TABLE TRAC, INC.

CONDENSED BALANCE SHEETS

See notes to condensed unaudited financial statements.

TABLE TRAC, INC.

CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

See notes to condensed unaudited financial statements.

TABLE TRAC, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) 

See notes to condensed unaudited financial statements.

TABLE TRAC, INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

See notes to condensed unaudited financial statements.

TABLE TRAC, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Basis of Presentation

The accompanying unaudited condensed financial statements of Table Trac, Inc. (the “Company,” or “Table Trac”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The condensed balance sheet as of JuneSeptember 30, 2021 and the condensed statements of operations, cash flows and stockholders’ equity for the three and sixnine months ended JuneSeptember 30, 2021 and 2020 are unaudited but include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Table Trac, Inc. Annual Report on Form 10-K for the year ended December 31, 2020.

Nature of Business

Table Trac was formed under the laws of the State of Nevada in June 1995. The Company has offices in Minnetonka, Minnesota and Oklahoma City, Oklahoma. The Company has developed and sells an information and management system that automates and monitors various aspects of the operations of casinos.

Table Trac provides system sales and technical support to casinos. System sales include installation, custom casino system configurations, and training. In addition, license and technical support are provided under separate license and service contracts.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s use of estimates and assumptions include: for revenue recognition, the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, determining collectability, and other obligations, realizability of accounts receivable, the valuation of  investments, the valuation of deferred tax assets and liabilities, and inventory valuation. Actual results could differ from those estimates, and the difference could be significant.

The Company’s significant accounting policies are described in Note 1 of the financial statement included in its Annual Report on Form 10-K for the year ended December 31, 2020.

Stock-Based Compensation

The Company's stock-based compensation consists of stock options and restricted stock issued to certain company employees.  The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, directors and non-employees. The compensation expense for the Company’s stock-based payments is based on estimated fair values at the time of the grant.

The Company estimates the fair value of restricted stock awards on the date of grant using the closing traded price on that date. The Company’s restricted stock awards are subject to vesting requirements and the corresponding compensation is recorded ratably over the service period.

For stock options, the Company recognizes compensation expense based on an estimated grant date fair value using the Black-Scholes option-pricing model. The Company has elected to account for forfeitures as they occur and to use the simplified method to determine the expected life of stock options.

Revenue

The Company derives revenues from the sale or leasing of systems, license and maintenance fees, hardware leasing and services.

System Sales

Revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of any taxes collected, when applicable from customers, which are subsequently remitted to governmental authorities.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is a unit of account in ASC 606. A majority of the Company’s systems sales have multiple performance obligations including an obligation to deliver a casino management system and another to provide maintenance services. For system sales with multiple performance obligations, the Company allocates revenue to each performance obligation based on its SSP. See discussion within the significant judgement paragraph regarding our determination of SSP.  At contract inception, management assesses whether it is probable that the company will collect substantially all of the consideration to determine whether the contract meets the criterion for collectability.  The revenue allocated to the casino management system is recognized upon installation.  The Company occasionally enters into contracts that include multiple sites; management has determined that each site installation is a separate performance obligation. In these instances, the Company recognizes revenue upon completion of each performance obligation. In addition, the Company has a contract with a reseller who purchases and resells the Company’s products; monthly the reseller notifies the Company of their successful installations and submits an invoice to the Company for those installations.  The Company also analyzes its standard business practice of using long-term contracts and the history of collecting on extended payment term contracts which include a significant financing component which is usually a market interest rate. The associated interest income is reflected accordingly on the statement of operations. 

Management’s assessment of collectability at both contract inception and on an ongoing basis resulted in the determination that some of our contracts did not meet the criterion for collectability.  The balance of these contracts are not included as part of accounts receivable on the balance sheet.  Accordingly, for these contracts whereby the collectability criterion has not been met, revenue will be recognized as payments are received.

