What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-10 · 236 added, 213 removed, 268 unchanged (63% of the section changed)

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Forward Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q for the period ended June 30, 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.

Certain statements included in this Quarterly Report on Form 10-Q for the period ended September 30, 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 the U.S.

federal securities laws, including 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.

The Company cautions readers not to place undue reliance on any such forward-looking statements, each of which involves certain 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 ended December 31, 2019 (our “2019 Form 10-K”), in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended June 30, 2020 (our “1Q 2020 Form 10-Q”), in Part II, Item 1A of this Report and in our other filings with the Securities and Exchange Commission (the “SEC”).

The Company cautions readers not to place undue reliance on any such forward-looking statements, each of which involves certain 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 ended December 31, 2019 (our “2019 Form 10-K”), in Part II, Item 1A of our Quarterly Report on Form 10-Q for the periods ended September 30, 2020 (our “1Q 2020 Form 10-Q”) and June 30, 2020 (our “2Q 2020 Form 10-Q”), in Part II, Item 1A of this Report and in our other filings with the Securities and Exchange Commission (the “SEC”).

Such risks and uncertainties could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements.

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As used in this Report, unless the context otherwise requires, references to “we”, “us”, “our”, the “Company” and “TransAct” refer to the consolidated operations of TransAct Technologies Incorporated, and its consolidated subsidiaries.

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.

In March 2019, we launched a new line of products for the food service technology market, the BOHA!

branded suite of cloud-based applications and companion hardware solutions.

The new BOHA!

software and hardware products help restaurants, convenience stores and food service operators of all sizes automate the food production operations in the back-of-house operations.

Known and respected worldwide for innovative designs and real-world service reliability, our thermal 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.

Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, New Zealand, 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.

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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.

Recent Developments

On September 29, 2020, the Company announced the launch of its BOHA!

Restaurant Operations Platform and that the Company will begin working with the Apple sales team and their eco-system partners to offer the platform to the restaurant market.

The platform pairs the new BOHA!

Work Station and iPad with native iOS BOHA!

applications that can be downloaded and installed directly from the Apple Business App Store.

Impact of the COVID-19 Pandemic

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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 of 2020 progressed and have continued throughout the second quarter of 2020.

however, the challenges posed by the COVID-19 pandemic on the United States and global economy increased significantly as the first quarter of 2020 progressed and continued throughout the second and third quarters of 2020.

Unfortunately, the massive economic and social disruptions across the world persist due to COVID-19 and the measures implemented to mitigate its spread.

The food service, casino and gaming and oil and gas industries have been particularly affected by the pandemic, and 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 its spread, we have experienced decreased demand for our products and lower than anticipated sales in the second half of March 2020 and the second quarter of 2020, particularly in our food service technology and casino and gaming markets.

We have seen some improvement in demand during July and August 2020 compared to the second quarter of 2020, but demand remains lower than 2019 and we expect this trend to continue for at least the remainder of the third quarter of 2020, and likely through the end 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.

As a result of the COVID-19 pandemic and measures implemented to mitigate its spread, we have experienced decreased demand for our products and lower than anticipated sales beginning in the second half of March 2020 through the third quarter of 2020, particularly in our food service technology and casino and gaming markets.

We saw some improvement in demand during the third quarter of 2020 compared to the second quarter of 2020 as some state and local governments lifted certain measures implemented earlier in 2020 to mitigate the spread of the virus, but demand remains lower than 2019, and we expect this trend to continue through the remainder of 2020.

Below is a discussion of the impact of COVID-19 that we have experienced, and that we believe we will continue to experience for the foreseeable future in each of our markets.

Food service technology and POS automation .

In both our food service technology and POS automation markets, many restaurants and food service establishments were closed during much of the second quarter of 2020, and those that were open did so under restrictions that limited 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.

Although restrictions in some states have been lifted, many restaurants reopened dine-in service gradually, beginning with outdoor seating only, and progressing to indoor dining with seating limitations in accordance with local protocols and social distancing guidelines.

As our food service customers reopen for business 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!

In both our food service technology and POS automation markets, many restaurants and food service establishments that were closed during much of the second quarter of 2020 started to reopen as state and local governments began to ease restrictions put in place in response to the pandemic.

Many customers have opened 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.

During the third quarter of 2020, we experienced sales improvement compared to the second quarter of 2020, as these food service customers reopened for business.

Notwithstanding the gradual resumption of limited operations that began in the third quarter of 2020, our food service technology and POS automation customers continue to recover from the financial impact of being closed for several months and we expect new capital expenditures to be a lower priority for them in the near term, which we believe will, continue to negatively impact sales of BOHA!

hardware, software and label products, as well as sales of POS printers.

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We anticipate that casinos will continue to limit capacity in the near term and will progressively increase 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.

As casinos gradually 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 exited the lottery market at the end of 2019 and IGT made a final purchase of our lottery printer during the second quarter of 2020.

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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 in China and Thailand 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.

We have also experienced supply chain disruptions, including delayed product shipments from our two contract manufacturers located in China and Thailand that conduct almost all of our printer and terminal manufacturing, due to reduced operations at these facilities.

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.

However, if the delays are sustained or additional disruptions from the pandemic occur, we may have insufficient inventory levels and our ability to deliver products to our customers on time or at all may be impaired.

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:

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 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 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;

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 (defined below);

a reduction in sales commissions for all commissioned employees starting in March 2020;

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In addition, we have taken further measures to increase liquidity, including the following:

PPP Loan - On May 1, 2020, the Company was granted a $2.2 million loan under the Paycheck Protections 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.

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 Part I, Item 1, Note 11 of this Report 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 Protections 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 facility (the "Siena Credit Facility") 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.

Reduced Capital Expenditures – We 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.

On March 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.

On March 20, 2020, we instituted work-from-home practices for the majority of our employees to reduce the spread of COVID-19 and to comply with government mandates.

Because most of our employees already had laptop computers with remote access into our IT systems, we have experienced only minor reductions in productivity and minimal costs related to the implementation of our work-from-home practices.

In addition, even with the move to work-from-home, our existing internal control structure remained operational and unchanged.

In addition, even with the move to a work-from-home environment, our existing internal control structure remained operational and unchanged.

