Q1 2022 TransAct Technologies Inc Earnings Call

May 10, 2022

Ladies and gentlemen, thank you for standing by at this time, we are assembling audience members and plan to be underway shortly.

Like to thank you for your patience and ask that you. Please continue to standby.

[music].

Please standby we're about to begin.

Good day and welcome to the transact technologies first quarter 2022 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Ryan Gardella Investor Relations. Please go ahead Sir.

Thank you good afternoon, and welcome to the transact technologies first quarter 2022 earnings call today, we'll be discussing the results announced in our press release issued after market close joining us from the company is CEO , Bart Shulman, and President and CFO , Steve Demartino. Today's call will include a discussion of the Companys key operating strategies progress on these initiatives and details on our first quarter financial.

We will then open the call to participants for questions. As a reminder, this conference call contains statements about future events and expectations, which are forward looking in nature statements on this call may be deemed as forward looking and actual results may differ materially for a full list of risks inherent to the business and the company. Please refer to the company's SEC filings, including its reports on forms 10-K, and 10-Q transact undertakes.

Takes no obligation to revise or update any forward looking statements to reflect events or circumstances that occur after the call.

Today's call and webcast will include non-GAAP financial measures within the meaning of SEC regulation G. When required a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website.

And with that I'd now I'll turn the call over to Bart.

Thank you Ryan and thank you to everyone joining us on the call today.

While we are disappointed with our results in the first quarter of 2022.

We believe there are highlights to give us confidence in our ability to deliver better results in the remainder of the year.

I will speak about the current situation with our business and let Steve speak to the financial performance.

There is no doubt the first quarter of 2022 was a quarter of haves and have nots.

In certain markets, we're totally sold out of product that crimped our revenue in the quarter.

We could have sold many more casino gaming and point of sale printers, and our current backlog across our entire business of over $13 million reflects our customers' willingness to wait for our product.

In our foodservice technology market, we face the slowing of label sales due to serious concerns by our customers as omicron spread and they started to see a downward shift in their business in early January .

Adding to the disappointing results for FSD, our largest customers 711 decided not to take any new terminals in the quarter.

This was not due to any change in our relationship, but rather the timing of their new builds and renovations being pushed out.

Well this is not what we thought we'd be you need to know that this is all starting to turnaround in the second quarter and should continue to improve through the rest of the year.

So let's go through the markets.

In the casino and gaming market, we saw demand far outstrips supply and currently have a very healthy backlog of orders from our customers waiting for the product.

As we mentioned on our last call, we're hand to mouth with gaming and casino printers as soon as we build we shipped to a customer.

Sadly I call the production environment, and we are working in whack a mole.

Once you resolve one electronic part issue another surfaces.

So what we did we set up a team of engineers and operations working together to design and a different component. If one is D committed but another is available.

We are working to increase our production as the forecast for casino printers continues to grow.

Our casino customers, especially in the U S continue to call and ask for a product.

Any additional printers, we can build already has a customer order ready ready for us to ship to but we have customers waiting and place. The order if we can get them the printer.

The same situation exists in our Pos market and with our largest customer donald's semi.

Some of you might know we attended in April their first worldwide convention since 2018.

And I can personally tell you if we had thousands of Pos printers in the booth, we could have sold them all right there.

The good news is our production is about to begin to ramp back up as we manufacture where the new processor and every penny we can build will shift to a franchisee.

Now onto our FSD market.

Sadly at the start of this year, we experienced a decline in terminal workstation and label orders.

On the hardware side 711 book no orders in the first quarter of 2022.

This also caused label revenue to drop as we sell boxes have labels with each terminal they buy.

Other customers also decided not to.

Purchase much more terminals workstations and labels.

At this point in Bolthouse lifecycle. It is still an early stage business and a few customers shifting orders a couple of weeks to the REIT can affect the outcome of our results on a quarterly basis pretty substantially.

The same happened with our label revenue.

In the first quarter, there was a small number of larger customers Glen and adverse effect on our label sales, which unfortunately caused a drop off in the quarter.

We equate this to their concern of omicron and holding off their inventory of labels.

However, right now we have no reason to believe that this is anything other than a temporary blip caused by the timing of some large orders.

Our label sales bookings for the month of April were very strong and we see that momentum continuing continuing right now through the rest of the quarter.

In addition bookings for our terminal and workstations have increased from the first quarter of 2022 and that includes a considerable size order from 711.

We're also working to close some new business, which we hope to announce either very shortly are during the quarter.

Now I want to address our <unk> for the quarter, which fell to $638.

Main cause of this decline was the unusually low label recurring revenue, which directly impacts the calculation.

While we do expect the number to normalize there were two factors that impacted <unk> in the quarter and has the potential to impacted in the coming quarters as well.

As I have told you we are beginning to convert our existing accu date 9700 customers over.

Excuse me to our Bohai terminal workstation, we have a very large population of the 9700 in the field and they are getting long in the tooth.

These deals with large corporate change will start with our selling our bahar hardware without any recurring revenue attached.

Naturally blowhard terminals of workstations in the marketplace with no dollars of <unk> will and already have begin to drag the number down.

There's a lot of potential here beyond the hardware sales.

As we begin to penetrate these corporate customers install terminals you will also have opportunities to bid and compete for the labeling contracts as well as the ability to up sell them on the different software apps.

We will generate additional recurring revenue, it's our goal to get these terminals in the marketplace.

With that said, we still think that our pool of 1000 to $200. A year is correct way to think about the range in the future which includes reviewing the potential orders we are working on right now.

In addition, the reason why label sales were down sequentially was due to 711, who is a large customer who took zero terminals in the quarter, which also impacted our label sales as new terminal ship with a number of labels as well.

Clarify we sell labels with every new Bolthouse terminal and we also sell labels for the existing install base.

Lack of new terminal orders negatively impacted total 711 label sales.

This is not due to any change in our agreement with the company, but due to a pause in the renovation of 711 stores.

Next I want to talk about our terminal installed base.

In the first quarter, we added 309 additional pay terminals for a total of 10127 paid terminals in the marketplace at the end of the first quarter.

Obviously, this was well beneath our expectations and far below our average over the past year.

As I mentioned earlier Baja is still an early stage business. So changes in the timing of contracts can have an outsized effect on our results.

When pursuing large corporate deals testing and approval can take a long time and in the current environment. They are subject to potential additional delays.

However, like our label sales we saw we saw a strong April bookings on the Bahar terminal and workstation side with more units booked in the month of April than for the whole quarter.

Let me say that again, we saw a strong April bookings in the Bolthouse terminal and workstation side with more units booked in the month of April for the second quarter than we sold in the entire first quarter of 2022.

We believe the second quarter, we will see a return to a more normalized run rate.

Taken together, we believe is now prudent to revise our guidance metrics. We now expect to install between 5500 6500, new paid bought terminals of workstations in the full year 2022.

We also now expect to generate recurring FSP revenue between eight and $10 million.

While the first quarter was disappointing we believe that we can execute and deliver better results for the rest of the year.

