TRANSACT TECHNOLOGIES INC 10-Q

Item 2. MANAGEMENTS 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 March 31, 2021 (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, 2020 (our “2020 Form 10-K”), 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. During 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 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 activities of customers in the restaurant and hospitality, 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. Impact of COVID-19 Our business trends through the first two months of 2020 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 remainder of 2020 and into the first three months of 2021. Though we have begun to see some recovery in the first quarter of 2021, 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. 14 As a result of the COVID-19 pandemic and measures implemented to mitigate its spread, we experienced decreased demand for our products and lower than anticipated sales beginning in the second half of March 2020 and continuing through the first three months of 2021, particularly in our food service technology and casino and gaming markets. We experienced some improvement in demand during the second half of 2020 though the first three months of 2021 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 remained lower than 2019, and we expect this trend to continue through at least the first half of 2021. 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 in the third quarter of 2020 as state and local governments began to ease restrictions put in place in response to the pandemic. Many of our 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 second half of 2020 and first three months of 2021, we experienced sales improvement compared to the second quarter of 2020, as these food service customers reopened for business. However, during the fourth quarter of 2020 and early in 2021, restaurants were again impacted by a resurgence of the pandemic. 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 have been and are likely to continue to 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 are and will likely continue to 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 and limited game play based on social distancing guidelines. During the fourth quarter of 2020, some casinos re-closed due to a resurgence of the pandemic. However, many casinos in the U.S. have reopened during the first quarter of 2021 with limited capacity and we anticipate that they 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 is likely to negatively impact sales of casino and gaming printers purchased by slot manufacturers for use in slot machines at casinos during 2021. Lottery . We exited the lottery market at the end of 2019 and IGT made a final purchase of our lottery printer during 2020. Therefore, COVID-19 has not had an 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 continue to 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, sales of spare parts, service and consumable products have declined, and we expect such sales to remain at reduced levels, 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 while the COVID-19 pandemic persists. As a result of an expected significantly lower sales level, we believe our gross margin will remain lower than pre-pandemic levels 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 almost all of our printer and terminal manufacturing, due to reduced operations and parts shortages 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. 15 While we began to experience a modest recovery starting in the second half of 2020 into 2021 and expect this recovery to continue during the remainder of 2021, the exact timing and pace of recovery is unknown given uncertainty surrounding responsive measures to potential future resurgences of the virus and the significant disruption that our customers have already experienced and may continue to experience. In light of this uncertainty, we implemented a number of cost saving measures during 2020 to help mitigate the impact on our financial position and operations and continued to limit discretionary spending during the first quarter of 2021. In addition, during 2020 we took additional 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. ● PPP Loan - On May 1, 2020, the Company was granted a $2.2 million loan (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (“SBA”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act), which has 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 - We also entered into a new credit facility with Siena Lending Group LLC (the “Siena Credit Facility”) that provides a revolving credit line of up to $10 million, subject to a borrowing base. ● Reduced Capital Expenditures - We limited capital expenditures during 2020. 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. With a majority of our employees now fully-vaccinated against COVID-19, we are beginning to prepare a return-to-work plan that we expect to implement in the second half of 2021. Our distribution centers, deemed an essential service, have remained operational throughout the pandemic. During 2020, we implemented a new COVID-19 policy, which was still in place during the first three months of 2021, 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 by the Centers for Disease Control and Prevention and implements the following operations procedures: ● staggered shifts and a rotational/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 ; ● spacing 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 10 days ; ● visitors are prohibited from entering all facilities; ● cleaning and disinfecting protocols at all facilities; and ● daily temperature taking of all employees before entering all facilities. We have evaluated the recoverability of the assets on our unaudited condensed consolidated balance sheet as of March 31, 2021 i n 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 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 Part I, Item 1A, Risk Factors, of Form 10-K for the year ended December 31, 2020 for further discussion of risks related to COVID-19. 