TRANSACT TECHNOLOGIES INC 10-Q

Item 1. FINANCIAL STATEMENTS TRANSACT TECHNOLOGIES INCORPORATED C ONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) March 31, 2024 December 31, 2023 Assets: (In thousands, except share data) Current assets: Cash and cash equivalents $ 10,631 $ 12,321 Accounts receivable, net of allowance for expected credit losses of $ 668 and $ 768 7,780 9,824 Inventories 19,171 17,759 Prepaid income taxes 352 322 Other current assets 931 773 Total current assets 38,865 40,999 Fixed assets, net of accumulated depreciation of $ 18,947 and $ 18,646 2,187 2,421 Right-of-use assets 1,371 1,602 Goodwill 2,621 2,621 Deferred tax assets 6,691 6,304 Intangible assets, net of accumulated amortization of $ 1,556 and $ 1,518 50 88 Other assets 133 163 13,053 13,199 Total assets $ 51,918 $ 54,198 Liabilities and Shareholders’ Equity: Current liabilities: Revolving loan payable $ 2,250 $ 2,250 Accounts payable 4,226 4,431 Accrued liabilities 4,126 4,947 Lease liabilities 941 929 Deferred revenue 925 1,079 Total current liabilities 12,468 13,636 Deferred revenue, net of current portion 196 209 Lease liabilities, net of current portion 468 720 Other liabilities 215 219 879 1,148 Total liabilities 13,347 14,784 Commitments and contingencies (see Notes 5 and 7) Shareholders’ equity: Common stock, $ 0.01 par value, 20,000,000 shares authorized; 14,039,749 and 14,003,653 shares issued, respectively; 9,994,907 and 9,958,811 shares outstanding, respectively 140 140 Additional paid-in capital 57,249 57,055 Retained earnings 13,342 14,378 Accumulated other comprehensive loss, net of tax ( 50 ) ( 49 ) Treasury stock, at cost ( 4,044,842 shares) ( 32,110 ) ( 32,110 ) Total shareholders’ equity 38,571 39,414 Total liabilities and shareholders’ equity $ 51,918 $ 54,198 See notes to Condensed Consolidated Financial Statements. 3 Index TRANSACT TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended March 31, 2024 2023 (In thousands, except per-share data) Net sales $ 10,687 $ 22,270 Cost of sales 5,063 10,015 Gross profit 5,624 12,255 Operating expenses: Engineering, design and product development 1,966 2,269 Selling and marketing 2,083 2,757 General and administrative 2,876 3,416 6,925 8,442 Operating (loss) income ( 1,301 ) 3,813 Interest and other (expense) income: Interest, net 48 ( 66 ) Other, net ( 60 ) 21 ( 12 ) ( 45 ) (Loss) income before income taxes ( 1,313 ) 3,768 Income tax (benefit) expense ( 277 ) 629 Net (loss) income $ ( 1,036 ) $ 3,139 Net (loss) income per common share: Basic $ ( 0.10 ) $ 0.32 Diluted $ ( 0.10 ) $ 0.31 Shares used in per-share calculations: Basic 9,972 9,930 Diluted 9,972 10,043 See notes to Condensed Consolidated Financial Statements. 4 Index TRANSACT TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited) Three Months Ended March 31, 2024 2023 (In thousands) Net (loss) income $ ( 1,036 ) $ 3,139 Foreign currency translation adjustment, net of tax ( 1 ) 2 Comprehensive (loss) income $ ( 1,037 ) $ 3,141 See notes to Condensed Consolidated Financial Statements. 5 Index TRANSACT TECHNOLOGIES INCORPORATED CONDE NSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31, 2024 2023 (In thousands) Cash flows from operating activities: Net (loss) income $ ( 1,036 ) $ 3,139 Adjustments to reconcile net (loss) income to net cash used in operating activities: Share-based compensation expense 265 278 Depreciation and amortization 395 352 Deferred income taxes ( 386 ) 501 Unrealized foreign currency transaction losses 62 21 Changes in operating assets and liabilities: Accounts receivable 2,029 ( 3,044 ) Employee retention credit receivable – 1,500 Inventories ( 1,440 ) ( 351 ) Prepaid income taxes ( 30 ) – Other current and long-term assets ( 139 ) ( 175 ) Accounts payable ( 214 ) ( 2,846 ) Accrued liabilities and other liabilities ( 996 ) ( 132 ) Net cash used in operating activities ( 1,490 ) ( 757 ) Cash flows from investing activities: Capital expenditures ( 106 ) ( 378 ) Net cash used in investing activities ( 106 ) ( 378 ) Cash flows from financing activities: Withholding taxes paid on stock issuances ( 71 ) ( 86 ) Net cash used in financing activities ( 71 ) ( 86 ) Effect of exchange rate changes on cash and cash equivalents ( 23 ) ( 81 ) Decrease in cash and cash equivalents ( 1,690 ) ( 1,302 ) Cash and cash equivalents, beginning of period 12,321 7,946 Cash and cash equivalents, end of period $ 10,631 $ 6,644 Supplemental schedule of non-cash investing activities: Non-cash capital expenditure items $ 31 $ 25 See notes to Condensed Consolidated Financial Statements. 6 Index TRANSACT TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited) Three Months Ended March 31, 2024 2023 (In thousands) Equity beginning balance $ 39,414 $ 33,862 Common stock: Balance, beginning of period 140 139 Issuance of common stock from restricted stock units – 1 Balance, end of period 140 140 Additional paid-in capital: Balance, beginning of period 57,055 56,282 Share-based compensation expense 265 278 Relinquishment of stock awards to pay for withholding taxes ( 71 ) ( 86 ) Balance, end of period 57,249 56,474 Retained earnings: Balance, beginning of period 14,378 9,630 Net (loss) income ( 1,036 ) 3,139 Balance, end of period 13,342 12,769 Treasury stock: Balance, beginning and end of period ( 32,110 ) ( 32,110 ) Accumulated other comprehensive loss: Balance, beginning of period ( 49 ) ( 79 ) Foreign currency translation adjustment, net of tax ( 1 ) 2 Balance, end of period ( 50 ) ( 77 ) Equity ending balance $ 38,571 $ 37,196 Supplemental share information Issuance of shares from stock awards 47 54 Relinquishment of stock awards to pay withholding taxes 11 12 See notes to Condensed Consolidated Financial Statements. 