Before I move on I do want to note that our special project with Mcdonald's, which involve sales of our Ithaca 9000, Pos printer is going along as planned we continue to expect these sales to continue to push our Pos automate.

Automation segment higher throughout the course of the year.

If all the production happens we should more than double the Pos printer sales in the second half of 2022 versus the first half.

Now, let's focus on the production side of our business.

Even with our production challenges, our gaming and casino market revenue was $4 8 million up 66% from the year prior period.

We could have sold more if we had the component components and produce more printers.

Our casino and gaming domestic market recovery continues with sales up 42% year over year, and our international market sales posted triple digit gains up 119% year over year.

In addition, our Pos market despite running out of printers to sell was up over 12% from Q1 2021.

Again, we could have sold more.

While we are of course encouraged by these results. Unfortunately, the same commentary we gave last quarter continues to apply to this one.

Parts were in short supply across the board, especially chips and other components and we continue to be hand to mouth.

We established a team of engineers and operations purchasing managers are working together to search for the parts, we need where.

Where we can find different parts to meet the design criteria, the engineering design and the new component to keep and eventually increase our production levels.

Our existing and our potential new customers, new product and we're going to work our hardest to get our production up and meet the higher demand.

Finally, I also want to mention that our price increases are now fully in place across the board and will be reflected in our second quarter results.

Many of the increases not take effect until March one or April one. So we did not get a full quarter of the price increase benefit.

This should help to increase our gross margins from Q1 2022.

From where we are today the world is a much different than just a few months ago COVID-19, still can impact our markets and our customers. There is now a war in the Ukraine and inflation this year one.

One of these alone will be a lot on the business, we have three plus the component shortage issue.

I want to emphasize that our pipeline remains strong we have a large backlog of orders to ship and I believe we have all the pieces in place to execute on our plan for the remainder of the year.

I want to thank the tireless work of our whole transact team and look forward to updating the investment community on our next conference call with that I would like to pass it over to our President and CFO , Steve Demartino for more detailed review of the financials.

Steve.

Thanks Bart.

Thanks, everyone for joining us today.

Let's turn to our first quarter 2020 to our financial results in more detail.

Total net sales for the first quarter were $9 $7 million up 17% from 18 from $8 3 million in the first quarter of 'twenty one.

Sales from our foodservice technology market or FSP were down 22% to $2 1 million compared to the first quarter of 'twenty one.

FSD hardware sales decreased 64% to $563000 from $1 5 million in the first quarter last year.

We added 390 <unk> terminals during the quarter and finished with a total of 10127 in the market.

Our recurring FSC sales, which include software and service subscriptions as well as consumable label sales were $1 6 million up 30% from the $1 $2 million reported in the prior year period, but down 26% sequentially.

As Bart mentioned, we believe this quarters recurring FSD sales were negatively impacted by several transitory issues, but we're seeing momentum towards a more normalized level in both hardware and recurring revenue so far in the second quarter.

Our <unk> for the first quarter 'twenty one.

First quarter 'twenty, two was $638 down from $965 in the fourth quarter of 'twenty one.

As Bart described this decline was due directly to lower FSD recurring revenue, which was negatively impacted by unusually low label sales as well as some terminals coming online without any recurring revenue for the time being.

We believe this number will begin to improve in the second quarter of 'twenty, two and in the future work its way back towards our $1200 target range.

Our casino and gaming sales were $4 8 million up 66% from the first quarter of 'twenty one.

Demand in both the U S and Europe remains very strong our sales in the quarter were limited by the amount of inventory, we were able to produce and ship a challenge we expect to face for the remainder of the year.

So we've been hand to mouth with inventory in the first quarter, our engineering and operations teams are doing everything they can to ramp production to meet customer demand going forward.

Both groups are working hard together to find alternate sources for existing parts that are in short supply.

In some cases selecting and designing a new alternative parts that are more readily available.

So it will take time, but we will likely encounter new shortages that we will have to solve for as we move through 'twenty two.

Based on our success to date, it looks promising for the second quarter and even the second half of 'twenty two.

Even with the supply chain headwinds, we saw great results in the first quarter with our domestic sales, increasing 42% and our international sales experiencing a triple digit gain increasing 119% over the prior year period.

We believe we will see these trends continue throughout the course of the year.

POS automation sales were up 12% from the prior year period to $1 $3 million. This.

This increase was due to higher sales of our epic 9000 printer for Mcdonald's as a result of the project Bart mentioned.

We expect sales in this market to continue to be higher throughout the year, especially in the second half due to competitive dynamics and increased sales to mcdonalds.

Moving on to transact services group or PSG.

Overall, <unk> sales were up 11% to $1 5 million.

This increase was largely attributable to an increase in international spare parts sales.

Keep in mind, we're no longer focusing on the products in this market and expect our <unk> revenue to decline over time.

And as we mentioned last quarter, we've decided to exit the oil and gas market as a result, our <unk> sales for the quarter were zero.

Don't expect any future sales.

Moving down the income statement now our first quarter gross margin was 39% as compared to 38, 4% in the prior year period.

Gross margin this quarter was negatively impacted by higher product and shipping costs related to the worldwide supply chain shortage and lower FSD recurring revenue, which were partially offset by an increase in our casino and gaming sales.

Just to give you a sense of the extent of the cost increases we face due to the rising cost of fuel wage inflation and having to air ship almost all of our inventory from our Asian contract manufacturers are shipping costs alone are projected to go up over $2 million in 2022 compared to 21.

As a reminder, we instituted price increases during the first quarter on most of our products to help protect gross margin, which are now fully implemented and will be reflected in our second quarter results.

As a result of these price increases we expect our gross margins to improve in the second quarter.

Our operating expenses for the first quarter increased $2 3 million or 40% to $8 2 million when compared to the first quarter of last year.

Breaking this down a little further our engineering and R&D expenses increased 27% to $2 3 million largely due to investment spending in R&D for <unk>, including the hiring of additional software developers for continued Bahar development projects.

Our selling and marketing expenses increased 86% to $2 7 million, mostly due to investment spending related to baja including more extensive marketing programs and the hiring of additional support staff around our <unk> offering to provide better sales and customer support.

In addition, we experienced higher trade show and travel expenses as we return to closer to a pre COVID-19 level of spending.

Lastly, our G&A expenses increased 23% to $3 2 million.

This increase was due to increased salaries across the board in response to wage inflation and higher recruiting fees for software engineering sales and marketing hires to support cohort.

In addition, our Q1 expenses included some one time expenses due to the implementation of the Companys, new ERP system as well as legal fees incurred related to the shareholder matter.

We incurred an operating loss of $5 2 million.

Or five 3% of net sales in the first quarter 'twenty two compared to the operating loss of $2 7 million or 32, 1% net sales in the first quarter 'twenty one.

On the bottom line, we recorded a net loss of $4 million or <unk> 41 per diluted share in the first quarter 'twenty, two which compares to a net loss of $2 $2 million or 25 in the year ago period.