Maintenance Revenue

Maintenance revenue is recognized ratably over the contract period. The SSP for maintenance is based upon the renewal rate for contracted services.

Lease Revenue

The Company derives a portion of its revenue from a sales type leasing arrangement in accordance with ASC 842. The Company leases hardware to a customer, and receives monthly payments.

Service Revenue and Other Revenue

Service revenue is recognized upon completion of the services and areis billed in arrears. The SSP for service revenue is established based upon actual selling prices for the services or prior similar arrangements.

The Company offers qualified customers a licensing agreement. Licensing revenue is recognized after the intellectual property (CMS system), the performance obligation, is delivered and in its operational and functional state. The SSP for licensing revenue is established based upon actual selling prices for the license. 

The following table summarizes disaggregated revenues by major product line for the three months ended JuneSeptember 30, 2021 and 2020, respectively:

The following table summarizes disaggregated revenues by major product line for the sixnine months ended JuneSeptember 30, 2021 and 2020, respectively:

See Major Customers for disaggregated revenue information about primary geographical markets.

Significant Judgments

Contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is required to determine the SSP for each distinct performance obligation, including lease and non-lease components. We use a single amount to estimate SSP when we sell a product or service separately. 

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we perform a gross margin analysis using information such as the size of the customer and geographic region in determining the SSP.

The collectability assessment requires the company to use judgement and consider all relevant facts and circumstances. 

We evaluate the interest rates in customer contracts with extended payment terms, representing a significant financing component. These rates range from approximately 1% to 6% and we believe those to be appropriate market interest rates for the financing component.

Accounts Receivable / Allowance for Doubtful Accounts

Accounts receivable are initially recorded at the invoiced amount and carried on the balance sheet at net realizable value as of each balance sheet date.  For receivables related to contracts that contain an interest rate, interest income is recorded upon receipt on the statements of operations. An allowance for doubtful accounts is recorded when the Company believes the amounts may not be collected. Management believes that receivables, net of the allowance for doubtful accounts, are fully collectible. Accounts receivable are written off when management determines collection is no longer likely. While the ultimate result may differ, management believes that any write-off not allowed for will not have a material impact on the Company’s financial position.

In March 2021, the Internal Revenue Service (“IRS”) released Notice 2021-20, which retroactively eliminated the restriction that prevented employers who received a PPP loan from qualifying for the Employee Retention Credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Company determined that we have complied with all of the conditions required to receive the credit.  A receivable of approximately $122,000 is included in accounts receivable at September 30, 2021 with a corresponding reduction to salaries and wages expense recognized in the three months ended September 30, 2021.  

Major Customers

The following table summarizes the Company's major customer’scustomers' information for the sixnine months ended JuneSeptember 30, 2021 and 2020:

For the threenine month periods ending JuneSeptember 30, 2021 and 2020, sales to customers in the United States represent 90.1%88.1% and 90.5%94.1%, of total revenues, respectively.

The following table summarizes the Company's major customer’scustomers' information for the three months ended JuneSeptember 30, 2021and 2020:

For the sixthree month periods ending JuneSeptember 30, 2021 and 2020, sales to customers in the United States represent 87.5%89.3% and 91.1%, of total revenues, respectively.  For the six month periods ending June 30, 2021 and 2020, sales to a customer in Australia represent 10.2% and 3.0%, of total revenues, respectively

A major customer is defined as any customer that represents at least 10% of revenue for a given period or 10% of outstanding account receivable at the end of a period.

Inventory

Inventory, consisting of finished goods, is stated at the lower of cost or net realizable value. The average cost method (which approximates the first in, first out method) is used to value inventory. Inventory is reviewed quarterly for the lower of cost or net realizable value and obsolescence. Any material cost found to be above net realizable value or considered obsolete is written down accordingly. Based on that evaluation, the Company had $36,353 and $45,045 of obsolescence reserve at JuneSeptember 30, 2021 and December 31, 2020, respectively.  The total inventory value was $1,588,823$1,643,450 and $1,793,459, as of JuneSeptember 30, 2021 and December 31, 2020, respectively, which included work-in-process of $21,938$81,310 and $140,022 as of JuneSeptember 30, 2021 and December 31, 2020, respectively, and the remaining amount is comprised of finished goods. At JuneSeptember 30, 2021 and December 31, 2020 the Company had $10,680$4,070 and $0 of prepaid inventory as a component of prepaid expenses, respectively.