16 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. 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. Results of Operations: Three months ended March 31, 2021 compared to three months ended March 31, 2020 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 March 31, 2021 and 2020 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2021 March 31, 2020 $ Change % Change Food service technology (“FST”) $ 2,747 33.1 % $ 1,371 13.4 % $ 1,376 100.4 % POS automation 1,164 14.0 % 1,558 15.2 % (394 ) (25.3 %) Casino and gaming 2,865 34.5 % 4,931 48.1 % (2,066 ) (41.9 %) Printrex 159 1.9 % 117 1.1 % 42 35.9 % TSG 1,366 16.5 % 2,270 22.2 % (904 ) (39.8 %) $ 8,301 100.0 % $ 10,247 100.0 % $ (1,946 ) (19.0 %) International * $ 1,306 15.7 % $ 2,832 27.6 % $ (1,526 ) (53.9 %) * 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 quarter of 2021 decreased $1.9 million, or 19%, from the same period in 2020. Printer, terminal and other hardware unit sales volume decreased 27% to approximately 18,000 units, due primarily to a sales volume decrease in the casino and gaming market of 42% and, to a lesser extent, a 17% decrease in the POS automation market. The volume decrease was partially offset by an increase in FST hardware volume of 129% in the first quarter of 2021 compared to the first quarter of 2020. The average selling price of our printers, terminals and other hardware increased 7% during the first quarter of 2021 compared to the first quarter of 2020 primarily due to a higher level of FST hardware sales, which sell at higher prices than our other products. The sales volume decreases were partially offset by a $0.6 million, or 96%, increase in software, labels and other recurring revenue from our food service technology market. International sales for the first quarter of 2021 decreased $1.5 million, or 54%, from the same period in 2020 primarily due to decreased 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/workstation, 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 for both Android and iOS, 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/workstation, 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! Workstation uses an iPad instead of an integrated touchscreen. Both the BOHA! terminal and workstation are 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 March 31, 2021 and 2020 were as follows: 17 Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2021 March 31, 2020 $ Change % Change Domestic $ 2,564 93.3 % $ 1,239 90.4 % $ 1,325 106.9 % International 183 6.7 % 132 9.6 % 51 38.6 % $ 2,747 100.0 % $ 1,371 100.0 % $ 1,376 100.4 % Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2021 March 31, 2020 $ Change % Change Hardware $ 1,542 56.1 % $ 755 55.1 % $ 787 104.2 % Software, labels and other recurring revenue 1,205 43.9 % 616 44.9 % 589 95.6 % $ 2,747 100.0 % $ 1,371 100.0 % $ 1,376 100.4 % The increase in food service technology sales for the first quarter of 2021 compared to the first quarter of 2020 was driven by an increase in sales of both hardware and BOHA! software, labels and other recurring revenue. Hardware sales increased 104% in the first quarter of 2021 compared to 2020 due largely to sales to an existing national convenience store customer and a new national travel center customer. Sales of BOHA! software recognized on a SaaS subscription basis, labels and other recurring revenue increased by 96%, primarily due to increased label sales and, to a lesser extent, increased software sales, compared to the prior year period due to the growth of the installed base of our BOHA! terminals. POS automation: Revenue from the POS automation 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. Sales of our worldwide POS automation products for the three months ended March 31, 2021 and 2020 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2021 March 31, 2020 $ Change % Change Domestic $ 1,160 99.7 % $ 1,554 99.7 % $ (394 ) (25.4 %) International 4 0.3 % 4 0.3 % - 0.0 % $ 1,164 100.0 % $ 1,558 100.0 % $ (394 ) (25.3 %) The decrease in POS automation sales during the first quarter of 2021 compared to the first quarter of 2020 was driven by a 25% decrease in domestic sales of our Ithaca® 9000 printer largely attributable to fewer sales to McDonald’s which we believe resulted from the continued 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 March 31, 2021 and 2020 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2021 March 31, 2020 $ Change % Change Domestic $ 1,964 68.6 % $ 2,558 51.9 % $ (594 ) (23.2 %) International 901 31.4 % 2,373 48.1 % (1,472 ) (62.0 %) $ 2,865 100.0 % $ 4,931 100.0 % $ (2,066 ) (41.9 %) The decrease in domestic sales of our casino and gaming products for the first quarter of 2021 compared to the first quarter of 2020 was primarily due to a 23% decrease in domestic sales of our thermal casino printers, driven by industry-wide weakness resulting in lower sales to our OEMs that continue to be impacted by casino closures, capacity limitations and lower customer demand resulting from the COVID-19 pandemic. We have started to experience some recovery from the negative impact of the COVID-19 pandemic as domestic casino sales in the first quarter of 2021 increased 11% compared to the fourth quarter of 2020. 18 The decrease in international casino and gaming sales during the first quarter of 2021 compared to the first quarter of 2020 was primarily due to a 64% decline in sales of our thermal casino printers and a 39% decline in international sales of our off-premise gaming printers attributable to the continued negative impacts of the COVID-19 pandemic on the international casino and gaming industry. 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 March 31, 2021 and 2020 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2021 March 31, 2020 $ Change % Change Domestic $ 27 17.0 % $ 61 52.1 % $ (34 ) (55.7 %) International 132 83.0 % 56 47.9 % 76 135.7 % $ 159 100.0 % $ 117 100.0 % $ 42 35.9 % The increase in sales of Printrex printers for the first quarter of 2021 compared to the first quarter of 2020 resulted primarily from increased international sales in the oil and gas market. This increase was partially offset by a decrease in domestic Printrex printer sales during the first quarter of 2021 compared to the first quarter of 2020. Though our overall Printrex sales increased, we are no longer focused on this market and expect sales to decline over time. TSG: Revenue generated by TSG includes sales of consumable products (POS receipt paper, inkjet cartridges, ribbons and other printing supplies for legacy products), 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 March 31, 2021 and 2020 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2021 March 31, 2020 $ Change % Change Domestic $ 1,280 93.7 % $ 2,003 88.2 % $ (723 ) (36.1 %) International 86 6.3 % 267 11.8 % (181 ) (67.8 %) $ 1,366 100.0 % $ 2,270 100.0 % $ (904 ) (39.8 %) The decrease in domestic revenue from TSG for the first quarter of 2021 as compared to the first quarter of 2020 was due primarily to lower sales of replacement parts, consumable products and service revenue. Replacement part sales decreased 31% primarily from lower lottery printer spare part sales to IGT which can vary significantly from quarter to quarter. Consumable sales declined 57% due primarily to lower sales of 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 printer paper. Service revenue declined 43% primarily related to a service contract with a banking customer that is expected to end later in 2021. We expect TSG sales to decrease in 2021 compared to 2020 due to lower expected sales of legacy lottery printer spare printer parts to IGT and lower service sales related to the service contract with a banking customer that is expected to end in 2021. Internationally, TSG revenue decreased for the first quarter of 2021 compared to the first quarter of 2020 primarily due to a 66% decrease in sales of replacement parts and accessories to international casino and gaming customers due to the negative impact from the COVID-19 pandemic. Gross Profit. Gross profit information for the three months ended March 31, 2021 and 2020 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2021 2020 Change Total Sales - 2021 Total Sales - 2020 $ 3,189 $ 4,918 (35.2 %) 38.4 % 48.0 % 19 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, expenses associated with installations and support of our EPICENTRAL TM print system and BOHA! ecosystem and royalty payments to third parties, including to the third-party licensor of our food service technology software products. For the first quarter of 2021, gross profit decreased $1.7 million, or 35%, due largely to a sales decrease of 19% for the first quarter in 2021 compared to the first quarter of 2020. Additionally, our gross margin decreased 960 basis points, to 38.4% for the first quarter of 2021 compared to 48.0% for the first quarter of 2020. The decrease in gross margin resulted from lower sales of our higher margin casino printers and lower margin on our BOHA! hardware sales in the first quarter of 2021 compared to the first quarter of 2020. Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development information for the three months ended March 31, 2021 and 2020 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2021 2020 Change Total Sales - 2021 Total Sales - 2020 $ 1,803 $ 1,385 30.2 % 21.7 % 13.5 % 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 including those to the third-party licensor of our food service technology software products). Engineering, design and product development expenses increased $418 thousand, or 30%, for the first quarter of 2021 compared to the first quarter of 2020, primarily due to the continued development for our food service technology products. We expect engineering, design and product development expense to increase in 2021 compared to 2020 related to accelerated investments planned for our food service technology products. Operating Expenses - Selling and Marketing. Selling and marketing information for the three months ended March 31, 2021 and 2020 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2021 2020 Change Total Sales - 2021 Total Sales - 2020 $ 1,443 $ 2,208 (34.6 %) 17.4 % 21.5 % Selling and marketing expenses primarily include 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. Selling and marketing expenses decreased by $765 thousand, or 35%, for the first quarter of 2021 compared to the first quarter of 2020 primarily due to lower expenses from travel, trade shows and marketing programs in the first quarter of 2021. The first quarter of 2020 reflected pre-COVID 19 levels of sales and marketing expenses before costs saving measures were taken once we were impacted by the pandemic. We expect selling and marketing expenses to increase in 2021 as we gradually return to more normalized pre-COVID-19 spending levels as well as make substantial strategic investments in our food service technology sales and marketing groups that were deferred from 2020 due to the pandemic. Operating Expenses - General and Administrative . General and administrative information for the three months ended March 31, 2021 and 2020 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2021 2020 Change Total Sales - 2021 Total Sales - 2020 $ 2,609 $ 2,620 (0.4 %) 31.4 % 25.6 % 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 less than 1% for the first quarter of 2021 compared to the first quarter of 2020. We expect general and administrative expenses to increase in 2021 as we gradually return to more normalized pre-COVID-19 spending levels. Operating Loss. Operating loss information for the three months ended March 31, 2021 and 2020 is summarized below (in thousands, except percentages): 20 Three Months Ended March 31, Percent Percent of Percent of 2021 2020 Change Total Sales - 2021 Total Sales - 2020 $ (2,666 ) $ (1,295 ) 105.9 % (32.1 %) (12.6 %) Our operating loss increased $1.4 million, or 106%, in the first quarter of 2021 compared to the first quarter of 2020 due to a decrease in sales of 19% resulting from the negative impact of COVID-19 on sales and a decrease in our gross margin of 960 basis points. This decrease was partially offset by a 6% decline in operating expenses during the first quarter of 2021 compared to the first quarter of 2020. Interest. We recorded net interest expense of $13 thousand for the first quarter of 2021 compared to net interest income of $3 thousand for the first quarter of 2020. Interest expense in 2021 was due to unused borrowing fees under the Siena Credit Facility that was entered into on March 13, 2020, partially offset by interest income earned on the note receivable and a long-term revenue contract. We expect interest expense to increase in the full year 2021 compared to the full year 2020 due to the full year impact of unused borrowing fees incurred from the Siena Credit Facility and lower interest income due to the collection of the note receivable in the first quarter of 2021. Other, net. We recorded other expense of $83 thousand for the first quarter of 2021 compared to other expense of $165 thousand for the first quarter of 2020 primarily due to foreign exchange losses recorded by our UK subsidiary. Going forward, we may continue to experience more foreign exchange gains or losses depending on the level of sales to European customers through our UK 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 first quarter of 2021 of $556 thousand at an effective tax rate of 20.1%, compared to an income tax benefit during the first quarter of 2020 of $465 thousand at an effective tax rate of 31.9%. The effective tax rate for the first quarter of 2020 was higher as it included the impact of our net operating loss (“NOL”) that we incurred during 2020 and will 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 generated an NOL in 2020 which we will carry back to tax years that had a federal statutory tax rate of 34% compared to 21% in 2020. Net Loss . We reported a net loss for the first quarter of 2021 of $2.2 million, or $0.25 per diluted share, compared to a net loss of $1.0 million, or $0.13, per diluted share, for the first quarter of 2020. Liquidity and Capital Resources Cash Flow For the first three months of 2021, our cash and cash equivalents balance decreased $1.6 million, or 16%, from December 31, 2020. We ended the first quarter of 2021 with $8.7 million in cash and cash equivalents, of which $0.1 million was held by our U.K. subsidiary. Operating activities : The following significant factors affected our cash used in operating activities of $3.1 million for the first three months of 2021 as compared to cash used in operating activities of $3.6 million for the first three months of 2020: During the first three months of 2021: ● We reported a net loss of $2.2 million. ● We recorded depreciation and amortization of $0.2 million, and share-based compensation expense of $0.3 million. ● Accounts receivable increased $1.3 million, or 40%, primarily due to increased sales volume late in the first quarter of 2021. ● Inventory decreased $1.3 million, or 11%, due to the utilization of inventory on hand to fulfill sales in response to the pandemic . ● Other current and long-term assets increased $0.1 million, or 7%, due largely to advance payments made in the first quarter of 2021 for annual ERP software maintenance. ● Accounts payable increased $0.2 million, or 13%, due primarily to the timing of payments during the first quarter of 2020. ● Accrued liabilities and other liabilities decreased $1.0 million, or 13%, due primarily to the payment of 2020 annual bonuses in March 2021. 21 During the first three months of 2020: ● We reported a net loss of $1.0 million. ● We recorded depreciation and amortization of $0.2 million, and share-based compensation expense of $0.2 million. ● Accounts receivable decreased $0.1 million, or 1%, primarily due to lower sales volume during the first three months of 2020. ● Inventory increased $0.6 million, or 5%, due to the purchase of inventory during the first quarter of 2020 to support anticipated sales that did not occur due to the impact of the COVID-19 pandemic on our sales in March 2020. ● Other current and long-term assets increased $0.3 million, or 26%, due largely to advance payments made in the first quarter of 2020 for our annual ERP software maintenance. ● Accounts payable decreased $1.2 million, or 42%, 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. ● Accrued liabilities and other liabilities decreased $0.8 million, or 11%, due primarily to the payment of 2019 annual bonuses in March 2020. Investing activities: Our capital expenditures were $68 thousand for the first three months 2021 compared to $328 thousand for the first quarter of 2020. Expenditures in 2021 were for computer and networking equipment and new product tooling equipment. Expenditures in 2020 were primarily for computer and networking equipment, new product tooling equipment and leasehold improvements at our Las Vegas facility. Investing activities also provided $1.6 million for the first three months of 2021 upon the collection of the remaining $1.6 million note receivable balance from an unaffiliated third-party compared to $0.6 million of cash used in investing activities during the first three months of 2020 for a loan to the same unaffiliated third-party. Capital expenditures and additions to capitalized software for 2021 are expected to be approximately $1.4 million, primarily for new product tooling, new computer software and computer and networking equipment to support our food service technology market. Financing activities: Financing activities used $15 thousand of cash during the first three months of 2021 to pay $75 thousand for withholding taxes on stock issued from our stock compensation plans and $31 thousand on the final payment of financing costs associated with our Siena Credit Facility, partially offset by proceeds of $91 thousand from stock option exercises. During the first three months of 2020, financing activities provided $0.9 million of cash from net borrowings of $794 thousand from our Siena Credit Facility and proceeds of $353 thousand from stock option exercises, partially offset by the payment of financing costs associated with signing our Siena Credit Facility. 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. 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 March 31, 2021, we had no outstanding borrowings under the Siena Credit Facility and were in compliance with our financial covenant. The agreement governing the Siena Credit Facility provides for the parties to update the financial covenant for periods ending after March 31, 2021 based on updated financial projections of the Company. The Company does not anticipate a material change in the financial covenant, nor does it anticipate any other material change in the terms or covenants pertaining to its current credit facilities. The following table demonstrates our compliance with the financial covenant at March 31, 2021. Financial Covenant Requirement Calculation for the period from April 1, 2020 to March 31, 2021 EBITDA Minimum of $(7,984) $(7,144) On May 1, 2020, the Company entered into the PPP Loan with Berkshire Bank in the aggregate amount of $2.2 million, pursuant to the PPP which is administered by the SBA and was established under Division A, Title I of the CARES Act, enacted March 27, 2020. 22 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 were due on the PPP Loan for six months from the date of first disbursement, and if a loan forgiveness application is submitted to the SBA within 10 months after the end of the covered period, no payments are due until the date on which the SBA remits the loan forgiveness amount to the PPP Lender (or notifies the PPP Lender that no loan forgiveness is allowed), but interest will continue to accrue during the deferment period. If no loan forgiveness is allowed, the Company will be required to pay the PPP Lender equal monthly payments of principal and interest based on the principal amount outstanding on the PPP Loan, plus interest outstanding at the end of the deferment period, and taking into account any reductions in the principal amount due to forgiveness, if any. 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 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. On January 23, 2020, our Board of Directors announced the cessation of our 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. 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. The agreement governing the Siena Credit Facility provides for the parties to update the financial covenant for periods ending after March 31, 2021 based on updated financial projections of the Company. The Company does not anticipate a material change in the financial covenant, nor does it anticipate any other material change in the terms or covenants pertaining to its current credit facilities. We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities and borrowings available under our Siena Credit Facility 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 continue to evaluate 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. Off-Balance Sheet Arrangements As of March 31, 2021, 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 TransAct is a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K, and is not required to provide information under this item. 23