Adjusted EBITDA for the first quarter 'twenty, two was negative $4 7 million, which compares.

To negative $2 2 million in the year ago period.

Looking forward due to the uncertainty we are experiencing related to supply chain challenges. We are prudently reviewing our operating expenses and taking steps to better match, our spending levels with the sales we can deliver based on the available supply of products in the near term.

This includes temporarily reducing the level of investment spending for longer term projects for Baja.

We're doing this to ensure we have adequate liquidity, while the uncertain market conditions persist.

Once our sales and marketing supply conditions improve we plan to resume that level of investment spending accordingly.

At this point I'd like to turn the call back over to Bart for some closing remarks.

Thank you, Steve as always great job, operator, we're ready to take questions.

Thank you to signal for a question. Please press star one on your telephone keypad.

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Once again it is star one at this time for questions and we will pause to give everyone the opportunity to signal.

And we will take our first question from Chris Howe with Barrington Research.

Good morning, Bart good afternoon, Bart good afternoon, Steve sorry.

Chris.

It's been a long day.

So.

Just starting with some of the initial comments on hands about 711.

No new terminals in the quarter.

Can you provide a current update how many terminals for 711 have been placed in the current quarter.

And how should we think about.

The unpredictable.

Ability.

Their construction levels as it relates to your terminal count guidance of 5500 6500.

New terminals in the market this year.

Yeah. So.

Yes.

We've already booked.

711 terminals in the second quarter and it's.

More.

They would normally do 500, a quarter and the bookings that we just got we got two orders from them.

It's more than the 500, we would normally do in the quarter. So.

We're just looking out and working with them on their construction schedule, they kind of give us a little.

We've asked them to provide us a better outlook and we feel comfortable with the number that we're using to get to the 5500 to 6000.

We are working on a couple of projects.

And.

One should close imminently and another should close this month, so that will add to it.

Our SMB business.

<unk>.

Closed 20, new accounts in the first quarter.

We shipped a total of 20 terminals and workstations in the quarter.

Got another 118 to go so that Atlanta too.

We've also booked three new customers in Q2.

<unk> terminals have shipped and we got 37 more to go.

We're also on this accu date 9700 conversion program.

We converted 10 accounts.

Shipped about 21 units in the first quarter and we've got about 250 to go.

Q2, we converted six accounts 14 of closed and we've got 14 of shift to 99 more to go.

So.

We're just what we're doing is.

We're getting very deep into the bids that we have out there, which we think we're going to close I am very excited about our new sales manager who is bringing in a lot of discipline.

We've.

<unk> got sales force up and running again and.

We're just tracking it so I think between with 711 is going to do in these.

The accounts that we're working on we also have two large Pos customers that are going to convert from the 9700 over to the terminal. So it's just a matter of time for them to finish up all their testing and one of them is already appears to have suggested the other one we're selling actually to the franchisees right now.

<unk> ahead of their agreement to buy to convert over to the terminals. So I.

I feel confident there.

That will make that number.

Okay great.

Yes.

Can you provide an update.

Your assessment.

Thus far.

This year on how the Apple partnership is growing.

You can't give a number as to what their backlog is but perhaps just some general commentary on how their backlog is progressing versus your expectations.

Yes, so they don't they don't book any orders. So there's no backlog for map of what they do is they introduce us to customers that they are selling the iPad to and letting them know that the bolt software can go on the iPad I believe shortly we're going to close one of those accounts. So it will be.

Really happy to announce that.

So our first real deal with them will happen they've been very helpful. In other accounts.

And actually we're doing a joint event at NRA.

At the Chicago Bears stadium.

US and Apple and another one of their partners will be hosting an event.

Together.

Chicago's Bayer stadium in Chicago, So, we're really getting very excited about that with Apple.

Okay, Great. That's all I have at this moment I'll hop back in the queue. Thanks, Bart Thanks, Steve Yes. Thanks.

Thanks, Chris.

Interest.

And moving on we'll go to Jeff Martin with Roth Capital Partners.

Thanks, Good afternoon, Barak stay probably doing well wanted to.

And then update.

Hi, I wanted to get an update with regards to large restaurant organizations in the past we've talked about labor shortage here, one I'm going to focus on that.

And inhibitor to the sales pipeline I'm just curious if you could give us an update there is there any increased level of engagement.

These are organizations.

<unk> taken some large potential terminal installation at some point down the road.

Sure. So yes, the engagement level has increased.

We've also got a list of probably 60 restaurant companies that will be coming to our NRA tradeshow booths in about two weeks.

Okay.

Pretty optimistic.

At NRA is going to be like when we launched in 2019, we're going to see some real.

<unk> from the restaurant companies they've been through a very challenging time. They spent a lot of money in the front of the house still read about all the things that they're doing with online ordering and key lock kiosks and delivery and all that but they are facing a significant headwind called labor inflation.

Food inflation and lack of labor and I think our solutions can help them.

We had some good conversations with some of our existing Pos customers that use the 9700 of course that's a.

One solution product and they can't really.

Migrate over to other apps. So we're working with them right now on converting over to the terminal and then working with them on different apps that can help them streamline their business.

We talked to one restaurant company in particular.

<unk> rolled out some of our technology and it's just amazing that some of the restaurants don't have our technology and how that shifts are asking the boxes to put it in because they really believe it's helping them manage their business better.

And also streamline.

Their cost structure.

So we will report after the <unk> ratio.

On the next conference call.

A lot of our SMB business is restaurants.

And we've got we've kind of got a double track we've got long term.

We've got a long sales process with the big guys and we've got a short sales timeline with small four 510 store restaurant companies and there were able to close very quickly like I said, we closed 20, new accounts in the first quarter.

And for a total of about 100.

40 terminals and workstations not all of them of course of shift so.

We think that the headwinds that the restaurant space with labor and food is clearly going to drive them to look for a solution like ours.

Okay, and then last quarter you mentioned.

You referred to two large opportunity for Quaker 8500 terminals.

Have those two opportunities progressed are those.

Colombia referred to as one is eminent.

Hopefully will close by the end of the quarter.

No no. So one of them one of them it's interesting they need.

They need a solution and one of them uses are 9700, and so we're working with corporate to go through the whole approval process and all that but because of our relationship with the franchisees some of the franchisees started buying it already so.

<unk> started to receive orders from one of them. The other one would just.

It's kind of complicated but how.

They approve it then they've got a buying group and then they've got a distributor that the franchisees buy through is just taking a little longer Jeff to get all that in place because theres licenses that we've got to pass on from the corporate to the franchisee through the distributor.

Theres just a bottleneck there that we're getting through I believe both of them will be one of them is already our customer on the franchise level and the other one will be at the corporate level. So theyre moving forward. The two other opportunities I just talked about are brand new.

Okay, and then Steve in your prepared remarks, you had mentioned your.

The dial in something for a period of time to preserve.

Reserve capital I didn't quite catch that could you repeat that.

Yeah, So we're going through our operating expenses, Jeff will reviewing them.

And we're going to we're going to do our best to match the level of spend with the level of sales.