Net Investment in Sales Type Lease

Net investment in leases are recognized when the Company's leases qualify as sales-type leases. The net investment in leases is initially measured at the present value of the fixed lease payments, discounted at the rate implicit in the lease. 

Investment

Investment consists of approximately 29% of the membership interest in a start-up technology Company.   The Company accounts for its investment using the equity method of accounting, whereby the investment was recorded initially at fair value, which equals the cost of the Company's initial equity contribution, and subsequently is adjusted for the Company's share of the income and losses of the investee.   During the quarter ended September 30, 2021, based on ceased operating activity of the investee, the Company determined the entire investment was impaired and recorded an investment loss of $57,000.

Research and Development

The Company expenses all costs related to research and development as incurred.  Research and development expense were $8,839 and $39,695 for the sixnine months ended JuneSeptember 30, 2021 and 2020, respectively. Research and development expenses are included in selling, general and administrative expenses on the statements of operations.

Accounts receivable consisted of the following at:

The allowance for accounts receivable represents management’s best estimate of probable losses in our receivables as of the date of the financial statements. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in receivables, but that have not been specifically identified.

A roll-forward of the Company’s allowance for doubtful accounts for the periods presented is as follows:

In January 2021, the Company entered into a five year lease with a customer for hardware which had an implied interest rate of 6%.

At inception, the Company recorded $210,782 in "Net investment in sales type leases" and derecognized $139,521 from “Inventory"“Inventory" on its condensed balance sheet. The Company recognized $71,261 in profit from sales type leases in its condensed statements of operations for the sixnine months ended June September 30,2021as a result of the transaction. For the three and ninemonths ended JuneSeptember 30, 2021 the Company recognized $5,757$5,493 and $15,232, respectively, of interest income in the Company's condensed statements of operations

The future minimum lease payments receivable for sales type leases are as follows:

The total net investments in sales type leases, as of JuneSeptember 30, 2021 was $195,525.$189,314. The current portion of $38,209$41,912 is included in Current Assets on the condensed balance sheet as of JuneSeptember 30, 2021, and the long term portion of $157,316$147,402 is included in Long-Term Assets on the condensed balance sheet as of June September 30,2021.The lease contains a purchase option at the conclusion of the lease, which the Company has determined does not meet the probability criterion.  The Company has not recorded an unguaranteed residual asset.

We lease space under non-cancelable operating leases for our two office locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.

Our leases include one or more options to renew. The exercise of lease renewal options are included in our right of use assets and lease liabilities if they are reasonably certain of exercise.

On May 18, 2021, we extended our lease for the Minnesota location.  The term of the extension is 48 months expiring July 31, 2025.

Our leases do not provide an implicit rate; we use our incremental borrowing rate of 5% which is based on the information available at the date of adoption in determining the present value of the lease payments.

The cost components of our operating leases were $14,504 for the three months ended JuneSeptember 30, 2021.

Maturities of our lease liabilities for all operating leases are as follows as of JuneSeptember 30, 2021:

The weighted average remaining lease terms equals 3.86 yearsequals 3.65 years as of JuneSeptember 30, 2021.

Revolving Credit Line

The Company has a revolving credit line of up to $500,000 that expires on February 1, 2022. The line of credit is collateralized by all receivables, inventory, equipment, and general intangibles of the Company. The Company had no borrowings under the credit line during the three months ended JuneSeptember 30, 2021. Interest on outstanding borrowings is payable monthly and charged at the Prime Rate, which was 4.0%, subject to a floor of 3.75% during the three and ninemonths ended JuneSeptember 30, 2021.

