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Operator
Ladies and gentlemen, thank you for standing by. At this time, we are assembling audience members and plan to be underway shortly. We'd like to thank you for your patience and ask that you please continue to stand by. Thank you. Please stand by. 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.
Ryan Gardella
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 closed. Joining us from the company is CEO Bart Shulman and President and CFO Steve DiMartino. Today's call will include a discussion of the company's key operating strategies, progress on these initiatives, and details on our first quarter of financial 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 made different 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 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 turn the call over to Bart.
Bart Shulman
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 that 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 have and have nots. In certain markets, we were 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 food service technology market, We faced a 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 FST, our largest customer, 7-Eleven, 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. While this is not what we thought we'd be, you need to know that this is all starting to turn around 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 outstrip 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 ship to a customer. Sadly, I call the production environment 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 decommitted 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 for us to ship to, but we have customers waiting in place to order if we can get them the printer. The same situation exists in our POS market and with our largest customer, McDonald's. 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 the new processor and every printer we can build will ship to a franchisee. Now onto our FST market. Sadly, at the start of this year, we experienced a decline in terminal workstation and label orders. On the hardware side, 7-Eleven booked no orders in the first quarter of 2022. This also caused label revenue to drop as we sell boxes of labels with each terminal they buy. Other customers also decided not to purchase much more terminals, workstations, and labels. At this point in BOHA's lifecycle, it is still an early-stage business, and a few customers shifting orders a couple of weeks to the right 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 who had an adverse effect on our label sales, which unfortunately caused a drop-off in the quarter. We equate this to the concern of Omicron in 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 booking for the month of April were very strong, and we see that momentum 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 7-11. We're also working to close some new business, which we hope to announce either very shortly or during the quarter. Now, I want to address our ARPU for the quarter, which fell to $638. The 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 are two factors that impacted ARPU in the quarter and has the potential to impact it in the coming quarters as well. As I've told you, we're beginning to convert our existing Accudate 9,700 customers over, excuse me, to our Bohar terminal workstation. We have a very large population of the 9,700 in the field, and they're getting long in the tooth. These deals with large corporate chains will start with us selling our Bohar hardware without any recurring revenue attached. Naturally, Bohart terminals or workstations in the marketplace with no dollars of ARPU will, and already have, begin to drag the number down. However, there's a lot of potential here beyond the hardware sales. As we begin to penetrate these corporate customers' installed terminals, we'll also have opportunities to bid and compete for the labeling contracts, as well as the ability to upsell 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 ARPU of $1,000 to $1,200 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 7-Eleven, who is a large customer who took zero terminals in the quarter. which also impacted our label sales as new terminals shipped with a number of labels as well. To clarify, we sell labels with every new BOHA terminal, and we also sell labels for the existing install base. 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 install base. In the first quarter, we added 309 additional paid terminals for a total of 10,127 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, BOHA 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 strong April bookings on the BOHA 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 strong April bookings on the BOHA 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 will 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 5,500 and 6,500 new paid BHA terminals or workstations in the full year 2022. We also now expect to generate recurring FST revenue between $8 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 involves sales of our Ithaca 9000 POS printer, is going along as planned. We continue to expect these sales to continue to push our POS 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 components and produced 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 are 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 operation purchasing managers who are working together to search for the parts we need. where we can find different parts that meet the design criteria the engineers designed in the new component to keep and eventually increase our production levels. Our existing and now potential new customers need 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 1st or April 1st, 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 isn't much different than just a few months ago. COVID-19 still can impact our markets and our customers. There's now a war in the Ukraine and inflation is here. One of these alone would 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 DiMartino, for more detailed review of the financials. Steve?