So we'll be making some spending cuts, which will start to institute in the second quarter and it should be in fully once we get to the third quarter and will be it will be scaling back the long term Baja investment spending.

Jeff If you look at what's going on and transact right now.

We had forecasted real growth of our casino and gaming business.

And of course, Mcdonalds and the problem that we're having is just getting the printers.

And.

The fact that it's unpredictable.

Getting better but unpredictable we can't continue to spend like we're spending while our two key.

Markets that support both our.

We can't supply enough printers.

What's going on in the casino market is just wild right now.

The amount of calls that we're getting and I can't disclose the customers and what's going on but the amount of begging we're getting for our product is just amazing and we're working with operations will work with engineering to figure out ways to build a lot more printers, because we can sell them and let me tell you I was at the Mcdonald's Tradeshow.

I'm, telling you if we had 5000 printers and apples we would have sold them. The first day, we were there they cant get printers from anybody else.

So we're working hard but when you set kind of a plan, but you've got this nagging production issue that just continues.

We thought it was a processor issue then it became a motor driver issue then it became an oscillator issue.

Tahira.

Vendor call Andy commit to a shipment that an order that was placed six months ago is something we've never experienced before.

And by the way our competitors in certain cases are in worse condition than we are and that's why we're starting to see this major roughly about $13 million backlog.

And we don't have that normally I mean outside of booking orders for <unk> in the old days, we start a quarter with $1 $2 million in backlog and book and ship because we always had inventory.

So we got to work through this we got to be prudent we got to be smart about it we've got a great product and boy. We've got long term ideas about the product that can wait and we're going to cut that back and once we get this operational issue resolved and we can better predict the business then we'll look at.

Whether we want to add those long term.

Change not really changes, but additions we want to make to boa.

At that time.

But.

It's just it's just.

It's an everyday occurrence here with us with with product with components and then over the weekend I read that BMW is going to ship cars.

Apple play because they can't get chips, so like no kidding, so Steve and I are just being very prudent cutting back, saying look let's get our costs in line to the sales we see a lot of opportunity, we see a lot of opportunity in our FSP business.

And we see a lot a lot of opportunity in casino and gaming printer business and as you know thats. Good margin business, we just got to get there.

Great. Thanks for the detail I appreciate it.

Yes, you got it Jeff.

And moving on we'll go to George Sutton with Craig Hallum.

Hey, Good evening this is Adam on for George.

Great to hear about all of the demand, but I'm sure. It's very frustrating for you guys on the supply side one question for me.

Bart.

Seeing these issues crop up are you seeing issues that you thought were solved now coming back or is it still just a rotation from one to another not necessarily <unk>.

Craig having to reoccur.

Same redo the same work.

Yes, Great question, Adam and I really appreciate the question because it'll tell you. The story look at Christmas time, where we're told by our processor company that they couldnt deliver processors to the demand we needed. This year that we thought was the problem.

And between myself operations and engineering I took care of the corporate office operations took care of their sales and operations people and engineering clearly looked at.

What processes, we could get and are in the process of redesigning our printers to Mcdonald's printer, it's going to have a new processor in it.

We have a team of people out in our Thailand plant right now kicking off the production.

Adam we thought that was it.

And like I said, it's kind of whack a mole all of our site and we can't get motor drivers and that came out of nowhere. So thats a new issue than we hadn't oscillator issue. These are all a little components that go on the board we had a sensor issue, we and some of our printers, we look at the paper moving.

Our sensor manufacturer, who has been manufacturing census for us for 20, some odd years had.

By a different wafer because they can't get wafers.

With the new wafer.

I don't want to get into too much detail, but there is a bell shaped curve when you're when you're when you're manufacturing a sensor and we fit in that certain ended the bell shaped curve. The coal bins comes down the line that drops in the bin and we buy that they can't get to our bin anymore. Because the wafer is different so we werent. So that just happened a couple of weeks ago, we worked with.

Worked with our sensor manufacturer ask them what's back we can they can be.

That redesign the circuitry the bunch of resistors, we have to change changed the resistors we're back in production.

It's like whack, a mole and we have no. What we do every day is our purchasing people are on the phone with our vendors.

Asking where are we with their shipments tell us are we going to get it are we going to get it and in certain cases, we're told yes, and all of a sudden we will call one and they say well looks like we had an issue. It looks like China is shut down for three weeks because of Covid, we can ship for three weeks.

It's just reality right I mean, we're all reading about August .

Parts of China that are shutting down for the virus and this effect, we don't manufacture that much there, but our vendors, but our vendor or are manufactured by its components from China.

So we have meetings every day, we follow it.

We're working on it we're working on some stuff right now, we're really trying to push operations to build a lot more casino printers, our competitors, having a horrible time and we'll see what we can do but it is it is not nothing is reoccurring. It's just different components as we move along the spa.

And Steve you I don't know if you got any comments about it but hey, Greg Yeah. So Adam it's a great question.

Frustrating I mean.

If the orders we have and could get it's just frustrating right now no doubt.

And as a final reminder, star one for question moving on we'll go to Chris Sakai with singular research.

Okay.

Hi, good afternoon.

I had a question on so you've got the $13 million backlog.

Wanted to get your idea I mean, if component shortages are still present.

Throughout the year.

This $13 million or order backlog.

Filled in 2022 or would we possibly see this extended into 2023 and if so how much of that.

Yes, Chris Great question. Thank you.

Based on our.

Forecast from production right now we are ramping up.

We are ramping up.

Our.

POS Mcdonald's printer, we're ramping up our casino printers.

We believe that all of that $13 million will ship this year.

That's not that's not a concern right now.

We were getting so many calls for printers that backlog could double.

We're asking our customers to place orders, we're telling our salespeople taken order and we've got we're going to try and force it through the system and see what we can build so the backlog could grow.

I would almost expect it to grow.

Our casino printers to sell more Mcdonald's printers to sell and some of the stuff that we're working on in the FSP business will really come through in the third quarter.

So the $13 million, Steve and the operation team feels very comfortable we will ship. This year. The question is how much larger is it going to get.

Okay, great Thanks and.

Hello.

Just looking at your gross margin so it was 31%.

This quarter.

38% a year ago.

<unk>.

Where do you guys see gross margin going for the rest of the year do.

Do you think it will get back up to 38%.

So the big thing Steve Yes.

Chris we should improve pretty nicely in the second quarter. It should get back up into like the mid <unk> by the second quarter and it should keep going up.

So if we have the second half that we're expecting to have think about it we will have the casino and gaming sales, which are which are very good margin the.

The Mcdonald's business, which is good margin and if we have the expense cuts also in there it should all drop to operating income. So we should have improved margins as we go through the year and improved operating margins. If we can if we can get the product and one thing that we did Chris was we put a surcharge because we're having to fly and the fact that we can bill.

<unk> printers has our customers begging for more but we have told them is we got to air ship them every customers paying a surcharge.