Paycheck Protection Program Loan

On February 8, 2021, the Company entered into a Promissory Note with Alerus Financial, N.A. (the “Promissory Note”), which provides for an unsecured loan of $473,400 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”). The Promissory Note has a term of five years with a 1% per annum interest rate. Payments are deferred for approximately one year from the date of the Promissory Note and the Company can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the CARES Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis. The Company intends to useused the entire loan amount for designated qualifying expenses and to applyapplied for forgiveness of the loan in accordance with the terms of the PPP.  No assurance can be given that the Company will obtain forgiveness of the loan in whole or in part.  In the event that the loan is not forgiven, it is the Company's intention to repay the loan immediately.

Estimated maturities of long-term debt at JuneSeptember 30, 2021 are as follows, for the twelve months ending June 30:September 30,:

Stock Compensation

On January 8, 2018, the Board of Directors of Table Trac, Inc. appointed Randy Gilbert as the Company’s Chief Financial Officer and awarded him 50,000 Restricted Stock shares. These shares are subject to a four-year vesting schedule as follows: 20,000 shares on January 8, 2019 and 10,000 shares in each subsequent year. Grant date fair value of $117,500 will be recognized equally over the vesting period as stock compensation expense as a component of selling, general and administration expense.

Additionally, on March 8, 2021, the Company awarded 15,200 Restricted Stock shares to employees out of treasury stock. These shares are subject to a two year vesting period.  Grant date fair value of $45,300 will be recognized over the vesting period as stock compensation expense as a component of selling, general and administrative expense.

The unvested stock compensation expense is expected to be recognized over a weighted average period of approximately two years. As of JuneSeptember 30, 2021, the remaining unrecognized stock compensation expense related to restricted shares is approximated $48,700.

The Company had 25,200 and 20,000 unvested restricted shares outstanding at JuneSeptember 30, 2021 and December 31, 2020, respectively.

On May 14, 2021, the Board of Directors of Table Trac, Inc. approved the 2021 Stock Incentive Plan (the "Plan").  The Plan provides for the issuance of incentive and other equity-based awards to its employees. Options issued under the Plan are exercisable for periods not to exceed ten years, and vest and contain such other terms and conditions as specified in the applicable award document. Options to buy common stock are issued under the Plan, with exercise prices equal to the closing price of shares of the Company’s common stock on the OTCQX Exchange at closing on the trading day of the date of award. The Company had 500,000 shares initially available for grant.

On May 14, 2021, the Board of Directors of Table Trac, Inc. awarded 70,000 options as follows:  20,000 to Chad Hoehne; 20,000 to Robert Siqveland and 30,000 to Randy Gilbert. These shares are subject to a vesting schedule as follows: 25% immediately and 25% in each subsequent year. Grant date fair value of $128,726 will be recognized over the vesting period as stock compensation expense as a component of selling, general and administration expense.

The fair value of the Company’s stock options issued was estimated using a Black-Scholes option pricing model with the following weighted-average assumptions:

The Company accounts for income taxes by following the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of the tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted. Management believes that any write-off not allowed for will not have a material impact on the Company’s financial position.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Based on its evaluation, the Company believes that it has no significant unrecognized tax positions. The Company’s evaluation was performed for the tax years ended December 31, 2016 through 2019, which are the tax years that remain subject to examination by major tax jurisdictions as of JuneSeptember 30, 2021. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. In accordance with current guidance, the Company classifies interest and penalties as income tax expense as incurred.

The Company computes earnings per share under two different methods, basic and diluted, and presents per-share data for all periods in which statements of operations are presented. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding.

The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share for the three and sixnine months ended JuneSeptember 30, 2021 and 2020:

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below should be read in conjunction with our unaudited financial statements, and notes thereto, contained in this Quarterly Report on Form 10-Q, as well as our

audited financial statements, and notes thereto, contained in our Form 10-K filed with the SEC on March 31,2021 relating to our year ended December 31, 2020.

