TRANSACT TECHNOLOGIES INC - Quarter Report: 2023 March (Form 10-Q)

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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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TRANSACT TECHNOLOGIES INC

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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)

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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.

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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.

		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

		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	)

		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

		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	)

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

		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	%

		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

		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

		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	)

		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

		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	)

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:

Investing activities:  Our capital expenditures were $378 thousand for the first three months 2023 compared to $496 thousand for the first quarter of 2022.  Expenditures in 2023 were for computer and networking equipment and new tooling equipment.  Expenditures in 2022 were primarily related to implementation costs of a new ERP system that was completed in April 2022 and computer and networking equipment.

Financing activities:  Financing activities used $86 thousand and $119 thousand of cash during the first three months of 2023 and 2022, respectively, to pay for withholding taxes on stock issued from our stock compensation plans.

Resource Sufficiency

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.  Given the unprecedented uncertainty related to the impact of these external factors on the food service and casino industries, the Company continues to monitor its cash generation, usage and preservation including the management of working capital to generate cash.

We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities, and borrowings available under the Siena Credit Facility will provide sufficient resources to meet our working capital needs, finance our capital expenditures and meet our liquidity requirements through at least the next twelve months.  Notwithstanding this belief, the duration and extent of these global economic pressures and the future of COVID-19 variants remain uncertain and the ultimate impact of these global pressures is unknown.

Credit Facility and Borrowings

On March 13, 2020, we entered into the Loan and Security Agreement governing the Siena Credit Facility with Siena Lending Group LLC (the “Lender”) and terminated our credit facility with TD Bank N.A. 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 were $245 thousand. We also pay a fee of 0.50% on unused borrowings under the Siena Credit Facility. Borrowings under the Siena Credit Facility are secured by a lien on substantially all the assets of the Company. Borrowings under the Siena Credit Facility are subject to a borrowing base based on (i) 85% of eligible accounts receivable plus the lesser of (a) $5.0 million and (b) 50% of eligible raw material and 60% of finished goods inventory.

The Siena Credit Facility imposes a financial covenant on the Company and restricts, among other things, our ability to incur additional indebtedness and the creation of other liens. The three-month period from April 1, 2020 to June 30, 2020 was the first period we were subject to the 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 ended 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 Siena Credit Facility Amendment No. 2. 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 Siena Credit Facility provided for in Siena Credit Facility Amendment No. 2 included, 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 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.

On May 1, 2023, the Company and the Lender agreed to a letter amendment to the Loan and Security Agreement governing the Siena Credit Facility.  Section 7.1(m) of the Loan and Security Agreement governing the Siena Credit Facility required that any successor to Mr. Shuldman be reasonably acceptable to the Lender, and this amendment confirmed that Mr. Dillon is an acceptable successor to Mr. Shuldman and applied the same requirement to any future successor to Mr. Dillon.

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.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of March 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business.  As of March 31, 2023, we are unaware of any material pending legal proceedings, or of any material legal proceedings contemplated by government authorities.

Information regarding risk factors appears under Part I, Item 1A, “Risk Factors,” of our 2022 Form 10-K.  There have been no material changes from the risk factors previously disclosed in our 2022 Form 10-K. The risks factors described in our 2022 Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties, not currently known to us or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition or future results.

None.

None.

Not applicable.

None.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.