So that $2 million that Steve talked about which is real that's what we're forecasting based on the first three months of the year, we added a surcharge to a price increase we separated the two increases right. We passed along pretty much a permanent price increase and that affects our customers.

And then what we did is we handed them a surcharge on the shipping side and that doesn't hit their PPV and eventually if we can get into an inventory situation will take that surcharge away, but based on the surcharge and the amount of printers in terminals and everything we're going to ship.

We should be easily be able to overcome that $2 million.

Going forward the first quarter look we saw the increases we saw the shipping charges oil went through the roof with the war in Ukraine, We started getting significant increases in our shipping cost and we passed on the price increases some went through in March somewhat through an April one that was based on customers, calling us and saying look can you just <unk>.

My first quarter, we played good corporate citizens and said, yes, but you got to take it by April one so now it's all flowing through the system.

Okay, great. It sounds like you guys will have a good second half Ben thanks for the answers.

You got it Chris Thank you.

And that concludes our question and answer session I would like to turn it back to Mr. Feldman for any closing comments.

Well.

Again, I'd like to thank the transact employees for staying focused through this challenging times, we got a great team.

What's going on here and watching everybody work together has been great.

I also want to thank our shareholders for their support I know this is not what we wanted to report today.

I do want to remind our shareholders that we're excited about attending the NRA show in Chicago in a few weeks should any of you decide to attend let me know.

Would be very happy to show you around our booth, it's a new book design. It looks fantastic we're spending a lot of time on it. We think this is the market's ripe for our technology. So if you do decide to go to NRA. Please call or E Mail me or Texted me and I'll make sure. We set up a time I really want to take you through the boots. So you can see the technology at all be there.

Again I. Thank you for attending today.

Operator, we're done thank you.

And that does conclude today's call we'd like to thank everyone for their participation you may now disconnect.

[music].

Results. We will then open the call to participants for questions. As a reminder, this conference call contains statements about future events and expectations, which are forward looking in nature statements on this call may be deemed as forward looking and actual results may differ materially for a full list of risks inherent to the business and the company. Please refer to the company's SEC filings, including its reports on forms 10-K, and 10-Q transact undertake.

It takes no obligation to revise or update any forward looking statements to reflect events or circumstances that occur after the call.

And with that I'd now I'll turn the call over to Bart.

Thank you Ryan and thank you to everyone joining us on the call today.

While we are disappointed with our results in the first quarter of 2022.

We believe there are highlights to give us confidence in our ability to deliver better results in the remainder of the year.

I will speak about the current situation with our business and let Steve speak to the financial performance.

There is no doubt the first quarter of 2022 was a quarter of half and half nuts.

In certain markets, we're totally sold out of product that crimped our revenue in the quarter.

Adding to the disappointing results for FSP, our largest customers 711 decided not to take any new terminals in the quarter.

This was not due to any change in our relationship, but rather the timing of their new builds and renovations being pushed out.

Well this is not where we thought we'd be you need to know that this is all starting to turnaround in the second quarter and should continue to improve through the rest of the year.

So let's go through the markets.

In the casino and gaming market, we saw demand far outstrips supply and currently have a very healthy backlog of orders from our customers waiting for the product.

As we mentioned on our last call, we're hand to mouth with gaming and casino printers as soon as we build we shipped to a customer.

Sadly I call the production environment, and we are working in whack a mole.

Once you resolve one electronic part issue another surfaces.

So what we did we set up a team of engineers and operations working together to design in a different component. If one is decommit it but another is available.

We are working to increase our production as the forecast for casino printers continues to grow.

Our casino customers, especially in the U S continue to call and ask for product.

Any additional printers, we can build already has a customer order ready ready for us to ship to but we have customers waiting and place. The order if we can get them the printer.

The same situation exists in our Pos market and with our largest customer donald's semi.

Some of you might know we attended in April their first worldwide convention since 2018.

And I can personally tell you if we had thousands of Pos printers in the booth, we could have sold them all right there.

Good news is our production is about to begin to ramp back up as we manufacture the new processor and every kind of we can build will ship to a franchisee.

Now onto our FSP market.

Sadly at the start of this year, we experienced a decline in terminal workstation and label orders.

On the hardware side 711 book no orders in the first quarter of 2022.

This also caused label revenue to drop as we sell boxes have labels with each terminal they buy.

Other customers also decided not to.

Purchase much more terminals workstations and labels.

The same happened with our label revenue.

In the first quarter, there was a small number of larger customers, who had an adverse effect on our label sales, which unfortunately caused a drop off in the quarter we.

We equate this to their concern of omicron and holding off their inventory of labels.

However, right now we have no reason to believe that this is anything other than a temporary blip caused by the timing of some large orders.

Our label sales bookings for the month of April were very strong and we see that momentum continuing continuing right now through the rest of the quarter and.

In addition bookings for our terminal and workstations have increased from the first quarter of 2022 and that includes a considerable size order from 711.

We're also working to close some new business, which we hope to announce either very shortly are during the quarter.

Now I want to address our <unk> for the quarter, which fell to $638.

Main cause of this decline was the unusually low label recurring revenue, which directly impacts the calculation.

While we do expect the number to normalize there were two factors that impacted <unk> in the quarter and has the potential to impacted in the coming quarters as well.

As I've told you we are beginning to convert our existing accu date 9700 customers over.

Excuse me to our Bohai terminal workstation, we have a very large population of the 9700 in the field and they are getting long in the tooth. These.

These deals with large corporate change will start with our selling our bahar hardware without any recurring revenue attached NAV.

Naturally bahar terminals of workstations in the marketplace with no dollars of <unk> will and already have begin to drag the number down.

There's a lot of potential here beyond the hardware sales.

As we begin to penetrate these corporate customers install terminals, you'll also have opportunities to bid and compete for the labeling contracts as well as the ability to up sell them on the different software apps.

We will generate additional recurring revenue, it's our goal to get these terminals in the marketplace.

With that said, we still think that our pool of a 1000 to $200. A year is correct way to think about the range in the future which includes reviewing the potential orders we are working on right now.

Clarify we sell labels with every new Bolthouse terminal and we also sell labels for the existing installed base the.

The lack of new terminal orders negatively impacted total 711 label sales.

This is not due to any change in our agreement with the company, but due to a pause in the renovation of 711 stores.

Next I want to talk about our terminal installed base and.

In the first quarter, we added 309 additional pay terminals for a total of 10127 pay terminals in the marketplace at the end of the first quarter.

Obviously, this was well beneath our expectations and far below our average over the past year.

As I mentioned earlier Baja is still an early stage business. So changes in the timing of contracts can have an outsized effect on our results.

When pursuing large corporate deals testing and approval can take a long time and in the current environment. They are subject to potential additional delays.

However, like our labeled sales leads.

A strong April bookings on the Bolthouse terminal and workstation side with more units booked in the month of April than for the whole quarter.

We believe the second quarter, we'll see a return to a more normalized run rate.

Taken together, we believe it's now prudent to revise our guidance metrics. We now expect to install between 5500 6500, new paid bought terminals of workstations in the full year 2022.

