TRANSACT TECHNOLOGIES INC 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements included in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2025 (this “Report”), including without limitation, statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 are any statements other than statements of historical fact. Forward-looking statements represent current views about possible future events and are often identified by the use of forward-looking terminology, such as “may,” “will,” “could,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” “plan,” “predict,” “design” or “continue” or the negative thereof or other similar words. Forward-looking statements are subject to certain risks, uncertainties and assumptions. In the event that one or more of such risks or uncertainties materialize, or one or more underlying assumptions prove incorrect, actual results may differ materially from those expressed or implied by the forward-looking statements. Important factors and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following: • the adverse effects of current economic conditions on our business, operations, financial condition, results of operations and capital resources; • difficulties or delays in manufacturing or delivery of inventory or other supply chain disruptions; • inflation; • the Russia/Ukraine and Middle East conflicts; • inadequate manufacturing capacity or a shortfall or excess of inventory as a result of difficulty in predicting manufacturing requirements due to volatile economic conditions; • price increases, decreased availability of third-party component parts or raw materials at reasonable prices, price wars or significant pricing pressures affecting the Company’s products in the United States or abroad; • increased product costs or reduced customer demand for our products in the United States or abroad, including as a result of trade wars or tariffs; • our ability to successfully develop new products that garner customer acceptance and generate sales, both domestically and internationally, in the face of substantial competition; • our reliance on an unrelated third party to develop, maintain and host certain web-based food service application software and develop and maintain selected components of our downloadable software applications pursuant to a non-exclusive license agreement, and the risk that interruptions in our relationship with that third party could materially impair our ability to provide services to our food service technology customers on a timely basis or at all and could require substantial expenditures to find or develop alternative software products; • any system outages, interruptions or other disruptions to our software applications, including as a result of unexpected errors or mistakes in connection with over-the-air updates; • our ability to successfully grow our business in the food service technology market; • renewal rates for our subscription-based products; • risks associated with the pursuit of strategic initiatives and business growth; • our dependence on contract manufacturers for the assembly of a large portion of our products in Asia; • our dependence on significant suppliers; • our ability to recruit and retain quality employees; • our dependence on third parties for sales outside the United States; • marketplace acceptance of new products; • risks associated with foreign operations; • price wars or other significant pricing pressures affecting the Company’s products in the United States or abroad; • the imposition of additional duties, tariffs, quotas, taxes, trade barriers, capital flow restrictions and other charges on imports and exports by the United States or the governments of the countries in which we or our manufacturers and suppliers operate; • increased product costs or reduced customer demand for our products due to changes in U.S. policy that may result in trade wars or tariffs; • political and policy uncertainties in connection with the change in U.S. presidential administrations; • our ability to protect intellectual property; • exchange rate fluctuations; • the availability of needed financing on acceptable terms or at all; • volatility of, and decreases in, trading prices of our common stock; and • other risk factors identified and discussed in Part I, Item 1A, Risk Factors, and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2024 (the “2024 Form 10-K”) and that may be detailed from time to time in the Company’s other reports filed with the Securities and Exchange Commission (the “SEC”). We caution readers not to place undue reliance on forward-looking statements, which speak only as of the date of this Report. We undertake no obligation to publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events or other factors, except where we are expressly required to do so by applicable law. 14 Index 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! hardware solutions and companion branded suite of cloud-based applications. The 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. We sell our technology to original equipment manufacturers (“OEMs”), value-added resellers, and 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, 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. The Company’s chief operating decision makers, who are the Company’s Chief Executive Officer and the Company’s Chief Financial Officer , utilize a consolidated approach to assess the performance of, and allocate resources to, the business. Accordingly, management has concluded that the Company consists of a single operating segment and single reportable segment for accounting and financial reporting purposes. Solely for convenience, some of the trademarks, service marks, trade names and copyrights referred to in this Report are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks, trade names and copyrights. Recent Developments Current Business and Economic Trends After strong demand during most of 2023 due in part to our primary competitor’s struggle to deliver products in the face of supply chain constraints, in late 2023, we began to see indications of a temporary slowdown in demand in the casino and gaming market, as customers that had built up excess inventory due to supply chain concerns advised us that they would temporarily reduce orders until their stock normalized. This slowdown impacted our results in the fourth quarter of 2023 and during the year ended December 31, 2024. As of March 31, 2025, we believe all significant domestic customers have been able to sell through their on-hand inventory and have resumed ordering again. As a result, we expect to continue to see a return to more normalized casino and gaming sales levels in 2025. However, c asino and gaming sales levels during 2025 may be impacted by an increase in advance orders from customers seeking to avoid potential price increases from the recent tariff actions discussed below, which could result in decreased demand in future periods. The Company is currently evaluating the potential impact of this trend. Since February 2025, the U.S. government has issued several executive orders imposing tariffs on imports from most countries with which the U.S. engages in trade. We are currently dependent upon a manufacturer located in Thailand for the manufacturing and assembly of substantially all of our printers and terminals. On April 2, 2025, the U.S. government imposed a baseline 10% tariff on goods imported from Thailand, effective April 5, 2025. In addition, the U.S. government announced a 36% reciprocal tariff on goods imported from Thailand that was intended to replace the baseline tariff on April 9, 2025, but was subsequently suspended until July 2025. These tariffs may impact certain goods that our assembled and imported into the U.S. from our manufacturer in Thailand if a reduction or resolution cannot be negotiated between the Thai and the U.S governments. The majority of raw components used in the manufacturing and assembly of our printers and terminals are sourced locally in Thailand, and to a lesser extent, from other countries in the region, including China. As a result, we currently have a limited ability to mitigate the potential impact of tariffs on goods sold into the U.S. through alternative sourcing or manufacturing. We currently plan to mitigate any potential tariffs by raising prices to customers, but there can be no assurance that we will be able to pass on all tariff costs to customers via price increases. While tariffs did not materially impact our results for the first quarter of 2025, we continue to monitor the ongoing implications of tariffs and anticipated increases in tariffs and counter-tariffs. Given the continued lack of clarity, it is uncertain whether other countries will continue to seek negotiations or retaliate as future developments occur, or whether the U.S. government will increase, eliminate or expand tariffs, reconsider or adjust tariffs based upon negotiations, or grant further exemptions. The continued effects of any global tariffs may potentially increase the likelihood of a recession, create a significant reduction in consumer confidence and customer demand, increase inflation or impact credit markets and interest rates. Any of these resulting effects could materially and adversely affect our business, financial condition and results of operations. For information regarding the risks related to our manufacturer in Thailand and global economic conditions, please see Part II, Item 1A, “Risk Factors,” of this Form 10-Q. 15 Index Strategic Review Process For information regarding the risks related to the strategic review process, please see Part I, Item 1A, “Risk Factors” under the sub-caption “Our success may depend in part on our ability to identify and pursue the best long-term strategy for our businesses” in our 2024 Form 10-K. Balance Sheet, Cash Flow and Liquidity During the third quarter of 2023, we began a cost reduction initiative to reduce our overall level of operating expenses that included reducing employee headcount, trade show, advertising and other promotional marketing expenses, certain third-party engineering resources and other expenses, and to a lesser extent, certain general and administrative expenses. We began experiencing the full impact of these actions in the first quarter of 2024 and such actions resulted in approximately $3 million of annualized savings during 2024 and we expect similar savings to be achieved in 2025 compared to the 2024 levels, partially offset by typical annual inflationary and cost of living increases in operating expenses. We also began an additional cost reduction initiative in the second quarter of 2024 focused largely on further reducing employee headcount and other external third-party resources. Savings from this initiative were realized beginning in the third quarter of 2024 and are expected to be approximately $2 million on an annualized basis. Notwithstanding the foregoing, there is no assurance that the cost-cutting efforts we have taken to bring expenses in line with our revenue and mitigate the impact of global economic conditions such as inflation, tariffs and conditions in our markets will be sufficient or adequate, and we may be required to take additional measures, as the ultimate extent of the effects of these risks on the Company, our financial condition, results of operations, liquidity, and cash flows are uncertain and are dependent on evolving developments which cannot be predicted at this time. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our unaudited 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 critical accounting estimates include those related to revenue recognition, accounts receivable, inventory obsolescence, goodwill and intangible assets, the valuation of deferred tax assets and liabilities and share-based compensation. 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 estimates from the information presented in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” since the filing of the 2024 Form 10-K. Results of Operations: Three months ended March 31, 2025 compared to three months ended March 31, 2024 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, 2025 and 2024 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended March 31, 2025 March 31, 2024 $ Change % Change Food service technology (“FST”) $ 4,908 37.6 % $ 3,300 30.9 % $ 1,608 48.7 % POS automation 618 4.7 % 651 6.1 % (33 ) (5.1 %) Casino and gaming 6,719 51.5 % 5,696 53.3 % 1,023 18.0 % TransAct Services Group (“TSG”) 808 6.2 % 1,040 9.7 % (232 ) (22.3 %) $ 13,053 100.0 % $ 10,687 100.0 % $ 2,366 22.1 % International * $ 2,307 17.7 % $ 2,922 27.3 % $ (615 ) (21.0 %) * 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. 16 Index Net sales for the first quarter of 2025 increased $2.4 million, or 22%, compared to the first quarter of 2024. Printer, terminal and other hardware unit sales volume increased 28% to approximately 24,700 units, due primarily to a 25% unit sales volume increase in the casino and gaming market and a 143 % unit sales volume increase in FST hardware. For more information about the sales volume changes described above, please refer to the results of operations for each of our markets discussed further below. The average selling price of our printers, terminals and other hardware was up 5% in the first quarter of 2025 compared to the first quarter of 2024. FST software, labels and other recurring revenue increased $250 thousand, or 10%, in the first quarter of 2025 compared to the first quarter of 2024. International sales for the first quarter of 2025 decreased $615 thousand, or 21%, from the same period in 2024 due primarily to lower sales in our casino and gaming market. Food service technology (“FST”) . Our primary offering in the FST market is our line of BOHA! products. The BOHA! product suite combines our latest generation terminal or workstation, which include one or two printers, with our BOHA! labeling, timers, and media software. In addition, customers may individually purchase cloud-based software applications that connect to an application on a separate mobile device into a solution to automate back-of-house operations in restaurants, convenience stores and food service operations. The additional software offering of BOHA! consists of a variety of individually purchased software-as-a-service (“SaaS”)-based applications for both Android and iOS operating systems, including applications for temperature monitoring, temperature taking and checklists and task lists. These applications are sold separately, and customers purchase the applications they need for their back-of-house operations. Customers may also purchase associated hardware, such as tablets, temperature sensors and gateways. The BOHA! Terminal and the more recently launched Terminal 2 combine an operating system and hardware components in a single touchscreen device with one or two thermal print mechanisms that print easy-to-read food rotation labels, grab-and-go labels, and nutritional labels for prepared foods, and “enjoy by” date labels. The BOHA! WorkStation uses an iPad or Android tablet instead of an integrated touchscreen. The BOHA! Terminal, Terminal 2 and WorkStation are equipped with the TransAct Enterprise Management System to ensure that only approved touchscreen functions are available on the device and to allow over-the-air updates to the operating system. BOHA! helps food service establishments and restaurants (including fine dining, casual dining, fast casual and quick-service restaurants (“QSRs”), 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 FST products for the three months ended March 31, 2025 and 2024 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended March 31, 2025 March 31, 2024 $ Change % Change Domestic $ 4,622 94.2 % $ 3,023 91.6 % $ 1,599 52.9 % International 286 5.8 % 277 8.4 % 9 3.2 % $ 4,908 100.0 % $ 3,300 100.0 % $ 1,608 48.7 % Three Months Ended Three Months Ended March 31, 2025 March 31, 2024 $ Change % Change Hardware $ 2,252 45.9 % $ 893 27.1 % $ 1,359 152.2 % Software, labels and other recurring revenue 2,656 54.1 % 2,407 72.9 % 249 10.3 % $ 4,908 100.0 % $ 3,300 100.0 % $ 1,608 48.7 % The increase in food service technology sales in the first quarter of 2025 compared to the first quarter of 2024 was primarily driven by an increase in domestic hardware sales. Hardware sales were strong in the first quarter of 2025, up 152% compared to the first quarter of 2024, due to sales of our BOHA! Terminal 2 to a large convenience store (replacing our BOHA! Terminal 1), a large international QSR (replacing our AccuDate 9700) and a new sushi customer win . Despite the loss of a significant customer (explained further below), FST software, labels and other recurring revenue increased 10% compared to the prior year period due to label sales to our new sushi customer as well as higher sales to several of our larger existing customers. During the second quarter of 2024, a significant customer notified us that it would be terminating service, including its BOHA! software subscriptions and label sales, for its existing installed base of BOHA! terminals by the middle of July 2024. Total sales to this customer (including hardware, software, labels and other recurring revenue) were approximately $ 900 thousand in 202 4 and approximately $300 thousand in the first quarter of 2024 (largely software and labels) . We had minimal sales to this customer in the first quarter of 2025 as we continue to service a small percentage of ongoing units. Despite the loss of this customer, we expect overall FST revenue for the remainder of 2025 to be higher than the comparable period of 2024. 17 Index We expect FST revenue to be higher in 2025 than in 2024 as we continue to focus on growing our installed base of terminals and the related recurring revenue (primarily the sale of BOHA! labels and subscription software revenue from our labeling software application). POS automation: In the POS automation market, we sell our Ithaca 9000 printer, which utilizes thermal printing technology. Our POS printer is used primarily by McDonald’s, and to a lesser extent, other QSRs either at the checkout counter, grill station or within self-service kiosks to print receipts for consumers or print on linerless labels. In the POS automation market, we primarily sell our products through a network of domestic and international distributors and resellers. Sales of our worldwide POS automation products for the three months ended March 31, 2025 and 2024 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended March 31, 2025 March 31, 2024 $ Change % Change Domestic $ 618 100.0 % $ 651 100.0 % $ (33 ) (5.1 %) International – 0.0 % – 0.0 % – – $ 618 100.0 % $ 651 100.0 % $ (33 ) (5.1 %) The modest 5% decline in POS automation sales in the first quarter of 2025 compared to the first quarter of 2024 was largely due to competitive pressure that has resulted in a return to a more normalized level of sales as well as a reduction in our average selling prices. We expect POS automation sales to be lower in 2025 than in 2024 as we expect to continue to experience competitive pressure in this market. 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, racetracks , charitable gaming establishments 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 and kiosks for sports betting at non-casino gaming and sports betting establishments. In addition, casino and gaming market revenue includes sales of the EPICENTRAL print system, our software solution, currently sold both directly and through certain casino system providers on a subscription basis, 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, 2025 and 2024 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended March 31, 2025 March 31, 2024 $ Change % Change Domestic $ 4,822 71.8 % $ 3,238 56.8 % $ 1,584 48.9 % International 1,897 28.2 % 2,458 43.2 % (561 ) (22.8 %) $ 6,719 100.0 % $ 5,696 100.0 % $ 1,023 18.0 % Domestic sales of our casino and gaming products for the first quarter of 2025 increased by $1.6 million, or 49%, compared to the first quarter of 2024. Sales during the first quarter of 2024 were negatively impacted as many of our customers had accumulated higher-than-normal levels of inventory of our product as a hedge during the worldwide supply chain crisis during 2022 and 2023. As a result, during 2024, we experienced a significant slowdown in their order and shipment rates as they worked through this excess inventory. Sales increased during the first quarter of 2025 compared to the first quarter of 2024 as most of our major casino and gaming customers worked through their on-hand inventory and began to order at normalized levels again. In addition, sales in the first quarter of 2025 benefitted from sales of our casino printer to a new OEM customer for the use in charitable gaming establishments. We expect this new OEM customer to continue to contribute to sales for the remainder of 2025. As a result of these factors, we expect our domestic casino and gaming sales to be significantly higher in 2025 compared to 2024. Our international casino and gaming sales were down 23% during the first quarter of 2025 compared to the first quarter of 2024 , largely due to a large European OEM still working down an overstock of their on-hand inventory . We expect our international sales to continue to be negatively impacted until this customer resumes ordering which is expected in the second half of 2025. 18 Index TransAct Services Group (“TSG”): Revenue generated by TSG includes sales of consumable products (POS receipt paper, ribbons and other printing supplies for non-FST 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, 2025 and 2024 were as follows (in thousands, except percentages): Three Months Ended Three Months Ended March 31, 2025 March 31, 2024 $ Change % Change Domestic $ 684 84.7 % $ 853 82.0 % $ (169 ) (19.8 %) International 124 15.3 % 187 18.0 % (63 ) (33.7 %) $ 808 100.0 % $ 1,040 100.0 % $ (232 ) (22.3 %) The decrease in both domestic and international revenue from TSG during the first quarter of 2025 as compared to the first quarter of 2024 was due largely to lower sales of legacy replacement parts for lottery printers, as well as lower legacy consumables sales and service revenue. We expect TSG sales to be somewhat lower in 2025 compared to 2024 as we expect to cease selling all of our remaining legacy consumable products by the end of 2025. Gross Profit. Gross profit information for the three months ended March 31, 2025 and 2024 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2025 2024 Change Total Sales - 2025 Total Sales - 2024 $ 6,359 $ 5,624 13.1 % 48.7 % 52.6 % 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! products and royalty payments to third parties, including to the third-party licensor of our food service technology software products. In the first quarter of 2025, gross profit increased $735 thousand, or 13%, and gross margin declined 390 basis points to 49% due largely to higher sales of BOHA! hardware products which carry lower average margins than our casino and gaming products, and to a lesser extent, increased overhead costs, inflation and lower prices on our POS automation printer due to increased competitive pressure. We expect gross margin for 2025 to continue to be in the mid-to high-40% range. Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development expense information for the three months ended March 31, 2025 and 2024 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2025 2024 Change Total Sales - 2025 Total Sales - 2024 $ 1,635 $ 1,966 (16.8 %) 12.5 % 18.4 % 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 payments to the third-party licensor of our food service technology software products). Engineering, design and product development expenses decreased $331 thousand, or 17%, for the first quarter of 2025 compared to the first quarter of 2024 due to cost reduction initiatives taken during the latter part of 2023, and again in the second quarter of 2024, including a reduction of contracted software development expenses. Operating Expenses - Selling and Marketing. Selling and marketing expense information for the three months ended March 31, 2025 and 2024 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2025 2024 Change Total Sales - 2025 Total Sales - 2024 $ 2,085 $ 2,083 0.1 % 16.0 % 19.5 % 19 Index 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 , other promotional marketing expenses and outsourced go-to-market consulting services . Selling and marketing expenses remained relatively flat in the first quarter of 2025 compared to the first quarter of 2024 due largely to typical inflationary and cost of living increases as well incremental costs we incurred related to programs to further improve and refine our go-to-market strategy offset by cost reduction initiatives including reduced headcount, trade show and other marketing expenses taken during the latter part of 2023 and the second quarter of 2024. Operating Expenses - General and Administrative . General and administrative information for the three months ended March 31, 2025 and 2024 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2025 2024 Change Total Sales - 2025 Total Sales – 2024 $ 2,654 $ 2,876 (7.7 %) 20.3 % 26.9 % General and administrative expenses primarily include salaries, incentive and share-based compensation, and other payroll-related expenses for our executive, accounting, human resources, corporate 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 decreased $222 thousand, or 8%, during the first quarter of 2025 compared to the first quarter of 2024. This decrease was driven largely by the impact of cost reduction initiatives taken during the latter part of 2023 and the second quarter of 2024 as well as lower depreciation and incentive compensation expense in the first quarter of 2025 compared to the same period in 2024. Operating Loss. Operating loss for the three months ended March 31, 2025 and 2024 is summarized below (in thousands, except percentages): Three Months Ended March 31, Percent Percent of Percent of 2025 2024 Change Total Sales – 2025 Total Sales – 2024 $ (15 ) $ (1,301 ) (98.8 %) (0.1 %) (12.2 %) Our operating loss decreased $1.3 million, or 99%, in the first quarter of 2025 compared to the first quarter of 2024 due largely to a 22% increase in sales and a resulting $735 thousand increase in gross profit (despite a 390 basis point decline in gross margin). Furthermore there was a reduction in operating expenses of $551 thousand, or 8%, primarily due to cost reduction efforts commenced in the latter part of 2023 and the second quarter of 2024. Interest, net. We recorded net interest income of $22 thousand in the first quarter of 2025 compared to $48 thousand in the first quarter of 2024. Following the November 2024 amendment of the Siena Credit Facility, we were required to maintain outstanding borrowings of at least $3 million in principal amount, an increase from $2.25 million prior to the amendment, which resulted in higher interest expense in the first quarter of 2025. In addition, we earned less interest income in the first quarter of 2025 than in the first quarter of 2024 due to the impact of lower interest rates on invested cash on hand. Other, net. Other, net primarily includes foreign exchange gains and losses by our UK subsidiary. During the first quarter of 2025 we recognized $63 thousand of foreign exchange gains compared to a $60 thousand foreign exchange loss in the first quarter of 2024. 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. Income Taxes. We recorded an income tax expense in the first quarter of 2025 of $51 thousand at an effective tax rate of 72.9 %, compared to an income tax benefit during the first quarter of 2024 of $277 thousand at an effective tax rate of (21.1%). The effective rate for the first quarter of 2025 was unusually high due to (1) a near-breakeven level of pre-tax earnings of $70 thousand and (2) t ax expense only included taxes associated with earnings in the United Kingdom and minimum required state taxes in the United States. In the fourth quarter of 2024, the Company recognized a $7.3 million charge to income tax expense to record a valuation allowance on the full value of its U . S . federal net deferred tax asset. The need for this valuation allowance has been assessed as of March 31, 2025 and management continues to believe this valuation allowance is appropriate. 20 Index Liquidity and Capital Resources Cash Flow In the first three months of 2025, our cash and cash equivalents balance decreased $216 thousand , or 2%, from December 31, 2024. We ended the first quarter of 2025 with $14.2 million in cash and cash equivalents, of which $0.2 million was held by our UK subsidiary. Operating activities : The following significant factors affected our cash used in operating activities of $161 thousand for the first three months of 2025 as compared to cash used in operating activities of $1.5 million for the first three months of 2024: During the first three months of 2025: • We reported net income of $19 thousand. • We recorded depreciation and amortization of $0.2 million and share-based compensation expense of $0.3 million. • Accounts receivable increased $2.5 million due to the increase in sales as discussed in our Results of Operations above. • Inventories decreased $1.8 million as we work down our elevated inventory levels on hand. During the first three months of 2024: • We reported a net loss of $1.0 million. • We recorded depreciation and amortization of $0.4 million and share-based compensation expense of $0.3 million. • Inventories increased $1.4 million consistent with the slowdown in sales as discussed in our Results of Operations above. • Accounts receivable decreased $2.0 million due to the continued collections of sales combined with the slowdown in sales as discussed in our Results of Operations above. • Accrued and other liabilities decreased $1.0 million due largely to the payout of 2023 bonuses in the first quarter of 2024. Investing activities: Our capital expenditures were $10 thousand for the first three months of 2025 compared to $106 thousand for the first three months of 2024. Expenditures for both periods were primarily for computer and networking equipment and new tooling equipment. Financing activities: Financing activities used $50 thousand of cash during the first three months of 2025 compared to $71 thousand in cash used during the first three months of 2024. These amounts relate to cash used to pay withholding taxes on stock issued from our stock compensation plans. Resource Sufficiency Competitors that were unable to supply products in 2023 due to supply chain constraints have returned to the market, resulting in increased competitive pressure. Certain large customers began to slow their order rates in the first half of 2024 due to higher-than-normal inventory levels, though most have resumed buying again. As a result, following an increase in casino and gaming sales in 2023 and then a fall-off in 2024 as customers worked through inventory on hand, we expect to see more normalized sales in casino and gaming in 2025. Given the continued uncertainty related to tariffs and general economic conditions, we continue to monitor our 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 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 current global economic pressures and conditions in our markets remain uncertain and their ultimate impact is unknown. Credit Facility We are party to a Loan and Security Agreement, dated as of March 13, 2020 (as amended, the “Loan Agreement”), with Siena Lending Group LLC (the “Lender”) that provides for a revolving credit line of up to $10.0 million, subject to a borrowing base based on 85% of eligible accounts receivable plus the lesser of (a) $5.0 million and (b) 50% of eligible raw material and 60% of finished goods inventory (the “Siena Credit Facility”). 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%. 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. The Siena Credit Facility imposes a financial covenant on the Company 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 and restricts, among other things, our ability to incur additional indebtedness and create other liens. W e have remained in compliance with our excess availability covenant through March 31, 2025 . 21 Index The Company is required to either maintain outstanding borrowings under the Siena Credit Facility of at least $3.0 million in principal amount, or during any period during which the Lender has control of the Company’s deposit account in accordance with the Loan Agreement, to pay interest on at least $3.0 million principal amount of loans, whether or not such amount of loans is actually outstanding. The maturity date of the Siena Credit Facility is March 31, 2027. As of March 31, 2025, we had $3.0 million of outstanding borrowings under the Siena Credit Facility at an interest rate of 9.25%. We had $3.3 million of net borrowing capacity available under the Siena Credit Facility at March 31, 2025. As stated above, we continue to monitor our cash generation, usage and preservation including the management of working capital to generate cash and continue to evaluate alternative sources of funding as necessary. 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.