Ryan
Thanks, Bart, and 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 $8.3 million in the first quarter of 2021. Sales from our food service technology market, or FST, were down 22% to $2.1 million compared to the first quarter of 2021. FST hardware sales decreased 64% to $563,000 from $1.5 million in the first quarter last year. We added 309 paid terminals during the quarter and finished with a total of 10,127 in the market. Our recurring FST 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 quarter's 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 ARPU for the first quarter of 21, first quarter of 22, was $638, down from $965 in the fourth quarter of 21. As Bart described, this decline was due directly to lower FST 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 22, and in the future, work its way back towards our $1,000 to $1,200 target range. Our casino and gaming sales were $4.8 million, up 66% from the first quarter of 2021. While 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. Though we've been hand-in-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 in new alternate parts that are more readily available. It will take time, and we will likely encounter new shortages that we will have to solve for as we move through 22. Based on our success to date, it looks promising for the second quarter and even the second half of 22. Even with these supply chain headwinds, we saw a great result 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 increase was due to higher sales of our Ithaca 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 McDonald's. Moving on to Transact Services Group, or TSG, overall TSG 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 TSG 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 print track sales for the quarter were zero, but we don't expect any future sales. Moving down the income statement now, our first quarter gross margin was 30.9% 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 FST 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 airship almost all our inventory from our Asian contract manufacturers, our 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 margins. 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 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. Breaking this down a little further, our engineering and R&D expenses increased 27% to $2.3 million, largely due to investment spending and R&D for BOHA including the hiring of additional software developers for continued BOHA development projects. Our selling and marketing expenses increased 86% to $2.7 million, mostly due to investment spending related to BOHA, including more extensive marketing programs and the hiring of additional support staff around our BOHA offering to provide better sales and customer support. In addition, we experienced higher trade show and travel expenses as we return closer to our pre-COVID 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 BOHA. In addition, our Q1 expenses included some one-time expenses due to the implementation of the company's new ERP system, as well as legal fees incurred related to the shareholder matter. We incurred an operating loss of 5.2 million or 5.3% of net sales in the first quarter of 22, compared to an operating loss of 2.7 million, or 32.1% of net sales in the first quarter of 21. On the bottom line, we recorded a net loss of $4 million, or 41 cents per diluted share in the first quarter of 22, which compares to a net loss of 2.2 million, or 25 cents in the year-ago period. Adjusted EBITDA for the first quarter of 22 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 long-term projects for BOHA. We are doing this to ensure we have adequate liquidity while the uncertain market conditions persist. Once our sales and market and 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.
Bart Shulman
Bart? Thank you, Steve. As always, great job. Operator, we're ready to take questions.
Operator
Thank you. To signal for a question, please press star 1 on your telephone keypad. Also, if you are using a speakerphone, please make sure that your mute button is turned off to allow your signal to reach our equipment. Once again, it is star one at this time for questions, and we'll pause to give everyone the opportunity to signal. And we'll take our first question from Chris Howe with Barrington Research.
Shipped
Good morning, Bart. Good afternoon, Bart. Good afternoon, Steve. Sorry, long day. Good afternoon, Chris. It's been a long day. So just starting with some of the initial comments on hand about 7-11, no new terminals in the corridor. Can you provide a current update? How many terminals for 7-11 have been placed in the current corridor? And how should we think about the unpredictability of their construction levels as it relates to your terminal count guidance? of 5,500 to 6,500 new terminals in the market this year?
Bart Shulman
Yeah. So, you know, we've already booked 711 terminals in the second quarter. And it's more, I mean, they would normally do 500 a quarter. And the bookings that we just got, we got two orders from them. is 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. They kind of give us a little, you know, 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 5,500 to 6,000. We are working on a couple of projects, and One should close imminently and another should close this month. So that'll 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. We've got another 118 to go so that'll add to We've also booked three new customers in q2 8 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 and Q2, we've converted six accounts, 14 have closed, and we've got 14 have shipped and 99 more to go. So, you know... 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'm very excited about our new sales manager who's bringing in a lot of discipline. We've got Salesforce up and running again, and we're just tracking it. So I think between what 7-Eleven is going to do and 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, you know, one of them already appears to have said yes. The other one we're selling actually to the franchisees right now, getting ahead of their agreement to buy, to convert over to the terminal. So, you know, I feel confident that we'll make that number.
Shipped
Okay, great. And can you provide an update? What's your assessment thus far this year on how the Apple partnership is going? I know 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.
Bart Shulman
Yeah, so they don't book any orders. So there's no backlog from Apple. What they do is they introduce us to customers that they're selling the iPad to and letting them know that the BOHA software can go on the iPad. I believe shortly we're going to close one of those accounts, so I'll be really happy to announce that. So our first real deal with them will happen. They've been very helpful on 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 at the Chicago's Bears Stadium in Chicago. So we're really getting very excited about that with Apple.
Shipped
Okay, great. That's all I have at this moment. I'll hop back in the queue. Thanks, Bart. Thanks, Steve. Yeah, thanks, Chris. Thanks, Chris.
Operator
And moving on, we'll go to Jeff Martin with Roth Capital Partners.