We also now expect to generate recurring FSP revenue between eight and $10 million.

While the first quarter was disappointing we believe that we can execute and deliver better results for the rest of the year.

Automation segment higher throughout the course of the year if.

If all the production happens we should more than doubled the Pos printer sales in the second half of 2022 versus the first half.

Now, let's focus on the production side of our business.

Even with our production challenges, our gaming and casino market revenue was $4 8 million up 66% from the year prior period.

We could have sold more if we had the component components and produce more printers or.

Our casino and gaming domestic market recovery continues with sales up 42% year over year, and our international market sales posted triple digit gains up 119% year over year.

In addition, our Pos market despite running out of printers to sell was up over 12% from Q1 2021.

Again, we could have sold more.

While we while we are of course encouraged by these results. Unfortunately, the same commentary we gave last quarter continues to apply to this one.

So were in short supply across the board, especially chips and other components and we continue to be hand to mouth. We established a team of engineers and operations purchasing managers are working together to search for the parts we need.

Where we can find different parts to meet the design criteria, the engineering design and the new component to keep and eventually increase our production levels.

Our existing and now potential new customers, new product and we're going to work our hardest to get our production up and meet the higher demand.

Finally, I also want to mention that our price increases are now fully in place across the board and will be reflected in our second quarter results.

Many of the increases not take effect until March one or April one. So we did not get a full quarter of the price increase benefit.

This should help to increase our gross margins from Q1 2022.

From where we are today the world is a much different than just a few months ago COVID-19, still can impact our markets and our customers. There is now a war in the Ukraine and inflation this year.

One of these alone will be a lot on the business, we have three plus the component shortage issue.

I want to emphasize that our pipeline remains strong we have a large backlog of orders to ship and I believe we have all the pieces in place to execute on our plan for the remainder of the year.

I want to thank the tireless work of our whole transact team and look forward to updating the investment community on our next conference call with that I'd like to pass it over to our President and CFO , Steve Demartino for more detailed review of the financials Steve.

Thanks Mark.

Thanks, everyone for joining us today.

Let's turn to our first quarter of 2022 financial results in more detail.

Total net sales for the first quarter were $9 7 million up 17% from 18 from $8 3 million in the first quarter of 'twenty one.

Sales from our foodservice technology market or <unk> were down 22% to $2 1 million compared to the first quarter of 'twenty one.

FSD hardware sales decreased 64% to $563000 from $1 5 million in the first quarter last year.

We added 390 <unk> terminals during the quarter and finished with a total of 10127 in the market.

Our recurring FSC sales, which include software and service subscriptions as well as consumable label sales were $1 6 million up 30% from the $1 2 million reported in the prior year period, but down 26% sequentially.

As Bart mentioned, we believe this quarters recurring FSC sales were negatively impacted by several transitory issues, but we are seeing momentum towards a more normalized level in both hardware and recurring revenue so far in the second quarter.

Our <unk> for the first quarter 'twenty one.

First quarter 'twenty, two was $638 down from $965 in the fourth quarter of 2011.

As Bart described this decline was due directly to lower FSC recurring revenue, which was negatively impacted by unusually low label sales as well as some terminals coming online without any recurring revenue for the time being.

We believe this number will begin to improve in the second quarter of 'twenty, two and then the future work its way back towards our 1000 to $200 target range.

Our casino and gaming sales were $4 8 million up 66% from the first quarter of 'twenty one.

So we've been hand to mouth with inventory in the first quarter, our engineering and operations teams are doing everything they can to ramp production to meet customer demand going forward.

Both groups are working hard together to find alternate sources for existing parts that are in short supply or in some cases, selecting and designing and new alternative parts that are more readily available.

So it will take time, but we will likely encounter new shortages that we will have to solve for as we move through 'twenty two.

Based on our success to date, it looks promising for the second quarter and even the second half of 2002.

We believe we will see these trends continue throughout the course of the year.

POS automation sales were up 12% from the prior year period to $1 3 million.

This increase was due to higher sales of our epic 9000 printer for Mcdonald's as a result of the project as Bart mentioned.

We expect sales in this market to continue to be higher throughout the year, especially in the second half due to competitive dynamics and increased sales to mcdonalds.

Moving on to transact services group or PSG.

Overall, <unk> sales were up 11% to $1 $5 million.

This increase was largely attributable to an increase in international spare parts sales.

Keep in mind, we're no longer focusing on the products in this market and expect our <unk> revenue to decline over time.

And as we mentioned last quarter, we've decided to exit the oil and gas market as a result, our <unk> sales for the quarter were zero.

Don't expect any future sales.

Moving down the income statement now our first quarter gross margin was 39% as compared to 38, 4% in the prior year period.

Gross margin this quarter was negatively impacted by higher product and shipping costs related to the worldwide supply chain shortage and lower FSC recurring revenue, which were partially offset by an increase in our casino and gaming sales.

Just to give you a sense of the extent of the cost increases we face due to the rising cost of fuel wage inflation, having to air ship almost all our inventory from our Asian contract manufacturers are shipping costs alone are projected to go up over $2 million in 2022 compared to <unk> 21.

As a result of these price increases we expect our gross margin to improve in the second quarter.

Our operating expenses for the first quarter increased $2 3 million or 40% to $8 2 million when compared to the first quarter of last year.

In addition, we experienced higher trade show and travel expenses as we return to closer to a pre COVID-19 level of spending.

Lastly, our G&A expenses increased 23% to $3 2 million.

This increase was due to increased salaries across the board in response to wage inflation and higher recruiting fees for software engineering sales and marketing hires to support Mohawk.

In addition, our Q1 expenses included some one time expenses due to the implementation of the Companys, new ERP system as well as legal fees incurred related to the shareholder matter.

We incurred an operating loss of $5 2 million or five 3% of net sales in the first quarter 'twenty two compared to the operating loss of $2 7 million or 32, 1% net sales in the first quarter 'twenty one.

On the bottom line, we recorded a net loss of $4 million or <unk> 41 per diluted share in the first quarter 'twenty, two which compares to a net loss of $2 2 million or 25 in the year ago period.

Adjusted EBITDA for the first quarter of 'twenty, two was negative $4 7 million, which compares to negative $2 2 million in the year ago period.

This includes temporarily reducing the level of investment spending for longer term projects for Baja.

We're doing this to ensure we have adequate liquidity, while the uncertain market conditions persist.

Once our sales and marketing supply conditions improve we plan to resume that level of investment spending accordingly.

At this point I'd like to turn the call back over to Bart for some closing remarks.

Thank you, Steve as always great job, operator, we're ready to take questions.

Thank you to signal for a question. Please press star one on your telephone keypad.

Philip you are using a speaker phone. Please make sure that your mute button is turned off.

Now your signal to reach our equipment.

Once again it is star one at this time for questions and we will pause to give everyone the opportunity to signal.

And we will take our first question from Chris Howe with Barrington Research.

Good morning, Barbara Good afternoon, Bart good afternoon, Steve sorry.

Chris.