7 Index 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, 2023 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 in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”). The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024. Current Business Trends After strong demand during most of 2023 due in part to our primary competitor’s struggle to deliver products in the face of supply chain constraints, in late 2023, we began to see indications of a temporary slowdown in demand in the casino and gaming market, as customers that had built up excess inventory due to supply chain concerns advised us that they would temporarily reduce orders until their stock normalized. This slowdown impacted our results in the fourth quarter of 2023 and the first quarter of 2024, and we expect this trend to continue to impact results during 2024 until these customers are able to sell their on-hand inventory. Further, our primary competitor in the casino and gaming market has resumed supplying product and continued to increase volume at what we believe is full capacity, which has resulted in the beginning of downward pricing pressure in that market and could exacerbate the demand slowdown, which has negatively impacted our worldwide casino and gaming sales. In addition, we have experienced cost increases as a result of current economic conditions, most of which we have been able to offset by increasing prices of our products. However, there can be no guarantee that we will be able to increase prices sufficiently to offset any future such cost increases that cannot be predicted, and we may be further impacted by supply chain disruptions, inflationary pressures and other global economic conditions that may affect the markets we serve and from which we source our supplies and parts. Balance Sheet, Cash Flow and Liquidity . During the third quarter of 2023, we began a cost reduction initiative to reduce our overall level of operating expenses that included reducing employee headcount, trade show, advertising and other promotional marketing expenses, certain third party engineering resources and other expenses, and to a lesser extent, certain general and administrative expenses. We saw the full impact of these actions in the first quarter of 2024 and expect they will result in approximately $ 3 million of annualized savings compared to the 2023 levels, partially offset by typical annual inflationary and cost of living increases in operating expenses. Notwithstanding the foregoing, there is no assurance that the cost-cutting efforts we have taken to bring expenses in line with our revenue and mitigate the impact of global economic conditions such as supply chain disruptions and inflation, and conditions in our markets will be sufficient or adequate, and we may be required to take additional measures, as the ultimate extent of the effects of these risks 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. 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 Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued, including consideration of the actions 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 12 months following the date that the Condensed Consolidated Financial Statements were issued. 8 Index 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 unaudited Condensed Consolidated Financial Statements were issued is based on assumptions which involve significant judgment and estimates of future revenues, inflation, rising interest rates, capital expenditures and other operating costs. Though demand for our products at casinos has increased substantially post-pandemic, we cannot predict the ultimate impact of the current economic environment, including inflation, rising interest rates and supply chain disruptions on our customers, which may impact sales. We believe that we are positioned to withstand the impact of any potential future economic downturn and we would be able to take additional financial and operational actions to cut costs and/or increase liquidity. In addition, the presentation of the accompanying unaudited Condensed Consolidated 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, accounts receivable, inventory obsolescence, goodwill and intangible assets, the valuation of deferred tax assets and liabilities, depreciable lives of equipment, share-based compensation and contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates used. 2. Significant accounting policies For a discussion of our significant accounting policies, see Note 2, Summary of significant accounting policies within Part II, Item 8. “Financial Statements and Supplementary Data” in the 2023 Form 10-K. There have been no changes to our significant accounting policies since the 2023 Form 10-K. Recently issued accounting pronouncements: On November 27, 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) . The amendments improve reportable segment disclosures requirements and clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment and contain other disclosure requirements. These amendments are effective for fiscal years beginning after December 15, 2023 and for interim periods beginning after December 15, 2024. These segment disclosure requirements must be applied retrospectively to all periods presented in the financial statements. We are currently evaluating the impact of adopting this standard; however, we do not expect it to have a material impact on our Consolidated Financial Statements. On December 14, 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) : Improvements to Income Tax Disclosures. This ASU requires the use of consistent categories and greater disaggregation in tax rate reconciliations and income taxes paid disclosures. These amendments are effective for fiscal years beginning after December 15, 2024. These income tax disclosure requirements can be applied either prospectively or retrospectively to all periods presented in the financial statements. We are currently evaluating the impact of adopting this standard; however, we do not expect it to have a material impact on our Consolidated Financial Statements. 