Jeff Martin
Thanks. Good afternoon, Bart and Steve. Hope you're doing well. Wanted to get an update. Hi. Wanted to get an update with regards to large restaurant organizations. In the past, we've talked about labor shortages and having to focus on that as being kind of an inhibitor to the sales pipeline. Just curious if you could give us an update there. Is there any increased level of engagement by these organizations at looking on taking some large, you know, potential terminal installations at some point down the road?
Bart Shulman
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 trade show booth in about two weeks. I'm pretty optimistic. that NRA 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 kiosks and delivery and all that, but they are facing a significant headwind called labor inflation today. 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, that's a one-solution product, and they can't really migrate over to other apps. So we're working with them right now, converting over to the terminal, and then working with them on different apps that can help them streamline their business. You know, we talked to one restaurant company in particular that's 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 are asking the bosses to put it in because they really believe it's helping them manage their business better and also streamline their cost structure. So, you know, we'll report after the NRA show on the next conference call. You know, a lot of our SMB business is restaurants. And, you know, we've got, you know, 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, five, 10-store restaurant companies. And there we're able to close very quickly. Like I said, we closed 20 new accounts in the first quarter and for a total of about 140 terminals and workstations. Not all of them, of course, have shipped. So, you know, 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.
Jeff Martin
Okay, and then last quarter you mentioned You referred to two large opportunities that equate to 8,500 terminals. How have those two opportunities progressed? Are those the ones you referred to as one is imminent and the other hopefully will close by the end of the quarter?
Bart Shulman
No, no. So one of them, it's interesting, they need a solution. And one of them uses our 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've 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. It's just taking a little longer, Jeff, to get all that in place because there's licenses that we've got to pass on from the corporate to the franchisee through the distributor. There's 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 they're moving forward. The two other opportunities I just talked about are brand new.
Jeff Martin
Okay. And then, Steve, in your prepared remarks, you had mentioned you were dialing something back for a period of time to preserve capital. I didn't quite catch that. Could you repeat that?
Ryan
Yeah. So we're going through our operating expenses, Jeff. We're reviewing them. And we're going to do our best to match the level of spend with the level of sales. Okay. So we'll be making some spending cuts, which we'll start to institute in the second quarter, and they should be in fully once we get to the third quarter. And we'll be scaling back the long-term BOHA investment spending.
Bart Shulman
You know, Jeff, if you look at what's going on in TransAp right now, we had forecasted real growth of our casino and gaming business and, of course, McDonald's. And the problem that we're having is just getting the printers. And, you know, the fact that it's unpredictable, getting better but unpredictable, we can't continue to spend like we're spending. While our two key, you know, markets that support BOHA are, you know, we can't supply enough printers. I mean, what's going on in the casino market is just wild right now, absolutely. 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 a product is just amazing. And we're working with operations, we're working 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 trade show. I'm telling you, if we had 5,000 printers in that booth, we would have sold them the first day we were there. They can't 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. You know, we thought it was a processor issue. Then it became a motor driver issue. Then it became an oscillator issue. You know, to hear a vendor call and decommit 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 up. We have a $13 million backlog, and we don't have that normally. I mean, outside of booking orders for G-Tech in the old days, we start a quarter with $1 million, $2 million in backlog and book and ship because we always had inventory. So we've got to work through this. We've got to be prudent. We've got to be smart about it. We've got a great product in BOHA. 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, you know, change – not really changes, but additions we want to make to BOHA at that time. But, you know, it's just a – It's an everyday occurrence here with us, with product, with components. I mean, over the weekend, I read that BMW is going to ship cars without Apple Play because they can't get ships. It's like, no kidding. So, you know, 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 FST business. And we see a lot of opportunity in casino and gaming printer as business. And as you know, that's good margin business. We just got to get there.
Jeff
Great. Thanks for the detail. Appreciate it. Yeah, you got it, Jeff.
Operator
And moving on, we'll go to George Sutton with Craig Hallam.
George Sutton
Hey, good evening. This is Adam 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, when you're 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 having to reoccur the same, redo the same work?