It's been a long day.

So.

Just starting with some of the initial comments on hand about 711.

No new terminals in the quarter.

Can you provide a current update how many terminals for 711 have been placed in the current quarter.

And how should we think about.

The unpredictable.

Stability.

Of their construction levels as it relates to your terminal count guidance of 5500 to 6500.

New terminals in the market this year.

Yeah. So.

We've already booked.

711 terminals in the second quarter and it's.

More.

They would normally do 500, a quarter and the bookings that we just got we got two orders from them.

It's more than the 500, we would normally do in the quarter. So.

We're just looking out and working with them on the construction schedule that kind of give us a little.

We've asked them to provide us a better outlook and we feel comfortable with the number that we're using to get to the 5500 to 6000.

We are working on a couple of projects and.

One should close imminently and another should close this month, so that will add to it.

Our SMB business.

Closed 20, new accounts in the first quarter.

We shipped a total of 20 terminals and workstations in the quarter.

Got another 118 to go so that will add to <unk>.

We've also booked three new customers in Q2.

<unk> terminals have shipped and we got 37 more to go.

We're also on this accu date 9700 conversion program.

We converted 10 accounts.

<unk> shipped about 21 units in the first quarter and we've got about 250 to go.

Q2, we converted six accounts 14 of closed and we've got a 14 of shift in 99 more to go.

So.

We're just what we're doing is.

We're getting very deep into the bids that we have out there, which we think are going to close I am very excited about our new sales manager who is bringing in a lot of discipline.

We.

Got sales force up and running again and.

Well just tracking it.

I think between with 711 is going to do in these.

Getting ahead of their agreement to buy to convert over to the terminals. So.

Confident.

That will that will make that number.

Okay great.

Yes.

Can you provide an update.

What's your assessment thus.

Thus far.

This year on how the Apple partnership is growing.

You can't give a number as to what their backlog is but perhaps just some general commentary on how that backlog is progressing versus your expectations.

Yes, so they don't they don't book any orders. So there is no backlog from Apple what they do is they introduce us to customers that they are selling the iPad to and letting them know that the <unk> software can go on the iPad I believe shortly we're going to close one of those accounts. So it will be.

Really happy to announce that.

So our first real deal with them will happen they have been very helpful. On other accounts.

And actually we're doing a joined event it at NRA.

At the Chicago Bears stadium.

US and Apple and another one of their partners will be hosting an event.

Together.

Chicago's Bayer stadium in Chicago, So, we're really getting very excited about that with Apple.

Okay, Great. That's all I have at this moment I will hop back in the queue. Thanks, Mark Thanks, Steve Yes. Thanks.

Thanks, Chris.

Interest.

And moving on we'll go to Jeff Martin with Roth Capital Partners.

Thanks, Good afternoon, Barak, Steve Hoppe doing well wanted to.

I just get an update.

Hi.

An update with regards to large restaurant organizations.

Patrick talked about labor shortages.

I'm going to focus on that as being kind of.

And then inhibitor the sales pipeline I'm just curious if you could give us an update there is there any increased level of engagement by these organizations.

<unk> taken some large potential terminal installation at some point down the road.

Sure. So yes, the engagement level has increased.

We've also got a list of probably 60 restaurant companies that will be coming to our NRA tradeshow booths in about two weeks.

<unk>.

Yes.

Pretty optimistic that an array is going to be like when we launched in 2019, we're going to see some real excitement from the restaurant companies they've been through a very challenging time. They spent a lot of money in the front of the house still read about all the things that they're doing with online ordering and.

<unk> kiosks.

And delivery and all of that but they are facing a significant headwind called labor inflation.

Food inflation and lack of labor and I think our solution can help them.

We had some good conversations with some of our existing Pos customers that use the 9700 of course better.

One solution product and they can't really Mike.

Migrate over to other apps. So we're working with them right now on converting over to the terminal and then working with them on different apps that can help them streamline their business.

We talked to one restaurant company in particular.

<unk> rolled out some of our technology and it's just amazing that some of the restaurants don't have our technology and how the chefs or asking the boxes to put it in because they really believe it's helping them manage their business better.

And also streamline the cost structure.

So we will report after the Ena ratio.

On the next conference call.

A lot of our SMB business is restaurants.

And we've got we've kind of got a double track we've got long term.

Got.

A long sales process with the big guys and we've got a short sales timeline with small four 510 store restaurant companies and there were able to close very quickly like I said, we closed 20, new accounts in the first quarter and for a total.

<unk>.

About 100.

40 terminals and workstations not all of them of course have shipped.

So.

We think that the headwinds that the restaurants face with labor and food is clearly going to drive them to look for a solution like ours.

Okay, and then last quarter you mentioned.

Third to two large opportunity to 8500 terminals.

Those two opportunities progressed are those.

We're going to be referred to as one is eminent.

Pro forma caused by the end of the quarter.

No no so one of them one of them.

They need.

They need a solution and one of them uses are 9700.

And so we're working with corporate to go through the whole approval process and all that but because of our relationship with the franchisees some of the franchisees started buying it already.

So.

We started to receive orders from one of them the other one.

Just.

It's kind of complicated but how.

They approve it then they've got a buying group and then they've got a distributor that the franchisees by through it's just taking a little longer Jeff to get all that in place because theres licenses that we've got to pass on from the corporate to the franchisee through the distributor.

Theres just a bottleneck there that we're getting through I believe both of them will be one of them is already our customer in the franchise level and the other one will be at the corporate level. So theyre moving forward. The two other opportunities I just talked about are brand new.

Okay, and then Steve in your prepared remarks, you had mentioned your.

Dial in something for a period of time to preserve.

Preserve capital I didn't quite catch that could you repeat that.

Yes, so we're going through our operating expenses, Jeff will reviewing them.

And we're going to we're going to do our best to match the level of spend with the level of sales.

We'll be making some spending cuts, which will start to institute in the second quarter and it should be in fully once we get to the third quarter and will be it will be <unk>.

Scaling back the long term Baja investment spending.

Jeff If you look at what's going on and transact right now.

We had we had forecasted real growth of our casino and gaming business.

And of course, Mcdonalds and the problem that we're having is just getting the printers.

And.

The fact that it's unpredictable.

Getting better but unpredictable we can't continue to spend like we're spending while our two key.

Markets that support bow hop are.

We can't supply enough printers.

What's going on in the casino market is just wild right now.

I'm, telling you if we had 5000 printers and apples, we would've sold them. The first day, we were there they can get printers from anybody else.

So we're working hard but when you set kind of a plan, but you've got this nagging production issue that just continues.

We thought it was a processor issue then it became a motor driver issue then it became an oscillator issue.

Tahira.

Vendor call Andy commit to a shipment and order that was placed six months ago is something we've never experienced before.

And by the way our competitors in certain cases are in worse condition than we are and that's why we're starting to see this major roughly about $13 million backlog and we don't have that normally I mean outside of booking orders for GTECH in the old days, we start a quarter with a $1 2 million in backlog and book and ship because we always had any.

