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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

(Mark One)

For the quarterly period ended: March 31, 2023

or

For the transition period from _______________ to _______________.

Commission file number: 0-21121

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(Exact name of registrant as specified in its charter)

(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ☐   No  ☒

As of April 30, 2023, the number of shares outstanding of the Registrant’s common stock, par value $0.01 par value, was 9,953,693.

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PART I - FINANCIAL INFORMATION

_TRANSACT TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

See notes to Condensed Consolidated Financial Statements.

TRANSACT TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, as adjusted – See Note 9)

See notes to Condensed Consolidated Financial Statements.

TRANSACT TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited, as adjusted – See Note 9)

See notes to Condensed Consolidated Financial Statements.

TRANSACT TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, as adjusted – See Note 9)

See notes to Condensed Consolidated Financial Statements.

TRANSACT TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited, as adjusted – See Note 9)

See notes to Condensed Consolidated Financial Statements.

TRANSACT TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The accompanying unaudited financial statements of TransAct Technologies Incorporated (“TransAct”, the “Company”, “we”, “us”, or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP to be included in full year financial statements.  In the opinion of management, all adjustments considered necessary for a fair statement of the results for the periods presented have been included and are of a normal recurring nature.  The December 31, 2022 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.  These interim financial statements should be read in conjunction with the audited financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

See Note 9 for a discussion of a change in accounting principle which occurred in the second quarter of 2022. TransAct changed its method of inventory valuation from standard costing which approximates first-in first-out (“FIFO”) to the average costing methodology. All prior periods presented have been retrospectively adjusted to apply the new method of accounting.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023.

Impact of the COVID-19 Pandemic and Global Supply Chain Issues

Since early 2020, the COVID-19 pandemic has continued to cause uncertainty and disruption in the global economy and financial markets.  We have also been impacted by global supply chain issues, increased shipping costs and inflationary pressures, which have increased our costs and, in some instances, slowed our ability to deliver products to our customers.  During 2021, our inventory levels decreased significantly as a result of these supply chain disruptions, and we experienced significantly lower sales levels.  However, during 2022 we were able to increase our inventory levels and minimize the impact to our customers by successfully modifying our products that were affected by supply chain disruptions, as well as sourcing component parts from alternate suppliers.  Although we were able to increase inventory levels during 2022 and expect to continue to do so in the balance of 2023, there can be no assurance that new or continuing supply chain disruptions will not affect our products or that we will be able to make timely modifications to address any future supply chain issues that arise.  Further, while we have offset most of our cost increases by increasing prices of our products, there can be no guarantee that we will be able to offset any future cost increases should they arise.  After a slowdown in the first quarter of 2022 resulting from the Omicron and other variants of COVID-19, we continued to experience demand recovery during the remainder of 2022. Based on our strong backlog and continued market share expansion due to certain competitors’ inability to supply product, we expect this recovery to continue into 2023, though the future timing and pace of recovery may be impacted by global economic conditions.

Balance Sheet, Cash Flow and Liquidity. 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, supply chain disruptions and inflationary pressures:

●

Employee Retention Credit – Under the provisions of the CARES Act, the Company is 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 and recorded $1.5 million as “Gain from employee retention credit” in the Consolidated Statement of Operations for the year ended December 31, 2021 and the related receivable as “Employee retention credit receivable” in the Consolidated Balance Sheet as of December 31, 2021 and 2022.  We received these funds in the first quarter of 2023.

●

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, and on July 19, 2022, we entered into an amendment to extend the maturity of the facility to March 13, 2025.  See Note 5 for further details regarding this facility.

After reviewing whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations over the 12 months following the date on which the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued, including consideration of the actions taken to manage expenses and liquidity, we believe that our net cash to be provided by operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility will provide sufficient liquidity to fund our current obligations, capital spending, and working capital requirements and to comply with the financial covenants of our credit facility over at least 12 months following the date that the Condensed Consolidated Financial Statements were issued.

