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, 2022 (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”, “plan” 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, 2021 (our “2021 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 such risks and uncertainties may also be exacerbated by the ultimate impact of the COVID-19 pandemic and the emergence of virus variants, which is unknown at this time, or by the Russia-Ukraine conflict and its impact on freight costs. 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 any resurgences or variants, vaccination rates and the direct and indirect impact of the pandemic on our employees, customers and third parties with which we conduct business, including difficulties or delays in manufacturing or delivery of inventory or other supply chain disruptions. Although management has taken steps to mitigate the negative effect of such risks and uncertainties, including the impact of the COVID-19 pandemic, significant unfavorable changes could severely impact the assumptions used. Forward-looking statements speak only as of the date 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 and casino and gaming. 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® and Ithaca® 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 BOHA! software and hardware products help restaurants, convenience stores and food service operators of all sizes automate 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. We sell our technology to original equipment manufacturers (“OEMs”), value-added resellers, select distributors and 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, and government 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 Pandemic During the first two months of 2020, our business trends 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 2021. Though we began to experience some recovery during 2021 the recovery slowed again in the first quarter of 2022 due to a resurgence of the Omicron variant, and unfortunately, the massive economic and social disruptions across the world persist due to COVID-19, including the emergence of virus variants, and the measures implemented to mitigate its spread. The food service and casino and gaming 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 experienced decreased demand for our products and lower than anticipated sales beginning in the second half of March 2020 and continuing through 2021 and the first quarter of 2022, particularly in our food service technology and casino and gaming markets. We experienced some improvement in demand during the second half of 2020 continuing through 2021 and the first quarter of 2022 compared to the second quarter of 2020, as state and local governments lifted certain measures implemented earlier in 2020 to mitigate the spread of the virus, but demand remained lower than 2019. While we expect this improvement to continue during 2022 as compared to 2021, the exact timing and pace of recovery is unknown. We have also experienced supply chain disruptions, including delayed product shipments from our two contract manufacturers located in Thailand and China that conduct almost all of our printer and BOHA! hardware manufacturing, due to reduced operations and part shortages at these facilities. Our inventory levels decreased significantly during 2021 due to these supply chain disruptions, and although we have been able to increase inventory levels during the first quarter of 2022, continuing delays and further disruptions have led to an increased backlog, including increased freight costs, and have impacted our ability to deliver products to our customers on time or at all. Below is a discussion of the impact we have experienced from the COVID-19 pandemic, and that we believe will continue to experience for the foreseeable future in each of our markets. 14 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 initially opened under restrictions that limited them to providing drive-through, take-out or delivery service without dine-in options, as well as limiting the volume of customers and employees on site at any one time. During the second half of 2020 and throughout 2021 and the first quarter of 2022, as these food service customers reopened for business, we experienced sales improvement compared to the second quarter of 2020. Notwithstanding the gradual resumption of operations that began in the third quarter of 2020, our food service technology customers continue to recover from the financial impact of the pandemic 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. 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. Additionally, our markets have experienced labor shortages and inflation in their food and labor costs. 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, while also helping to overcome staffing issues and inflation, especially as many establishments are and will likely continue to be operating with reduced staff levels due to the continuing labor shortage. 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 gameplay 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. reopened during the first quarter of 2021 with limited capacity and continued to remain open and further expand capacity during the remainder of 2021. We anticipate that casinos world-wide will continue to increase capacity over time, barring any new closures or reduced capacity requirements in response to any new resurgence of the pandemic, including the emergence of variants. Though sales of our casino and gaming products increased during 2021 and the first quarter of 2022, and we expect this trend to continue for the remainder of 2022, casinos continue to recover from the financial impact of the COVID-19 pandemic, and therefore we expect that certain casinos’ appetite for purchases of new slot machines may be diminished, which may negatively impact sales of casino and gaming printers purchased by slot manufacturers for use in slot machines at casinos during 2022. Printrex . We made a strategic decision to exit the Printrex market as of December 31, 2021 and expect to have no future sales in this market beyond 2021. 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 full year 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 and its economic effects on the markets we serve persists. As a result of the COVID-19 pandemic, we have experienced (1) lower sales levels compared to pre-pandemic levels, (2) increased material and shipping costs resulting from worldwide supply disruptions and (3) increased product, contract manufacturing and labor costs resulting from inflation. Though we have implemented price increases during the first and second quarters of 2022 on all our products (except our FST products) to help mitigate the product cost increases, 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. While we began to experience a modest recovery starting in the second half of 2020 and continuing into 2021 the recovery slowed again in the first quarter of 2022 due to a resurgence of the Omicron variant. We are beginning to see the recovery resume in the second quarter of 2022 which we expect to continue during the remainder of 2022, though the exact timing and pace of recovery is unknown given uncertainty surrounding responsive measures to potential future resurgences of the virus, vaccination rates, the emergence of virus variants and the significant disruption that our customers and suppliers have already experienced and may continue to experience. 15 We have taken the following actions to increase liquidity and strengthen our financial position in an effort to mitigate the negative impacts from the COVID-19 pandemic: ● Public Offering – O n October 16, 2020 and August 16, 2021, the Company raised net proceeds of $8.7 million and $11.2 million (including the exercise of the underwriters’ overallotment options on October 16, 2020 and August 20, 2021), respectively, after deducting underwriting discounts, commissions and offering expenses, through underwritten public offerings and sold an aggregate of 1,380,000 and 842,375 shares of common stock, respectively . ● 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 Division A, Title I of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. On July 8, 2021, we received notice that the PPP Loan had been forgiven as of July 1, 2021 . ● Employee Retention Credit –Under the provisions of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain criteria. In connection with the CARES Act, the Company recognized the employee retention credit during the fourth quarter of 2021 as a $1.5 million “Gain from employee retention credit” in the Consolidated Statement of Operations for the year ended December 31, 2021 and recorded a $1.5 million “Employee retention credit receivable” in the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021. We expect to receive these funds during 2022 . ● Credit Facility - On March 13, 2020, we entered into a 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 limited capital expenditures during 2020 and gradually increased expenses during 2021 as our sales improved. Since the onset of the pandemic, our top priority has been 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 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 internal control structure remained operational and unchanged. As of October 4, 2021, all of our employees were fully vaccinated against COVID-19 and, as a result, we implemented a return-to-work plan, reopening all of our facilities and ending our work-from-home practices. Our distribution centers, deemed an essential service, remained operational throughout the pandemic. During 2020, we implemented new COVID-19 policies, most of which were still in place prior to ending our work-from-home practices, to specifically address health and safety guidelines for employees to adhere to and follow when at work. These policies were based on the COVID-19 safety guidelines recommended by the Centers for Disease Control and Prevention. We have evaluated the recoverability of the assets on our unaudited Condensed Consolidated Balance Sheet as of March 31, 2022 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 any impairments 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 our 2021 Form 10-K 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. 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, accounts receivable, inventory obsolescence, goodwill and intangible assets, the valuation of deferred tax assets and liabilities, depreciable lives of equipment, warranty obligations, share-based compensation and contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. There have been no material changes in our critical accounting judgements and estimates from the information presented in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2021 Form 10-K. 16 Results of Operations: Three months ended March 31, 2022 compared to three months ended March 31, 2021 Net Sales: Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables (including labels) and maintenance and repair services, by market for the three months ended March 31, 2022 and 2021 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2022 March 31, 2021 $ Change % Change Food service technology (“FST”) $ 2,130 22.0 % $ 2,747 33.1 % $ (617 ) (22.5 %) POS automation 1,300 13.4 % 1,164 14.0 % 136 11.7 % Casino and gaming 4,762 49.1 % 2,865 34.5 % 1,897 66.2 % Printrex – 0.0 % 159 1.9 % (159 ) (100.0 %) TSG 1,510 15.5 % 1,366 16.5 % 144 10.5 % $ 9,702 100.0 % $ 8,301 100.0 % $ 1,401 16.9 % International * $ 2,600 26.8 % $ 1,306 15.7 % $ 1,294 99.1 % * 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 2022 increased $1.4 million, or 17%, compared to the first quarter of 2021. Printer, terminal and other hardware unit sales volume increased 25% to approximately 23,000 units, due primarily to a sales volume increase in the casino and gaming market of 61%. The volume increase was partially offset by a decrease in FST hardware volume of 64% in the first quarter of 2022 compared to the first quarter of 2021. The average selling price of our printers, terminals and other hardware decreased 7% during the first quarter of 2022 compared to the first quarter of 2021 primarily due to a lower level of FST hardware sales, which sell at higher prices than our other products. In addition to the sales volume increases, FST software, labels and other recurring revenue increased $0.4 million, or 30%, in the first quarter of 2022 compared to the first quarter of 2021. International sales for the first quarter of 2022 increased $1.3 million, or 99%, from the same period in 2021 primarily due to increased sales in the international casino and gaming market, and to a lesser extent, increased sales in the international TSG 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 operating systems, including applications for temperature monitoring of food and equipment, timers, food safety labeling, media libraries, checklists and task lists, and equipment service management. These applications can be 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 or Android tablet instead of an integrated touchscreen. Both the BOHA! terminal and BOHA! 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 typically charged to customers annually 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, 2022 and 2021 were as follows: 17 Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2022 March 31, 2021 $ Change % Change Domestic $ 1,946 91.4 % $ 2,564 93.3 % $ (618 ) (24.1 %) International 184 8.6 % 183 6.7 % 1 0.5 % $ 2,130 100.0 % $ 2,747 100.0 % $ (617 ) (22.5 %) Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2022 March 31, 2021 $ Change % Change Hardware $ 563 26.4 % $ 1,542 56.1 % $ (979 ) (63.5 %) Software, labels and other recurring revenue 1,567 73.6 % 1,205 43.9 % 362 30.0 % $ 2,130 100.0 % $ 2,747 100.0 % $ (617 ) (22.5 %) The decrease in food service technology sales for the first quarter of 2022 compared to the first quarter of 2021 was driven by a decrease in sales of hardware. Hardware sales decreased 64% in the first quarter of 2022 compared to 2021 due largely to lower sales to a national convenience store customer and an initial sale to a new national travel center customer completed in the first quarter of 2021 that did not reoccur in 2022. The decrease in hardware sales was partially offset by increased sales of BOHA! software recognized on a SaaS subscription basis, labels and other recurring revenue, which increased by 30%, 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 and workstations. POS automation: Revenue from the POS automation market includes sales of thermal printers used primarily by McDonald’s, and to a lesser extent, other quick serve restaurants 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, 2022 and 2021 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2022 March 31, 2021 $ Change % Change Domestic $ 1,300 100.0 % $ 1,160 99.7 % $ 140 12.1 % International – 0.0 % 4 0.3 % (4 ) (100.0 %) $ 1,300 100.0 % $ 1,164 100.0 % $ 136 11.7 % The increase in POS automation sales during the first quarter of 2022 compared to the first quarter of 2021 was driven by a 12% increase in domestic sales of our Ithaca® 9000 printer, primarily to McDonald’s, as POS automation sales continue to improve in 2022 compared to the negative impact that the COVID-19 pandemic had on POS automation sales during the first three months of 2021. We expect sales of POS automation printers to be significantly higher in the second half of 2022 compared to the first quarter of 2022 based on the backlog of orders we have received for McDonald’s. 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, 2022 and 2021 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2022 March 31, 2021 $ Change % Change Domestic $ 2,788 58.5 % $ 1,964 68.6 % $ 824 42.0 % International 1,974 41.5 % 901 31.4 % 1,073 119.1 % $ 4,762 100.0 % $ 2,865 100.0 % $ 1,897 66.2 % The increase in domestic sales of our casino and gaming products for the first quarter of 2022 compared to the first quarter of 2021 was primarily due to a 43% increase in domestic sales of our thermal casino printers, driven by higher sales to OEMs as the market continued to recover from the negative impact of the COVID-19 pandemic. The increase in international casino and gaming sales during the first quarter of 2022 compared to the first quarter of 2021 was due to a 71% increase in sales of our thermal casino printers and a 397% increase in international sales of our off-premise gaming printers. These increases are attributable to the recovery of the international markets after significant negative impacts from the COVID-19 pandemic. The international casino and gaming market recovered at a slower pace during 2021 compared to the domestic casino and gaming market. 18 Printrex: P rintrex branded printers were 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. Sales of our worldwide Printrex printers for the three months ended March 31, 2022 and 2021 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2022 March 31, 2021 $ Change % Change Domestic $ – 0.0 % $ 27 17.0 % $ (27 ) (100.0 %) International – 0.0 % 132 83.0 % (132 ) (100.0 %) $ – 0.0 % $ 159 100.0 % $ (159 ) (100.0 %) During 2021, we decided to exit the Printrex business and in the fourth quarter of 2021 fulfilled last buy orders to our legacy customers. We expect no future Printrex sales as we have shifted our focus away from this market and towards our higher value, technology-enabled food service technology terminals and casino and gaming products. 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 and accessories, maintenance and repair services, and shipping and handling charges. Sales in our worldwide TSG market for the three months ended March 31, 2022 and 2021 were as follows: Three Months Ended Three Months Ended (In thousands, except percentages) March 31, 2022 March 31, 2021 $ Change % Change Domestic $ 1,068 70.7 % $ 1,280 93.7 % $ (212 ) (16.6 %) International 442 29.3 % 86 6.3 % 356 414.0 % $ 1,510 100.0 % $ 1,366 100.0 % $ 144 10.5 % The decrease in domestic revenue from TSG during the first quarter of 2022 as compared to the first quarter of 2021 was due to lower sales of legacy replacement parts, service revenue, and consumable products. Replacement part sales decreased 14% primarily from lower lottery printer spare part sales to IGT, which can vary significantly from quarter to quarter. Service revenue declined 24%, primarily related to declining revenue from a service contract with a legacy banking customer that is expected to expire during 2022. Consumable sales declined 23%, due to decreased sales of consumable products for our legacy products on which we are no longer focusing. Internationally, TSG revenue increased in the first quarter of 2022 compared to the first quarter of 2021 primarily due to a 576% increase in sales of replacement parts, as we made a sale of obsolete electronic components to international customers. Gross Profit. Gross profit information for the three months ended March 31, 2022 and 2021 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2022 2021 Change Total Sales - 2022 Total Sales - 2021 $ 2,994 $ 3,189 (6.1 %) 30.9 % 38.4 % 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 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 2022, gross profit decreased $0.2 million, or 6%, due primarily to increased product and shipping costs related to world-wide supply chain shortages and disruptions offsetting a sales increase of $1.4 million. Additionally, our gross margin decreased 750 basis points to 30.9% for the first quarter of 2022 compared to 38.4% for the first quarter of 2021 due to the increased product and shipping costs noted above. We expect our gross margin to continue to be negatively impacted by higher product and shipping costs throughout 2022, but this impact should be mitigated by price increases instituted during the first quarter of 2022 that will be fully realized beginning in the second quarter of 2022. 19 Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development information for the three months ended March 31, 2022 and 2021 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2022 2021 Change Total Sales - 2022 Total Sales - 2021 $ 2,283 $ 1,803 26.6 % 23.5 % 21.7 % Engineering, design and product development expenses primarily include 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 $0.5 million, or 27%, for the first quarter of 2022 compared to the first quarter of 2021, primarily due to the hiring of additional software developers during the second half of 2021 and first quarter of 2022 for the continued development of our food service technology products. We expect engineering, design and product development expenses to continue to increase in 2022 compared to 2021 due to continued planned investments in our food service technology products. Operating Expenses - Selling and Marketing. Selling and marketing information for the three months ended March 31, 2022 and 2021 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2022 2021 Change Total Sales - 2022 Total Sales - 2021 $ 2,683 $ 1,443 85.9 % 27.7 % 17.4 % Selling and marketing expenses primarily include salaries and payroll-related expenses for our sales, marketing and customer success 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 increased by $1.2 million, or 86%, for the first quarter of 2022 compared to the first quarter of 2021 due primarily to investment spending for our food service technology sales and marketing groups. During the first quarter of 2022, we initiated BOHA! market studies, increased marketing programs and hired additional employees in our BOHA! sales and marketing groups. In addition to these investments, we experienced higher sales commissions, travel expenses and tradeshow expense, as travel begins to return to pre-COVID-19 levels, compared to the lower levels of spending in the first quarter of 2021 resulting from the negative impacts of COVID-19. We expect selling and marketing expenses to increase in 2022 compared to 2021, as we plan to continue to make substantial strategic investments in our food service technology sales and attend more trade shows in 2022 compared to 2021. Operating Expenses - General and Administrative . General and administrative information for the three months ended March 31, 2022 and 2021 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2022 2021 Change Total Sales - 2022 Total Sales - 2021 $ 3,204 $ 2,609 22.8 % 33.0 % 31.4 % 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, information technology expenses, board of director expenses and other expenses related to being a publicly traded company. General and administrative expenses increased $0.6 million, or 23%, during the first quarter of 2022 compared to the first quarter of 2021. The increase is primarily due to higher compensation expense for existing employees, higher recruiting fees related to BOHA! engineering and sales and marketing staff hired during the first quarter of 2022 and expenses related to the implementation of a new ERP system that was completed in April 2022 and legal fees related to a shareholder matter that was resolved on March 30, 2022 when we entered into a Cooperation Agreement with two shareholders. Operating Loss. Operating loss information for the three months ended March 31, 2022 and 2021 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2022 2021 Change Total Sales - 2022 Total Sales - 2021 $ (5,176 ) $ (2,666 ) 94.1 % (53.3 %) (32.1 %) Our operating loss increased $2.5 million, or 94%, in the first quarter of 2022 compared to the first quarter of 2021 due to the decrease in our gross margin of 750 basis points and the 40% increase in operating expenses, largely for BOHA! investment spending, during the first quarter of 2022 compared to the first quarter of 2021. 20 Interest. We recorded net interest expense of $64 thousand for the first quarter of 2022 compared to $13 thousand for the first quarter of 2021. The increase in interest expense was primarily due to losses reported in our short-term investment accounts during the first quarter of 2022. The first quarter of 2021 included interest income earned from a note receivable to a third-party software developer that was collected in March 2021. Other, net. We recorded other expense of $35 thousand for the first quarter of 2022 compared to other expense of $83 thousand for the first quarter of 2021 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 2022 of $1.3 million at an effective tax rate of 23.9%, compared to an income tax benefit during the first quarter of 2021 of $0.6 million at an effective tax rate of 20.1%. The effective tax rate for the first quarter of 2022 is higher than the effective tax rate for the first quarter of 2021 as we are estimating an increase in the R&D credit in 2022 compared to 2021 due to expected investment spending for our BOHA! products. Net Loss . We reported a net loss for the first quarter of 2022 of $4.0 million, or $0.41 per diluted share, compared to a net loss of $2.2 million, or $0.25 per diluted share, for the first quarter of 2021. Liquidity and Capital Resources Cash Flow For the first three months of 2022, our cash and cash equivalents balance decreased $7.5 million, or 38%, from December 31, 2021. We ended the first quarter of 2022 with $12.0 million in cash and cash equivalents, of which $2.6 million was held by our U.K. subsidiary. Operating activities : The following significant factors affected our cash used in operating activities of $6.8 million for the first three months of 2022 as compared to cash used in operating activities of $3.1 million for the first three months of 2021: During the first three months of 2022: ● We reported a net loss of $4.0 million. ● We recorded depreciation and amortization of $0.2 million, and share-based compensation expense of $0.3 million. ● Accounts receivable decreased $0.7 million, or 9%, primarily due to a decrease in sales in the first quarter of 2022 compared to the fourth quarter of 2021. ● Inventory increased $1.3 million, or 17%, due to the strategic purchase of additional inventory to mitigate supply chain constraints . ● Other current and long-term assets increased $0.8 million, or 68%, due primarily to customer cash deposits made during the last week of March 2022 that were automatically swept from our bank account by Siena pursuant to an arrangement made under our credit facility. These funds are typically redeposited to our bank account before each quarter but were not returned until April 1, 2022. ● Accounts payable decreased $0.4 million, or 9%, due primarily to the payment of inventory purchases made during the fourth quarter of 2021. ● Accrued liabilities and other liabilities decreased $0.3 million, or 3%, due primarily to the payment of 2021 annual bonuses in March 2022, somewhat offset by higher accrued legal expenses and accrued salaries. 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 our annual ERP software maintenance. ● Accounts payable increased $0.2 million, or 13%, due primarily to the timing of payments during the first quarter of 2021. ● Accrued liabilities and other liabilities decreased $1.0 million, or 13%, due primarily to the payment of 2020 annual bonuses in March 2021. 21 Investing activities: Our capital expenditures were $496 thousand for the first three months 2022 compared to $68 thousand for the first quarter of 2021. Expenditures in 2022 were primarily related to implementation costs of a new ERP system that was completed in April 2022 and computer and networking equipment. Expenditures in 2021 were for computer and networking equipment and new product tooling equipment. In the first quarter of 2021, investing activities also provided $1.6 million from the collection of the remaining $1.6 million note receivable balance from an unaffiliated third-party. Financing activities: Financing activities used $119 thousand of cash during the first three months of 2022 to pay for withholding taxes on stock issued from our stock compensation plans. During the first three months of 2021, financing activities used $15 thousand of cash 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. Credit Facility and Borrowings On March 13, 2020, we entered into the Siena Credit Facility with Siena Lending Group LLC, which 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 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 and continued through the 12-month period from April 1, 2020 to March 31, 2021. On July 21, 2021, the Company entered into an amendment (the “Credit Facility Amendment”) to the Siena Credit Facility. The Credit Facility Amendment changed the financial covenant under the Siena Credit Facility from a minimum EBITDA covenant to an excess availability covenant requiring that the Company maintain excess availability of at least $750 thousand under the Siena Credit Facility, tested as of the end of each calendar month, beginning with the calendar month ending July 31, 2021. From July 31, 2021 to March 31, 2022, we have been in compliance with our excess availability covenant. As of March 31, 2022, we had no outstanding borrowings under the Siena Credit Facility and $3.5 million of available borrowing capacity under the Siena Credit Facility. On May 1, 2020 (the “Loan Date”), the Company was granted 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. Under the terms of the PPP, the PPP Loan would be forgiven to the extent that funds from the PPP Loan were 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 payments 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, subject to conditions and limitations provided in the CARES Act. At least 60% (under the PPP terms, as amended) of the proceeds of the PPP Loan needed to have been used for eligible payroll costs for the PPP Loan to be forgiven. The PPP Loan, which was evidenced by a Note dated the Loan Date issued by the Company in favor of Berkshire Bank as a lender, was scheduled to mature on May 1, 2022 and had a fixed interest rate of 1.0% per annum, accruing from the Loan Date and payable monthly. The Company submitted its PPP Loan forgiveness application in May 2021 to the SBA through Berkshire Bank and submitted the related loan necessity questionnaire in June 2021. On July 8, 2021, the Company received notifications from Berkshire Bank and the SBA that its PPP Loan (including all interest accrued thereon) of $2.2. million had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. No payments were due on the PPP Loan for six months from the date of first disbursement, and because a loan forgiveness application was submitted to the SBA within 10 months after the end of the covered period, no payments were due until the date on which the SBA remitted the loan forgiveness amount to the PPP Lender, and interest that accrued during the deferment period was included in the forgiveness amount. The forgiveness of the PPP Loan was reported as “Gain on forgiveness of long-term debt” in the Consolidated Statement of Operations during the year ending December 31, 2021. 22 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. 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 remains uncertain and its ultimate impact is unknown. Further, availability under the Siena Credit Facility depends in part on inventory levels, which have been impacted and are expected to continue to be impacted by supply chain disruptions due to the COVID-19 pandemic. 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. 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.