Tori.

So we got to work through this we got to be prudent we got to be smart about it we've got a great product in <unk>. We've got long term ideas about the product that can wait and we're going to cut that back and once we get this operational issue resolved and we can better predict the business then we will look at.

Whether we want to add those long term.

Change not really changes, but additions we want to make to boa.

At that time.

But.

It's just it's just.

It's an everyday occurrence here with us with with product with components and then over the weekend I read that BMW is going to ship cars.

Apple play because they can't get chips like no kidding, So Steve and I are just being very prudent cutting back, saying look let's get our costs in line to the sales we see a lot of opportunity, we see a lot of opportunity in our FSP business.

And we see a lot a lot of opportunity in casino and gaming printer business and as you know thats. Good margin business, we just got to get there.

Great. Thanks for the detail I appreciate it.

Yes, you got it Jeff.

And moving on we'll go to George Sutton with Craig Hallum.

Hey, Good evening this is Adam on for George.

Great to hear about all of the demand, but I'm sure. It's very frustrating for you guys on the supply side one question for me.

Bart.

Seeing these issues crop up are you seeing issues that you thought were solved now coming back or is it still just a rotation from one to another not necessarily <unk>.

Great happy to reoccur.

Same redo the same work.

Yes, Great question, Adam and I really appreciate the question because it'll tell you. The story look at Christmas time, we were told by a processor company that they couldnt deliver processors to the demand we needed. This year that we thought was the problem and between myself operations and engineering I took care of the core.

But office operations took care of their sales and operations people and engineering clearly looked at.

What processes, we could get and are in the process of redesigning our printers to Mcdonald's printer, it's going to have a new processor in it.

We have a team of people out in our Thailand plant right now kicking off the production.

Adam we thought that was it.

And like I said, it's kind of whack a mole all of a sudden we cant get motor drivers and that came out of nowhere. So thats a new issue than we hadn't oscillator ratio. These are all a little components that go on the board we had a sensor issue, we and some of our printers, we look at the paper moving.

Our sensor manufacturer, who has been manufacturing census for us for 20, some odd years had.

By a different wafer because they can't get wafers.

With the new wafer.

I don't want to get into too much detail, but there is a bell shaped curve when you're when you're when you're manufacturing of sensor and we fit in that certain ended the bell shaped curve. The coal bins comes down the line that drops in the bin and we buy that they can't get to our bin anymore. Because the wafer is different so we werent. So that just happened a couple of weeks ago, we worked with.

Worked with our sensor manufacturer ask them, what's spec we can they can meet got that redesign the circuitry. The bunch of resistance, we have to change changed the resistors we're back in production.

Like whack, a mole and we have no what we do every day is our purchasing people are on the phone with our vendors.

Asking where are we with their shipments tell us are we going to get it are we going to get it and in certain cases, we're told yes, and all of a sudden we will call one and they say well it looks like we had an issue it looks like China is shut down for three weeks because of Covid, we can ship for three weeks.

Just reality right I mean, we're all reading about all this.

Parts of China that are shutting down for the virus and this effect.

Manufacturer that much there, but our vendors, but our vendor or are manufactured advice components from China.

So we have meetings every day, we follow it.

And Thats and Steve you I don't know if you got any comments about it but you got it.

Yeah, So Adam it's a great question.

Frustrating I mean.

If the orders we have and could get it's just frustrating right now no doubt.

And as a final reminder, star one for question moving on we'll go to Chris Sakai with singular research.

Okay.

Hi, good afternoon.

On the question on so you've got the $13 million backlog.

I wanted to get your idea I mean, if component shortages are still present.

Throughout the year.

This $13 million order backlog.

Fulfilled in 2022 or would we possibly see this extended into 2023 and if so how much of that.

Yes, Chris Great question. Thank you.

Based on our.

Forecast for production right now we are ramping up.

We are ramping up.

Our.

POS Mcdonald's printer, we're ramping up our casino printers.

We believe that all of that $13 million will ship this year.

That's not that's not our concern right now.

We were getting so many calls for printers that backlog could double.

We're asking our customers to place orders, we're telling our salespeople taken order.

And we've got we're going to try and force it through the system and see what we can build so the backlog could grow.

I would almost expect it to grow.

Especially with some of the FSP business, we're working on some of it will close in the second quarter, but installation is forecasted for the third quarter I think our second half of the year is going to be quite big will have more casino printers to sell more Mcdonald's printers to sell and some of the stuff that we're working on in the FSP business will.

Really come through in the third quarter.

So the $13 million, Steve and the operations team feels very comfortable we will ship. This year. The question is how much larger is it going to get.

Okay, great Thanks and.

Hi.

Just looking at your gross margin so it was 31%.

This quarter.

38% a year ago.

No.

Where do you guys see gross margin going for the rest of the year.

I think it will get back up to 38%.

So the big thing Steve Yes.

Chris we showed improved pretty nicely in the second quarter. It should get back up until like the mid <unk> by the second quarter and it should keep going up now if we have the second half that we're expecting to have think about it we will have the casino and gaming sales, which are which are very good margin.

The Mcdonald's business, which is good margin and if we have the expense cuts also in there. It should all drops to operating income. So we should have improved margin as we go through the year and improved operating margin. If we can if we can get the product and one thing that we did Chris was we put a surcharge because we're having to fly and the fact that we can build.

Printers has our customers begging for more what we have told them is we got to air ship every customers paying a surcharge so that $2 million that Steve talked about which is real that's what we're forecasting based on the first three months of the year.

We added a surcharge to a price increase we separated the two increases right. We've passed along pretty much a permanent price increase and that affects our customers PPV and then what we did is we handed them a surcharge on the shipping side and that doesn't hit their PPV.

And eventually if we can get into an inventory situation will take that surcharge away, but based on the surcharge and the amount of printers in terminals and everything we're going to ship.

We should be easily be able to overcome that $2 million.

My first quarter, we play good corporate citizens and said, yes, but you got to take it by April one so now it's all flowing through the system.

Okay, great. It sounds like you guys will have a good second half Ben thanks for the answers.

You got it Chris Thank you.

And that concludes our question and answer session I would like to turn it back to Mr. Feldman for any closing comments.

Well.

Again, I'd like to thank the transact employees for staying focused through this challenging times, we got a great team.

What's going on here and watching everybody work together has been great.

I also want to thank our shareholders for their support I know this is not what we wanted to report today.

I do want to remind our shareholders that we're excited about attending the NRA show in Chicago in a few weeks should any of you decide to attend let me know.

Would be very happy to show you around our booth at the new Booth design. It looks fantastic we're spending a lot of time on it. We think this is the market is right for our technology. So if you do decide to go to NRA. Please call or E Mail me or text me and I'll make sure. We set up a time I really want to take you through the boots, you can see the technology at all be there.

Again I. Thank you for attending today.

Operator, we're done.

And that does conclude today's call we'd like to thank everyone for their participation you may now disconnect.

Q1 2022 TransAct Technologies Inc Earnings Call

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