9 Index 3. Revenue We account for revenue in accordance with ASC Topic 606: Revenue from Contracts with Customers. Disaggregation of revenue The following tables disaggregate our revenue by market type, as we believe this 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. Three Months Ended March 31, 2024 2023 (In thousands) United States International Total United States International Total Food service technology $ 3,023 $ 277 $ 3,300 $ 3,263 $ 195 $ 3,458 POS automation 651 – 651 1,782 15 1,797 Casino and gaming 3,238 2,458 5,696 11,569 4,242 15,811 TransAct Services Group 853 187 1,040 983 221 1,204 Total net sales $ 7,765 $ 2,922 $ 10,687 $ 17,597 $ 4,673 $ 22,270 Contract balances Contract assets consist of unbilled receivables. Pursuant to the over-time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized when such revenue exceeds the amount invoiced to the customer. Unbilled receivables are separated into current and non-current assets and included within “Accounts receivable, net” and “Other assets” in the Condensed Consolidated Balance Sheets. 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 prepaid software subscriptions for our BOHA! software applications, and is recognized as revenue as (or when) we perform under the contract. For the three months ended March 31, 2024, we recognized revenue of $ 0.4 million related to our contract liabilities at December 31, 2023. Total net contract liabilities consisted of the following: March 31, 2024 December 31, 2023 (In thousands) Unbilled receivables, current $ 155 $ 145 Unbilled receivables, net of current portion 103 120 Customer pre-payments ( 123 ) ( 155 ) Deferred revenue, current ( 925 ) ( 1,079 ) Deferred revenue, net of current portion ( 196 ) ( 209 ) Total net contract liabilities $ ( 986 ) $ ( 1,178 ) 10 Index 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 March 31, 2024, the aggregate amount of transaction prices allocated to remaining performance obligations was $ 6.8 million. The Company expects to recognize revenue of $ 6.5 million of its remaining performance obligations within the next 12 months following March 31, 2024, $ 0.2 million within the next 24 months following March 31, 2024 and the balance of these remaining performance obligations recognized within the next 36 months following March 31, 2024. 4. Inventories The components of inventories were: March 31, 2024 December 31, 2023 (In thousands) Raw materials and purchased component parts $ 10,644 $ 9,382 Finished goods 8,527 8,377 $ 19,171 $ 17,759 5. Borrowings Credit Facility On March 13, 2020, we entered into the Loan and Security Agreement governing a credit facility (the “Sien a Credit Facility”) with Siena Lending Group LLC (the “Lender”). The Siena Credit Facility provides for a revolving credit line of up to $ 10.0 million and was originally scheduled to expire on March 13, 2023, prior to being extended, as discussed below. Borrowings under the Siena Credit Facility bear a floating rate of interest equal to the greatest of (i) the prime rate plus 1.75 %, (ii) the federal funds rate plus 2.25 %, and (iii) 6.50 %. The total deferred financing costs related to expenses incurred to complete the Siena Credit Facility were $ 245 thousand 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 Siena Credit Facility. Borrowings under the Siena Credit Facility are secured by a lien on substantially all the assets of the Company. Borrowings under the Siena Credit Facility are subject to a borrowing base based on 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. The Siena Credit Facility imposes a financial covenant on the Company and restricts, among other things, our ability to incur additional indebtedness and create other liens. On July 21, 2021, the Company entered into an amendment (“Siena Credit Facility Amendment No. 1”) to the Siena Credit Facility. Siena Credit Facility Amendment No. 1 changed the financial covenant under the Siena Credit Facility from a minimum EBITDA covenant to an excess availability covenant requiring that the Company maintain excess availability of at least $ 750 thousand under the Siena Credit Facility, tested as of the end of each calendar month, beginning with the calendar month ended July 31, 2021. From July 31, 2021 through March 31, 2024, we remained in compliance with our excess availability covenant. As of March 31, 2024, we had $ 2.3 million of outstanding borrowings under the Siena Credit Facility and $ 3.0 million of net borrowing capacity available under the Siena Credit Facility. On July 19, 2022, the Company and the Lender entered into Amendment No. 2 (“Siena Credit Facility Amendment No. 2”) to the Siena Credit Facility as amended by Siena Credit Facility Amendment No. 1. Also on July 19, 2022, the Company and the Lender entered into an Amended and Restated Fee Letter (the “Amended Fee Letter”) in connection with Siena Credit Facility Amendment No. 2. Siena Credit Facility Amendment No. 2 did not modify the aggregate amount of the revolving commitment or the interest rate applicable to the loans . 