Our distribution centers, deemed an essential service, have remained operational throughout the pandemic.

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daily temperature checks of all employees before entering all facilities.

We have evaluated the recoverability of the assets on our unaudited Condensed Consolidated Balance Sheet as of June 30, 2020 in accordance with relevant authoritative accounting literature.

We have evaluated the recoverability of the assets on our unaudited Condensed Consolidated Balance Sheet as of September 30, 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.

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Notwithstanding the foregoing, there is no assurance that the actions we have taken in response to the pandemic are sufficient or adequate, and we may be required to take additional preventive or responsive measures, as the ultimate extent of the effects of the COVID-19 pandemic on the Company, our financial condition, results of operations, liquidity, and cash flows are uncertain and are dependent on evolving developments which cannot be predicted at this time.

See the risk factors contained in Part I, Item 1A of the 2019 Form 10-K, Part II, Item 1A of our Q1 2020 Form 10-Q and Part II, Item 1A, of this Report for further discussion of risks related to COVID-19.

See the risk factors contained in Part I, Item 1A of the 2019 Form 10-K, Part II, Item 1A of our Q1 2020 Form 10-Q and our Q2 2020 Form 10-Q, and Part II, Item 1A, of this Report for further discussion of risks related to COVID-19.

Critical Accounting Judgments and Estimates

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As of March 31, 2020, when the impairment review was performed, we determined that no goodwill or intangible asset impairment had occurred and the fair value of goodwill was higher than our carrying value.

As of June 30, 2020, we determined that no new triggering events had occurred during the second quarter of 2020 and in accordance with ASC 350-20 an updated impairment review was not performed.

As of June 30, 2020 and September 30, 2020, we determined that no new triggering events had occurred during the second quarter or the third quarter of 2020 and, in accordance with ASC 350-20, an updated impairment review was not performed.

Refer to Note 1 to the Consolidated Financial Statements included in Part I, Item 1 of this Report for additional information about the valuation of goodwill, indefinite-lived intangible assets and long-lived assets.

For a complete description of our accounting policies other than goodwill and intangible assets, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” of our 2019 Form 10-K .

We have reviewed those policies and determined that they remain our critical accounting policies for the six months ended June 30, 2020 .

We have reviewed those policies and determined that they remain our critical accounting policies for the nine months ended September 30, 2020 .

Results of Operations:

Three months ended June 30, 2020 compared to three months ended June 30, 2019

Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the three months ended June 30, 2020 and 2019 are reflected in the table below (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.

Three months ended September 30, 2020 compared to three months ended September 30, 2019

Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the three months ended September 30, 2020 and 2019 are reflected in the table below (in thousands, except percentages).

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Food service technology

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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 second quarter of 2020 decreased $6.1 million, or 53%, from the same period in 2019.

Printer, terminal and other hardware sales volume decreased 64% to approximately 10,000 units for the second quarter of 2020 driven primarily by a 79% decrease in unit volume from the casino and gaming market and, to a lesser extent, a 58% decrease in the POS automation and banking market.

These decreases were partially offset by a 373% increase in unit volume in the lottery market.

The average selling price of our printers, terminals and other hardware increased 4% for the second quarter of 2020 compared to the second quarter of 2019 due primarily to a lower level of POS automation and banking printer sales, which sell at a lower price than our other products.

International sales for the second quarter of 2020 decreased $2.0 million, or 74%, from the same period in 2019 due primarily to an 82% decrease in sales in the international casino and gaming market.

Net sales for the third quarter of 2020 decreased $4.4 million, or 38%, from the same period in 2019.

Printer, terminal and other hardware sales volume decreased 58% to approximately 11,000 units for the third quarter of 2020 due to volume decreases in all our markets, but driven primarily by a 64% decrease in unit volume from the casino and gaming market and, to a lesser extent, a 45% decrease in the POS automation and banking market.

The average selling price of our printers, terminals and other hardware increased 3% for the third quarter of 2020 compared to the third quarter of 2019 primarily due to a lower level of POS automation and banking printer sales, which sell at a lower price than our other products.

The sales volume decreases were partially offset by a $1 million, or 157% increase in software, labels and other recurring revenue from our food service technology market.

International sales for the third quarter of 2020 decreased $1.8 million, or 64%, from the same period in 2019 primarily due to an 80% decrease in sales in the international casino and gaming market.

Food service technology.

Our primary offering in the food service technology market is our BOHA!

ecosystem, which combines our latest generation terminal, 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!

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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 June 30, 2020 and 2019 were as follows (in thousands, except percentages):

Sales of our worldwide food service technology products for the three months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

International

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Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Software, labels and other recurring revenue

The increase in food service technology sales for the second quarter of 2020 compared to the second quarter of 2019 was driven primarily by sales of our BOHA!

The increase in food service technology sales for the third quarter of 2020 compared to the third 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 103%, including a 116% increase in label sales and a 291% increase in software sales, compared to the prior year period, despite the impact from the COVID-19 pandemic, though such sales had a low base following the launch of BOHA!

in March 2019.

Hardware sales for the second quarter of 2020 decreased 32% compared to the second quarter of 2019 primarily due to the impact from the COVID-19 pandemic that resulted in widespread store closings and/or substantially reduced customer operations.

software recognized on a SaaS subscription basis, labels and other recurring revenue increased by 157%, primarily due to increased label sales and, to a lesser extent, increased software sales, compared to the prior year period, despite the impact from the COVID-19 pandemic.

The increase of label sales for the third quarter of 2020 was primarily due to an initial stocking order to a distributor of a large convenience store chain as well as increased usage by existing customers.

Hardware sales for the third quarter of 2020 decreased 42% compared to the third quarter of 2019 primarily due to the impact from the COVID-19 pandemic that resulted in substantially reduced customer operations.

POS automation and banking.

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We exited the banking market during 2018.

S ales of our worldwide POS automation and banking products for the three months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):

S ales of our worldwide POS automation and banking products for the three months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

International

The decrease in both domestic and international POS automation and banking product revenue for the second quarter of 2020 compared to the second quarter of 2019 was primarily driven by a 70% decrease in sales of our Ithaca® 9000 printer due to the impact of the COVID-19 pandemic on sales to McDonald’s.

The decrease in both domestic and international POS automation and banking product revenue for the third quarter of 2020 compared to the third quarter of 2019 was primarily driven by a 47% decrease in domestic and international sales of our Ithaca® 9000 printer largely attributable to fewer sales to McDonald’s which we believe resulted from the impact of the COVID-19 pandemic.

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 ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):

Sales of our worldwide casino and gaming products for the three months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

International

The decrease in domestic sales of our casino and gaming products was due to a 74% decline in domestic sales of our thermal casino printers in the second quarter of 2020 compared to the second quarter of 2019, driven by industry-wide weakness resulting in lower sales to our OEMs as they were impacted by casino closures through most of the second quarter of 2020 due to the COVID-19 pandemic.

We had no new EPICENTRAL™ software installations during the second quarter of 2020 or 2019.

The decrease in domestic sales of our casino and gaming products was primarily due to a 46% decline in domestic sales of our thermal casino printers in the third quarter of 2020 compared to the third quarter of 2019, driven by industry-wide weakness resulting in lower sales to our OEMs as they were negatively impacted by the COVID-19 pandemic.

Many casinos reopened during the third quarter of 2020, although at reduced capacities, which resulted in improved sales in the third quarter of 2020 compared to the second quarter of 2020.

We had no new EPICENTRAL™ software installations during the third quarter of 2020 or 2019.

Sales of domestic EPICENTRAL TM are project based and, as a result, may fluctuate significantly quarter-to-quarter and year-to-year.

The decrease in international sales of our casino and gaming products in the second quarter of 2020 compared to the second quarter of 2019 was due to a 76% decrease in sales of our thermal casino printers and a 92% decrease in sales of our off-premise gaming printers due to the negative impact of the COVID-19 pandemic.

The decrease in international sales of our casino and gaming products in the third quarter of 2020 compared to the third quarter of 2019 was primarily due to an 81% decrease in sales of our thermal casino printers and a 76% decrease in sales of our off-premise gaming printers attributable to the negative impacts of the COVID-19 pandemic on the international casino and gaming industry.

Revenue from the lottery market includes sales of thermal on-line and other lottery printers primarily to International Game Technology and its subsidiaries (“IGT”) and, to a lesser extent, other lottery system companies for various lottery applications.

Sales of our worldwide lottery printers for the three months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):

Sales of our worldwide lottery printers for the three months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

International

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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 ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):

Sales of our worldwide Printrex printers for the three months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

International

The decrease in sales of Printrex printers for the second quarter of 2020 compared to the second quarter of 2019 resulted primarily from lower domestic and international 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.

The decrease in sales of Printrex printers for the third quarter of 2020 compared to the third 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 largely attributable to the COVID-19 pandemic.

Due to the uncertainty of current and future market conditions, which may continue to be negatively impacted by 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.

Revenue generated by our TSG includes sales of consumable products (inkjet cartridges, ribbons, POS 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 ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):

Sales in our worldwide TSG market for the three months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

International

The decrease in domestic revenue from TSG for the second quarter of 2020 as compared to the second quarter of 2019 was primarily due to a 83% decline in consumable sales resulting largely from lower sales of legacy HP inkjet cartridges used in our banking printers, as we exited the banking market at the end of 2018, and to a lesser extent, lower sales of legacy POS receipt paper.

In addition, we experienced a 24% decrease in sales of replacement parts, primarily due to lower sales volume of lottery printer spare parts to IGT, which sales can vary significantly from quarter to quarter, and a 35% decrease in service sales primarily related to a service contract with a banking customer that is expected to end in 2020.

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 the service contract with a banking customer that is expected to end in 2020.

Internationally, TSG revenue decreased for the second quarter of 2020 compared to the second quarter of 2019 primarily due to a 60% decrease in sales of replacement parts and accessories to international casino and gaming customers due to the impact of the COVID-19 pandemic and the resulting closures of many casinos and other gaming establishments, which are gradually being reversed.

The decrease in domestic revenue from TSG for the third quarter of 2020 as compared to the third quarter of 2019 was primarily due to a 77% decline in consumable sales resulting largely from lower sales of legacy HP inkjet cartridges used in our banking printers, as we exited the banking market at the end of 2018, and to a lesser extent, lower sales of legacy POS receipt paper.

In addition, we experienced a 45% decrease in service sales primarily related to a service contract with a banking customer that is expected to end in 2020.

These decreases were partially offset by a 15% increase in sales of replacement parts, primarily due to higher sales volume of lottery printer spare parts to IGT, which sales can vary significantly from quarter to quarter.

We expect TSG sales to decrease for the full year 2020 compared to the full year 2019 due to lower expected sales of the legacy HP inkjet cartridges and lower service sales related to the service contract with a banking customer that is expected to end in 2020.

Internationally, TSG revenue decreased for the third quarter of 2020 compared to the third quarter of 2019 primarily due to a 52% decrease in sales of replacement parts and accessories to international casino and gaming customers attributable to the negative impacts of the COVID-19 pandemic and the resulting closures of many casinos and other gaming establishments, which gradually began to reopen during the third quarter of 2020.

Gross Profit.

Gross profit for the three months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Gross profit for the three months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Three Months Ended

September 30,

Total Sales - 2020

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Gross profit is measured as revenue less cost of sales, which includes primarily the cost of all raw materials and component parts, direct labor, manufacturing overhead expenses, cost of finished products purchased directly from our contract manufacturers and expenses associated with installations and support of our EPICENTRAL TM print system and BOHA!

For the second quarter of 2020, gross profit decreased $3.4 million, or 60%, due primarily to a 53% decline in sales during the second quarter of 2020 compared to the second quarter of 2019.

Gross margin decreased 700 basis points to 43.3% for the second quarter of 2020 compared to 50.3% for the second quarter of 2019 due to the impact of fixed manufacturing overhead expenses on lower sales volume as a result of the effects of the COVID-19 pandemic, partially offset by cost saving measures taken in late March in response to the COVID-19 pandemic.

For the third quarter of 2020, gross profit decreased $2.2 million, or 40%, as compared to the third quarter of 2019 due largely to a 38% decline in worldwide sales.

Gross margin decreased 160 basis points to 45.9% for the third quarter of 2020 compared to 47.5% for the third quarter of 2019 primarily due to the impact of fixed manufacturing overhead expenses on lower sales volume as a result of the effects of the COVID-19 pandemic, partially offset by cost saving measures taken in earlier in the year in response to the COVID-19 pandemic.

Operating Expenses - Engineering, Design and Product Development.

Engineering, design and product development expense for the three months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Engineering, design and product development expense for the three months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Three Months Ended

September 30,

Total Sales - 2020

1 unchanged sentence

Engineering, design and product development expense 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).

Such expenses increased $252 thousand, or 23% for the second quarter of 2020 compared to the second quarter of 2019, primarily due to continued and expanded development of our food service technology products .

Such expenses increased $0.4 million, or 38% for the third quarter of 2020 compared to the third quarter of 2019, primarily due to continued and expanded development of our food service technology products .

We expect engineering, design and product development expense for the full year 2020 to be slightly higher than the full year 2019, as we expect to continue our strategic investments in our food service technology products despite the COVID-19 pandemic.

Operating Expenses - Selling and Marketing.

Selling and marketing expense for the three months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Selling and marketing expense for the three months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Three Months Ended

September 30,

Total Sales - 2020

1 unchanged sentence

Selling and marketing expense primarily includes salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, public relations, e-commerce and other promotional marketing expenses.

Such expenses decreased $670 thousand, or 32%, for the second quarter of 2020 compared to the second quarter of 2019 due to cost saving measures taken in late March 2020 in response to the expected impact of the COVID-19 pandemic.

The Company expects to maintain these cost saving measures in the near term.

Such expenses decreased $0.7 million, or 35%, for the third quarter of 2020 compared to the third quarter of 2019 primarily due to continued cost saving measures implemented during the third quarter of 2020 in response to the expected impact of the COVID-19 pandemic.

The Company expects to maintain these cost saving measures for the remainder of 2020.

Operating Expenses - General and Administrative .

General and administrative expense for the three months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

General and administrative expense for the three months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Three Months Ended

September 30,

Total Sales - 2020

Total Sales - 2019

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 $51 thousand, or 2%, in the second quarter of 2020 compared to the second quarter of 2019 due primarily to higher professional and legal expenses partially offset by a decrease in discretionary spending due to cost saving initiatives enacted in response to the COVID-19 pandemic.

General and administrative expenses primarily include salaries, incentive compensation, and other payroll related expenses for our executive, accounting, human resources, business development and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunication expenses, and other expenses related to being a publicly-traded company.

General and administrative expenses decreased $0.1 million, or 5%, in the third quarter of 2020 compared to the third quarter of 2019 primarily due to lower professional and legal expenses and lower discretionary spending resulting from the cost saving initiatives implemented in response to the COVID-19 pandemic.

Operating (Loss) Income.

Operating income for the three months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Operating income for the three months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Three Months Ended

September 30,

Total Sales - 2020

Total Sales - 2019

Operating income decreased $3 million for the second quarter of 2020 compared to the second quarter of 2019 due primarily to the decrease in sales of 53% and a 700 basis point decline in gross margin due to the impact from the COVID-19 pandemic.

The decrease in operating income was partially offset by a 7% decrease in operating expenses due to the cost saving initiatives in place for the second quarter of 2020.

Operating income decreased $1.8 million for the third quarter of 2020 compared to the third quarter of 2019 primarily due to a 38% decrease in sales and a 160 basis point decline in gross margin resulting from the negative impacts of the COVID-19 pandemic.

The decrease in operating income was partially offset by an 8% decrease in operating expenses due to the cost saving initiatives in place during the third quarter of 2020.

Interest, net.

We recorded net interest expense of $25 thousand for the second quarter of 2020 compared to $7 thousand for the second quarter of 2019.

The increase in interest expense was primarily due to interest on borrowings from our revolving line of credit in the second quarter of 2020 compared to no borrowings during the second quarter of 2019.

We expect net interest expense to increase for 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.

We recorded other expense of $11 thousand for the second quarter of 2020 compared to $142 thousand for the second quarter of 2019 due to lower foreign currency exchange losses recorded by our U.K.

subsidiary for the second quarter of 2020 compared to the second quarter of 2019.

We recorded net interest expense of $19 thousand for the third quarter of 2020 compared to no interest income or expense for the third quarter of 2019.

The increase in interest expense was primarily due to fees incurred for unused borrowings under the Siena Credit Facility, which has a higher unused borrowing rate than the TD Bank revolving line of credit that was in place during the third quarter of 2019.

We expect net interest expense for the fourth quarter of 2020 to be lower than the third quarter of 2020 due to expected interest income earned on the $8.7 million of net proceeds received from the Offering.

We recorded other income of $116 thousand for the third quarter of 2020 compared to other expense of $71 thousand for the third quarter of 2019 due to foreign currency exchange gains recorded by our U.K.

subsidiary for the third quarter of 2020 compared to foreign exchanges losses recorded for the third quarter of 2019.

Going forward, we may continue to experience more foreign exchange gains or losses depending on the level of sales to European customers through our U.K.

2 unchanged sentences

Income Taxes.

We recorded an income tax benefit for the second quarter of 2020 of $921 thousand at an effective tax rate of 33.2%, compared to an income tax benefit for the second quarter of 2019 of $26 thousand at an effective tax rate of -16.3%.

The effective tax rate for the second quarter of 2020 was higher as it included the impact of the net operating loss (“NOL”) that we expect to carry back to prior years.

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%).

The effective tax rate for the third quarter of 2020 was higher because 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 second quarter of 2019 was lower 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 second quarter of 2019.

The effective tax rate for the third quarter of 2019 was lower because it included the foreign-derived intangible income (“FDII”) deduction under the Tax Cuts and Jobs Act of 2017, as well as near breakeven pre-tax income in the third quarter of 2019.

Net (Loss) Income .

We reported a net loss for the second quarter of 2020 of $1.9 million, or $(0.25) per diluted share, compared to net income of $0.2 million, or $0.02 per diluted share, for the second quarter of 2019.

We reported a net loss for the third quarter of 2020 of $0.9 million, or $(0.11) per diluted share, compared to net income of $0.4 million, or $0.05 per diluted share, for the third quarter of 2019.

Results of Operations:

Six months ended June 30, 2020 compared to six months ended June 30, 2019

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 six months ended June 30, 2020 and 2019 are reflected in the table below (in thousands, except percentages).

Six Months Ended

June 30, 2020

June 30, 2019

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

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 nine months ended September 30, 2020 and 2019 are reflected in the table below (in thousands, except percentages).

Nine Months Ended

September 30, 2020

September 30, 2019

Food service technology

3 unchanged sentences

Net sales for the first six months of 2020 decreased $7.4 million, or 32%, from the same period in 2019.

Printer, terminal and other hardware sales volume decreased by 38% to approximately 35,000 units for the first six months of 2020 driven by decreases across all our markets.

These volume decreases were primarily due to a 45% decrease in unit volume from the casino and gaming market and, to a lesser extent, a 23% and 27% unit decrease in our POS automation and banking market and lottery market, respectively.

The average selling price of our printers, terminals and other hardware remained consistent decreasing 1% for the first six months of 2020 compared to the first six months of 2019.

Net sales for the first nine months of 2020 decreased $11.8 million, or 34%, from the same period in 2019.

Printer, terminal and other hardware sales volume decreased by 45% to approximately 46,000 units for the first nine months of 2020 driven by decreases across all our markets.

These volume decreases were primarily due to a 51% decrease in unit volume from the casino and gaming market and, to a lesser extent, a 30% unit decrease in our POS automation and banking market.

The average selling price of our printers, terminals and other hardware remained consistent for the first nine months of 2020 compared to the first nine months of 2019.

The sales volume decreases were partially offset by a $1.6 million, or 129% increase in software, labels and other recurring revenue from our food service technology market.

International sales decreased $3.5 million, or 43%, primarily driven by a 50% decrease of international casino and gaming sales.

Food service technology.

Sales of our worldwide food service technology products for the six months ended June 30, 2020 and 2019 are reflected in the tables below (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.

Six Months Ended

June 30, 2020

June 30, 2019

Sales of our worldwide food service technology products for the nine months ended September 30, 2020 and 2019 are reflected in the tables below (in thousands, except percentages).

Nine Months Ended

September 30, 2020

September 30, 2019

International

Six Months Ended

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

Software, labels and other recurring revenue

The increase in food service technology sales in the first six months of 2020 compared to the first six months of 2019 was driven primarily by sales of our BOHA!

The increase in food service technology sales in the first nine months of 2020 compared to the first nine months 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 101%, including a 102% increase in label sales and a 333% increase in software sales compared to the prior year period, though off a low base following the launch of BOHA!

in March 2019.

Hardware sales declined by 24% primarily attributable to lower sales of our AccuDate 9700 terminal due to the impact from the COVID-19 pandemic that resulted in widespread store closings and/or substantially reduced customer operations.

software recognized on a SaaS subscription basis, labels and other recurring revenue increased by 129%, primarily due to increased label sales and, to a lesser extent, increased software sales, compared to the prior year period.

Sales for the prior year period were significantly lower due to the launch of BOHA!

not occurring until March 2019.

The large increase of label sales for the first nine months of 2020 was primarily due to an initial stocking order to a distributor of a large convenience store chain for the third quarter of 2020 as well as increased usage by existing customers.

Hardware sales for the first nine month of 2020 decreased 32% compared to the first nine months of 2019 primarily due to the impact from the COVID-19 pandemic that resulted in widespread store closings and/or substantially reduced customer operations.

POS automation and banking.

Sales of our worldwide POS automation and banking products for the six months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):

Six Months Ended

June 30, 2020

June 30, 2019

Sales of our worldwide POS automation and banking products for the nine months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Nine Months Ended

September 30, 2020

September 30, 2019

International

The decrease in both domestic and international POS automation and banking sales for the first six months of 2020 compared to the first six months of 2019 was primarily driven by a 29% decrease in domestic sales of our Ithaca® 9000 printer due to the impact of the COVID-19 pandemic on sales to McDonald’s.

The decrease in both domestic and international POS automation and banking sales for the first nine months of 2020 compared to the first nine months of 2019 was primarily driven by a 35% decrease in domestic and international sales of our Ithaca® 9000 printer largely attributable to fewer sales to McDonald’s which we believe resulted from the COVID-19 pandemic.

Casino and gaming.

Sales of our worldwide casino and gaming products for the six months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):

Six Months Ended

June 30, 2020

June 30, 2019

Sales of our worldwide casino and gaming products for the nine months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Nine Months Ended

September 30, 2020

September 30, 2019

International

The decrease in domestic sales of our casino and gaming products for the first half of 2020 compared to the first half of 2019 was due primarily to a 49% decrease in domestic sales of our thermal casino printer, driven by industry-wide weakness resulting in lower sales to our OEMs as they were impacted by casino closures through most of the second quarter of 2020 due to the COVID-19 pandemic.

We had no new EPICENTRAL™ software installations during the first six months of 2020 or 2019.

The decrease in domestic sales of our casino and gaming products for the first nine months of 2020 compared to the first nine months of 2019 was primarily due to a 48% decrease in domestic sales of our thermal casino printer, driven by industry-wide weakness resulting in lower sales to our OEMs that were impacted by casino closures in response to the COVID-19 pandemic, which were in place for most of the second quarter of 2020 before gradually reopening at reduced capacities during the third quarter of 2020.

We had no new EPICENTRAL™ software installations during the first nine months of 2020 or 2019.

Sales of domestic EPICENTRAL TM are project based, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year.

The decrease in international casino and gaming sales for the first half of 2020 compared to the first half of 2019 was due primarily to a 73% decline in international sales of our off-premise gaming printers and a 21% decline in sales of our thermal casino printer due to the negative impact of the COVID-19 pandemic.

Sales of our worldwide lottery printers for the six months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):

Six Months Ended

June 30, 2020

June 30, 2019

The decrease in international casino and gaming sales for the first nine months of 2020 compared to the first nine months of 2019 was primarily due to a 43% decline in sales of our thermal casino printers and a 74% decline in international sales of our off-premise gaming printers attributable to the negative impacts of the COVID-19 pandemic on the international casino and gaming industry.

Sales of our worldwide lottery printers for the nine months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Nine Months Ended

September 30, 2020

September 30, 2019

International

3 unchanged sentences

As a result, IGT made a final purchase of our lottery printers during the second quarter of 2020 and we do not expect any further lottery printer sales in the future.

S ales of our worldwide Printrex printers for the six months ended June 30, 2020 and 2019 were as follows (in thousands, except percentages):

Six Months Ended

June 30, 2020

June 30, 2019

S ales of our worldwide Printrex printers for the nine months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages):

Nine Months Ended

September 30, 2020

September 30, 2019

International

The decrease in sales of Printrex printers for the first six months of 2020 compared to the first six months of 2019 resulted primarily from lower domestic and international sales in the oil and gas market which was negatively impacted by the decline in worldwide oil prices attributable to the COVID-19 pandemic.

Sales in our worldwide TSG market for the six months ended June 30, 2020 and 2019 are reflected in the table below (in thousands, except percentages).

Six Months Ended

June 30, 2020

June 30, 2019

The decrease in sales of Printrex printers for the first nine months of 2020 compared to the first nine months 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 largely attributable to the COVID-19 pandemic.

Sales in our worldwide TSG market for the nine months ended September 30, 2020 and 2019 are reflected in the table below (in thousands, except percentages).

Nine Months Ended

September 30, 2020

September 30, 2019

International

The decrease in domestic TSG sales for the first six months of 2020 as compared to the first six months of 2019 was primarily due to a 71% decline in consumable sales resulting largely from lower sales of legacy HP inkjet cartridges used in our banking printers, as we exited the banking market at the end of 2018, and to a lesser extent, lower sales of legacy POS receipt paper.

The decrease in domestic TSG sales for the first nine months of 2020 as compared to the first nine months of 2019 was primarily due to a 71% decline in consumable sales resulting largely from lower sales of legacy HP inkjet cartridges used in our banking printers, as we exited the banking market at the end of 2018, and to a lesser extent, lower sales of legacy POS receipt paper.

In addition, we experienced 33% lower service sales primarily related to a service contract with a banking customer that is expected to end in 2020.

This decrease was partially offset by 7% higher sales of replacement parts, primarily from higher lottery printer spare parts to IGT which can vary significantly from quarter to quarter.

Internationally, TSG sales decreased for the first six months of 2020 compared to the first six months of 2019 primarily due to a 44% decrease in sales of replacement parts and accessories to international casino and gaming customers.

This decrease was partially offset by a 10% increase in sales of replacement parts, related to an increase in sales of lottery printer spare parts to IGT, which can vary significantly from quarter to quarter.

Internationally, TSG sales decreased for the first nine months of 2020 compared to the first nine months of 2019 primarily due to a 46% decrease in sales of replacement parts and accessories to international casino and gaming customers.

Gross Profit.

Gross profit for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Six Months Ended

Gross profit for the nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Nine Months Ended

September 30,

Total Sales - 2020

Total Sales - 2019

Gross profit decreased $4.6 million, or 39%, for the first six months of 2020 compared to the first six months of 2019 due primarily to a 32% decline in sales for the first six months of 2020 compared to the same period in the prior year.

Gross margin decreased 510 basis points, to 46.4% for the first six months of 2020 compared to 51.5% for the first six months of 2019 due primarily to the impact of fixed manufacturing overhead expenses on lower sales volume as a result of the effects of the COVID-19 pandemic, partially offset by cost savings measures taken in late March 2020 in response to the COVID-19 pandemic.

Gross profit decreased $6.8 million, or 39%, for the first nine months of 2020 compared to the first nine months of 2019 primarily due to a 34% decline in sales as compared the prior year period.

Gross margin decreased 390 basis points to 46.2% for the first nine months of 2020 compared to 50.1% for the first nine months of 2019 primarily due to the impact of fixed manufacturing overhead expenses on lower sales volume as a result of the effects of the COVID-19 pandemic, partially offset by cost savings measures implemented in late March 2020 and maintained through the third quarter of 2020 in response to the COVID-19 pandemic.

Operating Expenses - Engineering, Design and Product Development.

Engineering, design and product development expense for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Six Months Ended

Engineering, design and product development expense for the nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Nine Months Ended

September 30,

Total Sales - 2020

Total Sales - 2019

Engineering, design and product development expenses increased $472 thousand, or 21%, in the first six months of 2020 compared to the first six months of 2019 primarily due to continued and expanded development for our food service technology products despite the COVID-19 pandemic .

Engineering, design and product development expenses increased $0.9 million, or 26%, for the first nine months of 2020 compared to the first nine months of 2019 primarily due to continued and expanded development for our food service technology products .

Operating Expenses - Selling and Marketing.

Selling and marketing expense for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Six Months Ended

Selling and marketing expense for the nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Nine Months Ended

September 30,

Total Sales - 2020

Total Sales - 2019

Selling and marketing expenses decreased $316 thousand, or 8%, during the first six months of 2020 compared to the first six months of 2019 due to cost saving measures taken in late March 2020 in response to the expected impact of the COVID-19 pandemic which more than offset the increase in sales and marketing expenses from new and expanded marketing programs and promotions to support our food service technology products that were implemented during the first quarter of 2020 prior to the COVID-19 outbreak.

Selling and marketing expenses decreased $1 million, or 17%, for the first nine months of 2020 compared to the first nine months of 2019 primarily due to cost saving measures implemented in late March 2020 and maintained through the third quarter of 2020 in response to the COVID-19 pandemic, which more than offset the increase in sales and marketing expenses resulting from the new and expanded marketing programs and promotions to support our food service technology products that were implemented during the first quarter of 2020 prior to the COVID-19 outbreak.

Operating Expenses - General and Administrative .

General and administrative expense for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Six Months Ended

General and administrative expense for the nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Nine Months Ended

September 30,

Total Sales - 2020

Total Sales - 2019

General and administrative expenses increased $381 thousand, or 9%, in the first six months of 2020 compared to the first six months of 2019 due primarily to higher professional and legal expenses partially offset by a decrease in discretionary spending due to cost saving initiatives enacted in response to the COVID-19 pandemic.

General and administrative expenses increased $0.3 million, or 4%, for the first nine months of 2020 compared to the first nine months of 2019 primarily due to higher compensation expense and professional and legal expenses partially offset by a decrease in discretionary spending resulting from cost saving initiatives implemented in the first quarter of 2020 in response to the COVID-19 pandemic.

Operating (Loss) Income.

Operating (loss) income for the six months ended June 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Six Months Ended

Operating (loss) income for the nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages):

Nine Months Ended

September 30,

Total Sales - 2020

Total Sales - 2019

Our operating income decreased $5.1 million during the first six months of 2020 compared to the first six months of 2019 due to the decrease in sales of 32%, the 510 basis point decrease in gross margin and 5% increase in operating expenses during the first six months of 2020 compared to the first six months of 2019.

Our operating income decreased $6.9 million for the first nine months of 2020 compared to the first nine months of 2019 primarily due to the 34% decrease in sales and the 390 basis point decrease in gross margin for the first nine months of 2020 compared to the first nine months of 2019.

Interest, net.

We recorded net interest expense of $22 thousand for the first six months of 2020 compared to $13 thousand for the first six months of 2019.

The increase in interest expense was due to interest on borrowings from our revolving line of credit in the second quarter of 2020 compared to no borrowings during the first half of 2019.

We recorded other expense of $176 thousand for the first six months of 2020 compared to $52 thousand for the first six months of 2019 due to higher foreign currency exchange losses recorded by our U.K.

subsidiary for the first six months of 2020 compared to the first six months of 2019.

We recorded net interest expense of $41 thousand for the first nine months of 2020 compared to $13 thousand for the first nine months of 2019.

The increase in interest expense was primarily due to interest on borrowings under the Siena Credit Facility in the second quarter of 2020 and higher fees for unused borrowings under the Siena Credit Facility as compared to no borrowings and lower fees for unused borrowings under the TD Bank revolving line of credit for the first nine months of 2019.

We recorded other expense of $60 thousand for the first nine months of 2020 compared to $123 thousand for the first nine months of 2019 primarily due to lower foreign currency exchange losses recorded by our U.K.

Income Taxes.

We recorded an income tax benefit for the first six months of 2020 of $1.4 million at an effective tax rate of 32.8%, compared to an income tax provision during the first six months of 2019 of $0.1 million at an effective tax rate of 8.7%.

The effective tax rate for the first six months of 2020 was higher as it included the impact of the net operating loss (“NOL”) that we expect to carry back to prior years.

The CARES Act enacted on March 27, 2020 permits NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

We recorded an income tax benefit for the first nine months of 2020 of $1.9 million at an effective tax rate of 33.9%, compared to an income tax benefit for the first nine months of 2019 of $54 thousand at an effective tax rate of (4.3%).

The effective tax rate for the first nine months of 2020 was higher because 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 first six months of 2019 was unusually low as it included the FDII deduction and the impact on the tax rate on lower pre-tax income.

The effective tax rate for the first nine months of 2019 was unusually low because it included the FDII deduction and the impact of the tax rate on lower pre-tax income.

Net (Loss) Income .

We reported a net loss for the first six months of 2020 of $2.8 million, or $(0.38) per diluted share, compared to net income of $0.9 million, or $0.12 per diluted share, for the first six months of 2019.

We reported a net loss for the first nine months of 2020 of $3.7 million, or $(0.49) per diluted share, compared to net income of $1.3 million, or $0.17 per diluted share, for the first nine months of 2019.

Liquidity and Capital Resources

For the first six months of 2020, our cash and cash equivalents balance decreased $1.1 million, or 27%, from December 31, 2019.

We ended the second quarter of 2020 with $3.1 million in cash and cash equivalents, of which $0.1 million was held by our U.K.

subsidiary, and outstanding borrowings of $2.2 million primarily from the PPP Loan.

For the first nine months of 2020, our cash and cash equivalents balance decreased $3.3 million, or 77%, from December 31, 2019.

We ended the third quarter of 2020 with $0.9 million in cash and cash equivalents, of which $0.1 million was held by our U.K.

subsidiary, and outstanding borrowings of $2.2 million from the PPP Loan.

Operating activities :

The following significant factors affected our cash used in operating activities of $2.3 million for the first six months of 2020 as compared to cash provided by operating activities of $1.6 million for the first six months of 2019:

During the first six months of 2020:

The following significant factors affected our cash used in operating activities of $4.2 million for the first nine months of 2020 as compared to cash provided by operating activities of $0.8 million for the first nine months of 2019:

During the first nine months of 2020:

We reported a net loss of $3.7 million.

We recorded depreciation and amortization of $0.8 million and share-based compensation expense of $0.6 million.

Accounts receivable decreased $3.1 million, or 48%, due primarily to lower sales volume during the second quarter of 2020.

Inventories decreased by less than 1% due primarily to the utilization of inventory on hand to fulfill sales and delaying inventory purchases to the second half of 2020.

Accounts payable decreased $1.7 million, or 56%, due primarily to inventory purchases made towards the end of the fourth quarter of 2019 that were subsequently paid in the first quarter of 2020 and delaying inventory purchases to the second half of 2020 to improve our liquidity .

Accrued liabilities and other liabilities decreased $0.7 million, or 10%, due primarily to the payment of 2019 annual bonuses in March 2020.

During the first six months of 2019:

Accounts receivable decreased $1.4 million, or 22%, primarily due to lower sales volume during the third quarter of 2020.

Inventories increased $0.4 million, or 4%, primarily due to the buildup of inventory from non-cancellable purchase orders that were placed before the onset of the COVID-19 pandemic.

Accounts payable decreased $0.7 million, or 23%, primarily due to inventory 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 $0.5 million, or 7%, primarily due to decreased deferred revenue.

During the first nine months of 2019:

We reported net income of $1.3 million.

We recorded depreciation and amortization of $0.7 million, and share-based compensation expense of $0.6 million .

Accounts receivable decreased $1.7 million, or 21%, due primarily to the collection of receivables for 2018 sales and lower sales volume in the second quarter of 2019 .

Inventories increased $1.4 million, or 11%, due primarily to the buildup of inventory on hand to support future anticipated sales of BOHA!

hardware products in the Food service technology market.

Other current and long term assets increased $0.3 million, or 46% due primarily to an advanced payment of royalty fees to a technology partner for software solutions used in our Food service technology market .

Accounts payable increased $0.3 million, or 8%, due primarily to the timing of inventory purchases made during the second quarter of 2019 .

Accrued liabilities and other liabilities decreased $0.6 million, or 15%, due primarily to the payment of 2018 annual bonuses in March 2019 .

Accounts receivable increased $0.4 million, or 5%, primarily due to sales for the third quarter 2019 occurring late in the quarter .

Inventories decreased by less than 1% due to the utilization of inventory on hand to fulfill sales.

Other current and long term assets increased $0.6 million, or 81% primarily due to an advanced payment of royalty fees to a technology partner for software solutions used in our food service technology market .

Accounts payable decreased $0.9 million, or 24%, primarily due to the utilization of inventory on hand to fulfill sales, which in turn resulted in a lower level of inventory purchases during the third quarter of 2019.

Accrued liabilities and other liabilities decreased $0.1 million, or 3% .

Investing activities:

Our capital expenditures, including capitalized software costs, were $0.5 million and $0.4 million for the first six months of 2020 and 2019, respectively.

Expenditures for the first six months of 2020 were primarily for new product tooling equipment, leasehold improvements at our Las Vegas facility and computer and networking equipment.

Expenditures for the first six months of 2019 were primarily for new product tooling equipment and, to a lesser extent, computer and networking equipment.

Our capital expenditures, including capitalized software costs, were $0.6 million and $1.1 million for the first nine months of 2020 and 2019, respectively.

Expenditures for the first nine months of 2020 were primarily for new product tooling equipment, leasehold improvements at our Las Vegas facility and computer and networking equipment.

Expenditures for the first nine months of 2019 were primarily for new product tooling equipment and, to a lesser extent, computer and networking equipment.

Additionally, during the first quarter of 2020, prior to widespread shutdowns in the United States in response to the COVID-19 pandemic, we loaned an additional $0.6 million to an unaffiliated third party.

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Financing activities:

Financing activities provided $2.3 million of cash for the first six months of 2020 primarily from the $2.2 million in funds received from the PPP Loan and proceeds of $0.4 million from stock option exercises, partially offset by the payment of financing costs associated with signing our Siena Credit Facility.

During the first six months of 2020 we borrowed and subsequently repaid $2.8 million from our Siena Credit Facility.

During the first six months of 2019, we used $1.6 million of cash from financing activities to pay dividends of $1.3 million and $0.2 million related to the relinquishment of shares to pay for withholding taxes on stock issued from our stock compensation plan.

Financing activities provided $2.2 million of cash for the first nine months of 2020 primarily from the $2.2 million in funds received from the PPP Loan and proceeds of $0.4 million from stock option exercises, partially offset by the payment of financing costs associated with signing our Siena Credit Facility.

During the first nine months of 2020, we borrowed and subsequently repaid $2.8 million from our Siena Credit Facility.

During the first nine months of 2019, we used $2.2 million of cash from financing activities to pay dividends of $2 million and $0.2 million related to the relinquishment of shares to pay for withholding taxes on stock issued from our stock compensation plan.

Credit Facility and Borrowings.

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The three month period from April 1, 2020 to June 30, 2020 was the first period we were subject to the financial covenant, which required the Company to maintain a minimum EBITDA.

As of June 30, 2020, we had $6 thousand of outstanding borrowings under the Siena Credit Facility and were in compliance with our financial covenant.

The following table lists the financial covenant at June 30, 2020.

As of September 30, 2020, we had no outstanding borrowings under the Siena Credit Facility and were in compliance with our financial covenant.

The following table demonstrates our compliance with the financial covenant at September 30, 2020.

Financial Covenant

Calculation at June 30, 2020

Calculation for the period from

April 1, 2020 to September 30, 2020

Minimum of $(5,279)

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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 in May 2013, from $0.07 to $0.08 per share in May 2014, and from $0.08 to $0.09 per share in May 2017.

Dividends declared and paid on our common stock totaled $0.7 million or $0.09 per in the three months ended June 30, 2019.

Dividends declared and paid on our common stock totaled $0.7 million or $0.09 per in the three months ended September 30, 2019.

On January 23, 2020, our Board of Directors announced the cessation of 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!

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Repurchases of our common stock are accounted for as of the settlement date.

During the six months ended June 30, 2020 and 2019, we did not repurchase any shares of our common stock.

As of June 30, 2020, we did not have an authorized stock repurchase program.

During the nine months ended September 30, 2020 and 2019, we did not repurchase any shares of our common stock.

As of September 30, 2020, we did not have an authorized stock repurchase program.

Resource Sufficiency

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Upon receipt of the PPP Loan, management was able to bring back the furloughed employees and intends to apply for forgiveness by maximizing the use of the PPP Loan proceeds for qualifying expenses.

However, after fully using the proceeds of the PPP Loan by June 30, 2020, we took additional cost saving actions in July 2020 that included reducing our workforce by approximately 20% through a combination of temporary furloughs and permanent headcount reductions as well as instituting a 10% pay reduction for all hourly employees.

We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities, borrowings available under our Siena Credit Facility, and savings from the cost reduction actions discussed above will provide sufficient resources to meet our working capital needs, finance our capital expenditures and meet our liquidity requirements through at least the next twelve months.

We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities, proceeds raised through the Offering on October 16, 2020, borrowings available under our Siena Credit Facility, and savings from the cost reduction actions discussed above will provide sufficient resources to meet our working capital needs, finance our capital expenditures and meet our liquidity requirements through at least the next twelve months.

Notwithstanding this belief, the duration and extent of the pandemic remain uncertain and its ultimate impact unknown.

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Other than the extension of the Ithaca facility lease, there have been no material changes in our contractual obligations since December 31, 2019.

As of September 30, 2020, we had no off-balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosure of our exposure to market risk is set forth under Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, of our 2019 Form 10-K.

There has been no material change in our exposure to market risk during the six months ended June 30, 2020.

There has been no material change in our exposure to market risk during the nine months ended September 30, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis