticipated sales. These actions include additional expense reductions and capital raising activities, including participation in certain programs established under the CARES Act.

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. Our fourth quarter 2019 quantitative impairment test of goodwill and indefinite-lived intangible assets indicated that there was no indication of impairment as the fair value exceeded our carrying value.

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 its 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 June 30, 2020, we determined that no new triggering events had occurred during the second quarter of 2020 and as a result an updated impairment review was not performed. 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.