TRANSACT TECHNOLOGIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements 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 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. Any of such risks and uncertainties may also be exacerbated by the ultimate impact of the COVID-19 pandemic, which is unknown at this time. In addition, statements made in this Report about the COVID-19 pandemic and the potential effects and impacts of the COVID-19 pandemic on the Company’s business, financial condition, liquidity and results of operations may constitute forward-looking statements due to factors and future developments that are uncertain, unpredictable and, in many cases, beyond our control, including the scope, duration and extent of the pandemic, actions taken by governmental authorities and businesses in response to the pandemic and the direct and indirect impact of the pandemic on our employees, customers and third parties with which we conduct business. Although management has taken steps to mitigate any negative effect of such risks and uncertainties, including the COVID-19 pandemic, significant unfavorable changes could severely impact the assumptions used. Forward-looking statements speak only as of the date of they are made, and we do not undertake any obligation to update them to reflect the impact of subsequent events or circumstances, except as required by law. 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. Overview TransAct is a global leader in developing and selling software-driven technology and printing solutions for high growth markets including food service technology, point of sale (“POS”) automation, casino and gaming, 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. 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, the Caribbean Islands and the South Pacific. We also offer world-class service, support, labels, spare parts, accessories and printing supplies to our growing worldwide base of products currently in use by our customers. Through our TransAct Services Group (“TSG”), we provide a complete range of supplies and consumables used in the printing and scanning activities of customers in the restaurant and hospitality, banking, retail, casino and gaming, government and oil and gas exploration markets. Through our webstore, www.transactsupplies.com , and our direct selling team, we address the demand for these products. We operate in one reportable segment, the design, development, and marketing of software-driven technology and printing solutions for high growth markets, and provide related services, supplies and spare parts. 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. 16 Impact of the COVID-19 Pandemic In December 2019, a novel strain of coronavirus and the disease it causes, commonly known as COVID-19, was first reported in China and has since widely impacted the global public health and economic environment. In March 2020, the World Health Organization declared COVID-19, including all additional variations and strains thereof, a global pandemic. Our business trends through the first two months of the year were in line with internal expectations; however, the challenges posed by the COVID-19 pandemic on the United States and global economy increased significantly as the first quarter 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 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 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. However, food service providers will also be required to develop and implement new or enhanced policies and operating procedures regarding cleaning, sanitizing and social distancing to ensure the safety of their employees and customers. We believe that our BOHA! hardware, software and label products could prove to be helpful to our food service customers in efficiently and effectively managing and complying with these new procedures, especially as many establishments will likely be operating with reduced staff levels. Casino and gaming . In the casino and gaming market, most casinos and other gaming establishments were closed worldwide during most of the second quarter of 2020. Many casinos began to reopen in late May and early June 2020, but similar to restaurants, casino openings were slow and measured, starting with reduced capacity with limited game play based on social distancing guidelines. We anticipate that casinos will continue to limit capacity in the near term and will progressively increase capacity over time. 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. Lottery . 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. Therefore, we do not anticipate that COVID-19 will impact our lottery printer sales. Printrex . The oil and gas market has been negatively impacted by the decline in worldwide oil prices attributable to the COVID-19 pandemic. Due to the uncertainty of current and future market conditions, we believe sales of our Printrex oil and gas printers will be negatively impacted until oil and gas prices recover. TSG . Due to closures and reduced operating capacity of restaurants, food service establishments, casinos and other gaming establishments resulting from the COVID-19 pandemic, we expect sales of spare parts, service and consumable products to also decline correspondingly due to lower usage while the pandemic persists. Our gross margin has been negatively impacted and we expect our gross margin to continue to be negatively impacted by the COVID-19 pandemic. As a result of an expected significantly lower sales level, we believe our gross margin will decline due to fixed manufacturing overhead expenses (such as facility costs, depreciation, etc.) that cannot be reduced or eliminated even with the lower sales level. 17 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 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 2020 by approximately 20% through a combination of employee terminations and temporary furloughs that we expect to continue through the end of 2020; • a 10% reduction in the salaries of all salaried, non-commissioned employees, including executive officers starting in March 2020. From May 1, 2020 until early July 2020, employees below the vice president level were paid their full salary as a result of the receipt of the PPP Loan (defined below); • a reduction in sales commissions for all commissioned employees starting in March 2020; • a 10% reduction of cash retainer fees for all non-employee director starting in March 2020; and • the elimination of discretionary spending wherever possible starting in March 2020. In addition, we have taken further measures to increase liquidity, including the following: • 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 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 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 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. We implemented a new COVID-19 policy to specifically address health and safety guidelines for employees to adhere to and follow when at work or returning to work. This policy was based on the COVID-19 safety guidelines recommended from the Centers for Disease Control and Prevention and implements the following operations procedures: • staggered shifts and a rotational or flexible work schedule to minimize the number of employees at any particular facility at a single time; • mandated use of protective equipment, such as masks and gloves, when in common areas, which is provided to employees; • spaced seating in workspaces such as manufacturing cells, lunch/break rooms, conference rooms and other common areas to comply with social distancing guidelines; • employees who (i) show symptoms of COVID-19 or (ii) have been exposed to someone who shows symptoms or has tested positive for COVID-19 are prohibited from reporting to work for 14 days; • all visitors are prohibited from entering all facilities; • daily cleaning and disinfecting protocols at all facilities; and • daily temperature checks of all employees before entering all facilities. 18 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. Where forward-looking estimates are required, we made a good-faith estimate based on information available as of the balance sheet date. We have continued to monitor for indicators of impairment through the date of this Report and reflected accordingly in the accompanying condensed consolidated financial statements. Notwithstanding the foregoing, there is no assurance that the actions we have taken in response to the pandemic are sufficient or adequate, and we may be required to take additional preventive or responsive measures, as the ultimate extent of the effects of the COVID-19 pandemic on the Company, our financial condition, results of operations, liquidity, and cash flows are uncertain and are dependent on evolving developments which cannot be predicted at this time. See the 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 Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The presentation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, inventory obsolescence, the valuation of deferred tax assets and liabilities, depreciable lives of equipment, warranty obligations, and contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Goodwill and Intangible Assets. We acquire businesses in purchase transactions that result in the recognition of goodwill and intangible assets. The determination of the value of intangible assets requires management to make estimates and assumptions. In accordance with ASC 350-20 “Goodwill”, acquired goodwill is not amortized, but is subject to impairment testing at least annually and when an event occurs or circumstances change, which indicates it is more likely than not an impairment exists. As a result of the effect of COVID-19 on overall economic trends, the Company's operating results and the decrease in the Company’s share price as of March 31, 2020, management determined that potential impairment triggers had occurred and performed impairment testing as of March 31, 2020. 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 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 nine months ended September 30, 2020 . Results of Operations: Three months ended September 30, 2020 compared to three months ended September 30, 2019 Net Sales. Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the three months ended September 30, 2020 and 2019 are reflected in the table below (in thousands, except percentages). Three Months Ended Three Months Ended September 30, 2020 September 30, 2019 $ Change % Change Food service technology $ 2,349 32.2 % $ 1,951 16.7 % $ 398 20.4 % POS automation and banking 742 10.2 % 1,514 13.0 % (772 ) (51.0 %) Casino and gaming 2,009 27.5 % 5,074 43.4 % (3,065 ) (60.4 %) Lottery – 0.0 % 95 0.8 % (95 ) (100.0 %) Printrex 107 1.4 % 296 2.5 % (189 ) (63.9 %) TSG 2,093 28.7 % 2,756 23.6 % (663 ) (24.1 %) $ 7,300 100.0 % $ 11,686 100.0 % $ (4,386 ) (37.5 %) International * $ 1,013 13.9 % $ 2,815 24.1 % $ (1,802 ) (64.0 %) 19 * 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 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, convenience stores and food service operations. The software component of BOHA! consists of a suite of software-as-a-service (“SaaS”)-based applications, including applications for inventory management, temperature monitoring of food and equipment, timers, food safety labeling, food recalls, checklists and procedures, equipment service management, and delivery management. These applications are combined into a single platform with the associated hardware, which includes the BOHA! terminal, handheld devices, tablets, temperature probes and temperature sensors. The BOHA! terminal combines the software and hardware components in a device that includes an operating system, touchscreen and one or two thermal print mechanisms that print easy-to-read food rotation labels, grab and go labels for prepared foods, and “enjoy by” date labels. The BOHA! terminal is equipped with the TransAct Enterprise Management System to ensure that only approved applications and functions are available on the device and allows over-the-air updates to the applications and operating system. BOHA! helps food service establishments and restaurants (including fine dining, casual dining, fast casual and quick-serve restaurants, convenience stores, hospitality establishments and contract food service providers) effectively manage food safety and grab-and-go initiatives, as well as automate and manage back-of-house operations. Recurring revenue from BOHA! is generated by software sales, including software subscriptions that are charged to customers upfront on a per-application basis, as well as sales of labels, extended warranty and service contracts, and technical support services. Sales of our worldwide food service technology products for the three months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 2,081 88.6 % $ 1,730 88.7 % $ 351 20.3 % International 268 11.4 % 221 11.3 % 47 21.3 % $ 2,349 100.0 % $ 1,951 100.0 % $ 398 20.4 % Three Months Ended Three Months Ended September 30, 2020 September 30, 2019 $ Change % Change Hardware $ 771 32.8 % $ 1,338 68.6 % $ (567 ) (42.4 %) Software, labels and other recurring revenue 1,578 67.2 % 613 31.4 % 965 157.4 % $ 2,349 100.0 % $ 1,951 100.0 % $ 398 20.4 % 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 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. 20 POS automation and banking. Revenue from the POS automation and banking market includes sales of thermal printers used primarily by quick serve restaurants located either at the checkout counter or within self-service kiosks to print receipts for consumers or print on linerless labels. Prior to 2020, revenue included sales of inkjet printers used by banks, credit unions and other financial institutions to print deposit or withdrawal receipts and/or validate checks at bank teller stations. We exited the banking market during 2018. 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 Three Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 739 99.6 % $ 1,494 98.7 % $ (755 ) (50.5 %) International 3 0.4 % 20 1.3 % (17 ) (85.0 %) $ 742 100.0 % $ 1,514 100.0 % $ (772 ) (51.0 %) 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 and sports betting 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 in real-time at the slot machine. 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 Three Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 1,552 77.3 % $ 2,849 56.1 % $ (1,297 ) (45.5 %) International 457 22.7 % 2,225 43.9 % (1,768 ) (79.5 %) $ 2,009 100.0 % $ 5,074 100.0 % $ (3,065 ) (60.4 %) 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 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. Lottery. Revenue from the lottery market includes sales of thermal on-line and other lottery printers primarily to International Game Technology and its subsidiaries (“IGT”) and, to a lesser extent, other lottery system companies for various lottery applications. 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 Three Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ – 0.0 % $ 95 100.0 % $ (95 ) (100.0 %) International – 0.0 % – 0.0 % – 0.0 % $ – 0.0 % $ 95 100.0 % $ (95 ) (100.0 %) 21 Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations that IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year. Our sales to IGT are not indicative of IGT’s overall business or revenue. On December 31, 2019, we allowed our non-exclusive agreement to provide lottery terminal printers to IGT to expire, as we have decided to exit the lottery market and to shift our focus towards our higher-value, technology enabled food service technology and casino and gaming products. As a result, 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. Printrex. Printrex branded printers are sold into markets that include wide format, desktop and rack mounted and vehicle mounted black/white thermal printers used by customers to log and plot oil field, seismic and down hole well drilling data in the oil and gas exploration industry. It also includes high-speed color inkjet desktop printers used to print logs at the data centers of the oil and gas field service companies. Sales of our worldwide Printrex printers for the three months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 5 4.7 % $ 213 72.0 % $ (208 ) (97.7 %) International 102 95.3 % 83 28.0 % 19 22.9 % $ 107 100.0 % $ 296 100.0 % $ (189 ) (63.9 %) 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. TSG. 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. 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 Three Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 1,910 91.3 % $ 2,490 90.3 % $ (580 ) (23.3 %) International 183 8.7 % 266 9.7 % (83 ) (31.2 %) $ 2,093 100.0 % $ 2,756 100.0 % $ (663 ) (24.1 %) 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. 22 Gross Profit. Gross profit for the three months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages): Three Months Ended September 30, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ 3,349 $ 5,546 (39.6 %) 45.9 % 47.5 % 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! ecosystem. 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 September 30, 2020 and 2019 is summarized below (in thousands, except percentages): Three Months Ended September 30, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ 1,445 $ 1,048 37.9 % 19.8 % 9.0 % 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 $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 September 30, 2020 and 2019 is summarized below (in thousands, except percentages): Three Months Ended September 30, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ 1,258 $ 1,947 (35.4 %) 17.2 % 16.7 % 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 $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. 23 Operating Expenses - General and Administrative . 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, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ 2,125 $ 2,239 (5.1 %) 29.1 % 19.2 % 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 September 30, 2020 and 2019 is summarized below (in thousands, except percentages): Three Months Ended September 30, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ (1,479 ) $ 312 (574.0 %) (20.3 %) 2.7 % 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 $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. Other, net. 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. subsidiary and the fluctuation in exchange rates of the Euro and Pound Sterling against the U.S. Dollar, which may be impacted by volatility in global economic conditions due to the COVID-19 pandemic. Income Taxes. We recorded an income tax benefit for the 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 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 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. 24 Results of Operations: Nine months ended September 30, 2020 compared to nine months ended September 30, 2019 Net Sales. Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the nine months ended September 30, 2020 and 2019 are reflected in the table below (in thousands, except percentages). Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 $ Change % Change Food service technology $ 4,924 21.6 % $ 4,287 12.4 % $ 637 14.9 % POS automation and banking 2,781 12.2 % 4,435 12.8 % (1,654 ) (37.3 %) Casino and gaming 8,300 36.3 % 16,188 46.8 % (7,888 ) (48.7 %) Lottery 817 3.6 % 926 2.7 % (109 ) (11.8 %) Printrex 232 1.0 % 923 2.7 % (691 ) (74.9 %) TSG 5,778 25.3 % 7,827 22.6 % (2,049 ) (26.2 %) $ 22,832 100.0 % $ 34,586 100.0 % $ (11,754 ) (34.0 %) International * $ 4,529 19.8 % $ 7,993 23.1 % $ (3,464 ) (43.3 %) * International sales do not include sales of printers and terminals made to domestic distributors or other domestic customers who may, in turn, ship those printers and terminals to international destinations. Net sales for the first 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 nine months ended September 30, 2020 and 2019 are reflected in the tables below (in thousands, except percentages). Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 4,376 88.9 % $ 3,825 89.2 % $ 551 14.4 % International 548 11.1 % 462 10.8 % 86 18.6 % $ 4,924 100.0 % $ 4,287 100.0 % $ 637 14.9 % Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 $ Change % Change Hardware $ 2,071 42.1 % $ 3,040 71.0 % $ (969 ) (31.9 %) Software, labels and other recurring revenue 2,853 57.9 % 1,247 29.0 % 1,606 128.8 % $ 4,924 100.0 % $ 4,287 100.0 % $ 637 14.9 % 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 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. 25 POS automation and banking. 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 Nine Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 2,774 99.7 % $ 4,392 99.0 % $ (1,618 ) (36.8 %) International 7 0.3 % 43 1.0 % (36 ) (83.7 %) $ 2,781 100.0 % $ 4,435 100.0 % $ (1,654 ) (37.3 %) 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 nine months ended September 30, 2020 and 2019 were as follows (in thousands, except percentages): Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 5,080 61.2 % $ 9,765 60.3 % $ (4,685 ) (48.0 %) International 3,220 38.8 % 6,423 39.7 % (3,203 ) (49.9 %) $ 8,300 100.0 % $ 16,188 100.0 % $ (7,888 ) (48.7 %) 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 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. Lottery. 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 Nine Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 817 100.0 % $ 924 99.8 % $ (107 ) (11.6 %) International – 0.0 % 2 0.2 % (2 ) (100.0 %) $ 817 100.0 % $ 926 100.0 % $ (109 ) (11.8 %) Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations that IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year. Our sales to IGT are not indicative of IGT’s overall business or revenue. On December 31, 2019, we allowed our non-exclusive agreement to provide lottery terminal printers to IGT to expire, as we have decided to exit the lottery market and to shift our focus towards our higher-value, technology enabled food service technology and casino and gaming products. As a result, 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. Printrex. 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 Nine Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 72 31.0 % $ 740 80.2 % $ (668 ) (90.3 %) International 160 69.0 % 183 19.8 % (23 ) (12.6 %) $ 232 100.0 % $ 923 100.0 % $ (691 ) (74.9 %) 26 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. TSG. 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 Nine Months Ended September 30, 2020 September 30, 2019 $ Change % Change Domestic $ 5,184 89.7 % $ 6,947 88.8 % $ (1,763 ) (25.4 %) International 594 10.3 % 880 11.2 % (286 ) (32.5 %) $ 5,778 100.0 % $ 7,827 100.0 % $ (2,049 ) (26.2 %) 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 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 nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages): Nine Months Ended September 30, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ 10,557 $ 17,336 (39.1 %) 46.2 % 50.1 % 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 nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages): Nine Months Ended September 30, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ 4,197 $ 3,328 26.1 % 18.4 % 9.6 % 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 nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages): Nine Months Ended September 30, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ 4,885 $ 5,890 (17.1 %) 21.4 % 17.0 % 27 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 nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages): Nine Months Ended September 30, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ 6,987 $ 6,720 4.0 % 30.6 % 19.4 % 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 nine months ended September 30, 2020 and 2019 is summarized below (in thousands, except percentages): Nine Months Ended September 30, Percent Percent of Percent of 2020 2019 Change Total Sales - 2020 Total Sales - 2019 $ (5,512 ) $ 1,398 (494.3 %) (24.1 %) 4.0 % 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 $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. Other, net. 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. subsidiary. 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 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 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 Cash Flow 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. 28 Operating activities : 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 $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 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 $0.6 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. Capital expenditures and additions to capitalized software for 2020 were expected to be approximately $1.1 million, primarily for new product tooling, new computer software and equipment purchases and leasehold improvements to support our food service technology market. In response to the COVID-19 pandemic, we have curtailed portions of our planned capital expenditures until market conditions improve. Financing activities: Financing activities provided $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. On March 13, 2020, we entered into the Siena Credit Facility with Siena Lending Group LLC and terminated our credit facility with TD Bank N.A.. The Siena Credit Facility provides for a revolving credit line of up to $10 million expiring on March 13, 2023. Borrowings under the Siena Credit Facility bear a floating rate of interest equal to the greatest of (i) the prime rate plus 1.75%, (ii) the federal funds rate plus 2.25%, and (iii) 6.50%. The total deferred financing costs related to expenses incurred to complete the Siena Credit Facility were $245 thousand. 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 (i) 85% of eligible accounts receivable plus the lesser of (a) $5 million and (b) 50% of eligible raw material and 60% of finished goods inventory. 29 The Siena Credit Facility imposes a quarterly financial covenant on the Company and restricts, among other things, our ability to incur additional indebtedness and the creation of other liens. The 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 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 Requirement Calculation for the period from April 1, 2020 to September 30, 2020 EBITDA Minimum of $(5,279) $(3,170) On May 1, 2020 (the “Loan Date”), the Company entered into the PPP Loan with Berkshire Bank in the aggregate amount of $2.2 million, pursuant to the Paycheck Protection Program (the “PPP”) which is administered by the SBA and was established under Division A, Title I of the CARES Act, enacted March 27, 2020. The PPP Loan, which is evidenced by a Note dated the Loan Date issued by the Company (the “Note”), matures on May 1, 2022 and bears interest at a fixed rate of 1.0% per annum, accruing from the Loan Date and payable monthly. No payments are due on the PPP Loan for six months from the date of first disbursement, but interest will continue to accrue during the deferment period. The Note is unsecured and guaranteed by the SBA. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Note provides for customary defaults, including failure to make payment when due or to fulfill the Company’s obligations under the Note or related documents, reorganizations, mergers, consolidations or other changes to the Company’s business structure, and certain defaults on other indebtedness, bankruptcy events, adverse changes in financial condition or civil or criminal actions. The PPP Loan may be accelerated upon the occurrence of a default. Under the terms of the PPP, the PPP Loan may be forgiven to the extent that funds from the PPP Loan are used for payroll costs and costs to continue group health care benefits, as well as for interest on mortgage obligations incurred before February 15, 2020, rent under lease agreements in effect before February 15, 2020, utilities for which service began before February 15, 2020, and interest on debt obligations incurred before February 15, 2020 (collectively, “qualifying expenses”), subject to conditions and limitations provided in the CARES Act. At least 60% (as amended) of the proceeds of the PPP Loan must be used for eligible payroll costs for the PPP Loan to be forgivable. The Company has maximized the use of the PPP Loan proceeds for qualifying expenses and intends to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020. Whether forgiveness will be granted and in what amount is subject to an application to, and approval by, the SBA and may also be subject to further requirements in any regulations and guidelines the SBA may adopt. The PPP Loan is classified as “Long-term debt” in the Condensed Consolidated Balance Sheet until the forgiveness determination has been made by the SBA. Shareholder Dividend Payments In 2012, our Board of Directors initiated a quarterly cash dividend program which was subject to the Board’s approval each quarter. 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! ecosystem. The final dividend payment was made in December 2019. Stock Repurchase Program Prior to its expiration on December 31, 2019, we maintained a stock repurchase program (the “2018 Stock Repurchase Program”) whereby we were authorized to repurchase up to $5 million of our outstanding shares of common stock from time to time in the open market at prevailing market prices based on market conditions, share price and other factors. We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account. Repurchases of our common stock are accounted for as of the settlement date. During the 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. 30 Resource Sufficiency Given the unprecedented uncertainty related to the impact of the COVID-19 pandemic on the food service and casino industries, the Company is closely monitoring its cash generation, usage and preservation including the management of working capital to generate cash. The Company does not currently anticipate requiring any additional credit facilities within the next twelve months beyond our Siena Credit Facility and the PPP Loan, which are discussed above, nor does it anticipate a material change in the terms or covenants pertaining to its current facilities. To better align costs with the current business environment, on March 24, 2020 the Company announced several cost reduction actions. Such actions included the furlough of approximately 10% of the Company’s workforce, a 10% reduction in the salaries of all salaried, non-commissioned employees, including the executive officers, a reduction in sales commissions for all commissioned employees, a 10% reduction of cash retainer fees for all non-employee directors and the elimination of discretionary spending wherever possible. Upon receipt of the PPP Loan, management was able to bring back the furloughed employees and intends to apply for forgiveness by maximizing the use of the PPP Loan proceeds for qualifying expenses. 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. 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. As a result, we are currently evaluating several different strategies to enhance our liquidity position as a result of the significant financial and operational impacts due to the COVID-19 pandemic. These strategies may include, but are not limited to, seeking to raise additional capital through an equity or debt financing and applying for additional relief through other programs established under the CARES Act. Contractual Obligations / Off-Balance Sheet Arrangements The disclosure of payments we have committed to make under our contractual obligations is set forth under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” of our 2019 Form 10-K. On February 28, 2020, we entered into an amendment to extend the lease on our facility in Ithaca, New York. The lease, which was last amended on January 14, 2016, was scheduled to expire on May 31, 2021. The lease amendment provides for an extension of the lease for four additional years from June 1, 2021 to May 31, 2025. 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. Item 3. 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 nine months ended September 30, 2020.