Forward-Looking Statements

Some of the statements made in this section of our report are forward-looking statements. These forward-looking statements generally relate to and are based upon our current plans, expectations, assumptions and projections about future events.  Our management currently believes that the various plans, expectations, and assumptions reflected in or suggested by these forward-looking statements are reasonable.  Nevertheless, all forward-looking statements involve risks and uncertainties and our actual actions or future results may be materially different from our plans, objectives or expectations, or our assumptions and projections underlying our present plans, objectives and expectations, which are expressed in this report.

In light of the foregoing, prospective investors are cautioned that the forward-looking statements included in this filing may ultimately prove to be inaccurate - even materially inaccurate.  Because of the significant uncertainties inherent in such forward-looking statements, the inclusion of such information should not be regarded as a representation or warranty by Table Trac or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever.

Impact of COVID-19 on Our Business

The COVID-19 pandemic has and will continue to impact the economy and has and will likely continue to adversely affect our business. As of the date of this filing, uncertainty exists concerning the magnitude of the impact and duration of the pandemic.  Some of our customers have temporarily closed or are operating at a diminished capacity which may negatively impact revenue. The pandemic may shift industry demand for installing and replacing existing casino management systems, impact sales and gross margins in the future, limit our ability to secure products we sell due to supplier and manufacturer shortages, limit the ability of our employees to perform their work due to illness caused by the pandemic and local, state, or federal orders requiring employees to remain at home, limit the ability of carriers to deliver our products to customers, limit the ability of our customers to conduct their business and purchase our products and services, and limit the ability of our customers to pay us on a timely basis.

To ensure that our business can continue to operate during this uncertain time, in February 2021 we applied and were approved for a second Paycheck Protection Program (PPP) loan through the Small Business Administration. This loan will allowallowed us to continue to employ all existing employees to service our client base.

In March 2021, the Internal Revenue Service (“IRS”) released Notice 2021-20, which retroactively eliminated the restriction that prevented employers who received a PPP loan from qualifying for the Employee Retention Credit (“ERC”), which is a refundable tax credit against certain employment taxes. Upon determination that the employer has complied with all of the conditions required to receive the credit,, a receivable is recorded and the credit reduces salaries and wages expense.  We have determined that we qualified and have filed to claim the ERC.  In JulyOctober 2021 we have determined that we will receive  a credit  of approximately $317,000.$206,000.  These amounts have subsequently been recorded as a receivable.

With respect to liquidity, we are evaluating and taking actions to reduce costs and spending across our organization. This includes reducing hiring activities, adjusting pay programs, and limiting discretionary spending.

While we are unable to predict the nature, scope or duration of the impact of the COVID-19 pandemic on our business, results of operations, liquidity or capital resources, we will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.

General Overview

Table Trac, Inc. is a Nevada corporation, formed on June 27, 1995, with its principal office in Minnetonka, Minnesota.

The Company has developed and patented (U.S. patent # 5,957,776) a proprietary information and management system (called our “Table Trac” system) that automates and monitors the operations of casino table game operations. In addition to its table games management system, Table Trac has been adding functionality to related casino system modules for guest rewards and loyalty club, marketing analysis, guest service, promotions, administration / management, vault / cage management and audit / accounting tasks. Aggregated together, all of these modules have become the “Casino Trac” product, a full-featured Casino Management System (CMS) offering what we believe to be a powerful combination of value, efficiency and reliability for casinos seeking to add or upgrade their casino systems.

In September of 2020, the Company was granted a Patent (U.S. patent #10,769,885 B2) on its April 2017 application 15/946,227 “SYSTEMS AND METHODS OF FACILITATING INTERACTIONS BETWEEN AN ELECTRONIC GAMING MACHINE, GAME PLAYER, AND A CONTROL SYSTEM”.  In addition, the Company renewed its Trademark claim for “Table Trac” which was granted July 31, 2018 Reg. No. 5,529,779 and made a new Trademark claim on its “CasinoTrac” brand which is pending.

The Company sells systems and technical support to casinos. The open architecture of the Table Trac system is designed to provide operators with a scalable and flexible system that can interconnect and operate with most third-party software or hardware. Key products and services include modules designed to drive player tracking programs and kiosk promotions, as well as vault and cage controls. The Company’s systems are designed to meet strict auditing, accounting and regulatory requirements applicable to the gaming industry. The Company has developed a patented, real-time system that automates and monitors the operations of casino gaming tables. The Company continues to increase its market share by expanding its product offerings to include new system features, and ancillary products.

During the secondthird quarter of 2021, the Company delivered twofour casino management systems, plus ansystems. expanded one existing customer and our exclusive supplier expanded operations or installed our system in multiple locations.locations in Australia.  At the end of the quarter, the Company had casino management systems, table games management systems and ancillary products installed with on-going support and maintenance contracts with over 100 casino operators in over 260265 casinos worldwide.

Results of Operations – Three Months Ended JuneSeptember 30, 2021 Compared to Three months ended JuneSeptember 30, 2020

During the three months ended JuneSeptember 30, 2021, income from operations was $165,063$288,727 compared to income from operations of $78,531,$30,432, for the three months ended JuneSeptember 30, 2020.2020. The major components of revenues, cost of sales and selling, general and administrative expenses, and the reasons for changes in each, are discussed below.

Revenues

Revenues

Revenues totaled $1,447,046$1,449,881 for the three months ended JuneSeptember 30, 2021 compared to $1,133,071,$1,188,612, for the three months ended JuneSeptember 30, 2020.  2020.  

Refer to Note 1 – Revenue, disaggregated revenues by major product line table

During the three months ended JuneSeptember 30, 2021, the Company delivered twofour new systems, expanded one existing customer and our exclusive supplier installed our system in multiple locations in Australia. During the same period in 2020, the Company delivered fourtwo systems. 

Cost of Sales and Gross Profit

Cost of sales increased to $333,402$407,174 for the three months ended JuneSeptember 30, 2021 from $97,285,$314,399, for thethe three months ended JuneSeptember 30, 2020 due to a increase in systems sales in 2021.  The following table summarizes our cost of sales for the three months ended JuneSeptember 30, 2021 and 2020, respectively:

The Company’s gross profit was 77.1%72% and 91.4%73.6%, for the three months ended JuneSeptember 30, 2021 and 2020, respectively.  This decrease of approximately 14% was due tois a result maintenance wages not bebeing included in cost of sales for the period ending JuneSeptember 30, 2020 as a result of the COVID pandemic shutting down the gaming industry.

Selling, General and Administrative Expenses

For the three months ended JuneSeptember 30, 2021, selling, general and administrative expenses were $948,581$753,980 compared to $957,255$843,781 for the same period in 2020.  This decrease is a result of the Company receiving Employee Retention Credits offset by an increase in sales and marketing efforts as well as the Company's bonus accrual.

Interest Income

For the three months ended JuneSeptember 30, 2021, interest income was $12,072$11,584 compared to $11,263 for the same period in 2020. 

Tax Provision

The income tax expense for the three months ended JuneSeptember 30, 2021 was $23,500$56,500 compared to an income tax benefitexpense of $9,800$12,182 for the same period in 2020. The effective rate fluctuates significantly due to fluctuations in periodic net income, changes in state apportionment rates and availability of research and development and foreign tax credits.

Net Income

Income before taxes for the three months ended JuneSeptember 30, 2021, was $177,135$243,311 compared to income before taxes of $89,794,$41,695, for the same period in 2020.2020. Net income for the three months ended JuneSeptember 30, 2021 was $153,635 compared was $186,811 compared to net income of $99,594,$29,513, for the same period in 2020.2020. The basic and diluted income per share was $0.03 cwas $0.04 coomparedmpared to income per share of $0.02,$0.01, for the three months ended JuneSeptember 30, 2021 and 2020, respectively.

Results of Operations – SixNine Months Ended JuneSeptember 30, 2021 Compared to SixNine Months Ended JuneSeptember 30, 2020

During the sixnine months ended JuneSeptember 30, 2021, the income from operations was $945,589$1,234,317 compared to income from operations of $39,223$69,655 for the sixnine months ended JuneSeptember 30, 2020. The major components of revenues, cost of sales and selling, general and administrative expenses, and the reasons for changes in each, are discussed below.

Revenues

Revenues totaled $3,624,019$5,073,900 for the sixnine months ended JuneSeptember 30, 2021 compared to $2,258,701$3,447,312 for the sixnine months ended JuneSeptember 30, 2020.  

Refer to Note 1 – Revenue, disaggregated revenues by major product line table

During the sixnine months ended JuneSeptember 30, 2021, the Company delivered fourdelivered eight new systems, expanded one existing customer and our exclusive supplier installed our system in multiple locations in Australia. During the same period in 2020, the Company delivered five systems.seven system and expanded two existing customers. 

Cost of Sales and Gross Profit

Cost of sales increased to $793,861$1,201,035 for the sixnine months ended JuneSeptember 30, 2021 from $324,433$638,832 for the sixnine months ended JuneSeptember 30, 2020 due to an increase in the size of systems sales installed in 2021.  The following table summarizes our cost of sales for the sixnine months ended JuneSeptember 30, 2021 and 2020, respectively:

The Company’s gross profit was 78.1%76.3% and 85.6%81.5% for the sixnine months ended JuneSeptember 30, 2021 and 2020, respectively. This decrease is due to system sales which utilized refurbished parts anda result of maintenance wages not being included during Q1in cost of sales for the nine month period ending September 30, 2020, becauseas a result of the COVID pandemic shut down.  Additionally there was an increase in system sales installed during nine months ended September 30, 2021, compared to the system installations, which was lower due to COVID pandemic, during the sixnine months ended JuneSeptember 30, 2020 and no similar transactions for the six months ended June 30, 2021.

Selling, General and Administrative Expenses

For the sixnine months ended JuneSeptember 30, 2021, selling, general and administrative expenses were $1,884,568$2,638,547 compared to $1,895,045$2,756,825 for the same period in 2020.  This decrease is a result of the Company receiving approximately $317,000 in Employee Retention Credits offset by an increase in sales and marketing efforts as well as the Company's bonus accrual.

Interest Income

For the sixnine months ended JuneSeptember 30, 2021, interest income was $60,052$71,635 compared to $69,377$80,640 for the same period in 2020. 

Tax Provision

The income tax expense for the sixnine months ended JuneSeptember 30, 2021 was $236,000 co$292,500 comparmpareded to an income tax expense of $19,200$31,382 for the same period in 2020. The effective rate fluctuates significantly due to fluctuations in periodic net income and changes in state apportionment rates.

Net Income/LossIncome

Income before taxes for the sixnine months ended JuneSeptember 30, 2021, was $1,005,641$1,248,953 compared to income before taxes of $108,600$150,295 for the same period in 2020. Net income for the sixnine months ended JuneSeptember 30, 2021 was $769,641$956,453 compared to net income of $89,400$118,913 for the same period in 2020. The basic and diluted income per share was $0.17$0.21 compared to income per share of $0.02$0.03 for the sixnine months ended JuneSeptember 30, 2021 and 2020, respectively.

Backlog

The Company’s backlog generally consists of incomplete system installations and expansion of offerings for currently installed and supported systems.

The Company had nine projectshad eleven projects in its backlog at JuneSeptember 30, 2021. The Company had three projects in its backlog as of JuneSeptember 30, 2020.

The Company is currently serving gaming establishments in fourteen U.S. states, as well as countries in Central and South America, the Caribbean and Australia. The Company aims to pursue further opportunities and strategic partnerships.

Liquidity and Capital Resources

Management believes that the Company has adequate cash to meet its obligations and continue operations for both existing customer contracts and ongoing product development for at least the next 12 months from the date of this filing. In February 2020, the Company obtained a $500,000 line of credit available with a lender. The Company has a $473,400 Paycheck Protection Program loan to provide liquidity, as noted below.  The Company’s primary sources of liquidity are cash and cash equivalents, receivables and potentially other current assets. Management is not aware of any trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material way.

Cash and cash equivalents provided by operations for the sixnine months ended JuneSeptember 30, 2021 was  approximatelapproximately y $1,419,880$2,212,000 compared to cash used inprovided by operations of approximately $229,240$218,000 for the nine month period ending JuneSeptember 30, 2020. This increase was a result of a number of factors including a significant increase in net income, a decrease in inventory, prepaid expenses, accrued income taxes and ana substantial increase in customer deposits. These increases were offset by an increase in accounts receivable and net investment in sales type leases. 

The Company invested $57,000 for an approximately 29% of the membership interest in a start-up technology company which comprised the cash used for investing activitiesactivities for the sixnine months ended JuneSeptember 30, 2021.  During the quarter ended September 30, 2021, .based on ceased operating activity of the investee, the Company determined the investment was impaired and recorded an investment loss of $57,000.

Cash provided by financing activities was $473,400 as a result of the second Paycheck Protection Program loan for the sixnine months ended JuneSeptember 30, 2021.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements as of JuneSeptember 30, 2021.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

Item 4. Controls and Procedures

RemediationEvaluation of Previously Disclosed Material WeaknessDisclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in Internal Control overour reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial ReportingOfficer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

As previously disclosed in Item 9Aof September 30, 2021, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our Annual Reportdisclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on Form 10-K for the year ended December 31, 2020, management identified a material weaknessthat evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective as of that date. The identified material weakness wasSeptember 30, 2021. There were no changes in connection with our controls over revenue recognition. In response to the material weakness, with the oversight of the Audit Committee, we implemented changes to our internal controlcontrols over financial reporting which consisted primarily of new policies and procedures to assist management in recording transactions appropriately, particularly related to revenue and cost recognition.  Weduring our most recently completed reporting period that have completed documentation of these corrective actions and, based on the evidence obtained in validating the design and effectiveness of the implemented control, we have concluded that the previously disclosed material weakness has been remediated as of June 30, 2021.

Changes in Internal Control Over Financial Reporting

The change described under “Remediation of Previously Disclosed Material Weakness in Internal Control over Financial Reporting” above represents a change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended June 30, 2021 that has materially affected or isare reasonably likely to materially affect, our internal control over financial reporting.

Other than this change, there were no changes in the Company’s internal control over financial reporting during the second quarter of 2021 identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  As noted above, the material weakness in our controls over revenue recognition reported in our annual report at December 31, 2020 has been fully remediated as of June 30, 2021, and our internal control over financial reporting was effective.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully review the risks discussed in our Annual Report on Form 10-K filed with the SEC on March 31, 2021 relating to our year ended December 31, 2020 before making an investment decision.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

In May 2021, the Board of Directors of Table Trac, Inc. awarded 70,000 options under the 2021 Stock Incentive Plan as follows:  20,000 to Chad Hoehne; 20,000 to Robert Siqveland and 30,000 to Randy Gilbert. These shares are subject to a vesting schedule as follows: 25% immediately and 25% in each subsequent year. The shares were issued pursuant to the exemption set forth in Section 4(a)(2) of the Securities Act on the basis that the shares were issued in a transaction not involving any public offering.

Item 6. Exhibits

SIGNATURES

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