11 Index The changes to the Siena Credit Facility provided for in Siena Credit Facility Amendment No. 2 include, among other things, the following: (i) The extension of the maturity date from March 13, 2023 to March 13, 2025; and (ii) The termination of the existing blocked account control agreement and entry into a new “springing” deposit account control agreement, permitting the Company to direct the use of funds in its deposit account until such time as (a) the sum of excess availability under the Siena Credit Facility as amended and unrestricted cash is less than $ 5 million for 3 consecutive business days or (b) an event of default occurs and is continuing. In addition, the Amended Fee Letter requires the Company, while it retains the ability to direct the use of funds in the deposit account, to maintain outstanding borrowings of at least $ 2,250,000 in principal amount. If the Company does not have the ability to direct the use of funds in the deposit account, then the Amended Fee Letter requires the Company to pay interest on at least $ 2,250,000 principal amount of loans, whether or not such amount of loans is actually outstanding. On May 1, 2023, the Company and the Lender agreed to a letter amendment to the Loan and Security Agreement governing the Siena Credit Facility. Prior to such amendment, Section 7.1(m) of the Loan and Security Agreement governing the Siena Credit Facility required that any successor to the Company’s former Chief Executive Officer be reasonably acceptable to the Lender. This amendment confirmed that Mr. John Dillon, the Company’s current Chief Executive Officer, is an acceptable successor, and applied the same requirement to any future successor to Mr. Dillon as Chief Executive Officer . 6. Earnings per share The following table sets forth the reconciliation of basic and diluted weighted average shares outstanding : Three Months Ended March 31, 2024 2023 (In thousands, except per-share data) Net (loss) income $ ( 1,036 ) $ 3,139 Shares: Basic: Weighted average common shares outstanding 9,972 9,930 Add: Dilutive effect of outstanding options and restricted stock units as determined by the treasury stock method - 113 Diluted: Weighted average common and common equivalent shares outstanding 9,972 10,043 Net (loss) income per common share: Basic $ ( 0.10 ) $ 0.32 Diluted $ ( 0.10 ) $ 0.31 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 March 31, 2024, there were 89 thousand of potentially dilutive shares consisting of stock awards that were excluded from the calculation of earnings per diluted share. Furthermore, in periods when a net loss is reported, such as the three months ended March 31, 2024, basic and diluted net loss per common share are calculated using the same method. 12 Index 7. 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 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 Sheets. Our leases have various lease terms, some of which include options to extend. Lease expense is recognized on a straight-line basis over the lease term. Operating lease expense for the three months ended March 31, 2024 and 2023 was $ 282 thousand and $ 237 thousand, respectively, and is 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 expenses include short-term lease costs, which were immaterial during the periods presented. The following information represents supplemental disclosure for the statement of cash flows related to operating leases (in thousands): Three Months Ended March 31, 2024 2023 Operating cash outflows from leases $ 257 $ 252 The following summarizes additional information related to our leases as of March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 Weighted average remaining lease term (in years) 1.5 1.7 Weighted average discount rate 4.4 % 4.4 % The maturity of the Company’s operating lease liabilities as of March 31, 2024 and December 31, 2023 were as follows (in thousands): March 31, 2024 December 31, 2023 2024 727 985 2025 712 713 2026 22 22 Total undiscounted lease payments 1,461 1,720 Less imputed interest 52 71 Total lease liabilities $ 1,409 $ 1,649 13 Index 8. Income taxes We recorded an income tax benefit in the first quarter of 2024 of $ 277 thousand at an effective tax rate of ( 21.1 %) compared to an income tax expense in the first quarter of 2023 of $ 629 thousand at an effective tax rate of 16.7 %. 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 2019. However, our federal tax returns for the years 2020 through 2023 remain open to examination. Various U.S. state and foreign tax jurisdiction tax years remain open to examination as well, but we believe that any additional assessment would be immaterial to the Condensed Consolidated Financial Statements. The Company maintains a valuation allowance against certain deferred tax assets where realization is not certain. 9. Subsequent events The Company has evaluated all events or transactions that occurred up to the date the Condensed Consolidated Financial Statements were available to be issued. Based upon this review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the Condensed Consolidated Financial Statements. 14 Index