Bart Shulman
Yeah, great question, Adam, and I really appreciate the question because it'll tell you the story. Look, at Christmas time, we were told by our processor company that they couldn't 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 processors we could get. and are in the process of redesigning our printers. The McDonald's printer is 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 can't get motor drivers. And that came out of nowhere. So that's a new issue. Then we had an oscillator issue. These are all little components that go on the board. We had a sensor issue. In some of our printers, we look at the paper moving um our sensor manufacturer who's been manufacturing sensors for us for 20 some odd years had to buy 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's a bell-shaped curve when you when you when you're manufacturing a sensor and we fit in a certain end of the bell-shaped curve they're called bins comes down the line it drops in the bin and we buy that they can't get to our bin anymore because the wafer is different So that just happened a couple weeks ago. We worked with our sensor manufacturer, asked them what spec they can meet, got that, redesigned the circuitry, the bunch of resistors we have to change, changed the resistors, we're back in production. It's like whack-a-mole. 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'll call one and they say well looks like we had an issue it looks like china shut down for three weeks because of covid we can't ship for three weeks i mean it's just reality right i mean we're all reading about all this all the you know um parts of China that are shutting down for the virus. We don't manufacture that much there, but our vendor, our manufacturer buys 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 competitor is having a horrible time. And we'll see what we can do. But nothing is reoccurring. It's just different components as we move along the spectrum. And, Steve, I don't know if you've got any comments about it. I agree.
Jeff Martin
You got it.
Bart Shulman
Yeah. So, Adam, it's a great question. Frustrating. I mean, the orders we have and could get, it's just frustrating right now, no doubt.
Operator
And as a final reminder, star one for questions. Moving on, we'll go to Chris Sakai with Singular Research.
Chris Sakai
Hi, good afternoon. I've got a question on, so you've got the 13 million backlog. Wanted to get your idea, I mean, if component shortages are still present, you know, throughout the year, will this 13 million order backlog you know, be fulfilled in 2022 or would we possibly see this extended into 2023? And if so, how much of that?
Bart Shulman
Yeah, 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 that $13 million will ship this year. That's not our concern right now. We're getting so many calls for printers, that backlog could double. We're asking our customers to place orders. We're telling our salespeople, take an order. And 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 FST 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. We'll have more casino printers to sell, more McDonald's printers to sell, and some of the stuff that we're working on in the FST business will really come through in the third quarter. So the $13 million, Steve and the operations team feels very comfortable we'll ship this year. The question is how much larger is it going to get?
Chris Sakai
Okay, great. Thanks. And just looking at your gross margin, so it was 31%. this quarter, 38% a year ago. You know, where do you guys see gross margin going for the rest of the year? You know, do you think it'll get back up to 38%
Bart Shulman
So the big thing, Steve, yeah.
Ryan
Yeah, I was going to say, Chris, we should improve pretty nicely in the second quarter. We should get back up into the mid-30s by the second quarter, and it should keep going up. If we have the second half that we're expecting to have, think about it. We'll have the casino and gaming sales, which are a very good margin, the McDonald's business, which is a good margin. And if we have the expense cuts also in there, it should all drop to operating income. So we should have improve margin as we go through the year and improve operating margin, if we can get the product.
Bart Shulman
And one thing that we did, Chris, was we put a surcharge. Because we're having to fly in every – the fact that we can build printers has our customers begging for more. What we have told them is we've got to airship them. Every customer is 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 our price increase. We separated the two increases, right? We passed along pretty much a permanent price increase, and that affects our customer's 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, we'll take that surcharge away. But based on the surcharge and the amount of printers and terminals and everything we're going to ship, we should 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 costs, and we passed on the price increases. Some went through in March. Some went through in April 1st. That was based on customers calling us and saying, look, can you just protect my first quarter? We played good corporate citizens and said, yes, but you've got to take it by April 1st. So now it's all flowing through the system.
Chris Sakai
Okay, great. Sounds like you guys will have a good second half then. Thanks for the answers.
Jeff
You got it, Chris. Thank you.
Operator
And that concludes the question and answer session. I'd like to turn it back to Mr. Shultzman for any closing comments.
Bart Shulman
Well, again, I'd like to thank the Transact employees for staying focused through this challenging time. We've 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. I would be very happy to show you around the booth. It's a new booth design. It looks fantastic. We're spending a lot of time on it. We think this is the market's right for our technology. So if you do decide to go to NRA, please call or email me or text me, and I'll make sure we set up a time. I really want to take you through the booth so you can see the technology. It'll all be there. Again, I thank you for attending today. Operator, we're done.
Operator
Thank you, and that does conclude today's call. We'd like to thank everyone for their participation. You may now disconnect.
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