Use of Assumptions and Estimates

Management’s belief that the Company will be able to fund its planned operations over the 12 months following the date on which the Condensed Consolidated Financial Statements were issued is based on assumptions which involve significant judgment and estimates of future revenues, inflation, rising interest rates, capital expenditures and other operating costs. Our current assumptions are that casinos and restaurants will remain open and consumer traffic will continue to remain strong during the remainder of 2023. Though demand for our products at casinos has increased substantially in 2022, and we expect this trend to continue, we cannot predict the ultimate impact of the current economic environment, including inflation, rising interest rates and supply chain disruptions on our customers, which may impact sales. We believe that we are positioned to withstand the impact of any potential economic downturn or slower than anticipated economic recovery. However, should conditions warrant, we believe we will be able to take additional financial and operational actions to cut costs and/or increase liquidity.

In addition, the presentation of the accompanying unaudited 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, 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.  Actual results could differ from those estimates used.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.  See Note 9 for a discussion of a change in accounting policy which occurred in the second quarter of 2022.

2. Significant Accounting Policies

For a discussion of our significant accounting policies, see Note 2, Summary of significant accounting policies within Part II, Item 8. “Financial Statements and Supplementary Data” in the Annual Report on Form 10-K for the year ended December 31, 2022.  There have been no changes to our significant accounting policies since our Annual Report on 10-K for the year ended December 31, 2022.

Recently Adopted Accounting Pronouncement

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU and its related amendments (collectively, the “Credit Loss Standard”) modifies the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables, contract assets and off-balance sheet credit exposures. The Credit Loss Standard requires consideration of a broader range of information to estimate expected credit losses, including historical information, current economic conditions and a reasonable forecast period. This Credit Loss Standard requires that the statement of operations reflect estimates of expected credit losses for newly recognized financial assets as well as changes in the estimate of expected credit losses that have taken place during the period, which may result in earlier recognition of certain losses.

We adopted this standard effective January 1, 2023, and this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

We are exposed to credit losses primarily through our sales of products and software to commercial customers which are recorded as Accounts receivable, net on the Condensed Consolidated Balance Sheets. Our method for developing our allowance for credit losses involves making informed judgments regarding whether an adjustment is necessary to our historical loss experiences to reflect our expectations around current economic conditions and reasonable and supportable forecast periods, where applicable. We utilize current economic market data as well as other internal and external information available to us to inform our decision making in this process. 

3. Revenue

We account for revenue in accordance with ASC Topic 606: Revenue from Contracts with Customers.

Disaggregation of revenue

The following table disaggregates our revenue by market type, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.  Sales and usage-based taxes are excluded from revenues.

		Three Months Ended
		March 31,
		2023												2022
		(In thousands)
		United States				International				Total				United States				International				Total
Food service technology		$	3,263			$	195			$	3,458			$	1,946			$	184			$	2,130
POS automation			1,782				15				1,797				1,300				–				1,300
Casino and gaming			11,569				4,242				15,811				2,788				1,974				4,762
TransAct Services Group			983				221				1,204				1,068				442				1,510
Total net sales		$	17,597			$	4,673			$	22,270			$	7,102			$	2,600			$	9,702

Contract balances

Contract assets consist of unbilled receivables.  Pursuant to the over-time revenue recognition model, revenue may be recognized prior to the customer being invoiced.  An unbilled receivable is recorded to reflect revenue that is recognized when such revenue exceeds the amount invoiced to the customer. Unbilled receivables are separated into current and non-current assets and included within “Accounts receivable, net” and “Other assets” in the Condensed Consolidated Balance Sheets.

Contract liabilities consist of customer pre-payments and deferred revenue.  Customer prepayments are reported as “Accrued liabilities” in current liabilities in the Condensed Consolidated Balance Sheets and represent customer payments made in advance of performance obligations in instances where credit has not been extended and are recognized as revenue when the performance obligation is complete.  Deferred revenue is reported separately in current liabilities and non-current liabilities and consists of our extended warranty contracts, technical support for our food service technology terminals, EPICENTRAL maintenance contracts and prepaid software subscriptions for our BOHA! software applications, and is recognized as revenue as (or when) we perform under the contract.  For the three months ended March 31, 2023, we recognized revenue of $0.9 million related to our contract liabilities at December 31, 2022. Total net contract liabilities consisted of the following:

		March 31, 2023				December 31, 2022
		(In thousands)
Unbilled receivables, current		$	322			$	392
Unbilled receivables, non-current			150				163
Customer pre-payments			(7	)			(101	)
Deferred revenue, current			(1,205	)			(1,329	)
Deferred revenue, non-current			(148	)			(143	)
Total net contract liabilities		$	(888	)		$	(1,018	)

Remaining performance obligations

Remaining performance obligations represent the transaction price of firm orders for which a good or service has not been delivered to our customer.  As of March 31, 2023, the aggregate amount of transaction prices allocated to remaining performance obligations was $20.4 million.  The Company expects to recognize revenue of $20.2 million of its remaining performance obligations within the next 12 months following March 31, 2023, $0.2 million within the next 24 months following March 31, 2023 and the balance of these remaining performance obligations recognized within the next 36 months following March 31, 2023.

4. Inventories

The components of inventories were:

		March 31, 2023				December 31, 2022
		(In thousands)
Raw materials and purchased component parts		$	9,720			$	8,884
Finished goods			2,670				3,144
		$	12,390			$	12,028

5. Debt

Credit Facility

On March 13, 2020, we entered into a credit facility (the “Siena Credit Facility”) with Siena Lending Group LLC (the “Lender”).  The Siena Credit Facility provides for a revolving credit line of up to $10.0 million and was originally scheduled to expire 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 was $245 thousand, which were reported as “Other current assets” in current assets and “Other assets” in non-current assets in the Condensed Consolidated Balance Sheets. 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 and borrowings are subject to a borrowing base based on (i) 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 and restricts, among other things, our ability to incur additional indebtedness and create other liens. The three-month period from April 1, 2020 to June 30, 2020 was the first period we were subject to the original 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 (“Siena Credit Facility Amendment No. 1”) to the Siena Credit Facility. Siena Credit Facility Amendment No. 1 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 through March 31, 2023, we remained in compliance with our excess availability covenant. As of March 31, 2023, we had $2.3 million of outstanding borrowings under the Siena Credit Facility and $6.4 million of net borrowing capacity available under the Siena Credit Facility.

On July 19, 2022, the Company and the Lender entered into Amendment No. 2 (“Siena Credit Facility Amendment No. 2”) to the Siena Credit Facility, as amended by Siena Credit Facility Amendment No. 1.  Also on July 19, 2022, the Company and the Lender entered into an Amended and Restated Fee Letter (the “Amended Fee Letter”) in connection with the Siena Credit Facility Amendment No. 2. The Siena Credit Facility Amendment No. 2 did not modify the aggregate amount of the revolving commitment or the interest rate applicable to the loans.

The changes to the Siena Credit Facility provided for in Siena Credit Facility Amendment No. 2 include, among other things, the following:

(i) The extension of the maturity date from March 13, 2023 to March 13, 2025; and

(ii) The termination of the existing blocked account control agreement and entry into a new “springing” deposit account control agreement, permitting the Company to direct the use of funds in its deposit account until such time as (a) the sum of excess availability under the Siena Credit Facility (as amended) and unrestricted cash is less than $5 million for 3 consecutive business days or (b) an event of default occurs and is continuing.

In addition, the Amended Fee Letter requires the Company, while it retains the ability to direct the use of funds in the deposit account, to maintain outstanding borrowings of at least $2,250,000 in principal amount. If the Company does not have the ability to direct the use of funds in the deposit account, then the Amended Fee Letter requires the Company to pay interest on at least $2,250,000 principal amount of loans, whether or not such amount of loans is actually outstanding.

6. Earnings per Share

The following table sets forth the reconciliation of basic and diluted weighted average shares outstanding (as adjusted, see Note 9):

		Three Months Ended
		March 31,
		2023				2022
		(In thousands, except per-share data)
Net income (loss)		$	3,139			$	(4,348	)
Shares:
Basic:  Weighted average common shares outstanding			9,930				9,886
Add:  Dilutive effect of outstanding options and restricted stock units as determined by the treasury stock method			113				–
Diluted:  Weighted average common and common equivalent shares outstanding			10,043				9,886
Net income (loss) per common share:
Basic		$	0.32			$	(0.44	)
Diluted		$	0.31			$	(0.44	)

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options and restricted stock units, when the average market price of the common stock is lower than the exercise price of the related stock award during the period, as the inclusion of these stock awards in the computation of diluted earnings would be anti-dilutive. For the three months ended March 31, 2022, there were 943 thousand of potentially dilutive shares consisting of stock awards that were excluded from the calculation of earnings per diluted share.  Furthermore, in  periods when a net loss is reported, such as the three months ended March 31, 2022, basic and diluted net loss per common share are calculated using the same method.

7. Leases

We account for leases in accordance with ASC Topic 842: Leases.

We enter into lease agreements for the use of real estate space and certain equipment under operating leases and we have no financing leases. Our leases are included in “Right-of-use-assets” and “Lease liabilities” in our Condensed Consolidated Balance Sheets.  Our leases have various lease terms, some of which include options to extend. Lease expense is recognized on a straight-line basis over the lease term.

Operating lease expense for the three months ended March 31, 2023 and 2022 was $237 thousand and $237 thousand, respectively, and is reported as “Cost of sales”, “Engineering, design and product development expense”, “Selling and marketing expense”, and “General and administrative expense” in the Condensed Consolidated Statements of Operations. Operating lease expenses include short-term lease costs, which were immaterial during the periods presented.

The following information represents supplemental disclosure for the statement of cash flows related to operating leases (in thousands):

		Three Months Ended
		March 31,
		2023				2022
Operating cash outflows from leases		$	252			$	230

The following summarizes additional information related to our leases as of March 31, 2023 and December 31, 2022:

		March 31, 2023				December 31, 2022
Weighted average remaining lease term (in years)			2.5				2.7
Weighted average discount rate			4.5	%			4.5	%

The maturity of the Company’s operating lease liabilities as of March 31, 2023 and December 31, 2022 were as follows (in thousands):

		March 31, 2023				December 31, 2022
2023		$	723			$	972
2024			1,024				1,022
2025			712				710
2026			22				20
Total undiscounted lease payments			2,481				2,724
Less imputed interest			141				166
Total lease liabilities		$	2,340			$	2,558

8. Income Taxes

We recorded income tax expense in the first quarter of 2023 of $0.6 million at an effective tax rate of 16.7%, compared to an income tax benefit during the first quarter of 2022 of $1.4 million at an effective tax rate of 23.8%.  The effective tax rate for the first quarter of 2023 is lower than the effective tax rate for the first quarter of 2022 due to the impact from the research and development (“R&D”) credit.  In periods with pre-tax income, such as the first quarter of 2023, the R&D credit has the effect of lowering the effective tax rate.  In periods with pre-tax losses, such as first quarter of 2022, the R&D credit has the effect of raising the effective tax rate.

We are subject to U.S. federal income tax, as well as income tax in certain U.S. state and foreign jurisdictions.  We have substantially concluded all U.S. federal, state and local income tax, and foreign tax regulatory examination matters through 2018.  However, our federal tax returns for the years 2019 through 2022 remain open to examination. Various U.S. state and foreign tax jurisdiction tax years remain open to examination as well, but we believe that any additional assessment would be immaterial to the Condensed Consolidated Financial Statements. The Company maintains a valuation allowance against certain deferred tax assets where realization is not certain.

9.  Change in Accounting Method

Effective April 1, 2022, TransAct changed its method of inventory valuation from standard costing which approximates FIFO to the average costing methodology.  We believe this methodology is preferable because it reflects a better estimate of inventory cost as we do not typically perform intensive manufacturing of our finished products, which are therefore better measured under average cost.  Comparative financial statements of prior periods have been adjusted to apply the new method retrospectively.  Tax effects are calculated at the Company’s marginal tax rate, or the tax impact of incremental income changes rather than the average tax rate applied to our total net loss before income taxes.  The following financial statement line items for the periods presented were impacted by the change in accounting principle (dollars in thousands).

The effect of the changes made to the Company’s Condensed Consolidated Statements of Operations for the periods presented are as follows:

		Three months ended March 31, 2022
		Under FIFO Cost				Under Average Cost				Effect of Change
Cost of sales		$	6,708			$	7,136			$	428
Gross profit			2,994				2,566				(428	)
Operating loss			(5,176	)			(5,604	)			(428	)
Loss before income taxes			(5,275	)			(5,703	)			(428	)
Income tax benefit			1,262				1,355				93
Net loss			(4,013	)			(4,348	)			(335	)
Net loss per common share:
Basic		$	(0.41	)		$	(0.44	)		$	(0.03	)
Diluted		$	(0.41	)		$	(0.44	)		$	(0.03	)
Shares used in per-share calculation:
Basic			9,886				9,886
Diluted			9,886				9,886

The effect of the changes made to the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss) for the periods presented are as follows:

		Three months ended March 31, 2022
		Under FIFO Cost				Under Average Cost				Effect of Change
Net loss		$	(4,013	)		$	(4,348	)		$	(335	)
Comprehensive loss			(4,055	)			(4,390	)			(335	)

The effect of the changes made to the Company’s Condensed Consolidated Statements of Cash Flows for the periods presented are as follows:

		Three months ended March 31, 2022
		Under FIFO Cost				Under Average Cost				Effect of Change
Net loss		$	(4,013	)		$	(4,348	)		$	(335	)
Deferred income taxes			(1,262	)			(1,355	)			(93	)
Inventories			(1,344	)			(916	)			428

The effect of the changes made to the Company’s Condensed Consolidated Statements of Changes in Shareholders’ Equity for the periods presented are as follows:

		Three months ended March 31, 2022
		Under FIFO Cost				Under Average Cost				Effect of Change
Equity beginning balance		$	38,991			$	38,984			$	(7	)
Retained earnings -- beginning of period			15,573				15,566				(7	)
Net loss			(4,013	)			(4,348	)			(335	)
Retained earnings -- end of period			11,560				11,218				(342	)
Equity ending balance			35,113				34,771				(342	)

10. Subsequent Events

On April 5, 2023, the Company announced that on April 4, 2023, Bart C. Shuldman had resigned as the Company’s Chief Executive Officer and as a director of the Company, effective immediately (the “Effective Time”).  Mr. Shuldman’s resignation as director is not due to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.  On April 4, 2023, the Board of Directors appointed John M. Dillon, a Board member, to serve as interim Chief Executive Officer of the Company, effective as of the Effective Time. In this capacity, Mr. Dillon serves as the Company’s principal executive officer.  Mr. Dillon will continue to serve on the Board of Directors, but has resigned from his position as Audit Committee chair and from his membership on each of the committees of the Board of Directors.  On May 8, 2023, the Board of Directors removed the “interim” designation and the Company announced that Mr. Dillon would continue in the role of Chief Executive Officer indefinitely, subject to the terms of his employment agreement.

See Exhibit 10.1 “Separation Agreement and General Release, dated April 20, 2023 between the Company and Bart C. Shuldman” and Exhibit 10.2 “Letter Agreement dated April 24, 2023 between the Company and John M. Dillon” in Item 6. Exhibits of this Quarterly Report on Form 10-Q.

On May 1, 2023, TransAct and Siena Lending Group LLC signed a Letter Amendment to the Siena Credit Facility.  Section 7.1(m) of the Siena Credit Facility requires that any successor to Mr. Shuldman be reasonably acceptable to Siena Lending Group LLC and this Letter Amendment confirmed that Mr. Dillon is an acceptable successor to Mr. Shuldman.

The Company has evaluated all events or transactions that occurred up to the date the Condensed Consolidated Financial Statements were available to be issued.  Based upon this review, the Company did not identify any additional subsequent events that would have required adjustment or disclosure in the Condensed Consolidated Financial Statements.

Forward Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q for the period ended March 31, 2023 (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 that are often 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.  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, whether due to  the COVID-19 pandemic or otherwise, 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 and the Russia/Ukraine conflict, an inability of our customers to make payments on time or at all, diversion of management attention, a possible future reduction in the value of goodwill or other intangible assets, 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 or decreased availability of component parts or raw materials, exchange rate fluctuations, volatility of, and decreases in, trading prices of our common stock and the availability of needed financing on acceptable terms or at all; 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; our ability to successfully transition our business into the food service technology market; risks associated with potential future acquisitions; general economic conditions; 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 as the Company grows; our dependence on third parties for sales outside the United States; our dependence on technology licenses from third parties; marketplace acceptance of new products; risks associated with foreign operations; the availability of third party components at reasonable prices; price wars, supply chain disruptions or other significant pricing pressures affecting the Company’s products in the United States or abroad; 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; our ability to protect intellectual property; 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, of our Annual Report on Form 10-K for the year ended December 31, 2022 (our “2022 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 Form 10-Q.  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.

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 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.

Solely for convenience, some of the trademarks, service marks, trade names and copyrights referred to in this Form 10-Q 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

On April 5, 2023, the Company announced that on April 4, 2023, Bart C. Shuldman had resigned as the Company’s Chief Executive Officer and as a director of the Company, effective immediately (the “Effective Time”).  Mr. Shuldman’s resignation as director is not due to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.  On April 4, 2023, the Board of Directors appointed John M. Dillon, a Board member, to serve as interim Chief Executive Officer of the Company, effective as of the Effective Time. In this capacity, Mr. Dillon serves as the Company’s principal executive officer.  Mr. Dillon will continue to serve on the Board of Directors, but has stepped down from his position as Audit Committee chair and from his membership on each of the committees of the Board of Directors. On May 8, 2023, the Board of Directors removed the “interim” designation and the Company announced that Mr. Dillon would continue in the role of Chief Executive Officer indefinitely, subject to the terms of his employment agreement.

Impact of COVID-19 Pandemic and the Global Supply Chain Disruptions

Since early 2020, the COVID-19 pandemic has continued to cause uncertainty and disruption in the global economy and financial markets.  We have also been impacted by global supply chain issues, increased shipping costs and inflationary pressures, which have increased our costs and, in some instances, slowed our ability to deliver products to our customers.  During 2021, our inventory levels decreased significantly as a result of these supply chain disruptions, and we experienced significantly lower sales levels.  However, during 2022 we were able to increase our inventory levels and minimize the impact to our customers by successfully modifying our products that were affected by supply chain disruptions, as well as sourcing component parts from alternate suppliers.  Although we were able to increase inventory levels during 2022 and expect to continue to do so during the balance of 2023, there can be no assurance that new or continuing supply chain disruptions will not affect our products or that we will be able to make timely modifications to address any future supply chain issues that arise.  Further, while we have offset most of our cost increases by increasing prices of our products, there can be no guarantee that we will be able to offset any future cost increases should they arise.  After a slowdown in the first quarter of 2022 resulting from the Omicron and other variants of COVID-19, we continued to experience demand recovery during the remainder of 2022 and the first quarter of 2023. Based on our strong backlog position and continued market share expansion due to certain competitors’ inability to supply product, we expect this recovery to continue through 2023, though the future timing and pace of recovery may be impacted by global economic conditions.

During 2021, our gross margin was negatively impacted by significantly lower sales levels from the economic effects of the COVID-19 pandemic, as well as increased material and shipping costs resulting from worldwide supply chain disruptions continuing into 2022.  However, we saw significant sales improvement in the beginning in the second half of 2022 and continuing through the first quarter of 2023 resulting from significantly higher sales levels and price increases instituted on our products to mitigate higher material and shipping costs.  Though we expect this trend to continue for the remainder of 2023, our gross margin may be negatively impacted by the economic effects of any future cost increases that cannot be predicted, supply chain disruptions, inflationary pressures and potential new COVID-19 variants on the markets we serve.

Although in 2022 we continued to gradually return to more normalized pre-COVID-19 spending levels after implementing a number of cost saving measures in 2020 through 2022, we expect to continue to closely monitor our spending levels as circumstances warrant.

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, supply chain disruptions and inflationary pressures:

Notwithstanding the foregoing, there is no assurance that the actions we have taken in response to the pandemic, global supply chain disruptions and inflation are sufficient or adequate, and we may be required to take additional preventive or responsive 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.  See Part I, Item 1A, Risk Factors, of the 2022 Form 10-K for further discussion of risks related to COVID-19, global supply chain disruptions and inflation.

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, 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 2022 Form 10-K.

Results of Operations: Three months ended March 31, 2023 compared to three months ended March 31, 2022

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, 2023 and 2022 were as follows:

*	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 2023 increased $12.6 million, or 130%, compared to the first quarter of 2022.  Printer, terminal and other hardware unit sales volume increased 125% to approximately 51,000 units, due primarily to a sales volume increase in the casino and gaming market of 175%, and to a lesser extent, an increase in FST hardware volume of 173%.  Sales in the first quarter of 2022 were also still somewhat negatively impacted by COVID-19.  The volume increases noted above were partially offset by a decrease in POS automation volume of 1% in the first quarter of 2023 compared to the first quarter of 2022.  The average selling price of our printers, terminals and other hardware increased 25% during the first quarter of 2023 compared to the first quarter of 2022 primarily due to price increases instituted during 2022.  In addition to the sales volume increases, FST software, labels and other recurring revenue increased $0.8 million, or 49%, in the first quarter of 2023 compared to the first quarter of 2022.

International sales for the first quarter of 2023 increased $2.1 million, or 80%, from the same period in 2022 primarily due to increased sales in the international casino and gaming market, partially offset by a decline in sales in the international TSG market.

Food service technology (“FST”): Our primary offering in the food service technology market is our line of BOHA! products, which can combine our latest generation terminal and workstation which includes one or two printers and our BOHA! Labeling, timers, and media software.  In addition, customers may individually purchase cloud-based software applications that connect to a separate 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 handheld devices, tablets, temperature probes and temperature sensors and gateways. The BOHA! Terminal combines an operating system and hardware components in a device that includes a touchscreen and 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 and the BOHA! WorkStation are equipped with the TransAct Enterprise Management System to ensure that only approved touchscreen functions are available on the touchscreen 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, 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.  In the food service technology market, we use an internal sales force to solicit sales directly from end users.

Sales of our worldwide food service technology products for the three months ended March 31, 2023 and 2022 were as follows:

The increase in food service technology sales in the first quarter of 2023 compared to the first quarter of 2022 was driven by a quarter over quarter increase in both the sales of hardware and software.  Hardware sales increased 101% in the first quarter of 2023 compared to the first quarter of 2022, due to increased sales of our Accudate 9700, and BOHA! Terminals to several new brands.  Software sales, including sales of BOHA! software recognized on a SaaS subscription basis, labels and other recurring revenue, increased 49% compared to the prior year period due largely to the growth of the installed base of our BOHA! Terminals and WorkStations.

POS automation: In the POS automation market, we sell our Ithica 9000 printer, which utilizes thermal printing technology.  Our POS printer is used primarily by McDonald’s, and to a lesser extent, other quick-service restaurants either at the checkout counter 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.  We use an internal sales force to manage sales through our distributors and resellers, as well as to solicit sales directly from end-users.

Sales of our worldwide POS automation products for the three months ended March 31, 2023 and 2022 were as follows:

The increase in POS automation sales in the first quarter of 2023 compared to the first quarter of 2022 was driven by a 37% increase in domestic sales of our Ithaca® 9000 printer, resulting largely from a price increase instituted during 2022.

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 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.  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, 2023 and 2022 were as follows:

The large increase in domestic sales of our casino and gaming products for the first quarter of 2023 compared to the first quarter of 2022 was primarily due to an across-the-board increase in OEM printer sales, driven primarily by a 316% increase in domestic sales of our thermal casino printers as our business has experienced a strong recovery from the COVID-19 pandemic.  We believe we have significantly increased our market share compared to the first quarter of 2022 due to our largest competitor’s inability to supply product due to supply chain issues.

The increase in international casino and gaming sales during the first quarter of 2023 compared to the first quarter of 2022 was due to a 224% increase in sales of our thermal casino printers. The increase is attributable to the recovery of the international markets after significant negative impacts from the COVID-19 pandemic and our increased our market share compared to the first quarter of 2022 due to our largest competitor’s inability to supply product due to supply chain issues.  The international casino and gaming market recovered at a slower pace during 2022 compared to the domestic casino and gaming market.

Though we expect both domestic and international sales of our casino printers to continue to be strong and higher in 2023 as compared to 2022, we believe it is likely that our largest competitor will be able to resume supplying product later in 2023 which would negatively impact our worldwide casino and gaming sales.

TransAct Services Group (“TSG”): Revenue generated by TSG includes sales of consumable products (POS receipt paper, inkjet cartridges, ribbons and other printing supplies for non-FST legacy products), replacement parts and accessories, maintenance and repair services, refurbished printers, and shipping and handling charges.

Sales in our worldwide TSG market for the three months ended March 31, 2023 and 2022 were as follows:

The decrease in both domestic and international revenue from TSG during the first quarter of 2023 as compared to the first quarter of 2022 was due largely to lower sales of legacy replacement parts.

Gross Profit. Gross profit information for the three months ended March 31, 2023 and 2022 is summarized below (in thousands, except percentages):

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 2023, gross profit increased $9.7 million, or 378%, due primarily to a 130% increase in sales in the first quarter of 2023 compared to the first quarter of 2022  and the negative impact of COVID-19 on the first quarter of 2022.  Additionally, our gross margin increased to 55.0% for the first quarter of 2023 compared to 26.4% for the first quarter of 2022 due primarily to increased sales and market share gained in the casino and gaming industry (as previously discussed) as well as the effect from two rounds of price increases we instituted during 2022 to mitigate higher product and shipping costs related to worldwide supply chain disruptions.  We expect gross margin to be under downward pressure for the remainder of 2023 due to our largest competitor’s likely resumption of supplying product to the casino and gaming market later in 2023.

Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development expense information for the three months ended March 31, 2023 and 2022 is summarized below (in thousands, except percentages):

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 remained relatively flat and decreased $14 thousand, or less than 1%, for the first quarter of 2023 compared to the first quarter of 2022.

Operating Expenses - Selling and Marketing. Selling and marketing information for the three months ended March 31, 2023 and  2022 is summarized below (in thousands, except percentages):

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 $74 thousand, or 3%, in the first quarter of 2023 compared to the first quarter of 2022 due in part to the resumption of post-COVID levels of spending for travel, marketing and trade show expenses, partially offset by focused headcount reductions.

Operating Expenses - General and Administrative. General and administrative information for the three months ended March 31, 2023 and 2022 is summarized below (in thousands, except percentages):

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 $0.2 million, or 7%, during the first quarter of 2023 compared to the first quarter of 2022. The increase in general and administrative expenses is primarily attributable to an increase in compensation expense and audit fees, the hiring of additional accounting and finance staff in late 2022, and higher depreciation expense related to the Company’s new ERP system implemented in the second quarter of 2022.

In connection with the termination of TransAct's former CEO in April 2023, the Company expects to incur a severance charge of approximately $1.5 million in the second quarter of 2023 which will be included in general and administrative expenses.

Operating Income (Loss). Operating income (loss) information for the three months ended March 31, 2023 and 2022 is summarized below (in thousands, except percentages):

Our operating income increased $9.4 million, or 168%, in the first quarter of 2023 compared to the first quarter of 2022 due to a $9.7 million increase in gross profit on 130% higher sales combined with a 2,860 basis point increase in gross margin, somewhat offset by a 3% increase in operating expenses. This is due to strong sales in the casino and gaming market during the first quarter of 2023, while the comparable period from 2022 was negatively impacted by the COVID-19 pandemic.

Interest. We recorded net interest expense of $66 thousand for the first quarter of 2023 compared to $64 thousand for the first quarter of 2022.  This interest expense is related to the company’s Siena Credit Facility.

Other, net. We recorded other income of $21 thousand for the first quarter of 2023 compared to other expense of $35 thousand for the first quarter of 2022 primarily due to foreign exchange gains/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.

Income Taxes. We recorded income tax expense for the first quarter of 2023 of $0.6 million at an effective tax rate of 16.7%, compared to an income tax benefit during the first quarter of 2022 of $1.4 million at an effective tax rate of 23.8%. The effective tax rate for the first quarter of 2023 is lower than the effective tax rate for the first quarter of 2022 due to the impact from the R&D credit.  In periods with pre-tax income, such as the first quarter of 2023, the R&D credit has the effect of lowering the effective tax rate.  In periods with pre-tax losses, such as first quarter of 2022, the R&D credit has the effect of raising the effective tax rate.

Net Income (Loss). We reported net income for the first quarter of 2023 of $3.1 million, or $0.31 per diluted share, compared to a net loss of $4.3 million, or $0.44 per diluted share, for the first quarter of 2022.

Cash Flow

For the first three months of 2023, our cash and cash equivalents balance decreased $1.3 million from December 31, 2022. We ended the first quarter of 2023 with $6.6 million in cash and cash equivalents, of which $0.2 million was held by our U.K. subsidiary.

Operating activities:  The following significant factors affected our cash used in operating activities of $0.8 million for the first three months of 2023 as compared to cash used in operating activities of $6.8 million for the first three months of 2022:

During the first three months of 2023:

During the first three months of 2022: